58466503 Chapters of Merger and Aqusition
-
Upload
karthik-pittsburgh -
Category
Documents
-
view
97 -
download
1
Transcript of 58466503 Chapters of Merger and Aqusition
MERGER & ACQUISITION IN INDIA
Merger & Acquisition in India
1.
Introduction to Mergers and Acquisition
1.1 Background
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.
Page 1
MERGER & ACQUISITION IN INDIA
In this context, it would be essential for us to understand what corporate restructuring and
mergers and acquisitions are all about. The phrase mergers and acquisitions (abbreviated
M&A) refers to the aspect of corporate strategy, corporate finance and management dealing
with the buying, selling and combining of different companies that can aid, finance, or help a
growing company in a given industry grow rapidly without having to create another business
entity.
Thus important issues both for business decision and public policy formulation have been
raised. No firm is regarded safe from a takeover possibility. On the more positive side Mergers
& Acquisition’s may be critical for the healthy expansion and growth of the firm. Successful
entry into new product and geographical markets may require Mergers & Acquisition’s at
some stage in the firm's development.
Successful competition in international markets may depend on capabilities obtained in a
timely and efficient fashion through Mergers & Acquisition's. Many have argued that mergers
increase value and efficiency and move resources to their highest and best uses, thereby
increasing shareholder value. To 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.
Considerable amount of brainstorming 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. Decision 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 Transferor or Transferee Company.
1.2. The Hubris theory of mergers and acquisitions
The Hubris theory (Roll, 1986) takes a hypothetical view that mergers and acquisitions
Page 2
MERGER & ACQUISITION IN INDIA
affect the value of merging firms. When a merger or acquisition announcement is made, the
shareholders of the bidding firm incur a loss in terms of the share price while those of the
target firm generally enjoy a rise in the share price.
The current reasoning behind this is that when a firm announces a merger offer to the
target, the share price of the target firm increases because shareholders in the target firm are
ready to transfer shares in response to the high premium that will be offered by the acquiring
firm. Roll (1986) says " ...the hubris hypothesis is very simple: decision-makers in acquiring
firms pay to much for their targets..." (p.213). This behaviour is sometimes attributed to the
overconfidence of the shareholders of the bidding firm, hence the term "hubris". The increase
in share price of a target firm finally drives up the value of the target firm. On the ether hand,
the shareholders of acquiring firms suffer a capital loss of share value because they must
allocate cash or additional shares to the target shareholders, and sometimes they overpay
(Bames, 1998). Singh (1998) points out that there are a number of studies supporting the
existence of bidder overpayment consistent with the Hubris hypothesis. Consequently, the
decrease in share prices of an acquiring firm will drive down the value of the bidding firm.
Therefore, a takeover offer drives up the value of acquired firms and drives down the value of
acquiring firms (McCardle and Viswanathan, 1994).
Roll (p. 197) says, "My purpose here is to suggest a different and less conclusive
interpretation of the empirical results. This interpretation may net mm out to be valid, but I
hope to show that it has enough plausibility to be at least considered in further
investigation". In view of this hypothesis, it is important to test whether this theory is able to
accurately predict behaviour under different conditions of mergers and acquisitions. An
important test of a theory is its ability to predict behaviour under real conditions (Kerlinger,
1992). Also theories of a speculative nature, such as the hubris hypothesis, must be"rigorously
and ruthlessly tested by observation or experiments" (Chalmers, 1982, p.38). If a theory
cannot be supported by observational or experimental tests, it must be replaced by ones that
make better predictions and have better empirical support.
Hubris hypothesis has been empirically tested by studies such as: Dodd and Ruback,
1977;Bishop et.al., 1987; Ravenscraft and Scherer, 1989; Franks and Harris, 1989; Zhang,
Page 3
MERGER & ACQUISITION IN INDIA
1995;Sudarsanam et.al., 1996; Grallon et.al, 1997; Maquieria et.al., 1998. These studies have
produced empirical evidence in support of the hubris theory.
1.3. Definitions of merger, acquisition and takeover
Merger
Merger is defined as combination of two or more companies into a single company where one
survives and the others lose their corporate existence. The survivor acquires all the assets as
well as liabilities of the merged company or companies. Generally, the surviving company is
the buyer, which retains its identity, and the extinguished company is the seller.
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.
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 resemble a takeover but result in a new company name (often combining the
names of the original companies) and in new branding; in some cases, terming the
combination a "merger" rather than an acquisition is done purely for political or marketing
reasons.
Page 4
MERGER & ACQUISITION IN INDIA
Merger is a financial tool that is used for enhancing long-term profitability by expanding their
operations. Mergers occur when the merging companies have their mutual consent as different
from acquisitions, which can take the form of a hostile takeover. The business laws in US vary
across states and hence the companies have limited options to protect themselves from hostile
takeovers. One way a company can protect itself from hostile takeovers is by planning
shareholders rights, which is alternatively known as “poison pill.
If we trace back to history, it is observed that very few mergers have actually added to the
share value of the acquiring company and corporate mergers may promote monopolistic
practices by reducing costs, taxes etc.
Managers 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.
Types of merger
Merger or acquisition depends upon the purpose of the offeror company it wants to achieve.
Based on the offeror objectives profile, combinations could be vertical, horizontal, circular
and conglomeratic as precisely described below with reference to the purpose in view of the
offeror company. Merger types can be broadly classified into the following five subheads as
described below.
1. Horizontal Merger: - Refers to the merger of two companies who are direct competitors of
one another. They serve the same market and sell the same product.
Page 5
MERGER & ACQUISITION IN INDIA
2. Conglomeration: - Refers to the merger of companies, which do not either sell any related
products or cater to any related markets. Here, the two companies entering the merger process
do not possess any common business ties.
3. Vertical Merger: - Is effected either between a company and a customer or between a
company and a supplier.
4. Product-Extension Merger: - Is executed among companies, which sell different products
of a related category. They also seek to serve a common market. This type of merger enables
the new company to go in for a pooling in of their products so as to serve a common market,
which was earlier fragmented among them.
5. Market-Extension Merger: - Occurs between two companies that sell identical products in
different markets.
Merger basically expands the market base of the product as follows :-
1. Certified Mergers and Acquisitions
2. Horizontal Mergers
3. Vertical Mergers
4. Market Extension Merger and Product Extension Merger
5. Conglomerate Mergers
Page 6
MERGER & ACQUISITION IN INDIA
1. Certified Mergers and Acquisitions:
There are a number of certified mergers and acquisitions advisory programs available at the
present time. With the help of these programs, a lot of commercial entities are getting involved
in merger and acquisition activities. These programs are offered by numerous merger and
acquisition consultants and agencies. Some of them are also conducting educational programs
and seminars for the purpose of educating financial professionals about the nuances of
certified mergers and acquisitions and growing the knowledge base of the merger and
acquisition professionals.
One of the most important certified merger and acquisition advisory programs is the
Certified Valuation Manager Program offered by the American Academy of Financial
Management (AAFM). The American Academy of Financial Management is also hosting a
number of Certified Valuation Manager Training Conferences throughout the year.
The certified mergers and acquisitions agencies help commercial enterprises or business
corporations in acquiring or taking over other companies and also in significant issues related
to mergers and acquisitions. These agencies also help business entities regarding management
buyouts (MBOs), finding acquisition lookup, sources of equity and debt financing, as well as
valuation of businesses.
In this modern-day world, the power of globalization, market liberalization and
technological advancement has contributed towards the formation of an increasingly
competitive and active commercial world, where mergers and acquisitions are more and more
utilized for achieving optimization of firm value and competitive benefits.
With the help of certified merger and acquisition advisory services, the clients can enjoy
instant accessibility to:
• A large number of certified business purchasers, which include multinational or
transnational corporations who are seeking to buy profitable companies
• A platform of the merger and acquisition professionals, sources of funding, transaction
makers, intermediaries and tax professionals
• Knowledgeable principals
• Advices on pricing and valuation
Page 7
MERGER & ACQUISITION IN INDIA
• Forward-looking transaction formation, which will lead to value addition.
The certified mergers and acquisition advisory services can be broadly categorized into the
following types:
• Business Valuation Services
• Funding Services (Acquisition financing, recapitalizations, financial reconstruction)
• Asset Disposal Services
• Acquisition Lookup
• Management Buyouts (MBOs)
• Certified Equipment and Machinery Estimation
2. Horizontal Mergers :
• 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 main 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.
• Horizontal mergers are those mergers where the companies manufacturing similar
kinds of commodities or running similar type of businesses merge with each other.
• Two companies that are in direct competition and share similar product lines and
markets. In the context of marketing, horizontal merger is more prevalent in comparison to
horizontal merger in the context of production or manufacturing.
• The principal objective behind this type of mergers is to achieve economies of scale in
the production procedure through carrying off duplication of installations, services and
functions, widening the line of products, decrease in working capital and fixed assets
Page 8
MERGER & ACQUISITION IN INDIA
investment, getting rid of competition, minimizing the advertising expenses, enhancing the
market capability and to get more dominance on the market.
• Never the less, the horizontal mergers do not have the capacity to ensure the market
about the product and steady or uninterrupted raw material supply.
• Horizontal mergers can sometimes result in monopoly and absorption of economic
power in the hands of a small number of commercial entities.
• According to strategic management and microeconomics, the expression horizontal
merger delineates a form of proprietorship and control. It is a plan, which is utilized by a
corporation or commercial enterprise for marketing a form of commodity or service in a
large number of markets.
