mergers and acquisitions in tea industry

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MERGERS AND ACQUISITIONS IN TEA INDUSTRY: A CASE STUDYA Dissertation submitted in partial fulfillment of the requirements for the Degree of Masters in Finance and Investment at the University of Nottingham September 2007.

BY SHASHANK AGARWALSTUDENT ID: 4055919

ACKNOWLEDGEMENT

I would like to thank everyone who helped me in the compiling of my dissertation, from initial research to final documentation. I specially want to thank Ms. Kuasirinikan Nongnooch who

supervised this study and gave valuable feedback and advice throughout. Her assistance is greatly appreciated.

Further thanks to my parents and my family for their unlimited support during my study in U.K.

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ABSTRACT

This dissertation is aimed at finding motives and assessing the consequences of mergers and acquisitions, taking Tata Teas acquisition of Tetley into consideration. It overviews a vast amount of theoretical literature on mergers and acquisitions and presents empirical literature findings on companys post-merger financial performance. Case study section of the dissertation considers the history of Tata Tea Ltd. for engaging in M&A activities and measures the consequences of the activity by applying accounting and empirical financial approaches. Quantitative data is obtained from both online and published resources. The findings from the study are: Mergers and acquisitions contribute to increase in net sales revenue. Their impact on market share can either be neutral or positive. Quantitative data is taken from companys annual reports, business research companies archives and financial websites. The findings from the study are mergers and acquisitions can either have a positive or negative impact on financial performance.

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CONTENTS 1. INTRODUCTION .................................................................... 61.1 BACKGROUND ON MERGERS AND ACQUISITIONS ..................................... 7 1.1.1. Definition of Mergers and Acquisitions ........................................................... 7 1.1.2. Types of Mergers and Acquisitions .................................................................. 9

2. AIM OF THE STUDY ............................................................. 122.1. RESEARCH APPROACHES................................................................................ 12 2.2. PLAN ..................................................................................................................... 13

3. LITERATURE REVIEW ......................................................... 143.1. THEORETICAL LITERATURE: THE REASONS AND MOTIVES BEHIND MERGERS AND ACQUISITION ............................................................................... 14 3.2. THEORETICAL LITERATURE: SUCCESS AND FAILURES OF MERGERS AND ACQUISITION ................................................................................................... 20 3.3. THEORETICAL LITERATURE: CROSS-BORDER MERGERS & ACQUSITIONS ............................................................................................................ 25

4. EMPIRICAL EVIDENCE: CONSEQUENCES OF ENGAGING IN MERGER AND ACQUISITION ...................... 274.1. EVENT STUDY .................................................................................................... 27 4.2. ACCOUNTING STUDY ....................................................................................... 30 4.3. SURVEY OF EXECUTIVES ................................................................................ 34 4.4. CLINICAL STUDY............................................................................................... 36

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5. RESEARCH METHODOLOGY ............................................. 395.1. ACCOUNTING METHODOLOGY: THE BENCHMARK APPROACH .......... 39

6. CASE STUDY .......................................................................... 426.1. AN OVERVIEW OF TATA TEA LIMITED ....................................................... 42 6.2. AN OVERVIEW OF TETLEY ............................................................................. 42 6.3. THE HISTORY OF TATA TEAS MERGER AND ACQUISITION DEALS ... 43 6.4. BLENDING WITH PERFECTION ...................................................................... 45 6.5. THE CHALLENGES............................................................................................. 47 6.6. FLAVOUR OF SYNERGIES................................................................................ 49 6.7. GLOBAL SCENARIO .......................................................................................... 55 6.8. FINANCIAL ANALYSIS OF TATA-TEA PRE-ACQUISITION ....................... 61 6.9. LEVERAGED BUY-OUT..................................................................................... 65

7. CONSEQUENCES OF TATA TEAS ACQUISITIONS OF TETLEY ....................................................................................... 677.1. NET SALES REVENUE ....................................................................................... 67 7.2. POST-MERGER FINANCIAL PERFORMANCE............................................... 69

8. CONCLUSION ........................................................................ 73 REFERENCES ............................................................................. 76

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1. INTRODUCTION

Earlier, after a pitched battle among the MNC's in the domestic arena, not many Indian tea manufacturing companies thought of going global. Devour competitors and destroy competition - the mantra that the global conglomerates had been chanting so far, had not gone well with the Indian counterparts.

But fortunately, that doesnt remain the prerogative anymore. The war-averse domestic companies are shedding their inhibitions. The roles have undoubtly changed. And, after fighting in out in the global commodities arena, it is time now for a global teacup.

Taking a plunge in the global tea war in the year 2000 was Indias corporate tea giant Tata Tea. Though it was not an easy decision to make, that to when the competitor was no less than a stature of Unilever, a global food and beverage behemoth, but the Tata Tea had little choice - shape up or be swapped. It chose the former. And, what else could have been a better vehicle than Tetley for Tata tea to take on the might of global tea giants like Lever and Hillsdown.

The expansion took place through the acquisition of another tea giant from the UKTetley. Tata tea finally tasted victory on March 10, 2000 when it bought Tetley for a staggering INR 2,135 crore (305 million sterling). Such a deal had never been heard or seen before in the Indian Corporate world. What makes this deal special is the fact that it

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is the first ever LBO (Leveraged Buy Out) by any Indian company. In fact, this also happened to be the largest ever cross-border acquisition by an Indian company.

1.1 BACKGROUND ON MERGERS AND ACQUISITIONS1.1.1. Definition of Mergers and Acquisitions

Mergers and Acquisitions have always played a vital role in corporate history, ranging from greed is good corporate raiders buying companies in a hostile manner and breaking them apart, to todays trend to use mergers and acquisition for external and industry consolidation.( Sherman & Hart, 2006)

The terms mergers and acquisition are often used interchangeably but it is important to understand the differences between the two.

In the academic literature, there are number of authors, who define merger, acquisition and takeover differently. According to Sudarsanam (1995), a merger takes place when two or more corporations come together to combine and share their resources to achieve common objectives. The shareholders of the combining firms often remain as joint owners of the combined entity. But according to Sherman and Hart (2006), a merger is a combination of two or more companies in which the assets and liabilities of the selling firms are absorbed by the buying firm. According to Gaughan (2002), a merger is a process in which two corporations combines and only one survives and the merged corporation ceases to exist. Sometimes there is a combination of two companies where both the companies cease to exist and an entirely new company is created.

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An acquisition on the other hand, is the purchase of an asset such as a plant, a division or an entire company. Sudarsanam (1995) defines acquisition as an arms- length deal, where one company purchases the shares of another company and the acquired company is no longer the owner of the firm.

The term takeover is sometimes used to refer a hostile situation. According to Gaughan (2002), this happens when one company tried to acquire another company against the will of the companys management. But according to Sudarsanam (1995), a takeover is similar to an acquisition and also implies that the acquirer is much larger than the acquired.

According to Gaughan (2002), mergers and acquisition are friendly transactions in which the senior management of the companies negotiate the terms of the deal and the terms are then put in front of the shareholders of the target company for their approval. Whereas in a takeover, a different set of communication takes place between the target and the bidder, which involves att6orney and courts. Bidders here try to appeal directly to the shareholders often against the recommendations of the management.

According to Sudarsanam (1995), the differences between merging and acquiring are very important to consider valuing, negotiating and structuring the clients transactions.

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In line with common practice ( Chiplin and Wright, 1988) , terms mergers , acquisitions and takeovers will be used synonymously in this dissertation. According to Sherman and Hart (2006), at the

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