PROJECT REPORT

ON
MERGERS AND ACQUISITIONS IN TELECOM SECTOR IN
INDIA
SUBMITTED TO
KUMAUN UNIVERSITY,NAINITAL
IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION (2010-12)

UNDER THE GUIDANCE

SUBMITTED BY

MR. HITESH PANT

JYOTSANA BHATT
ROLL NO: 101636
ENROLLMENTNO:0636349

DEPARTMENT OF MANAGEMENT STUDIES, BHIMTAL

KUMAUN UNIVERSITY, NAINITAL
2012

ACKNOWLEDGEMENT
The writing of this project has been one of the significant academic challenges I have
faced and without the support, patience, and guidance of the people involved, this task
would not have been completed. It is to them I owe my deepest gratitude. It gives me
immense pleasure in presenting this project report on MERGERS AND
ACQUISITIONS IN TELECOM SECTOR IN INDIA
This project would not have been possible without the help of librarian of our
college who provided us the necessary books .And I also want to thank the H.O.D
Prof. P.C. KAVIDAYAL of our college for his support and guidance through out the
study.
I acknowledge my thanks to MR. HITESH PANT, my project guide and all faculties,
for their support ,constant advise, constructive criticism, able guidance ,constant
encouragement and the right amount of personal touch ,which enabled the project in
its present state.
I would like to thank My Parents & Brother who directly or indirectly were the
constant source of support which lead to successful completion of this report.
Last but not the least I would thank Almighty for showering his blessings and helping
me at each step.

(Jyotsana Bhatt)

DECLARATION

I hereby declare that project titled MERGERS AND ACQUISATIONS IN

TELECOM SECTOR IN INDIA was done during the winter vacation after the
third semester under the guidance of MR. HITESH PANT. This project has been
undertaken as a partial fulfillment of the requirement for the award of the degree of
MBA of KU Nainital.
Further I declare that information & findings of this report are based on the data
collected by me. It is my original work. I have neither copied from any report meant
for any other degree / diploma course nor have submitted for award of any degree/
diploma or similar program elsewhere

SIGNATURE OF
FACULTY GUIDE

SIGNATURE OF STUDENT

.
MR. HITESH PANT

.
JYOTSANA BHATT
Roll no 101636
Enrollment no - 0636349

EXECUTIVE SUMMARY

This project deals with the study of Mergers And Acquisitions In Telecom Sector
which comprises of information on various types of merger and acquisition.
This project, in a sense is an outgrowth of my learning experience. In my academic
interaction with teacher, friends and practicing financial executives. I have understood
the merger and acquisition mania to a great extent , the project in a way, represents a
modest attempt to provide information on the subject.

(Jyotsana Bhatt)

CONTENTS
CHAPTER 1

INTRODUCTION....06
IMPORTANCE OF MERGERS & ACQUISITIONS.............................10
CHAPTER 2
REVIEW OF LITERATURE...11
CHAPTER 3
OBJECTIVES OF THE STUDY.17
CHAPTER 4
CHALLENGES & REGULATION OF M & A..18
CHAPTER 5
RESEARCH METHODOLOGY.....23
PROBLEM STATEMENT..24
DATA COLLECTION & ANALYSIS25
CHAPTER 6
MERGERS AND ACQUISITIONS THEORITICAL CONCEPTS26
RISKS ASSOCIATED WITH MERGERS..39

CHAPTER 7
FINDINGS AND ANALYSIS.41
CHAPTER
CONCLUSIONS..49
BIBLIOGRAPHY50

CHAPTER 1
INTRODUCTION OF MERGER & ACQUISITION
Mergers and acquisitions in telecom sector have become familiar in the majority of all
the countries in the world. A large number of domestic telecom industries all over the
world are engaged in merger and acquisition activities.Mergers and acquisitions
encourage telecom industry to gain global reach and better synergy and allow large
telecom industry to acquire the stressed assets of weaker industry.
The word Telecommunication is a compound of the Greek prefix tele meaning
'far off', and the Latin communicare, meaning 'to share'. In its current usage, it
refers to transmission of signals over a distance for the purpose of communication. In
early days, communication between persons took place by means of drums, smoke
signals, flags, etc. Emerging from such humble beginnings, the means now involve
sophisticated high-speed, submarine optical cables laid on ocean floors and artificial
satellites circling the Earth in space. As the demand for signal transmission has
increased, the speed of transmission has also increased. Recently, scientists at
Karlsruhe Institute of Technology in Germany have succeeded in transmitting 26
terabits (equal to about 700 DVDs or about 4 million average paperback books) of
data per second at the distance of 50 kilometers.
The telecommunications industry has impact on every aspect of our lives, from the
simple reality of enabling telephonic communication between people in different
locations to enabling supply-chains to work seamlessly across continents to create
products and fulfill demands. Telecommunication services are now recognized as a
key to the rapid growth and modernization of the economy and an important tool for
socio-economic development for a nation.
Telecommunications in India can be traced back to the 19th century when the British
East India Company introduced telegraph services in India. The past two decades
have been considered as the golden period for the telecommunications industry in
India with exponential growth and development in terms of technology, penetration,
as well as policy. All this has paralleled with the liberalization in this sector and huge
investment by both domestic and foreign investors.

AN OVERVIEW
The modern system of communications in India started with the establishment of
telegraph network. In order to ensure telegraph networks exclusivity and establish
government control over electronic communications, various telegraph statutes were
enacted by the Government of India which laid the foundation of the present
regulatory framework governing telecommunications (both wired and wireless). In
early days, India witnessed increasing number of wired telephone connections. Even
when wireless communication was introduced in the form of cellular phones, it was
not immediately accepted by the Indian masses, mainly on account of high price of
cellular phones as well as high tariff structure prevalent at that point in time.
Gradually, with the price of cellular handset as well as mobile (wireless) tariff
reducing there was increasing adoption of wireless communications. Today the Indian
telecom industry is already witnessing the lowest telecom tariff globally.
Like elsewhere, telecommunications in India started as a state monopoly. In the
1980s, telephone services and postal services came under the Department of Posts and
Telegraphs. In 1985, the government separated the Department of Post and created the
Department of Telecommunications (DoT). As part of early reforms, the
government set up two new public sector undertakings: Mahanagar Telephone Nigam
Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL). MTNL looked
after telecommunications operations in two megacities, Delhi and Mumbai. VSNL
provided international telecom services in India. DoT continued to provide
telecommunications operations in all regions other than Delhi and Mumbai. It is
important to note that under this regime, telecommunication services were not treated
to be a necessity that should be made available to all people but rather a luxury
possible for select few. In the early 1990s the Indian telecom sector, which was owned
and controlled by the Indian government, was liberalized and private sector
participation was permitted through a gradual process2. First, telecom equipment
manufacturing sector was completely deregulated. The government then allowed
private players to provide value added services (VAS) such as paging services. In
1994, the government unveiled the National Telecom Policy 1994 (NTP 1994).
NTP 1994 recognized that existing government resources would not be sufficient to
achieve telecom growth and hence private investment should be allowed to bridge the
resource gap especially in areas such as basic services. As markets and telecom

technologies started converging and the differences between voice (both fixed and
wireless) and data networks started blurring, the need for developing the modern
telecom network became an immediate necessity. Accordingly, private sector
participation was allowed in basic services.The government anticipated that a major
part of the growth of the countrys GDP would be reliant on direct and indirect
contributions of the telecom sector and accordingly the need for a comprehensive and
forward looking telecommunications policy was felt. This then paved way for New
telecom Policy 1999 (NTP 1999) which largely focused on creating an environment
for attracting continuous investment in the telecom sector and allowed creation of
communication infrastructure by leveraging on technological development. The main
objectives and targets of NTP 1999 were as follows:

Availability of affordable and effective communications for citizens;

Strive to provide a balance between the provision of universal service to all

uncovered areas, including the rural areas and the provision of high-level
services capable of meeting the needs of the countrys economy;

Create a modern and efficient telecommunications infrastructure taking into

account the convergence of IT, media, telecom and consumer;

Protect the defense and security interests of the country.

NTP 1999 allowed private operators providing cellular and basic services to migrate
from a fixed license fee regime to a revenue sharing regime which made it financially
viable for such operators to function in the market. Most importantly, the government
recognized the necessity to separate the government's policy wing from its operations
wing so as to create a level playing field for private operators. Accordingly the NTP
1999 directed the separation of the policy and licensing functions of DoT from the
service provision functions. The Government corporatized the operations wing of
DoT in October 2000 and named it as Bharat Sanchar Nigam Limited (BSNL)
which operates as a public sector undertaking. Thereafter in 2002, the monopoly of
VSNL also came to an end.
Mergers and acquisitions in the telecommunication industry have grown by
substantial proportions in India since the mid 1990s. Economic reforms undertaken in
the 1990s in India opened up the telecom sector which used to be a predominantly
state controlled one. Private investment in the telecom sector in India not only

facilitated the rapid expansion of telecom services in the urban, as well as rural parts
of India, it also provided the opportunity for mergers and acquisitions in this sector.

