Professional Documents
Culture Documents
CERTIFICATE
This is to certify that the project entitled Mergers
&Acquisitions (India) is successfully done by
Siddhi Agarwal . During the Third Year, Fifth Semester of
B.com [Financial Markets] under University Of Mumbai
through the Thakur College of Science & Commerce,
Kandivali (East), Mumbai 400101.
_______________
Co-ordinator
Date: _________
_______________
______________
Project Guide
Principal
Place: ____________
____________________________
External Examiner
DECLARATION
I Siddhi Agarwal from Thakur College of Science & Commerce,
student of T.Y.B.Com (Financial Markets), semester VI,
Examination Seat no:-_________, here by submit my project report
on Mergers & Acquisitions (India).
I also declare that this project which is the partial fulfillment of the
requirement for the degree of T.Y.B.Com (Financial Markets) of
University of Mumbai, is the result of my own efforts with the help
of experts.
Date: __________
Signature : __________
ACKNOWLEDGEMENT
EXECUTIVE SUMMARY
After several years of declining activity, mergers and acquisitions (M&As) are making
a comeback in India . More deals are occurring, and the value of transactions is also on
the rise. Year-end totals for 2000 marked the first upswing in India.-based merger and
acquisition activity since the turn of the century.
Mega-deals (those valued at over $1 billion) have had significant impact, but some
analysts have noted that their popularity may be short-lived. However, firms are
beginning to question the profitability of such transactions, and deal sizes have
diminished for now. Now in India, companies have started engaging their business
profile pertaining to reverse merger as well as merger arbitrage thereby widening the
scope for domestic M&As.
Regardless of size, many firms are not prepared to meet the people management
challenges that M&As often introduce. A study conducted by Accenture, a global
management consulting, technology services and outsourcing company, found that
only 48% of surveyed firms believe their post-merger integration practices are sound.
The same study suggests that performance management systems are not adequately
tied to merger successes; just 37% of respondents reported that executives are
evaluated according to ongoing integration metrics.
Pre-planning can help firms avoid pitfalls that would otherwise doom a deal, whether a
merger is cross-border or domestic. Mergers fail for three primary reasons, according
to a poll by Thomson Financial and the Association for Corporate Growth:
inadequate post-merger integration,
too high a price paid for the acquired business
insufficient communications.
Due diligence is key to ethical and successful planning , but some firms are not doing
all they should. What might be the reason for their failure?
According to the 2003 research document, there has been slightly less than two-thirds
of companies surveyed conducted due diligence in the M&A process.
It's never too early for an organization to develop some expertise in M&As. After all,
based on current trends, the likelihood of a company's becoming involved in a merger
is increasing. By making basic preparations, can help firms update their processes and
procedures and decide if a future M&A would be in their best interest.
OBJECTIVES OF STUDY
To understand the increase in production capacity through acquisition of workforce and facilities
(Operational Synergies)
To know the increase in market share and economies of scale prevalent in the market (Revenue
Synergies/Cost Synergies)
To analyse the extent of reduction of financial risk and potentially lower borrowing costs
(Financial Synergies)
To make a detailed study of Research & Development expertise and programs (Operational
Synergies/Cost Synergies)
INDEX
Sr. No.
Particulars
Pg. No.
I.
Introduction
1-2
II.
History
3-
III.
15-21
IV.
22-23
V.
24-25
VI.
26-27
VII.
Merger Regulations
28
VIII.
Merger Arbitrage
29
IX.
Reverse Merger
30
X.
Merger Agreement
31-33
XI.
34-36
XII.
37-40
Sr. No.
Particulars
Pg. No.
XIII.
Benefits of M&A
41-42
XIV.
43-44
XV.
45-46
XVI.
47-48
XVII.
Due diligence
49-51
XVIII.
52-53
XIX.
Review OF Literature
XX
Conclusion
XXI
Bibliography
54
INTRODUCTION
Indian enterprises were subjected to strict control regime before 1990s. This has led to haphazard
growth of Indian corporate enterprises during that period. The reforms process initiated by the
Government since 1991, has influenced the functioning and governance of Indian enterprises which
has resulted in adoption of different growth and expansion strategies by the corporate enterprises. In
that process, mergers and acquisitions (M&As) have become a common phenomenon. M&As are not
new in the Indian economy. In the past also, companies have used M&As to grow and now, Indian
corporate enterprises are refocusing in the lines of core competence, market share, global
competitiveness and consolidation. This process of refocusing has further been hastened by the
arrival of foreign competitors. In this backdrop, Indian corporate enterprises have undertaken
restructuring exercises primarily through M&As to create a formidable presence and expand in their
core areas of interest.
M&As as a strategy employed by several corporate groups like R.P. Goenka, Vijay Mallya and
Manu Chhabria for growth and expansion of the empire in India in the eighties. Some of the
companies taken over by RPG group included Dunlop, Ceat, Philips Carbon Black, Gramaphone
India. Mallyas United Breweries (UB) group was straddled mostly by M&As. Further, in the post
liberalization period, the giant Hindustan Lever Limited has employed M&A as an important growth
strategy. The Ajay Piramal group has almost entirely been built up by M&As. The south based,
Murugappa group built an empire by employing M&A as a strategy. Some of the companies acquired
by Murugappa group includes, EID Parry, Coromondol Fertilizers, Bharat Pulverising Mills, Sterling
Abrasives, Cut Fast Abrasives etc. Other companies and groups whose growth has been contributed
by M&As include Ranbaxy Laboratories Limited and Sun Pharmaceuticals Industries particularly
during the later half of the 1990s. During this decade, there has been plethora of M&As happening in
every sector of Indian industry. Even, the known and big industrial houses of India, like Reliance
Group, Tata Group and Birla group have engaged in several big deals.
HISTORY
Most histories of M&A begin in the late 19th century U.S. However, mergers coincide historically
with the existence of companies. In 1708, for example, the East India Company merged with an
erstwhile competitor to restore its monopoly over Indian trade. In 1784, the Italian Monte dei Paschi
and Monte Pio banks were united as the Monti Reuniti.[29] In 1821, the Hudson's Bay Company
merged with the rival North West Company.
The Great Merger Movement: 18951905
The Great Merger Movement was a predominantly U.S. business phenomenon that happened from
1895 to 1905. During this time, small firms with little market share consolidated with similar firms to
form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of
these firms disappeared into consolidations, many of which acquired substantial shares of the markets
in which they operated. The vehicle used were so-called trusts. In 1900 the value of firms acquired in
mergers was 20% of GDP. In 1990 the value was only 3% and from 1998 to 2000 it was around 10
11% of GDP. Companies such as DuPont, US Steel, and General Electric that merged during the
Great Merger Movement were able to keep their dominance in their respective sectors through 1929,
and in some cases today, due to growing technological advances of their products, patents, and brand
recognition by their customers. There were also other companies that held the greatest market share
in 1905 but at the same time did not have the competitive advantages of the companies like DuPont
and General Electric. These companies such as International Paper and American Chicle saw their
market share decrease significantly by 1929 as smaller competitors joined forces with each other and
provided much more competition. The companies that merged were mass producers of homogeneous
goods that could exploit the efficiencies of large volume production. In addition, many of these
mergers were capital-intensive. Due to high fixed costs, when demand fell, these newly merged
companies had an incentive to maintain output and reduce prices. However more often than not
mergers were "quick mergers". These "quick mergers" involved mergers of companies with unrelated
technology and different management. As a result, the efficiency gains associated with mergers were
not present. The new and bigger company would actually face higher costs than competitors because
of these technological and managerial differences. Thus, the mergers were not done to see large
efficiency gains, they were in fact done because that was the trend at the time. Companies which had
specific fine products, like fine writing paper, earned their profits on high margin rather than volume
and took no part in Great Merger Movement.
Short-run factors
One of the major short run factors that sparked The Great Merger Movement was the desire to keep
prices high. However, high prices attracted the entry of new firms into the industry.
A major catalyst behind the Great Merger Movement was the Panic of 1893, which led to a major
decline in demand for many homogeneous goods. For producers of homogeneous goods, when
demand falls, these producers have more of an incentive to maintain output and cut prices, in order to
spread out the high fixed costs these producers faced (i.e. lowering cost per unit) and the desire to
exploit efficiencies of maximum volume production. However, during the Panic of 1893, the fall in
demand led to a steep fall in prices.
Another economic model proposed by Naomi R. Lamoreaux for explaining the steep price falls is to
view the involved firms acting as monopolies in their respective markets. As quasi-monopolists,
firms set quantity where marginal cost equals marginal revenue and price where this quantity
intersects demand. When the Panic of 1893 hit, demand fell and along with demand, the firms
marginal revenue fell as well. Given high fixed costs, the new price was below average total cost,
resulting in a loss. However, also being in a high fixed costs industry, these costs can be spread out
through greater production (i.e. Higher quantity produced). To return to the quasi-monopoly model,
in order for a firm to earn profit, firms would steal part of another firms market share by dropping
their price slightly and producing to the point where higher quantity and lower price exceeded their
average total cost. As other firms joined this practice, prices began falling everywhere and a price
war ensued.[30]
One strategy to keep prices high and to maintain profitability was for producers of the same good to
collude with each other and form associations, also known as cartels. These cartels were thus able to
raise prices right away, sometimes more than doubling prices. However, these prices set by cartels
only provided a short-term solution because cartel members would cheat on each other by setting a
lower price than the price set by the cartel. Also, the high price set by the cartel would encourage new
firms to enter the industry and offer competitive pricing, causing prices to fall once again. As a result,
these cartels did not succeed in maintaining high prices for a period of more than a few years. The
most viable solution to this problem was for firms to merge, through horizontal integration, with
other top firms in the market in order to control a large market share and thus successfully set a
higher price.[citation needed]
Long-run factors[edit]
In the long run, due to desire to keep costs low, it was advantageous for firms to merge and reduce
their transportation costs thus producing and transporting from one location rather than various sites
of different companies as in the past. Low transport costs, coupled with economies of scale also
increased firm size by two- to fourfold during the second half of the nineteenth century. In addition,
technological changes prior to the merger movement within companies increased the efficient size of
plants with capital intensive assembly lines allowing for economies of scale. Thus improved
technology and transportation were forerunners to the Great Merger Movement. In part due to
competitors as mentioned above, and in part due to the government, however, many of these initially
successful mergers were eventually dismantled. The U.S. government passed the Sherman Act in
1890, setting rules against price fixing and monopolies. Starting in the 1890s with such cases as
Addyston Pipe and Steel Company v. United States, the courts attacked large companies for
strategizing with others or within their own companies to maximize profits. Price fixing with
competitors created a greater incentive for companies to unite and merge under one name so that they
were not competitors anymore and technically not price fixing.
