A Project Report on Mergers and
, August 2008
Project Guide: Mr. Shinde
Submitted By: Mr. Sunil Shendage
I wish to take this opportunity to express my heart-felt gratitude to Mr. for helping me at
every stage of the project.
I also wish to thank the Director for his encouragement throughout the completion
of this project.
Theoretically it is assumed that Mergers and Amalgamations improve the performance of the
company. Because of Synergy effect, increased market power, Operational economy,
Financial Economy, Economy of Scales etc. But does it really improve the performance in
short run as well as long run. Various studies have already been done on this matter.
Table of Contents -
Scope for Mergers......................................................................................................2
Meaning of Mergers &Acquisitions...........................................................................2
Types of Mergers &Acquisitions................................................................................3
Objectives of Mergers &Acquisitions.......................................................................4
Trends in Mergers &Acquisitions.............................................................................9
The Acquisition Process..........................................................................................13
Mergers &Acquisitions in MNEs.............................................................................18
Forms of Corporate Downsizing...............................................................................21
Mergers &Acquisitions in IT Sector..........................................................................31
Patterns in MNE and Mergers &Acquisitions............................................................35
Recent Major Mergers &Acquisitions in I T Industry ...............................................36
Risk in Mergers &Acquisitions....................................................................................42
The Contours of M&A in Telecom ………………………………….. 43
Case- TATA Tea and Tetley.......................................................................................67
Making Mergers smoothers........................................................................................68
Mergers and acquisitions are increasingly getting popular and efficient way for corporate
growth. Yet their success cannot be assured. A majority of mergers and acquisitions fall
short of their stated goals. While researchers try to explain some failure from financial and
strategic standpoints, a considerable number of mergers and acquisitions have not explored
the organizational and human resource related issues.
THE year 2005 has been referred as the year of mergers and acquisitions (M&A). In India,
M&A deals in excess of $13 billion were struck in 2005 compared to $4.5 billion in 2004. In
Asia, India stands next only to China in M&A activity. There were 163 inbound acquisitions
in India valued at $2.83 billion.
The terms 'mergers', "acquisitions' and "takeovers' are often used interchangeably. However,
there are differences. While merger means unification of two entities into one, acquisition
involves one entity buying out another and absorbing the same.
There are several advantages in Mergers and acquisitions — cost cutting, efficient use of
resources, acquisition of competence or capability, tax advantage and avoidance of
competition are a few. While takeovers are regulated by SEBI, M&A falls under the
Companies Act. In cross-border transactions, international tax considerations also arise.
US economy is trying to keep check number of mergers and acquisitions in Trans-national
companies in the year 2006.
Report on Mergers and Acquisitions
Mergers and Acquisitions: Introduction
Mergers and acquisitions (M&A) and corporate restructuring are a big part of the
corporate finance world. Every day, Wall Street investment bankers arrange M&A
transactions, which bring separate companies together to form larger ones. When they're
not creating big companies from smaller ones, corporate finance deals do the reverse and
break up companies through spin offs, carve-outs or tracking stocks.
Not surprisingly, these actions often make the news. Deals can be worth hundreds of
millions, or even billions, of dollars. They can dictate the fortunes of the companies
involved for years to come. For a CEO, leading an M&A can represent the highlight of a
whole career. And it is no wonder we hear about so many of these transactions; they
happen all the time. Next time you flip open the newspaper's business section, odds are
good that at least one headline will announce some kind of M&A transaction.
With economic globalization, companies are growing by merger and acquisition in a bid
to expand operations and remain competitive. The complexity of such transactions makes
it difficult to assess all risk exposures and liabilities and requires the skills of a specialist
advisor. Generally the approach followed by the companies is as follows:
• Pre-Acquisition Due Diligence
Identification of hidden and potential liabilities, unreserved claims, and cash-flow
implications, as well as major gaps in the target company's current insurance and
employee benefits programs including pension fund valuation and transfer
Assistance with the identification of the skills and resources needed to ensure a
Design of post-completion insurance and benefits programs before the transaction
date to take advantage of enhanced coverage and competitive pricing
Report on Mergers and Acquisitions
Ensuring the recommendations highlighted in the due diligence reports are
India is the second largest and fastest growing mobile telecom market in the world
many international players are waiting to gain entry into this attractive market which
license for 3G service are expected to be auction out later during 2008 India also has
very low telecom penetration close to 15%-compared to other emerging market like
china and developed countries like the USE where telecom penetration range from
20%to 60%given the attractive market that it is we have seen global major like
Vodafone recently gaining in to it by paying very high premium domestic India
mobile telecom operators are also trying to consolidate their positions and thereby
grow to become strong players who can capture a largest pie in the untapped mobile
telecom market the current transaction between idea cellular and spice telecom was
also finalized with the same objective of consolidation and growth in the attractive
India mobile telecom market
Scope for Mergers
The scope of merger is generally downgraded when cultures of two organizations are
found to be incompatible. Although it is not possible to separate out natural culture from
organizational climate (culture), it has to be managed through engineering the norms of
the work place in the interest of strategy and the commercial imperative. Cross- cultural
comparisons can give real role model firms whose practices can be observed and aspired.
Managing national culture in two autonomous organizations after a global merger is
largely an issue relating to personnel management, which can be handled by selecting key
boundary positions that can mentally budge the differences and build cohesive teams
around them. Otherwise, in case of two different firms merging structurally have to
design new systems and practices, which are acceptable to both sides, i.e., within
parameters legitimated by two different national cultures. To reinforce cultural change,
leadership and communication are essential and it has to start essentially from the top.
Human resources practices if focused towards integration and acquisition goals can
immensely contribute to cultural change. These core practices are of selection, appraisal,
reward and development. These human resources practices can bring two cultures closer
and together. There is such a diversity of national difference in each of the global deals
that there can be no general presumption to ensure success of the deals. In short, the
common problem among the M&A failures is neglect of human factor but the solution
varies across the countries depending upon cultural, political and economic variability.
Meaning of Mergers and Acquisitions
Mergers and acquisitions take the form of open offers, substantial sale of equity, sale of
distressed assets by financial intermediaries, schemes of arrangement by companies, etc.
There is also a rising trend in buyback of issued equity by companies. Disinvestments are
also acquisitions by the new owners of the business hitherto owned by the government.
This trend is as significant at the State level (if not more) compared to the Central
Report on Mergers and Acquisitions
The phrase mergers and acquisitions or M&A refers to the aspect of corporate finance
strategy and management dealing with the merging and acquiring of different companies
as well as other assets. Usually mergers occur in a friendly setting where executives
from the respective companies participate in a due diligence process to ensure a
successful combination of all parts.
On other occasions, acquisitions can happen through a hostile takeover by purchasing
the majority of outstanding shares of a company in the open market. In the United
States, business laws vary from state to state whereby some companies have limited
protection against hostile takeovers. One form of protection against a hostile takeover is
the shareholder rights plan, otherwise known as the "poison pill".
Historically, mergers have often failed to add significantly to the value of the acquiring
firm's shares. Corporate mergers may be aimed at reducing market competition, cutting
costs (for example, laying off employees), reducing taxes, removing management,
"empire building" by the acquiring managers, or other purposes which may not be
consistent with public policy or public welfare. Thus they can be heavily regulated,
requiring, for example, approval in the US by both the Federal Trade Commission and
the Department of Justice.
Types of M& As
A vertical combination is one in which a company takes over or seeks a merger with
another company in order to ensure backward integration or assimilation of the sources
of supply or forward integration towards market outlets. The acquirer company gains a
strong position due to the imperfect market of its intermediary products and also through
control over product specifications. However, these gains must be weighed against the
adverse effects of the merger. For instance, firms which have monopoly power in one
stage may increase barriers to entry through vertical integration and this would help to
discriminate between different purchasers by monopolisation of raw material supplies or
Report on Mergers and Acquisitions
A horizontal combination is a merger of two competing firms belonging to the same
industry which are at the same stage of the industrial process. These mergers are carried
out to obtain economies of scale in production by eliminating duplication of facilities and
operations and broadening the product line, reducing investment in working capital,
eliminating competition through product concentration, reducing advertising costs,
increasing market segments and exercising better control over the market. It is also an
indirect route to achieving technical economies of large scale.
In a circular combination, companies producing distinct products in the same industry,
seek amalgamation to share common distribution and research facilities in order to
obtain economies by eliminating costs of duplication and promoting market
enlargement. The acquiring company obtains benefits in the form of economies of
resource sharing and diversification (An off and Weston, 1962).
A conglomerate combination is the amalgamation of two companies engaged in
unrelated industries. It enhances the overall stability of the acquirer company and
improves the balance in the company's total portfolio of diverse products and production
processes. Through this process, the acquired firm gets access to the existing productive
resources of the conglomerate which result in technical efficiency and furthermore it
can have access to the greater financial strength of the present acquirer which provides a
financial basis for further expansion by acquiring potential competitors. These processes
also lead to changes in the structure and behavior of acquired industries since it opens
up new possibilities (Mueller, 1969).