Reasons For The Growth Of Indian Telecommunication Industry

In recent times mergers and acquisitions in the Indian telecommunication industry
have been driven by a few important factors

The inclusion of internet (including broadband) and cable services in the

telecom sector.

New technologies like wireless fixed phone services.

Deregulation in the telecom sector.

Important Mergers & Acquisitions In The IndianTelecommunication

Industry
The first merger and acquisition deal in the Indian telecom industry occurred in 1998
between Max Group of Delhi and Hutchison Group of Hong Kong. 41% of stakes of
Orange services in Mumbai was acquired by Hutchison from Max for 560 million US
Dollars. In the years that followed several other mergers and acquisitions took place
in the telecommunications sector in India. Important ones among them include

Acquisition of Command Cellular Services in Kolkata by Hutchison from

Usha Martin in 2000.

Acquisition of 79.24% stakes of Aircel, Chennai by Sterling group from RPG

group for Rs. 210 Crores in 2003.

Acquisition of 48% stakes in Idea cellular by Aditya Birla group from the Tata
group in 2005.

Acquisition of Hutch services in India by Vodafone in 2006.

Amalgamations
In March 2011, the Vodafone Group announced that it would buy 33 percent stake in
its Indian joint venture for about 5 billion dollars after the Essar Group sold its
holding and exited Vodafone. Healthcare giant Piramal Group too, bought about 5.5
percent in the Indian arm of Vodafone for about 640 million dollars. This brings
Vodafones current stake to about 75 percent.

IMPORTANCE OF THE STUDY

The factors inducing mergers and acquisition include technological progress, excess
capacity, emerging opportunities and deregulation of geographic, functional and
product restrictions. It may also bring the performance of telecom sector.

The following are the important aspects for staying in the market:

Competition from global majors.

Competition from new Indian telecom industries.

Disinter mediation and competition resulting into pressure or spread.

Qualitative change in the industries paradigm.

The competencies required from a would be sharper information technology

and knowledge centric.

In order to compete with the new entrants effectively, Indian telecom industries need
to posses matching financial muscle, as a fair competition is possible only among the
equal. If Indian telecom industries are to be made more effective, efficiency and
comparable with their counterparts from abroad, they would need to be more
capitalized, automated

and technology oriented, even while strengthening their

internal operations and systems. Further in order to make them comparable with their
competitors from abroad with regard to the size of their capital and asset base, it
would be necessary to structure these industries. Merger and acquisitions are
considered useful to achieve the requisite size in the short run.

CHAPTER 2
REVIEW OF LITERATURE
Review of Previous Study
Market Measures-Based Studies
Gallet (1996) examined the relationship between mergers in the U.S. steel industry
and the market power. The study employed New Empirical Industrial Organization
approach which estimates the degree of market power from a system of demand and
supply equations. The study analyzed yearly observations over the period between
1950 and 1988 and results have revealed that in the period of 1968 to 1971 merges did
not have a significant effect on market power in the steel industry, whereas mergers in
1978 and 1983 did slightly boost market power in the steel industry.
Rau and Vermaelen (1998) investigated the controversial issue of under performance
after mergers and over performance after tender offers through examining the effect of
firm size and low book-to-market value on the post- acquisition performance to
pinpoint reasons behind under performance in mergers and over-performance in
tender offers if any. They also investigated the effect of the payment method
(Cash/Stock) on the post-acquisition performance. The study employed a sample of
3169 mergers and 348 tender offers and concluded that after adjusting for firm size
and book-to-market ratio, acquirers in mergers under perform by a significant 4%
over three years, while acquirers in tender offers earn a significant positive abnormal
return of 9% on average. A fact that destroys the belief that under-performance is due
to un-adjusting for book-to-market ratio. The study has interpreted under-performance
as a result of decision makers actions, where they over extrapolate the past
performance of the bidder with low book-to-market ratios "glamour firm" and
overestimate its abilities and hence approve the acquisition. On the other hand, value
bidders companies with poor track record or with high book-to-market ratio tend to be
more prudent and are not motivated by hubris when approving an acquisition. The
study failed to interpret the effect of methods of payment in cases where the long-run
abnormal return is negative in share-financed acquisition and positive in cash
financed acquisition. However, the study did not provide interpretation for the overperformance of tender offers compared to mergers.

Tse and Soufani (2001) examined the wealth effects on both acquiring and acquired
firms using a sample of 124 transactions over the period 1990 to 1996. The sample is
sub-divided into two merger eras to examine the effect of the prevailing economic
performance on the abnormal returns; the first era is Low Merger Activity from 1990
to 1993 which is a trough period and includes 65 transactions; and the second era is
High Merger Activity Era from 1994 to 1996 which is a booming period, it includes
59 transactions. The basic testing tool used is "event-study" to calculate cumulative
abnormal returns for both eras. The results have indicated that the returns on
successful bids in HMAE are positive while returns in LMAE are negative.
Marginally, returns in the HMAE are better than those in LMAE. This result has
suggested a link between the wealth effect and the economic conditions. Another
important result is that usually gains to target companies (acquired) are mostly
positive while those to bidders (acquirer) are debatable.
Choi and Russell (2004) investigated whether mergers and acquisitions in the
construction sector in U.S. make positive contributions to the performance and
determined the factors that may affect post-mergers and acquisitions performance as:
method of payment, acquisition timing and transaction size. The study analyzed 171
transactions that occurred between 1980 and 2002 using the cumulative abnormal
returns to indicate improvement in performance. The results have revealed that (i) the
number of acquisition transactions increased dramatically during the late 1990s, (ii)
firms experienced insignificant improved performance, in other words, they just
reached break even after mergers, and (iii) no evidence was found that either
acquisition time, method of payment, or target status had an influence on the reported
performance and that related diversifications perform slightly better than unrelated
diversifications. The analysis covered a long time span of about 22 years which
increased the reliability of the results. Unlike the majority of studies that supported
the method of payment as a primary factor influencing mergers and acquisitions, Choi
and Russell (2004) found no evidence to support such results. The study of Andre et
al. (2004) examined long-run performance of mergers and acquisitions in Canada and
investigated the main determinants of post-acquisition abnormal performance to
determine the sources of value creation or value destruction in Canadian M&A. The
studys sample comprises 267 events of mergers and acquisitions between 1980 and
2000 making up 176 companies to investigate the effects of (i) method of payment,

(ii) book-to-market value of the bidder, and (iii) local and cross-border deals on the
long-run performance. The analysis covered three years after the transaction using
mean calendar-time abnormal returns to measure the magnitude and reliability of
abnormal returns. The results have shown that Canadian acquirers significantly underperform over the three-year post-event period. After examining possible explanations
for the long-run performance of M&A, the study found that the method of payment
where stock-financed M&A under-perform relative to cash-financed M&A, glamour
acquirers under perform relative to value acquirers, and finally, crossborder deals
perform poorly in the long- run. The study did not compare post-merger performance
with a benchmark or control group of similar industries to account for industry
effects, and this was the main drawback. Therefore, the negative abnormal returns
could be due to industry conditions.
Yook (2004) tested the impact of acquisition on the acquiring firms financial
performance by comparing pre and post-acquisition Economic Value Added relative
to the industry average. The study based on a cross-sectional variation in EVA
performance according to the following transaction characteristics: (i) types of
acquisition, (ii) methods of payment, and (iii) business similarity. The sample
comprises 75 of the largest acquisitions occurring during 1989 to 1994 in the United
States. The results have concluded that acquiring firms experience significantly
deteriorating financial performance after the acquisitions. When calculating industryadjusted EVA, the difference is indiscernible, hence, the decline in raw EVA is
grounded by industry effects. Tender offers consistently earn larger EVA than do
mergers. However, there is no difference if EVA is calculated without adjusting the
premium. Hence, larger premiums paid in tender offers can be justified by higher
operating performance. Unfortunately, the study failed to find a relationship between
industry-adjusted EVA and types of acquisition, methods of payment, and business
similarity. However calculating EVA is a difficult process and still has a dispute in the
accounting literature.
Megginson et al. (2004) aim at investigating the relationship between the long-term
postmerger performance and the following factors: (i) the degree of corporate focus,
(ii) method of payment, (iii) the impact of target management attitude, (iv) the impact
of time period of the merger, and (v) the impact of (glamour/value) acquirers. The

sample consists of 204 strategic mergers completed in the period 1977-1996. In

examining the long-term performance, the study carried out three tests; first,
comparing the long-term stock performance; abnormal returns, of merging firms with
a portfolio of firms, second, comparing pre and post-merger operating cash flows to
the same control group, and finally, comparing sample and control pre-merger and
post-merger discounts and premiums in market-to-book values. The results have
indicated that the primary determinant of long-term performance is the degree of
change in corporate focus. On average, 10% decline in the focus results in (a) 9% loss
in relative stockholder wealth, (b) 4% discount in firm value, and (c) 1.2% decline in
operating cash flow by the third post-merger year. Cash-financed mergers
outperformed stock-financed mergers in the operating performance. There is no
significant relationship between managerial resistance and long-term performance.
Time period has no effect on the long-term post-merger performance. No evidence
was found to support that glamour outperform value acquirers.
Yuce and Ng (2005) investigated the effect of merger announcements of Canadian
firms on the abnormal returns. The sample consists of all Canadian mergers that
occurred between 1994 and 2000 making up 1361 acquirer companies and 242 target
companies representing industrial product companies, oil and gas companies,
consumer product sectors and the rest of the sample is scattered over 38 industries.
Abnormal returns have been used for both the acquiring and target companies in an
effort to support or reject the results of American studies that report negative
abnormal return for acquiring firms and positive abnormal return for target firms. The
results have indicated negative results in contrast to U.S. studies (for example; Andre
et al., 2004). Yuce and Ng (2005) argued that both the target and the acquiring
company shareholders earn significant positive abnormal returns, but it is lower than
what had reported in previous study of Megginson et al. (2004) on Canadian
companies. This means that abnormal returns appear to be decreasing through time.
The results of Yuce and Ng (2005) suggest that (i) there are significant and positive
cumulative abnormal returns to acquirers buying private firms with stock rather than
public ones, (ii) no significant difference is found between public and private targets
when paid in cash, (iii) there is higher risk for acquiring private firms than public
ones, (iv) firms tend to pay less in stocks for private firms, and (v) differences in
Canadian industry, capital markets, and regulations may justify the difference in the

