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A

PROJECT REPORT
On

Merger & Acquisition

Sub: Business Environment


MBA - 1ST SEM.

Submitted To: Submitted by:


DR. PROF. KIRAN M. JOSHI TEJAS SACHALA
(ROLL NO.24)
VAIBHAV BATUA
(ROLL NO. 02)
KARTIK PATEL
(ROLL NO. 20)
PARESH BHURIA
(ROLL NO. 04)
M.S. Patel Institute of Management
Studies
M.S. University, Baroda.
Introduction

The Indian economy has been growing with a rapid pace and has
been emerging at the top, be it IT, R&D, pharmaceutical, infrastructure,
energy, consumer retail, telecom, financial services, media, and
hospitality etc. It is second fastest growing economy in the world.

India’s economy grew at 6.1% in the first quarter & 7.9 per cent in
the second quarter of this fiscal - among the highest growth rates in the
world. This growth momentum was supported by the double digit growth
of the services sector at 12.7% and manufacturing sector at 9.2% in the
second quarter of 2008-09.

Investors, big companies, industrial houses view Indian market in


a growing and proliferating phase, whereby returns on capital and the
shareholder returns are high. Both the inbound and outbound mergers
and acquisitions have increased dramatically.

Mergers and acquisitions (M&A) refers to the aspect of corporate


strategy, corporate finance and management dealing with the buying,
selling and combining of different companies that can aid, finance, or
help a growing company in a given industry grow rapidly without having
to create another business entity.

There are many bids in the pipeline. Corporate earnings of


companies in India have been increasing, contributing to enhanced
profitability and healthy balance sheets. For such companies, M&As are
an effective strategy to expand their businesses and acquire global
footprint.

Mergers or amalgamation, result in the combination of two or


more companies into one, wherein the merging entities lose their
identities. No fresh investment is made through this process. However,
an exchange of shares takes place between the entities involved in such
a process.

What is Merger?
In economics or business sense of the term, merger may be
referred to as the establishment of a larger company as a result of the
amalgamation of two companies. Here the deal is made between two
companies in friendly terms. When two firms merge, stocks of both are
surrendered and new stocks in the name of new company are issued.
Generally, mergers take place between two companies of more or less
same size. Mergers comprise the process of "stock swap". "Stock swap"
is a process, in which the risk undertaken by the shareholders are
equally borne by the shareholders of both the companies.

Types of Mergers:
Mergers are classified into these types:

Horizontal mergers:

 A horizontal merger combines two companies that are direct


competitors making the same products or operating in the
same stage of production.

-Like as an example, an Automobile company TATA merges with


MARUTI.

Horizontal merger helps to come over from the competition


between two companies merging together strengthens the company to
compete with other companies. Horizontal merger between the small
companies would not effect the industry in large. But between the larger
companies will make an impact on the economy and gives them the
monopoly over the market. Horizontal mergers between the two
small companies are common in India. When large companies merging
together we need to look into legislations which prohibit the monopoly.

Vertical mergers:

 A vertical merger is a combination of two firms that operates


in different stages of production or we can say to combine a
company with its supplier or customer.
- Like as an example, Textiles firm merges raw materials firm.
This makes other competitors difficult to access to an important
component of product or to an important channel of distribution which
are called as "vertical foreclosure" or "bottleneck" problem. Vertical
merger helps to avoid sales taxes and other marketing expenditures.

Conglomerate mergers:

 Merger of firms in unrelated lines of business that are neither


competitors nor potential or actual customers or suppliers of each other
but use common or related production processes and/or marketing &
distribution channel.

-Like as an example, Essar steel merges Videocon Electronics.

Concentric Mergers:
 Merger of two firms that are so related that there is a carryover of
specific management functions (research, manufacturing, finance,
marketing, etc.

-like as an example Citigroup (principally a bank) buying Salomon Smith


Barney (an investment banker/stock brokerage operation).
What is Acquisition?

When one company takes over another and clearly establishes


itself as the new owner, the purchase is called an acquisition. From a
legal point of view, the target company ceases to exist, the buyer
"swallows" the business and the buyer's stock continues to be traded.
An acquisition, also known as a takeover or a buyout, is the buying
of one company (the ‘target’) by another. An acquisition may be friendly
or hostile. In the former case, the companies cooperate in negotiations;
in the latter case, the takeover target is unwilling to be bought or the
target's board has no prior knowledge of the offer. Acquisition usually
refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management
control of a larger or longer established company and keep its name for
the combined entity. This is known as a reverse takeover.
Another type of acquisition is reverse merger, a deal which
enables a private company to get publicly listed in a short time period. A
reverse merger occurs when a private company that has strong
prospects and is eager to raise financing buys a publicly listed shell
company, usually one with no business and limited assets.
There may be two types of acquisitions depending on the
option adopted by the buying company. In one case, the
buying company may buy all the shares of the smaller
company. The other option is buying the assets of the smaller
companies.
How does one company acquire or purchase a second company?

