Mergers and Acquisitions

PARVESH AGHI

Tata Steel- Corus $ 12.2 billion Vodafone- Hutchison Essar $ 11.1 billion Airtel-Zain $ 10.7 billion Hindalco- Novelis $ 6 billion Ranbaxy –Diaiichi Sankyo $ 4.5 billion ONGC- Imperial Energy $2.8 billion NTT DoCoMo Tata tele $2.7 Billion HDFC-Centurion Bank $2.4 billion Tata Motors-Jaguar-landRover $2.3 billion Sterlite-ASACRCO $ 1.8$ billion

India's 10 largest M&A deals

Tata Steel- Corus

Tata Steel-Corus: $12.2 billionOn January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at $12.2 billion.The deal is the largest Indian takeover of a foreign company till date and made Tata Steel the world's fifth-largest steel group

Vodafone- Hutchison

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

Aluminium and copper major Hindalco Industries, the Kumar Mangalam Birla-led Aditya Birla Group flagship, acquired Canadian company Novelis Inc in a $6-billion, all-cash deal in February 2007.Till date, it is India's third-largest M&A deal.The acquisition would make Hindalco the global leader in aluminium rolled products and one of the largest aluminium producers in Asia. With post-acquisition combined revenues in excess of $10 billion, Hindalco would enter the Fortune-500 listing of world's largest companies by sales revenues

Hindalco- Novelis

Marking the largest-ever deal in the Indian pharma industry, Japanese drug firm Daiichi Sankyo in June 2008 acquired the majority stake of more than 50 per cent in domestic major Ranbaxy for over Rs 15,000 crore ($4.5 billion).The deal created the 15th biggest drugmaker globally, and is India's 4th largest M&A deal to date

Ranbaxy –Diaiichi Sankyo

New Delhi, March 25 -- India's largest telecom service provider Bharti Airtel is set to become a large global player, with the Zain board on Wednesday approving closure of the deal under which Bharti would buy Zain's Africa operations for an enterprise value of $10.7 billion (Rs 49,000 crore). The two companies will make a formal announcement on Thursday, a senior executive close to the deal said. Currently, Bharti's non-India operations include Sri Lanka and Bangladesh. This acquisition will take its footprint to 15 African countries.

Airtel-Zain $ 10.7 billion

YEAR PURCHASER PURCHASED Transaction value (in mil. USD

2000 AOL TIME WARNER 164,747

2000 GLAXO SMITHKLINEBEECHAM

75,961

2004 ROYAL DUTCHPETORLEUM

SHELL TRANSPORT CO

74,559

2006 AT &T INC BELL SOUTH CORP

72,671

2001 COMCAST CORP

AT & T BROADBAND

72,041

2009 JP MORGAN CHASE

BANK ONE CORP

58,761

Major M&A in the 2000s

Lecture Agenda

Motives behind M&A Conceptual framework Reasons for M & A Problems with M & A Attributes of effective acquisitions Types of Mergers History of M & A M & A in India

Economy of scale Increase revenue or market share Synergy Cross selling Taxation Resource transfer Diversification Empire Building

Motives behind M&A

CONCEPTUAL FRAMEWORK

MEANING OF MERGERS ACQUSITIONS AMALAMATIONS TAKEOVERS ABSORPTIONS

A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger and competitive advantage

MERGER

Merger is a transaction that results in transfer of ownership and control of a corporation.

When one company purchases another company of an approximately similar size. The two companies come together to become one.

Two companies usually agrees to merge when they feel that they can do something together that they can’t do on their own.

MERGERS

Merger refers to the merging of one company into another or two companies getting merged to form a new corporate entity.

A merger is popularly understood to be fusion of two companies

MERGER

MERGER In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal.

A merger can take place in following four ways :

By purchase of assets

By purchase of common share.

Ways of Merger

The asset of company Y may be sold to company X . Once

this is done company Y is then legally terminated and company X survives

The common share of company Y may be purchased by company X. when company X holds all the shares of company Y it is dissolved .

