MERGER AND ACQUISITION

I. Introduction:
Until recently, mergers and acquisitions (M&A) activity was an insignificant part
of capital flows to developing countries. It was not until the recent surge in capital
flows, and the dominance of foreign direct investment (FDI) in the 1990s, that
economists started to take a closer look at M&A. However, such a “look” has often
been restricted to a simple reporting of the share of M&A activity in total FDI and
its growth over time. However, the growing share of FDI in total capital flows
directed to developing countries, coupled with the increase in the share of M&A in
FDI flows, should have incited economists to study more carefully the behavior as
well as the determinants of such activity. Surprisingly enough, the existing
literature focusing on the aggregate M&A activity in developing countries is
almost nonexistent. There are several reasons for this, most of which are related to
the availability of data and the way M&A are reported and organized.

This study aims at filling the gap in the literature by empirically examining the
determinants of aggregate M&A activity to developing countries in the 1990s
using the SDC Platinum Worldwide Mergers and Acquisitions Database. In
addition, by drawing on the literature pertaining to the determinants of FDI, this
study offers a more comprehensive and accurate account of the forces shaping the
two components of FDI: greenfield investment and M&A. A number of studies
have examined the determinants of FDI in the 1990s. However, a number of
questions have remained unanswered. This study should be regarded as another
step toward unraveling some of these questions.
More specifically, dissecting FDI and looking into one of its ingredients provides
valuable insights on how internal and external factors affect M&A, greenfield
investment, and ultimately FDI.

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II. Background:

The literature on M&A has roots in both financial economics and

macroeconomics. If the focus is on the individual firm, then one has to rely on
capital budgeting, information asymmetry, and other areas of corporate finance to
explain a firm’s decision to acquire another. On the other hand, if the focus is to
explain the “aggregate” behavior of M&A activity, then one has to concentrate on
broad macroeconomic and financial indicators used to explain aggregate variables,
such as investment. Nevertheless, it is possible that only micro data on M&A
produces meaningful empirical results, whereas aggregate M&A activity is just a
random variable with no distinct behavioral relation.

Shughart and Tollison (1984), using annual U.S data and univariate analysis, found
that the aggregate merger level is a white-noise process. However, they
emphasized that such a result should not be viewed as evidence against the
existence of external determinants of aggregate M&A. Indeed, almost all empirical
studies that have examined aggregate M&A activity have found evidence that
variables such as the cost of capital, stock prices, and measures of aggregate
activity significantly influence M&A activity.

The literature on the empirical determinants of M&A directed to developing

countries is almost nonexistent. The only study that focuses on M&A directed to
emerging markets is the study by Aguiar and Gopinath (2005). Aguiar and
Gopinath develop a corporate finance-based theoretical model with testable
predictions. Using firm-level data for five East Asian countries over the period
1981-2001, the authors verify that the liquidity crunch, faced by domestic firms as
a result of the East Asia crisis, increased M&A activity. Other studies such as
World Bank Global Development Finance that deal with capital flows, report
M&A directed to developing countries as an aggregate percentage of FDI without
analyzing the factors shaping its movement.

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III. Objectives:
 To discuss the conceptual framework of mergers and acquisitions.

 To focus on demarcations between various terms like mergers, acquisitions,

takeovers, consolidations, reverse mergers, management buyouts etc.

 Various Indian laws and statutes having a bearing on merger process have
also been outlined and trends traced.

 To examine the financial and strategic motives driving the mergers and
acquisitions activity.

 To deal with the changed forces affecting mergers, consequences of changed

forces, merger movements, regulations of tender offers, global acts
governing mergers and acquisitions.

 To study the merger performance during the 1980’s and the factors affecting
mergers and acquisitions and the cross border mergers.

 To understand and anticipate the nature and types of post-closing challenges

faced by both buyer and seller after the deal is completed.

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 IV. Literature Review:

i. Introduction :

The decision to invest in a new asset would mean internal expansion for the firm.
The new asset would generate returns raising the value of the corporation.
Mergers offer an additional means of expansion, which is external, i.e. the
productive operation is not within the corporation itself. For firms with limited
investment opportunities, mergers can provide new areas for expansion. In
addition to this benefit, the combination of two or more firms can offer several
other advantages to each of the corporations such as operating economies, risk
reduction and tax advantage.

Today mergers, acquisitions and other types of strategic alliances are on the
agenda of most industrial groups intending to have an edge over competitors.
Stress is now being made on the larger and bigger conglomerates to avail the
economies of scale and diversification. Different companies in India are
expanding by merger etc. In fact, there has emerged a phenomenon called merger
wave.

The terms merger, amalgamations, take-over and acquisitions are often used
interchangeably to refer to a situation where two or more firms come together
and combine into one to avail the benefits of such combinations and re-
structuring in the form of merger etc., have been attempted to face the challenge
of increasing competition and to achieve synergy in business operations

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 ii. Corporate Restructuring :

Restructuring of business is an integral part of the new economic paradigm. As

controls and restrictions give way to competition and free trade, restructuring
and reorganization become essential. Restructuring usually involves major
organizational change such as shift in corporate strategies to meet increased
competition or changed market conditions.

This activity can take place internally in the form of new investments in plant
and machinery, research and development at product and process levels. It can
also take place externally through mergers and acquisitions (M&A) by which a
firm may acquire another firm or by which joint venture with other firms.

This restructuring process has been mergers, acquisitions, takeovers,

collaborations, consolidation, diversification etc. Domestic firms have taken
steps to consolidate their position to face increasing competitive pressures and
MNC’s have taken this opportunity to enter Indian corporate sector. The
different forms of corporate restructuring are summarized as follows:

Corporate Restructuring

Expansion Contraction Corporate Control

 Amalgamation  Demerger  Going Private

 Absorption + Spin off  Equity Buyback
 Tender offer  Anti Takeover
 Asset + Equity carve out  Leveraged
acquisition Buyouts
+ Split off
 Joint Venture
+ Split up

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Expansion

 Amalgamation:

This involves fusion of one or more companies where the companies lose their
individual identity and a new company comes into existence to take over the
business of companies being liquidated. The merger of Brooke Bond India Ltd.
And Lipton India Ltd. Resulted in formation of a new company Brooke Bond
Lipton India Ltd.

 Absorption:

This involves fusion of a small company with a large company where the smaller
company ceases to exist after the merger. The merger of Tata Oil Mills Ltd.
(TOMCO) with Hindustan Lever Ltd. (HLL) is an example of absorption.

 Tender offer:

This involves making a public offer for acquiring the shares of a target company
with a view to acquire management control in that company. Takeover by Tata Tea
of consolidated coffee Ltd. (CCL) is an example of tender offer where more than
50% of shareholders of CCL sold their holding to Tata Tea at the offered price
which was more than the investment price.

 Asset acquisition:

This involves buying assets of another company. The assets may be tangible
assets like manufacturing units or intangible like brands. Hindustan lever limited
buying brands of Lakme is an example of asset acquisition.

 Joint venture:

This involves two companies coming whose ownership is changed. DCM group
and DAEWOO MOTORS entered into a joint venture to form DAEWOO Ltd. to
manufacturing automobiles in India.

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There are generally the following types of DEMERGER:

Spinoff:

This type of demerger involves division of company into wholly owned

subsidiary of parent company by distribution of all its shares of subsidiary
company on Pro-rata basis. By this way, both the companies i.e. holding as well
as subsidiary company exist and carry on business. For example Kotak, Mahindra
finance Ltd. formed a subsidiary called Kotak Mahindra Capital Corporation, by
spinning off its investment banking division.

Split ups:

This type of demerger involves the division of parent

company into two or more separate companies where parent company ceases to
exist after the demerger.

Equity carve out:

This is similar to spin offs, except that same part of shareholding of this
subsidiary company is offered to public through a public issue and the parent
company continues to enjoy control over the subsidiary company by holding
controlling interest in it.

Divestitures:

These are sale of segment of a company for cash or for securities to an outside
party. Divestitures, involve some kind of contraction. It is based on the principle
if “anergy” which says 5-3=3!

 Asset sale:

This involves sale of tangible or intangible assets of a company to generate cash.

A partial sell off, also called slump sale, involves the sale of a business unit or
plant of one firm to another. It is the mirror image of a purchase of a business
unit or plant. From the seller’s perspective, it is a form of contraction: from the
buyer’s point of view it is a form of expansion. For example, When Coromandal
Fertilizers Limited sold its cement division to India Cement limited, the size of
Coromandal Fertilizers contracted whereas the size of India Cements Limited
expanded.

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Corporate controls

 Going private:

This involves converting a listed company into a private company by buying back
all the outstanding shares from the markets. Several companies like Castrol India
and Phillips India have done this in recent years. A well known example from the
U.S. is that of Levi Strauss & company.

 Equity buyback:

This involves the company buying its own shares back from the market. This
results in reduction in the equity capital of the company. This strengthens the
promoter’s position by increasing his stake in the equity of the company.

 Anti takeover defenses:

With a high value of hostile takeover activity in recent years, takeover defenses
both premature and reactive have been restored to by the companies.

 Leveraged buyouts:

This involves raising of capital from the market or institutions by the

management to acquire a company on the strength of its assets.

Merger is a marriage between two companies of roughly same size. It is thus a

combination of two or more companies in which one company survives in its
own name and the other ceases to exist as a legal entity. The survivor company
acquires assets and liabilities of merged companies. Generally the company
which survives is the buyers which retiring its identity and seller company is
extinguished.

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Amalgamation

Amalgamation is an arrangement or reconstruction. It is a legal process by which

two or more companies are to be absorbed or blended with another. As a result,
the amalgamating company loses its existence and its shareholders become
shareholders of new company or the amalgamated company. In case of
amalgamation a new company may came into existence or an old company may
survive while amalgamating company may lose its existence.

According to Halsbury’s law of England amalgamation is the blending of two or

more existing companies into one undertaking, the shareholder of each blending
companies becoming substantially the shareholders of company which will carry
on blended undertaking. There may be amalgamation by transfer of one or more
undertaking to a new company or transfer of one or more undertaking to an
existing company. Amalgamation signifies the transfers of all are some part of
assets and liabilities of one or more than one existing company or two or more
companies to a new company.

The Accounting Standard, AS-14, issued by the Institute of Chartered

Accountants of India has defined the term amalgamation by classifying (i)
Amalgamation in the nature of merger, and (ii) Amalgamation in the nature of
purchase.

1. Amalgamation in the nature of merger:

As per AS-14, an amalgamation is called in the nature of merger if it satisfies all

the following condition:

 All the assets and liabilities of the transferor company should become, after
amalgamation; the assets and liabilities of the other company.

 Shareholders holding not less than 90% of the face value of the equity shares
of the transferor company (other than the equity shares already held therein,
immediately before the amalgamation, by the transferee company or its

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subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.

 The consideration for the amalgamation receivable by those equity

shareholders of the transferor company who agree to become equity shareholders
of the transferee company is discharged by the transferee company wholly by the
issue of equity share in the transferee company, except that cash may be paid in
respect of any fractional shares.

 The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.

 No adjustment is intended to be made in the book values of the assets and

liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of accounting
policies.

Amalgamation in the nature of merger is an organic unification of two or more

entities or undertaking or fusion of one with another. It is defined as an
amalgamation which satisfies the above conditions.

2. Amalgamation in the nature of purchase:

Amalgamation in the nature of purchase is where one company’s assets and

liabilities are taken over by another and lump sum is paid by the latter to the
former. It is defined as the one which does not satisfy any one or more of the
conditions satisfied above.

As per Income Tax Act 1961, merger is defined as amalgamation under sec.2
(1B) with the following three conditions to be satisfied.

1. All the properties of amalgamating company(s) should vest with the

amalgamated company after amalgamation.

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2. All the liabilities of the amalgamating company(s) should vest with the
amalgamated company after amalgamation.

3. Shareholders holding not less than 75% in value or voting power in

amalgamating company(s) should become shareholders of amalgamated
companies after amalgamation.

Amalgamation does not mean acquisition of a company by purchasing its

property and resulting in its winding up. According to Income tax Act, exchange
of shares with 90%of shareholders of amalgamating company is required.

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 iii. Definition:

Acquisition :-

Acquisition refers to the acquiring of ownership right in the property and asset
without any combination of companies. Thus in acquisition two or more
companies may remain independent, separate legal entity, but there may be
change in control of companies. Acquisition results when one company purchase
the controlling interest in the share capital of another existing company in any of
the following ways:

a) controlling interest in the other company. By entering into an agreement with a

person or persons holding.
b) By subscribing new shares being issued by the other company.
c) By purchasing shares of the other company at a stock exchange, and
d) By making an offer to buy the shares of other company, to the existing
shareholders of that company.

Merger :-

Merger refers to a situation when two or more existing firms combine together
and form a new entity. Either a new company may be incorporated for this
purpose or one existing company (generally a bigger one) survives and another
existing company (which is smaller) is merged into it. Laws in India use the term
amalgamation for merger.

 Merger through absorption

 Merger through consolidation

Absorption

An absorption is a combination of two or more companies into an existing company.

All companies except one lose their identity in a merger through absorption. An
example of this type of merger is the absorption of Tata Fertilisers Ltd.(TFL) TCL,

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an acquiring company (a buyer), survived after merger while TFL, an acquired
company ( a seller), ceased to exist. TFL transferred its assets, liabilities and shares
to TCL.

Consolidation

A consolidation is a combination of two or more companies into a new company .In

this type of merger, all companies are legally dissolved and a new entity is created.
In a consolidation, the acquired company transfers its assets, 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.

Takeover :-

Acquisition can be undertaken through merger or takeover route. Takeover is a

general term used to define acquisitions only and both terms are used
interchangeably. A Takeover may be defined as series of transacting whereby a
person, individual, group of individuals or a company acquires control over the
assets of a company, either directly by becoming owner of those assets or
indirectly by obtaining control of management of the company.

Takeover is acquisition, by one company of controlling interest of the other,

usually by buying all or majority of shares. Takeover may be of different types
depending upon the purpose of acquiring a company.

1. A takeover may be straight takeover which is accomplished by the

management of the taking over company by acquiring shares of another company
with the intention of operating taken over as an independent legal entity.

2. The second type of takeover is where ownership of company is captured to

merge both companies into one and operate as single legal entity.

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3. A third type of takeover is takeover of a sick company for its revival. This is
accomplished by an order of Board for Industrial and financial Reconstruction
(BIFR) under the provision of Sick Industrial companies Act, 1985. In India,
Board for Industrial and Financial reconstruction (BIFR) has also been active for
arranging mergers of financially sick companies with other companies under the
package of rehabilitation. These merger schemes are framed in consultation with
the lead bank, the target firm and the acquiring firm. These mergers are
motivated and the lead bank takes the initiated and decides terms and conditions
of merger. The recent takeover of Modi Cements Ltd. By Gujarat Ambuja
Cement Ltd. was an arranged takeover after the financial reconstruction Modi
Cement Ltd.

4. The fourth kind is the bail-out takeover, which is substantial acquisition of

shares in a financial weak company not being a sick industrial company in
pursuance to a scheme of rehabilitation approved by public financial institution
which is responsible for ensuring compliance with provision of substantial
acquisition of shares and takeover Regulations, 1997 issued by SEBI which
regulate the bail out takeover.

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 iv. History of Mergers and Acquisitions:  

Tracing back to history, merger and acquisitions have evolved in five stages and
each of these are discussed here. As seen from past experience mergers and
acquisitions are triggered by economic factors. The macroeconomic environment,
which includes the growth in GDP, interest rates and monetary policies play a key
role in designing the process of mergers or acquisitions between companies or
organizations.

First Wave Mergers

The first wave mergers commenced from 1897 to 1904. During this phase merger
occurred between companies, which enjoyed monopoly over their lines of
production like railroads, electricity etc. the first wave mergers that occurred
during the aforesaid time period were mostly horizontal mergers that took place
between heavy manufacturing industries.

End Of 1st Wave Merger

Majority of the mergers that were conceived during the 1st phase ended in failure
since they could not achieve the desired efficiency. The failure was fuelled by
the slowdown of the economy in 1903 followed by the stock market crash of 1904.
The legal framework was not supportive either. The Supreme Court passed the
mandate that the anticompetitive mergers could be halted using the Sherman Act.

Second Wave Mergers

The second wave mergers that took place from 1916 to 1929 focused on the
mergers between oligopolies, rather than monopolies as in the previous phase. The
economic boom that followed the post world war I gave rise to these mergers.
Technological developments like the development of railroads and transportation
by motor vehicles provided the necessary infrastructure for such mergers or
acquisitions to take place. The government policy encouraged firms to work in
unison. This policy was implemented in the 1920s.

The 2nd wave mergers that took place were mainly horizontal or conglomerate in
nature. Te industries that went for merger during this phase were producers of
primary metals, food products, petroleum products, transportation equipments and
chemicals. The investments banks played a pivotal role in facilitating the mergers
and acquisitions.
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End Of 2nd Wave Mergers

The 2nd wave mergers ended with the stock market crash in 1929 and the great
depression. The tax relief that was provided inspired mergers in the 1940s.

