Mergers and Acquisitions

Chapte r 1

Introduction to Mergers and Acquisition

We have been learning about the companies coming together to from another company and companies taking over the existing companies to expand their business. With recession taking toll of many Indian businesses and the feeling of insecurity surging over our businessmen, it is not surprising when we hear about the immense numbers of corporate restructurings taking place, especially in the last couple of years. Several companies have been taken over and several have undergone internal restructuring, whereas certain companies in the same field of business have found it beneficial to merge together into one company. All our daily newspapers are filled with cases of mergers, acquisitions, spin offs, tender offers, ! other forms of corporate restructuring. "hus important issues both for business decision and public policy formulation have been raised. #o firm is regarded safe from a takeover possibility. $n the more positive side %ergers ! Acquisition&s may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require %ergers ! Acquisition&s at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through %ergers ! Acquisition's. %any have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing shareholder value. .

V. E. S @ T. Y. B. M. S

Mergers and Acquisitions "o opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors that the management may have to look into before going for merger. (onsiderable amount of brainstorming would be required by the managements to reach a conclusion. e.g. a due diligence report would clearly identify the status of the company in respect of the financial position along with the net worth and pending legal matters and details about various contingent liabilities. )ecision has to be taken after having discussed the pros ! cons of the proposed merger ! the impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the "ransferor or "ransferee (ompany.

V. E. S @ T. Y. B. M. S

Mergers and Acquisitions

Merger:%erger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. "he survivor acquires all the assets as well as liabilities of the merged company or companies. *enerally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller. One plus one makes three this equation is the special alchemy of a merger or acquisition. "he key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. "wo companies together are more valuable than two separate companies at least, that's the reasoning behind %!A.

%erger is also defined as amalgamation. %erger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to "ransferee (ompany in consideration of payment in the form of+ ,quity shares in the transferee company, )ebentures in the transferee company, (ash A mix of the above modes.

V. E. S @ T. Y. B. M. S

Mergers and Acquisitions

Acquisition: In an acquisition, a company can buy another company with cash, with stock, or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company.

Example+
(ompany - buys all of (ompany .'s assets for cash, which means that (ompany . will have only cash /and debt, if they had debt before0. $f course, (ompany . becomes merely a shell and will eventually liquidate or enter another area of business.

Methods of Acquisition: An acquisition may be affected by: Agreement With the persons holding ma1ority interest in the company management like members of the board or ma1or shareholders commanding ma1ority of voting power 2urchase of shares in open market "o make takeover offer to the general body of shareholders 2urchase of new shares by private treaty Acquisition of share capital through the following forms of considerations vi3. means of cash, issuance of loan capital, or insurance of share capital.

V. E. S @ T. Y. B. M. S

Mergers and Acquisitions

%ergers ! Acquisitions rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost efficient company. "he companies will come together hoping to gain a greater market share or achieve greater efficiency. 4ecause of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. In practice, however, actual mergers of equals don't happen very often. $ften, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. 4eing bought out often carries negative connotations. 4y using the term 5merger,5 dealmakers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both (,$s agree that 1oining together in business is in the best interests of both their companies. 4ut when the deal is unfriendly that is, when the target company does not want to be purchased it is always regarded as an acquisition. So, 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.

V. E. S @ T. Y. B. M. S

Mergers and Acquisitions Chapte r 2

Purpose and Terms of Mergers and Acquisition

"he purpose for an offer or company for acquiring another company shall be reflected in the corporate ob1ectives. It has to decide the specific ob1ectives to be achieved through acquisition. "he basic purpose of merger or business combination is to achieve faster growth of the corporate business. 6aster growth may be had through product improvement and competitive position.

Other possible purposes for acquisition are short listed below: 1 !rocurement of supplies:
"o safeguard the source of supplies of raw materials or intermediary product7 "o obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.7 "o share the benefits of suppliers economies by standardi3ing the materials.

V. E. S @ T. Y. B. M. S

Mergers and Acquisitions

" #e$amping production facilities:

"o achieve economies of scale by amalgamating production facilities "o standardi3e product specifications, improvement of quality of

through more intensive utili3ation of plant and resources. product, expanding %arket and aiming at consumer&s satisfaction through strengthening after sale services "o reduce cost, improve quality and produce competitive products to retain and improve market share.

% Market expansion and strategy:

"o eliminate competition and protect existing market "o obtain a new market outlets in possession of the offeree

Strengthening retain outlets and sale the goods to rationali3e distribution

& 'inancial strength:

"o improve liquidity and have direct access to cash resource. "o dispose of surplus and outdated assets for cash out of combined enterprise. "o enhance gearing capacity, borrow on better strength and the greater assets backing. "o avail tax benefits. "o improve ,2S /,arning 2er Share0.

V. E. S @ T. Y. B. M. S

Mergers and Acquisitions

( )eneral gains:
"o improve its own image and attract superior managerial talents to manage its affairs7 "o offer better satisfaction to consumers or users of the product.

* Own de$elopmental plans:

"he purpose of acquisition is backed by the offer or company&s own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation, accounting, valuation, etc. but might feel resource constraints with limitations of funds and lack of skill managerial personnel&s. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities, secure additional financial facilities, eliminate competition and strengthen its market position.

+ ,trategic purpose:
"he Acquirer (ompany view the merger to achieve strategic ob1ectives through alternative type of combinations which may be hori3ontal, vertical, product expansion, market extensional or other specified unrelated ob1ectives depending upon the corporate strategies. "hus, various types of combinations distinct with each other in nature are adopted to pursue this ob1ective like vertical or hori3ontal combination.

V. E. S @ T. Y. B. M. S

Mergers and Acquisitions

- .orporate friendliness:
Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. "he combining corporate aim at circular combinations by pursuing this ob1ective.

/ 0esired le$el of integration:

%ergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. Such integration could be operational or financial. "his gives birth to conglomerate combinations. "he purpose and the requirements of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations.

1erms #elating to Merger and Acquisitions:

V. E. S @ T. Y. B. M. S 9

Mergers and Acquisitions

1. Asset ,tripping :
When a company acquires another and sells it in parts expecting that the funds generated would match the costs pf acquisition, it is known as asset stripping. 2. 2lack 3night : "he company that makes a hostile takeover is known as the 4lack 8night.

0awn #aid :
"his is a process of buying shares of the target company with the expectation that the market prices may fall till the acquisition is completed.

0e-merger or ,pin off :

)uring the process of corporate restructuring, a part of the company may beak up and set up as a new company and this is known as demerger. 9eneca and Argos are good examples in this regard that split from I(I and American "obacco respectively.

.ar$e 4out:
"his is a case of selling a small portion of the company as an Initial 2ublic $ffering.

)reenmail:
*reenmail is a situation where the target company purchases back its own shares from the bidding company at a higher price.

)rey 3night:
A grey knight is a company that takes over another company and its intentions are not clear.

