MERGERE CASE OF LUCKY CEMENT LIMITD AND DADABHOY

CEMENT LIMITED

Introduction

Textile businesses like others have been aggressively pursuing mergers and other form of
consolidations. Frequently mentioned motivations for mergers include potential
operational efficiencies, enhanced market power and other economies of scale and scope.
Another common perception is that firms in weak financial situation pursue mergers as
an alternative to bankruptcy. The purpose of the study is to examine the financial profile
of firms entering mergers and determine the success of firms’ mergers in improving
financial performance.

Objectives

Specific objectives include:

1. Identify the financial characteristics that lead to mergers by comparing the pre-merger
financial performance of both merger patners (surviving and target firms).

2. Determine the success of mergers from the standpoint of the surviving firm by
comparing the pre-merger and post-merger performance of the surviving firm.

3. Determine the overall success of merger by comparing the combined pre-merger

performance of both pre-mergers participants with the performance of merged firm.

4. Analyze the differences between firms used in the data set with peer group
performance, both prior and after the merger.
 Description of Companies

Lucky Cement Limited

Lucky Cement Limited is the largest cement producer in Pakistan. Its shares are traded
on the Karachi Stock Exchange, and are part of the KSE 100 Index. Its symbol in the
Karachi Stock Exchange (KSE) is 'LUCK'. The highest share price the company
witnessed, since its creation, was PKR 147.00 (per share). This price was achieved on the
18th of April 2008.

History

Lucky Cement Limited was founded in 1996 by Abdul Razzak Tabba. The company
initially started with factories in the Pezu district of the North West Frontier Province
(N.W.F.P). They now, also, own a factory in Karachi. Lucky Cement Limited has been
sponsored by Yunus Brothers Group (YB Group) which is one of the largest business
groups of the Country based in Karachi and has grown up remarkably over the last 50
years. The YB Group is engaged in diversified manufacturing activities including Textile,
Spinning, Weaving, Processing, Finishing, Stitching and Power Generation. The Group
consists of a number of industrial establishments other than Lucky Cement Limited.

Brands

The company currently produces five brands of cement;

1. Lucky Cement
2. Lucky Star
3. Lucky Gold
4. Chairman; and
5. Lucky Sulphate Resistant Cement(SRC)

Dadabhoy Cement Limited

Dadabhoy Group was among the very first to enter the cement sector soon after its
reopening for private enterprise. The group decided in April 1978 to set up a 1,000
metric tones per day capacity Portland cement plant. This plant was incorporated in
August 1979.

Since the Government of Pakistan was keen to patronize local machinery and know-
how, the Dadabhoy decided for setting up the same first. They opted for a plant
fabricated by the Heavy Mechanical Complex, Taxila. This was the first cement plant
to be fabricated in Pakistan. The Taxila Heavy Mechanical Complex got the necessary
expertise and license from the world renowned manufacturers of cement plants.
Fuller international Inc. of the USA. The Dadabhoy-HMC deal proved to be a
milestone in creating confidence and self-reliance in the country’s heavy industrial
sector.

The plant was set up at Kalu Kohar in Dadu District of Sindh, which is about 84
kilometers from Karachi on the Super Highway.

Dadabhoy Cement Industries Limited (DCIL) went into commercial production in

1986. The production, however, was not adequate to meet the growing demand for
cement. The management, therefore, decided to go for optimization and enhance the
plant capacity from the initial 1,500 tones per day (TPD) to 1,800 TPD. Further
optimization Plan of the Company is in process for which drawings and other
technical know-how have been acquired from world renowned company for
enhancement of capacity, initially up to 2,800 metric tones per day in the first Phase,
which will further be enhanced to 4,000 metric tones per day in the second Phase.
Dadabhoy Cement went public in late 1991 and thus increased its capital from
Rupees 300 to 600 million.

DCIL in one of the pioneers in introducing slag cement in Pakistan. The contribution
of Dadabhoy Cement is quite significant. This first indigenously designed and
fabricated cement plant is fully functional and producing in excess of half a million
tones of cement annually. DCIL is a prime example of the immense love and
devotion the Dadabhoy have for the country and of their bold entrepreneurship.

