project on merger and acquisition

Mergers & Acquisitions

A PROJECT REPORTOn

“MERGERS AND ACQUISITIONS- INDIAN SCENARIO”

Submitted to Faculty of Management Studies

Maharishi Arvind Institute of Engineering and TechnologyMansarovar, Jaipur

For the partial fulfillment of the degree ofMASTER OF BUSINESS ADMINISTRATION

(2009-2011)“Seminar on contemporary management issue”

Submitted To: Submitted By:

DEAN SIR Mr. MOSAM PANCHOLI COL. C.D.SHARMA

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PREFACEMBA is the one of the most reputed professional coures in the field of

Management.It include theory as well as its practical knowledge. Report on

contemporary issue is an integral part of MBA programe, as through this

students acquire knowledge of real happenings of the surroundings. So in

second semester each student at MAHARISHI ARVIND INSTITUTE OF

ENGINEERING & TECHNOLOGY, JAIPUR need to submit a report on

contemporary issue.

This knowledge serves the purposes of acquainting the student with economic

environment of an organisation in which student have to work hard in

future .Only theoretical knowledge is not enough but its practical knowledge is

also required to be learned.

I was fortunate enough to have an opportunity of submitting report on the topic

Mergers & Acquisitions: An Indian Scenario. In this report,all the important

concept relating to merger & acquisition are included, and few examples of

real corporate mergers in indian context are also given. I also tried to include a

case study for more broader vision.It is hoped that this report will make the

readers familiar with the Mergers & Acquisitions and also give the idea about

the recent scenario in Indian context.

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Executive SummaryMerger - It's the most talked about term today creating lot of excitement and speculative

activity in the markets. But before Mergers & Acquisitions (M&A) activity speeds up, it has to

actually pass through a long chain of procedures (both legal and financial), which at times

delays the deal.

With the liberalization of the Indian economy in 1991, restrictions on Mergers and Acquisitions

have been lowered. The numbers of Mergers and Acquisitions have increased many times in

the last decade compared to the slack period of 1970-80s when legal hurdles trimmed the

M&A growth. To put things in perspective, from 15 mergers in 1998, the number crossed to

over 280 in FY01. With a downturn in the capital markets, valuations have come down to

historic lows. It's high time that the consolidation game speeds up.

In simple terms, a merger means blending of two or more existing undertakings into one,

consequent to which each undertaking would lose their separate identity. The most common

reasons for mergers are, operating synergies, market expansion, diversification, growth,

consolidation of production capacities and tax savings. However, these are just some of the

illustrations and not the exhaustive benefits.

However, before the idea of Merger and Acquisition crystallizes, the firm needs to understand

its own capabilities and industry position. It also needs to know the same about the other firms

it seeks to tie up with, to get a real benefit from a merger. Globalization has increased the

competitive pressure in the markets. In a highly challenging environment a strong reason for

merger and acquisition is a desire to survive. Thus apart from growth, the survival factor has

off late, spurred the merger and acquisition activity worldwide.

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Objective of study:

To discuss the form of mergers and acquisitions.

To highlight the real motives of merger and acquisitions.

To focus on the considerations those are important in the mergers and acquisitions

negotiations.

To find relevant examples to explain Indian take.

To find the yin yens of mergers & acquitions.

Research Methodology

The lifeblood of business and commerce in the modern world is information. The ability to

gather,analyze, evaluate, present and utilize information is therefore is a vital skill for the

manager of today.

In order to accomplish this project successfully I have taken the following steps:-

1) Sampling- The study is limited to a sample of top 10 merging or merged Indian companies of various sectors of Indian economy.

2) Data Collection: The research will be done with the help Secondary data (from internet site

andJournals). The data is collected mainly from websites, company reports, existing journal reports,

database available etc.

3) Type of surveyIt is basically a descriptive survey which describes various aspects of mergers & acquisitions with Indian context.

4) Analysis:

Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was not

so common. The situation has undergone a sea change in the last couple of years.

Acquisition of foreign companies by the Indian businesses has been the latest trend in the

Indian corporate sector.

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http://www.economywatch.com/mergers-acquisitions/india.html


There are different factors that played their parts in facilitating the mergers and acquisitions

in India. Favorable government policies, buoyancy in economy, additional liquidity in the

corporate sector, and dynamic attitudes of the Indian entrepreneurs are the key factors

behind the changing trends of mergers and acquisitions in India.

The Indian IT and ITES sectors have already proved their potential in the global market.

The other Indian sectors are also following the same trend. The increased participation of

the Indian companies in the global corporate sector has further facilitated the merger and

acquisition activities in India.

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Mergers and Acquisition

Introduction:

Business combinations which may take forms of merger, acquisitions,

amalgamation and takeovers are important features of corporate structural changes. They

have played an important role in the financial and economic growth of a firm.

Merger is a combination of two or more companies into one company. One

or more companies may merge with an existing company or they may merge to form a new

company. Laws in India use the term amalgamation for merger. For example, Section 2(1A)

of the Income Tax Act, 1961 defines amalgamation as the merger of one or more

companies with another company or the merger of two or more companies (called

amalgamating company or companies) to form a new company (called amalgamated

company) in such a way that all assets and liabilities of the amalgamated company and

shareholders holding not less than nine-tenths in value of the shares in the amalgamating

company or companies become shareholders of the amalgamated company.

Merger or amalgamation may take two forms:

Merger through absorption

Merger through consolidation

Absorption:

In absorption, one company acquires another company. All companies except one

lose their identity in merger through absorption. The merger of Tata Oil Mills Ltd. (TOMCO)

with Hindustan Lever Ltd. (HLL) is an example of absorption

Consolidation:

In a consolidation, two or more companies combine to form a new company. In this form of

merger, all companies are legally dissolved and a new entity is created. In consolidation,

the acquired company transfers its asset, liabilities and shares to the acquiring company for

cash or exchange of shares. . An example of consolidation is the merger of Hindustan

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Computers Ltd., Hindustan Instruments Ltd., and Indian Reprographics Ltd., to an entirely

new company called HCL Ltd.

Acquisition:

A fundamental charectaristic of merger (either through absorption or consolidation) is that

the acquiring company (existing or new) takes over the ownership of other companies and

combine their operations with its own operations. In an acquisition two or more companies

may remain independent, separate legal entity, but there may be change in control of

companies. Hindustan lever limited buying brands of Lakme is an example of asset

acquisition.

Takeover:

A takeover may also define as obtaining of control over management of a company by

another. Under the Monopolies and Restrictive Trade Practices Act, takeover means

acquisition of not less than 25% of the voting power in a company. If a company wants to

invest in more than 10% of the subscribe capital of another company, it has to be approved

in the shareholders general meeting and also by the central government. The investment in

shares of another companies in excess of 10% of the subscribed capital can result into their

takeover.

Demerger

It has been defined as a split or division. As the same suggests, it denotes a situation

opposite to that of merger. Demerger or spin-off, as called in US involves splitting up of

conglomerate (multi-division) of company into separate companies.

This occurs in cases where dissimilar business are carried on within the same company,

thus becoming unwieldy and cyclical almost resulting in a loss situation. Corporate

restructuring in such situation in the form of demerger becomes inevitable. A part from core

competencies being main reason for demerging companies according to their nature of

business, in some cases, restructuring in the form of demerger was undertaken for splitting

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up the family owned large business empires into smaller companies. The historical

demerger of DCM group where it split into four companies (DCM Ltd., DCM shriram

industries Ltd., Shriram Industrial Enterprise Ltd. and DCM shriram consolidated Ltd.) is

one example of family units splitting through demergers.

Reverse Merger

Normally, a small company merges with large company or a sick company with healthy

company. However in some cases, reverse merger is done. When a healthy company

merges with a sick or a small company is called reverse merger. This may be for various

reasons. Some reasons for reverse merger are:

a) The transferee company is a sick company and has carry forward losses and Transferor

Company is profit making company. If Transferor Company merges with the sick transferee

company, it gets advantage of setting off carry forward losses without any conditions. If sick

company merges with healthy company, many restrictions are applicable for allowing set

off.

b) The transferee company may be listed company. In such case, if Transferor Company

merges with the listed company, it gets advantages of listed company, without following

strict norms of listing of stock exchanges.

For example Godrej soaps Ltd. (GSL) with pre merger turnover of 436.77 crores entered

into scheme of reverse merger with loss making Gujarat Godrej innovative Chemicals Ltd.

(GGICL) (with pre merger turnover of Rs. 60 crores) in 1994.

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DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were

synonymous, the terms merger and acquisition mean slightly different things. When one

company takes over another and clearly established itself as the new owner, the purchase

is called an acquisition. From a legal point of view, the target company ceases to exist, the

buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same

size, agree to go forward as a single new company rather than remain separately owned

and operated. This kind of action is more precisely referred to as a "merger of equals." Both

companies' stocks are surrendered and new company stock is issued in its place.

In practice, however, actual mergers of equals don't happen very often. Usually, one

company will buy another and, as part of the deal's terms, simply allow the acquired firm to

proclaim that the action is a merger of equals, even if it's technically an acquisition. Being

bought out often carries negative connotations, therefore, by describing the deal as a

merger, deal makers and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is

in the best interest of both of their companies. But when the deal is unfriendly - that is,

when the target company does not want to be purchased - it is always regarded as an

acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether

the purchase is friendly or hostile and how it is announced. In other words, the real

difference lies in how the purchase is communicated to and received by the target

company's board of directors, employees and shareholders.