Third Wave Mergers

The mergers that took place during this period (1965-69) were mainly
conglomerate mergers. Mergers were inspired by high stock prices, interest rates
and strict enforcement of antitrust laws. The bidder firms in the 3rd wave merger
were smaller than the Target Firm. Mergers were financed from equities; the
investment banks no longer played an important role.

End Of The 3rd Wave Merger

The 3rd wave merger ended with the plan of the Attorney General to split
conglomerates in 1968. It was also due to the poor performance of the
conglomerates. Some mergers in the 1970s have set precedence. The most
prominent ones were the INCO-ESB merger; United Technologies and OTIS
Elevator Merger are the merger between Colt Industries and Garlock Industries.

Fourth Wave Merger

The 4th wave merger that started from 1981 and ended by 1989 was characterized
by acquisition targets that wren much larger in size as compared to the 3rd wave
mergers. Mergers took place between the oil and gas industries, pharmaceutical
industries, banking and airline industries. Foreign takeovers became common with
most of them being hostile takeovers. The 4th Wave mergers ended with anti
takeover laws, Financial Institutions Reform and the Gulf War.

Fifth Wave Merger

The 5th Wave Merger (1992-2000) was inspired by globalization, stock market
boom and deregulation. The 5th Wave Merger took place mainly in the banking
and telecommunications industries. They were mostly equity financed rather than
debt financed. The mergers were driven long term rather than short term profit
motives. The 5th Wave Merger ended with the burst in the stock market bubble.

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Hence we may conclude that the evolution of mergers and acquisitions has been
long drawn. Many economic factors have contributed its development. There are
several other factors that have impeded their growth. As long as economic units of
production exist mergers and acquisitions would continue for an ever-expanding
economy.

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 v. Mergers and Acquisitions Trends:

Trend essentially refers to the observed long-term movement in a time series data.
Trend estimates are seasonally adjusted through an averaging process. Merger and
acquisition trends provide an idea about the market movements.
Merger and acquisition trends are seen to affect an economy's product market,
money market, and labor market. Global markets are also considerably influenced
by the merger and acquisition trends.

Global Merger and Acquisition Trends for 2006 and 2007

2007 and 2006 were marked by a spate of mergers and acquisitions all over the
globe in both developing and developed countries. The general trend was that,
there was a decline in the number of public sector undertakings along with a hike
in the number of private sector enterprises. This was due to the fact that many
public sector organizations worldwide were either acquired by large private sector
enterprises or merged with them.

The explanation to this merger and acquisition trend as observed in 2006 and 2007
lay in the robust growth recorded by the Private Equity Funds. The other factors
propelling this trend were the emphasis on short term earnings growth and the
strict regulatory structure of public sector enterprises.

This merger and acquisition trend towards increased privatization of public sector
holdings was observed in Europe, Brazil, North America, and China. Europe in
that period hosted a strong investment market, which catered to the public to
private sector transition of companies.

For China mergers and acquisitions from public to private business enterprises got
government approval in 2006.

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 vi. Benefits of Mergers and Acquisitions:

Merger refers to the process of combination of two companies, whereby a new

company is formed. An acquisition refers to the process whereby a company
simply purchases another company. In this case there is no new company being
formed.

Benefits of mergers and acquisitions are quite a handful.

Mergers and acquisitions generally succeed in generating cost efficiency through

the implementation of economies of scale. It may also lead to tax gains and can
even lead to a revenue enhancement through market share gain.

The principal benefits from mergers and acquisitions can be listed as increased
value generation, increase in cost efficiency and increase in market share.
Mergers and acquisitions often lead to an increased value generation for the
company. It is expected that the shareholder value of a firm after mergers or
acquisitions would be greater than the sum of the shareholder values of the parent
companies.

An increase in cost efficiency is effected through the procedure of mergers and

acquisitions. This is because mergers and acquisitions lead to economies of scale.
This in turn promotes cost efficiency. As the parent firms amalgamate to form a
bigger new firm the scale of operations of the new firm increases. As output
production rises there are chances that the cost per unit of production will come
down.

An increase in market share is one of the plausible benefits of mergers and

acquisitions. In case a financially strong company acquires a relatively
distressed one, the resultant organization can experience a substantial increase
in market share. The new firm is usually more cost-efficient and competitive as
compared to its financially weak parent organization.

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 vii. Types of Mergers:

There are four types of merger are as follows:

a. Horizontal Merger :

Horizontal mergers are those mergers where the companies manufacturing

similar kinds of commodities or running similar type of businesses merge with
each other. The principal objective behind this type of mergers is to achieve
economies of scale in the production procedure through carrying off duplication
of installations, services and functions, widening the line of products, decrease
in working capital and fixed assets investment, getting rid of competition,
minimizing the advertising expenses, enhancing the market capability and to get
more dominance on the market. Nevertheless, the horizontal mergers do not
have the capacity to ensure the market about the product and steady or
uninterrupted raw material supply. Horizontal mergers can sometimes result in
monopoly and absorption of economic power in the hands of a small number of
commercial entities. According to strategic management and microeconomics,
the expression horizontal merger delineates a form of proprietorship and
control. It is a plan, which is utilized by a corporation or commercial enterprise
for marketing a form of commodity or service in a large number of markets. In
the context of marketing, horizontal merger is more prevalent in comparison to
horizontal merger in the context of production or manufacturing.

Horizontal Integration

Sometimes, horizontal merger is also called as horizontal integration. It is

totally opposite in nature to vertical merger or vertical integration.

Horizontal Monopoly

A monopoly formed by horizontal merger is known as a horizontal monopoly.

Normally, a monopoly is formed by both vertical and horizontal mergers.
Horizontal merger is that condition where a company is involved in taking over or
acquiring another company in similar form of trade. In this way, a competitor is
done away with and a wider market and higher economies of scale are
accomplished.

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In the process of horizontal merger, the downstream purchasers and upstream
suppliers are also controlled and as a result of this, production expenses can be
decreased.

Horizontal Expansion

An expression which is intimately connected to horizontal merger is horizontal

expansion. This refers to the expansion or growth of a company in a sector that is
presently functioning. The aim behind a horizontal expansion is to grow its market
share for a specific commodity or service.

Examples of Horizontal Mergers

Following are the important examples of horizontal mergers:

# The formation of Brook Bond Lipton India Ltd. through the merger of Lipton
India and Brook Bond.

# The merger of Bank of Mathura with ICICI (Industrial Credit and Investment
Corporation of India) Bank.

# The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa
Power Supply Company.

# The merger of ACC (erstwhile Associated Cement Companies Ltd.) with

Damodar Cement.

Advantages of Horizontal Merger :

Horizontal merger provides the following advantages to the companies which are
merged:

1) Economies of scope

The notion of economies of scope resembles that of economies of scale.

Economies of scale principally denote effectiveness related to alterations in the
supply side, for example, growing or reducing production scale of an individual
form of

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commodity. On the other hand, economies of scope denote effectiveness
principally related to alterations in the demand side, for example growing or
reducing the range of marketing and supply of various forms of products.

Economies of scope are one of the principal causes for marketing plans like
product lining, product bundling, as well as family branding.

2) Economies of scale

Economies of scale refer to the cost benefits received by a company as the result
of a horizontal merger. The merged company is able to have bigger production
volume in comparison to the companies operating separately. Therefore, the
merged company can derive the benefits of economies of scale. The maximum use
of plant facilities can be done by the merged company, which will lead to a
decrease in the average expenses of the production.

The important benefits of economies of scale are the following:

# Synergy

# Growth or expansion

# Risk diversification

# Diminution in tax liability

# Greater market capability and lesser competition

# Financial synergy (Improved creditworthiness, enhancement of borrowing

power, decrease in the cost of capital, growth of value per share and price earning
ratio, capital raising, smaller flotation expenses)

# Motivation for the managers

For attaining economies of scale, there are two methods and they are the
following:

# Increased fixed cost and static marginal cost

# No or small fixed cost and decreasing marginal cost

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One example of economies of scale is that if a company increases its production
twofold, then the entire expense of inputs goes up less than twofold.

3) Dominant existence in a particular market.

b. Vertical Merger :

Vertical mergers refer to a situation where a product manufacturer merges with the
supplier of inputs or raw materials. In can also be a merger between a product
manufacturer and the product's distributor.

Vertical mergers may violate the competitive spirit of markets. It can be used to
block competitors from accessing the raw material source or the distribution
channel. Hence, it is also known as "vertical foreclosure". It may create a sort
of bottleneck problem.

As per research, vertical integration can affect the pricing incentive of a

downstream producer. It may also affect a competitors incentive for selecting
input suppliers. Research studies single out several factors, which point to the
fact that vertical integration facilitates collusion. Vertical mergers may promote
collusion through an outlets effect. A corollary of vertical integration is that
integrated business structures are able to perform better in crisis phases.

There are multiple reasons, which promote the vertical integration by firms. Some
of them are discussed below.

# The prime reason being the reduction of uncertainty regarding the availability
of quality inputs as also the uncertainty regarding the demand for its products.

# Firms may also enter vertical mergers to avail the plus points of economies of
integration.

# Vertical merger may make the firms cost-efficient by streamlining its

distribution and production costs. It is also meant for the reduction of
transactions costs like marketing expenses and sales taxes. It ensures that a
firm's resources are used optimally.

.
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 c. Conglomerate Mergers :

As per definition, a conglomerate merger is a type of merger whereby the two

companies that merge with each other are involved in different sorts of
businesses. The importance of the conglomerate mergers lies in the fact that they
help the merging companies to be better than before.

Types of Conglomerate Mergers

There are two main types of conglomerate mergers the pure conglomerate merger
and the mixed conglomerate merger. The pure conglomerate merger is one where
the merging companies are doing businesses that are totally unrelated to each
other.

The mixed conglomerate mergers are ones where the companies that are merging
with each other are doing so with the main purpose of gaining access to a wider
market and client base or for expanding the range of products and services that are
being provided by them.

There are also some other subdivisions of conglomerate mergers like the financial
conglomerates, the concentric companies, and the managerial conglomerates.

Reasons of Conglomerate Mergers

There are several reasons as to why a company may go for a conglomerate merger.
Among the more common reasons are adding to the share of the market that is
owned by the company and indulging in cross selling. The companies also look to
add to their overall synergy and productivity by adopting the method of
conglomerate mergers.

Benefits of Conglomerate Mergers :

There are several advantages of the conglomerate mergers. One of the major
benefits is that conglomerate mergers assist the companies to diversify. As a
result of conglomerate mergers the merging companies can also bring down the
levels of their exposure to risks.

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Implications of Conglomerate Mergers

There are several implications of conglomerate mergers. It has often been seen
that companies are going for conglomerate mergers in order to increase their
sizes. However, this also, at times, has adverse effects on the functioning of the
new company. It has normally been observed that these companies are not able to
perform like they used to before the merger took place.

This was evident in the 1960s when the conglomerate mergers were the general
trend. The term conglomerate mergers also implies that the two companies that are
merging do not even have the same customer base as they are in totally different
businesses.

It has normally been seen that a lot of companies that go for conglomerate mergers
are able to manage a wide variety of activities in a particular market. For
example, these companies can carry out research activities and applied engineering
processes. They are also able to add to their production as well as strengthen the
marketing area that ensures better profitability.

It has been seen from case studies that conglomerate mergers do not affect the
structures of the industries. However, there might be significant impact if the
acquiring company happens to be a leading company of its market that is not
concentrated and has a large number of entry barriers.

d. Co- generic Merger:

In these, mergers the acquirer and target companies are related through basic
technologies, production processes or markets. The acquired company
represents an extension of product line, market participants or technologies of
the acquiring companies. These mergers represent an outward movement by the
acquiring company from its current set of business to adjoining business. The
acquiring company derives benefits by exploitation of strategic resources and
from entry into a related market having higher return than it enjoyed earlier.
The potential benefit from these mergers is high because these transactions
offer opportunities to diversify around a common case of strategic resources.

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Western and Mansinghka classified co-generic mergers into product extension
and market extension types. When a new product line allied to or
complimentary to an existing product line is added to existing product line
through merger, it defined as product extension merger, Similarly market
extension merger help to add a new market either through same line of
business or adding an allied field . Both these types bear some common
elements of horizontal, vertical and conglomerate merger. For example, merger
between Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a
Product extension merger and merger between GMM Company Ltd. and Xpro
Ltd. contains elements of both product extension and market extension merger.

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 viii. Merger Procedure:

A merger is a complicated transaction, involving fairly complex legal

considerations. While evaluating a merger proposal, one should bear in mind the
following legal provisions.

Sections 391 to 394 of the Companies Act, 1956 contain the provisions for
amalgamations. The procedure for amalgamation normally involves the
following steps:

1. Examination of object Clauses:

The memorandum of association of both the companies should be examined to

check if the power to amalgamate is available. Further, the object clause of the
amalgamated company (transferee company) should permit it to carry on the
business of the amalgamating company (transferor company ) .If such clauses do
not exists, necessary approvals of the shareholders, boards of directors and
Company Law Board are required.

2. Intimation to stock Exchanges:

The stock exchanges where the amalgamated and amalgamating companies are
listed should be informed about the amalgamation proposal. From time to time,
copies of all notices, resolutions, and orders should be mailed to the concerned
stock exchanges.

3. Approval of the draft amalgamation proposal by the Respective Boards:

The draft amalgamation proposal should be approved by the respective boards of

directors. The board of each company should pass a resolution authorizing its
directors/executives to pursue the matter further.

4. Application to the National Company Law Tribunal (NCLT):

Once the draft of amalgamation proposal is approved by the respective boards,

each company should make an application to the NCLT so that it can convene the
meetings of shareholders and creditors for passing the amalgamation proposal.
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5. Dispatch of notice to shareholders and creditors:

In order to convene the meeting of shareholders and creditors, a notice and an

explanatory statement of the meeting, as approved by the NCLT, should be
dispatched by each company to its shareholders and creditors so that they get 21
days advance intimation. The notice of the meetings should also be published in
two newspapers (one English and one vernacular). An affidavit confirming that
the notice has been dispatched to the shareholders/creditors and that the same has
been published in newspapers should be filed with the NCLT.

6. Holding of Meetings of shareholders and creditors:

A meeting of shareholders should be held by each company for passing the

scheme of amalgamation. At least 75 percent (in value) of shareholders in each
class, who vote either in person or by proxy, must approve the scheme of
amalgamation. Likewise, in a separate meeting, the creditors of the company
must approve of the amalgamation scheme.

7. Petition to the NCLT for confirmation and passing of NCLT orders:

Once the amalgamation scheme is passed by the shareholders and creditors, the
companies involved in the amalgamation should present a petition to the NCLT
for confirming the scheme of amalgamation. The NCLT will fix a date of
hearing. A notice about the same has to be published in two newspapers. After
hearing the parties the parties concerned ascertaining that the amalgamation
scheme is fair and reasonable, the NCLT will pass an order sanctioning the same.
However, the NCLT is empowered to modify the scheme and pass orders
accordingly.

8. Filing the order with the Registrar:

Certified true copies of the NCLT order must be filed with the Registrar of
Companies within the time limit specified by the NCLT.

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9. Transfer of Assets and Liabilities:

After the final orders have been passed by the NCLT, all the assets and liabilities
of the amalgamating company will, with effect from the appointed date, have to
be transferred to the amalgamated company.

10.Issue of shares and debentures:

The amalgamated company, after fulfilling the provisions of the law, should issue
shares and debentures of the amalgamated company. The new shares and
debentures so issued will then be listed on the stock exchange.

Important elements of merger procedure are:

A. Scheme of merger

The scheme of any arrangement or proposal for a merger is the heart of the
process and has to be drafted with care. There is no specific form prescribed for
the scheme. It is designed to suit the terms and conditions relevant to the proposal
but it should generally contain the following information as per the requirements
of sec. 394 of the companies Act, 1956:

1. Particulars about transferor and transferee companies

2. Appointed date of merger

3. Terms of transfer of assets and liabilities from transferor company to

transferee company

4. Effective date when scheme will came into effect

5. Treatment of specified properties or rights of transferor company

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6. Terms and conditions of carrying business by transferor company between
appointed date and effective date

7. Share capital of Transferor Company and Transferee Company specifying

authorized, issued, subscribed and paid up capital.

8. Proposed share exchange ratio, any condition attached thereto and the
fractional share certificate to be issued.

9. Issue of shares by transferee company

10.Transferor company’s staff, workmen, employees and status of provident

fund, Gratuity fund, superannuation fund or any other special funds created for
the purpose of employees.

11.Miscellaneous provisions covering Income Tax dues, contingent and other

accounting entries requiring special treatment.

12.Commitment of transferor and Transferee Company towards making an

application U/S 394 and other applicable provisions of companies Act, 1956 to
their respective High court.

13.Enhancement of borrowing limits of transferee company when scheme

coming into effect.

14.Transferor and transferee companies consent to make changes in the scheme

as ordered by the court or other authorities under law and exercising the powers
on behalf of the companies by their respective boards.

15.Description of power of delegates of Transferee Company to give effect to the

scheme. Qualifications attached to the scheme which requires approval of
different agencies.

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16.Effect of non receipt of approvals/sanctions etc.