The economic history has been divided into Merger Waves based on the merger activities in the
business world as:
Period
18971904
19161929
19651969
Name
First Wave
Second Wave
Third Wave
19811989
Fourth Wave
19922000
20032008
Fifth Wave
Sixth Wave
Facet
Horizontal mergers
Vertical mergers
Diversified conglomerate mergers
Congeneric mergers; Hostile takeovers;
Corporate Raiding
Cross-border mergers
Shareholder Activism, Private Equity, LBO
STRUCTURE:
Legally speaking, a merger requires two companies to consolidate into a new entity with a new
ownership and management structure (ostensibly with members of each firm).
An acquisition takes place when one company takes over all of the operational management decisions
of another.
The more common interpretive distinction is whether the purchase is friendly (merger) or hostile
(acquisition).
FORMATION:
In practice, friendly mergers of equals do not take place very frequently.
It's uncommon that two companies would benefit from combining forces and two different CEOs
agree to give up some authority to realize those benefits.
When this does happen, the stocks of both companies are surrendered and new stocks are issued under
the name of the new business identity.
PRICE DETERMINATION:
Merger involves high legal cost and therefore is more expensive than aquistion.
Aquistion involves least or no legal cost and therefore is less expensive than mergers.
TIME FACTOR:
It is time consuming and the company has to maintain so much legal issues.
It is faster and easier transaction.
Since mergers are so uncommon and takeovers are viewed in a negative light, the two terms have
become increasingly conflated and used in conjunction with one another. Contemporary corporate
restructurings are usually referred to as merger and acquisition (M&A) transactions rather than simply
a merger or acquisition. The practical differences between the two terms are slowly being eroded by
the new definition of M&A deals.
TYPES OF MERGERS
VERTICAL
MERGER
HORIZONTAL
MERGER
TYPES
OF
MERGERS
CONCENTRIC
MERGER
CONGLOMERATE
MERGER
Horizontal Mergers
Horizontal mergers happen when a company merges or takes over another company that offers the
same or similar product lines and services to the final consumers, which means that it is in the same
industry and at the same stage of production. Companies, in this case, are usually direct competitors.
For example, if a company producing cell phones merges with another company in the industry that
produces cell phones, this would be termed as horizontal merger. The benefit of this kind of merger is
that it eliminates competition, which helps the company to increase its market share, revenues and
profits. Moreover, it also offers economies of scale due to increase in size as average cost decline due
to higher production volume. These kinds of merger also encourage cost efficiency, since redundant
and wasteful activities are removed from the operations i.e. various administrative departments or
departments suchs as advertising, purchasing and marketing.
Vertical Mergers
A vertical merger is done with an aim to combine two companies that are in the same value chain of
producing the same good and service, but the only difference is the stage of production at which they
are operating. For example, if a clothing store takes over a textile factory, this would be termed as
vertical merger, since the industry is same, i.e. clothing, but the stage of production is different: one
firm is works in territory sector, while the other works in secondary sector. These kinds of merger are
usually undertaken to secure supply of essential goods, and avoid disruption in supply, since in the
case of our example, the clothing store would be rest assured that clothes will be provided by the
textile factory. It is also done to restrict supply to competitors, hence a greater market share, revenues
and profits. Vertical mergers also offer cost saving and a higher margin of profit, since
manufacturers share is eliminated.
Concentric Mergers
Concentric mergers take place between firms that serve the same customers in a particular industry,
but they dont offer the same products and services. Their products may be complements, product
which go together, but technically not the same products. For example, if a company that produces
DVDs mergers with a company that produces DVD players, this would be termed as concentric
merger, since DVD players and DVDs are complements products, which are usually purchased
together. These are usually undertaken to facilitate consumers, since it would be easier to sell these
products together. Also, this would help the company diversify, hence higher profits. Selling one of
the products will also encourage the sale of the other, hence more revenues for the company if it
manages to increase the sale of one of its product. This would enable business to offer one-stop
shopping, and therefore, convenience for consumers. The two companies in this case are associated
in some way or the other. Usually they have the production process, business markets or the basic
technology in common. It also includes extension of certain product lines. These kinds of mergers
offer opportunities for businesses to venture into other areas of the industry reduce risk and provide
access to resources and markets unavailable previously.
Conglomerate Merger
When two companies that operates in completely different industry, regardless of the stage of
production, a merger between both companies is known as conglomerate merger. This is usually
done to diversify into other industries, which helps reduce risks.
TYPES OF AQUISITIONS
STOCK
AQUISTION
TYPES
OF
AQUISITIONS
ASSET
AQUISITION
Asset acquisitions
In an asset sale, individually identified assets and liabilities of the seller are sold to the acquirer. The
acquirer can choose ("cherry pick") which specific assets and liabilities it wants to purchase, avoiding
unwanted assets and liabilities for which it does not want to assume responsibility. The asset
purchase agreement between the buyer and seller will list or describe and assign values to each asset
(or liability) to be acquired, including every asset from office supplies to goodwill. Determining the
fair value of each
asset (or liability) acquired can be mechanically complex and expensive; tedious valuations are costly
and title transfer taxes must be paid on each asset transferred. Also, some assets, such as government
contracts, may be difficult to transfer without the consent of business partners or regulators.
If the assets to be acquired are not held in a separate legal entity, they must be purchased in an asset
sale, rather than a stock sale, unless they can be organized into a separate legal entity prior to sale.
Subsidiaries of consolidated companies are often organized as separate legal entities, whereas
operating divisions are usually not.
A major tax advantage to the acquirer of structuring a transaction as a taxable asset purchase is that
the acquirer receives stepped-up tax basis in the target's net assets (assets minus liabilities). This
means that the acquired net assets are written up (or down) from their carrying values on the seller's
tax balance sheet to fair value (FV) on the acquirer's tax balance sheet. The higher resulting tax basis
in the acquired net assets will minimize taxes on any gain on the future sale of those assets. Under
U.S. tax law, goodwill and other intangibles acquired in a taxable asset purchase are required by the
IRS to be amortized over 15 years, and this amortization is tax-deductible. Recall that goodwill is
never amortized for accounting purposes but instead tested for impairment.
Stepped-Up Basis
Buyer assumes a FV tax basis in the acquired net assets equal to the purchase price.
In a taxable asset sale, the seller pays tax on any gain on the sale of its assets. Of course, the seller
won't agree to bear the tax burden of an asset sale while the acquirer enjoys the benefit of a tax stepup without some incentives. To induce the seller to agree to an asset purchase, the buyer will often
pay a higher purchase price (relative to a stock acquisition) to the seller as compensation for the
seller's tax liability.
Stock Acquisitions
In a stock purchase, all of the assets and liabilities of the seller are sold upon transfer of the seller's
stock to the acquirer. As such, no tedious valuation of the seller's individual assets and liabilities is
required and the transaction is mechanically simple. The acquirer does not receive a stepped-up tax
basis in the acquired net assets but, rather, a carryover basis. Any goodwill created in a stock
acquisition is not tax-deductible.
Carryover Basis
Buyer assumes the seller's existing tax basis in the acquired net assets.
However, if an Internal Revenue Code (IRC) Section 338 election is made by the acquirer (or jointly
by the acquirer and seller), the stock sale is treated as an asset sale for tax purposes. A Section 338
election entitles the buyer to the coveted stepped-up tax basis and tax-deductible goodwill, but also
triggers a taxable gain on the hypothetical asset sale. We will discuss Section 338 elections more in
another lesson.
Although the buyer acquires all assets and liabilities in a stock purchase, it may contractually allocate
unwanted liabilities to the seller by selling them back to the seller.
In the stock acquisition of a corporate subsidiary without a Section 338 election, the selling parent
company may use the tax attributes (e.g. NOLs) of its other subsidiaries to offset its gain on the sale
of target stock. However, the parent cannot use the tax attributes of the target subsidiary because they
are lost to the buyer in the transaction and subject to limitation under Section 382.
effort for these hardware companies. If HP, for example, applied the same principles and processes
that it used in integrating Compaq, it would greatly complicate the EDS acquisition.
create an effective decision timeline, see "Making it happen: The Decision Drumbeat in practice," on
page 7.)
mostly about taking out costs, for instance, don't focus on a "Best of Both Organ-izations" in your
first town-hall speech. In general, it's wise to concentrate on what the deal will mean in the future for
your people, not on the synergies it will produce for the organization. "Synergies," after all, usually
means reducing payroll, among other things-and people know that.
MERGER REGULATIONS
The basic regulations covering mergers exist in section 391 of the Companies Act, 1956, which
enables a company to compromise or make arrangement with creditors and members. This can be
done in the following ways:
(a) Between a company and its creditors or any class of them; or
(b) Between a company and its members or any class of them.
Procedural formalities
The process effecting a merger is quite complex and elaborate in nature which can be summed up as
follows:
Preparation of draft scheme of merger.
Approval of the same by the board of directors of the companies intending to merge.
Application to the concerned High Court to convene general meetings of the respective companies
for obtaining approvals of the shareholders to the proposed scheme of merger.
Obtaining approval of the High Court for convening such meeting including fixation of time, place,
quorum and appointment of Chairman.
Giving Notice of the petition to the Central Government.
Holding the general body meetings and obtaining approvals of the shareholders.
Submission of the particulars of the general body meetings to the High Court where the following
resolutions need to be passed:
Resolution approving the scheme of mergers to be passed by three fourths majority in value of
shareholders and authorizing the directors to implement the scheme.
Resolution for increasing the authorized capital of the company, if necessary.
Submitting petition to the High Court by the respective companies for obtaining the Court's final
order which may be given on the basis of the report of the Official Liquidator.
Filing the certified true copy of the court's order with the concerned Registrar of Companies.
Annexing a copy of the order of the High Court to every copy of the memorandum of association
after filing the certified copy of the order as aforesaid, and
Allotment of shares or other instruments as per the approved scheme of merger.
MERGER ARBITRAGE
Merger
arbitrage
is
an
investment
strategy
that
simultaneously
buys
and
sells
the
stocks
of
two
merging
companies.
Before
we
explain
that,
lets
review
the
concept
of
arbitrage.
Arbitrage,
at
its
most
simplest,
involves
buying
securities
on
one
market
for
immediate
resale
on
another
market
in
order
to
profit
from
a
price
discrepancy.
