Project Finance-Merger and Acquisition

A Project report on Mergers & Acquisitions
(Project Report prepared under the XMBA- Programme of ITM Matunga Mumbai)
Submitted By: H i m m a t Si n gh B i s h t
U n d e r gu i d a n c e o f : P r o f N o m i t a A ga r w a l
Student: I T M In s t i t u t e M a t u n ga C a m p u s Mumbai X MB A - 4 2 R o l l N u m b e r : MA T 2 01 1 XMB A 5 2P0 0 6
Faculty Finance I T M In s t i t u t e Ma t u n g a C a m p u s Mumbai
Merger and Acquisition
Disclaimer
This project report/dissertation has been prepared by the author as an XMBA-Programme for academic purposes only. The views expressed in the report are personal to the intern and do not necessarily reflect the view of in general or personnel. The project report on Merger and acquisition was prepared purely for academic purpose.
Merger and acquisition
Acknowledgement
My first experience on the project of Merger and Acquisition has been successfully done, thanks to the support of everyone. I would like to acknowledge all the people who have helped us in this project. However, I wish to make special mention of the following. First of all I am thankful to our Prof. Nomita Agarwal under whose guideline I am able to complete my project. Throughout my project she gave through instruction regarding the project and different sources. And of curse my colleagues Mr. Uday Shetty being a company mentor he provided me all the essential information, holds the same space of honour. I am wholeheartedly thankful to them for giving me their valuable time & attention and for providing me a systematic way for completing my project in time. I must make special mention of Mr. Google, who gave me the secondary data and helped me a lot to complete the project.
DECLARATION
I, Mr. Himmat Singh Bisht, student of ITM-Mumbai, Matunga Campus, hereby declare that this project report entitled Merger and Acquisition is written and submitted by me under the guidance of Prof Nomita Agarwal. The findings in this report are based on the data collected by me during the course of the project. While preparing this project, I have not copied from any other report. Finally, I am very thankful to Prof. Nomita Agarwal for his valuable academic guidance in my project work.
Date: -
Signature of Candidates Himmat Singh Bisht
Table of contents
Tittle Disclaimer Acknowledgement Declaration Executive Summary Introduction of M & A Understanding of M & A Purpose of M & A M & A as growth strategy Type of Merger Advantage of M & A Consideration of merger & takeover Reverse merger Procedure of M & A Major area in M & A Ways to succeeds in M & A Improving odds in M & A Six key rationales for M& A Why to Regulate Mergers & Acquisitions Major M&A in 21st century by the Indian corporate CASE STUDY 1 GlaxoSmithKline Pharmaceuticals Limited, India (Merger Success) CASE STUDY 2 Deutsche Dresdner Bank (Merger Failure) CASE STUDY 3 Standard Chartered Grindlays (Acquisition Success) Case Study 4 TATA TETLEY (Controversial Issue over Success and Failure) CASE STUDY 5 Daimler Chrysler (Failure) Case Study 6 Tata Motors and JRL (Acquisition success) Conclusion Appendix Page number 2 3 4 6 7 9 10 14 16 17 19 23 27 29 30 32 34 37 40 41 42 43 45 47 48 56 57
Executive Summary
The basic concept of my project Merger and acquisition was to find out the type of merger and acquisition, need for M&A and post M&A effect.
Mergers and acquisitions (M&A) are two broad types of restructuring through which managers seek economies of scale, enhanced market visibility, and other efficiencies. A merger occurs when two companies decide to combine their assets and liabilities into one entity, or when one company purchases another. An acquisition describes one companys purchase of anotherfor example, the absorption of a smaller target firm into a larger acquiring firm. The nature and scope of M&A activity has changed over time, with a growing trend to crossborder transactions. M&As are motivated by the expectation of financially rewarding synergies in terms of reduced fixed costs, increased market share, cross-sales, economies of scale, lower taxes, and more efficient resource distribution. At the individual level, executives may pursue M&As because of psychological drivers such as empire-building, hubris, fear, and mimicry. There are five broad types of strategic fit: overcapacity, geographic roll-up, product or market extension, research and development, and industry convergence. M&A execution can be hampered by incompatible corporate cultures, with failure to achieve synergies, high executive turnover, and too much focus on integration at the expense of customers. Before the deal, managers should formulate a clear and convincing strategy, pre assess the deal, undertake extensive due diligence, formulate a workable plan, and communicate to internal and external stakeholders. After the deal, managers should establish leadership, manage culture and respect employees, explore new growth opportunities, exploit early wins, and focus on the customer.
Introduction
We have been learning about the companies coming together to from a n o t h e r company and companies taking over the existing companies to expand their business. With recession taking toll of many Indian businesses and the feeling of insecurity s u r g i n g o v e r o u r b u s i n e s s m e n , i t i s n o t s u r p r i s i n g w h e n w e h e a r a b o u t t h e i m m e n s e numbers of corporate restructurings taking place, especially in the last couple of years. Several companies have been taken over and several have undergone internal restructuring, w h e r e a s c e r t a i n c o m p a n i e s i n t h e s a m e f i e l d o f b u s i n e s s h a v e found it beneficial to merge together into one company. In this context, it would be essential for us to understand what corporate restructuring and mergers and acquisitions are all about. All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side Mergers & Acquisitions may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisitions at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers & Acquisition's. Many have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing shareholder value. Mergers and acquisitions are two broad types of restructuring through which managers seek economies of scale, enhanced market visibility, and other efficiencies. A merger occurs when two companies decide to combine their assets and liabilities into one entity, or when one company purchases another. The term is often used to describe a merger of equals, such as that of DaimlerBenz and Chrysler, which was renamed DaimlerChrysler (see case study). The term acquisition simply refers to one companys purchase of anotheras when a smaller target firm is bought and absorbed into a larger acquiring firm. To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors that the management may have to look into before going for merger. Considerable amount of brainstorming would be required by the managements to reach a conclusion. E.g. A due diligence report would clearly identify the status of the company in respect of the financial position along with the net worth and pending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company.
Patterns
The worldwide M&A market topped US$4.3 trillion and over 40,000 deals in 2007. Figure 1 depicts the growth of M&A activity, quarter by quarter, over the last five years.
The nature and scope of M&A activity has changed substantially over time. In the United States, the Great Merger Movement (1895 to 1905) was characterized by mergers across small firms with little market share, resulting in companies such as DuPont, Nabisco, and General Electric. More recently, globalization has increased the market for cross-border M&As. In 2007 cross-border transactions were worth US$2.1 trillion, up from US$256 billion in 1996. Transnational M&As have seen annual increases of as much as 300% in China, 68% in India, 58% in Europe, and 21% in Japan.1 The regional share of todays M&A market is shown in Figure 2.
Understanding of Merger and acquisition?

What is Merger?
Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller. 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.
What is acquisition?
Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. Methods of Acquisition: An acquisition may be affected by a) Agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; b) Purchase of shares in open market; c) To make takeover offer to the general body of shareholders; d) Purchase of new shares by private treaty; e) Acquisition of share capital through the following forms of considerations viz. Means of cash, issuance of loan capital, or insurance of share capital. 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 fulfilment of goals of combination all are different in takeovers than in mergers. For example, process of takeover is unilateral and the offer or company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offeree company being more co-operative. De-merger or corporate splits or division: De-merger or split or divisions of a company are the synonymous terms signifying a movement in the company.
Purpose of Mergers & Acquisitions

