Mergers and

Acquisitions
PARVESH AGHI
India's 10 largest M&A
deals
 Tata Steel- Corus $ 12.2 billion
 Vodafone- Hutchison Essar $ 11.1 billion
 Airtel-Zain $ 10.7 billion
 Hindalco- Novelis $ 6 billion
 Ranbaxy –Diaiichi Sankyo $ 4.5 billion
 ONGC- Imperial Energy $2.8 billion
 NTT DoCoMo Tata tele $2.7 Billion
 HDFC-Centurion Bank $2.4 billion
 Tata Motors-Jaguar-landRover $2.3 billion
 Sterlite-ASACRCO $ 1.8$ billion

Tata Steel- Corus
Tata Steel-Corus: $12.2 billion
On January 30, 2007, Tata Steel purchased a 100%
stake in the Corus Group at 608 pence per share in
an all cash deal, cumulatively valued at $12.2 billion.
The deal is the largest Indian takeover of a foreign
company till date and made Tata Steel the world's
fifth-largest steel group
Vodafone- Hutchison

Vodafone-Hutchison Essar: $11.1 billion

On February 11, 2007, Vodafone agreed to buy out
the controlling interest of 67% held by Li Ka Shing
Holdings in Hutch-Essar for $11.1 billion.
This is the second-largest M&A deal ever involving
an Indian company.
Vodafone Essar is owned by Vodafone 52%, Essar
Group 33% and other Indian nationals 15%.
Hindalco- Novelis

Aluminium and copper major Hindalco Industries, the Kumar

Mangalam Birla-led Aditya Birla Group flagship, acquired Canadian
company Novelis Inc in a $6-billion, all-cash deal in February 2007.
Till date, it is India's third-largest M&A deal.
The acquisition would make Hindalco the global leader in
aluminium rolled products and one of the largest aluminium
producers in Asia. With post-acquisition combined revenues in
excess of $10 billion, Hindalco would enter the Fortune-500 listing
of world's largest companies by sales revenues
Ranbaxy –Diaiichi Sankyo
Marking the largest-ever deal in the Indian pharma industry,
Japanese drug firm Daiichi Sankyo in June 2008 acquired
the majority stake of more than 50 per cent in domestic
major Ranbaxy for over Rs 15,000 crore ($4.5 billion).
The deal created the 15th biggest drugmaker globally, and is
India's 4th largest M&A deal to date
 Airtel-Zain $ 10.7 billion

New Delhi, March 25 -- India's largest telecom

service provider Bharti Airtel is set to become a
large global player, with the Zain board on
Wednesday approving closure of the deal under
which Bharti would buy Zain's Africa operations
for an enterprise value of $10.7 billion (Rs
49,000 crore). The two companies will make a
formal announcement on Thursday, a senior
executive close to the deal said. Currently,
Bharti's non-India operations include Sri Lanka
and Bangladesh. This acquisition will take its
footprint to 15 African countries.
Major M&A in the 2000s
YEAR PURCHASER PURCHASED Transaction
value (in mil.
2000 AOL TIME USD
164,747
WARNER
2000 GLAXO SMITHKLINE 75,961
BEECHAM
2004 ROYAL SHELL 74,559
DUTCH TRANSPORT
2006 PETORLEUM
AT &T INC CO
BELL SOUTH 72,671
CORP
2001 COMCAST AT & T 72,041
CORP BROADBAND
2009 JP MORGAN BANK ONE 58,761
CHASE CORP
Lecture Agenda


 Motives behind M&A

 Conceptual framework
 Reasons for M & A
 Problems with M & A
 Attributes of effective
acquisitions
 Types of Mergers
 History of M & A
 M & A in India
Motives behind M&A
 Economy of scale
 Increase revenue or market
share
 Synergy
 Cross selling
 Taxation
 Resource transfer
 Diversification
 Empire Building
CONCEPTUAL FRAMEWORK

 MEANING OF
 MERGERS
 ACQUSITIONS
 AMALAMATIONS
 TAKEOVERS
 ABSORPTIONS





MERGER
Atransaction where two
firms agree to integrate
their operations on a
relatively coequal basis
because they have
resources and capabilities
that together may create a
stronger and competitive
advantage
MERGERS
 Merger is a transaction that results in
transfer of ownership and control of
a corporation.
 When one company purchases another
company of an approximately similar
size. The two companies come
together to become one.
 Two companies usually agrees to merge
when they feel that they can do
something together that they can’t do
on their own.