V. E. S @ T. Y. B. M. S

10

Mergers and Acquisitions

5ostile 1akeo$er:
:ostile bids occur when acquisitions take place without the consent of the directors of the target company. "his confrontation on the part of the directors of the target company may be short lived and the hostile takeover may end up being friendly. %ost American;n and 4ritish companies like the phenomenon of hostile takeovers while there is some more which do not like such unfriendly takeovers.

Macaroni 0efense :
Macaroni Defense is a strate ! t"at is ta#en $% to %re&ent an! "osti'e ta#eo&ers. T"e iss$e of (on)s t"at can (e re)ee*e) at a "i "er %rice if t"e co*%an! is ta#en o&er )oes t"is. 3. Management Buy In : +"en a co*%an! is %$rc"ase) an) t"e in&estors (rin in t"eir

*ana ers to contro' t"e co*%an!, it is #no-n as *ana e*ent ($! in. 4. Management Buy Out : .n a *ana e*ent ($! o$t, t"e *ana ers of a co*%an! %$rc"ases it -it" s$%%ort fro* &ent$re ca%ita'ists. 5. Poison Pill or Suici e Pill !e"ense : "his is a strategy that is taken by the target company to make itself less appealing for a hostile takeover. "he bondholders are given the right to redeem their bonds at a premium before a takeover occurs. Chapte r 3

Types of mergers

V. E. S @ T. Y. B. M. S

11

Mergers and Acquisitions

A merger refers to the process whereby at least two companies combine to form one single company. 4usiness firms make use of mergers and acquisitions for consolidation of markets as well as for gaining a competitive edge in the industry. %erger types can be broadly classified into the following five subheads as described below. "hey are :ori3ontal %erger, (onglomeration, <ertical %erger, 2roduct ,xtension %erger and %arket ,xtension %erger. 5ori6ontal Merger refers to the merger of two companies who are direct competitors of one another. "hey serve the same market and sell the same product. .onglomeration refers to the merger of companies, which do not either sell any related products or cater to any related markets. :ere, the two companies entering the merger process do not possess any common business ties. 7ertical Merger is affected either between a company and a customer or between a company and a supplier.

!roduct-Extension Merger is executed among companies, which sell different products of a related category. "hey also seek to serve a common market. "his type of merger enables the new company to go in for a pooling in V. E. S @ T. Y. B. M. S 12

Mergers and Acquisitions of their products so as to serve a common market, which was earlier fragmented among them. Market-Extension Merger occurs between two companies that sell identical products in different markets. It basically expands the market base of the product.

'rom the perspecti$e of how the merge is financed8 there are two types of mergers:
2urchase mergers (onsolidation mergers.

Each has certain implications for the companies in$ol$ed and for in$estors

V. E. S @ T. Y. B. M. S

13

Mergers and Acquisitions

!urchase Mergers:
As the name suggests, this kind of merger occurs when one company purchases another one. "he purchase is made by cash or through the issue of some kind of debt instrument, and the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be =written up> to the actual purchase price, and the difference between book value and purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.

.onsolidation Mergers:
With this merger, a brand new company is formed and both companies are bought and combined under the new entity. "he tax terms are the same as those of a purchase merger.

Ad$antages of mergers and takeo$ers

%ergers and takeovers are permanent form of combinations which vest in management complete control and provide centrali3ed administration which are not available in combinations of holding company and its partly owned subsidiary.

V. E. S @ T. Y. B. M. S

14

Mergers and Acquisitions Shareholders in the selling company gain from the merger and takeovers as the premium offered to induce acceptance of the merger or takeover offers much more price than the book value of shares. Shareholders in the buying company gain in the long run with the growth of the company not only due to synergy but also due to 9boots trapping earnings:

Moti$ations for mergers and acquisitions

%ergers and acquisitions are caused with the support of shareholders, manager&s ad promoters of the combing companies. "he factors, which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear, are briefly noted below based on the research work by various scholars globally. 1. 'rom the standpoint of shareholders: Investment made by shareholders in the companies sub1ect to merger should enhance in value. "he sale of shares from one company&s shareholders to another and holding investment in shares should give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in different ways vi3. from the gains and achievements of the company i.e. through

o Realization of monopoly profits o Economies of scales o Diversification of product line o Acquisition of human assets and other resources not available otherwise o Better investment opportunity in combinations.

V. E. S @ T. Y. B. M. S

15

Mergers and Acquisitions

2. 'rom the standpoint of managers: %anagers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. %ergers where all these things are the guaranteed outcome get support from the managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult. 3. !romoter;s gains: %ergers do offer to company promoters the advantage of increasing the si3e of their company and the financial structure and strength. "hey can convert a closely held and private limited company into a public company without contributing much wealth and without losing control.

4. 2enefits to general public: Impact of mergers on general public could be viewed as aspect of benefits and costs to+

V. E. S @ T. Y. B. M. S

16

Mergers and Acquisitions

(onsumer of the product or services Workers of the companies under combination *eneral public affected in general having not been user or consumer or the worker in the companies under merger plan. <a= .onsumers "he economic gains reali3ed from mergers are passed on to consumers in the form of lower prices and better quality of the product, which directly raise their standard of living and quality of life. "he balance of benefits in favour of consumers will depend upon the fact whether or not the mergers increase or decrease competitive economic and productive activity, which directly affects the degree of welfare of the consumers through changes in price level, quality of products, after sales service, etc. <b= >orkers community "he merger or acquisition of a company by a conglomerate or other acquiring company may have the effect on both the sides of increasing the welfare in the form of purchasing power and other miseries of life. "wo sides of the impact as discussed by the researchers and academicians are

%ergers with cash payment to shareholders provide opportunities for them to invest this money in other companies, which will generate further employment and growth to uplift of the economy in general. Any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. 4oth workers and V. E. S @ T. Y. B. M. S 17

Mergers and Acquisitions communities will suffer on lessening 1ob opportunities, preventing the distribution of benefits resulting from diversification of production activity. <c= )eneral public %ergers result into centrali3ed concentration of power. ,conomic power is to be understood as the ability to control prices and industries output as monopolists. Such monopolists affect social and political environment to tilt everything in their favour to maintain their power ad expand their business empire. "hese advances result into economic exploitation. 4ut in a free economy a monopolist does not stay for a longer period as other companies enter into the field to reap the benefits of higher prices set in by the monopolist. "his enforces competition in the market, as consumers are free to substitute the alternative products. "herefore, it is difficult to generali3e that mergers affect the welfare of general public adversely or favorably. ,very merger of two or more companies has to be viewed from different angles in the business practices which protects the interest of the shareholders in the merging company and also serves the national purpose to add to the welfare of the employees, consumers and does not create hindrance in administration of the *overnment polices.

