A REPORT ON

Mergers and Acquisitions

BIRLA INSTITUTE OF TECHNOLOGY AND

SCIENCE PILANI - KK BIRLA GOA CAMPUS

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A REPORT ON

Mergers and Acquisitions

Prepared By :

Aditya M Dixit (2008A3PS197G)

Kunal Agrawal (2008C6PS433G)

Manasjyoti Saloi (2009A7PS129G)

Vishal Sinha (2009C6PS390G)

Varun Das (2009C6PS506G)

Prepared for :

Dr. Basavadatta Mitra

Report submitted in partial fulfillment of requirements of

BITS C393

Current Affairs

(2 May 2011)

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Acknowledgement

We would like to take this opportunity to thank each and everyone who has been closely

associated with us in completing this report.

We would also like to extend our heartfelt gratitude to Dr. Basavadatta Mitra, for

initiating, directing and guiding us and hence, bestowing upon us a sense of direction,

opportunity and purpose, all exceedingly necessary for the satisfactory completion of

this report.

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Abstract

In the recent decades that have witnessed rapidly growing and extremely competitive

economies, there is an increasing need for companies to expand their business, in

order to cut down competition, and more so, in order to survive. Until a couple of years

back, the news that Indian companies having acquired American-European entities was

very rare. However, this scenario has taken a sudden U turn. Nowadays, news of Indian

companies acquiring foreign businesses is more common than the other way round.

This report lists various such mergers and acquisitions that have taken place in India, in

the recent times. It would also carry out the task of shedding light on the various major

and subtle aspects and also the need of mergers and acquisitions, with special

reference to the Indian companies involved in them in the recent past.

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Table of Contents

Acknowledgement ii

Abstract iii

1. Introduction 1

1.1 Classification of Mergers 1

1.2 A few recent developments involving Indian companies 3

2. Tata Steel – Corus Acquisition: A Case Study 4

2.1 Background 4

2.2 Reasons 5

2.3 The Deal 5

2.4 SWOT Analysis 6

2.5 Benefits and Losses 7

3. Bharti-Airtel – Zain Acquisition: A Case Study 8

3.1 Background of the involved companies 8

3.2 A Brief Snapshot of the Acquisition Specifics 9

3.3 Structure of the acquisition 10

3.4 Commercial Considerations of the Deal for Bharti 11

3.5 Reasons for the acquisition (Bharti Airtel Perspective) 11

3.6 Future Prospects for Bharti in Africa 12

4. iGATE – Patni Acqusition: A Case Study 13

4.1 Salient features of the acquisition 13

4.2 Advantages 14

4.3 Disadvantages 14

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5. Conclusion 15

6. Surveys and Results 18

7. Appendix 20

8. Bibliography 21

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1. Introduction

Mergers and acquisitions (M&A) refers to the aspect of corporate strategy, corporate

finance and management dealing with the buying, selling and combining of different

companies that can aid, finance, or help a growing company in a given industry grow

rapidly without having to create another business entity.

An acquisition, also known as a takeover or a buyout, is the buying of one company

(the „target‟) by another. The acquisition process is very complex and various studies

shows that only 50% acquisitions are successful.

An acquisition may be friendly or hostile. In a friendly takeover companies cooperate

in negotiations. In the hostile takeover, the takeover target is unwilling to be bought

or the target's board has no prior knowledge of the offer. Acquisition usually refers to

a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will

acquire management control of a larger or longer established company and keep its

name for the combined entity. This is known as a reverse takeover.

Although merger and amalgamation mean the same, there is a small difference

between the two. In a merger one company acquires the other company and the

other company ceases to exist. In an amalgamation, two or more companies come

together and form a new business entity.

1.1 Classifications of Mergers

Horizontal merger – is the merger of two companies which are in produce of same

products. This can be again classified into Large Horizontal merger and small

horizontal merger. Horizontal merger helps to come over from the competition

between two companies merging together strengthens the company to compete with

other companies. Horizontal merger between the small companies would not effect

the industry in large. But between the larger companies will make an impact on the

economy and gives them the monopoly over the market. Horizontal mergers

between the two small companies are common in India. When large companies

merging together we need to look into legislations which prohibit the monopoly.

Vertical merger – is a merger between two companies producing different goods or

services for one specific finished product. Vertical merger takes between the

customer and company or a company and a supplier. IN this a manufacture may

merge with the distributor or supplier of its products. This makes other competitors

difficult to access to an important component of product or to an important channel of

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distribution which are called as "vertical foreclosure" or "bottleneck" problem. Vertical

merger helps to avoid sales taxes and other marketing expenditures.

