The Significance of Mergers and Acquisition in India

The Significance of Mergers and erudition in IndiaThe term nuclear fusions and acquisition refers to the facet of corporate finance, strategy and management dealing with buying and change or amalgamating different companies that can help in financial aid or help in increasing the market ploughsh atomic enactment 18 and process with step forward creating another(prenominal) business concern entity.Important terms used in the world of unifications acquisition, their brief explanationMerger is defined as the combination of dickens or more companies into a single ac come with where one survives and the other loses its corporate existence. The survivor acquires the assets as soundly as liabilities of the incorporate company or companies.Amalgamation Halsburys Laws of England absorb amalgamation as a blending of two or more existing undertakings onto one undertaking, the sh arholders of each blending company becoming substanti anyy the partake holders in the company whi ch is to carry on the blended undertaking. Section 2 (a) of Income Tax Act defines Amalgamation in relation to companies means the merger of two or more companies to form one company in much(prenominal) a modal prise thatAll the properties of the amalgamating company or companies expert before the modify company by sexual morality of amalgamation give-up the ghost the properties of amalgamation.All the liabilities of the amalgamating company or companies just before the amalgamation become the liabilities of the amalgamation become the liabilities of the amalgamated company by virtue of amalgamation.Shareholders holding not less than three-fourth in look on of apportions in the amalgamating company or companies becomes the shareholders of the amalgamated company by virtue of amalgamation. integrating is the fusion of two existing companies into a in the rude(prenominal) company in which twain the existing companies extinguish. The small difference in the midst of conso lidation and merger is that in merger one of the two or more merging companies retains its identity while in consolidation all the consolidating companies extinguish and an entirely new company is born.Acquisitions/Takeovers This refers to purchase of majority stake (controlling interest) in the share detonator of an existing company by another company. It whitethorn be noted that in the case of takeover although there is change in management, both the companies retain their separate legal identity.Leveraged Buyouts It means any takeover which is routed through a elevated degree of borrowings. In simple words a takeover with the help of debt.Management Buyouts It refers to the purchase of the corporation part or whole of shareholding of the controlling / predominant group of shareholders by the existing mangers of the company.Sell Off General Term for divestiture of part or whole of the riotous by any one or number of means i.e. sale, spin tally, split up etc.Spin Off A transac tion in which a company distributes all the shares it accepts in a subsidiary to its own shareholders on pro-rata basis then take a shits a new company with the resembling proportional shareholding pattern as in the produce company.Split Off A transaction in which some, but not all, shareholders of the reboot company receive shares in a subsidiary, for relinquishing their promote company shares.Split Up A transaction in which a company spins off, all of its subsidiaries to it shareholders and ceases to exist.Equity Carve Out A transaction in which a parent company offers some common decline of one of its subsidiaries to the general public, so as to bring in a cash infusion to the parent company without losing the control.TYPES OF MERGERS AND ACQUISITIONSMergers can be classified into three categoriesOn the basis of movement in the industriesHorizontal MergersThese involves merger of two firms operating and competing in the same line of business activity. It is performed with a view to form a crowingr firm, which may have economies of scale in merchandiseion by eliminating duplication of competitions, plus in market segments and exercise of better control over the market. It in like manner helps firms in industries like pharmaceuticals, automobiles where huge union is spent on RD to achieve a critical mass and reduce unit development costs. slip India cements acquiring Raasi Cement.Vertical MergersThese take place between two or more firms enmeshed in different stages of production. The main reason for vertical merger is to ensure ready take off of the materials, gain control over scarce raw materials, gain control over product specifications, increase in profitability by eliminating the margins of the previous supplier/ distributor and in some cases to avoid gross sales measure.Example Tea Estate