This document is a project report on mergers and acquisitions submitted by Mr. Sunil Shendage. It includes an acknowledgement, objective, table of contents, preface, and various sections analyzing mergers and acquisitions such as the acquisition process, forms of corporate downsizing, the legal procedure, mergers in the IT sector, risk in mergers and acquisitions, and a case study on TATA Tea and Tetley. The report discusses the meaning of mergers and acquisitions, types of mergers like vertical, horizontal, circular and conglomerate combinations, and common objectives for business combinations such as growth, synergy, managerial efficiency, market entry, and diversification.

1. A Project Report on Mergers and
Acquisitions
Date: 11th
, August 2008
Project Guide: Mr. Shinde
Submitted By: Mr. Sunil Shendage

2. ACKNOWLEDGEMENT
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.
Thanking You,
Sunil Shendage

3. OBJECTIVE
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.

4. Table of Contents -
Introduction...............................................................................................................1
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
Legal Procedure........................................................................................................22
Indian Scenario.........................................................................................................28
Mergers &Acquisitions in IT Sector..........................................................................31
Patterns in MNE and Mergers &Acquisitions............................................................35
Recent Major Mergers &Acquisitions in I T Industry ...............................................36
Merger Control...........................................................................................................41
Risk in Mergers &Acquisitions....................................................................................42
The Contours of M&A in Telecom ………………………………….. 43
Case- TATA Tea and Tetley.......................................................................................67
Making Mergers smoothers........................................................................................68
Measuring PMI.............................................................................................................81

5. Findings..........................................................................................................................82
Conclusion.......................................................................................................................85

6. PREFACE
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.

7. 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
• Integration
Assistance with the identification of the skills and resources needed to ensure a
smooth integration
• Pre-Closing
Design of post-completion insurance and benefits programs before the transaction
date to take advantage of enhanced coverage and competitive pricing

8. Report on Mergers and Acquisitions
• Post-Closing
Ensuring the recommendations highlighted in the due diligence reports are
implemented
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

9. 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

10. government.
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
Vertical Combination
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
distributive outlets.

11. Report on Mergers and Acquisitions
Horizontal Combination
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.
Circular Combination
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).
Conglomerate Combination
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

12. 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
the 20th
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
of it.
Business Combinations
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

13. 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
department, etc.
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

14. 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
avoided.
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
failures.
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

15. 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

16. 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.
First Wave:
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

17. 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.
Second 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.

18. 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.
Third Wave:
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
bootstrap game.

19. Fourth Wave:
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

20. 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.
Fifth Wave:
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
services.
The Acquisition Process

21. 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

22. 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
computation.
 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
Company.

23. 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,
etc
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
equity

24. shares. As timing is a critical factor in such deals, the investments bankers
involved often gives/arranges for a bridge loan against subsequent
refinancing.
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 -

25. 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.

26. Advantages Disadvantages
• 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
market
• 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
integration
• Target too large or too small
• Overly optimistic appraisal of
synergies
• Overestimation of market
potential
• Inadequate due diligence
• Incompatible corporate
cultures
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.
For example:
• Cultural distance - language, ethnicity, religion
• Administrative distance - institutional weaknesses, government policies,
political hostility
• Geographic distance - lack of common border, physical remoteness, size of country
• Economic distance - differences in consumer incomes, cost differences
Decidingonalocation
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
decision include:
• Political stability - political history, fiscal and monetary policy
• Economic stability - growth rates, incomes, costs, resources, interest rates and
inflation

27. • 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
market
• 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

28. 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.

29. 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
members.
Section 393 provides for the availability of the information required by the creditors and
members of the concerned company when acceding to such an arrangement. Section 394
makes provisions for facilitating reconstruction and amalgamation of companies. 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

30. 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

31. 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
Escrow account;
-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

32. 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
Itargetcompany.
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
the industry.
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
and develop.
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

33. 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
stock.
"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,

34. 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
haunt buyers.
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.
Indian Scenario
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
years.
India, which has particular strengths in IT, outsourcing and manufacturing, also has a
young, well-educated population, many of whom speak English.

35. 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
year.
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
Company Merged
with/Acquired
Reason/Benefits
Polaris Merged with
Orbi Tech
Acquired IPR of Orbi Tech's range of
Orbi Banking product suite.

36. Wipro Acquired
Spectra mind
Aimed at expanding in the BPO space,
the acquisition gave Wipro an
opportunity to run a profitable BPO
business.
Wipro Acquired global energy
practice of American
Management Systems
It acquired skilled professionals and a
strong customer base in the area of
energy consultancy.
Wipro Acquired the R&D
divisions of Ericsson
It acquired specialized expertise and
people in telecom R&D.
Wipro GE Medical Systems
(India)
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
IT market.
Moksha Challenger Systems &
X media
Primarily aimed at expanding its
customer base. The company also
leveraged on the expertise of the
companies in the BFSI space.
Mphasis Acquired China-
based Navion
software
Expanded its presence in the Japanese and
the Chinese markets. It also plans to use it
as a redundancy centre for its Indian
operations.
Mascot
Systems
Acquired US-based eJiva
and Hyderabad-based
Aqua Regia
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
considerably.

37. 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
parameters.
Intent/drivers :
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
Architecture:
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
(capabilities)?
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

38. 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
Identification
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
products)
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
Evaluation
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
Mechanics
There are many experts one can consult with to obtain legal and environment

39. 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.
Integration
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
buy-in.
Synergy

40. 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
unified culture.
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

41. 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
(S million)
M&A Funds
(S million)
Share of M&A Fluids
hi Inflows (°o)
1997 3200 1300 40.6
1998 2900 1000 34.5
1999 (Jan-
Mar.)
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
1999-00
(upto Jan.00) 5 74 79
Total 17 239 256
Source : Kumar based on RIS Database
Major Mergers & Acquisitions 200to^6b
United States
• 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) ([5])
• 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) ([6])
• Bank of America; with Fleet Boston Financial (2003, $47 billion) ([7])
• 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

42. • 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
Europe
• Vivendi Universal; Vivendi SA and Seagram (agreed 19 June 2000)
($32 billion, Stock: 100%, Cash: 0%) (The Tocqueville Connection,
Law firm)
• 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 ($35 billion) ([2])
• Walt Disney Company; with Capital Cities/ABC (1995) ($ 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

43. Europe
• DaimlerChrysler; Daimler Benz and Chrysler (Announced May 1998 -Final 1998)
($35 billion) ([3])
• Vodafone; with Mannesmann (completed February 2000) ($130 billion) ([4])
• Total; with Petrofina, and Elf Aquitaine
• BP; with Amoco (completed August 1998) ($ 11 Obn)
Japan
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:
Acquirer Target
Vodafone Mannesmann
MCI WorldCom Sprint
Bell Atlantic GTE
AT&T Macaw Cellular
SBC Ameritech
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
Acquirer Targets
American On-line Time Warner
Viacom CBS
Walt Disney Capital Cities
AT&T Media One
Time Warner Turner Broadcasting

44. 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
i----1---1—
3 CI 02

45. 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
17500
'EU-25-•us

46. 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
'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,
Switzerland)
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

47. 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
binding procedure.
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
company.'
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
buyout.
Strategic issues in mergers and acquisitions
VALUATION
IDENTIFYING

48. SYNERGIES
INTEGRATION
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

49. most strategic benefits ultimately should lead to some form of cost reduction or
revenue growth.
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
company
M: Minority Value or the present value of cash flows to minority
shareholders.
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.

50. 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.
REGULATORY FRAMEWORK
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 &
Internet (US)
Comcast(US) 57,547
Hugs electronics (US) Echo star Communications (US) 31,739
Compaq Computers (US)
(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

51. the telecom industry.
TRAI Recommendations
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.
DoT Guidelines
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

