Mergers and Acquisitions in India - A general Analysis

Introduction
The Indian economy has been growing with a rapid pace and has been emerging
at the top, be it IT, R&D, pharmaceutical, infrastructure, energy, consumer retail,
telecom, financial services, media, and hospitality etc. It is second fastest growing
economy in the world with GDP touching 9.3 % last year. This growth momentum
was supported by the double digit growth of the services sector at 10.6% and
industry at 9.7% in the first quarter of 2006-07. Investors, big companies,
industrial houses view Indian market in a growing and proliferating phase,
whereby returns on capital and the shareholder returns are high. Both the
inbound and outbound mergers and acquisitions have increased dramatically.
According to Investment bankers, Merger & Acquisition (M&A) deals in India will
cross $100 billion this year, which is double last year’s level and quadruple of
2005.

In the first two months of 2007, corporate India witnessed deals worth close to
$40 billion. One of the first overseas acquisitions by an Indian company in 2007
was Mahindra & Mahindra’s takeover of 90 percent stake in Schoneweiss, a
family-owned German company with over 140 years of experience in forging
business. What hit the headlines early this year was Tata’s takeover of Corus for
slightly over $10 billion. On the heels of that deal, Hutchison Whampoa of Hong
Kong sold their controlling stake in Hutchison-Essar to Vodafone for a whopping
$11.1 billion. Bangalore-based MTR’s packaged food division found a buyer in
Orkala, a Norwegian company for $100 million. Service companies have also
joined the M&A game.

The taxation practice of Mumbai-based RSM Ambit was acquired by

PricewaterhouseCoopers. There are many other bids in the pipeline. On an
average, in the last four years corporate earnings of companies in India have been
increasing by 20-25 percent, contributing to enhanced profitability and healthy
balance sheets. For such companies, M&As are an effective strategy to expand
their businesses and acquire global footprint.

Mergers or amalgamation, result in the combination of two or more companies

into one, wherein the merging entities lose their identities. No fresh investment is
made through this process. However, an exchange of shares takes place between
the entities involved in such a process. Generally, the company that survives is the
buyer which retains its identity and the seller company is extinguished.

Definitions:
Mergers, acquisitions and takeovers have been a part of the business world for
centuries. In today's dynamic economic environment, companies are often faced
with decisions concerning these actions - after all, the job of management is to
maximize shareholder value. Through mergers and acquisitions, a company can
(at least in theory) develop a competitive advantage and ultimately increase
shareholder value. The said terms to a layman may seem alike but in legal/
corporate terminology, they can be distinguished from each other:

# Merger: A full joining together of two previously separate corporations. A true

merger in the legal sense occurs when both businesses dissolve and fold their
assets and liabilities into a newly created third entity. This entails the creation of a
new corporation.

# Acquisition: Taking possession of another business. Also called a takeover or

buyout. It may be share purchase (the buyer buys the shares of the target
company from the shareholders of the target company. The buyer will take on the
company with all its assets and liabilities. ) or asset purchase (buyer buys the
assets of the target company from the target company)
In simple terms, A merger involves the mutual decision of two companies to
combine and become one entity; it can be seen as a decision made by two
"equals", whereas an acquisition or takeover on the other hand, is characterized
the purchase of a smaller company by a much larger one. This combination of
"unequals" can produce the same benefits as a merger, but it does not necessarily
have to be a mutual decision. A typical merger, in other words, involves two
relatively equal companies, which combine to become one legal entity with the
goal of producing a company that is worth more than the sum of its parts. In a
merger of two corporations, the shareholders usually have their shares in the old
company exchanged for an equal number of shares in the merged entity. In an
acquisition, the acquiring firm usually offers a cash price per share to the target
firm’s shareholders or the acquiring firm's share's to the shareholders of the
target firm according to a specified conversion ratio. Either way, the purchasing
company essentially finances the purchase of the target company, buying it
outright for its shareholders
# Joint Venture: Two or more businesses joining together under a contractual
agreement to conduct a specific business enterprise with both parties sharing
profits and losses. The venture is for one specific project only, rather than for a
continuing business relationship as in a strategic alliance.

