2012

Mergers and Acquisition and Impact on Organisational Growth

Under the guidance of Prof Nandakumar M K

Group 5
Arnab Guha Mallik 74 Atul Sharma 75 Bhushan Nadoni 77 Bishnu Dokania 78 Rohan Kalani 108 AGM Nikhil Warade 125 [Type the company name]
1/1/2012

Table of Contents
INTRODUCTION....................................................................................................................................... 2 LITERATURE REVIEW .......................................................................................................................... 2 Daiichi and Ranbaxy9 Indian Pharmaceutical Industry ............................................................................................................... 5 Ranbaxy vs. Daiichi Sankyo ....................................................................................................................... 5 Rationale for Acquisition: .......................................................................................................................... 7 For Ranbaxy .............................................................................................................................................. 7 For Daiichi Sankyo ................................................................................................................................... 7 Strategic Outlook: Synergy ........................................................................................................................ 7 Problems and Risks..................................................................................................................................... 8 Post-acquisition Objectives ........................................................................................................................ 8 Post-acquisition challenges ......................................................................................................................... 8 VODAFONE AND HUTCH ...................................................................................................................... 9 Why India? ................................................................................................................................................ 9 Hutchison Essar ........................................................................................................................................ 10 Why Hutch................................................................................................................................................. 11 Implications ............................................................................................................................................... 12 SWOT ANALYSIS ......................................................................................................................................... 15 Deal Justification & Synergies Vodafone............................................................................................. 16 1) 2) 3) 4) Market Entry & Speed to Market .................................................................................................... 16 Increased Market Power.................................................................................................................. 16 Operational & Business Synergies .................................................................................................. 17 Financials ........................................................................................................................................ 17

Some Issues ................................................................................................................................................ 18 1) 2) 3) Shareholding Pattern ....................................................................................................................... 18 Regulatory Issues ............................................................................................................................ 18 Tax evasion & Legalities ................................................................................................................ 18

References.21

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INTRODUCTION
Merger and Acquisition is the aspect of corporate strategy, finance and management which consists of buying selling dividing and combining different companies and/or similar entities which can help the organization grow faster in an industry sector. These days the distinction between merger and acquisition is increasingly becoming blurred and the terms are used commonly. In precise terms the distinction still exists of ownership, legal entity and mode of operation. An acquisition is the purchase of one business/company by another business/company. Acquisition can be termed as friendly or hostile depending on how the proposed acquisition is communicated to and perceived by the target companies board of director. Acquisition usually refers to a purchase of a smaller firm by a bigger firm. But this is not always true as smaller firms can acquire larger firms; this process is called the reverse takeover. Merger differs with acquisition in business view as merger can be achieved by two firms move forward to establish a new single company and cease to exist as a separately owned entity. In practice actual mergers rarely occur. Usually one company will buy out another company and it is euphemistically proclaimed by the target company that the deal is a merger whereas technically it is an acquisition. The literature review consists of research papers published on various aspects of merger and acquisition. Here is the brief of the papers.

LITERATURE REVIEW
Cross-country determinants of mergers and acquisitions by Stefano Rossi, Paolo F. Volpin; London Business School, UK. This study of merger and acquisition focuses on the factors around the world determining the differences in laws and regulation across countries. It has been found that the volume of M&A activity is significantly larger in countries with better accounting standards and stronger shareholder protection. The prospect of an all-cash bid is less likely with the higher level of shareholder protection in the acquirer country. It is found that in cross-border deals, the targets are typically from countries with poorer investor protection than their acquirers countries, which suggest that cross-border transactions imposes an authority by improving the degree of investor protection within target firms. Data on international mergers and acquisitions sorted by Target Country Volume is the percentage of traded companies targeted in a completed deal.

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Hostile takeover is the number of attempted hostile takeovers as a percentage of domestic traded firms. Cross-border ratio is the number of cross-border deals as a percentage of all completed deals.