Ltd merging with Brooke Bond Ltd.Conglomerate MergersConglomerate merger refers to the merger of two or more firms engaged in misrelated line of bus iness activity.Example GNFC acquiring Gujarat Scooters.Two important characteristics of conglomerate mergers areA conglomerate firm controls a range of activities in discordant industries that require different skills in the specific managerial functions of research, applied engineering, production and marketing.The diversification is achieved mainly by external acquisitions and mergers and not by internal development.Consolidation MergersThis involves a merger of a subsidiary company with parent company. The reasons behind such mergers are to stabilize cash flows and to make specie available for the subsidiary. In consolidation mergers, economic gains are not readily apparent as merging firms are under the same management. Still, Flow of funds between parent and the subsidiary is obstructed by other consideration of laws such as taxation laws, Companies Act etc. Therefore, consolidation can make it easier for to infuse funds for revivification of subsidiaries.One the basis of me thod or approachLeveraged buyoutsManagement buyoutsTakeover by workersOn the basis of response/relationFriendly Takeovers hostile TakeoversAcquisition is buying of Target troupe by another. It may be friendly or aggressive. In friendly acquisitions the companies cooperate and negotiate with each other whereas in aggressive the target company is not forgeting to be sold but it is with no prior(prenominal) friendship. The word acquisition is used when a large company overtakes small but when the small overtakes large it is called turn around takeover or merger.MERGER MOTIVESThe merger motives are as follows product profit / Combination BenefitsThe companies would always like to grow and best way to grow without much loss of time and resources is too inorganically by acquisition and mergers.Example Merger ofSCICI with ICICIITC Classic with ICICIAcquisition ofRaasi cement by India cementDharani Cement and Digvijay cement by GrasimModi cement by Gujarat Ambuja.DiversificationThe com panies could diversify into different product lines by acquiring companies with diverse products. The purpose is to diversify business risk by avoiding putting all eggs into one basket.Example All Multi-product companiessynergyWhen the companies combine their operations and realize leads greater in value than mere additions of their assets, the synergy is said to have been resulted.Example Merger of Ranbaxy and Crossland Laboratories. commercialize Dominance / Market Share/ Beat CompetitionThe predominant market share or market dominance has always driven the executives to look for acquiring competitive companies and create a huge market empire.ExampleAcquisition of Tomco by Hindustan LeverComputer Associates International Acquired around twenty software companies.Consolidation in cement industryNicholas Piramal Ltd. has merged into itself.Technological ConsiderationsIt refers to enhancing production capacities to derive economies of scale.Example Acquisition of Corus by Tata.Taxa tion Benefits / Revival Of Sick UnitsSection 72 A provides for revival of sick units by allowing accumulated losses of the sick unit to be absorbed by the healthy units number to compliances to the conditions of the provisions.Acquiring PlatformWhen a company would like to expand beyond geographical limits and acquire platform in the new place the best way would be to acquire the companies.Example Acquisition of Parle by Coke.METHODOLOGYANALYSISObjectiveTo inspect and analyze the trends and progress of MA in Indian market and corporation.To analyze year-wise trends with the variance.Hypotheses With the above objective in mind certain hypotheses areNo major difference in the amount and number of deals in MA between the industries and between the yearsNo major changes between service and manufacturing empyrean in MA proceedsThe table 1 shows the trends of MAs in India from the year 2000 to 2007.Food BeveragesIndia is the second largest producer of solid food Beverages, first bein g China. The food market is expected to be USD 182 billion and it is two thirds of the total retail market in India. The carbonated drinks market is worth(predicate) USD 1.5 billion whereas the market for juice is worth USD 0.25 billion. The market for fruit drinks is growing at 25%. The major reasons for MA concept commenced in this industry are deregulation, restructuring of parent companies, disinvestments and existing foreign players.Textile IndustryThe Indian textile industry was unorganized until liberalization of economy of India. After that there was an astounding growth in this industry and it is one of the largest in the world. 