The purpose for an offer or company for acquiring another company shall be reflected in the corporate objectives. It has to decide the specific objectives to beachieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position. Other possible purposes for acquisition are short listed below Motives Mergers and acquisitions are often motivated by company performance, but can also be linked to executive decision-makers empire-building, hubris, fear, and tendency to copy other firms. The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance through synergies that enhance revenues and lower costs. The two companies are expected to achieve cost savings that offset any decline in revenues. Then Hewlett-Packard CEO Carly Fiorina justified the merger with Compaq at a launch effort on September 3, 2001: This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners. In addition to the clear strategic benefits of combining two highly complementary organizations and product families, we can create substantial shareowner value through significant cost-structure improvements and access to new growth opportunities. The formula for the minimum value of the synergies required to protect the acquiring firms stockholder value (i.e. to avoid dilution in earnings per share) is: (Pre-M&A value of both firms + Synergies) Post-M&A firm number of shares = Pre-M&A firm stock price) Managers may be motivated by the potential for the following synergies: Reduced fixed costs: Duplicate departments and operations are removed, staff often made redundant, and typically the former CEO also leaves. Increased market share: The new larger company has increased market share and, potentially, greater market power to set prices. Cross-sales: The new larger company will be able to cross-sell one firms products to the other firms customers, and vice versa. Greater economies of scale: Greater size enables better negotiations with suppliers over bulk buying. Lower taxes: In some countries, a company that acquires a loss-making firm can use the targets loss to reduce liability. More efficient resource distribution: A larger company can pool scarce resources, or might distribute the technological know-how of one company, reducing information asymmetries. At the individual decision-making level, M&A activity is also linked to the following:
Merger and Acquisition 10
Empire-building: M&As may result from glory-seeking, as managers believe bigger is better and seek to create a large firm quickly via acquisition, rather than through the generally slower process of organic growth. In some firms, executive compensation is linked to total profits rather than profit per share, creating an incentive to merge/acquire to create a firm with higher total profits. Furthermore, executives often receive bonuses for completing mergers and acquisitions, regardless of the resulting impact on share price. Hubris: Public awards and increasing praise may lead an executive to overestimate his or her ability to add value to firms. CEOs who are publicly praised in the popular press tend to pay 4.8% more for target firms. Hubris can also lead executives to fall in love with the deal, lose objectivity, and overestimate expected synergies. Fear: Managers fear of an uncertain environment, particularly in terms of globalization and technological development, may lead them to believe they have little choice but to acquire if they are to avoid being acquired. Mimicry: If leading firms in their industry have merged or acquired others, executives may be more likely to consider the strategy. Executives may overpay for a target firm. Microsoft has acquired more than 128 companies, but recently withdrew a US$44.6 billion offer of cash and stock for Yahoo. Microsoft CEO Steve Ballmer commented on the logic of the decision: Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer. After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees, and other stakeholders to withdraw our proposal Strategic FIT: Regardless of their category or structure, all M&A share the common goal that the value of the combined companies will be greater than the sum of the two parts. M&A success depends on the ability to achieve strategic fit. Harvard Professor Joseph Bower identifies five broad types of strategic fit, based on the relationship between the two companies and the synergies sought: overcapacity M&A, geographic roll-up M&A, product or market extension M&A, M&A as R&D, and industry convergence M&A.4 Overcapacity M&A: In this horizontal M&A, the two companies often competed directly, with similar product lines and markets. The new combined entity is expected to leverage synergies related to overcapacity by rationalizing operations (for example, shutting factories). This often one-time M&A can be especially difficult to execute as both companies management groups are inclined to fight for control. Geographic Roll-Up M&A: In a geographic roll-up the new entity seeks geographic expansion, but often keeps operating units local. For example, Banc One purchased many local banks across the United States in the 1980s. Banc One was, in turn, acquired by JPMorgan Chase & Co. in 2004.
11
Product or Market Extension M&A: Market-based roll-up focuses on extending a product line or international coverage. Often the two companies sell similar products but in different markets, or different products in similar markets. Brands are often a key motivation. Philip Morris purchased Kraft for US$12.9 billionfour times its book value. Philip Morris CEO Hamish Marshall justified the premium: The future of consumer marketing belongs to companies with the strongest brands. M&A as R&D: A fourth type of strategic fit is research and development. Companies may acquire or merge with others to access technologies. Microsoft has aggressively pursued this strategy, acquiring smaller, entrepreneurial firms such as Forethought, which had presentation software that would eventually be known as PowerPoint. Industry Convergence M&A: Finally, the new entity may be motivated by a bet that a new industry is emerging and the desire to have a position in this industry. For example, Viacom purchased Paramount and Blockbuster in the expectation that integrated media firms controlling both content and distribution were the wave of the future. Apart from above points, below are the important points for any (1) Procurement of supplies: 1. To safeguard the source of supplies of raw materials or intermediary product. 2. To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc. 3. To share the benefits of suppliers economies by standardizing the materials. (2) Revamping production facilities: 1. To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources. 2. To standardize product specifications, improvement of quality of product, expanding 3. To Market and aiming at consumers satisfaction through strengthening after sale Services; 4. To obtain improved production technology and know-how from the offeredcompany 5. To reduce cost, improve quality and produce competitive products to retain and improve market share. (3) Market expansion and strategy: 1. To eliminate competition and protect existing market; 2. To obtain a new market outlets in possession of the offeree; 3. To obtain new product for diversification or substitution of existing products and to enhance the product range; 4. Strengthening retain outlets and sale the goods to rationalize distribution; 5. To reduce advertising cost and improve public image of the offeree company; 6. Strategic control of patents and copyrights. (4) Financial strength:
1. 2. 3. 4. 5.
To improve liquidity and have direct access to cash resource; To dispose of surplus and outdated assets for cash out of combined enterprise; To enhance gearing capacity, borrow on better strength and the greater assets backing; To avail tax benefits; To improve EPS (Earning Per Share).
(5) General gains: 1. To improve its own image and attract superior managerial talents to manage its affairs; 2. To offer better satisfaction to consumers or users of the product. (6) Own developmental plans: The purpose of acquisition is backed by the offer or companys own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation, accounting, valuation, etc. But might feel resource constraints, with limitation of funds and lack of skill, managerial personnelss. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities; secure additional financial facilities eliminate competition and strengthen its market position. (7) Strategic purpose: The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate strategies. Thus, various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination. (8) Corporate friendliness: Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. The combining corporate aim at circular combinations by pursuing this objective. (9) Desired level of integration: Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. Such integration could be operational or financial. This gives birth to conglomerate combinations. The purpose and the requirements of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations.
13
Mergers and Acquisitions as a Growth Strategy

As a business gets bigger, the growth will be organic or inorganic. Organic growth, also called internal growth, occurs when the company grows from its own business activity using funds from one year to expand the company the following year. While ploughing back profits into a business is a cheap source of finance, it is also a slow way to expand and many firms want to grow faster. A company can do so by inorganic growth. Inorganic growth, or external growth, occurs when the company grows by merger or acquisition of another business. Getting involved with another company in this way makes good business sense as it can give a new source of fresh ideas and access to new markets. Most business enterprises are constantly faced with the challenge of prospering an d growing their businesses. Growth is generally measured in terms of increased revenue, profits or assets. Businesses can choose to build their in-house competencies, invest to create competitive advantages, differentiate and innovate in the product or service line (Organic Growth) or leverage upon the market, products and revenues of other
Companies (In-organic Growth).

Apple Inc. is probably an excellent example of Organic Growth. Growth at Apple is driven by trendsetting product innovation. Macintosh, iMac, iPod and the latest technological breakthrough pioneered by Apple is the iPhone. Steve Jobs, Founder, Apple Inc. commented that -.Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets... Microsoft, on the other hand is a clear case of In-Organic growth as it has successfully completed more than 100 acquisitions since 1986. a. Classification of growth strategies: In finance literature the growth strategies followed by companies can be broadly classified into organic and inorganic growth strategies. Organic strategies refer to internal growth strategies that focus on growth by the process of asset replication, exploitation of technology, better customer relationship, innovation of new technology and products to fill gaps in the market Place. It is a gradual growth process spread over a few years (Bruner, 2004). Inorganic growth strategies refer to external growth by takeovers, mergers and acquisitions. It is fast and allows immediate utilization of acquired assets. Bruner (2004).
14
Table no. 2: brief illustration of growth strategies
15
Types of Mergers
Merger or acquisition depends upon the purpose of the offeror company it wants toachieve. Based on the offerors objectives profile, combinations could be vertical, horizontal, circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company. (A) Vertical combination: A company would like to take over another company or seek its merger with that company to expand espousing backward integration to assimilate the resources of supply and forward integration towards market outlets. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods, implements its production plans as per the objectives and economizes on working capital investments. 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. (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 ininvestment 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 commondistribution and research f acilities to obtain economies by elimination of cost onduplication 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 financialstructure 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 companys total portfolio of diverse products and production processes.
16
Advantages of Mergers
Mergers and takeovers are permanent form of combinations which vest inmanagement complete contr ol and provide centralized administration which are notavailable in combinations of holding company an d its partly owned subsidiary.Shareholders in the selling company gain from the merger and takeovers as the premium offered to induce acceptance of the merger or takeover offers much more price than the book value of shares. Shareholders in the buying company gain in the long run with the growth of the company not only due to synergy but also due to boots trapping earnings. Motivations for mergers and acquisitions Mergers and acquisitions are caused with the support of shareholders, managers and promoters of the combing companies. The factors, which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear, are briefly noted below based on the research work by various scholars globally. (1) From the standpoint of shareholders Investment made by shareholders in the companies subject to merger should enhance in value. The sale of shares from one companys shareholders to another and holding investment in shares should give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in different ways viz. From the gains and achievements of the company i.e. through (a)Realization of monopoly profits; (b)Economies of scales; (c)Diversification of product line; (d)Acquisition of human assets and other resources not available otherwise; (e)Better investment opportunity in combinations. One or more features would generally be available in each merger where shareholders may have attraction and favour merger. (2) From the standpoint of managers Managers are concerned with improving operations of the company; managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support from the managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult.
17
(3) Promoters gains Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control. (4) Benefits to general public Impact of mergers on general public could be viewed as aspect of benefits and costs to: (a)Consumer of the product or services; The economic gains realized from mergers are passed on to consumers in the form of lower prices and better quality of the product which directly raise their standard of living and quality of life. The balance of benefits in favour of consumers will depend upon the fact whether or not the mergers increase or decrease competitive economic and productive activity which directly affects the degree of welfare of the consumers through changes in price level, quality of products, after sales service, etc. (b)Workers of the companies under combination; The merger or acquisition of a company by a conglomerate or other acquiring company may have the effect on both the sides of increasing the welfare in the form of purchasing power and other miseries of life. Two sides of the impact as discussed by the researchers and academicians are: Firstly, Mergers with cash payment to shareholders provide opportunities for them to invest this money in other companies which will generate further employment and growth to uplift of the economy in general. Secondly, Any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. Both workers and communities will suffer on lessening job Opportunities, preventing the distribution of benefits resulting from diversification of production activity. (c)General public affected in general having not been user or consumer or the worker in the companies under merger plan. Mergers result into centralized concentration of power. Economic power is to be understood as the ability to control prices and industries output as monopolists. Such monopolists affect social and political environment to tilt everything in their favour to maintain their power ad expand their business empire. These advances result into economic exploitation. But in a free economy a monopolist does not stay for a longer period as other companies enter into the field to reap the benefits of higher prices set in by the monopolist. This enforces competition in the marketas consumers are free to substitute the alternative products. Therefore, it is difficult to generalize that mergers affect the welfare of general public adversely or favourably. Every merger of two or more companies has to be viewed from different angles in the business practices which protects the interest of the shareholders in the merging company and also serves the national purpose to add to
the welfare of the employees, consumers and does not create hindrance in administration of the Government policies.
Consideration of Merger and Takeover

