INDIA’S GLOBAL COMPETITIVENESS THROUGH

MERGERS AND ACQUISITIONS: TRENDS AND

STRATEGIES

(Lt. Col) Rattan Raina

INTRODUCTION
Following the liberalization and deregulation of Indian economy in 1991,
organizations are passing through a phase of change as never witnessed before. The new
business environment has provided Indian organizations to become global organizations
though acquisition and expansion plans. However it has opened Indian markets to global
players also. In this two way traffic, even successful Indian organizations are facing
challenges from both, domestic competitors as well as foreign competitors, who can
suddenly appear from anywhere on the globe. To remain ahead of competitors, business
leaders need to have a global vision, be pro-active, able to take calculated risk and initiate
and manage acquisition and consolidation process smoothly. The paper discusses trends
of acquisitions and mergers by Indian companies and recommends strategies to be
followed to make acquisition and merger process a success.
TRENDS OF MERGERS AND ACQUISITION IN INDIA
Mergers and acquisitions are not totally new to the Indian economy. In the past
also, companies used the takeover strategy to expand their business. In 1988, number of
takeovers was 15 (1), which have now grown to 115 foreign acquisitions in the first three
quarters of 2006 with total value of $ 7.4 billion. This is a huge increase as compared to
the previous year. There seems to be a great rush of Indian organization to achieve
global status through takeover and consolidation. Indian business Leaders are on the
shopping spree. This includes IT firms, Pharmaceutical Industry, Tea Co., Steel Industry
and even spare part producers are trying to enter global market. Recent cases include
takeover of Tetley Tea by Tata Tea by spending $ 435 million. This deal made Tata Tea,
the world’s 2nd largest Tea Company. In pharmaceutical, Ranbaxy bought Ethimed of
Belgium and Mundogen, the Spanish generies arms of GlaxoSimithKline. In IT, Wipro
took over Technology firms in Portugal, Finland and California. Bharat Forge, the
world’s second-biggest producer of forgings for engine and chassis components has
bought six companies in four countries – Britain, Germany, Sweden and China (2).
This year, Pune based Suzlon, producer of wind turbine bought Hansen, a Belgian
gearbox maker. After taking over Singapore firm Natsteel, Tata Steel has now concluded
the biggest takeover of European Steel giant – Corus for 4.3 billion Pounds (Rs. 36500
crores) (3). Day after Tata picked the deal to buy Corus, India’s largest electronics firm –
Videocon signed an agreement to acquire South Korea’s debt-Laden Daewoo Electronics
for nearly $ 370 million (Rs.3300 crore) (4). Latest effort is being made by Mahindra and
Mahindra, India’s largest utility vehicle maker to acquire German forging company
Schoeneweiss & Co. Acquisition cost is expected to be between $ 159 to 200 million (5).
With this trend, we do expect some more acquisition by Indian companies by end of
2006.
Above-mentioned examples show the trend and popularity of merger and
acquisition as an easy route for achieving growth and becoming global organization. No
doubt merger and acquisition, if planned and executed properly can provide great
opportunity of growth, cost saving, technology up gradation and capturing market beyond
the national boundaries. However success of Merger & Acquisition will depend on the
ability of management/business leader to critically analyze opportunities available
considering geopolitical issue, technical issues, cultural issues and above all human
issues.
Creating Global Organization Through Merger and Consolidation
It is inherent desire and need for every business to grow both vertically and
horizontally. Development within is slow and at times difficult. Best way to have fast
growth is to adopt a course of takeover and merger. This gives an organization an instant
growth. Considering its advantages the Indian companies seem to be in a great hurry to
achieve rapid growth through merger & acquisition. However all takeovers do not meet
the required expectations. Sahara-Jet Airways is a living example of the same. Such a
failure only leads to confusion and pain to management and to its employees. Reasons
for such failure are due to poor homework for acquisition and at times the negotiators are
excited and wish to conclude the deal in a hurry (6). Although, no two acquisitions or
mergers are same. Each situation is unique and presents its own set of problems and
potential solutions. Hence every deal requires individual approach. However, there are
some macro level aspects, which must be kept in mind while considering a targeting
company for acquisition or merger. These are economical environment, Geopolitical
environment, impact of terrorism on that region, economical health of the company,
availability of resources at appropriate cost including manpower etc. These are discussed
as under:
The Economical Environment
