Case Study: The General Motors Bankruptcy - 2009

Author
Donald DePamphilis
Clinical Professor of Finance
California
Article available on Google Knol under Creative Commons 3.0 Licence.

Background

Rarely has a firm fallen as far and as fast as General Motors (GM). Founded in 1908, GM dominated the car industry through the early 1950s with its share of the U.S. car market reaching 54 percent in 1954. However, this proved to be the firm’s high water mark. Efforts in the 1980s to cut cost by building brands on common platforms blurred their distinctiveness. Following increasing healthcare and pension benefits paid to employees, concessions made to unions in the early 1990s to pay workers even when their plants were shutdown reduced the ability of the firm to adjust to changes in the cyclical car market. GM was increasingly burdened by so-called legacy costs, i.e., healthcare and pension obligations to increasing large retiree population. Over time, GM’s labor costs soared compared to the firm’s major competitors. To cover these costs, GM continued to make higher margin medium to full size cars and trucks, which in the wake of higher gas prices could only be sold with the help of highly attractive incentive programs. Forced to support an escalating array of brands, the firm was unable to provide sufficient marketing funds for any one of its brands.
With the onset of one of the worst global recessions in the post World War II, auto sales worldwide collapsed by the end of 2008. All auto makers’ sales and cash flows plummeted. Unlike Ford, GM and Chrysler were unable to satisfy their financial obligations. The U.S. government, in an unprecedented move, agreed to lend GM and Chrysler $13 billion and $4 billion, respectively. The intent was to buy time to develop an appropriate restructuring plan. 
Having essentially ruled out liquidation of GM and Chrysler, continued government financing was contingent on gaining major concessions from all major stakeholders such as lenders, suppliers, and labor unions.  With car sales continuing to show harrowing double-digit year over year declines during the first half of 2009, the threat of bankruptcy was used to motivate the disparate parties to come to an agreement. With available cash running perilously low, Chrysler entered bankruptcy in early May and GM on June 1^st, with the government providing debtor in possession financing during their time in bankruptcy.  In its bankruptcy filing for its U.S. and Canadian operations only, GM listed $82.3 billion in assets and $172.8 billion in liabilities. In less than 45 days each, both GM and Chrysler emerged from government sponsored sales in bankruptcy court, a feat that many thought impossible.
Judge Robert E. Gerber of the United States Bankruptcy court of New York approved the sale in view of the absence of alternatives considered more favorable to the government’s option.  GM emerged from the protection of the court on July 10, 2009 in an economic environment characterized by escalating unemployment and eroding consumer income and confidence.  Even with less debt and liabilities, fewer employees, the elimination of most “legacy costs,” a reduced number of dealerships and brands, GM found itself operating in an environment in 2009 in which U.S. vehicle sales totaled an anemic 9.2 million units.  This compared to more than 16 million in 2008. GM’s 2009 market share slipped to a post-World War II low of 19 percent. Only the government’s “cash for clunkers” program during the summer months offered some respite from the largely unremitting downturn in U.S. auto sales. However, with the cessation of the program in late August, the boost in sales proved temporary.

Developing a Bankruptcy Strategy

While the bankruptcy option had been under consideration for several months, its attraction grew as it became increasingly apparent that time was running out for the cash strapped firm. Having determined from the outset that liquidation of GM either inside or outside of the protection of bankruptcy would not be considered, the government initially considered a prepackaged bankruptcy in which agreement is obtained among major stakeholders prior to filing for bankruptcy. The presumption is that since agreement with many parties had already been obtained, developing a plan of reorganization to emerge from Chapter 11 would move more quickly. However, this option was not pursued because of the concern that the public would simply view the post-Chapter 11 GM as simply a smaller version of its former self. The government in particular was seeking to position GM as a wholly new firm capable of profitably designing and building cars that the public wanted.
However, time was of the essence. The concern was that consumers would not buy GM vehicles while the firm was in bankruptcy. Consequently, a strategy in which GM would be divided into two firms: “old GM” containing the firm unwanted assets and “new GM” owning the most attractive assets. New GM would then emerge from bankruptcy in a sale to a new company owned by various stakeholder groups including the U.S. and Canadian Governments, a union trust fund, and to bond holders.
Buying distressed assets can be accomplished through a Chapter 11 plan of reorganization or a post-confirmation trustee. Alternatively, a 363 sale transfers the acquired assets free and clear of any liens, claims and encumbrances. The sale was ultimately completed under Section 363 of the U.S. bankruptcy code. Historically, firms used this tactic to sell failing plants and redundant equipment. In recent years, so-called 363 sales have been used to completely restructure businesses, including the 363 sales of entire companies. A 363 sale requires only the approval of the bankruptcy Judge while a plan of reorganization in Ch 11 must be approved by a substantial number of creditors and meet certain other requirements to be “confirmed.” A plan or reorganization is much more comprehensive than a 363 sale in addressing the overall financial situation of the debtor and how its exit strategy from bankruptcy will affect creditors.
Under Section 363, the bankrupt firm must file a motion with the bankruptcy court in which the case is pending seeking the bankruptcy court’s approval of the terms and conditions of the proposed sale. Opponents of the proposed sale will have a designated response period determined by the pertinent bankruptcy court (often 10-20 days) in which to file written objections to the proposed sale. Frequently, this time period will be shortened by the court to as little as a few days. Depending upon the degree of opposition to the sale and how many parties are interested in purchasing the assets being offered, the process could be completed in a matter of weeks. Once a 363 sale has been consummated and the purchase price paid, the bankruptcy court will decide how the proceeds of sale ware allocated among secured creditors with liens on the asses sold.

Terms of the Deal

GM’s U.S. and Canadian assets and liabilities were split between two companies under the protection of the bankruptcy court. GM’s exit from Chapter 11 involved the sale of its most attractive assets to a new company (dubbed the New GM) owned primarily by the American and Canadian governments and a healthcare trust for the UAW union.  The unattractive assets were transferred to the other company referred to as the “Old GM.”  The old GM which will be known as Motors Liquidation Company and includes various properties, including facilities already slated to be closed. Such properties will be sold to the highest bidder under court supervision.  Other assets to be filed under the old GM include the brands Hummer, Saturn, and Saab for which GM already has buyers. 
Total financing provided by the U.S. and Canadian (including the province of Ontario) governments amounted to $69.5 billion. U.S. taxpayer provided financing totaled $60 billion consisting of $10 billion in loans and the remainder in equity. The government decided to contribute $50 billion in the form of equity to reduce the burden on GM of paying interest and principal on its outstanding debt. Nearly $20 billion was provided prior to the bankruptcy, $11 billion to finance the firm during the bankruptcy proceedings, and an additional $19 billion was to be provided before the end of 2009. In exchange for these funds, the U.S. government will own 60.8 percent of the new GM’s common shares, while the Canadian and Ontario governments own 11.7 percent in exchange for their investment of $9.5 billion. The United Auto Workers (UAW) new voluntary employee beneficiary association (VEBA) received a 17.5 percent stake in exchange for assuming responsibility for retiree medical and pension obligations. Finally, bondholders and other unsecured creditors received a 10 percent ownership position. There will be $2.1 billion in preferred shares held by the Treasury and $6.5 billion in preferred shares which will be issued to the new VEBA.

Profiling the New GM

The new firm, which employs 244,000 workers in 34 countries, will further reduce its headcount of salaried employees to 27,200. The firm will also have shed 21,000 union workers from the 54,000 UAW workers it now employs in the U.S. and close 12 to 20 plants. GM did not include its foreign operations in Europe, Latin America, Africa, the Middle East or Asia Pacific in the Chapter 11 filing. Annual vehicle volume for the firm will decline to 10 million vehicles, compared with 15 to 17 million annual vehicle sales from 1995 through 2007. Consolidated debt for the firm will be $17 billion. The firm also will have $9 billion in 9% preferred stock, which is payable on a quarterly basis. GM will have a new board. Canada and UAW health care trust will each get a seat on the board.
GM will focus on its core brands Chevrolet, Cadillac, Buick and GMC through 3600 dealerships from its existing 5969 dealer network. The business plan calls for an IPO as early as the second quarter of 2010 depending upon stock market condition.
By offloading worker health care liabilities to the VEBA trust and seeding it mostly with stock instead of cash, GM has eliminated the need to pay more than $4 billion annually in medical costs. Concessions made by the UAW before GM entered bankruptcy have made GM more competitive in terms of labor costs with Toyota.
GM’s new cars in 2010 include the Chevrolet Volt, a plug-in hybrid electric car.  However, with a price tag of $40,000, the car is likely to be only a niche brand. Other small car models include the Chevrolet Cruz and Spark which may fare well but will face intense competition from models such as Honda’s Insight and the Toyota Prius as well as Ford’s Fiesta.

Future Challenges

New products must be introduced as scheduled and they must meet or exceed the expectations of potential customers. Success in this area would represent a substantial departure from past experience. New more energy efficient models must compete against brands long-established in the marketplace such as Honda’s Insight and Toyota’s Prius.
The need to buyout and workers who will lose their jobs as a result of the eleven pending plant closings will constitute a significant drain on operating cash flow during the next several years.  If the firm’s stock does not do well, the UAW will have to further cut medical benefits for workers covered by the union’s own trust. Bankruptcy allows GM to break dealer franchise contracts. Consequently, GM car owners may have to travel much further to get their cars maintained under warranty as the number of dealerships shrinks.
Finally, GM’s greatest challenge may be in changing the firm’s corporate culture which some have accused of being slow to innovate, risk adverse, and bureaucratic. The firm intends to eliminate as many as one-third of their current managers. While this may go a long way in changing the firm’s culture, it also will represent a loss of substantial expertise and experience.

Source article in Knol
http://knol.google.com/k/case-study-the-general-motors-bankruptcy-gm-arises-from-the-ashes

Case Study: Xerox Buys Affiliated Computer Systems

Author
Donald DePamphilis
Clinical Professor of Finance
California
Article available on Google Knol under Creative Commons 3.0 Licence.





This case study is representative of those found in Mergers, Acquisitions, and Other Restructuring Activities, 5th edition, 2010 by Donald M. DePamphilis. For more information or to buy this book online, click here.