#e$erse Merger
*enerally, a company with the track record should have a less profit earning or loss making but viable company amalgamated with it to have benefits of economies of scale of production and marketing network, etc. As a consequence of this merger the profit earning company survives and the loss making company

V. E. S @ T. Y. B. M. S

18

Mergers and Acquisitions extinguishes its existence. 4ut in many cases, the sick company&s survival becomes more important for many strategic reasons and to conserve community interest. "he law provides encouragement through tax relief for the companies that are profitable but get merged with the loss making companies. Infact this type of merger is not a normal or a routine merger. It is, therefore, called as a ?everse %erger. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets. "he private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares. ?egardless of their category or structure, all mergers and acquisitions have one common goal+ they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts.

5igh .ourt discussed % tests for re$erse merger

a. Assets of "ransferor (ompany being greater than "ransferee (ompany. b. ,quity capital to be issued by the transferee company pursuant to the acquisition exceeding its original issued capital.

V. E. S @ T. Y. B. M. S

19

Mergers and Acquisitions c. "he change of control in the transferee company clearly indicated that the present arrangement was an arrangement, which was a typical illustration of takeover by reverse bid.

(ourt held that prime facie the scheme of merging a prosperous unit with a sick unit could not be said to be offending the provisions of section @AA of the Income "ax Act, BCDB since the ob1ect underlying this provision was to facilitate the merger of sick industrial unit with a sound one.

,alient features of re$erse merger under section +"A:

1 Amalgamation should be between companies and none of them should be a firm of partners or sole proprietor. In other words, partnership firm or sole proprietary concerns cannot get the benefit of tax relief under section @AA merger. " "he companies entering into amalgamation should be engaged in either industrial activity or shipping business. In other words, the tax relief under section @AA would not be made available to companies engaged in trading activities or services.

% After amalgamation the =sick> or =financially unviable company> shall survive and other income generating company shall extinct. In other words essential condition to be fulfilled is that the acquiring company will be able to revive or rehabilitate having consumed the healthy company.

V. E. S @ T. Y. B. M. S

20

Mergers and Acquisitions & $ne of the merger partners should be financially unviable and have accumulated losses to qualify for the merger and the other merger partner should be profit earning so that tax relief to the maximum extent could be had. In other words the company, which is financially unviable, should be technically sound and feasible, commercially and economically viable but financially weak because of financial stringency or lack of financial recourses or its liabilities have exceeded its assets and is on the brink of insolvency. "he second requisite qualification associated with financial unavailability is the accumulation of losses for past few years. ( Amalgamation should be in the public interest i.e. it should not be against public policy, should not defeat basic tenets of law, and must safeguard the interest of employees, consumers, creditors, customers and shareholders apart from promoters of company through the revival of the company. %. "he merger must result into following benefit to the amalgamated company i.e. (arry forward of accumulated business loses of the amalgamated company (arry forward of unabsorbed depreciation of the amalgamating company Accumulated loss would be allowed to be carried forward set of for eight subsequent years.

+ Accumulated loss should arise from =2rofits and *ains from business or profession> and not be loss under the head =(apital *ains> or =Speculation>. - 6or qualifying carry forward loss, the provisions of section @A should have not been contravened.

V. E. S @ T. Y. B. M. S

21

Mergers and Acquisitions / Similarly for carry forward of unabsorbed depreciation the conditions of section EA should not have been violated. 1? Specified authority has to be satisfied of the eligibility of the company for the relief under section @A of the Income "ax Act. It is only on the recommendations of the specified authority that (entral *overnment may allow the relief. 11 "he company should make an application to a =specified authority> for requisite recommendation of the case to the (entral *overnment for granting or allowing the relief. 1" 2rocedure for merger or amalgamation to be followed in such cases is same as in any other cases. Specified Authority makes recommendation after taking into consideration the court&s direction on scheme of amalgamation.

Synergy
1he success of a merger or acquisition depends on how well this synergy is achie$ed

V. E. S @ T. Y. B. M. S

22

Mergers and Acquisitions ,ynergy: Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings.

2y merging8 the companies hope to benefit from the following:

1. ,taff reductions as every employee knows, mergers tend to mean 1ob losses. (onsider all the money saved from reducing the number of staff members from accounting, marketing and other departments. 2. Economies of scale yes, si3e matters. Whether it's purchasing stationery or a new corporate I" system, a bigger company placing the orders can save more on costs. %ergers also translate into improved purchasing power to buy equipment or office supplies when placing larger orders, companies have a greater ability to negotiate price with their suppliers.

3. Acquiring new technology to stay competitive, companies need to stay on top of technological developments and their business applications. 4y buying a smaller company with unique technologies, a large company can keep or develop a competitive edge. V. E. S @ T. Y. B. M. S 23

Mergers and Acquisitions

& @mpro$ed market reach and industry $isibility (ompanies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community+ bigger firms often have an easier time raising capital than smaller ones. "hat said, achieving synergy is easier said than done--it is not automatically realized once two companies merge Sure, there ought to be economies of scale when two businesses are combined, but sometimes it works in reverse. In many cases, one and one add up to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the dealmakers. Where there is no value to be created, the (,$ and investment bankers who have much to gain from a successful %!A deal will try to build up the image of enhanced value. "he market, however, eventually sees through this and penali3es the company by assigning it a discounted share price.

Chapte r 4

Procedure for acquisition And Acquisition

0oing the 0eal

,tart with offer:

V. E. S @ T. Y. B. M. S 24

Mergers and Acquisitions When the (,$ and top managers of a company decide they want to do a merger or acquisition, they start with a tender offer. "he process typically begins with the acquiring company carefully and discreetly buying up shares in the target company, building a position. $nce the acquiring company starts to purchase shares in the open market, it is restricted to buying FG of the total outstanding shares Working with financial advisors and investment bankers, the acquiring company will arrive at an overall price that it's willing to pay for its target in cash, shares, or both. "he tender offer is then frequently advertised in the business press, stating the offer price and the deadline by which the shareholders in the target company must accept /or re1ect0 it .

1he 1argetAs #esponse

$nce the tender offer has been made, the target company can do one of several things+ 1. Accept the terms of the offer: If the target firm's top managers and

shareholders are happy with the terms of the transaction, they will go ahead with the deal. 2.

Attempt to negotiate:

"he tender offer price may not be high enough for the target company's shareholders to accept, or the specific terms of the deal may not be attractive. In a merger, there may be much at stake for the management of the target. So, if they're not satisfied with the terms laid out in the tender

V. E. S @ T. Y. B. M. S

25

Mergers and Acquisitions offer, the target's management may try to work out more agreeable terms.

3.

Execute a poison pill or some other hostile takeo$er defense+

A poison pill scheme can be triggered by a target company when a hostile suitor acquires a predetermined percentage of company stock. "o execute its defense, the target company grants all shareholders except the acquirer options to buy additional stock at a dramatic discount. "his dilutes the acquirer's share and intercepts its control of the company. %ergers and acquisitions can face scrutiny from regulatory bodies.