Canadian experience. It can be argued that the study did not test the effect of industry
type on the acquisition price. Additionally, the study examined the performance for a
period of 40 days which is a very short period to examine the performance; therefore
the results have lack of generalization. Accordingly, an investigation over a long-run
is needed to determine whether the positive abnormal returns in the shortrun would
reverse in the long-run or continue as positive.
Kling (2006) carried out a study to judge the successfulness of the mergers wave in
Germany and to analyze the effect of mergers on the macro level taking into
consideration variables that might drive mergers such as: economics of scale, macro
economic conditions, success of former mergers and market structure. The study
choose a sample of 35 leading German companies that experienced mergers over the
period from the early 1870s to the beginning of the First World War in 1914 covering
a period of 44 years. The results reveal that the first German wave of merger started
around 1898 accompanied by the introduction of the new exchange law in 1896. The
vector regression model used was unable to find out that mergers were not successful
through the whole period albeit periods of successful mergers, hence, this issue has
been identified using rolling regressions. From 1898 to 1904, mergers affected total
stock returns positively in all industries except for banks. Despite this fact, managers
imitated the merger wave in the industrial companies without assessing the
successfulness of this activity on the banking sector. The study has cons and pros;
where the period covered in the study was long enough to conclude considerable
results. Moreover, categorizing the sample according to industry type provides
insights on the effects of mergers across sectors rather than generalizing results with
no evidence. On the other hand, the study is based on the macro level which in turn
might affect results of analyzing mergers on a micro level of corporate performance.

Table 1: Summary of Market Measures-Based Studies

Study
Gallet
(1996)
Rau &
Vermaelen
(1998)

Tse &
Soufani
(2001)
Choi &
Russell
(2004)

Andre et
al.
(2004)

Yook
(2004)

Objective(s)

Measures

Examine the relationship between

mergers in the U.S. steel industry
and the market power.
Identify the reason(s) behind under
performance in mergers & overperformance in tender offers as
well as examining the effect of the
payment method on post
acquisition performance.
Test the effect of M&A on the
abnormal returns for both the
acquired and the acquiring firms.

Used
Market
Power
Book-toMarket
Values

Results
Results have suggested that mergers
slightly boost market power in steel
industry.
Results have indicated that firms in
mergers & tender offers under-perform
their benchmarks by statistically
significant 4% in the three years following
the acquisitions.

Cumulative Results have indicated that the returns on

Abnormal
successful bids in high merger activity era
are +ve while returns in low merger
Returns
activity era are -ve. Shows link b/w the
Examine the effect of M&A in the
wealth effect & the economic conditions.
construction sector in the U.S. on
Cumulative Results have reported that firms experience
firms' performance & investigating Abnormal
insignificant improved performance. No
factors that may affect post M&A
evidence was found that either acquisition
Returns
performance.
time, method of payment, or target status
has an impact on the reported performance.
Explore the effect of Canadian
Mean
Results have shown that Canadian
mergers on long-term performance Calendaracquirers significantly under-perform over
and identifying the factor(s)behind Time
the three-year postevent period.
value creation or value destruction. Abnormal
Return
Economic
Test the effect of acquisition on the
Value
acquiring firms' financial
Added
performance.

Megginson
Examine the impact of the
et al.
followings & long term
(2004)
performance: (i) degree of
corporate focus, (ii) method of
payment, (iii) target management
attitude, (v) time period of the
merger,(iv) (glamour/value)
acquirers.
Yuce & Ng Investigate the effect of mergers
(2005)
announcements of Canadian firms
on the abnormal returns.
Kling
(2006)
Investigate the successfulness of
the mergers wave in Germany.

Abnormal
Return,
Market-toBook
Values

Abnormal
Return
Total-Stock
Return

CHAPTER 3

Results have reported that firms experience

significantly deteriorating operating
performance after the acquisitions.
Results have indicated the following: (i)
the primary determinant of long-term
performance is the degree of change in
corporate focus, (ii) on average, 10%
decline in the focus results in 9% loss in
relative stockholder wealth, 4% discount in
firm value, & 1.2% decline in operating
cash flow by the third postmerger year,
Results have indicated that both the target
and the acquiring company shareholders
earn significant +ve abnormal returns.
From 1898 to 1904 mergers affected stock
returns positively in all industries except
for banks.

(RESEARCH METHODOLOGY)
OBJECTIVES OF STUDY
The main purpose of the study is to identify and to know how merger and acquisition
takes place in telecom sectors and is significance in growth of telecom sectors
domestic as well as for the international telecom industries concern. Objectives of the
study are briefly stated below:

To critically analyze the impact mergers and acquisitions on the operating

performance of the firm in India.

To identify how through mergers and acquisitions in the telecom sector, the
industries look for strategic benefits in the telecom sector and also how they
enhance their customer base.

To know how Mergers and acquisitions help in ensuring efficiency,

profitability and synergy. And also help to form & grow shareholder value.

CHAPTER 4
CHALLENGES & REGULATION OF M & A
Challenges and opportunities in Indian telecom sector
The telecom sector has been one of the fastest growing sectors in the Indian economy
in the past 4 years. This has been witnessed due to strong competition that has brought
down tariffs as well as simplification of policy environment that has promoted healthy
competition among various players.. The mobile sector alone has been growing
rapidly and has emerged as the fastest growing market in the whole worlds. Currently
of a size nearing 70 million (GSM and CDMA), this sector is expected to reach a size
of nearly 200 million subscribers by financial year 2008.
The government has eased the rules regarding inter circle and intra circle mergers.
This has led to a slew of mergers and acquisitions in the recent past. Also as the sector
is moving closer to maturity, further consolidation is a reality and this will lead to the
survival of more profitable players in this segment. In order to further promote the use
of Internet in the country the government is takingproactive steps to develop this
sector with the help of the various players in this segment.For this purpose, the use of
broadband technology is being mooted and this will go a long way in improving the
productivity of the Indian economy as well as turn out to be the next big opportunity
for telecom companies after the mobile communications segment.
Non-voice services and VAS are the gold mines. The big takeoff is expected with the
rollout of 3G services in early 2007, once the spectrum issues are sorted out. Internet
users base fast reaching near the English speaking population base. Local language
and content required for further growth. Infrastructure equipment cost is down to a
fraction of what prevailed just a few years ago.Operators can plan better expansion
plan now. Increased viability for the operators to expand to semi-urban and rural
markets, hence, accelerate growth further
Its not without reason that India is tipped to be the worlds third-larges economy by
2050! No wonder if it happens much earlier Investors can look to capture the gains of
the Indian telecom boom and diversify their operations outside developed economies

that are marked by saturated telecom markets and lower GDP growth rates. At a time
when global telecom majors are struggling to cope with their losses and the rollout of
3G networks, which has been a non-starter for close to a year now; India, with its
telecom success story, represents an attractive and lucrative destination for
investment.

Regulatory Framework
The Telecom Regulatory Authority of India (TRAI) was set up in March 1997 as a
regulator for Telecom sector. The TRAIs functions are recommendatory, regulatory
and tariff setting in telecom sector.
Telecom Disputes Settlement and Appellate Tribunal (TDSAT) came into existence in
May, 2000. TDSAT has been empowered to adjudicate any dispute
between a licensor and a licensee
between two or more service providers
between a service provider and a group of consumers
hear and dispose of appeal against any direction, decision or order of TRAI
Tariffs for telecommunication services have evolved from a regime where tariffs were
determined by Telecom Regulatory Authority of India to a regime where tariffs are
largely under forbearance. TRAI intervenes by regulating the tariffs for only those
services, the markets of which are not competitive.
Universal Service Obligation Fund (USOF) exclusively for meeting the Universal
Service Obligation was established in April, 2002. The Universal Service Levy is
presently 5 per cent of the Adjusted Gross Revenue (AGR) of all telecom service
providers except the pure value added service providers like Internet, Voice Mail, EMail service providers etc. Indian Telegraph Act has been amended in October2006
to provide support for all telegraph services including mobile and broadband to bridge
the digital divide.
With the introduction of the Unified Access Licensing Regime, operators can offer
telecom access services to consumers in a technology neutral manner, subject to
fulfilling certain conditions. Introduction of this regime has also broken the

legal/regulatory impasse between the cellular and basic service providers. Issuance of
Intra-Circle Merger and Acquisition Guidelines provide investors an opportunity to
take stakes in existing telecom operations.

