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Mergers and Acquisitions

Introduction to

Mergers and Acquisition

We have been learning about the companies coming together to from

another company and companies taking over the existing companies to expand

their business.

With recession taking toll of many Indian businesses and the feeling of

insecurity surging over our businessmen, it is not surprising when we hear about

the immense numbers of corporate restructurings taking place, especially in the

last couple of years. Several companies have been taken over and several have

undergone internal restructuring, whereas certain companies in the same field of

business have found it beneficial to merge together into one company.

All our daily newspapers are filled with cases of mergers, acquisitions, spinoffs, tender offers, ! other forms of corporate restructuring. "hus important issues

both for business decision and public policy formulation have been raised. #o firm

is regarded safe from a takeover possibility. $n the more positive side %ergers !

Acquisition&s may be critical for the healthy expansion and growth of the firm.

Successful entry into new product and geographical markets may require %ergers

! Acquisition&s at some stage in the firm's development. Successful competition in

international markets may depend on capabilities obtained in a timely and efficientfashion through %ergers ! Acquisition's. %any have argued that mergers increase

value and efficiency and move resources to their highest and best uses, thereby

increasing shareholder value. .

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Chapte

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"o opt for a merger or not is a complex affair, especially in terms of the

technicalities involved. We have discussed almost all factors that the management

may have to look into before going for merger. (onsiderable amount ofbrainstorming would be required by the managements to reach a conclusion. e.g.

a due diligence report would clearly identify the status of the company in respect

of the financial position along with the net worth and pending legal matters and

details about various contingent liabilities. )ecision has to be taken after having

discussed the pros ! cons of the proposed merger ! the impact of the same on

the business, administrative costs benefits, addition to shareholders' value, tax

implications including stamp duty and last but not the least also on the employees

of the "ransferor or "ransferee (ompany.

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Acquisition: -In an acquisition, a company can buy another company with cash, with

stock, or a combination of the two. Another possibility, which is common in smaller

deals, is for one company to acquire all the assets of another company.

Example +(ompany - buys all of (ompany 's assets for cash, which means that (ompany

will have only cash /and debt, if they had debt before0. $f course, (ompany

becomes merely a shell and will eventually liquidate or enter another area of

business.

Methods of Acquisition:

An acquisition may be affected by: -

Agreement

With the persons holding ma1ority interest in the company management like

members of the board or ma1or shareholders

commanding ma1ority of voting power

2urchase of shares in open market

"o make takeover offer to the general body of shareholders

2urchase of new shares by private treaty

Acquisition of share capital through the following forms of considerations

vi3. means of cash, issuance of loan capital, or insurance of share capital.

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%ergers ! Acquisitions rationale is particularly alluring to companies when times

are tough. Strong companies will act to buy other companies to create a morecompetitive, cost efficient company. "he companies will come together hoping to

gain a greater market share or achieve greater efficiency. 4ecause of these

potential benefits, target companies will often agree to be purchased when they

know they cannot survive alone.

In practice, however, actual mergers of equals don't happen very often. $ften, one

company will buy another and, as part of the deal's terms, simply allow the

acquired firm to proclaim that the action is a merger of equals, even if it's

technically an acquisition. 4eing bought out often carries negative connotations.

4y using the term 5merger,5 dealmakers and top managers try to make the

takeover more palatable.

A purchase deal will also be called a merger when both ( $s agree that 1oining

together in business is in the best interests of both their companies. 4ut when the

deal is unfriendly that is, when the target company does not want to bepurchased it is always regarded as an acquisition.

So, whether a purchase is considered a merger or an acquisition really depends

on whether the purchase is friendly or hostile and how it is announced. In other

words, the real difference lies in how the purchase is communicated to and

received by the target company's board of directors, employees and shareholders.

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Purpose and Terms of Mergers and Acquisition

"he purpose for an offer or company for acquiring another company shall

be reflected in the corporate ob1ectives. It has to decide the specific ob1ectives to

be achieved through acquisition. "he basic purpose of merger or business

combination is to achieve faster growth of the corporate business. 6aster growth

may be had through product improvement and competitive position.

Other possible purposes for acquisition are short listed

below: -

1 !rocurement of supplies:

"o safeguard the source of supplies of raw materials or intermediary

product7

"o obtain economies of purchase in the form of discount, savings in

transportation costs, overhead costs in buying department, etc.7

"o share the benefits of suppliers economies by standardi3ing the

materials.

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Chapter2


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" #e$amping production facilities:

"o achieve economies of scale by amalgamating production facilitiesthrough more intensive utili3ation of plant and resources.

"o standardi3e product specifications, improvement of quality of

product, expanding

%arket and aiming at consumer&s satisfaction through strengthening after

sale services

"o reduce cost, improve quality and produce competitive products to

retain and improve market share.

% Market expansion and strategy:

"o eliminate competition and protect existing market

"o obtain a new market outlets in possession of the offeree

Strengthening retain outlets and sale the goods to rationali3e distribution

& 'inancial strength:

"o improve liquidity and have direct access to cash resource.

"o dispose of surplus and outdated assets for cash out of combined

enterprise.

"o enhance gearing capacity, borrow on better strength and the greaterassets backing.

"o avail tax benefits.

"o improve 2S / arning 2er Share0.

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( )eneral gains:

"o improve its own image and attract superior managerial talents to manageits affairs7

"o offer better satisfaction to consumers or users of the product.

* Own de$elopmental plans:

"he purpose of acquisition is backed by the offer or company&s owndevelopmental plans. A company thinks in terms of acquiring the other

company only when it has arrived at its own development plan to expand its

operation having examined its own internal strength where it might not have

any problem of taxation, accounting, valuation, etc. but might feel resource

constraints with limitations of funds and lack of skill managerial personnel&s. It

has to aim at suitable combination where it could have opportunities to

supplement its funds by issuance of securities, secure additional financial

facilities, eliminate competition and strengthen its market position.

+ ,trategic purpose:

"he Acquirer (ompany view the merger to achieve strategic ob1ectives

through alternative type of combinations which may be hori3ontal, vertical,

product expansion, market extensional or other specified unrelated

ob1ectives depending upon the corporate strategies. "hus, various types of

combinations distinct with each other in nature are adopted to pursue this

ob1ective like vertical or hori3ontal combination.

