INDIAS GLOBAL COMPETITIVENESS THROUGH MERGERS

AND ACQUISITIONS: TRENDS AND STRATEGIES

(Lt. Col) Rattan Raina

ABSTRACT
Indias Global Competitiveness Through Mergers and Acquisitions:
Trends and StrategiesThe new business environment has provided an
opportunity to Indian organizations to become global through
acquisition and merger. There seems to be a great rush of Indian
organizations to achieve global status through acquisition. In 1988,
numbers of acquisitions by Indian companies were just15 foreign
companies, which has now grown to more then 115 foreign companies by
2006. In Oct. 2006 it self, there have been two major acquisitions, one
by Tata steel and other by Indias largest electronics firm
Videocon. TataSteel took over European Steel giant-Corus for 4.3
billion
pound and Videocon acquired south
Koreas
Daewoo
Electronics. With this trend, we do expect some more acquisitions by
Indian companies by end 2006. It is very tempting for a business leader
venture for merger or acquisition for instant growth. However,
he need to understand that it is a very complex task and requires detailed
planning and execution with great care. This paper discusses trends of
acquisition and mergers by Indian companies and recommends
strategies to make these a success.

Keywords: Global Competitiveness, Acquisition & Merger, strategies and

implementation Indias Global Competitiveness Through Mergers and Acquisitions:
Trend and Strategies

INTRODUCTION

Following the liberalization and deregulation of Indian economy in 1991,

organizations are passing through a phase of change as never witnessed before. The
new business environment has provided Indian organizations to become global
organizations though acquisition and expansion plans. However it has opened Indian
markets to global players also. In this two way traffic, even successful Indian
organizations are facing challenges from both, domestic competitors as well as foreign
competitors, who can suddenly appear from anywhere on the globe. To remain ahead
of competitors, business leaders need to have a global vision, be pro-active, able to
take calculated risk and initiate and manage acquisition and consolidation process

smoothly. The paper discusses trends of acquisitions and mergers by Indian

companies and recommends strategies to be followed to make acquisition and merger
process a success.
TRENDS OF MERGERS AND ACQUISITION IN INDIA

Mergers and acquisitions are not totally new to the Indian economy. In the past
also, companies used the takeover strategy to expand their business. In 1988, number
of takeovers was 15 (1), which have now grown to 115 foreign acquisitions in the first
three quarters of 2006 with total value of $ 7.4 billion. This is a huge increase as
compared to the previous year. There seems to be a great rush of Indian organization
to achieve global status through takeover and consolidation. Indian business Leaders
are on the shopping spree. This includes IT firms, Pharmaceutical Industry, Tea Co.,
Steel Industry and even spare part producers are trying to enter global market. Recent
cases include takeover of Tetley Tea by Tata Tea by spending $ 435 million. This deal
made Tata Tea,
the
worlds
2nd largest
Tea
Company. In
pharmaceutical, Ranbaxy bought Ethimed of
Belgium
and Mundogen,
the
Spanish generies arms of GlaxoSimithKline. In IT, Wipro took over Technology firms
in Portugal, Finland and California. Bharat Forge, the worlds second-biggest
producer of forgings for engine and chassis components has bought six companies in
four countries Britain, Germany, Sweden and China (2).
This year, Pune based Suzlon, producer of wind turbine bought Hansen, a
Belgian gearbox maker. After taking over Singapore firm Natsteel, Tata Steel has
now concluded the biggest takeover of European Steel giant Corus for 4.3 billion
Pounds (Rs. 36500 crores) (3). Day after Tata picked the deal to buy Corus, Indias
largest electronics firm Videocon signed an agreement to acquire South Koreas
debt-Laden Daewoo Electronics for nearly $ 370 million (Rs.3300 crore)(4). Latest
effort is being made by Mahindra and Mahindra, Indias largest utility vehicle maker
to acquire German forging company Schoeneweiss & Co. Acquisition cost is expected
to be between $ 159 to 200 million (5). With this trend, we do expect some more
acquisition by Indian companies by end of 2006.
Above-mentioned examples show the trend and popularity of merger and
acquisition as an easy route for achieving growth and becoming global
organization. No doubt merger and acquisition, if planned and executed properly can
provide great opportunity of growth, cost saving, technology up gradation and
capturing market beyond the national boundaries. However success of Merger &
Acquisition will depend on the ability of management/business leader to critically
analyze opportunities available considering geopolitical issue, technical issues,
cultural issues and above all human issues.
Creating Global Organization Through Merger and Consolidation

It is inherent desire and need for every business to grow both vertically and
horizontally. Development within is slow and at times difficult. Best way to have fast
growth is to adopt a course of takeover and merger. This gives an organization an
instant growth. Considering its advantages the Indian companies seem to be in a great
hurry to achieve rapid growth through merger & acquisition. However all takeovers
do not meet the required expectations. Sahara-Jet Airways is a living example of the
same. Such a failure only leads to confusion and pain to management and to its
employees. Reasons for such failure are due to poor homework for acquisition and at
times the negotiators are excited and wish to conclude the deal in a
hurry (6). Although, no two acquisitions or mergers are same. Each situation is unique
and presents its own set of problems and potential solutions. Hence every deal
requires individual approach. However, there are some macro level aspects, which
must be kept in mind while considering a targeting company for acquisition or merger.
These are economical environment, Geopolitical environment, impact of terrorism on
that region, economical health of the company, availability of resources at
appropriate cost including manpower etc. These are discussed as under:
The Economical Environment