Government Initiatives
The Government has taken the following main initiatives for the growth of the
Telecom Sector:
All telecom services have been opened up for free competition for unprecedented
growth
217 (Information Technology Agreement) ITA-I items are at zero Customs Duty.
Specified capital goods and all inputs required to manufacture ITA-I, items are at zero
Customs Duty
Availability of low cost mobile handsets
In April 2004, license fee for Unified Access Service Providers (UAS) was reduced
by 2 per cent
License fee for infrastructure Provider-II reduced from 15 per cent to 6 per cent of
the Adjusted Gross Revenue and spectrum charges between 2 to 4 per cent in June
2004
Entry fee for NLD licenses was reduced to Rs. 2.5 Crore from Rs. 100 Crore. Entry
fee for ILD reduced to Rs. 2.5 Crore from Rs. 25 Crore
Lease line charges have been reduced to make the bandwidth available at
competitive prices to facilitate growth in IT enabled services
One India plan i.e. single tariff of Re. 1/-per minute to anywhere in India was
introduced from 1st March 2006 by the Public Sector Undertakings. This tariff was
emulated by most of the private service providers also. This scheme has led to death
of distance in telecommunication and is going to be instrumental in promoting
National Integration further
The robust telecom network has also facilitated the expansion of BPO industry that
is having 500,000 employees now and adding 400 employees per day.
Annual license fee for National Long Distance (NLD), International Long Distance
(ILD), Infrastructure Provider-II, VSAT commercial and Internet Service Provider
(ISP) with internet telephony (restricted) licenses was reduced to 6 per cent of
Adjusted Gross Revenue (AGR) with effort from Jan 2006.

 The Governments policy is neutral on use of technology by telecom service

providers subject to availability of scarce resources such as spectrum etc.
Licence Fees 6-10 per cent of Adjusted Gross Revenue (AGR)

Foreign Direct Investment Policy

Foreign Direct Investment (FDI) was permitted in the telecom sector beginning with
the telecom manufacturing segment in 1991 - when India embarked on economic
liberalisation. FDI is defined as investment made by non-residents in the equity
capital of a company. For the telecom sector, FDI includes investment made by NonResident Indians (NRIs), Overseas Corporate Bodies (OCBs), foreign entities,
Foreign Institutional Investors (FIIs), American Depository Receipts (ADRs)/Global
Depository Receipts (GDRs) etc.
Present FDI Policy for the Telecom sector
In Basic, Cellular Mobile, National Long Distance, International Long Distance,
Value Added Services and Global Mobile Personal Communications by Satellite, FDI
is limited to 49 per cent (under automatic route) subject to grant of licence from the
Department of Telecommunications and adherence by the companies (who are
investing and the companies in which investment is being made) to the licence
conditions for foreign equity cap and lock-in period for transfer and addition of equity
and other license provisions.
Foreign Direct Investment up to 74 per cent permitted, subject to licensing and
security requirements for the following:
- Internet Service (with gateways)
- Infrastructure Providers (Category II)
- Radio Paging Service
FDI up to 100 per cent permitted in respect to the following telecom services:
- ISPs not providing gateways (Both for satellite and submarine cables)
- Infrastructure Providers providing dark fibre (IP Category I)
- Electronic Mail
- Voice Mail
The above is subject to the following conditions:

- FDI up to 100 per cent is allowed subject to the condition that such companies
would divest 26 per cent of their equity in favour of Indian public within 5 years, if
these companies are listed in other parts of the world.
- The above services would be subject to licensing and security requirements,
wherever required.
- Proposals for FDI beyond 49 per cent shall be considered by Foreign Investment
Promotion Board (FIPB) on a case-to-case basis.
In the manufacturing sector 100 per cent FDI is permitted under the automatic route.
In Basic, Cellular Mobile, paging and Value Added service, and Global Mobile
Personal Communications by Satellite, FDI is permitted up to 49 per cent (under
automatic route) subject to grant of license from Department of Telecommunications
Foreign direct investment up to 74 per cent permitted, subject to licensing and
security requirements for the Internet Service (with gateways), Infrastructure
Providers (category-II), Radio Paging Service
FDI up to 100 per cent permitted in respect of
- ISPs not providing gateways (both for satellite and submarine cables),
- Infrastructure Providers providing dark fibre (IP Category I);
- Electronic Mail; and
- Voice Mail
FDI up to 49 per cent is also permitted in an investment company, set up for making
investment in the telecom companies licensed to operate telecom services. Investment
by these investment companies in a telecom service company is treated as part of
domestic equity and is not set of against the foreign equity cap.
Manufacturing - 100 per cent FDI is permitted under automatic route.
FDI is subject to the following conditions
FDI up to 100 per cent is allowed subject to the conditions that such companies
would divest 26 per cent of their equity in favour of Indian public in 5 years, if these
companies are listed in other parts of the world.
The above services would be subject to licensing and security requirements,
Wherever required.
Proposals for FDI beyond 49 per cent shall be considered by FIPB on case to case
basis

CHAPTER 5
RESEARCH METHODOLOGY
Research refers to a search for knowledge. Research is a scientific search and
systematic search for pertinent information on a specific topic. In fact, research is an
art of scientific investigation. The Advanced Learners Dictionary of Current English
lays down that A Research is a careful investigation or inquiry, especially through
search for new facts in any branch of knowledge. It is a systematized effort to gain
more knowledge.

Significance Of Research
All progress is born of inquiry. Research inculcates scientific and inductive thinking
and it promotes the development of logical habits of thinking and organization.
Research is equally important for social scientists in studying social relationships and
in seeking answers to various social problems.

TYPES OF RESEARCH:
1) Descriptive Vs. Analytical:
Descriptive research comprises surveys and fact-finding enquiries of different types.
The main objective of descriptive research is describing the state of affairs as it
prevails at the time of study. The most distinguishing feature of this method is that the
researcher has no control over the variables here.
2) Applied Vs. Fundamental:
Research can also be applied or fundamental research. An attempt to find a solution to
an immediate problem encountered by a firm, an industry, a business organisation, or
the society is known as applied research. Researchers engaged in such researches
aim at drawing certain conclusions confronting a concrete social or business
problem. On the other hand, fundamental research means gathering knowledge for
knowledges sake is termed pure or basic research.

3) Quantitative Vs. Qualitative:

Quantitative research relates to aspects that can be quantified or can be
expressed in terms of quantity. It involves the measurement of quantity or amount.
Statistical method is adopted for this research such as correlation, regressions, time
series analysis, etc. Whereas, qualitative research is concerned with qualitative
phenomenon, or more specifically, the aspects relating to or involving quality or kind.
Similar projective methods.

4) Conceptual Vs. Empirical:

A research related to some abstract idea or theory is known as conceptual
research. Generally philosophers and thinkers use it for developing new concepts or
for reinterpreting the existing ones. Empirical research relies on observation or
experience with hardly any regard for theory and system. Such research is data based.

PROBLEM STATEMENT
Since 1991, the process of liberalization, privatization and globalization initiated by
the government of India has influenced the functioning and governance of Indian
companies which has forced Indian companies to refocus their strategies. As a sequel
to this, Mergers and acquisitions are becoming a normal phenomenon. M & A are not
new in Indian economy. In the past also companies have used mergers and
acquisitions strategies to grow. Having spread their wings haphazardly during the
days of controlled regime. Indian corporate houses are now refocusing on the lines of
core competence, market share and global competitiveness. This process of refocusing
has been hastened by the arrival of foreign competitors. Thus, leading corporate
houses have undertaken restructuring exercise. M & A is one of the most effective
methods of restructuring and has, therefore, become an integral part of the long-term
business strategy of corporate enterprises.

DATA COLLECTION AND ANALYSIS

Data collection is the most essential aspect of any research because the whole result of
research depends on the data & information. How much primary & secondary data
must be collected, and which is the source; these are many related aspects must be
decided well in advance.
In any research there are two distinct types of data:

Primary data:The primary data was collected through personal observation

like questionnaire, interviews etc.

Secondary data: It means to collect data which is already available or have

been used by someone.

CHAPTER 6
MERGERS AND ACQUISITIONS THEORITICAL CONCEPTS
MERGERS
A merger occurs when two or more companies combines and the resulting firm
maintains the identity of one of the firms. One or more companies may merger with
an existing company or they may merge to form a new company.
Usually the assets and liabilities of the smaller firms are merged into those of larger
firms. Merger may take two forms1.