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.orporate friendliness:

Although it is rare but it is true that business houses exhibit degrees ofcooperative spirit despite competitiveness in providing rescues to each other from

hostile takeovers and cultivate situations of collaborations sharing goodwill of

each other to achieve performance heights through business combinations. "he

combining corporate aim at circular combinations by pursuing this ob1ective.

/ 0esired le$el of integration:

%ergers and acquisition are pursued to obtain the desired level of integration

between the two combining business houses. Such integration could be

operational or financial. "his gives birth to conglomerate combinations. "he

purpose and the requirements of the offeror company go a long way in selecting a

suitable partner for merger or acquisition in business combinations.

erms #elating to Merger and Acquisitions:

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1. Asset ,tripping :

When a company acquires another and sells it in parts expecting that the funds

generated would match the costs pf acquisition, it is known as asset stripping.

2. 2lack 3night :

"he company that makes a hostile takeover is known as the 4lack 8night.

0awn #aid :

"his is a process of buying shares of the target company with the expectation thatthe market prices may fall till the acquisition is completed.

0e-merger or ,pin off :

)uring the process of corporate restructuring, a part of the company may beak up

and set up as a new company and this is known as demerger. 9eneca and Argos

are good examples in this regard that split from I(I and American "obacco

respectively.

.ar$e 4out:

"his is a case of selling a small portion of the company as an Initial 2ublic$ffering.

)reenmail:

*reenmail is a situation where the target company purchases back its own sharesfrom the bidding company at a higher price.

)rey 3night:

A grey knight is a company that takes over another company and its intentions arenot clear.

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5ostile akeo$er:

:ostile bids occur when acquisitions take place without the consent of the

directors of the target company. "his confrontation on the part of the directors of

the target company may be short lived and the hostile takeover may end up being

friendly. %ost American;n and 4ritish companies like the phenomenon of hostile

takeovers while there is some more which do not like such unfriendly takeovers.

Macaroni 0efense :

Macaroni Defense is a strate ! t"at is ta#en $% to %re&ent an! "osti'e

ta#eo&ers. T"e iss$e of (on)s t"at can (e re)ee*e) at a "i "er %rice ift"e co*%an! is ta#en o&er )oes t"is.

3. Management Buy In :

+"en a co*%an! is %$rc"ase) an) t"e in&estors (rin in t"eir

*ana ers to contro' t"e co*%an!, it is #no-n as *ana e*ent ($! in.

4. Management Buy Out :

n a *ana e*ent ($! o$t, t"e *ana ers of a co*%an! %$rc"ases it

-it" s$%%ort fro* &ent$re ca%ita'ists.

5. Poison Pill or Suici e Pill !e"ense :

"his is a strategy that is taken by the target company to make itself less appealing

for a hostile takeover. "he bondholders are given the right to redeem their bondsat a premium before a takeover occurs.

Types of mergers

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Chapter3


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of their products so as to serve a common market, which was earlier

fragmented among them.

Market-Extension Merger occurs between two companies that sellidentical products in different markets. It basically expands the market base of

the product.

'rom the perspecti$e of how the merge is financed8 there are two

types of mergers:

2urchase mergers

(onsolidation mergers.

Each has certain implications for the companies in$ol$ed and for

in$estors

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Shareholders in the selling company gain from the merger and takeovers as the

premium offered to induce acceptance of the merger or takeover offers much

more price than the book value of shares. Shareholders in the buying companygain in the long run with the growth of the company not only due to synergy but

also due to 9boots trapping earnings

Moti$ations for mergers and acquisitions

%ergers and acquisitions are caused with the support of shareholders,

manager&s ad promoters of the combing companies. "he factors, which motivatethe shareholders and managers to lend support to these combinations and the

resultant consequences they have to bear, are briefly noted below based on the

research work by various scholars globally.

1. 'rom the standpoint of shareholders:

Investment made by shareholders in the companies sub1ect to merger should

enhance in value. "he sale of shares from one company&s shareholders to

another and holding investment in shares should give rise to greater values i.e.

the opportunity gains in alternative investments. Shareholders may gain from

merger in different ways vi3. from the gains and achievements of the company i.e.

through

o Realization of monopoly profits

o Economies of scales

o Diversification of product line

o Acquisition of human assets and other resources not available otherwise

o Better investment opportunity in combinations.

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2. 'rom the standpoint of managers:

%anagers are concerned with improving operations of the company, managing

the affairs of the company effectively for all round gains and growth of the

company which will provide them better deals in raising their status, perks and

fringe benefits. %ergers where all these things are the guaranteed outcome get

support from the managers. At the same time, where managers have fear of

displacement at the hands of new management in amalgamated company and

also resultant depreciation from the merger then support from them becomesdifficult.

3. !romoter;s gains:

%ergers do offer to company promoters the advantage of increasing the si3e of

their company and the financial structure and strength. "hey can convert a closely

held and private limited company into a public company without contributing much

wealth and without losing control.

4. 2enefits to general public:

Impact of mergers on general public could be viewed as aspect of benefits and

costs to+

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(onsumer of the product or services

Workers of the companies under combination*eneral public affected in general having not been user or consumer or the

worker in the companies under merger plan.


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communities will suffer on lessening 1ob opportunities, preventing the distribution

of benefits resulting from diversification of production activity.


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extinguishes its existence. 4ut in many cases, the sick company&s survival

becomes more important for many strategic reasons and to conserve community

interest.

"he law provides encouragement through tax relief for the companies that are

profitable but get merged with the loss making companies. Infact this type of

merger is not a normal or a routine merger . It is, therefore, called as a ?everse

%erger.

A reverse merger occurs when a private company that has strong prospects and

is eager to raise financing buys a publicly listed shell company, usually one with

no business and limited assets. "he private company reverse merges into the

public company, and together they become an entirely new public corporation with

tradable shares.

?egardless of their category or structure, all mergers and acquisitions have one

common goal+ they are all meant to create synergy that makes the value of the

combined companies greater than the sum of the two parts.