Horizontal Integration
Sometimes, horizontal merger is also called as horizontal integration. It is totally opposite in
nature to vertical merger or vertical integration.
Horizontal Monopoly
A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally, a
monopoly is formed by both vertical and horizontal mergers.
Horizontal merger is that condition where a company is involved in taking over or acquiring
another company in similar form of trade. In this way, a competitor is done away with and a
wider market and higher economies of scale are accomplished. In the process of horizontal
merger, the downstream purchasers and upstream suppliers are also controlled and as a result
of this, production expenses can be decreased.
Horizontal Expansion
An expression which is intimately connected to horizontal merger is horizontal expansion.
This refers to the expansion or growth of a company in a sector that is presently functioning.
Page 9
MERGER & ACQUISITION IN INDIA
The aim behind a horizontal expansion is to grow its market share for a specific commodity or
service.
Examples of Horizontal Mergers:-
Following are the important examples of horizontal mergers:
• The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India
and Brook Bond
• The merger of Bank of Mathura with ICICI (Industrial Credit and Investment
Corporation of India) Bank
• The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power
Supply Company
• The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar
Cement
3. Vertical merger : (A customer and company or a supplier and company)
Vertical mergers refer to a situation where a product manufacturer merges with the supplier of
inputs or raw materials. In can also be a merger between a product manufacturer and the
product's distributor.
A company would like to takeover another company or seek its merger with that company to
expand espousing backward integration to assimilate the resources of supply and forward
integration towards market outlets.
The acquiring company through merger of another unit attempts on reduction of inventories of
raw material and finished goods, implements its production plans as per the objectives and
economizes on working capital investments. 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 i.e.
Page 10
MERGER & ACQUISITION IN INDIA
(1) It gains a strong position because of imperfect market of the intermediary
products, scarcity of resources and purchased products;
(2) It has control over products specifications.
Vertical mergers may violate the competitive spirit of markets. It can be used to block
competitors from accessing the raw material source or the distribution channel. Hence, it is
also known as "vertical foreclosure". It may create a sort of bottleneck problem. As per
research, vertical integration can affect the pricing incentive of a downstream producer. It may
also affect a competitor’s incentive for selecting input suppliers.
There are multiple reasons, which promote the vertical integration by firms. Some of
them are discussed below.
• The prime reason being the reduction of uncertainty regarding the availability of
quality inputs as also the uncertainty regarding the demand for its products.
• Firms may also enter vertical mergers to avail the plus points of economies of
integration.
• Vertical merger may make the firms cost-efficient by streamlining its distribution and
production costs. It is also meant for the reduction of transactions costs like marketing
expenses and sales taxes. It ensures that a firm's resources are used optimally.
4. Market-extension merger and Product Extension Merger:
1) Market-extension merger: (Two companies that sell the same products in different
markets)
As per definition, market extension merger takes place between two companies that deal in the
same products but in separate markets. The main purpose of the market extension merger is to
make sure that the merging companies can get access to a bigger market and that ensures a
bigger client base.
Page 11
MERGER & ACQUISITION IN INDIA
Example of Market Extension Merger
A very good example of market extension merger is the acquisition of Eagle Bancshares Inc
by the RBC Century. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283
workers. It has almost 90,000 accounts and looks after assets worth US $1.1 billion.
Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in
the metropolitan Atlanta region as far as deposit market share is concerned. One of the major
benefits of this acquisition is that this acquisition enables the RBC to go ahead with its growth
operations in the North American market.
With the help of this acquisition RBC has got a chance to deal in the financial market of
Atlanta, which is among the leading upcoming financial markets in the USA. This move
would allow RBC to diversify its base of operations.
2) Product-extension merger : (Two companies selling different but related products in the
same market)
According to definition, product extension merger takes place between two business
organizations that deal in products that are related to each other and operate in the same
market. The product extension merger allows the merging companies to group together their
products and get access to a bigger set of consumers. This ensures that they earn higher
profits.
Example of Product Extension Merger
The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product
extension merger. Broadcom deals in the manufacturing Bluetooth personal area network
hardware systems and chips for IEEE 802.11b wireless LAN.
Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that
are equipped with the Global System for Mobile Communications technology.
Page 12
MERGER & ACQUISITION IN INDIA
It is also in the process of being certified to produce wireless networking chips that have high
speed and General Packet Radio Service technology. It is expected that the products of
Mobilink Telecom Inc. would be complementing the wireless products of Broadcom.
5. Conglomeration : (Two companies that have no common business areas)
As per definition, a conglomerate merger is a type of merger whereby the two companies that
merge with each other are involved in different sorts of businesses. The importance of the
conglomerate mergers lies in the fact that they help the merging companies to be better than
before.
Types of Conglomerate Mergers
There are two main types of conglomerate mergers:-
1. pure conglomerate merger
2. Mixed conglomerate merger.
1. Pure conglomerate merger
The pure conglomerate merger is one where the merging companies are doing businesses
that are totally unrelated to each other.
2. Mixed conglomerate merger
The mixed conglomerate mergers are ones where the companies that are merging with each
other are doing so with the main purpose of gaining access to a wider market and client base
or for expanding the range of products and services that are being provided by them There are
also some other subdivisions of conglomerate mergers like the financial conglomerates, the
concentric companies, and the managerial conglomerates.
Page 13
MERGER & ACQUISITION IN INDIA
Reasons of Conglomerate Mergers
There are several reasons as to why a company may go for a conglomerate merger. Among the
more common reasons are adding to the share of the market that is owned by the company and
indulging in cross selling. The companies also look to add to their overall synergy and
productivity by adopting the method of conglomerate mergers.
Benefits of Conglomerate Mergers
There are several advantages of the conglomerate mergers. One of the major benefits is that
conglomerate mergers assist the companies to diversify. As a result of conglomerate mergers
the merging companies can also bring down the levels of their exposure to risks.
Acquisition:
An Acquisition usually refers to a purchase of a smaller firm by a larger one. Acquisition, also
known as a takeover or a buyout, is the buying of one company by another.
The term acquisition means an attempt by one firm, called the acquiring firm, to gain a
majority interest in another firm, called target firm. In acquisition, two or more companies
may remain independent, separate legal entity, but there may be change in control of
companies.
Acquisitions or takeovers occur between the bidding and the target company. There may be
either hostile or friendly takeovers. Acquisition in general sense is acquiring the ownership in
the property. In the context of business combinations, an acquisition is the purchase by one
company of a controlling interest in the share capital of another existing company.
The different types of acquisition are as follows:-
Page 14
MERGER & ACQUISITION IN INDIA
A. Reverse takeover: - Sometimes, however, a smaller firm will acquire management control
of a larger or longer established company and keep its name for the combined entity. This is
known as a reverse takeover.
i). Reverse takeover occurs when the target firm is larger than the bidding firm. In the course
of acquisitions the bidder may purchase the share or the assets of the target company.
ii). In the former case, the companies cooperate in negotiations; in the latter case, the takeover
target is unwilling to be bought or the target's board has no prior knowledge of the offer.
B. Reverse merger:- A deal that enables a private company to get publicly listed in a short
time period.
i). 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.
ii). Achieving acquisition success has proven to be very difficult, while various studies have
showed that 50% of acquisitions were unsuccessful. The acquisition process is very
complex, with many dimensions influencing its outcome.
Takeover:
In business, a takeover is the purchase of one company (the target) by another (the acquirer, or
bidder). In the UK, the term refers to the acquisition of a public company whose shares are
listed on a stock exchange, in contrast to the acquisition of a private company.
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. For example, process of takeover is
unilateral and the offeror company decides about the maximum price. Time taken in
Page 15
MERGER & ACQUISITION IN INDIA
completion of transaction is less in takeover than in mergers, top management of the offeree
company being more co-operative
There are different types of takeover:-
Friendly takeovers
Hostile takeovers
Reverse takeovers
1. Friendly takeovers :
Before a bidder makes an offer for another company, it usually first informs that company's
board of directors. If the board feels that accepting the offer serves shareholders better than
rejecting it, it recommends the offer be accepted by the shareholders.
In a private company, because the shareholders and the board are usually the same people or
closely connected with one another, private acquisitions are usually friendly. If the
shareholders agree to sell the company, then the board is usually of the same mind or
sufficiently under the orders of the shareholders to cooperate with the bidder. This point is not
relevant to the UK concept of takeovers, which always involve the acquisition of a public
company. Hostile takeovers
2. Hostile takeovers :
A hostile takeover allows a suitor to bypass a target company's management unwilling to agree
to a merger or takeover. A takeover is considered "hostile" if the target company's board
rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer without
informing the target company's board beforehand.
A hostile takeover can be conducted in several ways. A tender offer can be made where the
acquiring company makes a public offer at a fixed price above the current market price.
Tender offers in the USA are regulated with the Williams Act.
Page 16
MERGER & ACQUISITION IN INDIA
An acquiring company can also engage in a proxy fight, whereby it tries to persuade enough
shareholders, usually a simple majority, to replace the management with a new one which will
approve the takeover.
Another method involves quietly purchasing enough stock on the open market, known as a
creeping tender offer, to effect a change in management. In all of these ways, management
resists the acquisition but it is carried out anyway.
3. Reverse takeovers :
A reverse takeover is a type of takeover where a private company acquires a public company.