Market-extension merger - is a merger of two companies that deal in same

products in different markets. Market extension merger helps the companies to have

access to the bigger market and bigger client base.

Product-extension merger – takes place between the two or more companies

which sells different products but related to the same category. This type of merger

enables the new company to go in for a pooling in of their products so as to serve a

common market, which was earlier fragmented among them. This merger is between

two companies that sell different, but somewhat related products, in a common

market. This allows the new, larger company to pool their products and sell them

with greater success to the already common market that the two separate

companies shared. The product extension merger allows the merging companies to

group together their products and get access to a bigger set of consumers. This

ensures that they earn higher profits.

Conglomeration - Two companies that have no common business areas. A

conglomeration is the merger of two companies that have no related products or

markets. In short, they have no common business ties. Conglomerate merger in

which merging firms are not competitors, but use common or related production

processes and/or marketing and distribution channels.

Congeneric merger - Merger between firms in the same general industry but having

no mutual buyer-seller relationship, such as a merger between a bank and a leasing

company.

Purchase mergers - this kind of merger occurs when one company purchases

another. The purchase is made with cash or through the issue of some kind of debt

instrument; the sale is taxable. Acquiring companies often prefer this type of merger

because it can provide them with a tax benefit. Acquired assets can be written-up to

the actual purchase price, and the difference between the book value and the

purchase price of the assets can depreciate annually, reducing taxes payable by the

acquiring company.

Consolidation mergers - With this merger, a brand new company is formed and

both companies are bought and combined under the new entity. The tax terms are

the same as those of a purchase merger.

A unique type of merger called a reverse merger is used as a way of going public

without the expense and time required by an IPO.

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Accretive mergers are those in which an acquiring company's earnings per share

(EPS) increase. An alternative way of calculating this is if a company with a high

price to earnings ratio (P/E) acquires one with a low P/E.

1.2 A few recent developments in the field of M&A involving Indian companies

Tata Chemicals buys British salt

Tata Chemicals bought British Salt; a UK based white salt producing company for

about US $ 13 billion. The acquisition gives Tata access to very strong brine supplies

and also access to British Salt‟s facilities as it produces about 800,000 tons of pure

white salt every year

Reliance Power and Reliance Natural Resources merger

This deal was valued at US $11 billion and turned out to be one of the biggest deals

of the year. It eased out the path for Reliance power to get natural gas for its power

projects

Airtel‟s acquisition of Zain in Africa

Airtel acquired Zain at about US $ 10.7 billion to become the third biggest telecom

major in the world. Since Zain is one of the biggest players in Africa covering over 15

countries, Airtel‟s acquisition gave it the opportunity to establish its base in one of the

most important markets in the coming decade

Abbott‟s acquisition of Piramal healthcare solutions

Abbott acquired Piramal healthcare solutions at US $ 3.72 billion which was 9 times

its sales. Though the valuation of this deal made Piramal‟s take this move, Abbott

benefited greatly by moving to leadership position in the Indian market

GTL Infrastructure acquisition of Aircel towers

This acquisition was worth about US $ 1.8 billion and brought GTL Infrastructure to

the third position in terms of number of mobile towers – 33000. The money

generated gave Aircel the funds for expansion throughout the country and also for

rolling out its 3G services

ICICI Bank buys Bank of Rajasthan

This merger between the two for a price of Rs 3000 cr would help ICICI improve its

market share in northern as well as western India

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2. Tata Steel – Corus Acquisition: A Case

Study

2.1 Background

'Tata Steel', formerly known as TISCO (Tata Iron and Steel Company Limited), was

the world's 56th largest and India's 2nd largest steel company with an annual crude

steel capacity of 3.8 million tonnes. It is based in Jamshedpur, Jharkhand, India. It is

part of the Tata Group of companies. Post Corus merger, Tata Steel is India's

second-largest and second-most profitable company in private sector with

consolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350 crore

during the year ended March 31, 2008. The company was also recognized as the

world's best steel producer by World Steel Dynamics in 2005. The company is listed

on BSE and NSE; and employs about 82,700 people (as of 2007).