For example
If the two biggest long distance companies in the Hnited States, A"!" and Sprint, wanted to merge, the deal would require approval from the 6ederal (ommunications (ommission. #o doubt, the 6(( would regard a merger of the two giants as the creation of a monopoly or, at the very least, a threat to competition in the industry.

.losing the 0eal

6inally, once the target company agrees to the tender offer and regulatory requirements are met, the merger deal will be executed by means of some transaction. In a merger in which one company buys another, the acquirer will pay for the target company's shares with cash, stock, or both.

V. E. S @ T. Y. B. M. S

26

Mergers and Acquisitions A cash for stock transaction is fairly straightforward, target company shareholders receive a cash payment for each share purchased. "his transaction is treated as a taxable sale of the shares of the target company. If the transaction is made with stock instead of cash, then it's not taxable. "here is simply an exchange of share certificates. "he desire to steer clear of the taxman explains why so many %!A deals are carried out as cash for stock transactions. When a company is purchased with stock, new shares from the acquirer's stock are issued directly to the target company's shareholders, or the new shares are sent to a broker who manages them for target company shareholders. $nly when the shareholders of the target company sell their new shares are they taxed. When the deal is closed, investors usually receive a new stock in their portfolio the acquiring company's expanded stock. Sometimes investors will get new stock identifying a new corporate entity that is created by the %!A deal.

>hy Mergers failB

It's no secret that plenty of mergers don't work. "hose who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to 1ustify the price premium. It can sound so simple.

V. E. S @ T. Y. B. M. S

27

Mergers and Acquisitions Iust combine computer systems, merge a few departments, use sheer si3e to force down the price of supplies, and the merged giant should be more profitable than its parts. @n theory8 1C1 D % sounds great8 but in practice8 things can go awry :istorical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. %otivations behind mergers can be flawed and efficiencies from economies of scale may prove elusive. And the problems associated with trying to make merged companies work are all too concrete.

Flawed Intentions
6or starters, a booming stock market encourages mergers, which can spell trouble. )eals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempts to imitate, somebody else has done a big merger, which prompts top executives to follow suit.

A merger may often have more to do with glory seeking than business strategy. "he executive ego, which is boosted by buying the competition, is a ma1or force in %!A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. %ost (,$s get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later. V. E. S @ T. Y. B. M. S 28

Mergers and Acquisitions

$n the other side of the coin, mergers can be driven by generali3ed fear. *lobali3ation, or the arrival of new technological developments, or a fast changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired . 1he idea is that only big players will sur$i$e a more competiti$e world

1he Obstacles of making it >ork

(oping with a merger can make top managers spread their time too thinly, neglecting their core business, spelling doom. "oo often, potential difficulties seem trivial to managers caught up in the thrill of the big deal. "he chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that people issues are easily overcome.

For example
,mployees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. "hese aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.

V. E. S @ T. Y. B. M. S

29

Mergers and Acquisitions %ore insight into the failure of mergers is found in the highly acclaimed study from the global consultancy %c8insey. "he study concludes that companies often focus too intently on cutting costs following mergers, while revenues and, ultimately, profits suffer. %erging companies can focus on integration and cost cutting so much that they neglect day to day business, thereby prompting nervous customers to flee. "his loss of revenue momentum is one reason so many mergers fail to create value for shareholders.

Remember
#ot all mergers fail. Si3e and global reach can be advantageous, and strong managers can often squee3e greater efficiency out of badly run rivals. 4ut the promises made by dealmakers demand the careful scrutiny of investors. "he success of mergers depends on how realistic the dealmakers are and how well they can integrate two companies together while maintaining day to day operations

Eife after a merger or an acquisition

V. E. S @ T. Y. B. M. S

30

Mergers and Acquisitions

A recent 6orrester report predicts a ma1or shakeout in the offshore I" industry and recommends that even large players align with each other to prepare for a maturing market. "hey predict consolidation, not 1ust at the small company level, but among companies of all si3es. We have recently witnessed the acquisition of %phasis by ,)S, one of the more significant deals in the offshore space. In an industry that is seeing consolidation at various levels, it is relevant to examine both the motives behind this trend and, more important, look at what it takes to create a successfully merged entity.

Chapte r 5 V. E. S @ T. Y. B. M. S

.A,E- ,1F0G
31

Mergers and Acquisitions

1.

)laxo,mith3line !harmaceuticals Eimited8 @ndia:

<Merger ,uccess=

Gla o !ndia "imited and #mith$line Beecham %harmaceuticals &!ndia' "imited have le(ally mer(ed to form Gla o#mith$line %harmaceuticals "imited in !ndia &G#$'. It may be recalled here that the global merger of the two companies came into effect in )ecember AJJJ. (ommenting on the prospects of *S8 in India, <ice (hairman and %anaging )irector, *laxoSmith8line said, )*he two companies that have mer(ed to become Gla o#mith$line in !ndi a have a (reat herita(e + a fact that (ets reflected in their products with stron( brand equity., :e added, )*he two companies have a lon( history of commitment to !ndia and en-oy a very (ood reputation with doctors, patients, re(ulatory authorities and trade bodies. At G#$ it would be our endeavor to levera(e these stren(ths to further consolidate our mar.et leadership., 2harmaceuticals Kimited, India, %r. < "hyagara1an

*laxoSmith8line, India

V. E. S @ T. Y. B. M. S

32

Mergers and Acquisitions 1he merger in @ndia brings together two strong companies to create a formidable presence in the domestic market with a market share of about + per cent With this merger, *laxoSmith8line has increased its reach significantly in India. With a field force of over A,JJJ employees and more than F,JJJ stockiest, the company&s products are available across the country. 1he enhanced basket of products of )laxo,mith3line8 @ndia will help ser$e patients better by strengthening the hands of doctors by offering superior treatment and healthcare solutions

)laxo,mith3line8 >orldwide
*laxoSmith8line 2K( is the world&s leading research based pharmaceutical and healthcare company. With an ?!) budget of over LA.E billion /?s.BD, BEJ crores0, *laxoSmith8line has a powerful research and development capability, encompassing the application of genetics, genomics, combinatorial chemistry and other leading edge technologies. A truly global organi3ation with a wide geographic spread, *laxoSmith8line has its corporate headquarters in the West Kondon, H8. "he company has over BJJ,JJJ employees and supplies its products to BMJ markets around the world. It has one of the largest sales and marketing operations in the global pharmaceutical industry.

About merger
*laxo Wellcome 2lc and Smith kline 4eecham 2lc announced a NBBMbn 5merger of equals5 between the two companies on Ianuary B@. "he merger comes almost

V. E. S @ T. Y. B. M. S

33

Mergers and Acquisitions two years since a previous attempt to bring them together broke down after disagreements between senior managers. "he merger will create the world's largest pharmaceutical company with annual sales of over NBFbn and a research and development budget of NA.Mbn. (,$ of Smith8line said, )*he time is ri(ht and the mar.et is ri(ht for what we are doin(., As definitely he was correct because drug market was having boom period at that time, since the boom period is still there. "he merger was too successful that the company was formed with a @.E percent share of the global pharmaceuticals market even $ther ma1or pharmaceutical companies had market shares aroun merge 4 to 4.5 per cent an e$en a P"i&er 'arner()am*ert +oul only reach %., per cent.