This is usually done at the instigation of the larger, private company, the purpose being for the
private company to effectively float itself while avoiding some of the expense and time
involved in a conventional IPO. However, under AIM rules, a reverse take-over is an
acquisition or acquisitions in a twelve month period which for an AIM company would:
• Exceed 100% in any of the class tests; or
• Result in a fundamental change in its business, board or voting control; or
• In the case of an investing company, depart substantially from the investing strategy stated
in its admission document or, where no admission document was produced on admission,
depart substantially from the investing strategy stated in its pre-admission announcement or,
depart substantially from the investing strategy.
2. OBJECTIVE AND SCOPE
Page 17
MERGER & ACQUISITION IN INDIA
The purpose for an offer or company for acquiring another company shall be reflected in the
corporate objectives. It has to decide the specific objectives to be achieved through
acquisition. The basic Objective of merger or business combination is to achieve faster growth
of the corporate business. Faster growth may be had through product improvement and
competitive position.
Other possible objectives for acquisition are short listed below: -
(1) Procurement of supplies:
1. To safeguard the source of supplies of raw materials or intermediary product;
2. To obtain economies of purchase in the form of discount, savings in transportation
costs, overhead costs in buying department, etc.;
3. To share the benefits of suppliers economies by standardizing the materials.
(2)Revamping production facilities:
1. To achieve economies of scale by amalgamating production facilities through
more intensive utilization of plant and resources;
2. To standardize product specifications, improvement of quality of product,
expanding market and aiming at consumers satisfaction through strengthening after sale
services;
3. To obtain improved production technology and know-how from the offeree
company
4. To reduce cost, improve quality and produce competitive products to retain and
improve market share.
(3) Market expansion and strategy:
1. To eliminate competition and protect existing market;
2. To obtain a new market outlets in possession of the offeree;
Page 18
MERGER & ACQUISITION IN INDIA
3. To obtain new product for diversification or substitution of existing products and to
enhance the product range;
4. Strengthening retain outlets and sale the goods to rationalize distribution;
5. To reduce advertising cost and improve public image of the offeror company;
6. Strategic control of patents and copyrights.
(4) Financial strength:
1. To improve liquidity and have direct access to cash resource;
2. To dispose of surplus and outdated assets for cash out of combined enterprise;
3. To enhance gearing capacity, borrow on better strength and the greater assets backing;
4. To avail tax benefits;
5. To improve EPS (Earning per Share).
(5) General gains:
1. To improve its own image and attract superior managerial talents to manage its affairs;
2. To offer better satisfaction to consumers or users of the product.
(6) Own developmental 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. 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.
Page 19
MERGER & ACQUISITION IN INDIA
(7) Strategic purpose:
The Acquirer Company view the merger to achieve strategic objectives through
alternative type of combinations which may be horizontal, vertical, product expansion, market
extensional or other specified unrelated objectives depending upon the corporate strategies.
Thus, various types of combinations distinct with each other in nature are adopted to pursue
this objective like vertical or horizontal combination.
(8) Corporate friendliness:
Although it is rare but it is true that business houses exhibit degrees of cooperative
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. The combining corporate aim at circular combinations
by pursuing this objective.
Page 20
MERGER & ACQUISITION IN INDIA
3. LIMITATIONS
1 Merge is a situation where one firm goes exist into
existence so due to this the process of industrialization
bears negative effect.
2 For merge and acquisition, there are number of
unethical activities take place like Greenmail, Golden
parachute due to this they create unethical
environment.
3 Due to merge or acquisition the acquiree firm’s
employees bear negative effect.
4 Now a day, mostly hostile takeover take place, which
considered unethical for society.
5 The practice of golden parachute compensates for top
management but do not compensate middle and lower
level management.
Page 21
MERGER & ACQUISITION IN INDIA
4. THEORETICAL PERSPECTIVE OF MERGERS AND
ACQUISITIONS
4.1 . Stages of mergers
Tracing back to history, merger and acquisitions have evolved in five stages and each of these
are discussed here. As seen from past experience 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.
First Wave 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.
End of 1st Wave Merger
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.
Second Wave Mergers
Page 22
MERGER & ACQUISITION IN INDIA
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 I 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. The 2nd wave mergers that took place were mainly horizontal or conglomerate in
nature. Te industries that went for merger during this phase were producers of primary metals,
food products, petroleum products, transportation equipments and chemicals. The investments
banks played a pivotal role in facilitating the mergers and acquisitions.
End of 2nd Wave Mergers
The 2nd wave mergers ended with the stock market crash in 1929 and the great depression.
The tax relief that was provided inspired mergers in the 1940s.
Third 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.
End of the 3rd Wave Merger
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.
Fourth Wave Merger
Page 23
MERGER & ACQUISITION IN INDIA
The 4th wave merger that started from 1981 and ended by 1989 was characterized by
acquisition targets that wren much larger in size as compared to the 3rd wave merger. 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.
Fifth Wave Merger
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. Hence we may conclude that the evolution of mergers and acquisitions
has been long drawn. Many economic factors have contributed its development.
4.2. The Hypotheses of mergers and acquisitions
The following are some of the theoretical frameworks concerning the rationale for
mergers and acquisitions.
4.2.1. Value maximising hypothesis
This hypothesis originates in economic theory (Manne, 1965) which views mergers
and acquisitions as an activity that may generate a valuable asset. Under this
hypothesis, the managers of firms have a primary goal of maximising shareholder
wealth (Firth, 1980; Sudarsanam et.al., 1996; Gonzalez et.al, 1997). According to this
hypothesis, a merger or acquisition should generate a positive economic gain to the
merging firms or at least non negative returns (Baradwaj et.al, 1992). Hence, any
merger or acquisition activity should meet the same criteria as any other investment
Page 24
MERGER & ACQUISITION IN INDIA
decision (Halpem, 1983). Most mergers and acquisitions are value maximising
activities whose aim is to boost shareholder wealth. If this objective cannot be met by
the managers of firms engaging in mergers and acquisitions, they may not proceed with
the merger proposal or may reject any merger offer, and therefore, in this case, the
ability to pick a good takeover target is essential (Powell, 1997) Managers should not
conduct any merger or acquisition if there are no positive gains expected through the
merger of their firms. If the firms' value increases as a result of a merger or acquisition,
it indicates that the firms involved in a merger or acquisition are assumed to be value
maximisers (Asquith and Kim, 1982; Malatesta, 1983). Even if, for example, at the
beginning of making a merger proposal shows a negative net present value investment,
it does not mean that this merger proposal does not generate any gain to the
shareholders of merging firms. The gain raised from mergers and acquisitions may
come after the announcement of merger offers or after the outcome of mergers is
known.
Financial motivations and synergy effects are among those which are consistent with
the value maximising hypothesis (Choi and Philippatos, 1983; Halpem, 1983).
Maquieira et.al. (1998) argue that financial synergies can arise from various aspects of
the merging firms, such as from a reduction of default risk which finally reduces
borrowing costs and diversification of equity risk for shareholders. Haugen and
Langetieg (1975) conclude that it is possible to minimise the risks of insolvency and
bankruptcy by merging with another firm. In addition, Berger et.al. (1998) point out
that mergers and acquisitions can generate a static effect which means the combination
of assets of merging firms becomes bigger than before. The bigger the assets, the
greater the possibility of the merging firms displaying a better wealth effect for the
shareholders.
4.2.2. Non -value maximising hypothesis
Page 25
MERGER & ACQUISITION IN INDIA
This hypothesis, proposed by Halpem (1973, 1983), takes the view that any merger or
acquisition has no economic gains for the merging firms. The positive returns are not
the objective of the firm conducting a merger attempt, and therefore, the bidding firms
are not interested in the profitability of a merger. According to Halpem, it is not
necessarily important for the managers of the firms who engage in mergers and
acquisition to display positive returns for their shareholders.
In this type of merger, the merging firms, especially the acquiring ones, will seek some
other objectives beyond the positive economic gains for their firms, such as to
maximize sales growth, to control a conglomerate empire, to lift company image, to
enter a new market which is not possible without a merger or acquisition due to
govemment regulations, to change the target market, to expand to a new geographic
market, to acquire qualified managers and expertise, and so on.
Meanwhile, a study by Healy, Palepu and Ruback (1997) finds that strategic takeovers
that can be categorised as non-value maximising activity (takeovers that typically
involved stock payment for firms in similar businesses) generate more gains than
financial takeovers (takeovers that generally involved cash payments for firms in
unrelated businesses). This result is very interesting because, in fact, the non-value
maximising merger often out performs the value maximising merger. Most non-value
maximising mergers are horizontal mergers which are subject to government
restrictions and regulations because the non-value maximising mergers sometimes
create monopoly and oligopoly. The involvement of governments, as part of an
antitrust policy, is essential to protect public interests against an increase in the use of
market power in setting prices (Akhavein et.al, 1997).
A study by Berger et.al. (1998) discovered that some mergers and acquisitions in the
U.S. Banking Industry are also driven by some non-value maximising objectives, for
example, to consolidate the merging firms, to refocus small business lending. Studies
Page 26
MERGER & ACQUISITION IN INDIA
by Bhagat, Sleifer and Vishny (1990), and Kaplan and Weisbach (1992) point out that
operating synergies can only be created in mergers between firms in the same or
related industries.
4.2.3. Managerial hypothesis
Mueller (1969) proposes that mergers can be used by the managers of firms as a tool to
achieve their own personal interests. Under this hypothesis, managers conduct mergers
or acquisitions if they contribute to their personal wealth (Agrawal and Knoeber, 1998;
Ghosh and Ruland, 1998). Bishop et.al (1987) call this hypothesis an anti takeover
theory, because managers act to maximise their own utility. These objectives, however,
basically do not always maximise shareholder returns (Firth, 1980). Therefore,
managers' acquisition decisions are not designed to enhance shareholder wealth. Lev
(1983) also argues that the increase in the power of the managers boosts their own
interest at the expense of that of their companies' shareholders.