B. Valuation in a merger: Determination of share exchange ratio

An important aspect of merger procedure relates to valuation of business relates

to valuation of business in order to determine share exchange ratio in merger.
Valuation is the means to assess the worth of a company which is subject to
merger or takeover so that consideration amount can be quantified and the price
of one company for other can be fixed. Valuation of both companies subject to
business combination is required for fixing the consideration amount to be paid in
the form of exchange of share. Such valuation helps in determining the value of
shares of acquired company as well as acquiring company to safeguard the
interest of shareholders of both the companies.

Broadly there are three(3) methods used for valuation of business:

1. Net Value Asset (NAV) Method

NAV is the sum total of value of asserts (fixed assets, current assets, investment
on the date of Balance sheet less all debts, borrowing and liabilities including
both current and likely contingent liability and preference share capital).
Deductions will have to be made for arrears of preference dividend, arrears of
depreciation etc. However, there may be same modifications in this method and
fixed assets may be taken at current realizable value (especially investments, real
estate etc.) replacement cost (plant and machinery) or scrap value (obsolete
machinery). The NAV, so arrived at, is divided by fully diluted equity (after
considering equity increases on account of warrant conversion etc.) to get NAV
per share.

The three steps necessary for valuing share are:

1. Valuation of assets
2. Ascertainment of liabilities
3. Fixation of the value of different types of equity shares.

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 All assets (value by appropriation method -

all liabilities - preference shares)

NAV =

Fully diluted equity shares

2. Yield Value Method

This method also called profit earning capacity method is based on the
assessment of future maintainable earnings of the business. While the past
financial performance serves as guide, it is the future maintainable profits that
have to be considered. Earnings of the company for the next two years are
projected (by valuation experts) and simple or weighted average of these profits
is computed. These net profits are divided by appropriate capitalization rate to get
true value of business. This figure divided by equity value gives value per share.
While determining operating profits of the business, it must be valued on
independent basis without considering benefits on account of merger. Also, past
or future profits need to be adjusted for extra ordinary income or loss not likely to
recur in future. While determining capitalization rate, due regard has to be given
to inherent risk attribute to each business. Thus, a business with established
brands and excellent track record of growth and diverse product portfolio will get
a lower capitalization rate and consequently higher valuation where as a cyclical
business or a business dependent on seasonal factors will get a higher
capitalization rate. Profits of both companies’ should be determined after
ensuring that similar policies are used in various areas like depreciation, stock
valuation etc.

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3. Market Value Method

This method is applicable only in case where share of companies are listed on a
recognized stock exchange. The average of high or low values and closing prices
over a specified previous period is taken to be representative value per share.

Now, the determination of share exchange ratio i.e., how many shares of
amalgamating company, are to be exchanged for how many shares of
amalgamated company, is basically an exercise in valuation of shares of two or
more of amalgamating company. The problem of valuation has been dealt with
by Weinberg and Blank (1971) by giving the relevant factors to be taken into
account while determining the final share exchange ratio. These relevant factors
has been enumerated by Gujarat High court in Bihari Mills Ltd. and also
summarized by the Apex court in the case of Hindustan Levers. Employees union
vs. Hindustan Lever Ltd. (1995) as under.

1. The stock exchange prices of the shares of the companies before the
commencement of negotiations or the announcement of the bid.

2. The dividends presently paid on the shares of two companies. It is often

difficult to induce a shareholder to agree to a merger if it involves a reduction in
his dividend income.

3. The relative growth prospects of the two companies.

4. The cover, (ratio of after tax earnings to divided paid during the year) for the
present dividends of the two companies. The fact that the dividend of one
company is better covered than the other is a factor which has to be compensated
to same extent.

5. The relative gearing of the shares of the two companies. The gearing of an
ordinary share is the ratio of borrowings to equity capital.

6. The value of net assets of the two companies.

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7. The voting strength in the company of shareholder of the two companies.

8. The past history of the prices of two companies.

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 ix. 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.

In such cases, it is provided that on date of merger, name of Transferee Company

will be changed to that of Transferor Company. Thus, outside people even may
not know that the transferor company with which they are dealing after merger is
not the same as earlier one. One such approved in Shiva Texyarn Ltd.

Many times, reverse mergers are also accompanied by reduction in the unwieldy
capital of the sick company. This capital reduction helps in unity of the
accumulated losses and other assets which are not represented by the share
capital of the company. Thus, a capital reduction aim rehabilitation scheme is an
ideal antidote (by way of reverse merger) for sick company. 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.The scheme
involved reduction of share capital of GGICL from Rs. 10 per share to Re. 1 per
share and later GSL would be merged with 1 share of GGICL to be allotted to
every shareholder of GSL. The post merger company, Godrej Soaps Ltd. (with
post-merger turnover of Rs. 611.12 crores) restructured its gross profit of 49.08
crores, higher turnover GSC’s pre-merger profits of Rs. 30 crores.

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The amalgamated company, GGICL reverted back to the old name of
amalgamating company, Godrej Soaps Ltd. Thus, this innovative merger which
was by way of forward integration in the name of GGICL was completed with
the help of financial institutions like IDBI, IFCI, ICICI, UTI etc. All financial
Institutions agreed to waive penal interest, liquidate damages besides finding of
interest, reschedule outside loans and also lower interest rate on term loans.

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 x. Laws statutes in India:

Various Laws governing merger in India are as follows:

1. Indian Companies Act, 1956

This has provisions specifically dealing with the amalgamation of a company or

certain other entities with similar status. The most common form of merger
involves as elaborate but time-bound procedure under sections 391 to 396 of the
Act.

Powers in respect of these matters were with High Court (usually called
Company Court). These powers are being transferred to National Company Law
Tribunal (NCLT) by companies (second Amendment) Act, 2002.

The Compromise, arrangement and Amalgamation/reconstruction require

approval of NCLT while the sale of shares to Transferee Company does not
require approval of NCLT.

Sec 390 This section provides that “The expression ‘arrangement’ includes a
reorganization of the share capital of the company by the consolidation of shares
of different classes, or by the division of shares into shares of different classes, or
by both these methods”

Sec 390(a) As per this section , for the purpose of sections 391 to
393,’Company’ means any company liable to be wound up under the Act.

Sec 390(b) As per this section, Arrangement can include reorganization of share
capital of company by consolidation of shares of different classes or by division
of shares of different classes.

Sec 390(c) As per this section, unsecured creditors who have filed suits or
obtained decrees shall be deemed to be of the same class as other unsecured
creditors. Thus, their separate meeting is not necessary.

Sec 391 This section deals with the meeting of creditors/members and NCLT’s
sanction to Scheme.
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If majority in number representing at least three-fourths in value of creditors or
members of that class present and voting agree to compromise or arrangement,
the NCLT may sanction the scheme. NCLT will make order of sanctioning the
scheme only if it is satisfied that company or any other person who has made
application has disclosed all material facts relating to the company, e.g. latest
financial position, auditor’s report on accounts of the company, pendency of
investigation of company etc. NCLT should also be satisfied that the meting was
fairly represented by members/creditors.

Sec 391(1) As per this sub-section, the company or any creditor or member of a
company can make application to NCLT. If the company is already under
liquidation, application will be made by liquidator. On such application, NCLT
may order that a meeting of creditors or members or a class of them be called and
held as per directions of NCLT.

Sec 391 (2) As per this sub-section, if NCLT sanction, it will be binding on all
creditors or members of that class and also on the company, its liquidator and
contributories.

Sec 391(3) As per this sub-section, Copy of NCLT order will have to be filled
with Registrar of Companies.

Sec 391(4) As per this sub-section, A copy of every order of NCLT will be
annexed to every copy of memorandum and articles of the company issued after
receiving certified copy of the NCLT order.

Sec 391(5) In case of default in compliance with provisions of section 391(4),

company as well as every officer who is in default is punishable with fine upto
Rs 100 for every copy in respect of which default is made.

Sec 391(6) After an application for compromise or arrangement has been made
under the section, NCLT can stay commencement of any suit or proceedings
against the company till application for sanction of scheme is finally disposed of.

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Sec 391(7) As per this sub-section, Appeal against NCLT order can be made to
National Company Law Appellate Tribunal (NCLAT) where appeals against
original order the NCLT lies.

Sec. 392 This section contains the powers of NCLT to enforce compromise and
arrangement

Sec 392 (1) As per this section, where NCLT sanctions a compromise or
arrangement, it will have powers to supervise the carrying out of the scheme. It
can give suitable directions or make modifications in the scheme of compromise
or arrangement for its proper working.

Sec 392 (2) As per this section, if NCLT finds that the scheme cannot work, it
can order winding up.

Sec 393 This section contains the rules regarding notice and conduct of meeting.

Sec.393 (1) Where a meeting of creditors or any class of creditors, or of numbers

or any class of members, is called under section 391:-

a) With every notice calling the meeting which is sent to a creditor or member,
there shall be sent also a statement setting forth the terms of the compromise or
arrangement and explaining its effect, and in particular stating any material
interests of the directors, managing directors, or manager of the company,
whether in their capacity as such or as members or creditors of the company or
otherwise and the effect on those interests of the compromise or arrangement if,
and in so far as, it is different from the effect on the like interests of other person,
and

b) In every notice calling the meeting which is given by advertisement, there

shall be included either such a statement as aforesaid or a notification of the place
at which creditors or members entitled to attend the meeting may obtain copies of
such a statement as aforesaid.

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Sec 393 (2) As per this sub-section, if the scheme affects rights of debenture
holders, statement should give details of interests of trustees of any deed for
securing the issue of debentures as it is required to give as respects the companies
directors.

Sec 393 (3) As per this sub-section, the copy of scheme of compromise or
arrangement should be furnished to creditor/member free of cost.

Sec 393 (4) Where default is made in complying with any of the requirements of
this section, the company and every officer of the company who is in default,
shall be punishable with fine which may extend to Rs. 50,000 and for the purpose
of this sub-section any liquidator of the company and any trustee of a deed for
securing the issue of debentures of the company shall be deemed to be an officer
of the company.

Provided that a person shall not be punishable under this sub-section, if he shows
that the default was due to the refusal of any other person, being a director,
managing director, manager or trustee for debenture holders, to supply the
necessary particulars as to his material interests.

Sec 393 (5) As per this section, any director, managing director, manager or
trustee of debenture holders shall give notice to the company of matters relating
to himself which the company has to disclose in the statement, if he unable to do
so, he is punishable with fine upto Rs.5,000.

Sec 394 This section contains the powers while sanctioning scheme of
reconstruction or amalgamation.

Sec 394(1) NCLT can sanction amalgamation of a company which is being

wound up with other company, only if Registrar of Companies (ROC) has made a
report that affairs of the company have not been conducted in a manner
prejudicial to the interests of its members or to public interest.

Sec 394 (2) As per this sub-section, if NCLT issues such an order, NCLT can
direct that the property will be vest in the transferee company and that the
transfer of property will be freed from any charge.

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Sec 394 (3) As per this sub-section, Copy of NCLT order shall be filed with
Registrar within 30 days. In case of default, company as well as every officer
who is in default is punishable with fine upto Rs.500.

Sec 394A As per this section, if any application is made to NCLT for sanction of
arrangement, compromise, reconstruction or amalgamation, notice of such
application must be made to Central Government. NCLT shall take into
consideration any representation made by Central Government before passing
any order.

Sec 395 This section provides that reconstruction or amalgamation without

following NCLT procedure is possible by takeover by sale of shares. Selling
shareholders get either compensation or shares of the acquiring company. This
procedure is rarely followed, as sanction of shareholders of at least 90% of value
of shares is required, and not only of those attending the meeting. This procedure
can be followed only when creditors are not involved in reconstruction and their
interests are not affected.

Sec 395(1) As per this sub-section, the transferee company has to be give notice
in prescribed manner to dissenting shareholder that it desires to acquire his
shares. The transferee company is entitled and bound to acquire those shares on
the same terms on which shares of approving share holders are to be transferred
to the transferee company. The dissenting shareholder can make application
within one month of the notice to NCLT. The NCLT can order compulsory
acquisition or other order may be issued.

Sec 395(2) As per this sub-section, if the transferee company or its nominee
holds 90% or more shares in the transferor company, it is entitled to and is also
under obligation to acquire remaining shares. The transferee company should
give notice within one month to dissenting shareholders. Their shares must be
acquired within three months of such notice.

Sec395 (3) As per this section, if shareholders do not submit the transfer deeds,
the transferee company will pay the amount payable to transferor company along
with the transfer deed duly signed. The transferor company will then record name
of the transferee company as holder of shares, even if transfer deed is not signed
by dissenting shareholders.

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Sec395 (4) As per this section, The sum received by transferor company shall be
kept in a separate account in trust for the dissenting shareholders.

Sec395 (4A) When the transferee company makes offer to shareholders of

transferor company, the circular of offer shall be accomplished by prescribed
information in form 35A. Offer should contain statement by Transferee Company
for registration before it is sent to shareholders of Transferor Company.

Sec 396 This section contains the power to Central Government to order
amalgamation.

Sec.396 (1) As per this sub-section, if central government is satisfied that two or
more companies should amalgamate in public interest, it can order their
amalgamation, by issuing notification in Official Gazette. Government can
provide the constitution of the single company, with such property, powers,
rights, interest, authorities and privileges and such liabilities, duties and
obligations as may be specified in the order.

Sec 396(2) The order may provide for continuation by or against the transferee
company of any legal proceedings pending by or against Transferor Company.
The order can also contain consequential, incidental and supplemental provisions
necessary to give effect to amalgamation.

Sec396 (3) As per this sub-section, every member, creditor and debenture holder
of all the companies will have same interest or rights after amalgamation, to the
extent possible. If the rights and interests are reduced after amalgamation, he will
get compensation assessed by prescribed authority. The compensation so
assessed shall be paid to the member or creditor by the company resulting from
amalgamation.

Sec 396A This section deals with the preservation of books and papers of
amalgamated company. Books and papers of the company which has
amalgamated or whose shares are acquired by another company shall be
preserved. These will not be disposed of without prior permission of Central
Government. Before granting such permission, Government may appoint a
person to examine the books and papers to ascertain whether they contain any
evidence of commission of an offence in connection with formation or

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management of affairs of the company, or its amalgamation or acquisition of its
shares.

2. Monopolies and Restrictive Trade practices Act, 1969 (MRTP 1969)

Certain Amendments in the MRTP Act were brought about in 1991. The
Government has removed restrictions on the size of assets; market shares and on
the requirement of prior government approvals for mergers that created entities
that would violate prescribed limits. The Supreme Court, in a recent judgment,
decided that “prior approval of the central government for sanctioning a scheme
of amalgamation is not required in view of the deletion of the relevant provision
of the MRTP Act and the MRTP Commission was justified in not passing an
order restraining implementation of the scheme of amalgamation of two firms in
the same field of consumer articles”.

3. Foreign Exchange Regulation Act 1973 (FERA 1973)

FERA is the primary Indian Law which regulates dealings in foreign exchange.
Although there are no provisions in the Act which deal directly with transactions
relating to amalgamations, certain provisions of the Act become relevant when
shares in Indian companies are allotted to non- residents, where the undertaking
sought to be acquired is a company which is not incorporated under any law in
India. Section 29 of FERA provides that no foreign company or foreign national
can acquire any share of an Indian company except with prior approval of the
reserve Bank of India. The Act has been amended to facilitate transfer of shares
two non residents and to allow Indian companies to set up subsidiaries and joint
ventures abroad without the prior approval of the Reserve Bank of India.

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4. Income Tax Act, 1961

Income Tax Act, 1961 is vital among all tax laws which affect the merger of
firms from the point view of tax savings/liabilities. However, the benefits under
this act are available only if the following conditions mentioned in Section 2 (1B)
of the Act are fulfilled:

a) All the amalgamating companies should be companies within the meaning of

the section 2 (17) of the Income Tax Act, 1961.

b) All the properties of the amalgamating company (i.e., the target firm) should
be transferred to the amalgamated company (i.e., the acquiring firm).

c) All the liabilities of the amalgamating company should become the liabilities
of the amalgamated company, and

d) The shareholders of not less than 90% of the share of the amalgamating
company should become the shareholders of amalgamated company.

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 xi. Causes of Mergers:

An extensive appraisal of each merger scheme is done to patternise the causes of

mergers. These hypothesized causes (motives) as defined in the mergers schemes
and explanatory statement framed by the companies at the time of mergers can be
conveniently categorized based on the type of merger. The possible causes of
different type of merger schemes are as follows:

1. Horizontal merger

These involve mergers of two business companies operating and competing in the
same kind of activity. They seek to consolidate operations of both companies. These
are generally undertaken to:
a) Achieve optimum size
b) Improve profitability
c) Carve out greater market share
d) Reduce its administrative and overhead costs.

2. Vertical merger

These are mergers between firms in different stages of industrial production in

which a buyer and seller relationship exists. Vertical merger are an integration
undertaken either forward to come close to customers or backwards to come close to
raw materials suppliers. These mergers are generally endeavored to:
a) Increased profitability
b) Economic cost (by eliminating avoidable sales tax and excise duty
payments)
c) Increased market power
d) Increased size

3. Conglomerate merger

These are mergers between two or more companies having unrelated business. These
transactions are not aimed at explicitly sharing resources, technologies, synergies or
product .They do not have an impact on the acquisition of monopoly power and
hence are favored through out the world. They are undertaken for diversification of
business in other products, trade and for advantages in bringing separate enterprise
under single control namely:

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a) Synergy arising in the form of economies of scale.
b) Cost reduction as a result of integrated operation.
c) Risk reduction by avoiding sales and profit instability.
d) Achieve optimum size and carve out optimum share in the market

4. Reverse Merger

Reverse mergers involve mergers of profir making companies with companies

having accumulated losses in order to:

a. Claim tax savings on account of accumulated losses that increase profits.

b. Set up merged asset base and shift to accelerate depreciation.