Objectives of M&A
Corporate India is re-shaping itself from conglomerate structure to focused
organizations in order to be core competent. M&A has become a powerful tool to
accomplish this objective. The year 2005 (up to November) has witnessed
unprecedented growth in Indian M&A market crossing $13 billion with over 245 deals
against $9.5 billion with 237 deals during 2004. Smart sizing of the balance sheets has
become absolutely necessary for sustainable growth. Restructuring in any form, be it
organizational or product-market portfolio, cannot be efficiently handled without
resorting to financial restructuring of the organization. Takeovers and corporate control
are also taking place at the same pace. Today, corporate managers have to understand
the strategy towards the M&A, divestment, spin-off, takeover and corporate control, etc.
This program is aimed at imparting conceptual framework and related strategies for
corporate restructuring and how it is affected through the tool of M & A in order to
sustain competitive advantage.
Mergers, Acquisitions and Alliances (MAA) are century old phenomena for corporate
survival or death. In the United States, the wave of mergers emerged in the beginning of
century, which were characterised by wider diversification leading to formation
of conglomerates. But the Great Depression of 1929 aborted this wave abruptly. During
1960's, the subsequent waves strengthened stability of M & A due to long lasting
recovery of the world economy. The current M & A wave has begun in the early
1990's in the wake of globalization and liberalization of foreign investment norms by a
large number of countries, leading to phenomenal rise in cross-border acquisitions.
Today, there exists clearly a market for M & A and corporate control. The total value of
global M & A is more than 3.5 trillion dollar and the US market accounts for almost half
Reasons for Business Combinations:
Some of the common for business combinations are:
1. Growth: One of the fundamental motives that drives Mergers and Acquisitions
is the growth impulse of firms. Firms that desire to expand have to choose
between two generic growth strategies: organic growth or acquisitions driven
growth. Organic growth is a slow steady process and very often a function of
time factor. Acquisition led growth is an aggressive strategy and is relatively
riskier to an organic growth strategy. For example; in an industry, which is
having overcapacity, a firm which intends to expand may necessarily have to
choose acquisition driven strategy. This is because organic growth would entail
creation of additional capacity and may prove suicidal by adding to the existing
overcapacity. Secondly, in a situation where speed is a essence to capitalize on
opportunity, organic growth may be an inappropriate strategy.
2. Synergy: The concept of synergy is based on the principal that the whole is greater
than sum of the parts. Simply stated, synergy is the phenomena where 2+2 5.In the
context of merger, this translates into the ability of business combination to be more
profitable than the sum of the profits of the individual firms that were combined. The
synergy may be in the form of revenue enhancement and Cost reduction. Clement
and green span define revenue-enhancing synergy as "a newly created or
strengthened product or service that is formulated by the fusion of two distinct
attributes of the merger partners and which generate immediate and/or long -term
revenue growth". Revenue enhancement synergies vary from transactions to
transactions. For example, this is the basis in the Merger between Citibank and
Travelers group. Citibank is one of the worlds leading bank in the area of Corporate
Banking and Retail Banking. Travelers Group operate in the area of insurance, retail
financial services and Investment banking. It was expected that there would be great
potential for revenue enhancement by Cross-selling of the products to each others
clients. The biggest problem with the revenue enhancement synergy is the difficulty
in qualifying its benefits. Cost reducing synergies refer to the potential to reduce the
cost of operations. This is possible in case the merging firms having overlapping
operations. One of the major factors which are resulting in the spate of mergers in the
banking industry is the potential to cut costs. The merged bank is able to close
branches in case both the banks have branches in same area. It is observed that banks
mergers are accompanied by announcements of Lay-offs of staff. The cost reduction
may arise due to economies of Scale and /or economies of scope. Economies of
scale refer to the benefits arising out of increase in the size of operations. For
example: better power with suppliers to reduce the cost of raw materials. Economies
of Scope arise due to the ability of the firm to use one set of input to provide a
broader range of products and services. In the case of bank merger cited above, the
may have a common platform for similar operations like a single dealing rooms
earlier, a single risk management department, a single HR function, a single legal
3. Managerial Efficiency: Some acquisitions are motivated by the belief that the
acquirer management can better manage the targets resources. This hypothesis is
based on the assumption that the two firms have different levels of managerial
competence. The acquirers management competence is superior to its target's.
Hence the value of the target firm will rise under the management control of the
acquirer. This is one of the premises on which the acquirer is willing to pay a
premium to assume control of the target firm.
4. Market Entry: Firms often use acquisition as a strategy to enter into new
markets or a new territory. This gives them a ready platform on which they can
future build their operations. For Example, Whirpool acquired a controlling stake
of 51% in Kelvinator India to enter into Indian Markets. Similarly Warburg, a
leading European investment bank acquired Dillon Read an American brokerage
house to gain entry into the lucrative American Markets.
5. Diversification: Firms indulge in diversification to overcome concentrating
risks. Firms which are excessively dependent on a single product are exposed to
the risk of the market for that product. Diversification reduces such risks. For
Example, Investment Banking firms are exposed to the vagaries of the stock
markets and have highly volatile earning stream. Asset Management firms have
relatively stable stream of earnings and have close relationships with the
investment banks. Hence several investment banks acquired asset management
firms to reduce volatility of the earnings stream. However diversification into
unrelated products in which the firm has no competitive advantage should be
6. Tax Shields: Tax shields play an important role particularly in acquisition of
distressed firms. Firms in distress have accumulating past losses and unclaimed
depreciation benefits on their books. A profit making, tax paying firm can derive
benefits from these tax shields. They can reduce or eliminate their tax liability by
benefiting from a merger from these firms. In some countries including India, tax
laws do not permit passing of such tax shields to the acquiring firm expect under
specific circumstances. This has led to an innovative practice called as Reverse
Merger. A reverse entails merging of a healthy firm into a sick, unit so that the
tax shields are not lost.
7. Strategic: The reason for acquisition can be strategic in nature. The strategic
factors would change from deal to deal. The two firms may be in complementary
business interests and a merger may results in consolidating their position in the
market. For example, American On-Line (AOL) is in the business of providing
Internet access and is world's largest access provider. Time Warner is a major
media firm with wide business interests including print media, broadcasting,
music, etc In early 2000 AOL acquired Time Warner to ensure availability of
Content for websites and portals. This combination of access and content is
assumed. To be a winning combination which will dominate the Internet world.
Another strategic reason can be to pre-empt a competitor from acquiring a
particular firm. For example, Gujarat Abuja Cements is reported to have acquired
the Tate’s stake in ACC to prevent Lafarge from acquiring it. Lafarge’s
acquisition of ACC would have posed a major threat to Gujarat Ambuja's plan to
emerge as a leader in the cement industry.
In addition these reasons there are some of the unstated reasons for acquisitions are:
1..Megalomania: Megalomania refers to being excessively self-obsessed and arises
from a high level of over confidence. Some managers have an aura about their own
managerial competence and believe that they deserve to preside their own managerial
competence over large corporate empires. They tend to acquire firms to satisfy their
own ego. Very often, the benefits of such acquisitions are only illusory and end up in
2.Hubris Spirit: Hubris spirit refers to the animal spirit, which leads to paying an
excessive price to make an acquisition. This is particularly evident in case of
competitive tender offer to acquire a target. The parties involved in the contest may
revise the price upwards time and again. The urge to win the game often results in
the winner curse. The winners refer to the ironic hypothesis that states that firms
which overestimates, the value of the target, most wins the contest. The factors that
results in the hubris spirit are the desire to avoid a loss of face, media praise, urge to
protect as an "aggressive firm, inexperience, overestimation of the synergies,
overenthusiastic investment bankers, etc
Trends in M&As
Four periods of economics history have witnessed very high levels of merger activity,
which are called as merger waves. These periods were characterized by cyclical activities
i.e. large number of mergers followed by relatively fewer mergers. The current period
(since 1992) is called as the fifth wave. In the first three waves merger activity was
concentrated in the United States of America. The fourth and the fifth waves were global
in nature though the impact of the waves is most pronounced in USA.
The first merger wave occurred after the Depression of 1883.It peaked between 1898
and 1902 though it began in 1987 and ended in 1904.The merger had the greatest impact
of 8 specific industries viz, primary metals, bituminous coal, food products, chemicals,
machinery, transportation, equipments, petroleum and fabricated metal products. These
industries accounted for almost two-thirds of the total mergers during this period. The
mergers in the first wave were predominantly horizontal combinations. These resulting
giant captured 75% of the steel market of the United States. Similarly Standard Oil
owned by Jhon D Rockfeller commanded 85% of the market share. Another feature of
this wave was creation of "trusts", where the owners of the competing companies put
their stock in the voting trusts and agreed not to compete against each other. In a typical
trusts, equity holders of the competing firms (in some cases as many as 200
competitors) placed the voting rights of there shares in the hands of their trustees to be
administered for their common benefits. These trusts were to be "benignly administered
"440 large trusts like sugar trusts, the copper trusts, the shipping trusts, the tobacco
trusts, the steel trusts, etc were created. Many experts do not differentiate between an
outright merger and trusts agreements.