By exchange of share for assets

Exchange of shares for shares

Ways of Merger

Company X may give its share to stake holders of

company Y for its net assets. Then company Y is

terminated by its shareholders who now holds

shares of company X

Company X gives its shares to the share holders of company Y and then company Y is terminated

A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of business

ACQUSITION

Acquisition or take over denotes a company acquiring controlling stake in another so that the acquirer can have management control over the other firm

Generally , acquisition is the purchase by one company of a substantial part of the assets or securities of another .

ACQUSITION

Strategy through which one firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

ACQUISITION

Mergers & Acquistions

MERGERSACQUISITION

S

Combining of two business entities under

common ownership

Two firms coalesce and share resources in order to realize a common goal

On firm buys the assets or shares of another firm

Take over implies the acquiring firm is larger than the target. Reverse take over takes place if the target firm

is larger than the acquirer

Mergers & Acquistions

MERGERSACQUISITION

S

parent stocks are usually retired and new stock

issued

name may be one of the parents’ or a combination

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

firm’s stock

can be friendly or hostile

one of the parents usually emerges as the dominant

management

usually done through a tender offer

An acquisition where the target firm did not solicit the bid of the acquiring firm

TAKEOVER

Problems inAchieving Success

Problems inAchieving Success

Integrationdifficulties

Inadequate evaluation of target

Too muchdiversification

Large orextraordinary debt

Inability toachieve synergy

Managers overlyfocused on acquisitions

Too large

Increasedmarket power

Overcomeentry barriers

Lower riskcompared to

developing new products

Cost of newproduct development

Increased speedto market

Increaseddiversification

Avoid excessivecompetition

Acquisitions

Reasons forAcquisitions

Reasons for AcquisitionsReasons for Acquisitions

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

Example: Watson Pharmaceuticals’ acquisition of TheraTech

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

Increased Market PowerAcquisition intended to reduce the competitive balance of the industry

Overcome Barriers to EntryAcquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive

Buying established businesses reduces risk of start-up ventures

Lower Cost and Risk of New Product Development

Example: Kraft Food’s acquisition of Boca Burger

Reasons for AcquisitionsReasons for Acquisitions

Increased Speed to MarketClosely related to Barriers to Entry, allows market entry in a more timely fashion

DiversificationQuick way to move into businesses when firm currently lacks experience and depth in industry Philip Morris acquired Millers' Brewing for $ 227 million

Reshaping Competitive ScopeReshaping Competitive ScopeFirms may use acquisitions to restrict its dependence on a single or a few products or marketsAirtel-Zain

Problems with Acquisitions

Example: Marks and Spencer’s acquisition of Brooks Brothers

Example: Intel’s acquisition of DEC’s semiconductor division

Integration DifficultiesDiffering financial and control systems can make integration of firms difficult

Inadequate Evaluation of Target“Winners Curse” bid causes acquirer to overpay for firm

Large or Extraordinary DebtLarge or Extraordinary DebtCostly debt can create onerous burden on cash outflows

Example: Ford and Jaguar

Example: Quaker Oats and Snapple

Example: GE--prior to selling businesses and refocusing

Inability to Achieve SynergyJustifying acquisitions can increase estimate of expected benefits

Problems with Acquisitions

Overly DiversifiedAcquirer doesn’t have expertise required to manage unrelated businesses

Managers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy

Too LargeLarge bureaucracy reduces innovation and flexibility

Example: Quaker Oats and Snapple

Inability to Achieve SynergyJustifying acquisitions can increase estimate of expected benefits

Problems with Acquisitions

Overly DiversifiedAcquirer doesn’t have expertise required to manage unrelated businesses

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

Too LargeLarge bureaucracy reduces innovation and flexibility

The M & A have been broadly categorized into :

HorizontalVerticalConglomerate

Types of Mergers and Acquisitions

Types of Mergers and Acquisitions Horizontal Mergers- between competing companies Vertical Mergers- Between buyer-seller relation-ship companies Conglomerate Mergers- Neither competitors nor buyer-seller relationship

A horizontal mergers results in the consolidation of firms that are direct rivals- that is sell , substitutable products within overlapping geographic markets. This form of merger results in expansion of a firm’s operation in a given line product line and at the same time eliminates competitor.