A business leader while planning Merger or Acquisition in other country must

give due consideration to the type of market economy. It is much easier to do business
in a country where resources are owned and controlled by the private sector (Market
Economy) as compared to a country where it is controlled by the Government
(Command Economy). However, due consideration must be given to the reforms
initiated by various governments to liberalize their economy. At present, most of the
South East Asian countries which are governed by command-based economy are now
moving to be more market-based economy (7).
Political Environment

A stable legal and political system is always preferred as it gives long-term

stability to the business. History of unstable Government, always increases the risk
factor and business in such a country should be avoided. A leader must have a clear
understanding of geopolitical situation of the region where the targeted company is
located. However, at times the countries with record of unstable Govt. do provide
great opportunities and a leader can afford to take calculated risk to grab the
opportunity.
Impact of Global Terrorism

Terrorism has added a new dimension, which directly or indirectly affects the
conduct of business. At times, terrorism even affects the control of Govt. on national
economy and resources. We have living examples of Afghanistan and Iraq where no
business leader would like to sink his investment. Terrorism has even affected the
functioning of big global companies. Following the terrorist attack on September 11,

2001, Boeing Company (The Chicago-based Aerospace Company) laid off thousand
of US workers because of uncertainty over customer order (8). Similar risk was felt by
General Electric in the summer of 2002, whenIndia and Pakistan nearly went to war
due to terrorist activities sponsored by Pakistan (9). General Electrical has invested
more than $ 80 million in Banglore (India) for creating largest research center
outside U.S.A. War between India and Pakistan would have greatly hampered their
business.
Work Culture

The work culture of an organization is greatly influenced by the national work

culture, which effect the functioning of local Government and bureaucracy. This also
includes level of corruption, which an organization is likely to face during the process
of takeover and later on for smooth conduct of the business. It is not possible to
impose work culture of home organization fully. Research works have highlighted
that work culture of country has direct bearing on the work culture
of aorganization. For example German employees at an IBM facility in Munich will
be influenced more by German culture than by IBM culture (10).
Based on the above-mentioned consideration, targeted companies should be
identified and short-listed and put up to Board of Directors for their
consideration. Once the proposal is accepted in principle, the further process can be
initiated.
Merger and Acquisition Strategy

Before any strategy is formulated, a company needs have a clear-cut policy

regarding merger and acquisition. This policy must be complimentary to its vision
and mission. Once a policy decision to expand business through merger and
acquisition has been taken, the first step is to establish a Merger and Acquisition
Cell. The roll of the cell would be to identify the potential companies, which would
depend on macro level issues discussed above and the broad guidelines laid down by
the company for such a move i.e. to diversify the business or expand the existing
business or for upgrading the technology.
This cell should be assisted by business analyst, representative of financial
institution/investment bankers, technical experts, valuators and lawyers specializing in
this field. For faster decision making, which is vital in such cases, the cell must have
direct axis to the business leader/decision making authority. Sophisticated software
that can handle financial analysis, projections, valuation, and so on is available in the
market and help of these can be taken.
Once the targeted company has been identified, option of finalizing deal
through negotiation must be considered. However, if it is not feasible due to any
reason and takeover is vital for the organization, a hostile takeover should be

considered. For hostile takeover, the stock of targeted company should be bought
quietly through third party. The whole process must be managed confidentially.
PROCESS OF MERGER AND ACQUISITION

Process of takeover should adopt a planned approach. Such a plan should

include extensive explanation of various phases and activities. The aim of developing
such an action plan is to give the broad outlines of the various activities and to show
the connection between these. Process of a Merger or Acquisition can be divided into
following steps:
Step I

Finalization of Targeted Company for Acquisition/Merger

Step II

Formulating the Approach for Acquisition.

Step III

Working out the Agreement.

Step IV

Integrating the merged /acquired company.

Step V

Post-acquisition/merger Plan.

STEP I: FINALIZATION OF TARGETED COMPANY

Information about targeted companies must be collected from all possible

sources & if required business intelligence agencies could also be hired to collect
additional information which may not be easily available. Final evaluation of targeted
company will broadly depend on the following:
1.

Purpose of Merger or Acquisition

2.

Financial information (Strength & Weakness of Company)

3.

Management and organization Information

4.

Environment of the country where targeted company is located)

As a result of this process some of the companies could be eliminated due to their
failure to meet important criteria.
Selection of Targeted Company: The specific criteria to make final selection
includes the following:
o

Size of the company (in terms of earning, sales, volume and assets).

Potential growth rate.

Market value and financial condition including debts (if any).

Coverage of market.

Manufacturing facilities (location, capacity and condition).

Management and personnel.

Type of technology being used.

Minimum return on investment.