Financial factors forced the end of the first merger wave. The stock market crash of
1904 and the panic in Banking of 1907 led to the closure of the many of the banks. The
era of easy availability of finance, basic ingredients for takeovers, ended resulting in the
halting of the first wave. Further the application of anti-trusts legislations, which was
hitherto lax, became more rigorous. The federal Government under the stewardship of
President Theodore Roosevelt (nick named as "trust buster") and subsequently under
President William Taft made a major crackdown on large monopolies .For example,
Standard Oil was broken into 30 Companies such as Standard Oil of New Jersey
(subsequently renamed Exxon), Standard oil of New York (subsequently renamed
Mobil), Standard Oil of California (Subsequently renamed Chevron) and Standard
Oil of Indiana (Subsequently renamed Amoco) Some of the current corporate
leaders like General Electric (GE),Du Pont, Eastman Kodak, Navistar International
are the products of the first wave.
The Second merger wave occurred between 1916 and 1929.George Stigler, a winner
of the Nobel prize in Economics, has contrasted the first wave as "merging for
monopoly" and the second wave as "merging for oligopoly". The consolidation
pattern resulted in the emergence of oligopolistic industrial structures. The second
wave was primarily fueled by the post World War I boom in American economy and
a buoyant capital market. The anti-trust environment was stricter with the passing of
Clayton Act 1914.This result in several vertical mergers, where in firms involved
did not produce the same results but had similar product lines. For Examples, Ford
Motors became a vertically integrated company. It manufactured its own tyres for
the cars from the rubber produced from its own plantations in Brazil. Further the
bodies for the car were made from the steel, produced from its own steel plants. The
steel plant in turn got iron ore from Ford's own mines and shipped on its own
railroad. Several companies in unrelated business were also involved in mergers
resulting in the formation of conglomerates. The industries, which witnessed
disproportionately high merger activities, were food products, chemicals, primary
metals, petroleum and transportation equipments. High level of consolidation was
also observed in public utilities.
The second merger wave lasted until the Great Depression. The wave ended with
the stock market crash on the "Black Thursday". On 29th
October 1929, the stock
market witnessed one of the steepest stock price fall in history. The crash resulted
in a loss of business confidence, curtailed spending and investment, thereby
worsening the depression. The number of mergers witnessed a sharp decline after
the crash. Firms were focusing on the basis survival and maintaining their solvency
rather going for fresh acquisitions. Some of the corporate giants like General
Motors, International Business Machine (IBM), Union Carbide, Hon Deere, etc, are
a product of this era.
Allied Chemicals Corporation:
Allied Chemicals Corporations, which came into existence during the second wave
consolidation its control over five firms to the chemicals business namely General
Chemicals, Barrette, Silvery Process, Semet-Solvay and National Aniline & Chemicals.
All the Five firms operated in related businesses. General Chemicals was a combination
of 12 producers of sculpture acid; Barrette sold by product of ammonia and coal tar
producers; Solve Process was the America's largest producer of ash; Semet-Solvay
traded in coal products and National Aniline & chemicals was America's largest seller
of dyestuffs. All the five firms consolidated into single management structure
undertheageis of Allied Chemical Corporations. Allied Chemical Corp, was able to
derive economics of scale particularly in production process and Marketing.
The third merger wave occurred during 1965 to 1969. This wave featured a historically high
level of merger activity .One of the reason for the factor is that this wave occurred in the
Background of a booming American economy. One of the new trends started by this wave
was the acquisition of larger companies by smaller companies. In the waves prior to this,
the acquirer was always bigger in size than the target.
A large proportion of transaction that took place during this wave were conglomerate
transactions. The conglomerates formed during this wave were highly diversified and
simultaneously operated in several unrelated industries. For Example during the sixties ITT
acquired such diversified business like car rental firms, bakeries, consumer credit agencies,
luxury hotels, airport parking firms, construction firms, restaurant chains, etc. The bull
market in the 1965s drove stock prices higher and higher. This resulted in the shares of
certain companies getting high Price/Earning multiple. Potential acquirers realized that
acquisitions through stock swaps (shares of the acquirer given in exchange for the shares of
the target company) was an innovative way to increase earnings. This led to a famous
The fourth wave occurred between 1981 and 1989.The most striking feature of this
wave is the increasing emergence of hostile takeovers. Although the number of hostile
deals were not very high, he figure is significant in terms of value of all M&As.
The fourth wave can be distinguished from the previous waves by size and prominence of
the target firms. Some of the largest firms in the world (Fortune 500 firms) because the
target of acquirers. The average size of deals was substantially higher.
The forth wave also witnessed the emergence of the professional corporate raider. The
raider's income emanated from his takeover attempts. The word "attempt" signifies that
very often the raider earns a handsome profits without taking control of the management of
the target firms. For Example, Paul Bilzerian participated in various raids and earned huge
profits without consummating a single transaction till he acquired Singer Corp in
J988.Manv takeovers attempts were designed to sell the shares purchased bv the raider at a
higher price. One method of the same was through Greenmail. (Greenmail involves forcing
the target to buyback the shares from the raider at a hefty premium by threatening a
takeover). In case the target did not
succumb to the greenmail pressure, the raider would have succeeded in putting the stock "in
play". This would result in the speculative demand for the shares in the secondary market, in
anticipation of a takeover attempts. This would attract the attention of all potential acquirers
towards the target. This would enhance the probability of the company being acquired
though not by the original raider. This wave also resulted in a new class of speculators
called the Arbitragers. They would buy the stock of the potential target firms in
anticipation of a possible takeover. Their entry into a particular counter would put the scrip
"into play". This would facilitate hostile takeovers, as they were always willing to sell their
holdings to the highest bidder.
The use of debt to finance acquisitions reached unprecedented proportions during the
fourth wave. This was possible due to the emergence of junk bonds Junk bonds refer to the
bonds, which are rated below investment grade or are unrated. The yield on the junk bonds
was significantly higher than that of investment grade bonds. The higher yield resulted in
the creation of virtually unlimited appetite for junk bonds. The ready availability of debt
financing enabled even the small firms to acquire large established blue chip firms. This
gave birth to the phenomena of leveraged buyouts
The aggressive role of investment bankers was one of the important factors in the fourth
wave. M&A advisory services became a lucrative source of income for investment
banks. Mergers specialists in investment banks and lawyer firms developed many
techniques to facilitate and prevent takeovers. They pitched in for mandates from both
potential targets and both potential acquirers for hiring their services to prevent or bring
about takeovers. Some firms like Drexel Burnham Lambert specialized in the issue and
trading of junk bonds.
Lastly the wave was more global in nature. Hitherto merger activity was generally
concentrated in the United States. The merger wave witnessed active participation from
European and Japanese firms.
The current merger wave began in 1992.This wave is marked by a large number of
mega-merger and cross -border mergers.
The major drivers for the current wave are deregulation, globalization and technology.
The increasing levels of deregulation are enabling companies to expand their operations
in the area, which has significant regulatory barriers. The process of privatization has
also thrown up opportunities for the acquisition of erstwhile public sector firms. The
phenomena of globalization are resulting in the dissipation of geographical barriers to
entry. Many countries across the world (including India) are eliminating the obstacles
that impeded the flow of foreign investments. Foreign firms often resort to major
acquisition in the local market as entry strategy. Further with the reduction in the
barriers to international trade, as a consequence of the setting of the WTO, firms have to
be globally competitive to survive in the new economy. The emergence of interest and
the intelligent application of the information technology have resulted in a paradigm
shifts in the operations of firms. The sectors where the impact of the wave is most
visible are telecommunications, entertainment and media, banking and financial
The Acquisition Process
1 Acquisition Search: The first step is to determine the universe of potential target
companies. Information is gathered about these companies based on their published
data, industry specific journals, databases, past prospectuses, etc. If the acquisition
involves buying only part of the target company, segmental data may be difficult to
obtain. Information about private companies may not be readily available. Once the
universe is determined, targets may be short-listed based on certain parameters.
2.Approaching the Targets: This is one of the most delicate part of the deal. There are
broadly two methods of approaching targets.
■S Passive Strategy: This approach is based on the premises that an
overwhelming majority of the firms are not for sale and are unreceptive
to any inquiries. The acquirer is unwilling to pursue any acquisition on
an aggressive basis. In such an approach, the acquirer passively waits
till the time a potential target is available for sale.
S Active Strategy: This is more pro-active approach by the acquirer. The
active approach may be either friendly or hostile. In the friendly way, a
private and confidential line of communication may be opened with
CEO, Director or the Investment Banker of the target company. It is
also made clear if the target company is not interested, no further action
will be taken. In the Hostile approach, the acquirer assumes the role of a
raider and actually starts accumulating the shares of the target. This
approach assumes that while the management may be averse to the
takeovers, the shareholders would be receptive to the offer. When
shares are accumulated by the acquirer, it is financially beneficial even
if it outbid in a counter offer.
3. Valuation: Now the stage is set for valuing the Target Company. The overall
process is centered around free cash flows and the Discounted Cash Flow (DCF) Model.