Furthermore, Amihud and Lev (1981) comment that managers engage in mergers and
acquisitions to minimise their human capital risk. In addition, merger activities can be
seen by the managers as an attempt to diversify their human capital risks (Morck,
Shleifer and Vishny, 1990). Mergers and acquisitions allow managers to limit their
risks by creating larger but less risky firms (Maquieira et.al, 1998). This argument is
logical when the risk to the new merging firm is divided and shared to some people,
leading managers to reduce their risks to the minimum possible.
The managerial hypothesis is consistent with the argument from Larcker (1983) who
states that managers focus on the short term, and always try to maximise their available
utility in their firm. Again, this argument is logical because most managers are hired
for a certain period of time, and consequently they will try to maximise their wealth
before at the end of a contract. Therefore, when a merger or acquisition provides a
Page 27
MERGER & ACQUISITION IN INDIA
manager with large personal benefits, he is more willing to sacrifice the market value
of the firm (Morck et.al., 1990).
On the other hand, shareholders prefer to maximise the share price, which is more a
long term outlook. To minimise this conflicting interest between managers and
shareholder objectives, it is very common for firms to provide their managers with
share options. By holding shares or options in their firms managers have a vested
interest and are morally responsible for maximising their own interests as well as
shareholder wealth.
4.2.4. Inefficient management hypothesis
Mergers or acquisitions can also be viewed as a response to inefficient management.
This scenario is seen by investors as a response to a situation where the incumbent
management has pursued inefficient policies, and consequently, the firm becomes an
acquisition target (Asquith, 1983; Malatesta, 1983).
Inefficient management can be identified from several indicators, for example, poor
earnings, undervalued shares and low P/E ratio. These indicators signal inefficient
management and demonstrate that the resources in the target firms are not utilised
efficiently and properly which motivates the bidding firms to takeover the target firm
(Dodd and Ruback, 1977). If the firm is acquired, the bidding firm will employ a new
management team who will manage the resources more efficiently.
Organisation effectiveness can be considered as part of efficient management. Mergers
maximise the resources from the combining firms, thus, the organisation's performance
becomes effective. It also increases productivity through combining two or more
resources one of which is underutilised.
Page 28
MERGER & ACQUISITION IN INDIA
Furthermore, the new management may change the organisation stmcmre, from a
centralized to a decentralised stmcture (Senn, 1994). This change makes the
organisation more effective in handling day to day activity, because it can react more
quickly to problems which arise. If an organisation can work efficientiy, it maximises
its available resources.
5. Methodology and Procedure for Takeover and Acquisition
In this chapter we will be able to know the procedure and method for takeover and acquisition
of a company and procedure of merging of a bank.
5.1 Methods of Acquisition:
An acquisition may be affected by
(a) Agreement with the persons holding majority interest in the company management like
members of the board or major shareholders commanding majority of voting power;
(b) Purchase of shares in open market;
(c) To make takeover offer to the general body of shareholders;
(d) Purchase of new shares by private treaty;
(e) Acquisition of share capital through the following forms of considerations viz. means
of cash, issuance of loan capital, or insurance of share capital.
5.2 Procedure of merger:
Public announcement:
To make a public announcement an acquirer shall follow the following procedure:
1. Appointment of merchant banker:
Page 29
MERGER & ACQUISITION IN INDIA
The acquirer shall appoint a merchant banker registered as category – I with SEBI to advise
him on the acquisition and to make a public announcement of offer on his behalf.
2. Use of media for announcement:
Public announcement shall be made at least in one national English daily one Hindi daily and
one regional language daily newspaper of that place where the shares of that company are
listed and traded.
3. Timings of announcement:
Public announcement should be made within four days of finalization of negotiations or
entering into any agreement or memorandum of understanding to acquire the shares or the
voting rights.
4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBI Regulations.
Therefore, it is required that it should be prepared showing there in the following
information:
(1) Paid up share capital of the target company, the number of fully paid up and partially paid
up shares.
(2) Total number and percentage of shares proposed to be acquired from public subject to
minimum as specified in the sub-regulation (1) of Regulation 21 that is:
a) The public offer of minimum 20% of voting capital of the company to the shareholders;
b) The public offer by a raider shall not be less than 10% but more than 51% of shares of
voting rights. Additional shares can be had @ 2% of voting rights in any year.
(3) The minimum offer price for each fully paid up or partly paid up share.
(4) Mode of payment of consideration;
(5) The identity of the acquirer and in case the acquirer is a company, the identity of the
promoters and, or the persons having control over such company and the group, if any, to
which the company belong;
Page 30
MERGER & ACQUISITION IN INDIA
(6) The existing holding, if any, of the acquirer in the shares of the target company, including
holding of persons acting in concert with him;
(7) Salient features of the agreement, if any, such as the date, the name of the seller, the price
at which the shares are being acquired, the manner of payment of the consideration and the
number and percentage of shares in respect. Which the acquirer has entered into the
agreement to acquirer the shares or the consideration, monetary or otherwise, for the
acquisition of control over the target company, as the case may be;
(8) The highest and the average paid by the acquirer or persons acting in concert with him for
acquisition, if any, of shares of the target company made by him during the twelve month
period prior to the date of the public announcement.
(9) Objects and purpose of the acquisition of the shares and the future plans of the acquirer for
the target company, including disclosers whether the acquirer proposes to dispose of or
otherwise encumber any assets of the target company: Provided that where the future plans
are set out, the public announcement shall also set out how the acquirers propose to
implement such future plans;
(10) The ‘specified date’ as mentioned in regulation 19.
(11) The date by which individual letters of offer would be posted to each of the shareholders.
(12) The date of opening and closure of the offer and the manner in which and the date by
which the acceptance or rejection of the offer would be communicated to the share
holders.
(13) The date by which the payment of consideration would be made for the shares in respect
of which the offer has been accepted.
(14) Disclosure to the effect that firm arrangement for financial resources required to
implement the offer is already in place, including the details regarding the sources of the
funds whether domestic i.e. from banks, financial institutions, or otherwise or foreign i.e.
from Non-resident Indians or otherwise.
Page 31
MERGER & ACQUISITION IN INDIA
(15) Provision for acceptance of the offer by person who own the shares but are not the
registered holders of such shares.
(16) Statutory approvals required to obtained for the purpose of acquiring the shares under the
Companies Act, 1956, the Monopolies and Restrictive Trade Practices Act, 1973, and/or
any other applicable laws.
5.3 Procedure of Bank Merger
The procedure for merger either voluntary or otherwise is outlined in the respective
state statutes/ the Banking regulation Act. The Registrars, being the authorities vested with
the responsibility of administering the Acts, will be ensuring that the due process prescribed
in the Statutes has been complied with before they seek the approval of the RBI. They
would also be ensuring compliance with the statutory procedures for notifying the
amalgamation after obtaining the sanction of the RBI.
Before deciding on the merger, the authorized officials of the acquiring bank and the
merging bank sit together and discuss the procedural modalities and financial terms. After
the conclusion of the discussions, a scheme is prepared incorporating therein the all the
details of both the banks and the area terms and conditions.
Once the scheme is finalized, it is tabled in the meeting of Board of directors of
respective banks. The board discusses the scheme thread bare and accords its approval if
the proposal is found to be financially viable and beneficial in long run.
After the Board approval of the merger proposal, an extra ordinary general meeting of
the shareholders of the respective banks is convened to discuss the proposal and seek their
approval.
After the board approval of the merger proposal, a registered valuer is appointed to
valuate both the banks. The valuer valuates the banks on the basis of its share
capital,market capital, assets and liabilities, its reach and anticipated growth and sends its
report to the respective banks.
Page 32
MERGER & ACQUISITION IN INDIA
Once the valuation is accepted by the respective banks , they send the proposal along
with all relevant documents such as Board approval, shareholders approval, valuation report
etc to Reserve Bank of India and other regulatory bodies such Security & exchange board
of India (SEBI) for their approval.
After obtaining approvals from all the concerned institutions, authorized officials of
both the banks sit together and discuss and finalize share allocation proportion by the
acquiring bank to the shareholders of the merging bank (SWAP ratio)
After completion of the above procedures , a merger and acquisition agreement is signed by
the bank.
5.4. Event time
The event time ( t ) is defined as the day of the announcement of merger offers made by the
bidding or acquiring firms. Hence, the announcement day is considered as " day 0" or t=0.
Furthermore, the day when the results of mergers and acquisitions are known (whether this is
at more than 50% or less than 50%) is also considered as "day 0" or t =0.
The event time t=0 is the day on which the share prices of the acquiring and target firms
fluctuate to follow the new information as a result of a merger announcement or an outcome
announcement. Because the share prices have reacted to this new information, these ultimately
affect the return of the bidding and target shares. Therefore, the announcement day (t=0) is the
best starting point from which to measure the abnormal return of mergers and acquisitions.
