Mergers and Acquisitions

Different Aspects

Corporate restructuring encompasses enhancing economy (cost reduction) and

improving efficiency (profitability). When a company wants to grow or survive in a
competitive environment, it needs to reconstruct itself and focus on its competitive
advantage. The survival and growth of companies in this environment depend on their
ability to pool all their resources and put them to optimum use. A large company,
resulting from merger of small ones, can achieve economies of scale. If the size is bigger,
it enjoys a high corporate status.
Reducing the cost of capital translates into profits. Availability of funds allows the
enterprise to grow at all levels and thereby become more and more competitive.
Amalgamation, mergers,demergers, takeovers, acquisitions of shares, disinvestments,
joint ventures, franchising and alliances are some of the methods through which
restructuring strategies are implemented.

Merger
A merger can be defined as “the fusion or absorption of one thing or right into another.”It
can also be defined as an arrangement whereby the assets of two (or more) companies
become vested in, or under the control of one company ( which may or may not be one of
the original two companies ), which has as its shareholders, all or substantially all, the
shareholders of the two companies.

Acquisition/ Takeover

Takeover is the strategy of acquiring control over the management of another company-
either directly by acquiring shares or indirectly by participating in the management. The
objective is to consolidate and acquire a large share of the market.

Different aspects of Mergers and Acquisitions

Legal Aspects

The Companies Act of 1956 has provided a set of provisions specially dealing with
amalgamation of companies to facilitate the transactions. The statutory provisions
relating to merger and amalgamation are contained in Sections 390 to 396A of the Act.

The provisions of Section 372A apply to the acquisition of shares through the company.

Section 395 lays down legal requirements for the purpose of takeover of an unlisted
company through transfer of undertaking to another company.

The takeover of a listed company is regulated by Rules 40A and 40B of the listing
agreement.
Economic Aspects

Synergies through Consolidation: Most mergers take place with the aim of exploiting
economies of scale by attaining critical mass and achieving cost savings. This has been
proved especially in the cases of pharmaceutical industries, pulping and air compressors.
The banking industry too has found global consolidation moves profitable, e.g. the
Deutsche Bank consolidating its investment banking activities by acquisition of Banker’s
Trust’s paid dividends.

Vertical Integration

Customer Demands

Technology

Tax Considerations

Diversifications

Disciplining the capital market, as inefficient and errant companies get taken over due to
their low book value and share prices.

Consolidation of efforts and capacities enables the industries to gain competitive strength
in domestic as well as international markets.

Concentrating on core competencies enables the companies to rationalize their portfolios,

enhance entity value and increase leveraging capability.

Financial and Accounting Aspect

If the consideration for the acquired shares has been paid in cash only, the cash account
will be credited and the investment account will be debited.

If only fully paid shares have been allotted by the acquiring company, then the share
capital account will be credited and the investment account will be debited.

If partly paid in cash and partly in the form of fully paid shares, then both the entries have
to be passed for the respective amounts.
The Human Aspects

Sensitive areas of the company are pinpointed and personnel in these sections are crefully
monitored.

Serious efforts are required to retain key people.

Records are to be kept of everyone who leaves, when, why and to where.

Likely union reaction to be assessed in advance.

Estimate cost of redundancy payments, early pensions and the like assets.

Family gatherings and picnics can be organised for the employees.

Taxation Aspects

The word ‘amalgamation’ or ‘merger’ is not defined anywhere in the Companies Act.
However, Section 2(1B) of the Income Tax Act, 1961 defines amalgamation. For a
merger to qualify as an ‘amalgamation’ for the purpose of Income Tax, the given
conditions in the Act have to be satisfied. Section 72A of the Income Tax Act is referred
to when considering a proposal involving the merger of a sick industrial company with
another company in order to reap the facility for carrying forward and setting off the
accumulated losses and unabsorbed depreciation. Taxation aspect is not involved in a
takeover at the time of acquisition of shares by the holding company in the target
company. However, If and when the holding company sells the shares, the sale will
involve the payment of Capital Gains Tax (short term or long term) under the Income
Tax Act, depending for which the shares are held by the holding company.