Now the focus is on the finer points in calculating the valuation. In the book Valuation:
Measuring and Managing the Value of Companies, the authors Tom Copland, Tim Koller,
and Jack Murrin outline five steps for valuing a company:
1. Historical Analysis: A detail analysis of past performance, including a determination
of what drives performance. Several financial calculations need to be made, such as
free cash flows, return on capital, etc. Ratio analysis and benchmarking are also
used to identify trends that will carry forward into the future.
2.Performance Forecast; It will be necessary to estimate the future financial performance
of the target company. This requires a clear understanding of what drives performance
and what synergies are expected from the merger.
3.Estimate Cost of Capital: The need is to determine a weighed average cost of capital for
discounting the free cash flows.
4.Estimate Terminal Value: Adding a terminal value to the forecast period to account for
the time beyond the forecast period.
Test & Interpret Results; Finally, once the valuation is calculated, the results should be
tested against independent sources, revised, finalized, and presented to senior management.
Valuation of the target company is the most critical part of the deal. A conservative
valuation can result in collapse of the deal while an aggressive valuation may create
perpetual problems for the acquiring company. Commonly used valuation methods are:
Discounted Cash Flow Method: In this method, valuation represents the present
value of the expected stream of the future cash flow discounted for time and risk.
This is the most valid methodology from the theoretical standpoint. However, it is
very subjective due to the need to make several assumptions during the
Comparable Companies Method: This method is based on the premise that
companies in the same industry provide benchmark for valuation. In this method,
the target company is valued vis-a vis its competitors on several parameters.
Book Value Method: This method attempts to discover the worth of the target
company based on its Net Asset Value.
Market Value Method: This method is used to value listed companies. The stock
market quotations provide the basis to estimate the market capitalization of the
Acquirers rarely rely on a single method of valuation. Normally the target companies
are value based on various methods. Different weightages are assigned to the valuation
computed by various methods. This weighted average valuation helps in eliminating the
errors that may creep in if a single method is relied on.
4.Negtiations: This is the process of formulation the structure of the deal. The
merchant banker plays a vital role in closing the financial side of the negotiations. From
a financial standpoint, the key elements of negotiations are the price and form of
considerations. Both the elements are interrelated and affect the attractiveness of the
deal. The acquirers must ensure that the final price paid should not exceed the
perceived value of the target to the acquirer.
5.Due Diligence: The basic function of due diligence is to assess the benefits and the
costs of a proposed acquisition by inquiring into all relevant aspects of the past, present
and the predictable future of a business to be purchased .Due Diligence is of vital
importance to prevent "unpleasant surprise" after completing the acquisition. The due
diligence should be thorough and extensive. The due diligence exercise is carried out by
a team of executive from the acquirers, their Investment Bankers Solicitors and
Chartered Accountants. The team should have members with experience of
all dimensions of the business like Finance, Marketing, Human Resources,
Operations, Legal etc. The exercise should cover all material factors, which
are likely to affect the future of the business. Due Diligence exercise covers
careful study of information in public domain like financial statements,
corporate records like minutes of meetings past prospectuses, share price
movements etc. All contracts entered into by the firms with lenders,
suppliers, customers, franchises, lease agreements, asset purchase
agreements etc need to be carefully studied. Special attention should be
given to litigations, contingent liabilities, environmental disputes, liens and
encumbrances, product warranties inter company transactions, tax disputes,
6.Acquisition Finance: Acquisition may be paid for in several ways: all cash, all
securities or a combination of cash and securities. The securities offered may be equity,
preference shares or debentures. Further the debentures and the preference shares may
be convertible. The cash may be raised from internal accruals, sale of assets, etc. It may
also be financed by bank borrowings, public issue or private placements of debt and
shares. As timing is a critical factor in such deals, the investments bankers
involved often gives/arranges for a bridge loan against subsequent
Sell-offs involve sale of assets or business entities. The assets may be tangible like
manufacturing unit, product line etc. or intangible assets like brands, distribution network,
etc. Sometimes the business entity as a whole may be sold to third party. The reasons for
Sell-offs are varied. They can be broadly classified as:
Opportunistic: In such cases the vendor company has no intentions to divest in the
normal course. However, the management is tempted by the buyers with a very high
bid. If the company feels that the price offered is substantially more than worth of
the assets/ business, it may divest. The reason for the sale is solely profit motives.
Forced: The reason for the sale is the prevalence of circumstances beyond the
control of the company. The company may be facing a severe liquidity crunch and
the only solutions to raise cash may be through divestiture. Sometime the
assets/business may be sold to avoid takeovers or to make a takeover bid
unattractive. Sometimes a divestiture may be a part of a rehabilitation package for
turnaround of a sick company.
Planned: A company may plan for sale of a particular assets/business. The reasons
may be varied:
• Strategic decisions to exit from a certain industry.
• Poor business fit with other operations of the company.
• Severe competition.
• Technological Factors
• Continuous losses in a particular line of activity
• Shrinking Margins
• Personal reasons like retirement, family disputes, financial needs, etc.
M&A's in MNE's -
A merger occurs when an exporter merges with a domestic company in the target market
and creates a new entity. Under an acquisition, the exporting company takes over a
domestic company in the target market. The domestic company may still trade under its
own company name with ownership and direction controlled by the exporting company.
• Decreased time to access and
penetrate target market as the
existing company already has a
product line to be exploited and
a distribution network
• Prevents an increase in the
number of competitors in the
• Overcome entry barriers
including restrictions on
skills, technology, materials
supply and patents.
• Increased risk - may be a large
financial commitment but faces
political and market risks
• Poor or slow post-merger
• Target too large or too small
• Overly optimistic appraisal of
• Overestimation of market
• Inadequate due diligence
• Incompatible corporate
Choosing a country
A useful starting point in considering the location of any foreign direct investment is to
take a wider view of distance than simply the distance from home measured in kilometers.
• Cultural distance - language, ethnicity, religion
• Administrative distance - institutional weaknesses, government policies,
• Geographic distance - lack of common border, physical remoteness, size of country
• Economic distance - differences in consumer incomes, cost differences
The main factor quoted by Australian firms as influencing their location decision is the
size of the market. Exposure to a broader range of large and small markets increases the
geographical base for revenue generation. Other reasons given as important to the location
• Political stability - political history, fiscal and monetary policy
• Economic stability - growth rates, incomes, costs, resources, interest rates and
• Geographic borders- remoteness, size of country, population and climate
• Infrastructure for transportation and communication
• Business ethics - language, ethnicity and culture
• Competitors and industry structure
• Tax policy, tariffs and other trade barriers, incentives offered by government
• Labor costs
• Quality of potential local partners
• Availability of local suppliers
Management issues with market entry strategies
• Uniqueness of product
• International experience and knowledge of cultural issues
• Barriers to entry
• Designing a good business model
• Is it cheaper to produce locally overseas or lo export?
• Is it better to license to infiltrate more markets faster?
• Have you insured against non-payment?
• Haw to address legal issues or conflicts with partners
• Have you got a plan for a currency increase?
Key success factors for market entry strategy for service firms
• Long-term commitment - CEO and Board (local
office, training, promotional activities)
. Relationship development (distributors, local government, JV
partners) . Patience (government, culture, realistic time frames and budgets)
• Prove the concept in Australia first - strong domestic client base to leverage
(especially if internationally recognized) - Cheaper to get finance from domestic
• Uniqueness of product and IP protection
• Strong reputation/confidence in ability
• Prior international experience or recruit internally experienced people
• In market presence - closeness to customer
• Good interpersonal skills of staff/cultural understanding
• Website up-to-date and informative to boost credibility
Forms of Corporate Downsizing:
1. Spin-Off: Spin-off has emerged as a popular form of corporate downsizing in the
nineties. A new legal entity is created to takeovers the operations of a particular
division or the unit of the company. The shares of the new units is distributed pro rata
among the existing shareholders. In other words the shareholding of the new company
at the time of the Spin-off will mirror the share-holding of the parent company. The
shares of the new company are listed and traded separately on the stock exchanges,
thus providing an exit route for the investors. Spin-Off does not result in cash inflow to
the parent company.
2. Split-Off: In a split-off, a new company is created to takeover the operations of an
existing division or unit. A portion of the shares of the parent company are exchanged
for the shares of the new company. In other words, a section of shareholders will be
allotted shares in the new company by redeeming their existing shares. The logic of
split-off is that the equity base of the parent company should be reduced reflecting the
downsizing of the firm. Hence the shareholding of the new entity does not reflect the
share holding of the parent firm. Just as in split-off does not results in any cash inflow
to the parent company.
3. Split-Up: A split-up results in a complete break-up of a company into two or more
companies. All the division or units are converted into separate companies and the
parent firm ceases to exist. The shares of the new companies are distributed among the
existing shareholders of the firm.
4. Equity Carve outs: An equity carve outs involves conversion of an existing division or
unit of wholly owned subsidiary. A part of the stake in this subsidiary is sold to a
outsiders. The parent company may or may not retain controlling stake in the new
entity. The shares of the subsidiary are separately listed and traded on the stock
exchange. Equity Carve outs results in a positive cash flows to the parent company.
An equity carve outs is different from spin-off because of the induction of outsiders of
new shareholders in the firm. Secondly equity carve outs requires higher levels of
disclosures and are more expensive to implement.