 MERGER

Merger refers to the merging of

one company into another or two
companies getting merged to
form a new corporate entity.
 A merger is popularly understood
to be fusion of two companies
 MERGER


 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.
 Ways of Merger
 A merger can take place in following four
ways :


 By purchase of assets

The asset of company Y may be sold to company X . Once this is done company Y is then



By purchase of common

 share.
The common share of company Y may be purchased by company X. when company X hold
 Ways of Merger
 By exchange of share
 for assets
y give its share to stake holders of company Y for its net assets. Then company Y is termina


 Exchange of shares
 for shares
Company X gives its shares to the share holders of company Y and then
ACQUSITION
A transaction where one
firm buys another firm
with the intent of more
effectively using a core
competence by making
the acquired firm a
subsidiary within its
portfolio of business
ACQUSITION
 Acquisition or take over denotes
a company acquiring controlling
stake in another so that the
acquirer can have management
control over the other firm
 Generally , acquisition is the
purchase by one company of a
substantial part of the assets or
securities of another .
ACQUISITION
 Strategy through which
one firm buys a
controlling, 100 percent
interest in another firm
with the intent of making
the acquired firm a
subsidiary business
within its portfolio
 Mergers & Acquistions

MERGERS ACQUISITIONS

mbining of two business entities under common ownership

On firm buys the assets or shares of another firm

ake over implies the acquiring firm is larger than the target. Reverse take over takes place
coalesce and share resources in order to realize a common goal
 Mergers & Acquistions

MERGERS ACQUISITIONS

parent stocks are usually retired and newa stock

can be issued
controlling share, a majority, or all of the target firm

name may be one of the parents’ or a combination can be friendly or hostile

the parents usually emerges as the dominant management

usually done through a tender offer
TAKEOVER
 An acquisition where the
target firm did not solicit
the bid of the acquiring
firm
Reasons for Problems
Problems in
in
Acquisitions Achieving
Achieving Success
Success
Increased Integration
market power difficulties

Overcome Inadequate
entry barriers evaluation of target

Cost of new Large or

product development extraordinary debt

Increased speed Acquisitions Inability to

to market achieve synergy

Lower risk Too much

compared to developing diversification
new products

Increased Managers overly

diversification focused on acquisitions

Avoid excessive
competition Too large
 Reasons for Acquisitions
Increased Market Power
Acquisition intended to reduce the competitive balance of the industry

Example: British Petroleum’s acquisition of U.S. Amoco

Overcome Barriers to Entry

Acquisitions overcome costly barriers to entry which may make “start-ups”
economically unattractive

Example: Belgian-Dutch Fortis’ acquisition of American Banker’s

Insurance Group

Lower Cost and Risk of New Product Development

Buying established businesses reduces risk of start-up ventures

Example: Watson Pharmaceuticals’ acquisition of TheraTech

 Reasons for Acquisitions
Increased Speed to Market
Closely related to Barriers to Entry, allows market entry in a more
timely fashion

Example: Kraft Food’s acquisition of Boca Burger

Diversification
Quick way to move into businesses when firm currently lacks experience and
depth in industry

Philip Morris acquired Millers' Brewing for $ 227 million

Reshaping
Reshaping Competitive
Competitive Scope
Scope
Firms may use acquisitions to restrict its dependence on a single or a few
products or markets
Airtel-Zain
 Problems with Acquisitions
Integration Difficulties
Differing financial and control systems can make integration of firms
difficult
Example: Intel’s acquisition of DEC’s semiconductor division

Inadequate Evaluation of Target

“Winners Curse” bid causes acquirer to overpay for firm
Example: Marks and Spencer’s acquisition of Brooks Brothers

Large
Large or
or Extraordinary
Extraordinary Debt
Debt
Costly debt can create onerous burden on cash outflows
 Problems with Acquisitions
Inability to Achieve Synergy
Justifying acquisitions can increase estimate of expected
benefits
Example: Quaker Oats and Snapple

Overly Diversified
Acquirer doesn’t have expertise required to manage unrelated
businesses

