Mergers and acquisition

INTRODUCTION
Mergers refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies and similar entities that can aid, finance, or help a growing company in a given industry grow rapidly without having to create a subsidiary or other child entity. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations. "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 and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse

merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets.

DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although often used synonymously, the terms merger and acquisition mean slightly different things. 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.

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations; therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at the time. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly (that is, when the target company does not want to be purchased) it is always regarded as an acquisition.

OBJECTIVES OF MERGERS AND ACQUISITIONS

The immediate objective of an acquisition is self-evidently growth and expansion of the acquirer's assets, sales and market share. A more fundamental objective may be the enhancement of shareholders' wealth through acquisitions aimed at accessing or creating sustainable competitive advantage for the acquirer. In modern finance theory, shareholder wealth maximization is posited as a rational criterion for investment and financing decisions made by managers. Share holder wealth maximization may, however, be supplanted by the self-interest pursuit of managers making those decisions. According to the managerial utility theory, acquisitions may be driven by mangerial ego or desire for power, empire building or perquisites that go with the size of the firm. Shareholder wealth maximization perspective

In this neo-classical perspective, all firms' decisions including acquisitions are made with the objective of maximizing the wealth of the shareholders of the firm. This means that the incremental cash-flows from the decision, when discounted at the appropriate discount rate, should yield zero or positive net present value. Under uncertainty, the discount rate is the riskadjusted rate with a market-determined risk premium for risk. With acquisitions, the shareholder wealth maximization criterion in satisfied when the added value created by the acquisition exceeds the cost of acquisition :

EVALUATION OF MERGERS AND ACQUISITIONS

For a merger to be successful, it is extremely important that the M&A be properly evaluated. The value of the merged entity should be greater than the sum of the individual values of the single entities. For this, a proper

model for evaluation are to be followed. A few models are described below :

Due Diligence:Under the due Diligence principle, the value of the merged entity should be greater than the sum of the individual entities. The share value has to increase and also the value of the firm should increase as a whole. The company should be in a position to command better financial terms from financial institutions. Otherwise the managers will not be doing due Diligence to their duty.

Thumb rule for Acquisitions:The initial value of the each firm is taken as 150% the turnover in the previous period. The final value should increase by at least one and a half times the value of the acquirer.

Asset and brand valuation:-

The combined value of assets and the increase in the brand as a result of acquisition can be used as a basis to measure the value of the acquisition. Various methods are prescribed for asset and brand valuation. But the method used must be consistently followed for both the firms for the valuation to be valid.

Depreciation and Replacement cost:The depreciation cost and replacement cost method takes into account the depreciation cost and replacement cost of the assets got by the acquirer and the transaction costs included should be greater than the premium he has paid for it.

Future Cash Flows from Individual Assets, Brands, etc.:This is the most common value of calculating the value of an acquisition. The cash flows are discounted at a rate of 18% in India, by convention (and at a rate of 30% in China). The future cash flows from the merged firms should exceed the individual cash flows for the firms. In the

case of synergies and integrations, this is affected by the savings in taxes. In the case of diversification, the risk is reduced and for other strategic acquisitions, the value of shareholders' wealth increases.

ADVANTAGE & DISADVANTAGE

The Advantages are:
A merger does not require cash. A merger may be accomplished tax-free for both parties. A merger lets the target (in effect, the seller) realize the appreciation potential of the merged entity, instead of being limited to sales proceeds. A merger allows the shareholders of smaller entities to own a smaller piece of a larger pie, increasing their overall net worth.

 A merger of a privately held company into a publicly held company allows the target company shareholders to receive a public company's stock, despite the liquidity restrictions of SEC Rule 144a. A merger allows the acquirer to avoid many of the costly and time-consuming aspects of asset purchases, such as the assignment of leases and bulk-sales notifications. Of considerable importance when there are minority stockholders is the fact that upon obtaining the required number of votes in support of the merger, the transaction becomes effective and dissenting shareholders are obliged to go along.

The disadvantages of mergers and acquisitions are:

Diseconomies of scale if business becomes too large, which leads to higher unit costs. Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration.

May need to make some workers redundant, especially at management levels - this may have an effect on motivation. May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business.