There are a couple ways to acquire a company. One way is


through the purchase of the shares of the targeted company gaining
control over its assets. This type or transaction makes the buying
company not only gain control of the assets but also any financial
problems or risks associated with that company.

A second way to acquire a company is for the buyer to purchase


the assets of the targeted company. If the buyer purchases all of the
assets, the target company is bought with a clean slate and the sell-off
cash is given back to the shareholders through liquidation or by
dividend. Often a buyer will not purchase all of the assets and instead
buy specific assets of the company in order to avoid past or future risks
and liabilities. The downside to purchasing a company in this manner is
the tax imposed on transfers of individual assets. Stock transactions,
however, generally have little to no taxes for the buyer or seller
shareholders.

The above two transactions refer specifically to the purchase of


larger companies. Smaller businesses have related processes such as
the purchasing of one company’s assets; however stock transactions
may or may not be involved.

What is the difference between Merger and Acquisition?


Although merger and acquisition are often used as synonymous
terms, there is a subtle difference between the two concepts.

In the case of a merger, two firms together form a new company.


After the merger, the separately owned companies become jointly
owned and obtain a new single identity. When two firms merge, stocks
of both are surrendered and new stocks in the name of new company
are issued.
However, with acquisition, one firm takes over another and
establishes its power as the single owner. Generally, the firm which
takes over is the bigger and stronger one. The relatively less powerful,
smaller firm loses its existence, and the firm taking over, runs the whole
business with its own identity. Unlike the merger, stocks of the acquired
firm are not surrendered, but bought by the public prior to the
acquisition, and continue to be traded in the stock market.

Another difference is, when a deal is made between two


companies in friendly terms, it is typically proclaimed as a merger,
regardless of whether it is a buy out. In an unfriendly deal, where the
stronger firm swallows the target firm, even when the target company is
not willing to be purchased, then the process is labeled as acquisition.
Motives behind M & A

STAFF
REDUCTIO
N
RESOURSE ECONOMIE
TRANSFER S OF SCALE

IMPROVED
MARKET NEW
REACH MOTIVES TECHNOLO
GY

INCREASE
MARKET
TAXES SHARE

CROSS
SELLING

By merging, the companies hope to benefit from the following:

• Staff reductions - As every employee knows, mergers tend to mean job


losses. Consider all the money saved from reducing the number of staff
members from accounting, marketing and other departments. Job cuts
will
also include the former CEO, who typically leaves with a compensation
package.

• Economies of Scale: This generally refers to a method in which the


average cost per unit is decreased through increased production, since
fixed costs are shared over an increased number of goods. In a layman’s
language, more the products, more is the bargaining power.
Yes, size matters. Whether it's purchasing stationery or a new corporate
IT system, a bigger company placing the orders can save more on costs.
Mergers also translate into improved purchasing power to buy
equipment or office supplies - when placing larger orders, companies
have a greater ability to negotiate prices with their suppliers.

• Acquiring new technology - To stay competitive, companies need to stay


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

• Increased revenue /Increased Market Share: This motive assumes that


the company will be absorbing the major competitor and thus increase
its power (by capturing increased market share) to set prices.

• Cross selling: For example, a bank buying a stock broker could then sell
its banking products to the stock brokers customers, while the broker
can sign up the bank’ customers for brokerage account. Or, a
manufacturer can acquire and sell complimentary products.

• Corporate Synergy: Better use of complimentary resources. It may take


the form of revenue enhancement (to generate more revenue than its
two predecessor standalone companies would be able to generate) and
cost savings (to reduce or eliminate expenses associated with running a
business).
• Taxes : A profitable can buy a loss maker to use the target’s tax right off
i.e. wherein a sick company is bought by giants.

• Resource transfer: Resources are unevenly distributed across firms and


interaction of target and acquiring firm resources can create value
through either overcoming information asymmetry or by combining
scarce resources. Eg: Laying of employees, reducing taxes etc.
• Improved market reach and industry visibility - Companies buy
companies to reach new markets and grow revenues and earnings. A
merge may expand two companies' marketing and distribution, giving
them new sales opportunities. A merger can also improve a company's
standing in the investment community: bigger firms often have an
easier time raising capital than smaller ones.