,.3 %., -

)laxo ,mith3line !fi6er >arner Eambert

"he company has base in H8, since there they have more than OJ G of shareholders, while it has operational base in united states, the world largest pharmaceutical market. V. E. S @ T. Y. B. M. S 34

Mergers and Acquisitions

"he company has F G of sale in H8 compare to FJ G in HS. )r Iean 2ierre *arnier /chief operating officer, Smithkline 4eecham, and chief executive designate, *S80 said+ 5"his is a merger of strong with strong, in contrast to some other mergers in this industry.5

.ompetiti$e ad$antage for the newly merged company are:

1 ,nhanced ?!) productivity 5%oney and scale are important, but you also need quality.5 "he two companies have BE compounds and BJ vaccines currently in phase III development. 4oth companies were leaders in genomics and bioinformatics. " Superior marketing power $ver MJ,JJJ employees in sales and marketing, including O,JJJ representatives in the HS, making the company the marketing partner of choice.

% Superior consumer marketing skills, these will be much more important than ever before. "he market was being changed by direct to consumer

V. E. S @ T. Y. B. M. S

35

Mergers and Acquisitions advertising and e marketing via the Internet. %any of the company's products would be switched to over the counter status in the future. & $perational excellence ,fficiency savings of over N@FJm would be achieved over three years, on top of savings of NF@Jm already achieved. Savings of NAFJm would be made by streamlining research and development. "his money would be reinvested.

( A talented management team 4oth sides had previous experience of integrating companies after mergers.

2.

,tandard .hartered )rindlay;s <Acquisition Success=

It has been a hectic year at Kondon based Standard (hartered 4ank, going by its acquisition spree across the Asia 2acific region. At the helm of affairs, globally, is V. E. S @ T. Y. B. M. S 36

Mergers and Acquisitions ?ana "alwar, group (,$. "he quintessential general, he knew what he was up against when he propounded his 'emerging stronger' strategy of growth through consolidation of emerging markets for the turn of the %illennium loads of scepticism. *he central issue/ #tan 0hart1s Au(ust 2333 acquisition of A45 Grindlay1s Ban., for 67.8 billion. ,veryone knows that acquisition is the easy part, merging operations is not. And recent history has shown that banking mergers and acquisitions, in particular, are not as simple to execute as unifying balance sheets. (an Standard(hartered proposed merger with A#9 *rindlays be any differentP "he 979 refers to the new entity, which will be India's #o B foreign bank once the integration is completed. "his should take around BO months7 till then, A#9 *rindlays will exist separately as Standard (hartered *rindlays /S(*0. "he 929 and 989 are (itibank and :ong 8ong and Shanghai 4anking (orp /:S4(0, India's second and third largest foreign banks, respectively. "hat makes the new entity the world's biggest 'emerging markets' bank. 4y way of strengths, it will have treasury operations that will probably go unchallenged as the country's most sophisticated. 4est of all, it will be a dynamic bank. "hanks to pre merger initiatives taken by both banks, it could per haps boast of the country's fastest growing retail banking business.

Standard(hartered is rated highly on other parameters too. It is currently targeting global cost savings of QBJO million, having reported a profit before tax of QDFJ million in the first half of AJJJ, up EB per cent from the same period last V. E. S @ T. Y. B. M. S 37

Mergers and Acquisitions year. #et revenue increased D per cent to QA billion for the same period. (onsumer banking, a typically low profit business which accounted for less than MJ per cent of its global operating profits till four years ago, now brings in FF per cent good. Standard(hartered knows it should not let its energy dissipate. It has been growing at a claimed annual rate of AF per cent in the last two years, well over the industry average of BJ per cent. of profits. So the company's global report card looks fairly

Growth rate
!" # 1% #

tandard chartered

Industry a$erage

4ut maintaining this pace won't prove easy, with (itibank and :S4( 1ust waiting to snip at it. "he A#9 *rindlays acquisition had happened 1ust before that, though the process started in early BCCC, at Stan (hart&s headquarters in Kondon. At first, it was 1ust talk of a strategic tie up with A#9 *rindlays, which had the same colonial 4ritish antecedents. 4ut this plan was abandoned when it became evident that all decision making would vacillate between %elbourne and Kondon, where the two are headquartered. 4y )ecember, A#9 had expressed a willingness to sell out, and Stan(hart initiated the due diligence proceedings. It wasn't until %arch that a few senior Indian bank executives were let into the secret.

V. E. S @ T. Y. B. M. S

38

Mergers and Acquisitions

#ow, it's time to get going. A new vehicle, navigators in place, engines revving and map charted, the road ahead is challenging and full of promise. "o steer clear of trouble is the only caution advised by industry analysts, as the two banks integrate their businesses. Skeptics don't see how Stan(hart can really be greater than the sums of its part.

"he aggression, though, is not as raw as it sounds. 4ehind it all is a strategy that everyone at Stan(hart seems to be in synchrony with. And behind that strategy is "alwar, very much the originator of the oft repeated phrase uttered by every executive :(ettin( the ri(ht footprint:. "he other key words that tend to find their way into every discussion are 'focus' and 'growth'. Stan(hart India's net non performing loans, as a percentage of net total advances, are reported at 1ust A per cent for BCCC AJJJ. In terms of capital adequacy too, the banks are doing fine. Stan(hart has a capital base of C.F per cent of its risk weighted assets, while S(* has BJ.C per cent. So, with or without a safety net provided by the global group, the Indian operations are on firm ground.

3.

0eutsche 4 0resdner 2ank <Merger Failure=

"he merger that was announced on march +8 "??? between )eutsche 4ank and )resdner 4ank, *ermany&s largest and the third largest bank respectively was considered as *ermany&s response to increasingly tough competition markets. "he merger was to create the most powerful banking group in the world with the balance sheet total of nearly A.F trillion marks and a stock market value around V. E. S @ T. Y. B. M. S 39

Mergers and Acquisitions BFJ billion marks. "his would put the merged bank for ahead of the second largest banking group, H.S. based citigroup, with a balance sheet total amounting to B.A trillion marks and also in front of the planned Iapanese book mergers of Sumitomo and Sukura 4ank with B.@ trillion marks as the balance sheet total. "he new banking group intended to spin off its retail banking which was not making much profit in both the banks and costly, extensive network of bank branches associated with it. "he merged bank was to retain the name )eutsche 4ank but adopted the )resdner 4ank&s green corporate color in its logo. "he future core business lines of the new merged 4ank included investment 4anking, asset management, where the new banking group was hoped to outside the traditionally dominant Swiss 4ank, Security and loan banking and finally financially corporate clients ranging from ma1or industrial corporation to the mid scale companies. +it" t"is #in) of *er er, t"e ne- (an# -o$') "a&e reac"e) t"e no.1 %osition of t"e /S an) create ne- )i*ensions of a ressi&eness in t"e t"eir internationa' *er ers. B$t (are'! 2 *ont"s after anno$ncin

a ree*ent to for* t"e 'ar est (an# in t"e -or'), ne otiations for a *er er (et-een De$tsc"e an) Dres)ner Ban# fai'e) on 0%ri' 5, 2000.