Changing Customer Requirements Force an Industry Shift


Reflecting the increasing cost and complexity of computing, many corporations have outsourced their information technology (IT) operations in an effort to streamline various business activities. These activities include procurement, customer tracking, record handling, and product design. Advances in technology enable IT vendors to more easily provide computing services delivered over the Internet from remote data centers (i.e., through the so-called “cloud computing”). Software such as word processing, spreadsheet, and customer management systems could be moved from desktop personal computers to become a Web-based service, accessible from anywhere.

In anticipation of a shift from hardware and software spending to technical services by their corporate customers, IBM announced an aggressive move away from its traditional hardware business and into services in the mid-1990s. Having sold its largely commodity personal computer business to Chinese manufacturer Lenovo in mid-2005, IBM became widely recognized as a largely hardware neutral systems integration, technical services, and outsourcing company whose services could be enlisted by corporations to assemble internal computer networks using the most effective hardware and software rather than only those proprietary to IBM. As part of its branding process, IBM became viewed as largely “hardware neutral” by its customers in that it offered the best possible solutions through its alliances with other IT vendors for its customers rather than favoring a particular IBM product or service offering.

As IT services have tended to be less cyclical than hardware and software sales, the move into services by IBM enabled the firm to tap a steady stream of revenue at a time when customers were keeping computers and peripheral equipment longer to save money. The 2008-09 recession exacerbated this trend as corporations spent a smaller percentage of their IT budgets on hardware and software. Software and hardware expenditures as a percent of total corporate IT budgets fell from 36 percent in 2004 to 28 percent in 2009 according to the Gartner Group, a market research firm. The remainder of corporate IT budgets were spent on operations and services provided by outside consultants.
Playing Catch Up

These developments were not lost on other IT companies. Hewlett-Packard (HP) bought tech services company EDS in 2008 for $13.9 billion. On September 21, 2009, Dell announced its intention to purchase another IT services company, Perot Systems, for $3.9 billion, a whopping 68 percent premium. One week later, Xerox announced a cash and stock bid for Affiliated Computer Systems (ACS) totaling $6.4 billion, a 34 percent premium to ACS’s closing price on September 25, 2009.

Each firm was moving to position itself as a total solution provider for its customers, achieving differentiation from its competitors by offering a broader range of both hardware and business services. While each firm focused on a somewhat different set of markets, they all shared an increasing focus on the government and healthcare segments. Consequently, these markets were likely to become increasingly competitive. However, by containing to retain a large proprietary hardware business, each firm faced challenges in convincing customers that they could provide objectively enterprise-wide solutions that reflected the best option for its customers.
The Xerox Strategy

Historically known as “the Document Imaging Company,” Xerox intends to move into providing technology services such as into the outsourcing business with a major focus on healthcare and government. Services contracts tend to provide a more recurring revenue stream than hardware sales. Xerox increasingly believes its customers wanted a stronger connection with vendors who could provide both back office (e.g., application and claims processing) and front office (e.g., customer service) information technology product and services.

Previous Xerox efforts to move beyond selling printers, copiers, and supplies and into services achieved limited success due largely to poor management execution. In an effort to expand into services, Xerox bought Amici for $174 million in 2006 to enter the business of helping lawyers organize digital documents created during the legal discovery process. In 2007, the firm acquired Advectis, which helps banks and consumers electronically manage mortgage documents for $32 million. While some progress in shifting away from the firm’s dependence on printers and copier sales was evident, the pace was far too slow. Xerox was looking for a way to accelerate the transition from a largely product driven company to one whose revenues were more dependent on the delivery of business services.
Why ACS?

With annual sales of about $6.5 billion, ACS handles paper-based tasks such as billing and claims processing for governments and private companies. With about one-fourth of ACS’ revenue derived from the healthcare and government sectors through long-term contracts, the acquisition gives Xerox a greater penetration into markets which should benefit from the 2009 government stimulus spending and healthcare legislation. More than two-thirds of ACS’ revenue comes from the operation of client back office operations, with the rest coming from providing technology consulting services. ACS would also triple Xerox’s service revenues to $10 billion, with almost 80 percent due to recurring revenue based on services and equipment leases.

Xerox is betting that it can apply its globally recognized brand and worldwide sales presence to expand ACS into Britain, Germany, Spain, and other geographic areas. Currently, about 92 percent of ACS’s revenue comes from the U.S. ACS technologies could also benefit from Xerox’s research in imaging and text recognition.

Xerox expects to save $300 million to $400 million in the first three years after the deal closes in early 2010. Most of the cost savings will come from ACS providing services to Xerox operations that would allow for some internal staff reduction.
Investor Reaction Mixed

The cash and stock offer for ACS was valued at $63.11 a share. ACS shares rose by 14 percent to $53.86 while Xerox shares dropped 14 percent to $7.68. Xerox also will assume $2 billion of ACS debt and issue $300 million in convertible preferred Xerox stock to ACS’s founder Darwin Deason to acquire his super-voting shares (i.e., those having multiple voting rights) which give him about 42 percent of total voting rights in ACS.

A perceived lack of synergies between the two firms, Xerox’s rising debt levels, and the firm’s struggling printer business fueled concerns about the long-term viability of the merger. Xerox has about $1 billion in cash and expects to borrow another $3 billion. Standard & Poor’s put Xerox’s credit on the “watch list,” with a credit downgrade to triple-B-minus, one notch above junk, likely.

Integration is Xerox’s major challenge as the firm has not done a lot of large deals. The two firms revenue mixes are very different as are their customer bases, with government customers often requiring substantially greater effort to close sales than Xerox’s traditional commercial customers. Xerox intends to operate ACS as a standalone business which will postpone the integration of its operations consisting of 54,000 employees with ACS’ 74,000. If Xerox intends to realize significant incremental revenues by selling ACS services to current Xerox customers, some degree of integration of the sales and marketing organizations would seem to be necessary.

With little experience in managing a services company, the acquisition will put Xerox in head-to-head competition with a variety of U.S. and foreign competitors. These include HP, Accenture, and Computer Sciences Corporation, as well as Indian service providers such as Satyam Computer Services, Infosys Consulting, and Wipro Technologies.
Concluding Comments

Operating ACS as a separate business could significantly reduce the ability of Xerox to realize the anticipated revenue gains due to cross selling. While Xerox notes that only 20 percent of the customers of the two firms overlap, it is hardly a foregone conclusion that customers will buy ACS services simply because the ACS sales representatives gain access to current Xerox customers. Presumably, additional incentives are needed such as some packaging of Xerox hardware with ACS IT services. However, this may require significant price discounting at a time when printer and copier profit margins already are under substantial pressure.

Dell, HP, and Xerox are primarily hardware firms desirous of moving increasingly into services. The presumption seems to be that the distinction between selling product and services is becoming blurred, particularly as “cloud computing” makes it increasingly attractive to deliver services from remote locations. Nonetheless, given their long histories, customers are likely to continue, at least in the near term, to view these firms more as product than service companies. The sale of services will require significant spending to rebrand these companies so that they will be increasingly viewed as service vendors.

The continued dependence of all three firms on the sale of hardware may retard their ability to sell packages of hardware and IT services to customers. With hardware prices under continued pressure, customers may be more inclined to continue to buy hardware and IT services from separate vendors to pit one vendor against another. Moreover, with all three firms targeting the healthcare and government markets, pressure on profit margins could increase for all three firms. The success of IBM’s services strategy could suggest that pure IT service companies are likely to perform better in the long-run than those that continue to have a significant presence in both the production and sale of hardware as well as IT services.








Source
http://knol.google.com/k/case-study-hardware-companies-race-to-move-into-it-services-xerox-buys#

Enron - Breakdown of Corporate Governance - Case Study

Author
Donald DePamphilis
Clinical Professor of Finance
California
(Article available on Knol under creative commons 3.0 license)

This article is taken from Mergers, Acquisitions, and Other Restructuring Activities, 5th edition, 2009 by Donald M. DePamphilis. For more information or to buy this book online, click here.

Background

What started in the mid-1980s as essentially a staid "old-economy" business became the poster child in the late 1990s for companies wanting to remake themselves into "new-economy" powerhouses. Unfortunately, what may have started with the best of intentions emerged as one of the biggest business scandals in U.S. history. Enron was created in 1985 as a result of a merger between Houston Natural Gas and Internorth Natural Gas. In 1989, Enron started trading natural gas commodities and eventually became the world's largest buyer and seller of natural gas. In the early 1990s, Enron became the nation's premier electricity marketer and pioneered the development of trading in such commodities as weather derivatives, bandwidth, pulp, paper, and plastics. Enron invested billions in its broadband unit and water and wastewater system management unit and in hard assets overseas. In 2000, Enron reported $101 billion in revenue and a market capitalization of $63 billion.

The Virtual Company

Enron was essentially a company whose trading and risk management business strategy was built on assets largely owned by others. The complex financial maneuvering and off-balance-sheet partnerships that former CEO Jeffrey K. Skilling and chief financial officer Andrew S. Fastow implemented were intended to remove everything from telecommunications fiber to water companies from the firm's balance sheet and into partnerships. What distinguished Enron's partnerships from those commonly used to share risks were their lack of independence from Enron and the use of Enron's stock as collateral to leverage the partnerships. If Enron's stock fell in value, the firm was obligated to issue more shares to the partnership to restore the value of the collateral underlying the debt or immediately repay the debt. Lenders in effect had direct recourse to Enron stock if at any time the partnerships could not repay their loans in full. Rather than limiting risk, Enron was assuming total risk by guaranteeing the loans with its stock.

Enron also engaged in transactions that inflated its earnings, such as selling time on its broadband system to a partnership at inflated prices at a time when the demand for broadband was plummeting. Enron then recorded a substantial profit on such transactions. The partnerships agreed to such transactions because Enron management seems to have exerted disproportionate influence in some instances over partnership decisions, although its ownership interests were very small, often less than 3 percent. Curiously, Enron's outside auditor, Arthur Andersen, had a dual role in these partnerships, collecting fees for helping to set them up and auditing them.
Time to Pay the Piper

At the time the firm filed for bankruptcy on December 2, 2001, it had $13.1 billion in debt on the books of the parent company and another $18.1 billion on the balance sheets of affiliated companies and partnerships. In addition to the partnerships created by Enron, a number of bad investments both in the United States and abroad contributed to the firm's malaise. Meanwhile, Enron's core energy distribution business was deteriorating. Enron was attempting to gain share in a maturing market by paring selling prices. Margins also suffered from poor cost containment.