But
in
the
hedge
fund
world,
arbitrage
more
commonly
refers
to
the
simultaneous
purchase
and
sale
of
two
similar
securities
whose
prices,
in
the
opinion
of
the
trader,
are
not
in
sync
with
what
the
trader
believes
to
be
their
true
value.
Acting
on
the
assumption
that
prices
will
revert
to
true
value
over
time,
the
trader
will
sell
short
the
overpriced
security
and
buy
the
underpriced
security.
Once
prices
revert
to
true
value,
the
trade
can
be
liquidated
at
a
profit.
(Remember,
short
selling
is
simply
borrowing
a
security
you
dont
own,
selling
it,
then
hoping
it
declines
in
value,
at
which
time
you
can
buy
it
back
at
a
lower
price
than
you
paid
for
it
and
return
the
borrowed
securities.)
Arbitrage
can
also
be
used
to
buy
and
sell
two
stocks,
two
commodities
and
many
other
securities.
Merger
arbitrage
is
a
type
of
Event-Driven
investing,
which
is
an
investing
strategy
that
seeks
to
exploit
pricing
inefficiencies
that
may
occur
before
or
after
a
corporate
event,
such
as
a
bankruptcy,
merger,
acquisition
or
spinoff.
To
illustrate,
consider
what
happens
in
the
case
of
a
potential
merger.
When
a
company
signals
its
intent
to
buy
another
company,
the
stock
price
of
the
target
company
typically
rises,
and
the
stock
price
of
the
acquiring
company
typically
declines.
However,
the
stock
price
of
the
target
company
usually
remains
somewhere
below
the
acquisition
pricea
discount
that
reflects
the
markets
uncertainty
about
whether
the
merger
will
truly
occur.
Thats
where
merger
arbitrageurs
enter
the
picture.
To
understand
how
merger
arbitrage
is
profitable,
it
is
important
to
understand
that
corporate
mergers
are
typically
divided
in
two
categories:
cash
mergers
and
stock-for-stock
mergers.
With
cash
mergers,
an
acquiring
company
purchases
the
shares
of
the
target
company
for
cash.
Until
the
acquisition
is
complete,
the
stock
of
the
target
company
typically
trades
below
the
acquisition
price.
So,
one
can
buy
the
stock
of
the
target
company
before
the
acquisition,
and
then
make
a
profit
if
and
when
the
acquisition
goes
through.
This
is
not
arbitrage,
however;
this
is
a
speculation
on
an
event
occurring.
With
a
stock-for-stock
merger,
an
acquiring
company
exchanges
its
own
stock
for
the
stock
of
the
target
company.
During
a
stock-for-stock
merger,
a
merger
arbitrageur
buys
the
stock
of
the
target
company
while
shorting
the
stock
of
the
acquiring
company.
So,
when
the
merger
is
complete,
and
the
target
companys
stock
is
converted
into
the
acquiring
companys
stock,
the
merger
arbitrageur
simply
uses
the
converted
stock
to
cover
his
or
her
short
position.
While
that
sounds
simple,
there
are
a
number
of
risks
involved.
For
example,
the
merger
may
not
go
through
due
to
a
number
of
reasons.
One
of
the
companies
may
not
be
able
to
satisfy
the
conditions
of
the
merger.
Shareholder
approval
may
not
be
obtained.
Or,
regulatory
issues
(such
as
antitrust
laws)
may
prevent
the
merger.
Additional
complications
arise
with
stock-for-stock
mergers
when
the
exchange
ratiothe
ratio
at
which
the
target
companys
stock
is
exchanged
for
the
acquiring
companys
stockfluctuates
with
the
stock
price
of
the
acquiring
company.
This
makes
evaluating
a
merger
arbitrage
opportunity
complex,
and
requires
significant
expertise
on
the
part
of
the
merger
arbitrageur.
Because
of
these
risks,
merger
arbitrageurs
must
have
the
knowledge
and
skill
to
accurately
assess
a
number
of
factors.
A
merger
arbitrageur
will
analyze
the
potential
mergerlooking
at
the
reason
for
the
merger,
the
terms
of
the
merger,
and
any
regulatory
issues
that
may
hinder
the
mergerand
determine
the
likelihood
of
the
merger
actually
occurring
and
how.
Because
this
requires
expertise,
large
institutional
investorssuch
as
hedge
funds,
private
equity
firms
and
investment
banksare
the
major
user
of
merger
arbitrage.
In
summary,
then,
while
merger
arbitrage
may
sound
like
a
good
investment
strategy,
and
often
is,
it
is
best
used
by
sophisticated
investors
who
have
the
expertise
to
evaluate
the
merger
and
are
willing
to
accept
the
risk
of
it
not
going
through.
REVERSE
MERGER
A
reverse
merger
(also
known
as
reverse
merger
or
reverse
IPO)
is
a
way
for
private
companies
to
go
public,
typically
through
a
simpler,
shorter,
and
less
expensive
process.
A
conventional
initial
public
offering
(IPO)
is
more
complicated
and
expensive,
as
private
companies
hire
an
investment
bank
to
underwrite
and
issue
shares
of
the
soon-to-be
public
company.
Aside
from
filing
the
regulatory
paperwork
-
and
helping
authorities
review
the
deal
-
the
bank
also
helps
to
establish
interest
in
the
stock
and
provide
advice
on
appropriate
initial
pricing.
The
traditional
IPO
necessarily
combines
the
go-public
process
with
the
capital
raising
function.
We
will
go
over
how
a
reverse
merger
separates
these
two
functions,
making
it
an
attractive
strategic
option
for
managers
and
investors
of
private
companies.
(For
more
information,
check
out,
why
should
a
company
do
a
reverse
merger
than
an
IPO?)
What
is
a
reverse
merger?
In
a
reverse
merger,
investors
of
the
private
company
acquire
a
majority
of
the
shares
of
the
public
shell
company,
which
is
then
merged
with
the
purchasing
entity.
Investment
banks
and
financial
institutions
typically
use
shell
companies
as
vehicles
to
complete
these
deals.
These
relatively
simple
shell
companies
can
be
registered
with
the
SEC
on
the
front
end
(prior
to
the
deal),
making
the
registration
process
relatively
straightforward
and
less
expensive.
To
consummate
the
deal,
the
private
company
trades
shares
with
the
public
shell
in
exchange
for
the
shell's
stock,
transforming
the
acquirer
into
a
public
company.
Reverse
mergers
allow
a
private
company
to
become
public
without
raising
capital,
which
considerably
simplifies
the
process.
While
conventional
IPOs
can
take
months
(even
over
a
calendar
year)
to
materialize,
reverse
mergers
can
take
only
a
few
weeks
to
complete
(in
some
cases,
in
as
little
as
30
days).
This
saves
management
a
lot
of
time
and
energy,
ensuring
that
there
is
sufficient
time
devoted
to
running
the
company.
Undergoing
the
conventional
IPO
process
does
not
guarantee
that
the
company
will
ultimately
finish
the
process.
Managers
can
spend
hundreds
of
hours
planning
for
a
traditional
IPO,
however,
if
market
conditions
become
unfavorable
to
the
proposed
offering,
all
of
those
hours
will
have
become
a
wasted
effort.
Pursuing
a
reverse
merger
minimizes
this
risk.
As
mentioned
earlier,
the
traditional
IPO
combines
both
the
go-public
and
capital
raising
functions.
As
the
reverse
merger
is
solely
a
mechanism
to
convert
a
private
company
into
a
public
entity,
the
process
is
less
dependent
on
market
conditions
(because
the
company
is
not
proposing
to
raise
capital).
Since
a
reverse
merger
functions
solely
as
a
conversion
mechanism,
market
conditions
have
little
bearing
on
the
offering.
Rather,
the
process
is
undertaken
in
order
to
attempt
to
realize
the
benefits
of
being
a
public
entity.
Benefits
as
a
Public
Company
Private
companies,
generally
with
$100
million
to
several
hundred
million
in
revenue,
are
usually
attracted
to
the
prospect
of
being
a
publicly-
traded
company.
The
company's
securities
become
traded
on
an
exchange,
and
thus
enjoy
greater
liquidity.
The
original
investors
gain
the
option
of
liquidating
their
investment,
providing
for
convenient
exit
alternatives.
The
company
has
greater
access
to
the
capital
markets,
as
management
now
has
the
option
of
issuing
additional
stock
through
secondary
offerings.
If
stockholders
possess
warrants
where
they
have
the
right
to
purchase
additional
stock
at
a
pre-determined
price
the
exercise
of
these
options
provides
additional
capital
infusion
into
the
company.
Public
companies
often
trade
at
higher
multiples
than
do
private
companies;
significantly
increased
liquidity
means
that
both
the
general
public
and
investing
institutions
(and
large
operational
companies)
have
access
to
the
company's
stock,
which
can
drive
up
price.
Management
also
has
more
strategic
options
to
pursue
growth,
including
mergers
and
acquisitions.
As
stewards
of
the
acquiring
company,
they
can
use
company
stock
as
the
currency
with
which
to
acquire
target
companies.
Finally,
because
public
shares
are
more
liquid,
management
can
use
stock
incentive
plans
in
order
to
attract
and
retain
employees.
Managers
must
conduct
appropriate
diligence
regarding
the
profile
of
the
investors
of
the
public
shell
company.
The
following
are
certain
questions
which
have
remained
unsolved:
What
are
their
motivations
for
the
merger?
Have
they
done
their
homework
to
make
sure
the
shell
is
clean
and
not
tainted?
Are
there
pending
liabilities
(such
as
those
stemming
from
litigation)
or
other
"deal
warts"
hounding
the
public
shell?
If
so,
shareholders
of
the
public
shell
may
merely
be
looking
for
a
new
owner
to
take
possession
of
these
deal
warts.
Therefore,
following
measures
should
be
undertaken:
Appropriate
due
diligence
should
be
conducted,
and
transparent
disclosure
should
be
expected
(from
both
parties).If
the
public
shell's
investors
sell
significant
portions
of
their
holdings
right
after
the
transaction,
this
can
materially
and
negatively
affect
the
stock
price.
To
reduce
or
eliminate
the
risk
that
the
stock
will
be
dumped,
important
clauses
can
be
incorporated
into
a
merger
agreement
such
as
required
holding
periods.
It
is
important
to
note
that,
as
in
all
merger
deals,
the
risk
goes
both
ways.