5. Group company mergers

These mergers are aimed at restructuring the diverse units of group companies to
create a viable unit. Such mergers are initiated with a view to affect consolidation in
order to:

a. Cut costs and achieve focus.

b. Eliminate intra-group competition
c. Correct leverage imbalances and improve borrowing capacity.

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 xii. Motives of Mergers:

Mergers and acquisitions are strategic decisions leading to the maximization of a

company’s growth by enhancing its production and marketing operations. They have
become popular in the recent times because of the enhanced competition, breaking
of trade barriers, free flow of capital across countries and globalization of business
as a number of economies are being deregulated and integrated with other
economies. A number of motives are attributed for the occurrence of mergers and
acquisitions.

a. Synergies through Consolidation:

Synergy implies a situation where the combined firm is more valuable than the sum
of the individual combining firms. It is defined as ‘two plus two equal to five’
(2+2=5) phenomenon. Synergy refers to benefits other than those related to
economies of scale. Operating economies are one form of synergy benefits. But
apart from operating economies, synergy may also arise from enhanced managerial
capabilities, creativity, innovativeness, R&D and market coverage capacity due to
the complementarily of resources and skills and a widened horizon of opportunities.

An under valued firm will be a target for acquisition by other firms. However, the
fundamental motive for the acquiring firm to takeover a target firm may be the
desire to increase the wealth of the shareholders of the acquiring firm. This is
possible only if the value of the new firm is expected to be more than the sum of
individual value of the target firm and the acquiring firm. For example, if A Ltd. and
Ltd. decide to merge into AB Ltd. then the merger is beneficial if

V (AB)> V (A) +V (B)

Where

V (AB) = Value of the merged entity

V (A) = Independent value of company A

V (B) = Independent value of company B

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 A merger which results in meeting the test of increasing the wealth of the
shareholders is said to contain synergistic properties. Synergy is the increase in the
value of the firm combining two firms into one entity i.e., it is the difference value
between the combined firm and the sum of the value of the individual firms. Igor
Ansoff (1998) classified four different types of synergies. These are:

1. Operating synergy:

The key to the existence of synergy is that the target firm controls a specialized
resource that becomes more valuable when combined with the bidding firm’s
resources. The sources of synergy of specialized resources will vary depending upon
the merger. In case of horizontal merger, the synergy comes from some form of
economies of scale which reduce the cost or from increase market power which
increases profit margins and sales. There are several ways in which the merger may
generate operating economies. The firm might be able to reduce the cost of
production by eliminating some fixed costs. The research and development
expenditures will also be substantially reduced in the new set up by eliminating
similar research efforts and repetition of work already done by the target firm. The
management expenses may also come down substantially as a result of corporate
reconstruction.

The selling, marketing and advertisement department can be streamlined. The

marketing economies may be produced through savings in advertising (by reducing
the need to attract each other’s customers), and also from the advantage of offering a
more complete product line (if the merged firms produce different but
complementary goods), since a wider product line may provide larger sales per unit
of sales efforts and per sales person. When a firm having strength in one functional
area acquires another firm with strength in a different functional area, synergy may
be gained by exploiting the strength in these areas. A firm with a good distribution
network may acquire a firm with a promising product line, and thereby can gain by
combining these two strength. The argument is that both firms will be better off after
the merger. A major saving may arise from the consolidation of departments
involved with financial activities e.g., accounting, credit monitoring, billing,
purchasing etc.

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Thus, when two firms combine their resources and efforts, they will be able to
produce better results than they were producing as separate entities because of
savings various types of operating costs. These resultant economies are known as
synergistic operating economies.

In a vertical merger, a firm may either combine with its supplier of input (backward
integration) and/or with its customers (forward integration). Such merger facilitates
better coordination and administration of the different stages of business stages of
business operations-purchasing, manufacturing and marketing –eliminates the need
for bargaining (with suppliers and/or customers), and minimizes uncertainty of
supply of inputs and demand for product and saves costs of communication.

An example of a merger resulting in operating economies is the merger of Sundaram

Clayton Ltd. (SCL) with TVS-Suzuki Ltd. (TSL).By this merger, TSL became the
second largest producer of two –wheelers after Bajaj. The main objective motivation
for the takeover was TSL’s need to tide over its different market situation through
increased volume of production. It needed a large manufacturing bas to reduce its
production costs. Large amount of funds would have been required for creating
additional production capacity. SCL also needed to upgrade its technology and
increase its production. SCL’s and TCL’s plants were closely located which added
to their advantages. The combined company has also been enabled to share the
common R&D facilities.

2. Financial synergy:

Financial synergy refers to increase in the value of the firm that accrues to the
combined firm from financial factors. There are many ways in which a merger can
result into financial synergy and benefit. A merger may help in:

 Eliminating financial constraint

 Deployment surplus cash
 Enhancing debt capacity
 Lowering the financial costs
 Better credit worthiness

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Financial Constraint:

A company may be constrained to grow through internal development due to

shortage of funds. The company can grow externally by acquiring another company
by the exchange of shares and thus, release the financing constraint.

Deployment of surplus cash:

A different situation may be faced by a cash rich company. 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 company. The shareholders
may not really 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
company. If they sell their shares, they would pay tax at a lower, capital gains tax
rate. The company would also be enabled to keep surplus funds and grow through
acquisition.

Debt Capacity:

A merger of two companies, with fluctuating, but negatively correlated, cash flows,
can bring stability of cash flows of the combined company. 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.

Financing Cost:

The enhanced debt capacity of the merged firm reduces 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.

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Better credit worthiness:

This helps the company to purchase the goods on credit, obtain bank loan and raise
capital in the market easily.

RP Goenka’s Ceat tyres sold off its type cord division to Shriram Fibers Ltd. in 1996
and also transfer’s its fiber glass division to FGL Ltd., another group company to
achieve financial synergies.

3. Managerial synergy

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. Often a firm, plagued with managerial
inadequacies, can gain immensely from the superior management that is likely to
emerge as a sequel to the merger. Another allied benefit of a merger may be in the
form of greater congruence between the interests of the managers and the
shareholders.

A common argument for creating a favorable environment for mergers is that it

imposes a certain discipline on the management. If lackluster performance renders a
firm more vulnerable to potential acquisition, existing managers will strive
continually to improve their performance.

4. Sales synergy

These synergies occurs when merged organization can benefit from common
distribution channels, sales administration, advertising, sales promotion and
warehousing.

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The Industrial Credit and Investment Corporation of India Ltd. (ICICI) acquired
Tobaco Company, ITC. Classic and Anagram Finance to obtain quick access to a
well dispersed distribution network.

b. Diversification:

A commonly stated motive for mergers is to achieve risk reduction through

diversification. The extent, to which risk is reduced, depends upon on the correlation
between the earnings of the merging entities. While negative correlation brings
greater reduction in risk, positive correlation brings lesser reduction in risk. If
investors can diversify on their own by buying stocks of companies which propose
to merge, they do not derive any benefits from the proposed merger. Any investor
who wants to reduce risk by diversifying between two companies, say, ABC
Company and PQR Company, may simply buy the stocks of these two companies
and merge them into a portfolio. The merger of these companies is not necessary for
him to enjoy the benefits of diversification. As a matter of fact, his ‘home-made
diversification give him far greater flexibility. He can contribute the stocks of ABC
Company and PQR Company in any proportion he likes as he is not confronted with
a ‘fixed’ proportion that result from the merger.

Thus, Diversification into new areas and new products can also be a motive for a
firm to merge an other with it. A firm operating in North India, if merges with
another firm operating primarily in South India, can definitely cover broader
economic areas. Individually these firms could serve only a limited area. Moreover,
products diversification resulting from merger can also help the new firm fighting
the cyclical/seasonal fluctuations. For example, firm A has a product line with a
particular cyclical variations and firm B deals in product line with counter cyclical
variations. Individually, the earnings of the two firms may fluctuate in line with the
cyclical variations. However, if they merge, the cyclically prone earnings of firm A
would be set off by the counter cyclically prone earnings of firm B. Smoothing out
the earnings of a firm over the different phases of a cycle tends to reduce the risk
associated with the firm.

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Through the diversification effects, merger can produce benefits to all firms by
reducing the variability of firm’s earnings. If firm A’s income generally rises when
B’s income generally falls, and vice-a versa, the fluctuation of one will tend to set
off the fluctuations of the other, thus producing a relatively level pattern of
combined earnings. Indeed, there will be some diversification effect as long as the
two firm’s earnings are not perfectly correlated (both rising and falling together).
This reduction in overall risk is particularly likely if the merged firms are in different
lines of business.

The diversification motive is based on the proposition that if two risky projects are
combined, then the risk of combination will be less than the weighted average of the
risk of these two projects. The greatest benefit from diversification can be obtained
by continuing firms from different industries i.e., conglomerate mergers; where two
firms poorly correlated cash flows merged to create a portfolio of a firms. But
portfolio of firms in a conglomerate merger is costly as the acquisition of firms is a
costly exercise. On the other hand, a shareholder can easily create a diversified
portfolio of firms merely by holding the shares of diversified companies. This is
much easier and cheaper than creating a portfolio of firms in conglomerate merger.

Thus, firms diversify to achieve:

 Sales and growth stability

 Favorable growth developments
 Favorable competition shifts
 Technological changes

c. Accelerated Growth:

Growth is essential for sustaining the viability, dynamism and value-enhancing

capability of company. A growth- oriented company is not only able to attract the
most talented executives but it would also be able to retain them. Growing
operations provide challenges and excitement to the executives as well as
opportunities for their job enrichment and rapid career development. This helps to
increase managerial efficiency. Other things being the same, growth leads to higher
profits and increase in the shareholders value. A company can achieve its growth
objective by:

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 Expanding its existing markets
 Entering in new markets.

A company may expand and/or diversify its markets internally or externally. If the
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. Mergers and acquisitions may help to accelerate the pace
of a company’s growth in a convenient and inexpensive manner.

Internal growth requires that the company should develop its operating facilities-
manufacturing, research, marketing etc. Internal development of facilities for growth
also requires time. Thus, lack or inadequacy of resources and time needed for
internal development constrains a company’s pace of growth. The company can
acquire production facilities as well as other resources from outside through mergers
and acquisitions. Specially, for entering in new products/markets, the company may
lack technical skills and may require special marketing skills and/or a wide
distribution network to access different segments of markets. The company can
acquire existing company or companies with requisite infrastructure and skills and
grow quickly.

Mergers and acquisitions, however, involve cost. External growth could be

expensive if the company pays an excessive price for merger. Benefits should
exceed the cost of acquisition for realizing a growth which adds value to
shareholders. In practice, it has been found that the management of a number of
acquiring companies paid an excessive price for acquisition to satisfy their urge for
high growth and large size of their companies. It is necessary that price may be
carefully determined and negotiated so that merger enhances the value of
shareholders.

For example, RPG Group had a turnover of only Rs.80 crores in 1979. This has
increased to about Rs. 5600 crores in 1996. This phenomenal growth was due to the
acquisitions of a several companies by the RPG Group. Some of the companies
acquired are Asian cables, ceat, Calcutta Electricity Supply and company, SAE etc.

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 d. Increased Market power:

A merger can increase the market share of the merged firm. The increased
concentration or market share improves the profitability of the firm due to
economies of scale. The bargaining power of the firm with labour, suppliers and
buyers is also enhanced. The merged firm can also exploit technological
breakthroughs against obsolescence and price wars. Thus, by limiting competition,
the merged firm can earn super normal profit and strategically employ the surplus
funds to further consolidate its position and improve its market power.

Merger is not only route to obtain market power. A firm can increase its market
share through internal growth or ventures or strategic alliances. Also, it is not
necessary that the increased market power of the merged firm will lead to efficiency
and optimum allocation of resources. Market power means undue concentration
which could limit the choice of buyers as well as exploit suppliers and labour.

e. Purchase of assets at bargain price:

Mergers may be explained by the opportunity to acquire assets, particularly land,

mined rights, plant and equipment at lower cost than would be incurred if they were
purchased or constructed at current market prices. If market prices of many stocks
have been considerably below the replacement cost of the assets they represent,
expanding firm considering constructing plants developing mines, or buying
equipment. Often it has found that the desired asset could be obtained cheaper by
acquiring a firm that already owned and operated the asset. Risk could be reduced
because the assets were already in place and an organization of people knew how to
operate them and market their products.

Many of mergers can be financed by cash tender offers to the acquired firm’s
shareholders at price substantially above the current market. Even, so, the assets can
be acquired for less than their current cost of construction. The basic factor

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underlying this is that inflation in construction costs not fully reflected in stock
prices because of high interest rates and limited optimism (or downright pessimism)
by stock investors regarding future economic conditions.

f. Increased external financial capability:

Many mergers, particularly those of relatively small firms into large ones, occur
when the acquired firm simply cannot finance its operations. This situation is typical
in a small growing firm with expanding financial requirements. The firm has
exhausted its bank credit and has virtually no access to long term debt or equity
markets. Sometimes the small firms have encountered operating difficulty and the
bank has served notice that its loans will not be renewed. In this type of situation, a
large firm with sufficient cash and credit to finance the requirements of the smaller
one probably can obtain a good situation by making a merger proposal to the small
firm. The only alternative the small firm may have is to try to interest two or more
larger firms in proposing merger to introduce completion into their bidding for the
acquisition.

The smaller firm’s situation might not be so bleak. It may not be threatened by
nonrenewable of a maturing loan. But its management may recognize that continued
growth to capitalize on its markets will require financing beyond its means.
Although its bargaining position will be better, the financial synergy of the acquiring
firm’s strong financial capability may provide the impetus for the merger.

Sometimes the financing capability is possessed by the acquired firm. The

acquisition of a cash rich firm whose operations have matured may provide
additional financing to facilitate growth of the acquiring firm. In some cases, the
acquiring firm may be able to recover all or part of the cost of acquiring the cash-
rich firm when the merger is consummated and the cash then belongs to it.

A merger also may be based upon the simple fact that the combination will make
two small firms with limited access to capital markets large enough to achieve that
access on a reasonable basis. The improved financing capability provides the
financial synergy.

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 g. Increased managerial skills:

Occasionally, a firm will have good potential that it finds itself unable to develop
fully because of deficiencies in certain areas of management or an absence of needed
product or production technology. If the firm can not hire the management or
develop the technology it needs, it might combine with a compatible firm that has
the needed managerial personnel or technical expertise. Any merger, regardless of
the specific motive for it, should contribute to the maximization of owner’s wealth.

h. Reduction in tax liability:

Under Income Tax Act, there is a provision for set-off and carry forward of losses
against its future earnings for calculating its tax liability. A loss making or sick
company may not be in a position to earn sufficient profits in future to take
advantage of the carry forward provision. If it combines with a profitable company,
the combined company can utilize the carry forward loss and save taxes with the
approval of government. In India, a profitable company is allowed to merge with a
sick company to set-off against its profits the accumulated loss and unutilized
depreciation of that company. A number of companies in India have merged to take
advantage of this provision.

The following is the list of some companies along with the amount of tax benefits
enjoyed:

 Orrisa synthesis merged with Straw product Ltd. (Rs. 16 crores)

 Ahmadabad cotton Mills merged with Arvind Mills (Rs. 3.34 crores)

 Sidhpur Mills merged with Reliance Industries Ltd. (Rs.3.34 crores)

 Alwyn Missan merged with Mahindra and Mahindra Ltd. (Rs.2.47 crores)

 Hyderabad Alwyn merged with Voltas Ltd. (Rs. 1600 crores)

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When two companies merge through an exchange of shares, the shareholders of
selling company can save tax. The profits arising from the exchange of shares are
not taxable until the shares are actually sold. When the shares are sold, they are
subject to capital gain tax rate which is much lower than the ordinary income tax
rate.

A strong urge to reduce tax liability, particularly when the marginal tax rate is high
is a strong motivation for the combination of companies. For example, the high tax
rate was the main reason for the post-war merger activity in the USA. Also, tax
benefits are responsible for one-third of mergers in the USA.

i. Economies of Scale:

Economies of scale arise when increase in the volume of production leads to a

reduction in the cost of production per unit. Merger may help to expand volume of
production without a corresponding increase in fixed costs. Thus, fixed costs are
distributed over a large volume of production causing the unit cost of production to
decline. Economies of scale may also arise from other indivisibilities such as
production facilities, management functions and management resources and systems.
This happens because a given function, facility or resource is utilized for a large
scale of operation. For example, a given mix of plant and machinery can produce
scale economies when its capacity utilisation is increased. Economies will be
maximized when it is optimally utilized. Similarly, economies in the use of the
marketing function can be achieved by covering wider markets and customers using
a given sales force and promotion and advertising efforts. Economies of scale may
also be obtained fro the optimum utilisation of management resource and systems of
planning, budgeting, reporting and control. A company establishes management
systems by employing enough qualified professionals irrespective of its size. A
combined firm with a large size can make the optimum use of the management
resource and systems resulting in economies of scale.