Horizontal Mergers

ADVANTAGES

REDUCTION OF COMPETITION

INCREASED MARKET POWER

PUTTING AN END TO PRICE CUTTING

ECONOMIES OF SCALE IN PRODUCTION

When two firms working in different stages of production or distribution of the same join together ,it is called vertical merger . A Vertical Merger is one in which one the buyer expands backwards and merges with the firm supplying raw material or expands forward in the direction of ultimate consumer.

The economic benefits of this type of merger stems from the firm’s increased control over the acquisition of raw material or distribution of finished goods.

Vertical Mergers

Vertical merger

Acquisition of a supplier or distributor of one or more products

Increase of market power by controlling more of the value chain

ADVANTAGES LOWER BUYING COST OF MATERIAL

LOWER DISTRIBUITION COST

ASSURED SUPPLIES AND MARKET

COST ADVANTAGE

A Conglomerate merger involves two firms in totally unrelated activities .

A conglomerate is a firm that has an external growth through number of mergers of companies whose business are not related either horizontally or vertically .

A conglomerate may have operations in manufacturing ,electronics , banking , fast food restaurants and other unrelated businesses .

This form of business results in the expansion of a firm’s operation in different unrelated lines of business with an increased sense of operating synergies

Conglomerate Merger

Three types of Conglomerate Mergers

1. Product Extension mergers- broaden the product line of the firms

2. A geographic –market extension merger involves two firms whose operations have been conducted in no overlapping geographic areas

3. Pure conglomerates mergers involve unconnected or unrelated business activities under a single banner.

Conglomerate Mergers

CONGLOMERATE MERGER

UNRELATED INDUSTRIES MERGEPURPOSE DIVERSIFICATION OF RISK

Ex:Time warner-(they were into media & movie production) & AOL-(leading American website)

40

Why M&A? Market Intensification:

Horizontal Integration – Buying a competitorAcquisition of equity stake in IBP by IOCAT&T merger into SBC enables the latter to access

the corporate customer base and exploit the predictable cash flows typical of this telephony section

Market Extensions – New markets for Present productsMaersk – Pipavav : strategic objective of investing in

a container terminal in the west coastBharat Forge’s acquisition of CDP (Germany)S&P’s proposed acquisition of CRISIL

41

Why M&A?

Vertical Integration : Internalization of crucial forward or backward activities• Vertical Forward Integration – Buying a

customerIndian Rayon’s acquisition of Madura

Garments along with brand rights

• Vertical Backward Integration – Buying a supplier

IBM’s acquisition of Daksh

42

Why M&A?

Diversification: Overcome Barriers to Entry• Product Extension: New product in Present

territoryP&G acquires Gillette to expand its product

offering in the household sector and smooth out fluctuations in earning

• Free-form Diversification: New product & New territories

Flight Centre’s proposed acquisition of Friends Globe

Indian Rayon’s acquisition of PSI Data Systems

43

Why M&A? Advantages: Greater Economic Clout:

Proposed merger of Petroleum PSUs P&G merger with Gillette expected to correct

balance of power between suppliers and retailers.

Economies of scale and Sharing Overheads: Size really does matter IOC & IBP

Synthesized capabilitiesProposed merger of nationalized banks

History of Mergers and Acquisitions

Several major merger movements have occurred in the United States

Each was more or less dominated by a particular type of merger.