Investors
of
the
public
shell
should
also
conduct
reasonable
diligence
on
the
private
company,
including
its
management,
investors,
operations,
financials
and
possible
pending
liabilities
(i.e.,
litigation,
environmental
problems,
safety
hazards,
labor
issues).
After
a
private
company
executes
a
reverse
merger,
will
its
investors
really
obtain
sufficient
liquidity?
Smaller
companies
may
not
be
ready
to
be
a
public
company,
including
lack
of
operational
and
financial
scale.
Thus,
they
may
not
attract
analyst
coverage
from
Wall
Street;
after
the
reverse
merger
is
consummated,
the
original
investors
may
find
out
that
there
is
no
demand
for
their
shares.
Reverse
mergers
do
not
replace
sound
fundamentals.
For
a
company's
shares
to
be
attractive
to
prospective
investors,
the
company
itself
should
be
attractive
operationally
and
financially.
A
potentially
significant
setback
when
a
private
company
goes
public
is
that
managers
are
often
inexperienced
in
the
additional
regulatory
and
compliance
requirements
of
being
a
publicly-
traded
company.
These
burdens
(and
costs
in
terms
of
time
and
money)
can
prove
significant,
and
the
initial
effort
to
comply
with
additional
regulations
can
result
in
a
stagnant
and
underperforming
company
if
managers
devote
much
more
time
to
administrative
concerns
than
to
running
the
business.
To
alleviate
this
risk,
managers
of
the
private
company
can
partner
with
investors
of
the
public
shell
who
have
experience
in
being
officers
and
directors
of
a
public
company.
The
CEO
can
additionally
hire
employees
(and
outside
consultants)
with
relevant
compliance
experience.
Managers
should
ensure
that
the
company
has
the
administrative
infrastructure,
resources,
road
map
and
cultural
discipline
to
meet
these
new
requirements
after
a
reverse
merger.
Conclusion
A
reverse
merger
is
an
attractive
strategic
option
for
managers
of
private
companies
to
gain
public
company
status.
It
is
a
less
time-consuming
and
less
costly
alternative
than
the
conventional
IPO.
As
a
public
company,
management
can
enjoy
greater
flexibility
in
terms
of
financing
alternatives,
and
the
company's
investors
can
also
enjoy
greater
liquidity.
Managers,
however,
should
be
cognizant
of
the
additional
compliance
burdens
faced
by
public
companies,
and
ensure
that
sufficient
time
and
energy
continues
to
be
devoted
to
running
and
growing
the
business.
It
is
after
all
a
strong
company,
with
robust
prospects,
that
will
attract
sufficient
analyst
coverage
as
well
as
prospective
investor
interest.
Attracting
these
elements
can
increase
the
value
of
the
stock
and
its
liquidity
for
shareholders.
AGREEMENT
Domestic
OF
MERGER
Corporation
BETWEEN
AND
This Plan and Agreement of Merger made and entered into on the ___________ day of
________________,
20______,
by
and
between____________________________
________________________________________________, a Delaware Corporation, and
________________________________________________,
a
______________________
Corporation.
WITNESSETH:
WHEREAS, the Delaware Corporation is a Corporation organized and existing under the laws of
the State of Delaware, its Certificate of Incorporation having been filed in the Office of the
Secretary of State of the State of Delaware on _____________________, ________; and
WHEREAS, __________________________________________ is a corporation organized and
existing under the laws of the State of __________________________; and WHEREAS, the
aggregate number of shares which the ________________
Corporation
has
authority
to
issue
is
___________________;
WHEREAS, the Board of Directors of each of the constituent corporations deems
and
shall cease except to the extent provided by the laws of the State of __________________ in the
case of a corporation after its merger into another corporation.
ARTICLE III
The Certificate of Incorporation of ____________________________ shall not be amended in any
respect by reason of this Agreement of Merger.
ARTICLE IV
The manner of converting the outstanding shares of each of the Constituent Corporations shall be as
follows:
ARTICLE V
The surviving corporation agrees that it may be served with process in the State of Delaware in any
proceeding for enforcement of any obligation of any constituent corporation of Delaware, as well as
for enforcement of any obligation of the surviving corporation arising from this merger, including
any suit or other proceeding to enforce the rights of any stockholders as determined in appraisal
proceedings pursuant to the provisions of Section 262 of the Delaware General Corporation laws,
and irrevocably appoints the Secretary of State of Delaware as its agent to accept service of process
in any such suit or proceeding. The Secretary of State shall mail any such process to the surviving
corporation at ___________________________________________________.
IN WITNESS WHEREOF, the _______________________ Corporation and the Delaware
Corporation, pursuant to the approval and authority duly given by resolutions adopted by their
respective Boards of Directors have caused this Plan and Agreement of Merger to be executed by an
authorized officer of each party thereto.
____________________________________ (A Delaware Corporation)
BY:____________________________________
Authorized
Name:____________________________________ Print or Type
Officer/Title
Officer/Title
I,
________________________________________________________,
Secretary
of
___________________________________, a corporation organized and existing under the laws of
the State of Delaware, hereby certify, as such Secretary of the said corporation, that the Agreement
of Merger to which this certificate is attached, after having been first duly signed on behalf of said
corporation
by
an
authorized
officer
of
_________________________________________________________________________
__________________________________________________, a corporation of the State of
Delaware, was duly submitted to the stockholders of said ________________________
______________________________________________________________, at a special meeting
of said stockholders called and held separately from the meeting of stockholders of any other
corporation, upon waiver of notice, signed by all the stockholders, for the purpose of considering
and taking action upon said Agreement of Merger, that _____________________ shares of stock of
said corporation were on said date issued and outstanding and that the holder of
__________________ shares voted by ballot in favor of said Agreement of Merger and the holders
of ______________________ shares voted by ballot against same, the said affirmative vote
representing at least a majority of the total number of shares of the outstanding capital stock of said
corporation, and that thereby the Agreement of Merger was at said meeting duly adopted as the act
of the stockholders of said
CAPEX
NWC,
where
NOPAT is equal to EBIT (1-t) where t is the appropriate marginal (not average) cash tax rate, which
should be inclusive of federal, state and local, and foreign jurisdictional taxes.
Depreciation is non-cash operating charges including depreciation, depletion, and amortization
recognized for tax purposes.
CAPEX is capital expenditures for fixed assets.
NWC is the increase in net working capital defined as current assets less the non-interest bearing
current liabilities.
The cash-flow forecast should be grounded in a thorough industry and company forecast. Care should
be taken to ensure that the forecast reflects consistency with firm strategy as well as with
macroeconomic and industry trends and competitive pressure.
The forecast period is normally the years during which the analyst estimates free cash flows that are
consistent with creating value. A convenient way to think about value creation is whenever the return
on net assets (RONA) the weighted average cost of capital (RONA can be divided into an income
statement component and a balance sheet component:
One challenging part of the analysis is to generate a free cash flow for the year after the forecast
period that reflects a sustainable or steady state cash flow. A convenient approach is for the analyst
to assume that RONA remains constant; i.e., both profit margin and asset turnover remain constant in
perpetuity. Under this assumption, the analyst applies g, the long-term, sustainable growth rate to all
financial statement line items: sales, NOPAT, depreciation, net working capital, additions to property
plant and equipment, etc.
Discount rate
The discount rate should reflect the weighed average of investors opportunity cost (WACC) on
comparable investments. The WACC matches the business risk, expected inflation, and currency of
the cash flows to be discounted. In order to avoid penalizing the investment opportunity, the WACC
also must incorporate the appropriate target weights of financing going forward. Recall that the
appropriate rate is a blend of the required rates of return on debt and equity, weighted by the
proportion these capital sources make up of the firms market value.
WACC = Wd .kd(1-t) + We.ke where:
The costs of debt and equity should be going-forward market rates of return. For debt securities, this
is often the yield to maturity that would be demanded on new instruments of the same credit rating
and maturity. The cost o0f equity can be obtained from the Capital Asset Pricing Model (CAPM).
1.
ke = Rf + B(Rm-Rf) where:
Rf is the expected return on risk-free securities over a time horizon consistent with the investment
horizon. Most firm valuations are best served by using a long maturity government bond yield.
Generally use the 10-year government bond rate.
Rm-Rf is the expected market risk premium. This value is commonly estimated as the average
historical difference between the returns on common stocks and long-term government bonds. For
example, Ibbotson Associates estimates the geometric mean return between 1926 and 2003 for large
capitalization U.S. equities between 1926 and 2003 was 10.4%. The geometric mean return on longterm government bonds was 5.4%. The difference between the two implies a historical market-risk
premium of 5.0%.
is beta, a measure of the systematic risk of a firms common stock. The beta of common stock
includes compensation for business and financial risk.
Network Economies: In some industries, firms need to provide a national network. This means
there are very significant economies of scale. A national network may imply the most efficient
number of firms in the industry is one.
For example, when T-Mobile merged with Orange in the UK, they justified the merger on the
grounds that:
The ambition is to combine both the Orange and T-Mobile networks, cut out duplication, and
create a single super-network. For customers it will mean bigger network and better coverage, while
reducing the number of stations and sites which is good for cost reduction as well as being good
for the environment.
Other Economies of Scale: The main advantage of mergers is all the potential economies of scale
that can arise. In a horizontal merger, this could be quite extensive, especially if there are high fixed
costs in the industry. Examples of economies of scale. Note: if the merger was a vertical merger or
conglomerate merger, the scope for economies of scale would be lower.
Avoid Duplication: In some industries it makes sense to have a merger to avoid duplication. For
example two bus companies may be competing over the same stretch of roads. Consumers could
benefit from a single firm with lower costs. Avoiding duplication would have environmental
benefits and help reduce congestion.
Regulation of Monopoly: Even if a firm gains monopoly power from a merger, it doesnt have to
lead to higher prices if it is sufficiently regulated by the government. For example, in some
industries the government have price controls to limit price increases. That enables firms to benefit
from economies of scale, but consumer dont face monopoly prices.
Obtaining quality staff or additional skills, knowledge of your industry or sector and other business
intelligence. For instance, a business with good management and process systems will be useful to a
buyer who wants to improve their own. Ideally, the business you choose should have systems that
complement your own and that will adapt to running a larger business.
Accessing funds or valuable assets for new development. Better production or distribution facilities
are often less expensive to buy than to build. Look for target businesses that are only marginally
profitable and have large unused capacity which can be bought at a small premium to net asset
value.
Organic growth, i.e. the existing business plan for growth, needs to be accelerated. Businesses in
the same sector or location can combine resources to reduce costs, eliminate duplicated facilities or
departments and increase revenue.
activity. Monitor employee performance to ensure that customer needs continue to be met. Solicit
customer feedback to verify that all is well on their end.
