analysis of trends in mergers and acquisitions in...

Chapter Three

ANALYSIS OF

TRENDS IN MERGERS

AND ACQUISITIONS IN INDIA

ANALYSIS OF TRENDS IN MERGERS AND ACQUISITIONS IN INDIA 80

CHAPTER THREE

ANALYSIS OF TRENDS IN MERGERS AND ACQUISITIONS IN INDIA

Mergers and Acquisitions in India have evolved through a distinct phase

of regulations. On one side of the regulatory spectrum there has been a

discouragement to the formation of combinations due to fear of concentration of

economic power in the hands of few and on the other side there have been

encouragement to varied forms of M&As due to reasons of optimum utilization of

resources, social benefits and growth of and competitiveness of Indian corporate

sector. Changing regulations and increased competition and competitiveness of

Indian corporate firms brought about substantial change in strategy formulations.

Growth through inorganic routes became significant corporate strategy

formulation. In this chapter we provide a detailed analysis of trends in M&A in

India during the study period of 1995-96 through 2005-06. A brief overview of

M&As during pre-liberalization is also discussed since it enables in

understanding the significance of supportive regulatory regime during post-

reform period that has created enabling environment for heightened M&A activity

in India.

3.1 M&As in India During Pre-Liberalization Period

During the pre-liberalization era which was marked by protectionist

policies of government of India, there have been huge deterrent to M&As in

India, and in particular, to horizontal combinations. Severe legislations such as

MRTP Act, 1969, Industrial Licensing Policy, Import Control Order, Industries

Goa University


Development and Regulation Act, and FERA 1973 provided no freedom in

capacity expansion decisions of Indian corporate entities. M&As therefore were

very rare (Rao, 1998). Venkiteswaran (1993) identifies following major reasons

for low M&A activity during the pre-liberalization period in India:

(i) Ownership pattern of Indian industry:

Most companies were tightly held by promoters and government owned

financial institutions. They resisted any attempts at takeovers.

(ii) Exercise of voting power by the public financial institutions:

Voting by stakeholding public financial institutions was guided more by

reasons of power and pelf than by any objective criteria to enhance

Shareholder wealth.

(iii) Tight regulatory environment:

MRTPA, Foreign Exchange Regulation Act (FERA), and other such

regulations looked at any attempt to grow through M&As as a precursor to

the dawn of a monopoly. Hence, such a regulatory environment made it

difficult to use M&As as a corporate-level strategy.

(iv) High entry and exit barriers:

Several mandatory government approvals such as licensing requirements

and clearances served as high entry barriers to indulging in M&As.

Similarly, legislations making it almost impossible to redeploy surplus or

Goa University


under-performing assets or labour served as high exit barriers that

dissuaded companies from using M&As.

At the same time, certain regulatory changes and initiative on the part of

government during the same period, did encourage M&A activity. The prominent

among these were nationalization of Indian insurance business in 1956 and

banking in 1969, and the announcement of new provisions granting tax relief in

the Finance Bill of 1967 with respect to exemption from capital gains tax on

shares transferred to amalgamating companies. Besides, the government also

encouraged merger of sick units with profitable entities. Although these changes

increased the number of M&As among the Indian corporate, they were mostly

conglomerate mergers as the anti -big government policies that prevailed during

the phase discouraged horizontal mergers.

3.2 M&As in India During Post-Liberalization

The real impetus for M&As in India came from the economic reforms of

liberalization, privatisation and globalisation introduced by the government. The

economic reforms, through the relaxation of controls and regulations on

production, trade and investment, were aimed at increasing competition,

improving efficiency and growth (Chaudhuri, 2002). With introduction of

economic reforms, the Indian companies were exposed to considerable degree

of competition both domestic and international. It was therefore required to

restructure, and re-engineer to increase efficiency and become more

competitive. Within the constraints of cost involved in this reorganization of

businesses, the Indian corporate entities adopted inorganic route to growth,

Goa University


expansion and efficiency by way of mergers and acquisitions. Further, positive

regulatory changes facilitated such moves of Indian companies. For instance,

the amendment of the MRTP Act made it possible for group companies to

consolidate through mergers eliminating duplication of resources and in bringing

down costs (Mehta and Samanta, 1997). M&A became a viable strategy for

growth in India post economic reforms due to a) easing of regulation, b)

restructuring of family-owned conglomerates, c) sale of state-owned companies,

d) overcapacity, and e) deregulation of fragmented industries (Anandan, et. al.,

1998).

Table 3.1 below provides data on M&A in India for the period from 1995-

96 through 2006-07.