5igh .ourt discussed % tests for re$erse merger

a. Assets of "ransferor (ompany being greater than "ransferee (ompany.

b. quity capital to be issued by the transferee company pursuant to the

acquisition exceeding its original issued capital.

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c. "he change of control in the transferee company clearly indicated that the

present arrangement was an arrangement, which was a typical illustration

of takeover by reverse bid.

(ourt held that prime facie the scheme of merging a prosperous unit with a sick

unit could not be said to be offending the provisions of section @ A of the Income

"ax Act, BCDB since the ob1ect underlying this provision was to facilitate the

merger of sick industrial unit with a sound one.

,alient features of re$erse merger under section +"A:

1 Amalgamation should be between companies and none of them should be a

firm of partners or sole proprietor. In other words, partnership firm or sole

proprietary concerns cannot get the benefit of tax relief under section @ A

merger.

" "he companies entering into amalgamation should be engaged in either

industrial activity or shipping business. In other words, the tax relief under

section @ A would not be made available to companies engaged in trading

activities or services.

% After amalgamation the =sick> or =financially unviable company> shall surviveand other income generating company shall extinct. In other words essential

condition to be fulfilled is that the acquiring company will be able to revive or

rehabilitate having consumed the healthy company.

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& $ne of the merger partners should be financially unviable and have

accumulated losses to qualify for the merger and the other merger partner

should be profit earning so that tax relief to the maximum extent could be had.In other words the company, which is financially unviable, should be technically

sound and feasible, commercially and economically viable but financially weak

because of financial stringency or lack of financial recourses or its liabilities

have exceeded its assets and is on the brink of insolvency. "he second

requisite qualification associated with financial unavailability is the accumulation

of losses for past few years.

( Amalgamation should be in the public interest i.e. it should not be against public

policy, should not defeat basic tenets of law, and must safeguard the interest of

employees, consumers, creditors, customers and shareholders apart from

promoters of company through the revival of the company.

%. "he merger must result into following benefit to the amalgamated company i.e.

(arry forward of accumulated business loses of the amalgamated company

(arry forward of unabsorbed depreciation of the amalgamating company

Accumulated loss would be allowed to be carried forward set of for eight

subsequent years.

+ Accumulated loss should arise from =2rofits and *ains from business orprofession> and not be loss under the head =(apital *ains> or =Speculation>.

6or qualifying carry forward loss, the provisions of section @ should have not

been contravened.

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/ Similarly for carry forward of unabsorbed depreciation the conditions of section

E should not have been violated.

1? Specified authority has to be satisfied of the eligibility of the company for the

relief under section @ of the Income "ax Act. It is only on the recommendations

of the specified authority that (entral *overnment may allow the relief.

11 "he company should make an application to a =specified authority> for requisite

recommendation of the case to the (entral *overnment for granting or allowing

the relief.

1" 2rocedure for merger or amalgamation to be followed in such cases is same as

in any other cases. Specified Authority makes recommendation after taking into

consideration the court&s direction on scheme of amalgamation.

Synergy

he success of a merger or acquisition depends on how well this

synergy is achie$ed

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,ynergy:

Synergy is the magic force that allows for enhanced cost efficiencies of the new

business. Synergy takes the form of revenue enhancement and cost savings.

2y merging8 the companies hope to benefit from the following:

1. ,taff reductions as every employee knows, mergers tend to

mean 1ob losses. (onsider all the money

saved from reducing the number of staff

members from accounting, marketing and otherdepartments.

2. Economies of scale yes, si3e matters. Whether it's purchasing stationery

or a new corporate I" system, a bigger

company placing the orders can save more on

costs. %ergers also translate into improved

purchasing power to buy equipment or office

supplies when placing larger orders,

companies have a greater ability to negotiate

price with their suppliers.

3. Acquiring new technology to stay competitive, companies need to stay ontop of technological developments and their

business applications. 4y buying a smaller

company with unique technologies, a large

company can keep or develop a competitive

edge.

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& @mpro$ed market reach and industry $isibility

(ompanies buy companies to reach new markets and grow revenues andearnings. A merge may expand two companies' marketing and distribution, giving

them new sales opportunities. A merger can also improve a company's standing

in the investment community+ bigger firms often have an easier time raising capital

than smaller ones.

"hat said , achieving synergy is easier said than done --it is not automatically

realized once two companies merge Sure, there ought to be economies of

scale when two businesses are combined, but sometimes it works in reverse. In

many cases, one and one add up to less than two.

Sadly, synergy opportunities may exist only in the minds of the corporate leaders

and the dealmakers. Where there is no value to be created, the ( $ and

investment bankers who have much to gain from a successful %!A deal will try

to build up the image of enhanced value. "he market, however, eventually sees

through this and penali3es the company by assigning it a discounted share price.

Procedure for acquisition And Acquisition

0oing the 0eal

,tart with offer:

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Chapter4


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When the ( $ and top managers of a company decide they want to do a

merger or acquisition, they start with a tender offer . "he process typically begins

with the acquiring company carefully and discreetly buying up shares in the targetcompany, building a position.

$nce the acquiring company starts to purchase shares in the open market, it

is restricted to buying FG of the total outstanding shares

Working with financial advisors and investment bankers, the acquiring

company will arrive at an overall price that it's willing to pay for its target in cash,

shares, or both. "he tender offer is then frequently advertised in the business

press, stating the offer price and the deadline by which the shareholders in the

target company must accept /or re1ect0 it

.

he arget s #esponse

$nce the tender offer has been made, the target company can do one of several

things+

1. Accept the terms of the offer : If the target firm's top managers and

shareholders are happy with the terms of

the transaction, they will go ahead with the

deal.

2. Attempt to negotiate : "he tender offer price may not be highenough for the target company's

shareholders to accept, or the specific termsof the deal may not be attractive. In a

merger, there may be much at stake for the

management of the target. So, if they're not

satisfied with the terms laid out in the tender

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offer, the target's management may try to

work out more agreeable terms.

3. Execute a poison pill or some other hostile takeo$er

defense + A poison pill scheme can be triggered by a target company when a hostile suitor

acquires a predetermined percentage of company stock. "o execute its defense,

the target company grants all shareholders except the acquirer options to buy

additional stock at a dramatic discount. "his dilutes the acquirer's share and

intercepts its control of the company.