27% of foreign exchange is from textile exports. This industry is 3% of GDP and it involves 21% of the total employment in the country. The major reasons for growth of MA are the growth of handlooms, closure of mills etc.Chemicals, Drugs and PharmaceuticalsThis sector accounts for 70% of the demands for drugs, formulations, tablets, chemicals etc. There are al just about 250 large and 8000 small manufacturers and suppliers in Pharma sector. The growth rate of this industry is almost 14%. The reason for the growth of MA in this sector is due to the rudimentary changes in this sector and the emergence of WTONon-Metallic Mineral ProductsThe major reasons for the growth of MA in this sector are mainly because the Indian economy has slowed down, SME are finding difficult to raise the funds and are not able to handle the pressure from planetary market.Information Technology and telecomThe factors for the growth of MA are up-gradation and expansion of the telecom industry, work and networks.Automobiles and AncillariesGlobalization is approaching and pushing foreign players merge and upgrade the technology and infrastructure, increase the product range and cut costs. too there is huge competitive pressure due to the existing foreign players leading to growth in MA.The pie chart ( intention 2) gives the sector-wise division in 2 007Figure 2 Sector-wise divisionAnalysis of MA in manufacturing and service sectorsTable1 shows the Trends and progress in terms of number of deals and Table 2 in terms of value of deals.Table1 Industry-wise Trends Growth of MAs in India (Number of deals)Table2 Progress and Trends in MA in number of deals (as calculated from Table1)Table 3 Industry-wise Trends Growth of MAs in India (in Rs. Cr.)Table 4 Progress and Trends in MA in value of deals (as calculated form Table 2)Number of Deals Value of deals The progress and trends of MA considered in number and value of deals in manufacturing and services sectors have been calculated by using t-test and ANOVA analysis. On the basis of Table 2 and Table 4 the number of deals in service sector is lower in the first 4 years but reverses in the last 3 years. So there is no major association between these two sectorsTable5 Two-way ANOVA- Sector-wise Number of Deals (as calculated from Table 1)Table6 Two-way ANOVA-Sector-wise Value of Deal s (as calculated from Table 3)ANALYSIS OF THE SURVEY DATARESEARCH AND FINDINGSFrom the calculations done above, it is observe that the number of deals has decreased from 1300 to 1007 i.e. almost 18%. There can be various reasons for this decrease, some are as followsThe slowdown of the economyWith no prior knowledge management makes a choice of MA leading to decrease in profitsEconomic crisis in the period of 2004-2007Dropping market capitalizations and precariousness in the economyFrom the above analysis it is concluded thatTotal amount of deals change magnitude by 613%In manufacturing sector the value of deals increased by 273% whereas it increased by 1217% in service sectorTotal number of deals decreased by 18.5% i.e. from 1322 to 1075In manufacturing sector the number of deals decreased by 844 to 440 i.e. 47.2% decrease whereas in service sector deals increased from 480 to 636 i.e. 33% increase.THEORIES OF MERGERThe phenomenon of merger and acquisitions has been explained by different theories as underEfficiency TheoriesDifferential EfficiencyIf the management of firm A is more efficient than the management of firm B and if after firm A acquires firm B, the efficiency of firm B is brought up to the aim of efficiency of firm A, efficiency is increased by merger.FeaturesThere would be social gain as well as private gain.This may also be called managerial synergy hypothesis.LimitationsIf carried to its logical extreme, it would result in only one firm in the economy, the firm with greatest managerial efficiency. Inefficient / underperforming firms could better performance by employing special managerial input through direct employment / contracting.Inefficient ManagementInefficient Management refers to non performance up to its potence level. It may be managed by another group more efficiently.FeaturesInefficient Management represents management which is inept in absolute sense.Differential management possible action is more likely to be basis for horiz ontal merger inefficient management theory could be basis for mergers between firms of unrelated business.LimitationsDifficult to cross out differential management theory from inefficient theory.The theory suggests replacement of inefficient management. However empirical evidence does not support this. direct SynergyOperating synergy or operating economies may be achieved in horizontal, vertical and even conglomerate mergers.FeaturesTheory is based on the assumption that economies of scale do exist in this industry and prior to merger, firms are operating at the