Table 3.1: Mergers and Acquisitions in India (1995-96 to 2006-07)

Year Aggregate M&A Mergers Acquisitions

1995-96 33 NA NA

1996-97 124 NA NA

1997-98 248 NA NA

1998-99 269 NA NA

1999-00 387 NA NA

2000-01 1469 288 1181

2001-02 1340 287 1053

2002-03 1169 323 846

2003-04 1047 216 831

2004-05 1041 252 789

2005-06 1243 373 870

2006-07 1261 347 914

Total 9631

Source: CMIE M&A, CMIE Business Beacon Database and Kar, R. (2006) NA: Not Available

Goa University


The following important observations can be , made from Table 3.1 above:

(i) A total of 9,631 M&A transactions have occurred during the entire period

from 1995-96 to 2006-07. The maximum number of M&A transactions are

reported during the year 2000-01 (1,469) while the lowest are observed

during the year 1995-96 (33).

(ii) The number of M&A deals has grown at CAGR (Compounded Annual

Growth Rate) of 35.47% during study period.

(iii) The number of M&As during early periods of economic reforms are found

to be negligible in comparison to those observed during the later part of

study period. There were only 33 M&As during the year 1995-96 and this

figure rose to 387 during the year 1999-2000. Further, within this period, a

considerable decline is observed in year-on-year increase in M&As. From

33 M&As in 1995-96, the number rose by a significant 124 which is

275.76% increase from the figures of 1995-96. In the following year

however, the total M&A deals increased to 248 accounting for a

comparatively low 100% growth on year-on-year basis. The year 1998-99

recorded the worst increase during this period of only 21 M&A deals in

comparison to previous year figures that accounted for a negligible 8.47%

increase. The percentage increase in M&A deals improved during the

year 1999-2000 to 43.87% with 387 transactions reported during this

year. The total number of M&As reported during this period of five years is

1,061 which accounts for a mere 11.02% of the total (9,631) M&As

recorded during the entire period of study.

Goa University


(iv) The total number of M&A deals recorded during the period from 2000-01

to 2006-07 are 8,570 and accounted for about 88.90% of M&A deals

during the period of study. The examination of year-on-year growth of

M&A deals, however, indicates a considerably low growth rate during this

period. The M&A deals saw a decline of -8.78% (from 1,469 in 2000-01 to

1,340 in 2001-02) during the year 2001-02 which further by -12.76%

(from 1,340 to 1,169) during the year 2002-03. An improvement of this

percentage increase in M&A deals is observed in the year 2005-06 which

recorded 19.40% increase in M&A deals in comparison to decline of

-0.57% during the previous year. However, again in the year 2006-07, the

M&A deals increased to 1,261 from 1,243 during previous year (an

increase by just 18 deals) and thus percentage increase dropped

significantly to 1.45%.

(v) Between 1995-96 and 1999-2000 the M&A have grown at CAGR of

63.62% while between 2000-01 to 2006-07 the CAGR is -2.16%. Thus,

though the later period accounted for sizeable M&A deals on aggregate

as well as year-on-year basis, in terms of growth rate, the former period of

1995-96 to 1999-2000 has been more significant.

(vi) The data on number of mergers and acquisitions separately for the period

from 1995-96 to 1999-2000 is not available since CMIE started tracking

and recording M&A only from 2000-01. The analysis of M&A for the rest of

the period indicates that aggregate number of Mergers during 2000-01 to

2006-07 is 2086 while number of acquisitions during same period is 6484.

This is a significant difference of 4398 acquisitions over mergers

Goa University


transactions. The year wise data clearly reveals that number of

acquisitions have always been more than the number of mergers. For

example, while in 2000-01 the number of mergers deals was 288, the

number of acquisitions is 1,181. On an average, every year, the number

of acquisitions is more by 628 cases as compared to number of mergers

and thus 3 times more than the number of mergers during the entire

period from 2000-01 to 2006-07. The acquisitions are considerably more

important than mergers in developing and transition countries.' The

preference to acquisitions observed is probably on account of

convenience in handling acquisition deals over merger deals. The

acquisition deals are much faster to complete, and do not involve

integration issues as in case of mergers. Besides SEBI Takeover Code

997 has simplified the process of acquisitions because of which acquirers

get easy entry into target companies with support of target company's

shareholders who are given opportunity to exit before acquisition through

an open offer.

(vii) Interestingly, however, the number of mergers has found to be increasing

while acquisitions show a declining trend. Thus, an opposite trend is

visible in the rate of growth of mergers and that of acquisitions. While

merger transactions have grown at the annual rate of 2.70% during the

period, the growth rate in Acquisitions is negative at -3.60%.

ILO (2001), "The Employment Impact of Mergers and Acquisitions in the Banking and Financial Services Sector".

Goa University


M&A saw high growth rate during the period 1995-96 to 1999-2000 on

account of benefits offered by Industrial Policy of 1991. Industrial slowdown

since 1996 that squeezed the profit margins of Indian entities forced them to

adopt M&A strategy for improving operational efficiency. Further, Sluggish export

growth since 1996-97 and Asian Crisis of 1997 made Indian products much

expensive and increased desire to consolidate for cost reduction (Kar, R., 2006).