Stamp Duty Aspects

The incidence of stamp duty is an important consideration in the planning of any merger.
In fact, in some cases, the whole form in which the merger is sought to take place is
selected taking into account the savings in stamp duty. The incidence of stamp duty, more
particularly on transfer of immovable property, is fairly high to merit serious
consideration. The fact that in India, the stamp duty is substantially levied by the states
has given considerable scope for savings in stamp duty.

In a takeover, the dutiable documents is the instruments of transfer executed by and

between the transferors of the shares and the transferee of the shares in the form
prescribed in the Companies (Central Government’s) General Rules and Forms,1956. The
duty on the instruments of transfer is paid in the form of share transfer stamps. These are
affixed and cancelled on each Instrument of transfer at the rate of 0.50p per 100 rupees or
a fraction thereof of the sale value of the shares. No stamp duty is payable in the case of
transfer of shares through depository.
Corporate restructuring is concerned with arranging the business activities of the
corporate as a whole so as to achieve certain predetermined objectives at the corporate
level. When we say corporate level it may mean a single company engaged in single
activity or an enterprise engaged in multiple activities.
 ISSUES IN BANK MERGERS
AN INDIAN PERSPECTIVE

The primary aim of Mergers and Acquisitions (M & A) is to expand a company’s

business and earn profits.Acquisitions help in expansion and growth as they bring in
more customers and business,which in turn brings in more money for the companies.A
large number of companies are on an expansion spree for fast-paced growth.Companies
have taken M&A as one of the fastest ways to set up business overseas as it helps in
gaining access to the target company’s customer base and in increasing the existing
market share of the merging entities.And more importantly it conquers the inefficiencies
associated with starting a business from scratch.

OVERVIEW OF MERGER SCENARIO IN INDIAN CONTEXT

With liberalization, the companies in India faced many challenges like rising
competition, lack of sophisticated technology and infrastructure bottlenecks. This in turn
led to a rise in the M&A activity in the country. M&A activity was necessitated by the
requirement of consolidation as the Indian economy opened up for foreign players. The
M&A scenario in India has witnessed radical changes with the year 2007 accounting for
acquisition deals worth almost $50bn,compared to just &16.3bn two years ago.Out of the
480 M&A deals in 2006 amounting to $20.3,Indian companies reported 266 cross-border
deals worth $15.3bn.Especially after 1999 Indian companies have increasingly embarked
upon M&A activity from a strategic standpoint.Indian companies entered into cross-
border deals with 54 countries between 1995 and 2005.

The Indian banking sector,during the post-reform period,has witnessed a series of

M&A;notable among them has been the merger of Times of India with HDFCBank and
reverse merger of ICCI with ICCI Bank,The banking sector is all set for onsolidation
with both the privte sector banks and the public sector banks on the lookout for
acquisition of foreign banks.Some of the PSU banks are planning to merge with their
peers to consolidate their capacities and reap benefits of economies of scale and scope.

As in most developing economies,the Indian banking sector is going through a process of

restructuring,mainly driven by pervasive trends such as deregulation, disintermediation,
technological progress, innovation and severe competition. M&A are not new to the
Indian banking sector.As many as 71 M&A have taken place in India between 1961 and
2004.

Three broad patterns of M&A emerge from past deals in the banking sector in India.
• Merger of private sector banks with private sector banks.
• Merger of public sector banks with private sector banks.
• Merger of public sector banks with public sector banks.

Today in the Indian banking sector,there is more talk of takeovers and consolidation in
the public sector banks and in the words of Finance Minister,P.Chidabaram
“Consolidation,convergence and competition” will be key drivers of mergers in the
Indian banking industry.

WHY BANK MERGERS?