Extent to which the above Issue/Challenge is a Factor in Your Organization (circle one)
To a great extent
To a moderate extent
To a minor extent
Not at all
7. Integration planning and implementation should begin as early as possible, well before the deal
closes. If integration is started early, there is a better chance for a seamless transition.
Extent to which the above Issue/Challenge is a Factor in Your Organization (circle one)
To a great extent
To a moderate extent
To a minor extent
Not at all
8. Once integration is underway, companies can forget to stop and check their progress. It can be
challenging to redirect integration activity but it must be done to ensure desired results. Check
employee perceptions of integration progress by regularly soliciting their feedback.
Extent to which the above Issue/Challenge is a Factor in Your Organization (circle one)
To a great extent
To a moderate extent
To a minor extent
Not at all
9. Merger training is often overlooked and can present obstacles if not implemented promptly. For
example, a group of acquired employees may need assistance in participating in automated benefits
enrollment. Without necessary training, it will take longer for new employees to feel part of their new
work environment.
Extent to which the above Issue/Challenge is a Factor in Your Organization (circle one)
To a great extent
To a moderate extent
To a minor extent
Not at all
10. Managers must not only be given adequate information; they must also be trained in appropriate
dissemination techniques. They must learn how to coach and remain sensitive to the feelings of their
staff. They must learn about change management and how to deal with resistance. If people are made
to feel that their feelings are normal and are given opportunities to openly discuss issues, their
concerns can be faced head on.
Extent to which the above Issue/Challenge is a Factor in Your Organization (circle one)
To a great extent
To a moderate extent
To a minor extent
Not at all
11. Employee productivity often falls where major staffing decisions are being made. The fear of
making a mistake can cause a drop in creativity or efficiency, as people become increasingly
cautious. Also, the time taken to talk to other employees during the period of uncertainty can affect
productivity.
Extent to which the above Issue/Challenge is a Factor in Your Organization (circle one)
To a great extent
To a moderate extent
To a minor extent
Cost reductions that are achieved by combining departments, operations, and trimming the
workforcethis cost reduction in turn leads to increased profitability.
Increasing revenue by absorbing a major competitor and thereby increasing market share.
Tax savings that are achieved when a profitable company merges with or takes over a
money- loser.
The Lifecycle
To achieve a successful merger or acquisition, business leaders must address a range of issues
strategic, operational, financial, cultural in an integrated way throughout all phases of the deal. The
M&A lifecycle model represents key M&A activities which must be addressed, beginning with the
strategic consideration of a deal through the post-merger integration and operation of the new,
merged entity.
Manage Deal
This phase involves oversight and program management for pre-deal and deal
structuring.
- Communicate to key constituencies
- Manage the strategic review and target analysis efforts
- Manage the deal team and advisors
- Track data and documents, issues and overall logistics
Develop Strategy
An organization evaluating mergers or acquisitions as growth options establishes its
position.
Develop corporate strategies
Mobilize Effort
The organization establishes the methods and resources required to communicate the
deal and conduct the integration.
Identify organization and integration team leadership
Make initial strategic decisions
Build the integration framework
Set up a stabilization program
Launch communications, including announcement of the deal
Define Migration
The organization defines the integrated environment and how the organization will
migrate to it.
Map and analyze current environments to determine target environment
Estimate overall work effort and budget required
Establish integration sequence and timeline
Determine high-level approaches for human resources, customers, lines of business and
technology
Execute Integration
The organization conducts the migration to the integrated environment.
Perform detailed design, development and testing of the target environment
Communicate the target environment to employees and conducting training
Communicate to impacted customer segments
Convert to the target environment
Prepare for post-implementation stabilization and support
DUE DILIGENCE
Mergers and acquisitions typically involve a substantial amount of due diligence by the buyer. Before
committing to the transaction, the buyer will want to ensure that it knows what it is buying and what
obligations it is assuming, the nature and extent of the target companys contingent liabilities,
problematic contracts, litigation risks and intellectual property issues, and much more. This is
particularly true in private company acquisitions, where the target company has not been subject to
the scrutiny of the public markets, and where the buyer has little (if any) ability to obtain the
information it requires from public sources.
The following is a summary of the most significant legal and business due diligence activities that are
connected with a typical M&A transaction. By planning these activities carefully and properly
anticipating the related issues that may arise, the target company will be better prepared to
successfully consummate a sale of the company.
Of course, in certain M&A transactions such as mergers of equals and transactions in which the
transaction consideration includes a significant amount of the stock of the buyer, or such stock
comprises a significant portion of the overall consideration, the target company may want to engage
in reverse diligence that in certain cases can be as broad in scope as the primary diligence
conducted by the buyer. Many or all of the activities and issues described below will, in such
circumstances, apply to both sides of the transaction.
1. Financial Matters. The buyer will be concerned with all of the target companys historical
financial statements and related financial metrics, as well as the reasonableness of the targets
projections of its future performance. Topics of inquiry or concern will include the following:
What do the companys annual, quarterly, and (if available) monthly financial statements for the last
three years reveal about its financial performance and condition?
Are the companys financial statements audited, and if so for how long?
Do the financial statements and related notes set forth all liabilities of the company, both current and
contingent?
Are the margins for the business growing or deteriorating?
Are the companys projections for the future and underlying assumptions reasonable and believable?
How do the companys projections for the current year compare to the board-approved budget for the
same period?
What normalized working capital will be necessary to continue running the business?
How is working capital determined for purposes of the acquisition agreement? (Definitional
differences can result in a large variance of the dollar number.)
What is the condition of assets and liens thereon?
2. Technology/Intellectual Property. The buyer will be very interested in the extent and quality
of the target companys technology and intellectual property. This due diligence will often focus on
the following areas of inquiry:
What domestic and foreign patents (and patents pending) does the company have?
Has the company taken appropriate steps to protect its intellectual property (including confidentiality
and invention assignment agreements with current and former employees and consultants)? Are there
any material exceptions from such assignments (rights preserved by employees and consultants)?
What registered and common law trademarks and service marks does the company have?
What copyrighted products and materials are used, controlled, or owned by the company?
Does the companys business depend on the maintenance of any trade secrets, and if so what steps
has the company taken to preserve their secrecy?
Is the company infringing on (or has the company infringed on) the intellectual property rights of any
third party, and are any third parties infringing on (or have third parties infringed on) the companys
intellectual property rights?
Is the company involved in any intellectual property litigation or other disputes (patent litigation can
be very expensive), or received any offers to license or demand letters from third parties?
What technology in-licenses does the company have and how critical are they to the companys
business?
3. Customers/Sales. The buyer will want to fully understand the target companys customer base
including the level of concentration of the largest customers as well as the sales pipeline. Topics of
inquiry or concern will include the following:
Who are the top 20 customers and what revenues are generated from each of them?
What customer concentration issues/risks are there?
Will there be any issues in keeping customers after the acquisition (including issues relating to the
identity of the buyer)?
How satisfied are the customers with their relationship with the company? (Customer calls will often
be appropriate.)
Are there any warranty issues with current or former customers?
What is the customer backlog?
What are the sales terms/policies, and have there been any unusual levels of
returns/exchanges/refunds?
How are sales people compensated/motivated, and what effect will the transaction have on the
financial incentives offered to employees?
What seasonality in revenue and working capital requirements does the company typically
experience?
4. Material Contracts. One of the most time-consuming (but critical) components of a due diligence
inquiry is the review of all material contracts and commitments of the target company. The categories
of contracts that are important to review and understand include the following:
Guaranties, loans, and credit agreements
Customer and supplier contracts
Agreements of partnership or joint venture; limited liability company or operating agreements
Contracts involving payments over a material dollar threshold
Settlement agreements
Past acquisition agreements
Equipment leases
Indemnification agreements
Employment agreements
Exclusivity agreements
Agreements imposing any restriction on the right or ability of the company (or a buyer) to
compete in any line of business or in any geographic region with any other person
Real estate leases/purchase agreements
License agreements
Powers of attorney
Franchise agreements
Equity finance agreements
Distribution, dealer, sales agency, or advertising agreements
Non-competition agreements
Union contracts and collective bargaining agreements
Contracts the termination of which would result in a material adverse effect on the company
Any approvals required of other parties to material contracts due to a change in control or
assignment
Case Details:
Period
Organization
Industry
Countries
Deal
:
:
:
:
2006-2007
Tata Steel Limited, Corus Group Plc
Iron & Steel
India, Netherlands
$12.2 billion
Introduction
On January 31, 2007, India based Tata Steel Limited (Tata Steel) acquired the Anglo Dutch steel
company, Corus Group Plc (Corus) for US$ 13.70 billion3. The merged entity, Tata-Corus, employed
84,000 people across 45 countries in the world. It had the capacity to produce 27 million tons of steel
per annum, making it the fifth largest steel producer in the world as of early 2007 (Refer Exhibit I for
the top ten players in the steel industry after the merger). Commenting on the acquisition, Ratan Tata,
Chairman, Tata & Sons, said, "Together, we are a well balanced company, strategically well placed
to compete at the leading edge of a rapidly changing global steel industry."
Tata Steel outbid the Brazilian steelmaker Companhia Siderurgica Nacional's (CSN) final offer of
603 pence per share by offering 608 pence per share to acquire Corus.
Tata Steel had first offered to pay 455 pence per share of Corus, to close the deal at US$ 7.6 billion
on October 17, 2006. CSN then offered 475 pence per share of Corus on November 17, 2006.
Finally, an auction was initiated on January 31, 2007, and after nine rounds of bidding, Steel could
finally clinch the deal with its final bid 608 pence per share, almost 34% higher than the first bid of
455 pence per share of Corus.
Many analysts and industry experts felt that the acquisition deal was rather expensive for Tata Steel
and this move would overvalue the steel industry world over.
Commenting on the deal, Sajjan Jindal, Managing Director, Jindal South West Steel said, "The price
paid is expensive...all steel companies may get re-rated now but it's a good deal for the industry."6
Despite the worries of the deal being expensive for Tata Steel, industry experts were optimistic that
the deal would enhance India's position in the global steel industry with the world's largest7 and fifth
largest steel producers having roots in the country. Stressing on the synergies that could arise from
this acquisition, Phanish Puram, Professor of Strategic and International Management, London
Business
School said, "The Tata-Corus deal is different because it links low-cost Indian production and raw
materials and growth markets to high-margin markets and high technology in the West.
