MERGER & ACQUISITION IN INDIA: An Analytical Study

by
Harpreet Singh Bedi Sr. Lecturer, Department of Management Lovely School of Business Lovely Professional University Mobile no- 9855267392 Harpreet.bedi_lim@yahoo.com

Electronic copy available at: http://ssrn.com/abstract=1618272

MERGER & ACQUISITION IN INDIA: An Analytical Study

Abstract 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. 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. The Indian IT and ITES sectors have already proved their potential in the global market. The other Indian sectors are also following the same trend. The increased participation of the Indian companies in the global corporate sector has further facilitated the merger and acquisition activities in India. The various factors that played their parts in facilitating the mergers and acquisitions in India are 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. Even though mergers and acquisitions (M&A) have been an important element of corporate strategy all over the globe for several decades, research on M&As has not been able to provide conclusive evidence on whether they enhance efficiency or destroy wealth. There is thus an ongoing global debate on the effects of M&As on firms. This article seeks to explore the trends and progress in M&As India.

Electronic copy available at: http://ssrn.com/abstract=1618272

MERGER & ACQUISITION IN INDIA: AN ANALYTICAL STUDY

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons. Mergers may be broadly classified in (i) Horizontal mergers: A situation when two or more merging companies manufacture similar product in the same industry. (ii) Vertical mergers: A situation when two or more merging companies work at different stages of manufacture of a same product. (iii) Conglomerate mergers: A situation when two or more merging companies operate in different industries. The word acquisition, also known as a takeover or a buyout, is the buying of one company (the target) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. Another type of acquisition is reverse merger, a deal that enables a private company to get publicly listed in a short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets.

Electronic copy available at: http://ssrn.com/abstract=1618272

Reasons for Merger and Acquisition

Operating synergies: The uniting of two firms improve productivity or cut costs so that the unlevered cash flows of the combined firm exceed the combined unlevered cash flows of the individual firm A vertical merger between a supplier and a customer, eliminates various coordination and bargaining problems A horizontal merger between competitors, produces a less competitive product market and cost savings from combining R&D facilities and sales forces Financial synergies: Information and incentive problems may cause cashstarved firms to pass up positive NPV projects, but cash-rich firms to overinvest in negative NPV projects Conglomerates can use internal capital markets to transfer funds from negative NPV projects to positive NPV projects Enhance the flexibility of the organization Reduces bankruptcy risk

Objectives In this article an attempt has been made (i) To examine the presence of trends and progress of M&As in Indian corporation. (ii) To analyze year-wise and industry-wise variance in number and amount of M&A deals. Hypotheses To cover the above objectives following hypotheses have been formulated: 1. There is no significant difference in number and amount of M&A deals in between years and between industries. 2. There is no significant difference between M&A progress in manufacturing and service sector

Industry-wise Trends of M&As

The industry-wise trends in number and amount of M&A deals between 2000 and 2007 are presented in the Table 1 and Table 2 and the industry-wise trends and progress of M&As have been analysed on this basis

Food and Beverages: India is the world's second largest producer of food next to China, and has the potential of being the biggest with the food and agricultural sector. The Indian food market is estimated at over US$ 182 billion, and accounts for about two thirds of the total Indian retail market. According to industry experts, the market for carbonated drinks in India is worth US$ 1.5 billion while the juice and juice-based drinks market accounts for US$ 0.25 billion. Growing at a rate of 25 per cent, the fruitdrinks category is one of the fastest growing in the beverages market. The Indian food processing industry plays a significant role in diversifaction of agriculture products, generates employment, enhances income of farmers and creates a surplus for export of agro-foods. The important reason of the M&A activity initiated in this industry are deregulation, restructuring disinvestment, restructuring by parent companies and presence of foreign players.