Dynegy Corp. agreed to buy Enron for $10 billion on November 2, 2001. On November 8, Enron announced that its net income would have to be restated back to 1997, resulting in a $586 million reduction in reported profits. On November 15, chairman Kenneth Lay admitted that the firm had made billions of dollars in bad investments. Four days later, Enron said it would have to repay a $690 million note by mid-December and it might have to take an additional $700 million pretax charge. At the end of the month, Dynegy withdrew its offer and Enron's credit rating was reduced to junk bond status. Enron was responsible for another $3.9 billion owed by its partnerships. Enron had less than $2 billion in cash on hand.

The end came quickly as investors and customers completely lost faith in the energy behemoth as a result of its secrecy and complex financial maneuvers, forcing the firm into bankruptcy in early December. Enron's stock, which had reached a high of $90 per share on August 17, 2001, was trading at less than $1 by December 5, 2001.

In addition to its angry creditors, Enron faced class-action lawsuits by shareholders and employees, whose pensions were invested heavily in Enron stock. Enron also faced intense scrutiny from congressional committees and the U.S. Department of Justice. By the end of 2001, shareholders had lost more than $63 billion from its previous 52-week high, bondholders lost $2.6 billion in the face value of their debt, and banks appeared to be at risk on at least $15 billion of credit they had extended to Enron. In addition, potential losses on uncollateralized derivative contracts totaled $4 billion. Such contracts involved Enron commitments to buy various types of commodities at some point in the future.

Questions remain as to why Wall Street analysts, Arthur Andersen, federal or state regulatory authorities, the credit rating agencies, and the firm's board of directors did not sound the alarm sooner. It is surprising that the audit committee of the Enron board seems to have somehow been unaware of the firm's highly questionable financial maneuvers. Inquiries following the bankruptcy declaration seem to suggest that the audit committee followed all the rules stipulated by federal regulators and stock exchanges regarding director pay, independence, disclosure, and financial expertise. Enron seems to have collapsed in part because such rules did not do what they were supposed to do. For example, paying directors with stock may have aligned their interests with shareholders, but it also is possible to have been a disincentive to question aggressively senior management about their financial dealings.

The Lessons of Enron

Enron may be the best recent example of a complete breakdown in corporate governance, a system intended to protect shareholders. Inside Enron, the board of directors, management, and the audit function failed to do the job. Similarly, the firm's outside auditors, regulators, credit rating agencies, and Wall Street analysts also failed to alert investors. What seems to be apparent is that if the auditors fail to identify incompetence or fraud, the system of safeguards is likely to break down. The cost of failure to those charged with protecting the shareholders, including outside auditors, analysts, credit-rating agencies, and regulators, was simply not high enough to ensure adequate scrutiny.

What may have transpired is that company managers simply undertook aggressive interpretations of accounting principles then challenged auditors to demonstrate that such practices were not in accordance with GAAP accounting rules (Weil, 2002). This type of practice has been going on since the early 1980s and may account for the proliferation of specific accounting rules applicable only to certain transactions to insulate both the firm engaging in the transaction and the auditor reviewing the transaction from subsequent litigation. In one sense, the Enron debacle represents a failure of the free market system and its current shareholder protection mechanisms, in that it took so long for the dramatic Enron shell game to be revealed to the public. However, this incident highlights the remarkable resilience of the free market system. The free market system worked quite effectively in its rapid imposition of discipline in bringing down the Enron house of cards, without any noticeable disruption in energy distribution nationwide.

Epilogue

Due to the complexity of dealing with so many types of creditors, Enron filed its plan with the federal bankruptcy court to reorganize one and a half years after seeking bankruptcy protection on December 2, 2001. The resulting reorganization has been one of the most costly and complex on record, with total legal and consulting fees exceeding $500 million by the end of 2003. More than 350 classes of creditors, including banks, bondholders, and other energy companies that traded with Enron said they were owed about $67 billion.

Under the reorganization plan, unsecured creditors received an estimated 14 cents for each dollar of claims against Enron Corp., while those with claims against Enron North America received an estimated 18.3 cents on the dollar. The money came in cash payments and stock in two holding companies, CrossCountry containing the firm's North American pipeline assets and Prisma Energy International containing the firm's South American operations.

After losing its auditing license in 2004, Arthur Andersen, formerly among the largest auditing firms in the world, ceased operation. In 2006, Andrew Fastow, former Enron chief financial officer, and Lea Fastow plead guilty to several charges of conspiracy to commit fraud. Andrew Fastow received a sentence of 10 years in prison without the possibility of parole. His wife received a much shorter sentence. Also in 2006, Enron chairman Kenneth Lay died while awaiting sentencing, and Enron president Jeffery Skilling received a sentence of 24 years in prison.

Citigroup agreed in early 2008 to pay $1.66 billion to Enron creditors who lost money following the collapse of the firm. Citigroup was the last remaining defendant in what was known as the Mega Claims lawsuit, a bankruptcy lawsuit filed in 2003 against 11 banks and brokerages. The suit alleged that, with the help of banks, Enron kept creditors in the dark about the firm's financial problems through misleading accounting practices. Because of the Mega Claims suit, creditors recovered a total of $5 billion or about 37.4 cents on each dollar owed to them. This lawsuit followed the settlement of a $40 billion class action lawsuit by shareholders, which Citicorp settled in June 2005 for $2 billion.

Source

http://knol.google.com/k/case-study-the-enron-shuffle-a-scandal-to-remember#

Case Study: The Challenges of Post-Merger Integration

The Arcelor and Mittal Merger

The focus in the case study is on the formation of the integration team, the importance of communication, and the realization of anticipated synergies during the post-merger period. The discussion centers on the events that followed the merger of steel giants Arcelor and Mittal into ArcelorMittal in mid-2006.

Author of the Case Study
Donald DePamphilis
Clinical Professor of Finance
California
(Article available under Creative Commons 3.0 license on Knol of Google)

Taken from Mergers, Acquisitions, and Other Restructuring Activities, 5th edition, 2009, by Donald M. DePamphilis. For more information, click here.

Background

The merger of Arcelor and Mittal into ArcelorMittal in June 2006 resulted in the creation of the world’s largest steel company. With 2007 revenue of $105 billion and its steel production accounting for about 10 percent of global output, the behemoth has 320,000 employees in 60 contries, and it is a global leader in all of its target markets.

Arcelor was a product of three European steel companies (Arbed, Aceralia, and Usinor). In contrast, Mittal resulted from a series of international acquisitions. Despite being competitors, the two firms exhibited little overlap in terms of their operations. However, their attributes proved to be highly complementary with Mittal owning much of its raw materials such as iron ore and coal and Arcelor having extensive distribution and service center operations. Like most mergers, ArcelorMittal faced the challenge of integrating management teams; sales, marketing, and product functions; production facilities; and purchasing operations. Unlike many mergers involving direct competitors, a relatively small portion of cost savings would come from eliminating duplicate functions and operations.

Top Management Sets Expectations

ArcelorMittal top management set three driving objectives before undertaking the postmerger integration effort. These included the following: (1) achieve rapid integration; (2) manage effectively daily operations; and (3) accelerate revenue and profit growth. The third objective was viewed as the primary motivation for the merger. The goal was to combine what were viewed as entities having highly complementary assets and skills. This goal was quite different from the way Mittal had grown historically, which was a result of acquisitions of turnaround targets focused on cost and productivity improvements.
Developing the Integration Team

The formal phase of the integration effort was to be completed in six months. Consequently, it was crucial to agree on the role of the management integration team (MIT), key aspects of the integration process such as how decisions would be made, and the roles and responsibilities of team members.

Activities were undertaken in parallel rather than sequentially. Teams from the two firms were identified. The teams were then asked to submit a draft organization to the MIT. The profiles of the people who would occupy the senior positions were defined and selection committees established. Once the senior managers were selected, they were to build their own teams to identify the synergies and to create action plans for realizing the synergies. Teams were formed before the organization was announced and implementation of certain actions began before detailed plans had been developed fully. Progress was monitored to plan on a weekly basis, enabling the MIT to identify obstacles facing the 25 decentralized task forces and, when necessary, to resolve issues.

The integration team leader was selected based on their demonstrated ability to be collaborative and process-oriented, enabling them to manage the weekly reviews and to resolve issues as they arose. The leader would also have to be sensitive to cultural differences in order to be able to get people to work together. Finally, the team leader would have to be someone who had the confidence of the CEO and other top managers.
Developing Communication Plans

Considerable effort was spent in getting line managers involved in the planning process and to sell the merger to their respective operating teams. Initial communication efforts included the launch of a top-mangement “road-show.” The new company also established a Web site and introduced Web TV. Senior executives provided two-to-three minute interviews on various topics giving everyone with access to a personal computer the ability to watch the interviews onscreen.
Owing to the employee duress resulting from the merger, uncertainty was high as employees with both firms wondered how the merger would impact them. To address employee concerns, managers were given a well-structured message about the significance of the merger and the direction of the new company. Furthermore, the new brand, ArcelorMittal, was launched at a meeting attended by 500 of the firm’s top managers during the spring of 2007. This meeting marked the end of the formal integration process. Finally, all communication of information disseminated throughout the organization was focused rather than of a general nature.

External communication was conducted in several ways. Immediately following closing, senior managers traveled to all the major cities and sites of operations (i.e., the road show) talking to local management and employees at these locations. Typicallly, media interviews also were conducted around these visits, providing an opportunity to convey the ArcelorMittal message to the communities through the press. In March 2007, the new firm held a media day in Brussels, which involved presentations on the status of the merger. Journalists were invited to go to the different businesses and review the progress themselves.

Within the first three months folowing closing, customers were informed about the advantages of the merger for them, such as enhanced R&D capabilities and wider global coverage. The sales forces of the two organizations were charged with the task of creating a single "face" to the market.