52. Policy, 1994 (NTP 94) provided guidelines on foreign equity participation and as revised
by NTP 99 permitted maximum 49% cap on foreign investment. Recently by its order no.
-842-585/2005-VAS/9 dated 1st February, 2006 DoT has enhanced the FDI limit in
telecom sector to 74%. The key provisions of these guidelines are as follows:
The total composite foreign holding including but not limited to investments by Foreign
Institutional Investors (FIIs), Nonresident Indians (NRIs), Foreign Currency Convertible
Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts
(GDRs),convertible preference shares, proportionate foreign investment in Indian
promoters/investment companies including their holding companies, etc., referred as FDI,
should not exceed 74%. The 74% investment can be made directly or indirectly in the
operating company or through a holding company and the remaining 26 per cent will be
owned by resident Indian citizens or an Indian Company (i.e. foreign direct investment
does not exceed 49 percent and the management is with the Indian owners). It is also
clarified that proportionate foreign component of such an Indian Company will also be
counted towards the ceiling of 74%. However, foreign component in the total holding of
Indian public sector banks and Indian public sector financial institutions will be treated as
‘Indian’ holding.
The licencee will be required to disclose the status of such foreign holding and certify that
the foreign investment is within the ceiling of 74% on a half yearly basis. The majority
Directors on the Board including Chairman, Managing Director and Chief Executive
Officer (CEO) shall be resident Indian citizens. The appointment to these positions from
among resident Indian citizens shall be made in consultation with serious Indian
investors. The merger of Indian companies may be permitted as long as competition is not
compromised as defined below:
“No single company/legal person, either directly or through its associates, shall have
substantial equity holding in more than one licensee Company in the same service area
for the Access Services namely; Basic, Cellular and Unified Access Service. ‘Substantial
equity’ herein will mean equity of 10% or more’. A promoter company/Legal person
cannot have stakes in more than one LICENCEE Company for the same service area”
Some exceptions have been provided to this guideline. The Licensee shall also ensure that
any change in shareholding shall be subject to all necessary statutory requirements.
As per recent news reports, the Government wants to arm itself with power to block FDI
in case the investment from companies or countries deemed undesirable, even if it is
within the approved limit. This is a positive step due to increasing security concern India
is facing but has led to apprehension that the new law will be used to block investment

53. from certain parts of the world.
FEMA Guidelines
The foreign exchange laws relating to issuance and allotment of shares to foreign entities
are contained in The Foreign Exchange Management (Transfer or Issue of Security by a
person residing out of India) Regulation, 2000 issued by RBI vide GSR no. 406(E) dated
3rd May, 2000. These regulations provide general guidelines on issuance of shares or
securities by an Indian entity to a person residing outside India or recording in its books
any transfer of security from or to such person. RBI has issued detailed guidelines on
foreign investment in India vide “Foreign Direct Investment Scheme” contained in
Schedule of said regulation. As per the FDI scheme, investment in telecom sector by
foreign investors is permitted under the automatic route within the overall sectoral cap of
74% without RBI approval. The salient features of FDI scheme as applicable to telecom
sector is as follows:
Industries which do not fall within the ambit of Annexure A can issue shares under
automatic route to foreign companies (Para 2). Since telecom sector is not listed in
Annexure A hence foreign investment can be made in telecom sector upto 74% cap
without prior approval of RBI.
In case, investment by foreign investor(s) in an Indian telco is likely to exceed sectoral
cap of 74%, then they should seek approval of (FIPB) Foreign Investment Proposal
Board. (Para 3) FDI scheme permits automatic approval of transfer of shares from one
foreign shareholder to another, so long as the transfer is in compliance of FDI scheme and
the regulation. (Regulation 9) However, if the shares are being transferred by a person
residing outside India to a person resident in India, it shall be subject to adherence to
pricing guidelines, documentation and reporting requirements of RBI. Application
seeking RBI approval is to be made in Form TS 1. (Regulation 10 B)
The issue price of share should be worked out as per SEBI guidelines in case of listed
companies. In case of unlisted companies, fair valuation method as prescribed by
erstwhile Controller of Capital Issues should be adopted and should be certified by a FDI
scheme also stipulates the norms on dividend balancing, whereby the cumulative amount
of outflow on account of dividend for a period of 7 years from commencement of
production or services should not exceed cumulative amount of export earning during
those years. The dividend balancing guidelines are applicable to companies included in
Annexure E of FDI scheme and telecom industry is not included. In case preference
shares are issued to a foreign investor, the rate of dividend shall not exceed 300 basis
points over the Prime lending rate of SBI, prevailing on the date of Board meeting where
such issuance is recommended.

54. The reporting requirement are contained in regulation 9 viz. a) The Indian company
should report the details of receipt of consideration to RBI within 30 days of receipt and
b) The Indian company should submit report of issuance and allotment of shares in Form
FCGPR along with necessary certificates from the Company Secretary and the Statutory
Auditor of the Company. An Indian Company may also issue shares on Rights basis or
issue bonus shares(Regulation 6A); subject to compliance of conditions of FDI scheme
and sectoral cap. FDI scheme prohibits investments by citizen or entities of Pakistan and
Bangladesh (regulation 5) primarily on security concerns. In the recent past, DoT has also
delayed its approval to an Egyptian company’s investment in Hutch India on similar
grounds.
SEBI Takeover Guidelines
SEBI takeover guidelines called Securities and Exchange Board of India (Substantial
acquisition of shares and takeover) Regulations, 1997 are applicable to listed Public
companies and hence would be applicable in case of M&A in listed telecom companies
like Bharti, Reliance Communication, Shyam Telecom, VSNL, Tata Teleservices
(Maharashtra) Limited, etc. These guidelines have been recently amended by SEBI and
notified vide SO No. 807(E) dated 26.05.2006.
The highlights of the amendment are as follows:
No acquirer who together with persons acting in concert with him, who holds 55% or
more but less than 75% of the shares or voting rights of the target company shall acquire
by himself or through persons acting in concert unless he makes a public announcement
as per the regulations. Further, if a target company was unlisted, but has obtained listing
of 10% of issue size, then the limit of 75% will be increased to 90%. Regulation 11(2). If
an acquirer who together with persons acting in concert with him, who holds 55% or
more but less than 75% of the shares or voting rights of the target company is desirous of
consolidating his holding while ensuring that Public Holding in the target company does
not fall below the permitted level of listing agreement he may do so only by making a
public announcement as per the regulations. Further, if a target company was unlisted, but
has obtained listing of 10% of issue size, then the limit of 75% will be increased to 90%. -
Regulation 11(2A) The minimum size of public offer to be made under Regulation
11(2A) shall be lesser of a) 20% of the voting capital of the company; or b) such other
lesser percentage of voting capital as would enable the acquirer to increase his holding to
the maximum possible level, while ensuring the requirement of minimum public
shareholding as per listing agreement.
Competition Laws

55. Competition Commission of India (CCI), established in 2003, holds statutory
responsibility for ensuring free and fair competition in all sectors of the economy. The
Competition Act, 2002 has provided for a liberal regime for mergers, whereby
combinations exceeding the threshold limits fall within the jurisdiction of CCI. The
threshold limits are quite high. Most competition laws in the world require mandatory
prior notification of every merger to the competition authority but under Indian law it is
voluntary. However CCI can also take cognizance of a merger perceived as potentially
anti competitive and it can also enquire until one year after the merger has taken place.
Once CCI has been notified, it must decide within 90 days of publication of details of the
merger or else it is deemed approved. The CCI can allow or disallow a merger or can
allow it with certain modification. Most of the operative provisions of Competition Act
have still not been notified.
THE CONTOURS OF M&A IN TELECOM
M&A are also referred as Corporate Marriages and Alliances. Mergers can be across
same or similar product lines. In many cases mergers are initiated to acquire a competing
or complementary product. A reverse merger is another scenario in taxation parlance
where a profit making company merges with a loss incurring company to take advantage
of tax shelter.
A horizontal merger (mergers across same product profile) adds to size but the chances
for attainment of profit efficiency are not very high. On the other hand a vertical merger
(entities with different product profiles) may help in optimal achievement of profit
efficiency. Say a mobile operator acquires a national long distance company and thus
saves IUC charges. In telecom Industry, most of the acquisitions were horizontal which
helped the acquirers to expand the area of their operation and customer base quickly.
These provided economies of scale with phenomenal benefit to the acquirers in terms of
higher profitability, and better valuations.
Takeovers generally have three typical patterns:
a) In the first model, the investor acquires a controlling stake in the acquired company
and retains it as a separate entity. This is the simplest model with the intent to avoid the
legal hurdle for merging the company into the parent company. This route also gives the
acquirer a flexibility to sell off the operation on a stand alone basis later on, in case the
merger is not successful. This mode has been followed by Hutchison, which has retained
most of the acquired companies (Usha Martin- Kolkata, Fascel- Gujarat, Aircel Digilink –
Haryana, Rajasthan and UP East, Sterling Cellular- Delhi, Escotel - Punjab) as separate
legal entities.
b) In the second model, the acquirer merges the acquired company with the parent after

