Project on merger and acquisition

Mergers & Acquisitions

A PROJECT REPORT On

“MERGERS AND ACQUISITIONS- INDIAN SCENARIO” Submitted to Faculty of Management Studies Maharishi Arvind Institute of Engineering and Technology Mansarovar, Jaipur

For the partial fulfillment of the degree of MASTER OF BUSINESS ADMINISTRATION (2009-2011) “Seminar on contemporary management issue” Submitted To:

Submitted By:

DEAN SIR COL. C.D.SHARMA

Mr. MOSAM PANCHOLI

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Mergers & Acquisitions

PREFACE MBA is the one of the most reputed professional coures in the field of Management.It include theory as well as its practical knowledge. Report on contemporary issue is an integral part of MBA programe, as through this students acquire knowledge of real happenings of the surroundings. So in second semester each student at MAHARISHI ARVIND INSTITUTE OF ENGINEERING & TECHNOLOGY, JAIPUR need to submit a report on contemporary issue. This knowledge serves the purposes of acquainting the student with economic environment of an organisation in which student have to work hard in future .Only theoretical knowledge is not enough but its practical knowledge is also required to be learned. I was fortunate enough to have an opportunity of submitting report on the topic Mergers & Acquisitions: An Indian Scenario. In this report,all the important concept relating to merger & acquisition are included, and few examples of real corporate mergers in indian context are also given. I also tried to include a case study for more broader vision.It is hoped that this report will make the readers familiar with the Mergers & Acquisitions and also give the idea about the recent scenario in Indian context.

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Executive Summary Merger - It's the most talked about term today creating lot of excitement and speculative activity in the markets. But before Mergers & Acquisitions (M&A) activity speeds up, it has to actually pass through a long chain of procedures (both legal and financial), which at times delays the deal. With the liberalization of the Indian economy in 1991, restrictions on Mergers and Acquisitions have been lowered. The numbers of Mergers and Acquisitions have increased many times in the last decade compared to the slack period of 1970-80s when legal hurdles trimmed the M&A growth. To put things in perspective, from 15 mergers in 1998, the number crossed to over 280 in FY01. With a downturn in the capital markets, valuations have come down to historic lows. It's high time that the consolidation game speeds up. In simple terms, a merger means blending of two or more existing undertakings into one, consequent to which each undertaking would lose their separate identity. The most common reasons for mergers are, operating synergies, market expansion, diversification, growth, consolidation of production capacities and tax savings. However, these are just some of the illustrations and not the exhaustive benefits. However, before the idea of Merger and Acquisition crystallizes, the firm needs to understand its own capabilities and industry position. It also needs to know the same about the other firms it seeks to tie up with, to get a real benefit from a merger. Globalization has increased the competitive pressure in the markets. In a highly challenging environment a strong reason for merger and acquisition is a desire to survive. FMS-MAIET

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Mergers & Acquisitions Thus apart from growth, the survival factor has off late, spurred the merger and acquisition activity worldwide.

Objective of study: •

To discuss the form of mergers and acquisitions.

•

To highlight the real motives of merger and acquisitions.

•

To focus on the considerations those are important in the mergers and acquisitions negotiations.

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To find relevant examples to explain Indian take.

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To find the yin yens of mergers & acquitions.

Research Methodology The lifeblood of business and commerce in the modern world is information. The ability to gather,analyze, evaluate, present and utilize information is therefore is a vital skill for the manager of today. In order to accomplish this project successfully I have taken the following steps:1) Sampling- The study is limited to a sample of top 10 merging or merged Indian companies of various sectors of Indian economy. 2) Data Collection: • The research will be done with the help Secondary data (from internet site andJournals). • The data is collected mainly from websites, company reports, existing journal reports, database available etc. 3) Type of survey It is basically a descriptive survey which describes various aspects of mergers & acquisitions with Indian context. FMS-MAIET

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4) Analysis: Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was not so common. The situation has undergone a sea change in the last couple of years. Acquisition of foreign companies by the Indian businesses has been the latest trend in the Indian corporate sector. There are different factors that played their parts in facilitating the mergers and acquisitions in India. Favorable government policies, buoyancy in economy, additional liquidity in the corporate sector, and dynamic attitudes of the Indian entrepreneurs are the key factors behind the changing trends of mergers and acquisitions in India. The Indian IT and ITES sectors have already proved their potential in the global market. The other Indian sectors are also following the same trend. The increased participation of the Indian companies in the global corporate sector has further facilitated the merger and acquisition activities in India.

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Mergers & Acquisitions

Mergers and Acquisition Introduction: Business combinations which may take forms of merger, acquisitions, amalgamation and takeovers are important features of corporate structural changes. They have played an important role in the financial and economic growth of a firm. Merger is a combination of two or more companies into one company. One or more companies may merge with an existing company or they may merge to form a new company. Laws in India use the term amalgamation for merger. For example, Section 2(1A) of the Income Tax Act, 1961 defines amalgamation as the merger of one or more companies with another company or the merger of two or more companies (called amalgamating company or companies) to form a new company (called amalgamated company) in such a way that all assets and liabilities of the amalgamated company and shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. Merger or amalgamation may take two forms: •

Merger through absorption

•

Merger through consolidation

Absorption: In absorption, one company acquires another company. All companies except one lose their identity in merger through absorption. The merger of Tata Oil Mills Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL) is an example of absorption

Consolidation:

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Mergers & Acquisitions In a consolidation, two or more companies combine to form a new company. In this form of merger, all companies are legally dissolved and a new entity is created. In consolidation, the acquired company transfers its asset, liabilities and shares to the acquiring company for cash or exchange of shares. . An example of consolidation is the merger of Hindustan Computers Ltd., Hindustan Instruments Ltd., and Indian Reprographics Ltd., to an entirely new company called HCL Ltd.

Acquisition: A fundamental charectaristic of merger (either through absorption or consolidation) is that the acquiring company (existing or new) takes over the ownership of other companies and combine their operations with its own operations. In an acquisition two or more companies may remain independent, separate legal entity, but there may be change in control of companies. Hindustan lever limited buying brands of Lakme is an example of asset acquisition. Takeover: A takeover may also define as obtaining of control over management of a company by another. Under the Monopolies and Restrictive Trade Practices Act, takeover means acquisition of not less than 25% of the voting power in a company. If a company wants to invest in more than 10% of the subscribe capital of another company, it has to be approved in the shareholders general meeting and also by the central government. The investment in shares of another companies in excess of 10% of the subscribed capital can result into their takeover. Demerger It has been defined as a split or division. As the same suggests, it denotes a situation opposite to that of merger. Demerger or spin-off, as called in US involves splitting up of conglomerate (multi-division) of company into separate companies.

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Mergers & Acquisitions This occurs in cases where dissimilar business are carried on within the same company, thus becoming unwieldy and cyclical almost resulting in a loss situation. Corporate restructuring in such situation in the form of demerger becomes inevitable. A part from core competencies being main reason for demerging companies according to their nature of business, in some cases, restructuring in the form of demerger was undertaken for splitting up the family owned large business empires into smaller companies. The historical demerger of DCM group where it split into four companies (DCM Ltd., DCM shriram industries Ltd., Shriram Industrial Enterprise Ltd. and DCM shriram consolidated Ltd.) is one example of family units splitting through demergers.

Reverse Merger Normally, a small company merges with large company or a sick company with healthy company. However in some cases, reverse merger is done. When a healthy company merges with a sick or a small company is called reverse merger. This may be for various reasons. Some reasons for reverse merger are: a) The transferee company is a sick company and has carry forward losses and Transferor Company is profit making company. If Transferor Company merges with the sick transferee company, it gets advantage of setting off carry forward losses without any conditions. If sick company merges with healthy company, many restrictions are applicable for allowing set off. b) The transferee company may be listed company. In such case, if Transferor Company merges with the listed company, it gets advantages of listed company, without following strict norms of listing of stock exchanges. For example Godrej soaps Ltd. (GSL) with pre merger turnover of 436.77 crores entered into scheme of reverse merger with loss making Gujarat Godrej innovative Chemicals Ltd. (GGICL) (with pre merger turnover of Rs. 60 crores) in 1994. FMS-MAIET

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DISTINCTION

BETWEEN

MERGERS

AND

ACQUISITIONS Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on FMS-MAIET

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Mergers & Acquisitions whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

Types of Merger There are four major types of mergers they can be explain as follows: 1 Horizontal Merger : This is a combination of two or more firms in similar type of production, distribution or area of business.

2 Vertical Merger : This is a combination of two or more firms involved in different stages of production or distribution. Vertical merger may take the form of forward or backward merger. Backward merger: When a company combines with the supplier of material, it is called backward merger. Forward merger: When it combines with the customer, it is known as forward merger.