Textiles Industry: Until the economic liberalization of Indian economy, the India Textile Industry was predominantly unorganized industry. The opening up of Indian economy post 1990s led to a stupendous growth of this industry. India Textile Industry is one of the largest textile industries in the world. Today, Indian economy is largely dependent on textile manufacturing and exports. India earns around 27% of the foreign exchange from exports of textiles. Further, India Textile Industry contributes about 14% of the total industrial production of India. Furthermore, its contribution to the gross domestic product of India is around 3% only. Textile Industry involves around 35 million workers directly and it accounts for 21% of the total employment generated in the economy. However the important reasons for the M&As in these sectors are: growth of power looms and handlooms sector at the cost of mill sector which has ultimately resulted in making them sick and unviable. This has led to an increase in the closure of mills; in addition, continued and persistent use of old plant and machinery

has led to low profitability in the mill sector and thereby forcing some of mills to closedowns.

Chemicals, Drugs and Pharmaceuticals: Under this category companies operating in the industrial groups of chemicals, drugs, pharmaceutical, cosmetics petrochemicals and rubbers have been taken into account for analyzing the trend and progress. The drug & pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. There are about 250 large Pharmaceuticals manufacturers and suppliers and about 8000 Small Scale Pharmaceutical & Drug Units which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These bulk drugs and pharmaceuticals manufacturers produce the complete range of pharmaceutical formulations i.e. medicines ready for consumption by patients and about 350 bulk drugs i.e. chemicals having therapeutic value and used for production of pharmaceutical formulations. Owing to a significant increase in Pharmaceuticals exports, India's USD 3.1 billion pharmaceutical industries are growing at the rate of 14 percent per year. It is one of the largest and most advanced among the developing countries. Even the number of pharmaceuticals exporters, manufacturers and suppliers is increasing tremendously, the factors that contributed to increase in M&A activity in these sectors are: Introduction of the process Patent Act in 1970, which required Indian companies to recognize international process patents. This has given an opportunity for the Indian companies to grow. This growth is associated with M&As and the emergence of WTO has brought about fundamental changes in the pharmaceutical industry. Trade-related aspects of intellectual property rights (TRIPS) of WTO require all Indian companies to comply with international patents. This has mainly happened in the form of M&As.

Nonmetallic Mineral Products: In this sector, cement and ceramics manufacturers are the primary players. The factors responsible for M&As are: before 1999 cement industry faced many problems like liquidity crisis, inadequate expenditure on infrastructure and costs of inputs. South-east Asian crisis brought narrowed profitability

resulting to the bigger players withstanding the pressure of lower profitability and smaller and marginal players closing down or merging with big players and trying to appear favorable for a takeover. National Quadrilateral Road Project and State Government Policies to construct the irrigation projects could be other factors responsible for this boom.

Basic Metal, Alloy and Steel: This is one of the oldest and traditional industry sectors in India. Companies operating in metals, alloy, steel and related concerns are grouped under this head. The factors contributing to M&As in this sector are: Slowdown of the economy during the year 1996-97, the capital markets, remaining depressed for the past couple of years, drying up sources of investment funds for industry, small and medium corporate finding it difficult to access institutional funds and export growth subjected to competitive pressure from imports.

Information Technology and Telecom: Companies operating in the IT, Software, telecom and convergence sector are clubbed in industry, the central government has formed an independent department of information technology. Since the removal of restrictions on foreign capital investment and industrial de-licensing, Indias Telecom industry has shown large growth The Important factors for increasing M&As in this sector are: Consistent efforts were made by the department of telecom and its constituent organizations for upgrading and expanding the telecom networks and services and the Initiation of internet and web based developments and introduction of cell phone in India;.

Automobiles and Automobile Ancillaries: Companies operating in automobile sector, locomotives, transport and spares have been included under this head. The Indian transport industry has been gradually playing a catalytic role for producing a wide variety of vehicles, passenger cars. Important factors responsible for an increase in M&As in this sector are: Globilalization is pushing global auto majors to consolidate, to upgrade technology, enlarge product range, access new markets and to cut costs.

Competitive pressure and presence of global players have resulted in a number of M&As in this sector.

Energy, Power, Gas and Oil: Companies operating in the field of energy, power, gas and oil are included in this group. Important factors responsible for an increase in M&As in this sector are, low rate of growth in power generation depressed the growth rate of industrial production and has necessitated immediate attention of big

companies like Reliance Industries and due to unavailability of power and frequent disruptions have given an impetus to M&As in this sector..