%ergers and acquisitions can face scrutiny from regulatory bodies.

For example

If the two biggest long distance companies in the Hnited States, A"!" and Sprint,

wanted to merge, the deal would require approval from the 6ederal

(ommunications (ommission. #o doubt, the 6(( would regard a merger of the

two giants as the creation of a monopoly or, at the very least, a threat tocompetition in the industry.

.losing the 0eal

6inally, once the target company agrees to the tender offer and regulatoryrequirements are met, the merger deal will be executed by means of some

transaction. In a merger in which one company buys another, the acquirer will pay

for the target company's shares with cash, stock, or both.

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ust combine computer systems, merge a few departments, use sheer si3e to

force down the price of supplies, and the merged giant should be more profitable

than its parts .

@n theory8 1C1 D % sounds great8 but in practice8 things can go awry

:istorical trends show that roughly two thirds of big mergers will disappoint on

their own terms, which means they will lose value on the stock market.

%otivations behind mergers can be flawed and efficiencies from economies of

scale may prove elusive. And the problems associated with trying to make merged

companies work are all too concrete.

Flawed Intentions

6or starters, a booming stock market encourages mergers, which can spell

trouble. )eals done with highly rated stock as currency are easy and cheap, but

the strategic thinking behind them may be easy and cheap too. Also, mergers are

often attempts to imitate, somebody else has done a big merger, which prompts

top executives to follow suit.

A merger may often have more to do with glory seeking than business strategy.

"he executive ego, which is boosted by buying the competition, is a ma1or force in%!A, especially when combined with the influences from the bankers, lawyers

and other assorted advisers who can earn big fees from clients engaged in

mergers. %ost ( $s get to where they are because they want to be the biggest

and the best, and many top executives get a big bonus for merger deals, no

matter what happens to the share price later.

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$n the other side of the coin, mergers can be driven by generali3ed fear.

*lobali3ation, or the arrival of new technological developments, or a fast changingeconomic landscape that makes the outlook uncertain are all factors that can

create a strong incentive for defensive mergers. Sometimes the management

team feels they have no choice and must acquire a rival before being acquired .

he idea is that only big players will sur$i$e a more competiti$e world

he Obstacles of making it >ork

(oping with a merger can make top managers spread their time too thinly,neglecting their core business, spelling doom. "oo often, potential difficulties

seem trivial to managers caught up in the thrill of the big deal.

"he chances for success are further hampered if the corporate cultures of the

companies are very different. When a company is acquired, the decision is

typically based on product or market synergies, but cultural differences are often

ignored. It's a mistake to assume that people issues are easily overcome.

For example

mployees at a target company might be accustomed to easy access to top

management, flexible work schedules or even a relaxed dress code. "hese

aspects of a working environment may not seem significant, but if newmanagement removes them, the result can be resentment and shrinking

productivity.

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%ore insight into the failure of mergers is found in the highly acclaimed study from

the global consultancy %c8insey. "he study concludes that companies often

focus too intently on cutting costs following mergers, while revenues and,ultimately, profits suffer. %erging companies can focus on integration and cost

cutting so much that they neglect day to day business, thereby prompting nervous

customers to flee. "his loss of revenue momentum is one reason so many

mergers fail to create value for shareholders.

Remember

#ot all mergers fail. Si3e and global reach can be advantageous, and strong

managers can often squee3e greater efficiency out of badly run rivals. 4ut the

promises made by dealmakers demand the careful scrutiny of investors.

"he success of mergers depends on how realistic the dealmakers are and how

well they can integrate two companies together while maintaining day to day

operations

ife after a merger or an acquisition

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A recent 6orrester report predicts a ma1or shakeout in the offshore I" industry and

recommends that even large players align with each other to prepare for amaturing market. "hey predict consolidation, not 1ust at the small company level,

but among companies of all si3es.

We have recently witnessed the acquisition of %phasis by )S, one of the more

significant deals in the offshore space. In an industry that is seeing consolidation

at various levels, it is relevant to examine both the motives behind this trend and,

more important, look at what it takes to create a successfully merged entity.

.A,E- , F0G

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Chapter5


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1. )laxo,mith3line !harmaceuticals imited8 @ndia:< Merger ,uccess =

Gla o !ndia "imited and #mith$line Beecham %harmaceuticals &!ndia' "imited

have le(ally mer(ed to form Gla o#mith$line %harmaceuticals "imited in !ndia

&G#$'. It may be recalled here that the global merger of the two companies came

into effect in )ecember JJJ.

(ommenting on the prospects of *S8 in India,


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he merger in @ndia brings together two strong companies to create a

formidable presence in the domestic market with a market share of about +

per cent

With this merger, *laxoSmith8line has increased its reach significantly in India.

With a field force of over ,JJJ employees and more than F,JJJ stockiest, the

company&s products are available across the country . he enhanced basket of

products of )laxo,mith3line8 @ndia will help ser$e patients better by

strengthening the hands of doctors by offering superior treatment and

healthcare solutions

)laxo,mith3line8 >orldwide

*laxoSmith8line 2K( is the world&s leading research based pharmaceutical and

healthcare company. With an ?!) budget of over L .E billion /?s.BD, BEJ

crores0, *laxoSmith8line has a powerful research and development capability,

encompassing the application of genetics, genomics, combinatorial chemistry and

other leading edge technologies.

A truly global organi3ation with a wide geographic spread, *laxoSmith8line has its

corporate headquarters in the West Kondon, H8. "he company has over BJJ,JJJ

employees and supplies its products to BMJ markets around the world. It has one

of the largest sales and marketing operations in the global pharmaceutical

industry.

About merger

*laxo Wellcome 2lc and Smith kline 4eecham 2lc announced a NBBMbn 5merger

of equals5 between the two companies on anuary B@. "he merger comes almost

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two years since a previous attempt to bring them together broke down after

disagreements between senior managers.

"he merger will create the world's largest pharmaceutical company with annual

sales of over NBFbn and a research and development budget of N .Mbn.

( $ of Smith8line said, ) *he time is ri(ht and the mar et is ri(ht for what we are

doin( . As definitely he was correct because drug market was having boom period

at that time, since the boom period is still there.