Synergy: The Premium for Potential Success

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

For the most part, acquiring companies nearly always pay a


substantial premium on the stock market value of the companies they
buy. The justification for doing so nearly always boils down to the notion
of synergy; a merger benefits shareholders when a company's post-
merger share price increases by the value of potential synergy.

Let's face it, it would be highly unlikely for rational owners to sell if
they would benefit more by not selling. That means buyers will need to
pay a premium if they hope to acquire the company, regardless of what
pre-merger valuation tells them.

For sellers, that premium represents their company's future prospects.


For
buyers, the premium represents part of the post-merger synergy they
expect can be achieved. The following equation offers a good way to
think about synergy and how to determine whether a deal makes sense.
The equation solves for the minimum required synergy:

In other words, the success of a merger is measured by whether the


value of the buyer is enhanced by the action. However, the practical
constraints of mergers, often prevent the expected benefits from being
fully achieved. Alas, the synergy promised by deal makers might just fall
short.

Valuation Matters

Investors in a company that is aiming to take over another one


must determine whether the purchase will be beneficial to them. In
order to do so, they must ask themselves how much the company being
acquired is really worth.
Naturally, both sides of an M&A deal will have different ideas about the
worth of a target company: its seller will tend to value the company at
as high of a price as possible, while the buyer will try to get the lowest
price that he can.
There are, however, many legitimate ways to value companies. The
most
common method is to look at comparable companies in an industry, but
deal
makers employ a variety of other methods and tools when assessing a
target company. Here are just a few of them:

1. Comparative Ratios - The following are two examples of the many


comparative metrics on which acquiring companies may base their
offers:

o Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an


acquiring company makes an offer that is a multiple of the earnings of
the target company. Looking at the P/E for all the stocks within the
same industry group will give the acquiring company good guidance for
what the target's P/E multiple should be.

o Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the


acquiring company makes an offer as a multiple of the revenues, again,
while being aware of the price-to-sales ratio of other companies in the
industry.

2. Replacement Cost - In a few cases, acquisitions are based on the cost


of
replacing the target company. For simplicity's sake, suppose the value of
a
company is simply the sum of all its equipment and staffing costs. The
acquiring company can literally order the target to sell at that price, or it
will create a competitor for the same cost. Naturally, it takes a long time
to
assemble good management, acquire property and get the right
equipment. This method of establishing a price certainly wouldn't make
much sense in a service industry where the key assets - people and
ideas - are hard to value and develop.

3. Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted


cash flow analysis determines a company's current value according to its
estimated future cash flows.
Forecasted free cash flows (operating profit + depreciation +
amortization of goodwill – capital expenditures – cash taxes - change in
working capital) are discounted to a present value using the company's
weighted average costs of capital (WACC). Admittedly, DCF is tricky to
get right, but few tools can rival this valuation method.

Valuation Method
What to Look For

It's hard for investors to know when a deal is worthwhile. The


burden of proof should fall on the acquiring company. To find mergers
that have a chance of success, investors should start by looking for
some of these simple criteria:
• A reasonable purchase price - A premium of, say, 10% above the
market
price seems within the bounds of level-headedness. A premium of 50%,
on the other hand, requires synergy of stellar proportions for the deal to
make sense. Stay away from companies that participate in such
contests.
• Cash transactions - Companies that pay in cash tend to be more
careful
when calculating bids and valuations come closer to target. When stock
is
used as the currency for acquisition, discipline can go by the wayside.
• Sensible appetite – An acquiring company should be targeting a
company
that is smaller and in businesses that the acquiring company knows
intimately. Synergy is hard to create from companies in disparate
business
areas. Sadly, companies have a bad habit of biting off more than they
can
chew in mergers.
Mergers are awfully hard to get right, so investors should look for
acquiring
companies with a healthy grasp of reality.

You need a well-defined corporate strategy. It allows you to cast


aside any deal that doesn’t move the strategy forward, even if it looks
incredibly attractive. It is not about growing for growth’s sake but about
building a viable company.

DETERMINE WHETHER AN ACQUISITION MAKES SENSE FOR YOUR


FIRM

TACTIC WHY IT WORKS WHAT CAN GO WRONG


Grow market Acquiring a firm can build If the acquisition
goes sour,

share quickly your finances faster than revenues and profit


can dry up

just growing your firm faster than a drainage ditch in

naturally. Phoenix. Investors might prefer

that you up the dividend or


launch

a stock buy-back.