Regulatory changes like introduction of SEBI Takeover code in 1997 has been

another major development contributing to rise in number of M&A during this sub

period. On the whole this period was characterized by Indian corporates focusing

on capital and business restructuring and cleaning up their balance sheets. A

large number of M&As during the second half of nineties were between firms

belonging to the same business group (Agarwal, 2003). Another important trend

during this period has been the participation of MNEs in Indian M&A scenario.

Beena, P. (2004) classifies the period of 1995-2000 as the second wave of M&A

in India that was marked by significant M&A activity on the part of MNEs with a

view to get entry or to strengthen their presence in Indian markets. 32% of the

M&As during 1995-2000 were MNE related (Beena, P., 2004). The deals relating

to MNEs have been predominantly horizontal rather than vertical in nature; two-

fifths of them involved buying out the local partners in joint ventures set up in

India raising the stake of MNEs (Kumar, 2000; Saha, 2001).

The subsequent study period was marked by Indian companies venturing

abroad and making acquisitions abroad in developed as well as developing

countries. Various factors including desire to gain entry in international markets,

huge cash reserves accumulated out of greater profits, enhanced

Goa University


88

competitiveness, decreasing interest rates and regulatory changes facilitated

growth of outbound deals during this period. The outbound deals grew from $0.7

billion in 2000-01 to $4.3 billion in 2005 and further to $15 billion in 2006-07 (Fig.

3.1).

Fig. 3.1 Indian Outbound M&A Deals During 2000-01 to 2008-09

USD Billion 100

90

80

70

190

60

40

30

20

10

0 2000-01 2001-02 2002-03 2003-04 2130445 2005-06 2006-07 21307-08 2006-09

Esti mimed

Source: http://ibeforg

The intensity of cross-border M&As has increased significantly during the

period from 1995 to 2006. According to Accenture data, as depicted in Fig. 3.2

below, the number of such deals has increased from 30 in the year 1995 to 71 in

the year 2000, an increase of 136% during the 5 year period. Further, the

estimated cross-border M&A deals for 2006 is 183 which represents an

aggregate increase of 510% during the entire period from 1995 to 2006. In fact,

about three quarters of acquisitions conducted by Indian companies since 2003

have been cross-border. 29% of Indian cross-border M&As between 1995 and

August 2006 occurred in the European Union and 32% in North America on

Goa University


account of larger consumer markets, transparent business processes, rule of

law, advanced technologies, skills and knowledge capital (Accenture, 2006).

Fig. 3.2: Cross-Border M&As of Indian Companies (1995 to 2006) Nu

mbe

r of c

ross

- bor

der M

IAs

200

16r.1

160

140

120

100

SO

60

40

20

0

Source: "India Goes Global", (2006), Accenture

The cross-border acquisitions by Indian companies is facilitated by

number of important developments that have taken place in political and

economic environment of Indian business. In 2004, for instance, the Indian

companies were permitted to make overseas investment upto 100% of their

networth, whether through joint ventures or a wholly owned subsidiary. Earlier, in

1999, the restrictive FERA Act was revised and the new FEMA introduced to

govern foreign exchange related transactions provided incentives to companies

to go global. With introduction of FEMA, 1999, Indian companies were allowed to

make overseas investments upto $15 million and which was subsequently

enhanced to annual limit of $100 million in the year 2002. In 2005, RBI for the

first time allowed Indian banks to lend money to Indian companies to make

Goa University


acquisitions abroad. The ECB route opened during the same year to fund

external FDI provided further boost to cross-border M&As.

The major industries focussed in cross-border M&As during 1995 to 2000

have been consumer goods and services, pharmaceuticals and healthcare and

energy which together accounted for 66% of cross-border M&A activity.

However, since 2000, industries as diverse as forest products, human resource

and market research are getting involved in cross-border acquisitions. IT

services and electronics and high technology industries accounted for more than

half of cross-border transactions post-2000. 2

3.3 Success Rate of M&A Deals in India

We also examine the trend on success rate of M&A deals in India in order

to gauge the effectiveness of M&A negotiation process and the significance

attached to the M&A transactions. We analyse this by examining the data on

number of mergers and acquisitions announced and accomplished over a period

of time. The data on these variables is available for the period from 2000-01 to

2006-07. Table 3.2 below gives details of number of mergers announced and

accomplished for this period while Table 3.3 provides same details for

acquisitions. The data clearly indicates that the success rate of M&A deals in

India is significant.

2 "India Goes Global", (2006), Accenture.