BENEFITS OF MERGERS AND ACQUISITIONS

Benefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions can generate cost efficiency through economies of scale, can enhance the revenue through gain in market share and can even generate tax gains. The principal benefits from mergers and acquisitions can be listed as increased value generation, increase in cost efficiency and increase in market share. Benefits of Mergers and Acquisitions are the main reasons for which thecompanies enter into these deals. Mergers and Acquisitions may generate tax gains, can increase revenue and can reduce the cost of capital. The main benefits of Mergers and Acquisitions are the following: also leads to tax gains and can even lead to a revenue enhancement through market share gain. Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more value than the separate firms. When a company buys out another, it expects that the newly generated

shareholder value will be higher than the value of the sum of the shares of the two separate companies

INTRODUCTION OF COMPANIES
Reliance Industries Limited
The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's largest private sector enterprise, with businesses in the energy and materials value chain. Group's annual revenues are in excess of US$ 28 billion. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India. Backward vertical integration has been the cornerstone of the evolution and growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration

- in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production - to be fully integrated along the materials and energy value chain. The Group's activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fibre intermediates, plastics and chemicals), textiles, retail and special economic zones. Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products. Major Group Companies are Reliance Industries Limited (including main subsidiary Reliance Retail Limited) and Reliance Industrial Infrastructure Limite Reliance Industries Limited (RIL) is India's largest private sector company on all major financial parameters with a turnover of Rs. 1,39,269 crore (US$ 34.7 billion), cash profit of Rs. 25,205 crore (US$ 6.3 billion), net profit (excluding

exceptional income) of Rs. 15,261 crore (US$ 3.8 billion) and net worth of Rs. 81,449 crore (US$ 20.3 billion) as of March 31, 2008

Reliance Petroleum Limited

Reliance Petroleum Limited ("RPL" or the "Company"), was set up to harness an emerging value creation opportunity in the global refining sector, one of India's largest private sector company with a significant presence across the entire energy chain and a global leadership across key product segments. Currently, RPL is subsidiary of RIL. RPL was formed to set up a greenfield petroleum refinery and polypropylene plant in the Special Economic Zone (SEZ) at Jamnagar in Gujarat. This global sized, highly complex refinery is being located adjacent to RIL's existing refinery and petrochemicals complex, which is amongst the largest and most efficient in the world, thus offering significant synergies.

The commissioning of the RPL refinery catapults Reliance into the league of the largest refiners globally, both in terms of complex refining capacity and earnings potential. With the completion of the RPL refinery, Jamnagar has emerged as the Refining Hub of the World with the largest refining complex with an aggregate refining capacity of 1.24 million barrels of oil per day in any single location in the world. The state-of-the-art, globally competitive RPL refinery has been completed in 36 months from concept to commissioning, which is a new benchmark for building a grass-root refinery of this scale and complexity. This refinery has been built with a significant capital cost competitive advantage. This record has been achieved in spite of the significant shortfall in engineering and construction resources that has impacted most other refinery projects globally. RPL achieved the milestone by leveraging the project management skills of the Reliance group together with world-class implementation partners like Bechtel, UOP and Foster Wheeler amongst others.

RELIANCE INDUSTRIES AND RELIANCE PETROLEUM BOARDS APPROVE MERGER

Merger is Indias largest ever. RPL shareholders to receive 1 (one) share of RIL for every 16 (sixteen) shares of RPL. RILs holding in RPL to be cancelled. No fresh treasury stock created.

 RIL to be a top 10 private sector refining company globally. RIL to become the worlds largest producer of Ultra Clean Fuels at single location. Merger to unlock greater efficiency from scale and synergies. Merger to be EPS accretive. RIL to have 3.7 million shareholders.

MUMBAI, 2 March 2009: The Boards of Directors of Reliance Industries Limited (RIL)and Reliance Petroleum Limited (RPL) today unanimously approved RPLs merger with RIL,subject to necessary approvals. The exchange ratio recommended by both boards is 1 (one) share of RIL for every 16 (sixteen) shares of RPL. RIL will issue 6.92 crore

new shares,thereby increasing its equity capital to Rs 1,643 crore. Commenting on the merger, Mukesh Ambani, Chairman and Managing Director, Reliance Industries Ltd said: This merger follows Reliance Industries philosophy ofcreating enduring value for all our stakeholders. It is a significant step in our goal to be among the largest global corporations.