LUCKY CEMENT LIMITED

Balance Sheet

Particulars 2006 2007

Rupees(000) Rupees(000)
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment 19,165,108 20,318,908
Long term security deposits 2,175 2,175
19,167,283 20,321,083
CURRENT ASSETS
Stores and spares 1,267,000 1,993,573
Stock-in-trade 431,418 676,256
Trade debts - unsecured, considered
good 98,389 476,667
Loans and advances 202,238 241,948
Trade deposits and short term
prepayments 285,121 9,661
Other receivables 83,912 176,546
Tax refunds due from government 538,812
Taxation-net 23,661 50,057
Cash and bank balances 2,063,755 1,239,158
TOTAL ASSETS 23,622,777 25,723,761

EQUITY AND LIABILITIES

SHARE CAPITAL AND RESERVES
Share capital 2,633,750 2,633,750
Reserves 4,435,883 6,719,800
7,069,633 9,353,550
NON - CURRENT LIABILITIES
Long term finance 10,156,595 8,329,012
Long term deposits 27,269 25,863
Deferred liabilities 181,623 147,245
Deferred taxation 1,435,622 1,515,535

CURRENT LIABILITIES
Trade and other payables 1,451,086 1,546,699
Accrued mark-up 190,130 326,181
Short term borrowings 645,872 2,864,397
Current portion of long term finance 2,382,576 1,615,152
Sales tax payable 82,371 127
TOTAL EQUITY & LIABILITIES 23,622,777 25,723,761
DADABHOY CEMENT LIMITED
Balance Sheet

Particulars 2006 2007

Rupees(000) Rupees(000)
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment 2917427 3,021,930
Long term security deposits 122724 219,420
3,040,151 3,241,350
CURRENT ASSETS
Stores and spares 189,502 187,215
Stock-in-trade 3,515 63,062
Trade debts - unsecured, considered good 1,897 444
Loans and advances 137,143 13,306
Trade deposits and short term prepayments 543 2,246
Other receivables 56,592 5,435
Cash and bank balances 13,009 4,915
402,201 276,623
TOTAL ASSETS 3,442,352 3,517,973

EQUITY AND LIABILITIES

SHARE CAPITAL AND RESERVES
Share capital 1,220,767 1,663,262
Reserves 33,224 33,224
1253991 1,696,486
NON - CURRENT LIABILITIES
Long term finance 1,119,608 788,311
Long term deposits 17,129 13,208
Deferred liabilities 644,714 777,027
1,781,451 1,578,546
CURRENT LIABILITIES
 Trade and other payables 183,557 227,030
Accrued mark-up 47,785
Short term borrowings 166,783 8,248
Sales tax payable 8,785 7,663
406,910 242,941
TOTAL EQUITY & LIABILITIES 3,442,352 3,517,973

Summary at financial statements of Lucky Cement Limited

Lucky Cement is having the following financial performance of 2006-2007.

First of all, when we look at the liquidity position of the acquiring company, we come to
know that in 2006 the total liquid assets are 3.76 million rupees which includes 2.06
million cash and 1.7 million inventories while other current assets and other receivables
are 0.083 and 0.607 million rupees respectively and that makes the total current assets of
worth 4.45 million rupees. While in 2007 the liquid assets were utilized and came at total
of 3.90 million rupees and other current assets and inventories increased 5.4 and 2.6
million rupees respectively. Fixed assets in 2006 were 19.16 while in 2007, 20.31 million
rupees.
As for as the liability side is concerned, no new share issued in 2007, and remained like
the last year. But when see the fixed liabilities of the co. these are 11.80M and 10M in
2006 and in 2007 respectively while current liabilities were 4.7M and 6.3M respectively.
The income statement tells us that sales increased with greater values by 8.84 million
rupees and the cost of sales as well. The company having larger gross profits in 2007 3.6
million rupees. The company paid larger value as interest expense and EBIT 2.5 and 2.6
receptively.