In the era of globalization,banks will have to be competitive in order to face challenges

and exploit
opportunities.A bank merger could take place with the following strategic objectives:

• Resource Constraints
• Increase in Share Price
• Improved Efficiency
• Leveraging Technology
• Regulatory Changes
• Diversification
• Broad and Varied Range of Products and Services.

Factors Favoring M & A in the Indian Banking Sector

Mergers are not new to the Indian banking sector. Between 1961-2004, 71 mergers took
place among the various banks in India. Of these, 55 mergers occurred during the pre-
reform period of 1960-1990. Globalization, technological progress and regulatory
changes are three determinants of M&A in any sector of the economy. More often than
not, bank CEOs look for cost reductions achieved by reduced inputs and reduced business
risks as the primary benefits in merger deals. Cross-selling opportunities, operating and
financial synergies as well as tax benefits are also a part of the benefit package in a
merger. The new WTO regime allows far more freedom for foreign entities to operate in
the financial sector. Perhaps, this factor will uniquely encourage more and more private
banks to consider M&A as it will help them undertake increased risk exposures in a cost
effective manner.

Challenges Faced by the Banking Industry in India

The banking industry in India is in a state of flux. It is experiencing a major

transformation due to the changes taking place in the business environment,
governmental regulations and emergence of technologies which can deliver products and
services efficiently, on time, and at affordable rates.

Possible Strategies to Address the Current Challenges

Indian banks are slowly but surely moving from a regime of “large number of small
banks” to “small number of large banks”. Market leaders have chalked out and
implemented quite a few strategic and tactical methods to cope with the above
challenges. The following are illustrative:
• Increasing retail lending of improved quality.
 • Cost-effective business models.
• Making aggressive investments in technology to ensure reliable and timely
delivery of products and services.
• Customer Relationship Management (CRM)
• Introducing changes in organizational structure.
• Added emphasis on fee based services.
• Wealth management.
• Introducing innovative products and services.
• Efficient management of risk through effective implementation of Basel norms.
• Replacing the concept of capital sufficiency by capital efficiency.

The process of merging two banks is a very complex process and hence the acquirers
must consider both the strategic and tactical issues during the planning, due diligence and
post-acquisition phases. Following are some of the issues that arise in the context of
mergers in the Indian banking industry:

IT System Incompatibility

Business Objectives

Legal and Accounting Requirements

Is Merger a Compulsion for Public Sector Banks?

Consumer is the King

Impact on Employees

Monopolistic Tendencies May set in

People Issues

Legal Aspects

Valuation Issues

The Road Ahead

Technology Explosion

New entrants in the banking sector have technological skills while the veterans are well-
equipped with experience in practices. A merger will thus help both parties gain expertise
in a mutually beneficial manner and pave the way for a win-win situation for both the
merging banks. Implementing core banking solutions could be a good example in this
context. Widespread use of internet banking, mobile banking and other modern
technologies such as SWIFT have widened the frontiers of global banking, so much so
that it is now possible tpo market financial products and services globally.

Cross-border M&A Deals in Banks

The trends towards banking consolidation and especially cross-border mergers is moving
inexorably ahead and key deals appear to indicate a fundamental shift in the evolution of
mergers and the beginning of a new phase in banking structures, both domestic and
global. Larger banks, by definition, have more flexibility, are less encumbered by the
regulatory load and have room for growth and expansion into new areas essential for long
term growth. The hard reality behind the growth in bank mergers worldwide is that
economies of scale are critical.
Looking ahead, the banking consolidation locomotive has gathered speed in 2007 and
is now shifting into a new gear. Indian banks are setting up branches and subsidiaries
overseas and foreign banks are expanding their operations in India. These bank branches
further target the local population to be profitable and hence local acquisitions. Evidently
this results in an M&A opportunity for foreign banks to acquire an Indian bank and vice
versa.
For example, ICICI Bank has made an acquisition of a bank in Europe in 2006 to
establish itself in a geographical area.