Corus was formed from the merger of Koninklijke Hoogovens N.V. with British Steel

Plc on 6 October 1999. It has major integrated steel plants at Port Talbot, South

Wales; Scunthorpe, North Lincolnshire; Teesside, Cleveland (all in the United

Kingdom) and IJmuiden in the Netherlands. It also has rolling mills situated at

Shotton, North Wales (which manufactures Colorcoat products), Trostre in Llanelli,

Llanwern in Newport, South Wales, Rotherham and Stocksbridge, South Yorkshire,

England, Motherwell, North Lanarkshire, Scotland, Hayange, France, and Bergen,

Norway. In addition it has tube mills located at Corby, Stockton and Hartlepool in

England and Oosterhout, Arnhem, Zwijndrecht and Maastricht in the Netherlands.

Group turnover for the year to 31 December 2005 was £10.142 billion. Profits were

£580 million before tax and £451 million after tax.

Tata acquired Corus, which is four times larger than its size and the largest steel

producer in the U.K. The deal, which creates the world's fifth-largest steelmaker, is

India's largest ever foreign takeover and follows Mittal Steel's $31 billion acquisition

of rival Arcelor in the same year. Over the past five years, Indian companies had

made global acquisitions for over $10 billion. The Tata bid almost equals this

amount. Most of them have averaged $100 to 200 million.

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2.2 Reasons

There were a lot of apparent synergies between Tata Steel which was a low cost

steel producer in fast developing region of the world and Corus which was a high

value product manufacturer in the region of the world demanding value products.

Some of the prominent synergies that could arise from the deal were as follows :

Tata was one of the lowest cost steel producers in the world and had self

sufficiency in raw material. Corus was fighting to keep its productions costs

under control and was on the look out for sources of iron ore.

Tata had a strong retail and distribution network in India and SE Asia. This

would give the European manufacturer a in-road into the emerging Asian

markets. Tata was a major supplier to the Indian auto industry and the

demand for value added steel products was growing in this market. Hence

there would be a powerful combination of high quality developed and low cost

high growth markets

There would be technology transfer and cross-fertilization of R&D capabilities

between the two companies that specialized in different areas of the value

chain

There was a strong culture fit between the two organizations both of which

highly emphasized on continuous improvement and ethics. Tata steel's

Continuous Improvement Program „Aspire‟ with the core values - Trusteeship,

Integrity, and respect for individual, credibility and excellence. Corus's

Continuous Improvement Program „The Corus Way‟ with the core values :

code of ethics, integrity, creating value in steel, customer focus, selective

growth and respect for our people.

2.3 The Deal

The deal (between Tata & Corus) was officially announced on April 2nd, 2007 at a

price of 608 pence per ordinary share in cash. This deal is a 100% acquisition and

the new entity will be run by one of Tata‟s steel subsidiaries. As stated by Tata, the

initial motive behind the completion of the deal was not Corus‟ revenue size, but

rather its market value. Even though Corus is larger in size compared to Tata, the

company was valued less than Tata (at approximately $6 billion) at the time when

the deal negotiations started. But from Corus‟ point of view, as the management has

stated that the basic reason for supporting this deal were the expected synergies

between the two entities. Corus has supported the Tata acquisition due to different

motives. However, with the Tata acquisition Corus has gained a great and profitable

opportunity to make an exit as the company has been looking out for a potential

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buyer for quite some time. The total value of this acquisition amounted to ₤6.2 billion

(US$12 billion). Tata Steel the winner of the auction for Corus declares a bid of 608

pence per share surpassed the final bid from Brazilian Steel maker Companhia

Siderurgica Nacional (CSN) of 603 pence per share.

Prior to the beginning of the deal negotiations, both Tata Steel and Corus were

interested in entering into an M&A deal due to several reasons. The official press

release issued by both the company states that the combined entity will have a pro

forma crude steel production of 27 million tonnes in 2007, with 84,000 employees

across four continents and a joint presence in 45 countries, which makes it a serious

rival to other steel giants.

Acquisition was completed through Tata Steel‟s UK Special Purpose vehicle(SPV)

named Tata Steel UK. This SPV raised US $ 6.14 billion through a mix of high yield

mezzanine and long term debt funding. For immediate financing Tata Steel UK

raised US $ 2.66 bn through bridge loans.

2.4 SWOT Analysis

Strengths :

Easy Access to quality raw material

New technology for producing high value products.

Reach in 4 continents and 45 countries. Economies of Scale and production.

Weakness :

Cost of production per unit bound to increase.

High Debt equity ratio.

High dependability on the growth of market.

A lot of stress on the cash flows of combined entity.

