International Business

Assignment: Mergers & Acquisitions

Submitted toProf. V. K. Bhalla

Submitted By:N 23: Jitender Bansal N 43: Rajeev Kr Singh N 51: Rohit Sehgal N 65: Vinai Kr Kanaujia S 09: Anil KandpalS 39: Nitin KhannaS 41: Pradeep KumarS 56: Satya Prakash

JhaS 77: Arya Krishan

Bhola

15 February 2010

MERGERS &

ACQUISITIONS

Contents

M&A: INTRODUCTION....................................................................................................................4

Rationale for M&A...........................................................................................................................5

M&A Motives.....................................................................................................................................6

Reasons M&A Deals Fall Through............................................................................................10

Distinction between Mergers and Acquisitions...................................................................17

Types of Mergers...........................................................................................................................19

CASE STUDIES................................................................................................................................22

Tata Motors’ Acquisition of Jaguar and Land Rover....................................................................22

The Exxon-Mobil Merger.............................................................................................................36

The Vodafone acquisition of Hutchinson Essar............................................................................46

HP-Compaq Merger.....................................................................................................................52

Hindalco-Novelis Acquisition.......................................................................................................56

Kingfisher & Air Deccan Merger...................................................................................................67

Delta Airlines and Northwest Airlines Merger.............................................................................79

Adidas – Reebok Merger..............................................................................................................90

HDFC Bank Ltd and Centurion Bank of Punjab Merger................................................................97

Don’t integrate your acquisitions, partner with them....................................................113

M&A in India: Opportunities & Challenges.........................................................................118

A Launch pad for the Indian Multinational.........................................................................125

M&A: Valuation Matters............................................................................................................127

M&A Regulations in India.........................................................................................................129

M&A: INTRODUCTION

Mergers & Acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, investment bankers arrange M&A transactions which bring separate companies together to form larger ones. When they’re not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spin offs, carve-outs or tracking stocks.

Competition is fierce, and companies are teaming up to survive in an industry where specialized knowledge is king. The prime objective of a firm is to grow profitably. The growth can be achieved either through the process of introducing or developing new products or by expanding or enlarging the capacity of existing products. M&A are quite important forms of external growth. Deals can be worth hundreds of millions, or even billions, of dollars. They can dictate the fortunes of companies involved for years to come. For a CEO, leading an M&A can represent the highlight of a whole career. No wonder, one hears about so many of these transactions; they happen all the time. Next time you flip open the newspaper’s business section, odds are good that at least one headline will announce some kind of M&A transaction.

Sure, M&A deals grab headlines, but what does this all mean to the investors? In the section ahead, we discuss the forces that drive companies to buy or merge with others, or to sell parts of their own businesses. Once one knows the different ways in which these deals are executed, one will have a better idea of whether one should cheer or weep when a company one owns buy another company – or is bought by one. One will also be aware of the tax consequences for companies & for investors. One will also come to know that the successful integration of the enterprise networks of the merger partners is the most critical part of a business merger. 

Rationale for M&A

One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A. 

This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. 

The last decade of 20th century has seen substantial increase in both number and volume of M&A activity. In fact, consolidation through Mergers & Acquisitions has become a major trend across the globe. This wave was driven by globalisation, liberalization, technological changes, and market deregulation and liberalization. Almost all industries are going through reorganization and consolidation. M&A activity has been predominant in sectors like steel, aluminium, cement, auto, banking and finance, computer software, pharmaceuticals, consumer durables, food products, agro-chemicals, textiles, etc. Generally, the synergistic gains by M&A activity accrue from more efficient management, economies of scale and scope, improved production techniques, combination of complementary resources, redeployment of assets to more profitable uses, the exploitation of market power or any number of value enhancing mechanisms that fall under the rubric of corporate synergy. It’s an indispensable strategic tool for expanding product portfolios, entering new markets, acquiring new technologies and building new generation organization with power and resources to compete on a global basis.

M&A Motives Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following: 

Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. 

Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. 

Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Staff reductions - Mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. 

Achieving synergy is easier said than done - it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two.

Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers - who have much to gain from a successful M&A deal - will try to create an image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price. Why M&A may fail has been dealt in a later section of this report.

Mergers or amalgamation, result in the combination of two or more companies into one, wherein the merging entities lose their identities. No fresh investment is made through this process. However, an exchange of shares takes place between the entities involved in such a process. Generally, the company that survives is the buyer that retains its identity and the seller company is extinguished.

Opportunities to grow and the options for future growth are the two main drivers which are making companies in the west look increasingly at Indian companies.

The take over of Ranbaxy by Daichi, or DoCoMo buying a stake in Tata, are the two prime examples of Japanese companies looking at India. While the pace of inbound M&As is likely to continue, the faster pace of recovery in developing markets could also see more outbound M&A activity.

As Indian companies embrace the growth path once again, investment bankers also point out that domestic promoters will try to fortify holdings in their companies, and we could see more restructuring and consolidation between group companies. And they are taking innovative steps to protect their interests.

The de-merging of the cement division by Grasim into a separate company and the subsequent takeover by Ultra-tech, Grasim’s subsidiary, is a prime example of inter-se restructuring taking place. By retaining Grasim’s stake in the de-merged entity, Grasim has also ensured that investors’ interest remains in the company. Had the entire cement division been de-merged into a separate entity, Grasim would have suffered huge erosion in market value. Tata Chemicals’ takeover of Rallis India is another instance of internal group restructuring.

Globally, things have started stabilising despite the upheavals witnessed over the past 18 months which saw a marked slowdown in the number of deals being pushed through. The total value of deals announced by the top investment bankers in 2009 is nearly 50% lower, at $33 billion, compared to $65 billion in 2008. Till June 2009, it was mostly restructuring deals. Now it is a two-way traffic with both inbound and outbound deals looking up. Indian assets are again looking attractive for Japanese and European companies. More deals could be witnessed in telecom, IT and pharma sectors. While it will be mostly inwards in the case of pharma, auto ancillaries will once again start looking outwards. The cement sector could see some consolidation, he says. But these will be small deals with companies having capacities of 2-5 mmt.The buoyancy in the capital market could result in more activity in the equity capital market as well as the debt market. High global equity could see more money backing the Indian growth companies, he says. One sector which could see more debt being raised is the power sector.

Mukesh Ambani’s tentative offer to buy control of the bankrupt petrochemicals company LyondellBasell could turn Reliance industries into a major multinational in a single deal. It’s hard to guess which Indian companies & industries are going to achieve the transition to power or dominance in world markets. It is even harder to predict how important cross border acquisitions will be in making or breaking the global ambitions of Indian entrepreneurs.

How are multinationals made? The US produced its first generation of MNC giants in a domestic market that was vast compared with the rest of the world. These companies – in cars, chemicals, finance, food, telecom- were helped by the political weight of the US in world affairs. Companies from small economies like Sweden and Switzerland had a different incentive to become MNCs, because their home markets were small. Disruptive technologies offer yet another route to going multinational. And, as shown by Laxmi Mittal, it can be done just by buying at the right time.

All successful MNCs have been built using a formidable accumulation of skills in management, technology, manufacturing or service provision, and marketing. India’s IT services industry, which checks all these boxes, is the obvious frontrunner for multinational stardom.

However, it may be years before many Indian companies evolve into truly multinational companies. The huge home market is far from fully developed. Indian promoter led groups also have uniquely broad opportunities for deploying capital at home.

Reasons M&A Deals Fall Through It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. 

Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete. 

Flawed Intentions

For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit.

A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later.

On the other side of the coin, mergers can be driven by generalized fear. Globalisation, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world.

The Obstacles to Making it Work

Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal.

The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.

A failed merger can be understood in two ways: Qualitatively, whatever the companies had in mind that caused them to merge in the first place doesn’t work out that way in the end. Quantitatively, shareholders suffer because operating results deteriorate instead of improve.

More insight into the failure of mergers is found in the highly acclaimed study from McKinsey, a global consultancy. The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. 

Here’s a list of notorious failed mergers that evaluated in one way or another: AOL/Time Warner, HP/Compaq, Alcatel/Lucent, Daimler Benz/Chrysler, Mattel/The Learning Company, Novell/WordPerfect, and National Semiconductor/Fairchild Semiconductor.

Some failed so spectacularly that the combined company went down the tubes, others resulted in the demise of the executive(s) that masterminded them, some later reversed themselves, and others were just plain dumb ideas that were doomed from the start.

But remember, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations. 

If the transaction is made with stock instead of cash, then it's not taxable. There is simply an exchange of share certificates. The desire to steer clear of the tax man explains why so many M&A deals are carried out as stock-for-stock transactions. 

When a company is purchased with stock, new shares from the acquiring company's stock are issued directly to the target company's shareholders, or the new shares are sent to a broker who manages them for target company shareholders. The shareholders of the target company are only taxed when they sell their new shares. 

When the deal is closed, investors usually receive a new stock in their portfolios - the acquiring company's expanded stock. Sometimes investors will get new stock identifying a new corporate entity that is created by the M&A deal. 

Mergers and acquisitions (M&A) is an important way for companies to grow and become stronger and better organizations.

Still, bad deals happen, and this often means a major loss in value for shareholders. Anticipated synergies may not materialize, the two entities may clash, cost savings projections may be overstated or turf wars may ensue. Here are eight common M&A mistakes that can wreak havoc on shareholders' portfolios.

Pitfall No.1: Smart people are working up this deal - it must be a good one: Employees and deal champions are not celebrated when a deal is killed. In fact, the hundreds (and often times thousands) of hours spent on a deal are often viewed as a tremendous waste of time if the deal does not go through. Investment bankers, corporate development officers, transaction professionals and consultants are heavily compensated when deals close. Massive bonuses are paid out. Glory, visibility and promotions are doled out when a transaction closes. Hourly professionals get lots of billable hours. Just because a lot of people are pushing for a deal does not mean there are no strategic, operational and financial pitfalls that make a prospective deal a bad one.

Pitfall No.2: There seems to be one good reason to do this deal: When contemplating a business combination, there should ideally be multiple compelling reasons to do the deal. Management cannot simply rely on projected cost savings from the elimination of redundant jobs. Besides, there is only so much cash to be saved from cost-related synergies. The most attractive deals focus on growth of revenue and profitability. For instance, an acquirer with superior products and services can buy another company with access to major and global customers.

Such a move can translate to strong growth for the newly combined entity for years to come. In another instance, the acquiring company can buy a target company in a region or market that offers potential for high growth. Buying a target should make an acquiring company a lot stronger, not just theoretically stronger. Too much capital, reputation, cost and effort go into putting together a deal to achieve just meagre returns, if any at all.

Pitfall No.3: The balance sheet is not overflowing with cash, so a good deal is put off: If the company's stock has a high price, it can use its equity to purchase the shares of the target company. This can be excellent way to execute an acquisition, especially if the target’s shares are trading at a low multiple. If there is liquidity in the markets, the company can raise money for an acquisition by selling equity or by issuing bonds. Alternatively, there are numerous investment firms willing to loan the funds necessary in order to make a deal push through. Once the synergies are realized (after the transaction), the company can regain the cash in order to pay back such loans.

Pitfall No.4: The Company appears to have healthy deal flow: No single investment bank, professional services firm, private equity group or company sees all the deal flow that surface in any given year. An important metric for deal professionals is quantity of deal flow. If they wish to review more prospective deals, they should establish and maintain good relationships with investment banks, industry insiders and services professionals. Once the message is out that the company is looking to acquire complementary entities, people will approach - and too often overwhelm - the corporate development officer with ideas. Unfortunately, the deal champion too often will be presented with bad ideas. That comes with the territory. It is helpful to have a summary of the company's acquisition criteria readily available. Solid rapport with positioned industry insiders can help generate quality deal flow. Additionally, contacts from distant regions can be especially helpful if those regions present growth opportunities for the acquiring company.

Pitfall No.5: The CFO or general counsels are/ can act as M&A champions: CFOs, general counsels, controllers and other key members of the leadership team are already swamped by their full-time jobs. Tasking them to head M&A initiatives can lead the company to miss out on good acquisition opportunities. They simply do not have time to do the job properly. It is preferable to have a dedicated and focused corporate development officer. When things get busy, third party advisors and consultants can be hired to shore up resources. The deal champion should also have enough rapport with the company's division managers, accountants and lawyers in order to secure their commitment once there

is a prospective deal. These professionals also have full-time responsibilities. However, their involvement is critical at several stages of the M&A process.

Pitfall No.6: The information provided by seller has not be thoroughly analysed: For a variety of reasons, sellers can provide inaccurate numbers or a rosy future for their business. Potentially significant liabilities and risks may not be presented. For instance, there may be environmental problems within the target's facilities; possible new products may possess inherent defects. There might be unusual risk of litigation. Proper due diligence is critical for the vast majority of deals. Fortunately the buyer can exercise caution and thoroughness during the review phase and put in place the correct people to properly assess the target. Subject matter experts can be brought in to mitigate risks facing the buyer. Additionally, management can proactively communicate with its customers and employees - when appropriate - to provide assurance that the deal strengthens the company and improves the lot of its various stakeholders. 

Pitfall No.7: The decision becomes a strictly a left-brained process: Deal professionals will assess a voluminous amount of information to include a variety of models, valuation analyses, charts and graphs. It is easy to treat a prospective transaction as purely a mechanical, scientific process. However, the people aspect and "art side" of any deal are always critical. Cultural congruence can provide that extra assurance that combining two companies make sense. Deal professionals must establish and continue to maintain a rapport with a variety of personalities and exercise tact despite the long hours involved. After all, the owners of the target company do not have to sell the company to a prospective buyer. Deal-making involves a long and tedious courtship, and successful M&A champions understand this, but good deals can collapse as a result of unnecessary and avoidable ego clashes.

Pitfall No.8: There's no post-integration plan: The time to put in place a post-integration plan is prior to closing, not after closing. The buyer's management team should set a roadmap complete with action items, people responsible and timetables for achieving the goals set forth in the roadmap. For value to be created after the transaction, management and employees must execute and realize the revenue and cost synergies forecasted for the deal. Ideas must now transition into action and results. Ultimately, in order for the deal to make sense, the newly combined entity must be successful in gaining stronger positioning within the competitive dynamics of its industry.