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Types of Merger

There are four major types of mergers they can be explain as follows:

1 Horizontal Merger :

This is a combination of two or more firms in similar type of production, distribution or area of

business.

2 Vertical Merger :

This is a combination of two or more firms involved in different stages of production

or distribution. Vertical merger may take the form of forward or backward merger.

Backward merger: When a company combines with the supplier of material, it is called

backward merger.

Forward merger: When it combines with the customer, it is known as forward merger.

3. Conglomerate Merger :

This is a combination of firms engaged in unrelated lines of business activity. Example

is merging of different business like manufacturing of cement products, fertilizers products,

electronic products, insurance investment and advertising agencies.

4. Concentric Merger

Concentric merger are based on specific management functions where as the conglomerate

mergers are based on general management functions. If the activities of the segments brought

together are so related that there is carry over on specific management functions such as

marketing research, Marketing, financing, manufacturing and personnel.

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Advantages of Merger and Acquisitions

1 Maintaining or accelerating a company’s growth.

2 Enhancing profitability, through cost reduction resulting from economies of scale.

3 Diversifying the risk of company, particularly when it acquires those businesses whose

income streams are not correlated.

4 Reducing tax liability because of the provision of setting-off accumulated losses and

unabsorbed depreciation of one company against the profits of another.

5 Limiting the severity of competition by increasing the company’s market power.

Motives behind the Merger

Motives of merger can be broadly discussed as follows:

1. Growth:

One of the fundamental motives that entice mergers is impulsive growth.

Organizations that intend to expand need to choose between organic growth and acquisitions

driven growth. Since the former is very slow, steady and relatively consumes more time the

latter is preferred by firms which are dynamic and ready to capitalize on opportunities.

2. Synergy:

Synergy is a phenomenon where 2 + 2 =>5. This translates into the ability of a business

combination to be more profitable than the sum of the profits of the individual firms that were

combined. It may be in the form of revenue enhancement or cost reduction.

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3. Managerial Efficiency:

Some acquisitions are motivated by the belief that the acquires management can

better manage the target’s resources. In such cases, the value of the target firm will rise under

the management control of the acquirer.

4. Strategic:

The strategic reasons could differ on a case-to-case basis and a deal to the other. At

times, if the two firms have complimentary business interests, mergers may result in

consolidating their position in the market.

5. Market entry:

Firms that are cash rich use acquisition as a strategy to enter into new market or new

territory on which they can build their platform.

6. Tax shields:

This plays a significant role in acquisition if the distressed firm has accumulated

losses and unclaimed depreciation benefits on their books. Such acquisitions can eliminate the

acquiring firm’s liability by benefiting from a merger with these firms.

7. Resource transfer:

Resources are unevenly distributed across firms (Barney, 1991) and the interaction of

target and acquiring firm resources can create value through either overcoming information

asymmetry or by combining scarce resources.

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8. Vertical integration:

Vertical Integration occurs when an upstream and downstream firm merges (or one

acquires the other). There are several reasons for this to occur. One reason is to internalize

an externality problem. A common example is of such an externality is double

marginalization. Double marginalization occurs when both the upstream and downstream

firms have monopoly power; each firm reduces output from the competitive level to the

monopoly level, creating two deadweight losses. By merging the vertically integrated firm

can collect one deadweight loss by setting the upstream firm's output to the competitive

level. This increases profits and consumer surplus. A merger that creates a vertically

integrated firm can be profitable.

Benefits of Mergers

1. Limit competition

2. Utilizes under-utilized market power

3. Overcome the problem of slow growth and profitability in one’s own industry

4. To achieve diversification

5. Gain economies of scale and increase income with proportionately less investment

6. Establish a transnational bridgehead without excessive start-up costs to gain access to a

foreign market.

7. utilize under-utilized resources- human and physical and managerial skills.

8. Displace existing management.

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9. Circum government regulations.

10. Reap speculative gains attendant upon new security issue or change in P/E ratio.

11. Create an image of aggressiveness and strategic opportunism, empire building and to

amass vast economic power of the company.

Steps of Merger and Acquisitions

There are three important steps involved in the analysis of merger and acquisitions can be

explained as follows:

1. Planning:

The most important step in merger and acquisition is planning. The planning of

acquisition will require the analysis of industry specific and the firm specific information. The

acquiring firm will need industry data on market growth, nature of competition, capital and

labour intensity, degree of regulation etc. About the target firm the information needed will

include the quality of management, market share, size, capital structure, profit ability,

production and marketing capabilities etc,

2 Search and Screening :

Search focuses on how and where to look for suitable company for acquisition.

Screening process shortlists a few company from available companies. Detailed information

about each of these companies is obtained.

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Merger objectives may include attaining faster growth, improving profitability, improving

managerial effectiveness, gaining market power and leadership, achieving cost reduction etc.

These objectives can be achieved in various ways rather than through merger alone. The

alternatives to merger include joint venture, strategic alliances, elimination of inefficient

operations, cost reduction and productivity improvement, hiring capable manager etc. If

merger is considered as the best alternative, the acquiring firm must satisfy itself that it is the

best available option in terms of its own screening criteria and economically most attractive.

3 Financial Evaluation :

Financial evaluation of a merger is needed to determine the earnings and cash flows,

area of risk, the maximum price payable to the target company and the best way to finance the

merger. The acquiring firm must pay a fair consideration to the target firm for acquiring its

business. In a competitive market situation with capital market efficiency, the current market

value is the current market value of its share of the target firm. The target firm will not accept

any offer below the current market value of its share. The target firm in fact, expects that

merger benefits will accrue to the acquiring firm.

A merger is said to be at a premium when the offer price is higher than the target

firm’s pre merger market price. The acquiring firm may pay the premium if it thinks that it can

increase the target firm’s after merger by improving its operations and due to synergy. It may

have to pay premium as an incentive to the target firm’s shareholders to induce them to sell

their shares so that the acquiring firm is enabled to obtain the control of the target firm.

Reasons for Merger

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The reason of merger can be broadly explain as follows:

1. Accelerated Growth:

Growth is essential for sustaining the viability, dynamism and value enhancing

capability of a firm. Growing operations provide challenges and excitement to the executives

as well as opportunities for their job enrichment and rapid career development. This help to

increase managerial efficiency. Other things being the same, growth must lead to higher profits

and increase in the shareholders value. It can be achieve growth in two ways:

Expanding its existing markets

Enhancing in new market

A firm may expand and diversify its markets internally or externally. If company cannot grow

internally due to lack of physical and managerial resources, it can grow externally by

combining its operations with other companies through mergers and acquisitions.

2. Enhanced Profitability

The combination of two or more firm may result in more than the average profitability

due to cost reduction and efficient utilization of resources. This may happen because of the

following reasons:

a) Economies of Scale :

When two or more firm combine, certain economies are realized due to the larger volume of

operations of the combined entity. These economies arise because of more intensive

utilization of production capacities, distribution networks, engineering services, research and

development facilities, data processing systems and so on.

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b) Operating Economies :

In addition to economies of scale, a combination of two or more firm may result into cost

reduction due to operating economies. A combined firm may avoid or reduce fuctions and

facilities. It can consolidate its management functions such as manufacturing, R & D and

reduce operating costs. Foe example, a combined firm may eliminate duplicate channels of

distribution or create a centralized training center or introduce an integrated planning and

control system.

c) Strategic Benefits :

If a firm has decided to enter or expand in a particular industry, acquisition of a firm engaged

in that industry rather than dependence on internal expansion may offer strategic advantages

such as less risk and less cost.

d) Complementary Resources :

If two firms have complementary resources it may make sense for them to merge. For

example, a small firm with an innovative product may need the engineering capability and

marketing reach of a big firm. With the merger of the two firms it may be possible to

successfully manufacture and market the innovative product. Thus, the two firms, thanks to

their complementary resources, are worth more together than they are separately.

e) Tax Shields :

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When a firm with accumulated losses and unabsorbed tax shelters merges with a profit

making firm, tax shields are utilized better. The firm with accumulated losses and

unabsorbed tax shelters may not be able to derive tax advantages for a long time. However,

when it merges with a profit making firm, its accumulated losses and unabsorbed tax

shelters can be set off against the profits of the profit making firm and tax benefits can be

quickly realized.

3. Utilisation of surplus funds:

A firm in a mature industry may generate a lot of cash but may not have

opportunities for profitable investment. Most managements have a tendency to make

further investments, even though they may not be profitable. In such a situation a merger

with another firm involving cash compensation often represents a more efficient utilization

of surplus fund.

4. Managerial Effectiveness:

One of the potential gains of merger is an increase in managerial effectiveness.

This may occur if the existing management team, which is performing poorly, is replaced by

a more effective management team. Another allied benefit of a merger may be in the form

of greater congruence between the interests of managers and the shareholders. A common

argument for creating a favourable environment for mergers is that it imposes a certain

discipline on the management.