Achieving Operational and Functional Integration
ArcelorMittal management set a target for annual cost savings of $1.6 billion annually, based on their experience with earlier acquisitions. The role of the task forces was first to validate this number from the bottom up and then to tell the MIT how the synergies would be achieved. As the merger progressed, it was necessary to get the business units to assume ownership of the process to formulate the initiatives, timetables, and key performance indicators that could be used to track performance against objectives. In some cases, synergy potential was larger than anticipated, while smaller in other situations. The expectation was that the synergy could be realized by mid-2009. The integration objectives were included in the 2007 annual budget plan. As of the end of 2007, the combined firms were on track to realize their goal with annualized cost savings running $1.4 billion.

Concluding Formal Integration Activities
The integration was deemed complete when the new organization, the brand, the “one face to the customer” requirement, and the synergies were finalized. This occurred within eight months of the closing. However, integration would continue for some time to achieve cultural integration. Cultrural differences within the two firms are significant. In effect, neither company was homogeneious from a cultural perspective. ArcelorMittal management viewed this diverity as an advantage, since it provided an opportunity to learn new ideas.

This case study relies upon information provided in an interview with Jerome Ganboulan (formerly of Arcelor) and William A. Scotting (formerly of Mittal), the two executives charged with directing the postmerger integration effort. See Jan De Mdedt and Michel Van Hoey, "Integrating Steel Giants: An Interview with the Arcelor Mittal Post-Merger Managers," Mckinsey Quarterly, Februrary, 2008.


Source:
http://knol.google.com/k/case-study-the-challenges-of-post-merger-integration#

Parker Hannifin - A Century of Mergers

I came to know from a Wall Street Journal article republished in Mint that Parker Hannifin made more than 100 acquisitions. It will be interesting to study this company acquisition process to understand the practices that make a merger a success.

A brief about Parker Hannifin

Arthur L. “Art” Parker founded Parker Appliance Co. in 1918. It had to be closed and Parker went back to job. He restarted the company offering tube fitting components, attracting both automotive and industrial customers. One of his first customers was a rather famous one: Charles Lindbergh who used the components for his aeroplane.

In the mid 1930s, Art Parker took a major step forward by purchasing from the bankrupt Hupp Motor Co. an enormous, 500,000-square-foot manufacturing facility in Cleveland. Years later, the entire facility was fully utilized by Parker operations. By the end of the decade, Parker Appliance reached $3 million in sales.

Art Parker died in 1945 and his wife Helen (Fitzgerald) Parker invested his $1 million life insurance policy back into Parker company. She acquired Berea Rubber Company.

Another family member, Patrick S. (Pat) Parker was named president in 1968 and at that time annual sales revenue was $197 million. He retired from the position of chairman in 1999 and, by the time of his death in 2005, the company had become an $8 billion global giant of pneumatic, hydraulic, and electromechanical products.

Parker acquired 42 businesses in the 1994-2000 period.

Present chairman and CEO, Donald E. Washkewicz started with Parker in 1972 as an engineer in the Hose Products division. He carries on the Parker tradition of acquisitions, while also building brands and globalizing.

The result is stunning growth and nearly $11 billion in annual sales in fiscal 2007.

http://www.ien.com/article/ien-75th-anniversary/114645




Parker Hannifin, the Cleveland-based industrial products manufacturer, has made around 100 acquisitions in the past 10 years. According to CEO, Donald Washkewicz every acquisition fits their core business and is something they know well.

The company strives to keep talent at acquired companies by communicating frequently with employees and sticking to an orderly integration process. An “integration manager” is deputed to each acquired company to get to know its managers and rank-and-file employees and to help them understand Parker Hannifin’s goals. The company then sends teams of supply chain and sales managers, who share how they get the best prices for both supplies they use in manufacturing and for their own products. Finally, an innovation team urges acquired companies to launch new products to expand their units.

“We don’t try to ram our ways down everyone’s throat because that won’t fly, but instead try to get employees’ approval by showing how they can be even more successful (with us) than before they were acquired,” says Washkewicz. Do they remove people from acquired companies? The answer is yes, managers who don’t get results are removed.

http://www.livemint.com/2008/05/23235306/In-dealmaking-keep-people-in.html

Alcatel-Lucent Post Merger Performance

Information accesses on 24 Jan 2008 from http://www.alcatel-lucent.com

Incorporated in:
France

Executive Offices:
54 rue la Boétie
Paris 75008, France

Chief Executive Officer:
Patricia Russo

Employees:
79,000* in 130 countries

Stock Listing:
Euronext Paris and NYSE - ALU

Revenues:
€18.3 billion* (CY06)

* after completion of the Thales transaction


Alcatel-Lucent's vision is to enrich people’s lives by transforming the way the world communicates. Born with an unparalleled ability to offer end-to-end communications solutions to our customers, we are focused on enhancing client relationships and enriching the lives of people through communications. Expert, driven, intuitive, innovative, Alcatel-Lucent is the first truly global communications solutions provider, with the most complete end-to-end portfolio of solutions and services in the industry.


About Alcatel-Lucent
Alcatel-Lucent’s vision is to enrich people’s lives by transforming the way the world communicates. Alcatel-Lucent provides solutions that enable service providers, enterprises and governments worldwide, to deliver voice, data and video communication services to end-users. As a leader in fixed, mobile and converged broadband access, carrier and enterprise IP technologies, applications, and services, Alcatel-Lucent offers the end-to-end solutions that enable compelling communications services for people at home, at work and on the move.

With 79,000 employees (after the completion of the Thales transaction) and operations in more than 130 countries, Alcatel-Lucent is a local partner with global reach. The company has the most experienced global services team in the industry, and Bell Labs, one of the largest research, technology and innovation organizations focused on communications. Alcatel-Lucent achieved adjusted proforma revenues of Euro 18.3 billion* in 2006, and is incorporated in France, with executive offices located in Paris.

Organization
With a strong focus on complete solutions maximizing value for customers, Alcatel-Lucent is organized around three business groups and two geographic regions. The Carrier Business Group serves fixed, wireless and convergent service providers - as well as enterprises and governments for their business critical communications. The Enterprise Business Group focuses on meeting the needs of business customers. The Services Business Group designs, deploys, manages and maintains networks worldwide. The company's geographic regions are the Americas and Asia-Pacific, Europe, Middle East, and Africa.

Innovation & Technology
Alcatel-Lucent today is one of the largest innovation powerhouses in the communications industry, representing a combined R&D investment of Euro 2.7 billion in 2005, and a portfolio of over 25,000 active patents spanning virtually every technology area. At the core of this innovation is Alcatel-Lucent’s Bell Labs, which brings together Lucent Technologies' Bell Labs and Alcatel’s Research & Innovation organizations, providing Alcatel-Lucent with an innovation engine comprising researchers and scientists at the forefront of research into areas such as multimedia and convergent services and applications, new service delivery architectures and platforms, wireless and wireline, broadband access, packet and optical networking and transport, network security, enterprise networking and communication services and fundamental research in areas such as nanotechnology, algorithmic, and computer sciences.

History
Formed from the merger of Alcatel and Lucent Technologies, Alcatel-Lucent combines two entities that share a common lineage that can be traced back to 1986, when Alcatel’s parent company, CGE (la Compagnie Générale d’Electricité), acquired ITT’s European telecom business. Nearly 60 years earlier, ITT had purchased most of AT&T’s manufacturing operations outside the United States. AT&T was Lucent’s former parent company.

By creating Alcatel-Lucent we are bringing our common lineages back together and starting an exciting new chapter of our history -- creating the world’s first truly global communications solutions provider, with the most complete end-to-end portfolio of solutions and services in the industry.


-------------------

September 2007

Restructuring Plan

Pat Russo, chief executive of Alcatel-Lucent, has been given one month to present an emergency restructuring plan to her board, as well as lay out where the group should focus its future research and sales efforts.

Ms Russo is also being urged to streamline the telecommunications equipment group’s organisational structure, particularly the executive committee, which has grown top heavy since the merger of equals between Alcatel of France and Lucent of the US
Directors believe this has slowed decision-making and helped spark the crisis that has led to three profit warnings in less than 10 months.

The group’s directors met in Paris on Friday for an update on the crisis, where they told Ms Russo to present the information at the next board meeting on October 30. Directors are intersted to know the next step, after the restructuring is done.


Alcatel-Lucent has been struggling with a rapidly deteriorating market in the US, as well as the typical integration problems that beset many mergers. However, some inside the company say management has not been quick enough to make the necessary hard decisions, including a far more radical approach to cost-cutting and the elimination of management and operational duplications.

Per Lindberg, analyst at Dresdner Kleinwort, on Thursday published a research note calling on Alcatel-Lucent to replace Ms Russo with Mike Quigley, former chief operating officer and one-time heir apparent to Mr Tchuruk, who quit last month.

Mr Lindberg, who changed his rating on Alcatel-Lucent from “hold” to “buy”, said the company should consider disposals so as to pay for a more ambitious reduction in its workforce.

Alcatel-Lucent is planning to reduce the workforce by 12,500, but Mr Lindberg said it should be cut by 30,000, so as to bring productivity in line with rivals such as Ericsson.

He added that Alcatel-Lucent should refocus its research and marketing on areas where the company had competitive strength.

“There is little doubt that the merger between Alcatel and Lucent has turned into a veritable fiasco,” said Mr Lindberg.

http://www.ft.com/cms/s/0/4b6ecf2e-6d2f-11dc-ab19-0000779fd2ac.html
----------------------

Patricia Russo was beaming on Dec. 1, 2006, when she appeared at a Paris press conference celebrating her appointment as chief executive officer of Alcatel-Lucent, a $26 billion global telecom equipment giant newly created by an historic Franco-American merger. She has had little reason to smile since then. Alcatel-Lucent (ALU) has posted three consecutive quarterly losses.

On Oct. 31, 2007 the company announced an emergency restructuring plan under which one in five of its 80,000 employees will lose his job by 2009. Shares are down a stomach-churning 50% since January, and five of Russo's top deputies have left the company. Many industry-watchers now say the merger was a mistake.

Russo agrees it has been an awful year for Alcatel-Lucent. But she staunchly defends the merger and cites evidence the worst is now over. Alcatel-Lucent's recent turmoil stems not from bad strategy but from "problems that we're going to work our way out of."

One of those problems, Russo now admits, was that integrating Alcatel and Lucent proved more disruptive than expected. Customers, uncertain about possible changes in the merged company's product lineup, hesitated to place new orders. At the same time many employees were "distracted" by worries their jobs would change or be eliminated, she says.