DAIMLERCHRYSLER MERGER, A CULTURAL MISMATCH?A recent example of such intercultural failure has been that of Daimler-Chrysler.  Recent articles in the Wall Street Journal and Business Week suggest however that Daimler-Chrysler underestimated the influence of culture, and due to culture clash, almost two years later is still struggling to become a unified global organization.

In the period leading up to the Daimler-Chrysler merger, both firms were performing quite well (Chrysler was the most profitable American automaker), and there was widespread expectation that the merger would be successful. People in both organizations expected that their “merger of equals” would allow each unit to benefit from the other’s strengths and capabilities. Stockholders in both companies overwhelmingly approved the merger and the stock prices and analyst predictions reflected this optimism.

Performance after the merger, however, was entirely different, particularly at the Chrysler division. In the months it was found that the high rate of turnover among management at acquired firms was not related to poor prior performance, indicating that the turnover was not due to the pruning of under performing management at the acquired firm.

Following the merger, the stock price fell by roughly one half since the immediate post merger high. The Chrysler division, which had been profitable prior to the merger, began losing money shortly afterwards and was expected to continue to do so for several years. In addition, there were significant layoffs at Chrysler following the merger (that had not been anticipated prior to the merger. Differences in culture between the two organizations were largely responsible for this failure.

Operations and management were not successfully integrated as “equals” because of the entirely different ways in which the Germans and Americans operated: while Daimler-Benz’s culture stressed a more formal and structured management style, Chrysler favoured a more relaxed, freewheeling style (to which it owed a large part of its pre merger financial success). In addition, the two units traditionally held entirely different views on important things like pay scales and travel expenses. As a result of these differences and the German unit’s increasing dominance, performance and employee satisfaction at Chrysler took a steep downturn. There were large numbers of departures among key Chrysler executives and engineers, while the German unit became increasingly dissatisfied with the performance of the Chrysler division. Chrysler employees, meanwhile, became extremely dissatisfied with what they perceived as the source of their division’s problems: Daimler’s

attempts to take over the entire organization and impose their culture on the whole firm failed.

While cultural conflict often plays a large role in producing merger failure, it is often neglected when the benefits of a potential merger are examined. For instance, following the announcement of the AOL Time Warner deal, a front-page Wall Street Journal article (Murray et al. 2000) discussed possible determinants of success or failure for the merger (such as synergies, costs, competitor reaction, and so forth). The only clear discussion of possible cultural conflict is a single paragraph (out of a 60-column-inch article) revealing how the “different personalities” of AOL’s Steve Case and Time Warner’s Gerald Levin reflect cultural differences between the two firms. A similar article included a single paragraph entitled “What could go wrong with the synergy strategy.” Moreover, in these sorts of short, cursory, obligatory discussions of possible cultural conflict, there is rarely discussion of what steps might be taken if there is dramatic conflict. While culture may seem like a “small thing” when evaluating mergers, compared to product-market and resource synergies, we think the opposite is true because culture is pervasive. It affects how the everyday business of the firm gets done—whether there is shared understanding during meetings and in promotion policy, how priorities are set and whether they are uniformly recognized, whether promises that get made are carried out, whether the merger partners agree on how time should be spent, and so forth.

 The guiding hypothesis is that an important component of failure is conflict between the merging firms’ cultural conventions for taking action, and an underestimation by merger partners of how severe, important, and persistent conflicts are. Cultural conventions emerge to make individual firms more efficient by creating a shared understanding that aids communication and action. However, when two joined firms differ in their conventions, this can create a source of conflict and misunderstanding that prevents the merged firm from realizing economic efficiency

Such discourse is highlighting the need for more intercultural training both within the framework of mergers and acquisitions and for key personnel such as managers and HR departments. In both instances culture is being ignored rather than being embraced and used positively.

When intercultural differences are ignored during the evaluation and negotiation stages of a merger, integration inevitably fails.  He adds that the manner in which an organization handles intercultural challenges is directly correlated with the performance of the merger in the post-

integration stage and can mean the difference between long-term success or failure.

The Bottom Line:

Many studies have shown that only about half of acquisitions are considered successful. Management and employees must work together with the newly acquired entity to realize the various strategic and operational synergies the company expects out of the deal.

Distinction between Mergers and Acquisitions

Although Mergers and Acquisitions are often uttered in the same breath and used as though they were synonymous, these terms mean slightly different things. 

Merger: A merger is a transaction that results in the transfer of ownership and control of a corporation; a transaction where two firms agree to integrate their operations because they have resources and capabilities that together may create stronger competitive advantage. The term ‘merger’ refers to a combination of two or more companies into a single company and this combination may be either through consolidation or absorption.

A consolidation is a combination of two or more companies into a third entirely new company formed for the purpose. The new company absorbs the assets, and possibly liabilities, of both original companies which cease to exist. When two firms merge, stocks of both are surrendered and new stocks in the name of new company are issued. In case of absorption one company absorbs another company i.e. it purchases either the assets or shares of that company.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, Daimler-Chrysler, was created. 

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. 

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. 

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. 

Acquisition: An acquisition may be only slightly different from a merger. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. Generally, the firm which takes over is the bigger and stronger one. The relatively less powerful, smaller firm loses its existence, and the firm taking over, runs the whole business with its own identity. Unlike the merger, stocks of the acquired firm are not surrendered, but bought by the public prior to the acquisition, and continue to be traded in the stock market.

Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile. 

In an acquisition, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business. 

Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. 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. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares. 

Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved. 

Types of Mergers From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging: 

Horizontal mergers 

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 the same product lines and markets.

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

Examples: Boeing-McDonnell Douglas; Staples-Office Depot (unconsummated); Chase Manhattan-Chemical Bank; Lipton India and Brook Bond; Bank of Madurai & ICICI Bank; BSES Ltd. - Orissa Power Supply Company; ACC - Damodar Cement

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 investment, getting rid of competition, minimizing the advertising expenses, enhancing the market capability and to get more dominance on the market.

Nevertheless, 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.

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.

Vertical merger

When two firms working in different stages of production or distribution of the same product join together, it is called Vertical Merger - a

customer and company or a supplier and company; for instance, a cone supplier merging with an ice cream maker.

A Vertical Merger is one in which the buyer expands backwards and merges with the firm supplying raw material or expands forward in the direction of the ultimate consumer.

The economic benefits of this type of merger stem from the firm’s increased control over the acquisition of raw material or the distribution of finished goods. There are multiple reasons, which promote the vertical integration among firms viz., reduction of uncertainty regarding the availability of quality inputs as also the uncertainty regarding the demand for its products; economies of integration; cost-efficiency by streamlining its distribution and production costs; reduction of transactions costs like marketing expenses and sales taxes and optimum use of firm's resources.

Examples: Time Warner-TBS; Disney-ABC Capitol Cities; Cleveland Cliffs Iron-Detroit Steel; Brown Shoe-Kinney; Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS, and other programming. 

Market-extension merger – takes place when two companies that sell the same products in different markets merge together. This type of merger joins together firms that sell competing products in separate geographic markets. Examples: Time Warner-TCI; Morrison Supermarkets-Safeway; SBC Communications-Pacific Telesis

Product-extension merger - takes place when two companies selling different but related products in the same market merge together. This type of merger involves firms that sell non-competing products using related marketing channels of production processes. Examples: Scripps Howard Publishing—Knoxville News Sentinel;

Conglomeration - takes place when two companies that have no common business areas merge together. A pure conglomerate merger unites firms that have no obvious relationship of any kind. Examples: Bank Corp of America-Hughes Electronics; R.J. Reynolds-Burmah Oil & Gas; AT&T-Hartford Insurance.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors: 

Purchase Mergers - This kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue

of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial.

Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger. 

A merger can take place in following four ways:

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

By exchange of share for asset: Company X may give its shares to the shareholders of company Y for its net assets. Then company Y is terminated by its shareholders who now hold shares of company X. By exchange of shares for asset.

By exchange of shares for shares: Company X gives its shares to the shareholders of company Y and then company Y is terminated. Exchange of shares for shares.

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

CASE STUDIES Tata Motors’ Acquisition of Jaguar and Land Rover

In June 2008, India-based Tata Motors Ltd. announced that it had completed the acquisition of the two iconic British brands - Jaguar and Land Rover (JLR) from the US- based Ford Motors for US $ 2.3bn. Tata Motors stood to gain on several fronts from the deal. One, the acquisition would help the company acquire a global footprint and enter the high-end premier segment of the global automobile market. After the acquisition, Tata Motors would own the world’s cheapest car- the US$ 2,500 Nano, and luxury marquees like the Jaguar and Land Rover. Though there was initial skepticism over an India Company owning the luxury brands, ownership was not considered a major issue at all. According to industry analyst, some of the issues that could trouble Tata Motors were economic slowdown in European and American markets, funding risks, currency risks etc.

Profile of Tata Motors

Tata Motors Limited, formerly known as TELCO (TATA Engineering and Locomotive Company), is a multinational corporation headquartered in Mumbai, India. It is India's largest passenger automobile and commercial vehicle manufacturing company and a mid sized player on the world market with 0.81% market share in 2007 according to OICA data. The OICA ranked it as the world's 19th largest automaker, based on figures for 2007, as well as the second largest automaker of commercial vehicles.

Established in 1945, when the company began manufacturing locomotives, today it is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. The company is the world’s fourth largest truck manufacturer, and the world’s second largest bus manufacturer. Tata Motors has its manufacturing base in Jamshedpur, Pantnagar, Lucknow, Ahmedabad and Pune in India as well as manufacturing facilities in Argentina, South Africa and Thailand. The company manufactured its first commercial vehicle in 1954 in collaboration with Daimler-Benz AG, which ended in 1969. Tata Motors is a dual-listed company traded on both the New York Stock Exchange and the Indian Stock Exchange. Tata Motors was listed on the NYSE in 2004, and in 2005 it was ranked among the top 10 corporations in India with an annual revenue exceeding INR 320 billion. In 2004, it bought Daewoo's truck manufacturing unit, now known as Tata Daewoo Commercial Vehicle, in

South Korea. It also, acquired a 21% stake in Hispano Carrocera SA, giving it controlling rights in the company.

Profile of Jaguar

Jaguar Cars Ltd. (better known simply as Jaguar) is an automaker from England, United Kingdom that manufactures luxury and executive motor car. Jaguar was founded as the Swallow Sidecar Company by Sir William Lyons in 1922, originally making motorcycle sidecars before switching to passenger cars. The name was changed to Jaguar after the Second World War due to the unfavourable connotations of the SS initials. Jaguar cars are designed in an engineering centre at their headquarters in Coventry, England and are manufactured in one of three English Jaguar plants; Castle Bromwich in Birmingham, Halewood near Liverpool and Gaydon in Oxfordshire. Following several subsequent changes of ownership since the 1960s, Jaguar was listed on the London Stock Exchange and became a constituent of the FTSE 100 Index, which ended when Ford acquired Jaguar in 1989. The Ford Motor Company made offers to the US and UK Jaguar shareholders to buy their shares in November 1989; Jaguar's listing on the London Stock Exchange was removed on 28 February 1990. In 1999 it became part of Ford's new Premier Automotive Group along with Aston Martin, Volvo Cars and, from 2000, Land Rover; Aston Martin was subsequently sold off in 2007. Between Ford purchasing Jaguar in 1989 and selling it in 2008 it did not earn any profit for the Dearborn-based auto manufacturer.

Profile of Land Rover

Land Rover is an all-terrain vehicle and Multi Purpose Vehicle (MPV) manufacturer, based in Solihull, West Midlands, England. Originally the term Land Rover referred to one specific vehicle, a pioneering civilian all-terrain utility vehicle launched on 30 April 1948, at the Amsterdam Motor Show, but was later used as a brand for several distinct models, all capable of four-wheel drive. Starting out as a model in the Rover Company's product range, the Land Rover brand developed, first as a marquee, then as a separate company, developing a range of four-wheel drive capable vehicles under a succession of owners, including British Leyland, British Aerospace and BMW. In 2000, the company was sold by BMW to the Ford Motor Company, becoming part of their Premier Automotive Group.

Acquisition of British Icons

On June 02, 2008, India-based Tata Motors completed the acquisition of the Jaguar and Land Rover (JLR) units from the US- based auto

manufacturer Ford Motor Company (Ford) for US$ 2.3 bn on a cash free debt free basis. JLR was a part of Ford’s Premier Automotive Group (PAG) and were considered to be British icons. Jaguar was involved in the manufacture of high end luxury cars, while Land Rover manufactured high-end SUVs. Forming a part of the purchase consideration were JLR’s manufacturing plants, two advanced design centers in the UK, national sales companies spanning across the world and also licenses of all necessary intellectual property rights.

Tata Motors had several major international acquisitions to its credit. It had acquired Tetley, South Korea-based Daewoo’s commercial vehicle unit and Anglo-Dutch Steel maker Corus. Tata Motors Long-term strategy included consolidating its position in the domestic Indian market and expanding its international footprint by leveraging on in-house capabilities and products and also through acquisitions and strategic collaborations.

Analysts were of the view that the acquisition of JLR, which had a global presence and a repertoire of well-established brands, would help Tata Motors become one of the major players in the global automobile industry. On acquiring JLR, Ratan Tata, Chairman, Tata Group said “We are very pleased at the prospect of Jaguar and Land Rover being a significant part of our automotive business. We have enormous respect for the two brands and will endeavour to preserve and build on their heritage and competitiveness, keeping their identities intact. We aim to support their growth, while holding true to our principles of allowing the management and employees to bring their experience and expertise to bear on the growth of the business.”