>hat happenedB
"he union of the two previous competitors should be carried out Hby agreement:8 areas that overlapped should not be shut down or broken up but merged and integrated. Although they intended a reduction of BD,JJJ 1obs, this was to proceed by Hsocially acceptableH means. "his was insisted upon by both the union representatives on the supervisory board as well.

V. E. S @ T. Y. B. M. S

40

Mergers and Acquisitions 6rom the outset, the international investors re1ected this concept of a socially acceptable merger. After a short initial rise, the share values of the two institutions slumped by almost EJ percent. 4anking analysts, on whose assessments large investors rely, stated that this type of merger would Hset free too little synergyH &% #

$ne banking analyst explained that in order to obtain the :large reduction of costs necessary"8 the )resdner 4ank would have had to go down. "he reduction of BD,JJJ 1obs announced could only have been the start. $nly the shares of the insurance company Allian3 A* increased, rising over AJ percent on the first day after news of the agreement to merge. "he Allian3 had contrived the merger plans and was regarded as the actual winner. It owns a AB.@ percent share in the )resdner 4ank and has wanted to dispose of this for some time in order to concentrate on its own business.

!% #

"he Allian3 is also interested in the retail banking business, which has become unattractive to the banks, in order to utilise these structures to sell their insurance. In the merger plan, it was intended that the Allian3 would take a ma1ority holding in the new 4ank AM, which would retain the ma1ority of the two banks' smaller customers. A third point concerned asset management. In return for its share of the )resdner 4ank, the Allian3 was to receive )WS, the asset management arm of the )eutsche 4ank, *ermany's market leader with investments of B@F billion marks. V. E. S @ T. Y. B. M. S 41

Mergers and Acquisitions

Shareholders of the two banks did not look kindly on the fact that the Allian3 was to receive the golden egg without requiring any effort of its own. "he more negotiations over the mergerRwhich at first had only been roughly discussed in a small circleRturned to the details, the more open the contradictions and differences became. $n the one hand, the pressure from the workforce increased. "here were several demonstrations by bank staff as it became increasingly clear that it was mainly )resdner 4ank employees from the branches and central administration who were on the blacklist. "he boards of directors also lost control concerning the distribution of highly paid 1obs in middle management. %any started to look around for new employers offering safer prospects. "he dependency of their salary levels on the banks' share value /now sinking0 also played a role. "here was a nation wide outcry by customers after a member of the )resdner board announced that the merged bank was only interested in customers with over AJJ,JJJ marks. "hose with less would be transferred to the new 4ank AM. %any customers consequently moved their accounts over to the competition. "he main point at issue became the fate of the bank's investment arm, )84 /)resdner 8leinwort 4enson0, which the executive committee of the )resdner 4ank did not want to relinquish under any circumstances. Apart from asset management, investment banking i.e. the trade with securities and the consultancy business concerning mergers, acquisitions and floatationsR forms part of the most profitable business of the financial markets, with high profits arising from the stock market boom and the rapidly increasing wave of mergers.

V. E. S @ T. Y. B. M. S

42

Mergers and Acquisitions $ver FJ percent of bank profits are made within this area. 4reuer wanted to position the new bank at the highest place internationally in this sector. In the preliminary negotiations it had been agreed that )84 would be integrated into the new ma1or bank. 4ut from the outset these considerations encountered resistance in the leading echelons of )eutsche Asset %anagement, the )eutsche 4ank's investment arm, also situated in Kondon. )eutsche Asset %anagement had only 1ust integrated Kondon's %organ *renfell and the American 4ankers "rust, aggressively headhunting whole teams of investment bankers with top salaries. %eanwhile, this division alone now contributed over DJ percent of )eutsche 4ank's profits, which in the past year amounted to about A.D billion euro. In this area, )eutsche 4ank was among the top BJ in the world. "he top people at )eutsche Asset %anagement were not ready to undertake a new process of integration with )84. "he investment business is driven by expert teams, which concentrate on certain industries or countries. $nly in this way is it possible to grow or even survive in this hotly contested market, which serves internationally mobile investors. International comparisons are constantly drawn in this market, so that only those succeed who score above the average, the so called benchmark. %oreover, the administration and controlling departments would have almost completely overlapped with the structures of )eutsche 4ank, so that almost nobody from )84 could have been taken over into )eutsche Asset %anagement, which had already developed to be a global player, without losing profits. Among the leading staff, nobody was prepared for a new round of haggling for positions with the people from )84. "here would only have been 1obs for some of the expert teams.

V. E. S @ T. Y. B. M. S

43

Mergers and Acquisitions HEither 0resdner 3leinwort 2enson is completely sold off8 or at the most a few hundreds of its +8(?? workforce will be taken o$er Another $ersion is out of the question widespread opinions "he )eutsche 4ank's Kondon investment bankers were not prepared to compromise and used the weight of the share they contributed to the profits to pressure 4reuer. After the merger was announced, they immediately dispatched a message via the ;inancial *imes that either the )84 was smashed up or sold off. Walter from the )resdner 4ank was not prepared for this, since )84 was considered his 5pearl5. At a press conference on %arch C, 4reuer had to publicly assure the distrustful Walter that statements about the sale of )84 were 5absolute nonsense5 and that this company was a 51ewel5. :owever, 4reuer did not succeed in getting the investment bankers onto his side. "heir division head ,dson %itchell, one of the most successful investment bankers with an annual salary of over BJ million marks, continued to exert enormous pressure on 4reuer via Ioseph Ackermann, the division's chief executive. 6inally, 4reuer capitulated to the pressure of his subordinates. >e will not let our business be ruined8H were

At the last 1oint session of the two boards of directors on April F, he placed himself completely on the side of Ackermann, which led to the withdrawal of the )resdner 4ank from the merger negotiations. %ade to look foolish by his own staff, the otherwise independent and self assured 4reuer stepped forward with trembling voice to publicly explain the failure of the merger.

