Project on Mergers and Acquisitions.

Nikita Gorawal.

Roll No. 13

SIES

Case Study on HP and Compaq.

The following is a brief description of the two companies:

Hewlett-Packard (HP)

It all began in the year 1938 when two electrical engineering graduates from Stanford University called William Hewlett and David Packard started their business in a garage in Palo Alto. In a year’s time, the partnership called Hewlett-Packard was made and by the year 1947, HP was incorporated. The company has been prospering ever since as its profits grew from five and half million dollars in 1951 to about 3 billion dollars in 1981. The pace of growth knew no bounds as HP’s net revenue went up to 42 billion dollars in 1997. Starting with manufacturing audio oscillators, the company made its first computer in the year 1966 and it was by 1972 that it introduced the concept of personal computing by a calculator first which was further advanced into a personal computer in the year 1980. The company is also known for the laser-printer which it introduced in the year 1985.

Compaq

The company is better known as Compaq Computer Corporation. This was company that started itself as a personal computer company in the year 1982. It had the charm of being called the largest manufacturers of personal computing devices worldwide. The company was formed by two senior managers at Texas Instruments. The name of the company had come from-”Compatibility and Quality”. The company introduced its first computer in the year 1983 after at a price of 2995 dollars. In spite of being portable, the problem with the computer was that it seemed to be a suitcase. Nevertheless, there were huge commercial benefits from the computer as it sold more than 53,000 units in the first year with a revenue generation of 111 million dollars.

Reasons for the Merger

A very simple question that arises here is that, if HP was progressing at such a tremendous pace, what was the reason that the company had to merge with Compaq? Carly Fiorina, who became the CEO of HP in the year 1999, had a key role to play in the merger that took place in 2001. She was the first woman to have taken over as CEO of such a big company and the first outsider too. She worked very efficiently as she travelled more than 250,000 miles in the first year as a CEO. Her basic aim was to modernize the culture of operation of HP. She laid great emphasis on the profitable sides of the business. This shows that she was very extravagant in her approach as a CEO. In spite of the growth in the market value of HP’s share from 54.43 to 74.48 dollars, the company was still inefficient. This was because it could not meet the targets due to a failure of both company and industry. HP was forced to cut down on jobs and also be eluded from the privilege of having Price Water House Cooper’s to take care of its audit. So, even the job of Fiorina was under threat. This meant that improvement in the internal strategies of the company was not going to be sufficient for the company’s success. Ultimately, the company had to certainly plan out something different. So, it was decided that the company would be acquiring Compaq in a stock transaction whose net worth was 25 billion dollars. Initially, this merger was not planned. It started with a telephonic conversation between CEO HP, Fiorina and Chairman and CEO Compaq, Capellas. The idea behind the conversation was to discuss on a licensing agreement but it continued as a discussion on competitive strategy and finally a merger. It took two months for further studies and by September, 2001, the boards of the two companies approved of the merger. In spite of the decision coming from the CEO of HP, the merger was strongly opposed in the company. The two CEOs believed that the only way to fight the growing competition in terms of prices was to have a merger. But the investors and the other stakeholders thought that the company would never be able to have the loyalty of the Compaq customers, if products are sold with an HP logo on it. Other than this, there were questions on the synchronization of the organization’s members with each other. This was because of the change in the organization culture as well. Even though these were supposed to serious problems with respect to the merger, the CEO of HP, Fiorina justified the same with the fact that the merger would remove one serious competitor in the over-supplied PC market of those days. She said that the market share of the company is bound to increase with the merger and also the working unit would double.

Advantages of the Merger

Even though it seemed to be advantageous to very few people in the beginning, it was the strong determination of Fiorina that she was able to stand by her decision.

Wall Street and all her investors had gone against the company lampooning her ideas with the saying that she has made 1+1=1.5 by her extravagant ways of expansion. Fiorina had put it this way that after the company’s merger, not only would it have a larger share in the market but also the units of production would double. This would mean that the company would grow tremendously in volume. Her dream of competing with the giants in the field, IBM would also come true. She was of the view that much of the redundancy in the two companies would decrease as the internal costs on promotion, marketing and shipping would come down with the merger. This would produce the slightest harm to the collection of revenue. She used the ideas of competitive positioning to justify her plans of the merger. She said that the merger is based on the ideologies of consolidation and not on diversification. She could also defend allegations against the change in the HP was. She was of the view that the HP has always encouraged changes as it is about innovating and taking bold steps. She said that the company requires being consistent with creativity, improvement and modification. This merger had the capability of providing exactly the same.

Positive Aspects

A CEO will always consider such a merger to be an occasion to take a competitive advantage over its rivals like IBM as in this case and also be of some interest to the shareholders as well. The following are the strategies that are related to this merger between HP and Compaq:

Having an eye over shareholders’ value: If one sees this merger from the eyes of Fiorina, it would be certain that the shareholders have a lot to gain from it. The reason for the same is the increment in the control of the market. So, even of the conditions were not suitable from the financial perspective, this truth would certainly make a lot of profits for the company in the future.