Summary

M&A in the banking sector evokes high interest simply for the fact that after decades of
tight regulations easing up of the ownership and control has led to a wave of M&A in the
banking industry, globally. Considering the rapid changes occurring in the environment,
M&A in the Indian banking industry is a sheer necessity. There are some critical issues
related to M&A of banks in India. It is rather difficult to evaluate the impact on
consumers from M&A moves, as the impact can be felt in medium and long run. It must
be noted that mere consolidation will not suffice. It must be followed by further reforms
and total functional autonomy in day to day decision making in tune with market
requirements and practices. It must however be remembered that merger as only one of
the alternatives for restructuring/ revitalizing the banking sector and that there could be
more advantageous opinion to achieve optimal utilization of corporate resources.
 M&A
Corporate India Going Global

India as an economy has come a long way when we compare it with the scenario
prevailing before the opening up of the economy. In fact today ‘Brand India’ is being
well recognized all over the world. In 1991, economic conditions in India were not very
optimistic. It was stagnant at 3-4% GDP growth, inflation was as high as 16%,
unemployment problem was taking its toll on the economy, there was nothing in the
name of forex reserves, interest rates were very high and hence unfavourable for
industrial growth and foreign investment was not coming as desired.

Our GDP growth is touching 10% and what is more important is that this growth is
sustainable in future. Inflation which has always been a big matter of concern for our
policy makers is now around 7 %. Thanks to the keen interest of FDIs and FIIs, our
concern is how to ensure optimum utilization of foreign fund inflows rather than how to
attract them. The rupee is appreciating everyday against the dollar depicting the strength
of the Indian economy.

Forex reserves are sufficient around $300 billion.The Indian financial system,important
for the economic growth,is very stable and sound.India now enjoys the distinction of
being a trillion dollar economy.In other words,it can be said that of late we have seen the
emergence of a strong corporate India.

Not long ago,M&A’s were considered to be athreat to Indian corporates as they were
targeted by foreign entities for M&A.But now we see a U-turn in the scenario in the
sense that now it is the Indian corporates which are targeting and acquiring foreign
entities,specially European and American entities,for the purpose of inorganic
growth.Corporate India is now realizing the potential of global market and is going global
to capture the opportunities available there.The giant positive strides taken by Brand
India in the last few years are nothing less than astonishing.Indian businessmen ad
entrepreuners are now ready to revamp the Indian imagethat will make them the world’s
biggest corporations in the time to come.All the sectors like the
steel,manufacturing,IT,auto and FMCG are all buzzing with mega Indian acquisitions.In
fact,a couple of years back Indian companies acquiring European and American entitites
was a rare occurrence but now it has become a very common phenomenon.Indian
outbound deals were values at $0.7bn in 2000-01.

According to Grant Thornton’s anuual Deal Tracker issue,the total value of deals{M&A
and Private Equity(PE)} announced last year was $70.14bn as against $28.16bn in 2006
and $18.35bn in 2005.In fact,in the last few years corporate India ha snot only emerged
as an important destination for internationalprivate equity funding and inbound M&A but
the country has also been highly active in acquiring global companies.In 2007,we have
seen a number of multi-billion-dollar deals being struck by Corporate India striving to
achieve its ambition of growing global.
Why M&A Deals

A firm generally resorts to M&A when it wants to register rapid growth which is not
possible through organic growth or when it is really going through a very tough time. In
the current market scenario, M&A deals are highly regarded as a way of corporate
restructuring. Two companies together are more valuable is the main rationale behind
M&A deals. When a firm takes over another firm and establishes it as a new entity, it is
called acquisition. On the other hand, when two companies agree to cease their
operations and form a new entity, it is called a merger. The main motivating factor for
these M&A deals is synergy. Beside this, there are a number of benefits that accrue from
M&A deals such as:

• Staff Reduction
• Economies of Sale
• Acquiring new Technology
• Improved Market Reach/ Industry Visibility