3. Conglomerate Merger :

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Mergers & Acquisitions This is a combination of firms engaged in unrelated lines of business activity. Example is merging of different business like manufacturing of cement products, fertilizers products, electronic products, insurance investment and advertising agencies.

4. Concentric Merger Concentric merger are based on specific management functions where as the conglomerate mergers are based on general management functions. If the activities of the segments brought together are so related that there is carry over on specific management functions such as marketing research, Marketing, financing, manufacturing and personnel. Advantages of Merger and Acquisitions

1 Maintaining or accelerating a company’s growth. 2 Enhancing profitability, through cost reduction resulting from economies of scale. 3 Diversifying the risk of company, particularly when it acquires those businesses whose income streams are not correlated. 4 Reducing tax liability because of the provision of setting-off accumulated losses and unabsorbed depreciation of one company against the profits of another. 5 Limiting the severity of competition by increasing the company’s market power.

Motives behind the Merger Motives of merger can be broadly discussed as follows:

1. Growth: FMS-MAIET 11

Mergers & Acquisitions One of the fundamental motives that entice mergers is impulsive growth. Organizations that intend to expand need to choose between organic growth and acquisitions driven growth. Since the former is very slow, steady and relatively consumes more time the latter is preferred by firms which are dynamic and ready to capitalize on opportunities.

2. Synergy: Synergy is a phenomenon where 2 + 2 =>5. This translates into the ability of a business combination to be more profitable than the sum of the profits of the individual firms that were combined. It may be in the form of revenue enhancement or cost reduction.

3. Managerial Efficiency: Some acquisitions are motivated by the belief that the acquires management can better manage the target’s resources. In such cases, the value of the target firm will rise under the management control of the acquirer.

4. Strategic: The strategic reasons could differ on a case-to-case basis and a deal to the other. At times, if the two firms have complimentary business interests, mergers may result in consolidating their position in the market. FMS-MAIET 12

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5. Market entry: Firms that are cash rich use acquisition as a strategy to enter into new market or new territory on which they can build their platform.

6. Tax shields: This plays a significant role in acquisition if the distressed firm has accumulated losses and unclaimed depreciation benefits on their books. Such acquisitions can eliminate the acquiring firm’s liability by benefiting from a merger with these firms.

7. Resource transfer: Resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

8. Vertical integration: Vertical Integration occurs when an upstream and downstream firm merges (or one acquires the other). There are several reasons for this to occur. One reason is to internalize an externality problem. A common example is of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power; each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. By merging the vertically integrated firm can collect one deadweight loss by setting the upstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable. FMS-MAIET 13

Mergers & Acquisitions

Benefits of Mergers 1. Limit competition 2. Utilizes under-utilized market power 3. Overcome the problem of slow growth and profitability in one’s own industry 4. To achieve diversification 5. Gain economies of scale and increase income with proportionately less investment 6. Establish a transnational bridgehead without excessive start-up costs to gain access to a foreign market. 7. utilize under-utilized resources- human and physical and managerial skills. 8. Displace existing management. 9. Circum government regulations. 10. Reap speculative gains attendant upon new security issue or change in P/E ratio. 11. Create an image of aggressiveness and strategic opportunism, empire building and to amass vast economic power of the company.

Steps of Merger and Acquisitions There are three important steps involved in the analysis of merger and acquisitions can be explained as follows: FMS-MAIET 14

Mergers & Acquisitions

1. Planning: The most important step in merger and acquisition is planning. The planning of acquisition will require the analysis of industry specific and the firm specific information. The acquiring firm will need industry data on market growth, nature of competition, capital and labour intensity, degree of regulation etc. About the target firm the information needed will include the quality of management, market share, size, capital structure, profit ability, production and marketing capabilities etc,

2 Search and Screening : Search focuses on how and where to look for suitable company for acquisition. Screening process shortlists a few company from available companies. Detailed information about each of these companies is obtained. Merger objectives may include attaining faster growth, improving profitability, improving managerial effectiveness, gaining market power and leadership, achieving cost reduction etc. These objectives can be achieved in various ways rather than through merger alone. The alternatives to merger include joint venture, strategic alliances, elimination of inefficient operations, cost reduction and productivity improvement, hiring capable manager etc. If merger is considered as the best alternative, the acquiring firm must satisfy itself that it is the best available option in terms of its own screening criteria and economically most attractive. FMS-MAIET 15

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3 Financial Evaluation : Financial evaluation of a merger is needed to determine the earnings and cash flows, area of risk, the maximum price payable to the target company and the best way to finance the merger. The acquiring firm must pay a fair consideration to the target firm for acquiring its business. In a competitive market situation with capital market efficiency, the current market value is the current market value of its share of the target firm. The target firm will not accept any offer below the current market value of its share. The target firm in fact, expects that merger benefits will accrue to the acquiring firm. A merger is said to be at a premium when the offer price is higher than the target firm’s pre merger market price. The acquiring firm may pay the premium if it thinks that it can increase the target firm’s after merger by improving its operations and due to synergy. It may have to pay premium as an incentive to the target firm’s shareholders to induce them to sell their shares so that the acquiring firm is enabled to obtain the control of the target firm.

Reasons for Merger The reason of merger can be broadly explain as follows:

1. Accelerated Growth: Growth is essential for sustaining the viability, dynamism and value enhancing capability of a firm. Growing operations provide challenges and excitement to the FMS-MAIET 16

Mergers & Acquisitions executives as well as opportunities for their job enrichment and rapid career development. This help to increase managerial efficiency. Other things being the same, growth must lead to higher profits and increase in the shareholders value. It can be achieve growth in two ways: •

Expanding its existing markets

•

Enhancing in new market

A firm may expand and diversify its markets internally or externally. If company cannot grow internally due to lack of physical and managerial resources, it can grow externally by combining its operations with other companies through mergers and acquisitions.

2. Enhanced Profitability The combination of two or more firm may result in more than the average profitability due to cost reduction and efficient utilization of resources. This may happen because of the following reasons: a) Economies of Scale : When two or more firm combine, certain economies are realized due to the larger volume of operations of the combined entity. These economies arise because of more intensive utilization of production capacities, distribution networks, engineering services, research and development facilities, data processing systems and so on.

b) Operating Economies :

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Mergers & Acquisitions In addition to economies of scale, a combination of two or more firm may result into cost reduction due to operating economies. A combined firm may avoid or reduce fuctions and facilities. It can consolidate its management functions such as manufacturing, R & D and reduce operating costs. Foe example, a combined firm may eliminate duplicate channels of distribution or create a centralized training center or introduce an integrated planning and control system.

c) Strategic Benefits : If a firm has decided to enter or expand in a particular industry, acquisition of a firm engaged in that industry rather than dependence on internal expansion may offer strategic advantages such as less risk and less cost.

d) Complementary Resources : If two firms have complementary resources it may make sense for them to merge. For example, a small firm with an innovative product may need the engineering capability and marketing reach of a big firm. With the merger of the two firms it may be possible to successfully manufacture and market the innovative product. Thus, the two firms, thanks to their complementary resources, are worth more together than they are separately.

e) Tax Shields : When a firm with accumulated losses and unabsorbed tax shelters merges with a profit making firm, tax shields are utilized better. The firm with accumulated losses and FMS-MAIET 18

Mergers & Acquisitions unabsorbed tax shelters may not be able to derive tax advantages for a long time. However, when it merges with a profit making firm, its accumulated losses and unabsorbed tax shelters can be set off against the profits of the profit making firm and tax benefits can be quickly realized.

3. Utilisation of surplus funds: A firm in a mature industry may generate a lot of cash but may not have opportunities for profitable investment. Most managements have a tendency to make further investments, even though they may not be profitable. In such a situation a merger with another firm involving cash compensation often represents a more efficient utilization of surplus fund.

4.

Managerial Effectiveness: One of the potential gains of merger is an increase in managerial

effectiveness. This may occur if the existing management team, which is performing poorly, is replaced by a more effective management team. Another allied benefit of a merger may be in the form of greater congruence between the interests of managers and the shareholders. A common argument for creating a favourable environment for mergers is that it imposes a certain discipline on the management.

5. Diversification of Risk:

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Mergers & Acquisitions A commonly stated motive for mergers is to achieve risk reduction through diversification. The extent, to which risk is reduced, of course, depends on the correlation between the earnings of the merging entities. While negative correlation brings greater reduction in risk. The positive correlation brings lesser reduction in risk.

6.

Lower Financing Costs: The consequence of large size and greater earnings stability is to reduce the cost of borrowing for the merged firm. The reason for this is that the creditors of the merged firm enjoy better protection than the creditor of the merging firms independently.