Ford had bought Jaguar for US$2.5 bn in 1989 and Land Rover for US$2.7 bn in 2000. However, over the years, the company found that it was failing to derive the desired benefits from these acquisitions. In 2006, Ford announced a major restructuring programme `The Way Forward’, which involved plans to shut down unprofitable operations. As a part of the programme, Ford decided to dismantle PAG and in June 2007, announced that it was considering selling JLR. There were several bidders for JLR but Ford was more concerned about handing over the management of JLR to a company that would take into consideration the interests of the workers. The labour unions of JLR were not in favour of moving the existing manufacturing facilities and factories out of Britain as it would lead to elimination of jobs. These factors, among others, made Tata Motors the preferred bidder. Ford and Tata Motors announced a definite agreement in March 2008, under which Tata Motors was to purchase JLR for US$ 2.3bn.

News of the proposed acquisition by Tata Motors was greeted with much hope and enthusiasm. One of the suppliers to JLR, Grant Adams, Managing Director of Sertec Group Holdings, a UK body panel and stampings supplier for JLR said, “We are very positive, especially when you look at the other companies that Tata Group has bought such as Corus and Tetley. Both have gone from strength to strength. However, Moody’s downgraded Tata Motors credit ratings from Ba1 to Ba2, citing concerns about operations integration and the impact of the acquisition on the company’s finances. According to Moody’s, “This acquisition also comes at a time when there is intense competition and rising cost pressure in Tata Motors’ domestic market. Furthermore, there are inherent challenges with any major M&A transactions. This deal, therefore, raises the immediate business risk profile of Tata Motors.”

British Marques under Ford

Ford Motors Company (Ford) is a leading automaker and the third largest multinational corporation in the automobile industry. The company acquired Jaguar from British Leyland Limited in 1989 for US$2.5 bn.

After Ford acquired Jaguar, adverse economic conditions worldwide in the 1990s led to tough market conditions and a decrease in the demand for luxury cars. The sales of Jaguar in many markets declined, but in some markets like Japan, Germany, and Italy, it still recorded high sales. In March 1999, Ford established the PAG with Aston Martin, Jaguar and Lincoln. During the year, Volvo was acquired for US$6.45 bn, and it also became a part of the PAG.

Ford bought Land Rover in 2000 for US$2.7 bn from BMW, and it became a part of the PAG. Since 2002, the activities of both Jaguar and Land Rover were fully integrated. They had a single engineering team, shared technologies and power trains, and functioned through co-managed engineering facilities. Most of the back office functions like purchasing; HR, IT, quality and finance were also integrated. Under Ford, the Range Rover MK III was launched in 2002 and the Discovery 3 in 2004. The Freelander 2 was introduced in 2006.

When it acquired Jaguar, Ford had plans to produce around 400,000 units a year to compete with the likes of Mercedes Benz, Audi and BMW. However, its objective did not materialize as its plans to revive Jaguar’s E-type spots car and F-type car failed. Some of the Jaguar models released in 2001 which targeted young customers failed to impress. In 2002, the sales of Jaguar reached 130,000. Analysts were of the view that under Ford, the engineering standards of Jaguar had improved but its image had

taken a downturn. According to Paul Horrell, who writes for BBC’s Top Gear magazine, “The trouble with Ford was, around the Millennium, it became very fashionable to build retro looking cars. A policy of building modern cars that looked like old cars developed. The Jaguar gradually became known as basically an old man’s car”.

The customers of Jaguar and Land Rover were seen as being highly nationalistic and brand loyal. Jaguar customers were considered to be traditionalists. Analysts cited the case of the X-type launched by Ford, which consumers did not accept as they did not like the design. They felt that it was more like a Ford Mondeo than a Jaguar. In order to control costs, Ford built Jaguar on the Mondeo platform, but this only served to dilute Jaguar’s premium image. Jaguar recorded losses of US$426 mn in 2004. By 2006, it was believed that Ford had spent over US$10 bn on Jaguar since acquiring it. However, it had little to show in terms of profit. In the fiscal 2006, Jaguar reported a loss of US$327 mn.

Ford reported losses of US$12.7 bn in the year 2006, the worst loss in the history of the company. It lost around US$6 bn in the American operations, and a further investment of US$12 bn was required to make these operations profitable by the year 2009.

By the time the results for the year 2006 were out, analysts believed that in order to salvage the North American business, Ford needed to sell JLR. Strategic reviews conducted by Ford on the two brands ended with recommendations of sale. However, some analysts voiced the view that both brands were on the path to revival. Jaguar had several new models lined up and had introduced the XK in 2006. Land Rover was on its way to profit and recorded sales of 192,000 units in 2006.

JLR had three manufacturing sites spanning an area of around 800 acres. These were located at Hale Wood, Solihull, and Castle Bromwich. Two advanced design centres were located at Gaydon and Whitley. The design centres employed around 5,000 of the total 16,000 workforce in JLR. The facilities available at the advanced design centres included testing facilities, workshop, proto type building facilities, design studio, vehicle development, power train engineering, power train development and power train integration.

By the end of 2007, Jaguar had 859 dealers and a presence in 93 markets across the world. The vehicle sales were at 60,485 units, with Europe accounting for 57% of the sales and North America for 26%. Land Rover had a presence in 175 markets through 1,397 dealers. Europe accounted for 60% of the sales and North America for 23%.

Assets and Liabilities – Jaguar Land Rover (Held-for Sale Operations)

December 31, 2007 (US$ mn)

December 31, 2006 (US$ mn)

AssetsReceivables 758 590Inventories 1,530 1,404Net Property 2,246 2,119Goodwill and other net intangibles 2,010 3,210Pension assets 696 3Other assets 297 122Total Assets of the held-for-sale Operations

7,537 7,448

LiabilitiesPayables 2,395 2,202Pension liabilities 19 380Warranty liabilities 645 759Other liabilities 2,022 2,050Total Liabilities of the held-for-sale Operations

5,081 5,391

Jaguar and Land Rover – Worldwide SalesNo. (in units) 2007 2006 2005

Jaguar 57,578 72,680 86,651Western Europe 33,024 41,367 46,789

America 16,836 22,136 32,131Rest of the world 7,718 9,177 7,731

Land Rover 202,609 174,940 170,156Western Europe 109,785 95,399 97,303

America 57,092 53,638 51,634Rest of the World 35,732 25,903 21,219

Jaguar Land Rover – Financial Performance2005 2006 2007 Q1

2007Q1 2008

Revenue 12,462 12,969 14,942 3,548 4,145Cost of Sales (10,955) (11,292) (12,258) 2,747) 3,161)Gross Profit 1,507 1,677 2,684 801 984Marketing & Selling (1,112) (1,057) (1,069) (265) (275)R&D (821) (683) (829) (183) (226)Admin (408) (360) (352) (88) (82)Other 336 66 215 24 16EBIT (excl. special items*)

(498) (357) 649 289 417

Special Items (1,434) (1,751) (30) (15) (417)EBIT (incl. special 1,933 2,108 620 274 0

items)Special Items: Impairments of the asset base (2005: $ (1,300)mn, 2006: $ (1,600) mn,

2008 Q1: $ (421) mn) Restructuring costs, primarily personnel separation costs (2005:$(134)

mn, 2006: $ (151) mn, 2007: $(52) mn, 2007 Q1: $ (15) mn) Variable marketing accrual methodology (2007: $ (53) mn) Mark-to-market of forward year hedging contracts (2007: $143 mn,

2008 Q1: $ (18) mn) Other incl. transaction fees relating to the sale of JLR and D&A `held for

sale’ treatment (2007: $ (68), 2008 Q1: $ 22 mn).

Ford Sells JLR

In September 2006, after Allan Mulally assumed charge as the President and CEO of Ford, he decided to dismantle the PAG. In March 2007, Ford sold the Aston Martin sports car unit for US$ 931 mn. In June 2007, Ford announced that it was considering selling JLR. Commenting on the sale of JLR, Lord Bhattacharya, Head, Warwick Manufacturing Group said, “How often do two such icons come up for sale at the same time? Land Rover is now sustainably profitable and you are about to see a renaissance of Jaguar. But what you really have to look at is the timing”.

The bids for JLR came to close in the third week of July 2007. Several private equity firms and automobile manufacturers from across the world expressed an interest in acquiring JLR. These included Cerberus Capital Management LLC, Ripplewood Holdings, Once Equity Partners LLC, TPG Capital, Tata Motors and Mahindra & Mahindra (M&M).

In November 2007, Ford announced the three preferred bidders: Tata Motors, M&M and One Equity Partners. Analysts were of the view that Ford was concerned more about the interests of the workers employed with JLR than the price, as it was of the view that any misstep in this direction could adversely affect its image in the UK, which was its second largest market.

JLR’s labour unions were looking at a company that would guarantee job security and were against selling it to private equity firms. According to one of the union members, “That’s because of the way it operates, loading debt on to companies that they take over, which has the effect of squeezing pay and pensions – and in many cases putting pressure on jobs as well.

In November 2007, Tata Motors secured the support of Unite, the Union that represented Ford. All the three short listed bidders gave a presentation to representatives of the union. During the presentation, the

Managing Director of Tata Motors, Ravi Kant, assured the union representatives that the company did not intend to close any of the plants and would continue to manufacture JLR in the UK. He even came out with plans to employ more people in the next two to three years. He said the executives from JLR were welcome to stay with the company. Most of the union representatives opted for Tata Motors over M&M and One Equity.

On January 03, 2008, Ford announced that it had decided on Tata Motors as the preferred bidder and had entered into focused negotiations with the company. According to an industry expert, “The manner in which the Tata group handled the Corus Steel deal in late 2006 created a major positive impression among the unions and the employees at large. Finally, it was one of the key factors that led to a successful completion of the Jaguar and Land Rover deal”.

However, there was widespread skepticism about an Indian company acquiring such iconic brands. According to Ken Gorin, Head of Jaguar’s American dealers, “I don’t believe the US public is ready for ownership out of India for a luxury-car brand such as Jaguar…….”

The Deal

On March 26, 2008, Tata Motors entered into an agreement with Ford for the purchase of JLR. Tata Motors agreed to pay US $ 2.3 bn in cash for a 100% acquisition of the businesses of JLR. As part of the acquisition Tata Motors did not inherit any of the debt liabilities of JLR- the acquisition was totally debt free. On the reasons why Ford sold off the brands, John Wolkonowiez, analyst, Global Insight, said, “They had almost 20 years of playing with Jaguar without success. Ford realized they don’t want to put good money after bad anymore and it is in a position where they need the money to shore up their core business”.

As a part of the acquisition, Tata Motors acquired the manufacturing plants, two advanced design and engineering centres, and a worldwide network of 26 national sales companies. The IPRs on key technologies were to be transferred from Ford to JLR. In case the technology was shared from Ford, a royalty free license for using these technologies was part of the purchase consideration. For also provided minimum guarantees capital allowances of US$ 1.1 bn for taxation.

Ford was to continue supplying JLR with vehicle components like power trains, stampings, environment and platform technologies, and services like engineering support, R&D, IT and accounting. Ford also agreed to provide critical supplies including engines, access to test facilities and key services in the areas of IT, accounting etc. The supply of engines included

new engines being developed by JLR, produced at a Ford manufacturing plant. The engine supplies were to continue for a period ranging between 7 and 9 years. The design development cooperation included sharing certain platforms, technical support, joint development, and advanced research projects. Ford did not disclose the time period for which it would provide this support. For Motor Credit Company, the captive credit division of Ford, agreed to continue providing financing to dealers and customers of JLR during the transition period”.

Tata committed itself to following Ford’s business plan for JLR till 2011. The plan included new product launches; reducing the dependence on the matured markets, which accounted for 80% of JLR’s sales, through strategies to increase sales from the emerging markets; complying with the EU norms pertaining to emissions, etc.

These arrangements would help JLR to continue with their plans and to develop own capabilities. After the deal, not many changes were expected in the employment terms of around 16,000 employees of JLR.

Tata Motors said it did not have any plans to bring in any major changes in either the brands or the way the companies were run. At the Geneva Motor Show in March 2008, Ratan Tata said, “We plan to retain the image, touch and feel of these brands and not tinker with them in any way. These brands belong to Britain and they will continue to belong to Britain. Who owns them is not as material as the brands belonging to Britain and the West Midlands”.

On the completion of sale, Ford was to contribute US$600 mn out of the purchase consideration toward the pension fund of JLR in the UK. Tata Motors was also required to contribute to the fund. Ford had funded a substantial part of the deficit as on October 31, 2007. The next evaluation was planned for April 2009.

Tata Motors signed an agreement with the employees of JLR and those belonging to Unite, safeguarding the jobs till 2011. According to an officer at Unite, “Unite has secured written guarantees for all the plants on staffing levels, employee terms and conditions, including pensions and sourcing agreements. The sale ensures the future of our members”.

The trade unions in the UK announced that the deal was good news for the automotive industry in the UK. The unions were happy about the fact that, “Tata recognize the Britishness of the two brands and have no intention of closing any plants in the UK.” Analysts were of the view that the support that Tata Motors received from Unite was due to Tata’s track record of managing its employees well and keeping its promises to them.

Tata Steel’s acquisition of Corus, where it had kept its promise to the employees, convinced unions about the management’s sincerity. The unions were reportedly in touch with the employees of Tetley and Corus to understand how Tata operated. They found that Tata had not outsourced any jobs and had not even moved the job offshore.

However, investors of Tata Motors did not appear too pleased with the deal. When Ford announced that Tata Motors would be preferred bidder, the share price of the company on the National Stock Exchange (NSE) was at Rs.794.25. It had fallen to Rs.679.40 by the time the deal was announced. Investors expressed concern over how Tata Motors would finance the acquisition.

Initially, Tata Motors obtained a bridge loan of US $3 bn underwritten by a consortium of banks. The additional funding was meant for engine and component supply, for which Tata Motors had entered into a separate agreement with Ford, for any contingencies and requirements that may arise in the future and for the working capital requirement of JLR. The amount required was to be obtained through a bridge loan raised by Tata Motors, UK, a special purpose vehicle 100% subsidiary of Tata Motors.

To refinance the bridge loan, the company planned to raise amount of around US $ 2.3 bn equity and equity linked instruments. Of this, it planned to obtain US $ 1.7 bn through three simultaneous but unlinked rights issues and overseas flotation. This rights issue consisted of normal shares and also shares with differential voting rights. The rights issue was priced at Rs. 340 for the normal shares and Rs. 305 for the shares with differential voting rights.