Mergers and takeovers are two different approaches to business combinations. Mergers are pursued under the Companies Act, 1956 vide sections 391/394 thereof or may be envisaged under the provisions of Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial Companies Act, 1985 whereas, takeovers fall solely under the regulatory framework of the SEBI Regulations, 1997.
Minority shareholders rights SEBI regulations do not provide insight in the event of minority shareholders not agreeing to the takeover offer. However section 395 of the Companies Act, 1956 provides for the acquisition of shares of the shareholders. According to section 395 of the Companies Act, if the offeror has acquired at least 90% in value of those shares may give notice to the non-accepting shareholders of the intention of buying their shares. The 90% acceptance level shall not include the share held by the offeror or its associates. The procedure laid down in this section is briefly noted below. 1. In order to buy the shares of non-accepting shareholders the offeror must have reached the 90% acceptance level within 4 months of the date of the offer, and notice must have been served on those shareholders within 2 months of reaching the 90% level. 2. The notice to the non-accepting shareholders must be in a prescribed manner. A copy of a notice and a statutory declaration by the offeror (or, if the offeror is a company, by a director) in the prescribed form confirming that the conditions for giving the notice have been satisfied must be sent to the target. 3. Once the notice has been given, the offeror is entitled and bound to acquire the outstanding shares on the terms of the offer. 4. If the terms of the offer give the shareholders a choice of consideration, the notice must give particulars of options available and inform the shareholders that he has six weeks from the date of the notice to indicate his choice of consideration in writing. 5. At the end of the six weeks from the date of the notice to the non-accepting shareholders the offeror must immediately send a copy of notice to the target and pay or transfer to the target the consideration for all the shares to which the notice relates. Stock transfer forms executed on behalf of the non-accepting shareholders by a person appointed by the offeror must also be sent. Once the company has received stock transfer forms it must register the offeror as the holder of the shares. 6. The consideration money, which is received by the target, should be held on trust for the person entitled to shares in respect of which the sum was received.
7. Alternatively, if the offeror does not wish to buy the non-accepting shareholders shares, it must still within one month of company reaching the 90% acceptance level give such shareholders notice in the prescribed manner of the rights that are exercisable by them to require the offeror to acquire their shares. The notice must state that the offer is still open for acceptance and specify a date after which the right may not be exercised, which may not be less than 3 months from the end of the time within which the offer can be accepted. If the offeror fails to send such notice it (and its officers who are in default) are liable to a fine unless it or they took all reasonable steps to secure compliance. 8. If the shareholder exercises his rights to require the offeror to purchase his shares the offeror is entitled and bound to do so on the terms of the offer or on such other terms as may be agreed. If a choice of consideration was originally offered, the shareholder may indicate his choice when requiring the offeror to acquire his shares. The notice given to shareholder will specify the choice of consideration and which consideration should apply in default of an election. 9. On application made by an happy shareholder within six weeks from the date on which the original notice was given, the court may make an order preventing the offeror from acquiring the shares or an order specifying terms of acquisition differing from those of the offer or make an order setting out the terms on which the shares must be acquired.
In certain circumstances, where the takeover offer has not been accepted by the required 90% in value of the share to which offer relates the court may, on application of the offeror, make an order authorizing it to give notice under the Companies Act, 1985, section 429. It will do this if it is satisfied that: a. the offeror has after reasonable enquiry been unable to trace one or more shareholders to whom the offer relates; b. the shares which the offeror has acquired or contracted to acquire by virtue of acceptance of the offeror, together with the shares held by untraceable shareholders, amount to not less than 90% in value of the shares subject to the offer; and c. the consideration offered is fair and reasonable. The court will not make such an order unless it considers that it is just and equitable to do so, having regarded, in particular, to the number of shareholder who has been traced who did accept the offer. Alternative modes of acquisition The terms used in business combinations carry generally synonymous connotations and can be used interchangeably. All the different terms carry one single meaning of merger but each term cannot be given equal treatment in the discussion because law has created a dividin g line between take-over and acquisitions by way of merger, amalgamation or reconstruction. Particularly the takeover Regulations for substantial acquisition of shares and takeovers known as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 vide section 3 excludes any attempt of merger done by way of any one or more of the following modes:
(a) by allotment in pursuant of an application made by the shareholders for right issue and under a public issue; (b) preferential allotment made in pursuance of a resolution passed under section 81(1A) of the Companies Act, 1956; (c) allotment to the underwriters pursuant to underwriters agreements; (d) inter-se-transfer of shares amongst group, companies, relatives, Indian promoters and Foreign collaborators who are shareholders/promoters; (e) acquisition of shares in the ordinary course of business, by registered stock brokers, public financial institutions and banks on own account or as pledges; (f) acquisition of shares by way of transmission on succession or inheritance; (g) acquisition of shares by government companies and statutory corporations; (h) transfer of shares from state level financial institutions to co-promoters in pursuance to agreements between them; (i) acquisition of shares in pursuance to rehabilitation schemes under Sick Industrial Companies (Special Provisions) Act, 1985 or schemes of arrangements, mergers, amalgamation, Demerger, etc. under the Companies Act, 1956 or any other law or regulation, Indian or Foreign; (j) Acquisition of shares of company whose shares are not listed on any stock exchange. However, this exemption in not available if the said acquisition results into control of a listed company; (k) Such other cases as may be exempted from the applicability of Chapter III of SEBI regulations by SEBI. The basic logic behind substantial disclosure of takeover of a company through acquisition of shares is that the common investors and shareholders should be made aware of the larger financial stake in the company of the person who is acquiring such companys shares. The main objective of these Regulations is to provide greater transparency in the acquisition of shares and the takeovers of companies through a system of disclosure of information.
Escrow account To ensure that the acquirer shall pay the shareholders the agreed amount in redemption of his promise to acquire their shares, it is a mandatory requirement to open escrow account and deposit therein the required amount, which will serve as security for performance of obligation. The Escrow amount shall be calculated as per the manner laid down in regulation 28(2). Accordingly: For offers which are subject to a minimum level of acceptance, and the acquirer does want to acquire a minimum of 20%, then 50% of the consideration payable under the public offer in cash shall be deposited in the Escrow account. Payment of consideration Consideration may be payable in cash or by exchange of securities. Where it is payable in cash the acquirer is required to pay the amount of consideration within 21 days from the date of closure of the offer. For this purpose he is required to open special account with the bankers to an issue (registered with SEBI) and deposit therein 90% of the amount lying in the Escrow Account, if any. He should make the entire amount due and payable to shareholders as consideration. He can transfer the funds from Escrow account for such payment. Where the consideration is payable in exchange of securities, the acquirer shall ensure that securities are actually issued and dispatched to shareholders in terms of regulation 29 of SEBI Takeover Regulations.
22
Reverse Merger
Generally, a company with the track record should have a less profit earning or loss making but viable company amalgamated with it to have benefits of economies of scale of production and marketing network, etc. As a consequence of this merger the profit earning company survives and the loss making company extinguishes its existence. But in many cases, the sick companys survival becomes more important for many strategic reasons and to conserve community interest. The law provides encouragement through tax relief for the companies that are profitable but get merged with the loss making companies. Infact this type of merger is not a normal or a routine merger. It is, therefore, called as a Reverse Merger. The allurement for such mergers is the tax savings under the Income-tax Act, 1961. Section 72A of the Act ensures the tax relief which becomes attractive for amalgamations of sick company with a healthy and profitable company to take the advantage of carry forward losses. Taking advantage of the provisions of section 72A through merger or amalgamation is known as reverse merger, which gives survival to the sick unit by merging it with the healthy unit. The healthy unit extinct losing its name and the surviving sick company retains its name. Companies to take advantage of the section follow this route but after a year or so change their names to the one of the healthy company as were done amongst others by Kirloskar Pneumatics Ltd. The company merged with Kirloskar Tractors Ltd, a sick unit and initially lost its name but after one year it changed its name as was prior to merger. Reverse Merger under Tax Laws Section 72A of the Income-tax Act, 1961 is meant to facilitate rejuvenation of sick industrial undertaking by merging with healthier industrial companies having incentive in the form of tax savings designed with the sole intention to benefit the general public through continued productive activity, increased employment avenues and generation of revenue. (1) Background Under the existing provisions of the Income-tax Act, so much of the business loss of a year as cannot be set off by him against the profits of the following year from any business carried on by him. If the loss cannot be so wholly set off, the amount not so set off can be carried forward to the next following year and so on, up to a maximum of eight assessment years immediately succeeding the assessment year for which the loss was first computed. The benefit of carry forward and set off of business loss is, however, not available unless the business in which the loss was originally sustained is continued to be carried on by the assessee. Further, only the assessee who incurred the loss by his predecessor. Similarly, if a business carried on one assessee is taken over by another, the unabsorbed depreciation allowance due to the predecessor in business and set off against his profits in subsequent years. In view of these provisions, the accumulated business loss and unabsorbed depreciation allowance of a company which
23
merges with another company under a scheme of amalgamation cannot be carried forward and set off by the latter company against its profits. The very purpose of section 72A is to revive the business of an undertaking, which is financially nonviable and to bring it back to health. Sickness among industrial undertakings is a matter of grave national concern. Experience has shown that taking over of such units by Government is not always the most satisfactory or the most economical solution. The more effective course suggested was to facilitate the amalgamation of sick industrial units with sound ones by providing incentives and removing impediments in the way of such amalgamation. To save the Government from social costs in terms of loss of production and employment and to relieve the Government of the uneconomical burden of taking over and running sick industrial units is one of the motivating factors in introducing section 72A. To achieve this objective so as to facilitate the merger of sick industrial units with sound one, the general rule of carry forward and set off of accumulated losses and unabsorbed depreciation allowance of amalgamating company by the amalgamated company was statutorily related. By a deeming fiction, the accumulated loss or the unabsorbed depreciation of the amalgamating is treated to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which amalgamation was affected. There are three statutory conditions which are to be fulfilled under section 72A(1) for the benefits prescribed therein to be available to the amalgamated company, namely (i) (ii) The amalgamating company was, immediately before such amalgamation, financially non-viable by reason of its liabilities, losses and other relevant factors; The amalgamation is in the public interest; specify, to ensure that the benefit under this section is restricted to amalgamation, which would facilitate the rehabilitation or revival of the business of amalgamating company. (iii) Such other conditions as the Central Government may by notification in the Official Gazette,
(2) Reverse merger As it can be now understood, a reverse merger is a method adopted to avoid the stringent provisions of Section 72A but still be able to claim all the losses of the sick unit. For doing so, in case of a reverse merger, instead of a healthy unit taking over a sick unit, the sick unit takes over/ amalgamates with the healthy unit. High Court discussed 3 tests for reverse merger: a. Assets of transferor company being greater than transferee company; b. equity capital to be issued by the transferee company pursuant to the acquisition exceeding its original issued capital, and c. The change of control in the transferee company clearly indicated that the present arrangement was an arrangement, which was a typical illustration of takeover by reverse bid.
Court held that prime facie the scheme of merging a prosperous unit with a sick unit could not be said to be offending the provisions of section 72A of the Income Tax Act, 1961 since the object underlying this provision was to facilitate the merger of sick industrial unit with a sound one.
(3) Salient features of reverse merger under section 72A 1. Amalgamation should be between companies and none of them should be a firm of partners or sole-proprietor. In other words, partnership firm or sole-proprietary concerns cannot get the benefit of tax relief under section 72A merger. 2. The companies entering into amalgamation should be engaged in either industrial activity or shipping business. In other words, the tax relief under section 72A would not be made available to companies engaged in trading activities or services. 3. After amalgamation the sick or financially unviable company shall survive and other income generating company shall extinct. In other words essential condition to be fulfilled is that the acquiring company will be able to revive or rehabilitate having consumed the healthy company. 4. One of the merger partner should be financially unviable and have accumulated losses to qualify for the merger and the other merger partner should be profit earning so that tax relief to the maximum extent could be had. In other words the company which is financially unviable should be technically sound and feasible, commercially and economically viable but financially weak because of financial stringency or lack of financial recourses or its liabilities have exceeded its assets and is on the brink of insolvency. The second requisite qualification associated with financial unavailability is the accumulation of losses for past few years. 5. Amalgamation should be in the public interest i.e. it should not be against public policy, should not defeat basic tenets of law, and must safeguard the interest of employees, consumers, creditors, customers and shareholders apart from promoters of company through the revival of the company. 6. The merger must result into following benefit to the amalgamated company i.e. (a) carry forward of accumulated business loses of the amalgamated company; (b) carry forward of unabsorbed depreciation of the amalgamating company and (c) accumulated loss would be allowed to be carried forward set of for eight subsequent years. 7. Accumulated loss should arise from Profits and Gains from business or profession and not be loss under the head Capital Gains or Speculation. 8. For qualifying carry forward loss, the provisions of section 72 should have not been contravened.
25
9. Similarly for carry forward of unabsorbed depreciation the conditions of section 32 should not have been violated.
10. Specified authority has to be satisfied of the eligibility of the company for the relief under section 72 of the Income Tax Act. It is only on the recommendations of the specified authority that Central Government may allow the relief. 11. The company should make an application to a specified authority for requisite recommendation of the case to the Central Government for granting or allowing the relief. Procedure for merger or amalgamation to be followed in such cases is same as in any other cases. Specified Authority makes recommendation after taking into consideration the courts direction on scheme of amalgamation.
26
Procedure of Mergers & Acquisitions