Merger movements occurred when the economy experienced sustained high rates of growth

Early Merger movements

Mergers and Acquisitions are triggered by economic factors. The macroeconomic environment, which includes the growth in GDP, interest rates and monetary policies play a key role in designing the process of mergers or acquisitions between companies or organizations

History of Mergers and Acquisitions

History of Mergers and Acquisitions Activity in United States

The First Wave 1897-1904 After 1883 depression Horizontal mergers Create monopolies The Second Wave 1916-1929 Oligopolies The Clayton Act of 1914 The Third Wave 1965-1969 Conglomerate Mergers Booming Economy The Fourth Wave 1981-1989 Hostile Takeovers Mega-mergers Mergers of 1990’s Strategic mega-mergers

The first wave mergers commenced from 1897 to 1904.

During this phase merger occurred between companies, which enjoyed monopoly over their lines of production like railroads, electricity etc.

The first wave mergers that occurred during the aforesaid time period were mostly horizontal mergers that took place between heavy manufacturing industries.

First Wave Mergers

Majority of the mergers that were conceived during the 1st phase ended in failure since they could not achieve the desired efficiency.

The failure was fuelled by the slowdown of the economy in 1903 followed by the stock market crash of 1904.

The legal framework was not supportive either. The Supreme Court passed the mandate that the anticompetitive mergers could be halted using the Sherman Act.

First Wave Mergers

First Wave Mergers 1897-1904-horizontal Mergers Monopolistic Market structure Mega merger between US Steel and Carnegie

Steel . It also merged with 785 separate firms-75% of Steel production of US.

More than 3000 companies disappeared. General Electric , Navistar, Standard Oil, Du-

Pont, American Tobacco-90% of market share Transformation of regional firms into national

firms. Exploited the economies of scale.

Table-1 Year Number of mergers 1897 69 1898 303 1899 1208 1900 340 1904 79

Problems of the first Wave Financial factors Fraudulent financing Stock Market crash in 1904 and Banking

panic of 1907 Closure of many banks and formation of

Federal Reserve System. Easy finance ends here. The US President Teodore Roosevelt and

President William Taft made a crack down on Large Monopolies.

As a result: ???? What happened to Standard Oil?

Standard Oil(SO) Broken in to 30 Companies. SO of New Jersey named EXXON SO of New York named MOBIL SO of California renamed CHEVRON SO of Indiana renamed AMOCO

The second wave mergers that took place from 1916 to 1929 focused on the mergers between oligopolies, rather than monopolies as in the previous phase.

The economic boom that followed the post world war gave rise to these mergers.

Technological developments like the development of railroads and transportation by motor vehicles provided the necessary infrastructure for such mergers or acquisitions to take place.

The government policy encouraged firms to work in unison. This policy was implemented in the 1920s.

Second Wave Mergers

Second Wave Mergers 1916-1929 Oligopolies industry structure Industries like primary metals, petrolium

products, food products, chemicals Outside the previously consolidated heavy

manufacturing industries.

Vertical mergers In the mining and metal industries(1920)

Prominent Corporations General Motors, IBM, Union Carbide, John DEERE Between 1926 and 1930- there were 4600

mergers took place Result of which between 1919 and 1930 12,000

manufacturing , mining,public utility and banking firms disappeared.

This period rail transportation, motor vehicle transportation became national market.

Radios in homes, entertainment enhanced the competition.

Mass merchandising, national brand advertising

Enhance productivity as a part of war effect.

The firms were urged to work together rather than compete

The second wave came to an end when stock market crashed on October 29,1929.

Investment Bankers played in the first two phases of mergers.

Second Wave Mergers

The mergers that took place during this period (1965-69) were mainly conglomerate mergers.

Mergers were inspired by high stock prices, interest rates and strict enforcement of antitrust laws.

The bidder firms in the 3rd wave merger were smaller than the Target Firm. Mergers were financed from equities; the investment banks no longer played an important role

The third Wave-1965-1969

The 3rd wave merger ended with the plan of the Attorney General to split conglomerates in 1968.