# Strategic Alliance: A partnership with another business in which you combine

efforts in a business effort involving anything from getting a better price for goods
by buying in bulk together to seeking business together with each of you
providing part of the product. The basic idea behind alliances is to minimize risk
while maximizing your leverage.

# Partnership: A business in which two or more individuals who carry on a

continuing business for profit as co-owners. Legally, a partnership is regarded as a
group of individuals rather than as a single entity, although each of the partners
file their share of the profits on their individual tax returns.

Many mergers are in truth acquisitions. One business actually buys another and
incorporates it into its own business model. Because of this misuse of the term
merger, many statistics on mergers are presented for the combined mergers and
acquisitions (M&A) that are occurring. This gives a broader and more accurate
view of the merger market .
Types of Mergers:

From the perception of business organizations, there is a whole host of different

mergers. However, from an economist point of view i.e. based on the relationship
between the two merging companies, mergers are classified into following:

# Horizontal merger- Two companies that are in direct competition and share the
same product lines and markets i.e. it results in the consolidation of firms that are
direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce
and Lamborghini

# Vertical merger- A customer and company or a supplier and company i.e.

merger of firms that have actual or potential buyer-seller relationship eg. Ford-
Bendix, Time Warner-TBS.

# Conglomerate merger- generally a merger between companies which do not

have any common business areas or no common relationship of any kind.
Consolidated firma may sell related products or share marketing and distribution
channels or production processes. Such kind of merger may be broadly classified
into following:

# Product-extension merger - Conglomerate mergers which involves companies

selling different but related products in the same market or sell non-competing
products and use same marketing channels of production process. E.g. Phillip
Morris-Kraft, Pepsico- Pizza Hut, Proctor and Gamble and Clorox

# Market-extension merger - Conglomerate mergers wherein companies that sell

the same products in different markets/ geographic markets. E.g. Morrison
supermarkets and Safeway, Time Warner-TCI.

# Pure Conglomerate merger- two companies which merge have no obvious

relationship of any kind. E.g. BankCorp of America- Hughes Electronics.

On a general analysis, it can be concluded that Horizontal mergers eliminate

sellers and hence reshape the market structure i.e. they have direct impact on
seller concentration whereas vertical and conglomerate mergers do not affect
market structures e.g. the seller concentration directly. They do not have
anticompetitive consequences.

The circumstances and reasons for every merger are different and these
circumstances impact the way the deal is dealt, approached, managed and
executed. .However, the success of mergers depends on how well the deal
makers can integrate two companies while maintaining day-to-day operations.
Each deal has its own flips which are influenced by various extraneous factors
such as human capital component and the leadership. Much of it depends on the
company’s leadership and the ability to retain people who are key to company’s
on going success. It is important, that both the parties should be clear in their
mind as to the motive of such acquisition i.e. there should be census- ad- idiom.
Profits, intellectual property, costumer base are peripheral or central to the
acquiring company, the motive will determine the risk profile of such M&A.
Generally before the onset of any deal, due diligence is conducted so as to gauze
the risks involved, the quantum of assets and liabilities that are acquired etc.

Legal Procedures for Merger, Amalgamations and Take-overs

The basis law related to mergers is codified in the Indian Companies Act, 1956
which works in tandem with various regulatory policies. 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 Tribunal the power to sanction a compromise or
arrangement between a company and its creditors/ members subject to certain
conditions. Section 392 gives the power to the Tribunal to enforce and/ or
supervise 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, by making an appropriate application to the
Tribunal. 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, both the amalgamating company or companies and the
amalgamated company should comply with the requirements specified in sections
391 to 394 and submit details of all the formalities for consideration of the
Tribunal. 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 Tribunal and
the central government in the matter of bringing about amalgamations of
companies.

After the application is filed, the Tribunal would pass orders with regard to the
fixation of the dates of the hearing, and the provision of a copy of the application
to the Registrar of Companies and the Regional Director of the Company Law
Board in accordance with section 394A and to the Official Liquidator for the
report confirming that the affairs of the company have not been conducted in a
manner prejudicial to the interest of the shareholders or the public. Before
sanctioning the scheme of amalgamation, the Tribunal has also to give notice of
every application made to it under section 391 to 394 to the central government
and the Tribunal 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 Tribunal.