Improve utiliza- Investors think that money Investors might prefer


that

tion of cash on sitting in a money-market you up the dividend or


launch

hand account is wasted equity. a stock buy-back.

________________________________________________________________________

Provide addition- If they complement your If the product hasn’t


been proven

al products for current products, the in the marketplace, you


could

current whole could be greater end up with a product nobody

Customers than the sum of the parts. wants.

________________________________________________________________________

Recruit hard- Acquiring talent in one Acquired employees may


not be

to-find personnel mighty swoop can be comfortable in the new


environ-
easier than running a ment, resulting in an
exodus of

series of job fairs. talent.

_________________________________________________________________________

Expand into Acquisitions immed- Multiple markets can


make

new markets iately bootstrap you it difficult for


management

into the new market, to focus on being


success-

without forcing you ful in any one business.

to build a new bus-

iness from scratch.

_________________________________________________________________________
_

Goal: Pick the company that best matches your corporate strategy.
Build a list of potential acquisition targets and narrow them down to one
or two that have the best chance of success. Create a matrix that allows
you to compare the candidates against your Strategy. Then bring your
team together to discuss the pros and cons.

DOING THE DEAL

Start with an Offer


When the CEO and top managers of a company decide that they
want to do a merger or acquisition, they start with a tender offer. The
process typically begins with the acquiring company carefully and
discreetly buying up shares in the target company, or building a
position. Once the acquiring company starts to purchase shares in the
open market, it is restricted to buying 5% of the total outstanding
shares before it must file with the SEC. In the filing, the company must
formally declare how many shares it owns and whether it intends to buy
the company or keep the shares purely as an investment.
Working with financial advisors and investment bankers, the
acquiring company will arrive at an overall price that it's willing to pay
for its target in cash, shares or both. The tender offer is then frequently
advertised in the business press, stating the offer price and the deadline
by which the shareholders in the target company must accept (or reject)
it.

The Target's Response


Once the tender offer has been made, the target company can do
one of several things:
• Accept the Terms of the Offer - If the target firm's top managers
and
shareholders are happy with the terms of the transaction, they will go
ahead with the deal.
• Attempt to Negotiate - The tender offer price may not be high
enough for the target company's shareholders to accept, or the specific
terms of the
deal may not be attractive. In a merger, there may be much at stake for
the management of the target - their jobs, in particular. If they're not
satisfied with the terms laid out in the tender offer, the target's
management may try to work out more agreeable terms that let them
keep their jobs or, even better, send them off with a nice, big
compensation package.
Not surprisingly, highly sought-after target companies that are the
object
of several bidders will have greater latitude for negotiation.
Furthermore, managers have more negotiating power if they can show
that they are crucial to the merger's future success.
• Execute a Poison Pill or Some Other Hostile Takeover Defense –
A poison pill scheme can be triggered by a target company when a
hostile
suitor acquires a predetermined percentage of company stock. To
execute
its defense, the target company grants all shareholders - except the
acquiring company - options to buy additional stock at a dramatic
discount. This dilutes the acquiring company's share and intercepts its
control of the company.
• Find a White Knight - As an alternative, the target company's
management may seek out a friendlier potential acquiring company, or
white knight. If a white knight is found, it will offer an equal or higher
price
for the shares than the hostile bidder.
Mergers and acquisitions can face scrutiny from regulatory bodies. For
example,
if the two biggest long-distance companies in the U.S., AT&T and Sprint,
wanted to merge, the deal would require approval from the Federal
Communications Commission (FCC). The FCC would probably regard a
merger of the two giants as the creation of a monopoly or, at the very
least, a threat to competition in the industry.

Closing the Deal

Finally, once the target company agrees to the tender offer and
regulatory requirements are met, the merger deal will be executed by
means of some transaction. In a merger in which one company buys
another, the acquiring company will pay for the target company's shares
with cash, stock or both.
A cash-for-stock transaction is fairly straightforward: target
company
shareholders receive a cash payment for each share purchased. This
transaction is treated as a taxable sale of the shares of the target
company.
If the transaction is made with stock instead of cash, then it's not
taxable. There is simply an exchange of share certificates. The desire to
steer clear of the tax man explains why so many M&A deals are carried
out as stock-for-stock transactions.
When a company is purchased with stock, new shares from the
acquiring company's stock are issued directly to the target company's
shareholders, or the new shares are sent to a broker who manages them
for target company shareholders. The shareholders of the target
company are only taxed when they sell their new shares.
When the deal is closed, investors usually receive a new stock in
their portfolios - the acquiring company's expanded stock. Sometimes
investors will get new stock identifying a new corporate entity that is
created by the M&A deal.