A business leader while planning Merger or Acquisition in other country must
give due consideration to the type of market economy. It is much easier to do business in
a country where resources are owned and controlled by the private sector (Market
Economy) as compared to a country where it is controlled by the Government (Command
Economy). However, due consideration must be given to the reforms initiated by various
governments to liberalize their economy. At present, most of the South East Asian
countries which are governed by command-based economy are now moving to be more
market-based economy (7).
Political Environment
A stable legal and political system is always preferred as it gives long-term
stability to the business. History of unstable Government, always increases the risk
factor and business in such a country should be avoided. A leader must have a clear
understanding of geopolitical situation of the region where the targeted company is
located. However, at times the countries with record of unstable Govt. do provide great
opportunities and a leader can afford to take calculated risk to grab the opportunity.
Impact of Global Terrorism
Terrorism has added a new dimension, which directly or indirectly affects the
conduct of business. At times, terrorism even affects the control of Govt. on national
economy and resources. We have living examples of Afghanistan and Iraq where no
business leader would like to sink his investment. Terrorism has even affected the
functioning of big global companies. Following the terrorist attack on September 11,
2001, Boeing Company (The Chicago-based Aerospace Company) laid off thousand of
US workers because of uncertainty over customer order (8). Similar risk was felt by
General Electric in the summer of 2002, when India and Pakistan nearly went to war due
to terrorist activities sponsored by Pakistan (9). General Electrical has invested more than
$ 80 million in Banglore (India) for creating largest research center outside U.S.A. War
between India and Pakistan would have greatly hampered their business.
Work Culture
The work culture of an organization is greatly influenced by the national work
culture, which effect the functioning of local Government and bureaucracy. This also
includes level of corruption, which an organization is likely to face during the process of
takeover and later on for smooth conduct of the business. It is not possible to impose
work culture of home organization fully. Research works have highlighted that work
culture of country has direct bearing on the work culture of a organization. For example
German employees at an IBM facility in Munich will be influenced more by German
culture than by IBM culture (10).
Based on the above-mentioned consideration, targeted companies should be
identified and short-listed and put up to Board of Directors for their consideration. Once
the proposal is accepted in principle, the further process can be initiated.
Merger and Acquisition Strategy
Before any strategy is formulated, a company needs have a clear-cut policy
regarding merger and acquisition. This policy must be complimentary to its vision and
mission. Once a policy decision to expand business through merger and acquisition has
been taken, the first step is to establish a ‘Merger and Acquisition Cell’. The roll of the
cell would be to identify the potential companies, which would depend on macro level
issues discussed above and the broad guidelines laid down by the company for such a
move i.e. to diversify the business or expand the existing business or for upgrading the
technology.
This cell should be assisted by business analyst, representative of financial
institution/investment bankers, technical experts, valuators and lawyers specializing in
this field. For faster decision making, which is vital in such cases, the cell must have
direct axis to the business leader/decision making authority. Sophisticated software that
can handle financial analysis, projections, valuation, and so on is available in the market
and help of these can be taken.
Once the targeted company has been identified, option of finalizing deal through
negotiation must be considered. However, if it is not feasible due to any reason and
takeover is vital for the organization, a hostile takeover should be considered. For hostile
takeover, the stock of targeted company should be bought quietly through third party.
The whole process must be managed confidentially.
PROCESS OF MERGER AND ACQUISITION
Process of takeover should adopt a planned approach. Such a plan should include
extensive explanation of various phases and activities. The aim of developing such an
action plan is to give the broad outlines of the various activities and to show the
connection between these. Process of a Merger or Acquisition can be divided into
following steps:
Step I Finalization of Targeted Company for Acquisition/Merger
Step II Formulating the Approach for Acquisition.
Step III Working out the Agreement.
Step IV Integrating the merged /acquired company.
Step V Post-acquisition/merger Plan.