RISKS ASSOCIATED WITH MERGER There are several risks associated with consolidation and few of them are as follows: 1) When two companies merge into one then there is an inevitable increase in the size of the organization. Big size may not always be better. The size may get too widely and go beyond the control of the management. The increased size may become a drug rather than an asset. 2) Consolidation does not lead to instant results and there is an incubation period before the results arrive. Mergers and acquisitions are sometimes followed by losses and tough intervening periods before the eventual profits pour in. Patience, forbearance and resilience are required in ample measure to make any merger a success story. All may not be up to the plan, which explains why there are high rate of failures in mergers. FMS-MAIET 20

Mergers & Acquisitions 3) Consolidation mainly comes due to the decision taken at the top. It is a top-heavy decision and willingness of the rank and file of both entities may not be forthcoming. This leads to problems of industrial relations, deprivation, depression and demonization among the employees. Such a work force can never churn out good results. Therefore, personal management at the highest order with humane touch alone can pave the way. 4) The structure, systems and the procedures followed in two banks may be vastly different, for example, a PSU bank or an old generation bank and that of a technologically superior foreign bank. The erstwhile structures, systems and procedures may not be conducive in the new milieu. A thorough overhauling and systems analysis has to be done to assimilate both the organizations. This is a time consuming process and requires lot of cautions approaches to reduce the frictions. 5) There is a problem of valuation associated with all mergers. The shareholder of existing entities has to be given new shares. Till now a foolproof valuation system for transfer and compensation is yet to emerge. 6) Further, there is also a problem of brand projection. This becomes more complicated when existing brands themselves have a good appeal. Question arises whether the earlier brands should continue to be projected or should they be submerged in favour of a new comprehensive identity. Goodwill is often towards a brand and its sub-merger is usually not taken kindly.

Legal aspects of Merger Legal Procedures for Merger and Acquisition The following is the procedures for merger or acquisition is fairly long dawn. Normally it involves the following steps: FMS-MAIET 21

Mergers & Acquisitions 1. Permission for merger: Two or more firm can amalgamate only when amalgamation is permitted under their memorandum of association. Also, the acquiring firm should have the permission in its object clause to carry on the business of the acquired company. In the absence of these provisions in the memorandum of association, it is necessary to seek the permission of the shareholders, board of directors and the Company Law Board before affecting the merger. 2. Information to the stock exchange: The acquiring and the acquired companies should inform the stock exchange where they are listed about the merger.

3. Approval of board of directors: The boards of the directors of the individual firm should approve the draft proposal for amalgamation and authorize the managements of companies to further pursue the proposal.

4. Application in the High Court: An application for approving the draft amalgamation proposal duly approved by the board of directors of the individual firm should be made to the High Court. The High Court would convene a meeting of the shareholders and creditors to approve the amalgamation proposal. The notice of meeting should be sent to them at least 21 days in advance.

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Mergers & Acquisitions 5. Shareholders and Creditors meetings: The individual firm should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme. At least 75% of shareholders and creditors in separate meeting, voting in person or by proxy, must accord their approval to the scheme.

6. Sanction by the High Court: After the approval of shareholders and creditors on the petitions of the companies, the High Court will pass order sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. If it deems so, it can modify the scheme. The date of the court’s hearing will be published in two newspapers and also the Regional Director of the Law Board will be intimated.

7. Filing of the Court order: After the Court order its certified true copies will be filed with the Registrar of Companies.

8. Transfer of asset and liabilities: The asset and liabilities of the acquired firm will be transferred to the acquiring firm in accordance with the approved scheme, with effect from the specified date.

9. Payment by cash or securities: FMS-MAIET 23

Mergers & Acquisitions As per the proposal, the acquiring firm will exchange shares and debentures and pay cash for the shares and debentures of the acquired firm. These securities will be listed on the stock exchange.

Financial Aspects of Merger There are many ways in which a merger can result into financial synergy. A merger may help in: •

eliminating the financial constraint

•

deploying surplus cash

•

enhancing debt capacity

•

lowering the financial cost. It can be broadly explain as follows:

1. Financial Constraint: A firm may be constrained to grow through internal development due to shortage of fund. The firm can grow externally by acquiring another firm by the exchange of shares and thus, release the financial constraints.

2. Surplus Cash: A firm may be faced by a cash rich firm. It may not have enough internal opportunities to invest its surplus cash. It may either distribute its surplus cash to its shareholders or use it to acquire some other firm. The shareholders may not really FMS-MAIET 24

Mergers & Acquisitions benefit much if surplus cash is returned to them since they would have to pay tax at ordinary income tax rate. Their wealth may increase through an increase in the market value of their shares if surplus cash is used to acquire another firm. If they sell their shares they would pay tax at a lower, capital gain tax rate. The company would also be enabled to keep surplus funds and grow through acquisition.

3. Debt capacity: A merger of two firms, with fluctuating, but negatively correlated, cash flows, can bring stability of cash flows of the combined firm. The stability of cash flows reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt. The increased borrowing allows a higher interest tax shield which adds to the shareholders wealth.

4. Financing cost: Does the enhanced debt capacity of the merged firm reduce its cost of capital? Since the probability of insolvency is reduced due to financial stability and increased protection to lenders, the merged firm should be able to borrow at a lower rate of interest. This advantage may, however be taken off partially or completely by increase in the shareholders risk on account of providing better protection to lenders. Another aspect of the financing costs is issue costs. A merged firm is able to realize economies of scale in flotation and transaction costs related to an issue of capital. Issue costs are saved when the merged firm makes a larger security issue. FMS-MAIET 25

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SOMETHING ACQUISITION

WRONG

WITH

A

MERGER

OR

The extent and quality of the planning and research you do before a merger or acquisition deal will largely determine the outcome. Sometimes situations will arise outside your control and you may find it useful to consider and prepare for these risks. An acquisition could become expensive if you end up in a bidding war where other parties are equally determined to buy the target business. A merger could become expensive if you cannot agree terms such as who will run the combined business or how long the other owner will remain involved in the business. Both mergers and acquisitions can damage business performance because of time spent on the deal and a mood of uncertainty.

Face pitfalls following a deal such as: 1) The target business does not do as well as expected. 2) The costs you expected to save do not materialize. 3) Key people leave. 4) The business cultures are not compatible.

Indian context Why Mergers and Acquisitions in India?

The factors responsible for making the merger and acquisition deals favorable in India are: •

Dynamic government policies

Corporate investments in industry FMS-MAIET 26 •

Mergers & Acquisitions •

Economic stability

•

“ready to experiment” attitude of Indian industrialists

Sectors like pharmaceuticals, IT, ITES, telecommunications, steel, construction, etc, have proved their worth in the international scenario and the rising participation of Indian firms in signing M&A deals has further triggered the acquisition activities in India.

TATA – TETLEY (Controversial Success And Failure).

Issue

over

The Tata group was infusing a fresh 30 million pounds into Tata tea that had been used to buy an 85.7% stake in the UK-based Tetley last year. Already high on a heady brew of a fresh buy and caffeine, most missed what Krishna Kumar's statement meant. Tata Tea’s much hyped acquisition of Tetley, one of the world’s biggest tea brands, isn’t proceeding according to the plan. 15 months ago, the Kolkata based Rs 913 crore Tata Tea’s buyout of the privately held The Tetley Group for Rs 1843 crore had stunned corporate watchers and investment bankers alike. It was a coup! An Indian company had used a leveraged buyout to snag one of the Britain’s biggest ever brands. It was by far, the biggest ever leveraged buyout by an Indian company. Tata Tea didn’t pay cash upfront. Instead, it invested 70 million pounds as equity capital to set up Tata Tea. It borrowed 235 million to buy the Tetley stake. The plan was that Tetley’s cash flows would be insulated from the debt burden. When Tata Tea took the big gamble to buy Tetley, its intent was very clear. The company had established a firm foothold in the domestic market and had a controlling position in growing tea. Going global looked like the obvious thing to do. With Tetley, the second largest brand after Lipton in its bag, Tata Tea looked ready to set the Thames on fire. FMS-MAIET 27

Mergers & Acquisitions Right from the start, Tetley was never a easy buy. In 1996, Allied Domecq, the liquor and retail conglomerate, had put Tetley on the block. Even then Tata Tea, nestle, Unilever and Sara lee had put in bids, all under 200 million pounds. Allied wanted to cash on the table. Tata Tea didn’t have enough of its own. The others bids also did not go through. Eventually, Tetley group together with a consortium of financial investors like Prudential and Schroders, bought the entire equity stake for 190 million pounds in all cash deal. Two years later, Tetley went for an IPO, hoping to raise 350-400 million pounds. But the IPO never took place. Soon afterwards, the investors began looking for exit options. Tetley was once again on the block. It was until Feb 2000 that the due diligence was completed. By this time, the Tata's were ready with their offer. They would pay 271 million pounds to buy the entire Tetley equity and the funds would go towards first paying off Tetley’s 106 million debt. The balance would go the owners. The offer price did not include rights to Tetley coffee business, which was sold to the US-based Rowland Coffee Roasters and Mother Parker’s Tea and Coffee in Feb 2000 for 55 million pounds. For Tetley new owners, too, the problems were only just beginning. The deal hinged on Tetley’s ability, over and above covering its own debts, to service the loans Tata Tea had taken for the acquisition. That’s where reality bites. Consider the facts. When Tata Tea acquired Tetley through Tata Tea, it sunk in 70 million pounds as equity and borrowed 235 million pounds from a consortium to finance the deal. Implicit in the LBO was that Tetley’s future cash flows would fund the SPV’s interest and principal repayment requirements. At an average interest rate of 11.5%, Tetley needed to generate 22 million pounds in interest alone on a loan of 190 million pounds. Add to this the interest on the high cost vendor loan notes of 30 million pounds— it worked out to be 4.5 million and the charges on the working capital portion, amounting to 2 million pounds per annum. All this works out to about 28 million pounds in interest alone per year. At the same time, it also has to pay back the principal of 110 million pounds over a nice period through half yearly installments. This works out to 12 million pounds per year. FMS-MAIET 28