Buyer always wants to buy low, but seller wants to sell high!

 Usually, merger intermediaries are involved in the process of M&A


for both buyer side and seller side. These intermediaries are
called financial advisors, who are experts in merger and acquisition

 Set up initial contacts to match up potential buyer or seller

 If there is a match, a Letter of Intent (LOI) or Memorandum of


Understanding (MOU) will be signed to agree to proceed with Due
Diligence process and exchanging information; usually a off-site
data room will be set-up

Legal Procedures for Merger, Amalgamations and Take-over

The basis law related to mergers is codified in the Indian


Companies Act, 1956 which works in tandem with various regulatory
policies. The general law relating to mergers, amalgamations and
reconstruction is embodied in sections 391 to 396 of the Companies Act,
1956 which jointly deal with the compromise and arrangement with
creditors and members of a company needed for a merger. Section 391
gives the Tribunal the power to sanction a compromise or arrangement
between a company and its creditors/ members subject to certain
conditions. Section 392 gives the power to the Tribunal to enforce and/
or supervise such compromises or arrangements with creditors and
members. Section 393 provides for the availability of the information
required by the creditors and members of the concerned company when
acceding to such an arrangement. Section 394 makes provisions for
facilitating reconstruction and amalgamation of companies, by making
an appropriate application to the Tribunal. Section 395 gives power and
duty to acquire the shares of shareholders dissenting from the scheme
or contract approved by the majority.

And Section 396 deals with the power of the central government to
provide for an amalgamation of companies in the national interest. In
any scheme of amalgamation, both the amalgamating company or
companies and the amalgamated company should comply with the
requirements specified in sections 391 to 394 and submit details of all
the formalities for consideration of the Tribunal. It is not enough if one
of the companies alone fulfils the necessary formalities. Sections 394,
394A of the Companies Act deal with the procedures and the
requirements to be followed in order to effect amalgamations of
companies coupled with the provisions relating to the powers of the
Tribunal and the central government in the matter of bringing about
amalgamations of companies.

After the application is filed, the Tribunal would pass orders with
regard to the fixation of the dates of the hearing, and the provision of a
copy of the application to the Registrar of Companies and the Regional
Director of the Company Law Board in accordance with section 394A and
to the Official Liquidator for the report confirming that the affairs of the
company have not been conducted in a manner prejudicial to the
interest of the shareholders or the public. Before sanctioning the scheme
of amalgamation, the Tribunal has also to give notice of every
application made to it under section 391 to 394 to the central
government and the Tribunal should take into consideration the
representations, if any, made to it by the government before passing
any order granting or rejecting the scheme of amalgamation. Thus the
central government is provided with an opportunity to have a say in the
matter of amalgamations of companies before the scheme of
amalgamation is approved or rejected by the Tribunal.

The powers and functions of the central government in this regard


are exercised by the Company Law Board through its Regional Directors.
While hearing the petitions of the companies in connection with the
scheme of amalgamation, the Tribunal would give the petitioner
company an opportunity to meet all the objections which may be raised
by shareholders, creditors, the government and others. It is, therefore,
necessary for the company to keep itself ready to face the various
arguments and challenges. Thus by the order of the Tribunal, the
properties or liabilities of the amalgamating company get transferred to
the amalgamated company. Under section 394, the Tribunal has been
specifically empowered to make specific provisions in its order
sanctioning an amalgamation for the transfer to the amalgamated
company of the whole or any parts of the properties, liabilities, etc. of
the amalgamated company. The rights and liabilities of the employees of
the amalgamating company would stand transferred to the amalgamated
company only in those cases where the Tribunal specifically directs so in
its order.

The assets and liabilities of the amalgamating company


automatically gets vested in the amalgamated company by virtue of the
order of the Tribunal granting a scheme of amalgamation. The Tribunal
also make provisions for the means of payment to the shareholders of
the transferor companies, continuation by or against the transferee
company of any legal proceedings pending by or against any transferor
company, the dissolution (without winding up) of any transferor
company, the provision to be made for any person who dissents from
the compromise or arrangement, and any other incidental consequential
and supplementary matters to secure the amalgamation process if it is
necessary. The order of the Tribunal granting sanction to the scheme of
amalgamation must be submitted by every company to which the order
applies (i.e., the amalgamating company and the amalgamated
company) to the Registrar of Companies for registration within thirty
days.