Example: GE--prior to selling businesses and refocusing

Managers
Managers Overly
Overly Focused
Focused on
on Acquisitions
Acquisitions
Managers may fail to objectively assess the value of outcomes
achieved through the firm’s acquisition strategy
Example: Ford and Jaguar

Too Large
Large bureaucracy reduces innovation and flexibility
 Problems with Acquisitions
Inability to Achieve Synergy
Justifying acquisitions can increase estimate of expected
benefits
Example: Quaker Oats and Snapple

Overly Diversified
Acquirer doesn’t have expertise required to manage unrelated
businesses

Managers
Managers Overly
Overly Focused
Focused on
on Acquisitions
Acquisitions
Managers may fail to objectively assess the value of outcomes
achieved through the firm’s acquisition strategy
Example ; Ford and Jaguar

Too Large
Large bureaucracy reduces innovation and flexibility
Types of Mergers and
Acquisitions
The M & A have been broadly


categorized into :
 Horizontal
 Vertical
 Conglomerate
 Types of Mergers and
Acquisitions
 Horizontal Mergers
- between competing companies
 Vertical Mergers
- Between buyer-seller relation-ship companies

 Conglomerate Mergers
- Neither competitors nor buyer-seller relationship
Horizontal Mergers
A horizontal mergers results in
the consolidation of firms that
are direct rivals- that is sell ,
substitutable products within
overlapping geographic
markets. This form of merger
results in expansion of a firm’s
operation in a given line
product line and at the same
time eliminates competitor.
ADVANTAGES

 REDUCTION OF COMPETITION

 INCREASED MARKET POWER

 PUTTING AN END TO PRICE CUTTING

 ECONOMIES OF SCALE IN
PRODUCTION



Vertical Mergers
 When two firms working in different stages
of production or distribution of the same
join together ,it is called vertical merger .
A Vertical Merger is one in which one the
buyer expands backwards and merges with
the firm supplying raw material or
expands forward in the direction of
ultimate consumer.
 The economic benefits of this type of
merger stems from the firm’s increased
control over the acquisition of raw
material or distribution of finished goods.
Vertical merger

 Acquisition of a supplier or
distributor of one or more products
 Increase of market power by
controlling more of the value chain
ADVANTAGES
 LOWER BUYING COST OF MATERIAL

 LOWER DISTRIBUITION COST

 ASSURED SUPPLIES AND MARKET

 COST ADVANTAGE
Conglomerate Merger
 A Conglomerate merger involves two firms
in totally unrelated activities .
 A conglomerate is a firm that has an
external growth through number of
mergers of companies whose business
are not related either horizontally or
vertically .
 A conglomerate may have operations in
manufacturing ,electronics , banking ,
fast food restaurants and other
unrelated businesses .
 This form of business results in the
expansion of a firm’s operation in
different unrelated lines of business with
an increased sense of operating
synergies
Conglomerate Mergers
 Three types of Conglomerate Mergers


1.Product Extension mergers- broaden the

product line of the firms
2.A geographic –market extension merger
involves two firms whose operations
have been conducted in no overlapping
geographic areas
3.Pure conglomerates mergers involve
unconnected or unrelated business
activities under a single banner.



CONGLOMERATE MERGER
UNRELATED INDUSTRIES MERGE
PURPOSE

 DIVERSIFICATION OF RISK

 Ex:Time warner-(they were into media &
movie production) & AOL-(leading
American website)



 Why M&A?
§ Market Intensification:
 Horizontal Integration – Buying a competitor
ü Acquisition of equity stake in IBP by IOC
ü AT&T merger into SBC enables the latter to
access the corporate customer base and
exploit the predictable cash flows typical
of this telephony section
ü
Market Extensions – New markets for Present
products
ü Maersk – Pipavav : strategic objective of
investing in a container terminal in the
west coast
ü Bharat Forge’s acquisition of CDP (Germany)
ü S&P’s proposed acquisition of CRISIL

§



40
 Why M&A?
§ Vertical Integration : Internalization of
crucial forward or backward activities
• Vertical Forward Integration – Buying a
customer
üIndian Rayon’s acquisition of Madura
Garments along with brand rights


• Vertical Backward Integration – Buying

a supplier
üIBM’s acquisition of Daksh


41
 Why M&A?
§ Diversification: Overcome Barriers to Entry
• Product Extension: New product in Present
territory
üP&G acquires Gillette to expand its
product offering in the household
sector and smooth out fluctuations in
earning