Goa University


Table 3.2: Number of Mergers Announced and Accomplished

Year Mergers Announced

Mergers Accomplished

1995-96 NA NA

1996-97 NA NA

1997-98 NA NA

1998-99 NA NA

1999-00 NA NA

2000-01 296 288

2001-02 266 287

2002-03 332 323

2003-04 258 216

2004-05 254 252

2005-06 384 373

2006-07 347 347

Source: CMIE M&A Database NA: Not Available

Table 3.3: Number of Acquisitions Announced and Accomplished

Year Acquisitions Announced

Acquisitions Accomplished

1995-96 NA NA

1996-97 NA NA

1997-98 NA NA

1998-99 NA NA

1999-00 NA NA

2000-01 1188 1181

2001-02 1050 1053

2002-03 846 846

2003-04 834 831

2004-05 792 789

2005-06 871 870

2006-07 914 914

Source: CMIE M&A Database NA: Not Available

Goa University

-


3.4 Value of Acquisitions

The examination of data on number of M&A has revealed that number of

acquisition deals is significantly higher as compared to number of merger

transactions. On the other hand the growth rate of mergers has been more than

that of acquisitions. One probable reason for this trend could be the value of

acquisition transactions. High premium on acquisitions can make acquisition

deals costlier and therefore may put limit on adoption of this strategy for

expansion. We therefore analyse the trends of value of acquisition deals. Table

3.4 and Table 3.5 below presents the data on value of acquisition deals in India.

Table 3.4: Aggregate and Average Value of Acquisition Deals in India

Year Acquisitions Accomplished Aggregate Value Avg Deal

(Rs.Crore) Value

1995-96 NA NA NA

1996-97 NA NA NA

1997-98 NA NA NA

1998-99 NA NA NA

1999-00 NA NA NA

2000-01 1181 NA NA

2001-02 1053 35765 33.96

2002-03 846 23386 27.64

2003-04 831 35472 42.69

2004-05 789 59720 75.69

2005-06 870 99914 114.84

2006-07 914 204792 224.06

Source: CM1E M&A Database NA: Not Available

Goa University


Table 3.5: Highest and Lowest Value of Acquisition Deals

Year Highest Amount Lowest Amount

2000-01 1,950 -

2001-02 2,590.65 0.01

2002-03 2,637.64 -

2003-04 10,535.70 0.01

2004-05 3,600 0.01

2005-06 4,860 0.01

2006-07 85,000 0.01

Source: CMIE M&A Database

Following observations can be made from the Table 3.4 and Table 3.5

above:

(i) Table 3.4 while the number of acquisition deals has not grown at much

faster pace, the value of these acquisition deals has grown manifold

during the study period. In the year 2001-02, a total of 1053 deals

accounted for aggregate deal value of Rs.35,765 Cr. While in the year

2006-07, only 914 acquisition deals accounted for significant amount of

Rs.2,04,792 Cr.

(ii) The average value per acquisition deal has grown substantially from

Rs.33.96 Cr. in 2001-02 to Rs.224.06 Cr. in 2006-07 representing a

significant increase of 560% over six year period. An examination of

year-on-year data show a significant percentage increase in value of

acquisitions for all the years except for 2002-03 which has seen a decline

in average value of acquisition deals by -18.61% compared to that of

deals in previous year. The year 2006-07 has seen the highest year-on-

year increase in average value of acquisition deals (95.10%). This

Goa University


substantial increase in deal value implies that target firms are becoming

increasingly costlier in terms of acquisition strategy on account of high

acquisition premium. It may also imply that larger target firms are being

acquired. Therefore, it is imperative to evaluate the financial performance

of acquirers post acquisition in order to examine if the deals are actually

creating value for its shareholders. The higher cost of acquisition is

probably one reason why growth rate of acquisition has come down.

(iii) Table 3.5 indicates that though the lowest amount paid for an acquisition

deal remains fairly similar during the period from 2000-01 to 2006-07 at

Rs.0.01 Cr., the highest amount paid per acquisition transaction

represents a very volatile range. The amount ranges from Rs.1,950 Cr.

per acquisition deal to Rs.85,000 Cr. per acquisition deal with values

fluctuating significantly in each of the years of above period. The

acquisition deal value over the years has been dependent upon the

purpose of acquisition. One-third of the companies for which open offers

were made in 2001-02 had thinly traded scrips and therefore acquiring

these companies had been much easier for the acquirers. The year 2002-

03 has been the year of strategic sale in public sector undertakings. On

the other hand the fiscal year 2003-04 has been the year of

disinvestments through public offers. In fact, during this year the charge

through high value acquisition was primarily led by the Central

Government's disinvestment initiatives. The largest deal during 2003-04

was Rs.10,536 Cr. disinvestment of 10% stake in ONGC by Central

Government. The acquisitions through disinvestment amounted to

Goa University

ANALYSIS OF TRENDS IN MERGERS AND ACQUISITIONS IN INDIA '95

Rs.15,539 Cr. for Central Government during 2003-04 fiscal, accounting

for 43% of the total amount recorded during the year. 3 The year 2004-05

recorded an appreciation in average valuation of firms in most of the

industrial sectors. The cement sector, for instance, showed a tremendous

growth during this year with average valuations touching as high as

Rs.368.46 Cr. per acquisition. In fact, the largest chunk of value of deals

during this year consisted of Holcem's acquisition of substantial stake in

ACC and Ambuja Cements Eastern aggregating to approximately

Rs.2,634.77 Cr. Similar trends were also observed in pharma, metals and

textile industries. The acquisitions during this year largely focussed on

consolidations. The faster pace of economic growth in India further

accelerated the pace of acquisitions in subsequent years of 2005-06 and

2006-07, that largely focussed on consolidations.