56. acquiring controlling stake. This model requires completion of merger formalities with
due approval of High courts and also from DoT. It has the advantage of avoiding statutory
compliance for several entities and integrates all operations seamlessly into a single legal
entity. This model has been followed by Bharti, which has merged most of the acquired
entities with the parent in due course of time.
c) The third model entails purchase of assets of the target company on stand alone basis
without purchasing the company as a whole. In some cases, where the licences were
cancelled by DoT due to default, such companies sold the telecom assets and customer
database to the acquirer, who could easily integrate the same into his existing licence and
strengthened his network and customer base at a nominal cost. The seller company which
was stripped of licence as well as telecom network was ultimately wound off.
THE ATTRACTION OF M&A IN TELECOM
India’s telecom liberalisation was noticed by Global investors in 1995 when the
Government permitted entry of foreign telecom operators through Joint venture route.
Some of these global giants included Vodaphone, AT&T, Hutchison Whampoa, Telekom
Malaysia, and Telestra Australia. We now need to understand some of the predominant
objective of takeovers in telecom sector, which can be summarised as follows:
1) Acquisition of licences or geographical territory;
2) Acquisition of spectrum;
3) Acquisition of telecom infrastructure and network;
4) Acquisition of customer base to achieve an economic base;
5) Acquisition of brand value;
6) Higher operating profit (EBITDA) margin;
7) A combination of above.
Market access: There has been almost saturation of demand in the home market of
majority of foreign investors where teledensity ranges from 40% to 100%. On the other
hand, the teledensity in Indian market is currently hovering at 14% like a low hanging
fruit. The rural teledensity is almost negligible at about 3%. India’s young and middle
class market offers tremendous scope for market expansion and new business. For
example, even after 15 years of economic reforms, sale of most consumer durable goods
has not exceeded Rs. 60 million, whereas telephone penetration has already crossed the
Rs. 120 million mark and is all set to cross 150 million mark by December 2006 and Rs.
250 million mark by 2010.This huge expansion is possible only with higher focus on rural
telephony, bridging the digital divide and higher allocation of network and funds to rural
areas which are not so rewarding in terms of ARPU.
Spectrum: Spectrum is turning out to be the biggest bottleneck for Indian mobile

57. operators as they face network problems, poor voice quality and call dropping. GSM
operators initially get 4.4
MHz of spectrum while CDMA operators get 2.5 MHz spectrum. In case of GSM
operators with 10 lakh or more subscribers, they are eligible for 10 MHz spectrum, while
CDMA operators get 5 MHz for 10 lakh subscribers. Since CDMA technology carries the
voice in small packets, it can carry about five times more traffic and hence has a lower
spectrum allocation.
However, as the number of mobile users is growing at an amazing rate of 4 million per
month), spectrum is falling short of requirements. Thus, the foreign investors prefer to
acquire an existing operation to ensure ready availability of spectrum, instead of applying
for a new licence where spectrum allocation from DoT is really a challenging task. The
Government is also taking effective steps to get approx 40 MHz spectrum vacated from
Indian defense services which will give a fresh lease of life to spectrum starved market.
This will be a key driver for all future M&A in India.
Network roll out: Network roll out is a nightmare for telecom operators. It is more
complex for a foreign operator who may not be conversant with local conditions.
Network roll out involves Right of way (ROW) approvals, coordination with local
government departments, acquiring BTS and BSC sites on rentals, acquiring municipal
and local approvals to set up tower and antenna, obtaining electrical connection for the
sites, import of equipment, installation of tower, equipment and shelter, SACFA and TEC
approvals, integration of various sites and final launch of services in a geographical area
etc. Generally the time to roll out a network in a circle takes minimum 6 months to 1-year
time. The industry is also resorting to site and infrastructure sharing with other operators
to reduce its capital expenses and operating expenses cost and optimise profitability.
Human Resource: The dovetailing of human resources of the acquired company into the
culture of parent company has significant importance in any M&A deal and can even
spoil a deal if not properly managed. It is now an established principle that local leaders
decide the success or failure of a cross boarder deal. The savvy acquirer retains competent
local leaders and dangles incentives and awards to align their personal interest with that
of the merged entity. Premium is placed for target companies which have strong
management team in place, lower manpower base and higher employee productivity.
Some benchmarks used in this regard are – Number of customers per employee, Revenue
per employee per month etc. Majority of the telecom companies resort to outsourcing of
routine and non core activities and reduce number of “on roll employee” to attract better
valuations. Hence, it is essential to make an assessment of the off roll and outsourced
staff involved in a telecom operation to ascertain the true operational efficiency and real

58. manpower cost.
Brand value: In most cases, where the acquisition is for majority control, the foreign
investor is likely to introduce its own brand in India instead of local brand. Hence,
generally no value is placed on brand related expenditure amortised or any goodwill.
However, where the investor takes minority stake and the brand stabilised by the
controlling local partners has become popular, brand value plays an important role in
valuation.
Better margin possibility: Across Asia-Pacific, be it China, Indonesia, Philippines,
Thailand or
Australia, operating margins (EBITDA) average 40% -60%, which are considerably
higher than the mid-30% for Indian telecom operators. The EBITDA margin of Bharti
Airtel at 37% is the highest among all telecom operators whereas for other operators it
ranges from 11% to 25%. Thus, the scope for enhancing margins is fairly significant in
Indian market since Government levies, licence fees, etc. are likely to come down to give
further fillip to teledensity. The Government is also providing Universal Service
Obligation (USO) support to operators to expand their network in rural areas. The foreign
investors continue to look at India to spread their market. In the initial years, the number
of operators in each circle was limited to four which was a major entry barrier. Further
the entry fee for acquiring a licence was also high. But over the years, the DoT has been
consistently liberalising entry norms and making market access easier for foreign
investors with the ultimate objective of benefiting consumers.
THE VALUATION OF A TELECOM LICENCE
George Bernard Shaw had once said, “Economists know the price of everything, but the
value of nothing.” This saying is aptly reflected in case of telecom valuation also. The
acquirer pays hefty valuation to acquire an entity and the “Business value” placed is much
higher than “Accounting value”.
The local promoters strive hard to enhance the enterprise value of their project by
adopting a multi pronged strategy. This involves a careful incubation of network across
the entire circle, hiring a strong management team, installing robust billing system, well
oiled channel partner network and above all, an aggressive selling strategy to build a
critical mass of customer base. In their aggression to inflate enterprise value, some
operators end up creating” phantom subscribers” to attract better valuation. Phantom
subscribers refer to low value prepaid cards, which are sold by channel partners to
unwilling end users. These cards are not likely to yield much revenue to the operator, but
just retained as customers to show an inflated subscriber base and fetch higher valuations.
The Investment banker has to decide what is being valued – a) Whether its a valuation of

59. company’s equity or its assets; b) Whether the company is being valued as a going
concern with all its assets and liabilities or is under liquidation; or c) Is it a valuation of
minority interest or a Controlling stake; d) Whether the valuation of entity on per sub
base is appropriate; e) Whether the EV/EBITDA ratio is in line with Industry trend. The
list of these factors is endless. Enterprise value (EV) refers to the market capitalization of
a company plus debts. When an investor acquires a company, it takes over not only the
assets of the company, but also assumes the liability to pay the existing debts and
liabilities of the company. Thus, Enterprise value is the sum total of all fair value of assets
and the liabilities of the acquired entity. The key performance metrics to evaluate the EV
are:
a) EV / EBITDA ratio: This ratio reflects number of years the unit has to yield operating
profit (EBITDA) to return the basic investment made by the Investor. This ratio is in the
nature of PE ratio from the viewpoint of a retail investor and varies from Industry to
industry. In telecom Industry, most of the deals struck in the past couple of years have
been at EV/EDITDA ratio of 6-10 times.
b) EV/Revenue Ratio: This ratio indicates number of years required to generate revenue
to return the investment price paid by the acquirer. In one way it can be likened to pay-
back period. EV/Revenue ratio is on an average five or less.
c) Per subscriber EV (EV/number of acquired subscribers): This ratio represents
value placed by the acquirer on subscribers acquired along with complete network and
infrastructure. Smart acquirers on the lookout prefer to pay a premium for taking over an
existing operation say US$ 450 per subscriber as against network rollout which costs
even less than 1/3rd cost @ US$ 100. As we would see later, the per subscriber rate varies
from US$ 400 to US$ 1000. A company earning higher Average Revenue per User
(ARPU) is likely to command better per subscriber rate. A better rate is also dependent on
other factors like Churn ratio, VAS revenue, type of circle, average life cycle of customer,
subscriber acquisition cost, quality of customers etc. An indicative
Enterprise value can also be computed by multiplying the subscriber base of the company
with the per subscriber rate. For example, if the subscriber base of a telecom operator is
1,00,000 customers and the applicable per subscriber rate for this category of operator is
US$ 400, then the indicative enterprise value will be US$ 40,000,000 (US$ Forty
million).
M&A – CASE STUDIES
The first M&A deal in India was the sale of Mumbai licence by Max group to Hutchison
Whampoa group of Hong Kong. The deal fetched over half a billion dollars for Max
group and was touted as a major success for Indian entrepreneur in telecom venture. This