• Free-form Diversification: New product &

New territories
üFlight Centre’s proposed acquisition of
Friends Globe
üIndian Rayon’s acquisition of PSI Data
Systems


42
 Why M&A?
§ Advantages:
 Greater Economic Clout:
üProposed merger of Petroleum PSUs
üP&G merger with Gillette expected to
correct balance of power between
suppliers and retailers.
ü
Economies of scale and Sharing Overheads:
Size really does matter
üIOC & IBP
ü
Synthesized capabilities
üProposed merger of nationalized banks
§

43
 


History of Mergers and



Acquisitions
Early Merger movements
 Several major merger movements have
occurred in the United States
 Each was more or less dominated by a
particular type of merger.
 Merger movements occurred when the
economy experienced sustained high rates
of growth
History of Mergers and
Acquisitions
 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
History of Mergers and
Acquisitions Activity in United
States
 The First Wave 1897-1904
- After 1883 depression
- Horizontal mergers
- Create monopolies
 The Second Wave 1916-1929
- Oligopolies
- The Clayton Act of 1914
 The Third Wave 1965-1969
- Conglomerate Mergers
- Booming Economy
 The Fourth Wave 1981-1989
- Hostile Takeovers
- Mega-mergers
 Mergers of 1990’s
- Strategic mega-mergers
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.
First Wave Mergers
 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 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.
First Wave Mergers
 1897-1904-horizontal Mergers
 Monopolistic Market structure
 Mega merger between US Steel and Carnegie
Steel . It also merged with 785 separate
firms-75% of Steel production of US.
 More than 3000 companies disappeared.
 General Electric , Navistar, Standard Oil, Du-
Pont, American Tobacco-90% of market
share
 Transformation of regional firms into national
firms.
 Exploited the economies of scale.
Table-1
 Year Number of mergers
 1897 69
 1898 303
 1899 1208
 1900 340
 1904 79
Problems of the first Wave
 Financial factors
 Fraudulent financing
 Stock Market crash in 1904 and
Banking panic of 1907
 Closure of many banks and formation of
Federal Reserve System.
 Easy finance ends here.
 The US President Teodore Roosevelt and
President William Taft made a crack down
on Large Monopolies.
As a result: ???? What happened to

Standard Oil?
Standard Oil(SO)
 Broken in to 30 Companies.
 SO of New Jersey named EXXON
 SO of New York named MOBIL
 SO of California renamed CHEVRON
 SO of Indiana renamed AMOCO
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 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.
Second Wave Mergers
 1916-1929
 Oligopolies industry structure
 Industries like primary metals, petrolium
products, food products, chemicals
 Outside the previously consolidated heavy
manufacturing industries.


 Vertical mergers In the mining and metal

industries(1920)
Prominent Corporations
 General Motors, IBM, Union Carbide, John DEERE
 Between 1926 and 1930- there were 4600
mergers took place
 Result of which between 1919 and 1930 12,000
manufacturing , mining,public utility and
banking firms disappeared.
 This period rail transportation, motor vehicle
transportation became national market.
 Radios in homes, entertainment enhanced the
competition.
 Mass merchandising, national brand advertising
Second Wave Mergers

 Enhance productivity as a part of war

effect.
 The firms were urged to work together
rather than compete

 The second wave came to an end when
stock market crashed on October
29,1929.
 Investment Bankers played in the first two
phases of mergers.
The third Wave-1965-1969
 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 ; the investment banks
no longer played an important role
The third Wave-1965-1969
 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.
The third Wave-1965-1969
 Merger activity reached its highest level
during this period
 Booming of economy
 Conglomerate merger period-80%
 Diversification strategy
 It is because of ANTI TRUST enforcement
 Federal government adopted a stronger
antitrust enforcement both with
horizontal and verticle merger.
 1963-1361 mergers; 1970-5152 mergers



Management sciences
 Management principles were applied in
industries.
 Management graduates were employed to
manage conglomerate mergers.
 There were 6000 mergers which leads to
25000 firms disappeared.
 Investment Bankers do not finance most of
these mergers
Finance for mergers
 Equity financing
 Boom in stock market prices
 Many conglomerate merger failed
 The Revlon –cosmetic entered into health
care and failed and suffered in cosmetic
industry.
The Fourth Wave-1981-1989