3.5 Sectoral Analysis of Mergers and Acquisitions

While aggregate picture of mergers and acquisition does give an insight

into the level of M&A activity in India during the study period, the examination of

sectoral trends in M&A is imperative from research point of view. We discuss the

details of sectoral trends in M&A in India separately using two important data

banks viz. Kar, R. (2006) for period from 1995-96 to 1999-2000 and CMIE M&A

Database for the period from 2000-01 to 2006-07.

Table 3.6 below presents data on sectoral trends in M&A during the first

half of the study period.

3 CMIE M&A Monthly Journal, April 2004.

Goa University

Pharma

D Petro chem.

❑ Energy, Gas, Power

❑ Non metallic mineral

D Tourism, travels

O Paper products

D Food products

❑ Textiles, wearing

0 Finance, Banking

O It & telecom

❑ Electricals, electronics

❑ Basic metal, alloy

O Equipment, machinery

O Transport equipment

O Tobacco, beverages

O Others

1997 98

Year


Table 3.6 Sectoral Trends in M&A in India (1995-96 to 1999-2000)

INDUSTRY / YEARS 1995 - 96

1996 - 97

1997 - 98

1998 - 99

1999 - 00

Total

Pharma 5 27 47 29 57 165 Petro chem 4 11 5 11 13 44 Energy, Gas, Power 3 6 13 15 16 53 Non metallic mineral 3 2 11 11 19 46 Tourism, travels 2 4 7 6 13 32 Paper products 1 0 9 4 1 15 Food products 8 8 10 9 20 55 Textiles, wearing 0 4 4 12 6 26 Finance, Banking 0 7 24 35 51 117 It & telecom 0 11 20 31 45 107 Electricals, electronics

0 7 11 13 11 42

Basic metal, alloy 4 9 13 15 15 56 Equipment, machinery

2 12 26 25 30 95

Transport equipment 1 4 13 13 24 55 Tobacco, beverages 0 0 4 3 5 12 Others 0 12 31 37 61 141 TOTAL M& A 33 124 248 269 387 1061

Source: M&A Database, Kar, R. (2006)

Fig. 3.3: Sectoral Trends in M&A in India (1995-96 to 1999-2000)

Goa University


Following observations can be made from the Table 3.6 and Fig. 3.3

above:

(i) During the first phase of study period, it can be observed that maximum

number of M&A have taken place in the Pharmaceutical sector totalling to

165, accounting for 15.55% of aggregate M&A during this sub-period.

This is followed by Finance and Banking with 117 M&A cases accounting

for 11.03% and IT and Telecom with 107 deals accounting for 10.08% of

the total MA deals during the sub-period. All the three sectors together

accounted for more than one-third (36.67%) of total M&A deals during this

period. On the other hand least number of M&As are recorded for sectors

involved in manufacturing of tobacco, beverages (12) and paper products

(15). Fig. 3.2 clearly indicates aggregation of M&A activity in later part of

the sub-period and this is observed across several sectors. This further

indicates that economic reforms have not influenced the M&A activity in

India instantly. Although the reforms were introduced in the year 1991, it

is only late 1990s that significant M&A activity is observed.

(ii) Year wise analysis of above data indicates that the number of M&As have

been consistently higher in case of pharmaceutical sector with maximum

in a year being 57 during the year 1999-2000. Similarly, a consistent year

wise increase in M&As can be observed in banking and finance sector as

well as IT and telecom sector. The number of M&As in banking and

finance sector have increased from zero in 1995-96 to 24 in 1997-98 and

subsequently to 51 in 1999-2000. IT and telecom M&As also have

increased from zero in 1995-96 to 20 in 1997-98 and again to 45 in 1999-

Goa University


2000. The trend of year wise percentage composition of M&As in

pharmaceutical, banking and finance and IT and telecom sectors is more

consistent in comparison to other sectors during this period. This is

indicative of the fact that the consolidations were happening as an

outcome of increasing competition in these sectors due to LPG policies

under structural adjustment programme implemented in 1991. It is also

indicative of changing structure of Indian economy with significant focus

on services sector.

(iii) The year wise percentage of M&As of food products sector to aggregate

M&As has declined significantly from 24.24% in 1995-96 to 5.17% in

1999-2000 though the number of M&As have increased from 8 in 1995-96

to 20 in 1999-2000. Other notable declines during the period have been in

the petro chemical sector (from 12.12% in 1995-96 to meagre 3.36% in

1999-2000) and basic metal, alloy sector (from 12.12% in 1995-96 to

3.88% of the aggregate M&As in 1999-2000).

Table 3.7 below presents sectoral data of M&As during the second half of

study period, i.e. 2000-01 to 2006-07.