Merger through absorption

2. Merger through consolidation.

Absorption
Absorption is a combination of two or more companies into an existing company. All
companies except one loose their identify in a merger through absorption.
Consolidation
A consolidation is a combination if two or more combines into 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 assets, liabilities and share of the
acquiring company for cash or exchange of assets.
ACQUISITIONS
A fundamental characteristic of merger is that the acquiring company takes over the
ownership of other companies and combines their operations with its own operations.
An acquisition may be defined as an act of acquiring effective control by one
company over the assets or management of another company without any
combination of companies.

TAKEOVER
A takeover may also be defined as obtaining control over management of a company
by another company.

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 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.

1.2 TYPES OF MERGERS

Mergers can be a distinguished into the following four types:1. Horizontal Merger
2. Vertical Merger
3. Conglomerate Merger
4. Concentric Merger
Horizontal Merger
Horizontal merger is a combination of two or more corporate firms dealing in same
lines of business activity. Horizontal merger is a co centric merger, which involves
combination of two or more business units related to technology, production
process, marketing research, development and management

Vertical Merger

Vertical merger is the joining of two or more firms in different stages of production
or distribution that are usually separate. The vertical Mergers chief gains are
identified as the lower buying cost of material.
Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated business units in
respect of technology, production process or market and management.
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.
1.3ADVANTAGES OF MERGERS AND ACQUISITIONS
1)

Accelerating a company's growth, particularly when its internal growth is

constrained due to paucity of resources.

2)
3)

Resources can be acquired from outside through mergers and acquisitions.

For entering in new products/markets, the company may lack technical skills
and may require special marketing skills and a wide distribution network to
access different segments of markets.

4)

The company can acquire existing company or companies with requisite

infrastructure and skills and grow quickly.

5)

Enhancing profitability because a combination of two or more companies may

result in more than average profitability due to cost reduction and efficient
utilization of resources. This may happen because of:-

1. GROWTH OR DIVERSIFICATION: Companies that desire rapid growth in size or market share or diversification in the
range of their products may find that a merger can be used to fulfill the objective
instead of going through the tome consuming process of internal growth or
diversification. The firm may achieve the same objective in a short period of time by
merging with an existing firm. In addition such a strategy is often less costly than the

alternative of developing the necessary production capability and capacity. If a firm

that wants to expand operations in existing or new product area can find a suitable
going concern. It may avoid many of risks associated with a design; manufacture the
sale of addition or new products..
SYNERGY: Implies a situation where the combined firm is more valuable than the sum of the
individual combining firms. It refers to benefits other than those related to economies
of scale. Operating economies are one form of synergy benefits. But apart from
operating economies, synergy may also arise from enhanced managerial capabilities,
creativity, innovativeness, R&D and market coverage capacity due to the
complementarity of resources and skills and a widened horizon of opportunities
Merger may result in financial synergy and benefits for the firm in many ways:-

i.
ii.

By eliminating financial constraints

By enhancing debt capacity. This is because a merger of two companies
can bring stability of cash flows which in turn reduces the risk of
insolvency and enhances the capacity of the new entity to service a larger
amount of debt

iii.

By lowering the financial costs. This is because due to financial stability,

the merged firm is able to borrow at a lower rate of interest.

Other Motives For Mergers

Merger may be motivated by other factors that should not be classified under
synergism. These are the opportunities for acquiring firm to obtain assets at bargain
price and the desire of shareholders of the acquired firm to increase the liquidity of
their holdings.

1. Purchase Of Assets At Bargain Prices

Mergers may be explained by opportunity to acquire assets, particularly land mineral

rights, plant and equipment, at lower cost than would be incurred if they were
purchased or constructed at the current market prices. If the market price of many
socks have been considerably below the replacement cost of the assets they represent,
expanding firm considering construction plants, developing mines or buying
equipments often have found that the desired assets could be obtained where by
heaper by acquiring a firm that already owned and operated that asset. Risk could be
reduced because the assets were already in place and an organization of people knew
how to operate them and market their products.
2.Increased Managerial Skills or Technology
Occasionally a firm will have good potential that is finds it unable to develop fully
because of deficiencies in certain areas of management or an absence of needed
product or production technology. If the firm cannot hire the management or the
technology it needs, it might combine with a compatible firm that has needed
managerial, personnel or technical expertise. Of course, any merger, regardless of
specific motive for it, should contribute to the maximization of owners wealth.

2. Acquiring New Technology

To stay competitive, companies need to stay on top of technological
developments and their business applications. By buying a smaller company with
unique technologies, a large company can maintain or develop a competitive
edge.
i.

Economy Of Scale: This refers to the fact that the combined company can
often reduce its fixed costs by removing duplicate departments or operations,
lowering the costs of the company relative to the same revenue stream, thus
increasing profit margins.

ii.

Operating Economies: Arise because, a combination of two or more firms

may result in cost reduction due to operating economies. In other words, a
combined firm may avoid or reduce over-lapping functions and consolidate its
management functions such as manufacturing, marketing, R&D and thus
reduce operating costs

iii.

Increased Revenue Or Market Share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power
capturing increased market share) to set prices.

(by

iv.

Cross-Selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up
the bank's customers for brokerage accounts. Or, a manufacturer can acquire
and sell complementary products.

1.4 Procedure For Evaluating the decision or Merger & Acquisitions

The three important steps involved in the analysis of mergers and acquisitions are:-

1. Planning: Acquisition will require the analysis of industry-specific and firmspecific information. The acquiring firm should review its objective of
acquisition in the context of its strengths and weaknesses and corporate goals.
It will need industry data on market growth, nature of competition, ease of
entry, capital and labour intensity, etc.

2. Search And Screening: Search focuses on how and where to look for suitable
candidates for acquisition. Screening process short-lists a few candidates from
many available and obtains detailed information about each of them.

3. Financial Evaluation: A merger is needed to determine the earnings and cash

flows, areas of risk, the maximum price payable to the target company and the
best way to finance the merger. In a competitive market situation, the current
market value is the correct and fair value of the share of the target firm. The
target firm will not accept any offer below the current market value of its share

3. MERGERS AND ACQUISITION IN INDIA

1.The Reliance BP deal

The much talked about Reliance BP deal finally came through in July 2011 after a 5
month wait. Reliance Industries signed a 7.2 billion dollar deal with UK energy giant
BP, with 30 percent stake in 21 oil and gas blocks operated in India. Although the
Indian governments approval on two oil blocks still remains pending, this still makes
it one of the biggest FDI deals to come through in India Inc in 2011-12-31.

2.Essar Exits Vodafone

In March 2011, the Vodafone Group announced that it would buy 33 percent stake in
its Indian joint venture for about 5 billion dollars after the Essar Group sold its
holding and exited Vodafone. Healthcare giant Piramal Group too, bought about 5.5
percent in the Indian arm of Vodafone for about 640 million dollars. This brings
Vodafones current stake to about 75 percent.

3.The Fortis Healthcare Merger

In September 2011, Indias second largest hospital chain, Fortis Healthcare (India)
Ltd, announced that it will merge with Fortis Healthcare International Pte Ltd., the
promoters privately held company. This will make Fortis Asias top healthcare
provider with the approximate total revenue pegged at Rs. 4,800 crore. Fortis India
will buy the entire stake of the Singapore based Fortis International. This company is
currently held by the Delhi-based Singh brothers (Malvinder Singh and Shivinder
Singh).

4.iGate Acquires Majority Stake In Patni Computers

In May 2011, IT firm iGate completed its acquisition of its midsized rival Patni
Computers for an estimated 1.2 billion dollars. For iGate, the main aim of this
acquisition was to increase its revenue, vertical capability and customer base. iGate
now holds an approximate stake of 82.5 percent in Patni computers, now called iGate
Patni.

5.GVK Power Acquires Hancock Coal

In one of the biggest overseas acquisitions initiated by India in September 2011,

Hyderabad-based GVK Power bought out Australias Hancock Coal for about 1.26
billion dollars. The acquisition includes a majority of the coal resources, railway line
and port infrastructure of Hancock Coal, along with the option for long term coal
supply contracts.

6.Essar Energys Stanlow Refinery Deal With Royal Dutch Shell

The Ruias flagship company for its oil business, Essar Energy completed its 350
million dollar acquisition of the UK based Stanlow Refinery of Shell in August 2011.
In addition to a direct access to the UK market, Essar is planning to make optimum
utilization of this deal with its 100 day plan to improve operations at the UK unit.

7.Aditya Birla Group To Acquire Columbian Chemicals

In June 2011, the Aditya Birla Group announced its completion of acquiring US based
Columbian Chemicals, a 100 year old carbon black maker company for an estimated
875 million dollars. This will make the Aditya Birla Group one of the largest carbon
black maker companies in the world, doubling its production capacity instantly.

8.Mahindra & Mahindra Acquires Ssangyong

In March 2011, Mahindra acquired a 70 percent stake in ailing South Korean auto
maker Ssangyong Motor Company Limited (SYMC) at a total of 463 million
dollars. This acquisition will see the Korean companys flagship SUV models, the
Rexton II and the Korando C foray into the Indian market.