Mergers & Acquisitions If you were to assume that depreciation and restructuring charges were pegged at last year’s levels, the bill tots up to 48 million pounds a year. In FY 1999, the Tetley’s cash flows were 29 million pounds. Some of the problems could have been obviated if Tetley’s cash flows had increased by 40 % in FY 2001 over the previous year. That way, the company would have covered both its own commitments as well as of the Tata's. But the situation worsened. Major UK retailers clamped down on grocery prices last year. That substantially reduced Tetley’s pricing flexibility. Besides, the UK tea markets have been under pressure for some time now. According to the UK government’s national food survey, there has been a substantial fall in the consumption of mainstream teas- tea-bag black teas drunk with milk and sugar. Also the tea drinking population in UK has come down from 77.1% to 68.3% in 1999. On the other hand, natural juices and coffee have consistently increased their market share. So, when it was confronted by Tetley’s sliding performance, what options did Tata Tea have? On its own, it could not do much. The last year has been one of the worst years for the Indian tea industry and Tata Tea has also been affected. The drop in tea prices and a proliferation of smaller brands in the organized segment have taken toll on Tata Tea’s performance. In FY 2001, Tata Tea’s net profit fell by 19.59% from Rs 124.63 crore to Rs 100.21 crore. Income from operations declined by 8.72%. But letting Tetley sink under the weight of the interest burden would have been an unthinkable option, given the prestige attached to the deal. Thus from the above case we infer that Tata had to shell out a lot of money to cover all the debts of Tetley which was found not worthy enough by the general public.

Recent examples from Indian merger & acquisition 1. Tata

Steel-Corus: $12.2 billion

On January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at $12.2 billion. FMS-MAIET 29

Mergers & Acquisitions The deal is the largest Indian takeover of a foreign company till date and made Tata Steel the world's fifth-largest steel group. Tata Steel Background •

Tata Steel a part of Tata group, one of the largest diversified business

conglomerates in India. •

In the mid 1990s, Tata Steel emerged as Asia’s first and India’s largest integrated

steel producer in the private sector. •

In February 2005, Tata Steel acquiesced the Singapore based steel manufacturer

NatSteel, let the company gaining access to major Asian Markets and Australia. •

Tata Steel acquired the Thailand based Millennium Steel in December 2005.

•

Tata Steel generated net sales of Rs.5 billion in the financial year 2006-07.

Tata Steel SWOT Analysis Strengths: •

Tata is one of the lowest cost producer in the world

•

Tata group has successfully acquired some companies in past

Weakness: •

Corus was triple size of Tata Steel in terms of production

Opportunities: •

Tata steels may have Exposure to global steel market through various mergers &

acquisitions. •

Consolidation trend in steel industry

FMS-MAIET 30

Mergers & Acquisitions

Threats: •

There are various Russian bidder who are ready to grab the opportunity.

•

There is absence of any committed financers to support the conglomerate

Corus Background •

Hoogovens had good access to the sea for the raw materials and export of finished goods.

•

The company was established at Ijmuiden, a town on the sea coast with good access inland via the north sea canal.

•

On October 6th ,1999, Hoogovens(38.3%) merged with British Steel Plc(61.7%) to form Corus Group Plc.

•

Philippe Varin (CEO) and Jim Leng (Chairman) of Corus, both worked to revive the companies business.

Swot ANALYSIS Strengths: •

Corus group is Worlds 9th largest & Europe’s 2nd largest producer of steel

•

Corus group had Wide range of products

•

Operating facilities of corus group is spread in the whole Europe

Weakness: •

Corus was in bad shape because of high operational cost.

•

Liabilities on corus group was increasing day by day

Opportunities: •

There was a trend of consolidation in Steel Industry

FMS-MAIET 31

Mergers & Acquisitions •

It should try to get right price at a time when market is volatile

Threats: •

Huge pension liability might have led to collapse of the deal

•

Disagreement of Labour and Government reasons behind acquiring Corus by Tata

group

Implication on Corus acquisition: •

The acquisition made the Tata-Corus into the world steel’s Big-Five status( by

revenue). •

It is notable not only for creating a steel giant, but also this deal was a private

sector venture far from Indian Govt. influence. •

TCL was to supplement the customer front-end in the developed markets, with a

lower-cost back-end in an emerging market. •

It gave Tata the huge west market came into its hand.

•

With this venture to an extent, the India’s greater command to the worlds lingua

franca will lubricate the inevitably-difficult integration process.

Swot of Tata corus after merger Strengths: •

Corus takeover catapults Tata Steel from its current 65th place to no.5 spot, with a

combined capacity of 23.5 million •

Cost advantage of operating from India can be leveraged in Western markets and

differentiation based on better technology from Corus can support Tata Steel Weakness: FMS-MAIET 32

Mergers & Acquisitions •

Corus EBITDA at 8% was much lower than that of Tata Steel which was 30% in the

financial year 2006-07 •

The merger requires high level of integration for technology transfer and

coordinating Opportunities: •

Chinese steel plants dependence on imported raw material limit their pricing power

•

Corus strong R&D and technology would add to the competitive strength for Tata

Steel Threats: •

Capacity additions by China, Russia and Brazil may outrun the demand growth and

lead to the subdued steel prices •

If the business performance of Corus declines, the companies cash flows would

also decline.

2. Vodafone-Hutchison Essar: $11.1 billion Vodafone has found its passage to India, but at what cost. The company, known for its expensive telecom asset acquisition in the past, appears to be ready to pay top dollars for a fast growing mobile operator in one of the fastest growing cell phone markets in the world. Assumptions of market growth rates may have to be revised if current estimates of economic growth rates may not be realized. Vodafone may need more than third partner to share this risk On February 11, 2007, Vodafone agreed to buy out the controlling interest of 67% held by Li Ka Shing Holdings in Hutch-Essar for $11.1 billion. This is the second-largest M&A deal ever involving an Indian company.

FMS-MAIET 33

Mergers & Acquisitions Vodafone Essar is owned by Vodafone 52%, Essar Group 33% and other Indian nationals 15%.

Logic of the deal The average monthly revenue per subscriber has been between $8 and $10 or between $100 and $120 per year for almost all the cellular carriers in India. At the top end of the annual revenue of $120 per subscriber, Vodafone is prepared to pay nearly seven times fiscal 2006 revenue. Assuming 30% growth in cellular subscriber base and no growth or decline in annual revenue per subscriber, the deal values the company at five times the revenue in fiscal 2006. Not to forget, this is multiple of revenue and not a multiple of operating earnings. The largest cell carrier, Bharti Airtel, has a market cap of $33 billion, and Reliance Communication is valued at $22 billion. The current Vodafone deal values Hutch Essar at a roughly $800 per subscriber, similar to what market values for other cell carrier companies. But then market assumes that current subscriber growth rate of 50% will continue for many years to come. If the subscriber base increases only on cheaper cost of service and innovative price plans, then the current assumption of revenue growth may be difficult to attain. Future subscriber growth is likely to come from smaller towns and rural areas that are not likely to pay more than $60 per year for the telecom service and are going to demand handset that may cost less than $10. Of course, there is market at the bottom end of the industry, but is it as profitable as at the top end? Previous predictions of the lack of profitability in the cellular business in emerging markets, such as India and China, have not proven to be correct. China now has 350 million subscribers, and India has 150 million. However, more than 50 million of these

FMS-MAIET 34

Mergers & Acquisitions subscribers in India were added in the last twelve months and their behavior and loyalty is still unpredictable. Emerging Markets Rational Cellular carriers around the emerging markets have found it difficult to justify the purchase price above three times trailing revenue, but then there are very few markets growing as fast as markets in India. If future growth is what is likely to help the current valuation, then investors have to ask two more questions. What is going to drive this future growth and what will stem the decline in average revenue per subscriber

SWOT ANALYSIS Strengths •

Diversified geographical portfolio with strong mobile telecommunications operations

in Europe, the Middle East, Africa, Asia Pacific and Australiasia •

Leading presence in emerging markets

•

Strategic alliances with Apple iPhone

•

Increasing the range of products we can offer to customers, in particular in

enterprise, and providing us with the ability to compete with integrated competitors •

Value for money %u2013 in the past three years we%u2019ve reduced costs more

than five times, which equates to savings of around 50% for our customers. Opportunities

FMS-MAIET 35

Mergers & Acquisitions •

Focus on cost reductions improving returns

•

Majority stake in mobile sector in New Zealand

•

Research and development of new technologies

•

Focus on developing fixed landline and broadband market.