The Benefits

Tata Motors was interested in acquiring JLR as it would reduce the company’s dependence on the Indian market, which accounted for 90% of its sales. The company was of the view that the acquisition would provide it with the opportunity to spread its business across different geographies and across different customer segments.

The acquisition provided Tata Motors an opportunity to establish its presence in the high-end premier segment of the global automobile market. According to Peter Cooke, Professor Automotive Industries Management, University of Buckingham, “For any company with aspiration to become a global player, there is a good opportunity there.”

Analysts were of the opinion that Land Rover fitted into the position above the utility vehicles Tata Motors already had. Tata Motors said it was

looking forward to synergies in the areas of component sourcing, engineering and design. The vehicles from the Tata would have better technology in the future, due to the association with JLR. Tata Motors would also benefit from JLR’s service and distribution networks.

Unlike in the case of Ford, there would not be any overlap with Tata Motors’ existing models. The acquisition would mean that the company would be able to compete both at the low-end of the market, with Nano priced at US$2500 and at the top-end with the Jaguar XF priced at US$64,000.

Another brand that Tata Motors had obtained through the deal was Lanchester, which Jaguar had acquired from Daimler in 1960. The deal also included the right to use the Daimler brand. According to Ratan Tata, “We are looking at whether we can resurrect the Daimler brand, which is sort of moribund. Tata Motors planned to place it in the super luxury segment, competing with Bentley and Rolls-Royce.

Both Jaguar and Land Rover had many new models lined up for the next few years. These launches were expected to take Jaguar’s sales volumes beyond the 100,000 vehicle mark for 2008. The XF in particular had received rave reviews and “Auto Car UK” had rated it ahead of the BMW 5 while “What Car magazine” had awarded it the Car of the Year Award for the year 2008.

The new products in the offing from the Jaguar stable included the much awaited X351, which would replace the popular XJ Sedan. Another produce was a two-seat sports car, based on the XK Coupe. Land Rover had plans of launching a small crossover vehicle by 2010. This would be one of the several small vehicles, including two doors and four door vehicles that Land Rover planning to bring out from a common platform.

Jaguar and Land Rover New Products PipelineYear (expected)

Models Description

2009 Jaguar XFR High performance version of XF SedanJaguar XKR High performance version of XK coupeRange Rover Facelift version, with 5.0-liter V8,

redesigned interiorsRange Rover Sport Facelift version, with 5.0- liter V8

redesigned interiors.2010 Jaguar XJ Flagship sedan with XF styling, more

leg and shoulder room.Land Rover LR3 Facelift version, with new interiors.

2011 Land Rover LRX Urban chic car also includes hybrid model.

2012 Jaguar F Type Two seat sports car priced around US$ 50,000

Land Rover LRX Spin off of LRX with seven seats.2013 Jaguar Coupe Range extension with low-roofline

style.All New Range Rover Replacement of the flagship product.

2014 All New Range XF Aluminum body constructionAll New Range Rover Sport

Variant of the new range rover, with aluminum body.

All New Land Rover Defender

Similar to Toyota land cruiser targeted at the developing countries

The success Tata Group had with other international acquisitions, especially Corus, was often cited as an example of Tata’s ability to succeed in its international ventures. According to an analyst from Lehman Brothers in Mumbai, “When they bought Corus a lot of people said they were stupid. May be it’s the same with Jaguar. If anyone has a chance to emerge as a big auto player from India, it’s Tata”.

The ChallengesMorgan Stanley reported that JLR’s acquisition appears negative for Tata Motors, as it had increased the earnings volatility, given the difficult economic conditions in the key markets of JLR including the US and Europe. Moreover, Tata Motors had to incur a huge capital expenditure as it planned to invest another US$1 bn in JLR. This was in addition to the US$2.3 bn it had spent on the acquisition. Tata Motors had also incurred huge capital expenditure on the development and launch of the small car Nano and on a joint venture with Fiat to manufacture some of the company’s vehicles in India and Thailand. This, coupled with the downturn in the global automobile industry, was expected to impact the profitability of the company in the near future.

Many analysts were skeptical about the synergies Tata expected to achieve out of the deal. They pointed out that even after spending over US$ 10 bn over a span of 18 years; Ford had not been able to revive the fortunes of Jaguar. Prof. Garel Rhys, Director, Centre for Automotive Industry Research, Cardiff Business School, said, “With Jaguar, Tata has to prove it can succeed where Ford failed. Ford couldn’t turn the company around despite its knowledge of the European market.”

Analysts were of the view that Tata Motors would not get much of a value through the deal. They reiterated that as Tata Motors was a major truck manufacturer and was dealing in the low end of the passenger car market, JLR, which catered to the needs of the premium segment, did not go well with its existing line-up. According to an analyst from Morgan Stanley, “Buying Jaguar, Land Rover was value-destructive given the lack of synergies and the high-cost operations involved.

Analysts were also skeptical about Tata Motors’ ability to market such high-end products, as it had neither manufactures nor marketed high-end luxury vehicles earlier. The luxury car market was highly competitive with several prestigious brands vying for the space. These were backed by huge conglomerates like Porsche-Volkswagen, Daimler, BMW and Toyota. These companies boasted significant financial resources, technology and vast experience in dealing with the luxury brands that Tata Motors did not possess, they pointed out.

One of the major challenges that Tata Motors could face was the cost of key components. While Ford had agreed to provide access to engine and engine technology for some time, if the prices of these components go up after the deal, Tata Motors might have to incur extra costs on producing the vehicles. Experts were of the view that Ford was highly unlikely to supply the components as per the fixed price contracts as these prices were highly volatile.

The European Commission had decided to adopt a proposal for legislation in December 2007. The proposal aimed at reducing the CO2 emissions from passenger cars from 160 grams per kilometre to 130 grams per kilometre by 2012. The permitted CO2 emissions for new vehicles were stipulated depending on the mass of the vehicle. This meant that cars which were heavier needed to bring in more improvements than the lighter ones. Manufacturers could make cars with higher emissions provided they also made smaller cars with lower emissions that would offset the higher emissions.

And this was another problem area for Tata Motors, Jaguar and Land Rover had comparatively high emissions. For example, Jaguar’s most fuel-efficient model, the X-type, emitted around 194 grams of CO2, per kilometre. If Jaguar and Land Rover were with Ford, the higher emissions of the two could have been balanced by the lower emissions from Ford’s other brands. But Tata Motors did not sell its cars in the UK, nor did it sell any other car in Europe. The company could, thus, end up facing a proposed penalty in the form of excess emissions premium. For the first year, i.e. 2012, the penalty was proposed at 20 Euro per gram/kilometre, which would increase to 35 Euro per gram/kilometre by 2013 and to 95 Euro by 2015. According to Wright, “Neither Jaguar or Land Rover is very well-placed in the race to significantly lower the average emissions of their respective ranges.” However, Tata Motors on its part was planning to launch Nano in Europe by 2012, after meeting the crash standards and Euro 5 emission standards.

The Road Ahead

Tata Motors had formed an integration committee with senior executives from the JLR and Tata Motors, to set milestones and long-term goals for the acquired entities. One of the major problems for Tata Motors could be the slowing down of the European and US automobile markets. It was expected that the company would address this issue by concentrating on countries like Russia, China, India and the Middle East. As of 2008, China was the fastest growing auto market in the world and was estimated to be Land Rover’s fifth largest market and Jaguar’s seventh largest market. Russia was expected to be Land Rover’s third largest market and Jaguar’s eighth in 2008.

Though several analysts were skeptical about Tata Motors being able to turn Jaguar profitable, Tata Motors itself was confident about it. According to C. Ramakrishnan, CFO, Tata Motors, “I think Ford has put in several building blocks in terms of turning Jaguar around very successfully. You are looking at the business at a point of time when they are still making losses, but well on their way to a full recovery and we believe some of the work that has already been happened in this company, will take it forward successfully”.

Analysts were of the view that Tata Motors needed to understand how to market to the premium segment to take advantage of the opportunities provided by the acquisition of JLR. Going forward, the way Tata Motors managed these brands and derived synergies from them would hold the key to the success of JLR’s acquisition. Harbir Singh, Management Professor at Wharton commented, “My sense is that the Tatas are trying

to expand their portfolio in general and they are trying to offer (various brands). I don’t think it’s a question of the customer viewing Nano and Jaguar and Land Rover as all offerings of the same company. It’s much more a question of like Louis Moet Hennessy having a set of brands and really doing the best you can for Land Rover and the best you can for Jaguar. In terms of the economic sense of the transaction, I think another way of looking at it is: What’s the replacement value of those brands, right? And, clearly, whatever price they pay is much lower than the replacement value. So the real challenge here for them is to make sure that they can enhance Jaguar in its own terms and enhance Land Rover in its own terms.”

Conclusion

Tata Motors, the country's largest automobile company, suffered a net loss of about Rs 2,500 crore in 2008-09 mainly on account of JLR that it acquired in June 2008. The expensive JLR marquee suffered on account of the economic meltdown. But, still the deal mean a lot from business point of view as it is a major step of India Inc. to really become Global as well as on emotional point of view as it brought pride to India. May be the deal is not sounding convincing in the first year of its operation but of course the technological knowledge and advancement it will bring to Tata Motors with its world class R & D, it will surely benefit Tata Motor in long run and will establish it as a major player in global auto market.

The Exxon-Mobil Merger Exxon and Mobil was one company in the history called Standard oil Company of Ohio created by John D Rockefeller at 1870 who then formed the Rockefeller trust. In 1911, the Rockefeller trust was ordered to broken up. From that time, Exxon and Mobil begin their independent history until November 1999 when Exxon Corp. and Mobil Corp. confirmed their plans to merge in a historic $80 billion deal that reunited fragments of the Standard Oil monopoly and created an entity rivalling some of the richest oil-producing nations of the world. 

Under terms of the deal, the merged company called Exxon Mobil Corp. retained both the Exxon and Mobil brands. The company is headquartered in Exxon's home city of Irving, Texas.

Objective of the M&A

The deal was expected to allow the companies to compete more effectively in the face of sharply lower oil prices and higher costs for finding new oil reserves.

According to analysts, besides falling oil prices, improved earnings stability, long-term capital productivity, increased exploration and production costs and enhanced competitive advantage in technology were the main reasons that led to the mega merger.

Exxon-Mobil merger was expected to produce cost savings of at least $4.2 billion a year. The oil deals are driven by many factors, but none is as powerful as the falling price of crude, which closed at week’s end at $10.92 (U.S.) a barrel.

The motivations for the Exxon-Mobil merger reflect the industry forces described above. By combining complementary assets, Exxon-Mobil would have a stronger presence in the regions of the world with the highest potential for future oil and gas discoveries. The combined company would also be in a stronger position to invest in programs involving large outlays with high prospective risks and returns.

Exxon’s experience in deepwater exploration in West Africa would combine with Mobil’s production and exploration acreage in Nigeria and Equatorial Guinea. In the Caspian region, Exxon’s strong presence in Azerbaijan would combine with Mobil’s similar position in Kazakhstan, including its significant interest in the Tengiz field, and its presence in

Turkmenistan. Complementary exploration and production operations also existed in South America, Russia, and Eastern Canada.

Near term operating synergies of $2.8 billion were predicted. Two-thirds of the benefits were expected from eliminating duplicate facilities and excess capacity. It was expected that the combined general and administrative costs would also be reduced.

Additional synergy benefits would come from applying each company’s best business practices across their worldwide operations. In a news release on 8/1/00, Exxon-Mobil reported that synergies had reached $4.6 billion.

Primary motive

The mega merger was one amongst the many petroleum industry deals brought about by an oil glut that forced down the price of a barrel of crude by late 1998 to about $11, the cheapest price in history with inflation factored in. Just one year earlier, the price had been about $23. The oil glut was caused by a number of factors, principally the Asian economic crisis and the sharp decline in oil consumption engendered by it, and the virtual collapse of OPEC, which was unable to curb production by its own members. In such an environment, pressure to cut costs was again exerted, and Exxon and Mobil cited projected savings of $2.8 billion per year as a prime factor behind the merger.

First, a shift to bigness often provides firms with needed economies of scale, which means lower prices for consumers and a stronger competitive edge for the United States. This need for greater efficiency is also the key impetus in the current merger of Exxon and Mobil, two parts of the old Standard Oil Company.

Second, because of the dynamic nature of markets, monopolization is hard to achieve.

At a joint-news conference, Exxon Chairman and Chief Executive Officer Lee Raymond and Mobil Chief Executive Lucio Noto said the deal would allow the companies to compete more effectively in the face of sharply lower oil prices and higher costs for finding new oil reserves. Indeed, over the last few months’ oil companies have been slashing payrolls and capital spending plans in an effort to offset sharply lower oil prices. And, with the prospect of even lower prices ahead, industry experts said it makes sense for Exxon and Mobil to pool their vast resources.

Financial Plan (Exchange Ratio): Deal Terms and Event Returns

Exxon had a pre-merger market value of $175 billion, compared with $58.7 billion for Mobil. Exxon had a P/E ratio of about 23.6 versus 17.9 for Mobil. Exxon paid 1.32 shares for each share of Mobil. Since Mobil had 780 million shares outstanding, Exxon paid 1,030 million shares times the $72 share price of Exxon for a total of $74.2 billion. This was a 26.4% premium over the $58.7 billion Mobil market cap.

Pre-merger, the equity value of Exxon shares represented 75% of the combined market value. The premium paid to Mobil caused the post merger proportion of ownership to drop to about 70% for Exxon and rise to 30% for Mobil. This demonstrates the fallacy of the statement sometimes made: “In a stock for stock transaction, the terms of the deal don’t matter because you are only exchanging paper.” The terms of the deal determine the respective ownership shares in the combined company.