Summary at financial statement of Dadabhoy Cement Limited

Dadabhoy Cement Limited having the following financial information in 2007-2008

When we look at the liquidity position of the Target company, we come to know that in
2006 the total liquid assets are 0.206 million rupees which includes all the cash of worth
0.0130 million and 0.193 inventories, while other current assets are 0.196 million rupees.
While in 2007 the liquid assets were increased and came at total of 0.255 million rupees
and other current assets and inventories increased 0.021 and 0.250 million rupees
respectively. Fixed assets in 2006 were 2.91 and increased in 2007 by 3.02 million
rupees.
As for as the liability side is concerned, no new share issued in 2008, and remained like
the last year 400 million while no debentures and preferred stock issued during 2007 and
2008. But when see the fixed liabilities of the co. these are 52.2 and 149.9 in 2007 and in
2008 respectively while current liabilities were 819.9 and 794.2 respectively.
The income statement tells us that sales increased with greater values by 1.48 million
rupees and the cost of sales as well. The company having lower gross profits in 2007
0.487 million rupees. The company’s interest charges also come at lower level by
comparing with 2007 EBIT 0.149 and 2006 0.17 receptively.

Data and Methods

Data for this study came from the audited financial statements of under observation
companies. Both of the companies selected for the study had at least two year data of
2007 and 2008 of pre-merger data. Annual ratios, measuring liquidity, leverage,
efficiency, profitability and sales growth were calculated for each firm.

Financial ratios used in analysis

Liquidity

 Liquidity refers to the degree to which the current liabilities are covered by current
assets. The current ratio (current asset divided by current liabilities) was used as a
measure of liquidity.
 Leverage ratio measure the portion of the firm’s assets financed by creditors. The
debt to total asset ratio was used as a measure of leverage.
 Efficiency ratio measures how effectively the firm is using its assets or human
resources. Two expense ratios were used to measure, ratio of total expense to gross
 margin and ratio of personnel expense to gross margin. The ratio of sales to total
assets often used as a measure and referred to as the asset turnover.
 Profitability ratio measure the operating performance of the firm, the return on total
assets and return on equity were used as a measure of profitability
 Sales performance was measured by the amount of total sales and sales growth.

Results and Discussion

The financial performance of the study group prior to the merger is in the following table.
The surviving firm was greater than the target firm. Surprisingly, there was a little
difference between the balance sheet ratios between acquiring and target firm prior to the
merger. Prior to the merger profitability and sales growth of the acquiring co. is
significantly higher than target co. and there is a big difference between current ratio of
both companies while sales figure shows a surprisingly better results of acquiring co. than
target co.

Performance of acquiring and target firm prior to the merger

Acquiring Co. Target Co.

Current Ratio 0.85 1.13

Debt/Asset 0.63 0.51

Sales to total assets 1.97 0.42

ROA 9.9% 0.40%
ROE 27.23% 0.84%
Sales growth 74.36% -52.65%
Sales 8.84 million 0.70 million
EPS 10.21 0.33%

Impact of Merger on Surviving Firm

The sales volume of the surviving firm increased subsequent to the unification. The
results also indicated that merger tended to decrease expenses of the company, increase
profitability and increase the rate of sales growth.

Comparison of Combined Pre-merger financial Statements With merged firms

The true measure of success of merger is the combined results of income statements and
balance sheet of both of the firms. The results did indicate that the merger improved
efficiency and member’s return on asset and return on equity. The EPS also improved
with the merger of both companies.

After Merger

Current Ratio 0.86 times

Debt/Asset 0.62
Sales to total assets 32.66%

ROA 8.76%
ROE 23.18%
Sales 9.54 Million
EPS 8.81

Conclusion

The study indicates that the mergers have generally been successful in increasing
profitability and efficiency. On average, the financial performance of surviving firm
improved after the merger. The comparison of ratios from combined pre-merger financial
data with post-merger ratios indicated that mergers were win-win games improving
overall performance.