STEP I: FINALIZATION OF TARGETED COMPANY

Information about targeted companies must be collected from all possible sources
& if required business intelligence agencies could also be hired to collect additional
information which may not be easily available. Final evaluation of targeted company
will broadly depend on the following:
1. Purpose of Merger or Acquisition
2. Financial information (Strength & Weakness of Company)
3. Management and organization Information
4. Environment of the country where targeted company is located)
As a result of this process some of the companies could be eliminated due to their failure
to meet important criteria.
Selection of Targeted Company: The specific criteria to make final selection includes
the following:
o Size of the company (in terms of earning, sales, volume and assets).
o Potential growth rate.
o Market value and financial condition including debts (if any).
o Coverage of market.
o Manufacturing facilities (location, capacity and condition).
o Management and personnel.
o Type of technology being used.
o Minimum return on investment.
 Depending upon the circumstances, other criteria may also be added to meet the
requirement of the objectives or companies’ basic policies regarding minimum return on
the investment human issues or environmental issues.
Step II: Formulating the Approach for Acquisition
Final recommendation must be put up to the Board of Directors for their approval.
Such approval constitutes authorization of Management to proceed with succeeding steps
of the process. The first and the most effective strategy is to convince the
management/business leader of targeted company to explore the idea of affiliating with
the acquirer and that it is going to gain from the proposal. Importance in this strategy is
to determine who should initiate the discussion (11). It is desirable that first such
discussion should be initiated through a consultant or an investment broker. This gives
an option for switching over to other strategy (hostile takeover).
If the management of targeted company is willing to be acquired or get merged,
the process of discussion must continue. The first few discussions will normally be
confined to generalities such as why two companies should combine, gains for both,
financial position, organizational structure and out look.
During the preliminary talks, targeted company may like to know approx price &
other broad terms of condition before it is willing to continue to discuss the deal
seriously. Acquirer must do his homework well & be prepared to submit the proposed
terms & conditions.
Step III: Working out the Agreement
The agreement for merger or acquisition should be done in two stages. In first
stage, a preliminary agreement between two companies could be worked out and in the
second & final stage the final agreement can be worked out. This is essential to give
breathing time to both companies to workout finer details for final agreement and also
check some additional detail, which might have been overlooked previously. The
preliminary agreement will include the following points:
1. The basis of agreement (Terms of Merger/Acquisition)
2. The authorization by the share holders of each company
3. The provision that during the interim period none of them will make any
substantial change in its operation or enter into unusual agreement without each
other’s approval. This agreement will be in form of a memorandum.
After due consideration final agreement of acquisition/merger should be prepared
considering legal aspects. This document should be prepared by the legal council of both
the companies in consultation with each other. Due consideration must be given to the
law of the land and code of conduct for acquisition and merger prepared by respective
governments. Final agreement must be put up to board of Directors for obtaining formal
approval of the agreement and its terms and conditions.
Once the agreement is approved by Board of Directors, announcement of
acquisition/merger should be made. This announcement must highlight the
advantages/gains of the both organization, their employees, shareholders and customers.
Step IV: Integration of Two Enterprises
To get full benefit from any acquisition or merger plan, it is essential that the two
companies must get integrated rapidly and effectively. To achieve this, it is essential to
formulate an integration plan. This plan must cover management function, accounting
controls, budgeting control and functional control. In case of merger, it is essential to
give due importance and share to both companies in running the new organization. There
may be a requirement to even develop a new organizational structure.
To achieve effective & smooth integration, it is essential to have integration cell
comprising of key personnel of both the companies. This cell could look after five types
of integration (12).
1. Strategic Integration It involves continuing contact among the top-leaders to
discuss broad goals or changes in each company.
2. Tactical Integration: It brings middle management together to develop plans for
specific projects of joint activities.
3. Operational Integration: Facilitating individual and small task group working
relationship.
4. Interpersonal Integration: It is important that leaders of both companies try
bringing people of their respective companies closer to each other. The
interpersonal ties between the members of the separate companies help in proper
integration of two merged companies.
Role of communication in Facilitating Integration: Communication plays an
important role in facilitating proper integration. This can be achieved by the followings
(13)
:
• Handling the fundamental questions asked by stakeholders
• Creating a communication strategy and infrastructure
• Unfolding the ‘vision’ and dealing with the dilemma of management disconnects
• Establishing the key message(s)communicated to all stakeholders
• Marketing the deal
• Motivating staff: retaining key people
• Controlling the rumor mill: how it can be done
• Stabilizing the new organization: the tools to use
• Getting buy-in from customers, suppliers, and alliance partners
• Creating two-way communication channels
Step V: Post-Merger Integration
There is generally tendency to become casual once deal has been finalized. Both
the parties feel so relieved and at times they fail to realize that the real problems come
when dealing with the nuts & bolts of the merger/takeover. Hence it is important to
prepare for rapid responses to unanticipated situations. Human relation aspects need
special attention.
Recommended model for merger and acquisition is appended as Appendix ‘A’
CONCLUSION
It is very tempting for a business leader to venture for merger or acquisition of
other company. But is must be understood that it is a very complex task. Hence any such
move must be planned & executed with great care. Remember a successful attempt
would be very rewarding.
Appendix ‘A’
(Refer to page 12)

A Generalized Model of Merger and Acquisition – Action Plans

Working out Broad policy regarding Acquisition\ Merger Programme
Defining Objectives of Acquisition\ Merger
Approval of the Board of Directors of the Objectives
Formulating The Programme
Search of a Partner for Acquisition\d Merger
Identifying, Selecting & Rating the Companies for the Final Choice
Formulating the Strategy of Approach
Undertaking Negotiations
Reaching the Preliminary Agreement
Considering Legal Aspects of Merger
Working out Final Agreement
Approval by the Boards of Directors
Announcement of the Merger\Acquisition
Integrating the Operations & Organizations of the Two Enterprises
 Five Levels of Integration
• Strategic Integration
• Tactical Integration
• Operational Integration
• Interpersonal Integration
• Cultural Integration
• Communication for integration

Post-Merger Integration

Source: H.C.Chaudhary, Relevance of Mergers and Acquisition; Evolving

Performing Organization Through People, New Age International Publishers, New Delhi,
P 281 (Modified)