Goa University


Table 3.7 Sectoral Trends in M&As in India (2000-01 to 2006-07)

Panel A: Sectorwise Aggregate M&As

Sectors 00-01 01-02 02-03 03-04 04-05 05-06 06-07 Total

Food & Beverage 19 113 77 77 74 63 61 484

Textile 7 57 59 59 64 77 55 378

Chemicals and Drugs & Pharma

47 198 158 156 149 139 134 981

Cement NA 11 7 8 22 NA NA NA

IT & Telecom 51 153 114 84 80 109 103 694

Diversified NA 15 8 13 4 7 5 NA

Financial Services 33 194 201 160 116 193 177 1074

Other Srevices 3 297 280 287 281 271 293 1712

Misc Manufacturing 0 31 36 31 35 35 24 192

Non Mettalic Mineral P rod ucts

7 32 24 27 27 47 34 198

Panel B: Sector wise Mergers

Sectors 00-01 01-02 02-03 03-04 04-05 05-06 06-07 Total

Food & Beverage 5 17 23 10 19 20 8 102

Textile 3 7 7 8 11 21 23 80

Chemicals 18 27 15 12 23 39 27 208

Drugs & Pharma 6 17 14 10

Cement 0 2 1 3 NA NA NA

IT & Telecom 12 19 19 13 16 17 12 108

Diversified 1 0 1 0 0 0 NA


Other Services 0 90 92 105 81 61 83 512

Misc Manufacturing 3 13 0 4 11 3 NA

Non Metallic Mineral Products 2 3 5 1 5 8 11 37

Panel C: Sector wise Acquisitions

Sectors 00-01 01-02 02-03 03-04 04-05 05-06 06-07 Total

Food & Beverage 14 96 54 67 55 43 53 382

Textile 4 50 52 51 53 56 32 298

Chemicals 29

107 83 100 76 100 107 773

Drugs & Pharma 58 43 30 40 Cement 11 5 7 19 NA NA NA

IT & Telecom 39 134 95 71 64 92 91 586

Diversified 14 8 12 4 7 5 NA


Other Services 3 207 188 182 200 210 210 1200

Misc Manufacturing 28 23 31 31 24 21 NA

Non Metallic Mineral Products 5 29 19 26 22 39 23 163

Source: Compiled from CMIE M&A Database NA: Not Available

Goa University

00-01 01-02 02-03 03-04 04-05 05-06 06-07

Year

350

300

250 cn

03 200 2

150 0

100

50

❑ Food & Beverage

13 Textile

❑ Chemicals and Drugs & Pharma

❑ IT & Telecom

O Financial Services

❑ Other Services

D Misc Manufacturing

❑ Non Mettalic Mineral Products

1.1 ti


100

Fig. 3.4: Sectoral Trends in M&As in India (2000-01 to 2006-07)

Following observations can be made from Table 3.7 and Fig.3.4 above:

Panel A in Table 3.7 above presents trends in aggregate M&As in select

sectors of Indian economy during the period 2000-01 to 2006-07. The

data clearly indicates that maximum number of M&As during the second

sub-period of study have been again in services sector numbering to

2,786 and accounting for 32.51% of total M&As (8,570) during the period.

Within the services sector, there have been significant 1,074 M&As in

financial services sector accounting for 12.53% of the aggregate M&As

during the second sub-period. This has been the single largest sector in

terms of M&A transactions during 2000-01 to 2006-07. M&A deals in all

other services constituted about 20% of total M&A deals.

Goa University


101

(ii) Chemicals and drugs and pharmaceutical sectors combined with 981

M&A transactions and accounting for 11.45% of total M&A deals during

the second sub-period of the study. Study on each of these sectors is not

possible due to non-availability of separate data from CMIE.

(iii) IT and Telecom sector constituted 8.10% of total M&A transactions during

2000-01 to 2006-07 with 694 cases of M&A transactions. Thus, the four

important sectors of financial services, chemical, drugs and

pharmaceuticals and IT and Telecom sectors contributed a total of 2,749

M&A transactions during the second sub-period which is approximately

one-third of total M&A deals (32.07%) during this period.

(iv) An important observation that can be made here is that significant number

of M&A transactions has taken place in same sector while diversified

M&As have been negligible. This is evident from the fact that there have

been merely 52 M&A deals between 2001-02 and 2006-07 accounting for

a negligible 0.73% of aggregate M&A deals (7,101) during this period.

(v) Yearwise analysis of M&As across sectors as indicate that services sector

has seen a consistent occurrence of M&A transactions (Fig. 3.4) since

2001-02. A similar trend is observed in textile sector with number of M&A

transactions remaining close to 60 and above through 2001-02 to 2006-

07. On the other hand a consistent decline in number of M&As is

observed in case of Chemicals and Drugs and Pharmaceutical sectors

during the period 2001-02 to 2006-07 with yearly M&A transactions

reducing from 198 in 2001-02 to 134 in 2006-07. Similarly, the number of

M&A transactions in food and beverage sector has dropped significantly

Goa University


from 113 in 2001-02 to just 61 in 2006-07, which represents a decline of

46%.