 The 4th wave merger that started from 1981

and ended by 1989 was characterized by
acquisition targets that were 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.
The Fourth Wave-1981-
1989
Recession in 1974-75

 Hostile merger
 Take over or targeting on target company’s
board of directors.
 If the board accepts, it is considered friendly,
and if it opposes it, it is deemed to be
hostile.
 The great mergers such as Oil companies-
21.6%
Of dollar values of merger and acquisitions

Drugs and medical equipment industries due to

deregulation in some industries

Deregulation of airline industries


The Fourth Wave-1981-
1989
 Investment bankers played an aggressive
role.
 M&A advisory services became a lucrative
source of income for Goldman Sachs
 Innovation in acquisition techniques
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.
Fifth Wave Merger
 Once again increased activity in merger in
1992
 Mega mergers
 Strategic mergers
 Equity based
 Deregulations and technological changes
 Banking , telecommunications
entertainment and media industries
 High growth in banking sectors in 1990 as
banks grew greater than central banks.
 Banks fund M&A rather than new ventures.

Fifth Wave Merger
 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.
Fifth Wave Merger
 1981-2395
 1989-2366
 1990-2074 companies
 2001-7528 companies merged
Major Mergers in the
telecom
 Acquirer Target
 Vodafone Mannes man
 MCL worldcomSpirit
 Bell atlantic GTE
 AT&T MeCaw Celluar
 SBC Pacific Telesis
Major Mergers in Media and
Entertainment sector
 AOL Time Warner
 VIOCOM CBS
 WALT DISNEY CAPITAL ITIES/ABC
 AT&T MEDIA ONE
 TIME WARNER TURNER BRODCAST

M&A IN INDIA
 License era-Unrelated diversification
 Conglomerate merger
 Friendly take over and hostile bids by
buying equity shares
 Example: Swaraj paul attempted to raid on
Escorts Ltd.and DCM Ltd but could not
succeed.
 The Hindujas raided and took over Ashok
leyland and Ennore Foundaries.
 Chhabria Group acquired stake in Shaw
Wallace, Dunlop india and Falcon Tyres.
 Goenka group from culcutta took over Ceat
tyres.
 The Obroi-Pleasant hotels of Rane group.
 1989- Tata Tea acquired 50% of the equity
shares of Consolidated Coffee Ltd from
resident shareholders.
 merged to form HCL Ltd??.
HCL
 Hindustan Computers, Hindustan
Reprographic, Hindustan
Telecommunications and Indian Software
Ltd.
Comparative study
 US India
 Strategic By default(ANZ&
Standard chartered
 Gains by invest Not benefited by banks
ment bankers

Capital goods consumer goods

Borrowed

Earlier debt later by equity cash/FDI

Anti trust MRTP later The competition
bill 2001

Merger can takes plays in
folowing 4 ways
 By purchase of assets
 By purchase of Common
shares
 By Exchange of share for
asset
 Exchange of Shares for
Shares

By Purchase of Asset
 The asset of company Y may
be sold to company X. Once
this is done , company Y is
the legally terminated and
company X survives .
By purchase of common
shares
 The common share of the
company Y may be
purchased by company X .
When company X holds all
the shares of company Y, it
is dissolved
By Exchange of share for
asset
 Company X may give its
shares to the Shareholders
of company Y for its net
assets. Then company Y is
terminated by its
shareholders who now hold
shares of company X
Exchange of Shares for
Shares
 Company X gives its shares
to the shareholders of the
company Y and then
company Y is terminated.


 Back-up
 Takeover:
A ‘takeover’ is acquisition and both the
terms are used interchangeably.
 Takeover differs from merger in approach to
business combinations i.e. the process of
takeover, transaction involved in takeover,
determination of share exchange or cash
price and the fulfillment of goals of
combination all are different in takeovers
than in mergers

 In other words, in vertical combinations, the
merging undertaking would be either a
supplier or a buyer using its product as
intermediary material for final production.
The following main benefits accrue from
the vertical combination to the acquirer
company:
(1) It gains a strong position because of
imperfect market of the intermediary
products, scarcity of resources and
purchased products;
(2) Has control over products
specifications.

Amalgamation

 Merger is also defined as amalgamation.