The data on successful M&A in public listed companies in India is as follows Volume of target Country Volume attempted 2.01% Hostile takeover 0.02% Cross Border takeover 56.02%

Corporate Cultural Fit and Performance in Mergers and Acquisitions by Yaakov Weber, School of Business Administration, Hebrew University of Jerusalem, Israel. The cultural fit has recently been acknowledged as a potentially important factor in mergers and acquisitions though the concept has been ill-defined. This paper finds its relationships to other human aspects in mergers have not been rigorously examined. The relationships between cultural differences and other human factors for the efficient integration process and financial performance has not been a subject of research using relatively large samples of mergers and acquisitions. This study examines the role of corporate cultural fit, autonomy removal, and commitment of managers in the merger to predict the effective integration between merger members in different industry sectors. The explored relationships between members, their role in this are found to be complex. These factors vary across industries and have different relationships with different measures of performance.

Making mergers and acquisitions work: Strategic and psychological preparation by Mitchell Lee Marks and Philip H. Mirvis, The Academy of Management Executive May 2001 This paper explores the M&A in the view of Strategic and Psychological preparation. It has been found that three out of four mergers and acquisitions have failed to achieve their financial and strategic objectives. The nature of the M&A combination process-such as the secrecy that shrouds negotiations opposes the necessities of rigorous research, learn why so many combinations fail, and to understand the management actions which put combinations on a successful course. Due to these reasons mergers and acquisitions continue to be mismanaged and to produce disappointing results. This paper focuses on early efforts in the pre-combination phase which steer the combination toward the successful path. Pre-combination preparation covers strategic and psychological matters. The strategic challenges concern key analyses that clarify and bring into focus the sources of synergy in a combination. It involves reality testing of
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potential synergies of the two sides' structures and cultures and establishing the preferred relationship between the two companies. The psychological challenge covers actions required to understand the mindsets which people have with them and develop over the period. Cross-Border Mergers as Instruments of Comparative Advantage by J. Peter Neary, Review of Economic Studies, October 2007 This paper proposes a model to examine the effect of cross border merger. It proposes a twocountry model of oligopoly in general equilibrium and it is used to show how changes in market structure accompany the process of trade and capital-market liberalization. This model predicts that bilateral mergers in which low-cost firms buying higher-cost foreign rivals are profitable under Cournot competition. As a result of this trade liberalization can trigger international merger waves thus encouraging countries to specialize and trade with respect to comparative advantage. Factors influencing wealth creation from mergers and acquisitions: A meta-analysis by Deepak K. Datta, George E. Pinches, V. K. Narayanan, Strategic Management Journal,1992 This paper analyzes the empirical literature regarding the contribution of various factors on shareholder wealth creation in M&A by the use of the multivariate framework. The results indicate that the target firm's shareholders gain considerably from mergers and acquisitions, the acquiring firm do not. It is also found that stock financing has a major impact on wealth of both the target and acquiring firms' shareholders. The presence of multiple bidders and the type of acquisition influence the acquiring firms return, whereas the regulatory changes and tender offering has the influence the targets' firms returns. This paper also provides a comparison of the findings with that of previous narrative review. It also discusses their implications from perspective of managers and researchers.

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DAIICHI and RANBAXY Indian Pharmaceutical Industry

At the time of acquisition deal in the year 2008, India was gaining in importance as a manufacturer of pharmaceuticals. Between 1996 and 2006 nominal sales of pharmaceuticals were up 9% per annum and thus expanded much faster than the global pharmaceutical market as a whole (+7% p.a.). Demand in India was growing markedly due to rising population figures, the increasing number of old people and the development of incomes. As a production location, the country was benefiting from its wage cost advantages over western competitors also when it comes to producing medicines. Currently, India is World's third-largest in terms of volume and stands 14th in terms of value with total turnover between 2008 and September 2009 was US$21.04 billion. It has expertise in reverse-engineering new processes for manufacturing drugs at low costs. Its Contributor to industry growth:-Bio pharma (60%), Bio services (18%) and Bio-agri (12%).The Indian pharmaceutical Industry statistics is that it has 3000 companies including 270 R&D companies in market with an employees base of 5 lakhs. However, lack of patent protection make undesirable to the multinational companies.