Background Note
Tata Steel
Tata Steel is a part of the Tata Group, one of the largest diversified business conglomerates in India.
Tata Group companies generated revenues of Rs. 967,229 million in the financial year 2005-06.
The group's market capitalization was US$ 63 billion as of July 2007 (only 28 of the 96 Tata Group
companies were publicly listed). In 1907, Jamshedji Tata established Tata Steel at Sakchi in West
Bengal. The site had a good supply of iron ore and water...
Issues:
Gain an in-depth knowledge about various corporate valuation techniques.
Critically examine the rationale behind the acquisition of Corus by Tata Steel.
Understand the advantages and disadvantages of cross-border acquisitions.
Understand the need for growth through acquisitions in foreign countries.
Study the regulations governing mergers & acquisitions in the case of a cross-border acquisition.
Get insights into the consolidation trends in the Indian and global steel industries.
Tata Steel Vs CSN: The Bidding War
There
was
a
heavy
speculation
surrounding
Tata
Steel's
proposed
takeover
of
Corus
ever
since
Ratan
Tata
had
met
Leng
in
Dubai,
in
July
2006.
On
October
17,
2006,
Tata
Steel
made
an
offer
of
455
pence
a
share
in
cash
valuing
the
acquisition
deal
at
US$
7.6
billion.
Corus
responded
positively
to
the
offer
on
October
20,
2006.
Agreeing
to
the
takeover,
Leng
said,
"This
combination
with
Tata,
for
Corus
shareholders
and
employees
alike,
represents
the
right
partner
at
the
right
time
at
the
right
price
and
on
the
right
terms."
In
the
first
week
of
November
2006,
there
were
reports
in
media
that
Tata
was
joining
hands
with
Corus
to
acquire
the
Brazilian
steel
giant
CSN,
which
was
itself,
keen
on
acquiring
Corus.
On
November
17,
2006,
CSN
formally
entered
the
foray
for
acquiring
Corus
with
a
bid
of
475
pence
per
share.
In
the
light
of
CSN's
offer,
Corus
announced
that
it
would
defer
its
extraordinary
meeting
of
shareholders
to
December
20,
2006
from
December
04,
2006,
in
order
to
allow
counter
offers
from
Tata
Steel
and
CSN...
Financing
the
Acquisition
By
the
first
week
of
April
2007,
the
final
draft
of
the
financing
structure
of
the
acquisition
was
worked
out
and
was
presented
to
the
Corus'
Pension
Trusties
and
the
Works
Council
by
the
senior
management
of
Tata
Steel.
The
enterprise
value
of
Corus
including
debt
and
other
costs
was
estimated
at
US$
13.7
billion
(Refer
Table
I
for
fund
raising
mix
for
the
Corus'
acquisition)...
The Synergies
Most experts were of the opinion that the acquisition did make strategic sense for Tata Steel. After
successfully acquiring Corus, Tata Steel became the fifth largest producer of steel in the world, up
from fifty-sixth position.
There were many likely synergies between Tata Steel, the lowest-cost producer of steel in the world,
and Corus, a large player with a significant presence in value-added steel segment and a strong
distribution network in Europe. Among the benefits to Tata Steel was the fact that it would be able to
supply semi-finished steel to Corus for finishing at its plants, which were located closer to the highvalue markets.
The Pitfalls
Though the potential benefits of the Corus deal were widely appreciated, some analysts had doubts
about the outcome and effects on Tata Steel's performance. They pointed out that Corus' EBITDA
(earnings before interest, tax, depreciation and amortization) at 8 percent was much lower than that of
Tata Steel which was at 30 percent in the financial year 2006-07.
Case:
Period
Organizon
Industry
Countries
Deal
:
:
:
:
Details:
2006-2007
Vodafone, Hutchison Essar
Telecom and Broadband
India, UK
$10 billion
INTRODUCTION
In the year 2007, the world's largest telecom company in terms of revenue, Vodafone Plc (Vodafone)
made a major foray into the Indian telecom market by acquiring a 52 percent stake in the Indian
telecom company, Hutchison Essar Ltd (Hutchison Essar), through a deal with the Hong Kong-based
Hutchison Telecommunication International Ltd. (HTIL). It was the biggest deal in the Indian
telecom market. Vodafone's main motive in going in for the deal was its strategy of expanding into
emerging and high growth markets like India. In 2007, India had emerged as the fastest growing
telecom market in the world outpacing China. But it still had low penetration rates, making it the
most lucrative market for global telecom companies.
Though Hutchison Essar was one of the established players in this market, HTIL had exited India as
the urban markets in the country had become saturated. Future expansion would have had to be only
in the rural areas, which would lead to falling average revenue per user (ARPU) and consequently
lower returns on its investments. HTIL also wanted to use the money earned through this deal to fund
its businesses in Europe.
Vodafone had to face many obstructions in clinching the deal - initial opposition for the Indian
partner of HTIL, Essar Ltd., aggressive bidding by competitors, as well as regulators who took their
time to approve the deal. But in the end, Vodafone bagged the deal outbidding other competitors.
Though some critics felt that Vodafone had overpaid for Hutchison Essar, Vodafone contended that
the price was worth paying as the deal would help it get a massive footprint in one of the most
competitive telecommunication markets in the world.
Issues:
The case will help the students to:
Understand the importance of international mergers and acquisitions as a growth strategy in the era
of globalization.
Understand the opportunities that emerging markets such as India offer to global business
enterprises.
Understand the issues and challenges faced by global business firms expanding into emerging
markets.
Understand the entry and exit strategies adopted by firms operating in the international markets.
Understand the importance of the government's policy in influencing the business strategy of a
firm.
Background Note
Vodafone
Vodafone, based in the UK, was the world's largest mobile communications company by revenue. It
operated under the brand name 'Vodafone'. The brand name 'Vodafone' comes from 'Voice data fone',
reflecting the company's wish to provide voice and data services on the mobile phones. Vodafone
operated in Europe, the Middle East, Africa, Asia Pacific, and the US.
Vodafone Eyes Hutchison Essar: In 2006, GoI raised the FDI limit in the telecom sector from 49%
to 74%. The government increased the FDI limit in the sector after protracted lobbying by telecom
players who were in dire need of capital...
The Slugfest
Before initiating the bidding process, Vodafone had to clear many regulatory issues.
Bharti Airtel, in which Vodafone had a 10% stake, asked its partner to make it clear whether
Vodafone wanted to continue its relation with it.
Moreover, as GoI's telecom policy allowed only 74% of FDI into the sector, Vodafone's acquisition
of a 67% stake in HEL would lead to the company crossing the limits of FDI allowed as both the
players would be operating in the same circles...
The Aftermath
On March 22, 2007, Vodafone signed a shareholder agreement with its Indian partner, Essar,
according to which Vodafone would hold a 52% and Essar would continue to hold a 33% stake.
Some other minority shareholders, such as Asim Ghosh (Ghosh), Infrastructure development finance
company (IDFC) and Analjit Singh together would continue to hold the remaining 15 per cent stake
in the company...
Outlook
Vodafone planned to bring world class branding to India after the 'Hutch' brand was replaced by the
Vodafone brand name. Vodafone wanted to build up its numbers in the Indian market mostly by
expanding into the rural areas.Vodafone also wanted to launch a 3G service in the Indian market as
soon as the government declared the 3G policy. Rather than using the 3G services as a premium
product targeted at upscale segment, Vodafone wanted to take 3G to the rural areas to provide hispeed data services to the rural masses...
Case Details:
Period
Organizatin
Industry
Countries
Deal
:
:
:
:
1991 - 2007
Hindalco, Novelis
Metal and Mining
US(India), Canada
$6 billion
Introduction
The case discusses the acquisition of US-Canadian aluminum company Novelis by India-based
Hindalco Industries Limited (Hindalco), a part of Aditya Vikram Birla Group of Companies, in May
2007. The case explains the acquisition deal in detail and highlights the benefits of the deal for both
the companies. It also examines the valuation of the acquisition deal and how the deal was financed.
The case concludes by describing the challenges that Hindalco would face in integrating the
operations of Novelis and analyzing if the deal was overvalued as opined by some industry experts.
On May 16, 2007, India-based Hindalco Industries Limited (Hindalco), a subsidiary of the AV
(Aditya Vikram) Birla Group of Companies (Aditya Birla Group), acquired the US-Canadian
aluminum giant Novelis Inc. (Novelis). The acquisition was the result of an agreement arrived at
between Hindalco and Novelis on February 10, 2007. Hindalco was to buy Novelis for US$ 6 billion
in cash, making it the second biggest acquisition3 by an Indian company till then. Novelis was to
operate as a subsidiary of Hindalco, and was to have Kumar Mangalam Birla (Kumar Mangalam) as
Chairman who was also the Chairman of Hindalco and the Aditya Birla Group.
Martha Finn Brooks, from Novelis would continue as Chief Operating Officer and was also
appointed as the President of the merged entity. Hindalco was among the leading companies in the
aluminum and copper industry in the world. (Refer to Exhibit I for leading aluminum companies in
the world based on EBITDA figures).
In the financial year 2006-07, Hindalco generated revenues of US$ 14 billion and the company
had a market capitalization of more than US$ 4.5 billion. It had a significant market share in all
the segments in which it operated and enjoyed a domestic market share of 42 percent in primary
aluminum, 63 percent in rolled products, 20 percent in extrusions, 44 percent in foils, and 31
percent in wheels (Refer to Exhibit II for Hindalco's revenues and net income for the year 2006
and 2005). Novelis had a three million ton capacity for manufacturing value added aluminum
rolled products4 and was a leading producer of aluminum sheet and light gauge (thin) rolled
products for the construction and industrial markets.
The company operated in 11 countries and supplied high quality aluminum sheet and foil
products to various industries including automotive, transportation, packaging, construction,
industrial products, and printing. Novelis'customers included companies like Coca-Cola, Kodak,
Ford, General Motors, and other leading Fortune 500 companies. Novelis sold rolled aluminum
products in Asia, Europe, North America, and South America (Refer to Exhibit III for
performance of Novelis in different regions). Industry analysts opined that the acquisition would
benefit Hindalco by strengthening the company's global presence, as Novelis had flat rolled
aluminum manufacturing plants in different locations in the world. They considered the deal a
good platform for Hindalco to access global customers. Novelis had a 19 percent global market
share in foil products, 25 percent in construction and industrial products, and 43 percent in
beverage cans.