Public announcement: To make a public announcement an acquirer shall follow the following procedure: 1. Appointment of merchant banker: The acquirer shall appoint a merchant banker registered as category I with SEBI to advise him on the acquisition and to make a public announcement of offer on his behalf. 2. Use of media for announcement: Public announcement shall be made at least in one national English daily one Hindi daily and one regional language daily newspaper of that place where the shares of that company are listed and traded. 3. Timings of announcement: Public announcement should be made within four days of finalization of negotiations or entering into any agreement or memorandum of understanding to acquire the shares or the voting rights. 4. Contents of announcement: Public announcement of offer is mandatory as required under the SEBI Regulations. Therefore, it is required that it should be prepared showing therein the following information: 1. Paid up share capital of the target company, the number of fully paid up and partially paid up shares. 2. Total number and percentage of shares proposed to be acquired from public subject to minimum as specified in the sub-regulation (1) of Regulation 21 that is: a. The public offer of minimum 20% of voting capital of the company to the shareholders; b. The public offer by a raider shall not be less than 10% but more than 51% of shares of voting rights. Additional shares can be had @ 2% of voting rights in any year. 3. The minimum offer price for each fully paid up or partly paid up share; 4. Mode of payment of consideration; 5. The identity of the acquirer and in case the acquirer is a company, the identity of the promoters and, or the persons having control over such company and the group, if any, to which the company belong; 6. The existing holding, if any, of the acquirer in the shares of the target company, including holding of persons acting in concert with him; 7. Salient features of the agreement, if any, such as the date, the name of the seller, the price at which the shares are being acquired, the manner of payment of the consideration and the number and percentage of shares in respect of which the acquirer has entered into the
agreement to acquirer the shares or the consideration, monetary or otherwise, for the acquisition of control over the target company, as the case may be; 8. The highest and the average paid by the acquirer or persons acting in concert with him for acquisition, if any, of shares of the target company made by him during the twelve month period prior to the date of the public announcement; 9. Objects and purpose of the acquisition of the shares and the future plans of the acquirer for the target company, including disclosers whether the acquirer proposes to dispose of or otherwise encumber any assets of the target company: Provided that where the future plans are set out, the public announcement shall also set out how the acquirers propose to implement such future plans; 10. The specified date as mentioned in regulation 19; 11. The date by which individual letters of offer would be posted to each of the shareholders; 12. The date of opening and closure of the offer and the manner in which and the date by which the acceptance or rejection of the offer would be communicated to the shareholders; 13. The date by which the payment of consideration would be made for the shares in respect of which the offer has been accepted; 14. Disclosure to the effect that firm arrangement for financial resources required to implement the offer is already in place, including the details regarding the sources of the funds whether domestic i.e. from banks, financial institutions, or otherwise or foreign i.e. from Non-resident Indians or otherwise; 15. Provision for acceptance of the offer by person who own the shares but are not the registered holders of such shares; 16. Statutory approvals required to obtained for the purpose of acquiring the shares under the Companies Act, 1956, the Monopolies and Restrictive Trade Practices Act, 1973, and/or any other applicable laws; 17. Approvals of banks or financial institutions required, if any; 18. Whether the offer is subject to a minimum level of acceptances from the shareholders; and 19. Such other information as is essential fort the shareholders to make an informed design in regard to the offer.
28
Major Points in Merger & Acquisitions

1. Merger is the combination of two or more firms through direct acquisition of assets by one of other or others. 2. Merger could be horizontal or vertical or conglomerate. 3. Horizontal merger is the combination of two or -+more firms in th-+e same stage of production / distribution / area of business. 4. Vertical integration is combination of two or more firms involved in different stages of production or distribution. 5. Conglomerate merger is the combination of firms -+engaged in unrelated lines of business. 6. Acquisition or takeover means a combination in which the acquiring company acquires all or part of assets shares of the target company. 7. In acquisitions there exists willingness of the management of the target company to be acquired while this may not be so under takeover. 8. A merger results into an economics advantages when the combined firms are worth together than as separate entities. Merger benefits may results from economies of scale, economies of vertical integration, increased efficiency tax shields or shared resources. Merger should be undertaken when the acquiring company s gain exceeds the cost. Cost is the premium that the buyer acquiring company pays for the selling company target company} over its value as a separate entity. Discounted cash flow technique can be used to determine the value of the target company to the acquiring company. However the mechanics of buying a company is very complex than those of buying an equipment or machine. Integrating an acquired company successfully to the buying company operation is quite difficult and challenging task. In a leveraged buyout (LBO) a company is brought by raising most funds through borrowings. When its own managers buy out the company, it is called management buyout (MBO). After acquisition the LBO generates lot of profit and creates high value. Lenders get high return by converting their loans into equity or using warrants buying the company shares. Merger and acquisition activities are regulated under various laws in India. The objectives of the laws as well as the stock exchange requirements are to make merger deals trans parent and protect the interest of all shareholders. The assets and liabilities of the post-merger firm can be combined later using either the pooling of interest method or the purchase method. In the pooling of interest method assets and liabilities are combined at book values. In the purchase method, the assets and liabilities are re-valued and then combined. The difference between book values of assets and liabilities and their revaluation is shown as good will or capital reserve.
29
Way to succeeds in Merger & Acquisition

Despite the grim statistics, several companies are skilled M&A executors. For example, General Electric has integrated as many as 534 companies over a six-year period, and Kelloggs delivered a 25% return to stockholders after purchasing Keebler. The following are key steps to facilitating a successful process before and after a merger: Before the Merger 1. Begin by formulating a clear and convincing strategy. Strategists must first develop a compelling and sustainable strategy. Key questions include: What is your firms strategy? What role does the M&A play in this strategy? What is the vision of the strategy of the new entity? 2. Preassess the deal. Prior to signing a memo of understanding, managers should examine operational and management issues and risks. Seek answers to the following questions: Is this the right target? What is the compelling logic behind this deal? What is the value? How would we communicate this value to the board of directors and other key stakeholders? What will our strategy be for bidding and negotiations? How much are we willing to spend? If we are successful, how can we accelerate integration? 3. Do your due diligence. Executives must acquire and analyze as much information as possible about potential synergies. In addition to managers across key functional areas in the firm, outside experts can be brought in to help appraise answers in the pre-assessment, and especially to challenge assumptions, by asking questions such as: Are our estimates of future growth and profitability rates reliable? Are there aspects of the company history/culture or of the environment (for example, legal, cultural, political, economic) that should be taken into account? 4. Devise a workable plan. Formulate plans that take into account some of the following: What is our new entitys organizational structure? Who is in charge? What products will be taken forward? How will we manage company accounts? What IT systems will we use? 5. Communicate. M&A transactions tend to be viewed favourably when executives can convincingly discuss integration plans, both internally and externally. Managers should be prepared to answer the questions identified above, as well as: How can we prepare our people psychologically for the deal? What value will be created? What are the priorities for integration? What are the primary risks? How will progress be measured? How will we address any surprises? After the Deal 1. Establish leadership. The new entity will require the quick identification and buy-in of managers, especially at top and middle levels. Ask: Who will lead the new entity? Do we have buy-in and support from the right people? 2. Manage the culture and respect the employees of the merged/acquired company. An atmosphere of respect and tolerance can aid the speed and ease of integration. Executives should formulate plans that address the following concerns: How can we encourage the best and brightest employees to stay on in the new entity? How can we build loyalty and buy-in?
30
3. Explore new growth opportunities. Long-run performance is linked to identifying and acting on both internal and external growth opportunities. Managers should seek out any untapped growth opportunities in the new entity. 4. Exploit early wins. To build momentum, the new entity should actively seek early wins and communicate these. To identify them, consider whether there early wins in sales, knowledge management, or the work environment. 5. Focus on the customer. To survive, firms must create value for customers. Managers must continue to ask: Are we at risk of losing customers? Are our salespeople informed about the new entity? Can our salespeople get our customers excited about the new entity?
31
Improving the odds in Merger & Acquisition
Six rationales to anchor merger success

General Electric wrestled Honeywell from the arms of United Technologies in October 2000. And AOL and Time Warner.s merger process captured headlines throughout that same year. Both events underscore an important shift: Old-fashioned mergers and acquisitions may have surpassed the Internet on chief executives agendas. Indeed, TheStreet.com.s Internet index fell 78% last year, while the total market cap of the top 10 mergers closed rose 50%. Moreover, the top 10 new deals announced in 2000, totalling $600 billion, include prominent plays at industry redefinition, such as GE.s and AOLs. Clearly, mergers have both resurged and re-emerged as a master tool of strategy. Mergers today are altering the nature of competition in industries, harking back to Transactions in the early 1900s never that boldly created the likes of DuPont and General Motors.
This contrasts with the more recent history of mergers and acquisitions, which includes a corporate craze for diversification in the 60s and 70s and leveraged buyouts fuelled by high-risk, high-yield debt in the 80s. More often than not leveraged buyout transactions such as Kohlberg Kravis Robertss takeover of RJR Nabisco, amounted to corporate restructuring or active investing-an effort to squeeze value out of an underperforming business. Such deals, while significant, did not change the rules of competition. Shift to strategy But the late 90s saw both an increase in mergers and acquisitions and a fundamental shift in their motivation. None of the largest acquisitions were merely about swapping assets. Each had a stated strategic rationale. Some were conceived to improve competit ive positioning, as in Pfizers takeover of pharmaceuticals competitor Warner-Lambert. Others let acquirers push into highly related businesses. Cable powerhouse Viacoms acquisition of broadcast mainstay CBS has allowed Viacom to deploy CBS.s
assets to promote its cable offerings, and vice versa. Still other deals were geared to redefine a business model. For instance, new-media force AOL.s deal with old-media empire Time Warner, announced in January-2000, yet succeeding at mergers and acquisitions has never been easy. Several well-structured studies calculate 50 to 75% of acquisitions actually destroy shareholder value instead of achieving cost and/or revenue benefits. There are five root causes of failure: Poor strategic rationale, or a poor understanding of the strategic levers Overpayment for the acquisition, based on overestimated value Inadequate integration planning and execution A void in executive leadership and strategic communications A severe cultural mismatch Of the five, getting strategic rationale right is crucial. Being clear on the nature of the strategic levers is critical both for pre- and post-merger activities. Indeed, failure to do so can trigger the four other causes of failure. The following rationales lie on a continuum, from deals that play by the rules of merger transactions and integration, to those that transform the rules. (See Figure 1: Strategic rationales for M&A) Figure 1: Strategic rationales for M&A
33
Six key rationales for M& A