Merger is the fusion of two or more
existing companies. All assets, liabilities
and the stock of one company stand
transferred to Transferee Company in
consideration of payment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,
Cash, or
A mix of the above modes.
 (B) Horizontal combination:
It is a merger of two competing firms which
are at the same stage of industrial process.
The acquiring firm belongs to the same
industry as the target company. The mail
purpose of such mergers is to obtain
economies of scale in production by
eliminating duplication of facilities and the
operations and broadening the product line,
reduction in investment in working capital,
elimination in competition concentration in
product, reduction in advertising costs,
increase in market segments and exercise
better control on market
 C) Circular combination:
Companies producing distinct products
seek amalgamation to share common
distribution and research facilities to obtain
economies by elimination of cost on
duplication and promoting market
enlargement. The acquiring company
obtains benefits in the form of economies
of resource sharing and diversification.
 D) Conglomerate combination:
It is amalgamation of two companies engaged
in unrelated industries like DCM and Modi
Industries. The basic purpose of such
amalgamations remains utilization of financial
resources and enlarges debt capacity through
re-organizing their financial structure so as to
service the shareholders by increased
leveraging and EPS, lowering average cost of
capital and thereby raising present worth of
the outstanding shares. Merger enhances the
overall stability of the acquirer company and
creates balance in the company’s total
portfolio of diverse products and production
processes
M&A activity in India

Share of India in global market

10,000.0 3,935.0 4,520.0 3.0%
1,628.2 1,976.8
1,028.1 1,087.4
1,000.0
2.1% 2.0%
USD billion

28.4
100.0
1.2% 16.8 38.4
1.2%
10.7 21.2 1.0%
4.4
10.0 0.7% 3.9 25.9
3.9
0.1 0.5% 3.2 0.5% 1.7
7.4 9.4
2.7 0.6 2.7
1.5
1.0 0.0%
2002 2003 2004 2005 2006 2007*
Inbound Outbound Domestic
* 2007 figure is estimated
Total Value of Global Deals % Share of india Source : Bloomberg

Value of Indian deals grew at a CAGR of 140 % from USD 8.3 bn in CY04 to USD
47.4 bn in CY06

Outbound M&A deals till March was USD 8.8 billion in 2007
Estimated total outbound M&A projected to be more than USD 35.0 bn in 2007
This appears to be just the beginning of the M&A wave in India

88
Increased corporate activity
lIndian corporates aspiring to become market leaders in their
business segments not only in India but also globally
lGrowth drivers
lStrong growth in demand leading to increased utilisation
of existing capacity
lProduct portfolio and service offering enhancement
lAccess to new technology and markets
lDerisking the business

…aided by easier access to capital supply…

89
Increased access to capital Private Equity Domestic Public issue
8,000 7,500 6,000
5,386

Public Issue (USD mn)

PE Funding (USD mn)

4,864

6,000 4,045
4,000

4,000

2,000 2,000
1,750
2,000

0 0
CY 2004 CY 2005 CY 2006 CY 2004 CY 2005 CY 2006

ADR/ GDR issue ECB/ FCCB issue

3,000 15,000
2,552 13,451
ADR/ GDR issue (USD mn)

ECB/ FCCB issue (USD mn)

2,500 12,000
2,000 8,546
9,000
1,500
5,228
6,000
1,000 613
459
500 3,000

0 0
FY 2004 FY 2005 FY 2006 FY 2004 FY 2005 FY 2006

…reflecting in the sharp increase in M&A activity in

the recent past…

90
Mergers and Acquisitions
trend
Amalgamation

 Merger is also defined as amalgamation.

Merger is the fusion of two or more
existing companies. All assets, liabilities
and the stock of one company stand
transferred to Transferee Company in
consideration of payment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,
Cash, or
A mix of the above modes.
 At tt r ib
ibu t e s of Ef f e ct
ct ive
ive
Acq
Acqu uisit
isit ion
ionss
+ p le m e n t a r y Asse t s or Re sou rce s
Com
Buying firms with assets that meet current needs to
build competitiveness

+Friendly
Friendly Acquisitions
Acquisitions
Friendly deals make integration go more smoothly

+Careful
Careful Selection
Selection Process
Process
Deliberate evaluation and negotiations is more likely to lead to
easy integration and building synergies