Financial Services: Companies operating in the field of finance, banking leasing and financial consultancy services are taken into account for this trends and progress analysis. Important factors responsible for an increase in M&As in this sector are: Boom in consumer spending, Liberalization of the economy, Greater liquidity of debt instruments, gradual opening up for direct investment by foreign pension/mutual funds in the Indian companies abroad.

Press of M&As In Manufacturing and service-sectors Table 1 and Table 3 respectively shows the industry-wise M&As which is divided into manufacturing and service sectors for the analysis of trends and progress in number and value of deals.

Table 1: Industry-wise Trends and Progress of M&As in India (Number of Deals)

INDUSTRY Food & Beverages Textiles Chemicals Non-Metallic Products

2001 113 56 205 Mineral 30

2002 90 59 180 27

2003 83 61 153 26

2004 70 61 159 24

2005 54 65 146 34

2006 74 67 124 46

2007 46 37 120 42

TOTAL 530 406 1087 229

Metals

45

54 248 36 44 11 18 767 227 122 323 672 1439

56 175 45 27 10 21 657 161 81 266 508 1165

44 157 36 33 8 22 614 107 81 260 448 1062

44 87 39 28 6 19 522 213 90 266 569 1091

41 92 33 25 4 37 543 190 70 296 556 1099

32 70 38 37 3 17 442 156 58 211 635 1077

316 1103 275 229 61 151 4387 1227 676 1753 3866 8353

Machinery (Electric, Non- 274 Electric, and Electronic) Automobiles & Ancillaries 48 Miscellaneous Manufacturing Diversified Electricity & Mining Manufacturing Sector Total Financial services Computer software Telecom Other Services Service sector Total 35 19 17 842 173 & 174 131 478

Grand Total (Manufacturing 1320 & service)

Source: Compile from various issues of CMIE Reports.

Table 2
t-Test: Two-Sample Assuming Equal Variances Mean Variance Observations Pooled Variance Hypothesized Mean Difference Df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Variable 1 626.7142857 19866.57143 7 13251.7381 0 12 1.209587481 0.124863998 1.782287548 0.249727996 2.178812827 Variable 2 552.2857143 6636.904762 7

Source:- Calculated on the basis of table no. 1 Number of Deals: The progress and trends are studied in number of deals of M&As by using the t-test and Anova analysis respectively. The number of deals of manufacturing sector is higher than the service sector in the first four years of the study but it becomes

reverse trend in the last three years of the study. Therefore, it can be concluded that there is no significant relationship between these two industries. Table 3: Industry-wise Trends and Progress of M&As in India (in Rs. Cr.)
INDUSTRY 2001 2002 2003 2004 2005 2006 2007 TOTAL

Food & Beverages Textiles Chemicals Non-Metallic Mineral Products Metals Machinery (Electric, Non-Electric, and Electronic) Automobiles & Ancillaries Miscellaneous Manufacturing Diversified Electricity & Mining Manufacturing Sector Total

2183 517 23241 909 1627 3067

1219 348 6410 435 1993 3126

1430 279 4176 563 735 3966

1432 934 7594 1861 628 6486

2385 1476 19088 4089 2138 5382

3348 873 12772 7236 2862 1729

1233 1163 29006 9536 3903 4508

123230 5590 81287 24629 13886 28261

743 1131 2169 2911 17498

1400 122 1114 2208 18372

1355 589 247 395 13702

957 596 574 12756 33818

6167 469 466 5260 46920

2026 469 125 9569 41009

7251 2640 51 5730 65021

19866 6016 4746 38829 236340

Computer software 1812 & Telecom Financial Services 1375 Other Services 6769

1536 4346 10546 16428

2614 2348 3892 8854

4320 4968 16897 26185

7506 17175 32278 56959

15536 15767 35830 67133

2987 17205 111057 131249

63184 36311 217269 316764

Service Sector Total 9956

Grand Total (Manfc. & service)

27454

34800

22556

60003

103879

108142

196270

553104

Source: Compile from various issues of CMIE Reports.