After the acquisition, the merged entity would emerge as the world's largest aluminum rolling
company and among the world's top five aluminum manufacturers. According to Shivanshu
Mehta, Assistant Vice-President, NCDEX, "The deal will catapult Hindalco's flat rolled product
capacity from 0.2 million ton to 3.2 million ton per annum and elevate the company to a
leadership position in the business.
Some analysts, however, were of the view that the deal was not beneficial to Hindalco as it had
paid a huge amount in cash to acquire a company which was recording losses. Novelis had
incurred a loss of US$ 275 million for the year 2006.
Even in the year 2005, when Novelis had reported US$ 90 million as net profit, its share price did
not cross US$ 30 (Refer to Exhibit IV for Novelis and Hindalco stock charts).
The analysts pointed out that the way the deal was financed would affect Hindalco's financial
performance as the acquisition would not add value in the short and medium term.
Issues:
Study the synergies of the merger between Hindalco and Novelis
Study the rationale behind Hindalco acquiring a loss making aluminum company
Examine the way the acquisition deal was financed
Analyze whether the deal was overvalued or not
Analyze the trends in the global aluminum industry
Background Note
Hindalco Industries Limited
The Birla Group of Companies was founded by Seth Shiv Narayan Birla in 1857 as a cotton trading
company at Pilani, Rajasthan, India. The group later expanded its operations into other business
segments (Refer to Exhibit V for other business of Birla Group). Hindustan Aluminum Corporation
Limited (HACL) was established on December 15, 1958, to manufacture alumina, aluminum, and
aluminum fabricated items. The company was formed as collaboration between Kaiser Aluminum &
Chemicals Corporation (KACC), US, and the Birla Group. Under the agreement with KACC, KACC
had to train the people of HACL and provide technical advice and information for 20 years along
with the assistance to operate the aluminum fabrication plant.
Novelis
Novelis was split from its parent company, Alcan Inc. (Alcan), the Canada-based aluminum giant and
set up as its subsidiary in January 2005. The origin of the company can be traced back to 1902 when
the Northern Aluminum Company, a Canadian subsidiary of the Pittsburgh Reduction Company was
set up.
The Pittsburgh Reduction Company was renamed as the Aluminum Company of America (ALCOA)
in the year 1907. In 1925, The Northern Aluminum Company was renamed the Aluminum Company
of Canada (ACOC) Limited.
The Deal
Hindalco acquired Novelis through its wholly owned subsidiary AV Metals on February 10, 2007.
AV Metals purchased 100 percent of the issued and outstanding common shares of Novelis at US$
44.93 per share, amounting to US$ 3.6 billion. Hindalco paid a premium of 16.6 percent on the
closing price of Novelis' stock. Apart from equity purchase, Hindalco also acquired Novelis' debts to
the tune of US$ 2.4 billion.
The Pitfalls
Though the Hindalco-Novelis merger had many synergies, some analysts raised the issue of valuation
of the deal as Novelis was not a profit-making company and had a debt of US$ 2.4 billion. They
opined that the acquisition deal was over-valued as the valuation was done on Novelis' financials for
the year 2005 and not on the financials of 2006 in which the company had reported losses (Refer to
Exhibit IX for Novelis P&L statements and balance sheets). They said that Hindalco might have to
collect a huge amount of resources to revive and restructure Novelis.
Case Details:
Period
2008-2012
Organization
Industry
Automobile sector
Countries
India, US
Deal
$2.3 billion
Introduction
Corporations have been following an upward tendency of mergers, joint ventures and acquisitions,
which results in new strategies and approaches. The scenario can be more challenging when it
happens internationally and the company needs to deal with different cultures. Nonetheless, the need
to expand the business is responsible for a huge slice of Foreign Direct Investment (FDI) worldwide
crossing several sectors and industries. Clearly factors as globalization and technology are
responsible to accelerate this process by accessing markets and human capital rapidly. Companies
increased its economies of scale by conquering new markets and new public. This need is the reason
why Tata Motors decided for the acquisition of Jaguar and Land Rover (JRL), which involved
advantages as well as pitfalls.
Aim:
What was the strategic and economic rationale for the acquisition in the case?
What strengths of Jaguar and Land Rover were the most valuable for Tata?
What were the major challenges for Tata Motors in this acquisition?
What were the major potential synergies from the deal? Were they realized?
Background note:
Tata Motors
Nowadays Tata Group is one of the India s biggest business conglomerates and it was established by
an Indian industrialist called Jamsetji Tata known as the Father of the Indian Economy. In the
first moment, the conglomerate was established as a private trading firm in 1868. In the previous
decade, Tata has posted a revenue over $30 billion among a diversified business sectors such as
communications, engineering, energy and so on. The conglomerate includes several companies,
which TML was the automobile manufacturing. TML major segment included commercial (medium
and heavy commercial) and passenger vehicles (small cars).
Economic rationale:
Tata Motors (TML) acquired Jaguar Land Rover for many reasons. First of all, it made part of the
strategy of TML. The acquisition would have been able to launch Tata worldwide by providing it
better technology and broadening its product range. Tata was well established in India but it had
problems to expand globally because of the high entry barriers of the automotive sector. With the
acquisition of JRL, Tata would be in charge for two well-known brands which could allow it easy
access to international markets.
Tata aimed to improve its technology in order to ingress into the international markets and JRL
would support it by providing technological know-how. Moreover, the terms of the contract with
Ford covered the provision of technology know-how to Tata for a period of time. With the
acquisition, it would be possible to expand the range of products which focused in the very beginning
on low end cars. Tata would also broader its consumers by selling to luxury market as well.
Therefore, the acquisition would provide gain of competitiveness such as technology, brand names
valued and logistical and distribution advantages while getting advantage among others competitors
in the Indian market.
A) Strategy
Tata Motor s had a clear strategy regarding the consolidation of the company: keep investing on
Indian market but also expanding towards international markets by focus on the development of the
products as well as acquisitions and collaborations.
Ford decided to adopt a new strategy The Ford Forward which consisted in dismantling PAG as a
part of a plan to integrate the brand globally and for this reason Ford sells one of its the most luxury
brand Land Rover and Jaguar for $2,3 billion in 2008. One aspect that must be highlighted about
this acquisition is that TML demonstrated interest in keeping the brands identities intact at the same
time incorporating the expertise and experience of the employees to its growth.
This acquisition represented a huge step once TML could enter into a global market by adding
technology and diversifying its products. Moreover, TML now could reach a selected public
emerging markets which countries have expressive growth in a short period of time. This suddenly
growth sometimes is not sustainable and equal among the population has created a high society,
which is able to consume these luxury products such as in India. Nonetheless, there are some
considerations before continue. Theory argues that a way to be global is looking for resources,
markets and productive advantages. In this case, Tata is looking for a new segment which means new
market. TML acquires Jaguar and Land Rover in order to incorporate expertise & technology and it
represents a chance to expand the business into emerging countries, precisely luxury segment.
The necessity to go abroad and expand its operations is to decrease the dependence of the Indian
market which is responsible for 90% of the sales and this strategy is supported by theory as the
growth necessity. Therefore, it would expand the markets not only geographically but also across
different segments. With this acquisition TML would its efficiency in terms of economies of scales
once the sales will increase as well as the profit. So relevant as the economy of scale is the economy
of scope in this case. The acquisition also means the acquisition of technology and expertise so that
TML can improve its low-ends cars without extra expenses because it would be integrated. The
production of vehicles depends on the research and ongoing improvements in its vehicles.
Acquiring an enterprise anywhere in the world has three common elements and for TML would not
be different. The theory points out some steps that support us to understand this case:
Identification and Valuation of the Target (acquiring a good vs. bad company)
Jaguar and Land Rover are considered a good company due to its good reputation among the luxury
segment. The decision of Ford to sell its brand concerns Ford strategy which does not mean
necessarily that the brand was not doing well.
The Tender or Completion of the Ownership Change Transaction (approval of the target
company or if not, hostile takeover; regulatory approval; compensation settlement)
In this case, the acquisition was made in a compensation settlement
basis in which TML paid ($2,3billion) for the operation. In other words, it was a cash deal.
Management
of
the
post-acquisition
transition
This step is the most challenging for TML once the loan required for the acquisition has caused
uncertainty among the investors and there is synergy issue as well. Therefore, TML has to handle
these two main challenges.
B) Synergies
One of the major reasons for a company to acquire another, according to acquisitions and merges
theory, is the possibility to obtain synergy in order to be competitive. In the case of Tata Motors,
there were potential synergies involved. The Indian group responds for others companies as well,
such as:
i) Tata Auto Comp Systems Limited (TACO), owned by Tata, specialized in the provision of
products and services in the automotive industry; ii) Tata Consultancy Services (TCS): it is an Indian
multinational information technology area in Europe.
The potential synergy in this situation is huge once TML was acquiring also the expertise and the
technology of JRL which would be useful to improve the quality of Tata products in the Indian
market. One of the most remarkable features of the JRL is the design and Tata would incorporate it in
the other companies of the group. One proof that it was realized is the new range of Tata truck
launched last year .It has a global design that matches aesthetics with enhanced comfort, fuelefficiency and low cost. Another aspect also important in terms of synergy is the reduction of
production costs. The cost will decrease because of synergy with Corus (another company of the
same group). Apart from the production cost, it is also important to look at the operational costs
because Tata will spend less money on Research and Development. Also, qualified personnel
represent another synergy once Tata can transfer the workers from the UK to India or vice versa.
All these synergies summed up roughly $450 million that Tata saved in production, procurement,
financing, in the first three years after the acquisition which proved that the synergies made Tata
better off. Therefore, the acquisition of JRL will improve the financial situation of Tata because Tata
would reduce the cost of production and as a consequence it will increase its margin of profit.
Although Tata invest US$ 3 billion to acquire JRL, the reduction of cost production would offset this
loan. Finally, JRL will allow Tata access to the luxury market.
Case Study:
Period
2008
Organization
Industry
Banking Sector
Countries
India
Deal
$ 2.4 billion
Introduction
HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab
(CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector in India. CBoP
shareholders will get one share of HDFC Bank for every 29 shares held by them.
HDFC Bank and Centurion Bank of Punjab have agreed to the biggest merger in Indian banking
history, valued at about $2.4 billion. It is likely the beginning of wave of M&A deals in the
financial services industry, as India prepares to ease restrictions on bank ownership in 2009.
Background note:
HDFC Bank
The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive
an 'in principle' approval from the Reserve Bank of India (RBI) to setup a bank in the private sector,
as part of the RBI's liberalization of the Indian Banking Industry in 1994. The bank was
incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in
Mumbai, India. HDFC Bank commences operations as a Scheduled Commercial Bank in January
1995.