9.The Vedanta Cairn acquisition

December 2011 finally saw the completion of the much talked about Vedanta Cairn
deal that was in the pipeline for more than 16 months. Touted to be the biggest deal
for Indian energy sector, Vedanta acquired Cairn India for a neat 8.6 billion dollars.
Although the Home Ministry cleared the deal, it has highlighted areas of concern with
64 legal proceedings against Vedanta.

10.Adani Enterprises Takes Over Abbot Point Coal

In June 2011, Adani acquired the Australian Abbot Point Port for 1.9 billion dollars.
With this deal, the revenues from port operations are expected to almost triple from
110 million Australian dollars to 305 million Australian dollars in 2011. According to
Adani, this was amongst the largest port deals ever made.

4.MERGERS IN INDIAN TELECOM SECTOR

The number of mergers and acquisitions in Telecom Sector has been increasing
significantly.Telecommunications industry is one of the most profitable and rapidly
developing industries inthe world and it is regarded as an indispensable component of
the worldwide utility and services sector.Telecommunication industry deals with
various forms of communication mediums, for example mobile phones, fixed line
phones, as well as Internet and broadband services.
Currently, a slew of mergers and acquisitions in Telecom Sector are going on
throughout the world. The aim behind such mergers is to attain competitive benefits in
the telecommunications industry.The mergers and acquisitions in Telecom Sector are
regarded as horizontal mergers simplybecause of the reason that the entities going for
merger or acquisition are operating in the same industry that is telecommunications
industry. In the majority of the developed and developing countries around the world,
mergers andacquisitions in the telecommunications sector have become a necessity.
This kind of mergersalso assits in creation of jobs.
Both transnational and domestic telecommunications services providers are keen to
try merger and acquisition options because this will help them in many ways. They
can cut down on their expenses, achieve greater market share and accomplish market
control.
Mergers & acquisitions in the telecommunications sector have been showing a
prosperoustrend in the recent past and the economists are advocating that they will
continue to do so. The majority of

telecommunication services providers have

understood that in order to grow globally,strategic alliances and mergers and

acquisitions are the principal devices.
Private sector investment and FDI (Foreign Direct Investment) have also boosted the
growth of mergers and acquisitions in the telecommunications sector.Over the last
few years, a phenomenal growth has been witnessed in the number of mergers
andacquisitions taking place in the telecommunications industry. The reasons behind
thisdevelopment include the following:
Deregulation

 Introduction of sophisticated technologies (Wireless land phone services)

Innovative products and services (Internet, broadband and cable services)
Economic reforms have spurred the growth in the mergers and acquisitions industry
of the telecommunications sector to a satisfactory level.
Mergers and acquisitions in Telecom Sector can also have some negative effects,
which includemonopolization of the telecommunication products and services,
unemployment and others.However, the governments of various countries take
appropriate steps to curb these problems.
In countries like India, mergers and acquisitions have increased to a considerable level
from themid 1990s. In the United States, the mergers and acquisitions in the
telecommunications sector are going on in a full-fledged manner.
The mergers and acquisitions in the telecommunications sector are governed or
supervised by theregulatory authority of the telecommunication industry of a
particular country, for instance theTelecom Regulatory Authority of India or TRAI.
The regulatory authorities always keep a tab onthe telecommunications industry so
that no monopoly is formed.

FOLLOWING ARE THE IMPORTANT MERGERS AND ACQUISITIONS

THAT TOOK PLACE IN THE TELECOMMUNICATIONS SECTOR
The takeover of Mobilink Telecom by Broadcom. This can also be described as a
suitableexample of product extension merger
AT&T Inc. taking over BellSouth
The acquisition of eScription Inc. by Nuance Communications Inc.
The taking over of Hutchison Essar by the Vodafone Group. Now it has
becomeVodafone Essar Limited

China

Communications

Services

Corporation

Ltd.

taking

over

China

InternationalTelecommunication Construction Corporation

The acquisition of Ameritech Corporation by SBC (Southwestern Bell
Corporation)Communications
The merger of GTE (General Telephone and Electronics) with Bell Atlantic
The acquisition of US West by Qwest Communications
The merger of MCI Communications Corporation with WorldCom

BENEFITS PROVIDED BY THE MERGERS AND ACQUISITIONS IN

THETELECOMMUNICATIONS-SECTOR
Following are the benefits provided by the mergers and acquisitions in the
telecommunicationsindustry:
Building of infrastructure in a more convenient way
Licensing options for mergers and acquisitions are often found to be easier
Mergers and acquisitions offer extensive networking advantages
Brand value
Bigger client base
Wide array of products and services

REASONS FOR THE GROWTH OF INDIAN TELECOMMUNICATION

INDUSTRY
In recent times mergers and acquisitions in the Indian telecommunication industry
have beendriven by a few important factors
The inclusion of internet (including broadband) and cable services in the telecom
sector.
New technologies like wireless fixed phone services.

Deregulation

in

the

telecom

sector.

Rules Related To Mergers & Acquisitions In The Indian Telecommunication

Industry
Certain regulatory and statutory norms pertaining to mergers and acquisitions in the
Indiantelecommunications sector are laid down by the Indian government and its
authorized agencies.These include

Mergers

and

acquisitions

require

approval

from

the

Department

Of

Telecommunications(DOT)
Mergers are allowed in the same service area.
Mergers or acquisitions in a service area should not lead to less than 3 operators in
thatarea.
Mergers and acquisitions should not lead to monopoly

Major M&A deals in Indian telecom

sector
Company/Service
Name

Stake
sold

Buyer

Seller

Year

Orange, Mumbai

41%

Hutch, India

8.3%

Hutchison
Group, Hong
Kong
Max India

Hutch Essar, India

5.1%

Hutchison
Group, Hong
Kong

Max
Group,
Delhi
Kotak
Mahindr
a, India
Hinduja

Hutch Essar

3.1%

Essar Group

Command Cellular,
Kolkata

100%

Hutchison
Indian
Group,

Idea Cellular

48.14
%

Aditya
Group

&

Birla

Indicative
Enterprise
value (US$)
1.36 Bln

Per
sub
value
(US$)

1998

Deal
size
(US$)
560 Mn

2006

225 Mn

NA

2006

450 Mn

9 Bln

NA

Max
India

2005

146 Mln

570

Usha
Martin &
Others

2000

138 Mln

Tata
Group

2005

NA

2 Bln

NA

400

Modi Telestra,
Calcutta

100%

Bharti Group,
India

B.K.Modi
and
Telestra

2000

NA

160 Mln

Bharti

9.3%

Private
Investors

Warburg
Pincus

NA

873 Mn

NA

1000

Bharti Airtel

10%

Vodaphone

Bharti
Group

2005

1.5 bln

16 Bln

1000

Aircel, Chennai

79.24
%

RPG
Group

2003

210 Cr

Aircel, TN, Chennai

and NE

74%

Sterling
Group,
Chennai
Maxis,
Malaysia

Sterling
Group

2006

750 Mn

1.07 Bln

496

Spice, (Punjab and

Bangalore)

49%

Telekom
Malaysia,
Malaysia

NA

2006

178 Mn

363 Mln

Reliance CDMA

Qualcomm,
San Diego,
US

Reliance
Infocom
m

2002

10 Bln

BPL Mobile and BPL

Cellular

Promoters

2005

1.15 Bln

NA

RISKS ASSOCIATED WITH MERGER

Here Is My Analysis Of The 10 Risks With Examples :
1. Regulation and Compliance : The regulatory authority in India has delayed
the 3G auction and sets up new guidelines every now and then. It has also
given 3G license for BSNL without giving it to other providers. Airtel and
Vodafone which has launched iPhone 3G phone were left in the dark with 3G
phones without any 3G service.
2. Entry Of 4-5 Players : Licenses were granted to 6 new players. Unitech,
Sistema, etc.. Sitema has started its operations under the name of MTS by
providing 1 million minutes free. New players and offers like these would
seriously dent the expansion plans of established players. All the players
should think out of the box and come up with IDEAS. Next thing would be

consolidation in the industry which is already happening in the telecom tower

business.
3. Capital For Expansion : This is the biggest criteria for smaller players. While
there are no smaller players, as the new players are backed up by some heavyweights, expansion is still tough. This is where sharing infrastructure comes
into picture. Indus Towers is one such example. BSNL has recently announced
about leasing its towers. Initiatives like these will help both the older and
newer players to penetrate into new markets.
4. Attracting & Managing Talent And Intellectual Capital : This is a tough
one. With fierce competition comes the talent poaching. Companies should
have some talent retention measures in place. Airtel has restructured its
business into 9 verticals to retain talent. Not every company can do the same
but, that is one option.
5. Management Of Strategic Partnerships : Providing free SMSs or call rates
at 40 paise per minute are no longer the differentiators. It is the value Added
services which matter. There were bunch of partnerships which happened in
the

last

months.