Divestitures: Divestitures involves outright sale of a portion of the firm to outsiders. The
portion sold may be a division, unit, business or assets of the firm .The firm receives
purchases consideration in the form of cash, securities or a combination of the two. The
divestiture is the simplest form of Sell-offs.
Legal Procedures for Merger, Amalgamations and Take-overs
The control exercised by the government over mergers is articulated in an elaborate legal
framework embodied in the Companies Act and the MRTP Act. 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 High
Court the power to sanction a compromise or arrangement with creditors and members,
subject to certain conditions. Section 392 gives the power to the High Court to enforce and
supervise the carrying out of such compromises or arrangements with creditors and
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. 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, oath the amalgamating company or companies and
use amalgamated company should comply with
the requirements specified in sections 391 to 394 and submit details of all the formalities
for consideration of the High Court. 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 court and the central
government in the matter of bringing about amalgamations of companies. After the
application is filed, the High Court 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 court has also to give notice of every
application made to it under section 391 to 394 to the central government and the court
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 court.
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 court 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
Court, the properties or liabilities of the amalgamating company get transferred to the
amalgamated company. Under section 394, the court 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 court 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 court granting a scheme of amalgamation. The court 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 court 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. Provisions in the MRTP Act
The law relating to mergers also explicitly prescribed that any merger or amalgamation,
which increased concentration of asset ownership, should not
be approved by the High Court. Thus wherever such a possibility existed the role of the
High Court as the agency which ensured that a merger was not prejudicial to the interests of
its members or the public was superseded by the role of the central government as an agency
that safeguards the national interest. This was done under Section 23 of the MRTP Act.
According to sub-section (2) of this section, Government approval for amalgamations was
necessary in the following circumstances: (i) if one MRTP undertaking amalgamated with
another undertaking; and (ii) if, on amalgamation of two or more undertakings, an
undertaking came into existence which became remittable under the MRTP Act. As per the
law, the power of the central government under section 23 of the MRTP Act overrode the
power of the Court to sanction a scheme of merger or amalgamation under sections 391 to
396 of the Companies Act. According to this section, no scheme for the merger or
amalgamation of an undertaking could be sanctioned by any Court or would be recognized
for any purpose or would be given effect to unless the scheme for such merger or
amalgamation had been approved by the central government under the specific provisions of
this section. The owner of the undertaking had to make an application to the central
government for the approval. The scheme of approval could not be modified without the
previous approval of the central government. The approval of the central government was
not necessary for the merger or amalgamation of interconnected undertakings (which
were not dominant undertakings) if they produced the same goods or provided the same
services. If one of the transacting parties is a non-resident Indian, then transfer of shares
could be made only with the permission of the RBI. Finally, the provisions under the
sections 23 and 24 of chapter 3 of MRTP Act were abolished in 1991. As a result, the
MRTP commission does not play a role in mergers and acquisitions in the same
manner in which it used to. But, it does play a role in cases where it believes that a merger
or a take-over would lead to restrictive trade practices Regarding take over there were no
comprehensive regulations to govern these activities until the new clauses 40A and 40B
were incorporated in May 1990 although both the companies Act (section 395) and the
MRTP Act (section 24) had provisions for corporate takeovers. According to this clause,
any person who acquires 5% or more of the shares in a company must notify the stock
exchange and when the holdings cross 10%, a public offer to purchase shares must be made.
However, this agreement was restricted to only listed companies and was effective only
when either of the parties in an acquisition was a listed company. In November 1994, the
Securities and Exchange Board of India came out with SEBI (Substantial acquisition of
shares and take-over) Regulation, 1994to regulate the take-over of the companies. But this
code was inadequate to address all the complexities and therefore a new committee was set
up tore view the present code. The committee under the chairmanship of
P.N.Bhagwati suggested substantial modifications in the existing code. The important
chan>pp*-atf -consolidation of holdings by an existing shareholder holding not less than10
percent of voting rights will be allowed;
- Conditional bid will be allowed;
-Acquirer will be required to deposit upfront 10 percent of the total consideration in an
-Time limit for competitive bidding has been extended to 21 days;
-The consideration shall be payable even by exchange and/ or transfer of secured
instruments with a minimum of 'A' grade rating from a credit rating agency. The valuation
of the instrument will be duly certified by an Independent category 1 merchant banker or a
chartered accountant of 10 years standing
- Acquisition of shares by the acquirer during offer period is permitted,
except in case of conditional offer
-Time schedule for each event in the take-over process has been specified; • Waiting for offer
letter by SEBI has been dispensed with.
Thus the revised code is applicable to the take-overs through acquisition of control over a
company irrespective of whether or not there has been any acquisition of shares or voting
rights in the company whereas, the present code restricts its applicability to take- over
through acquisition of shares or voting rights. However mergers and amalgamations
constitute a subject matter of companies Act, 1956 and is outside the preview of SEBI.
How is the valuation of a target company done in an M&A?
Both sides of an M&A deal may have differing views about the worth of a target
company: its seller will tend to value the company as high as possible, while the buyer
will try to get the lowest price possible.
There are, however, many legitimate ways to value companies. The most common
method is to look at comparable companies in an industry, but dealmakers employ a
variety of other methods and tools when assessing a
Following are the commonly used methods for valuation of a company:
One method is called comparative ratios. Acquirers may base their offers on the
following two of the many comparative ratios:
In the using the P/E (price-to-earnings) ratio, an acquirer makes an offer as a multiple of
the earnings the target company is producing. Looking at the P/E for all the stocks
within the same industry group will give the acquirer a good idea of what the
target's P/E multiple should be.
In the EV/Sales (price-to-sales) ratio, the acquiring company makes an offer as a
multiple of the revenues, again, while being aware of the P/S ratio of other companies in
Another method is the "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.
It, obviously, 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
Then there is the discounted cash flow (DCF) method. 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 are discounted to a present
value using the company's weighted average costs of capital (WACC). DCF is tricky to
get right, but few tools can rival this valuation method.
Do investors stand to gain from mega-mergers?
Not always, only a few top executives, investment bankers, and lucky stock market
speculators get rich from mega-mergers. Quoting academic research, she states that the
majority of big deals don't create any long-term shareholder value.
According to a Purdue University study, when glamour companies acquire other
companies, the stock for the acquiring company is likely to under perform comparable
companies in the three years after the acquisition. Value acquirers, on the other hand,
outperform their peers in the long term after the acquisition. The study defines a glamour
company as one to which the stock market assigns a much higher value than the book
value of its assets, in other words a company with a high market-to-book ratio. A value
company is just the opposite - its book value is greater than the value of its
"Glamour companies are the blue-eyed boys of Wall Street," says Raghavendra Rau,
assistant professor of management at Purdue's Krannert Graduate School of Management.
"When their management announces an acquisition, both the market and the management
have inflated views of their ability to manage the acquisition. The acquisitions tend to
perform badly. Value companies, on the other hand, have performed poorly in the past.
Their shareholders are more likely to be prudent in only approving acquisitions that
actually create value."
Big deals rarely generate long-term gains. Integrating two companies often takes longer
than expected, yields fewer benefits, and causes more disruption than anticipated.
Daren Fonda, citing data from a research firm, writes in Time that in the seven of the
nine mergers valued at more than $50 billion, the acquirers share price fell 46% from
the pre-merger levels.
How can small investors then make money from mega mergers?
The options are very few. Small investors usually tend to lose out in mega-mergers.
Gregory Zuckerman writes in Wall Street Journal that for investors, the best way to make
money at the takeover game usually is to be a holder of a company that receives a
takeover offer. Gillette, for example, shot up 13% the day Procter & Gamble
made the merger announcement.
But for shareholders of the companies doing the buying, the M&resurgence has its
perils. The sad reality is that most large mergers just don't work out, despite all the
hoopla surrounding them, according to Zuckerman.
At the same time, speculation on takeover targets is a risky proposition and shares
shouldn't be purchased strictly on a hunch that a deal is looming, analysts say. Rather,
takeover potential is just another reason to consider a stock that otherwise looks
attractive based on price and earnings potential.
Why do mega-mergers not succeed as expected?
One doesn't have to look far for reasons why mega-M&As fail. Top executives clash,
synergies often aren't borne out and the heavy cost of the deals sometimes comes back to
James Fanton of the Brooklyn Law School says that in the heady days of the 1990s'
market excesses, CEOs justified M&A deals with tales of "synergy," and used their
over-inflated stock as acquisition currency. Boards went passively along.
The professionals who worked on the deals did not intervene to question the wisdom of
the mergers. Paid by the number of deals and deal size, investment bankers had no
reason to caution CEOs about the risks of the transactions. Accountants and lawyers
abandoned all pretensions of independent thinking and were only too happy to join in the
feeding frenzy of large fees, says Fanton.
And in the case of media mergers, the business press, itself owned by the firms that were
created by these mergers, fawned over the CEOs and extolled the transactions. As an
example, Fanton cites former Worldcom CEO Ebbers.