What are the risks involved with a merger?

That said, achieving synergy is easier said than done - it is not


automatically realized once two companies merge. Sure, there ought to
be economies of scale when two businesses are combined, but
sometimes a merger does just the opposite. In many cases, one and one
add up to less than two.
Sadly, synergy opportunities may exist only in the minds of the
corporate leaders and the deal makers. Where there is no value to be
created, the CEO and investment bankers - who have much to gain from
a successful M&A deal – will try to create an image of enhanced value.
The market, however, eventually sees through this and penalizes the
company by assigning it a discounted share price.

A merger does not always generate success. Sometimes mergers


result in a net loss of value because of problems that arise in the
combining of forces whether through technological incompatibility,
unnecessary employees or equipment, poor management, etc. This often
results in confusion among new management in the decision making of
which staff to keep and which operations to uphold. In order to create a
successful merger it must be well researched, maintain the employee
environment, and in the case of larger companies it must increase
shareholder value quicker than if the two companies were still
separated.

A second risk involved with mergers is monopoly concerns. The


European Commission, the United States Department of Justice, and the
US Federal Trade Commission have the power to deny a merger in anti-
trust cases that signal a monopoly or a negative impact on the market.
Again this is the case for the merge of larger companies. Smaller
business mergers do not necessarily share the same risks. George and
Company can assist in determining the risk and benefits of any merge or
acquisition and clarify each step to be taken to ensure a smooth and
professional process.

What are the risks involved in an acquisition or takeover?

Business acquisitions or takeovers share many of the same risks


as a merger in the sense that when a second company is purchased new
management has to reconfigure the employee environment and
operations among other things. Risks involved with the purchased
company such as past and present debt, problems, assets or liabilities
are “baggage” that must be addressed by the new owners and
management. George and Company will assist in identifying risks
involved with a merge or acquisition by adequately valuating any
business involved.

Why They Can Fail

It's no secret that plenty of mergers don't work. Those who


advocate mergers will argue that the merger will cut costs or boost
revenues by more than enough to justify the price premium. It can
sound so simple: just combine computer systems, merge a few
departments, use sheer size to force down the price of supplies and the
merged giant should be more profitable than its parts. In theory,
1+1 = 3 sounds great, but in practice, things can go awry.
Historical trends show that roughly two thirds of big mergers will
disappoint on their own terms, which means they will lose value on the
stock market. The motivations that drive mergers can be flawed and
efficiencies from economies of scale may prove elusive. In many cases,
the problems associated with trying to make merged companies work
are all too concrete.

Flawed Intentions:

For starters, a booming stock market encourages mergers, which


can spell trouble. Deals done with highly rated stock as currency are
easy and cheap, but the strategic thinking behind them may be easy and
cheap too. Also, mergers are often attempt to imitate: somebody else
has done a big merger, which prompts other top executives to follow
suit.
A merger may often have more to do with glory-seeking than business
strategy.
The executive ego, which is boosted by buying the competition, is
a major force in M&A, especially when combined with the influences
from the bankers, lawyers and other assorted advisers who can earn big
fees from clients engaged in mergers. Most CEOs get to where they are
because they want to be the biggest and the best, and many top
executives get a big bonus for merger deals, no matter what happens to
the share price later.
On the other side of the coin, mergers can be driven by generalized fear.
Globalization, the arrival of new technological developments or a fast-
changing economic landscape that makes the outlook uncertain are all
factors that can create a strong incentive for defensive mergers.
Sometimes the management team feels they have no choice and must
acquire a rival before being acquired.
The idea is that only big players will survive a more competitive world.

The Obstacles to Making it Work

Coping with a merger can make top managers spread their time
too thinly and neglect their core business, spelling doom. Too often,
potential difficulties seem trivial to managers caught up in the thrill of
the big deal.
The chances for success are further hampered if the corporate cultures
of the companies are very different. When a company is acquired, the
decision is typically based on product or market synergies, but cultural
differences are often ignored. It's a mistake to assume that personnel
issues are easily overcome. For example, employees at a target
company might be accustomed to easy access to top management,
flexible work schedules or even a relaxed dress code. These aspects of a
working environment may not seem significant, but if new management
removes them, the result can be resentment and shrinking productivity.
More insight into the failure of mergers is found in the highly
acclaimed study from McKinsey, a global consultancy. The study
concludes that companies often focus too intently on cutting costs
following mergers, while revenues, and ultimately, profits, suffer.
Merging companies can focus on integration and cost-cutting so much
that they neglect day-to-day business, thereby prompting nervous
customers to flee. This loss of revenue momentum is one reason so
many mergers fail to create value for shareholders.
But remember, not all mergers fail. Size and global reach can be
advantageous, and strong managers can often squeeze greater
efficiency out of badly run rivals.