AskLaila-Airtel

partnership

for

local

search,

AmarChitraKatha Vodafone, IDEA and Bharat Matrimony have tied up for

VAS. BSNL has recently tied up with Hungama portal for music and game
downloads.Strategic partnerships like these should be nurtured and
maintained.
6. Inappropriate Processes & Systems To Support Exponential Business
Growth Experienced Over Past 4-5 Years : This is where investing in IT and
the right tools is crucial. These are the operations that should be outsourcing
so that the telecom companies can focus on their core areas. Indian telecom
companies should outsource aggressively and focus on expanding their
network and services.
7. Forecasting Returns From Technology & Infrastructure Investments
8. Privacy & Security Risks
9. Contain & Reduce Costs
10. Manage Consolidation And Mergers & Acquisition : This would tie back to
point #2 of entry of new players and a possible consolidation in the telecom
business and the tower business.

Few of the risks given for India are different from global risks. For example, E&Y
report has Losing ownership of the client as the number one risk. It does not feature
as a risk for Indian telecom. Reason is India is still in the growth phase and losing a
customer is not yet on the minds of the service providers.

CHAPTER 7
FINDINGS AND ANALYSIS
MERGER /ACQUISITION OF HUTCHISON ESSAR BY VODAFONE
The acquisition of Hutchison Essar by Vodafone at an enterprise value of $19.3 billion
which comes to around $794 per share was one of the biggest cross border deals in the
booming Indian telecom market at that time. Vodafone won the 67% block on sale by
Hutch-Essar leaving behind Reliance Communication and a consortium led by
Hindujas as well. It paid around 10.9 billion dollars for the acquisition.
Profile of Co-parties
Owners: Vodafone: 67% Essar: 33%

Vodafone Profile: Vodafone Group plc is a global telecommunications company

headquartered in Newbury, United Kingdom. It is the world's largest mobile
telecommunications company measured by revenues and the world's second-largest
measured by subscribers, with around 332 million proportionate subscribers as at 30
September 2010. It operates networks in over 30 countries and has partner networks
in over 40 additional countries. It owns 45% of Verizon Wireless, the largest mobile
telecommunications company in the United States measured by subscribers.
Its primary listing is on the London Stock Exchange and it is a constituent of the
FTSE 100 Index. It had a market capitalisation of approximately 92 billion as of
November 2010, making it the third largest company on the London Stock Exchange.
It has a secondary listing on NASDAQ.
Essar Profile: The Essar Group is a multinational conglomerate corporation in the
sectors of Steel, Energy, Power, Communications, Shipping Ports & Logistics as well
as Construction headquartered at Mumbai, India. The Group's annual revenues were
over USD 15 billion in financial year 2008-2009.
Essar began as a construction company in 1969 and diversified into manufacturing,
services and retail. Essar is managed by Shashi Ruia, Chairman Essar Group and
Ravi Ruia, Vice Chairman Essar Group.
Hutch Profile: Hutchison Whampoa Limited of Hong Kong is a Fortune 500
company and one of the largest companies listed on the Hong Kong Stock Exchange.
HWL is an international corporation with a diverse array of holdings which includes
the world's biggest port and telecommunication operations in 14 countries and run
under the 3 brand. Its business also includes retail, property development and
infrastructure. It belongs to the Cheung Kong Group
Vodafone-Essar: - Hutchison International, a non-resident seller and parent company
based in Hong Kong sold its stake in the foreign investment company CGP
Investments Holdings Ltd., registered in the Cayman Islands (which, in turn, held
shares of Hutchison-Essar - Indian operating company, through another Mauritius
entity) to Vodafone, a Dutch nonresident buyer. Vodafone Essar is owned by Vodafone

52%, Essar Group 33%, and other Indian nationals, 15%. On February 11, 2007,
Vodafone agreed to acquire the controlling interest of 67% held by Li Ka Shing
Holdings in Hutch-Essar for US$11.1 billion, pipping Reliance Communications,
Hinduja Group, and Essar Group, which is the owner of the remaining 33%. The
whole company was valued at USD 18.8 billion. The transaction closed on May 8,
2007. The total is Vodafone Essar subscription is 106,347,368 subscribers i.e., 23.94%
of the total 444,295,711 subscribers.
Individual Investors: Individual large stake holders Analjit Singh and Asim Ghosh
sold their stakes to Vodafone in December 2009. Asim Ghosh, the former managing
director of Vodafone Essar, had 4.68 per cent stake in the company held through
investment firm AG Mercantile, and sold a part of it for about Rs 3.3 billion. Analjit
Singh, who had a share of 7.58 per cent through three companies, sold a part of his
stake for over Rs 5 billion. After the sale, the stakes held by Ghosh and Singh in
Vodafone Essar will come down to 2.39 per cent and 3.87 per cent respectively.
Vodafone Hutch Deal Time Line
The time line for the Vodafone and Hutch deal is as follow:
2007/05/29 - Court sends notice to Vodafone and Hutch
2007/05/05 - Vodafone-Hutch deal gets Finance Minister's nod
2007/04/04 - Vodafone-Hutch deal: Decision likely at next FIPB meeting
2007/03/19 - FIPB to take up Vodafone proposal on Tuesday
2007/03/16 - Hutchison offers $415 m to Essar as `sign-on bonus'
2007/03/16 - Vodafone's Hutch deal in order: Kamal Nath
2007/03/15 - Essar, Vodafone reach agreement on jointly managing Hutch
2007/02/18 - What Vodafone will collect from the Hutch call
2007/02/15 - `Roses for Essar, telephony for masses'
2007/02/15 - Vodafone pledges $2-b investments
2007/02/12 - Hutch: Vodafone top bidder with $19-b offer
2007/02/11 - Hindujas to partner Qatar Telecom, Altimo for Hutch
2007/02/10 - Hutch bidding goes to the wire
2007/01/11 - Vodafone offer in a few weeks
2007/01/09 - Vodafone starts due diligence of Hutch
2007/01/06 - Hutchison, Essar differ over right of refusal

2007/01/03 - Essar gets fund pledge worth $24 b for Hutch-Essar buy
2006/12/29 - Reliance Comm in race for Hutch-Essar
2006/12/23 - Vodafone joins race for Hutchison Essar stake
2006/12/21 - Vodafone may join race for Hutch
Taxation Issue In Vodafone Hutch Deal: The Indian Revenue authorities issued
show cause notice to Vodafone arguing that they had failed to discharge withholding
tax obligation with respect to tax on gains made by Hutch on sale of shares to
Vodafone. Vodafone filed a writ petition in the Mumbai High Court challenging the
jurisdiction of the Revenue department. The revenue department issued show-cause to
Vodafone asking for an explanation as to why Vodafone Essar (which was formerly
Hutchison Essar) should not be treated as an agent (representative assessee) of
Hutchison International and asked Vodafone Essar to pay $ 1.7 billion as capital gains
tax.
Indian Income Tax Department View: The whole controversy in the case of
Vodafone is about the taxability of transfer of share capital of the Indian entity.
Generally, the transfer of shares of a non-resident company to another non-resident is
not subject to tax in India. But the revenue department is of the view that this transfer
represents transfer of beneficial interest of the shares of the Indian company and,
hence, it will be subject to tax. The revenue authorities are of the view that as the
valuation for the transfer includes the valuation of the Indian entity also and as
Vodafone has also approached the Foreign Investment Promotion Board (FIPB) for its
approval for the deal, Vodafone has a business connection in India and, therefore, the
transaction is subject to capital gains tax in India.
Vodafone View: On the contrary, Vodafones argument is that there is no sale of
shares of the Indian company and what it had acquired is a company incorporated in
Cayman Islands which, in turn, holds the Indian entity. Hence, the transaction is not
subject to tax in India.
Vodafone argued that the deal was not taxable in India as the funds were paid outside
India for the purchase of shares in an offshore company that the tax liability should be
borne by Hutch; that Vodafone was not liable to withhold tax as the withholding rule

in India applied only to Indian residence that the recent amendment to the IT act of
imposing a retrospective interest penalty for withholding lapses was unconstitutional.
Now the taxmans argument was focused on proving that even though the VodafoneHutch deal was offshore, it was taxable as the underlying asset was in India and so it
pointed out that the capital asset; that is the Hutch-Essar or now Vodafone-Essar joint
venture is situated here and was central to the valuation of the offshore shares; that
through the sale of offshore shares, Hutch had sold Vodafone valuable rights - in that
the Indian asset including tag along rights, management rights and the right to do
business in India and that the offshore transaction had resulted in Vodafone having
operational control over that Indian asset. The Department also argued that the
withholding tax liability always existed and the amendment was just a
clarification.
Key questions before the High Court:
Whether the show cause notice issued by the Revenue authorities was without
Jurisdiction as Vodafone could not be said to be liable under section 201 of the
Income tax Act 1961 for not withholding tax?
Whether the provisions relating withholding tax obligation under section 195 of
the Acts have extra territorial application and a non resident without presence in
India has an obligation to comply with it?
Whether the transaction per se resulted in income chargeable to tax in India?
Vodafones Petition and Arguments: Vodafones argument is that there is no sale of
shares of the Indian company and what it had acquired is a company incorporated in
Cayman Islands which in turn holds the Indian entity. Hence, the transaction is not
subject to tax in India.
The Petitions And Arguments Of Vodafone Are As Under:
It was not in default (under section 201) for not withholding tax as the law applied to
situations where tax had been withheld and not deposited. Hence, to impose an
obligation where no withholding had been made was unconstitutional. Giving a
contextual interpretation, person liable to withhold tax could not include a non
resident having no presence (in India), since such an interpretation would amount to