Significant Deals Made in Recent Years

The year 2007 can be regarded as a year of M&A in India. The Indian IT and ITES
companies already have a strong international presence, but what is more interesting to
note is that other sectors are also registering fast growth. The ever increasing presence of
the Indian companies in the world markets, especially in the US, is undoubtedly an
indication of the maturity reached by the Indian industry. Most of the big industries in
India have chosen the route of M&A to grow globally. Indian companies have started to
acquire international firms with a view to acquiring new markets and maintaining their
growth momentum, buying cutting edge technology, developing new product mixes,
improving operating margins and efficiencies, and taking worldwide competition head-
on.

As per an estimate, the total value of M&A deals that were announced during the
year 2007, including private equity transactions, stands at a whooping $72.2 bn. On
further analysis, it can be found that the value was spread over 1,070 transactions,
representing a growth of 156% in value terms over 2006. The total value of private equity
deals in India which were announced in 2007 amounted to $15.7bn spread over 389
deals, representing a growth of 98% over 2006.

If the Indian economy can grow at a rate of 8-10% in the year 2008, then M&A
deals are expected to exceed those in 2007. The growth of outbound deals exceeded $33
bn in 2007 and grew by 118% over 2006 and it is expected to continue in 2008 across the
board.

The Indian outbound deals, which were valued at $0.7 bn in 2000-01 increased to
$4.3 bn in 2005, and further crossed the $15 bn mark in 2006. There are a number of
growing Indian companies like Reliance Gatewaynet, VSNL and Scandent which were
never heard of by most of the US based companies, but these have recently acquired US
firms. The news of Indian companies acquiring US firms was a surprise to many a few
years back, but not now. And what is more heartening to note is that these US
acquisitions are actually a very small part of a bigger picture. In order to fulfill their quest
to become global players, Indian companies have been on a buying spree in Continental
Europe.

Tata Steel took over the English-Dutch steel-maker Corus in 2007 for a staggering
amount of $12 bn. It is an indication of the fact that global commercial and industrial
leadership is beginning to pass from the West to emerging economies like India. Indian
companies are now looking at global markets instead of domestic ones to move up the
growth ladder. They have started to believe that large companies must have a presence in
the US and Europe. Managers and executives of Indian companies are no longer afraid of
taking much higher risks.

Another thing which helped the cause is the regulatory changes, which has made the
whole process of M&A much easier than ever before. For example, restrictions like the
amount of foreign exchange entering India have been relaxed. As a result Indian
companies have enough forex reserves and this helped them to eye the global market.

As per a recent estimate, Tata’s $12 bn acquisition of Corus Group Plc which has
made it the world’s sixth largest steel maker has been ranked among the ten best business
deals of 2007. In order to have the results of the M&A as desired, lot of pre M&A
research must be made. That means we need to carefully examine the synergy which is
expected to be derived from these deals. Often we see overvaluation of synergy, which
results in the failure of M&A deals.

Indian Corporates Need to be Careful

• Wrong corporate strategy for either one or both the companies.

• One company reveals the truth, and the other hides it.
• Sub-optimum integration strategy for the situation.
• Cultural difference, loss of key employees after retention agreements are up.
• Inexperienced management team of the acquiring company.
• High optimism in Synergies’ calculation.
• Ineffective corporate governance, plain and simple.
• Two desperate companies merge to form one big desperate company.

Consequences of Going Global

The two most significant things for which 2007 will be remembered in India are the
Sensex and the record number of M&A by Indian corporates. While everyone is
concerned with the global crisis, some view it as an opportunity for India to scale new
heights. Many argue that the recent spurt in M&A activity by Indian companies abroad
and multinationals in India will only result in strengthening the country’s economic
growth. But as we know that a single mistake may result in the entire collapse of the
companies, they must exercise proper caution. They should not just jump on the M&A
bandwagon without strategic purpose as early preparation and a clear roadmap for
integration are a must.