(vi) Food and Beverage sector maintained a steady percentage contribution

of about 6% during both the sub-periods (67 M&As between 1995-96 and

1999-2000 and 484 M&As between 2000-01 and 2006-07). The share of

M&A in textile sector has increased from 2.45% of total transactions to

4.41% during the two sub-periods.

(vii) Panel B and Panel C in Table 3.7 above present data separately for

mergers and acquisitions for various industrial sectors. The data clearly

reveal that within all the sectors for which separate data is available, the

number of acquisitions significantly outperform the number of mergers.

For instance, in textile sector there were 80 mergers between 2000-01

and 2006-07 while there were 298 acquisition deals during the same

period, which is over three times the number of mergers. Similarly in IT

and Telecom sectors there were 108 mergers during the second sub-

period of study and 586 deals of acquisition which is more than five times

the number of merger transactions. Only in case of financial services

sector, comparatively a lesser magnitude of difference between mergers

and acquisitions is observed. Between 2000-01 and 2006-07 there were

462 cases of mergers while the number of acquisitions was 612 which is

1.3 times the number of mergers. This highlights the necessity felt in the

financial services sector to consolidate for synergic benefits with formation

of bigger financial institutions and intermediaries and not just acquiring a

controlling stake.

Goa University


3.6 Causes of M&As — Analysis of Select Sectors

As is evident from the above analysis of sectoral trend in M&As in India,

some of the sectors in Indian economy have shown significant number of M&A

transactions. In this section we analyse the causes for M&As in these sectors.

Financial Services sector

The Indian financial services sector comprises of banks, NBFCs,

insurance companies, and other financial intermediaries in capital markets. The

banking sector is by far the most dominant sectors in the Indian financial

services industry. The focus on M&A in banking sector came with Narsimham

Committee (1991) recommendations that emphasized on strong and big size

banks in India that are comparable to global banks. The second Narsimham

Committee (1998) also suggested that mergers between strong banks in both

public and private sectors and even with financial institutions and NBFCs. While

pre-reform period was characterized by merger of sick or weak banks with strong

banks in the interest of depositors, the post reform period has accounted for

similar such forced mergers as well as voluntary mergers. Prominent among

such voluntary mergers are the cases of HDFC Bank acquiring Times Bank,

ICICI Bank acquiring Bank of Madura, the amalgamation of Centurion Bank and

Bank of Punjab. The initial period of economic reforms marked entry of several

private sector banks in India. This resulted in drop in spread earned by the public

banks. Over a period of time banks did try to sustain their growth rates by

expanding in various segments but with increased competition, consolidation

was imperative (Bhan, A., 2009). In fact, the smaller players in banking sector

Goa University


have focussed on acquisition of peers or non-banking financial companies to

expand geographical reach, branch penetrations and asset size.

M&A between banks and non-banking finance companies have also

occurred on account of increased demand for consumer credit in India. The

consumer finance sector reached a market size of $51 billion in FY2007

registering a robust CAGR of 29% between 2002 and 2007. 4 With rising number

of players targeting consumer finance sector, consolidations were necessary to

establish dominant market position.

Apart from increased number of market players and overseas

competition, the mounting NPAs, better access to private funds and wider depth

of capital market has increased the number of M&As in this sector. Private equity

has been particularly active player in the Indian market, taking stakes in regional

banks and consumer finance companies. 5 Overall it can be said that financial

sector reforms and desire to establish bigger financial institutions have

contributed significantly to rise in M&As in Indian financial services sector.

(ii) Chemicals sector

The Indian chemical industry is an integral component of the Indian

economy contributing and is estimated to be $66 billion as of 2010. If

pharmaceutical sector has to be included in this, then the valuation for the

industry comes to $83 billion. In the decade of 2000, the chemical industry has

accounted for more than 14% of total deals in top 10 sectors in India and 4% by

4 "India — An Opportunity Dawns: Opportunities for South African Companies in the Indian Financial Services Sector", (2007), KPMG. 5 "Financial Services M&A Going for Growth in Asia: Report and Survey Results" (2007), PwC.

Goa University


value of total deals. 6 While globally, the M&A activity in this industry is dominated

by petrochemicals and base chemicals, in India, segments such as fertilizers,

agri-products and speciality chemicals have also been the key focus for M&A

activity. Another interesting phenomenon has been that M&A deals in Indian

chemical industry have consistently obtained higher premiums in comparison to

those in global M&A deals (See Fig. 3.5).

Fig. 3.5: M&A Premiums in Chemical Industry During Decade of 2000:

India vs. Global

60% -

0%

50% -

40% -

20% -

10% -

2002 2001 2003 2005 2007 2009

—110— Premiums - India Chemcals —0— Premiums - Global Chemicals

Source: "Handbook on Indian Chemicals Industry", (2010), FICCI.