treating unequals as equal by imposing onerous compliance obligations as applicable

to residents or nonresidents having a presence in India. The transfer was with respect
to ownership of shares in a foreign company and no capital asset in India. Further,
change in controlling interest in Indian companies was only incidental to change in
foreign shareholding.
Vodafone also challenged the constitutional validity of retrospective amendments to
sections 191 and 201 of the Act, motivated to impose an obligation on payer to
withhold tax.
The transfer of the shares of CGP which was a capital asset situated outside India
could not result in any income chargeable to tax in India. A share in a company
represents a bundle of rights and its transfer results in a transfer of all the underlying
rights. However, what were transferred were only a share and not the individual
rights.
When there is no look-through provisions under the Income Tax Act, 1961 ("the
Act"), such a provision cannot be read into the statute and the corporate veil cannot be
lifted unless a tax fraud is perpetrated. The Supreme Court ("SC") in the case of Azadi
Bachao Andolan (2003) 263 ITR 706 has held that there was no tax consequence in
India when the shares of one of the intermediate holding company in Mauritius were
transferred. Similarly, there should not be a tax consequence, even when an upstream
holding company transfers its shares.

ANALYSIS
Analysis Of The Issue
HC ruling in Vodafone Case: The HC held that the series of transactions in question
has a significant nexus' with India. Since the essence of it was change in controlling
interest in HEL, it constituted a source of income in India. It held that the price paid
by Vodafone factored in, as part of the consideration, diverse rights and entitlements
being transferred as part of the composite transaction. Many of these entitlements
were not relatable to the transfer of the CGP share. It held that intrinsic to the
transaction were transfer of other rights and entitlements. Such rights and entitlements
constitute capital assets' as per the provisions of the Act.

The apportionment of consideration paid by Vodafone for a bundle of entitlements

stated above lies within the jurisdiction of the Indian Revenue. The Indian Revenue
Authorities sought to apportion income resulting to HTIL between what has accrued
or arisen or what is deemed to have accrue or arise as a result of a nexus with India
and that which lies outside. Subsequent to the HC ruling, the Revenue has raised a tax
demand of Rs. 112,180 million on Vodafone for failure to withhold taxes. Meanwhile,
the appeal filed by Vodafone before the Supreme Court was heard in November 2010.
Analysis Of Decision
This is a landmark ruling which throws light on principles of taxation of cross-border
transfers. The High Court's observation on the principle of proportionality' that a
portion of the income would be chargeable to tax is asignificant one. The Court has
also observed that the other rights and entitlements, passed on as a part of the deal are
separate assets and can be regarded as capital assets', within the meaning of the Act.
These observations seem to indicate that transactions involving a simpler transfer of
shares of a company outside India, which has companies in its fold in India, would
not be chargeable to tax in India. However, if certain other rights and entitlements in
India are transferred along with the transfer of shares, there would be an incidence of
tax in India.
This decision could certainly embolden the Revenue authorities to investigate
offshore transactions, which have a connection with India or cases where limited
interest exists in India and the demand raised by the Revenue authorities is a clear
indication of things to come.
The Dutch government, on behalf of Vodafone, has approached the Indian
government for settling a three-year-old dispute involving a tax claim of over Rs
11,000 crore. Netherlands has written to India asking it to consider an alternate
dispute resolution that will run parallel to the ongoing court process through what is
termed as a Mutual Agreement Procedure (MAP).
India would examine the request and take a decision in accordance with the
provisions of the India-Netherlands double tax avoidance agreement (DTAA). MAP is

an alternate process of dispute resolution, and is an option available to a taxpayer in

addition to and concurrent with the appellate process. However, under MAP, once the
proceedings are initiated, it is possible to obtain a stay on the tax demand provided
one gives a bank guarantee
This opens up the possibility of a settlement on the lines of what Vodafone clinched in
the UK earlier this year, when it agreed to pay 1.25 billion in taxes to settle a decadelong dispute dating back to 2000 regarding its Luxembourg subsidiary.
Supreme Court Of India Decision
The Supreme Court today ruled in favour of Vodafone in the $2 billion tax case saying
capital gains tax is not applicable to the telecom major. The apex court also said the
Rs 2,500 crore which Vodafone has already paid should be returned to Vodafone with
interest. The decision will be a big boost for cross-border mergers and acquisitions
here. The Income tax departments contention, if upheld, would have rendered
standard transaction structures too risky forcing foreign companies to weigh
potentially new litigation and insurance costs. Nearly five years after the Indian
taxman issued the first notice to Vodafone international on September 2007 for failure
to withhold tax on payments made to Hutchison Telecom, Chief Justice of India SH
Kapadia and Justice KS Radhakrishnan pronounced their judgement. The SC has
ruled that the transaction is not taxable in India, and it has made the following
observations/ comments while pronouncing its ruling:

Presently, there are no look-through provisions in the Indian domestic tax law
to tax the transaction.

There is no extinguishment of property rights in India through the transfer of

shares between two foreign entities of shares in another foreign entity.

Similarly, provisions which treat a person as an agent/representative of a

foreign entity for the purpose of levy and recovery of tax due from such a
foreign entity is not applicable in the absence of a nexus.

There is no conflict between the earlier decisions of the SC in Azadi Bachao

Andolan, and Mc Dowell. The SC in the case of Azadi (263 ITR 706), had
held that an act which is otherwise valid in law cannot be held as sham, merely
on the basis of some underlying motive supposedly resulting in some tax

advantage. The SC in the case of Mc Dowells (154 ITR 148), held that
sanction cannot be accorded to a colourable device.

The duration of the holding structure, timing of exit and continuity of

business, are important factors while evaluating as to whether the transaction
as a whole is a sham. Considering the factual matrix in the present scenario,
the SC held that the transaction is not a sham.

Withholding tax provisions in the Indian domestic tax law cannot apply to off
shore transactions

The Tax Authority has also been directed to refund the entire amount (US$ 0.5
billion) deposited by Vodafone as part payment towards the demand in early
2011 along with interest

Tax policy certainty crucial for national economic interest.

The decision of the SC is expected to be a milestone development in the taxation of

international transactions and on the judicial approach to tax avoidance. This case is,
perhaps, the first in the world where the issue of taxation on indirect transfer of shares
is being litigated before a countrys highest judicial forum. The principles emanating
from this ruling could therefore, have ramifications beyond India. It could also be of
relevance in shaping Indias tax policy on international taxation and tax avoidance in
the future.

CHAPTER 8
CONCLUSIONS
M&As have become very popular over the years especially during the last two
decades owing to rapid changes that have taken place in the business
environment. Business firms now have to face increased competition not
only from firms within the country but also from international business
giants thanks to globalization, liberalization, technological changes, etc. Generally the
objective of M&As is wealth maximization of shareholders by seeking gains in
terms of synergy, e c o n o mi e s o f s c a l e , b e t t e r f i n a n c i a l a n d ma r k e t i n g
a d v a n t a g e s , d i v e r s i f i c a t i o n a n d r e d u c e d earnings volatility, improved
inventory management, increase in domestic market share and also to capture fast
growing international markets abroad. But astonishingly, though the number and
value of M&As are growing rapidly, the results of the studies on the impact

of mergers on the performance from the acquirers' shareholders perspective have

been highly disappointing.
In this paper an attempt has been made to draw the results of only some of
the earlier studies while analyzing the causes of failure

of majority of the

mergers. Making the mergers work successfully i s n o t t h a t e a s y a s h e r e w e

a r e n o t o n l y j u s t p u t t i n g t h e t w o o rga n i z a t i o n s t o g e t h e r b u t a l s o
integrating people of two organizations with different cultures, attitudes and mind
sets.Meticulous pre-merger planning including conducting proper due diligence,
effective communication during the integration, committed and competent
leadership, speed with which t h e i n t e g r a t i o n p l a n i s i n t e g r a t e d a l l t h i s
p a v e f o r t h e s u c c e s s o f M & A s . Wh i l e m a k i n g t h e merger deals, it is
necessary not only to make analysis of the financial aspects of the acquiring
firm but also the cultural and people issues of both the concerns for proper
post-acquisition integration

BIBLOGRAPHY
BOOKS

Chandra, Prasanna, Financial Management,(7e), Tata MC-Graw Hill.

Pandey, I.M, Financial Management, 2006, Vikas Publication, New Delhi.

Bhalla, V. K., Financial Management & Policy, 1999, Anmol Publication, New
Delhi.

Kisore R.M, Advanced Financial Management, Taxmanns Publication.

WEBSITES

http://www.hindubusinessline.com

http://www.economictimes.com

http://www.sebi.gov.in

www.wikipedia.com