Success/Failure

Financial Data USD millions

Year-end 2002 2003 2004 2005 2006

Total revenue 204 506 237 054 291 252 358 955 377 635

EBITDA 26 038 41 220 51 646 70 181 79 869

Net income 11 460 21 510 25 330 36 130 39 500

Total debt 10 748 9 545 8 293 7 991 6 645

In 1999, after merger succeeded, Exxon-Mobil has experienced its lowest ROE of 12.46 (Chart 1). Exxon Mobil ratio was bigger than the industry ratio, but when we consider the heavy loss in 1998 it can be judged that the Exxon-Mobil didn’t perform well in 1999 because its ROE has fallen from, average of them, 14.50 per cent, industry on the other hand has risen from -16.85 per cent to 7.53 per cent. In 2000 while ROE has become 22.60 it was below the industry’s 26.48. So two years after the merger, Exxon-Mobil under performed the industry on ROE. New investments made on Mobil’s resources and financial changes like paying some of debts  (Chart 6) seems to be the underlying reasons for that. Likewise the cost of marriage and settling the management and organization contributed towards the same. In the following years, while ROE follows the path of oil price changes, Exxon-Mobil performed better than the industry and the ratio average.

Like ROE, Exxon and Mobil’s ROCE ratio is better than both industry and the ratio average before merger (Table 3). But when we compare Mobil and Exxon we see a great difference among them. While Mobil performed better than Exxon in both ROCE and in Asset Turnover ratios, it couldn’t reflect this performance to its ROE. This shows that Mobil has a potential that that could be tapped by re-engineering its capital structure, and by lowering its costs.

After the merger (Chart 2) Exxon-Mobil sustained it’s ROCE above the industry ratio and the ratio average. But it took four years to catch that performance, when another price fall hit the industry in 2002. So it can be judged that new scale of the corporation couldn’t reveal Mobil’s potential for 4 years, which is reasonable as they were both big corporations.

Current ratio (4) and Acid test (5) are financial status ratios which are better the higher. Exxon’s status was better than Mobil’s before merger by nearly 25 points of percentage for each year, but they were both worse than the industry (Table 3). The industry is neat in these ratios, especially in acid test that the ratio average is perfect 1. Because these ratios are important in credit rating, and the industry firms are highly leveraged. Therefore Exxon and Mobil, in this sense, under performed the industry before the merger. Especially Mobil used to finance its activities heavily through long term debt. After merger, this situation continued for two more years for current ratio (Chart 4) and three more years for acid test ratio (Chart 5). After 2002 Exxon-Mobil strengthened its financial status by paying most of the debt and improved upon its Current and Acid Test ratios.

Reasons for success/failure

While Mobil's strength was liquefied natural gas, Exxon had a strong hold on pipeline gas, thus completing the oil circle.

Raymond and Noto said that the strengths of Mobil and Exxon were complementary, benefiting not only shareholders and employees but

customers - "In the exploration and production area, for example, Mobil's and Exxon's respective strengths in West Africa, the Caspian region, Russia, South America and North America line up well, with minimal overlap. Our respective deepwater assets and deepwater technology also complement each other well."

The companies expected that the merger would produce economies of scale that will yield cost savings of $2.8 billion in the near term. The companies also planned to cut about 9,000 jobs out of 123,000 worldwide. The deal, which included $1.5 billion termination fee, is expected to close in the middle of next year.

Both executives were realistic that capital spending budgets could be trimmed by about 10 percent by eliminating overlapping expenses from the balance sheet.

Exxon-Mobil has continuously driven home the concept of technological progress, to be able to meet future energy needs. Exxon-Mobil's Upstream

Research Company has left no stones unturned to develop and deploy the latest technologies time and again to set world standards in their sector.

Relentless Drive to Improve Productivity and Efficiency

Operating Expense Management

Productivity Leadership

Improve Earnings Stability Through Functional and Geographic Diversity

Developing and Employing the Best Technology

Maintain Investment Discipline and Capitalize on Financial Strength

Exxon Mobil in the 21st Century

The integration of Mobil into Exxon promised to deliver cost savings and to interweave two contrasting corporate cultures. Historically, Exxon's strengths had been in finance and engineering, while Mobil's strengths had been in marketing and deal-making. Exxon was as rigid as its leader, Lee Raymond, while Noto, "renowned from Riyadh to Jakarta for his high-octane energy and charm," as Business Week noted in its April 9, 2001 issue, personified the more relaxed culture of Mobil. As these two dissimilar, but potentially complementary, heritages combined, the corporate personality of Exxon dominated Exxon Mobil. Throughout the merged company's senior management ranks, Mobil executives generally served under Exxon executives. Noto, whose responsibilities and influence were diminished as vice-chairman, announced his retirement in January 2001, the same year the Exxon-Mobil board of directors made an exception to the company's mandatory retirement age and asked Raymond to continue leading the company.

Under Raymond's tight control, Exxon Mobil demonstrated its skill as an efficient, financially prudent behemoth. By 2001, cost savings from the merger reached $4.6 billion. These savings were used to fund the company's growth by internal means, as the company prepared to expand its output of oil and gas--something it had not done since the 1970s. The company planned to invest $10 billion in exploration and production in 2001, an amount Exxon Mobil planned to spend annually through the end of the decade.

Five years after the merger, its success was confirmed. Between 1999 and 2004, Exxon-Mobil earned $75 billion in net profits and generated $123 billion in cash. By 2004, the company was enjoying what Raymond, in a

March 11, 2004 interview with the Oil Daily, referred to as "unprecedented developments" in Angola, Equatorial Guinea, Chad, and the Caspian Sea. The profile of the company's production portfolio was expected to be altered substantially by these developments. Africa, the Mideast, and Russia accounted for less than 20 percent of Exxon-Mobil's oil and gas production in 2004. By 2010, the regions were expected to account for 40 percent of the company's oil and gas production.

As Exxon-Mobil prepared for the future, the most significant event on the horizon was a change in leadership. Industry observers were expecting Raymond to retire at some point midway through the decade, and the consensus on his replacement was Rex Tillerson, who joined Exxon in 1975. Following the 1999 merger, Tillerson was appointed executive vice-president of Exxon-Mobil Development Co., the entity responsible for guiding oil and gas development and drilling activities for Exxon-Mobil. In February 2004, in a move that appeared to confirm his imminent promotion to chief executive officer, Tillerson was elected president of Exxon-Mobil with a reputation as a good 'hands on' guy, and a solid exploration and production manager. He's a Texas engineer type in a company with a history of being run by engineers. If Tillerson did in fact succeed Raymond, his challenge was to keep Exxon Mobil moving forward, as the largest oil company in the United States endeavoured to maintain its reputation on the global scene.

The Vodafone acquisition of Hutchinson Essar

In the year 2007, the world's largest telecom company in terms of revenue, Vodafone Plc made a major foray into the Indian telecom market by acquiring a 52 percent stake in the Indian telecom company, Hutchison Essar Ltd, through a deal with the Hong Kong-based Hutchison Telecommunication International Ltd (HTIL). It was the biggest deal in the Indian telecom market.

For Acquisition of a controlling interest in Hutch Essar Vodafone agreed to:

Acquire companies that control a 67% interest in Hutch Essar from Hutchison Telecom International Limited (“HTIL”) for a cash consideration of US$11.1 billion (£5.7 billion)

Assume net debt of approximately US$2.0 billion (£1.0 billion)

The transaction implied an enterprise value of US$18.8 billion (£9.6 billion) for Hutch Essar

The acquisition met Vodafone’s stated financial investment criteria

Objectives of Acquisition

Vodafone's main motive in going in for the deal was its strategy of expanding into emerging and high growth markets like India. In 2007, India had emerged as the fastest growing telecom market in the world outpacing China. But it still had low penetration rates, making it the most lucrative market for global telecom companies. Though Hutchison Essar was one of the established players in this market, HTIL had exited India as the urban markets in the country had become saturated. Future expansion would have had to be only in the rural areas, which would lead to falling average revenue per user (ARPU) and consequently lower returns on its investments. HTIL also wanted to use the money earned through this deal to fund its businesses in Europe. Vodafone had to face many obstructions in clinching the deal - initial opposition for the Indian partner of HTIL, Essar Ltd, aggressive bidding by competitors, as well as regulators who took their time to approve the deal. But in the end, Vodafone bagged the deal outbidding other competitors. Though some critics felt that Vodafone had overpaid for Hutchison Essar, Vodafone contended that the price was worth paying as the deal would help it get a massive footprint in one of the most competitive telecommunication markets in the world.

In the context of penetration that is expected to exceed 40% by FY2012, Vodafone is targeting a 20-25% market share within the same timeframe. The operational plan focuses on the following objectives:

Expanding distribution and network coverage

Lowering the total cost of network ownership

Growing market share

Driving a customer focused approach

Primary Motive

Fourth largest player: The acquisition of Hutchison Essar will make Vodafone the fourth largest operator in the Indian mobile sweepstakes. Since mobile penetration in India, at 13 percent, is likely to exceed 50 per cent (at 500 million subscribers) by 2012, the sector is probably at the starting block of a serious battle for mobile market share.

Emerging market focus: 'Vodafone needs India more than India needs Vodafone.' The mobile giant was once a high growth favourite of telecom investors. In recent years, though, Vodafone has become something of a victim of the mobile sector’s success: most of the company’s subsidiaries now operate in countries where mobile penetration exceeds 90% (see chart below).

The principal benefits of the transaction to Vodafone are:

1) Accelerates Vodafone’s move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market

India is the world’s 2nd most populated country with over 1.1 billion inhabitants

India is the fastest growing major mobile market in the world, with around 6.5 million monthly net adds in the last quarter

India benefits from strong economic fundamentals with expected real GDP growth in high single digits

2) Hutch Essar delivers a strong existing platform in India nationwide presence with recent expansion to 22 out of 23 licence

areas (“circles”) 23.3 million customers as at 31 December 2006, equivalent to a

16.4% nationwide market share year-on-year revenue growth of 51% and an EBITDA margin of 33%

in the six months to 30 June 2006 experienced and highly respected management team

3) Driving additional value in Hutch Essar accelerated network investment driving penetration and market

share growth infrastructure sharing MOU with Bharti plans to reduce substantially

network opex and capex potential for Hutch Essar to bring Vodafone’s innovative products

and services to the Indian market, including Vodafone’s focus on total communication solutions for customers

Vodafone and Hutch Essar both expected to benefit from increased purchasing power and the sharing of best practices

4) Increases Vodafone’s presence in higher growth emerging markets proportion of Group statutory EBITDA from the EMAPA region

expected to increase from below 20% in the financial year ending 31 March 2007 (FY2007) to over a third by FY2012

Financial Plan (Exchange Ratio)

Considering that Hutchison Essar was the only asset available for acquisition, the price tag and valuation attached to this deal are stiff, with a sizeable control premium.

Financial assumptions

As part of the operational plan, Vodafone expects to increase capital investment, particularly in the first two to three years, with capex as a percentage of revenues reducing to the low teens by FY2012. The operational plan results in an FY2007-12 EBITDA CAGR percentage around the mid-30s. Cash tax rates of 11-14% for FY2008-12 are expected due to various tax incentives and will trend towards approximately 30-34% in the long term.

As a result of this operational plan, the transaction meets Vodafone’s stated financial investment criteria, with a ROIC exceeding the local risk adjusted cost of capital in the fifth year and an IRR of around 14%.

Financial impact on Vodafone

The transaction enhances Vodafone’s growth profile on a pro forma statutory basis, with Vodafone’s revenue and EBITDA CAGR increasing by around one and a half percentage points over the three year period to 31 March 2010.

The transaction is expected to be broadly neutral to adjusted earnings per share in the first year post acquisition and accretive thereafter excluding the impact of intangible asset amortization for the transaction. Including this impact, the transaction is expected to be approximately seven percent dilutive to adjusted earnings per share in the first year post acquisition and neutral by the fifth year.

The Board remains committed to its longer term targeted dividend payout of 60% of adjusted earnings per share.

Furthermore, the Board expects the dividend per share to be at least maintained in the short term.

The acquisition of HTIL’s controlling interest in Hutch Essar will be financed through debt and existing cash reserves and Vodafone expects pro forma net debt of around £22.8-23.3 billion at 31 March 2007 as a result of this transaction.

Further transaction details

HTIL’s existing partners, who between them hold a 15% interest in Hutch Essar, have agreed to retain their holdings and become partners with Vodafone. Vodafone’s interest will be 52% following completion and Vodafone will exercise full operational control over the business. If Essar decides to accept Vodafone’s offer, these local minority partners between them will increase their combined interest in Hutch Essar to 26%.

In the event that the Bharti group company exercises its option over Vodafone’s 5.6% direct interest in Bharti, consideration will be received up to 18 months after completion of the Hutch Essar acquisition.

Vodafone will continue to hold its 26% interest in Bharti Infotel Private Limited (BIPL), which is equivalent to an indirect 4.4% economic interest in Bharti. Vodafone will now account for its entire interest as an investment.

UBS Investment Bank acted as financial adviser to Vodafone.

Why control premium?

Vodafone's willingness to pay the control premium stems from some key advantages that it perceives from this deal. It is encouraging to note that the deal meets the investment criteria set by Vodafone in the interest of its shareholders.

The two criteria Vodafone provided are ROIC (return on invested capital) to exceed local adjusted cost of capital within three to five years and IRR (internal rate of return) to exceed cost of capital by 200 basis points. This acquisition meets the Vodafone ROIC criteria only in the fifth year and the IRR is expected to be 14 per cent.

Reasons for Success/Failure

The total subscriber base for Vodafone Essar is 78680291 i.e. 24.05% of the total 344487458 GSM mobile connections in India till Sep’09.

The key elements of the deal that are likely to play to its strengths are:

Infrastructure sharing with Bharti: Concurrent with the Hutchison Essar deal, Vodafone has entered into a memorandum of understanding for infrastructure sharing with Bharti Airtel. This will include sharing towers, shelter, civil works and back-haul transmission. And Vodafone expects savings in capital expenditure and operating expenditure for Hutch Essar to he tune of $1 billion over the next five years; the opex savings are likely to improve the EBITDA margin by 1.5 per cent.