Opportunities :

To become global player in steel industry.

Takeover more companies successfully.

Increase in production capacity beyond 56 mn tons by 2015

Threats :

Cultural Diversifications are not easy to integrate.

Markets should continue to grow.

Rising cost of raw material.

Rising terrorism and political unrest among nations

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2.5 Benefits and Losses

Tata has reportedly financed only $4 billion of the Corus purchase from internal

company resources, meaning that more than two-thirds of the deal has had to be

financed through loans from major banks. The day after the acquisition was officially

announced, Tata Steel‟s share fell by 10.7 percent on the Bombay stock market.

Despite its four times smaller size and smaller capacity, Tata Steel‟s operating profit

for 2006, earning $840 million on sales of 5.3 million tones, were very close in

amount to those generated by Corus ($860 million in profits on sales of 18.6 million

tons).

Tata‟s new debt amounting to $8 billion due to the acquisition, financed with Corus‟

cash flows, is expected to generate up to $640 million in annual interest charges (8%

annual interest cost). This amount combined with Corus‟ existing interest debt

charges of $400 million on an annual basis implies that the combined entity‟s interest

obligation will amount to approximately $725 million after the acquisition. The debate

whether Tata Steel has overpaid for acquiring Corus is most likely to be certain,

since just based on the numbers alone it turns out that at the end of the bidding

conflict with CSN Tata ended up paying approximately 68% above the average price

of

Corus‟ shares. Another pressing issue resulting for this deal that has created a

dilemma between experts and analysts opinions is whether this acquisition for the

right move for Tata Steel in the first place. The fact that Tata has managed to

acquire a British steel maker that has been a symbol of Britain‟s industrial power and

at the same time its dominion over India has been perceived as quite ironic. Only

time will show whether Tata will be able to truly benefit from the many expected

synergies for the deal and not make the typical mistakes made in many large M&A

deal during this beginning period.

A final word on this deal If TATA steel were to create, from scratch, 19 million tonnes

of steel making capacity comparable in quality to what Corus possesses, It would

end up investing 70% to 85% more than it is paying now. Besides, setting up a new

factory, a 3 to 5 years project if everything goes well, has great execution risk. With

Corus in its fold, Tata steel can confidently target becoming one of the top 3 steel

makers globally by 2015, the company would have an aggregate capacity beyond 50

million tones per annum, if all the planned Greenfield capacities go on stream by

then. We can conclude that if the acquisitions well planned, executed and the

necessary precautions taken for the deal a company can achieve its strategic

objectives and thus ensure its growth through acquisition.

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3. Bharti-Airtel – Zain Acquisition: A Case

Study

On February 15, 2010, Bharti Airtel announced that it had entered into exclusive

discussions with Mobile Telecommunications Company KSC (“Zain”) for the

acquisition of Zain Africa International BV (“Zain Africa”) and thereby the entire

African operations of Zain, excluding the operations in Sudan and Morocco. With

bitter experience to haunt, Bharti Airtel strategically played it safe this time and made

an offer to Zain which it just could not refuse. For a commercially ailing Zain, Bharti

Airtel‟s offer of USD 10.7 billion was a jackpot.

On March 30, 2010, Mr. Sunil Bharti Mittal, Chairman and Managing Director of

Bharti Airtel and Mr. Asaad Al, Banwan, Chairman, Zain Group executed the

definitive agreements at Netherlands marking the transformation of Bharti Airtel into

an emerging-market multinational. The acquisition is the largest by an Indian

company, second only to the USD 12 billion acquisition of Corus by Tata Steel in

2007.1 In the Indian telecom space, the deal is the second largest after the USD

11.2 billion (approximately) Vodafone Hutchison transaction in 2007.

3.1 Background of the involved companies:

Bharti Airtel:

India‟s first private telecom services provider with a footprint in all the 23 telecom

circles. Widely regarded as India‟s largest telecom service provider in terms of

annual revenues, Bharti Airtel provides mobile & fixed wireless services using GSM

technology across all the telecom circles along with broadband & telephone services

in 94 cities. All these services are provided under the „Airtel‟ brand. Bharti Airtel, as

we understand, also has licenses to operate telecom operations in Sri Lanka and

Seychelles. In January 2010, it acquired Warid Telecom, a 3-million-subscriber

company based in Dhaka, Bangladesh for USD 300 million.