5. Diversification of Risk:

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A commonly stated motive for mergers is to achieve risk reduction through

diversification. The extent, to which risk is reduced, of course, depends on the correlation

between the earnings of the merging entities. While negative correlation brings greater

reduction in risk. The positive correlation brings lesser reduction in risk.

6. Lower Financing Costs:

The consequence of large size and greater earnings stability is to reduce the cost of

borrowing for the merged firm. The reason for this is that the creditors of the merged firm

enjoy better protection than the creditor of the merging firms independently.

RISKS ASSOCIATED WITH MERGER

There are several risks associated with consolidation and few of them are as follows: -

1) When two companies merge into one then there is an inevitable increase in the size of

the organization. Big size may not always be better. The size may get too widely and go

beyond the control of the management. The increased size may become a drug rather than

an asset.

2) Consolidation does not lead to instant results and there is an incubation period before

the results arrive. Mergers and acquisitions are sometimes followed by losses and tough

intervening periods before the eventual profits pour in. Patience, forbearance and resilience

are required in ample measure to make any merger a success story. All may not be up to

the plan, which explains why there are high rate of failures in mergers.

3) Consolidation mainly comes due to the decision taken at the top. It is a top-heavy

decision and willingness of the rank and file of both entities may not be forthcoming. This

leads to problems of industrial relations, deprivation, depression and demonization among

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the employees. Such a work force can never churn out good results. Therefore, personal

management at the highest order with humane touch alone can pave the way.

4) The structure, systems and the procedures followed in two banks may be vastly

different, for example, a PSU bank or an old generation bank and that of a technologically

superior foreign bank. The erstwhile structures, systems and procedures may not be

conducive in the new milieu. A thorough overhauling and systems analysis has to be done

to assimilate both the organizations. This is a time consuming process and requires lot of

cautions approaches to reduce the frictions.

5) There is a problem of valuation associated with all mergers. The shareholder of existing

entities has to be given new shares. Till now a foolproof valuation system for transfer and

compensation is yet to emerge.

6) Further, there is also a problem of brand projection. This becomes more complicated

when existing brands themselves have a good appeal. Question arises whether the earlier

brands should continue to be projected or should they be submerged in favour of a new

comprehensive identity. Goodwill is often towards a brand and its sub-merger is usually not

taken kindly.

Legal aspects of Merger

Legal Procedures for Merger and Acquisition

The following is the procedures for merger or acquisition is fairly long dawn. Normally it

involves the following steps:

1. Permission for merger:

Two or more firm can amalgamate only when amalgamation is permitted under their

memorandum of association. Also, the acquiring firm should have the permission in its object

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clause to carry on the business of the acquired company. In the absence of these provisions in

the memorandum of association, it is necessary to seek the permission of the shareholders,

board of directors and the Company Law Board before affecting the merger.

2. Information to the stock exchange:

The acquiring and the acquired companies should inform the stock exchange where

they are listed about the merger.

3. Approval of board of directors:

The boards of the directors of the individual firm should approve the draft proposal for

amalgamation and authorize the managements of companies to further pursue the proposal.

4. Application in the High Court:

An application for approving the draft amalgamation proposal duly approved by the

board of directors of the individual firm should be made to the High Court. The High Court

would convene a meeting of the shareholders and creditors to approve the amalgamation

proposal. The notice of meeting should be sent to them at least 21 days in advance.

5. Shareholders and Creditors meetings:

The individual firm should hold separate meetings of their shareholders and creditors

for approving the amalgamation scheme. At least 75% of shareholders and creditors in

separate meeting, voting in person or by proxy, must accord their approval to the scheme.

6. Sanction by the High Court:

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After the approval of shareholders and creditors on the petitions of the companies, the

High Court will pass order sanctioning the amalgamation scheme after it is satisfied that the

scheme is fair and reasonable. If it deems so, it can modify the scheme. The date of the

court’s hearing will be published in two newspapers and also the Regional Director of the Law

Board will be intimated.

7. Filing of the Court order:

After the Court order its certified true copies will be filed with the Registrar of Companies.

8. Transfer of asset and liabilities:

The asset and liabilities of the acquired firm will be transferred to the acquiring firm

in accordance with the approved scheme, with effect from the specified date.

9. Payment by cash or securities:

As per the proposal, the acquiring firm will exchange shares and debentures and

pay cash for the shares and debentures of the acquired firm. These securities will be listed on

the stock exchange.

Financial Aspects of Merger

There are many ways in which a merger can result into financial synergy. A merger may

help in:

eliminating the financial constraint

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deploying surplus cash

enhancing debt capacity

lowering the financial cost.

It can be broadly explain as follows:

1. Financial Constraint:

A firm may be constrained to grow through internal development due to shortage

of fund. The firm can grow externally by acquiring another firm by the exchange of shares

and thus, release the financial constraints.

2. Surplus Cash:

A firm may be faced by a cash rich firm. It may not have enough internal

opportunities to invest its surplus cash. It may either distribute its surplus cash to its

shareholders or use it to acquire some other firm. The shareholders may not really benefit

much if surplus cash is returned to them since they would have to pay tax at ordinary

income tax rate. Their wealth may increase through an increase in the market value of their

shares if surplus cash is used to acquire another firm. If they sell their shares they would

pay tax at a lower, capital gain tax rate. The company would also be enabled to keep

surplus funds and grow through acquisition.

3. Debt capacity:

A merger of two firms, with fluctuating, but negatively correlated, cash flows, can

bring stability of cash flows of the combined firm. The stability of cash flows reduces the

risk of insolvency and enhances the capacity of the new entity to service a larger amount of

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debt. The increased borrowing allows a higher interest tax shield which adds to the

shareholders wealth.

4. Financing cost:

Does the enhanced debt capacity of the merged firm reduce its cost of capital?

Since the probability of insolvency is reduced due to financial stability and increased

protection to lenders, the merged firm should be able to borrow at a lower rate of interest.

This advantage may, however be taken off partially or completely by increase in the

shareholders risk on account of providing better protection to lenders.

Another aspect of the financing costs is issue costs. A merged firm is able to realize

economies of scale in flotation and transaction costs related to an issue of capital. Issue

costs are saved when the merged firm makes a larger security issue.

SOMETHING WRONG WITH A MERGER OR ACQUISITION

The extent and quality of the planning and research you do before a merger or acquisition

deal will largely determine the outcome. Sometimes situations will arise outside your control

and you may find it useful to consider and prepare for these risks.

An acquisition could become expensive if you end up in a bidding war where other parties

are equally determined to buy the target business. A merger could become expensive if you

cannot agree terms such as who will run the combined business or how long the other

owner will remain involved in the business. Both mergers and acquisitions can damage

business performance because of time spent on the deal and a mood of uncertainty.

Face pitfalls following a deal such as:

1) The target business does not do as well as expected.

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2) The costs you expected to save do not materialize.

3) Key people leave.

4) The business cultures are not compatible.

Indian context

Why Mergers and Acquisitions in India?

The factors responsible for making the merger and acquisition deals favorable in India are:

Dynamic government policies

Corporate investments in industry

Economic stability

“ready to experiment” attitude of Indian industrialists

Sectors like pharmaceuticals, IT, ITES, telecommunications, steel, construction, etc, have

proved their worth in the international scenario and the rising participation of Indian firms in

signing M&A deals has further triggered the acquisition activities in India.

TATA – TETLEY ( Controversial Issue over Success And Failure ).

The Tata group was infusing a fresh 30 million pounds into Tata tea that had been used

to buy an 85.7% stake in the UK-based Tetley last year. Already high on a heady brew of a

fresh buy and caffeine, most missed what Krishna Kumar's statement meant.

Tata Tea’s much hyped acquisition of Tetley, one of the world’s biggest tea brands, isn’t

proceeding according to the plan. 15 months ago, the Kolkata based Rs 913 crore Tata Tea’s

buyout of the privately held The Tetley Group for Rs 1843 crore had stunned corporate

watchers and investment bankers alike. It was a coup! An Indian company had used a

leveraged buyout to snag one of the Britain’s biggest ever brands. It was by far, the biggest

ever leveraged buyout by an Indian company.

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Tata Tea didn’t pay cash upfront. Instead, it invested 70 million pounds as equity capital

to set up Tata Tea. It borrowed 235 million to buy the Tetley stake. The plan was that Tetley’s

cash flows would be insulated from the debt burden.

When Tata Tea took the big gamble to buy Tetley, its intent was very clear. The

company had established a firm foothold in the domestic market and had a controlling position

in growing tea. Going global looked like the obvious thing to do. With Tetley, the second

largest brand after Lipton in its bag, Tata Tea looked ready to set the Thames on fire.

Right from the start, Tetley was never a easy buy. In 1996, Allied Domecq, the liquor

and retail conglomerate, had put Tetley on the block. Even then Tata Tea, nestle, Unilever and

Sara lee had put in bids, all under 200 million pounds. Allied wanted to cash on the table. Tata

Tea didn’t have enough of its own. The others bids also did not go through. Eventually, Tetley

group together with a consortium of financial investors like Prudential and Schroders, bought

the entire equity stake for 190 million pounds in all cash deal. Two years later, Tetley went for

an IPO, hoping to raise 350-400 million pounds. But the IPO never took place. Soon

afterwards, the investors began looking for exit options. Tetley was once again on the block.