"he merger was too successful that the company was formed with a @.E percentshare of the global pharmaceuticals market even $ther ma1or pharmaceutical

companies had market shares aroun 4 to 4.5 per cent an e$en a

merge P"i&er 'arner()am*ert +oul only reach %., per cent.

"he company has base in H8, since there they have more than OJ G of

shareholders, while it has operational base in united states, the world largest

pharmaceutical market.

V. E. S @ T. Y. B. M. S 34

,.3 -

%., -

)laxo,mith3line

!fi6er >arner -


35/58


"he company has F G of sale in H8 compare to FJ G in HS.

)r ean 2ierre *arnier /chief operating officer, Smithkline 4eecham, and chief

executive designate, *S80 said+

5"his is a merger of strong with strong, in contrast to some other mergers in this

industry.5

.ompetiti$e ad$antage for the newly merged company are:

1 nhanced ?!) productivity 5%oney and scale are important, but you also

need quality.5 "he two companies have BE compounds and BJ vaccines

currently in phase III development. 4oth companies were leaders in genomics

and bioinformatics.

" Superior marketing power $ver MJ,JJJ employees in sales and marketing,

including O,JJJ representatives in the HS, making the company the marketing

partner of choice.

% Superior consumer marketing skills, these will be much more important

than ever before. "he market was being changed by direct to consumer

V. E. S @ T. Y. B. M. S 35


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advertising and e marketing via the Internet. %any of the company's products

would be switched to over the counter status in the future.

& $perational excellence fficiency savings of over N@FJm would be

achieved over three years, on top of savings of NF@Jm already achieved.

Savings of N FJm would be made by streamlining research and development.

"his money would be reinvested.

( A talented management team 4oth sides had previous experience of

integrating companies after mergers.

2. ,tandard .hartered )rindlay;s < Acquisition Success =

It has been a hectic year at Kondon based Standard (hartered 4ank, going by its

acquisition spree across the Asia 2acific region. At the helm of affairs, globally, is

V. E. S @ T. Y. B. M. S 36


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?ana "alwar, group ( $. "he quintessential general, he knew what he was up

against when he propounded his 'emerging stronger' strategy of growth

through consolidation of emerging markets for the turn of the %illennium loads ofscepticism.

*he central issue/ #tan 0hart1s Au(ust 2333 acquisition of A45 Grindlay1s Ban ,

for 67.8 billion .

veryone knows that acquisition is the easy part, merging operations is not. And

recent history has shown that banking mergers and acquisitions, in particular, are

not as simple to execute as unifying balance sheets. (an Standard(hartered

proposed merger with A#9 *rindlays be any differentP

"he 979 refers to the new entity, which will be India's #o B foreign bank once the

integration is completed. "his should take around BO months7 till then, A#9

*rindlays will exist separately as Standard (hartered *rindlays /S(*0.

"he 929 and 989 are (itibank and :ong 8ong and Shanghai 4anking (orp /:S4(0,India's second and third largest foreign banks, respectively.

"hat makes the new entity the world's biggest 'emerging markets' bank. 4y way of

strengths, it will have treasury operations that will probably go unchallenged as

the country's most sophisticated. 4est of all, it will be a dynamic bank. "hanks to

pre merger initiatives taken by both banks, it could per haps boast of the

country's fastest growing retail banking business.

Standard(hartered is rated highly on other parameters too. It is currently

targeting global cost savings of QBJO million, having reported a profit before tax of

QDFJ million in the first half of JJJ, up EB per cent from the same period last

V. E. S @ T. Y. B. M. S 37


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year. #et revenue increased D per cent to Q billion for the same period.

(onsumer banking, a typically low profit business which accounted for less than

MJ per cent of its global operating profits till four years ago, now brings in FF percent of profits. So the company's global report card looks fairly

good.

Standard(hartered knows it should not let its energy dissipate. It has been

growing at a claimed annual rate of F per cent in the last two years, well over the

industry average of BJ per cent.

4ut maintaining this pace won't prove easy, with (itibank and :S4( 1ust

waiting to snip at it. "he A#9 *rindlays acquisition had happened 1ust before that,

though the process started in early BCCC, at Stan (hart&s headquarters in Kondon.

At first, it was 1ust talk of a strategic tie up with A#9 *rindlays, which had the

same colonial 4ritish antecedents.

4ut this plan was abandoned when it became evident that all decision

making would vacillate between %elbourne and Kondon, where the two are

headquartered. 4y )ecember, A#9 had expressed a willingness to sell out, and

Stan(hart initiated the due diligence proceedings. It wasn't until %arch that a few

senior Indian bank executives were let into the secret.

V. E. S @ T. Y. B. M. S 38

Growth rate

tandard chartered

!" #

Industry a$erage

1% #


39/58


#ow, it's time to get going. A new vehicle, navigators in place, engines revvingand map charted, the road ahead is challenging and full of promise. "o steer clear

of trouble is the only caution advised by industry analysts, as the two banks

integrate their businesses. Skeptics don't see how Stan(hart can really be greater

than the sums of its part.

"he aggression, though, is not as raw as it sounds. 4ehind it all is a

strategy that everyone at Stan(hart seems to be in synchrony with. And behind

that strategy is "alwar, very much the originator of the oft repeated phrase uttered

by every executive :(ettin( the ri(ht footprint:. "he other key words that tend to

find their way into every discussion are 'focus' and 'growth'.

Stan(hart India's net non performing loans, as a percentage of net total

advances, are reported at 1ust per cent for BCCC JJJ. In terms of capital

adequacy too, the banks are doing fine. Stan(hart has a capital base of C.F per

cent of its risk weighted assets, while S(* has BJ.C per cent. So, with or withouta safety net provided by the global group, the Indian operations are on firm

ground.

3. 0eutsche 4 0resdner 2ank < Merger Failure =

"he merger that was announced on march +8 "??? between )eutsche 4ank and)resdner 4ank, *ermany&s largest and the third largest bank respectively was

considered as *ermany&s response to increasingly tough competition markets.