These are the tangible savings this MOU can extract on an on going basis. Essar’s, however, are threatening to play spoilsport, having indicated their unhappiness at not being consulted on this issue. How this relationship with the Essar group plays out will have to be watched closely.

Value-added services: In terms of value-add, Vodafone can plug Hutch Essar into its global procurement chain, especially in the area of ultra-low-

cost handsets. Moreover, as the world's largest mobile service provider, with 200 million subscribers, Vodafone can contribute significantly to Hutch Essar's economies of scale in procurement or operations.

As Hutch Essar commences operations in six new licensed circles (through Spacetel) in 2007, efficiencies in network build-outs, low-cost handsets and bundled packages can play a key role in new subscriber additions. In saturated markets such as the metros, it can launch its popular Vodafone Live! services, which give value added access to entertainment, sports and pictures.

3G foray: Since the telecom regulator is likely to announce the policy for 3G (third generation mobile telephony) in India, Vodafone's 3G experience in Europe will come in handy for growth initiatives. This is expected to help Hutch Essar get a competitive advantage in the 3G market place. Though the benefits from these variables cannot be quantified now, they are likely to pay off in a big way in the long run.

Miscellaneous:

2008: Vodafone acquired the Licence in remaining 7 circles and has started its pending operations in Madhya Pradesh/ Chhattisgarh with its headquarters at Malviya Nagar, Bhopal as well as in Orissa, Assam, North East and Bihar.

2008: Vodafone launched the Apple iPhone 3G to be used on its 17 circle 2.75G network. Hutch was often praised for its award winning advertisements which all follow a clean, minimalist look. A recurrent theme is that its message Hello stands out visibly though it uses only white letters on red background. Another recent successful ad campaign in 2003 featured a pug named Cheeka following a boy around in unlikely places, with the tagline, wherever you go, our network follows. The simple yet powerful advertisement campaigns won it many admirers.

2009: Vodafone Essar - 1st Indian Telecom operator to receive the Payment Card Industry Security Standard (PCI DSS) certification for its Mumbai operations. Also launched Recharge Online

2009: The Zoozoos campaign resonated strongly with viewers in creating an emotional connect and communicating Vodafone various offerings. They tell viewers about various innovative and customer-centric offerings in a simple and endearing manner. Carrying forward the success of Zoozoos on screen and the internet, telecom company Vodafone Essar is set to launch Zoozoo merchandise in partnership with retail chain Shopper's Stop.

HP-Compaq Merger

Introduction

"The HP-Compaq merger was a big bet that didn't pay off, that didn't even come close to attaining what Fiorina and HP's board said was in store. At bottom, they made a huge error in asserting that the merger of two losing computer operations, HP's and Compaq's, would produce a financially fit computer business."

- Fortune, February 07, 2005.

Those who took the side of Walter Hewlett, the son of founder William Hewlett, saw the merger as the death of ‘The HP Way’. Those siding with CEO Carly Fiorina saw it as a necessary step forward, a battle between past and future.

In this case study, we deconstruct the merger and reflect on some relevant larger issues: the role of families and heirs in large corporations, how companies balance the ideals and vision of its founders against the realities of the current business environment, and the relationship between boards and company management.

When Carly Fiorina was appointed CEO of Hewlett-Packard in 1999, it marked many firsts: the first outsider, the first woman, the first non-engineer, and the youngest person ever to head HP in its 60-year history. Her mandate from the board: “totally recreate and reinvent HP according to the original HP Way.” In many people’s eyes, she accomplished this, transforming the company from a slow, risk-averse country club into a battle-ready competitor in the ‘new economy’. Others believe she destroyed the very heart and soul of a company.

In fiscal 2001, HP was the second largest computer company, behind IBM, with pre-merger revenue of $45 billion, 19th on the Fortune 500, with over 88,000 employees in more than 120 countries. However, HP was struggling with difficult economic conditions and a technology industry slump.  At the time, Compaq was the third largest computer company, behind IBM and HP, with revenue of $42 billion in fiscal 2001. The company had 66,000 employees in over 200 countries, and was ranked 27th in the Fortune 500. Compaq integration of Tandem and Digital in 1997 and 1998 respectively proved difficult; further pressured by the computer industry’s intense competition, Compaq’s stock took a beating.

The case analyses the merger deal and understands the various issues involved such as product synergies, cost savings and technological compatibility. The case also provides an insight into the possible hurdles that might crop up while implementing a mega - merger. The case

Explores the reasons for HP's failure to realize the synergies identified prior to the merger. It highlights that the leadership, legacy and cultural issues play an important role in mergers.

Describes in detail the rationale for HP -Compaq merger, problems faced in integrating the merged entities and whether the merger made business and economic sense.

Also describes the product profile of the merged entity and how the new HP compares with its major competitors, IBM and Dell Computers.

Presents the challenges faced by the new CEO of HP, Mark Hurd, in mid -2005.

Mega Merger

On September 04, 2001, two leading players in the global computer industry - Hewlett-Packard Company (HP) and Compaq Computer Corporation (Compaq) - announced their merger. HP was to buy Compaq for US$ 24 billion in stock in the biggest ever deal in the history of the computer industry. The merged entity would have operations in more than 160 countries with over 145,000 employees, and would offer the industry's most complete set of products and services.

However, the stock markets reacted negatively to the merger announcement with shares of both companies collapsing - in just two days, HP and Compaq share prices declined by 21.5% and 15.7% respectively. Together, the pair lost US$ 13 billion in market capitalization in a couple of days. In the next two weeks, HP's stock went down by another 17%, amidst a lot of negative comments about the merger from analysts and the company's competitors. Industry analysts wondered what benefits HP, a global market leader in the high margin printers business, would reap in acquiring a personal computer (PC) manufacturer like Compaq at a time when PCs were fast emerging as low-margin commodity products.

Though the merger helped HP in achieving economies of scale in the PC business, it faced fierce competition from Dell Computers (Dell), 2 a low-cost, direct-marketer of PCs.

The merger also did not help HP to compete with IBM, which not only sold PCs but was also a market leader in the high-margin consulting and service businesses. In June 2005, HP's shares hovered around US$ 23 per share, below the price just before the merger was announced. This indicated that the merger had failed to create shareholder value. In contrast, the share price of US-based Lexmark, HP's major competitor and the second largest company in the printers business, rose by 60%, while Dell's share price moved up by 90% in the same period. With the PC and other hardware businesses of HP making miniscule profits, analysts

opined that the company's printer business should be spun off into a stand-alone company...

Commenting on the dilemma faced by HP, George Day (Day), Professor of Marketing at Wharton School of Business, University of Pennsylvania, said, "HP is trying to be cost competitive with Dell and be the same kind of integrated-solutions provider that IBM has become. If that doesn't work - if it's clear IBM has too big a lead - then HP, which has this hugely profitable printer business, has to think about breaking up."4

Rationale for the merger

In the late 1990s, the PC industry slipped into its worst-ever recessionary phase, resulting in losses of US$ 1.2 billion and 31,000 layoffs by September 2001. According to analysts, with the computer industry commoditizing and consolidating very fast, mergers had become inevitable.

The HP-Compaq merger thus did not come as a major surprise to industry observers. The details of the merger were revealed in an HP press release issued soon after the merger was announced. The new company was to retain the HP name and would have revenues of US$ 87.4 billion - almost equivalent to the industry leader IBM (US$ 88.396 billion in 2000).

Under the terms of the deal, Compaq shareholders would receive 0.6325 share of the new company for each share of Compaq. HP shareholders would own approximately 64% and Compaq shareholders 36% of the merged company. Fiorina was to remain Chairman and CEO of the new company while Capellas was to become the President...

Merger Integration

The new HP developed a white paper giving complete details of its post-merger product strategy. The HP and Compaq brand names were retained for desktop PCs and notebooks for both consumers and commercial segments. The merged entity supported Compaq's brand name for its servers while it continued with HP for workstations. The electronic shopping sites of both the companies were also integrated.

To make the merger work, the new HP initially focused on two areas - avoiding culture clashes internally and reducing any problems to the customers. The company devoted a significant amount of time in planning to minimize any instance of culture clashes that usually happened in such mega-mergers. The task of ensuring this was given to Susan Bowick, HP's Senior VP of HR. She put all employees through a training workshop

named as 'Fast Start,' designed to explain the merged entity's new organizational structure and allow employees overcome concerns about their new co-workers. HP also made efforts to strengthen its image as a single unified company...

Does the merger make business sense

Soon, the HP-Compaq merger deal was approved by the HP's board and its shareholders in March 2002, industry analysts termed the deal as a strategic blunder. Critics ridiculed Fiorina by saying that one bad PC business merged with another bad PC business does not make a good PC company.

Many analysts felt that the synergies HP foresaw would not materialize easily. They said that the merged company would have to cut costs drastically in order to beat Dell in PCs, while constantly investing money in research and development and consulting to compete with IBM and Sun Microsystems.

In the high-end server markets, IBM and Sun Microsystems were constantly introducing new products. Since more than half of the new HP's sales came from low-margin PCs, analysts expressed concerns that it would not have enough cash to invest in R&D in order to compete in the high-end market...

A few HP divisions that were big revenue earners were not able to contribute correspondingly to profits. An analysis of the company's business segment revenues in the fiscal 2004 revealed that the Enterprise Storage & Servers and the Personal Systems divisions, the erstwhile Compaq strongholds, brought in revenues of US$ 39.774 billion, comprising approximately 50% of HP's total revenues (Refer Table II for HP's business segment information for the fiscal 2002 to 2004).

However, the operating profits from both these divisions combined were US$ 383 million, less than 1% of the divisions' revenues. Moreover, the total contribution of these two divisions in the overall operating profits of HP of US$ 5.473 billion was just 7%. Another major business of the erstwhile Compaq, HP services which generated revenues of US$ 13.778 billion, witnessed a fall in operating profits from US$ 1.362 billion in fiscal 2003 to US$ 1.263 billion in fiscal 2004. HP's own imaging and printing was the only business division that posted respectable operating profits of US$ 3.847 billion...

Challenges ahead

Due to her inability to revive the performance of hardware businesses, HP's board asked Fiorina to step down as the company's Chairman and CEO on February 09, 2005. The day Fiorina resigned; the shares of HP increased by 6.9 percent on the New York Stock Exchange.

Hindalco-Novelis Acquisition

'We look upon the aluminium business as a core business that has enormous growth potential in revenues and earnings,' 'Our vision is to be a premium metals major, global in size and reach .... The acquisition of Novelis is a step in this direction'

Kumar Mangalam Birla, Chairman, Hindalco Industries

Synopsis

Last decade witnessed growing appetite for takeovers by Indian corporate across the globe as a part of their inorganic growth strategy. In this chain, Indian aluminium giant Hindalco acquired Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled aluminium products. Hindalco Industries Ltd. acquired Novelis Inc. to gain sheet mills that supply can makers and car companies.

Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the leader in downstream aluminium rolled products. The transaction makes Hindalco the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as well as being India's leading copper producer. The section ahead analyses the financial and strategic implications of this acquisition for the shareholders of Hindalco and highlights the benefits of the deal for both the companies. Followings are the main issues addressed for critical review of this deal -

What is the strategic rationale for this acquisition? Were the valuation for this acquisition was correct?

What are financial challenges for this Acquisition?

What is the future outlook of this acquisition?

Introduction

Mergers and Acquisitions have been the part of inorganic growth strategy of corporate worldwide. Post 1991 era witnessed growing appetite for takeovers by Indian corporate also across the globe as a part of their growth strategy. This series of acquisitions in metal industry was initiated by acquisition of Arcelor by Mittal followed by Corus by Tata’s. Indian aluminium giant Hindalco extended this process by acquiring Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled aluminium products.

Hindalco Industries Ltd. acquired Novelis Inc. to gain sheet mills that supply can makers and car companies. Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the leader in downstream

aluminium rolled products. The acquisition of Novelis by Hindalco bodes well for both the entities. Novelis, processes primary aluminium to sell downstream high value added products. This is exactly what Hindalco manufactures. This makes the marriage a perfect fit. Currently Hindalco, an integrated player, focuses largely on manufacturing alumina and primary aluminium. It has downstream rolling, extruding and foil making capacities as well, but they are far from global scale. Novelis processes around 3 million tonnes of aluminium a year and has sales centers all over the world. In fact, it commands a 19% global market share in the flat rolled products segment, making it a leader.

Hindalco has completed this acquisition through its wholly-owned subsidiary AV Metals Inc and has acquired 75.415 common shares of Novelis, representing 100 percent of the issued and outstanding common shares. AV Metals Inc transferred the common shares of Novelis to its wholly-owned subsidiary AV Aluminium Inc. The deal made Hindalco the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as well as being India's leading copper producer. Hindalco Industries Ltd has completed its acquisition of Novelis Inc under an agreement in which Novelis will operate as a subsidiary of Hindalco.

INDUSTRY OVERVIEW: GLOBAL

Globally, newer packaging applications and increased usage in automobiles is expected to keep the demand growth for aluminium over 5% in the long-term. Asia will continue to be the high consumption growth area led by China, which has been and is expected to continue to register double-digit growth rates in aluminium consumption in the medium-term. With key consuming industries forming part of the domestic core sector, the aluminium industry is sensitive to fluctuations in performance of the economy. Power, infrastructure and transportation account for almost 3/4th of domestic aluminium consumption. With the government focusing towards attaining GDP growth rates above 8%, the key consuming industries are likely to lead the way, which could positively impact aluminium consumption. Domestic demand growth is estimated to average in the region of over 8% over the longer-term. Lowering of duties reduces the net tariff protection for domestic aluminium producers. Aluminium imports are currently subject to a customs duty of 5% and an additional surcharge of 3% of the customs duty. The customs duty has been reduced in a series of steps from 15% in 2003 to 5% in January 2007. With reduction in import duties, domestic realization of aluminium majors, namely Hindalco and Nalco, is likely to be under pressure, as the buffer on international prices is reduced. Moreover, with greater linkage to international prices, volatility in financials could increase. However, producers are moving downstream to negate the higher volatility.