60. followed a series of M&A in subsequent years as stated hereunder. Some of the other
high profile deals were Vodaphone’s acquisition of 10% equity in Bharti in 2006 for US$
1 billion, Maxis acquisition of Aircel at enterprise value of US$ 1 Billion, Birla Group’s
acquisition of Tata’s stake in Idea Cellular. Interestingly some of the high profile
investors who had sold their stake around year 2000 are now reentering India like
Telecom Malaysia (exited India in 2000 from Kolkata licence and recently acquired 49%
stake in Spice Telecom) and Vodafone (exited India in 2003 from RPG Cellular Chennai
and recently acquired stake in Bharti). Closely followed the sell-off, acquisition, resale
and reacquisition by Indian Promoters as a case study. In April 1998, Max group had sold
its stake in Mumbai licence to Hutchison Telecom for US$ 560 million. Somewhere
along the way Max group again picked up a small stake of 3.16% in Hutch and resold it
to Essar Group in October 2005 for US$ 147 million. Max India has staged another
comeback in Hutch by acquiring an 8.33% from Kotak Mahindra Bank for Rs. 1,019
crore in 2006. This second return to the telecom business reflects the buoyant conditions
in telecom sector.
The valuation of state owned Bharat Sanchar Nigam Limited (BSNL) is estimated to be
US$ 30 Billion one of the highest in India. On a global scale, China Mobile has emerged
as the world’s most highly valued telco with enterprise value of US$ 131.46 billion,
followed by Vodaphone at US$ 123.11 billion as on July 2006. We find that average
valuation per subscriber ranges from US$ 400 to US$ 550 which in turn is based on a
variety of factors including Average ARPU, type of circle, competition in the circle,
Category of operator— whether only a Mobile service provider or an integrated telecom
player (like Bharti and Reliance) etc. Valuation is generally lower in case the acquirer
takes a minority stake as against controlling stake. Similarly, valuation also suffers if the
target company is not listed and hence has lower liquidity (as in case of Idea, Hutch etc).
As a thumb rule, suggested by one economist, the differential for non liquidity of non
listed entity could be as high as 20% -25%. While most of the GSM operators resorted to
M&A in order to achieve growth, RelianceInfocomm did not go for inorganic route and
instead rolled out a green field project. This was also due to the fact that Reliance had
adopted CDMA technology and was able to roll out the network at much lower cost as
compared to GSM network.
DUE DILIGENCE AND DIAGNOSIS
The due diligence exercise gives the investor a deep insight into financial and operational
issues of the target company. If these issues are not properly analysed, it can lead to

61. serious integration issues, while by that time the merchant bankers who have assisted in
the acquisition may have left the scene. Some of these due diligence areas are:
Strategic and Business due diligence: This includes careful analysis of current market
share, planned market share, quality of existing customer base, revenue mix, average
ARPU in the service area, per minute revenue (RPM), review of marketing strategy,
customer care philosophy, ability of existing channel partners to promote
Major M&A deals in Indian telecom sector Company/Service % Buyer Seller Year Deal
Indicative Per sub Name Stake size Enterprise value sold (US$) value (US$) Orange,
Mumbai 41% Hutchison Group, Hong Kong Max Group, Delhi 1998 560 Mn 1.36 Bln
NA Hutch, India 8.33% Max India Kotak Mahindra, India 2006 225 Mn -NA Hutch
Essar, India 5.1% Hutchison Group, Hong Kong Hinduja 2006 450 Mn 9 Bln NA Hutch
Essar 3.17% Essar Group Max India 2005 146 Mln -570 Command Cellular, Kolkata
100% Hutchison & Indian Group, Usha Martin & Others 2000 -138 Mln Idea Cellular
48.14% Aditya Birla Group Tata Group 2005 NA 2 Bln 400 Modi Telestra, Calcutta
100% Bharti Group, India B.K.Modi and Telestra 2000 NA 160 Mln Bharti 9.3% Private
Investors Warburg Pincus NA 873 Mn NA 1000 Bharti Airtel 10% Vodaphone Bharti
Group 2005 1.5 bln 16 Bln 1000 Aircel, Chennai 79.24% Sterling Group, Chennai RPG
Group 2003 210 Cr Aircel, TN, Chennai and NE 74% Maxis, Malaysia Sterling Group
2006 750 Mn 1.07 Bln 496 Spice, (Punjab and Bangalore) 49% Telekom Malaysia,
Malaysia NA 2006 178 Mn 363 Mln -Reliance CDMA -Qualcomm, San Diego, US
Reliance Infocomm 2002 -10 Bln -BPL Mobile and BPL Cellular -Promoters 2005 1.15
Bln NA -the services and withstand competition, reason for low performance of the target
company, synergies which are likely to be enjoyed on acquisition, likelihood of entry of
new competitors in the licenced area, strategic initiatives needed to establish market
leadership etc.
Technological & Integration issues: The technical due diligence includes review of
technical aspects, telecom network technology adopted etc. This helps the investor to find
out the quality of network assets, whether the coverage is adequate or not, their
maintenance and upgrade status, status of integration of various systems like switch, non
compatibility of existing network
equipment if any with the current system of acquirer resulting their obsolescence and
write offs, value added services, billing system(Whether the billing system can be
interfaced with the system of acquirer, the upgrade status of billing system, does it
interface with financial systems), customer care system (database structure in customer
care system, its interface with switch for seamless flow of data on activation through front
end, customer grievance resolution mechanism, ease of customer interaction from call

62. centre, reporting mechanism for pending customer queries and its escalation), IT system,
order fulfillment process, etc.
Financial & Commercial due diligence: The financial due diligence is likely to give
deep insight into operations, which otherwise would not be possible. Some key issues to
be analysed under this head would include: accounting policies on intangibles and
deferment, contingent liabilities disclosed and undisclosed, statutory and workmen dues,
finance cost and possibility of debt restructuring, capital structure, vendor and other dues
and reason for delayed or non payment, list of all contracts and agreements and the
review of all rates and terms, possibility of renegotiation of major commercial agreements
and quantification of possible saving, details of pending export obligations under EPCG
rules, details of bank guarantees issued, pending cost saving measures initiated in the
company, internal control measures and processes, internal audit reports, fixed assets
verification reports, valuation reports if any, etc.
Secretarial & Legal due diligence: The acquirer also carries a detailed legal due
diligence of the various approvals obtained by the target company to understand possible
instances of violations if any and the quality of statutory compliances. This includes a
review of statutory approvals required, approvals taken and their renewal status, Minute
books of AGM, EGM, Board and committee meetings, review of shareholders agreement,
Memorandum and Articles, statutory clearances for all investments made till date, review
of all major agreements (with lessors for BTS/BSC/MSC sites, collection and recovery
agents, channel partner agreement, roaming agreements, network services providers, VAS
services, DoT licence agreement), listing of all legal cases filed by and against the
company and current status, list of statutory compliances, list of all statutory liabilities
(status of payment of various dues like PF, ESI, licence and spectrum charges,
interconnect payments, liquidated damages if any levied by licensor), list of all IPR
rights, IPR violation issues etc).
Human Resource issues: The investor analyses the average salary of the employees,
ratio of outsourced employee to total employees, salary range vis a vis Industry trend and
chances of salary increase to be made. The investor also tries to find out whether any
Golden Parachute has been issued to senior management which has to be borne by the
merged entity.
The results of due diligence exercise help to unearth startling facts and assist the
investment banker to revise the valuation. From the acquirer’s perspective, some change
management problems can be avoided by solving them before the deal closes. For
example, if the due diligence reveals that the workforce of the target company is inflated,
then he may insist for its rationalization as a precondition to deal closure.

63. WHETHER M&A IN INDIAN TELECOM WERE SUCCESSFUL
A merger to be successful should create new capabilities, offer better value proposition to
the combined entity’s customers and above all enhance shareholders’ value. Empirical
studies prove that M&A brings with it the advantage of synergies to the operators and in
majority of cases results in immense increase of shareholders value. M&A in Indian
telecom industry has also benefited other stakeholders i.e. customers, Indian economy and
society at large.
M&A have acted as catalyst to stupendous growth in tele density to 14% in 10 years
(1995 -2006), as against 2% in 48 years (1947-1994) of independence. According to a
study conducted by the reputed international agency, OVUM on “The economic benefits
of mobile services in India” on behalf of Cellular Operators’ Association of India, it was
found that mobile sector has generated 3.6 million jobs directly or indirectly and the same
will rise by at least 30%. Similarly the Mobile industry contributes over Rs. 145 billion
per annum by licence fees, spectrum fees, import duties, taxes, etc. Taking the OVUM
findings on the base of 48 million subscribers in January 2005, COAI has estimated that
at a mobile subscriber’s base of 200 million in 2007, the industry would contribute over
10 million jobs and over Rs. 500 billion annual revenue to the Government.
From foreign investors’ perspective, they have immensely gained from investing in India.
As per recent news, out of Hutchison’s total global revenue of Rs. 13440 crores, over
45% comes from India which is no mean achievement. Indian promoters who
commenced their telecom operation on a small scale in few circles, gained immensely on
sale of their stake to foreign investors. In fact, some of the world’s largest telecom
companies, who have left India with a bitter experience a few years ago like British
Telecom, Vodaphone, France Telecom, Telekom Malaysia, Telestra Australia are all set
to return even as minority shareholders on witnessing telecom success story.
ACCOUNTING ISSUES
The accounting issues arising in any M&A include merger accounting by the acquirer,
treatment of goodwill and reserves of the acquired company, treatment of
Goodwill/capital reserve arising on M&A, choice of the method of accounting – pooling
of interest or purchase method, accounting for share of profits/losses and dividends for
investments made in Indian operating company.
Accounting Standard 14 classifies amalgamations (also referred as business combination)
into two categories for the purpose of accounting a) amalgamation in the nature of merger
and IFRS 3 prohibits pooling of interest method and permits only purchase method of