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 j. Vertical Integration:

Vertical integration is a combination of companies of companies business with the

business of a supplier or customer generally motivated by a pure desire:

a) To secure a source of supply for key materials or sources

b) To secure a distribution outlet or a major customer for the company’s products.

c) To improve profitability by expanding into high margin activities of suppliers

and customers.

Thus, vertical merger may take place to integrate forward or backward. Forward
integration is where company merges to come close to its customers. A holiday tour
operator might acquire chain of travel agents and use them to promote his own
holiday rather than those of rival tour operators. So forward or downstream vertical
integration involves takeover of customer business.

Backward integration occurs when a company comes close to its raw materials or
suppliers. The real gain can be achieved by integrating backward if raw material
market is not perfectly competitive and firm has to buy raw materials at
monopolistic prices hence merge to obtain control of supplies. There are many
reasons why firms want to be integrated vertically at different stages. Some of these
reasons are technological economies like avoidance of reheating and transportation
cost as in the case of iron and steel producer. Transactions within a firm might
eliminate costs of searching for prices, contracting, advertising, costs of
communicating and co-ordination. Proper planning for production and inventory
management may improve due to more efficient information flow within a single
firm. Further, these merger help avoid inefficient market transactions and result in
reduced exchange inefficiencies.

Tata Tea’s acquisition of consolidated coffee which produces coffee beans and
Asian Coffee, which possesses coffee beans, was also backward integration which
helped reduce exchange inefficiencies by eliminating market transactions. The
recent merger of Samtel Electron services (SED) with Samtel Color Ltd. (SCL)

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entailed backward integration of SED which manufactures electronic components
required to make picture tubes with SCL, a leading maker of color picture tube.

Thus, when companies engaged at different stages of production or value chain

merge, economies of vertical integration may be realized. For example, the merger
of a company engaged in oil exploration and production (like ONGC) with a
company engaged in refining and marketing (like HPCL) may improve coordination
and control

Vertical integration, however, is not always a good idea. If a company does

everything in-house, it may not get the benefit of outsourcing from independent
suppliers who may be more efficient in their segments of the value chain.

k. Early entry and market penetration:

An early mover strategy can reduce the lead time taken in establishing the facilities
and distribution channels. So, acquiring companies with good manufacturing and
distribution network or few brands of a company gives the advantage of rapid
market share.

The ICICI, a leading financial institution secured a foot hold in retail network
through acquisition of Anagram Finance Company and ITC classic. Anagram had a
strong retail franchise, distribution network of over fifty branches in Gujarat,
Rajasthan and Maharashtra and a depositor base of over two lakhs depositors. ICICI
was therefore attracted by the retail portfolio of Anagram which was active in lease
and hire purchase, car purchase, truck finance, and customer finance. These
acquisitions thus helped ICICI to obtain quick access to well dispersed distribution
network.

Further, market penetration means developing new and large markets for a company
existing products. Market penetration strategy is generally pursued within markets
that are becoming more global. Cross border merger are a means of becoming or
remaining major players in such markets. Hence, this strategy is mainly adopted by
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MNC’s to gain to new markets. They prefer to merge with a local established
company which knows behavior of market and has established customer base. One
such example is Indian market. Few instances of MNC’s related mergers are:

1. Whirlpool Corporation’s entry into India by acquiring Kelvinator India.

2. Coca Cola while re-entering India market in 1993 acquired Parle, the largest
player in market with several established brands and nationwide bottling and
marketing network.

3. H.J. Heinz entered into India through acquisition of Glato Industries.

4. HLL acquired Dollops, Kwality, Milk food to gain an entry into ice cream market
with the help of their marketing networks, production facilities, brands etc.

l. Revival of sick companies:

An important motive for merger is to turn around a financially sick company

through the process of merger. Amalgamation taking place under the aegis of Board
for Industrial (BIFR) fall under this category.

BIFR found revival of ailing companies through the means of their with healthy
company as the most successful route for revival of their financial wealth. Firstly,
the purpose is to revive a group of sick companies by merging it with groups of
healthy company by obtaining concessions from financial institution and
government agencies and obtaining benefits of tax concessions u/s 72A of Income
Tax Act, 1961. Secondly, it also helps to preserve group reputation. Some of the
group companies which have amalgamated through the BIFR include Mahindra
Missan Allwyn with Mahindra and Mahindra, Hyderabad, Allwyn with Voltas etc.

m. Consolidation at Group level:

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Group company mergers are generally initiated with a view to affect consolidation to
derive critical mass to cut costs in order to achieve focus and eliminate competition.
Such mergers within group are also aimed at restructuring their diverse units to
create a more viable unit, to revive sickness, improve borrowed capital. There are
few other micro economic reasons to decide on mergers with group consideration as
their sole consideration:

 To achieve economies of scale

 To reduce cost of administration and management expenses in companies within

same group.

 To bifurcate business by floating separate products this is referred to as demerger.

Example of restructuring and consolidation within the group companies is the case
of Nirma Ltd. merging with it, its group companies, Nirma detergents, Nirma soaps
and detergents, Shina soaps and detergents and Nirma chemicals. The objective was
to make Nirma a strong and resilient corporate entity capable of facing global
competition by restructuring management, sizable reduction in management costs
and increased professionalism.

Merger of Videocon groups Videocon Narmada Electronics with its flagship

company Videocon International led to operating efficiencies by controlling costs
under one head.

n. Following Parent’s Footsteps:

Some of mergers in India belonging to Multinational giants take place as a result of

direct fall out of mergers of their parent companies taking place in their home
countries.

Some instances of such mergers are listed below:

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1. As per the dictates of their parent companies, their two Indian counter parts,
visa. The General Electric Company of India Ltd. and The English Electric
Company of India Ltd. were merged from I st April 1992 and changed their name to
GEC. Alsthen India Ltd.( just like the GEC, Alsthen N.V. Ltd. formed by merger of
two largest industrial groups The General Electric company plc. U.K. and Alcatel
Alsthen, France)

2. Consequent of the merger of Grand plc. and Guiness plc. In London in Dec.
1997, their Indian offspring’s IDL Ltd. and united Distilleries India Ltd. both liquor
companies followed this in India.

3. Novartis India (51% of Novartis AG) was formed in India by the merger of
Hindustan ciba Giegy and Sandoz India Ltd. in 1996 following the merger of their
global parents.

o. Increase Promoter’s stake:

Another motive for merger could be to increase the stake of promoters. Thus, ‘A’
company which is family owned could be merged with ‘B’ company which is a
listed company with family stake in it. By the process of merger, the family stake
could be consolidated without going through the complications of SEBI guidelines
of 4th august 1994. So, mergers could be motivated by the need to enhance
promoter’s holdings in post- merger company.

For instance, Nanda family’s holding in escorts Ltd. was 20% before merger. Its
merger with Escorts Tractors Ltd. increased their holding by another 20%. Similarly,
merger of Reliance Polythylene and Reliance Polypropylene into Reliance Industries
swap ratio of 100: 30 and 100:25 respectively resulted in an increase in Ambani’s
stake from 23% to 37%. The higher stakes helps to ward off takeover bids.

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 p. Defensive Maneuver:

Merger can be used as shields for protection from raiders. A merger or acquisition
can be used by a company as defensive maneuver to resist takeover by another
company. If a firm feels that it could be acquired by another firm, it may consider
getting involved in a merger game. In doing so, it is able to expand its size, making
its acquisition very expensive. Also, by increasing market capitalization of the
merged company’s threat of takeover can be tackled. For instance, merger of Jindal
Ferro Alloys with Jindal Strips helped Jindal Ferro Alloys improve its share price
from Rs. 65 to Rs. 170 and market capitalization of Rs. 160 crores to Rs. 550 crores
with the help of swap ratio of forty five Jindal strips for every hundred Jindal Ferro
alloy shares.

q. Acquire Global Competitive strength:

With competitive forces resulting from globalization and deregulation, many

industries have forced most corporate to consolidate. European and Asian market
have become more receptive to merger and acquisitions. On the one hand, European
countries face competitive pressures from creation of single Euro currency, on the
other hand, Asian crisis has forced most Asian nations to look to the west for
technological and capital support. Hence, merger are planned to acquire global
competitive strength.

After the pitched Battle against Multi National Company (MNC) in domestic arena,
Indian companies have also felt the need of becoming global. The globalized
business environment thus demands that Indian Industries also restructured. Its size
and capacities are small as compared to MNC’s. Industries have to increase its
capacity, induct new technology and development markets. Globalization has thus
resulted in major implications for industrial competitiveness by lowering the cost of
labour and opening markets to a great number of producing firms. To meet the
opportunities thrown open by fast growing world, generic market and to acquire
global competitive strength. Cross border mergers and acquisitions are being

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resorted to such mergers provide opportunities for taking up larger projects. Also the
merged company is able to compete more effectively with increased size.

The recent acquisition of Tetley, the world’s largest Tea brands by Tata tea, the
world’s largest integrated tea company has been driven by the fact that Tetley fits
perfectly into Tata tea’s globalization drive and could be a perfect launch vehicle to
achieve greater synergies in global arena. The acquisition has brought with it, greater
market penetration, helped improve operating efficiencies and resulted in instant
expansion of product lines of Tata tea –Tetley combines.

The process of globalization and increasing integration of Indian economy with the
international market will have its impact sooner or later.

Ansoff suggested a number of reasons that are attributed to the occurrence of

mergers and acquisitions. For example, it is suggested that mergers and acquisition
are intended to:

 Limit competition
 Utilize under-utilization market power
 Overcome the problem of slow growth and profitability in one’s own industry
 Achieve diversification
 Gain economies of scale and increase income with proportionately less
investment
 Establish a transnational bridgehead without excessive start-up costs to gain
access to a foreign market
 Utilize under-utilized resources-human and physical and managerial skills
 Displace existing management
 Circumvent government regulations
 Reap speculative gains attendant upon new security issue or change in P/E ratio
 Create an image of aggressiveness and strategic opportunism empire building and
to amass vast economic powers of the economy.

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 xiii. The Change Forces:

The increased pace of M&A activity in recent years has reflected powerful change
forces in the world economy. Ten change forces are identified:

1. The pace of technological change has accelerated.

2. The costs of communication and transportation have been greatly

reduced.

3. Hence markets have become international in scope.

4. The forms, sources, and intensity of competition have expanded.

5. New industries have emerged.

6. While regulations have increased in some areas, deregulation has taken place
in other industries.

7. Favorable economic and financial environments have persisted from 1982 to

1990 and from 1992 to mid-2000.

8. Within a general environment of strong economic growth, problems have

developed in individual economies and industries.

9. Inequalities in income and wealth have been widening.

10. Valuation relationships and equity returns for most of the 1990s have risen to
levels significantly above long-term historical patterns.

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Overriding all are technological changes, which include personal computers,
computer services, software, servers, and the many advances in information systems,
including the Internet. Improvements in communication and transportation have
created a global economy. Nations have adopted international agreements such as
the General Agreement on Tariffs and Trade (GATT) that have resulted in freer
trade. The growing forces of competition have produced deregulation in major
industries such as financial services, airlines, and medical services.

The next set of factors relates to efficiency of operations. Economies of scale spread
the large fixed cost of investing in machinery or computer systems over a larger
number of units. Economies of scope refer to cost reductions from operations in
related activities. In the information industry, these would represent economies of
activities in personal computer (PC) hardware, PC software, server hardware, server
software, the Internet, and other related activities. Another efficiency gain is
achieved by combining complementary activities, for example, combining a
company strong in research with one strong in marketing. Mergers to catch up
technologically are illustrated by the series of acquisitions by AT&T.

Another major force stimulating M&A and restructuring activities comprises

changes in industry organization. An example is the shift in the computer industry
from vertically integrated firms to a horizontal chain of independent activities. Dell
Computers, for example, has been very successful concentrating on PC sales with
only limited activities in the many other segments of the value chain of the
information industry.

The economic and financial environments have also been favorable for deal making.
Strong economic growth, rising stock prices and relatively low interest rates have
favored internal growth as well as a range of M&A activities.

Individual entrepreneurship has responded to opportunities and, in turn, created

further dynamism in industrial activities. Examples are Bill Gates at Microsoft,
Andrew Grove at Intel, Jack Welch at General Electric, John Chambers at Cisco
Systems, and Bernie Ebbers at MCI WorldCom, among the many.

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 xiv. Consequences of the Changed Forces:

The change forces are having major impacts. The technological requirements for
firms have increased. The requirements for human capital inputs have grown
relative to physical assets. The knowledge and organizational capital components
of firm value have increased. Growth opportunities among product areas are
unequal. New industries have been created. The pace of product introductions has
accelerated. Economic activity has shifted from manufacturing to services of
increasing sophistication. Distribution and marketing methods have changed. The
value chain has deconstructed in the sense that more activities are performed by
specialist firms. Forces for vertical integration have diminished in some areas, but
increased in others. Changes in the organization of industries have taken place.
Industry boundaries have become increasingly blurred. The forms and number of
competitors have been increasing. New growth opportunities have attracted such
large flows of resources that unfavorable sales-to-capacity relationships have
developed, even in new industries such as telecommunications and e-commerce.
The decline and failure rates of firms in some sectors have accelerated. Strategy
formulation and revisions are more important. Real-time financial planning and
control information requirements have increased.

These impacts have expanded opportunities and risks. A wide range of adjustment
processes have been used by firms in response to their increasingly changing
environment.

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 xv. Factors Affecting Mergers:

There are several factors that motivate the mergers and acquisitions. These factors
can be broadly summarized into two categories:

1. Exogenous Factors Affecting Mergers:

Accounting.

The availability of pooling accounting for mergers has been a significant factor in
the 1990s merger activity. Pooling avoids dilution of earnings brought about by the
recognition and mandatory amortization of goodwill when a merger is accounted
for as a purchase. As pooling came under increasing pressure from the SEC and the
FASB, its impending demise, first at the end of 2000 and then in the first-half of
2001, undoubtedly acted as a stimulant for some mergers, but it is not possible to
gauge accurately how many deals were undertaken in 1999 and 2000 to beat the
deadline. Now, at the beginning of 2001, the FASB is proposing that purchase
accounting replace pooling but that goodwill should not be automatically written
down, but instead should be subjected to a periodic impairment test. An
impairment charge would be taken when the fair value of goodwill falls below its
book value.

This method of accounting could be even more favorable for mergers than pooling
in that it will avoid amortization of goodwill and not saddle the merged companies
with the restrictions against share repurchases and asset dispositions that encrust
the pooling rules. Thus, accounting will basically be a neutral factor in 2001 and
the foreseeable future, neither significantly stimulating nor restraining mergers.
However, the new purchase accounting will make hostile exchange offers practical
for the first time in the United States and therefore might be a greater stimulant to
merger activity than presently thought.

Arbitrage.

Arbitrageurs, together with hedge funds and activist institutional investors, are a
major factor in merger activity. They sometimes band together to encourage a
company to seek a merger and sometimes to encourage a company to make an
unsolicited bid for a company with which they are dissatisfied. By accumulating
large amounts of stock of a company to be acquired, they can be, and frequently

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are, a factor in assuring the shareholder vote necessary to approve a merger. They
will continue to be a force both facilitating and promoting mergers.

Currencies.

Fluctuations in currencies have an impact on cross-border mergers and current

conditions in the foreign exchange markets have contributed to the slowdown in
merger activity. The sharp decline in the Euro during 2000 was a deterrent to
European acquisitions of U.S. companies. The strong dollar and weak Asian
currencies led to a significant increase in acquisitions by U.S. companies in Asia.
The recent strength in the Euro has not had time to become a factor in mergers.
The uncertainty as to the U.S. economy, the U.S. trade deficit and the strength of
the dollar portend at best slow growth of cross-border acquisitions of U.S.
companies.

Deregulation.

The worldwide movement to market capitalism and privatization of state

controlled companies has led to a significant increase in the number of candidates
for merger. The concomitant change in attitude toward cross-border mergers has
had a similar effect.

Hostile Bids.

With the demise of the financially motivated bust-up bids of the 1970s and 1980s,
and the shift to strategic transactions, major companies have been willing to make
hostile bids. General Electric, IBM, Johnson & Johnson, AT&T, Pfizer, Wells
Fargo and Norfolk Southern are some of the companies that have done so. In
addition there has been a dramatic increase in hostile bids in Europe. The $202
billion record-setting bid by Vodafone for Mannesmann being the prime example.
The willingness of continental European governments to step back and let the
market decide the outcome of a hostile bid has opened the door and led to a
significant increase in European hostile bid activity. In the U.S. the success rate for
strategic hostile bids by major companies has similarly led to an increase in
activity.

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LBO Funds.

The growth of LBO funds from a humble beginning in the 1970s to the mega-
funds of the 1990s has been a significant factor in acquisitions. With tens of
billions of dollars of equity to support leverage of two to three to one, these funds
have the capability of doing major deals and will continue to be an important
factor.