Reducing the impact of global warming by reducing their carbon foot print

Threats •

Ongoing price reductions due to competitive pressures

•

New entrants: Growing range of providers of converged fixed and mobile services

•

Expanding presence of mobile virtual network operators

Weaknesses •

Total Telecommunication not nearly as strong as Telecom.

•

Wholesaling the lines through Telecom thereby gaining less profit.

•

Lack of systems and tools to backup the new processes.

•

Lack of skilled employee (Technicians, engineers, accountants) availability in New

Zealand Market.

3. Bharti –zain: $10.7 billion Analyst community got a shocker when the Bharti group honcho Mr. Sunil Mittal dubbed analyst community criticism to the Bharti Zain deal as Fairy Tales. He insisted that the so called analyst cannot see the long term thinking behind this deal. With the earlier attempt to acquire African telecom giant MTN failed, Bharti is really scouting hard for satisfying its global ambitions. The recent announcement of Bharti of FMS-MAIET 36

Mergers & Acquisitions acquiring Zain Telecom’s African assets (another prominent telecom company) at $10.7 billion invited analyst’s criticism that it is overpaying for snapping this deal. Who’s right and who’s wrong only time will tell! Dissecting the deal, the immediate reaction is that the deal would stress the balance sheet as the company is likely to borrow $9 billion, a hefty debt by any standards. Information on Bharti group •

Bharti supposedly has $1.5B in cash – about 7,000 crores – and the African unit

has around $2 billion in debt; so they have to pay about $8 billion – 35,000 crores. Assuming they put in 5,000 cr. as equity, they have to raise 30,000 cr. as debt. •

Adding that to current debt will mean 39,000 cr in debt; say at 6% they will pay Rs.

2,400 cr as interest costs. •

For a set of assets that are at this point not even EBIDTA positive, this means

Bharti will have to absorb it from its profitable India operations. •

The India operations will do about 10,000 cr. in net profits this year – that’s a hit of

25% on its profits (until the African operations scale to absorb the losses)

Information on zain Telecoms •

Zain’s entire operations have slumped – the first nine months of 2009 have seen a

17% drop in net profits from 235m KWD to 196m KWD. •

9 months in USD: Revenue: $6.1B, EBIDTA: $2.6B, Net Profit: $677 million.

•

47-50% of all Zain revenue comes from non-African sources (source: Q3

presentation) •

In Nigeria, they lost 6% of their customers year on year as of September 2009

•

The ARPUs for Africa lie between $3 and $13 – Nigeria is halfway at $7. In India it’s

ARPU is Rs. 230 or $5. FMS-MAIET 37

Mergers & Acquisitions •

Zain has 42 million customers in Africa

SWOT analysis of bharti group strengths • • •

Bharti Airtel has more than 98 million customers. It is the largest cellular provider in India, and also supplies broadband and telephone services - as well as many other telecommunications services to both domestic and corporate customers. Other stakeholders in Bharti Airtel include Sony-Ericsson, Nokia - and Sing Tel, with whom they hold a strategic alliance. This means that the business has access to knowledge and technology from other parts of the telecommunications world. The company has covered the entire Indian nation with its network. This has underpinned its large and rising customer base

weakness An often cited original weakness is that when the business was started by Sunil Bharti Mittal over 15 years ago, the business has little knowledge and experience of how a cellular telephone system actually worked. So the start-up business had to outsource to industry experts in the field. Until recently Airtel did not own its own towers, which was a particular strength of some of its competitors such as Hutchison Essar. Towers are important if your company wishes to provide wide coverage nationally. The fact that the Airtel has not pulled off a deal with South Africa's MTN could signal the lack of any real emerging market investment opportunity for the business once the Indian market has become mature

Opportunities The company possesses a customized version of the Google search engine which will enhance broadband services to customers. The tie-up with Google can only enhance the Airtel brand, and also provides advertising opportunities in Indian for Google. FMS-MAIET 38

Mergers & Acquisitions Global telecommunications and new technology brands see Airtel as a key strategic player in the Indian market. The new iPhone will be launched in India via an Airtel distributorship. Another strategic partnership is held with BlackBerry Wireless Solutions. Despite being forced to outsource much of its technical operations in the early days, this allowed Airtel to work from its own blank sheet of paper, and to question industry approaches and practices - for example replacing the Revenue-Per-Customer model with a Revenue-Per-Minute model which is better suited to India, as the company moved into small and remote villages and towns. The company is investing in its operation in 120,000 to 160,000 small villages every year. It sees that less well-off consumers may only be able to afford a few tens of Rupees per call, and also so that the business benefits are scalable - using its 'Matchbox' strategy. Bharti Airtel is embarking on another joint venture with Vodafone Essar and Idea Cellular to create a new independent tower company called Indus Towers. This new business will control more than 60% of India's network towers. IPTV is another potential new service that could underpin the company's long-term strategy

Threats Airtel and Vodafone seem to be having an on/off relationship. Vodafone which owned a 5.6% stake in the Airtel business sold it back to Airtel, and instead invested in its rival Hutchison Essar. Knowledge and technology previously available to Airtel now moves into the hands of one of its competitors. The quickly changing pace of the global telecommunications industry could tempt Airtel to go along the acquisition trail which may make it vulnerable if the world goes into recession. Perhaps this was an impact upon the decision not to proceed with talks about the potential purchase of South Africa's MTN in May 2008. This opened the door for talks between Reliance Communication's Anil Ambani and MTN, allowing a competing Inidan industrialist to invest in the new emerging African telecommunications market. Bharti Airtel could also be the target for the takeover vision of other global telecommunications players that wish to move into the Indian market.

FMS-MAIET 39

Mergers & Acquisitions

4. Hindalco-Novelis: $6 billion Aluminium and copper major Hindalco Industries, the Kumar Mangalam Birla-led Aditya Birla Group flagship, acquired Canadian company Novelis Inc in a $6-billion, allcash deal in February 2007.Till date, it is India's fourt-largest M&A deal.The acquisition would make Hindalco the global leader in aluminium rolled products and one of the largest aluminium producers in Asia. With post-acquisition combined revenues in excess of $10 billion, Hindalco would enter the Fortune-500 listing of world's largest companies by sales revenues.

Company overview HINDALCO INDUSTRIES LIMITED Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is structured into two strategic businesses aluminium and copper with annual revenue of US $14 billion and a market capitalization in excess of US $ 23 billion. Hindalco commenced its operations in 1962 with an aluminium facility at Renukoot in Uttar Pradesh. Birla Copper, Hindalco's copper division is situated in Dahej in the Bharuch district of Gujarat. Established in 1958, Hindalco commissioned its aluminium facility at Renukoot in eastern U.P. in 1962 and has today grown to become the country's largest integrated aluminium producer and ranks among the top quartile of low cost producers in the world. The aluminium division's product range includes alumina chemicals, primary aluminium ingots, billets, wire rods, rolled products, extrusions, foils and alloy wheels. It enjoys a domestic market share of 42 per cent in primary aluminium, 63 per cent in rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent in wheels. Hindalco has launched several brands in recent years, namely Aura for alloy wheels, Freshwrapp for kitchen foil and ever last for roofing sheets. The copper plant produces copper cathodes, continuous cast copper rods and precious metals like gold, silver and FMS-MAIET 40

Mergers & Acquisitions platinum group metal mix. sulphuric acid, phosphoric acid, di-ammonium phosphate, other phosphatic fertilisers and phospho-gypsum are also produced at this plant. Hindalco Industries Limited has a 51.0% shareholding in Aditya Birla Minerals which has mining and exploration activities focused in Australia. The company has two R&D centres at Belgaum, Karnataka and Taloja, Maharashtra.