Merger Benefits and Synergies

The merger will unlock significant operational and financial synergies that exist between RIL and RPL. It creates a platform for value-enhancing growth and reinforces RILs position as an integrated global energy company. The merger will enhance value for shareholders of both companies. The merger is EPSaccretive for RIL. Through this merger, RIL consolidates a worldclass, complex refinery with minimal residual project risk, while complementing RILs product range. There will befurther gains from reduced

operating costs arising from synergies of a combined operation. The merger is expected to reduce the earnings volatility for RPL shareholders and allowsthem to participate in the full energy value chain of RIL.

The merger will result in RIL

Operating two of the worlds largest, most complex refineries. Owning 1.24 million barrels per day (MBPD) of crude processing capacity, the largestrefining capacity at any single location in the world. Emerging as the worlds 5th largest producer of Polypropylene Merger Details: Under the terms of the proposed merger, RPL shareholders will receive 1 (one) share of RIL for every 16 (sixteen) RPL shares held by them. The appointed date of merger of RPL with RIL is 1st April 2008.

RIL will cancel its holding in RPL.Based on the recommended merger ratio, RIL will issue 6.92 crore new equity shares to the existing shareholders of RPL. This will result in a 4.4% increase in equity base from Rs 1,574 crore to Rs 1,643 crore. Consequently, the promoter holding in RIL will reduce from 49.0% to 47.0%

Advisors to the merger are as follows:

Valuation Advisors Transaction
: Ernst & Young Pvt. Ltd. and Morgan Stanley India Co. Pvt. Ltd.

Financial Consultants Pvt. Ltd. and Kotak Mahindra Capital Co Ltd.

Advisors

JM

Fairness Opinion

DSP

Merrill

Lynch Ltd. (for RIL) and Citigroup Global Markets India Pvt. Ltd (for RPL).

Legal

: Amarchand Mangaldas & Suresh A. Shroff & Co.

Advisor

&

Tax Advisor

: PriceWaterhouse and

Coopers Pvt. Ltd. The proposed merger is subject to all necessary approvals. All other procedural aspects ofthe proposed merger, and the timetable for implementation, will be communicated separately.

FUTURE OF RPL SHAREHOLDERS

Book value of RIL shareholder as of March 31, 2009, which is likely to be the effective date of the merger, would be 700, while that of RPL would be Rs 30.

How he arrived at book value: Reliance Industries has been in existence for the last30 years. So there has been an accretion in the value of the fixed assets of thecompany, while RPL being a new company, there has not been much accretion. Theproject cost of RPL of Rs 27,000 crore can be taken at about Rs 30,000-33,000 croreas of today. Therefore, a shareholder of Reliance Industries will be shouting if the ratio isanywhere more than 24 to 1 because that is the ratio working out, based on the bookvalue. If market value is the criteria for swap ratio, it works out to about 16-17. Ratio would definitely be negative for RPL shareholders.

FUTURE OF RIL SHAREHOLDERS

Tulsian said that RPL itself is entitled under Section 10AA; therefore RPLs profitswould be exempted for the first five years being an EOU (Export Oriented Unit). Thismerger is not being mooted or moved with a view to have any tax advantagebecause RPL as such is entitled, all its profits will be exempted

for the first five yearsto the extent of 100% of Section 10AA being a 100% EOU.

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.

INDEX
INTRODUCTION DISTINCTION BETWEEN MERGERS AND ACQUISITIONS OBJECTIVES OF MERGERS AND ACQUISITIONS EVALUATION OF MERGERS AND ACQUISITIONS ADVANTAGE & DISADVANTAGE BENEFITS OF MERGERS AND ACQUISITIONS IN T R O D U C T I O N O F CO M P A N I E S Reliance Industries Limited Reliance Petroleum Limited RELIANCE INDUSTRIES AND RELIANCE PETROLEUM BOARDS APPROVE MERGER

Merger Benefits and Synergies FUTURE OF RPL SHAREHOLDERS FUTURE OF RIL SHAREHOLDERS CONCLUSION