If so, that restraint on mergers will be ameliorated. A special feature of the collapse
in the telecommunications, media and technology stocks is that there are now
many good companies with low stock market values and a need for fresh capital
that may be met only through merger with a stronger company.

2. Autogenous Factors Affecting Mergers:

The foregoing external factors are essentially beyond the ability of companies to
control or even to influence significantly. While they basically determine whether
a particular merger is doable at a particular time, they do not explain why
companies want to merge. What are the autogenous businesses reasons driving
merger activity? There is no single or simple explanation and again no ranking in
importance is possible. Experience indicates that one or more of the following
factors are present in all mergers:

Obtaining market power.

Starting with the 19th Century railroad and oil mergers, a prime motivation for
merger has been to gain and increase market power. Left unrestrained by
government regulation it would be a natural tendency of businesses to seek
monopoly power.

The 19th Century Interstate Commerce Act and Sherman Antitrust Act were the
governmental response to the creation of trusts to effectuate railroad and oil
mergers.

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Sharing the benefits of an improved operating margin through reduction of
operating costs.

Many of today's acquisitions involve a company with a favorable operating margin

acquiring a company with a lower operating margin. By improving the acquired
company's operations, the acquirer creates synergies that pay for the acquisition
premium and provide additional earnings for the acquirer’s shareholders.
Acquiring firms may reallocate or redeploy assets of the acquired firm to more
efficient uses. Additionally, intra-industry consolidating acquisitions provide
opportunities to reduce costs by spreading administrative overhead and eliminating
redundant personnel.

Sharing the costs and benefits of eliminating excess capacity.

The sharp reductions in the defense budget in the early 1990s resulted in defense
contractors consolidating in order to have sufficient volume to absorb fixed costs
and leave a margin of profit. The Defense Department encouraged the
consolidations to assure that its suppliers remained healthy. The pressure to control
healthcare costs has had a similar impact in the healthcare industry. The mega-
mergers of, and joint-venture consolidation of refining and marketing operations
by, oil and gas companies is another example of an effort to reduce costs by
eliminating overcapacity.

Integrating back to the source of raw material or forward to control the means of
distribution.

Over the years vertical integration has had a mixed record. Currently it has a poor
record in media and entertainment, particularly where "hardware" companies have
acquired "software" companies. However, vertical integration continues to be a
motivation for a significant number of acquisitions, and, as noted below, is being
widely pursued as a response to the Internet. The acquisition of Time Warner by
AOL is an example

The advantage or necessity of having a more complete product line in order to be

competitive.

This is particularly the case for companies such as suppliers to large retail chains
that prefer to deal with a limited number of vendors in order to control costs of

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purchasing and carrying inventory. A similar situation has resulted in a large
number of mergers of suppliers to the automobile manufacturers.

The need to spread the risk of the huge cost of developing new technology.

This factor is particularly significant in the aerospace/aircraft and pharmaceutical

industries.

Response to deregulation.

Banking, insurance, money management, healthcare, telecommunications,

transportation and utilities are industries that have experienced mid-1990s mergers
as a result of deregulation. Examples are the acquisition of investment banks and
insurance companies by commercial banks following the relaxation of restrictions
on activities by commercial banks, and the cross-border utility mergers following
the relaxation of state utility regulation.

Concentration of management energy and focus.

The 1990s witnessed a recognition by corporate management that it is frequently

not possible to manage efficiently more than a limited number of businesses.
Similarly, there has been recognition that a spinoff can result in the market valuing
the separate companies more highly than the whole. These factors resulted in the
spinoff or sale of non-core businesses by a large number of companies. The
amendment to the tax law eliminating new Morris Trust spinoff/merger
transactions had a dampening effect on the level of spinoff/merger activity, but
spinoffs have continued as a frequently used means of focusing on core
competencies.

Response to industry consolidation.

When a series of consolidations takes place in an industry, there is pressure on

companies to not be left out and to either be a consolidator or choose the best
partner. Current examples of industries experiencing significant consolidation are
banking, forest products, food, advertising and oil and gas. A recent study by J.P.
Morgan shows that size has a major impact on a company’s price earnings
multiple. Larger companies have significantly higher multiples than smaller
companies with the same growth rate.

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The receptivity of both the equity and debt markets to large strategic transactions.

When equity investors are willing to accept substantial amounts of stock issued in
mergers and encourage deals by supporting the stock of the acquirer, companies
will try to create value by using what they view as an overvalued currency. When
debt financing for acquisitions is also readily available at attractive interest rates,
companies will similarly use what they view as cheap capital to acquire desirable
businesses.

Pressure by institutional shareholders to increase shareholder value.

Institutional investors and other shareholder activists have had considerable

success in urging (and sometimes forcing) companies to restructure or seek a
merger. The enhanced ability of shareholders to communicate among themselves
and to pressure boards of directors has had a significant impact. Boards have
responded by urging management to take actions designed to maximize
shareholder value, resulting in divestitures of non-core businesses and sales of
entire companies in some cases. In other cases, shareholder pressure has been the
impetus for growth through acquisitions designed to increase volume, expand
product lines or gain entrance to new geographic areas.

Less management resistance to takeovers.

The recognition by boards of directors that it is appropriate to provide incentive

compensation, significant stock options and generous severance benefits has
removed much of the management resistance to mergers. So too the ability of
management to obtain a significant equity stake through an LBO has been a
stimulant to these acquisitions.

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 xvi. Mergers and Acquisitions in India:

The process of mergers and acquisitions has gained substantial importance in

today's corporate world. This process is extensively used for restructuring the
business organizations. In India, the concept of mergers and acquisitions was
initiated by the government bodies. Some well known financial organizations also
took the necessary initiatives to restructure the corporate sector of India by
adopting the mergers and acquisitions policies. The Indian economic reform since
1991 has opened up a whole lot of challenges both in the domestic and
international spheres. The increased competition in the global market has prompted
the Indian companies to go for mergers and acquisitions as an important strategic
choice. The trends of mergers and acquisitions in India have changed over the
years. The immediate effects of the mergers and acquisitions have also been
diverse across the various sectors of the Indian economy.

Mergers and Acquisitions Across Indian Sectors

Among the different Indian sectors that have resorted to mergers and acquisitions
in recent times, telecom, finance, FMCG, construction materials, automobile
industry and steel industry are worth mentioning. With the increasing number of
Indian companies opting for mergers and acquisitions, India is now one of the
leading nations in the world in terms of mergers and acquisitions.
The merger and acquisition business deals in India amounted to $40 billion during
the initial 2 months in the year 2007. The total estimated value of mergers and
acquisitions in India for 2007 was greater than $100 billion. It is twice the
amount of mergers and acquisitions in 2006.

Mergers and Acquisitions in India: The Latest Trends

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

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participation of the Indian companies in the global corporate sector has further
facilitated the merger and acquisition activities in India.

Major Mergers and Acquisitions in India

Recently the Indian companies have undertaken some important acquisitions.

Some of those are as follows:

Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982
million. Tata Steel acquired Corus Group plc. The acquisition deal amounted to
$12,000 million. Dr. Reddy's Labs acquired Betapharm through a deal worth of
$597million. Ranbaxy Labs acquired Terapia SA. The deal amounted to $324
million.

Suzlon Energy acquired Hansen Group through a deal of $565 million. The
acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729
million. HPCL acquired Kenya Petroleum Refinery Ltd.. The deal amounted to
$500million. VSNL acquired Teleglobe through a deal of $239 million.
When it comes to mergers and acquisitions deals in India , the total number was
287 from the month of January to May in 2007. It has involved monetary
transaction of US $47.37 billion. Out of these 287 merger and acquisition deals,
there have been 102 cross country deals with a total valuation of US $28.19 billion.

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 xvii. Recent Mergers And Acquisitions:

Mergers and Acquisitions have been very common incidents since the turn of the
20th century. These are used as tools for business expansion and restructuring.
Through mergers the acquiring company gets an expanded client base and the
acquired company gets additional lifeline in the form of capital invested by the
purchasing company. The recent mergers and acquisitions authenticate such a
view.

The Long Success International (Holdings) Ltd merged with City Faith
Investments Ltd on the 8th of April 2008. The value of the merger was US $3.2
million. The agency in this instance was Bermuda Monetary Authority, Hong
Kong Stock Exchange and other regulatory authority that was unspecified.

Novartis AG acquired 25% stake in Alcon Inc. This acquisition was worth 73,666
million common shares of the company. They bought this stake from Nestle SA for
$10.547 billion by paying $143.18 for every share. It was a privately negotiated
transaction that needed to have a regulatory approval. Simultaneously, Novartis
AG also received an offer of 52% interest that was equivalent of 153.225 million
common shares of Alcon Inc.

Kinetic Concepts acquired each and every remaining common stock of LifeCell
Corp for $51 for each share. Their total offer was $1.743 billion. The deal was
done in accordance to regulatory approvals and the conventional closing
conditions.

Kapstone Paper & Packaging Corp acquired the kraft paper mill as well as other
assets of MeadWestVaco.Corp. They paid them $485 million. The deal was
conducted as per the regulatory approvals, receipt of financing and conventional
closing conditions. This deal included a lumber mill in Summerville, hundred
percent interest in Cogen South LLC. The Chip mills in Kinards, Elgin, Andrews
and Hampton in South Carolina are also parts of this deal.

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 xviii. Mergers and Acquisitions in Banking Sector:

Mergers and acquisitions in banking sector have become familiar in the majority of
all the countries in the world. A large number of international and domestic banks
all over the world are engaged in merger and acquisition activities. One of the
principal objectives behind the mergers and acquisitions in the banking sector is
to reap the benefits of economies of scale.

With the help of mergers and acquisitions in the banking sector, the banks can
achieve significant growth in their operations and minimize their expenses to a
considerable extent. Another important advantage behind this kind of merger is
that in this process, competition is reduced because merger eliminates competitors
from the banking industry.

Mergers and acquisitions in banking sector are forms of horizontal merger because
the merging entities are involved in the same kind of business or commercial
activities. Sometimes, non-banking financial institutions are also merged with
other banks if they provide similar type of services.

Through mergers and acquisitions in the banking sector, the banks look for
strategic benefits in the banking sector. They also try to enhance their customer
base.

In the context of mergers and acquisitions in the banking sector, it can be

reckoned that size does matter and growth in size can be achieved through mergers
and acquisitions quite easily. Growth achieved by taking assistance of the mergers
and acquisitions in the banking sector may be described as inorganic growth. Both
government banks and private sector banks are adopting policies for mergers and
acquisitions.

In many countries, global or multinational banks are extending their operations

through mergers and acquisitions with the regional banks in those countries. These
mergers and acquisitions are named as cross-border mergers and acquisitions in the
banking sector or international mergers and acquisitions in the banking sector. By
doing this, global banking corporations are able to place themselves into a
dominant position in the banking sector, achieve economies of scale, as well as
garner market share.

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Mergers and acquisitions in the banking sector have the capacity to ensure
efficiency, profitability and synergy. They also help to form and grow shareholder
value.

In some cases, financially distressed banks are also subject to takeovers or

mergers in the banking sector and this kind of merger may result in monopoly and
job cuts.

Deregulation in the financial market, market liberalization, economic reforms, and

a number of other factors have played an important function behind the growth of
mergers and acquisitions in the banking sector. Nevertheless, there are many
challenges that are still to be overcome through appropriate measures.
Mergers and acquisitions in banking sector are controlled or regulated by the apex
financial authority of a particular country.

For example, the mergers and acquisitions in the banking sector of India are
overseen by the Reserve Bank of India (RBI).

xix. Mergers and Acquisitions in Telecom Sector:

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The number of mergers and acquisitions in Telecom Sector has been increasing
significantly. Telecommunications industry is one of the most profitable and
rapidly developing industries in the world and it is regarded as an indispensable
component of the worldwide utility and services sector. Telecommunication
industry deals with various forms of communication mediums, for example mobile
phones, fixed line phones, as well as Internet and broadband services.

Currently, a slew of mergers and acquisitions in Telecom Sector are going on

throughout the world. The aim behind such mergers is to attain competitive
benefits in the telecommunications industry.

The mergers and acquisitions in Telecom Sector are regarded as horizontal mergers
simply because of the reason that the entities going for merger or acquisition are
operating in the same industry, that is telecommunications industry.

In the majority of the developed and developing countries around the world,
mergers and acquisitions in the telecommunications sector have become a
necessity. This kind of mergers also assists in creation of jobs.

Both transnational and domestic telecommunications services providers are keen to

try merger and acquisition options because this will help them in many ways. They
can cut down on their expenses, achieve greater market share and accomplish
market control.

Mergers and acquisitions in the telecommunications sector have been showing a

prosperous trend in the recent past and the economists are advocating that they will
continue to do so. The majority of telecommunication services providers have
understood that in order to grow globally, strategic alliances and mergers and
acquisitions are the principal devices.
Private sector investment and FDI (Foreign Direct Investment) have also boosted
the growth of mergers and acquisitions in the telecommunications sector.

Over the last few years, a phenomenal growth has been witnessed in the number of
mergers and acquisitions taking place in the telecommunications industry. The
reasons behind this development include the following:

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# Deregulation

# Introduction of sophisticated technologies (Wireless land phone services)

# Innovative products and services (Internet, broadband and cable services)

Economic reforms have spurred the growth in the mergers and acquisitions
industry of the telecommunications sector to a satisfactory level.

Mergers and acquisitions in Telecom Sector can also have some negative effects,
which include monopolization of the telecommunication products and services,
unemployment and others. However, the governments of various countries take
appropriate steps to curb these problems.

In countries like India, mergers and acquisitions have increased to a considerable

level from the mid 1990s..

The mergers and acquisitions in the telecommunications sector are governed or

supervised by the regulatory authority of the telecommunication industry of a
particular country, for instance the Telecom Regulatory Authority of India or
TRAI. The regulatory authorities always keep a tab on the telecommunications
industry so that no monopoly is formed.

Significant Mergers and Acquisitions in Telecom Sector

Following are the important mergers and acquisitions that took place in the
telecommunications sector:

* The takeover of Mobilink Telecom by Broadcom. This can also be described as

a suitable example of product extension merger

* AT&T Inc. taking over BellSouth.

* The taking over of Hutchison Essar by the Vodafone Group. Now it has become
Vodafone Essar Limited.
Benefits Provided by the Mergers and Acquisitions in the Telecommunications
Sector

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Following are the benefits provided by the mergers and acquisitions in the
telecommunications industry:

* Building of infrastructure in a more convenient way

* Licensing options for mergers and acquisitions are often found to be easier

* Mergers and acquisitions offer extensive networking advantages

* Brand value

* Bigger client base

* Wide array of products and services

xx. Cross-border Mergers:

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 Cross border mergers and acquisitions are playing an important role in the growth
of international production. ``Not only they dominate FDI flows in developing
countries, they have also begun to take hold as a mode of entry into developing
countries and economies in transition.

FACTORS TO CONSIDER IN A CROSS-BORDER TRANSACTION

Although the basic merger or acquisition is the same worldwide, undertaking a

cross-border transaction is more complex than those conducted ‘‘in market’’ because
of the multiple sets of laws, customs, cultures, currencies, and other factors that
impact the process.

How should the transaction be financed?

The financial structure of the transaction might be impacted by which country the
target is in. For example, from a valuation perspective, ‘‘flow-back’’ can have a
negative impact on the acquirer’s stock price and cause regulatory problems (i.e.
stock ‘‘flowing’’ back to the acquirer’s home jurisdiction). Other types of
considerations include the change in the nature of the investments held by
institutional investors caused by a stock exchange merger – these investors may be
compelled under their own investment guidelines to sell newly acquired stock in the
acquirer; and the possible change in the tax treatment of dividends that encourages
the sale of the stock (e.g. foreign tax credit is useless to US tax-exempt
investors).The following are issues for an acquirer to address when structuring the
transaction.

» If the transaction involves issuing stock, will the stock be common or preferred
stock, and will the stock be issued directly to the target the transaction. or to the
target’s stockholders? Is the acquirer prepared to be subject to the laws of the
target’s country if it issues stock in the transaction, particularly the financial
disclosure laws?

» After issuing stock, how will the acquirer’s stockholder base be composed? How
many shares are held by cross-border investors? Does the new composition shift
stockholder power dramatically? Will any of the new stockholders cause problems?

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» If the transaction involves debt, where will the debt be issued, from ‘‘in country’’
or cross-border? What type of debt will be issued – senior, secured, unsecured, or
mezzanine?

» If the transaction involves cash, will cash be raised by raising capital in the public
markets, and if so, in which market will the stock be issued? If cash financing is
obtained in the target’s country, can the acquirer comply with any applicable margin
requirements, such as those promulgated by the Federal Reserve Board in the US?

How are the customs and cultures of the parties different?

Before contemplating the transaction, the acquirer should be able to express a clear
vision of how the target will be operated and funded. This will be necessary to share
with the target and its employees and shareholders, as well as with its own
shareholders.

Public relations are important in winning the hearts of the target’s employees,
communities, and shareholders. One cultural issue is whether the target will still be
managed ‘‘in country,’’ or whether it will be part of a regional center or managed
solely from the acquirer’s headquarters. Employees worry about overseas managers
and communities wonder about loss of jobs. From a financial perspective, investors
will want pro forma information to understand how the combined company will
operate going forward. This may require disclosure of financial information to which
the target’s investors are accustomed, but which is new for the acquirer.