NOVELIS Novelis is the world leader in aluminium rolling, producing an estimated 19 percent of the world's flat-rolled aluminium products. Novelis is the world leader in the recycling of used aluminium beverage cans. The company recycles more than 35 billion used beverage cans annually. The company is No. 1 rolled products producer in Europe, South America and Asia, and the No. 2 producer in North America. With industryleading assets and technology, the company produces the highest-quality aluminium sheet and foil products for customers in high -value markets including automotive, transportation, packaging, construction and printing. Our customers include major brands such as Agfa -Gevaert, Alcan, Anheuser-Busch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak, ThyssenKrupp and others. Novelis represents a unique combination of the new and the old. Novelis is a new company, formed in January 2005, with a new velocity, a new philosophy and a new attitude. But Novelis is also a spin-off from Alcan and, as such, draws on a rich 90-year history in the aluminium rolled product marketplace. Novelis has a diversified product portfolio, which serves to the different set of industries vis-à-vis it has a very strong geographical presences in four continents. Novelis was always a problem child. It was born in early 2005 as a result of a ‘forced’ spin-off from its parent, the $ 23.6-billion aluminium giant and Canada-based Alcan. In 2003, Alcan won a hostile offer to wed French aluminium company Pechiney. But the marriage produced an unwanted child — Novelis. Both Alcan and Pechiney had FMS-MAIET 41

Mergers & Acquisitions bauxite mines, facilities to produce primary aluminium, and rolling mills to turn the raw metal into products such as stock for Pepsi and Coke cans and automotive parts. But the US and European anti-trust proceedings ruled that the rolled products business of either Alcan or Pechiney had to be divested from the merged entity. Alcan cast out its rolled products business to form Novelis. It is now the world’s leading producer of aluminium-rolled products with a 19 per cent global market share. But in the spin-off process, Novelis ended up inheriting a debt mountain of almost $2.9 billion on a capital base of less than $500 million. That was just the beginning of its troubles.The situation is worse now.Though it marginally reduced debt, it made some losses too. On a net worth of $322 million, Novelis has a debt of $2.33 billion (most of it high cost). That’s a debt-equity ratio of 7.23:1

STRATEGIC RATIONALE FOR ACQUISITION This acquisition was a very good strategic move from Hindalco. Hindalco will be able to ship primary aluminium from India and make value-added products.'' The combination of Hindalco and Novelis establishes an integrated producer with low-cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint. Hindalco’s rationale for the acquisition is increasing scale of operation, entry into high —end downstream market and enhancing global presence. Novelis is the global leader (in terms of volume) in rolled products with annual production capacity of 2.8 million tonnes and a market share of 19 per cent. It has presence in 11 countries and provides sheets and foils to automotive and transportation, beverage and food packaging, construction and industrial, and printing markets. Hindalco’s rationale for the acquisition is increasing scale of operation, entry into high—end downstream market and enhancing global presence. Novelis is the global leader (in terms of volumes) in rolled products with annual production capacity of 2.8 million tonnes and a market share of 19 per cent. It has presence in 11 countries and provides sheets and foils to automotive and transportation, beverage and food packaging, construction and industrial, and printing markets. Acquiring Novelis will provide Aditya Birla Group's FMS-MAIET 42

Mergers & Acquisitions Hindalco with access to customers such as General Motors Corp. and Coca-Cola Co. Indian companies, fueled by accelerating domestic growth, are seeking acquisitions overseas to add production capacity and find markets for their products. Tata Steel Ltd. spent US $12 billion last month to buy U.K. steelmaker Corus Group Plc. Novelis has capacity to produce 3 million tonne of flat- rolled products, while Hindalco has 220,000 tonne .. ``This acquisition gives Hindalco access to higher-end products but also to superior technology,'' Hindalco plans to triple aluminium output to 1.5 million metric tonne by 2012 to become one of the world's five largest producers. The company, which also has interests in telecommunications, cement, metals, textiles and financial services, is the world's 13thlargest aluminium maker. After the deal was signed for the acquisition of Novelis, Hindalco's management issued press releases claiming that the acquisition would further internationalize its operations and increase the company's global presence. By acquiring Novelis, Hindalco aimed to achieve its long-held ambition of becoming the world's leading producer of aluminium flat rolled products. Hindalco had developed long-term strategies for expanding its operations globally and this acquisition was a part of it. Novelis was the leader in producing rolled products in the Asia-Pacific, Europe, and South America and was the second largest company in North America in aluminium recycling, metal solidification and in rolling technologies worldwide. The benefits from this acquisition canbe discussed under the following points: •

Post acquisitions, the company will get a strong global footprint.

•

After full integration, the joint entity will become insulated from the fluctuation of

LME Aluminium prices. •

The deal will give Hindalco a strong presence in recycling of aluminium business.

As per aluminium characteristic, aluminium is infinitely recyclable and recycling it requires only 5% of the energy needed to produce primary aluminium. •

Novelis has a very strong technology for value added products and its latest

technology ‘Novelis Fusion’ is very unique one. FMS-MAIET 43

Mergers & Acquisitions •

It would have taken a minimum 8-10 years to Hindalco for building these facilities, if

Hindalco takes organically route.

SWOT ANALYSIS OF deal Strengths •

It will give Cost advantage to the new company

•

It will help in communicating effectively in various cross border business

•

It will raise the R&D & hece more innovation will be applied

•

It will increase its Loyal customers & hence will have market leadership

•

Strong management team will help in making Strong brand equity & Strong

financial position •

The Supply chain is perfect for performing various jobs.

Weaknesses •

Bad communication

•

Diseconomies to scale

•

Over leveraged fiancial position

•

Low R&D

•

Low market share

•

No online presence

•

Not innovative

•

Not diversified

•

Poor supply chain

•

Weak management team

•

Weak real estate

•

Weak, damaged brand

FMS-MAIET 44

Mergers & Acquisitions •

Ubiquitiouegory, products, services

Opportunities •

Acquisitions

•

Asset leverage

•

Financial markets (raise money through debt, etc)

•

Emerging markets and expansion abroad

•

Innovation

•

Online

•

Product and services expansion

•

Takeovers

Threats •

Competition

•

Cheaper technology

•

Economic slowdown

•

External changes (government, politics, taxes, etc)

•

Exchange rate fluctuations

•

Lower cost competitors or imports

•

Maturing categories, products, or services

•

Price wars

•

Product substitution

5.

Ranbaxy-Daiichi Sankyo: $4.5 billion

Marking the largest-ever deal in the Indian pharma industry, Japanese drug firm Daiichi Sankyo in June 2008 acquired the majority stake of more than 50 per cent in domestic major Ranbaxy for over Rs 15,000 crore ($4.5 billion). FMS-MAIET 45

Mergers & Acquisitions The deal created the 15th biggest drugmaker globally, and is India's 5th largest M&A deal to date. The biggest acquisition of a listed Indian company, the Ranbaxy-Daiichi deal, has come as a shocker. Reactions to the development have been mixed, coming as it does at a time when Indian companies were getting used to the idea of being among the top dogs in global corporate takeovers. The controversies notwithstanding, the pharma deal is a truly strategic combination that creates an innovator and generics powerhouse. The deal will bring in new drugs from Daiichi's portfolio into the Indian market, and tempt Indian pharma majors, particularly generics makers hitting a plateau in overseas markets, to sell out and realise attractive valuations of the kind Ranbaxy has secured. In the words of Takashi Shoda, Daiichi Sankyo's president and CEO, "The proposed transaction is in line with our goal to be a global pharma innovator and provides the opportunity to complement our strong presence in innovation with a new, strong presence in the fast growing business of non-proprietary pharmaceuticals." This complementary combination represents a perfect strategic fit and delivers a considerable opportunity for the future growth of the new Daiichi Sankyo Group. Daiichi Sankyo and Ranbaxy believe this transaction will create significant long-term value for all stakeholders through a complementary business combination that provides sustainable growth through diversification spanning the full spectrum of the pharmaceutical business; an expanded global reach that enables leading market positions in both mature and emerging markets with proprietary and non-proprietary products; strong growth potential by effectively managing opportunities across the full pharmaceutical lifecycle; and cost competitiveness by optimising usage of R&D and manufacturing facilities of both companies, especially in India.

FMS-MAIET 46

Mergers & Acquisitions Post the buyout, Daiichi Sankyo will be the second-largest pharma company in India with about 5% market share in the Rs 33,000 crore domestic pharma retail market, closely following domestic major Cipla. It is a win-win situation for Ranbaxy and Daiichi. The latter can leverage the cost advantage offered by India complemented by world-class infrastructure and also Ranbaxy's marketing strengths, while Ranbaxy would benefit from Daiichi's product pipeline and research facilities. Company profile About Daiichi Sankyo Company, Limited

A global pharma innovator, Daiichi Sankyo Company, Ltd., was established in 2005 through the merger of two leading Japanese pharmaceutical companies. This integration created a more robust organization that allows for continuous development of novel drugs that enrich the quality of life for patients around the world. A central focus of Daiichi Sankyo's research and development are thrombotic disorders, malignant neoplasm, diabetes mellitus, and autoimmune disorders. Equally important to the company are hypertension, hyperlipidemia or atherosclerosis and bacterial infections

About Ranbaxy Laboratories Limited

Ranbaxy Laboratories Limited, India's largest pharmaceutical company, is an integrated, research based, international pharmaceutical company producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. Ranbaxy’s continued focus on R&D has resulted in several approvals in developed markets and significant progress in New Drug FMS-MAIET 47

Mergers & Acquisitions Discovery Research. The Company’s foray into Novel Drug Delivery Systems has led to proprietary "platform technologies," resulting in a number of products under development. The Company is serving its customers in over 125 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 49 countries and manufacturing operations in 11 countries.