Zain:

Zain was established in 1983 in Kuwait as the region's first mobile operator. It is a

public company engaged, together with its subsidiaries, in the provision of mobile

telecommunication and data services, including operation, purchase, delivery,

installation, management and maintenance of mobile telephones and paging

systems in Kuwait and 21 other countries in the Middle East and North Africa. Its

wholly owned subsidiaries include; Mobile Telecommunications Company Lebanon

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(MTC) SARL, Lebanon, and Sudanese Mobile Telephone (Zain) Company Limited,

Sudan.

Zain-Africa:

Wholly owned subsidiary of Zain, incorporated in Netherlands and held the African

operations of Zain. The company was originally named Celtel which was acquired by

Zain in 2005 and renamed as Zain International BV. The same has been acquired by

Bharti Airtel now through Bharti Airtel Netherlands BV.

3.2 A Brief Snapshot of the Acquisition Specifics:

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3.3 Structure of the Acquisition:

The fifteen jurisdictions are: 1) Burkina Faso, 2) Chad, 3) Republic of the Congo, 4) Democratic Republic of the Congo, 5)

Gabon, 6) Ghana, 7) Kenya, 8) Malawi, 9) Madagascar, 10) Niger, 11) Nigeria, 12) Sierra Leone, 13) Tanzania, 14) Uganda

and 15) Zambia

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3.4 Commercial Considerations of the Deal for Bharti:

EV to EBITDA Multiple:

Bharti Airtel is paying Zain an enterprise value of USD 10.7 billion which is 10 times

the enterprise value (“EV”) to Earnings Before Interest, Taxes, Depreciation and

Amortization (“EBIDTA”) multiple for Zain. Out of the total acquisition price, USD 8.3

billion will be paid in cash within three months from the date of closing and USD 700

million will be paid after one year from the date of closing. Further, Bharti Airtel was

to assume debt to the tune of USD 1.7 billion on the books of Zain Africa. The

valuation multiple that Bharti Airtel is shelling out to buy Zain Africa is upwards of ten

times on EV/ EBITDA multiple based on current EBITDA of Zain Africa. This

valuation is glaringly high given that Bharti Airtel itself is available at 7.2 times EV to

EBITDA. Even if significant EBITDA growth of 20-22% for the next two years is

factored in, the deal would still be upwards of 6 times to 6.5 times on EV/EBITDA

multiples. This would make it amongst the most expensive emerging market telecom

players on figures after two years.

The deal was highly volatile and carried huge commercial risk for Bharti Airtel. The

loan would be a drag on Bharti Airtel's earnings with no immediate returns expected

from the loss-making target. Adding to Bharti Airtel‟s woes is the risk on foreign

exchange exposure as the equipments will be purchased in dollars but the revenue

will be generated in local currencies. The extremely high cost of acquisition, interest

payable on loans availed and meagre revenues for next few years make this deal a

very costly investment for Bharti Airtel.

3.5 Reasons for the acquisition (Bharti Airtel Perspective):

Expansion necessary for Bharti:

With the decision Bharti took, to focus on being a core telecom based firm, in 2004,

by selling all its other businesses like IT and Networking to IBM, and coupled with a

very dynamic growth strategy, it soon rose to the number 1 spot in the domestic

market. Now, being a core telecom firm, the only expansion options were to look at

acquiring international businesses.

Reasons for choosing Africa:

By the end of 2009, Africa increasingly seemed to be the place where the next big

telecom revolution was about to happen. This, also combined with the low tariff and

incomes there made Africa very attractive to Bharti. A heavy rural population, just

like that of India was another main factor that was very useful for Bharti as its

business strategy was very successful in a similar market like India. Also, by buying

Zain-Africa, Bharti was acquiring so many assets and was about to get access to so

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many markets (15 countries within Africa) in one single transaction such a scale was

rare.

3.6 Future Prospects for Bharti in Africa:

The key to reviving the Zain operations in Africa would be to replicate Bharti Airtel‟s

low-cost, outsourced model of operations in Africa. This strategy bought them great

success in India, so with the similar demographic sketch, barring a few differences

like language barriers and lack of political support, unlike that in India. Only 1 in

every 2 Africans owns a mobile phone today, again an object of exploitation and

opportunity for Bharti Airtel.

With the help of the existing Zain‟s infrastructure and facilities, Bharti Airtel can

harness the potential of the African market in the long run.