The following year, it started its operations as a Scheduled Commercial Bank. Today, the bank
boasts of as many as 1412 branches and over 3275 ATMs across India.
Merger Positions
HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab
(CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector in India. CBoP
shareholders will get one share of HDFC Bank for every 29 shares held by them.
HDFC Bank and Centurion Bank of Punjab have agreed to the biggest merger in Indian banking
history, valued at about $2.4 billion. It is likely the beginning of a wave of M&A deals in the
financial services industry, as India prepares to ease restrictions on bank ownership in 2009. This will
be HDFC Banks second acquisition after Times Bank. HDFC Bank will jump to the 7th position
among commercial banks from 10th after the merger.
However, the merged entity would become second largest private sector bank. The merger will
strengthen HDFC Bank's distribution network in the northern and the southern regions. CBoP has
close to 170 branches in the north and around 140 branches in the south. CBoP has a concentrated
presence in the in the Indian states of Punjab and Kerala. The combined entity will have a network of
1148 branches.
HDFC will also acquire a strong SME (small and medium enterprises) portfolio from CBoP. There is
not much of overlapping of HDFC Bank and CBoP customers. The entire process of the merger had
taken about four months for completion. The merged entity will be known as HDFC Bank. Rana
Talwar's Sabre Capital would hold less than 1 per cent stake in the merged entity from 3.48 in CBoP,
while Bank
Muscat's holding will decline to less than 4 per cent from over 14 per cent in CBoP. HDFC
shareholding falls to will fall from 23.28 per cent to around 19 per cent in the merged entity.
Rana Talwar, chairman of Centurion Bank of Punjab, says, I believe that the merger with HDFC
Bank will create a world-class bank in quality and scale and will set the stage to compete with banks
both locally as well as on a global level.
According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri, Integration
will be smooth as there is no overlap. In an interview, he mentioned that at 40% growth rate there
will be no lay-offs. The integration of the second rung officials should be smooth as there is hardly
any overlapping.
6.FLIPKART-MYNTRA MERGER
Case Details:
Period
Organization
Industry
Countries
Deal
2014
Flipkart , Myntra
FMCG
India
$ 2.32 billion
Introduction
The acquisition of Myntra (Indias largest fashion e-tailer) by Flipkart (Indias biggest e-tail
company) brought together two of the biggest e-tailers in India. Made possible by common investors,
the acquisition would enable Myntra to leverage on Flipkarts infrastructure, while allowing Flipkart
to strengthen its portfolio of product offering. This consolidation is seen as a response to taking on
Amazon, which has made big plans for Indian market.
It was midsummer in 2014 in India when the countrys leading e-tailer Flipkart made the hottest and
most awaited announcement of the Indian e-commerce industry the acquisition of Myntra, its rival
and leading e-tailer in the fashion and lifestyle segment, a vertical in which Flipkart was lagging
behind its competitors. On this occasion, Sachin Bansal (Sachin) and Binny Bansal (Binny), cofounders of Flipkart, said, We believe that the future of fashion in India is e-commerce. Myntra has
a strong team with excellent domain knowledge. They also have the best relationships with lifestyle
brands.
This partnership will strengthen both our positions in the fashion space. We will continue to work as
independent entities and grow together as leaders in the Indian fashion and lifestyle industry. Arvind
Singhal, Chairman of Technopak Advisors Pvt. Ltd., said, The Flipkart and Myntra merger will
create the first Indian e-tailing powerhouse, and provide a big fillip to India's still nascent but very
promising e-commerce industry.
However, not all experts were of the same view. Mahesh Murthy, co-founder of Seedfund , said,
While this (deal between Flipkart and Myntra) may be good for investors, it might not be so good
for the entrepreneurs and staff of these companies. Swati Bhargava, cofounder of Cashkaro.com ,
said Consolidation of top two out of five players is probably not great from a customer
perspective. It reduces competition and perhaps incentive for continual improvement....
Issues
The case is structured to achieve the following teaching objectives:
Evaluate the Acquisition of Myntra and its potential synergies
Study the benefits of the deal to Flipkart and Myntra
Evaluate the impact of the deal on Indian e-commerce industry
Analyze the future challenges, which Indian ecommerce players could face with the global majors
focusing on India.This case is meant for MBA/MS students as a part of the Merger and Acquisition/
Business Strategy curriculum.
invested Rs. 5 million in the company. Myntra was started as an on-demand online personalization
platform for products and gifts where the customer could personalize products such as mugs, Tshirts, calendars, key-chains, diaries, etc.
Acquisition By Myntra
November 2012, Myntra acquired Exclusively.in Inc and its brand Sher Singh (www.shersingh.com)
in exchange for cash and equity. On this acquisition, Mukesh said, We have been working on a
private label initiative within Myntra and wanted a team with strong design and inventory and Sher
Singh has done that really well. It made sense to acquire the team. In April 2013, Myntra went in for
its second acquisition, buying FITIQUETTE for cash and stock. Mentioning the significance of this
acquisition, Mukesh said, Myntra aims to create the most compelling fashion shopping experience
for Indian consumers at per or better than global standards. FITIQUETTE developed pioneering
technology for solving the fit/size problem online.
This acquisition will not only help us improve the experience significantly, but will also enhance our
technology team with addition of top tech talent.
The Deal
In January 2014, The Times of India reported that Flipkart had approached Myntra with a merger
proposal. Initially, the offer was to merge Myntra with Flipkart.
However, later, Flipkart changed the offer and agreed to run both companies (Flipkart and Myntra)
independently. Experts said that two common investors campaigned for the deal Tiger Global
Management, LLC (Tiger) and Accel. If the deal went through, then it would save both investors
from injecting fresh capital into the loss making duo. In addition to this, the merger would create the
undisputed leader in the Indian online space and keep the competitors of both companies, such as
Amazon and Snapdeal (competitors of Flipkart) and Jabong (competitor of Myntra), at bay.
Synergies
Myntra was in the high margin fashion segment and was the leader in this category. Flipkart wanted
to establish itself in this segment ever since it had launched mens
clothing in October 2012. Vijay Kumar Ivaturi, member of Indian Angel Network , said, Flipkart
wants to be a horizontal, multi-category, and scale player. Hence, it seems like a good strategy to
acquire a category (fashion) player for scale and depth. The deal helped Myntra gain access to
Flipkart's logistics network and it was able to deliver its products to more than 9,000 PIN codes
(before this deal it could do so only in 9,000 PIN codes) and cover more than 100 cities (before this
deal it was only 30 cities). In July 2014, both websites (Flipkart and Myntra) had 26 million unique
visitors followed by Jabong and Amazon with 23.5 million and 16.9 million unique visitors
respectively.
Road Ahead
After the deal, Flipkart and Myntra had a total 50% share in the Indian online fashion segment. BS
reported that both were looking to achieve a 65% share by late 2015 or early 2016. To achieve its
target, the company had a plan. According to Mukesh, Recently (around mid of 2014), we set up a
fashion incubator, in which 15-20 people will be given support in manufacturing, sampling, supply
chain, etc, to grow private labels. After a year, three-four private labels might be acquired by
Myntra. Both companies also planned to take over some private brands whether online and offline.
Case Details :
Period
2002
Organisation VSNL , Teleglobe
Industry
Telecom
Country
India , UK
Deal
EUR 18.22 billion
INTRODUCTION
Videsh Sanchar Nigam Limited (VSNL) was incorporated in 1986 as a public sector enterprise to
cater to overseas communication services. In 2002, the Indian government privatised VSNL and the
Tata Group acquired a controlling stake in the company..VSNL is India's largest player in
international long-distance services and has a strong pan-India presence in domestic long-distance
services.The company operates landing stations, undersea cables, managed services, leased lines and
data centres across India. It also runs a network of earth station, switches and submarine cable
systems and offers international telecommunications services including mobile, IP and voice
services. 7%
COMPANY BACKGROUND
VSNL is the worlds largest international wholesale carrier with more than 415 direct and bialateral
relationships with leading international voice tetecommunications providers ,providing more than 17
billion minutes of international wholesale voice traffic annually. It was the first telecom service
provider to acquire the TL 9000 certification globally.The company provides connections to
over 400 mobile operators worldwide. It is also the principal provider of signalling conversion
services to enable GSM roaming to and from North America.
Through its acquisition of Teleglobe in 2005,VSNL extended its global reach to over 240 countries.
It also became the worlds largest submarine cable system after acquiring the Tyco Global Network.
UK Ltd., in the country. Over the years, the company has been able to increase its presence across the
EU. In 2005, it acquired the Tyco Global Network, a state-of-the-art undersea cable network that
covers Europe.Another subsidiary,VSNL UK, also launched its wholesale voice service in the UK
and focuses on selling call-termination services to telecom companies in Europe.
Currently, the company has 52 subsidiaries in
21 countries as well as operations across four continents. VSNL International, a subsidiary of the
company, takes care of its international operations. It has its offices in Virginia, New Jersey, London,
Paris, Madrid, Amsterdam, Frankfurt, Singapore and Tokyo. Its ADRs are listed on the New York Stock
Exchange .VSNL International had a work force of about 2000 employees and generated revenue of
EUR 704.01 million for the financial year 2005-06.
Financial Backup
VSNL is backed by the EUR 18.22 billion Tata Group providing the company with the necessary
financial cushion to pursue its global acquisitions drive. It acquired the Tata Global Network (TGN)
and Teleglobe at EUR 107.66 million and EUR 197.93 million, respectively, enabling it to diversify
its business across the EU.
CONCLUSION
Mergers and acquisitions in India have grown on a rampant scale after the introduction of the
takeover code. This has created a market for M&A and M&A specialists in the form of consultants,
merchant bankers, managers, etc. Corporate India has been quick to grab the opportunity and try for
the maximum success rate. In a short time, it has also been learnt that Mergers and acquisitions are
not a panacea for corporate ills. Negotiated takeovers with the proper synergy to back them and
managerial willingness to manage the process smoothly have resulted in the few successes that were
seen in India.
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CONFERENCE PAPERS
Cording, M., Christmann, P., & Bourgeois, L. J. III. (2002), A Focus on Resources in M&A.
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NEWSPAPER
The Economic Times
The Hindu
INTERNET SOURCE
http://business.mapsofindia.com
http://www.thehindubusinessline.com
http://www.legalserviceindia.com
http://economictimes.indiatimes.com