That opened the door to aggressive competitors such as mobile equipment market leader Ericsson (ERIC) and Huawei Technologies, who have grabbed market share from Alcatel-Lucent's wireless network business. "Our competitors pulled the rug out from under us," Russo says. "They put forward some very aggressive pricing." Some mobile operators jumped ship, and while Alcatel-Lucent was able to hold onto others, it often had to give discounts or concessions that ate up profits.

Profitability also suffered as Alcatel-Lucent tried to streamline its product lineup. Take W-CDMA, the third-generation wireless technology the company adopted as a successor to the so-called CDMA technology central to its U.S. wireless business. Russo says she decided to discontinue much of the W-CDMA gear developed by Alcatel, replacing it with equipment made by a unit of Nortel (NT), which the merged company acquired earlier this year. When customers began changing over to new equipment, Alcatel-Lucent had to absorb much of the cost.

Russo acknowledges too that until a few months ago, some of Alcatel-Lucent's product offerings weren't up to par technologically. "We were late in getting to the refresh of the latest technology" for GSM networks—the second-generation mobile standard used in most countries outside the U.S. The GSM offering was updated several months ago, she says, and now "That business is doing just fine."

Indeed, Russo says many of the problems bedeviling Alcatel-Lucent over the past year are starting to ease. Customers now have clearer information about the merged company's product portfolio. And rivals such as Ericsson can't afford to keep luring customers away with aggressive pricing, as their own profits have tumbled .

According to Russo,Alcatel-Lucent also is powering ahead in developing countries Just this week it won a $1.1 billion contract with two Chinese mobile operators for network equipment. Its fixed-telephone and broadband equipment business, though suffering from the housing slump in the U.S., is generally healthy too. The company remains the world leader in digital subscriber line (DSL) broadband equipment and hopes to translate its big customer footprint and strong carrier relationships into a post position for the coming rollout of optical networks to neighborhoods and homes.

With an eye to falling prices and tightening margins for basic telecom equipment, Russo also is pushing Alcatel-Lucent increasingly into the service and support business, where it already ranks No. 2 globally—behind Ericsson. A team of 20,000 field technicians operating in 130 countries has won Alcatel-Lucent contracts to build and operate fixed and mobile networks for carriers around the world, and services should account for about one-quarter of the company's top line this year, up from 20% in 2006. The services market worldwide is growing at double the rate of telecom equipment.

Russo is confident the company will emerge stronger and more competitive. "This merger still has strategic logic," she says.

http://www.businessweek.com/globalbiz/content/nov2007/gb20071128_204292.htm?chan=top+news_top+news+index_businessweek+exclusives

Is the Worst Over at Alcatel-Lucent?
Business Week, Europe November 28, 2007,

---------------------

Case RBS - ABN AMRO

The case needs to be developed. Presently relevant materials are being assembled
-------------------
3rd Jan 2008


THE 71 billion takeover of Dutch bank ABN Amro was a coup. Sir Fred Goodwin, the 49-year-old chief executive of Royal Bank of Scotland (RBS) has been confirmed as the uber-hero of Scottish business and finance. The three-way takeover, in which RBS acquired the Dutch lender's European corporate and investment banking arms as well as its Asian operations, with other parts going to RBS's bidding partners Banco Santander and Fortis, is the largest and most complex banking takeover ever. At a stroke it has transformed RBS into a much more global financial services player, enabling it to narrow the gap with giants such as Citigroup and HSBC.



The most challenging task facing Goodwin and his close colleague Mark Fisher (RBS's director of manufacturing) is to deliver on promises they made to investors during the gruelling takeover battle, which lasted from April to October. This will include dividing up the spoils between the three winning banks without upsetting customers or staff as well as integrating the businesses that RBS has acquired with the Edinburgh-based bank's existing operations - again without alienating ABN Amro's customers or staff.

Given that Goodwin has promised cost savings of 1.3bn a year from the parts of ABN Amro that he is acquiring, job losses are clearly on his agenda. There could be as many as 20,000, and he has said they will not uniquely fall on the previously underperforming Dutch side of the equation.


On December 6, 2007, Goodwin - said: "One of the most important things we've been doing is looking at management structures. One of the things we did after NatWest, and it slows things down a little bit but it's critically important, in making all the management appointments, is to go through an interview process and we involve external consultants in the process, to ensure fairness and also to ensure an appearance of fairness. Once the senior appointments have been made, it removes a lot of uncertainty."



RBS's shares were trading at 705p on February 16, 2007 before Goodwin announced his intention to bid for the Amsterdam-based bank. They have since fallen 39% to 432p.

Admittedly, all bank shares have taken a hammering over worries about exposure to bad debts arising from the sub-prime mortgage crisis. Investors have been fretting about the true level of that exposure, enmeshed as it is in opaque and convoluted financial instruments such as collateralised debt obligations (CDOs), which are basically parcels of debt extended to sub-prime borrowers in the US.

After the $10.5bn acquisition of Ohio-based Charter One Financial in May 2004, Goodwin came in for a similar drubbing from investors, dismayed that he had overpaid for the US bank. Goodwin was forced to promise to steer clear of further big acquisitions and pledged to do more to boost shareholder value, through organic growth, higher dividends and share buybacks. For a couple of years, he kept to his pledges, but when the opportunity to acquire ABN Amro arose last spring, he could not resist having a go.

Writing in the Financial Times in October, Lina Saigol claimed that Goodwin and his Dos Amigos - Emilio Botin, patriarch of Madrid-based Banco Santander and Jean-Paul Votron, boss of Belgian-Dutch bank Fortis - were "driven by ego, conceit and a deep-seated need for power" to plough ahead with the ABN Amro deal even as global capital markets were collapsing. She argued they were paying a 70% premium to ABN Amro's share price prior to the announcement of its abortive tie-up with Barclays. Many critics argue the three bidding banks would have been better advised to walk away or at least lower their offer for ABN Amro. They say they could have invoked a so-called "material adverse change" clause, arguing that the sub-prime crisis - which had yet to erupt when they made their offer in April - had changed the value of ABN Amro for good.

James Eden, bank analyst at Exane BNP Paribas, says: "We did not condone the decision by RBS management to press ahead with the value destructive acquisition of ABN Amro. In our view, it could - and should - have walked away, or at least secured a lower acquisition price."

In October and December he was keen to stress the value that he believes lurks within ABN Amro's international franchise. He also said it had only about £300 million of markdowns on its sub-prime related investments.

Speaking on December 6, Goodwin argued that RBS's prime motivation for the ABN Amro deal was to diversify its asset base and give the Edinburgh bank a wider range of strategic options. "What we've been trying to do for a long time now is build a group that has sufficient diversification in its income streams that we've opportunity to participate in growth whenever and wherever it happens No single economy is ever going to be booming all the time but having a finger in a greater number of pies gives us a greater opportunity to deliver sustainable good quality earnings."

On that occasion Goodwin also took the opportunity to reassure investors that RBS's annual results for 2007 (due in February) will be ahead of analysts' estimates - in other words more than £10 billion - and that the merged bank's exposure to the whole sub-prime mess would be much lower than had been feared. Overall, he said the bank will write-off about £1.5bn because of its exposure to the toxic tide and that large areas of RBS are performing strongly.

After biting his tongue for several weeks while the brickbats fell all around, Goodwin clearly relished being able to deliver a much more positive story than many in Square Mile had expected on December 6. He said: "It hasn't exactly been beer and skittles this year but we're anticipating a strong set of results. I think you'll see in the body of the pre-close trading statement a comment suggesting that when you strip out the markdowns and the gains, you'll see a growth trajectory that's pretty consistent."

Goodwin is also surprisingly upbeat about the outlook for the UK economy - which some believe will follow the US into recession. "It is not in bad shape," he says. "Slowing down never feels as good as speeding up or being at a constant speed. From our customers' perspective it doesn't look too bad. Obviously the retailers are all looking to see anxiously what happened over the Christmas period but touch wood so far so good. We're seeing some very high levels of credit-card spend."

Nor does Goodwin believe the crisis at Northern Rock will affect consumer confidence or cause people to leave their credit cards at home. He says: "Insofar as there's any damage from Northern Rock, I think it's more to do with international perceptions of the UK financial services industry. I don't think it will affect the behaviour of the consumers in the UK because no consumers have lost any money as a result of Northern Rock."

He also points out that RBS has been a major beneficiary of the Newcastle-based lender's collapse, with many depositors shifting savings to RBS and NatWest as part of a "flight to quality". Overall, he says, RBS saw inflows of more than £1bn during September (the month in which Northern Rock collapsed).


Goodwin was rumoured to have been approached to take over from Charles "Chuck" Prince as chief executive of Citigroup. Even though such a move would see him multiply his remuneration package tenfold, Goodwin is seen as unlikely to want to take over the reins at the New York-based banking giant. He recognises that his job at RBS is far from complete. As long as he can apply the same ruthless determination to integrating ABN Amro as he applied to the integration of NatWest, he will almost certainly be able to prove his critics wrong.

Excerpts from the article from Sunday Herald, 3 Jan 2008
http://www.sundayherald.com/business/businessnews/display.var.1932743.0.goodwin_hunting.php
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Acquisitions by GE - Case Study

Nikhil Mittal, P A Jeetendra, Saurabh Bishit, Vineet Gupta (PGDIM 13, NITIE)

GE is a prolific acquirer of companies. The case study documents some of the recent acquisitions.

SONDEX
Announcement
U.S. conglomerate General Electric Co. has agreed to buy British maker of oilfield services equipment Sondex Plc a company listed on the London Stock Exchange on 3rd September 2007. The announcement was made in London UK.

Sondex is headquartered in Hampshire in the UK and specializes in the design, manufacture and sale of electro-mechanical downhole tools and surface equipment to oilfield service companies who run well-site operations on behalf of oil and gas production companies.