It was until Feb 2000 that the due diligence was completed. By this time, the Tata's

were ready with their offer. They would pay 271 million pounds to buy the entire Tetley equity

and the funds would go towards first paying off Tetley’s 106 million debt. The balance would

go the owners.

The offer price did not include rights to Tetley coffee business, which was sold to the

US-based Rowland Coffee Roasters and Mother Parker’s Tea and Coffee in Feb 2000 for 55

million pounds.

For Tetley new owners, too, the problems were only just beginning. The deal hinged on

Tetley’s ability, over and above covering its own debts, to service the loans Tata Tea had

taken for the acquisition. That’s where reality bites.

Consider the facts. When Tata Tea acquired Tetley through Tata Tea, it sunk in 70

million pounds as equity and borrowed 235 million pounds from a consortium to finance the

deal. Implicit in the LBO was that Tetley’s future cash flows would fund the SPV’s interest and

principal repayment requirements. At an average interest rate of 11.5%, Tetley needed to

generate 22 million pounds in interest alone on a loan of 190 million pounds. Add to this the

FMS-MAIET 26


interest on the high cost vendor loan notes of 30 million pounds—it worked out to be 4.5

million and the charges on the working capital portion, amounting to 2 million pounds per

annum. All this works out to about 28 million pounds in interest alone per year.

At the same time, it also has to pay back the principal of 110 million pounds over a nice

period through half yearly installments. This works out to 12 million pounds per year. If you

were to assume that depreciation and restructuring charges were pegged at last year’s levels,

the bill tots up to 48 million pounds a year. In FY 1999, the Tetley’s cash flows were 29 million

pounds.

Some of the problems could have been obviated if Tetley’s cash flows had increased by

40 % in FY 2001 over the previous year. That way, the company would have covered both its

own commitments as well as of the Tata's. But the situation worsened. Major UK retailers

clamped down on grocery prices last year. That substantially reduced Tetley’s pricing

flexibility.

Besides, the UK tea markets have been under pressure for some time now. According

to the UK government’s national food survey, there has been a substantial fall in the

consumption of mainstream teas- tea-bag black teas drunk with milk and sugar. Also the tea

drinking population in UK has come down from 77.1% to 68.3% in 1999. On the other hand,

natural juices and coffee have consistently increased their market share.

So, when it was confronted by Tetley’s sliding performance, what options did Tata Tea

have? On its own, it could not do much. The last year has been one of the worst years for the

Indian tea industry and Tata Tea has also been affected. The drop in tea prices and a

proliferation of smaller brands in the organized segment have taken toll on Tata Tea’s

performance. In FY 2001, Tata Tea’s net profit fell by 19.59% from Rs 124.63 crore to Rs

100.21 crore. Income from operations declined by 8.72%.

But letting Tetley sink under the weight of the interest burden would have been an

unthinkable option, given the prestige attached to the deal.

Thus from the above case we infer that Tata had to shell out a lot of money to cover all

the debts of Tetley which was found not worthy enough by the general public.

Recent examples from Indian merger & acquisition

FMS-MAIET 27


1. Tata Steel-Corus: $12.2 billion

On January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at $12.2 billion.

The deal is the largest Indian takeover of a foreign company till date and made Tata Steel the world's fifth-largest steel group.

Tata Steel Background

Tata Steel a part of Tata group, one of the largest diversified business conglomerates in

India.

In the mid 1990s, Tata Steel emerged as Asia’s first and India’s largest integrated steel

producer in the private sector.

In February 2005, Tata Steel acquiesced the Singapore based steel manufacturer NatSteel,

let the company gaining access to major Asian Markets and Australia.

Tata Steel acquired the Thailand based Millennium Steel in December 2005.

Tata Steel generated net sales of Rs.5 billion in the financial year 2006-07.

Tata Steel SWOT Analysis

Strengths:

Tata is one of the lowest cost producer in the world

Tata group has successfully acquired some companies in past

Weakness:

Corus was triple size of Tata Steel in terms of production

Opportunities:

Tata steels may have Exposure to global steel market through various mergers &

acquisitions.

Consolidation trend in steel industry

FMS-MAIET 28


Threats:

There are various Russian bidder who are ready to grab the opportunity.

There is absence of any committed financers to support the conglomerate

Corus Background Hoogovens had good access to the sea for the raw materials and export of finished

goods.

The company was established at Ijmuiden, a town on the sea coast with good access

inland via the north sea canal.

On October 6th ,1999, Hoogovens(38.3%) merged with British Steel Plc(61.7%) to form

Corus Group Plc.

Philippe Varin (CEO) and Jim Leng (Chairman) of Corus, both worked to revive the

companies business.

Swot ANALYSIS

Strengths:

Corus group is Worlds 9th largest & Europe’s 2nd largest producer of steel

Corus group had Wide range of products

Operating facilities of corus group is spread in the whole Europe

Weakness:

Corus was in bad shape because of high operational cost.

Liabilities on corus group was increasing day by day

Opportunities:

There was a trend of consolidation in Steel Industry

It should try to get right price at a time when market is volatile

FMS-MAIET 29


Threats:

Huge pension liability might have led to collapse of the deal

Disagreement of Labour and Government reasons behind acquiring Corus by Tata group

Implication on Corus acquisition:

The acquisition made the Tata-Corus into the world steel’s Big-Five status( by revenue).

It is notable not only for creating a steel giant, but also this deal was a private sector

venture far from Indian Govt. influence.

TCL was to supplement the customer front-end in the developed markets, with a lower-cost

back-end in an emerging market.

It gave Tata the huge west market came into its hand.

With this venture to an extent, the India’s greater command to the worlds lingua franca will

lubricate the inevitably-difficult integration process.

Swot of Tata corus after merger

Strengths:

Corus takeover catapults Tata Steel from its current 65th place to no.5 spot, with a

combined capacity of 23.5 million

Cost advantage of operating from India can be leveraged in Western markets and

differentiation based on better technology from Corus can support Tata Steel

Weakness:

Corus EBITDA at 8% was much lower than that of Tata Steel which was 30% in the

financial year 2006-07

The merger requires high level of integration for technology transfer and coordinating

Opportunities:

Chinese steel plants dependence on imported raw material limit their pricing power

FMS-MAIET 30


Corus strong R&D and technology would add to the competitive strength for Tata Steel

Threats:

Capacity additions by China, Russia and Brazil may outrun the demand growth and lead to

the subdued steel prices

If the business performance of Corus declines, the companies cash flows would also

decline.

2. Vodafone-Hutchison Essar: $11.1 billion

Vodafone has found its passage to India, but at what cost. The company, known for its

expensive telecom asset acquisition in the past, appears to be ready to pay top dollars for a

fast growing mobile operator in one of the fastest growing cell phone markets in the world.

Assumptions of market growth rates may have to be revised if current estimates of

economic growth rates may not be realized. Vodafone may need more than third partner to

share this risk

On February 11, 2007, Vodafone agreed to buy out the controlling interest of 67% held by

Li Ka Shing Holdings in Hutch-Essar for $11.1 billion.

This is the second-largest M&A deal ever involving an Indian company.

Vodafone Essar is owned by Vodafone 52%, Essar Group 33% and other Indian nationals

15%.

Logic of the deal

The average monthly revenue per subscriber has been between $8 and $10 or between

$100 and $120 per year for almost all the cellular carriers in India. At the top end of the

annual revenue of $120 per subscriber, Vodafone is prepared to pay nearly seven times

fiscal 2006 revenue. Assuming 30% growth in cellular subscriber base and no growth or

decline in annual revenue per subscriber, the deal values the company at five times the

revenue in fiscal 2006. Not to forget, this is multiple of revenue and not a multiple of

FMS-MAIET 31


operating earnings.

The largest cell carrier, Bharti Airtel, has a market cap of $33 billion, and Reliance

Communication is valued at $22 billion. The current Vodafone deal values Hutch Essar at a

roughly $800 per subscriber, similar to what market values for other cell carrier companies.

But then market assumes that current subscriber growth rate of 50% will continue for many

years to come.

If the subscriber base increases only on cheaper cost of service and innovative price plans,

then the current assumption of revenue growth may be difficult to attain. Future subscriber

growth is likely to come from smaller towns and rural areas that are not likely to pay more

than $60 per year for the telecom service and are going to demand handset that may cost

less than $10. Of course, there is market at the bottom end of the industry, but is it as

profitable as at the top end?

Previous predictions of the lack of profitability in the cellular business in emerging markets,

such as India and China, have not proven to be correct. China now has 350 million

subscribers, and India has 150 million. However, more than 50 million of these subscribers

in India were added in the last twelve months and their behavior and loyalty is still

unpredictable.

Emerging Markets Rational

Cellular carriers around the emerging markets have found it difficult to justify the purchase

price above three times trailing revenue, but then there are very few markets growing as

fast as markets in India. If future growth is what is likely to help the current valuation, then

investors have to ask two more questions. What is going to drive this future growth and

what will stem the decline in average revenue per subscriber

FMS-MAIET 32


SWOT ANALYSIS

Strengths

Diversified geographical portfolio with strong mobile telecommunications operations in

Europe, the Middle East, Africa, Asia Pacific and Australiasia

Leading presence in emerging markets

Strategic alliances with Apple iPhone

Increasing the range of products we can offer to customers, in particular in enterprise,

and providing us with the ability to compete with integrated competitors

Value for money %u2013 in the past three years we%u2019ve reduced costs more

than five times, which equates to savings of around 50% for our customers.