1. Active investing Leveraged buyout companies and private equity firms engage in active investing acquiring a company and running it more efficiently and profitably as a stand-alone firm. Typically these transactions improve performance through financial engineering, incentive compensation, management changes, and stripping out costs. Private equity player Bain Capitals purchase and restructuring of Gartner Group illustrates the power of active investing or squeezing the lemon. With honed operations, Gartner became a premier broker of computer information, its margins expanding from 10% to 30%. Active investing can, and often does, add value. However, active investing is truly the domain of leveraged buyout and private equity firms such as Bain Capital, a company independent of Bain & Company. For corporations, a more strategic rationale is needed.
2.
Growing scale
Mergers most often aim to grow scale, which doesnt mean simply getting larger. Rather, success requires gaining scale in specific elements of a business and using these elements to become more competitive overall. For instance, if materials cost drives profit, then purchasing scale will be key. If customer acquisition is more important, then channel scale will be critical. Getting scale-based initiatives right requires the correct business definition and the correct market definition. This can be difficult since, over time, the definition of scale in an industry can change dramatically. For example, a sea change in the economics of pharmaceuticals led to the mergers of Pfizer with Warner-Lambert, and of SmithKline Beecham (SKB) with Glaxo Wellcome. For decades, pharmaceuticals were a national or regional business. Regulatory processes were unique to each country, and barriers existed that made drug introduction to foreign markets difficult. Distribution and regulatory costs needed to be spread over the maximum proportion of local markets. Today, many of those barriers have diminished, while the costs per successful drug development have risen exponentially. Research and development can and should be spread across the entire global market, covering more countries, more products, and more types of diseases. In the June 2000 Harvard Business Review, Jan Leschly, recently retired CEO of SKB, remarked candidly: What really drives revenues in the drug business is R&D. 3. Building adjacencies
The next most common impetus for mergers and acquisitions is to expand into highly related or adjacent businesses, as in the Viacom example. This can mean expanding business to new locations, new products, higher growth markets, or new customers. But most importantly, the additions should be closely related to a companys existing business. Chris Zook, in Profit from the Core: Growth Strategy in an Era of Turbulence, provides empirical evidence that expanding into closely related businesses through acquisitions drove some of the most dramatic stories of sustained, profitable growth in the 90s: Emerson, GE, Enron, Charles Schwab, and Reuters, to name a few.2 When Travelers Insurance acquired Citicorp bank, the merger gave the two companies a complete range of financial services products to cross-sell to their combined customers across a broad range of global markets.
4.
Broadening scope
In mergers geared to broaden the scope of products or technologies, a serial acquirer systematically buys specific expertise to either accelerate or substitute for a traditional new-business development or technology R&D function. A serial/scope acquisition model has been successfully executed in a number of industries, such as financial services (e.g., GE Capital), Internet hardware (e.g., Cisco), and chip manufacturing (e.g., Intel). For these firms, major ongoing investment to scan for new product concepts or technologies is an integral part of their growth strategy. For most of these firms, organic development would be too expensive, too slow, and/or would dilute focus on their existing businesses. 5. Redefining business
Deployed strategically, mergers and acquisitions can redefine a business. This is an appropriate strategic rationale when an organizations capabilities and resources grow stale very suddenly due to, for example, a major technological change. In such cases, a firm cannot quickly refresh its technology or knowledge by making internal investments and incremental adjustments. When telecommunications equipment provider Nortel embarked on a strategic shift toward Internet provider-based working infrastructure, Nortel transformed its business model through a series of acquisitions. Since January 1998, the company has acquired 21 businesses, including Cisco.s competitor, Bay Networks, to refocus from supplying switches for traditional voice communication networks to supplying technology for the Internet. Nortel utilized mergers and acquisitions strategically to make what CEO John Roth calls the companys right-angle turn. While hit hard in 2001 by a downturn in fiber optics, Nortel has nevertheless become Cisco.s chief rival. 6. Redefining industry
Sometimes a bold, strategic acquisition can redefine an entire industry, changing the boundaries of competition and forcing rivals to re-evaluate their business models. For example, the AOL/Time Warner merger could potentially rewrite the rules for communication and entertainment. Beyond creating new distribution channels for content and new content for the Internet, the merger could allow the new company to choose to take profit in either content or distribution, depending on customers preferences. No other traditional content or distribution competitors have this choice. Similarly, several analysts believe GE.s intended acquisition of Honeywell would fundamentally alter relationships in the aircraft industry, among operators, maintenance providers, leasing companies, manufacturers, and parts suppliers. In the words of an analyst quoted in the New York Times: .I think GE just bought Boeing and Boeing doesn.t know it yet.
Foundation for success

A clear, strategic rationale for an acquisition is critical, but not enough to guarantee a successful deal and merger integration. The rationale helps to identify the right target and set boundaries for negotiations, but the hard work remains of bringing two companies together effectively. The right strategic rationale will inform the preparation and valuation of the merger. The strategic rationale should also inform what leadership and communication style to adopt and how to plan for post-merger
integration, including cultural integration. In acquisitions seeking to gain scale, pre-merger planning can be done .by the numbers. One can, in advance, calculate goals for combined market share and cost reduction, plan steps to achieve them, and create measures of performance improvement. This type of merger places great demands on a chief executives ability as a manager to cope with complexity. The task may not be easy, but at least the leader can craft a plan before the transaction and execute it after the merger. But in bolder mergers, where parties seek to redefine their industries, the numbers may not be as precise. The companies involved will have a post-merger model for operations. However, that model will change as industry rules change and as competitors react. In such a profoundly uncertain environment, vision is critical and must come from the top of the organization. A strong leader must cope with flux by confidently and effectively communicating the strategy and vision. The post-merger integration plan will have to be much less detailed and much more flexible than that of a scale transaction, leaving room for leadership to adapt its message to a rapidly evolving competitive environment. In short, a transactions strategic rationale is ground zero for planning and your foundation for capturing the value that spurred your acquisition.
36
Why to Regulate Mergers & Acquisitions

When two companies are merged or combined, they must have some objectives behind this merger. One motive is of merger may be to realize economies of scale, improving operative performance or expanding the business in order to gain more assets. However, on the other the motive may be to create anti-competitive effects like to reduce the numbers of competitors or to create dominance in the market. This can be explained by Porters five sector model, as below:
The Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates. Firms in order to gain advantage over its rival firm may merger and eliminate the threats as explained in the model above. According to Fairburn and Kay (1989), from the past it is evident that mergers may cause more harm than bring the advantages to the merging firms. The merger and acquisition activities have increased in the past and firms merge because they think by doing so various advantages will be realized and therefore increase the profits of the firm.
37
This basically happens more in horizontal merger as they create more anti-competitive effects in the market. Similarly vertical mergers can also have the same potential effects; on one side it may be combined with substantial market power and on the level it may permit the extension of that market power. For example, if a firm has a monopoly over the supply of a particular input and it integrates downstream into processing of the input into finished products. An anti-competitive effect may arise if the firm charges a high price for the input supplies and a low price for the finished products. This differential price jeopardizes the economic viability of all the other firms in the downstream finished product market. This practice is mainly prevailed in the steel industry, where integrated steel manufacturers follow differential pricing in hot-rolled coils to harm the interest of cold-rolled steel manufacturers, the downstream players. But in case of conglomerate merger, such anti-competitive effect is not shown so much as it is perceived in case of horizontal and vertical mergers. Such Conglomerate merger is generally beyond the purview of law on merger. Effects of merger a) Unilateral effect: The merged entity may also have a unilateral incentive to increase the price of one or more of the products sold by the merging firms if a significant proportion of consumers view the two merging firms as their first and second choices. In the pre-merger equilibrium, firms have chosen their prices to maximize profits, taking into account their perceptio ns about consumerswillingness to switch to other products. Thus, a firm would not have an incentive to increase its price independently prior to the merger because it has already determined that the benefit of a higher price would be outweighed by the cost of lost sales to competitors. However, if a large enough proportion of the lost sales by one merging firm would be captured by the other merging firm, then a price increase could be profitable after the merger. b) Coordinated effects: It occurs when a merger increases the likelihood that competitors will coordinate -either tacitly or expressly -to rise prices. A merger may enhance the ability to coordinate by reducing the number of independent competitors. This is more likely to occur if the existing number of competitors is already relatively small. Many other factors also affect the ability to coordinate. For example, all other things equal, it is easier for competitors to reach and monitor agreements if the products are relatively homogeneous and the pricing by individual competitors is relatively transparent. Remedies Successful merger enforcement is defined by obtaining effective remedies, whether that means blocking a transaction or settling under terms that avoid or resolve a contested litigation while protecting consumer welfare. In situations where a merger remedy can protect consumers while otherwise allowing the merger to proceed, appropriate remedies may include a divestiture of assets (to limit the merged firms ability to use the combined assets to harm competition) or limitations on the firms conduct (to ensure that consumers will not be harmed by anticompetitive behavior). In India, till date all M&A transaction has been approved, thus in order to study remedies in mergers we have to study the practices used by different antitrust authorities. Although in different parts of the world different remedies are used by respective antitrust authority, but the below are some of most widely used remedies.
a) Structural Remedies: Structural remedies modify the allocation of property rights; they include divestiture of an on-going business, either fully or partially. The goal of a divestiture is to ensure that the purchaser possesses both the means and the incentive to effectively preserve competition. In divestitures tangible or intangible assets from the merging firms are sold to the third-party purchaser. b) Behavioural or Conduct Remedies : The most common forms of Behavioural or conduct relief are firewall, non-discrimination, mandatory licensing, transparency, and anti-retaliation provisions, as well as prohibitions on certain contracting practices.
39
Major M&A in 21st century by the Indian corporate