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4. iGATE – Patni Acqusition: A Case Study

Patni Computer Systems Ltd. (Patni) is one of the leading global providers of

Information Technology services and business solutions. Over 16,000 professionals

service clients across diverse industries, from 30 international offices across the

Americas, Europe and Asia-Pacific. Patni Computer Systems is promoted by three

brothers, Narendra Patni, Gajendra Patni and Ashok Patni who collectively own

close to 46% in the company while private equity firm General Atlantic owns 16%. It

is the 6th largest IT company in India.

iGATE Corporation is an information technology firm headquartered in Fremont,

California which provides complete end-to-end services that integrate Consulting,

Technology, Business Process Outsourcing & Provisioning. Offices are located in 16

countries and serve businesses in various fields. While the US has long been its

operations centre, the company is undergoing an aggressive expansion into India.

4.1 Salient features of the acquisition

Patni had a „For Sale‟ tag for long time. But deal prospects fizzled out many

times due to lack of consensus among the promoters and unwillingness of the

brothers to sell their stake. Finally on 10th Jan 2011 iGATE CEO Phaneesh

Murthy (ex Infosys HR head) announced the acquisition of PCS in a closely

fought war with Japanese firms Fujitsu and NTT Docomo.

iGATE bought the 46% stake of the 3 brothers and of General Atlantic (17%)

also at Rs. 503.5 per share.

According to SEBI laws, if a company is acquiring more than 15% shares,

then it also has to make an open offer to public for acquiring atleast 20% of

more shares thus taking the total purchase amount is $1.22 billion and hence

making it the largest deal in domestic IT industry.

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iGATE has a revenue of about $300 million whereas PCS has a revenue of

$700 million. The combined enterprise will have revenue of over $1 billion.

PCS is almost double in size to iGATE in terms of employees also.

4.2 Advantages

This deal would help iGATE shed its small company image and propel it into

mainstream Indian IT industry.

iGATE customers will benefit from a more disciplined delivery method that

was followed by PCS.

Patni can now enter into BFSI sector(Banking, Financial, Services and

Insurance).

It will also end ownership issues at Patni.

It would give increased access to global customers, increased scale,

leadership strength and engineering bench.

The new company would have two $100million+ customers, two $50million+

customers and 36 $5million+ customers under its belt.

4.3 Disadvantages

Overall $1 billion revenue is not a big deal. Already 7 companies are above

iGATE-Patni. As a psychological mark, it was valid only when there were 3-4

companies in the league.

A big client tends to prefer small company for reasons like service,

management attention, flexibility. If it is satisfied by the company, then it will

surely avail its services more in near future. By this small companies create a

name and space for themselves and hence survive in the industry. So if two

companies merge and form a billion dollar company, then some old clients will

surely rethink on their decision whether to continue with it or not.

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Conclusion

With the growth of the Indian economy at an average rate of 8.8 per cent every year,

it may just prove to be an additional reason which triggers the growth in overseas

investments. The data provided by the Reserve Bank of India for the year 2006 for

the total value of Indian direct investments abroad was USD 9.7 billion. The latest

World Bank report pegs India as the tenth largest economy in the world and the

Goldman Sachs reports that India‟s GDP will top $ 1 trillion by 2011, treble by 2025

and be $ 27 trillion by 2025, taking its economy to third place after the US and China.

During the last decade overseas acquisitions by Indian firms have exploded, both in

terms of the number of deals they have done, and the value of those transactions.

From just 11 deals valued at less than $500 million in 1998, the number of overseas

acquisitions crossed 230 with an aggregate value of over $30 billion by end 2007

(Accenture 2008). The transactions include acquisitions by companies from large

multibusiness groups such as Tata (e.g. Tata Motor's acquisition of Daewoo Trucks

and Jaguar-Land Rover, Tata Steel's acquisition of NatSteel and Corus, Tata

Chemical's acquisition of Brunner Mond and General Chemicals, Tata Tea's

acquisition of Tetley), Aditya Birla (e.g. Hindalco's acquisition of Novelis), or

Mahindra and Mahindra (e.g. Mahindra Systech's acquisition of Stokes Plc., Jeco

Holdings, etc.), large single business corporations like Bharat Forge, Suzlon, Wipro,

or Dr Reddy's, or by medium sized companies such as United Phosphorous, Rolta

and others. Our study of 412 overseas acquisitions by publicly traded Indian firms

during 1998-2008 shows that these acquisitions occurred in a variety of industries;

among them, the primary industries were computer software (26%), chemicals and

pharmaceuticals (15%), auto and auto ancillaries (11%), consumer goods (8%),

engineering (6%), metals (6%). In terms of geographical break-up, majority of the

acquired companies were in developed countries (74%). Among developed

countries, US-based companies account for the largest group (over 40%), followed

by those in Europe (UK, Germany, France, Belgium).