Opportunities

Focus on cost reductions improving returns

Majority stake in mobile sector in New Zealand

Research and development of new technologies

Focus on developing fixed landline and broadband market.

Reducing the impact of global warming by reducing their carbon foot print

Threats

Ongoing price reductions due to competitive pressures

New entrants: Growing range of providers of converged fixed and mobile services

Expanding presence of mobile virtual network operators

Weaknesses

Total Telecommunication not nearly as strong as Telecom.

Wholesaling the lines through Telecom thereby gaining less profit.

Lack of systems and tools to backup the new processes.

FMS-MAIET 33


Lack of skilled employee (Technicians, engineers, accountants) availability in New

Zealand Market.

3. Bharti –zain: $10.7 billion

Analyst community got a shocker when the Bharti group honcho Mr. Sunil Mittal dubbed

analyst community criticism to the Bharti Zain deal as Fairy Tales. He insisted that the so

called analyst cannot see the long term thinking behind this deal.

With the earlier attempt to acquire African telecom giant MTN failed, Bharti is really

scouting hard for satisfying its global ambitions. The recent announcement of Bharti of

acquiring Zain Telecom’s African assets (another prominent telecom company) at $10.7

billion invited analyst’s criticism that it is overpaying for snapping this deal. Who’s right and

who’s wrong only time will tell!

Dissecting the deal, the immediate reaction is that the deal would stress the balance sheet

as the company is likely to borrow $9 billion, a hefty debt by any standards.

Information on Bharti group

Bharti supposedly has $1.5B in cash – about 7,000 crores – and the African unit has

around $2 billion in debt; so they have to pay about $8 billion – 35,000 crores. Assuming

they put in 5,000 cr. as equity, they have to raise 30,000 cr. as debt.

Adding that to current debt will mean 39,000 cr in debt; say at 6% they will pay Rs.

2,400 cr as interest costs.

For a set of assets that are at this point not even EBIDTA positive, this means Bharti will

have to absorb it from its profitable India operations.

The India operations will do about 10,000 cr. in net profits this year – that’s a hit of 25%

on its profits (until the African operations scale to absorb the losses)

FMS-MAIET 34


Information on zain Telecoms

Zain’s entire operations have slumped – the first nine months of 2009 have seen a 17%

drop in net profits from 235m KWD to 196m KWD.

9 months in USD: Revenue: $6.1B, EBIDTA: $2.6B, Net Profit: $677 million.

47-50% of all Zain revenue comes from non-African sources (source: Q3 presentation)

In Nigeria, they lost 6% of their customers year on year as of September 2009

The ARPUs for Africa lie between $3 and $13 – Nigeria is halfway at $7. In India it’s

ARPU is Rs. 230 or $5.

Zain has 42 million customers in Africa

SWOT analysis of bharti group

strengths

Bharti Airtel has more than 98 million customers. It is the largest cellular provider in India, and also supplies broadband and telephone services - as well as many other telecommunications services to both domestic and corporate customers.

Other stakeholders in Bharti Airtel include Sony-Ericsson, Nokia - and Sing Tel, with whom they hold a strategic alliance. This means that the business has access to knowledge and technology from other parts of the telecommunications world.

The company has covered the entire Indian nation with its network. This has underpinned its large and rising customer base

weakness

An often cited original weakness is that when the business was started by Sunil Bharti Mittal over 15 years ago, the business has little knowledge and experience of how a cellular telephone system actually worked. So the start-up business had to outsource to industry experts in the field.

Until recently Airtel did not own its own towers, which was a particular strength of some of its competitors such as Hutchison Essar. Towers are important if your company wishes to provide wide coverage nationally.

FMS-MAIET 35

http://www.zain.com/download/able/reports/Q32009ZainPresentation.pdf


The fact that the Airtel has not pulled off a deal with South Africa's MTN could signal the lack of any real emerging market investment opportunity for the business once the Indian market has become mature

Opportunities

The company possesses a customized version of the Google search engine which will enhance broadband services to customers. The tie-up with Google can only enhance the Airtel brand, and also provides advertising opportunities in Indian for Google.

Global telecommunications and new technology brands see Airtel as a key strategic player in the Indian market. The new iPhone will be launched in India via an Airtel distributorship. Another strategic partnership is held with BlackBerry Wireless Solutions.

Despite being forced to outsource much of its technical operations in the early days, this allowed Airtel to work from its own blank sheet of paper, and to question industry approaches and practices - for example replacing the Revenue-Per-Customer model with a Revenue-Per-Minute model which is better suited to India, as the company moved into small and remote villages and towns.

The company is investing in its operation in 120,000 to 160,000 small villages every year. It sees that less well-off consumers may only be able to afford a few tens of Rupees per call, and also so that the business benefits are scalable - using its 'Matchbox' strategy.

Bharti Airtel is embarking on another joint venture with Vodafone Essar and Idea Cellular to create a new independent tower company called Indus Towers. This new business will control more than 60% of India's network towers. IPTV is another potential new service that could underpin the company's long-term strategy

Threats

Airtel and Vodafone seem to be having an on/off relationship. Vodafone which owned a 5.6% stake in the Airtel business sold it back to Airtel, and instead invested in its rival Hutchison Essar. Knowledge and technology previously available to Airtel now moves into the hands of one of its competitors.

The quickly changing pace of the global telecommunications industry could tempt Airtel to go along the acquisition trail which may make it vulnerable if the world goes into recession. Perhaps this was an impact upon the decision not to proceed with talks about the potential

FMS-MAIET 36


purchase of South Africa's MTN in May 2008. This opened the door for talks between Reliance Communication's Anil Ambani and MTN, allowing a competing Inidan industrialist to invest in the new emerging African telecommunications market.

Bharti Airtel could also be the target for the takeover vision of other global telecommunications players that wish to move into the Indian market.

4. Hindalco-Novelis: $6 billion

Aluminium and copper major Hindalco Industries, the Kumar Mangalam Birla-led Aditya

Birla Group flagship, acquired Canadian company Novelis Inc in a $6-billion, all-cash deal

in February 2007.Till date, it is India's fourt-largest M&A deal.The acquisition would make

Hindalco the global leader in aluminium rolled products and one of the largest aluminium

producers in Asia. With post-acquisition combined revenues in excess of $10 billion,

Hindalco would enter the Fortune-500 listing of world's largest companies by sales

revenues.

Company overview

HINDALCO INDUSTRIES LIMITED

Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is structured into

two strategic businesses aluminium and copper with annual revenue of US $14 billion and

a market capitalization in excess of US $ 23 billion. Hindalco commenced its operations in

1962 with an aluminium facility at Renukoot in Uttar Pradesh. Birla Copper, Hindalco's

copper division is situated in Dahej in the Bharuch district of Gujarat. Established in 1958,

Hindalco commissioned its aluminium facility at Renukoot in eastern U.P. in 1962 and has

today grown to become the country's largest integrated aluminium producer and ranks

among the top quartile of low cost producers in the world. The aluminium division's product

range includes alumina chemicals, primary aluminium ingots, billets, wire rods, rolled

products, extrusions, foils and alloy wheels. It enjoys a domestic market share of 42 per

FMS-MAIET 37


cent in primary aluminium, 63 per cent in rolled products, 20 per cent in extrusions, 44 per

cent in foils and 31 per cent in wheels.

Hindalco has launched several brands in recent years, namely Aura for alloy wheels,

Freshwrapp for kitchen foil and ever last for roofing sheets. The copper plant produces

copper cathodes, continuous cast copper rods and precious metals like gold, silver and

platinum group metal mix. sulphuric acid, phosphoric acid, di-ammonium phosphate, other

phosphatic fertilisers and phospho-gypsum are also produced at this plant. Hindalco

Industries Limited has a 51.0% shareholding in Aditya Birla Minerals which has mining and

exploration activities focused in Australia. The company has two R&D centres at Belgaum,

Karnataka and Taloja, Maharashtra.

NOVELIS

Novelis is the world leader in aluminium rolling, producing an estimated 19 percent of the

world's flat-rolled aluminium products. Novelis is the world leader in the recycling of used

aluminium beverage cans. The company recycles more than 35 billion used beverage cans

annually. The company is No. 1 rolled products producer in Europe, South America and

Asia, and the No. 2 producer in North America. With industry-leading assets and

technology, the company produces the highest-quality aluminium sheet and foil products for

customers in high -value markets including automotive, transportation, packaging,

construction and printing. Our customers include major brands such as Agfa -Gevaert,

Alcan, Anheuser-Busch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford,

General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak,

ThyssenKrupp and others. Novelis represents a unique combination of the new and the old.

Novelis is a new company, formed in January 2005, with a new velocity, a new philosophy

and a new attitude. But Novelis is also a spin-off from Alcan and, as such, draws on a rich

90-year history in the aluminium rolled product marketplace. Novelis has a diversified

product portfolio, which serves to the different set of industries vis-à-vis it has a very strong

geographical presences in four continents.