"he merger was to create the most powerful banking group in the world with the

balance sheet total of nearly .F trillion marks and a stock market value around

V. E. S @ T. Y. B. M. S 39


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BFJ billion marks. "his would put the merged bank for ahead of the second largest

banking group, H.S. based citigroup, with a balance sheet total amounting to B.

trillion marks and also in front of the planned apanese book mergers ofSumitomo and Sukura 4ank with B.@ trillion marks as the balance sheet total.

"he new banking group intended to spin off its retail banking which was not

making much profit in both the banks and costly, extensive network of bank

branches associated with it.

"he merged bank was to retain the name )eutsche 4ank but adopted the

)resdner 4ank&s green corporate color in its logo. "he future core business lines

of the new merged 4ank included investment 4anking, asset management, where

the new banking group was hoped to outside the traditionally dominant Swiss

4ank, Security and loan banking and finally financially corporate clients ranging

from ma1or industrial corporation to the mid scale companies.

+it" t"is #in) of *er er, t"e ne- (an# -o$') "a&e reac"e) t"e no.1

%osition of t"e /S an) create ne- )i*ensions of a ressi&eness in t"e

internationa' *er ers. B$t (are'! 2 *ont"s after anno$ncin t"eir

a ree*ent to for* t"e 'ar est (an# in t"e -or'), ne otiations for a

*er er (et-een De$tsc"e an) Dres)ner Ban# fai'e) on %ri' 5, 2000.

>hat happenedB

"he union of the two previous competitors should be carried out Hby agreement 8areas that overlapped should not be shut down or broken up but merged and

integrated. Although they intended a reduction of BD,JJJ 1obs, this was to proceed

by Hsocially acceptableH means. "his was insisted upon by both the union

representatives on the supervisory board as well.

V. E. S @ T. Y. B. M. S 40


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6rom the outset, the international investors re1ected this concept of a socially

acceptable merger. After a short initial rise, the share values of the two institutions

slumped by almost EJ percent.4anking analysts, on whose assessments large investors rely, stated that this type

of merger would Hset free too little synergyH

$ne banking analyst explained that in order to obtain the : large reduction of

costs necessary" 8 the )resdner 4ank would have had to go down. "he reduction

of BD,JJJ 1obs announced could only have been the start.

$nly the shares of the insurance company Allian3 A* increased, rising over J

percent on the first day after news of the agreement to merge. "he Allian3 had

contrived the merger plans and was regarded as the actual winner. It

owns a B.@ percent share in the )resdner 4ank and has wanted to

dispose of this for some time in order to concentrate on its own

business.

"he Allian3 is also interested in the retail banking business, which has become

unattractive to the banks, in order to utilise these structures to sell their insurance.

In the merger plan, it was intended that the Allian3 would take a ma1ority holding inthe new 4ank M, which would retain the ma1ority of the two banks' smaller

customers. A third point concerned asset management. In return for its share of

the )resdner 4ank, the Allian3 was to receive )WS, the asset management arm

of the )eutsche 4ank, *ermany's market leader with investments of B@F billion

marks.

V. E. S @ T. Y. B. M. S 41

&% #

!% #


42/58


Shareholders of the two banks did not look kindly on the fact that the Allian3 was

to receive the golden egg without requiring any effort of its own. "he morenegotiations over the mergerRwhich at first had only been roughly discussed in a

small circleRturned to the details, the more open the contradictions and

differences became.

$n the one hand, the pressure from the workforce increased. "here were several

demonstrations by bank staff as it became increasingly clear that it was mainly

)resdner 4ank employees from the branches and central administration who were

on the blacklist.

"he boards of directors also lost control concerning the distribution of highly paid

1obs in middle management. %any started to look around for new employers

offering safer prospects. "he dependency of their salary levels on the banks'

share value /now sinking0 also played a role.

"here was a nation wide outcry by customers after a member of the )resdnerboard announced that the merged bank was only interested in customers with

over JJ,JJJ marks. "hose with less would be transferred to the new 4ank M.

%any customers consequently moved their accounts over to the competition.

"he main point at issue became the fate of the bank's investment arm, )84

/)resdner 8leinwort 4enson0, which the executive committee of the )resdner

4ank did not want to relinquish under any circumstances.

Apart from asset management, investment banking i.e. the trade with securities

and the consultancy business concerning mergers, acquisitions and floatationsR

forms part of the most profitable business of the financial markets, with high profits

arising from the stock market boom and the rapidly increasing wave of mergers.

V. E. S @ T. Y. B. M. S 42


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$ver FJ percent of bank profits are made within this area. 4reuer wanted to

position the new bank at the highest place internationally in this sector.

In the preliminary negotiations it had been agreed that )84 would be integratedinto the new ma1or bank. 4ut from the outset these considerations encountered

resistance in the leading echelons of )eutsche Asset %anagement, the )eutsche

4ank's investment arm, also situated in Kondon.

)eutsche Asset %anagement had only 1ust integrated Kondon's %organ *renfell

and the American 4ankers "rust, aggressively headhunting whole teams of

investment bankers with top salaries. %eanwhile, this division alone now

contributed over DJ percent of )eutsche 4ank's profits, which in the past year

amounted to about .D billion euro. In this area, )eutsche 4ank was among the

top BJ in the world.

"he top people at )eutsche Asset %anagement were not ready to undertake a

new process of integration with )84. "he investment business is driven by expert

teams, which concentrate on certain industries or countries. $nly in this way is it

possible to grow or even survive in this hotly contested market, which servesinternationally mobile investors. International comparisons are constantly drawn in

this market, so that only those succeed who score above the average, the so

called benchmark.

%oreover, the administration and controlling departments would have almost

completely overlapped with the structures of )eutsche 4ank, so that almost

nobody from )84 could have been taken over into )eutsche Asset %anagement,

which had already developed to be a global player, without losing profits. Amongthe leading staff, nobody was prepared for a new round of haggling for positions

with the people from )84. "here would only have been 1obs for some of the

expert teams.

V. E. S @ T. Y. B. M. S 43


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HEither 0resdner 3leinwort 2enson is completely sold off8 or at the most a

few hundreds of its +8(?? workforce will be taken o$er Another $ersion is

out of the question >e will not let our business be ruined8H werewidespread opinions

"he )eutsche 4ank's Kondon investment bankers were not prepared to

compromise and used the weight of the share they contributed to the profits to

pressure 4reuer. After the merger was announced, they immediately dispatched a

message via the ;inancial *imes that either the )84 was smashed up or sold off.