5.5. Event window
If a long term measurement is used, the size of the participating firms must be controlled
(Gregory, 1997). Failure to control the size effect produces a biased result because size effect
emerges on the long term measurement (Dimson and Marsh, 1986; Brown and Da Silva Rosa,
1997; Gregory, 1997). Some recent studies (for example. Ran and Vermaelen, 1998; Fama,
1998) stress that long term measurements tend to generate some anomalies because size
Page 33
MERGER & ACQUISITION IN INDIA
effects and the model used for computing abnormal returns are sensitive to long term
measurements. This implies that the shorter the period of measurement, the better the results,
because bias is minimised and the merger effect on share prices surrounding the
announcement of merger proposals and also surrounding the announcement of merger
outcomes is maximised.
The event window is the duration for measuring the effect of the announcement of mergers
and acquisitions on share prices and abnormal returns. The length of the event window is
considered some days before and some days after the announcement of merger and acquisition
say as 10 days prior to the announcement of mergers and acquisitions to 10 days after the
announcement of mergers and acquisitions.
The length of an event window can be written as t = -10, for the measurement of share prices
and abnormal returns 10 days prior to the announcement of mergers and acquisitions, and t =
10, for the measurement of share prices and abnormal returns 10 days after the announcement
of mergers and acquisitions. t = 10, for the measurement of share prices and abnormal returns
10 days after the outcome of mergers and acquisitions is known (whether this is at more than
50% or less than 50%).
Page 34
MERGER & ACQUISITION IN INDIA
6. Analysis of Data
6.1 CASE STUDY I: ICICI BANK LTD
ICICI Bank was originally promoted in 1994 by ICICI limited, an Indian financial institution,
and was its wholly owned subsidiary. ICICI was formed in 1955 at the initiative of the World
Bank, the Government of India and representatives of the Indian industry.
The principal objective was to create a development financial institution for providing
medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI
transferred its businesses from a development financial institution offering only project
finance to a diversified financial services group offering a wide variety of product and
services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In
1999, ICICI became the first Indian company and the first bank or financial institution from
non-Japan Asia to be listed on NYSE.
After consideration of various corporate structuring alternatives in the context of the emerging
competitive scales in the Indian banking industry, and the move towards universal banking,
the management of ICICI and ICICI Bank formed the view that the manager of ICICI with
ICICI Bank would be the optimal strategic alternative for both entities, and would create the
optimal legal structure for the ICICI group’s universal banking, strategy.
Page 35
MERGER & ACQUISITION IN INDIA
The merger would enhance the value for ICICI shareholders through the merged entity’s
access to low-cost deposits, greater opportunities for earning fee-based income and the ability
to participate in the payment system and provide transaction-banking services.
The merger would enhance value for ICICI Bank shareholders through a large capital base and
scale of operation, seamless access to ICICI’s strong corporate relationship built up over five
decade, entry into new business segment, higher market share in various business segment,
particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries.
In October 2001, the board of director of ICICI and ICICI Bank approved the merger of ICICI
and its two wholly owned retail finance subsidiaries ICICI personnel financial services limited
and ICICI Bank.
The merger was Approved by shareholder of ICICI and ICICI Bank in January 2002, by the
high court of Gujarat at Ahmadabad in April 2002.Consequent to the merger, the ICICI
group’s financing and banking operation, both wholesale and retail, have been integrated in a
single entity.
The following tables analyses the financial performance of ICICI Bank Limited from the Year
1997 to 2004
Sales position and assets turnover of ICICI Bank
Year Net sales Increase over
previous period
(%)
Total Assts (Rs.
cr.)
Assets Turnover
Ratio
1997 221.76 - 1781.86 0.1241998 344.26 35.58 3279.43 0.1041999 634.19 45.71 6981.67 0.092000 1042.09 39.14 12072.62 0.862001 1442.48 27.75 19736.59 0.0732002 2724.73 47.06 104959.5 0.0252003 10771.83 74.7 107760.3 0.0992004 11509.26 6.4 126149.6 0.091
Page 36
MERGER & ACQUISITION IN INDIA
Table 6.1 shows the Sales position and Assts Turnover of ICICI Bank.
The net Sales have been rising especially after the merger in 2001. In 2002, sales have
increased by 47.06% and in 2003 by 74.71%. The percentage increase was less in 2004 i.e.
6.4% over the previous year. But overall there has been an improvement in the sales position
after the merger.
The Assts turnover ratio has declined from 0.124 (1997) to 0.86 (2000) and 0.073 (2001) (pre-
merger). In the year 2004 it has slightly improved to 0.091. The bank needs to further improve
the ratio so that it reaches 1.0 beyond which the assets of a company are supposed to be fully
utilized.
Table 6.2: Profitability Position of ICICI Bank
Year PAT (Rs. Cr.) PBDIT as % of sales (%)
PBIT as % of sales (%)
PAT as % of sales (%)
ROI (%)
1997 40.13 79.52 74.99 1706 2.251998 5.22 78.97 73.63 14.28 1.531999 63.35 84.08 80.58 9.17 0.92000 105.3 79.95 77.48 11.27 0.872001 161.1 74.93 72.38 9.77 0.812002 258.3 69.97 67.62 5.93 0.242003 1206.18 74.69 69.99 -507 1.192004 1637.11 82.11 77.42 14.11 1.29
Table 6.2 shows the profitability position of ICICI Bank.
The PAT has seen a significant improvement especially after the merger.
In 2001, PAT were Rs. 161.1 crore, the level went up to Rs. 258 crore in 2002. There was
sizeable jump at Rs. 1206 crore in 2003 and Rs. 1637 crore in 2004.
The PBDIT as percentage of sales has also gone up from 74.93% in 2001 to 82.11% in 2004
(after the merger).
Page 37
MERGER & ACQUISITION IN INDIA
PBIT as percentage of sales has almost remained the same at around 72% in 2001 and slightly
improved in 2004 at 77.42%.
The PAT as percentage of sales was 17.06% in 1997 but declined to 9.77% in 2001 (the year
of the merger), reduced to 5.93% in 2002 and also a negative in 2003 but in 2004 it has gone
up to 14.11%.
The ROI was 2.25% in 1997 it declined to 0.81% in 2001 (the year of the merger) and has
now improved in 2004 at 1.29%.
Overall, the operational performance of the Bank has enhanced after the merger as indicate by
its PAT and ROI.
The single most important reason for the merger was synergies between the two institutions.
The only problem faced due to this merger was to raise lot of funds and the biggest challenge
was to meet the government regulation. And after analysis that there has been an increase in
sales by 50% in fee income in 2004 and by 80% in 2005 due to the merger.
6.2 CASE STUDY II: CASE STUDY ON MERGING OF ADIDAS AND REEBOK
COMPANIES
Reebok Companies Profile
Page 38
MERGER & ACQUISITION IN INDIA
Reebok International Limited, a subsidiary of German sportswear giant Adidas, is a producer
of athletic footwear , apparel, and accessories. Joe and Jeff Foster founded Mercury Sports. In 1960,
Joe and Jeff Foster renamed the company Reebok in England, having discovered the name in a
dictionary won in a race by Joe Foster as a boy. The name comes from the Afrikaans spelling
of rhebok, a type of African antelope or gazelle. The dictionary was a South African edition, hence
the spelling.
In 1979, United States camping equipment distributor Paul B. Fireman saw a pair of Reeboks at an
international trade show and negotiated for the rights to sell them in North America, where they did
very well despite being pricier than competitors Adidas, Nike and Puma.
In 1999, Reebok developed a new innovative fabric that holds any dirt picked to avoid creating mess.
The fabric was later specifically used for all Reebok socks.
Adidas Companies Profile
Adidas is a major German-based sports apparel manufacturer and parent company of the Adidas
Group, which consists of the Reebok sportswear company, TaylorMade-adidas golf company
(including Ashworth), and Rockport. Besides sports footwear, the company also produces other
products such as bags, shirts, watches, eyewear and other sports and clothing related goods. The
company is the largest sportswear manufacturer in Europe and the second biggest sportswear
manufacturer in the world, after its U.S. rival Nike.
The company's clothing and shoe designs typically feature three parallel bars, and the same motif is
incorporated into Adidas's current official logo. The "Three Stripes" were bought from the Finnish
sport company Karhu Sports in the 1950s. The company revenue for 2009 was listed at €10.38 billion
and the 2008 figure at €10.80 billion.
The Deal :
Page 39
MERGER & ACQUISITION IN INDIA
In August 2005, German adidas-Salomon AG announced plans to
acquire Reebok at an estimated value of € 3.1 billion ($3.78 billion).
At the time, Adidas had a market capitalization of about $8.4 billion,
and reported net income of $423 million a year earlier on sales of
$8.1 billion. Reebok reported net income of $209 million on sales of about $4 billion. While
analysts opined that the merger made sense, the purpose of the merger was very clear. Both
companies competed for No. 2 and No. 3 positions following Nike (NKE).
Why Merger?
Nike was the leader in U.S. and had made giant strides in Europe even surpassing Adidas in
the soccer shoe segment for the first time. According to 2004 figures by the Sporting Goods
Manufacturers Association International, Nike had about 36%, Adidas 8.9% and Reebok
12.2% market share in the athletic-footwear market in the U.S. Adidas was the No. 2 sporting
goods manufacturer globally, but it struggled in the U.S. – the world’s biggest athletic-shoe
market with half the $33 billion spent globally each year on athletic shoes. Adidas was
perceived to have good quality products that offered comfort whereas Reebok was seen as a
stylish or hip brand. Nike had both and was a favorite brand because of its fashion status,
colors, and combinations. Adidas focused on sport and Reebok on lifestyle. Clearly the
chances of competing against Nike were far better together than separately. Besides Adidas
was facing stiff competition from Puma, the No. 4 sporting-goods brand. Puma had then
recently disclosed expansion plans through acquisitions and entry into new sportswear
categories. For a successful merger, the challenge was to integrate Adidas’s German culture of
control, engineering, and production and Reebok’s U.S. marketing- driven culture.