64. accounting by the acquirer in M&A. With issuance of IFRS 3, IAS 22 stands withdrawn.
The significant changes introduced by IFRS 3 are as follows:
b) Amalgamation in the nature of purchase. AS 14 provide that in case of amalgamation
in the nature of merger, pooling of interest method is to be applied, whereas for other
cases purchase method is to be applied. This standard is applicable only if two or more
entities are merged to form a new entity. In case of takeover of majority interest which
does not yield to formation of a new merged entity, AS 14 is not applicable. In order to
apply pooling of interest method (in case of merger scenario) five conditions have to be
fulfilled i.e. a) transfer of all assets and liabilities to transferee company b) 90% of
shareholders of transferor company should become shareholder of transferee company c)
Consideration for purchase should be paid by issue of equity share of transferee company
d) Continuation of business of the acquired company and e) No adjustment to be made for
assets and liability taken over. Since in most of the telecom acquisitions, conditions no.
(B) and (C) are generally not applicable; the purchase method is applied for takeovers. In
June, 2001, the US Financial Accounting Standards Board (FASB) adopted two new
accounting standards: FAS 141 ‘Business Combinations’ and FAS 142 ‘Goodwill and
Other Intangibles’ which was applicable for business combinations from 1 July 2001.
These introduced major changes in US accounting as follows: a ban on pooling (i.e.
merger accounting); all business combinations are to be treated as purchases (i.e.
acquisitions); no amortisation of goodwill and in most cases, annual testing for goodwill
impairment testing rather than amortisation, for acquired intangible assets with indefinite
lives. Takeovers in Indian telecom industry have seen following common accounting and
financial issues:
In telecom acquisitions, goodwill is stated at cost/book value less accumulated
amortisation and is amortised on straight-line basis over the remaining period of service
licence of the acquired company from the date of acquisition. For example, say A Limited
acquired B Limited at a purchase consideration of US$ 1.5 billion, as against the book
value of US$ 1 billion on 1st August 2006. The licence of B Ltd is expiring on 30th July
2016. In this case, US$ 500 million is the goodwill in the books of A Limited and will be
amortized over next 10 years being the balance period of licence of B, on SLM basis, In
case of change of brand and launch of “superior” brand, the existing brand related
amortized expenses and goodwill are written off fully. For example, when Hutchison
finally decided to introduce Hutch Brand on consolidation of its operations across India, it
had to write off all the local brands like Orange, Fiscal, and Command etc which were
amortized earlier.
Major write off of debts is also seen. For example, upon demerger of Reliance Infocomm

65. from Reliance Industries Limited, over US$ 1 billion were written off from the Balance
Sheet which included; inter alia, bad debts, receivable etc. Change in key accounting
policies of acquired unit in line with the acquirer’s accounting policies, like revenue
recognition, treatment of licence fee payment, debtors provisioning, and treatment of
activation revenue. In many cases, the new operators also junk the existing billing system
leading to major write off. Intelligent network (IN) system is the heart for credit
monitoring and management of prepaid services. In some cases, IN system of a preferred
vendor is installed leading to junking of existing IN system and its resultant write off.
TAXATION
Following are the major taxation issues in any M&A deals including telecom sector:
1) Carry forward of losses of the acquired company.
2) Capital gains on sale of shares by Indian shareholders.
3) Capital gains on sale of shares by foreign shareholders.
Carry forward of losses:
The Income Tax law relating to carry forward of losses are contained in Section 72, 72A
and Section 79 of the Income Tax Act, 1961. While Section 72 provides timeline for
carry forward of losses, Section 79 stipulated conditions for carrying forward of losses.
Section 79 provides that in case of company in which public are not substantially
interested, no loss incurred in any prior previous year shall be carried forward and set off
against losses of the previous year unless shares carrying 51% or more of voting rights
are held beneficially by same set of shareholders on last date of financial year as
compared to previous year(s) in which losses were incurred. The exception provided are
a) Change in voting power due to death of shareholder or arising out of gift to any relative
and b) Change in shareholding of an Indian subsidiary of a foreign company arising due
to amalgamation or demerger of foreign company. Majority of M&A in telecom sector
were in respect of closely held companies, in which public were not substantially
interested and hence 51% beneficial shareholding was attracted. In most cases of telecom
acquisitions, the control was obtained by investing at indirect level and altering direct
holding as to a minimum avoidable level. This was achieved by changing shareholding at
a level above the direct holding level, so that at least 51% direct beneficial holding
continued.
Capital gains
The capital gains arising from transfer of shares is liable to taxation under the Income Tax
Act depending upon the nature of gain, whether it is long term or short term. Section 112

66. provides for taxation of long-term capital gains (LTCG). However, Section 10 (38) in
troduced in 2004 provides for full exemption from Income Tax for long term capital gains
(LTCG) provided a) The capital gain arises on transfer of shares of listed public
companies; b) At the time of transfer, the transaction is chargeable to securities
transaction tax (STT). In case of short term capital gains on listed securities (arising in
less than 12 months), on fulfilling same conditions, Indian investor has to pay tax on
STCG @ 10% u/s 111A. Twelve months holding period is applicable only for listed
securities, in case of unlisted securities, the minimum holding period has to be 36 months,
before it qualifies as long term.
However, majority of telecom holdings as discussed in this article are not listed securities.
Hence they are subjected to taxation under the regular provisions of Income Tax Act.
Thus in case of capital gain arising from sale of shares of unlisted entities, the taxation is
as follows: a) In case of short term capital gain, the gain is included as income from other
sources/ business Income as the case may be and charged to tax at full rate; and b) In case
of LTCG, the gain is liable to tax @ 20% u/s 112. Section 10(23G) this section was
introduced in 1995 with an objective of promoting investment in telecom sector by Indian
and foreign investors. Telecom operators, whether listed or not were required to get the
approval of Ministry of Finance u/s 10(23G) on submission of requisite details. In case a
telecom entity was approved under this section, the investors in such entity were entitled,
inter alia, tax exemption on long term capital, interest on long term finance and dividend.
The approval was given by Ministry of Finance (MOF) on year-to-year basis or for a
block of years based on satisfying eligibility criteria. It is pertinent to note that approval
under this section is provided only to the operating company which owns telecom
network and infrastructure and hence capital gain exemption was available in respect of
capital gain arising on direct shareholding. In case of indirect holding, routed through
chain holding, benefit of this section would not be available.
Most of the telecom operators had obtained approval u/s 10(23G). However this section
has been withdrawn i.e. AY 2007-2008 after a 10year period and henceforth this
incentive is not available to the telecom sector.
Thus, proper tax planning for Indian and foreign investors to save their tax liability on
future capital gains liability pose a great challenge. We will now discuss the Mauritius
angle, through which most of the foreign shareholding is routed.
The Mauritius connection

67. The scenic Mauritius has emerged as the favorite landing point for foreign investors for
FDI in Indian telecom companies. Mauritius accounts for more than a third of the
aggregate FDI inflows. India’s tax treaty with Mauritius provides exemption from capital
gain arising out of Investment in India made by a Mauritius resident company. A
common strategy adopted by foreign investors is to hold the shares of Indian operating
company through Mauritius based special purpose vehicle (SPV). In case of exit, these
SPVs are sold to foreign investors who land in Mauritius. Board level changes are made
in such SPV and new investors take control of the SPV and nominate their representative
on the Indian telecom company. In such a case, in accordance with DTAA with
Mauritius, no capital gains tax is levied on the foreign investor. No transfer is needed to
be recorded in the register of transfer of Indian Telecom Company as the same Mauritius
SPV continues as shareholder.
Let us consider sale of direct holding in an Indian telecom company by a foreign investor.
Say AB (Mauritius) Limited (an SPV and resident of Mauritius and referred as AB) holds
25% share capital of CD India Telecom Limited. AB is a 100% subsidiary of J Inc, USA.
If J Inc wants to transfer its full stake to another foreign entity say EF (UK) Plc, UK then
AB will sell all shares held in CD to EF. EF will lodge shares of AB, to the Indian
company for registering them in his favour. The capital gain arising to AB on sale of EF
is an offshore transaction and will not attract capital gain taxation in Mauritius or India
due to DTAA with Mauritius. The directors nominated by AB are withdrawn and the new
directors nominated by EF will take Board position in CD’s Board of Directors.
Now we will consider sale of indirect or beneficial holding. Say AB Mauritius Limited
(an SPV and resident of Mauritius) holds 40% share capital of CD India Telecom
Limited. The shareholders in AB Limited are A, Inc US (51%) and B Limited, Japan
(49%). if A Inc and B Limited want to reduce their joint holding to 20% and sell balance
20% to a third investor say EF plc UK. Then A Inc and B Limited will transfer their
holding in AB to EF Plc and EF Plc will be inducted as another shareholder of Mauritius
entity. Thus, by investing in AB Mauritius, EF obtains a beneficial holding in CD India
equal to 20% and right to nominate 1/5th of number of Directors on the Board of CD
India. Since, this transaction does not involve transfer of shares of an Indian company, no
Capital Gain Taxation liability arises in India.
India’s tax treaty with Mauritius has been an eye sore with Indian revenue authority for
long.
The controversy started after the Central Board of Direct Taxes (CBDT) issued a circular