Walter from the )resdner 4ank was not prepared for this, since )84 was

considered his 5pearl5. At a press conference on %arch C, 4reuer had to publicly

assure the distrustful Walter that statements about the sale of )84 were 5absolute

nonsense5 and that this company was a 51ewel5.

:owever, 4reuer did not succeed in getting the investment bankers onto his side.

"heir division head dson %itchell, one of the most successful investment

bankers with an annual salary of over BJ million marks, continued to exert

enormous pressure on 4reuer via oseph Ackermann, the division's chiefexecutive. 6inally, 4reuer capitulated to the pressure of his subordinates.

At the last 1oint session of the two boards of directors on April F, he placed himself

completely on the side of Ackermann, which led to the withdrawal of the )resdner

4ank from the merger negotiations. %ade to look foolish by his own staff, the

otherwise independent and self assured 4reuer stepped forward with tremblingvoice to publicly explain the failure of the merger.

.onclusion

V. E. S @ T. Y. B. M. S 44


45/58


"he ;inancial *imes hit the nail on the head concerning the failed merger when it

remarked that 4reuer got a bloody nose in the attempt to combine American

behaviour with *erman culture. "he conclusion is that those who wish to become:(lobal players: on the international financial markets must adhere to their rules.

It is not possible to force 5*erman culture5Ri.e., the traditions of mutually

acceptable decisions and social equilibrium, which characterised *ermany after

the Second World WarRonto global capitalism. *lobal competition leaves no

more room for deviations from the profit yardstick.

If some )resdner 4ank staff popped the champagne corks on hearing news that

the merger had failed /because they believed to have avoided losing their 1obs0,

they are deluding themselves. "he failure of this fusion does not mean an end to

the wave of mergers, but only that in future they will be carried out more ruthlessly

and more brutally.

"he pressure of the international financial markets continues to intensify and a

whole wave of hostile take over will follow. "he entire *erman banking system willbe turned upside down and a previously unknown degree of aggressiveness will

feature in the merger and take over of banks.

A member of the )eutsche 4ank board of directors said afterwards that following

the experiences of the past weeks he would never again agree to a 5merger of

equals5. And a )eutsche 4ank investment banker put forward the view that 5such

a fusion can only be hard and brutal5.

6ollowing the failure, rumours immediately began to circulate that different

international banks wanted to take over )resdner 4ank, such as (itibank, (hase

%anhattan or the )utch A4# Amro. )espite its recent record profits, announced

V. E. S @ T. Y. B. M. S 45


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almost at the same time as the merger failure, the )resdner 4ank remains a

candidate for take over.

International analysts assess its yield is too weak, and say that it has no clear

strategy and is set up badly.

)eutsche 4ank supervisory board said, 5"he game of roulette continues. 4ut

nobody knows where the ball will stay.... "he wave of mergers in banking

continues apace.5

An expert commented , 5"oo many finance houses in *ermany are sharing too

little market.... Anyway, we are only at the start. And after the private banks, the

savings banks will soon follow. Also the credit cooperatives face a wave of

mergers.5

& A A 4 E EG


47/58


"ata "ea&s much hyped acquisition of "etley, one of the world&s biggest tea

brands, isn&t proceeding according to the plan. BF months ago, the 8olkata based

?s CBE crores "ata "ea&s buyout of the privately held "he "etley *roup for ?sBOME crores had stunned corporate watchers and investment bankers alike. It was

a coup An Indian company had used a leveraged buyout to snag one of the

4ritain&s biggest ever brands. It was by far, the biggest ever leveraged buyout by

an Indian company.

"ata "ea didn&t pay cash upfront. Instead, it invested @J million pounds as equity

capital to set up "ata "ea. It borrowed EF million to buy the "etley stake. "he

plan was that "etley&s cash flows would be insulated from the debt burden.

When "ata "ea took the big gamble to buy "etley, its intent was very clear. "he

company had established a firm foothold in the domestic market and had a

controlling position in growing tea. *oing global looked like the obvious thing to

do. With "etley, the second largest brand after Kipton in its bag, "ata "ea looked

ready to set the "hames on fire.

?ight from the start, "etley was never a easy buy. In BCCD, Allied )omecq, the

liquor and retail conglomerate had put "etley on the block. ven then "ata "ea,

nestle, Hnilever and Sara lee had put in bids, all under JJ million pounds.

Allied wanted to cash on the table. "ata "ea didn&t have enough of its own. "he

others bids also did not go through. ventually, "etley group together with a

consortium $f financial investors like 2rudential and Schroders, bought the entireequity stake for BCJ million pounds in all cash deal. "wo years later, "etley went

for an I2$, hoping to raise EFJ MJJ million pounds. 4ut the I2$ never took place.

Soon afterwards, the investors began looking for exit options. "etley was once

again on the block.

V. E. S @ T. Y. B. M. S 47


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It was until 6eb JJJ that the due diligence was completed. 4y this time, the

"ata's were ready with their offer. "hey would pay @B million pounds to buy the

entire "etley equity and the funds would go towards first paying off "etley&s BJDmillion debt. "he balance would go the owners.

"he offer price did not include rights to "etley coffee business, which was sold to

the HS based ?owland (offee ?oasters and %other 2arker&s "ea and (offee in

6eb JJJ for FF million pounds.

6or "etley new owners, too, the problems were only 1ust beginning. "he deal

hinged on "etley&s ability, over and above covering its own debts, to service the

loans "ata "ea had taken for the acquisition. "hat&s where reality bites.

(onsider the facts. When "ata "ea acquired "etley through "ata "ea, it sunk in

@J million pounds as equity and borrowed EF million pounds from a consortium

to finance the deal. Implicit in the K4$ was that "etley&s future cash flows would

fund the S2


49/58


Some of the problems could have been obviated if "etley&s cash flows had

increased by MJ G in 6 JJB over the previous year. "hat way, the company

would have covered both its own commitments as well as of the "ata's. 4ut thesituation worsened. %a1or H8 retailers clamped down on grocery prices last year.