Table 4
t-Test: Two-Sample Assuming Equal Variances

Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail

Variable 1 Variable 2 33762.85714 45226.28571 351092263.5 1964452653 7 7 1157772458 0 12 -0.630284961 0.270162615 1.782287548 0.54032523 2.178812827

Value of Deals: The progress and trends are studied in value of deals of M&As by using the t-test and Anova analysis respectively. The value of deals of manufacturing sector is higher than the service sector in the first four years of the study but it becomes reverse trend in the last three years of the study. Therefore, it can be concluded that there is no significant relationship between these two industries.

Analysis of Variance of M&As Two-way ANOVA examines the variation between rows and columns. In this study we have calculated the variation between years and between industries by selecting number and value of M&A deals in India and result have been presented in Table 5 and 6 respectively.

Table 5: Two-way ANOVA Sector-wise Number of Deals of M&As in India

ANOVA Source of Variation Industry Year Error Total

SS 458595.8 15888.77 76524.95 551009.5

df

MS F P-value F crit 12 38216.32 35.95658 1.39E-25 1.889242 6 2648.128 2.491544 0.030184 2.227404 72 1062.846 90

Source:- Computed from Table No. 1

Number of Deals: It is concluded that the number of deals between years remained more or less similar but between industries the same is not true. Table 6: Two-way ANOVA Sector-wise Value of Deals of M&As in India (Rs. Cr.)
ANOVA Source of Variation Industries Year Error Total

SS 5912772082 1660473135 7983128132 15556373350

df

MS F P-value F crit 12 492731006.9 4.443951 2.73E-05 1.889242 6 276745522.6 2.495974 0.029928 2.227404 72 110876779.6 90

Source:- Complied from table no 3 Value of Deals: It is concluded that the value of deals between the years and between industries is not similar, and there is a growth in the value of deals of M&As in India over the period. Reasons for decrease in M & A in India From the above analysis we observed that the number of M&A deals decreased from 1,320 to 1,077, i.e. decreased by 18.5 per cent, in manufacturing sector it has decreased from 842 to 442, i.e. decreased by 47.5 per cent. The following are the possible reasons for decrease in the number of deals of M&A in India during the last couple of years. 1. The World wide economic slowdown is one of the most important factor for decrease in the no. of M&A in India during the last couple of years. 2. The various research studies in past shows that management cannot take it for granted that synergy can be generated and profits can be increased simply by going for mergers and acquisitions. 3. Bubble in the Financial market during the period of 2004-07 results in the over valuation in the stock prices almost all of the companies. 4. Further, the number of deals that fell through in the first 10 months of 2009 is less than that in 2007, experts and analysts say the overwhelming trend is of slowing M&A (merger and acquisition) activity in the background of drying credit lines, plunging market capitalizations and global economic uncertainty.

5. The environment also makes it very difficult for the companies involved in a transaction to arrive at a bidding price, Hon added, because the volatility in stock and credit markets had skewed traditional parameters used to arrive at this figure.

Findings
From the above study it is concluded that the 1. Total amount of M&A deals increased by 615 per cent during 2001-07. 2. The amount of M&A deals of manufacturing sector increased by 272 per cent, in service sector increased tremendously by 1,218 per cent. 3. In case of financial services increased from Rs. 1375 crore to Rs. 17205 crore during 2001-07. 4. However the total number of M&A deals decreased from 1,320 to 1,077, i.e. decreased by 18.5 per cent, in manufacturing sector it has decreased from 842 to 442, i.e. decreased by 47.5 per cent, in service sector increased from 478 to 635, i.e. increased by 32.9 per cent and in financial services it was fluctuating. 5. Even with decrease in the number of deals of M&A in India during the last couple of years the position of India fares better than some developed countries in terms of M&As. The size of completed M&A deals for India had declined by 25%, according to an 9 October 2009 Thomson Reuters reportexactly in line with the global average and significantly better than a 28% decline for the US, 57% for France and 32% for the UK. References: 1. Boston Consulting Group research report, The Brave new world of M&A How to create value from Mergers and Acquisitions, July 2007, International Research Journal of Finance and Economics - Issue 22 (2008) 203. 2. Campa, Jose and Simi Kedia. 1999. Explaining the diversification discount.

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