Merger & acquisition in india


Until upto a couple of years back, the news that Indian companies
having acquired American-European entities was very rare. However,
this scenario has taken a sudden U turn.

Nowadays, news of Indian Companies acquiring a foreign


businesses are more common than other way round. Buoyant Indian
Economy, extra cash with Indian corporates, Government policies and
newly found dynamism in Indian businessmen have all contributed to
this new acquisition trend. Indian companies are now aggressively
looking at North American and European markets to spread their wings
and become the global players.

The Indian IT and ITES companies already have a strong presence


in foreign markets, however, other sectors are also now growing rapidly.
The increasing engagement of the Indian companies in the world
markets, and particularly in the US, is not only an indication of the
maturity reached by Indian Industry but also the extent of their
participation in the overall globalization process.

Here are the top 10 acquisitions made by Indian companies


worldwide:
Deal
Country
Acquirer Target Company value Industry
targeted
($ ml)
Tata Steel Corus Group plc UK 12,000 Steel
Hindalco Novelis Canada 5,982 Steel
Daewoo
Videocon Korea 729 Electronics
Electronics Corp.
Dr. Reddy’s Labs Betapharm Germany 597 Pharmaceutical
Suzlon Energy Hansen Group Belgium 565 Energy
HPCL Kenya PetroleumKenya 500 Oil and Gas
Deal
Country
Acquirer Target Company value Industry
targeted
($ ml)
Refinery Ltd.
Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom

If you calculate top 10 deals itself account for nearly US $ 21,500


million. This is more than double the amount involved in US companies’
acquisition of Indian counterparts.

Graphical representation of Indian outbound deals since 2000.

Have a look at some of the highlights of Indian Mergers and


Acquisitions scenario as it stands

Indian outbound deals, which were valued at US$ 0.7 billion in 2000-
01, increased to US$ 4.3 billion in 2005, and further crossed US$ 15
billion-mark in 2006. In fact, 2006 will be remembered in India’s
corporate history as a year when Indian companies covered a lot of new
ground. They went shopping across the globe and acquired a number of
strategically significant companies.
Mergers and Acquisitions in 2009

Mergers and acquisitions (M&A) in the country slumped to their worst


since 2004 in the first half of 2009 as a liquidity crunch and mismatched
valuations marred buying plans of Indian companies.

Analysts, however, say the worst may be over.

In the first six months of 2009, Indian companies were involved in 136
M&A deals, down nearly 54% from the same period last year.

Unhappy tidings: Mergers


and acquisitions came down
considerably with companies
busy on survival mode rather
than getting into expansions.

On value of announced deals,


M&A activities fell 73% from
a year ago to $5.4 billion
(Rs26,136 crore). The
average deal value dropped
nearly 40% to $98 million.

In the second half of 2008,


when the global slowdown
started, the number of deals
declined 28% but the
average deal value has
recovered from the $60
million seen then.

“The biggest reason for the fall was the lack of liquidity” “This
particularly affected cross-border deals as no leverage or buying finance
was available. It was only companies with cash in hand that went
hunting for targets.”

Mismatch in valuations further dampened spirits as expectations of many


promoters had not come down as much as the markets.
“A few promoters were able to raise debt even as it was expensive.
Therefore, instead of giving out stake on lower valuations, they raised
debt,”

M&A activity increasing in consumer-driven services and products and


more inbound deals, or acquisitions of Indian companies by foreign
firms.

The country’s biggest deals in the first half of 2009 were :

ONGC Videsh Ltd’s purchase of the UK’s Imperial Energy Corp. Plc. for
$1.9 billion,

Tech Mahindra Ltd’s $576 million acquisition of fraud-hit Satyam


Computer Services Ltd in a global bid, and

Sesa Goa Ltd’s $350 million takeover of Dempo Mining Corp. Pvt. Ltd.

At least 50% of the deals in the first half of 2009 were domestic
acquisitions, against 40% last year.