It was also due to the poor performance of the conglomerates.

Some mergers in the 1970s have set precedence. The most prominent ones were the INCO-ESB merger; United Technologies and OTIS Elevator Merger are the merger between Colt Industries and Garlock Industries.

The third Wave-1965-1969

The third Wave-1965-1969 Merger activity reached its highest level

during this period Booming of economy Conglomerate merger period-80% Diversification strategy It is because of ANTI TRUST enforcement Federal government adopted a stronger

antitrust enforcement both with horizontal and verticle merger.

1963-1361 mergers; 1970-5152 mergers

Management sciences Management principles were applied in

industries. Management graduates were employed to

manage conglomerate mergers. There were 6000 mergers which leads to

25000 firms disappeared. Investment Bankers do not finance most of

these mergers

Finance for mergers Equity financing Boom in stock market prices Many conglomerate merger failed The Revlon –cosmetic entered into health

care and failed and suffered in cosmetic industry.

The 4th wave merger that started from 1981 and ended by 1989 was characterized by acquisition targets that were much larger in size as compared to the 3rd wave mergers.

Mergers took place between the oil and gas industries, pharmaceutical industries, banking and airline industries.

Foreign takeovers became common with most of them being hostile takeovers. The 4th Wave mergers ended with anti takeover laws, Financial Institutions Reform and the Gulf War.

The Fourth Wave-1981-1989

The Fourth Wave-1981-1989 Recession in 1974-75 Hostile merger Take over or targeting on target company’s

board of directors. If the board accepts, it is considered friendly,

and if it opposes it, it is deemed to be hostile. The great mergers such as Oil companies-

21.6%Of dollar values of merger and acquisitionsDrugs and medical equipment industries due to

deregulation in some industriesDeregulation of airline industries

The Fourth Wave-1981-1989 Investment bankers played an aggressive

role. M&A advisory services became a lucrative

source of income for Goldman Sachs Innovation in acquisition techniques

The 5th Wave Merger (1992-2000) was inspired by globalization, stock market boom and deregulation.

The 5th Wave Merger took place mainly in the banking and telecommunications industries.

They were mostly equity financed rather than debt financed. The mergers were driven long term rather than short term profit motives. The 5th Wave Merger ended with the burst in the stock market bubble.

Fifth Wave Merger

Fifth Wave Merger Once again increased activity in merger in

1992 Mega mergers Strategic mergers Equity based Deregulations and technological changes Banking , telecommunications

entertainment and media industries High growth in banking sectors in 1990 as

banks grew greater than central banks. Banks fund M&A rather than new ventures.

Hence we may conclude that the evolution of mergers and acquisitions has been long drawn. Many economic factors have contributed its development. There are several other factors that have impeded their growth. As long as economic units of production exist mergers and acquisitions would continue for an ever-expanding economy.

Fifth Wave Merger

Fifth Wave Merger 1981-2395 1989-2366 1990-2074 companies 2001-7528 companies merged

Major Mergers in the telecom Acquirer Target Vodafone Mannes man MCL worldcom Spirit Bell atlantic GTE AT&T MeCaw Celluar SBC Pacific Telesis

Major Mergers in Media and Entertainment sector AOL Time Warner VIOCOM CBS WALT DISNEY CAPITAL ITIES/ABC AT&T MEDIA ONE TIME WARNER TURNER BRODCAST

M&A IN INDIA License era-Unrelated diversification Conglomerate merger Friendly take over and hostile bids by

buying equity shares Example: Swaraj paul attempted to raid on

Escorts Ltd.and DCM Ltd but could not succeed.

The Hindujas raided and took over Ashok leyland and Ennore Foundaries.

Chhabria Group acquired stake in Shaw Wallace, Dunlop india and Falcon Tyres.

Goenka group from culcutta took over Ceat tyres.

The Obroi-Pleasant hotels of Rane group. 1989- Tata Tea acquired 50% of the equity

shares of Consolidated Coffee Ltd from resident shareholders.

merged to form HCL Ltd??.