.onclusion

V. E. S @ T. Y. B. M. S

44

Mergers and Acquisitions "he ;inancial *imes hit the nail on the head concerning the failed merger when it remarked that 4reuer got a bloody nose in the attempt to combine American behaviour with *erman culture. "he conclusion is that those who wish to become :(lobal players: on the international financial markets must adhere to their rules. It is not possible to force 5*erman culture5Ri.e., the traditions of mutually acceptable decisions and social equilibrium, which characterised *ermany after the Second World WarRonto global capitalism. *lobal competition leaves no more room for deviations from the profit yardstick. If some )resdner 4ank staff popped the champagne corks on hearing news that the merger had failed /because they believed to have avoided losing their 1obs0, they are deluding themselves. "he failure of this fusion does not mean an end to the wave of mergers, but only that in future they will be carried out more ruthlessly and more brutally. "he pressure of the international financial markets continues to intensify and a whole wave of hostile take over will follow. "he entire *erman banking system will be turned upside down and a previously unknown degree of aggressiveness will feature in the merger and take over of banks. A member of the )eutsche 4ank board of directors said afterwards that following the experiences of the past weeks he would never again agree to a 5merger of equals5. And a )eutsche 4ank investment banker put forward the view that 5such a fusion can only be hard and brutal5. 6ollowing the failure, rumours immediately began to circulate that different international banks wanted to take over )resdner 4ank, such as (itibank, (hase %anhattan or the )utch A4# Amro. )espite its recent record profits, announced

V. E. S @ T. Y. B. M. S

45

Mergers and Acquisitions almost at the same time as the merger failure, the )resdner 4ank remains a candidate for take over. International analysts assess its yield is too weak, and say that it has no clear strategy and is set up badly. )eutsche 4ank supervisory board said, 5"he game of roulette continues. 4ut nobody knows where the ball will stay.... "he wave of mergers in banking continues apace.5 An expert commented, 5"oo many finance houses in *ermany are sharing too little market.... Anyway, we are only at the start. And after the private banks, the savings banks will soon follow. Also the credit cooperatives face a wave of mergers.5

& 1A1A 4 1E1EEG <Controversial Issue over Success And Failure=

"he "ata group was infusing a fresh EJ million pounds into "ata tea that had been used to buy an OF.@G stake in the H8 based "etley last year.

V. E. S @ T. Y. B. M. S

46

Mergers and Acquisitions "ata "ea&s much hyped acquisition of "etley, one of the world&s biggest tea brands, isn&t proceeding according to the plan. BF months ago, the 8olkata based ?s CBE crores "ata "ea&s buyout of the privately held "he "etley *roup for ?s BOME crores had stunned corporate watchers and investment bankers alike. It was a coupS An Indian company had used a leveraged buyout to snag one of the 4ritain&s biggest ever brands. It was by far, the biggest ever leveraged buyout by an Indian company. "ata "ea didn&t pay cash upfront. Instead, it invested @J million pounds as equity capital to set up "ata "ea. It borrowed AEF million to buy the "etley stake. "he plan was that "etley&s cash flows would be insulated from the debt burden. When "ata "ea took the big gamble to buy "etley, its intent was very clear. "he company had established a firm foothold in the domestic market and had a controlling position in growing tea. *oing global looked like the obvious thing to do. With "etley, the second largest brand after Kipton in its bag, "ata "ea looked ready to set the "hames on fire. ?ight from the start, "etley was never a easy buy. In BCCD, Allied )omecq, the liquor and retail conglomerate had put "etley on the block. ,ven then "ata "ea, nestle, Hnilever and Sara lee had put in bids, all under AJJ million pounds. Allied wanted to cash on the table. "ata "ea didn&t have enough of its own. "he others bids also did not go through. ,ventually, "etley group together with a consortium $f financial investors like 2rudential and Schroders, bought the entire equity stake for BCJ million pounds in all cash deal. "wo years later, "etley went for an I2$, hoping to raise EFJ MJJ million pounds. 4ut the I2$ never took place. Soon afterwards, the investors began looking for exit options. "etley was once again on the block.

V. E. S @ T. Y. B. M. S

47

Mergers and Acquisitions It was until 6eb AJJJ that the due diligence was completed. 4y this time, the "ata's were ready with their offer. "hey would pay A@B million pounds to buy the entire "etley equity and the funds would go towards first paying off "etley&s BJD million debt. "he balance would go the owners. "he offer price did not include rights to "etley coffee business, which was sold to the HS based ?owland (offee ?oasters and %other 2arker&s "ea and (offee in 6eb AJJJ for FF million pounds. 6or "etley new owners, too, the problems were only 1ust beginning. "he deal hinged on "etley&s ability, over and above covering its own debts, to service the loans "ata "ea had taken for the acquisition. "hat&s where reality bites. (onsider the facts. When "ata "ea acquired "etley through "ata "ea, it sunk in @J million pounds as equity and borrowed AEF million pounds from a consortium to finance the deal. Implicit in the K4$ was that "etley&s future cash flows would fund the S2<&s interest and principal repayment requirements. At an average interest rate of BB.FG, "etley needed to generate AA million pounds in interest alone on a loan o BCJ million pounds. Add to this the interest on the high cost vendor loan notes of EJ million poundsRit worked out to be M.F million and the charges on the working capital portion, amounting to A million pounds per annum. All this works out to about AO million pounds in interest alone per year. At the same time, it also has to pay back the principal of BBJ million pounds over a nice period through half yearly installments. "his works out to BA 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 MO million pounds a year. In 6. BCCC, the "etley&s cash flows were AC million pounds.

V. E. S @ T. Y. B. M. S

48

Mergers and Acquisitions Some of the problems could have been obviated if "etley&s cash flows had increased by MJ G in 6. AJJB over the previous year. "hat way, the company would have covered both its own commitments as well as of the "ata's. 4ut the situation worsened. %a1or H8 retailers clamped down on grocery prices last year. "hat substantially reduced "etley&s pricing flexibility. 4esides, the H8 tea markets have been under pressure for some time now. According to the H8 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 H8 has come down from @@.BG to DO.EG in BCCC. $n the other hand, natural 1uices and coffee have consistently increased their market share.

Tea drin'ing population 1(((

)).1 # *+.& #

So, when it was confronted by "etley&s sliding performance, what options did "ata "ea haveP $n its own, it could not do much. "he last year has been one of the worst years for the Indian tea industry and "ata "ea has also been affected. "he drop in tea prices and a proliferation of smaller brands in the organi3ed segment have taken toll on "ata "ea&s performance.

V. E. S @ T. Y. B. M. S

49

Mergers and Acquisitions In 6. AJJB, "ata "ea&s net profit fell by BC.FCG from ?s BAM.DE crores to ?s BJJ.AB crores. Income from operations declined by O.@AG.

1!,.*& cr. 1%%.!1 cr.

1(."( # 4ut letting "etley sink under the weight of the interest burden would have been an unthinkable option, given the prestige attached to the deal. "hus from the above case we infer that "ata had to shell out a lot of money to cover all the debts of "etley which was found not worthy enough by the general public.