FMS-MAIET 38


Novelis was always a problem child. It was born in early 2005 as a result of a ‘forced’ spin-

off from its parent, the $ 23.6-billion aluminium giant and Canada-based Alcan. In 2003,

Alcan won a hostile offer to wed French aluminium company Pechiney. But the marriage

produced an unwanted child — Novelis. Both Alcan and Pechiney had bauxite mines,

facilities to produce primary aluminium, and rolling mills to turn the raw metal into products

such as stock for Pepsi and Coke cans and automotive parts. But the US and European

anti-trust proceedings ruled that the rolled products business of either Alcan or Pechiney

had to be divested from the merged entity. Alcan cast out its rolled products business to

form Novelis. It is now the world’s leading producer of aluminium-rolled products with a 19

per cent global market share. But in the spin-off process, Novelis ended up inheriting a debt

mountain of almost $2.9 billion on a capital base of less than $500 million. That was just the

beginning of its troubles.The situation is worse now.Though it marginally reduced debt, it

made some losses too. On a net worth of $322 million, Novelis has a debt of $2.33 billion

(most of it high cost). That’s a debt-equity ratio of 7.23:1

STRATEGIC RATIONALE FOR ACQUISITION

This acquisition was a very good strategic move from Hindalco. Hindalco will be able to

ship primary aluminium from India and make value-added products.'' The combination of

Hindalco and Novelis establishes an integrated producer with low-cost alumina and

aluminium facilities combined with high-end rolling capabilities and a global footprint.

Hindalco’s rationale for the acquisition is increasing scale of operation, entry into high—end

downstream market and enhancing global presence. Novelis is the global leader (in terms

of volume) in rolled products with annual production capacity of 2.8 million tonnes and a

market share of 19 per cent. It has presence in 11 countries and provides sheets and foils

to automotive and transportation, beverage and food packaging, construction and industrial,

and printing markets. Hindalco’s rationale for the acquisition is increasing scale of

operation, entry into high—end downstream market and enhancing global presence.

Novelis is the global leader (in terms of volumes) in rolled products with annual production

capacity of 2.8 million tonnes and a market share of 19 per cent. It has presence in 11

countries and provides sheets and foils to automotive and transportation, beverage and

FMS-MAIET 39


food packaging, construction and industrial, and printing markets. Acquiring Novelis will

provide Aditya Birla Group's Hindalco with access to customers such as General Motors

Corp. and Coca-Cola Co. Indian companies, fueled by accelerating domestic growth, are

seeking acquisitions overseas to add production capacity and find markets for their

products. Tata Steel Ltd. spent US $12 billion last month to buy U.K. steelmaker Corus

Group Plc. Novelis has capacity to produce 3 million tonne of flat- rolled products, while

Hindalco has 220,000 tonne ..

``This acquisition gives Hindalco access to higher-end products but also to superior

technology,''

Hindalco plans to triple aluminium output to 1.5 million metric tonne by 2012 to become one

of the world's five largest producers. The company, which also has interests in

telecommunications, cement, metals, textiles and financial services, is the world's 13th-

largest aluminium maker. After the deal was signed for the acquisition of Novelis,

Hindalco's management issued press releases claiming that the acquisition would further

internationalize its operations and increase the company's global presence. By acquiring

Novelis, Hindalco aimed to achieve its long-held ambition of becoming the world's leading

producer of aluminium flat rolled products. Hindalco had developed long-term strategies for

expanding its operations globally and this acquisition was a part of it. Novelis was the

leader in producing rolled products in the Asia-Pacific, Europe, and South America and was

the second largest company in North America in aluminium recycling, metal solidification

and in rolling technologies worldwide. The benefits from this acquisition canbe discussed

under the following points:

Post acquisitions, the company will get a strong global footprint.

After full integration, the joint entity will become insulated from the fluctuation of LME

Aluminium prices.

The deal will give Hindalco a strong presence in recycling of aluminium business. As per

aluminium characteristic, aluminium is infinitely recyclable and recycling it requires only 5%

of the energy needed to produce primary aluminium.

Novelis has a very strong technology for value added products and its latest technology

‘Novelis Fusion’ is very unique one.

FMS-MAIET 40


It would have taken a minimum 8-10 years to Hindalco for building these facilities, if

Hindalco takes organically route.

SWOT ANALYSIS OF dealStrengths

It will give Cost advantage to the new company

It will help in communicating effectively in various cross border business

It will raise the R&D & hece more innovation will be applied

It will increase its Loyal customers & hence will have market leadership

Strong management team will help in making Strong brand equity & Strong financial

position

The Supply chain is perfect for performing various jobs.

Weaknesses

Bad communication

Diseconomies to scale

Over leveraged fiancial position

Low R&D

Low market share

No online presence

Not innovative

Not diversified

Poor supply chain

Weak management team

Weak real estate

Weak, damaged brand

Ubiquitiouegory, products, services

Opportunities

FMS-MAIET 41


Acquisitions

Asset leverage

Financial markets (raise money through debt, etc)

Emerging markets and expansion abroad

Innovation

Online

Product and services expansion

Takeovers

Threats

Competition

Cheaper technology

Economic slowdown

External changes (government, politics, taxes, etc)

Exchange rate fluctuations

Lower cost competitors or imports

Maturing categories, products, or services

Price wars

Product substitution

5. Ranbaxy-Daiichi Sankyo: $4.5 billion

Marking the largest-ever deal in the Indian pharma industry, Japanese drug firm Daiichi

Sankyo in June 2008 acquired the majority stake of more than 50 per cent in domestic

major Ranbaxy for over Rs 15,000 crore ($4.5 billion).

The deal created the 15th biggest drugmaker globally, and is India's 5th largest M&A deal

to date.

The biggest acquisition of a listed Indian company, the Ranbaxy-Daiichi deal, has come as

a shocker. Reactions to the development have been mixed, coming as it does at a time

FMS-MAIET 42


when Indian companies were getting used to the idea of being among the top dogs in

global corporate takeovers.

The controversies notwithstanding, the pharma deal is a truly strategic combination that

creates an innovator and generics powerhouse.

The deal will bring in new drugs from Daiichi's portfolio into the Indian market, and tempt

Indian pharma majors, particularly generics makers hitting a plateau in overseas markets,

to sell out and realise attractive valuations of the kind Ranbaxy has secured.

In the words of Takashi Shoda, Daiichi Sankyo's president and CEO, "The proposed

transaction is in line with our goal to be a global pharma innovator and provides the

opportunity to complement our strong presence in innovation with a new, strong presence

in the fast growing business of non-proprietary pharmaceuticals." This complementary

combination represents a perfect strategic fit and delivers a considerable opportunity for the

future growth of the new Daiichi Sankyo Group.

Daiichi Sankyo and Ranbaxy believe this transaction will create significant long-term value

for all stakeholders through a complementary business combination that provides

sustainable growth through diversification spanning the full spectrum of the pharmaceutical

business; an expanded global reach that enables leading market positions in both mature

and emerging markets with proprietary and non-proprietary products; strong growth

potential by effectively managing opportunities across the full pharmaceutical lifecycle; and

cost competitiveness by optimising usage of R&D and manufacturing facilities of both

companies, especially in India.

Post the buyout, Daiichi Sankyo will be the second-largest pharma company in India with

about 5% market share in the Rs 33,000 crore domestic pharma retail market, closely

following domestic major Cipla.

It is a win-win situation for Ranbaxy and Daiichi. The latter can leverage the cost advantage

offered by India complemented by world-class infrastructure and also Ranbaxy's marketing

FMS-MAIET 43


strengths, while Ranbaxy would benefit from Daiichi's product pipeline and research

facilities.

Company profile

About Daiichi Sankyo Company, Limited

A global pharma innovator, Daiichi Sankyo Company, Ltd., was established in 2005 through

the merger of two leading Japanese pharmaceutical companies. This integration created a

more robust organization that allows for continuous development of novel drugs that enrich

the quality of life for patients around the world. A central focus of Daiichi Sankyo's research

and development are thrombotic disorders, malignant neoplasm, diabetes mellitus, and

autoimmune disorders. Equally important to the company are hypertension, hyperlipidemia

or atherosclerosis and bacterial infections

About Ranbaxy Laboratories Limited

Ranbaxy Laboratories Limited, India's largest pharmaceutical company, is an integrated,

research based, international pharmaceutical company producing a wide range of quality,

affordable generic medicines, trusted by healthcare professionals and patients across

geographies. Ranbaxy’s continued focus on R&D has resulted in several approvals in

developed markets and significant progress in New Drug Discovery Research. The

Company’s foray into Novel Drug Delivery Systems has led to proprietary "platform

technologies," resulting in a number of products under development. The Company is

serving its customers in over 125 countries and has an expanding international portfolio of

affiliates, joint ventures and alliances, ground operations in 49 countries and manufacturing

operations in 11 countries.

FMS-MAIET 44


5. ONGC-Imperial Energy: $2.8 billion

The Oil and Natural Gas Corp took control of Imperial Energy Plc for $2.8 billion, in January

2009, after an overwhelming 96.8 per cent of London-listed firm's total shareholders

accepted its takeover offer.