levels of activity that fall short of achieving the potential for economies of scale.Economies of scale arise because of indivisibilities such as people, equipment overhead which provide increasing returns if spread over a large number of units of output.Pure DiversificationDiversification of the firm can provide the managers and employees with trouble security and opportunity for promotion and other things being equal, re sults in lower costs. Even for owner manager diversification is valuable as risk allowance for undiversified firm is higher.Diversification has value for many reasonsDemand for diversification by managers, other employeesPreservation of organizational and reputation capitalFinancial and tax advantagesDiversification helps preserving reputational capital of the firm, which will be lost if firm is liquidated.Strategic Realignment to Changing EnvironmentStrategic planning is concerned with firms environment and constituencies, not just operating decisions. The speed of adjustment through merger would be quicker than internal development.FeaturesStrategic planning approach to mergers implies either the possibilities of economies of scale or tapping an underused competency in the firms present managerial capabilities.By external diversification the firm acquires management skills for augmentation of its present capabilities.A competitive market for acquisitions implies that the net pre sent value from merger and acquisition investment is likely to be small. Nonetheless if synergy can be used as a base for still additional investments with positive net present values, the strategy may succeed.Agency problemsAgency problem arises when a manager owns a fraction of possession shares of the firm. This partial ownership may cause managers to work less vigorously than other wise and / or consume more perquisites, (luxurious offices, company cars, membership of clubs) because majority owners bear most of the cost.Agency costs includeCost of structuring a set of contractsCost of monitoring and controlling the behavior of agents by principals.Cost of bonding to guarantee that agents will make optimal decisions or principles will be compensated for consequences of sub-optimal decisions.Residual loss i.e. welfare loss experienced, by the principals arising from the divergence between agents decisions and decisions to maximize principals warfare. This proportion loss can aris e because the cost of full enforcement of contracts exceeds the benefits.Takeover as solution to Agency ProblemsAgency problems can be controlled by organizational or market mechanismA number of compensation arrangements and market for managers may mitigate agency problems.Stock market gives rise to external monitoring device, because derivation prices summaries the implications of decisions made by managers. Low stock prices exert pressure on managers to change their behavior and to stay in line with interest of shareholders.When these mechanisms are not sufficient, market for takeover provides an external control device of last resort.A takeover through a tender offer or proxy interlocking enables outside managers to gain control of decision process of Target Company, while circumventing the existing managers and Board of Directors.Free Cash flow hypothesisPay out of free cash flow can play an important role in dealing with conflict between managers and shareholders. Payout of f ree cash flow reduces the amount under control of managers and reduces their power. Further they are subject to monitoring in capital market when they seek to finance additional investment with new capital. A free cash flow must be paid out to shareholders if firm is to be efficient and to maximize share price.Further they are subject to monitoring in capital market when they seek to finance additional investment with new capital. Managers arrange cash flows also by issuing debts / leveraging. In leveraged buyouts, increased debt increases risk of bankruptcy cost in addition and agency costs. Optimum debt / Equity Ratio will be where the fringy cost of debt equals marginal benefit of debt.Market PowerMergers increase a firms market share. It is argued that larger volume of operations through Mergers and Acquisitions result in economies of scale. But it is not straighten whether this price required by the selling firm will really make acquisition route more economical method of exp anding a firms ability either horizontally or vertically.An objection often raised against permitting a firm to increase its market share by merger is that it will result into undue concentration in the industry.Value increase by RedistributionValue increases under merger on account of redistribution among the stake holders of the firm. Shifts are from the Bond holders to stock holders and from labor to stock holders and / or consumers.DE-MERGER AND REVERSE MERGERDE-MERGERDe-merger essentially means bonafide separation of the key business assets and reorganizing the business in such a manner that though there is separation in favor of another company, atleast 50% of the equity stake in two companies continues to be common. Section 2 (19AA) was introduced by Finance Act of 1999 defining De-MergerExamplesSterlite Industries and Sterlite OpticalSterlite which was a diversified company with presence both in non-ferrous metal as well as Telecom cables decided to de-merge both the busine ss into separate companies. The spin off was done in the ratio of 11.Raymonds LtdRaymonds sold of Cement and Steel business to become one again, a purely fabric and garment company. The whole exercise fetched Raymonds Rs. 1140 crores. This enabled it to reduce high cost debts as well as buyback its own shares. Thus financially as well as in terms of shareholder value it was a correct step.REVERSE MERGERReverse merger takes place when a healthy company merges into a financially weak company. Under the Companies Act there is no difference between regular merger and reverse merger. It is like any other amalgamation.On Amalgamation merger automatically makes the transferee company entitled to the benefits of carry forward and set off of loss and unabsorbed depreciation of the transferor company. There is no need to comply with Section 72 of Income Tax Act.On amalgamation being effective, the weak companys name may be changed into that of a healthy company.ExampleCase Study- Kirloskar Oi l Engines merging into Prashant Khosla Pneumatics LtdIn April, 1994, Kirloskar Oil Engines Ltd. (KOEL) took over the management control of Prashant Khosla Pneumatics Ltd. (PKPL) a Delhi Based Company having its works at Nasik.PKPL became a sick unit as on 31st March, 1994 and went into BIFR in June 1994. ICICI was appointed as Operating Agency who invited bids for PKPL for revival. KOEL made a bid although PKPL was already under its control. KOELs bid was accepted and confirmed by BIFR.Main objective in the takeover was to make use of PKPLs engine determine for KOELs large engine activity.PKPL take over added to KOELs assets, two plants located at MIDC, Nasik on MIDC leased land of 80,000 sq. mtrs.A scheme for revival of PKPL through reverse merger of KOEL with PKPL was submitted to BIFR and was sanctioned in February 1996.Accordingly, KOEL merged in PKPL, and name of PKPL stood changed KOEL on 1st March, 1996 which was the effective date of amalgamation.Again of merged company for 1994-95 was held in April 1996 and coalesced accounts for the year ended 31st March, 1995 were adopted. Delay of 7 months for holding AGM was condoned by BIFR.This merger did not affect in any way KOEL shareholders.PKPL capital of Rs. 218 lakhs was decreased by 95% to 11 lakhs and KOEL shares were exchanged for PKPL shares in the merged company in the ratio of 1 for 20.PKPL shareholders were paid 5% dividend for 1994-95 and full dividend for 1995-96.56% of PKPLs capital held by its holding company was transferred at agreed price of Rs. 75 lakhs to KOEL associate company which subsequently got shares in the merged company.The scheme provided for certain matters without press release through the formalities under companys Act, under powers of BIFR such asChange of name of conveyance Company from PKPL to KOEL.Memorandum of association (MOA), articles of association (AOA) of Transferor Company becomes MOA and AOA of Transferee Company.Auditors of Transferee Company to automatically cease to hold office and auditors of the transferor company to become auditors of the transferee company.MD and ED of Transferor Company to continue as such in Transferee Company without reappointment and without break.Authorized capital of Transferee Company to stand increased from Rs. 5 crores to Rs. 27 crores.Transferee Company to allot to shareholders of Transferor Company, shares in Transferee Company.Share certificates of Transferor Company not to be called back and replaced by new certificates.ICICI to be issued 4,75,000 equity shares in transferee company without complying with Section 81 (1A) and SEBI guidelines on preferential issue.Stamp duty on transfer of property and share certificates was saved.Premium payable to MIDC saved only loans for fee paid.PKPL revival resulted into both the plants being operative- Direct employment to more than 300 people working.POST MERGER SCENARIOKey steps to winning Post Acquisition Management (Figure 3)Figure 3 Steps for Successful Acq uisitionSuccess constitutes two important factorsMeeting the objectivesEnhanced shareholder valueShort lived mergers Some ExamplesMerger of ICICI and readWhen employees of Anagram Finance heard that ailing firm was to be merged with ICICI there was a sigh of relief. But two months