Sondex makes flow-meters and other electronic instruments to measure the quality of oil and gas in wells, and had revenue of 68.5 million pounds in the year ended Feb. 28. Fairfield, Connecticut-based GE will combine the unit with its energy division, which has sales of $19.1 billion and products such as turbines and solar equipment.
``Sondex is one of the best niche players in oilfield services and with GE's global clout that immediately becomes a worldwide proposition,'' said Mark Breslin, an analyst at McCall Aitken McKenzie in Stirling, Scotland, with an ``accumulate'' rating on Sondex. ``GE has been steadily moving up the chain to more high-value devices.''
Sondex develops and manufactures electro-mechanical equipment used in oil and gas fields such as drilling and transport tools as well as more sophisticated devices that measure well performance and the quality of the oil being mined. The company has embarked on a series of acquisitions since it listed in 2003, including the Aberdeen-based Geo-link, Bluestar in Canada and the Texan company Ultima Labs.
The integration into GE's business will enable the company to tap into fast-growing markets around the world, in particular China where the company has a fledgling operation, and Russia.

The company's existing management team led by Mark Perry, the chief executive of Sondex, will stay on after the acquisition is complete. Last year Sondex notched a 33 per cent increase in revenue to nearly £70m, with pre-tax profit rising 14 per cent to £8.5m. In June, it said that orders had risen 20 per cent on the previous year due to strong demand in China and Russia.

In contrast, GE's Optimization and Control unit, which has never acquired a company outside the United States before, recorded revenue of $1.1bn.

Valuation

General Electric, whose interests span technology, media, energy and financial services, will pay 460 pence a share for Sondex, which designs, makes and markets electro-mechanical based equipment for oilfield service companies. That is 35.5 percent above Sondex's closing share price on Aug. 30, the day before it announced it was in takeover talks. The total valuation of Sondex stands at 288.7 million pounds ($583.1 million).

The price being offered by GE is ``fair and reasonable,'' says industry analysts.
Sondex said June 20 that orders were 20 percent ahead of last year, helped by demand in China and Russia. Fiscal 2007 profit through February increased to 5.7 million pounds from 5.1 million
pounds on revenue 33 percent higher at 68.5 million pounds. The U.K. company last year
acquired Ultima Labs Inc. to add the Houston-based company's technology used to measure the
fluid content of rock formations.
Synergies and Benefits claimed:
“Sondex will be an important addition to GE Energy's portfolio of businesses, complementing
our existing Tensor product line. The company brings to us a broad range of advanced products
and technologies, as well as employees with a deep understanding of the customers they serve.
We expect the combination to form a substantial growth business for GE going forward.” said
Brian Palmer, Vice President of GE Energy’s Optimization and Control business.
"The acquisition of Sondex by GE is an exciting move for our company and employees. With
GE, we will have greater resources to further develop innovative new technologies and together
with one of the world’s most respected companies, we will be able to provide an enhanced level
of global support to our customers.” said Martin Perry, Chief Executive of the Sondex Group.
Sondex, with operations in the U.S., the U.K. and seven other countries, will operate as part of
GE Energy's Optimization and Control business. Sondex makes products to monitor reservoir,
well and production conditions. GE's Tensor division makes oil and gas sensors. "Sondex will be
an important addition to GE Energy's portfolio of businesses, complementing our existing Tensor
product line," said Brian Palmer, vice president of GE Energy's Optimization and Control
business.

"With GE Energy, we will have greater resources to further develop innovative new technologies
and provide an enhanced level of global support to our customers," said Sondex CEO Martin
Perry.
Structuring of the deal
General Electric has bought Sondex in an all cash deal.
Financing of the deal
General Electric will finance the deal from its reserve and surplus.
Advisors to the Buyer and Sellers
Sondex, headed by Chief Executive Officer Martin Perry, is being advised by Investec. Credit
Suisse advised GE.
Subsequent Performance
On 3rd September Sondex shares were up 7.5 percent at 454.25 pence by 0752 GMT.
GE’s share rose by 0.17 dollars (+0.4%) to 39.04 dollars at that time.
Smiths Aerospace
Announcement
Global giant GE Aerospace announced on 12th January, 2007 that it was acquiring
Smiths Aerospace which is a manufacturer of aircraft control & diagnostic systems.
Smiths is a global technology company, listed on the London Stock Exchange.
Smiths Group is a world leader in the practical application of advanced
technologies. Its products and services make the world safer, healthier and more
productive. Smiths Group has four divisions: Aerospace, Detection, Medical and
Specialty Engineering. It employs 32,000 people and has over 250 major facilities in
50 countries. For more information visit www.smiths.com
Smiths Aerospace is a leading transatlantic aerospace systems and equipment
business, with more than 11,000 employees and $2 billion revenues globally. The
business holds key positions in the supply chains of all major military and civil
aircraft and engine manufacturers and is a world-leader in digital, electrical power,
mechanical systems, engine components and customer services.
Valuation
Smiths Aerospace is the largest division, with sales of £1.3bn. It is a tier-one
supplier to the world’s major aircraft and engine manufacturers, such as Boeing,
Airbus and Rolls-Royce. Although exposed to the delayed Airbus A380, otherwise
known as the superjumbo, Butler-Wheelhouse said that “this program will have
minimal profit effect in the early years. On the other hand, the Boeing 787, which
we’ve invested in heavily, has gone extremely well.”
And the outlook for the sector is buoyant. “For both military and commercial
aircraft, we see continued strength at least through 2009.” With this level of
earnings visibility, I think the unit is worth some £2.3bn, representing a 2005/2006
EBIT multiple of 15 times, which is in line with its peers.

Synergies and Benefits claimed :
The acquisition will broaden GE’s offerings for aviation customers by adding Smiths
innovative flight management systems, electrical power management, mechanical
actuation systems and airborne platform computing systems to GE Aviation’s
commercial and military aircraft engines and related services.
“This acquisition is consistent with our strategy to invest in high-technology
infrastructure businesses that deliver strong growth, earnings expansion and
higher margins,” Immelt said. “GE Aviation is growing about 10% a year and this
acquisition gives us a technology growth platform that will be accretive to our net
income and will deliver immediate and future value for our investors.”
GE Aviation President and CEO Scott Donnelly said, “The acquisition will broaden
our collective expertise. Smiths has made significant investments in its aerospace
technologies with resulting success on several exciting new aircraft. Together, we
will bring greater product scope and value to our customers.”
Financing of the deal
General Electric will finance the deal from its reserve and surplus.
Advisors to the Buyer and Sellers
Smiths financial advisors in the deal were Evercore Partners Limited, as well as
Credit Suisse Securities (Europe) Limited and JPMorgan Cazenove Limited.
Brunswick is their PR adviser.
Subsequent Performance
Smiths shares rose 109.50 pence to £10.945 in London after the company said it
planned to return £2.1 billion, or $4.1 billion, to shareholders. GE shares fell 3 cents
to $37.89 .
Smiths aerospace has been doing really after the acquisition by GE. Some
highlights after the deal are shown below.
Smiths Aerospace awarded Performance Based Logistics C-130J\K contract
worth $52m
Smiths Aerospace and Boeing reach milestone in successful refueling hose
deployment for KC-767 Italian Tanker
Smiths Aerospace partners with HCL to open development centre in India
Smiths Aerospace grows engine components business in North Carolina

ICONICS
Announcement
WILTON, CONNECTICUT (November 24, 2004): GE Infrastructure, a unit of General Electric
Company (NYSE:GE), and Ionics, Inc. (NYSE:ION) announced today that they have signed a
definitive agreement for GE's acquisition of Ionics.
Ionics is a global leader in desalination, water reuse & recycling, and industrial ultrapure water
services. Ionics will join GE Infrastructure’s Water & Process Technologies business unit upon
completion of the transaction. Ionics, headquartered in Watertown, Mass., is a global leader in
water purification and wastewater treatment. The Company has over 50 years of experience in
the design, installation, operation and maintenance of water and wastewater treatment systems
and is a leading provider of emergency and long-term water purification services. More
membrane-based desalination systems have been designed and built by Ionics than any other
supplier worldwide. Ionics is also a leader in supplying zero-liquid-discharge systems, in
providing ultrapure water systems for the power and microelectronics industries, and in the
measurement and analysis of water impurities
GE Infrastructure, headquartered in Wilton, Conn., is a high-technology platform, comprised of
some of GE's fastest-growing businesses, including the Security and Water & Process
Technologies platforms. These global businesses offer a set of infrastructure protection and
productivity solutions to some of the most pressing issues that industries face.
Valuation
Ionics have signed a definitive agreement for GE's acquisition in an all cash merger for $44 per
share, valuing the transaction at approximately $1.1 billion plus the assumption of existing debt.
Synergies and Benefits claimed:
“Water is the lifeblood of industries and communities around the world, and scarcity, increasing
demand and rising costs are driving the need to conserve, reuse and identify new supplies of this
essential resource,” said Bill Woodburn, President and CEO of GE Infrastructure. “The
combination of Ionics’ technology, project experience, and services network with GE’s operating
and project finance expertise will accelerate the development of technology solutions for the
global water purification segment. We see significant revenue and cost synergies that will enable
us to focus our resources on developing technologies that increase access to safe drinking water
and provide industrial customers with greater access to ultrapure water sources."
Doug Brown, CEO of Ionics said, “Through this merger we create the opportunity to serve our
industrial and municipal customers in new and exciting ways. Both GE and Ionics are focused on
building the water services business. By combining our technology with GE’s and by accessing
GE’s financial expertise and world class international organization, we substantially enhance our
ability to deliver our water purification services globally.”
George Oliver, GE Infrastructure’s President of Water & Process Technologies said, “This
acquisition strengthens GE’s commitment to people, technology and solutions. There are great
synergies between the two companies – GE currently has more than 2,000 scientists and
engineers focused on improving water quality for industrial and commercial use, and the addition
of Ionics expands our ability to provide solutions to our customers’ most pressing water needs.
Ionics has established technologies, engineering resources and global desalination management
capabilities that gives GE a significant presence in the potable water segment.
“Because Ionics utilizes multiple technologies for its emergency mobile fleet, we will be able to
offer expanded services for our industrial customers who need immediate assistance treating
their water supply,” Oliver said. “The acquisition of Ionics reinforces our commitment to our
customers by providing the services they need to remain productive and profitable.”
Structuring of the deal
General Electric has bought Ionics in an all cash deal.
Financing of the deal
General Electric will finance the deal from its reserve and surplus.