What level of due diligence is appropriate?

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Due diligence is critical in a cross-border transaction since there is a greater
likelihood for undesirable surprises to surface after an agreement has been reached
initially. It is important to establish in the formal agreement what type of due
diligence is permitted and what the consequences are of finding certain types of
surprises.

The acquirer should ensure that it has adequate access to the target’s documentation
and personnel to facilitate the due diligence process. In addition to access to all
financial information, the acquirer should review the target’s loan agreements,
severance plans, and other employee agreements to see if the target’s change in
control would impose any previously undisclosed costs or obligations (e.g. constitute
an event of default so as to accelerate outstanding indebtedness).

Similarly, any other major agreements should be reviewed, such as licensing and
joint venture agreements, to determine whether any benefits may be lost due to the
pending change in control.

The target’s charter and bylaws should be checked to see if they have any peculiar
provisions that might make it more difficult for the acquirer to gain full control of
the target. For example, the acquirer should determine whether the target has a
shareholder rights plan or poison pill, or has a provision that requires a super-
majority vote to approve mergers.

Are there any significant tax or currency issues?

The acquirer should structure the transaction with a complete understanding of the
tax implications. This requires an analysis of the interplay of local law and tax
treaties as well as the expectation of where future revenues and deductions will be
derived. Based on the acquirer’s own tax preferences, it may desire current income
(i.e. dividends) or capital gain, and should structure the transaction accordingly.

The acquirer must also take care to consider the volatility of any currencies that are
implicated in the transaction and ensure that it has adequate protection from
downward swings in them before the transaction is closed. If it cannot tolerate the
currency risk that is involved in the target’s operations, the acquirer should consider
the ongoing impact of a volatile currency after the transaction is complete.

xxi. Post Closing Challenges:

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The closing of a merger or acquisition usually brings a great sigh of relief to the
buyer, seller, and their respective advisors. Everyone has worked hard to ensure that
the process went smoothly and that all parties are happy with the end result. But the
term closing can be misleading in that it suggests a sense of finality, when in truth
the hard work, particularly for the buyer, has just begun.

Often one of the greatest challenges for the buyer is the post-closing integration of
the two companies. The integration of human resources, the corporate cultures, the
operating and management information systems, the accounting methods and
financial practices, and related matters are often the most difficult part of completing
a merger or acquisition. It is a time of fear, stress and frustration for most of the
employees who were not on the deal team and may only have limited amounts of
information regarding their roles in the post-closing organization. Estimates are as
high as three out of every five M&A deals results in an ineffective plan for the
external integration of the two companies. And even if there is a plan, well they
don’t always work out as anticipated. The consequences of a weak or ineffective
transition plan are the buyer’s inability to realize the transaction’s true value, wasted
time and resources devoted to solving post-closing problems, and in some cases,
even litigation.

A Time of Transition

Post-closing challenges raise a wide variety of human fears and uncertainties that
must be understood and addressed by both buyer and seller. The fear of the unknown
experienced by the employees of the seller must be addressed and put to rest;
otherwise, the employees’ stress and distraction will affect the seller’s performance
and the viability of the transaction. The need to quickly integrate the two corporate
cultures also raises personal and psychological issues that must be addressed. Once
word of a deal leaks out to employees, the uncertainty associated with the change
will likely lead to widespread insecurity and fear of job loss at all levels of the
organization.

Many of the fears experienced by the employees of both buyer and seller result from
expectations of downsizing to cut costs, avoid duplication, and achieve the
economies of scale potential provided by the transaction.

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Another common problem is the psychological consequences of ‘‘seller’s remorse,’’
particularly when the seller remains on-site in a consulting capacity or even as a
minority owner. The seller can be so accustomed to managing the business that
he/she may not be open to changes in strategies or policies implemented by the
buyer.

The seller undermines the buyer’s efforts or contradicts its authority. These sellers
often want the benefit of the bargain but seem unwilling to accept the burden of the
bargain and relinquish control of the company. These problems are particularly
common in mergers where the management and flow of the deal may be one of
shared objectives and values as opposed to an acquisition that more clearly has a
designated quarterback.

In attempting to realize the true value of a merger or acquisition, the buyer must
coordinate a smooth and efficient post-closing process. Important issues that need to
be managed fall into three areas—people, places, and things. Some issues are
addressed in the closing documents. Most require forethought in order to anticipate
potential pitfalls. The bottom line is that if the buyer doesn’t plan to address the
following issues, the chances for not fully realizing success are greatly increased.

1. Staffing Levels and Other People Problems

One of the primary areas that an acquiring company looks to in order to realize the
projected return on its investment is the new company’s level of staffing. If a certain
number of employees can be eliminated, it is more likely that earnings projections
will be met or exceeded. The hard part is deciding who stays, and in what positions,
and who goes. Much of this depends on the nature of the acquisition. On the one
hand, if the terms dictate that the acquired firm is to maintain its independence, it is
much more difficult to reduce staffing levels. On the other hand, if the acquired firm
is absorbed into the acquirer, staff cutbacks are probably appropriate and healthy.
This is the greatest source of employee fear and is the fuel that powers the rumor
mill. But some of these fears are valid. An April 2005 report published by
Challenger, Gray & Christmas recommended that job cuts following M&A deals in
the first quarter of 2005 soared to nearly 77,000, over six times the rate of the last

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quarter of 2004 and three times the rate of the first quarter of 2004. The biggest cuts
came in the telecom and high tech industries.

The first step in determining staffing levels is to divide the workforce into
management and staff/labor. These two groups must be distinguished because the
terms of employment are often quite different. Management is often party to
employment contracts, and receives deferred compensation, stock options, and other
issues, while staff can be protected by union contracts and/or federal or state
employment laws.

Management

In many ways, management staffing is a much easier problem to resolve. Most

employment agreements and/or management benefits can be quantified to determine
the cost of such decisions. This should have been examined during the due diligence
process and worked into the pricing for the transaction.

The primary task of resolving the level of management staffing is to determine

where there are redundancies and who the most qualified candidates are. Such a
process is normally driven by the acquiring company, but it is not a bad idea to
involve the acquired company as well. Only in this way can a true evaluation be
made. Not consideration of all candidates fairly may result in a lower return on the
investment.

All candidates must be evaluated objectively. It is often difficult to do so because

emotions often cloud the judgment of the evaluators. For the acquiring company,
choosing the incumbent management team is an easy decision. However, a formal
evaluation of all candidates can lead to a stronger, more diverse team. While change
can be difficult, it is necessary to embrace the change inherent in acquisitions to
enhance your chances of success.

Labor

Labor is often protected by union contracts and labor laws. This limits the options
available when deciding who should stay and who should go. However, it should not

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prevent the buyer from evaluating all employees. By evaluating first and then
worrying about possible protections, the buyer gains a much better sense of the
quality of the workforce that does ultimately remain.

The same rules apply to evaluating labor as to evaluating management. Be objective.

Be balanced. Be honest. The buyer shortchanges itself by not doing so. Develop a
selection methodology by targeting certain employees for layoff or retention based
on performance and experience. Make sure that the applied criteria are documented
and objective and are supported by a performance evaluation and that any review of
personnel files and performance evaluations is confidential. This may require the
formation of a review committee made up of representatives from each organization
to ensure that the terminations occur according to agreed upon procedures.

Once the selections are made, they must be examined from a legal point of view.
The following is a list of legal considerations to be examined:

• Employment agreements that may contain conditions that are unacceptable to the
buyer or conditions that may be triggered in the event of a merger or acquisition.

• Employees on family leave workers ’ compensation, or disability, which has

certain rights to comparable positions upon their return to work, which may or may
not be consistent with staffing plans after the acquisition.

• Whistle-blowers who could bring claims of wrongful discharge.

• WARN (Worker Adjustment and Retraining Notification) notices, which must be

sent 60 days in advance by the seller to its employees if there is a plan to close
facilities.

• Union contracts that could fall under the National Labor Relations Act (NLRA),
which protects the rights of union, as well as nonunion, employees on matters of
wages, hours, and working conditions.

• Race, religion, or sex discrimination for which the buyer may be held accountable
under civil rights legislation, even if claims are filed based on events that occurred
before the acquisition.

• Age discrimination under the Age Discrimination in Employment Act (ADEA)

and/or Older Workers Benefit Protection Act (OWBPA), which protects workers

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against changes in the workforce or changes in benefit plans that would discriminate
against workers over 40 or make age-based distinctions..

• Problems that could develop under the Occupational Health and Safety Act
(OSHA) if current compliance is not verified and the cost of future compliance is not
factored into operating results.

• To ensure that the employees being acquired are legally able to work in the United
States, the burden of compliance is on the employer under the Immigration Reform
and Control Act (IRCA).

• Lack of compliance with the Drug-Free Workplace Act and various government
contract laws can lead to suspended payments or terminated contracts for a seller
that is a federal government contractor.

The bottom line is that the buyer needs to conduct a thorough labor and employment
review. This entails all manner of documents related to such issues. Each transaction
is unique in that the above issues will apply in differing degrees.

Customers

When a buyer acquires a business, one of the most valuable assets is the customer
base. One of the post-closing challenges is to determine the profitability of the
customers. Often the acquired company has legacy customers that they have been
unwilling or unable to terminate if the customer is unprofitable or difficult to
manage. The acquirer should review all customers for profitability and
sustainability. It makes little sense to keep a customer if it is not possible to make a
profit on the relationship, unless the customer enables the merged company to
penetrate a new market or if the customer helps achieve scale economies, thereby
enabling other customers to be profitable. However, even in these cases, there is a
limit to the amount of losses that make financial sense. In addition, the customer
may be a direct competitor of the buyer or of one of the buyer’s customers. As a
result, it is important to evaluate the seller’s customer base. It may be necessary to
discount the value of the acquisition to account for a customer base that is
unprofitable or duplicative and that provides little additional strategic value.

Perhaps more important, however, is for the seller to transfer the goodwill of its
customers to the buyer. A disgruntled employee can very quickly destroy this

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goodwill and perhaps jeopardize a significant income stream on which the value of
the acquisition was based.

The key steps to transferring this goodwill are:

 Personal introductions to customer contacts

 Social events to acquaint customers with the new owners
 Letters from both the seller and buyer that thank customers for their business and
announce the new management and plans for the merged entity

Vendors

Suppliers are much more often overlooked than customers. After all, any vendor can
easily be replaced. Since this is often true, it is necessary for the buyer to conduct a
thorough review of the existing suppliers to ensure that the seller is getting the best
prices and terms. However, there are certain suppliers whose replacement would
cause significant disruption. This can occur in situations where there is only one
supplier of a given product or service, or if the supplier is an integral part of a just-
in-time inventory system.

Essential vendors are a key component of the continued success and uninterrupted
operations of a company.

Of special importance are suppliers that provide professional services—in particular,

bankers, accountants, and lawyers. The standard assumption is that the combined
company will use the buyer’s professional suppliers, but this may not always be
desirable or feasible. If a buyer is purchasing a business in a different industry, the
bankers may not have the appropriate expertise. The legal counsel of the seller may
be better suited to deal with certain local matters or be more cost-effective. The
accountants of the seller may be providing outsourcing of certain tasks for which it
may not be practical to change immediately. These factors should be considered
carefully before any key relationships are terminated. Ultimately, it may be best to
continue to use both firms for certain purposes, subject to any potential conflicts of
interests being resolved.

2. Problems Involving Places

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Often one of the larger expenses on the income statement, rent and/ or lease
payments are a natural place for a buyer to focus on when evaluating the efficiencies
to be gained by a merger. It would seem to be an easy issue to resolve: In acquiring
this company, we can reduce the staff by x percent, which means that we need x
percent less of square footage in which to work. In addition, the staff has x percent
more square footage per employee than our company. As a result, total square
footage can be reduced by x percent, thereby saving $x. But very few decisions in a
merger or acquisition can be resolved with a simple mathematical equation. There
usually are people involved, and with people come emotions and unpredictability.

This has to be accounted for when looking at space, just as much as when examining
staffing levels. When examining the space requirements of the combined entity, it is
certainly helpful to consider the square footage. The space should be evaluated to
determine if the rent is more or less expensive than other company space and if the
amount of space is more than is needed. This will go a long way toward helping to
cut expenses in order to reach the target return.

However, there must also be human considerations. How long have the employees
been in this space? How does the commute compare to where they might be
relocated? How much interaction is required between the staff being relocated and
staff in a different location? How much reconfiguration of the office and facilities of
each company will be required to accommodate additional staff or functions? How
much productivity can be expected from these people during the course of the
move?

Non-consideration of these and other related questions can open up a can of worms.
Location is a factor that can effect the overall integration of the buyer by the seller
and can lead to significant turnover. It is taken very personally by many employees.
Our suggestion is to take steps to maximize your efficiency of space and property
but to do so considering the human elements of the changes.

3. Corporate Identity

Now that the two companies have become one, it only stands to reason that the
merged entity is different from what existed before. Yet this is a point that can often

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be forgotten when it comes to corporate identity. Since there is essentially a new
company, it may be important to consider a new corporate identity in the form of the
company name and/or logo.

This may seem obvious, but the real issue goes much deeper. A corporate identity
defines what makes a corporation unique. The company name and logo are merely
manifestations of that identity. Before such issues can be decided, it must be
determined what the corporation stands for, where it is going, and how it is different
from other corporations. Only then does it make sense to put a name on it and
identify an image with it.

There are several aspects of a corporation that go into its identity. These include
market share, industry group identification, customer base, employees, and direction.
Most, if not all, of these aspects are altered in some way as the result of a merger or
acquisition. The key is to identify what changes have occurred and respond to them
by shaping the image or identity that is communicated to the public.

4. Legal Issues

Following the closing of the transaction, there are many legal and administrative
tasks that must be accomplished by the acquisition team to complete the transaction.
The nature and extent of these tasks will vary, depending on the size and type of the
financing method selected by the purchaser. The parties to any acquisition must be
careful to ensure that the jubilation of closing does not cause any post-closing
matters to be overlooked.

In an asset acquisition, these post-closing tasks typically include the following:

• Final verification that all assets acquired are free of liens and encumbrances

• Recording of financing statements and transfer tax returns

• Notification of the sale to employees, customers, distributors, and suppliers

• Adjustments to bank accounts and insurance policies

In addition to the above, a stock acquisition may also include the following:

• Filing articles of amendment to the corporate charter or articles of merger

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• Completion of the transfer of all stock certificates

• Amendments to the corporate bylaws

• Preparation of all appropriate post-closing minutes and resolutions

Such actions require legal counsel familiar with the issues of corporate governance
and intellectual property. While the buyer’s legal counsel attends to these matters,
management can more readily focus on the other aspects of the business
combination for which they are better qualified and more effective.

5. Minimizing the Barriers to Transition

No matter how hard you try and how well you anticipate the issues that need to be
addressed, the natural response of most people is to avoid change. As a result, it is
important to be aware of the various aspects of change management and address
them as well. The primary emotion that will be encountered in dealings with various
groups will be fear. There will be fear on the part of employees, as relates to such
things as job security, workplace location, and reporting structure. But you may also
have to deal with fear on the part of customers (the buyer may discontinue a product
line) and suppliers (the buyer may already have someone to supply that good).

Communication

The primary tool for dealing with fear, and many of the other emotions that surface
during the course of acquisition transition, is communication. If a merger is thought
of as the beginning of a marriage, think of the amount of communication that is
necessary in the first few weeks and months of such a relationship. As with any
relationship, a lack of communication typically means a lack of success.

In a merger, the two keys to effective communication are to determine

(1) the importance of the information and (2) who should communicate it.
Information should be communicated in the order of its importance. This means that

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you want to first communicate that information that affects people directly,
including changes in:

• The organization, especially who is staying and who is leaving

• Reporting structures

• Job descriptions and responsibilities

• Title, compensation, and benefits

• Job location and operating procedures

As a result of the importance of this information, the person doing the

communicating is also important. A trusted person from the seller’s side, along with
an important person from the buyer’s side, works best. This will assist in the
transition and add credibility to the process.

The next most important information is the introduction of the new management
team and the transition to new managers and employees. It is a bit disconcerting to
walk the halls in an organization and not know people. Think of how it feels on the
first day of a new job. Well, that’s how it feels for all the employees of an acquired
company. By making an effort to introduce the key players, people are more
comfortable. They can place a name with a face and know who is being referred to
in discussions. This can help overall efficiency because employees will be focusing
on doing their job rather than wondering who someone is and how that person might
affect their career. It also helps in the socialization process among the employees,
which in turn contributes to efficiency! This, of course, is more difficult as
organizations grow larger. Finally, communicate the new reporting structure and
have individual managers introduce the two sides when there will be day-today
interaction. If possible, have the prior manager make some kind of handover to the
new. Some kind of group meeting or social gathering among the employees of
various departments, especially those that interact regularly, can go a long way in
making everyone more comfortable with the new faces, functions, and procedures.

6. Post-Merger Task Force

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One of the tools through which communication can be made more effective is a
post-merger task force. Such an entity should be composed of a representative group
from both sides of the transaction and should be formed after the due diligence
process. The role of such a group, which needs to be defined and communicated
early, is to uncover, evaluate, and resolve post-merger problems.