The ADDYY and RBK Merger – Impossible is Nothing
Page 40
MERGER & ACQUISITION IN INDIA
On January 31, 2006, adidas closed its acquisition of Reebok International Ltd. The
combination provided the new adidas Group with a footprint of around €9.5 billion ($11.8
billion) in the global athletic footwear, apparel and hardware markets.
Adidas-Salomon AG Chairman and CEO Herbert Hainer said, “We are delighted with the
closing of the Reebok transaction, which marks a new chapter in the history of our Group. By
combining two of the most respected and well-known brands in the worldwide sporting goods
industry, the new Group will benefit from a more competitive worldwide platform, well-
defined and complementary brand identities, a wider range of products, and a stronger
presence across teams, athletes, events and leagues.”
Hainer also said, “The brands will be kept separate because each brand has a lot of value and
it would be stupid to bring them together. The companies would continue selling products
under respective brand names and labels.”
Adidas plus Reebok is equal to better competition with giant Nike
In 2006, Adidas (the German athletic apparel and the world’s second-biggest sports goods
maker after Nike) acquired Reebok in a US$3.1 billion deal. The merger was aimed at helping
Adidas increase its share in the U.S. market and better compete with market leader Nike Inc.
and fourth ranked Puma AG. At the time experts felt that the merger made sense. But the key
challenge was to unite Adidas’s German culture of control, engineering, and production and
Reebok’s U.S. marketing- driven culture.
The Reebok acquisition was seen as a key factor in growing the Adidas brand in developing
and fashion-oriented markets of Asia like China, Korea, and Malaysia. Moreover, Reebok
already had marketing tie-ups in China (with Yao Ming) and Adidas did not have to cover all
China segments
Page 41
MERGER & ACQUISITION IN INDIA
Conclusion
Year-end order backlog represents firm future revenues from contracts signed up to that date.
Order backlog is a key indicator of future sales for retailers and Reebok’s lower order backlog
remains the key question mark. Order backlog of brand Adidas was excellent up 17 percent
which can be partly attributed to the Euro 2008 soccer championship and Beijing Olympics
this year. However, Reebok’s order backlog was down 8 percent (down 20 percent in North
America). Nike reported worldwide futures orders for athletic footwear and apparel
(scheduled for delivery from December 2007 through April 2008) totaling $6.5 billion, 13
percent higher than such orders reported for the same period last year.
Meanwhile, Nike announced (Mar 3, 2008) that it has completed its acquisition of Umbro Plc.
Nike’s Umbro takeover is an effort to consolidate its position in the football market where
Adidas has performed well. Last year, Nike’s CEO Mark Parker outlined a brave plan to
increase the company’s business to $23 billion in revenue by 2011. Will Nike do it or will the
Adidas-Reebok merger spoil its plans, still remains to be seen.
6.3 CASE STDY III: Case Study on merging of Kingfisher Airlines and Air
Deccan
Air Deccan Profile
Air Deccan, the airline was previously operated by Deccan Aviation. It was started by
Captain G. R. Gopinath and its first flight took off on 23 August 2003
Page 42
MERGER & ACQUISITION IN INDIA
from Hyderabad to Vijaywada. It was known popularly as the common man's airline, with is
logo showing two palms joined together to signify a bird flying. The tagline of the airline was
"Simpli-fly," signifying that it was now possible for the common man to fly. The dream of
Captain Gopinath was to enable "every Indian to fly at least once in his lifetime." Air Deccan
was the first airline in India to fly to second tier cities
like Hubballi, Mangalore, Madurai and Visakhapatnam from metropolitan areas like
Bangalore and Chennai.
Kingfisher Profile
Kingfisher Airlines is an airline group based in India. Its head office is Kingfisher House
in Vile Parle (East), Mumbai.[3][4] Kingfisher Airlines, through its parent company United
Breweries Group, has a 50% stake in low-cost carrier Kingfisher Red.
Kingfisher Airlines is one of six airlines in the world to have a 5-star rating from Skytrax,
along with Asiana Airlines, Cathay Pacific, Malaysia Airlines, Qatar Airways and Singapore
Airlines. Kingfisher operates more than 375 daily flights to 71 destinations, with regional and
long-haul international services. In May 2009, Kingfisher Airlines carried more than a million
passengers, giving it the highest market share among airlines in India.
Merger
Air Deccan airlines merged with Kingfisher Airlines and decided to operate as a single entity
from April, 2008. It would be known by a different name-Kingfisher Aviation. The merger is
based on recommendations of Accenture, the global consulting firm. KPMG was asked to do
the valuation and the swap ratio was decided accordingly. The merger came through on as
Vijay Mallya from Kingfisher airlines bought 26% of the stake in Air Deccan. The unification
Page 43
MERGER & ACQUISITION IN INDIA
of the two carriers had to be sanctioned not only by the two panels, but also by the
institutional investors, independent directors, and other shareholders. Air Deccan had four
independent directors-which included prominent persons like IIM Prof Thiru Naraya, Tennis
player Vijay Amritraj, and A K Ganguly, Former MD Nabisco Malaysia.
After the merger, the company has a combined fleet of 71 aircrafts, connects 70 destinations
and operates 550 flights in a day. The combined entity has a market share of 33%. Gopinath
would continue as the Executive Chairman and Malay would take charge as Vice Chairman.
The charter service of the respective airlines would be hived off and operate as a separate
entity. Post merger, KingFisher would operate as a single largest (private) airline in the sub-
continent. Besides, operational synergies (engineering, inventory management and ground
handling services, maintenance and overhaul), the management and staff of both the airlines
would be integrated. They would be stronger vis-a vis lessors, aircraft
manufacturers (Airbus in this case), and will also spend less on training and employees.Costs
would also reduce which is associated with maintenance of aircraft. The savings in cost would
be lower by about 4-5% (Rs 300 crores) (Business Standard, June 3, 2007, 4) which is a large
sum. It would result in a saving of 3 billion in the first year itself through the sharing of
aircraft and workers. (Business Standard, June 13, 2007, p-13.)
Further, by devising a more optimal routing strategy it could help in rationalizing the fares.
Before the merger Air Deccan recorded a net loss of Rs 213.17 crores on revenue of Rs437.82
crores for 2006-07. The company had also raised Rs 400 crores through an IPO inMay 2006.
The merger will create a more competitive business in scale and scope to emerge as market
leader.
Air Deccan began its operations with one aircraft and with one flight but after the alignment
with Kingfisher Airlines, has a total fleet of seventy one aircrafts-41 Airbus and 30 ATR
aircraft (Business Standard, June 7, 2007, p-8). It operates 537 flights (Business Standard,
June 3, 2007, p-4) and covers 70 destinations. It offers point to point service.
After the merger, it is expected that Kingfisher will focus more on the international routes
while Air Deccan will give it a wider domestic reach. Also Air Deccan plans to continue as a
low cost carrier while Kingfisher will function as a full-service carrier. There will be immense
Page 44
MERGER & ACQUISITION IN INDIA
synergies as both operate Airbus. The average age of the Air Deccan fleet is 6.1 years as of
Apr 2006.* Air Deccan operates a fleet of 43 aircraft comprising 20 brand new Airbus A320
aircraft and 23 ATR aircraft. The Airbus aircraft serve metro routes while ATR are utilized
for Tier II and III cites and also for small airports. The newly formed company plans to revisit
their fleet plan in coordination with each other to rationalize the fleet structure. Working on
these lines the company has already placed orders from the European aircraft major, Airbus
Industries for about 90 aircrafts. These
include five of the largest aircraft-A380, the first of which is slated to be delivered to
Kingfisher by 2011.
It is also India’s largest private sector helicopter charter company, which pioneered
helitourism in India. It offers point to point service. It has a secondary hub at
Chennai.*Deccan Aviation is the largest private sector helicopter charter company in India. It
has a fleet of 12 helicopters and small aircraft deployed in 8 bases across India. These bases
are at Bangalore, Mumbai, Delhi, Ranchi, Hyderabad, Surat, Katra and Colombo (Sri Lanka).
There are many changes that have taken place. This period of consolidation in the sky gives a
good signal to the airlines industry. It may lead to reducing the over-capacity existing in the
market and thereby stabilizing prices, increasing yields and bringing down costs. The era of
cheap fares might also come to an end.
Conclusion
It’s a capital intensive industry, With few scale efficiencies, Within a partly regulated
infrastructure, Free market entry Price competency This was the right decision to merge for
achieving all of the above objectives.
Page 45
MERGER & ACQUISITION IN INDIA
7. Finding, Infrences and Recommendation
7.1 Recent Mergers and Acquisitions
Mergers and Acquisitions have been very common incidents since the turn of the 20th century.
These are used as tools for business expansion and restructuring.
Through mergers the acquiring company gets an expanded client base and the acquired
company gets additional lifeline in the form of capital invested by the purchasing company.
7.2 Major Mergers and Acquisitions in India
Recently the Indian companies have undertaken some important acquisitions. Some of those
are as follows:
Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982
million.
Tata Steel acquired Corus Group plc. The acquisition deal amounted to $12,000
million.
Dr. Reddy's Labs acquired Betapharm through a deal worth of $597 million.
Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million.
Suzlon Energy acquired Hansen Group through a deal of $565 million.
The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of
$729 million.