Development of Markets: Two organizations get involved in mergers as they want to expand their market both on the domestic and the international level. Integration with a domestic company doesn’t need much effort but when a company merges internationally as in this case, a challenging task is on head. A thorough situation scanning is significant before putting your feet in International arena. Here, the competitor for HP was Compaq to a large degree, so this merger certainly required a lot of thinking. Organizations merge with the international companies in order to set up their brands first

and let people know about what they are capable of and also what they eye in the future. This is the reason that after this merger the products of Compaq would also have the logo of HP. Once the market is well-known, then HP would not have to suffer the branding created by Compaq. They would be able to draw all the customers of Compaq as well.

Negative Aspects

There are a number of mergers and acquisitions that fail before they actually start to function. In the critical phase of implementation itself, the companies come to know that it would not be beneficial if they continue as a merger. This can occur in this merger between HP and Compaq due to the following reasons.

Conversations are not implemented: Because of unlike cultures, ambitions and risk profiles; many of the deals are cancelled. As per as the reactions of the owners of HP, this seems to be extremely likely. So, motivation amongst the employees is an extremely important consideration in this case. This requires an extra effort by the CEO, Fiorina. This could also help her maintain her position in the company.

Legal Contemplations: Anti-competitive deals are often limited by the rules presiding over the competition rules in a country. This leads to out of order functioning of one company and they try to separate from each other. A lot of unnecessary marketing failures get attached to these conditions. If this happens in this case, then all that money which went in publicizing the venture would go to be a waste. Moreover, even more would be required to re-promote as a single entity. Even the packaging where the entire inventory from Compaq had the logo of HP would have to be re-done, thus hampering the finance even further.

Case Study on RIL & RPL

RELIANCE INDUSTRIES AND RELIANCE PETROLEUM BOARDSAPPROVE MERGER

• Merger is India’s largest ever• RPL shareholders to receive 1 (one) share of RIL for every 16 (sixteen) shares of RPL• RIL’s holding in RPL to be cancelled. No fresh treasury stock created• RIL to be a top 10 private sector refining company globally• RIL to become the world’s largest producer of Ultra Clean Fuels at single location• Merger to unlock greater efficiency from scale and synergies• Merger to be EPS accretive• RIL to have 3.7 million shareholders

MUMBAI, 2 March 2009:

The Boards of Directors of Reliance Industries Limited (RIL)and Reliance Petroleum Limited (RPL) today unanimously approved RPL’s merger with RIL,subject to necessary approvals. The exchange ratio recommended by both boards is 1 (one)share of RIL for every 16 (sixteen) shares of RPL. RIL will issue 6.92 crore new shares,thereby increasing its equity capital to Rs 1,643 crore.Commenting on the merger, Mukesh Ambani, Chairman and Managing Director,Reliance Industries Ltd said: “This merger follows Reliance Industries’ philosophy ofcreating enduring value for all our stakeholders. It is a significant step in our goal to beamong the largest global corporations.”

Merger Benefits and Synergies:The merger will unlock significant operational and financial synergies that exist between RILand RPL. It creates a platform for value-enhancing growth and reinforces RIL’s position asan integrated global energy company.

The merger will enhance value for shareholders of both companies. The merger is EPSaccretive for RIL. Through this merger, RIL consolidates a world-class, complex refinerywith minimal residual project risk, while complementing RIL’s product range. There will befurther gains from reduced operating costs arising from synergies of a combined operation.The merger is expected to reduce the earnings volatility for RPL shareholders and allowsthem to participate in the full energy value chain of RIL.

The merger will result in RIL:

• Operating two of the world’s largest, most complex refineries• Owning 1.24 million barrels per day (MBPD) of crude processing capacity, the largestrefining capacity at any single location in the world• Emerging as the world’s 5th largest producer of Polypropylene

Merger Details:

Under the terms of the proposed merger, RPL shareholders will receive 1 (one) share of RILfor every 16 (sixteen) RPL shares held by them.The appointed date of merger of RPL with RIL is 1st April 2008.RIL will cancel its holding in RPL.Based on the recommended merger ratio, RIL will issue 6.92 crore new equity shares to theexisting shareholders of RPL. This will result in a 4.4% increase in equity base fromRs 1,574 crore to Rs 1,643 crore. Consequently, the promoter holding in RIL will reducefrom 49.0% to 47.0%Advisors to the merger are as follows:Valuation Advisors : Ernst & Young Pvt. Ltd. andMorgan Stanley India Co. Pvt. Ltd.Transaction Advisors : JM Financial Consultants Pvt. Ltd. andKotak Mahindra Capital Co Ltd.Fairness Opinion : DSP Merrill Lynch Ltd. (for RIL) andCitigroup Global Markets India Pvt. Ltd (for RPL)Legal Advisor : Amarchand & Mangaldas & Suresh A. Shroff & Co.Tax Advisor : PriceWaterhouse and Coopers Pvt. Ltd.The proposed merger is subject to all necessary approvals. All other procedural aspects ofthe proposed merger, and the timetable for implementation, will be communicated separately.