1. Tata Steel's acquisition of European steel major Corus for $12.2 billion. 2. Vodafone's purchase of 52% stake in Hutch Essar for about $10 billion. Essar group still holds 32% in the Joint venture. 3. Hindalcos (Aditya Birla group) acquisition of Novellis for $6 billion. 4. Ranbaxy's acquisition by Japan's Daiichi for $4.5 billion. 5. ONGCs acquisition of Russia based Imperial Energy for $2.8 billion. 6. NTT DoCoMo-Tata Tele services deal for $2.7 billion. 7. HDFC Banks acquisition of Centurion Bank of Punjab for $2.4 billion. 8. Tata Motorss acquisition of luxury car maker Jaguar Land Rover for $2.3 billion. 9. Suzlon Energy's acquisition of RePower for $1.7 billion. 10. Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8,500 crore or $1.6billion.
40
Case Study
CASE STUDY 1
GlaxoSmithKline Pharmaceuticals Limited, India (Merger Success). Mumbai-- Glaxo India Limited and SmithKline Beecham Pharmaceuticals (India) Limited have legally merged to form GlaxoSmithKline Pharmaceuticals Limited in India (GSK). It may be recalled here that the global merger of the two companies came into effect in December 2000. Commenting on the prospects of GSK in India, Vice Chairman and Managing Director, GlaxoSmithKline Pharmaceuticals Limited, India, Mr. V Thyagarajan said, The two companies that have merged to become GlaxoSmithKline in India have a great heritage a fact that gets reflected in their products with strong brand equity. He added, The two companies have a long history of commitment to India and enjoy a very good reputation with doctors, patients, regulatory authorities and trade bodies. At GSK it would be our endeavour to leverage these strengths to further consolidate our market leadership. GlaxoSmithKline, India The merger in India brings together two strong companies to create a formidable presence in the domestic market with a market share of about 7 per cent. With this merger, GlaxoSmithKline has increased its reach significantly in India. With a field force of over 2,000 employees and more than 5,000 stockiest, the companys products are available across the country. The enhanced basket of products of GlaxoSmithKline, India will help serve patients better by strengthening the hands of doctors by offering superior treatment and healthcare solutions. GlaxoSmithKline, Worldwide GlaxoSmithKline plc is the worlds leading research-based pharmaceutical and healthcare company. With an R&D budget of over 2.3 billion (Rs.16, 130 crores), GlaxoSmithKline has a powerful research and development capability, encompassing the application of genetics, genomics, combinatorial chemistry and other leading edge technologies. A truly global organization with a wide geographic spread, GlaxoSmithKline has its corporate headquarters in the West London, UK. The company has over 100,000 employees and supplies its products to 140 markets around the world. It has one of the largest sales and marketing operations in the global pharmaceutical industry.
41
CASE STUDY 2
Deutsche Dresdner Bank (Merger Failure) The merger that was announced on march 7, 2000 between Deutsche Bank and Dresdner Bank, Germanys largest and the third largest bank respectively was considered as Germanys response to increasingly tough competition markets. The merger was to create the most powerful banking group in the world with the balance sheet total of nearly 2.5 trillion marks and a stock market value around 150 billion marks. This would put the merged bank for ahead of the second largest banking group, U.S. based Citi group, with a balance sheet total amounting to 1.2 trillion marks and also in front of the planned Japanese book mergers of Sumitomo and Sukura Bank with 1.7 trillion marks as the balance sheet total. The new banking group intended to spin off its retail banking which was not making much profit in both the banks and costly, extensive network of bank branches associated with it. The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Banks green corporate color in its logo. The future core business lines of the new merged Bank included investment Banking, asset management, where the new banking group was hoped to outside the traditionally dominant Swiss Bank, Security and loan banking and finally financially corporate clients ranging from major industrial corporation to the mid-scale companies. With this kind of merger, the new bank would have reached the no.1 position of the US and create new dimensions of aggressiveness in the international mergers. But barely 2 months after announcing their agreement to form the largest bank in the world, had negotiations for a merger between Deutsche and Dresdner Bank failed on April 5, 2000. The main issue of the failure was Dresdner Banks investment arm, Kleinwort Benson, which the executive committee of the bank did not want to relinquish under any circumstances. In the preliminary negotiations it had been agreed that Kleinwort Benson would be integrated into the merged bank. But from the outset these considerations encountered resistance from the asset management division, which was Deutsche Banks investment arm. Deutsche Banks asset management had only integrated with Londons investment group Morgan Grenfell and the American Bankers trust. This division alone contributed over 60% of Deutsche Banks profit. The top people at the asset management were not ready to undertake a new process of integration with Kleinwort Benson. So there was only one option left with the Dresdner Bank i.e. to sell Kleinwort Benson completely. However Walter, the chairman of the Dresdner Bank was not prepared for this. This led to the withdrawal of the Dresdner Bank from the merger negotiations. In economic and political circles, the planned merger was celebrated as Germanys advance into the premier league of the international financial markets. But the failure of the merger led to the disaster of Germany as the financial centre.
42
CASE STUDY 3
Standard Chartered Grindlays (Acquisition Success) It has been a hectic year at London-based Standard Chartered Bank, going by its acquisition spree across the Asia-Pacific region. At the helm of affairs, globally, is Rana Talwar, group CEO. The quintessential general, he knew what he was up against when he propounded his 'emerging stronger' strategy - of growth through consolidation of emerging markets - for the turn of the Millennium: loads of scepticism. The central issue: Stan Charts August 2000 acquisition of ANZ Grindlays Bank, for $1.3 billion. Everyone knows that acquisition is the easy part, merging operations is not. And recent history has shown that banking mergers and acquisitions (MERGERS & ACQUISITIONs), in particular, are not as simple to execute as unifying balance sheets. Can Stan Charts proposed merger with ANZ Grindlays be any different? The '1' refers to the new entity, which will be India's No 1 foreign bank once the integration is completed. This should take around 18 months; till then, ANZ Grindlays will exist separately as Standard Chartered Grindlays (SCG). The '2' and '3' are Citibank and Hong Kong and Shanghai Banking Corp (HSBC), India's second and third largest foreign banks, respectively. That makes the new entity the world's biggest 'emerging markets' bank. By way of strengths, it will have treasury operations that will probably go unchallenged as the country's most sophisticated. Best of all, it will be a dynamic bank. Thanks to pre-merger initiatives taken by both banks, it could per- haps boast of the country's fastest growing retail-banking business. StanChart is rated highly on other parameters too. It is currently targeting global cost-savings of $108 million in 2001, having reported a profit-before-tax of $650 million in the first half of 2000, up 31 per cent from the same period last year. Net revenue increased 6 per cent to $2 billion for the same period. Consumer banking, a typically low-profit business which accounted for less than 40 per cent of its global operating profits till four years ago, now brings in 55 per cent of profits. So the company's global report card looks fairly good. Stan Chart knows it mustn't let its energy dissipate. It has been growing at a claimed annual rate of 25 per cent in the last two years, well over the industry average of below 10 per cent. But maintaining this pace won't prove easy, with Citibank and HSBC just waiting to snip at it. The ANZ Grindlays acquisition had happened just before that, though the process started in early 1999, at Stan Charts headquarters in London. At first, it was just talk of a strategic tie-up with ANZ Grindlays, which had the same colonial British antecedents But this plan was abandoned when it became evident that all decision-making would vacillate between Melbourne and London, where the two are headquartered. By December, ANZ had expressed a willingness to sell out, and StanChart initiated the due-diligence proceedings. It wasn't until March that a few senior Indian bank executives were let into the secret. Now, it's time to get going. A new vehicle, navigators in place, engines revving and map charted, the road ahead is challenging and full of promise. To steer clear of trouble is the only caution advised by industry analysts, as the two banks integrate their businesses. Sceptics don't see how StanChart can really be greater than the sum of its parts. The aggression, though, is not as raw as it sounds. Behind it all is a strategy that everyone at
StanChart seems to be in synchrony with. And behind that strategy is Talwar, very much the originator of the oft-repeated phrase uttered by every executive - "getting the right footprint". The other key words that tend to find their way into every discussion are 'focus' and 'growth'. StanChart India's net non-performing loans, as a percentage of net total advances, are reported at just 2 per cent for 1999-2000. In terms of capital adequacy too, the banks are doing fine. StanChart has a capital base of 9.5 per cent of its risk-weighted assets, while SCG has 10.9 per cent. So, with or without a safety net provided by the global group, the Indian operations are on firm ground.
44
Case Study 4
TATA TETLEY (Controversial Issue over Success and Failure). The Tata group was infusing a fresh 30 million pounds into Tata tea that had been used to buy an 85.7% stake in the UK-based Tetley last year. Already high on a heady brew of a fresh buy and caffeine, most missed what Krishna Kumar's statement meant. Tata Teas much hyped acquisition of Tetley, one of the worlds biggest tea brands, isnt proceeding according to the plan. 15 months ago, the Kolkata based Rs 913 crore Tata Teas buyout of the privately held The Tetley Group for Rs 1843 crore had stunned corporate watchers and investment bankers alike. It was a coup! An Indian company had used a leveraged buyout to snag one of the Britains biggest ever brands. It was by far, the biggest ever leveraged buyout by an Indian company. Tata Tea didnt pay cash up front. Instead, it invested 70 million pounds as equity capital to set up Tata Tea. It borrowed 235 million to buy the Tetley stake. The plan was that Tetleys cash flows would be insulated from the debt burden. When Tata Tea took the big gamble to buy Tetley, its intent was very clear. The company had established a firm foothold in the domestic market and had a controlling position in growing tea. Going global looked like the obvious thing to do. With Tetley, the second largest brand after Lipton in its bag, Tata Tea looked ready to set the Thames on fire. Right from the start, Tetley was never an easy buy. In 1996, Allied Domecq, the liquor and retail conglomerate, had put Tetley on the block. Even then Tata Tea, nestle, Unilever and Sara lee had put in bids, all under 200 million pounds. Allied wanted to cash on the table. Tata Tea didnt have enough of its own. The others bids also did not go through. Eventually, Tetley group together with a consortium of financial investors like Prudential and Schroders, bought the entire equity stake for 190 million pounds in all cash deal. Two years later, Tetley went for an IPO, hoping to raise 350-400 million pounds. But the IPO never took place. Soon afterwards, the investors began looking for exit options. Tetley was once again on the block. It was until Feb 2000 that the due diligence was completed. By this time, the Tata's were ready with their offer. They would pay 271 million pounds to buy the entire Tetley equity and the funds would go towards first paying off Tetleys 106 million debt. The balance would go the owners. The offer price did not include rights to Tetley coffee business, which was sold to the US-based Rowland Coffee Roasters and Mother Parkers Tea and Coffee in Feb 2000 for 55 million pounds. For Tetley new owners, too, the problems were only just beginning. The deal hinged on Tetleys ability, over and above covering its own debts, to service the loans Tata Tea had taken for the acquisition. Thats where reali ty bites. Consider the facts. When Tata Tea acquired Tetley through Tata Tea, it sunk in 70 million pounds as equity and borrowed 235 million pounds from a consortium to finance the deal. Implicit in the LBO was that
45
Tetleys future cash flows would fund the SPVs interest and principal repayment requirements. At an average interest rate of 11.5%, Tetley needed to generate 22 million pounds in interest alone on a loan 190 million pounds. Add to this the interest on the high cost vendor loan notes of 30 million poundsit worked out to be 4.5 million and the charges on the working capital portion, amounting to 2 million pounds per annum. All this works out to about 28 million pounds in interest alone per year. At the same time, it also has to pay back the principal of 110 million pounds over a nice period through half yearly instalments. This works out to 12 million pounds per year. If you were to assume that depreciation and restructuring charges were pegged at last years levels, the bill tots up to 48 milli on pounds a year. In FY 1999, the Tetleys cash flows were 29 million pounds. Some of the problems could have been obviated if Tetleys cash flows had increased by 40 % in FY 2001 over the previous year. That way, the company would have covered both its own commitments as well as of the Tata's. But the situation worsened. Major UK retailers clamped down on grocery prices last year. That substantially reduced Tetleys pricing flexibility. Besides, the UK tea markets have been under pressure for some time now. According to the UK governments national food survey, there has been a substantial fall in the consumption of mainstream teas- tea-bag black teas drunk with milk and sugar. Also the tea drinking population in UK has come down from 77.1% to 68.3% in 1999. On the other hand, natural juices and coffee have consistently increased their market share. So, when it was confronted by Tetleys sliding performance, what options did Tata Tea have? On its own, it could not do much. The last year has been one of the worst years for the Indian tea industry and Tata Tea has also been affected. The drop in tea prices and a proliferation of smaller brands in the organized segment have taken toll on Tata Teas performance. In FY 2001, Tata Teas net profit fell by 19.59 % from Rs 124.63 crore to Rs 100.21 crore. Income from operations declined by 8.72%. But letting Tetley sink under the weight of the interest burden would have been an unthinkable option, given the prestige attached to the deal. Thus from the above case we infer that Tata had to shell out a lot of money to cover all the debts of Tetley which was found not worthy enough by the general public.
46
CASE STUDY 5
Daimler Chrysler (Failure). Germanys Daimler and the United States Chrysler merged in 1988, creating the worlds largest commercial auto manufacturer. At the time of the merger, Daimlers CEO claimed that the merger of a luxury car maker (Daimler) with a mass-market brand (Chrysler) would become the worlds most profitable auto manufacturer due to new economies of scale and scope across brands, product niches, manufacturing expertise, and distribution networks. For example, it was hoped Daimlers high -end manufacturing expertise and worldwide network would help to distribute Chrysler products and compete successfully against increasingly strong Asian competitors, especially Toyota and Honda. However, at the time, not all executives were positive. One DaimlerChrysler executive was quoted as saying, It is unthinkable for a Chrysler car to be built in a Mercedes-Benz factory, and for as long as Im responsible for the Mercedes-Benz brand, only over my dead body will a Mercedes be built in a Chrysler factory.6 By the end of 2003 DaimlerChryslers market capitalization was just US$38 billion, significa ntly lower than the pre-merger US$47 billion in 1998. Despite product costs, DaimlerChrysler was unable to realize expected synergies. Furthermore, many competitors followed Chryslers lead, introducing minivans, pickup trucks, and SUVs that eroded Chryslers formerly attractive market share. Further barriers to success came with management and national cultural differences: Daimlers mostly German management used approaches that did not go down well with Chrysler managers. By early 2003 most of Chryslers top executive team had left the firm. even years after the merger the picture became more positive, with Chrysler contributing one-third of the companys earnings in the first half of 2005. Dieter Zetsche was promoted to chairman of DaimlerChryslers board. By August, market capitalization reached US$54 billion and worldwide sales of the newly launched Mercedes were up 9%. Still, the American market proved difficult, with the three major American auto manufacturers experiencing significantly declining sales. Meanwhile, Toyota and Honda sales were up 16% and 10% respectively, gaining in the upscale market DaimlerChrysler had hoped to dominate. In the summer of 2006, DaimlerChrysler sought to make a positive out of a negative in its US television advertisements, with Zetsche presented as an amusing cultural misfit to America. Still the company faced high labour and health care costs and soaring fuel costs. By April 2007, DaimlerChrysler confirmed that buyers were being sought, as German investors declared this marriage made in heaven turned out to be a complete failure. In fact, some suggested that Daimler could itself become a takeover target if it did not sell Chrysler. By May, DaimlerChrysler had paid Cerberus Capital Management, a private equity investment firm, US$650 million to end its exposure to health care and other costs as well as to ongoing operational losses.
47
Case Study 6 Tata Motors and JRL (Acquisition success)
1 Pre-Merger Due Diligence 1.1