Ranbaxy vs. Daiichi Sankyo

The comparative study of the two companies at the time of deal can be summarized as:-

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Some of the key events during the acquisition process are: Date June 11, 2008 June 14, 2008 Event Signing of Agreement by Daiichi with Ranbaxy and its Promoters. Public announcement by Daiichi to the shareholders of Ranbaxy to acquire Additional 20% equity shares at Rs.737 per share under the Takeover Code. Ranbaxy announces its settlement with Pfizer over Lipitor litigation worldwide. Submission of draft letter of offer by Daiichi to SEBI for its observations Approval of preferential allotment of equity shares and warrants to Daiichi by the shareholders of Ranbaxy. Daiichi receives SEBIs observation on the draft letter of offer FIPB approves the proposed investment, subject to approval of CCEA Daiichi issues revised schedule of activities due to delayed receipt of SEBI observation Opening of open offer Closing of open offer Receipt of approval from CCEA for foreign investment Acquisition of 20% equity stake by Daiichi pursuant to open offer SEBI rejects Promoters application to sell their equity stake through a block deal on the stock market Ranbaxy becomes subsidiary of Daiichi upon increase in Daiichis stake to 52.5% (including preferential allotment and transfer of 1st tranche shares from Promoters) Daiichi acquires balance 11.42% shares from the Promoters off the stock market and the deal is concluded. Daiichis equity stake in Ranbaxy up to 63.92%

June 18, 2008 June 27, 2008 July 15, 2008

August 4, 2008 August 6, 2008 August 11, 2008

August 16, 2008 September 4, 2008 October 3, 2008 October 15, 2008 October 16, 2008

October 20, 2008

November 7, 2008

Finally, Ranbaxy was valued at US $ 8.5 billion in the deal. The financing was through a mix of debt and cash - 50% of cost of acquisition secured by short term debt and rest from internal accruals 6|Page

Rationale for Acquisition:

For Ranbaxy
Not enough products in the pipeline Generic market alone : not giving enough returns Scale and specialty were the key determinants of success Affected due to recent patent laws

For Daiichi Sankyo

Facing expiry of its patents Growing demand of Generics drugs due to Japanese Government intervention Aging Population with low pricing power Signs of a global downfall

Strategic Outlook: Synergy

1. Product Diversification a. Capability Acquisition - Reduce market risk through generics as well as proprietary drugs. 2. Financial Reasons a. Cost Competitiveness Low cost manufacturing facilities through R&D of the currently existing facilities of Ranbaxy b. Achieve Growth & Survive 3. Geographical diversification a. Access to New Markets Expanded Global Reach since Ranbaxy has exports to more than 125 countries across the globe b. This will also help in economies of scope, since the average cost of producing the drugs will be reduced substantially. 4. Strategic Reasons a. To gain better competitive position as compared to its competitors in the drugs and pharmaceutical industry b. Effectively managing opportunities across the full pharmaceutical life-cycle

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Problems and Risks

There were lots of government restrictions on Ranbaxy drugs and US FDA invocation may affect overall business in the country. There were concerns that the anticipated synergies may fail if such hurdles continue in the future. Also Daiichi Sankyo was to be exposed to separate products and markets hence there were high chances that cross selling will not occur and synergies just might be limited to operations. Another important concern for the Daiichi Sankyo was that cannibalization of the products of Ranbaxy might still occur with Japanese people switching to cheaper generic drugs.

Post-acquisition Objectives
Daiichi Sankyos focus is to develop new drugs to fill the gaps and take advantage of Ranbaxys strong areas. To overcome current challenges in cost structure and supply chain, Daiichi Sankyos primary aim is to establish a management framework that will expedite synergies. Daiichi seeks to reduce its exposure to branded drugs in a way that it can cover the impact of margin pressures on the business, especially in Japan. In a global pharmaceutical industry making a shift towards generics and emerging market opportunities, Daiichi Sankyos acquisition of Ranbaxy signals a move on the lines of its global counterparts Novartis and local competitors Astellas Pharma, Eesei and Takeda Pharmaceutical.

Post-acquisition challenges
Managing the different working and business cultures of the two organizations Undertaking minimal and essential integration and retaining the management independence of Ranbaxy without hampering synergies. Ranbaxy and Daiichi Sankyo will also need to consolidate their intellectual capital and acquire an edge over their foreign counterparts.