INDUSTRY OVERVIEW: INDIA

The Indian aluminium sector is characterized by large integrated players like Hindalco and National Aluminium Company (Nalco). The other producers of primary aluminium include Indian Aluminium (Indal), now merged with Hindalco, Bharat Aluminium (Balco) and Madras Aluminium (Malco) the erstwhile PSUs, which have been acquired by Sterlite Industries. Consequently, there are only three main primary metal producers in the sector. The per capita consumption of aluminium in India is only 0.5 kg as against 25 kg. in USA, 19kg. in Japan and 10 kg. in Europe. Even the World’s average per capita consumption is about 10 times of that in India. One reason of low consumption in the country could be that consumption pattern of aluminium in India is vastly different from that of developed countries. The demand of aluminium is expected to grow by about 9 percent per annum from present consumption levels. This sector is going through a consolidation phase and existing producers are in the process of enhancing their production capacity so that a demand supply gap expected in future is bridged. However, India is a net exporter of alumina and aluminium metal at present.

Features of Indian Aluminium Industry

Highly concentrated industry with only five primary plants in the country

Controlled by two private groups and one public sector unit

Bayer-Hall-Heroult technology used by all producers

Electricity, coal and furnace oil are primary energy inputs

All plants have their own captive power units for cheaper and un-interrupted power supply

Energy cost is 40% of manufacturing cost for metal and 30% for rolled products

Plants have set internal target of 1 – 2% reduction in specific energy consumption in the next 5 – 8 years

Energy management is a critical focus in all the plants

Two plants have declared formal energy policy

Each plant has an Energy Management Cell

Achievements in energy conservation are highlighted in the Annual Report of the company

Energy targets are based on best energy figures achieved in their sector / region and by the plant itself in the past

Generally, government policies were rated as conducive to energy management

Task Force’ formed by BEE in this sector to work as catalyst in promoting energy efficiency

High cost of technology is the main barrier in achieving high energy efficiency

COMPANY OVERVIEW: HINDALCO INDUSTRIES LIMITED

Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is structured into two strategic businesses aluminium and copper with annual revenue of US $14 billion and a market capitalization in excess of US $ 23 billion. Hindalco commenced its operations in 1962 with an aluminium facility at Renukoot in U.P. Birla Copper, Hindalco's copper division is situated in Dahej in the Bharuch district of Gujarat. Established in 1958, Hindalco commissioned its aluminium facility at Renukoot in eastern U.P. in 1962 and has today grown to become the country's largest integrated aluminium producer and ranks among the top quartile of low cost producers in the world. The aluminium division's product range includes alumina chemicals, primary aluminium ingots, billets, wire rods, rolled products, extrusions, foils and alloy wheels. It enjoys a domestic market share of 42 per cent in primary aluminium, 63 per cent in rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent in wheels. Hindalco has launched several brands in recent years, namely Aura for alloy wheels, Freshwrapp for kitchen foil and ever last for roofing sheets. The copper plant produces copper cathodes, continuous cast copper rods and precious metals like gold, silver and platinum group metal mix. sulphuric acid, phosphoric acid, di-ammonium phosphate, other phosphatic fertilisers and phospho-gypsum are also produced at this plant. Hindalco Industries Limited has a 51.0% shareholding in Aditya Birla Minerals which has mining and exploration activities focused in Australia. The company has two R&D centres at Belgaum, Karnataka and Taloja, Maharashtra. They have been recognized by the Government of India's Department of Scientific and Industrial Research (DSIR). Year over year, Hindalco Industries Ltd. has been able to grow revenues from 121.2B to 193.2B. Most impressively, the company has been able to reduce the percentage of sales devoted to selling, general and administrative costs from 4.15% to 2.96%. This was a driver that led to a bottom line growth from 15.8B to 26.9B.

COMPANY OVERVIEW: NOVELIS

Novelis is the world leader in aluminium rolling, producing an estimated 19 percent of the world's flat-rolled aluminium products. Novelis is the world leader in the recycling of used aluminium beverage cans. The company recycles more than 35 billion used beverage cans annually. The company is No. 1 rolled products producer in Europe, South America and

Asia, and the No. 2 producer in North America. With industry-leading assets and technology, the company produces the highest-quality aluminium sheet and foil products for customers in high -value markets including automotive, transportation, packaging, construction and printing. Our customers include major brands such as Agfa -Gevaert, Alcan, Anheuser-Busch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak, ThyssenKrupp and others. Novelis represents a unique combination of the new and the old. Novelis is a new company, formed in January 2005, with a new velocity, a new philosophy and a new attitude. But Novelis is also a spin-off from Alcan and, as such, draws on a rich 90-year history in the aluminium rolled product market place. Novelis has a diversified product portfolio, which serves to the different set of industries vis-à-vis it has a very strong geographical presences in four continents. Novelis was always a problem child. It was born in early 2005 as a result of a ‘forced’ spin-off from its parent, the $ 23.6-billion aluminium giant and Canada-based Alcan. In 2003, Alcan won a hostile offer to wed French aluminium company Pechiney. But the marriage produced an unwanted child — Novelis. Both Alcan and Pechiney had bauxite mines, facilities to produce primary aluminium, and rolling mills to turn the raw metal into products such as stock for Pepsi and Coke cans and automotive parts. But the US and European anti-trust proceedings ruled that the rolled products business of either Alcan or Pechiney had to be divested from the merged entity. Alcan cast out its rolled products business to form Novelis. It is now the world’s leading producer of aluminium-rolled products with a 19 per cent global market share. But in the spin-off process, Novelis ended up inheriting a debt mountain of almost $2.9 billion on a capital base of less than $500 million. That was just the beginning of its troubles. The situation is worse now. Though it marginally reduced debt, it made some losses too. On a net worth of $322 million, Novelis has a debt of $2.33 billion (most of it high cost). That’s a debt-equity ratio of 7.23:1. Soon, the unwanted child stumbled into another crisis. Novelis has a simple business model. It buys primary aluminium, processes it into rolled products like stock for soft drink cans, automotive parts, etc., and sells it to customers such as Coke and Ford. But the management took a wrong call on aluminium prices. In a bid to win more business from soft drink manufacturers, it promised four customers not to increase product prices even if raw material aluminium prices went up beyond a point. A few months after Novelis signed those contracts, aluminium prices shot up 39 per cent (between 30 September 2005 and 2006). To these four customers, Novelis was forced to sell its products at prices that were lower than raw material costs. These four account for 20 per cent of Novelis’ $9-billion revenues. But the management’s wrong judgement led to losses of $350 million (in 2006). For long, Novelis’ former CFO Geoffrey P. Batt, former controller Jo-Ann Longworth and the finance team didn’t quantify these losses. After the complicated spin-off from Alcan — this involved extensive operations in over 35 plants in 11 countries and four continents — the finance team also struggled to file quarterly and annual results on time. Many of the

numbers it managed to file on time were wrong and were later re-stated. The board stepped in. First, it replaced its CFO and controller (in December 2005). When that didn’t help much, it replaced CEO Brian W. Sturgell in August 2006. (It is still looking for a full-time CEO.) There are many more reasons for the distress in Novelis. Now, enter the suitor. More recent expansions were made through both acquisitions and modernization of existing mills, which increased Alcan’s can stock, sheet and foil rolling capabilities. Novelis was spun off to carry on most of the aluminum rolled products businesses operated by Alcan with an approach to business that is more focused on helping our customers perform and on transforming new ideas into practical product solutions. Novelis inherited its assets, know-how and structure from Alcan. In 1902, the Canadian subsidiary of the Pittsburgh Reduction Company (later re-named Alcoa) was first chartered as the Northern Aluminum Company, Limited. When Alcoa divested most of its interests outside the United States in 1928, Alcan was formed as a separate company from Alcoa to assume control of most of these interests. In the following years Alcan expanded globally, building or acquiring hydroelectric power, smelting, packaging and fabricated product facilities run by approximately 88,000 employees in 63 countries. The first Alcan rolling operation began in 1916 in Toronto, Canada, with an 84-inch hot mill and three finishing mills. Over the years Alcan constructed a number of mills, including several that are among the largest aluminum rolling operations in each of the geographic regions in which Novelis operates:

Oswego, United States (1963) - the hot mill began operations and is now a major producer of can stock and industrial sheet.

Norf, Germany (1967) - a joint venture, owned at 50%, operates the world’s largest aluminum rolling mill in terms of capacity.

Saguenay Works, Canada (1971) – the largest continuous caster in the world in terms of capacity.

Pindamonhangaba, Brazil (1977) – the only South American plant producing beverage can body and end stock.

The company had 36 operating facilities in 11 countries as of December 31, 2005. The tables below present Net sales and Long-lived assets by geographical area (in millions). Net sales are attributed to geographical areas based on the origin of the sale. Long-lived assets are attributed to geographical areas based on asset location. In 2005, 2004 and 2003, 40%, 41% and 39%, respectively, of our total Net sales were to our ten largest customers. [Exhibit 11]

IMPORTANT FACTS ABOUT DEAL

Organic and inorganic both strategies have worked for companies worldwide. But in the process of global expansions inorganic growth strategies has always been the first preference for the companies globally.

As a part of its inorganic growth strategy of global expansion. The following points highlight the important points about this acquisition of Hindalco for this acquisition:

The acquisition of Novelis by Hindalco was in an all-cash transaction, which values Novelis at enterprise value of approximately US $6.0 billion, including approximately US $2.4 billion of debt.

This merger of Novelis into Hindalco will establish a global integrated aluminium producer with low-cost alumina and aluminium production facilities combined with high -end aluminium rolled product capabilities.

After merger Hindalco will emerge as the biggest rolled aluminium products maker and fifth -largest integrated aluminium manufacturer in the world.

As Novelis is the global leader in aluminium rolled products and aluminium can recycle, with a global market share of about 19%. Hindalco has a 60% share in the currently small but potentially high-growth Indian market for rolled products.

Hindalco's position as one of the lowest cost producers of primary aluminium in the world is leverageable into becoming a globally strong player. The Novelis acquisition will give the company immediate scale and strong a global footprint.

Novelis is a globally positioned organization, operating in 11 countries with approximately 12,500 employees. In 2005, the company reported net sales of US $8.4 billion and net profit of US $90 million.

The company reported net sales of US $7.4 billion and net loss of US $170 million in nine months during 2006, on account of low contract prices. Some of these contracts are expected to continue for next Years also.

By January 1, 2010, all the sales contracts will get expired and profitability will increase substantially from then onwards.

Novelis will work as a forward integration for Hindalco as the company is expected to ship primary aluminium to Novelis for downstream value addition.

Novelis has a rolled product capacity of approximately 3 million tonne while Hindalco at the moment is not having any surplus capacity of primary aluminium.

Hindalco’s green-field expansion will give it primary aluminium capacity of approximately 1 million tonne, but this will take a minimum 3-4 years to all the capacities to come into operation. Novelis

profitability is adversely related to aluminium prices and higher aluminium prices on LME in near future can’t be ruled out. However, we expect the aluminium prices to be softening in long term and this would be positive for Novelis.

Considering these factors, Hindalco’s profitability is expected to remain under pressure and this will bounce back in 2009-10. The profitability will be accretive only in 2010-11.

The debt component of Novelis stood at US $2.4 billion and additional US $2.8billion will be taken by Hindalco to finance the deal. This will put tremendous pressure on profitability due to high interest burden.

Hindalco’s existing expansion will cost Rs. 25,000 crore and as a result debt and interest burden of the company will increase further.

CRISIL has placed its outstanding long-term rating of ‘AAA/Stable’ on Hindalco Industries Limited (Hindalco), on ‘Rating Watch with Negative Implications’. The short term rating of ‘P1+’ has been reaffirmed. This would lead to higher interest rate for the company.

FUNDING STRUCTURE FOR THE DEAL

The funding structure of this deal is remarkably different from the leveraged buyout model that Tata Steel used to fund the Corus buy. The Tatas are to buy 100 per cent of Corus’ equity for $12.1 billion. Only $4.1 billion of this is being raised by the Tatas. The remaining $8 billion will be raised (as debt) and repaid on the strength of the Corus balance sheet. Effectively, the Tatas are paying only a third of the acquisition price. This was possible because Corus had relatively low debt on its balance sheet and was able to borrow more. But that is not the case with Novelis. With a debt-equity ratio of 7.23:1, it can’t borrow any more. So, the Birlas were unable to do a leverage buyout. To buy the $3.6 billion worth of Novelis’ equity, Hindalco is now borrowing almost $2.85 billion (of the balance, $300 million is being raised as debt from group companies and $450 million is being mobilised from its cash reserves). That is almost a third of the Rs 2,500 crore net profits Hindalco may post in 2006-07. (It has reported a net profit of Rs 1,843 crore for the first three quarters of this year.) The second part of the deal is the $2.4-billion debt on Novelis’ balance sheet. Hindalco will have to refinance these borrowings, though they will be repaid with Novelis’ cash flows.

STRATEGIC RATIONALE FOR ACQUISITION

This acquisition was a very good strategic move from Hindalco. Hindalco will be able to ship primary aluminium from India and make value-added products.'' The combination of Hindalco and Novelis establishes an integrated producer with low-cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint.

Hindalco’s rationale for the acquisition is increasing scale of operation, entry into high—end downstream market and enhancing global presence. Novelis is the global leader (in terms of volume) in rolled products with annual production capacity of 2.8 million tonnes and a market share of 19 per cent. It has presence in 11 countries and provides sheets and foils to automotive and transportation, beverage and food packaging, construction and industrial, and printing markets. Hindalco’s rationale for the acquisition is increasing scale of operation, entry into high—end downstream market and enhancing global presence. Novelis is the global leader (in terms of volumes) in rolled products with annual production capacity of 2.8 million tonnes and a market share of 19 per cent. It has presence in 11 countries and provides sheets and foils to automotive and transportation, beverage and food packaging, construction and industrial, and printing markets. Acquiring Novelis will provide Aditya Birla Group's Hindalco with access to customers such as General Motors Corp. and Coca-Cola Co. Indian companies, fueled by accelerating domestic growth, are seeking acquisitions overseas to add production capacity and find markets for their products. Tata Steel Ltd. spent US $12 billion to buy U.K. steel maker Corus Group Plc. Novelis has capacity to produce 3 million tonne of flat- rolled products, while Hindalco has 220,000 tonne.