One of the most important reasons for M&A in chemicals industry has

been its characteristic of being a highly R&D intensive. Huge investments in

R&D coupled with longer gestation period makes it difficult for new entrants to

manage competition. Therefore, acquisition of already established companies

6 "Handbook on Indian Chemical Industry", (2010), FICCI.

Goa University


with diverse product portfolio within the sector has been an important strategy of

Indian chemical industry firms. Further, synergy motivation has prevailed in M&A

strategy in chemical industry, particularly focussing on vertical integration. For

instance, the merger of Gulf Oil India with IDL Industries in 2002 provided much

needed synergies to Hinduja Group to consolidate its position in Indian

chemicals sector and provide larger network for both domestic and international

marketing. The housing boom and increased demand from the automobile

sector have also generated lot of M&A activity in chemicals sector (Kar, 2006).

(iii) Drugs and Pharmaceutical sector

The drugs and pharmaceutical sector is another significant sector in

Indian economy. The pharmaceutical industry in India is one of the largest and

most advanced among developing nations. As seen earlier, the M&A activity was

maximum in this sector during 1995-96 to 1999-2000 with 165 transactions and

accounting for 15.55% of total deals during the period. In the second half though

the focus of M&A shifted to financial services sector, the pharmaceuticals sector

continued to record M&As in large number. The domestic pharmaceutical sector

is very fragmented with The major driving forces behind M&As in this sector

are:

• Developing manufacturing and research infrastructure.

• Establish front-end presence (marketing and distribution) in the

developed world.

Goa University


• Diversification into new areas: Tap other geographies / therapeutic

segments / customers to enhance product life cycle and build

synergies for new products

• Enhance product, technology and intellectual property portfolio -4,

• Catapulting market share

The second half of the study period saw an operation of post — patent

regime and resultant wave of consolidations. Mid-cap pharmaceutical companies

have been particularly aggressive in forging global alliances, buying brands, and

investing in international companies and joint ventures. Supply chain integration

has also been an important reason for M&A in this sector whereby the domestic

companies looked to consolidate their position across the value chain by

coalescing their strengths with partners having complimentary skill sets.' For

instance, the merger between Matrix and Strides Arcolabs and Jubilant

Organosys' 75% equity buy out in a US generics company. In general the M&A

transactions in this sector occurred between Indian companies in the generics

space and among MNCs and Indian companies in research space.

(iv) Textile sector

Prior to economic reforms, the Indian textile industry was predominantly

an unorganized sector. With the opening of economy in 1991, the textile industry

has made a good progress. Today it is one of the largest textile industries in the

world contributing slightly more than 30% of foreign exchange earnings through

"Pharma Sector Rides Consolidation Wave", www.expresspharmaonline.com , (2005).

Goa University


exports of textiles. It contributes about 20% of the total industrial production of

India and is significant employer accounting for 21% of total employment

generated in the economy. The M&A activity has paced in the Indian textile

industry only during the later half of 2000. The broad trend that emerged during

this time were cross border acquisitions and joint ventures to gain better access

to developed markets, M&A in domestic markets to achieve globally competitive

size. The growth of power looms and handlooms sector at the cost of mill sector

which has ultimately resulted in making them sick and unviable resulting in

closure of several mills (Bedi, H., 2010). Furthermore, continued and persistent

use of old plant and machinery has led to low profitability in this sector.

(v) Food and Beverage sector

During the entire study period, there have been 551 transactions of

mergers and acquisitions in Food and Beverage sector, which accounts for

approximately 6% of the total number of M&As during the period. This is one

sector where significant number of M&As were observed as early as 1995-96

accounting for 24.24% of total M&A during that year. Some of the important

causes of M&A in this sector have been the deregulation of the food industry in

1991 which allowed entry of foreign food chains thus creating competition for

Indian firms; secondly, the restructuring undertaken by parent companies to

mitigate competitive risk; and thirdly, the process of disinvestment.

Thus, mergers and acquisitions activity has come a long way in Indian

corporate sector. Although M&As did exist even in 70s and 80s in India, the

Goa University


quantum of transactions have increased substantially only after the economic

reforms of 1991. The analysis of trends of M&A presents two distinctive phases

of growth of M&A. Significant growth rate in M&As has been observed since

1995-96 upto 1999-2000. The yearly growth rate slowed down during the second

sub-period from 2000-01 to 2006-07, although the number of M&A are much

higher in comparison to the earlier sub-period. Further it is seen that M&A have

been observed across all the sectors and are generally within the same sector.

Sectors such as financial services, Chemicals, It and Telecom, Drugs and

Pharmaceuticals, Textile, Food and Beverage have emerged as significant

sectors driving M&A activity in India. With such widespread M&A activity, it is

imperative to analyze its financial implications on companies and shareholders.

Goa University

analysis of trends in mergers and acquisitions in...

Documents