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VODAFONE AND HUTCH Vodafone

Vodafone Group Plc. is the world's leading mobile telecommunications company with significant presence in Europe, the Middle East, Africa, Asia Pacific and the United States and had 289 million customers till Dec, 2008. The Company's ordinary shares are listed on the London Stock Exchange and NYSE and had a total market capitalization of approximately 74 billion at 31 December 2008.

Fig: Vodafone Global Enterprises Footprint

Why India?
The other global acquisitions of Vodafone were not performing up to the mark. German business of Mannesmann, telecom businesses in Japan and Belgium and markets where Vodafone functioned were maturing and not growing in big way. There was stiff competition among all major players in the industry and this was the key driver for expanding in new markets.

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In India nationwide penetration was 13% and would grow to 50 % in the near future. Fastest Growing telecom Sector CAGR 22% (02-07).It was the second largest telecom market with the lowest tariff charges in the world having a wireless Subscriber base of 315.3 Mn and wire line base of 38.4 Mn and a Tele-density of 30.6 covering 23 circles and 4 categories (Metro, A, B & C).Moreover there was a large number of additions in telecom subscribers and the low teledensity ensured large untapped potential.

Hutchison Essar
Hutchison Essar is a leading Indian telecommunications mobile operator with 25 million customers currently, representing a 16.4% national market share. Hutchison Essar has over 6,000 employees ,operates in 16circles and has licenses in an additional six circles .In the year up to 31December2005, Hutchison Essar reported revenue of US$1.3billion,EBITDA of US$415million, and operating profit of US$313million. In the six months to 30 June 2006 ,Hutchison Essar reported revenue of US$908 million ,EBITDA of US $297 million ,and operating profit of US$226million and was the fourth largest mobile operator in India with 24.41 million subscribers .Average revenue per user was at Rs 374 ($8.31) against national average of Rs 335.46 ($7.45)

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Why Hutch
Urban markets in India became saturated and future expansion possible only in rural areas leading to falling Average revenue per user. HTIL wanted money through this deal to fund businesses in Europe and enable Hutchison to become one of Asias best capitalized companies. Hutch-Essar: mutual distrust Hutch needed fund for its overseas operations - launch of operations in Vietnam and Indonesia Lucrative offer (was getting $18.8 Bn on original investment of $2.6 Bn) Will able to generate huge cash for launch of operations in Vietnam and Indonesia HTIL Suffers loss of HK$768 million in 2005

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200 150 100 5.1 50 53 0 200203 200304 200405 200506 76 98.4 7.0 140.3 12.8 9.1

18.3

19.9 20 16 225.21 12 8 4 0

206

Telecom Subscriber Base

200607 200708 (as of June 2007) Teledensity

The Essar Group (Essar) currently holds a 33% interest in Hutch Essar and Vodafone will make an offer to buy this stake at the equivalent price per share it has agreed with HTIL. The estimated pre-tax gain from the sale is expected to be approximately $9 billion to Hutchison Telecom International Ltd. Vodafone to increase capital investment, particularly in the first two to three years. Vodafone will continue to hold its 26% interest in Bharti Infotel Private Limited (BIPL), which is equivalent to an indirect 4.4% economic interest in Bharti. Vodafone and Bharti have entered into a MOU relating to a comprehensive range of infrastructure sharing options in India. Vodafone's path towards building its Indian empire was far from easy. Numerous financial and regulatory roadblocks presented themselves. It had already made one foray into the market in 2005, when it bought a 10% stake in Bharti

Implications
Vodafone declared 80% growth in its customer base after 11 months of its acquisition of Hutch. And by 2009 it had 71.5 million subscribers (customer penetration at 34%). Vodafone was declared the second largest mobile service provider by revenue in India and reported revenues of
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Teledensity (in percent)

250
Subscribers (in million)

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2,689 million from 1,822 million in 2009 year ending. And they are still benefitting Vodafone India reported a growth of nearly 9 per cent in revenue to 1.03 billion pounds during the first quarter ended June 30, 2011. Some experts have pointed out that Vodafone may have overpaid Hutchison Essar by 30% to 40%. According to analysis, the fair value of Aires mobile services is about Rs25,000 (about $600) per subscriber. By contrast, Vodafone agreed to pay Rs35, 000 per subscriber for Hutchison Essar. Average revenue per user for Indian telecoms providers is Rs5, 400, while the operating margin is around 32% or Rs1,728 per customer per year. It seems Vodafone will take a long time to break even in the Indian market. Innovative services may give Vodafone an edge, but it will not be a significant one that would enable Vodafone to recoup the massive investment.