Due Diligence
The acquisition would help the company acquire a global footprint and enter the High-end premier segment of the global automobile market. Tata also got two advance design studios and technology as part of the deal - the company gets access to latest technology which would also allow Tata to improve their core products in India, for eg, Indica and Safari suffered from internal noise and vibration problems. This deal provided Tata an instant recognition and credibility across globe which would otherwise would have taken years
Tata Motors stood to gain on several fronts from the deal.
1..2
Company Profile
Tata Motors Tata Motors, part of the Tata Group, one of the largest business conglomerates in India with a presence in over 80 countries and a work force of around 290,000 people. Tata Motors is the largest automobile company in India with gross revenue of Rs.330.93 billion in 2007 -08. Tata Motors is also the second largest bus manufacturer and the fourth largest truck manufacturer in the world. Tata Motors unveiled the cheapest car in the world, the Tata Nano, priced at around US$ 2,500, in early 2008. Tata Motors Limited, formerly known as TELCO (TATA Engineering and Locomotive Company), is a multinational corporation headquartered in Mumbai, India. It is India's largest passenger automobile and commercial vehicle manufacturing company and a midsized player on the world market with 0.81% market share in 2007 according to OICA data. Part of the Tata Group, is one of the world's largest manufacturers of commercial vehicle. The OICA ranked it as the world's 19th largest automaker, based on figures for 2007. as well as the second largest automaker of commercial vehicles. Established in 1945, when the company began manufacturing locomotives, today it is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. The company is the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer. Tata Motors has its manufacturing base in Jamshedpur, Pantnagar, Lucknow, Ahmedabad and Pune in India as well as manufacturing facilities in Argentina, South Africa and Thailand.
The company manufactured its first commercial vehicle in 1954 in collaboration with Daimler-Benz AG, which ended in 1969. Tata Motors is a dual-listed company traded on both the New York Stock Exchange and the Indian Stock Exchange (where it is a component of the Sensex index). Tata Motors was listed on the NYSE in 2004, and in 2005 it was ranked among the top 10 corporations in India with an annual revenue exceeding INR 320 billion. In 2004, it bought Daewoo's truck manufacturing unit, now known as Tata Daewoo Commercial Vehicle, in South Korea. It also, acquired a 21% stake in Hispano Carrocera SA, giving it controlling rights in the company. In March 2008, it finalised a deal with Ford Motor Company to acquire their British Jaguar Land Rover (JLR) business, which also includes the Rover, Daimler and Lanchester brand names. and the purchase was completed on 2 June 2008. Jaguar Land Rover JLR was a part of Ford's Premier Automotive Group (PAG) and were considered to be British icons. Jaguar was involved in the manufacture of high-end luxury cars, while Land Rover manufactured high-end SUVs. Jaguar Cars Ltd. (better known simply as Jaguar) is an automaker from England, United Kingdom that manufactures luxury and executive motor car. Sir William Lyons founded jaguar as the Swallow Sidecar Company in 1922, originally making motorcycle sidecars before switching to passenger cars. The name was changed to Jaguar after the Second World War due to the unfavourable connotations of the SS initials. Jaguar cars are designed in an engineering centre at their headquarters in Coventry, England and are manufactured in one of three English Jaguar plants; Castle Bromwich in Birmingham, Halewood near Liverpool and Gaydon in Oxfordshire. Following several subsequent changes of ownership since the 1960s, Jaguar was listed on the London Stock Exchange and became a constituent of the FTSE 100 Index. 1..3Rationale behind the Merger The acquisition of Jaguar Land Rover enabled Tata to acquire internationally recognized brands with a strong heritage and global presence, and increases Tata Motors product and market diversity. JLR also will help Tata Motors expand and diversify their current international sales market, allowing them to reduce reliance on the Indian market. Land Rover provides Tata Motors an opportunity to broaden their existing portfolio of UV, SUV and crossover offerings. Land Rover's products in the all-terrain vehicle segment are complementary to Tata's products in terms of features, technology and price positioning and as such, allow them to offer a wide range of vehicles that satisfies various consumer needs. Additionally, Jaguar's premium product offerings will provide Tata with immediate entry into the luxury performance car segment. The acquisition of Jaguar Land Rover also enables Tata to leverage Jaguar Land Rover's technology and engineering expertise. For example, Jaguar Land Rover's technological capabilities in petrol engines, Four Wheel Drive technology and Aluminium BIW (Body in White) technology will help Tata further develop and strengthen their existing engineering capabilities. Through the acquisition, Tata also gain research and development capabilities of Jaguar Land Rover's strong engineering workforce and its two advanced design centers in the UK. To summarize, some of the reasons behind the merger are as follows: 1. Immediate entry to the luxury performance car and premium all-terrain vehicle segments. 2. An improvement in the global market position through a combination of resources and strengths 3. Strengthening of technological and product development/ innovation capabilities to address changing market trends. 4. Sharing of best practices in manufacturing and quality assurance systems and processes
49
5. Enhanced human capital and managerial talent. 6. Potential operational synergies.
50
1.4 Synergies Some of the Synergies that exist are listed in the figures below:
51
2 Post Merger Strategies 2..1 Post Merger Initiatives
Post-Merger, several cost rationalization initiatives were taken to improve cash flows: 1. Single shifts and down time at all three UK assembly plants. 2. Supplier payment terms extended from 45 to 60 days in line with industry standard. 3. Receivables reduced by 133 million from 38 to 27 days. 4. Inventory reduced by 217m between June 2008 and March 2009 from 70 to 50 Days. 5. Labour Actions a. Voluntary retirement to 600 employees b. Agency staff reduced by 800 c. Offered leaves to 300 workers of Bromwhich and solihull plant d. Additional 450 job cuts including 300 managers 6. Agreement with Unions to implement pay freeze and longer working hours (Equivalent to approximately 20% reduction in labour costs). 7. Engineering and capital spending efficiencies. 8. Fixed marketing and selling costs reduced in line with sales volume. 9. Reduction in all other non-personnel related overhead costs 3 Financial Due Diligence 3..1 Financial Ascertainment
On June 2, 2008, Tata Motors completed the acquisition of Jaguar Land Rover from Ford for a purchase consideration of US$ 2,300 million on cash free and debt free basis. Jaguar Land Rover Limited, Tata Motors indirect subsidiary, paid the purchase consideration. As part of the acquisition, the Company acquired the global businesses relating to Jaguar Land Rover including three vehicle manufacturing facilities, one veneer production facility, two advanced design centers, 26 national sales companies, intellectual property rights (including perpetual royalty free licenses), and brands and trademarks. The purchase consideration of US$ 2,300 million, on cash free and debt free basis, paid by Jaguar Land Rover Limited was financed through a capital contribution of US$ 400 million and a portion of the proceeds from a US$ 3,000 million short term bridge loan facility extended to Jaguar Land Rover Limited. The purchase consideration was based on an agreed level of working capital as defined in the sale and purchase agreement entered into with Ford. In addition, US$ 100 million was paid by TML Holdings Pte Limited towards fees and other acquisition expenses consisting of legal and advisory fees, due-diligence and related expenses, structuring fees, underwriters fees and other expenses in relation to the short term bridge loan, and other acquisition related expenses. A net cash position of US$ 93 million was estimated for Jaguar Land Rover as at the date of acquisition. This amount represents additional net cash over the purchase consideration basis and was paid additionally by Jaguar Land Rover Limited. The same was financed out of the proceeds of the short term bridge loan.
In addition, a final adjustment relating to the actual cash, debt and working capital position (as defined in the sale and purchase agreement) of Jaguar Land Rover on the date of the acquisition, based on a final completion statement of Jaguar Land Rover agreed between Jaguar Land Rover Limited and Ford, of US$ 131 million is payable by Jaguar Land Rover Limited to Ford. This represents additional net working capital/ cash available with Jaguar Land Rover over the agreed levels. 3..2 Bank Consortium Funding the Merger
The US$ 3,000 million short-term bridge loan facility extended to Jaguar Land Rover Limited in connection with the acquisition of Jaguar Land Rover was pursuant to a credit facility agreement dated March 13, 2008 with an initial group of arrangers including the following: Bank of Tokyo-Mitsubishi UFJ Limited Citigroup Global Markets Asia Limited ING Bank N.V., Singapore Branch J.P. Morgan Securities (Asia Pacific) Limited Mizuho Corporate Bank Limited Standard Chartered Bank State Bank of India BNP Paribas, Singapore Branch TML and TML Holdings Pte Limited were also obligors to the aforementioned credit Facility agreement and TML provided a guarantee for the facility. Citicorp International Limited acted as the Facility Agent. 3..3 Mode of Payment
Jaguar Land Rover Limited utilized US$ 1,900 million of the aforementioned Short Term bridge loan towards part payment of the purchase consideration for the acquisition of Jaguar Land Rover from Ford on cash free and debt free basis. In addition, a net cash position of US$ 93 million, representing additional net cash over the purchase consideration basis, was estimated for Jaguar Land Rover as at the date of the acquisition. Jaguar Land Rover Limited paid this amount additionally out of the proceeds of the short term bridge loan. Further, US$ 700 million from the proceeds from the short term bridge loan was utilized by Jaguar Land Rover Limited for a short term working capital loan to its subsidiary, Land Rover. The balance proceeds from the Short Term Bridge Loan are intended to be utilized by Jaguar Land Rover Limited towards the on-going operational/ contingency requirements of Jaguar Land Rover. 4. Critical Self-Assessment According to me, the brand JLR has not fallen into the wrong hands, looking at Tata Motors legacy, the company is remoulding the future of these two international luxury brands. The sales of Jaguar have picked up in India and Tata Motors has been successful in reinvigorating the luxury car segment in India. Tata Motors set-up an integration committee with senior executives from the JLR and Tata Motors, to set milestones and long-term goals for the acquired entities - this strategy has paid off since sales of Jaguar has picked up and so has the image of Tata Motors post the merger and the Nano launch.
53
One of the major problems for Tata Motors could be the slowing down of the European and US automobile markets. We expect that the company would address this issue by Concentrating on countries like Russia, China, India, and the Middle East. The companies investment plans, new designs with a scope for alternate energy usage, the new target markets and retaining the best both production units and talents, hiring fresh talents from around the world is definitely going to make the company gain a strong foothold globally.
Why did Tata go for JLR? Tata Motors had several major international acquisitions to its credit. It had acquired Tetley, South Korea-based Daewoo's commercial vehicle unit, and Anglo-Dutch Steel maker Corus (Refer to Exhibit I for the details of the group's international acquisitions). Tata Motors' long-term strategy included consolidating its position in the domestic Indian market and expanding its international footprint by leveraging on in-house capabilities and products and also through acquisitions and strategic collaborations. On acquiring JLR, Ratan Tata, Chairman, Tata Group, said, "We are very pleased at the prospect of Jaguar and Land Rover being a significant part of our automotive business. We have enormous respect for the two brands and will endeavour to preserve and build on their heritage and competitiveness, keeping their identities intact. We aim to support their growth, while holding true to our principles of allowing the management and employees to bring their experience and expertise to bear on the growth of the business."
Tata Motors stood to gain on several fronts from the deal. One, the acquisition would help the company acquire a global footprint and enter the high-end premier segment of the global automobile market. After the acquisition, Tata Motors would own the world's cheapest car - the US$ 2,500 Nano, and luxury marquees like the Jaguar and Land Rover. Two, Tata also got two advance design studios and technology as part of the deal. This would provide Tata Motors access to latest technology which would also allow Tata to improve their core products in India, for eg, Indica and Safari suffered from internal noise and vibration problems. Three, this deal provided Tata an instant recognition and credibility across globe which would otherwise would have taken years. Four, the cost competitive advantage as Corus was the main supplier of automotive high grade steel to JLR and other automobile industry in US and Europe. This would have provided a synergy for TATA Group on a whole. The whole cost synergy that can be created can be seen in the following diagram.
54
TAMO's flagship ancillary biz. Customers inc. Ford, Daimler, FIAT etc.
Leader in the automative grade steel. 16% of revenue fron auto steel division.
TACO
TATA Corus INCAT
TCS
Provides engineering design, manufacturing solutions and sourcing services. Major customer include Chrysler, Ford , GM etc.
Provides services like supplier programs, consulting services and global outsourcing. Customers include Chrysler, Ford, GM etc.
Five, in the long run TATA Motors will surely diversify its present dependence on Indian markets (which contributed to 90% of TATAs revenue). Along with it due to TATAs footprints in South East Asia will help JLR do diversify its geographic dependence from US (30% of volumes) and Western Europe (55% of volumes). Analysts were of the view that the acquisition of JLR, which had a global presence and a repertoire of well established brands, would help Tata Motors become one of the major players in the global automobile industry.
55
Conclusion
Mergers and acquisitions can be accretive in that they increase financial performance, or dilutive in the reverse case, where a measure such as earnings per share (EPS) actually falls. It is a fact that 70% of mergers and acquisitions actually destroy value. In implementation, M&As typically face the following critical issues: Incompatible corporate cultures: The cultures of the two companies may be inconsistent, resulting in resources being diverted away from the focal synergies. Business as usual: The target company may allow redundant staff and overlapping operations to continue, thwarting efficiency. High executive turnover: The target company may lose critical top management team leadership. A recent study reports that target companies lose 21% of their executives each year for at least ten years following an acquisition (twice the turnover experienced in non-merged firms). Neglect business at hand: A recent McKinsey study reported that too many companies focus on integration and cost cutting, and neglect the daily business at hand and customers.
56
Appendix
Sources
MAGAZINES: 1. Business world (March 31, 2008, April 20, 2009) 2. Business Today (April 5, 2008) 3. India Today (April 18, 2009) 4. 4p's (April, 2008) 5. Business & Economy (April, 2008) NEWSPAPERS: 1. Times of India 2. Economics Times 3. The Telegraph Web sites : 1. Google 2. Wikipedia.com 3. ICICIdirect.com 4. Mergersindia.com 5. 4.Mergerdigest.com 6. Deustchbank.com 7. ICMR.com 8. Businessstandard.com 9. Tatamotors.com 10. Jaguarlandrover.com
57