Advisors to the Buyer and Sellers
Goldman, Sachs & Co. and UBS Investment Bank acted as financial advisors to Ionics.
Subsequent Performance

ZENON

Announcement
General Electric Co. agreed to buy Zenon Environmental Inc. for C$760 million ($655 million),
its second purchase of a water-filtration company in the past year on March 14, 2007.
ZENON is the world's largest manufacturer and system integrator of hollow fiber
membrane technologies and complimentary products. Since its inception in 1980,
ZENON has repeatedly demonstrated through hundreds of installations in more
than 45 countries, that its products and people have the proven experience to treat
virtually any water source.
ZENON employs over 1,400 skilled people around the world, each dedicated to
continuously improving our membrane technology, our systems, and our services—
ensuring that our customers can always rely on us for the best the industry has to
offer.
To meet global demand for our products, ZENON operates two state-of-the-art
manufacturing plants, one in Canada and one in Hungary, which have the potential
to generate the world's highest hollow fiber membrane output.
Valuation
GE, the world's second-biggest company by market value, will pay C$24 in cash for
each outstanding share of Oakville, Ontario-based Zenon, the companies said in a
statement today. Fairfield, Connecticut-based General Electric is paying 55 percent
more than Zenon's share price of C$15.50 in Toronto trading yesterday.
Synergies and Benefits claimed :
The purchase of Zenon, whose products are used to filter water for municipal and
agricultural use, will help GE boost revenue from its water-treatment unit about 25
percent to almost $2.5 billion next year, the company said. GE entered the industry
in 2002 and last year paid a 48 percent premium for Ionics Inc. to add desalination
and industrial customers.
``This is a good deal for GE,'' said Steven Isenberg, chief executive officer of M
Capital Partners Inc. in Toronto, which owns about 10,000 Zenon shares. ``Water is
an important new business for them.''
GE's water unit, based in Trevose, Pennsylvania, specializes in reverse osmosis
technology, which removes dissolved solids, such as salt, from water. Zenon's
products add to that line and give GE ``greater market share,'' said Michael
Gaugler, an analyst who follows water companies for Boenning & Scattergood Inc.
in West Conchohocken, Pennsylvania.

Financing of the deal
General Electric will finance the deal from its reserve and surplus.

Advisors to the Buyer and Sellers

Smiths financial advisors in the deal were Evercore Partners Limited, as well as
Credit Suisse Securities (Europe) Limited and JPMorgan Cazenove Limited.
Brunswick is their PR adviser.

Subsequent Performance
Shares of Zenon traded as high as C$27.10 in July before sliding in recent months
as changes to its manufacturing slowed production. They rose C$8.28 to C$23.78 in
Toronto.
General Electric shares rose 11 cents to $33.78 at 4:16 p.m. in New York Stock
Exchange composite trading. They have declined 6.7 percent in the past year.

Grasim's Acquisition of L&T Cement Business - Case Study

1. Initial Contacts and Discussion
All the talks about Grasim , the flagship company of the Aditya Birla Group, a leading
Indian business conglomerate showing keen interest in L&T started way back in Nov
2001. Kumar Mangalam Birla always wanted to become a major player in cement
industry in India and worldwide.
1.1 Reliance out, Grasim in
First step in order to fulfill his dreams began with acquiring of 10% stake of Reliance in
L&T (Larsen and Toubro) for INR 766.5 crore. There seemed to be some planning
behind this exchange of stocks between Reliance and Grasim because the Reliance
Group (Reliance), which held 3.92% in L&T in September 2001, had increased its stake
to 10.05% by November 2001, by acquiring over 15.8 million shares from the market.
Reliance sold this entire stake to Grasim at Rs 306.60 per share, at a premium of 47%
over the prevailing market price of Rs 208.50. Thus, since late‐2001, Grasim had
acquired over 15% stake in L&T and had also made an open offer to L&T shareholders
to further increase its stake.
The deal seems to be a win‐win situation for the three entities concerned. Although
Grasim and L&T have their fingers in many business pies, cement is the prime cash
driver for both companies. The combine becomes the largest player in the cement
sector, overtaking the Gujarat Ambuja‐ACC pairing. For Reliance, the deal translates to
exiting from a non‐core business at a hefty profit and the inflow of much‐needed cash to
fund some of its ongoing capital projects. In one stroke, Grasim has catapulted to the
top spot in the cement sector as well as stalled the possible entry of an international
major. Grasim is also expected to gain market leadership in the eastern, southern and
western markets through this association; the Ambuja‐ACC combine will still rule the
roost in the north, though.
4
1.2 Grasim’s first intermediate open offer
In May 2002, Grasim further acquired a stake of 2.84% in L&T from the open market,
taking its overall holding to 12.89%. These shares were purchased at prices ranging
between Rs 175 to Rs 180.
Justifying the above move, Grasimʹs President and Chief Financial Officer, D D Rathi,
said that since the company had surplus cash with no immediate investment plans,
increasing the stake in L&T seemed to be a good opportunity. The decline in the value
of L&T stock since September 2001 had also induced Grasim into buying L&T shares.
Industry observers however already had commented that there was a lot more behind
Grasimʹs move than the strategic investment angle. They alleged that” Grasim was trying
to make a ʹbackdoor entryʹ to take control in L&T”.
1.3 L&T’s kneejerk reaction
This increase of stake of Grasim caused some uneasiness in the power circles of L&T.
They tried to protect L&T from the possible takeover by Grasim Industries Limited by
announcing new plans for cement division, L&T cement. In October 2002, Larsen &
Toubro Ltd. (L&T), announced plans to spin off (demerge) its cement unit into a
separate company. It was told that L&T was thinking of demerger for the past 3 years
and not because of imminent threat posed by Grasim. The reason given was that,
though the cement division generated 26% of the groupʹs revenues, it consumed over 75% of
its total investments.
As per the demerger plan, called the Structural Demerger, it was ruled that L&T along
with financial institutions (FIs) would hold 76% in the new cement company, while the
remaining 24% would be distributed among the existing shareholders of L&T. L&T
5
would later sell 6% of its share to the FIs, retain the control in the company for the
following 4 or 5 years and subsequently, sell half of the 70% stake to a strategic partner.
Grasimʹs stake in the cement business would come down to 3.75%, if L&Tʹs demerger
plan went through. Since Grasim had spent over Rs 10 billion in acquiring its L&T
stake, it was not ready to let go off the latterʹs cement business (one of its own core
businesses).

Grasim therefore charged that L&T, through the demerger plan, was trying to retain
control of the business division with itself, without focusing on overall shareholdersʹ
interests. Grasim claimed that under L&Tʹs demerger plan, L&T shareholders would
only get a 24% stake in the new cement company, as a result of which individual
shareholders would not have much control over the new cement company
1.4 Grasim’s Proposal Announcement
Grasim came out with an alternate vertical demerger plan in November 2002.
According to this plan, the cement unit was to be demerged into a separate entity which
would be listed on the stock exchanges.
All L&T shareholders including the Aditya Birla Group would get shares in the new
company. However, L&T, as a company, would not hold anything. Reportedly, the
relationship between the board members of Grasim and L&T also became increasingly
hostile. L&T and Grasim nominees on the L&T board were resorting to ʹmutual fault
finding.ʹ
While other directors blamed Grasim for insider trading, Grasim nominees blamed the
other board members for the ʹbelow par performance of L&T in 2002 (the company had
reported a profit of Rs 188.9 million for the quarter ended June 2002, as compared to Rs
651 million for the same period in 2001).
6
1.5 Grasim’s intermediate unsuccessful open offer
The open offer at Rs 190 per share by Grasim to acquire 20% stake in L&T was put on
hold by the Securities Exchange Board of India (SEBI) pending investigations into the
deal including ʺchange in controlʹʹ. As soon as the open offer was announced, there was
a widespread, and well‐founded, view that the price was low. In general, in takeover
situations, the premium for corporate control has been anywhere between 100 per cent
and 150 per cent of the market price levels in most deals of consequence. Significantly,
Grasim had paid Rs 306.6 per share to Reliance to pick up its initial stake of slightly
more than 10 per cent.
1.6 Twist in the Tale: L&T’s new maneuver
In December 2002, L&T announced that it was considering the proposal made by
Commonwealth Development Corporation (CDC), a UK based company, to invest in its
cement business.
Under this proposal, CDC was to subscribe to optionally convertible debentures of
L&Tʹs demerged cement business and with an option to convert the debentures into
6.8% equity stake by December 2004. If CDC decided to hold on to the debentures, it
could redeem them in three equal installments between 2004 and 2007. According to a
clause in CDCʹs proposal, CDC would convert the debentures into equity only when the
share price of the demerged cement company reached a specific price, called the strike price. The strike price was fixed as Rs 158 per share. Another clause in CDC's proposal stated that L&T required the approval of CDC if it wanted to come out with an initial public offering (IPO) for the cement business.

Comments from both sides
We are not the buyer who would naturally look for the lowest valuations. We are the seller
looking for the best valuations. As a seller, getting funds at the current time at the best future
valuations is what the shareholder is looking for and that is what L&T has done.ʺ
‐ An L&T spokesman, speaking in favor of potential buyer CDCʹs proposal, in
December 2002.
ʺIt is obvious that the whole purpose of this exercise is to create confusion in the minds of the
shareholders of L&T and change the very structure of the target company, L&T, so that essential
features of our clientsʹ offer would be greatly prejudiced and jeopardized.ʺ
‐ Grasimʹs solicitors, commenting on L&Tʹs demerger proposal, in December 2002



2. Acquisition Announcement
PRESS RELEASE
6 July, 2004
Mumbai
L&T completes cement restructuring; Grasim acquires majority stake in UltraTech
Larsen & Toubro Limited (L&T) and Grasim Industries Limited (Grasim) today
announced that the implementation process of the demerger of the cement division of
L&T has been completed, and Grasim has acquired majority stake in UltraTech CemCo
Limited (UltraTech), the demerged cement business of L&T.
The scheme of arrangement for the demerger of the cement business, sanctioned by the
Honorable High Court of Bombay, became effective from Friday, 14 May, 2004.
Accordingly, the cement business undertaking was transferred to and vested in
UltraTech CemCo Limited.
Grasim had made a successful open offer bid for 30 per cent of the equity of UltraTech
with a view of taking management control. Concurrently, Grasim acquired 8.5 per cent
equity stake of UltraTech from L&T, and Grasim and its associates have sold 14.95 per
cent of their holding in the demerged L&T to the L&T Employee Welfare Foundation.
Speaking on the occasion, Mr. A.M. Naik, Chairman & Managing Director, L&T, said
ʺThis transaction, one of the biggest in corporate India, has helped to unlock value for
its shareholders and position the demerged L&T as a more focused engineering and
construction co.ʺ
9
Says Mr. Kumar Mangalam Birla, Chairman, The Aditya Birla Group, ʺThis transaction
reflects our commitment to build a leadership position in cement. We believe that it will
take about two to three years for UltraTech to provide a competitive return on the
aggressive price offered to its shareholders.ʺ
The transaction is expected to provide UltraTech an opportunity to leverage synergies
with Grasim and strengthen their ability to compete in the Indian and overseas markets.
Source:
http://www.grasim.com/media/press_releases/200406june/20040622_ultratech.htm