Porters 5 forces

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1. Threat for New Entrants (Low) Strong Brand pull and resonance exists for brands like Airtel , Vodafone, and Idea. Extremely high infrastructure setup costs Spectrum License cost is pretty high Cost of a new connection is low, hence breaking even takes a lot of time 2. Bargaining Power of Consumers (Low- Medium) Lack of differentiation among the service providers Service providers are the main drivers. Cut throat competition among the players Customer is price sensitive Low switching costs 3. Bargaining Power of Suppliers (Medium) Presence of large number of suppliers in the market Shared tower infrastructure among the companies Dearth of skilled managers and engineers especially those well equipped with the latest technologies Cost of switching is medium as changing the hardware will lead to an additional cost in modifying the architecture 4. Rivalry Against Existing Competitors (HIGH) 6-7 players in each region The Three Major players are : a. BSNL & MTNL ( State Owned Companies), Reliance Infocom, Tata Telecommunications, Bharti-Airtel and Idea High Exit Barriers High fixed cost for infrastructure and technology Frequent price wars mainly due to new entrants Low imitability i.e. very less time to gain advantage by an innovation (e.g. Caller tunes, life time card)

5. Threat to Substitute Products (High) The reach of Internet has now become a real threat, internet telephony and voice chats are not only a cheaper substitute but also effective and successful with growing awareness among the users. Some Substitutes: o VOIP (Skype, Messenger, etc.)
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o Online Chat o Email o Satellite phones Price-Performance trade-off very high Issues of mobility and penetration with the substitutes

SWOT ANALYSIS

Strengths
Diversified geographical portfolio with strong mobile telecommunications operations in Europe, the Middle East, Africa and Asia Pacific Network infrastructure Leading presence in emerging markets Large customer base

Weakness
Revenue concentration 80% of revenues come from Europe Lack of rural network wireless access

Opportunities
Improve accessibility to wide range of customers Focus on cost reductions improving returns Research and development of new mobile technologies Fast growing industry

Threats
High competition Regulated market

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Deal Justification & Synergies Vodafone

1) Market Entry & Speed to Market
Maturity of Other Global Markets Most of the global telecom markets of Vodafone had matured and the growth rates were sluggish in these markets. Vodafone wanted to enter into the high growth telecom markets of emerging countries where the mobile penetration rates were presently low but expected to grow at a relatively fast rate. Also Vodafones revenues were mostly from European countries and hence geographical diversification of its revenue base was desirable through addition of other markets to its portfolio. Indian Mobile Market as a Prospect The mobile penetration rate in India was low (around 13%) and was expected to grow at a fast rate (40% by 2012). The Indian Mobile market was therefore an attractive option to consider adding to the existing revenue base of Vodafone. More than Six Million subscribers were being added every month in the Indian Market. Also, Hutchison-Essar Limited was the 4th largest telecom operator in India with the highest Average Revenue per User (ARPU). Bharti Airtel Vodafone had a minority stake in Bharti Airtel and the original plan of Vodafone was to gain a majority share in Bharti Airtel. However, Bharti was a tightly held family run business which did not allow Vodafone to gain the desired majority stake. Reliance Reliance was also interested in acquiring a controlling stake in Hutchison-Essar which would have spelt clear trouble for Vodafones India Strategy. Vodafone had to speed up its entry to India which would have been difficult if it had to start from scratch in India. Hutchison-Essar was therefore the most attractive option that it had.

2) Increased Market Power

India was a key addition to the revenue base of Vodafone. This was evident from the post deal analysis where India accounts for 45% of total volume traffic of Vodafone. The Indian mobile market was highly untapped and it presented a very unique opportunity to Vodafones global operations. Also, Hutchison-Essar was the 4th largest telecom operator in India with a subscriber base of close to 23 million. Also, Hutch was the most visible mobile brand with a premium positioning having the highest Average Revenue per User. As mentioned earlier the addition of India was strategic in the sense that other global markets of Vodafone had matured and revenue growth in them had slowed down.