Project Finance-Merger and Acquisition

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Project Finance-Merger and Acquisition

Uploaded by

Copyright:

Available Formats

A Project report on Mergers & Acquisitions

Student: I T M In s t i t u t e M a t u n ga C a m p u s Mumbai X MB A - 4 2 R o l l N u m b e r : MA T 2 01 1 XMB A 5 2P0 0 6

Faculty Finance I T M In s t i t u t e Ma t u n g a C a m p u s Mumbai

Merger and Acquisition

Merger and acquisition

Merger and Acquisition

Signature of Candidates Himmat Singh Bisht

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Understanding of Merger and acquisition?

Merger and Acquisition

Purpose of Mergers & Acquisitions

Merger and Acquisition

Merger and Acquisition

Mergers and Acquisitions as a Growth Strategy

Companies (In-organic Growth).

Merger and Acquisition

Table no. 2: brief illustration of growth strategies

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Consideration of Merger and Takeover

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Procedure of Mergers & Acquisitions

Merger and Acquisition

Major Points in Merger & Acquisitions

Merger and Acquisition

Way to succeeds in Merger & Acquisition

Merger and Acquisition

Merger and Acquisition

Improving the odds in Merger & Acquisition

Six rationales to anchor merger success

Merger and Acquisition

Six key rationales for M& A

Foundation for success

Merger and Acquisition

Why to Regulate Mergers & Acquisitions

Merger and Acquisition

Merger and Acquisition

Major M&A in 21st century by the Indian corporate

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Merger and Acquisition

Case Study 6 Tata Motors and JRL (Acquisition success)

1 Pre-Merger Due Diligence 1.1

Tata Motors stood to gain on several fronts from the deal.

Merger and Acquisition

5. Enhanced human capital and managerial talent. 6. Potential operational synergies.

Merger and Acquisition

Merger and Acquisition

2 Post Merger Strategies 2..1 Post Merger Initiatives

Merger and Acquisition

TATA Corus INCAT