3. Valuation

As per the open offer price of Rs346 per share, EV/ton worked out to US$83 per ton of
capacity (US$105 per ton of production). This was at a 15% premium to ACC and 32%
discount to GACL valuations.
GACL was the most efficient player in the cement industry, which justified its premium
valuation. At the offer price of Rs346, Grasim was offering to pay US$83 per ton for its
stake in UCL. Part of this premium could be attributed to a premium for acquiring
controlling stake in the company through the offer. The listing price however would not
include a ‘Control Premium’ and was likely to be lower than the offer price.
Based on operational parameters, Cemcos was expected to trade at a discount to Gujarat
Ambuja as well as ACC on listing. Its EBIDTA margins were lower than both its peers.
ROCE was a low 4%. EV/EBIDTA at 15.4x is on the higher side as compared to ACC
(14.6) and Gujarat Ambuja (15.4).
11
Based on an EV/Ton of US$70 (2.5% discount to ACC), the fair price worked out to
Rs293 per share. Even if Cemco managed to get a valuation similar to ACC at US$72 per
ton, fair price works out to Rs306.

4. Synergies Claimed
• The geographical overlap is not significant and this may offer logistical
advantages (freight costs) in manufacturing and catering to different markets.
• L&Tʹs brand equity is strong across the country and its product commands a
slightly higher price.
• The capacities of L&T and Grasim are fairly contemporary as both have grown
their cement businesses through the 1990s.
• This should be a big plus in an environment where volumes and efficiencies are
becoming the earnings driver and the key for `survivalʹ in cement.
• According to Mr K Birla there would be Rs 100 crore savings between the two
companies on account of savings in logistics and procurement.

5. Steps Subsequent to announcement of the deal
5.1 Stock Exchange Listing
Immediately after the takeover the new entity named, “Ultratech Cement Company”
was listed on the Bombay stock exchange.
5.2 Setting Up of New Board
The new board for the company was set up , including two nominees from the
institutions, two from L&T — Mr. Naik and Deosthale, four from Grasim, namely,
Rajashree Birla, Kumaramangalam Birla, S. Mishra (Corporate & HR Director, Grasim)
and D. D. Rathi. There are also two independent directors — R. C. Bhargava (former
Managing Direcor, Maruti Udyog) and Arun Gandhi (Tata Sons). Saurabh Mishra was
appointed the Chief Executive Officer of UTCC. Both Ms. Rajashree Birla and Mr.
Kumarmangalam Birla will step down from the board of L&T.
5.3 Rebranding
Grasim was having cement brands like Birla plus and Birla super in the 150 mn TPA
Cement market in India. L&T was a leading brand in the premium segment of the
cement market. The acquisition gave Grasim an entry into the premium segment of the
market.
L&T cement which enjoyed leadership position in the premium cement market
epitomized engineering prowess, technology quality and modernity. This has enabled
the brand to command a premium over the other cement brands. Grasim was allowed 8
months to use the L&T brand.
14
Grasim was faced with a tough task. The time was short and there were two choices,
merge the L&T brand with existing Grasim brands or launch a new brand. The
company decided on the later and did it with style.
The name Ultratech was chosen after careful marketing research. Since L&T does not
mean anything by virtue of the brand name, Grasim wanted the new brandname to
portray significant intrinsic value of the brand. Hence the name Ultratech was chosen.
Since Grasim didnot want to dilute the premiumness that L&T enjoyed, a high decibel
ad blitz was launched to announce that L&T is now Ultratech. The campaigns was
backed with direct marketing where the company officials met the 5500 odd stockists
and authorised dealers explaining the brand and company policies.

Cement is basically viewed as a commodity and the industry is fragmented with
around 50 players. So inorder to command a premium, the brand had to show a
significant differentiation.

Ultratech was positioned as the ʹ Engineerʹs choiceʺ cement emphasizing on the
qualities such as Quality, Modernity and technology. The gamble has paid off well for
Aditya Birla group and Ultratech was able to carry the legacy of L&T cement.
15
6. Structuring of Deal
• Shareholders of L&T as on May 27, 2004 were entitled to 5 shares of the L&T
Engineering (Face value Rs2) and 4 shares of UCL (Face value Rs 10) for every 10
shares held in erstwhile L&T Ltd. Prior to merger Grasim held 12.6% in UCL.
• L&T transferred as promised 8.5% of its holding in UCL to Grasim at the open
Offer price, enabling Grasim to acquire a controlling 51.1% stake in UCL.
• Grasim successfully made an open offer to the shareholders of UCL to acquire
upto 30% of the stake at Rs342.6 per share.
• In addition, Rs3 per share were to be paid out of the interest on the money
deposited in the escrow account (Rs12.6bn) for the open offer. This meant a final
price of Rs346 per share was on offer to all those tendering their shares in the
open offer. The offer had opened on June 7 and closed on June 21 2004.
• Grasim Industries had arrived at an informal understanding with Larsen &
Toubro to offload 14.95 per cent out of the 15.74 per cent stake it holds in the
engineering company to L&Tʹs employeesʹ trust. According to the arrangement,
Grasim, following the demerger of L&Tʹs cement business, sold the stake to the
L&T employeesʹ trust at Rs 120 per share.

7. Financing of Deal
• Grasim Industries acquired 8.5% equity of L&T in the new cement company.
Total investment outlay was around 362 crore.
• Grasim made an open offer for 30% equity stake. Total Investment outlay at Rs.
1278 crore.
• Grasim sold its entire existing holding in L&T’s non‐cement (engineering and
other business) at Rs. 120 per share. Total cash inflow for Grasim at around Rs.
470 crore.
• Net cash outflow for Grasim on this deal will be Rs. 1170 crores. Total investment
for Grasim (including its earlier purchase from Reliance and open market of Rs.
1020 crore) around Rs 2190 crore on this deal
• The Rs. 2,200 Crore required for entire deal was funded from internal accruals of
Grasim Industries.
• This internally funded Rs.2,200 Crores transaction is the largest of its kind cash
acquisition
17
8. Closure of the Deal
• Shareholders and Creditors of L&T approved the Scheme on 3rd Feb. 2004
• High Court approved the Scheme of Arrangement on 22nd April 2004
• Grasim deposited balance 90% of Open Offer consideration with Escrow Agent;
Total amount deposited Rs.1,279 Crs
• The scheme of arrangement for the demerger of the cement business, sanctioned
by the Honorable High Court of Bombay, became effective from Friday, 14 May,
2004.
• Accordingly, the cement business undertaking was transferred to and vested in
UltraTech CemCo Limited.

9. Subsequent performance
• ULTRATECH CemCo Ltd had reported a net loss of Rs 2.3 crore for the second
quarter and a net loss of Rs 3.3 crore for the half‐year ended September 30, 2004,
in its first reported results since its listing on the stock exchanges
The companyʹs performance has been constrained because of input costs, mainly
those of power and fuel, said a company release.
• Grasim increased exports with increase in capacity. Grasim Industries have
reported increased shipments, year‐on‐year, for both Grasim Cement as well as
UltraTech Cemco Ltd. Despatches at Grasim Cement moved up 12.54 per cent
from the year‐ago despatch quantity, amounting to 11.37 lakh tonnes. Production
increased 14.36 per cent to 11.61 lakh t.
• HIGHER sales volumes and realisations in all of its businesses have helped
Grasim Industries report a 68 per cent increase in net profit for the quarter ended
June 30, 2004. Net profit for the quarter amounted to Rs 219 crore, up from Rs
130.5 crore reported for the corresponding quarter of the previous year.
• UltraTech draws up Rs 200‐cr capex plan (Q2 2004) for the next two years that
would generate around 2.5 million tonnes of capacity through debottlenecking
and reduction of the companyʹs debt equity ratio.
• Subsequently as a result, Ultra Tech Cement reported a 76 per cent rise in net
profit at US$ 56.65 million in the last quarter of 2006‐07. Its sale of cement stood
at 3.57 mn. tons and clinker at 0.77 mn. tons. Domestic cement realisations at
Rs.3,019 per ton increased by 50 per cent. Net profit grew by 573 per cent from
Rs.32 crore to Rs.214 crore.
19
10. Advisors to Deal
Advisor to Grasim was Enam Securities. They helped them with valuation of company.
Transaction advisor for the deal was JM Morgan Stanley and Mulla and Mulla group
was the legal advisor.
BCG group was the advisor of L&T for a very long time. They were advised by BCG as
early as 1999 to come out of cement business gradually and focus on their more
profitable engineering and defense business.
ICRA was the valuation advisory for L&T.

11. References

http://www.thehindubusinessline.com/bline/2003/06/18/stories/2003061802280100.htm
http://www.grasim.com/investors/downloads/Grasim_Annual_Report_FY2005.pdf
http://www.rediff.com/cms/print.jsp?docpath=//money/2004/feb/05birla.htm
www.blonnet.com/iw/2003/02/23/stories/2003022300490800.htm
www.thehindubusinessline.com/bline/iw/2002/10/20/stories/2002102000210800.htm
www.thehindubusinessline.com/iw/2002/12/08/stories/2002120800030800.htm
www.grasim.com/about_us/milestones.htm
www.grasim.com/media/press_reports/20040706_cement_deal.htm
www.indiainfoline.com/sect/cemo.pdf
www.thehindubusinessline.com/bline/iw/2002/10/20/stories/2002102000210800.htm
www.icmr.icfai.org/PDF/Finance.PDF
www.rediff.com/money/2003/jun/21spec.htm
www.tribuneindia.com/2003/20030216/biz.htm