later, reality was bitter. Out of 450 cater only 140 were repaired and all others were given pink slips with 3 months severance pay.Takeover of Merind by WockhardtThere was exodus of top management team of Merind.CIBA and Sandoz merged to form Novartis115 out of 120 managers of new corporate office were Sandoz people with Sandoz Indias erstwhile MD John Simon ailing the shareholders.POST MERGER desegregationSEVEN RULES BY MAX HABECK- FRITZ MICHAEL TRAM pileGuide post merger Integration with a clear and realistic vision derived from through business due diligence.Research Findings78% of mergers are mistakenly driven by fit, and not vision.Around 58% of mergers fail.Examples M A Cases That Have Failed O n note Of Lack of Vision or Unrealistic VisionAT T and NCRIn the late 1980s American Telephone and Telegraph still had assets such as Bell Labs to go with long distance telephone services it kept after the 1984 anti-trust break up. The company had a grand vision of a technological synergy between its expertise in telecommunications and NCRs expertise in computer technology.After years of intense searching, hampered by management changes as well as cultural frictions, no synergies were found. The presumed fit between telecommunication equipment and computer hardware failed to turn up. AT T spun off the remains of NCR around louver years later at a loss of around $ 3.5 billion, n early(a) half of what it initially paid.Sony PicturesSony acquired Columbia Pictures in 1989 for $ 5 billion. However, Columbia had difficulties in generating the successful software to begin with. Rapidly rising salaries of stars and lack of success at box office culminated in Sony making operating loss o f around $ vitamin D zillion. The company wrote off $ 2.7 billion. The losses were attributed to abandonment of large number of projects and settlement of outstanding lawsuits.However, instead of divesting the unit, Sony made management changes and imposed stricter controls. Columbia is now a part of Sony Pictures Entertainment, which represented just fewer than 10% of Sony Groups Worldwide Sales of around $ 50 billion.Examples of Successful cases of M A driven by VisionAcquisition of Salomon Inc. by CitigroupFord Motor Acquisition of AB Volvo.Leadership- Its Critical Establish It QuicklyResearch FindingsLeaderships urgency is often neglected. Some 39% of all companies faced a leadership vacuum because they failed to make the establishment of leadership a priority.A merger without strong leadership in place from its early days will drift quickly and drift is deadly.Growth- Merge to Grow, Focus On added Value not on Efficiency SynergiesResearch Findings76% of the companies surveye d centre too heavily on efficiency synergies. 30% of the companies virtually ignored attractive growth opportunities such as cross selling possibilities or knowledge sharing in research and development.Most Successful Growth through MergersCisco SystemsThis fortune 500 company has grown since its founding in 1984, thank to a combination of organic growth and successful integration of 25 acquisitions. Cisco has almost quadrupled its revenue since 1995 to $ 8.5 billion and its net income tripled to $ 1.3 billion. It holds a market share of around 80% routers and switches which form the internet infra structure.Making mergers is and will continue to be absolutely essential for Cisco to maintain its rapid growth and enhance its competitive advantages.CONCLUSIONThe practice of Mergers and Acquisitions and restructuring of business entities has achieved a lot of importance and significance in todays corporate world. Due to the cut-throat competition in the global market pushed Indian com panies to opt for this strategic option in order to sustain in the marketplace.There are various factors for making MA deals reconstructive in India such as Government policies are dynamic, stability in the economy, ready-to-experiment approach of the firms etc.Some additional and recent facts about MAThe value of MA is increasing every year in India it almost increased seven fold to USD 4.2 billion in August 2010 from USD 629 billion in 2009The number of deals (outbound) increased to USD 3.35 billion in 2010 from USD 60 millionThe number of domestic deals increased from 20 to 27 but the value of deals decreased from USD 521 million to USD 364 million in2010.From the study it is observed that companies get involved in MAs to increase the shareholders earnings by increasing the revenue or decreasing the cost. It also increases the market share provided if management is careful about the MA and has a prior knowledge of it.Synergy should be achieved with MA but at times it does not ha ppens so the companies need to work to control the synergy and allow new company to go ahead and look for new business growth possibilities.