5. ONGC-Imperial Energy: $2.8 billion The Oil and Natural Gas Corp took control of Imperial Energy Plc for $2.8 billion, in January 2009, after an overwhelming 96.8 per cent of London-listed firm's total shareholders accepted its takeover offer. Speaking about India's fifth largest M&A deal, ONGC chairman R S Sharma said the company owed the acquisition to government support, which has seen OVL in the past seven years increase its number of projects to 39 in 17 countries, from just a single project in Vietnam. In its largest buyout abroad, Oil & Natural Gas Corp (ONGC) is all set to a acquire the London Stock Exchange-listed Imperial Energy, a British oil and gas company, for £1.3 billion ($1.9 billion) after 97% shareholders in the Leeds-based company gave their consent to the takeover bid. The deadline for the state-owned firm’s £12.50 per share offer closed on December 30 and 99,241,110 or 96.8% of the shares were tendered, according to an announcement FMS-MAIET 48

Mergers & Acquisitions made by ONGC Videsh, the overseas arm of the ONGC, to London Stock Exchange. Imperial will now have to be delisted from LSE, after the formalities are done with. The entire process of takeover and delisting may be completed in three weeks, according to some quarters. OVL is acquiring Imperial through Jarpeno Ltd, a wholly owned subsidiary registered in Cyprus. The hiccups in the deal arose because of the difference in the price of crude oil when OVL first disclosed its bid and now. OVL had made its £12.50 per share offer in August, when the international oil prices had soared to $130 a barrel. From then on, the crude oil prices have crashed dramatically to less than $40, making the acquisition look exorbitantly expensive. Returns on investment have fallen to 3-4% from 12.6%, keeping crude oil price of $100 per barrel in mind. For this reason alone, the deal had to brought before the Cabinet for clearance a second time. In August 2008, Imperial was producing around 7,000 barrels per day (bpd) of oil, targeting to increase production to 25,000 bpd by the end of 2008 and 80,000 bpd by the end of 2011. Production is likely to go up to 130,000 bpd by the end of 2015

SWOT ANALYSIS 1) STRENGTHS

A) O.N.G.C LTD is perceived to be the leader in oil production industry. B)

O.N.G.C

has

a

very

efficient

and

professional

management

team.

C) O.N.G.C being an international company has sufficient resources and capital to invest. FMS-MAIET 49

Mergers & Acquisitions

D) O.N.G.C has ISO-9001 & ISO 14001 registration.

2) WEAKNESSES

A) O.N.G.C facing difficulties to produce oil from aging reservoirs 3) OPPURTUNITY

A) Energy utilization of buried coal resource (700 -1700M), estimated 63BT – Equivalent to 15000 BCM B) O.N.G.C facing difficulties to produce oil from aging reservoirs.

4) WEAKNESSES

A) Security of personnel & property especially crude oil continues to be a cause of concern in certain area.

B) In some exploration Campaign Company involves high technology, high technology, High investment and high risks.

FMS-MAIET 50

Mergers & Acquisitions

6. NTT DoCoMo-Tata Tele: $2.7 billion Japanese telecom giant NTT DoCoMo picked up a 26 per cent equity stake in Tata Teleservices for about Rs 13,070 crore ($2.7 billion) in November 2008. This is the 6th-largest M&A deal involving an Indian company. With a subscriber base of 25 million in 20 circles DoCoMo paid Rs 20,107 per subscriber to acquire the stake. DoCoMo picked up the equity through a combination of fresh issuance of equity and acquisition of shares from the existing promoters.

On November 12, 2007, Tokyo-based NTT DoCoMo announced it was entering into a strategic alliance with the Tatas. The Japanese telecom giant which, with 53 million customers and 51.5% of the Japanese market, is one of the world's largest players in the telecommunications industry, bought a 26% stake in Tata Teleservices Ltd (TTSL) for $2.7 billion. NTT DoCoMo followed up this deal with an open offer for 20% in Tata Teleservices (Maharashtra) Ltd -- TTML -- the listed subsidiary of TTSL. At Rs24.70 (50 cents) a share, this means another $191 million. The offer will open in January. "We are hoping that this will be a long-term partnership as we are like-minded companies," Tata group chief Ratan Tata told a media briefing soon after the deal was struck. "The Indian telecom industry is poised for the introduction of new technologies," says Anil Sardana, managing director of TTSL. "Having DoCoMo as a partner will enhance our ability to evaluate, introduce and manage next generation technologies, as and when opportunities arise." This is obviously a big deal at a time when mergers and acquisitions (M&A) activity has declined in India. It is, in fact, the biggest deal in the Indian telecom market since early 2007, when Vodafone bought a 67% stake in Hutchison Essar (now Vodafone India) for $11.1 billion. Yet the Japanese entry didn't make too many waves. FMS-MAIET 51

Mergers & Acquisitions Both the Tatas and the media are partly responsible for that. The media has been celebrating outbound takeovers -- Jaguar Land Rover (JLR), Corus, Novelis. An inbound acquisition in this environment is a step in the opposite direction. Besides, Indian telecom companies – Bharti Airtel and Reliance Communications (RCom) -were supposed to be spreading their wings abroad, targeting MTN of South Africa. Was NTT DoCoMo planning a takeover against the tide? At the media briefing, there were questions about this issue. "At the moment, we have no intention of increasing our stake," Ryuji Yamada, NTT DoCoMo president & CEO, noted.

Controversial aspect Great deal it may be, but it has its risks. One reason is that telecom deals have been controversial in recent times. This goes back to late last year when the government sold pan-India licenses for $333 million apiece, amid a welter of controversy. New players, with no experience in the business, got these licenses on a first-come-firstserved basis. Now they are making hay – or some might say gold -- with these pieces of paper. Unitech Wireless, a part of real estate group Unitech, got one of these licenses. Telenor of Norway has now picked up a 60% stake in the company for $1 billion, putting the valuation of the license at $1.78 billion. It is the license alone that the firm has as an asset; there are no subscribers or infrastructure. The UAE-based Etisalat has bought a 45% stake in Swan Telecom for $900 million valuing the company at $2 billion. Swan, too, has only a license. A. Raja, Union minister for telecommunications and information technology, has been facing most of the flak. "I have simply followed the decision of the Cabinet and the recommendations of the TRAI," he told Business India magazine. "These funds (invested by Telenor and Etisalat) will be used for the establishment of networks, FMS-MAIET 52

Mergers & Acquisitions including infrastructure....The valuations reflect the value of the funds applied to the business and not the value of the license or spectrum." Shende of Ascendia disagrees. "The government has made a very poor decision," he says. "It is a decision that does not recognize the economic value of the transactions. There is a whole lot of ambiguity around it." According to Shende, the bigger question is how the new operators will make money. They have been late entering the market, which means that existing telecom operators have already signed up millions of customers. In seeking to encourage subscribers to switch over, the new entrants may seek to offer services at a lower price. "But this will not be sustainable over the long term," he points out. "More importantly, they do not have the capabilities to offer services at a lower price because they need to set up huge infrastructure. The current operators have already set up their infrastructure and have amortized the costs."

HDFC Bank-Centurion Bank of Punjab: $2.4 billion 7.

HDFC Bank approved the acquisition of Centurion Bank of Punjab for Rs 9,510 crore ($2.4 billion) in one of the largest mergers in the financial sector in India in February, 2008. CBoP shareholders got one share of HDFC Bank for every 29 shares held by them. Post-acquisition, HDFC Bank became the second-largest private sector bank in India. The acquisition was also India's 8th largest ever.

HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab (CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector

FMS-MAIET 53

Mergers & Acquisitions in India. CBoP shareholders will get one share of HDFC Bank for every 29 shares held by them.

This will be HDFC Bank’s second acquisition after Times Bank. HDFC Bank will jump to the 7th position among commercial banks from 10th after the merger. However, the merged entity would become second largest private sector bank.

The merger will strengthen HDFC Bank's distribution network in the northern and the southern regions. CBoP has close to 170 branches in the north and around 140 branches in the south. CBoP has a concentrated presence in the in the Indian states of Punjab and Kerala. The combined entity will have a network of 1148 branches. HDFC will also acquire a strong SME (small and medium enterprises) portfolio from CBoP. There is not much of overlapping of HDFC Bank and CBoP customers.