A total of 872 Indian companies merged or were taken over in the year up to November
30, compared with 565 deals worth 4.5 billion dollar in the same period in 2004, The
Times reported, quoting research agency Thomson Financial.
The merger and acquisition surge forms part of a broader economic boom in India,
which has seen its 30-share benchmark stock market index (Sensex) nearly triple from
3,300 in March 2003 to 8,788.81 at yesterday's close.The index, which hit a record
9,033.99 points yesterday before falling back slightly after profit-taking, is likely to rise
by as much as 18 per cent a year over the next few years, according to the Indian unit of
Societe Generale, thebank.
Foreign companies and institutional investors are pouring into India, which recorded an
annual increase of 8 per cent in its GDP in the three months to October, according to
figures published yesterday.
The investors are attracted by India's burgeoning affluent classes, which have nearly
tripled from 30 million households to 81 million in the past 10
India, which has particular strengths in IT, outsourcing and manufacturing, also has a
young, well-educated population, many of whom speak English.
About half the country's population are under 25.
Vodafone's 67 billion rupee purchase of a 10 per cent stake in Bharti Tele-Ventures,
India's largest mobile phone operator, in October, is the largest foreign investment this
The one billion pounds acquisition of Dabhol Power, the utility, by Ratnagiri Gas and
Power is the largest takeover this year, according to Thomson Financial.
Studies have confirmed the general apprehension that FDI inflows in the form of
mergers and acquisitions (M&As) are in general of poorer quality as compared to
Greenfield FDI inflows, in terms of their domestic capital augmenting potential,
spillover benefits, competition and efficiency. This is because M&As do not always
augment the stock of productive physical capital in the host country which would
contribute to further growth. It is to be noted that Greenfield investment, by virtue of
new entry, increases competition, while M&As most often lead to increases in economic
concentration by reducing the number of active enterprises in the market.
Even a successful M&A bid and its efficient implementation from the investors' point of
view need not necessarily have a favorable impact on the economic development of the
host country. The main reason for this is that the objectives of the concerned
multinational corporations (MNCs) and those of the host economies do not necessarily
coincide. The effects of the M&As, either directly or through linkages and spillovers,
also depend on whether the investment is natural-resource-seeking, market-
seeking, efficencyseeking or created-asset-seeking. In case the initial investment decision
related to a merger or acquisition is taken on purely financial profitability
considerations, without due regard for the economic benefits likely to accrue to the host
country, the effects of such M&As cannot be expected to be beneficial for the host
economy. China Siow Yue et al note that the "driving forces behind this M&A surge
include increased corporate competition as a result of liberalization in many host country
regimes, and the need to consolidate international business in the face of falling corporate
profit margins. Recent declines in commodity prices and global overcapacity across a
spectrum of industries have exacerbated this business consolidation trend". The motive-
factor would also have an important bearing on the type and quality of the technology
transferred. It is important for the developing countries, therefore, to not only see
"whether" technology is being transferred, but also the "nature" of such transfer. The
quality of the technology acquired cannot be ignored if one has to keep in mind the
dynamic long-term development interests of the developing countries.
Recent Mergers & Acquisitions
Polaris Merged with
Acquired IPR of Orbi Tech's range of
Orbi Banking product suite.
Aimed at expanding in the BPO space,
the acquisition gave Wipro an
opportunity to run a profitable BPO
Wipro Acquired global energy
practice of American
It acquired skilled professionals and a
strong customer base in the area of
Wipro Acquired the R&D
divisions of Ericsson
It acquired specialized expertise and
people in telecom R&D.
Wipro GE Medical Systems
It acquired IP from the medical
systems company, which in turn gave
it a platform to expand its offerings in
the Indian and Asia Pacific healthcare
Moksha Challenger Systems &
Primarily aimed at expanding its
customer base. The company also
leveraged on the expertise of the
companies in the BFSI space.
Mphasis Acquired China-
Expanded its presence in the Japanese and
the Chinese markets. It also plans to use it
as a redundancy centre for its Indian
Acquired US-based eJiva
Expanded in size and leveraged on
technical expertise of the acquired
companies. Acquisitions have helped the
company in offering multiple services
and expanding its customer base
M & A in IT Sector
TIS 15 years since the process of liberalization started, and India Inc. is on the path to
building MNCs (Multi-National Companies) across the globe. It is the desire of every
enterprise to go global through sales outlets and/or mergers and acquisitions.
A variety of acquisition stories are doing the rounds in the media. Here are a few thoughts
that could be handy in understanding the M&A domain.
The facilitators of the M&A process spend more time on the financials and projected cash
flows to arrive at a value to complete the transaction. The acquiring company is
interested in non-financial facts that could impact the performance of the acquired
company. It is thus equally desirable to spend quality time on such non-financial
There are a variety of reasons for engaging in acquisitions. The integration of the
acquired unit leads to success only when our actions match these intents. These are:
P Consolidation: Buying the competition
o Diversification: Increasing the value chain width
o Parking: Benefit from arbitrage in unrelated areas
o Repositioning: Synchronising with societal change
o Paradigm pioneering: Betting on future technologies
What are we seeking with the acquisition? Many a time, the acquisition yields results
through improved capabilities, technology, brand position, and so on. It is worthwhile
for the acquiring entity to ask some questions before deciding on any unit:
3 Will the acquisition add to tangible assets (resources) and/or intangible assets
Where does value come from? Is it process efficiency, asset turnover, ability to expand
(financial leverage) in new areas, or a combination?
3 Can human capital be assessed and indexed to establish a baseline? Are
there metrics to measure capability growth?
3 How are talent retention and sustenance handled? Can they be replicated?
Strategy map :
It is desirable to have answers on the what, why, where, when, and how questions to
find a strategy fit with the proposed acquisition.
— What: Value generation and delivery infrastructure
— Why: Maslow's Hierarchy of Needs — security and/or recognition needs
— Where: Leadership in demanding markets
— When: Towards portfolio balance
— How: With value fit, integration, and institutionalization
Identifying target companies is normally done through accounting firms as they are
considered to have a broader knowledge of the markets. However,
before engaging them, a framework needs to be developed to filter the lists generated by
them. A sample of filters worth looking into are:
o Relevance to the overall strategy
o Size — turnover, territories, technologies
o Infrastructure/platform (commodity products) or applications (custom-built
o Stages in the business cycle (adolescence, youth, prime/peak) D With sustainable
competitive advantage or for building competitive advantage
o Geopolitical, civility, and ethical considerations
o Regulatory, ecological, and infrastructure frameworks
o Ease of exit, related costs and value loss
This is an area the views and issues are varied. Typical parameters for evaluation
include customer, capital, brand, financials and liabilities. In addition, a few more
parameters on the intangibles would add value:
o Process and practice
o Ethics, excellence, and eco-consciousness
o Culture, communication, and commitment
o TQM (6-sigma, BPR, CMM, ISO), and ERP/MIS Systems
o IPR, time-to-market, and re-positioning
There are many experts one can consult with to obtain legal and environment
clearances, arrive at transaction value based on EBITDA/WACC vs. Market-cap, book-
value, etc., structuring the transaction in terms of cash, stock, swap, etc., and negotiating
for equitable gains to both the parties.
M&A in the economies that are comparable to India are as good as domestic
acquisitions, and the issues are fewer. While venturing into acquisitions in the
developed economies, the challenges are psychological and not just business-related.
Many would resist a new boss (parent company) from an economy that is not at par with
their economy. Often, businesses are bought based on brand, technology and,
importantly, by future cash flows.
If half (or a significant number) of the management team decides to leave, what value
will remain with the business?
The challenges of making it work multiply with the acquisition as the expectations run
high from every corner. The role of the integrating agent will remain under the
microscope until the objectives are met to everyone's satisfaction.
To ensure single-point accountability, the acquired unit should be viewed as a subsidiary
of the parent, and one business head should be appointed from the parent company.
Communication with the members of the acquired unit should be structured and
measured to get the best synergies from the teams.
A quick audit should be done to reach the members of the management team and ensure
consistent performance and effective people management.
Reassurances must be given (maybe in writing, with the necessary caveats) to retain
them through the integration process.
High-performing employees would typically expect independence and continued
respect. Guaranteeing this, within the framework of the overall strategy, would go a long
way in making the integration process smooth.
The members of the management team who do not fall under the above category should
be eased out at the earliest to minimize/eliminate the spread of negative energy. This
activity should be done in one go and not spread over time. Nobody likes to have bitter
medicine more than once!
Share with the team (remaining members of the management) the objectives of the
acquisition, set the expectations, the measures, and develop the timetable with
milestones to track integration. Involving them in creating the timetable would secure
The synergy of the acquisition will be decided by the communication to the markets,
customers, and other stakeholders.
Often, internal acceptance is faster than the external acceptance. For example, HP
acquired Compaq but the market sees the products differently.
The Compaq products that competed with HP prior to the acquisition are viewed a
notch below by the market, leading to value erosion.
To gain market acceptance on the value delivered, joint positioning of the brands
(basically kill one of the two brands) is needed, with changes to product design,
ergonomics, and support systems.