In fact, the success of an acquisition is directly dependent on the quality of

integration. It is the steel and telecom sectors where record breaking deals have
happened. Tata-Corus and Vodafone-Hutch acquisitions have set new benchmarks in
leveraged buyouts. These two deals account for $14.9 bn and $11.3 bn respectively out of
the total $51.7 bn. The question which needs careful consideration is, “does the act create
wealth in India, of course apart from giving psychological satisfaction?” Undoubtedly the
entrepreneurs will be getting good returns on their investment, which again adds to their
personal wealth. The major concern is that these big M&A may not create enough
employment opportunities for Indians in the emerged entities. If similar amount of
investments can be made in India which will lead to greater employment opportunities, it
will be great for our economy. However, it cannot be denied that corporate India has
matured tremendously during the recent years and is going global in its quest to increase
its international presence which is undoubtedly an indication of the fact that India is on
the right track to become a super economic power in the world soon.

STRATEGY

• Decisions that represent the future of the firm

Process of Strategic Planning

• Getting Ready

 Identify Specific Issues

 Clarify Roles
 Create a Planning Committee
 Develop Organizational Profile
 Identify the information

• Mission and Vision

 Purpose
 Business
 Values

• Assessing the situation

• Developing Strategies, Goals and Objectives

• Completing the written Plan

 Determine Strategy Methods

 SWOT Analysis
 GAP Analysis
 Top Down and Bottom Up Approach
 Competitive Analysis
 Synergy
 Delphi Technique
 Group Discussion Technique

Approaches to Strategy Formulation

1. Boston Consulting Group

2. Porter Approach
3. Adaptive Approach

Boston Consulting Group

 Experience Curve
 Product Life Cycle
 Portfolio Balance

Porter Approach
 Selection of an attractive industry
 Developing a competitive advantage through cost leadership
 Developing value chain

Adaptive Processes
 Uniqueness of every firm
Mergers and Acquisitions

The Search Process

The Screening Process

First Contact

Discussing Value
 Discontented Cash Flow Method
 Comparable Companies Method
 Book Value Method
 Market Value Method

Preliminary Legal Document

 Confidentiability Agreement
 Letter of intent

Negotiation

Defining the Purchase Price

 Total consideration
 Total purchase price or the enterprise value
 The net Purchase Price

Total Consideration
 Cash
 Shares
 New Debts
Calculation Exchange Ratio

Total Purchase Price

Due Diligence
 Financial
 Legal
 Commercial
 Tax
 Management

Developing the Financial Plan

  Bridge Financing
 Mezzanine Financing Subordinated debt
 Permanent Financing
 Venture Capital Financing
 Seller Financing

Participants in the Merger and Acquisition Process

Investment Bankers
Area for Restructuring
Buyer/Seller Identification
Structuring and Valuation
Negotiation
Legal Compliance

Lawyers
Accountant
Valuation Experts
Institutional Investors
Arbitrageurs

Reasons for Failure of Mergers

 Payment of High Price

 Culture Clash
 Overstated Synergies
 Failure to Integrate Operation
 Poor Business Fit
 Inadequate Due Diligence
 Over Leverage
 Boardroom Split
 Regulatory Delay

Valuation
 Income approach
 Market approach
 Asset approach

Income Approach
 Capitalization Method
 D.C.F

Market Approach
 Relative Valuation
 Comparable Company Approach
Asset Approach
 Adjusted Book Value
 Liquidation Method

The Replacement Cost Approach

 Gross Replacement
 Net Replacement

Option Pricing Model

Some Misconception
 Valuation Models gives an exact estimate of value
 Data
 Correctness of Assumption
 Application of right Valuation Model
 Valuation is totally objective exercise
 Subjective judgement

A well done valuation is timeless treasure

 Specific point of time
 The value estimated is important
 The market is always wrong
 Valuation should always be more quantitative for better estimate