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
Tribunal 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 Tribunal, the
properties or liabilities of the amalgamating company get transferred to the
amalgamated company. Under section 394, the Tribunal 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 Tribunal 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 Tribunal granting a
scheme of amalgamation. The Tribunal 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 Tribunal 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.

Motives behind M & A

These motives are considered to add shareholder value:
# Economies of Scale: This generally refers to a method in which the average cost
per unit is decreased through increased production, since fixed costs are shared
over an increased number of goods. In a layman’s language, more the products,
more is the bargaining power. This is possible only when the companies merge/
combine/ acquired, as the same can often obliterate duplicate departments or
operation, thereby lowering the cost of the company relative to theoretically the
same revenue stream, thus increasing profit. It also provides varied pool of
resources of both the combining companies along with a larger share in the
market, wherein the resources can be exercised.

# Increased revenue /Increased Market Share: This motive assumes that the
company will be absorbing the major competitor and thus increase its power (by
capturing increased market share) to set prices.

# Cross selling: For example, a bank buying a stock broker could then sell its
banking products to the stock brokers customers, while the broker can sign up the
bank’ customers for brokerage account. Or, a manufacturer can acquire and sell
complimentary products.

# Corporate Synergy: Better use of complimentary resources. It may take the form
of revenue enhancement (to generate more revenue than its two predecessor
standalone companies would be able to generate) and cost savings (to reduce or
eliminate expenses associated with running a business).

# Taxes : A profitable can buy a loss maker to use the target’s tax right off i.e.
wherein a sick company is bought by giants.

# Geographical or other diversification: this is designed to smooth the earning

results of a company, which over the long term smoothens the stock price of the
company giving conservative investors more confidence in investing in the
company. However, this does not always deliver value to shareholders.

# Resource transfer: Resources are unevenly distributed across firms and

interaction of target and acquiring firm resources can create value through either
overcoming information asymmetry or by combining scarce resources. Eg: Laying
of employees, reducing taxes etc.

# Improved market reach and industry visibility - Companies buy companies to

reach new markets and grow revenues and earnings. A merge may expand two
companies' marketing and distribution, giving them new sales opportunities. A
merger can also improve a company's standing in the investment community:
bigger firms often have an easier time raising capital than smaller ones.

Advantages of M&A’s:
The general advantage behind mergers and acquisition is that it provides a
productive platform for the companies to grow, though much of it depends on
the way the deal is implemented. It is a way to increase market penetration in a
particular area with the help of an established base. As per Mr D.S Brar (former
C.E.O of Ranbaxy pharmaceuticals), few reasons for M&A’s are:

# Accessing new markets

# maintaining growth momentum
# acquiring visibility and international brands
# buying cutting edge technology rather than importing it
# taking on global competition
# improving operating margins and efficiencies
# developing new product mixes

Conclusion
In real terms, the rationale behind mergers and acquisitions is that the two
companies are more valuable, profitable than individual companies and that the
shareholder value is also over and above that of the sum of the two companies.
Despite negative studies and resistance from the economists, M&A’s continue to
be an important tool behind growth of a company. Reason being, the expansion is
not limited by internal resources, no drain on working capital - can use exchange
of stocks, is attractive as tax benefit and above all can consolidate industry -
increase firm's market power.

With the FDI policies becoming more liberalized, Mergers, Acquisitions and
alliance talks are heating up in India and are growing with an ever increasing
cadence. They are no more limited to one particular type of business. The list of
past and anticipated mergers covers every size and variety of business -- mergers
are on the increase over the whole marketplace, providing platforms for the small
companies being acquired by bigger ones.

The basic reason behind mergers and acquisitions is that organizations merge and
form a single entity to achieve economies of scale, widen their reach, acquire
strategic skills, and gain competitive advantage. In simple terminology, mergers
are considered as an important tool by companies for purpose of expanding their
operation and increasing their profits, which in façade depends on the kind of
companies being merged. Indian markets have witnessed burgeoning trend in
mergers which may be due to business consolidation by large industrial houses,
consolidation of business by multinationals operating in India, increasing
competition against imports and acquisition activities. Therefore, it is ripe time for
business houses and corporates to watch the Indian market, and grab the
opportunity.