HCL Hindustan Computers, Hindustan

Reprographic, Hindustan Telecommunications and Indian Software Ltd.

Comparative study US India Strategic By default(ANZ&

Standard chartered Gains by invest Not benefited by

banksment bankersCapital goods consumer

goodsBorrowedEarlier debt later by equity cash/FDIAnti trust MRTP later The

competition bill 2001

By purchase of assetsBy purchase of Common shares

By Exchange of share for asset

Exchange of Shares for Shares

Merger can takes plays in folowing 4 ways

The asset of company Y may be sold to company X. Once this is done , company Y is the legally terminated and company X survives .

By Purchase of Asset

The common share of the company Y may be purchased by company X . When company X holds all the shares of company Y, it is dissolved

By purchase of common shares

Company X may give its shares to the Shareholders of company Y for its net assets. Then company Y is terminated by its shareholders who now hold shares of company X

By Exchange of share for asset

Company X gives its shares to the shareholders of the company Y and then company Y is terminated.

Exchange of Shares for Shares

Back-up

Takeover:A ‘takeover’ is acquisition and both the terms are used interchangeably.

Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers

In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production.The following main benefits accrue from the vertical combination to the acquirer company:(1) It gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products;(2) Has control over products specifications.

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.

Amalgamation

(B) Horizontal combination:It is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The mail purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line, reduction in investment in working capital, elimination in competition concentration in product, reduction in advertising costs, increase in market segments and exercise better control on market

C) Circular combination:Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification.

D) Conglomerate combination:It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger enhances the overall stability of the acquirer company and creates balance in the company’s total portfolio of diverse products and production processes

88

2.7 1.52.7

7.4 9.425.9

0.10.6

1.7

4.421.2

38.4

3.9 3.23.9

10.7

16.8

28.4

Inbound Outbound Domestic

1,028.1 1,087.4 1,628.2 1,976.83,935.0 4,520.0

0.7%0.5% 0.5%

1.2%

2.1%

1.2%

1.0

10.0

100.0

1,000.0

10,000.0

2002 2003 2004 2005 2006 2007*

0.0%

1.0%

2.0%

3.0%

Total Value of Global Deals % Share of india

US

D b

illio

n

Sh

are

of

Ind

ia in

glo

bal m

ark

etM&A activity in India

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

• Outbound M&A deals till March was USD 8.8 billion in 2007• Estimated total outbound M&A projected to be more than USD 35.0 bn in

2007

• This appears to be just the beginning of the M&A wave in India

* 2007 figure is estimatedSource : Bloomberg

89

Increased corporate activity Indian corporates aspiring to become market leaders in

their business segments not only in India but also globally

Growth driversStrong growth in demand leading to increased

utilisation of existing capacityProduct portfolio and service offering enhancementAccess to new technology and marketsDerisking the business

…aided by easier access to capital supply…

90

Increased access to capital

1,750 2,000

7,500

0

2,000

4,000

6,000

8,000

CY 2004 CY 2005 CY 2006

PE F

undin

g (

US

D m

n)

4,045

4,8645,386

0

2,000

4,000

6,000

CY 2004 CY 2005 CY 2006

Public Issue (

US

D m

n)

5,228

8,546

13,451

0

3,000

6,000

9,000

12,000

15,000

FY 2004 FY 2005 FY 2006

EC

B/

FCC

B i

ssue

(U

SD

mn)

459613

2,552

0

500

1,000

1,500

2,000

2,500

3,000

FY 2004 FY 2005 FY 2006

AD

R/

GD

R i

ssue

(U

SD

mn)

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

Private Equity Domestic Public issue

ADR/ GDR issue ECB/ FCCB issue

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

0

200

400

600

800

1000

1200

1400

1600

Total Dollar Value of Mergers & Acquisitions (In Billions)

Total $ Value (In Billions)

Mergers and Acquisitions trend

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.