Page 46
MERGER & ACQUISITION IN INDIA
HPCL acquired Kenya Petroleum Refinery Ltd. The deal amounted to $500 million.
VSNL acquired Teleglobe through a deal of $239 million.
When it comes to mergers and acquisitions deals in India, the total number was 287 from the
month of January to May in 2007. It has involved monetary transaction of US $47.37 billion.
Out of these 287 merger and acquisition deals, there have been 102 cross country deals with a
total valuation of US $28.19 billion.
7.3 Mergers and Acquisitions in India
The process of mergers and acquisitions has gained substantial importance in today's corporate
world. This process is extensively used for restructuring the business organizations.
In India, the concept of mergers and acquisitions was initiated by the government bodies.
Some well known financial organizations also took the necessary initiatives to restructure the
corporate sector of India by adopting the mergers and acquisitions policies.
The Indian economic reform since 1991 has opened up a whole lot of challenges both in the
domestic and international spheres. The increased competition in the global market has
prompted the Indian companies to go for mergers and acquisitions as an important strategic
choice.
The trends of mergers and acquisitions in India have changed over the years. The immediate
effects of the mergers and acquisitions have also been diverse across the various sectors of the
Indian economy.
India has emerged as one of the top countries with respect to merger and acquisition deals. In
2007, the first two months alone accounted for merger and acquisition deals worth $40 billion
in India.
Page 47
MERGER & ACQUISITION IN INDIA
7.3.1 Mergers and Acquisitions across Indian Sectors
Among the different Indian sectors that have resorted to mergers and acquisitions in recent
times, telecom, finance, FMCG, construction materials, automobile industry and steel industry
are worth mentioning.
With the increasing number of Indian companies opting for mergers and acquisitions, India is
now one of the leading nations in the world in terms of mergers and acquisitions.
The merger and acquisition business deals in India amounted to $40 billion during the initial 2
months in the year 2007. The total estimated value of mergers and acquisitions in India for
2007 was greater than $100 billion. It is twice the amount of mergers and acquisitions in 2006.
7.3.2 Mergers and Acquisitions in India: The Latest Trends
Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was not so
common. The situation has undergone a sea change in the last couple of years. Acquisition of
foreign companies by the Indian businesses has been the latest trend in the Indian corporate
sector.
There are different factors that played their parts in facilitating the mergers and acquisitions in
India. Favorable government policies, buoyancy in economy, additional liquidity in the
corporate sector, and dynamic attitudes of the Indian entrepreneurs are the key factors behind
the changing trends of mergers and acquisitions in India.
The Indian IT and ITES sectors have already proved their potential in the global market. The
other Indian sectors are also following the same trend. The increased participation of the
Indian companies in the global corporate sector has further facilitated the merger and
acquisition activities in India.
Page 48
MERGER & ACQUISITION IN INDIA
7.4 Mergers and Acquisitions in Banking Sector
Mergers and acquisitions in banking sector have become familiar in the majority of all the
countries in the world.
A large number of international and domestic banks all over the world are engaged in merger
and acquisition activities. One of the principal objectives behind the mergers and acquisitions
in the banking sector is to reap the benefits of economies of scale. With the help of mergers
and acquisitions in the banking sector, the banks can achieve significant growth in their
operations and minimize their expenses to a considerable extent.
Another important advantage behind this kind of merger is that in this process, competition is
reduced because merger eliminates competitors from the banking industry. Mergers and
acquisitions in banking sector are forms of horizontal merger because the merging entities are
involved in the same kind of business or commercial activities. Sometimes, non-banking
financial institutions are also merged with other banks if they provide similar type of services.
In the context of mergers and acquisitions in the banking sector, it can be reckoned that size
does matter and growth in size can be achieved through mergers and acquisitions quite easily.
Growth achieved by taking assistance of the mergers and acquisitions in the banking sector
may be described as inorganic growth. Both government banks and private sector banks are
adopting policies for mergers and acquisitions. In many countries, global or multinational
banks are extending their operations through mergers and acquisitions with the regional banks
in those countries.
These mergers and acquisitions are named as cross-border mergers and acquisitions in the
banking sector or international mergers and acquisitions in the banking sector. By doing this,
global banking corporations are able to place themselves into a dominant position in the
banking sector, achieve economies of scale, as well as garner market share. Mergers and
acquisitions in the banking sector have the capacity to ensure efficiency, profitability and
synergy. They also help to form and grow shareholder value.
Page 49
MERGER & ACQUISITION IN INDIA
In some cases, financially distressed banks are also subject to takeovers or mergers in the
banking sector and this kind of merger may result in monopoly and job cuts. Deregulation in
the financial market, market liberalization, economic reforms, and a number of other factors
have played an important function behind the growth of mergers and acquisitions in the
banking sector. Nevertheless, there are many challenges that are still to be overcome through
appropriate measures. Mergers and acquisitions in banking sector are controlled or regulated
by the apex financial authority of a particular country. For example, the mergers and
acquisitions in the banking sector of India are overseen by the Reserve Bank of India (RBI).
Change in scenario of Banking Sector
1. The first mega merger in the Indian banking sector that of the HDFC Bank with Times
Bank, has created an entity which is the largest private sector bank in the country.
2. The merger of the city bank with Travelers Group and the merger of Bank of America with
Nation Bank have triggered the mergers and acquisition market in the banking sector world
wide.
3. Europe and Japan are also on their way to restructure their financial sector thought merger
and acquisitions. Merger will help banks with added money power, extended geographical
reach with diversified branch Network, improved product mix, and economies of scale of
operations. Merger will also help banks to reduced them borrowing cost and to spread total
risk associated with the individual banks over the combined entity. Revenues of the
combine entity are likely to shoot up due to more effective allocation of bank funds.
4. ICICI Bank has initiated merger talks with Centurion Bank but due to difference arising
over swap ration the merger didn’t materialized. Now UTI Bank is egeing Centurion Bank.
The proposed merger of UTI Bank and Centurion Bank will make them third largest private
banks in terms of size and market Capitalization State Bank of India has also planned to
merge seven of its associates or part of its long-term policies to regroup and consolidate its
position. Some of the Indian Financial Sector players are already on their way for mergers
to strengthen their existing base.
Page 50
MERGER & ACQUISITION IN INDIA
5. In India mergers especially of the PSBS may be subject to technology and trade union
related problem. The strong trade union may prove to be big obstacle for the PSBS mergers.
Technology of the merging banks to should complement each other NPA management.
Management of efficiency, cost reduction, tough competition from the market players and
strengthen of the capital base of the banks are some of the problem which can be faced by
the merge entities. Mergers for private sector banks will be much smoother and easier as
again that of PSBS.
7.5 Mergers and Acquisitions in Telecom Sector
The number of mergers and acquisitions in Telecom Sector has been increasing significantly.
Telecommunications industry is one of the most profitable and rapidly developing industries
in the world and it is regarded as an indispensable component of the worldwide utility and
services sector. Telecommunication industry deals with various forms of communication
mediums, for example mobile phones, fixed line phones, as well as Internet and broadband
services. Currently, a slew of mergers and acquisitions in Telecom Sector are going on
throughout the world.
The aim behind such mergers is to attain competitive benefits in the telecommunications
industry. The mergers and acquisitions in Telecom Sector are regarded as horizontal mergers
simply because of the reason that the entities going for merger or acquisition are operating in
the same industry that is telecommunications industry.
In the majority of the developed and developing countries around the world, mergers and
acquisitions in the telecommunications sector have become a necessity. This kind of mergers
also assists in creation of jobs. Both transnational and domestic telecommunications services
providers are keen to try merger and acquisition options because this will help them in many
ways.
Page 51
MERGER & ACQUISITION IN INDIA
They can cut down on their expenses, achieve greater market share and accomplish market
control. Mergers and acquisitions in the telecommunications sector have been showing a
prosperous trend in the recent past and the economists are advocating that they will continue
to do so.
The majority of telecommunication services providers have understood that in order to grow
globally, strategic alliances and mergers and acquisitions are the principal devices.
Private sector investment and FDI (Foreign Direct Investment) have also boosted the growth
of mergers and acquisitions in the telecommunications sector. Over the last few years, a
phenomenal growth has been witnessed in the number of mergers and acquisitions taking
place in the telecommunications industry.
The reasons behind this development include the following:
• Deregulation
• Introduction of sophisticated technologies (Wireless land phone services)
• Innovative products and services (Internet, broadband and cable services)
Economic reforms have spurred the growth in the mergers and acquisitions industry of the
telecommunications sector to a satisfactory level. Mergers and acquisitions in Telecom Sector
can also have some negative effects, which include monopolization of the telecommunication
products and services, unemployment and others.
However, the governments of various countries take appropriate steps to curb these problems.
In countries like India, mergers and acquisitions have increased to a considerable level from
the mid 1990s. In the United States, the mergers and acquisitions in the telecommunications
sector are going on in a full-fledged manner.
The mergers and acquisitions in the telecommunications sector are governed or supervised by
the regulatory authority of the telecommunication industry of a particular country, for instance
the Telecom Regulatory Authority of India or TRAI. The regulatory authorities always keep a
tab on the telecommunications industry so that no monopoly is formed.
Page 52
MERGER & ACQUISITION IN INDIA
Significant Mergers and Acquisitions in Telecom Sector
Following are the important mergers and acquisitions that took place in the
telecommunications sector:
• The takeover of Mobilink Telecom by Broadcom. This can also be described as a
suitable example of product extension merger
• AT&T Inc. taking over BellSouth
• The acquisition of Scription Inc. by Nuance Communications Inc.
