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Will Expansion always drive lift in valuation?

Created by : Veena Gupta, Analyst, Blackstone Group  | 02 26 2010 13:09:57 +0000
Industry : Equity Research/AnalyticsFunctional Area : Getting Started(Entrepreneurship)
Keywords : merger and acquisition hp expansion aig bharati airtel mphasis zain lift valuation
Activity:  144 views;  last activity : 07 06 2010 20:18:09 +0000

These days companies are forming a merger and acquisition on the wake of expansion. For example, recently we saw the merger of Bharati Airtel and Zain telecommunications and now the acquisition of MPHASIS and AIG with the MPHASIS's parent organisation HP which rose its sales to 5.2%.

So users, do you think Will expansion always drive lift in valuation?

  
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I agree with this statement. Expansion always drives lift valuation. due to the acquisition of MPHASIS and AIG, MPHASIS's sales rose sequentially by 5.2% to Rs 1,191.6 crore during the January 2010 quarter, which is also the first financial quarter of the current fiscal for MphasiS. Its net profit rose by 9.5% to Rs 268.3 crore.
By Veena Gupta, Analyst, Blackstone Group  02 26 2010 13:15:54 +0000
 
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Sorry to contradict Veena, but we shouldn't forget, yesterday MPHASIS's stocks fell sharply by 8% in a flat broader market. It happened because MphasiS is heavily relying on its parent company HP for a major chunk of business and also dwindling billing rates and margins in its technology outsourcing and BPO segments.
By Jyoti Rath, Sr. Associate, Barclays  02 26 2010 13:19:50 +0000
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Expansion works & provides good dividend if you plan it out properly. Before doing any acquisition companies need to identify synergies that achieves by acquiring a company but there is a huge difference between identifying synergies & achieving synergies.

Organization real work starts after acquisition because maximum benefit from acquisition can be achieved during first 18 months. If you can't make proper planning and strategy to achieve synergies in first 18 months then valuation of the company goes down. This is the reason we see almost 2/3 of the acquisition fails. 

So, expansion works when you plan and strategies it properly. Please read my blog article "How to get maximum out of an acquisition" to know how to do proper expansion or acquisition.

http://deepakagrawalblog.wordpress.com/2010/02/16/how-to-get-maximum-out-of-an-acquisition/

 
By Deepak Agrawal, Consultant, Independent Consultant  | 03 02 2010 08:00:41 +0000
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Totally , in agreement. M and As may not lift valuation always. proper integration and positioning post the process is very imp. and many times, lack to smooth integration leads to failure...

 

I remember reading an article days back saying that only 40 per cent of the total M & A's are successful.
By Akanksha Prasad, Sr. correspondent  | 03 04 2010 20:03:35 +0000
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There are many companies which announce various expansion plans every year, every company does not successfully does that.. Also good companies with good execution ability, the expansion takes place in a period of time. If we look in a short term the expansion is a expenditure to the company which is going to reduce the cash flows and the expansion is going to add revenue and cash flow after the expansion plan is successfully rolled out.. 

The valuation of the company will not be affected till the expansion is rolled out..
By Japan Shah, H.O.D, Oxford School of Management  | 03 02 2010 06:04:42 +0000
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I back Jyothi sir’s comments and don’t agree with an expansion having a positive effect on valuation in all probability.

Usually market views merger or acquisition as positive and validating financial stability and so will have a positive impact on validation. The success of merger or acquisition depends upon how synergy pays and can be very damaging, if not properly planned and executed or wrongly timed.
By Padmanabhan R, Articled / Audit assistant, Finance student  | 02 26 2010 18:08:20 +0000
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It is too early to comment on these accqusitions...but they seem to be done in haste...and done to achieve or make noise for themselves...rather than sound business logic...At least in case of bharti...zain...
By suchita Ambardekar, Director on Board, Vir Rubber Products Pvt Ltd, Vir auto enterprises Pvt Ltd  | 02 26 2010 17:53:27 +0000
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