Depending upon the circumstances, other criteria may also be added to meet
the requirement of the objectives or companies basic policies regarding minimum
return on the investment human issues or environmental issues.
Step II: Formulating the Approach for Acquisition

Final recommendation must be put up to the Board of Directors for their

approval. Such approval constitutes authorization of Management to proceed with
succeeding steps of the process. The first and the most effective strategy is to
convince the management/business leader of targeted company to explore the idea of
affiliating with the acquirer and that it is going to gain from the proposal. Importance
in this strategy is to determine who should initiate the discussion (11). It is desirable
that first such discussion should be initiated through a consultant or an investment
broker. This gives an option for switching over to other strategy (hostile takeover).
If the management of targeted company is willing to be acquired or get
merged, the process of discussion must continue. The first few discussions will
normally be confined to generalities such as why two companies
should combine, gains for both, financial position, organizational structure and out
look.
During the preliminary talks, targeted company may like to know approx price
& other broad terms of condition before it is willing to continue to discuss the deal
seriously. Acquirer must do his homework well & be prepared to submit the proposed
terms & conditions.
Step III: Working out the Agreement
The agreement for merger or acquisition should be done in two stages. In first
stage, a preliminary agreement between two companies could be worked out and in
the second & final stage the final agreement can be worked out. This is essential to
give breathing time to both companies to workout finer details for final agreement and
also check some additional detail, which might have been overlooked previously. The
preliminary agreement will include the following points:
1.

The basis of agreement (Terms of Merger/Acquisition)

2.

The authorization by the share holders of each company

3.
The provision that during the interim period none of them will make any
substantial change in its operation or enter into unusual agreement without each
others approval. This agreement will be in form of a memorandum.
After due consideration final agreement of acquisition/merger should be
prepared considering legal aspects. This document should be prepared by the legal

council of both the companies in consultation with each other. Due consideration
must be given to the law of the land and code of conduct for acquisition and merger
prepared by respective governments. Final agreement must be put up to board of
Directors for obtaining formal approval of the agreement and its terms and conditions.
Once the agreement is approved by Board of Directors, announcement of
acquisition/merger should be made. This announcement must highlight the
advantages/gains of the both organization, their employees, shareholders and
customers.
Step IV: Integration of Two Enterprises
To get full benefit from any acquisition or merger plan, it is essential that the
two companies must get integrated rapidly and effectively. To achieve this, it is
essential to formulate an integration plan. This plan must cover management
function, accounting controls, budgeting control and functional control. In case of
merger, it is essential to give due importance and share to both companies in running
the new organization. There may be a requirement to even develop a new
organizational structure.
To achieve effective & smooth integration, it is essential to have integration
cell comprising of key personnel of both the companies. This cell could look after
five types of integration (12).
1. Strategic Integration It involves continuing contact among the top-leaders to discuss
broad goals or changes in each company.
2. Tactical Integration: It brings middle management together to develop plans for
specific projects of joint activities.
3. Operational Integration: Facilitating individual and small task group working
relationship.
4. Interpersonal Integration: It is important that leaders of both companies try bringing
people of their respective companies closer to each other. The interpersonal ties between
the members of the separate companies help in proper integration of two merged
companies.
Role of communication in Facilitating Integration: Communication plays an important role in
facilitating proper integration. This can be achieved by the followings (13):

Handling the fundamental questions asked by stakeholders

Creating a communication strategy and infrastructure

Unfolding the vision and dealing with the dilemma of management disconnects

Establishing the key message(s)communicated to all stakeholders

Marketing the deal

Motivating staff: retaining key people

Controlling the rumor mill: how it can be done

Stabilizing the new organization: the tools to use

Getting buy-in from customers, suppliers, and alliance partners

Creating two-way communication channels

Step V: Post-Merger Integration

There is generally tendency to become casual once deal has been

finalized. Both the parties feel so relieved and at times they fail to realize that the real
problems come when dealing with the nuts & bolts of the merger/takeover. Hence it
is important to prepare for rapid responses to unanticipated situations. Human
relation aspects need special attention.
Recommended model for merger and acquisition is appended as Appendix A
CONCLUSION

It is very tempting for a business leader to venture for merger or acquisition of

other company. But is must be understood that it is a very complex task. Hence any
such move must be planned & executed with great care. Remember a successful
attempt would be very rewarding.
Appendix A

(Refer to page 12)

A Generalized Model of Merger and Acquisition Action Plans
Working out Broad policy regarding Acquisition\ Merger Programme
Defining Objectives of Acquisition\ Merger
Approval of the Board of Directors of the Objectives
Formulating The Programme
Search of a Partner for Acquisition\d Merger
Identifying, Selecting & Rating the Companies for the Final Choice
Formulating the Strategy of Approach
Undertaking Negotiations
Reaching the Preliminary Agreement
Considering Legal Aspects of Merger
Working out Final Agreement

Approval by the Boards of Directors

Announcement of the Merger\Acquisition
Integrating the Operations & Organizations of the Two Enterprises
Five Levels of Integration

Strategic Integration

Tactical Integration

Operational Integration

Interpersonal Integration

Cultural Integration

Communication for integration

Post-Merger Integration

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

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