"hat substantially reduced "etley&s pricing flexibility.

4esides, the H8 tea markets have been under pressure for some time now.

According to the H8 government&s national food survey, there has been a

substantial fall in the consumption of mainstream teas tea bag black teas drunk

with milk and sugar. Also the tea drinking population in H8 has come down from

@@.BG to DO.EG in BCCC. $n the other hand, natural 1uices and coffee have

consistently increased their market share.

So, when it was confronted by "etley&s sliding performance, what options did "ata

"ea haveP $n its own, it could not do much. "he last year has been one of the

worst years for the Indian tea industry and "ata "ea has also been affected. "he

drop in tea prices and a proliferation of smaller brands in the organi3ed segment

have taken toll on "ata "ea&s performance.

V. E. S @ T. Y. B. M. S 49

Tea drin'ing population 1(((

)).1 #

*+.& #


50/58


In 6 JJB, "ata "ea&s net profit fell by BC.FCG from ?s B M.DE crores to ?s

BJJ. B crores. Income from operations declined by O.@ G.

4ut letting "etley sink under the weight of the interest burden would have been an

unthinkable option, given the prestige attached to the deal.

"hus from the above case we infer that "ata had to shell out a lot of money to

cover all the debts of "etley which was found not worthy enough by the general

public.

2ut ata still calls it to be a success whereas in reality it

is a failure

( .hrysler and 0aimler-2en6"he takeover of (hrysler (orporation by )aimler 4en3 in a QEO billion stock deal

is a powerful demonstration of the globali3ation of the world economy. "he largest

industrial company in *ermany, and in urope as a whole, is acquiring one of the

V. E. S @ T. Y. B. M. S 50

1!,.*& cr.

1%%.!1 cr.

1(."( #


51/58


biggest American corporations, creating a transnational giant with a work force of

MBJ,JJJ and an annual output of over QBEJ billion.

"he combination is the largest industrial merger in history and the biggest ever

acquisition of an American company by an overseas concern. "he merged

company, to be called )aimler(hrysler, will be the fifth largest auto maker in

terms of the number of vehicles produced, ranking after *%, 6ord, "oyota and


52/58


4efore the merger, (hrysler and )aimler 4en3 were essentially regional

producers (hrysler with the third largest market share in #orth America, )aimler4en3 controlling the luxury market in urope.

(hrysler was compelled to sell its uropean and Katin American operations during

its financial crises of the BCOJs and early BCCJs. It sold only B@,@BE vehicles

outside #orth America, compared to nearly a quarter of a million vehicles in its

home market. )aimler 4en3 opened its first plant outside urope and it began

assembling a sport utility version of the %ercedes 4en3 at a plant in "uscaloosa,

Alabama.

In the wake of the merger, financial commentators and auto industry analysts

predicted that the remaining regional auto manufacturers would be compelled to

combine into global scale firms in order to compete with *%, 6ord, "oyota, :onda

and the new )aimler(hrysler. "hey cannot remain nationally limited

manufacturers, selling to a national market. As one analyst told the *imes of

Kondon, 5"he country flags have come down and the flag of profitability has goneup.5

>hat happenedB

)aimler 4en3 has cut MJ,JJJ 1obs since BCCF, when Schrempp became ( $, and

officials at the *erman company said that one of the most attractive features of

V. E. S @ T. Y. B. M. S 52

-hrysler o/ reduction graph


53/58


(hrysler was its :e pertise: at cutting 1obs and slashing costs. (hrysler has

shrunk from BDJ,JJJ to @C,JJJ workers since the early BCOJs.

Whatever the short run impact of the merger, a principal goal of every such

combination is to consolidate operations and achieve economies of scale, which

inevitably involves the destruction of 1obs.

4y JJ , (hrysler figured, there would be OJ more assembly plants

than the market demanded, an overcapacity equal to six (hrysler (orporations

but this gigantic surplus of productive capacity is 5excess5 only from the

standpoint of capitalism, because it means that far more cars can be produced

than can be sold at a profit.

"his productive capacity cannot be put to use, within the framework of the profit

system, to meet the needs of people all over the world for cheap and convenient

transportation. Instead, it looms over the industry, insuring that the next downturn

V. E. S @ T. Y. B. M. S 53

10*%0%%%

)(0%%%


54/58


in the business cycle will have dire consequences for autoworkers and the

working class worldwide.

"he )aimler 4en3 takeover of (hrysler is part of an enormous outflow of capital

from *ermany, as giant corporations like :oechst, 4ertelsmann's, Siemens and


55/58


I* %etall. %oreover, the HAW and (AW bureaucrats hope that )aimler 4en3

officials will extend to America the corporatist policies carried out in *ermany

under the rubric of :co


56/58


"he (hrysler )aimler merger is another powerful proof that only the perspective

of socialist internationalism offers a way forward for working people. "he cultures

were very different. It was a much more limited undertaking.

"his merger has a lot of promise, but the difference between the promise and the

reality is yet to be seen. And if there's one ma1or difference here, it is this not

simply cultural approach in terms of a *erman and American culture but a very

different approach to building cars.

And the way in which that works out, the way the labor issues work out, it will be

essential to seeing whether or not they will be popping champagne BJ years down

the road.

V. E. S @ T. Y. B. M. S 56


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.onclusion

$ne si3e doesn&t fit all. %any companies find that the best route forward is

expanding ownership boundaries through mergers and acquisitions. 6or others,

separating the public ownership of a subsidiary or business segment offers more

advantages.

At least in theory, mergers create synergies and economies of scale, expanding

operations and cutting costs. Investors can take comfort in the idea that a merger

will deliver enhanced market power.

4y contrast, de merged companies often en1oy improved operating performance

thanks to redesigned management incentives. Additional capital can fund growth

organically or through acquisition. %eanwhile, investors benefit from the improved

information flow from de merged companies.

%!A comes in all shapes and si3es, and investors need to consider the complex

issues involved in %!A. "he most beneficial form of equity structure involves a

complete analysis of the costs and benefits associated with the deals.

V. E. S @ T. Y. B. M. S 57


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2ibliography

mergers amp acqusition

Documents