Amalgamation

Attributes of Effective Acquisitions

Attributes of Effective Acquisitions

Complementary Assets or ResourcesBuying firms with assets that meet current needs to build competitiveness

++

Friendly AcquisitionsFriendly AcquisitionsFriendly deals make integration go more smoothly

++

Careful Selection ProcessCareful Selection ProcessDeliberate evaluation and negotiations is more likely to lead to easy integration and building synergies

++

Maintain Financial SlackMaintain Financial SlackProvide enough additional financial resources so that profitable projects would not be foregone

++

Attributes of Effective Acquisitions

Attributes of Effective Acquisitions

Low-to-Moderate DebtLow-to-Moderate DebtMerged firm maintains financial flexibility

++

FlexibilityFlexibilityHas experience at managing change and is flexible and adaptable

++

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

++

Horizontal Acquisitions

◦Acquisition of a company competing in the same industry

◦The increase of market power by exploiting cost-based and revenue-based synergies

◦Character similarities between the firms lead to smoother integration and higher performance

Horizontal Mergers HORIZONTAL MERGER – SIMILAR LINES OF

ACTIVITY as Ford announced the sale of the two

British iconic cars to Tata Motors Ltd. Ford acquired Jaguar for $2.5 bn in 1989

and Land Rover for $2.75 bn in 2000 but put them on the market last year after posting losses of $12.6 bn in 2006 - the heaviest in its 103-year history.

Why do mergers fail? Unfortunately, mergers are inherently risky. For every way to do them

right, there are probably 10 ways to do them wrong. Here are my top 10 most common, preventable merger failure modes. Just one is enough to spell doom, but many mergers suffer from several:

Flawed corporate strategy for either or both companies One company sugarcoats the truth; the other buys a PowerPoint pitch Sub-optimum integration strategy for the situation Cultural misfit, loss of key employees after retention agreements are up Acquiring company’s management team inexperienced at M&A Flawed assumptions in synergies calculation Ineffective corporate governance, plain and simple Two desperate companies merge to form one big desperate company CEO of one or both companies sells the board and shareholders a bill of

goods An impulse buy or panic sell gets shoved down the board’s throat

Corporate synergy occurs when corporations interact congruently. A corporate synergy refers to a financial benefit that a corporation expects to realize when it merges with or acquires another corporation.There are three distinct types of corporate synergies:

Revenue A revenue synergy refers to the opportunity of a combined corporate entity to

generate more revenue than its two predecessor stand alone companies would be able to generate. For example, if company A sells product X through its sales force, company B sells product Y, and company A decides to buy company B then the new company could use each sales person to sell products X and Y thereby increasing the revenue that each sales person generates for the company.

Management Synergy in terms of management and in relation to team working refers to the

combined effort of individuals as participants of the team. Positive or negative synergy can exist. The condition that exists when the organization's parts interact to produce a joint effect that is greater than the sum of the parts acting alone.

Cost A cost synergy refers to the opportunity of a combined corporate entity to reduce or

eliminate expenses associated with running a business. Cost synergies are realized by eliminating positions that are viewed as duplicate within the merged entity. Examples include the head quarters office of one of the predecessor companies, certain executives, the human resources department, or other employees of the predecessor companies.

Corporate synergy

Mergers or Amalgamations A merger is a combination of two or more businesses into one business. Laws in India use

the term 'amalgamation' for merger. The Income Tax Act,1961 [Section 2(1A)] defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company.

Thus, mergers or amalgamations may take two forms:- Merger through Absorption:- An absorption is a combination of two or more companies

into an 'existing company'. All companies except one lose their identity in such a merger. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd (TCL). TCL, an acquiring company(a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

Merger through Consolidation:- A consolidation is a combination of two or more companies into a 'new company'. In this form of merger, all companies are legally dissolved and a new entity is created . Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.

Absorption/consolidation