2ut 1ata still calls it to be a success whereas in reality it is a failure

( .hrysler and 0aimler-2en6

"he takeover of (hrysler (orporation by )aimler 4en3 in a QEO billion stock deal is a powerful demonstration of the globali3ation of the world economy. "he largest industrial company in *ermany, and in ,urope as a whole, is acquiring one of the

V. E. S @ T. Y. B. M. S

50

Mergers and Acquisitions biggest American corporations, creating a transnational giant with a work force of MBJ,JJJ and an annual output of over QBEJ billion. "he combination is the largest industrial merger in history and the biggest ever acquisition of an American company by an overseas concern. "he merged company, to be called )aimler(hrysler, will be the fifth largest auto maker in terms of the number of vehicles produced, ranking after *%, 6ord, "oyota and <olkswagen. In terms of the value of the vehicles, )aimler(hrysler, will rank third. If )aimler(hrysler were a country, it would rank E@th in the world in terms of *ross )omestic 2roduct, 1ust behind Austria, but well ahead of six other members of the ,uropean Hnion *reece, 2ortugal, #orway, )enmark, 6inland and Ireland. Hnlike auto industry mergers, which frequently involved the gobbling up of small or failing companies by more powerful rivals, the )aimler (hrysler deal involves two highly profitable companies, with combined net earnings of QF.@ billion in BCC@. )aimler 4en3 has rebounded from losses in the early BCCJs to post record profits, while (hrysler makes a larger profit per vehicle than any other auto manufacturer.

"he driving force behind the combination is the necessity to create ever larger globally based enterprises which can compete in all the ma1or markets of the world, and especially in the three main centers of world capitalism+ #orth America ,urope Asia V. E. S @ T. Y. B. M. S 51

Mergers and Acquisitions

4efore the merger, (hrysler and )aimler 4en3 were essentially regional producers (hrysler with the third largest market share in #orth America, )aimler 4en3 controlling the luxury market in ,urope. (hrysler was compelled to sell its ,uropean and Katin American operations during its financial crises of the BCOJs and early BCCJs. It sold only B@,@BE vehicles outside #orth America, compared to nearly a quarter of a million vehicles in its home market. )aimler 4en3 opened its first plant outside ,urope and it began assembling a sport utility version of the %ercedes 4en3 at a plant in "uscaloosa, Alabama. In the wake of the merger, financial commentators and auto industry analysts predicted that the remaining regional auto manufacturers would be compelled to combine into global scale firms in order to compete with *%, 6ord, "oyota, :onda and the new )aimler(hrysler. "hey cannot remain nationally limited manufacturers, selling to a national market. As one analyst told the *imes of Kondon, 5"he country flags have come down and the flag of profitability has gone up.5

>hat happenedB
)aimler 4en3 has cut MJ,JJJ 1obs since BCCF, when Schrempp became (,$, and officials at the *erman company said that one of the most attractive features of

V. E. S @ T. Y. B. M. S

52

-hrysler .o/ reduction graph

Mergers and Acquisitions (hrysler was its :e pertise: at cutting 1obs and slashing costs. (hrysler has shrunk from BDJ,JJJ to @C,JJJ workers since the early BCOJs.

10*%0%%%

)(0%%%

Whatever the short run impact of the merger, a principal goal of every such combination is to consolidate operations and achieve economies of scale, which inevitably involves the destruction of 1obs. 4y AJJA, (hrysler figured, there would be OJ more assembly plants than the market demanded, an overcapacity equal to six (hrysler (orporations but this gigantic surplus of productive capacity is 5excess5 only from the standpoint of capitalism, because it means that far more cars can be produced than can be sold at a profit.

"his productive capacity cannot be put to use, within the framework of the profit system, to meet the needs of people all over the world for cheap and convenient transportation. Instead, it looms over the industry, insuring that the next downturn

V. E. S @ T. Y. B. M. S

53

Mergers and Acquisitions in the business cycle will have dire consequences for autoworkers and the working class worldwide. "he )aimler 4en3 takeover of (hrysler is part of an enormous outflow of capital from *ermany, as giant corporations like :oechst, 4ertelsmann's, Siemens and <olkswagen buy foreign companies or invest in new plant and equipment outside the country. "he goal of this investment is to achieve higher profits by obtaining labor at cheaper rates than these corporations currently pay within *ermany itself. <olkswagen has purchased Skoda, the biggest (3ech manufacturer, while Siemens acquired the electrical equipment business of Westinghouse and now has more than half its corporate work force outside *ermany. )aimler 4en3 has bought or built plants throughout the former Soviet bloc. Its most recent excursion in search of low paid labor is to Alabama, where labor costs were less than half the QAC an hour which the company pays in Stuttgart and other *erman cities. "he takeover of (hrysler is likely to followed by a further shift in production by the merged company from *ermany to #orth America, slashing the 1obs of *erman workers while, in the short term, maintaining or even temporarily increasing the number of 1obs in the HS and (anada.

"his explains the enthusiastic support for the merger from the union bureaucrats of the Hnited Auto Workers and the (anadian Auto Workers. "hey count on increasing their dues income at the expense of their counterparts in the *erman V. E. S @ T. Y. B. M. S 54

Mergers and Acquisitions I* %etall. %oreover, the HAW and (AW bureaucrats hope that )aimler 4en3 officials will extend to America the corporatist policies carried out in *ermany under the rubric of :co<determination.5 Hnder the *erman system, union officials are given half the seats on the corporation's board and play a more substantial role in the administration of the business than their American counterparts. (o determination, however, has nothing to do with genuine industrial democracy, workers' control or socialism. It is only a more developed form of the labor management collaboration, which the HAW has embraced over the past two decades, sacrificing the 1obs and living standards of autoworkers in return for well paid perks and posts for union bureaucrats. "he (hrysler )aimler merger demonstrates the urgent necessity for the working class to develop an international strategy to fight the attacks of globally organi3ed capital. It demonstrates the backwardness and stupidity of those, from union bureaucrats to middle class ex radicals, who seek to limit the working class to struggles within a national framework, or waged by purely trade union methods. It underscores the incapacity of the old nationally based labor organi3ations to provide an effective means of struggle for the working class.

.onclusion

V. E. S @ T. Y. B. M. S

55

Mergers and Acquisitions "he (hrysler )aimler merger is another powerful proof that only the perspective of socialist internationalism offers a way forward for working people. "he cultures were very different. It was a much more limited undertaking. "his merger has a lot of promise, but the difference between the promise and the reality is yet to be seen. And if there's one ma1or difference here, it is this not simply cultural approach in terms of a *erman and American culture but a very different approach to building cars. And the way in which that works out, the way the labor issues work out, it will be essential to seeing whether or not they will be popping champagne BJ years down the road.

V. E. S @ T. Y. B. M. S

56

Mergers and Acquisitions

.onclusion
$ne si3e doesn&t fit all. %any companies find that the best route forward is expanding ownership boundaries through mergers and acquisitions. 6or 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. 4y contrast, de merged companies often en1oy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. %eanwhile, investors benefit from the improved information flow from de merged companies. %!A comes in all shapes and si3es, and investors need to consider the complex issues involved in %!A. "he most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.

V. E. S @ T. Y. B. M. S

57

Mergers and Acquisitions

2ibliography

V. E. S @ T. Y. B. M. S

58