68. (No. 789 dated 13/4/2000) clarifying that a certificate of residence issued by Mauritius
will constitute sufficient evidence for accepting the status of residence as well as
ownership for applying the provisions of the tax treaty. The circular also clarified that the
test of residence would also apply to income from capital gains on sale of shares. Thus,
FIIs which are resident in Mauritius would not be taxable in India on income from capital
gains arising in Mauritius country on sale of shares.
The above circular was declared invalid and quashed by the Delhi High Court (Shiv Kant
Jha versus Union of India, (2002) 256 ITR 563). But the Hon’ble Supreme Court reversed
the decision of the Delhi HC and declared the circular valid (Union of India versus Azadi
Bachao Andolan, (2003) 263 ITR 706).
There are moves to bring the Mauritian tax treaty at par with Singapore treaty whereby, a
resident of a contracting state (read Mauritius) shall be deemed to be a shell/conduit
company and exemption from Capital Gains tax will be denied to such a company, if:
(a) Such a company is not listed on a recognised stock exchange of the contracting state;
or
(b) its total annual expenditure on operations in that contracting state is NOT equal to or
more than Rs. 5 million in the respective contracting state as the case may be, in the
immediately preceding period of 24 months from the date the gains arise. This
amendment once approved is likely to put a spanner in the investment plan of foreign
investors who have long utilised the loophole in DTAA with Mauritius without sharing
any benefit of capital gain either with Government of India or Mauritius. It is likely those
foreign investors, who have used Mauritius as a safe route for Indian FDI, Mauritius
accounts for more than a third of the aggregate FDI inflows. India’s tax treaty with
Mauritius provides exemption from capital gain arising out of Investment in India made
by a Mauritius resident company. A common strategy adopted by foreign investors is to
hold the shares of Indian operating company through Mauritius based special purpose
vehicle (SPV) will take necessary steps to ensure compliance of the proposed guidelines
by a) offloading the minimum stake required for listing on Mauritius based stock
exchanges and listing of their SPV b) Maintaining office infrastructure and incur
operational expenditure as per proposed guidelines.
Licence fee on sale proceeds of licence:
As per current licensing guidelines, telecom operators have to pay licence fee on Adjusted

69. Gross Revenue (AGR) which includes non operating revenue like revenue from handset
sale, Interestrevenue etc. There is no clarity whether the sale proceeds of a telecom
licence will be included within the levy of AGR and attract licence fee. In this regard,
let’s review the case of Shyam Telecom Ltd (a DoT licencee itself), Holding company of
Hexacom (Rajasthan Licence) who sold its Hexacom operation. The following extract
from the Annual report of Public listed company Shyam Telecom (Year 2006, page 53) is
self explanatory: “The Company sold its holding in HIL to Bharti Televenture Limited for
a consideration of Rs 1751.87 Million. ……With respect to Income arising on transaction
referred above, the company based on a legal opinion believes that it is not covered under
the definition of Adjusted Gross Revenue, as inter alia, such revenue do not accrue out of
operation licenced or require to be licenced by DoT… The issue is covered undergeneric
petition filed by Association of Basic Telecom operators (ABTO) with TDSAT
contesting the inclusion of non telecom related service revenue in the AGR which is
pending resolution. In view of the legal opinion obtained by the company and the above
petition filed by ABTO with the TDAST, the company is of the opinion that no revenue
share is payable from sale of above investments and has accordingly made no provisions
in its books of accounts.”
EMERGING OPPORTUNITY FOR CAs
Mergers and Acquisitions in telecom sector have showered a boon for professionals
including Chartered Accountants and finance community in general. As per an industry
estimate, the telecom industry is likely to provide cumulative employment at various
levels to over 4,000 Chartered Accountants to support its growth plans.
Some of the emerging area of practice firms in telecom industry include following:
Business Process outsourcing like Financial reconciliations, Bills Processing, Collection,
Bill delivery, Payroll outsourcing, Customer refunds and Credits, address and identity
verification, Revenue accounting, Back end compliant resolution on financial issues etc.
Management Audit on telecom Industry process like billing process, Revenue Assurance
process, Collection and Credit control process, Bill delivery and returned bills
management. Assignments on Internal Controls and Six-sigma implementation.
Certifications under Income tax law. As the telecom operators consolidate their operation,
they are likely to outsource more and more operational and financial activities. Chartered
Accountant firms which have attained economies of scale and have knowledge base,
operational skills, IT savvy team, cost effective manpower support are likely to see a vista
of opportunity ahead of them in India’s telecom Industry.

70. CONCLUSION
India needs a whopping US$30 billion to meet 22% tele density target (250 million
telephones) by the end of 2007 as set by DoT. Government’s decision to raise the foreign
investment limit to 74% is expected to spur fresh round of mergers and takeovers in India.
The sector has slimmed from more than 20 carriers to 5-6 major players in 2006 and
telecom pundits believe that a final round of consolidation to churn the number of players
is in the offing. The possibility of realignment of shareholding structure in existing
licences and entry of new investors also cannot be ruled out. The sector thus represents
humongous opportunity waiting to be tapped by Indian and foreign conglomerates. Critics
claim telecom mergers reduce competition and promote monopoly. In reality, these
mergers are part of a healthy competitive process and would foster innovation and bring
benefits to consumers. Finally, the success of a merger hinges on how well the post-
merged entity positions itself to achieve cost and profit efficiencies. As Robert C Higgins
of University of Washington points out “careful valuation and disciplined negotiation are
vital to successful acquisition, but in business as in life, it is sometimes more important to
be lucky than smart.”
The acquisition of Tetley by the Tatas
In mid 2000, India's largest tea company, Tata Tea announced it was buying the UK
based Tetley for £271 million in a leveraged buyout. Tetley which

71. earned a net profit of £35 million in 1998 on sales of £280 million was the third
largest brand in the global $600 million packaged tea market behind Unilever's Brook
Bond and Lipton. Tata Tea looked at the acquisition as a quick way of gaining access
to markets in the US, Canada, Europe and Australia. It also looked at the opportunities
created by Tetley's estimated weekly purchase of three million kg of tea from 10,000
estates in 35 different countries. Besides, Tata Tea hoped to pick up packaging
expertise from Tetley. Tata Tea did not pay cash upfront. Instead, it set up a special
purpose vehicle where it pumped in £70 million of equity. Then it leveraged the
equity to borrow £235 million from the market. Tata Tea hoped that cash flows from
Tetley would be adequate to pay off the debt. At the time of finalising the deal, there
were press reports that Tata Tea was probably overpaying, £100 million more than the
second highest bid. To service the debt, Tetley needed to generate cash flows of
atleast £48 million per year whereas it generated only £29 million in 1999. Tata Tea
had hoped for a significant increase in the cash flows after the acquisition but
unfortunately for it, retail tea prices in the UK market softened. Moreover, the
popularity of tea continued to decline in the UK while the market share for natural
juices and coffee went up. By September 2001, the deal was running into short term
financial problems. The Tatas announced they would bring in an additional amount of
£60 million as equity. The equity infusion would facilitate retirement of expensive
debt and reduce interest charges by about £ 8 million per year. If cash flows touch £40
million, the risk of not being able to service the debt will be eliminated. This will
however, not be an easy task. Tata Tea Managing Director, R K Krishna Kumar
recently admitted that additional investments will be needed to revive demand.
Making Mergers smoothers
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.