Though benefits for mergers and acquisitions already given earlier in the report, a

more detailed understanding of why the Indian companies began to take this step

seriously since the start of this new millennium is required. The trend began haltingly

a few years ago. In 2000, Tata Tea took over a global company twice its size, Tetley

Tea, the second biggest tea company in the world. This was followed by Essel

Packaging, owned by Subhash Chandra, took over Propack of Switzerland to form

Essel Propack. The merger created the biggest producer in the world of laminated

tubes, and an Indian MNC became global number one. But these takeovers

remained exceptional events till 2003. Only in that year did the pace of Indian

takeovers accelerate so much as to constitute a new trend. More than 40 foreign

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companies were taken over by Indians in 2003. Among the Indian companies on a

takeover spree were Tata Motors, Ranbaxy, Wockhardt, Hindalco, etc. The trend of

acquiring foreign companies was not limited to large size companies. Many middle-

sized companies have also become a part of this new trend. Sundaram Fasteners

has acquired Dana Spicer Europe, the British arm of a global multinational. Amtek

Auto, another auto ancillary has acquired the GWK group in the UK, which is twice

its size are some of the few middle sized companies which have joined the

bandwagon. The trend continued with Indian companies shelling out $1.7 billion in

the first eight months of 2005 for acquiring overseas companies. The biggest of the

takeovers till date being the Tata Steel's $12.1 billion deal for Corus, the British steel

company.

The increased number in overseas acquisitions by Indian companies is attributable

to the growing realization that the future growth of Indian companies will be

influenced by the share that they can garner in the world market. This is not only by

producing in the country and exporting, but also by acquiring overseas assets,

including intangibles like brands and goodwill, to establish overseas presence and to

upgrade their competitive strength in the overseas markets, which has resulted in

cross-border acquisitions.

By acquiring foreign firms, Indian companies were able to quickly get (and learn)

some of the technology or capabilities they lacked. Mr. Ravi Kant, the Managing

Director of Tata Motors said this in 2003 when his company acquired Daewoo

Commercial Vehicles in Korea, "Tata Motors has been working on a world truck for

India (and international markets). We now have a base to build it, rather than starting

from ground zero. The risks are reduced as we now have access to their technology

and experience." Later, as Indian companies gained the confidence to successfully

take on foreign rivals in their local market and aspired to become more competitive in

international markets, acquisitions of overseas companies played a vital role in

infusing the required technology to improve the quality of their products/services for

global markets. Apart from that, combining operations of the acquired company with

their local operations also gave them greater scale and size to become cost-

competitive at a global level. Hindalco's acquisition of Novelis in North America is a

case in point. As Kumar Birla, the chairman of Hindalco said, "This deal secures

Hindalco's position as a leading aluminum company in the world. Novelis brings

critical technological expertise. With Novelis, we also gain immediate scale and a

global footprint." Finally, acquisition of overseas companies also provides Indian

companies the management talent and expertise required to become global leaders.

17

Also Indian companies are uniquely placed to profit from the global drive towards

consolidation. For one, they have successfully weathered the pressures of global

competition in many sectors and are thus reaping the benefit of superior returns on

their investments. Two, the sustained boom in the stock market (minor hiccups,

apart) since the mid-1990s has meant that they have been able to raise resources

both from domestic and overseas investors to a point where they now sport some of

the healthiest balance-sheets in terms of debt capital seen anywhere among

countries wedded to market economy. But none of this would make strategic sense

were it not for the fact that the domestic market is providing a huge measure of

comfort. A buoyant Indian economy translates into a higher per capita consumption

of practically all primary goods be it steel, aluminium or cement. While India may

never quite reach the standards of consumption of advanced economies, even a

marginal improvement should translate into huge business growth for those with

capacities to exploit demand from the vast population emerging into prosperity.

18

Surveys and Results

Many studies have investigated how acquisitions perform, and whether they create

value for companies involved in the transaction .Most of these studies, barring a few,

have examined this issue for acquisitions in or by developed country companies.