The Case: ICICI and Bank of Madura

The take over of Bank of Madura (BoM) by ICICI Bank has been the second

success story in the banking industry after the take over of Times bank by HDFC

Bank last year. The Board of Directors of ICICI Bank and Bank of Madura (BoM)

approved the merger of the two banks at their respective meetings held on

11thDecember and agreed to a share swap ratio of two shares of ICICI Bank for

one share of BoM.

The amalgamation scheme was placed for approval at the meeting of

shareholders of the two banks on January 19 .The proposed date of merger was

February 1, 2001. ICICI Bank Limited has fixed Wednesday, April 11, 2001 as the

'Record Date' to determine the shareholders of Bank of Madura Limited who

would be entitled to receive the equity shares of ICICI Bank. ICICI Bank was third

time lucky after two earlier attempts of merger. The first was a proposed merger

with Centurion Bank, which fizzled out after the bank’s promoters asked for

higher valuations, the second a recent reverse merger with parent ICICI. The

integration exercise was scheduled to be completed by September 2001. Before

we move onto why the two banks decided to merge. Let us look at why ICICI

decided to merge with Bank of Madura?

ICICI Bank had been scouting for a private banker for merger. Though it had 21

percent of stake, the choice of Federal bank, was not lucrative due to the

employee size (6600), per employee business is as low at Rs.161 lakh and a snail

pace of technical up gradation. While, BOM had an attractive business per

employee figure of Rs.202 lakh, a better technological edge and had a vast base in

southern India when compared to Federal bank.

Some key financials of both the banks:

Financial Standings of ICICI Bank and Bank of Madura

(Rs. in crore)

Parameters ICICI Bank Bank of Madura

1999-

2000 1998-99

1999-

2000 1998-99

Net worth 1129.90 308.33 247.83 211.32

Total Deposits 9866.02 6072.94 3631.00 3013.00

Advances 5030.96 3377.60 1665.42 1393.92

Net profit 105.43 63.75 45.58 30.13

Share capital 196.81 165.07 11.08 11.08

Capital Adequacy

Ratio 19.64% 11.06% 14.25% 15.83%

Gross NPAs/ Gross

Advances 2.54% 4.72% 11.09% 8.13%

Net NPAs /Net

Advances 1.53% 2.88% 6.23% 4.66%

Source: Compiled from Annual reports (March 2000) of ICICI

Bank and BOM

Crucial Parameters: How they stand

Name of

the Bank

Book value of

Bank on the

day of merger

announcement

Market price

on the day of

announcement

of merger

Earnings

per

share

Dividend

paid (in

%)

P/E ratio

Profit per

employee

(in lakh)

1999-2000

Bank of

Madura183.0 131.60 38.7 55% 3% 1.73

ICICI

Bank58.0 169.90 5.4 15%

-7.83

Source: Business Line, December 10, 2000and January 28, 2001.

Reasons for the merger: BoM was bankrupt (with assets which are Rs.350 crore behind liabilities) and

had a leverage of 41 times. If it were to be brought up to a point where its

assets were 10% ahead of liabilities, which is broadly consistent with the Basle

Accord, this would require an infusion of Rs.800 crore of equity capital, which

would be impossible for them to raise.

Illustration 13

Illustration 14

BoM had a network, which ICICI Bank wanted. They had many regional

branches, which would help ICICI increase their reach in the regional markets.

Financial consolidation was becoming necessary for the growth of BoM. The

merger with a new private sector bank, particularly a financially and

technological strong bank like ICICI would add to shareholder value and

enhance career opportunities for the employees besides providing first rate,

technology based, modern banking services to customers

Benefits

For BoM, the most significant benefit would be the brand equity it would

acquire by becoming a part of the ICICI group, with the most overt advantage

being technology infusion.

BoM would not have been able to raise the Rs800 crore that it needs to get

the assets 10% ahead of its liabilities, but after the merger with ICICI this

amount will be infused into the bank.

The shareholders of both the banks will benefit. Although the swap ratio

favours BoM the ICICI bank shareholders still earn a higher Earning per Share

(EPS).

o On post merger, ICICI Bank's equity shall be Rs.220.36 crores while its

annual total income would be about Rs.1,700 crores with expected net

profit of Rs.192

crores giving an annualised EPS of Rs.8.70 as compared to an EPS of

Rs.7.90 as on 30 September. 2000 Hence it has been seen that even

after issue of shares in exchange ratio of 2:1 the financial performance

of the bank shall improve, thus improving the bottom line of the bank.

Problems in the merger: The employees and staff of the two banks had no clue whatsoever and were

`surprised and shocked' in their own words when the merger was announced.

Hence they might make the merger process more tiresome for the

management. The surprise element is said to have hit even the top

management of Bank of Madura who are reported to have been "caught

unawares" by the developments set in motion by the owners/directors of the

two banks.

It is a merger of a 57-year old BOM, south based old generation bank with a

fast growing tech savvy new generation bank this in itself has enough

problems.

Managing rural branches : ICICI’s major branches are in major metros and

cities, whereas BOM spread its wings mostly in semi urban and city segments

of south India. There is a task ahead lying for the merged entity to increase

dramatically the business mix of rural branches of BOM. On the other hand,

due to geographic location of its branches and level of competition, ICICI Bank

will have a tough time to cope with.