Speaking about India's fifth largest M&A deal, ONGC chairman R S Sharma said the

company owed the acquisition to government support, which has seen OVL in the past

seven years increase its number of projects to 39 in 17 countries, from just a single project

in Vietnam.

In its largest buyout abroad, Oil & Natural Gas Corp (ONGC) is all set to a acquire the

London Stock Exchange-listed Imperial Energy, a British oil and gas company, for £1.3

billion ($1.9 billion) after 97% shareholders in the Leeds-based company gave their consent

to the takeover bid.

The deadline for the state-owned firm’s £12.50 per share offer closed on December 30 and

99,241,110 or 96.8% of the shares were tendered, according to an announcement made by

ONGC Videsh, the overseas arm of the ONGC, to London Stock Exchange. Imperial will

now have to be delisted from LSE, after the formalities are done with.

The entire process of takeover and delisting may be completed in three weeks, according

to some quarters. OVL is acquiring Imperial through Jarpeno Ltd, a wholly owned

subsidiary registered in Cyprus.

The hiccups in the deal arose because of the difference in the price of crude oil when OVL

first disclosed its bid and now. OVL had made its £12.50 per share offer in August, when

the international oil prices had soared to $130 a barrel. From then on, the crude oil prices

FMS-MAIET 45


have crashed dramatically to less than $40, making the acquisition look exorbitantly

expensive.

Returns on investment have fallen to 3-4% from 12.6%, keeping crude oil price of $100 per

barrel in mind. For this reason alone, the deal had to brought before the Cabinet for

clearance a second time.

In August 2008, Imperial was producing around 7,000 barrels per day (bpd) of oil, targeting

to increase production to 25,000 bpd by the end of 2008 and 80,000 bpd by the end of

2011. Production is likely to go up to 130,000 bpd by the end of 2015

SWOT ANALYSIS

1) STRENGTHS

A) O.N.G.C LTD is perceived to be the leader in oil production industry.

B) O.N.G.C has a very efficient and professional management team.

C) O.N.G.C being an international company has sufficient resources and capital to invest.

D) O.N.G.C has ISO-9001 & ISO 14001 registration.

2) WEAKNESSES

A) O.N.G.C facing difficulties to produce oil from aging reservoirs

3) OPPURTUNITY

FMS-MAIET 46


A) Energy utilization of buried coal resource (700 -1700M), estimated 63BT – Equivalent to

15000 BCM

B) O.N.G.C facing difficulties to produce oil from aging reservoirs.

4) WEAKNESSES

A) Security of personnel & property especially crude oil continues to be a cause of concern

in certain area.

B) In some exploration Campaign Company involves high technology, high technology,

High investment and high risks.

6. NTT DoCoMo-Tata Tele: $2.7 billion

Japanese telecom giant NTT DoCoMo picked up a 26 per cent equity stake in Tata

Teleservices for about Rs 13,070 crore ($2.7 billion) in November 2008.

This is the 6th-largest M&A deal involving an Indian company.

With a subscriber base of 25 million in 20 circles DoCoMo paid Rs 20,107 per subscriber to

acquire the stake. DoCoMo picked up the equity through a combination of fresh issuance of

equity and acquisition of shares from the existing promoters.

On November 12, 2007, Tokyo-based NTT DoCoMo announced it was entering into a

strategic alliance with the Tatas. The Japanese telecom giant which, with 53 million

FMS-MAIET 47


customers and 51.5% of the Japanese market, is one of the world's largest players in the

telecommunications industry, bought a 26% stake in Tata Teleservices Ltd (TTSL) for $2.7

billion.

NTT DoCoMo followed up this deal with an open offer for 20% in Tata Teleservices

(Maharashtra) Ltd -- TTML -- the listed subsidiary of TTSL. At Rs24.70 (50 cents) a share,

this means another $191 million. The offer will open in January. "We are hoping that this

will be a long-term partnership as we are like-minded companies," Tata group chief Ratan

Tata told a media briefing soon after the deal was struck.

"The Indian telecom industry is poised for the introduction of new technologies," says Anil

Sardana, managing director of TTSL. "Having DoCoMo as a partner will enhance our ability

to evaluate, introduce and manage next generation technologies, as and when

opportunities arise."

This is obviously a big deal at a time when mergers and acquisitions (M&A) activity has

declined in India. It is, in fact, the biggest deal in the Indian telecom market since early

2007, when Vodafone bought a 67% stake in Hutchison Essar (now Vodafone India) for

$11.1 billion. Yet the Japanese entry didn't make too many waves.

Both the Tatas and the media are partly responsible for that. The media has been

celebrating outbound takeovers -- Jaguar Land Rover (JLR), Corus, Novelis. An inbound

acquisition in this environment is a step in the opposite direction. Besides, Indian telecom

companies – Bharti Airtel and Reliance Communications (RCom) -- were supposed to be

spreading their wings abroad, targeting MTN of South Africa. Was NTT DoCoMo planning a

takeover against the tide?

At the media briefing, there were questions about this issue. "At the moment, we have no

intention of increasing our stake," Ryuji Yamada, NTT DoCoMo president & CEO, noted.

Controversial aspect

Great deal it may be, but it has its risks. One reason is that telecom deals have been

controversial in recent times. This goes back to late last year when the government sold

FMS-MAIET 48


pan-India licenses for $333 million apiece, amid a welter of controversy. New players, with

no experience in the business, got these licenses on a first-come-first-served basis. Now

they are making hay – or some might say gold -- with these pieces of paper.

Unitech Wireless, a part of real estate group Unitech, got one of these licenses. Telenor of

Norway has now picked up a 60% stake in the company for $1 billion, putting the valuation

of the license at $1.78 billion. It is the license alone that the firm has as an asset; there are

no subscribers or infrastructure. The UAE-based Etisalat has bought a 45% stake in Swan

Telecom for $900 million valuing the company at $2 billion. Swan, too, has only a license.

A. Raja, Union minister for telecommunications and information technology, has been

facing most of the flak. "I have simply followed the decision of the Cabinet and the

recommendations of the TRAI," he told Business India magazine. "These funds (invested

by Telenor and Etisalat) will be used for the establishment of networks, including

infrastructure....The valuations reflect the value of the funds applied to the business and not

the value of the license or spectrum." Shende of Ascendia disagrees. "The government has

made a very poor decision," he says. "It is a decision that does not recognize the economic

value of the transactions. There is a whole lot of ambiguity around it."

According to Shende, the bigger question is how the new operators will make money. They

have been late entering the market, which means that existing telecom operators have

already signed up millions of customers. In seeking to encourage subscribers to switch

over, the new entrants may seek to offer services at a lower price. "But this will not be

sustainable over the long term,"

he points out. "More importantly, they do not have the capabilities to offer services at a

lower price because they need to set up huge infrastructure. The current operators have

already set up their infrastructure and have amortized the costs."

7. HDFC Bank-Centurion Bank of Punjab: $2.4 billion

HDFC Bank approved the acquisition of Centurion Bank of Punjab for Rs 9,510 crore ($2.4

billion) in one of the largest mergers in the financial sector in India in February, 2008.

FMS-MAIET 49


CBoP shareholders got one share of HDFC Bank for every 29 shares held by them. Post-

acquisition, HDFC Bank became the second-largest private sector bank in India.

The acquisition was also India's 8th largest ever.

HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of

Punjab (CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector in

India. CBoP shareholders will get one share of HDFC Bank for every 29 shares held by

them.

This will be HDFC Bank’s second acquisition after Times Bank. HDFC Bank will jump to the

7th position among commercial banks from 10th after the merger. However, the merged

entity would become second largest private sector bank.

The merger will strengthen HDFC Bank's distribution network in the northern and the

southern regions. CBoP has close to 170 branches in the north and around 140 branches

in the south. CBoP has a concentrated presence in the in the Indian states of Punjab and

Kerala. The combined entity will have a network of 1148 branches. HDFC will also acquire

a strong SME (small and medium enterprises) portfolio from CBoP. There is not much of

overlapping of HDFC Bank and CBoP customers.

The entire process of the merger would take about four months for completion. The merged

entity will be known as HDFC Bank. Rana Talwar's Sabre Capital would hold less than 1

per cent stake in the merged entity from 3.48 in CBoP, while Bank Muscat's holding will

decline to less than 4 per cent from over 14 per cent in CBoP. HDFC shareholding falls to

will fall from 23.28 per cent to around 19 per cent in the merged entity

.

FMS-MAIET 50


Mr Rana Talwar, Chairman of Centurion Bank, has been offered a seat on the Board as

non-executive director and Mr Shailendra Bhandari, Managing Director, Centurion Bank,

has been invited to join as the Executive Director on the board post merger.

According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri,

Integration will be smooth as there is no overlap. In an interview, he mentioned that at 40%

growth rate there will be no lay-offs. The integration of the second rung officials should be

smooth as there is hardly any overlap.

The boards of the two banks will meet again on February 28 to consider the draft scheme

of amalgamation, which will be subject to regulatory approvals. HDFC Bank will consider

making a preferential offer to its parent Housing Development Finance Corp Ltd (HDFC).