The entire process of the merger would take about four months for completion. The merged entity will be known as HDFC Bank. Rana Talwar's Sabre Capital would hold less than 1 per cent stake in the merged entity from 3.48 in CBoP, while Bank Muscat's holding will decline to less than 4 per cent from over 14 per cent in CBoP. HDFC shareholding falls to will fall from 23.28 per cent to around 19 per cent in the merged entity . Mr Rana Talwar, Chairman of Centurion Bank, has been offered a seat on the Board as non-executive director and Mr Shailendra Bhandari, Managing Director, Centurion Bank, has been invited to join as the Executive Director on the board post merger.

FMS-MAIET 54

Mergers & Acquisitions According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri, Integration will be smooth as there is no overlap. In an interview, he mentioned that at 40% growth rate there will be no lay-offs. The integration of the second rung officials should be smooth as there is hardly any overlap.

The boards of the two banks will meet again on February 28 to consider the draft scheme of amalgamation, which will be subject to regulatory approvals. HDFC Bank will consider making a preferential offer to its parent Housing Development Finance Corp Ltd (HDFC). The move would allow HDFC to maintain the same level of shareholding in the bank

Company profile Housing Development Finance Corporation Limited, more popularly known as HDFC Bank Ltd, was established in the year 1994, as a part of the liberalization of the Indian Banking Industry by Reserve Bank of India (RBI). It was one of the first banks to receive an 'in principle' approval from RBI, for setting up a bank in the private sector. The bank was incorporated with the name 'HDFC Bank Limited', with its registered office in Mumbai. The following year, it started its operations as a Scheduled Commercial Bank. Today, the bank boasts of as many as 1412 branches and over 3275 ATMs across India.

Tech-Savvy HDFC Bank has always prided itself on a highly automated environment, be it in terms of information technology or communication systems. All the braches of the bank boast of online connectivity with the other, ensuring speedy funds transfer for the clients. At the same time, the bank's branch network and Automated Teller Machines (ATMs) FMS-MAIET 55

Mergers & Acquisitions allow multi-branch access to retail clients. The bank makes use of its up-to-date technology, along with market position and expertise, to create a competitive advantage and build market share.

SWOT analysis Strengths 1. HDFC is the strongest and most venerable play on Indian mortgages over the long term. The management of the bank is termed to be one of the best in the country. 2. HDFC has differentiated itself from its peers with its diversified network and revamped distribution strategy. 3. HDFC has been highly proactive in passing on the cost and benefit to customers. 4. Besides the core business, HDFC’s insurance, AMC, banking, BPO, and real estate private equity businesses are also growing at a rapid pace and the estimated value of its

investments/subsidiaries explains ~30%

of HDFC’s market capitalization.

Weaknesses 1. High dependence on individual loans. 2. Major stake held by American financial groups which are under stress due to economic slowdown . Opportunity 1 it has vast opportunity in fast growing insurance business in the country. 2. rural markets are still untapped. FMS-MAIET 56

Mergers & Acquisitions

Threats 1. Loss of market share to commercial banks and HFC’s 2. Higher than expected increase in funding cost 3. Risk of fraud and NPA accretion due to increase in interest rates and fall in property prices is inherent to the mortgage business.

9. Tata Motors-Jaguar Land Rover: $2.3 billion Creating history, one of India's top corporate entities, Tata Motors, in March 2008 acquired luxury auto brands -- Jaguar and Land Rover -- from Ford Motor for $2.3 billion, stamping their authority as a takeover tycoon. Beating compatriot Mahindra and Mahindra for the prestigious brands, just a year after acquiring steel giant Corus for $12.1 billion, the Tatas signed the deal with Ford, which on its part chipped in with $600 million towards JLR's pension plan. Tata Motors' buyout of JLR is India's 9th-largest in history.

10. Sterlite-Asarco: $1.8 billion Anil Agarwal-led Sterlite Industries Ltd's $1.8 billion Asarco LLC buyout deal is the ninth biggest-ever merger and acquisitions deal involving an Indian firm, and the largest so far in 2009.

FMS-MAIET 57

Mergers & Acquisitions This is despite the deal size falling by almost $1 billion, from a projected estimate of $2.6 billion in May 2008, due to devaluation of mining assets and a sharp fall in copper prices. Sterlite, the Indian arm of the London-based Vedanta Resources Plc, acquired Asarco in March 2008. The acquisition has given Sterlite a “fantastic” boost to its margins, the spokesman said. He said that the cost of production of copper at Asarco was around $1.5 a pound. At this rate, it would yield an EBIDTA margin of $4,700 a tonne, at the current ruling prices of the metal. Including the production from Asarco-owned Amarillo copper mines in Texas, the acquisition could add 5 lakh tonnes to Sterlite’s existing capacity of 4 lakh tonnes. In fact, the capacity of the Amarillo mine is twice the current level of production of around 2.3 lakh tonnes. “This mine alone has the potential to turnaround the whole company,” the spokesman said. He noted that this acquisition was considerably cheaper than another recent acquisition — of the Brazilian Cumerio mines by Nord Deutsche. Nord Deutsche bought it paying close to seven times the EBIDTA, whereas Sterlite has struck a deal at around four. It is learnt that the Asarco deal was brought to fruition by a team headed by Mr C.V. Krishnan, who looks after Sterlite’s business development from New York. Asarco had two legacy problems, one pertaining to environment-related litigations and the other, labour issues. (In fact, a cursory read of Wikipedia shows a long history of environment-related wrangles, starting from 1910.) FMS-MAIET 58

Mergers & Acquisitions According to the Sterlite spokesman, the company’s acquisition of the operating assets — mine, smelter and refinery — has been ring-fenced from the legacy green issues. On labour problems, the spokesman noted that the Vedanta Group (to which Sterlite belongs) has a track record of settling such issues after takeovers — as it happened, he pointed out, in the cases of the acquisitions of Balco, Hindustan Zinc and Konkola Copper Mines in Zambia. “There have been voluntary separations but not a single person has ever been fired,” he said. Asked if the acquisition would add to the group’s gold production, the spokesman pointed out that while Asarco has a precious metal refinery, only small quantities of gold and molybdenum would be extracted. Vedanta is putting up a 20-tonne gold refinery at Dubai, which will extract the yellow metal out of the sludge that the Tuticorin copper smelter generates. The spokesman said that the quantity of gold contained in the sludge of the Asarco smelter would not justify its shipping to Dubai. Sterlite also produces 100 tonnes of silver, which comes as a by-product in the production of zinc.

11. Suzlon-RePower: $1.7 billion Wind power major Suzlon Energy in May 2007 acquired the German wind turbine manufacturer REpower for $1.7 billion. The deal now ranks as the country's 10th largest corporate takeover.REpower is one of Germany's leading manufacturers of wind turbines, with a 10-per cent share of the overall market.Suzlon is now the largest wind turbine maker in Asia and the fifth largest in the world. FMS-MAIET 59

Mergers & Acquisitions

Until upto a couple of years back, the news that Indian companies having acquired American-European entities was very rare. However, this scenario has taken a sudden U turn. Nowadays, news of Indian Companies acquiring a foreign businesses are more common than other way round. Buoyant Indian Economy, extra cash with Indian corporates, Government policies and newly found dynamism in Indian businessmen have all contributed to this new acquisition trend. Indian companies are now aggressively looking at North American and European markets to spread their wings and become the global players. The Indian IT and ITES companies already have a strong presence in foreign markets; however, other sectors are also now growing rapidly. The increasing engagement of the Indian companies in the world markets, and particularly in the US, is not only an indication of the maturity reached by Indian Industry but also the extent of their participation in the overall globalization process.

MERGERS AND ACQUISITIONS: CONCLUSION Countries that are seeking mergers in India for enhancing the trade scenario are Canada, Holland, Belgium, Italy, Sweden, Norway, Poland, Germany, Spain and the United Kingdom. Globalization and mergers in India is an important standpoint of any corporate executive on every detail of mergers and acquisitions implemented around the world. Mergers in India may include mergers, joint ventures, acquisitions, takeovers, and other kinds of cross-border transactions. The trends and growth of mergers and acquisition dealings has led to a noticeable increase in the globalization and mergers in India.

FMS-MAIET 60

Mergers & Acquisitions 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. The relation between globalization and mergers in India are quite noteworthy. The important elements of Indian mergers for globalization can be cited as follows: 1. M&A is a good growth strategy in context of globalization – Corporates in India have been experiencing a surge in the revenue growth due to cross border mergers and the figures are only to go up more. 2. Most Indian companies have a clear M&A strategy – the market strategy is clear for most corporates. That is why when finalizing a deal, there arises no confusion. Top M&A markets – The top M&A markets are US, India and UK

References: FMS-MAIET 61

Mergers & Acquisitions •

www.wikipedia.com

• www.google.com •

www.tatagroup.org

•

www.vodafone.com

•

www.hutchinessar.com

FMS-MAIET 62