72. There are several advantages in M&A — 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.
The Indian Income-Tax Act refers to amalgamations to mean merger of one or more
companies with another company or the merger of two or more companies to form
another company. Companies often undertake M&A to get the benefit of carry forward
and set off of operating losses or tax credit.
Tax treatment differs from country to country. M&A should normally attract capital
gains. Singapore and Malaysia tax capital gains on real estate or shares in real estates at
special rates. Hong Kong does not tax capital gains. Indonesia and Thailand tax capital
gains arising out of the sale of shares and other assets at the normal rates of tax.
The Indian law starts on the premise that transfer of capital assets in a scheme of
amalgamation by the amalgamating company to the amalgamated company will attract
capital gains tax. However, if the amalgamated company is an Indian company, it is
exempted from capital gains tax.
The transfer of capital assets by the amalgamating company will not be considered as
transfer so as to exempt the transaction from capital gains tax. The shareholder is also
conferred exemption as long as the two entities are Indian companies.
However, exemption is not available when cross-border M&A takes place, unless the
resultant company is an Indian outfit.
One of the major considerations will be the carry forward of tax losses of the acquired
company so as to reduce the tax burden in the hands of the profit-making acquirer
company.
The condition insisted upon is that the acquirer should continue to operate the pre-
acquisition business of the company. Unabsorbed losses and unabsorbed depreciation of
the amalgamating company can be claimed by the amalgamated company. This will hold
good even in respect of cross-border amalgamation.

73. When the asset is acquired on amalgamation, the cost taken will have to be as that of
the amalgamating company, as provided under Section 49(i) (iii) of the I-T Tax Act.
Is there an option to substitute the market value as on the specified date in such cases?
But for amalgamation, the amalgamating company would have had such a right to
substitute market value on the specified date.
Should the right be lost because of amalgamation? Courts have held that the fiction
about the cost for the amalgamated company being the cost of the amalgamating
company should necessarily lead to the consequential inference that the cost would be
the cost to which the amalgamating company was entitled.
After all, Section 47 clearly indicates that amalgamation is not regarded as transfer.
The Revenue, however, disputes this view and argues that the right to substitute the
market value as on the specified date is not available for assets acquired on
amalgamation. This view has not found favors with the Madras and the Bombay High
Courts {Madura Coats Ltd vs CIT 279 ITR 493).
Transfer of depreciable assets piecemeal will attract Section 50. A slump sale will
take care of the difficulties involved in interpreting the section (CIT vs Garden Silk
Weaving Factory (2005) — 279 ITR 136 Gujarat). There can be no question of
levying tax on transfer of depreciable assets if the transaction is considered a slump
sale.
Finance Act 1999 made amendments to avoid adverse tax implications in the case of
de-merger of companies. Transfer of capital assets by a de-merged company to a
resulting Indian company is exempted under Section 47 (vi (b)). Transfer of shares of
an Indian company by a de-merged foreign company to the resulting foreign
company is exempt provided shareholders holding at least three-fourths in value of
the shares of the de-merged company continue to be shareholders of the resulting
company and the transfer is not liable to capital gains tax in the country where the de-
merged company is incorporated [d (vie)].
The provision to this clause clarifies that the provisions of Sections 391 to 394 of the
Companies Act shall not apply in the case of such de-mergers. Transfer or issue of
shares by the resulting company to the shareholders of

74. the de-merged company in consideration of the de-merger of the undertaking is
exempt [d (vid)].
There is no reason why the company and I-T laws should not be harmonized. M&A
will be easier if the time-consuming processes under company law, like approaching
the Company Law Board and the High Courts for approval, are either eliminated or
made less cumbersome than at present.
Value Drivers
Three core financial drivers of value are:
1. Return on Invested Capital (NOPAT / Invested Capital)
2. Free Cash Flows
3. Economic Value Added (NOPAT - Cost of Capital)
NOP AT: Net Operating Profits After Taxes
A value driver can represent any variable that affects the value of the company,
ranging from great customer service to innovative products. Once we have identified
these value drivers, we gain a solid understanding about how the company functions.
The key is to have these value drivers fit between the Target Company and the
Acquiring Company. When we have a good fit or alignment, management will have
the ability to influence these drivers and generate higher values.
In the book Valuation: Measuring and Managing the Value of Companies, the authors
break down value drivers into three categories:
Type of Value Driver Management's Ability to Influence
Level 1 - Generic Low
Level 2 - Business Units Moderate
Level 3 - Operating High
For example, sales revenue is a generic value driver (level 1), customer mix would be
a business unit value driver (level 2), and customers retained would be an operating
value driver (level 3). Since value drivers are inter-related and since management will
have more influence over level 3 drivers, the key is to ascertain if the merger will
give management more or less influence over the

75. operating value driver. If yes, then a merger and acquisition could lead to revenue or
expense synergies. Be advised that you should not work in reverse order; i.e. from
level 1 down to level 3. For example, an increase in sales pricing will add more value
to level 1, but in the long run you will hurt customers retained (level 3) and thus, you
may end-up destroying value.
Once we have identified value drivers, we can develop a strategic view of the Target
Company. This strategic view along with drivers of value must be considered in
making a performance forecast of the Target Company. We want to know how will
the Target Company perform in the future. In order to answer this question, we must
have a clear understanding of the advantages that the Target Company has in relation
to the competition. These competitive advantages can include things like customer
mix, brand names, market share, business processes, barriers to competition, etc. An
understanding of competitive advantages will give us insights into future expected
growth for the Target Company.
Managing Resistance
The failure to manage resistance is a major reason for failed mergers. Resistance is
natural and not necessarily indicative of something wrong. However, it cannot be
ignored. Four important tools for managing resistance are:
Communicate: As we just indicated, you have to make sure people know what is
going on if you expect to minimize resistance. Rumors should not be the main form
of communication. The following quote from a middle level manager at a meeting
with executive management says it all:
"How can I tell my people what needs to be done to integrate the two companies,
when I have heard nothing about what is going on."
Training: As we just noted, people must possess the necessary skills to manage PMI.
Investing in people through training can help achieve "buy-in" and thus, lower
resistance.
Involvement: Resistance can be reduced by including people in the decision making
process. Active engagement can also help identify problem areas.
Alignment: One way to buffer against resistance is to align yourself with those
people who have accepted the merger. Ultimately, it will be the non-resistors

76. who bring about the integration. Do not waste excessive resources on detractors; they
will never come around.
Closing The Cultural Gap
One of the biggest challenges within PMI is to close the cultural divide between the
two companies. Cultural differences should have been identified within Phase II Due
Diligence. One way of closing the cultural gap is to invent a third, new corporate
culture as opposed to forcing one culture onto another company. A re-design
approach can include:
■ Reducing the number of rules and policies that control people. In today's
empowered world, it has become important to unleash the human capacities
within the organization.
■ Create a set of corporate policies centered around the strategic goals and
objectives of the new organization.
■ Implement new innovative approaches to human resource management, such as
the 360-degree evaluation.
■ Eliminate various forms of communication that continue with the "old way" of
doing things.
■ Re-enforce the new ways with incentive programs, rewards, recognition, special
events, etc.
Specific areas of Integration
As we move forward with the integration process, a new organizational structure will
unfold. There will be new reporting structures based on the needs of the new
company. Structures are built around workflows. For best results, collaboration
should take place between the two companies; mixing people, combining offices,
sharing facilities, etc. This collaboration helps pull the new organization together. As
noted earlier, a centralized organization will experience less difficulty with PMI than
a decentralized organization. Collaboration is also enhanced when there are:
■ Shared Goals - The more common the goals and objectives of the two
companies, the easier it is to integrate the two companies.
■ Shared Cultures - The more common the cultures of the two companies, the
easier the integration.

77. • Shared Services - The closer both company's can come to developing a set
of shared services (human resource management, finance, etc.), the more
likely synergies can be realized through elimination of duplicative services.
Many functional areas will have to be integrated. Each will have its own integration
plan, led by a Task Force. Two areas of concern are compensation and technologies.
Compensation Plans; It is important to make compensation plans between the two
companies as uniform as possible. Failure to close the compensation gap can lead to
division within the workforce. Compensation plans should be designed based on a
balance between past practices and future needs of the company. Since lost productivity
is a major issue, compensation based on performance should be a major focus.
Technologies: When deciding which information system to keep between the two
companies, make sure you ask yourself the following questions:
■ Do we really need this information?
■ Is the information timely?
■ Is the information accurate?
■ Is the information accessible?
One of the misconceptions that may emerge is to retain the most current, leading-edge
technology. This may be a mistake since older legacy systems may be well tested and
reliable for future needs of the organization. If both systems between the two companies
are outdated, a whole new system may be required.
Retaining Key Personnel
Mergers often result in the loss of key (essential) personnel. Since synergies are highly
dependent upon quality personnel, it will be important to take steps for retaining the high
performers of the Target Company.
The first step is to identify key personnel. Ask yourself, if these people were to leave,
what impact would it have on the company? For example, suppose a Marketing Manager
decided to resign, resulting in the loss of critical customers. Other people may be critical
to strategic thinking and innovation.
Once you have a list of key personnel, the next step is to determine what motivates
essential personnel. Some people are motivated by their work while