This is not surprising because until recently acquisitions were a relatively rare

phenomenon in emerging economy contexts. Studies on acquisition performance

generally show that a large proportion of acquisitions fail, e.g., many studies show

that acquisitions create zero or negative value for shareholders of the acquirer

company (in terms of abnormal stock returns), whereas they create between +10-

25% value for shareholders of the acquired company; in other words, they are good

for shareholders of the acquired company, but not for that of the acquirer company.

Others find that most acquirers fail to meet their stated objectives in a given

transaction, or that there is no significant improvement in the return on investment of

the acquirer. Studies by consultants also reflect similar trends: Mckinsey finds that

61% of acquisitions done by Fortune 200 firms have failed, whereas KPMG has

observed that 83% of the deals done by US firms (of $500 million value or more)

have failed to create value for acquirers' shareholders. The performance of cross-

border acquisitions is somewhat mixed. Some scholars find that cross-border

acquisitions are more likely to fail (Haspeslagh & Jemison 1991), whereas others

find that they are more likely to succeed.

For this report, an on campus survey was conducted with the use of questionnaires.

Though the response was not that good with a total of 30 people responding to the

questionnaire, it still gives us a sufficient understanding of whether people are aware

of M and A activities and also their opinion on the recent developments in this area.

Out of 30 people surveyed, 23 were not able to differentiate between mergers and

acquisitions, though all of them viewed these as a positive thing and a way of India

stamping its authority in the global field. None of the respondents are active on the

stock market and almost none are aware of the behaviour of stocks pre and post

mergers.

The questionnaire has been included in the appendix.

With regard to the question asked during end of the presentation regarding financing

of these mergers and acquisitions, here are a few details:

19

Overseas acquisitions are being funded through a variety of sources such as drawal

foreign exchange in India, capitalization of exports, balances held in Exchange

Earner‟s Foreign Currency accounts (EEFC), share swaps through ADR/GDR,

External Commercial Borrowings/Foreign Currency Convertible Bonds, ADRs/GDRs,

etc.

A substantial portion of investments takes place through special purpose vehicles

(SPVs) set up for the purpose abroad. Existing Wholly Owned Subsidiaries (WOS) /

Joint Venture (JV) or the SPVs are being used to fund acquisitions through

Leveraged buy-out (LBO) route. In fact the Tata – Corus deal was made possible by

the scheme of leveraged buy-out.

The major investment destinations appear to be the US and European markets. Tax

havens like Mauritius and Cayman Islands also feature significantly in the Indian

acquisitions or setting up of new WOS/JVs. In recent times, sustained growth in

corporate earnings has boosted the profitability and strengthened the balance sheets

of Indian companies. This has, in turn, strengthened their credit ratings and ability to

raise funds overseas.

In recent years financing by Indian Banks have also increased .In view of the

expertise in certain areas developed by Indian corporates over the years and the

importance attached to leveraging of such expertise for enhancing the international

presence of Indian corporate, with effect from June 7, 2005, banks have been

allowed to extend financial assistance to Indian companies for acquisition of equity in

overseas joint ventures/wholly owned subsidiaries or in other overseas companies,

new or existing, as strategic investment, in terms of a Board approved policy, duly

incorporated in the loan policy of the bank. Such policy should include overall limit on

such financing, terms and conditions of eligibility of borrowers, security, margin, etc.

While the Board may frame its own guidelines and safeguards for such lending, such

acquisition(s) should be beneficial to the company and the country. The finance

would be subject to compliance with the statutory requirements under Section 19(2)

of the Banking Regulation Act, 1949.

In April 2003 banks were permitted to extend credit/non-credit facilities to Indian

Joint Ventures (JVs) (where the holding by the Indian company is more than 51%) /

Wholly Owned Subsidiaries (WOS) abroad up to the extent of 10 per cent of their

unimpaired capital funds subject to certain terms and conditions. On November 6,

2006, in order to facilitate the expansion of Indian corporate‟s business abroad, it

was decided to enhance the prudential limit on credit and non-credit facilities

extended by banks to Indian Joint Ventures (where the holding by the Indian

company is more than 51%) /Wholly Owned Subsidiaries abroad from the existing

limit of 10 per cent to 20 per cent of their unimpaired capital funds.

20

Appendix

1. Are you aware of the acquisitions by the Indian companies abroad?

a) Yes b) No

2. Do you know the difference between mergers and acquisitions?

a) Yes b) No

3. Do these buys by Indian companies make you proud?

a) Yes b) No

4. Do you invest in the stock market?

a) Yes b) No

5. Do you honestly care?

a) Yes b) No

21

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