• The taking over of Hutchison Essar by the Vodafone Group. Now it has become
Vodafone Essar Limited
• China Communications Services Corporation Ltd. taking over China International
Telecommunication Construction Corporation
• The acquisition of Ameritech Corporation by SBC (Southwestern Bell
Corporation) Communications
• The merger of GTE (General Telephone and Electronics) with Bell Atlantic
• The acquisition of US West by Qwest Communications
• The merger of MCI Communications Corporation with WorldCom
Following are the benefits provided by the mergers and acquisitions in the telecommunications
industry:
• Building of infrastructure in a more convenient way
• Licensing options for mergers and acquisitions are often found to be easier
• Mergers and acquisitions offer extensive networking advantages
• Brand value
• Bigger client base
• Wide array of products and services
Page 53
MERGER & ACQUISITION IN INDIA
7.6 Mergers and Acquisitions in Pharmaceutical Sector
There are several causes of mergers and acquisitions in the global pharmaceutical industry.
Among them are the absence of proper research and development facilities, gradual expiry of
patents and competition within specific pharmaceutical genres. The high profile product
recalls have also played a major role in the continuing mergers and acquisitions in the
industry.
Mergers and Acquisitions in Indian Pharmaceutical Sector
In the Indian pharmaceutical market there are a number of companies that have entered into
merger and acquisition agreements in the context of the global market scenario. These
companies would be selling off the non-core business divisions like Over-the-Counter. This is
expected to further the consolidation in the mid-tier as far as the pharmaceutical industry in
Europe is concerned.
The sheer number of companies acquiring parts of other companies has shown that the Indian
pharmaceutical industry is ready to be a dominant force in this scenario. In the recent times
Nicholas Piramal has taken the ownership of 17% of Biosyntech that is a major
pharmaceutical packing organization in Canada.
Torrent has got the ownership of Heumann Pharma, a general drug making company and,
formerly, a subsidiary of Pfizer. Matrix has acquired Docpharma, a major pharmaceutical
company of Belgium.
Sun Pharmaceutical Industries is set to make acquisitions in pharmaceutical companies in the
US and has set aside $450 million to execute these plans. In Bengaluru, Strides Arcolab has
aimed at acquiring 70 percent in a pharmaceutical facility in Italy that is worth $10 million.
Opportunities for Pharmaceutical Companies
Page 54
MERGER & ACQUISITION IN INDIA
There are a number of opportunities for the major pharmaceutical products and services
providers in the Indian pharmaceutical sector as the price controls have been relaxed and there
have been significant changes in the medicinal requirements of the Indians.
The manufacturing base in India is also strong enough to support the major international
pharmaceutical companies from the performance perspective.
This may be said as the Indian pharmaceutical market is varied as well as economical. It is
expected that in the coming years the Indian pharmaceutical companies would be executing
more mergers and acquisitions. It is expected that the regulated pharmaceutical markets in the
United States and Europe would be the main areas of operation.
In the recent years the Indian pharmaceutical companies have been venturing into mergers and
acquisitions so that they can gain access to the big names of the international pharmaceutical
scenario.
One of the major features of the mergers and acquisitions in the pharmaceutical sector of the
Asia-Pacific region has been the integration of the local pharmaceutical companies. This has
happened especially in India and China. Acquisition has made it convenient for a number of
companies to do business in various pharmaceutical markets. Previously the pharmaceutical
markets of Europe were closed to the companies of other countries due to the difference in
language. There were also other problems for companies like the trade barriers for instance.
Mergers and Acquisitions in Global Pharmaceutical Sector
This deal was worth $7.9 billion. In the same period the Asia-Pacific region has experienced
the highest percentage of growth in the mergers and acquisitions in pharmaceutical sector. In
the same period the rate of growth in the Asia-Pacific region has been 37%. In Western
Europe the rate of growth has been 11% and in North America it has been 20%. The
pharmaceutical market in Eastern Europe has not experienced any increase in the rate of
mergers and acquisitions.
Page 55
MERGER & ACQUISITION IN INDIA
Since the year 2004 there has been an increase in the mergers and acquisitions in the global
pharmaceutical sector. This was reflective of the increase in the mergers and acquisitions in
other industries at the same period. There was 20% increase in the number of deals, which
stood at 1,808. There were eight deals with the value of more than $1 billion. This was three
more than 2003. The total financial value of the deals was $112 billion and this was an
increase of 53%. However, these figures do not include the acquisition of Aventis by Sanofi-
Synthelabo that was worth $60 billion. This is the biggest acquisition in the pharmaceutical
industry after the merger of Pharmacia and Pfizer in 2002.
7.7 Inferences
Motivations for mergers and acquisitions
Mergers and acquisitions are caused with the support of shareholders, manager’s ad promoters
of the combing companies. The factors, which motivate the 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) From the standpoint of shareholders:-
Investment made by shareholders in the companies subject to merger should enhance in value.
The 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 viz. from the gains and achievements of
the company i.e. through
(a) Realization of monopoly profits;
(b) Economies of scales;
(c) Diversification of product line;
Page 56
MERGER & ACQUISITION IN INDIA
(d) Acquisition of human assets and other resources not available otherwise;
(e) Better investment opportunity in combinations.
One or more features would generally be available in each merger where shareholders may
have attraction and favor merger.
(2) From the standpoint of managers
Managers 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.
Mergers 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 becomes difficult.
(3) Promoter’s gains
Mergers do offer to company promoters the advantage of increasing the size of their company
and the financial structure and strength. They can convert a closely held and private limited
company into a public company without contributing much wealth and without losing control.
(4) Benefits to general public
Impact of mergers on general public could be viewed as aspect of benefits and costs to:
(b) Consumer of the product or services;
(c) Workers of the companies under combination;
(d) General public affected in general having not been user or consumer or
the worker in the companies under merger plan.
(a) Consumers
Page 57
MERGER & ACQUISITION IN INDIA
The economic gains realized from mergers are passed on to consumers in the form of lower
prices and better quality of the product which directly raise their standard of living and quality
of life.
The balance of benefits in favour of consumers will depend upon the fact whether or not the
mergers increase or decrease competitive economic and productive activity which directly
affects the degree of welfare of the consumers through changes in price level, quality of
products, after sales service, etc.
(b) Workers community
The merger or acquisition of a company by a conglomerate or other acquiring company may
have the effect on both the sides of increasing the welfare in the form of purchasing power and
other miseries of life. Two sides of the impact as discussed by the researchers and
academicians are:
1. Mergers with cash payment to shareholders provide opportunities for them to invest
this money in other companies which will generate further employment and growth to
uplift of the economy in general.
2. Any restrictions placed on such mergers will decrease the growth and investment
activity with corresponding decrease in employment. Both workers and communities
will suffer on lessening job opportunities, preventing the distribution of benefits
resulting from diversification of production activity.
(c) General public
Mergers result into centralized concentration of power. Economic power is to be understood as
the ability to control prices and industries output as monopolists. Such monopolists affect
social and political environment to tilt everything in their favour to maintain their power ad
expand their business empire. These advances result into economic exploitation. But in a free
economy a monopolist does not stay for a longer period as other companies enter into the field
Page 58
MERGER & ACQUISITION IN INDIA
to reap the benefits of higher prices set in by the monopolist. This enforces competition in the
market as consumers are free to substitute the alternative products.
Therefore, it is difficult to generalize that mergers affect the welfare of general public
adversely or favorably. Every merger of two or more companies has to be viewed from
different angles in the business practices which protects the interest of the shareholders in the
merging company and also serves the national purpose to add to the welfare of the employees,
consumers and does not create hindrance in administration of the Government polices.
8. Conclusions
The following conclusions have been drawn from the study:
1. Post liberalization, most Indian business houses are undergoing major structural changes,
the level of restructuring activity is increasing rapidly and the consolidations through M&A
have reached every corporate boardroom.
2. Most of the mergers that took place in India during the last decade seemed to have followed
the consequence of mergers in India corroborate the conclusions of research work in U.S.
with most of the M&A are taking place in India to improve the size to withstand
international competition which they have been exposed to in the Post-liberalization
regime.
3. The M&A activity is undertaken with the objective of financial restructuring and to avail of
the benefits of financial restructuring. Nowadays, before financial restructuring, it has
become a pre-requisite that companies need to merge or acquire. Moreover, financial
Page 59
MERGER & ACQUISITION IN INDIA
restructuring becomes easier because of M&A. the small companies cannot approach
international markets without becoming big i.e. without merging or acquiring.
4. Market capitalalisation of a company sometimes is found to be going up or down without
any corresponding change in the EVA and MVA since the stock may be strong because of
the general bullish scenario in the market, s is observed in most of the cases in our study.
9. SUMMARY
Mergers and takeovers are permanent form of combinations which vest in management
complete control and provide centralized administration which are not available in
combinations of holding company and its partly owned subsidiary.
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 company gain in the long run with the growth of
the company not only due to synergy but also due to “boots trapping earnings”.
Page 60
MERGER & ACQUISITION IN INDIA
10. BIBLIOGRAPHY
Books: -
• Merger, Acquisition and corporate restructuring in India (Rachna jawa)
• Financial services 3rd edition (M.Y.khan)
Website: -
• www.google.com
• www.wikipedia.com
• www.icicidirect.com
• www.mergersindia.com
• www.mergerdigest.com
Page 61
MERGER & ACQUISITION IN INDIA
Page 62