78. others are interested in climbing the corporate ladder. Retention programs are designed
around these motivating factors.
The third step is to implement your retention programs. Personally communicate with key
personnel; let them know what their position will be in the new company. If compensation is
a motivating factor, offer key personnel a "stay" bonus. If people are motivated by career
advancement, invite them to important management meetings and have them participate in
decision-making. Don't forget to reinforce retention by recognizing the contributions made by
key personnel. It is also a good idea to recruit key personnel just as if you would recruit any
other key management position. This solidifies the retention process.
Finally, you will need to evaluate and modify retention programs. For example, if key people
continue to resign, then conduct an exit interview and find out why they are leaving. Use this
information to change your retention programs; otherwise, more people will be defecting.
Retaining Customers
Mergers will obviously create some disruptions. One area where disruptions must be
minimized is customer service. Once a merger is announced, communicate to your
customers, informing them that products and services will not deteriorate due to the merger.
Additionally, the merger cannot distract employees directly involved with customer
service.
If customers are expected to defect, consider offering special deals and programs to
reinforce customer retention. As a minimum, consider setting up a customer hotline to
answer questions. Finally, do not forget to communicate with vendors, suppliers, and
others involved in the value chain. They too are your customers.
Measuring Post Merger Integration
The last area we want to touch on is measurement of post merger integration (PMI). Results
of the integration process need to be captured and measured so that you can identify problem
areas and make corrections. For example, are we able to retain key personnel? How effective
is our communication? We need answers to these types of questions if we expect success in
PMI.
One way of ensuring feedback is to retain the current measurement systems that are in place;
especially those involved with critical areas like customer service

79. and financial reporting. Day to day operations will need to be monitored for sudden
changes in customer complaints, return merchandise, cancelled orders, production
stoppages, etc. New measurements for PMI will have to be simple and easy to deploy
since there is little time for formal design. For example, in one case the PMI relied on a
web site log to capture critical data, identify synergy projects, and report PMI progress.
On-line survey forms were used to solicit input and identify problem areas. A clean and
simple approach works best.
A measurement system starts with a list of critical success factors (CSF) related to PMI.
These CSF's will reflect the strategic outcomes associated with the merger. For example,
combining two overlapping business units might represent a CSF for a merger. From
these CSF's, we can develop key performance indicators. Collectively, a complete system
known as the Balanced Scorecard can be used to monitor PMI. Process leaders are
assigned to each perspective within the scorecard, collecting the necessary data for
measurement.
Balanced Scorecard for Post Merger Integration (PMI)
Perspective________________Key Performance Indicator
Customers - Retention of Existing Customers
- Efficiency in Delivering Services Financial
- Synergy Components Captured to Date
- Timely Financial Reporting
- Timely Cash Flow Management
Operational - Completion of Systems Analysis
- Reassignments to all Operating Units
- Resources Allocated for Workloads Human
Resource - Percentage of Personnel Defections
- Change Management Training
- Communication Feedbacks
Organizational - Cultural Gaps between company's
- Number of Critical Processes Defined
- Lower level involvement in integration
Findings
• A merger can happen when two companies decide to combine into one entity or
when one company buys another. An acquisition a/ways involves the purchase of
one company by another.

80. • The functions of synergy allow for the enhanced cost efficiency of a new entity made
from two smaller ones - synergy is the logic behind mergers and acquisitions.
• Acquiring companies use various methods to value their targets. Some of these
methods are based on comparative ratios - such as the P/E and P/S ratios -
replacement cost or discounted cash flow analysis.
• An M&A deal can be executed by means of a cash transaction, stock-for-stock
transaction or a combination of both. A transaction struck with stock is not taxable.
• Break up or de-merger strategies can provide companies with opportunities to raise
additional equity funds, unlock hidden shareholder value and sharpen management
focus. De-mergers can occur by means of divestitures, carve-outs spin-offs or tracking
stocks.
• Mergers can fail for many reasons including a lack of management foresight, the
inability to overcome practical challenges and loss of revenue momentum from a
neglect of day-to-day operations.
• A common error in M&As is the tendency to underestimate the challenges involved
in integration. As a result actually realized synergies turn out to be well short of
projected ones.

81. Mergers and Acquisitions - Conclusion
One size doesn't fit all. Many companies find that the best way to get ahead is to expand
ownership boundaries through mergers and acquisitions. For others, separating the public
ownership of a subsidiary or business segment offers more advantages. At least in theory,
mergers create synergies and economies of scale, expanding operations and cutting costs.
Investors can take comfort in the idea that a merger will deliver enhanced market power.
By contrast, de-merged companies often enjoy improved operating performance thanks to
redesigned management incentives. Additional capital can fund growth organically or
through acquisition. Meanwhile, investors benefit from the improved information flow
from de-merged companies.
M&A comes in all shapes and sizes, and investors need to consider the complex issues
involved in M&A. The most beneficial form of equity structure involves a complete
analysis of the costs and benefits associated with the deals.
Idea Cellular Ltd . India Fifth largest mobile telecom operater with around 26 miilion
subscribers it operates in nine circles and is proposing to starter operation in Mumbai and
bihar shortly and aiming to be pan India operater very soon . other bigger players in the
mobile telecom sector are Bharati Airtel , Vodafone , Tata Indicom and Reliance. Idea
cellular recently agreed to acquire Spice Communication Ltd. Having a subscribe base of
around 4.4 million through a complex merger deal the key objective of this article is to
understand the structure of this acquisition and appreciate the rationale behind this
transaction idea Cellular predominated owned by Adity Birla group will now a acquire
spice telecom that is partly owned by BK.Modi and Partly by TM International
(TMI),Malaysian Multinational company with 44 million subscribers and operations more
than 10 countries Modi owns around 41% while TMI owns around 40% , it has been
agreed that post acquisitions, spice telecom will not bee existence and the current
operations of spice will be rebranded as idea , spice operates in Punjab Karnataka circles
The structure of the transitions
1The first part of transitions entails idea acquiring modi 41% stake at around Rs.2700
Crore in cash idea idea cellular wouid pay this amount directly to modi who would take
the cash and exit spice telecom as a shareholder in addition to this idea will pay around
Rs. 540 crore to Modi in order to ensure that he does not henceforth compete with the
mobile telecom business of idea cellular after exiting the mobile telecom business modi
now proposes to focus on his other business in mobile phone handsets telecom software
service and business process outsourcing activities
2 Idea Cellular is eventully paying around 40% premium for the spice share over what
was quated in the market
3 TML The Malaysian Telecom company is however very keen to fast growing India
mobile telecom industry with spice being completely taken over by idea TML and the
birla have come to an understanding that TMLwould henceforth work as part of idea
cellular on order to accommodate TMl in Idea Cellular the second part of the transaction
would entail idea cellular issuing 5% share in idwa to TML in lieu of it 40 % stake in
spice this part of the trasaction is structured through an exchange of share without any

82. cash settlement one is naturally cirious to ask why TMLis settlement for a mearge 5% in
idea in exchange for its 40% stake in spice the reason is that 40% shareholders in a
company like spice has 4.4 million subscribe equates favourably with 5 % in a much
larger company like idea
4. While TML has 5% shareholder in idea cellular through this transaction it naturally has
an appetite for a larger stake in idea cellular the company is ready to invest more and take
on more risks as one of its key objectives player is to be prominent player in the Indian
telecom industry given this aspiration a 5 % shareholder in idea does not provide the
critical mass the birlas accept this position and hence the third component of the
transaction is structure as follow in addiction to the 5 5 equity share allotted in exchange
of tis share in spice TMI would be altered an additional 15% share in idea cellular through
preferential allotment for a cash payment of Rs. 7300 core this world take TML total
shareholding in idea to around 20% more importantly from being operational from being
in just two circles TML will now become a serious pan India player since idea cellular has
aggressive plans to grow its national presence to virtually all circles in the country TML
chance of expansion in India are also bright
5 public shareholder of spice will have an option to sell their stake directly to idea cellular
for cash through an open offer or they could exchange their share in spice for share in idea
thus becoming shareholder in idea cellular this the fourth and final component of the
transaction
like most other this deal too has its downside idea has already paid ans received license
for operation in Punjab and Karnataka circle and its duplication a part of the same as it
acquires spice telecom similarly there are other duplication as well for example spice has
already paid and received license for Andrapradesh Dehli Haryana and Maharastra circles
where idea already operates However acquisition of spice ongoing operation in Punjab
and Karnataka will give idea a head start in theser two circles the start in theses two
circles the transaction is expected to be completed by the of the year subject to regulatory
approvals

83. Bibliography
• www.investopedia.com
• www.thebusinessline.com
• www.businessweek.com
• All India Management Journal
• www.beyondresistance.com
• European Commission - Editorial www.wto.org
Economic Times
Paper presentation by P.L.Beena (NO.301)