The most preferred destination for Indian acquirers was the US, with
seven of the 31 outbound targets located in that country, followed by
the UK with three deals.

The acquirers in eight of the 34 inbound deals were US-based


companies, followed by French firms with five deals and German firms
with four.

Information technology (IT), IT-enabled services (ITeS) and


manufacturing industries accounted for the most acquisitions in the first
half, with an 18% share each.

However, M&A activity in IT and ITeS had fallen from 27% in the first
half of 2008, and manufacturing deals from 20%.

Some of Successful Mergers and Acquisitions deals.

Tata steel buys Corus Plc: 12.1$ billion


Tata buy jaguar and land rover: 2.3$ billion

Vodafone buys hutch: 11$ billion

Mittal Steel and Arcelor: $38.3 billion.

Google bought YouTube ($1.65B in 2006)

Why?

• Google bought a rival.

• YouTube had four times as many hits as Google Video

• YouTube streamed nine times as many clips as Google Video.

• Google’s choice to buy rather than build marked a big strategic


change.

• YouTube = 53% of video users in the world.

No Guarantee of Success for Every Merger Case

 In average, three out of four mergers fail to achieve their desired


financial and strategic goals

 AOL-Time Warner deal:

 Indigestion: One or both companies fail to


successfully incorporate their business models, goals, or cultures
into an integrated whole.

 The promised payoffs never materialize

 Stock price has plunged ever since the merger


Some other fail cases in M&A

• Quaker Oats bought in 1994 Snapple for $ 1.7 billion.

$ 500 million lost on announcement, $ 100 million a year later

Snapple was spun off 2 years later at 20% of price

• Anheuser-Busch bought in 1982 Campbell-Taggart at $ 560

million. Closed down after 13y of struggling for survival.

• IBM bought Lotus for $ 3.2 bn. (more than 100% premium)

Probably never to be recouped.


LESSONS FROM MEGA-MERGERS

1. Don’t try to swallow something larger than your own head. If the
company you’re acquiring is almost as large as your own, it’s
going to take major amounts of time and effort to work the people
issues and organizational details of the new company. If the
merger is too complicated, you may not survive the process.

2. The bigger the hype, the harder the fall. You never want your
investors and customers to think that the long-term success of
your company hinges entirely on the success of a single M & A.
Too much can go wrong and, if it does, you look very, very foolish.

3. 3. Merge in haste, repent at leisure. You’re got to spend the time


to determine whether or not the two firms are compatible. If
there’s too big a difference between the two cultures, executives
from the two firms will keep fighting until one side is completely
exhausted. But by then there may not be much left to sell off.

4. 4. The more you buy, the greater your risk. You can grow a
business by gobbling up smaller firms, but without a strategy that
puts those acquisitions into context, you’ll be vulnerable to any
market shift that puts the acquired companies under stress.

5. 5. Too many chefs spoil the broth. While it’s natural to want to
keep talented management onboard after a merger, you’ve got be
certain they know that they’re no longer running the show.
Otherwise, you’re just setting yourself up for turf wars and endless
management conflict.
Conclusion

In real terms, the rationale behind mergers and acquisitions is that


the two companies are more valuable, profitable than individual
companies and that the shareholder value is also over and above that of
the sum of the two companies. Despite negative studies and resistance
from the economists, M&A’s continue to be an important tool behind
growth of a company. Reason being, the expansion is not limited by
internal resources, no drain on working capital - can use exchange of
stocks, is attractive as tax benefit and above all can consolidate industry
- increase firm's market power.

With the FDI policies becoming more liberalized, Mergers,


Acquisitions and alliance talks are heating up in India and are growing
with an ever increasing cadence. They are no more limited to one
particular type of business. The list of past and anticipated mergers
covers every size and variety of business -- mergers are on the increase
over the whole marketplace, providing platforms for the small companies
being acquired by bigger ones.

The basic reason behind mergers and acquisitions is that


organizations merge and form a single entity to achieve economies of
scale, widen their reach, acquire strategic skills, and gain competitive
advantage. In simple terminology, mergers are considered as an
important tool by companies for purpose of expanding their operation
and increasing their profits, which in façade depends on the kind of
companies being merged. Indian markets have witnessed burgeoning
trend in mergers which may be due to business consolidation by large
industrial houses, consolidation of business by multinationals operating
in India, increasing competition against imports and acquisition
activities. Therefore, it is ripe time for business houses and corporate to
watch the Indian market, and grab the opportunity.