If mergers are on the cards, then compensation parity and management team rotation
between the acquirer and the acquired is a must to gain synergy and bring about a
Often, the experience gained from one acquisition is not captured or documented as part
of knowledge management to leverage at the time of future acquisitions.
Just like post-implementation audits on projects, audits on acquisitions would highlight
the lessons learned and add value to the organization and ensure the prevention of the
same mistakes being committed.
After all, a learning system is not expected to make the same mistake twice!
Patterns of MNE Related M&A in India
In tune with the worldwide trend, M&As have become an important conduit
for FDI inflows in India in the recent years. Official figures on the relative
importance of M&As in total FDI inflows are not published. But
independent sources suggests that during 1997-99 nearly 40 per cent of FDI
inflows in the country have taken the form of M&As by MNEs of existing
Indian enterprises rather than Greenfield investments. As indicated
earlier, until 1990, almost all of FDI inflows in the country took the form of
Greenfield investments. To examine the sect oral distribution, motives,
patterns etc. of MNE related M&As in the country, a database covering 256
deals entered into by foreign MNEs or by their controlled affiliates in India
between March 1993 and 15 February 2000 has been compiled. The main
sources of the information are reports in financial media and CMIE's
Economic Intelligence Service. The database (hereafter
RISICDRC database) defines deals as acquisitions if it involves taking over
the operations of a going concern by the acquirer. Merger is defined to cover deals where the
identities of enterprises involved are merged. Some of the acquisitions are followed by
amalgamation of the acquired entity into the acquiring company. However, such deals are
classified as acquisitions. Following patterns emerge from analysis of the database.
Table 1: Share of M&As iu FDI Inflows iu India
Year FDI Inflows
Share of M&A Fluids
hi Inflows (°o)
1997 3200 1300 40.6
1998 2900 1000 34.5
1400 500 35.7
Total 7100 2800 39.4
Year Mergers Acquisitions Total
1993-94 4 9 13
1994-95 - 7 7
1995-96 - 12 12
1996-97 2 46 4S
1997-98 4 61 65
1998-99 2 30 32
(upto Jan.00) 5 74 79
Total 17 239 256
Source : Kumar based on RIS Database
Major Mergers & Acquisitions 200to^6b
• Sprint; with Nextel
• Verizon with MCI
• Kmart; with Sears, Roebuck (Announced 17 November 2004) (
billion, 55% stock, 45% cash)
• Hewlett-Packard; with Compaq (Announced Sept. 2001 - Final 1
2002) ($25 billion) ()
• NBC Universal; NBC and Universal
• J .P. Morgan Chase, Bank One (announced January 14, 2004)
billion, Stock: 100%, Cash: 0%) (SNL)
•Procter & Gamble buy Gillette (2005, $54 billion) ()
• Bank of America; with Fleet Boston Financial (2003, $47 billion) ()
• Cingular and AT&T Wireless (Announced February - Final 16 Oct 2004) ($41 billion)
• SBC and AT&T Completed November 18, 2005
Source: Economic Times. 23 December 199S and 21 June
1999. Table 2: MNE Related M&As iu India
• Macromedia Inc by Adobe Systems Inc ($3.4 billion; close 05 Dec 2005)
• Paramount; acquiring DreamWorks for $3.1 billion
• Walt Disney Company and Pixar, announced January 2006, $7 billion
• Vivendi Universal; Vivendi SA and Seagram (agreed 19 June 2000)
($32 billion, Stock: 100%, Cash: 0%) (The Tocqueville Connection,
• Galax Welcome with Smith Kline Beecham (2000) (US$76 billion)
Major Mergers & Acquisitions 1990-1999
Acquirer and target, announcement date, deal size, share and cash payment. United States
• AOL Time Warner; America Online and Time Warner (US$166
billion excluding debt, Stock: 100%, Cash: 0%) (PBS coverage, CNN)
• Exxon Mobil; Exxon and Mobil Oil (Dec. 1998, $77 billion, Stock: 100%, Cash: 0%)
(Suns Online, CNN)
• Citigroup; Citicorp and Travelers Group (1999, $73 billion, Stock:
100%, Cash: 0%) (Cornell, Citigroup FAQ)
• MCI Communications; with WorldCom; created MCI WorldCom (1997) ($44 billion,
Stock: 100%, Cash: 0%) (Department of Justice, MCI.com)
• Chevron Texaco; Chevron and Texaco ($35 billion) ()
• Walt Disney Company; with Capital Cities/ABC (1995) ($ 19 billion)
• Monsanto; with Pharmacia & Upjohn
• Pfizer; with Warner-Lambert
• I . JDS Anaphase; with SDL
• Union Pacific Railroad; with Southern Pacific Railroad
• Venison; Bell Atlantic, GTE, and Air Touch Cellular
• DaimlerChrysler; Daimler Benz and Chrysler (Announced May 1998 -Final 1998)
($35 billion) ()
• Vodafone; with Mannesmann (completed February 2000) ($130 billion) ()
• Total; with Petrofina, and Elf Aquitaine
• BP; with Amoco (completed August 1998) ($ 11 Obn)
Mitsubishi UFJ Financial Group (merger of Mitsubishi Tokyo Financial and UFJ, $88
billion in combined market capitalization at the time of announcement).
Major Mergers in the Telecom Sectors:
MCI WorldCom Sprint
Bell Atlantic GTE
AT&T Macaw Cellular
US West Global Crossing
Bell Atlantic NYNEX
SBC Pacific Telesis
The Indian telecom industry witnessed the merger of Tata Cellular with Birla AT &T and
Bharati Telecom's acquisition of JTM.
Major Mergers in Media & Entertainment Sector
American On-line Time Warner
Walt Disney Capital Cities
AT&T Media One
Time Warner Turner Broadcasting
After the worldwide peak in 2000 and subsequent decreases over the two following years,
M&A activity in the world as a whole slightly increased in 2003. Globally the total
number of operations reached 30 200 in 2003, against 29 300 in 2002 (an increase of
3%). The total number of operations involving the acquisition of a US company
increased by 1% to 7 900 operations, due to an increase in domestic mergers and
acquisitions. For the EU-25 the situation was different, with a decrease of 3.4% between
2002 (9 000 operations involving EU firms as a target) and 2003 (8 700 operations). The
gap between the EU-25 and the USA may be explained in part by the delay in the
economic recovery in the EU-15
Graph 1a : Evolution of MSA as target
As a source of bidders (i.e. acquiring companies), the USA seem to have shown a
slight recovery in the last two years with a higher number of acquisitions than the
EU-25 in 2003 (8 153 against 8 100)
Important differences between M&A and FDI statistics
Broadly speaking, FDI includes M&A statistics, Greenfield investments, reinvested
earnings and intra-company loans. However, the following issues should be noted.
Firstly, M&As record capital transactions without deducting disinvestment while
FDI data deduct disinvestment. Second, cross-border M&A may be financed by
external and domestic settlements while FDI are financed by external settlements and
reinvested earnings. Third, while M&As record all acquisitions of shareholdings of
5% I or more, only acquisitions of holdings of more than 10% of the capital I
qualify as FDI M&A statistics in this note are based on data provided by Thomson
Financial Services (TFS). The database covers all acquisitions of shareholdings of
5% or more and with a value over US$1 million as well as acquisitions for which
the value is unknown. Although it endeavors to collect and present information,
which is as complete as possible, the nature of the information makes the coverage
somewhat arbitrary. This is because although major operations affecting publicly
listed companies are often officially published, the numerous purchases of smaller
or unlisted companies are more difficult to identify. Also, subjective assessments
are often inevitable e.g. as regards the date and sect oral classifications of a merger
and acquisition operation. In addition a number of conventions have been
established when drafting this M&A note. Both completed and pending deals are
3 CI 02
taken into account. TFS are used for classification for the sectoral aspects of M&A
(SIC classification, different from NACE classification). Moreover, sectoral
activities are defined according to the target's main activity, as this is the activity
most likely to interest the bidder and also because the targeted sector is the one in
which the effects of an operation are likely to be the greatest. Finally it is important
to note that the database does not contain value data for a significant number of
deals. However these are mostly small deals since the value of large operations can
usually be ascertained. The value data are therefore underestimated, though not by
a large amount.
Graph 1b : Evolution of M&A as bidder
The value of M&A has decreased in the world as a whole, the EU-25 and the USA
since 1999-2000. Globally the total value decreased by 8.6% in 2003 to 1 365 billion
euros. The decrease was 15.6% in the EU-25 and 4.2% in the USA . The decline in
value of mergers can be attributed in part to weak the economic performance,
concerns about international security, a pause in the consolidation of some industries
and declining stock prices, but can also be seen as a correction of the exceptional
surge in M&A during 1999-2000. The value of M&A has decreased in the world as a
whole, the EU-25 and the USA since 1999-2000. Globally the total value decreased by
8.6% in 2003 to 1 365 billion euros. The decrease was 15.6% in the EU-25 and 4.2%
in the USA . The decline in value of mergers can be attributed in part to weak the
economic performance, concerns about international security, a pause in the
consolidation of some industries and declining stock prices, but can also be seen as a
correction of the exceptional surge in M&A during 1999-2000.