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3) Operational & Business Synergies

VAS & Other Technologies There was a huge potential for Value Added Services in the Indian market in which Vodafone had a lot of experience owing to its international exposure. Also, Vodafone was keen to provide total communication solutions in the Indian market and the impending introduction of 3G and other technologies was conducive to Vodafone. Customer Orientation & Service Hutch was the most visible and premium mobile brand in India. It had a unique positioning with a high level of customer orientation. This kind of positioning was also conducive for Vodafone to continue as it followed a similar practice in its other markets as well. Sharing of Infrastructure with Bharti Vodafone signed up a MOU with Bharti to share mobile towers and other infrastructure in rural areas which significantly reduced the infrastructure development costs in penetration of rural markets. This was possible as Vodafone had a minority stake in Bharti Airtel as well.

4) Financials
Financial Ratios (Profitability & Debt) Before acquisition Vodafone had favorable debt ratios when compared to the other bidders. It had lower Debt-Equity ratio which implied that it could afford greater debt on its balance sheet. Also, the profitability ratios (ROE, ROI, ROA, Gross Margin etc.) were also favorable for Vodafone. Revenues The ARPU of Hutchison-Essar was the highest amongst the telecom operators in India. Also, as mentioned earlier it had 23 million subscribers with a further scope of tapping the rural market. The acquisition was therefore projected to provide substantial revenue inflows to Vodafone.

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Some Issues
1) Shareholding Pattern
The majority shareholder in Hutchison-Essar Limited (HEL) was Hutchison Telecommunications International Limited (HTIL) with headquarters in Hong Kong with a 67% stake. The other major stake in HEL was of Essar group owned by Ruias. The relations between the two major shareholders in HEL were less than cordial and hence the Hutchison-Essar deal was opposed by the Essar group which threatened recourse to legal action against HTIL if it went ahead with the deal. However Essar was bought out later by Vodafone by paying $5.46 billion for the 33% stake held by Essar. The overall deal was speculated to be overvalued.

2) Regulatory Issues
FDI Cap

The sectorial Foreign Direct Investment was capped at 74% and when Essar group was bought out by Vodafone it led to allegations of violations of the FDI cap. Vodafone however maintained that Indian FDI laws will not be violated and the excess shares of Vodafone over 74% will be transferred to an Indian Entity or be made available in an IPO.
Spectrum Licensing & TRAI

There was a lack of transparency in spectrum allocation & licensing in the Indian context. Also TRAI had been slow in rolling out policies related to Mobile Number Portability amongst others. The allocation of 3G spectrum had also been on the menu for long enough. The following 2G scam validated some of the transparency issues and corruption in allocation of licenses.

3) Tax evasion & Legalities

The Cayman Island deal came under the scanner of Indian Income Tax Authorities for an alleged Tax evasion. The IT authorities maintained that as the assets of an Indian company were involved, the deal was to be taxed under capital gains tax by the Indian authorities. Vodafone, however, denied these claims and asserted that there was no tax liability on part of Vodafone and any such liability should fall on HTIL.

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References
Cross-country determinants of mergers and acquisitions, Stefano Rossi, Paolo F. Volpin, London Business School, UK. Corporate Cultural Fit and Performance in Mergers and Acquisitions, Yaakov Weber, School of Business Administration, Hebrew University of Jerusalem, Israel. Making mergers and acquisitions work: Strategic and psychological preparation, Mitchell Lee Marks and Philip H. Mirvis, The Academy of Management Executive May 2001 Cross-Border Mergers as Instruments of Comparative Advantage, J. Peter Neary, Review of Economic Studies, October 2007 Factors influencing wealth creation from mergers and acquisitions: A meta-analysis, Deepak K. Datta, George E. Pinches, V. K. Narayanan, Strategic Management Journal,1992
http://www.ipfrontline.com/depts/article.aspx?id=21319&deptid=3 http://www.nishithdesai.com/M&A-Lab/M&A%20Lab-Nov-11-2008.html http://www.nishithdesai.com/M&A-Lab/Ranbaxy%20Daiichi%20Deal%20%20November%202008.pdf http://www.jimandaz.com/indian_news/4/daiichiranbaxy_deal_gets_fipb_clearance_cceclearance _awaited.html

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