The move would allow HDFC to maintain the same level of shareholding in the bank

Company profile

Housing Development Finance Corporation Limited, more popularly known as HDFC Bank

Ltd, was established in the year 1994, as a part of the liberalization of the Indian Banking

Industry by Reserve Bank of India (RBI). It was one of the first banks to receive an 'in

principle' approval from RBI, for setting up a bank in the private sector. The bank was

incorporated with the name 'HDFC Bank Limited', with its registered office in Mumbai. The

following year, it started its operations as a Scheduled Commercial Bank. Today, the bank

boasts of as many as 1412 branches and over 3275 ATMs across India.

Tech-SavvyHDFC Bank has always prided itself on a highly automated environment, be it in terms of

information technology or communication systems. All the braches of the bank boast of

FMS-MAIET 51


online connectivity with the other, ensuring speedy funds transfer for the clients. At the

same time, the bank's branch network and Automated Teller Machines (ATMs) allow multi-

branch access to retail clients. The bank makes use of its up-to-date technology, along with

market position and expertise, to create a competitive advantage and build market share.

SWOT analysis

Strengths

1. HDFC is the strongest and most venerable play on Indian mortgages over the long term.

The management of the bank is termed to be one of the best in the country.

2. HDFC has differentiated itself from its peers with its diversified network and revamped

distribution strategy.

3. HDFC has been highly proactive in passing on the cost and benefit to customers.

4. Besides the core business, HDFC’s insurance, AMC, banking, BPO, and real estate

private equity businesses are also growing at a rapid pace and the estimated value of its

investments/subsidiaries explains ~30% of HDFC’s market capitalization.

Weaknesses

1. High dependence on individual loans.

2. Major stake held by American financial groups which are under stress due to economic

slowdown

.

Opportunity

1 it has vast opportunity in fast growing insurance business in the country.

2. rural markets are still untapped.

FMS-MAIET 52


Threats

1. Loss of market share to commercial banks and HFC’s

2. Higher than expected increase in funding cost

3. Risk of fraud and NPA accretion due to increase in interest rates and fall in property

prices is inherent to the mortgage business.

9. Tata Motors-Jaguar Land Rover: $2.3 billion

Creating history, one of India's top corporate entities, Tata Motors, in March 2008 acquired

luxury auto brands -- Jaguar and Land Rover -- from Ford Motor for $2.3 billion, stamping

their authority as a takeover tycoon.

Beating compatriot Mahindra and Mahindra for the prestigious brands, just a year after

acquiring steel giant Corus for $12.1 billion, the Tatas signed the deal with Ford, which on

its part chipped in with $600 million towards JLR's pension plan.

Tata Motors' buyout of JLR is India's 9th-largest in history.

10. Sterlite-Asarco: $1.8 billion

Anil Agarwal-led Sterlite Industries Ltd's $1.8 billion Asarco LLC buyout deal is the ninth

biggest-ever merger and acquisitions deal involving an Indian firm, and the largest so far in

2009.

This is despite the deal size falling by almost $1 billion, from a projected estimate of $2.6

billion in May 2008, due to devaluation of mining assets and a sharp fall in copper prices.

FMS-MAIET 53


Sterlite, the Indian arm of the London-based Vedanta Resources Plc, acquired Asarco in

March 2008.

The acquisition has given Sterlite a “fantastic” boost to its margins, the spokesman said.

He said that the cost of production of copper at Asarco was around $1.5 a pound. At this

rate, it would yield an EBIDTA margin of $4,700 a tonne, at the current ruling prices of the

metal.

Including the production from Asarco-owned Amarillo copper mines in Texas, the

acquisition could add 5 lakh tonnes to Sterlite’s existing capacity of 4 lakh tonnes. In fact,

the capacity of the Amarillo mine is twice the current level of production of around 2.3 lakh

tonnes. “This mine alone has the potential to turnaround the whole company,” the

spokesman said.

He noted that this acquisition was considerably cheaper than another recent acquisition —

of the Brazilian Cumerio mines by Nord Deutsche. Nord Deutsche bought it paying close to

seven times the EBIDTA, whereas Sterlite has struck a deal at around four.

It is learnt that the Asarco deal was brought to fruition by a team headed by Mr C.V.

Krishnan, who looks after Sterlite’s business development from New York.

Asarco had two legacy problems, one pertaining to environment-related litigations and the

other, labour issues. (In fact, a cursory read of Wikipedia shows a long history of

environment-related wrangles, starting from 1910.)

According to the Sterlite spokesman, the company’s acquisition of the operating assets —

mine, smelter and refinery — has been ring-fenced from the legacy green issues.

On labour problems, the spokesman noted that the Vedanta Group (to which Sterlite

belongs) has a track record of settling such issues after takeovers — as it happened, he

pointed out, in the cases of the acquisitions of Balco, Hindustan Zinc and Konkola Copper

Mines in Zambia.

FMS-MAIET 54


“There have been voluntary separations but not a single person has ever been fired,” he

said.

Asked if the acquisition would add to the group’s gold production, the spokesman pointed

out that while Asarco has a precious metal refinery, only small quantities of gold and

molybdenum would be extracted.

Vedanta is putting up a 20-tonne gold refinery at Dubai, which will extract the yellow metal

out of the sludge that the Tuticorin copper smelter generates. The spokesman said that the

quantity of gold contained in the sludge of the Asarco smelter would not justify its shipping

to Dubai.

Sterlite also produces 100 tonnes of silver, which comes as a by-product in the production

of zinc.

11. Suzlon-RePower: $1.7 billion

Wind power major Suzlon Energy in May 2007 acquired the German wind turbine

manufacturer REpower for $1.7 billion. The deal now ranks as the country's 10th largest

corporate takeover.REpower is one of Germany's leading manufacturers of wind turbines,

with a 10-per cent share of the overall market.Suzlon is now the largest wind turbine maker

in Asia and the fifth largest in the world.

Until upto a couple of years back, the news that Indian companies having acquired

American-European entities was very rare. However, this scenario has taken a sudden U

turn. Nowadays, news of Indian Companies acquiring a foreign businesses are more

common than other way round.

Buoyant Indian Economy, extra cash with Indian corporates, Government policies and

newly found dynamism in Indian businessmen have all contributed to this new acquisition

FMS-MAIET 55

http://trak.in/Tags/Business/2007/05/30/india%E2%80%99s-new-found-confidence-global-acquisitions/

http://trak.in/Tags/Business/2007/06/20/vijay-mallya-kingfisher-airlines-enters-overseas-market-biggest-airbus-order/

http://trak.in/Tags/Business/2007/04/28/indian-it-companies-flush-with-cash/

http://trak.in/Tags/Business/2007/04/30/the-indian-economy-can-it-be-stopped-somehow/

http://trak.in/Tags/Business/2007/07/02/the-indian-mergers-and-acquisitions-are-growing-exponentially/



trend. Indian companies are now aggressively looking at North American and European

markets to spread their wings and become the global players.

The Indian IT and ITES companies already have a strong presence in foreign markets;

however, other sectors are also now growing rapidly. The increasing engagement of the

Indian companies in the world markets, and particularly in the US, is not only an indication

of the maturity reached by Indian Industry but also the extent of their participation in the

overall globalization process.

MERGERS AND ACQUISITIONS: CONCLUSION

Countries that are seeking mergers in India for enhancing the trade scenario are Canada,

Holland, Belgium, Italy, Sweden, Norway, Poland, Germany, Spain and the United

Kingdom. Globalization and mergers in India is an important standpoint of any corporate

executive on every detail of mergers and acquisitions implemented around the world.

Mergers in India may include mergers, joint ventures, acquisitions, takeovers, and other

kinds of cross-border transactions. The trends and growth of mergers and acquisition

dealings has led to a noticeable increase in the globalization and mergers in India.

One size doesn't fit all. Many companies find that the best way to get ahead is to expand

ownership boundaries through mergers and acquisitions. For others, separating the public

ownership of a subsidiary or business segment offers more advantages. At least in theory,

mergers create synergies and economies of scale, expanding operations and cutting costs.

Investors can take comfort in the idea that a merger will deliver enhanced market power.

By contrast, de-merged companies often enjoy improved operating performance thanks to

redesigned management incentives. Additional capital can fund growth organically or

through acquisition. Meanwhile, investors benefit from the improved information flow from

de-merged companies.

FMS-MAIET 56



M&A comes in all shapes and sizes, and investors need to consider the complex issues

involved in M&A. The most beneficial form of equity structure involves a complete analysis

of the costs and benefits associated with the deals.

The relation between globalization and mergers in India are quite noteworthy. The

important elements of Indian mergers for globalization can be cited as follows:

1. M&A is a good growth strategy in context of globalization – Corporates in India have

been experiencing a surge in the revenue growth due to cross border mergers and the

figures are only to go up more.

2. Most Indian companies have a clear M&A strategy – the market strategy is clear for

most corporates. That is why when finalizing a deal, there arises no confusion.

Top M&A markets – The top M&A markets are US, India and UK

References:

www.wikipedia.com

www.google.com

www.tatagroup.org

www.vodafone.com

www.hutchinessar.com

FMS-MAIET 57

http://www.hutchinessar.com/

http://www.vodafone.com/

http://www.tatagroup.org/

http://www.wikipedia.com/

project on merger and acquisition

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