The importance of effectively communicating the role of the task force cannot be
emphasized enough. Failure to do so will limit its effectiveness and call into
question the resolve of the new organization. In a very real sense this is the first
operating decision to be seen by the seller’s employees and thus it will greatly
influence the new employees’ perception of the acquiring organization.

The composition of the task force has a bearing on its effectiveness and the integrity
of the buyer, as viewed by the seller’s employees. As a result, the CEO should
probably avoid making him or herself a member. An honest assessment of those
being considered for the task force will go a long way toward establishing its
credibility. If one of the members from the seller’s side is an employee who is not
respected by the majority of the workforce, people will not take the task force
seriously.

The role of the task force is best kept simple. It can serve as a conduit from labor to
management to resolve problems that arise during the course of the merger. In this
way, a dialogue can be opened and people will get the impression that actions are
being taken to address concerns. The task force can also be used to organize the
information that needs to be communicated to the new employees. The amount of
information to be communicated can be overwhelming, and the way it is
communicated can also cause problems. The task force can serve to communicate
the issues in order of importance and to address them accurately. This helps prevent
the grapevine from disseminating erroneous information. Creating the dialogue and
organizing the information serve to help reduce or eliminate the fear.

Once its work is completed, the task force must be dissolved. This is easier said than
done, as it is much easier to say when the merger activity begins than to define when
it is over. The first sign that the end of the task force’s life is near is when all the
information deemed to be important in relation to the merger has been disseminated.
An additional indication is the amount of information flowing back from the

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employees to the task force has significantly waned. Nonetheless, it is often helpful
to give the task force a set life at its beginning—60 or 90 days—and to evaluate the
situation at that time. The final call will come from the CEO, when it is determined
that the value of the task force has been expended and it is now time to get to work
to realize the true value of the combination.

The importance of a well-planned and smooth post-closing transition cannot be

emphasized enough. Without the proper attention to these matters, the value of the
transaction may never be realized. This will require assembling a team with proven
implementation skills and a desire to see the transaction work. The sheer number of
issues that need to be addressed can seem overwhelming at first glance. But the
importance of these issues in the success of a business combination cannot be
overemphasized. By planning properly, paying attention to the details, and picking
the right people for the job, a buyer will gain confidence in its ability to successfully
integrate the seller into its operations. This will serve to encourage further growth
through mergers and acquisitions.

V. Case- Study:

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HINDALCO - NOVELIS ACQUISITION: CREATING AN ALUMINIUM
GLOBAL GIANT

 Abstract

'We look upon the aluminium business as a core business that has enormous
growth potential in revenues and earnings,' 'Our vision is to be a premium
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metals major, global in size and reach .... The acquisition of Novelis is a step in
this direction'
-Kumar Mangalam Birla, Chairman, Hindalco Industries

Last decade witnessed growing appetite for takeovers by Indian corporate across
the globe as a part of their inorganic growth strategy. In this chain Indian
aluminium giant Hindalco acquired Atlanta based company Novelis Inc, a world
leader in aluminium rolling and flat-rolled aluminium products. Hindalco
Industries Ltd., acquired Novelis Inc. to gain sheet mills that supply can makers
and car companies. Strategically, the acquisition of Novelis takes Hindalco
onto the global stage as the leader in downstream aluminium rolled products. The
transaction makes Hindalco the world's largest aluminium rolling company and
one of the biggest producers of primary aluminium in Asia, as well as being India's
leading copper producer.

The case study attempts to analyze the financial and strategic implications of this
acquisition for the shareholders of HINDALCO. The case explains the acquisition
deal in detail and highlights the benefits of the deal for both the companies.

Followings are the main issues to be discussed for critical review of this case:

 What is the strategic rational for this acquisition?

 Were the valuation for this acquisition was correct?

 What are financial challenges for this Acquisition?

 What is the future outlook of this acquisition?

 Introduction:

Mergers and Acquisitions have been the part of inorganic growth strategy of
corporate worldwide. Post 1991 era witnessed growing appetite for takeovers by
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Indian corporate also across the globe as a part of their growth strategy. This series
of acquisitions in metal industry was initiated by acquisition of Arcelor by Mittal
followed by Corus by Tata’s. Indian aluminium giant Hindalco extended this
process by acquiring Atlanta based company Novelis Inc, a world leader in
aluminium rolling and flat-rolled aluminium products. Hindalco Industries Ltd.,
acquired Novelis Inc. to gain sheet mills that supply can makers and car
companies.

Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the
leader in downstream aluminium rolled products. The acquisition of Novelis by
Hindalco bodes well for both the entities. Novelis, processes primary aluminium to
sell downstream high value added products. This is exactly what Hindalco
manufactures. This makes the marriage a perfect fit
.
Currently Hindalco, an integrated player, focuses largely on manufacturing
alumina and primary aluminium. It has downstream rolling, extruding and foil
making capacities as well, but they are far from global scale. Novelis processes
around 3 million tonnes of aluminium a year and has sales centers all over the
world. In fact, it commands a 19% global market share in the flat rolled
products segment, making it a leader.

Hindalco has completed this acquisition through its wholly-owned subsidiary AV

Metals Inc and has acquired 75.415 common shares of Novelis, representing 100
percent of the issued and outstanding common shares AV Metals Inc transferred
the common shares of Novelis to its wholly-owned subsidiary AV Aluminium Inc.
The deal made Hindalco the world's largest aluminium rolling company and one of
the biggest producers of primary aluminium in Asia, as well as being India's
leading copper producer. Hindalco Industries Ltd has completed its acquisition of
Novelis Inc under an agreement in which Novelis will operate as a subsidiary of
Hindalco.

 Industry Overview:

a. Global :

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Globally, newer packaging applications and increased usage in automobiles is
expected to keep the demand growth for aluminium over 5% in the long-term. Asia
will continue to be the high consumption growth area led by China, which has been
and is expected to continue to register double-digit growth rates in aluminium
consumption in the medium-term. With key consuming industries forming part of
the domestic core sector, the aluminium industry is sensitive to fluctuations in
performance of the economy. Power, infrastructure and transportation account for
almost 3/4th of domestic aluminium consumption. With the government focusing
towards attaining GDP growth rates above 8%, the key consuming industries are
likely to lead the way, which could positively impact aluminium consumption.
Domestic demand growth is estimated to average in the region of over 8% over the
longer-term. Lowering of duties reduces the net tariff protection for domestic
aluminium producers. Aluminium imports are currently subject to a customs duty
of 5% and an additional surcharge of 3% of the customs duty. The customs duty
has been reduced in a series of steps from 15% in 2003 to 5% in January 2007.
With reduction in import duties, domestic realization of aluminium majors, namely
Hindalco and Nalco, is likely to be under pressure, as the buffer on international
prices is reduced. Moreover, with greater linkage to international prices, volatility
in financials could increase. However, producers are moving downstream to negate
the higher volatility.

b. India:

The Indian aluminium sector is characterized by large integrated players like

Hindalco and National Aluminium Company (Nalco). The other producers of
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primary aluminium include Indian Aluminium (Indal), now merged with Hindalco,
Bharat Aluminium (Balco) and Madras Aluminium (Malco) the erstwhile PSUs,
which have been acquired by Sterlite Industries.

Consequently, there are only three main primary metal producers in the sector.

The per capita consumption of aluminium in India is only 0.5 kg as against 25 kg.
in USA, 19kg. in Japan and 10 kg. in Europe. Even the World’s average per capita
consumption is about 10 times of that in India. One reason of low consumption in
the country could be that consumption pattern of aluminium in India is vastly
different from that of developed countries. The demand of aluminium is expected
to grow by about 9 percent per annum from present consumption levels.

This sector is going through a consolidation phase and existing producers are in the
process of enhancing their production capacity so that a demand supply gap
expected in future is bridged.

However, India is a net exporter of alumina and aluminium metal at present. In

order to develop a guideline for energy management policy for the plants
comprising the aluminium industry, it was decided to undertake a questionnaire
survey that was followed up by plant visits.

Features of Indian Aluminium Industry:

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  Highly concentrated industry with only 5 primary plants in the country.
 Controlled by only a few players.
 Electricity, coal and furnace-oil are primary energy inputs.
 All plants have their own captive power units for cheaper and un-interrupted
power supply.
 Energy is 40% of manufacturing cost for metals and 30% for rolled
products.
 Energy management is a critical focus in all the plants.
 Each plant has an Energy Management Cell.
 High cost of technology is the main barrier in achieving high energy
efficiency.

 Company Over-view :

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 a. About Hindalco Industries

 Hindalco Industries a flagship company of Aditya Birla Group is structured

into two strategic business alliances- copper and aluminium.
 It has an annual revenue of US $ 14 bn and market capitalization in
excess of US $ 23bn.
 It commenced its operations in 1962 and today it has grown to become
the country’s largest integrated aluminium producer.
 It also 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, rolled products, extrusions, wire rods,
foils and alloy wheels.

Shareholding Pattern:

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Operations In India:

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Global Presence:

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Hindalco: Impressive Growth:

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Hindalco Growth Path:

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Consolidated Hindalco:

Hindalco Business:

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Domestic Market Share:

Division Market Share [ % ]

Primary aluminium 42
Rolled products 63
Extrusions 20
Foils 44
Wheels 31

Sales Revenue Of Aluminium Business:

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Production Capacities:

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Expansion Plans:

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Stock Highlights:

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Stock Reactions:

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Company Growth v/s Industry Growth:

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Peer Comparison:

FY 08- A Challenging Year:

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Consolidated Financial Highlights:

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Future Outlook:

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 b. About Novelis :
 It is the world leader in aluminium rolling.
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  It produces an estimated 19% of the world’s flat rolled aluminium
products.
 It is the world leader in the recycling of used aluminium beverage cans.
 It is the no. 1 rolled products producer in Europe, South- America and
Asia and the no.2 producer in North- America.
 Some of its customers include- Coca- Cola, Ford and General Motors.
 The company had 36 operating facilities in 11 countries as of December
31, 2005.

Global Presence:

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Product Portfolio:

Novelis Supplies World Leaders:

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Leader In Auto Sheet Maker:
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Leader In Can Sheet Market:

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Attractive Industry Fundamentals:

 Significant barriers to entry exist in the aluminium rolled products

industry:
1. Large capital cost.
2. Long lead times to install cost competitive plants.
3. Technological requirements, premium on “ know-how.”
4. Customer qualifications demand.
 Rising service, quality and efficiency demands of large global
customers.
 Continued growth in aluminium consumption particularly China and
India.
 Price structure insulates producer from the variability of primary
aluminium prices.

Novelis Regional Overview:

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Balanced Portfolio And Market Position:

World Of Novelis:

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Market Share Of Aluminium Rolled Products:

Diversified Presence:

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Growth Platforms For Novelis Fusion:

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Investments For Strategic Growth:

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Growth Model:

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Past Performance Novelis:[ Million $ ]

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  Rationale For Acquisition

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  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 foot-print.
 Hindalco will be able to ship primary aluminium form India and make
value added products.
 The acquisition will increase Hindalco’s scale of operation , entry into a
high-end downstream market and enhancing global presence.
 Novelis is a global leader [in terms of volume] in rolled products with an
annual capacity of 2.8 million tonnes and a global market share of 19%.
 Novelis has a capacity to produce 3 million tonne while Hindalco has a
capacity of 2,20,000 tonne.
 Hindalco plan to triple aluminium output to 1.5 million metric tonne by
2012 to become the world’s 5th largest producer.
 By acquiring Novelis, Hindalco fulfilled it’s dream to become the
world’s largest producer of aluminium flat rolled products.
 This acquisition gives access for Hindalco to high-end products and also
superior technology.
 This deal will give Hindalco a strong presence in recycling of aluminium
business.
 It would have taken a minimum of 8-10 years for Hindalco for building
these facilities.
 Hindalco also get the fusion technology of Novelis which increases the
formability of aluminium.
 According to reports it would take 10 years and US $12bn to build the
29 plants that Novelis has with capacity close to 3 million tonnes.
 The purchase strategically shifts Hindalco from an upstream aluminium
producer to a downstream producer
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  Facts About The Bid:
 Unlike the Tata-CSN shootout, the bidding was low profile.
 The identity of other bidders and the price they offered are not known,
though Birla said that the bidding was very competitive.
 Hindalco made only one bid- 44.93$.That won the deal.

 Rules Of The Deal:

 If 66.66% of the shareholders okay the deal, remaining shareholders will be
compelled to sell their share to Hindalco under the Canadian law.
 If the 66.66% approval is not obtained, Birla has the right to walk away from
the deal.
 Hindalco made the Novelis board sign a $100- million breakfee, the price
Novelis has to pay if it finds another buyer.
 There was also a clause of ‘new buyer premium ’of a ‘few dollars a share’
over the 44.93$ per price- only at that price can Novelis entertain a fresh
rival bid.
 So if a new bidder enters, it has to cough up atleast $5 a share more than
what Hindalco did.

 Facts Of The Deal:

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  The deal was an all cash transaction of US $6 bn, which included debt of
US $ 2.4bn.
 Hindalco will pay $ 44.93 in cash for each outstanding common share of
Novelis, around 15% premium to the market price.
 The agreement requires 66.66 per cent of Novelis shareholders present and
voting to tender their shares. Otherwise, Hindalco will walk away. If this
condition is satisfied, the remaining one-third of shareholders will be
"squeezed out," (will have to sell to Hindalco).
 Post-acquisition, over 50 per cent of the group's business could come
from operations outside India, which is currently at 30 per cent.
 Also, 20 per cent of the group's total workforce would also be based outside
India.
 After the merger Hindalco will emerge as the largest rolled aluminium
products maker and 5th largest integrated aluminium manufacturer in
the world.
 Novelis brings in high technology support.
 Novelis has a global market share of 19% while Hindalco enjoys a share of
60% in the rolled products market.
 The Novelis acquisition will give Hindalco a strong global foot-print .
 Novelis is operating in 11 countries with around 12,500 employees.In 2005,
the company reported net sales worth US $8.4bn and net profit of US $90
mn.
 Novelis reported net sales of US $7.4 bn and net loss of US $170 million in
nine months during 2006, on account of low contract prices.
 Novelis has a rolled product capacity of 3 million tonne while Hindalco at
this moment does not have any surplus capacity.

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  Hindalco’s Greenfield expansion will give it a primary aluminium
capacity of approximately 1 million tonne, but it will take around 3-4
years for all these to come into operation.
 Considering these factors, Hindalco’s profitability is expected to remain
under pressure and this will bounce back in 2009-10
 The debt burden of Novelis stood at US $2.4bn and additional US
$2.8bn will be taken by Hindalco to finance the deal.
 This will put tremendous pressure on profitability due to high interest
burden.
 Hindalco’s current expansion plans will cost Rs 25,000 crores and as a
result debt burden and interest will increase further.

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  Funding Structure:

 Funding Pattern:
 The Novelis acquisition of US $6bn is been funded through US $3.1bn of
loan.
 Hindalco personally will contribute USD 450 million.
 Aditya Birla group company Essel Mining will contribute USD 300 million.
 Hindalco plans to raise USD 2.8 bn of debt through 2 special purpose
vehicles.
 US $455mn through liquidation of investments.
 Existing loan of US $2.4bn will be replaced by term loan of US $1bn and
high yield bonds of US $1.4bn.
 Financial Challenges:
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  The acquisition will expose Hindalco to a weaker balance sheet.
 The company will move from high margin metal business to low margin
downstream products business.
 The acquisition will more than triple Hindalco’s revenues, but will increase
the debt burden and erode profitability.

 Risk Factors:
 The deal will create value only after completion of Hindalco’s expansion
plans, and due to its highly leveraged position, its plans may get affected.
 Novelis profitability could be adversely affected by the inability to pass
through metal price increases due to metal price ceilings in certain of the
company’s sales contracts.
 Some of the customers are significant to the company’s revenues and any
change in their business or financial conditions could adversely affect the
company’s business.
 Adverse changes in currency exchange rates could negatively affect the
financial results and competitiveness of company’s aluminium rolled
products relative to other materials.
 Unexpected fall in aluminium prices could adversely impact earnings.
 The end-use markets for certain products of Novelis products are highly
competitive and customers are willing to accept substitutes for the company
products.

 FUTURE:

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Future Of Aluminium:

Investment Required:

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  Financials:

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 1. Consolidated:

2. Standalone Performance: [ Hindalco ]

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 3. Consolidated Balance Sheet:
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 4. Segmental Performance:
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 5. Aluminium- Sales Volume/ Realization:

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 6. Operational Performance:

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 7. Production Growth:

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 8. Key Ratios- Aluminium:

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SWOT Analysis:

 Strengths:
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 1) Post acquisition of Novelis, Hindalco has become the world leader in flat-
rolled aluminium products and recycling of aluminium cans.
2) It is also the leading producer in primary aluminium and alumina in Asia.
3) It has a strong geographical presence- North and South America, Asia and
Europe.

 Weakness:
1) The R&D expenditure is very low compared to industry standards.

 Opportunities:
1) Strong growth in demand for aluminium.

 Threat:
1) Prices of primary metals are highly volatile.
2) Disruption in production due to external factors.

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