+Maintain
Maintain Financial
Financial Slack
Slack
Provide enough additional financial resources so that
profitable projects would not be foregone
Attributes of Effective Acquisitions
Acquisitions

+
Low-to-Moderate
Low-to-Moderate Debt
Debt
Merged firm maintains financial flexibility

+ Flexibility
Flexibility
Has experience at managing change and is flexible and
adaptable

+ Emphasize
Emphasize Innovation
Innovation
Continue to invest in R&D as part of the firm’s overall
strategy
Horizontal Acquisitions

◦ Acquisition of a company
competing in the same industry
◦ The increase of market power by
exploiting cost-based and
revenue-based synergies
◦ Character similarities between the
firms lead to smoother
integration and higher
performance
Horizontal Mergers
 HORIZONTAL MERGER – SIMILAR LINES OF
ACTIVITY
 as Ford announced the sale of the two
British iconic cars to Tata Motors Ltd.
 Ford acquired Jaguar for $2.5 bn in 1989
and Land Rover for $2.75 bn in 2000 but
put them on the market last year after
posting losses of $12.6 bn in 2006 - the
heaviest in its 103-year history.

 Why do mergers fail?
 Unfortunately, mergers are inherently risky. For every way to do them
right, there are probably 10 ways to do them wrong. Here are my
top 10 most common, preventable merger failure modes. Just one is
enough to spell doom, but many mergers suffer from several:
 Flawed corporate strategy for either or both companies
 One company sugarcoats the truth; the other buys a PowerPoint pitch
 Sub-optimum integration strategy for the situation
 Cultural misfit, loss of key employees after retention agreements are
up
 Acquiring company’s management team inexperienced at M&A
 Flawed assumptions in synergies calculation
 Ineffective corporate governance, plain and simple
 Two desperate companies merge to form one big desperate company
 CEO of one or both companies sells the board and shareholders a bill
of goods
 An impulse buy or panic sell gets shoved down the board’s throat

Corporate synergy
 Corporate synergy occurs when corporations interact congruently. A corporate
synergy refers to a financial benefit that a corporation expects to realize when it
merges with or acquires another corporation.There are three distinct types of
corporate synergies:
 Revenue
 A revenue synergy refers to the opportunity of a combined corporate entity to
generate more revenue than its two predecessor stand alone companies would be
able to generate. For example, if company A sells product X through its sales force,
company B sells product Y, and company A decides to buy company B then the
new company could use each sales person to sell products X and Y thereby
increasing the revenue that each sales person generates for the company.
 Management
 Synergy in terms of management and in relation to team working refers to the
combined effort of individuals as participants of the team. Positive or negative
synergy can exist. The condition that exists when the organization's parts interact
to produce a joint effect that is greater than the sum of the parts acting alone.
 Cost
 A cost synergy refers to the opportunity of a combined corporate entity to reduce or
eliminate expenses associated with running a business. Cost synergies are realized
by eliminating positions that are viewed as duplicate within the merged entity.
Examples include the head quarters office of one of the predecessor companies,
certain executives, the human resources department, or other employees of the
predecessor companies.

Absorption/consolidation
 Mergers or Amalgamations
 A merger is a combination of two or more businesses into one business. Laws in
India use the term 'amalgamation' for merger. The
Income Tax Act,1961 [Section 2(1A)] defines amalgamation as the merger of
one or more companies with another or the merger of two or more companies
to form a new company, in such a way that all assets and liabilities of the
amalgamating companies become assets and liabilities of the amalgamated
company and shareholders not less than nine-tenths in value of the shares in
the amalgamating company or companies become shareholders of the
amalgamated company.
 Thus, mergers or amalgamations may take two forms:-
 Merger through Absorption:- An absorption is a combination of two or more
companies into an 'existing company'. All companies except one lose their
identity in such a merger. For example, absorption of Tata Fertilisers Ltd (TFL)
by Tata Chemicals Ltd (TCL). TCL, 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.
 Merger through Consolidation:- A consolidation is a combination of two or
more companies into a 'new company'. In this form of merger, all companies
are legally dissolved and a new entity is created . Here, the acquired
company transfers its assets, liabilities and shares to the acquiring company
for cash or exchange of shares. For example, merger of Hindustan Computers
Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian
Reprographics Ltd into an entirely new company called HCL Ltd.