'Merger Control' refers to the procedure of reviewing mergers and acquisitions under
antitrust / competition law. Over 60 nations worldwide have adopted a regime
providing for merger control.
Merger control regimes are adopted to prevent anti-competitive consequences of
concentrations (as mergers/takeovers are also known). Accordingly most merger
control regimens provide for one of the following substantive tests:
Does the concentration
• substantially lessen competition? (US, UK)
• significantly impede effective competition? (EU)
• lead to the creation or strengthening of a dominant position? (Germany,
In practice most merger control regimes are based on very similar underlying
principles. Simplified, the creation of a dominant position would usually result in a
substantial lessening of or significant impediment to effective competition.
While it is undisputable that a concentration may lead to a reduction in output and
result in higher prices and thus in a welfare loss to consumers, the antitrust authority
faces the challenge of applying various economic theories and rules in a legally
Modern merger control regimes are of an ex-ante nature, i.e. the antitrust authority
has the burden of predicting the anti-competitive outcome of a concentration.
Risk in M&As
'A big mistake most acquirers make is to lay too much stress on strategic,
unquantifiable benefits of deal. This results in overvaluation of the acquired
Eg- Tata Tea is believed to have paid millions of dollars more than the second highest
when it acquired Tetley. It had a tough time servicing additional debt required for the
Strategic issues in mergers and acquisitions
Need for caution
Quite clearly, major acquisitions have to be handled carefully because they leave little
scope for trial and error and are difficult to reverse. The risks involved are not merely
financial. A failed merger can disrupt work processes, diminish customer confidence,
damage the company's reputation, cause employees to leave and result in poor employee
motivation levels. A comprehensive assessment of the various risks involved must
precede an M&A deal. The circumstances under which the acquisition may fail, including
worst case scenarios, should be carefully considered. The ability of a merger to create
value for shareholders must be examined carefully. As Sirower puts it neatly: "When you
make a bid for the equity of another company, you are issuing cash or claims to the
shareholders of that company. If you issue claims or cash in an amount greater than the
economic value of the assets you purchase, you have merely transferred value from the
shareholders of your firm to the shareholders of the target -right from the beginning."
Acquirers often make two major blunders. One is the tendency to lay too much stress on
the strategic, un-quantifiable benefits of the deal. This results in overvaluation of the
acquired company leading to what is called the winner's curse. The second is the tendency
to underestimate the challenges involved in integration. As a result, the actually realized
synergies turn out to be short of projected ones. Many companies confidently project
substantial cost savings before the merger. But they underestimate the practical
difficulties involved in realizing them. For example, a job may be eliminated, but the
person currently on that job may simply be shifted to another department. As a result, the
headcount remains intact and there is no cost reduction. This is especially so in a country
like India, where retrenchment is not very easy.
Many a merger is finalized hoping that efficiency can be improved by combining the best
practices and core competencies of the acquiring and acquired companies. Cultural
factors may, however, prevent such knowledge sharing. The DaimlerChrysler merger is a
good example. Also, it may take much longer to generate cost savings than anticipated.
The longer it takes to cut costs, the lesser the value of synergies generated.
If generating savings is not easy, revenue growth - the reason given to justify many
mergers - is even more difficult. In fact, growth may be adversely affected after a
merger if customer or competitor reactions are hostile. When Lockheed Martin
acquired Loral, it lost business from important customers such as McDonnell
Douglas, who were Lockheed's competitors. So, companies must also look at the
acquisition in terms of the impact it makes on competitors and the possibility of their
retaliation. Some M&A experts consider revenue enhancement to be a soft synergy
and discount it heavily while calculating synergy value. Companies making an
acquisition not only have to meet performance targets the market already expects, but
also higher targets implied by the acquisition premium. When they pay acquisition
premium, managers are essentially committing themselves to delivering more than
what the market expects on the basis of current projections. More often than not, the
acquirers fail to discharge this commitment. Even when the numbers do not justify an
acquisition, executives may insist on going ahead for strategic, un-quantifiable
benefits. In the heat of finalizing the deal, what is conveniently overlooked is that
most strategic benefits ultimately should lead to some form of cost reduction or
We should note some special problems that can influence the valuation calculation -
Private Companies; When valuing a private company, there is no marketplace for
the private company. This can make comparisons and other analysis very difficult.
Additionally, complete historical information may not be available. Consequently, it
is common practice to add to the discount rate when valuing a private company since
there is much more uncertainty and risk.
Foreign Companies: If the target company is a foreign company, you will need to
consider several additional variables, including translation of foreign currencies,
differences in regulations and taxes, lack of good information, and political risk. Your
forecast should be consistent with the inflation rates in the foreign country. Also, look
for hidden assets since foreign assets can have significant differences between book
values and market values.
Complete Control: If the target company agrees to relinquish complete and
total control over to the acquiring firm, this can increase the value of the target,
he value assigned to control is expressed as:
CV = C + M
CV: Controlling Value
C: Maximum price the buyer is willing to pay for control of the target
M: Minority Value or the present value of cash flows to minority
the merger is not expected to result in enhanced values (synergies), then the
squiring firm cannot justify paying a price above the minority value. Minority
due is sometimes referred to as stand-alone value.
MERGERS & ACQUISITIONS (M&A) IN INDIAN TELECOM INDUSTRY
Mergers and Acquisitions (M&A) are strategic tools in the hands of management to
achieve greater efficiency by exploiting synergies and growth opportunities. Mergers are
motivated by desire to grow inorganically at a fast pace, quickly grab market share and
achieve economies of scale. India has become a hotbed of telecom mergers and
acquisitions in the last decade. Foreign investors and telecom majors look at India as one
of the fastest growing telecom markets in the world. Sweeping reforms introduced by
successive Governments over the last decade have dramatically changed the face of the
telecommunication industry. The mobile sector has achieved a tele density of 14% by
July 2006 which has been aided by a bouquet of factors like aggressive foreign
investment, regulatory support, lower tariffs and falling network cost and handset
prices.M&A have also been driven by the development of new telecommunication
technologies. The deregulation of the industry tempts telecom firms (telcos) to provide
bundled products and services, especially with the ongoing convergence of the telecom
and cable industries. The acquisition of additional products and services has thus become
a profitable move for telecom providers.
M&A in telecom Industry are subject to various statutory guidelines and Industry specific
provisions e.g. Companies Act, 1956; Income Tax Act, 1961; Competition Act, 2002;
MRTP Act; Indian Telegraph Act; FEMA Act; FEMA regulations; SEBI Takeover
regulation; etc. We will cover some of these regulations hereunder which are unique to
Top M&A deals in 2001
Target Acquirer Value of deal ($ millions)
AT & T Broadband &
Hugs electronics (US) Echo star Communications (US) 31,739
Compaq Computers (US)
Hewlett Packard (US) 25,263
American General (US) American International Group (US) 23,398
Dresdner ankh (Germany) Aliens (Germany) 19,656
Bank of Scotland (UK) Halifax Group (UK) 14,904
Wachovia (US) First Union (US) 13,132
Benicia (Mexico) City Group (US) 12,821
Telecom Italia (Italy) Olivetti (Italy) 11,973
Billiton (UK) BHP (Australia) 11,511
the telecom industry.
Telecom Regulatory Authority of India (TRAI) is of the view that while on one hand
mergers encourage efficiencies of scope and scale and hence are desirable, care has to be
taken that monopolies do not emerge as a consequence. TRAI had issued its
recommendation to DoT in January 2004 regarding intra circles Mergers & Acquisitions
which were accepted by DoT and stated below.
Department of Telecommunications (DoT) can be credited with issuing a series of
liberalizing initiatives in telecom sector which has led to phenomenal growth of the
Industry. Based on recommendations of TRAI, DoT issued guidelines on merger of
licenses in February 2004. The important provisions are state below:
Prior approval of the Department of Telecommunications will be necessary for merger of
the license. The findings of the Department of Telecommunications would normally be
given in a period of about four weeks from the date of submission of application.
Merger of licenses shall be restricted to the same service area.
There should be minimum 3 operators in a service area for that service, consequent upon
such merger. Any merger, acquisition or restructuring, leading to a monopoly market
situation in the given service area, shall not be permitted. Monopoly market situation is
defined as market share of 67% or above of total subscriber base within a given service
area, as on the last day of previous month. For this purpose, the market will be classified
as fixed and mobile separately. The category of fixed subscribers shall include wire-line
subscribers and fixed wireless subscribers.
Consequent upon the merger of licences, the merged entity shall be entitled to the total
amount of spectrum held by the merging entities, subject to the condition that after
merger, the amount of spectrum shall not exceed 15 MHz per operator per service area for
Metros and category ‘A’ service areas, and 12.4 MHz per operator per service area in
category ‘B’ and category
‘C’ service areas.
In case the merged entity becomes a “Significant Market Power” (SMP) post merger, then
the extant rules & regulations applicable to SMPs would also apply to the merged entity.
TRAI has already classified SMP as an operator having market share greater or equal to
30% of the relevant market.
In addition to M&A guidelines, DoT has also issued guidelines on foreign equity
participations and management control of telecom companies. The National Telecom