“This acquisition gives Hindalco access to higher-end products but also to superior technology,”

Hindalco plans to triple aluminium output to 1.5 million metric tonne by 2012 to become one of the world's five largest producers. The company, which also has interests in telecommunications, cement, metals, textiles and financial services, is the world's 13th-largest aluminium maker. After the deal was signed for the acquisition of Novelis, Hindalco's management issued press releases claiming that the acquisition would further internationalize its operations and increase the company's global presence. By acquiring Novelis, Hindalco aimed to achieve its long-held ambition of becoming the world's leading producer of aluminium flat rolled products. Hindalco had developed long-term strategies for expanding its operations globally and this acquisition wasa part of it. Novelis was the leader in producing rolled products in the Asia-Pacific, Europe, and South America and was the second largest company in North America in aluminium recycling, metal solidification and in rolling technologies worldwide. The benefits from this acquisition can be discussed under the following points:

Post acquisition, the company has a strong global footprint. The deal has given Hindalco a strong presence in recycling of

aluminium business. As per aluminium characteristic, aluminium is infinitely recyclable and recycling it requires only 5% of the energy needed to produce primary aluminium.

Novelis has a very strong technology for value added products and its latest technology ‘Novelis Fusion’ is very unique one.

It would have taken a minimum 8-10 years to Hindalco for building these facilities, if Hindalco takes organically route.

As per company details, the replacement value of the Novelis is US $12 billion, so considering the time required and replacement value; the deal is worth for Hindalco.

Novelis being market leader in the rolling business has invested heavily in developing various production technologies. One of such technology is a fusion technology that increases the formability of aluminium. This means that it can be better used formed into the design requirement by the car companies. All raw aluminium is processed so that it can be used in products. Forty percent of the products are rolled products and Novelis is in leader in rolling business with a market share of 20%. Any change in the raw material price is directly passed on to the customers who range from coca cola to automobile companies like aston martin. The current revenue of Hindalco is very much dependent on the aluminium prices and when the prices are high they make a larger margin, this not the case with rolling business which usually has a constant margin. For Hindalco, to develop such technology will take a lot of time. According to Standard and Poor, it would take 10 years and $ 12 billion to build the 29 plants that Novelis has with capacity of close to 3 million tonnes. The takeover of Novelis provides Hindalco with access to the leading downstream aluminium player in western markets. The purchase structurally shifts Hindalco from an upstream aluminium producer to a downstream producer. This is reflected in Novelis’ downstream product capacity of 3.0 mt compared to Hindalco’s existing primary capacity of 500 kt. Even with Hindalco’s expansion plans to take primary production to 1.5 mt by 2011, the group will remain a downstream aluminium producer. Novelis shareholders are required to approve the deal which the companies expect to be completed by 2007.

VALUATION FOR ACQUISITION

The big concern is Novelis’ valuation. Analysts believe the Birlas are paying too high a price for a company that incurred a loss of US $170 million for the nine months ended 30 September 2006. In its latest guidance, the Novelis management has indicated a loss of US $240 million- 285 million for the whole of 2006. Even in 2005, when Novelis had made a US $90-million net profit, its share prices never crossed US $30. Financial numbers show that Novelis is not a good choice by Hindalco at least at the price that they paid for the company. The immediate effect of the merger is that Hindalco would achieve its target of doubling its turnover to $ 20 billion three years in advance. Novelis fits well in the long term strategy of Hindalco. Novelis is not a dying company looking for a savior; Hindalco approached Novelis because they believed that Novelis can give them some business advantage. So why is Hindalco paying US $44.93 a share for a loss-making company? In its guidance, the Novelis management has indicated a pre-tax profit of US $35 million-100 million

for 2007. Going by the optimistic end of the guidance, the price Hindalco paid translates to a market capitalization/profit before tax (PBT) multiple of 36 on Novelis’ 2007 forecast. That appears to be high. [Exhibit 13] Hindalco has long held an ambition to become a leading (top 10) player across its 2 key business segments, aluminium and copper. The acquisition of Novelis should achieve part of this goal by propelling Hindalco to the world’s leading producer of aluminium flat rolled products. With capacity of nearly 3.0 mt of flat rolled aluminium products, Novelis takes Hindalco down the value chain to become a downstream aluminium producer, versus its current upstream focus. At a price of US $44.93/share and assuming US $2.4 bn of debt, Novelis is not coming cheaply. Based on Novelis’ guidance and consensus forecasts for 2007, we estimate that Hindalco is paying 11.4x EBITDA, 20.7x EBIT or 53.4x PE. At a total enterprise value of US $ 6 billion, Novelis is nearly 50% larger than Hindalco’s current market capitalization. The concern is the severity of the earnings and value dilution that will result. Assuming synergies are minimal and based on Novelis’ guidance for 2007; we calculate that Hindalco’s EPS will be diluted by 18%. At Novelis long term annual free cash flow target of US $400m (using a real WACC of 9%), we estimate the acquisition will destroy value by INR60/share. To put it another way, we estimate Hindalco will need to improve annual free cash flow by 35% to US $540m for the acquisition to be value (NPV) neutral. Perhaps the greatest issue with the Novelis acquisition is Hindalco’s balance sheet position post acquisition. Having already committed to significant expansion projects, Novelis will push Hindalco’s high gearing levels even further. We calculate that Hindalco’s gearing (ND/E) will reach 236%, with its Net Debt / EBITDA ratio reaching over 5.0 xs. In our view, an equity raising is highly possible in the short to medium term. Novelis recently reported a 3Q loss of US $102m. For the nine-months to Sep06, Novelis reported a loss of US $170m. A key factor behind the losses suffered in 2006 was price ceilings contracted to Novelis’ long-term can-making customers, which impacted revenues by US $350m. Novelis believes that their exposure to these types of contracts will reduce to a maximum of 10% of sales in 2007. While this is comforting, we believe Novelis remains a challenging turnaround prospect. Based on Novelis guidance for 2007 and assuming this is relevant to Hindalco’s FY08 period, we calculate Hindalco’s EPS will be diluted by 18%.

FINANCIAL CHALLENGES FOR THE ACQUISITION

The acquisition will expose Hindalco to weaker balance sheet. Besides, the company will move from high margin metal business to low—margin downstream products business. The acquisition will more than triple Hindalco’s revenues, but will increase the debt and erode its profitability. The deal will create value only after the Hindalco’s expansion completion, and due to its highly leveraged position, expansion plans may get affected. Some of the customers of Novelis are significant to the company’s revenues, and that could be adversely affected by changes in the business or financial condition of these significant customers or by the

loss of their business. (The company’s ten largest customers accounted for approximately 40% of total net sales in 2005, with Rexam Plc and its affiliates representing approximately 12.5% of company’s total net sales in that year). Novelis profitability could be adversely affected by the inability to pass through metal price increases due to metal price ceilings in certain of the company’s sales contracts. Adverse changes in currency exchange rates could negatively affect the financial results and the competitiveness of company’s aluminium rolled products relative to other materials. The Company’s agreement not to compete with Alcan in certain end-use markets may hinder Novelis ability to take advantage of new business opportunities. The end-use markets for certain of Novelis products are highly competitive and customers are willing to accept substitutes for the company products. Though the Hindalco-Novelis acquisition had many synergies, some analysts raised the issue of valuation of the deal as Novelis was not a profit making company and had a debt of US $ 2.4 billion. They opined that the acquisition deal was over-valued as the valuation was done on Novelis' financials for the year 2005 and not on the financials of 2006 in which the company had reported losses.

FUTURE OUTLOOK

High prices and buoyant demand outlook in the domestic as well as international markets prompted aluminium companies to undertake huge expansion plans. Huge quantity of aluminium will come into the market in the coming years. All the three major companies Nalco, Hindalco and Vedanta group have drawn up plans to increase Capacities. At the end of January 2007, investment in hand in the aluminium anti aluminium products sector amounted to Rs.59,81800 million and are spread across 35 projects. Most of the major projects, amounting to over 60 per cent of the aggregate investment in value terms, are under implementation. If all the projects are successfully implemented, aluminium smelting capacity will increase from 11.8 lakh tonnes to 18 lakh tonnes. Of this, about 1.6 lakh tonnes will come on stream in 2007—08 and five lakh tonnes each in 2009 and 2010. Hindalco has undertaken aggressive plans to increase its capacities through capacity expansion as well as by setting up green-field plants. Hindalco increased its capacity at Hirakud plant by 35,000 tonnes to one lakh tonne. When Hindalco completes all its project, smelting capacity will increase by about 10 lakh tonnes. Along with smelting capacities, the companies are expanding alumina capacities and setting up captive power plants. Domestic alumina capacity is set to increase by 9.5 million tonnes when all the outstanding projects are completed. In 2007—0 itself about 1.23 million tonnes of capacity will come on stream, catapulting aggregate capacity to 4.23 million tonnes. Large alumina capacities will not only feed captive aluminium smelters, but also leave surplus alumina to be exported to lucrative markets like China. Currently Hindalco's production is tied up with clients. Also Novelis has similar contracts with its suppliers. But after 3-4 years it would start the operation of new plants. Then it can source excess capacity to the Novelis plants

located in South East Asian countries. The merger looks not bad if the current financial valuations are ignored. Also we need to keep in mind that Hindalco is a very aggressively growing company, for it to build infrastructure that can match Novelis is very difficult.

Kingfisher & Air Deccan Merger

Introduction

India is one of the fastest growing aviation markets in the world. With the liberalization of the Indian aviation sector, the industry had witnessed a transformation with the entry of the privately owned full service airlines (FSA) and low cost carriers (LCA). In the year 2006, private carriers accounted for around 75% share of the domestic aviation market. The sector also witnessed a significant increase in number of domestic air travel passengers. Some of the factors that have resulted in higher demand for air transport in India include the growing middle class and its purchasing power, low airfares offered by LCA’s, the growth of the tourism industry in India, increasing outbound travel from India, and the overall economic growth of India.

In addition to these factors, the emphasis on modernization of non-metro airports, fleet expansion by airlines, service expansion by state owned carriers, development of the maintenance, repair and overhaul (MRO) industry in India, opening up of new international routes by the Indian government, establishment of new airports and renovation and restructuring of the existing airports have added to the growth of the industry.

The trend has been sustained, rather improved, in the first half of 2007 with key drivers being positive economic factors (the highest GDP growth), industrial performance, corporate profitability/expansion, higher disposable incomes and growth in consumer spending as well as wider availability of low fares.

In the period of April-September 2006, the total aircraft movements witnessed an increase of 29.6% year-on-year to 494.92 thousand aircraft movements, compared to 318.89 thousand during April-September 2005. In September 2006 period, the total passenger traffic has shown an increase of 31.1% year-on year as compared to September 2005. The Indian domestic market has been growing at and has exceeded 50% in the 1st half of 2007. An analysis of the industry for 2006 revealed that FSA’s are losing out 1.5% of their market share every month to LCCs.

Indian Aviation Industry: Issues and Concern

The comprehensive civil aviation policy, expected to pave the way for start-up airlines to launch international operations without waiting to

complete five years in the domestic market, has been referred to a group of ministers. The Union Cabinet decided to set up a Group of Ministers (GoM) for detailed study of the issues concerned. Titled Vision 2020, the civil aviation policy draft also seeks to enhance FDI in some areas such as cargo operations, chartered flights and ground handling. On the drawing board for years, the policy draft was submitted to the Cabinet recently. Indian airlines are now allowed to launch overseas operations only after they serve the domestic market for five years. Civil aviation minister Praful Patel initially sought to reduce the five year experience criterion to three years. Ultimately, he proposed that the experience criterion should be scrapped and airlines should get the green signal purely on the basis of their capability, which will be decided on the basis of fleet size, financial capability, management expertise, human resources and technical competence.

In less than three months, the Indian aviation industry has seen a rapid transition in the number of players. From being a fragmented industry with ten players competing neck-to-neck with each other, now the industry is left with only three big players.

While the long awaited merger of Air India and Indian Airlines has been given a green signal, consolidation has spread out to cover even private players. After the Jet-Sahara merger, the recent one to join the bandwagon is Kingfisher Airlines, which bought a 26 per cent stake in the biggest domestic low cost carrier Air Deccan.

Paramount Airways, a smaller regional player, is also said to be interested in buying out the Wadia-owned Go Air, which too is a national LCC.

According to Captain Gopinath, now the executive chairman, Deccan Aviation this consolidation was much needed for the aviation sector. The only way forward is by making profit, for which the key is consolidation.

Air fares are expected to rise as companies cannot afford to bleed anymore. An average increase of 5-7 per cent is expected over the next few months excluding the effect of monsoon when prices tend to be low because of off season.

Although, ATF price is stable at around $37-38 a liter, it is higher compared to international prices of about $22. However the government is deliberating on a proposal of allowing imports of ATF directly, which would be a big boon to the industry. Moreover the

overall costs will come down due to better synergies in operations and infrastructure.

Though there are some concerns that continuing fleet additions by most players may lead to a situation of supply outstripping demand -- supply is expected to grow at 22-25 per cent while passenger traffic is expected to grow at 20 per cent -- with fewer players in the fray, competition will be healthier.

Deccan Aviation Limited – A Review

Deccan Aviation, promoted by Capt. G.R. Gopinath, Capt. K.J. Samuel and Capt. Vishnu Singh Rawal, was initially incorporated as a private limited company on June 15, 1995 in Karnataka with the main object of pursuing chartered aviation services both for commercial and non commercial purposes in India and to provide all aviation related services. It was converted into a public limited company in 2005. The company’s vision was “To empower every Indian to Fly” and its mission “To demystify air travel in India by providing reliable low cost and safe travel to the common man by constantly driving down the air fares as an ongoing mission”.3 As is evident from their mission statement, the strategy was to garner market penetration through cost reduction. Some of the key factors that helped the company reduce costs included:

1. Quicker Turnaround Time –The turnaround time taken between two Air Deccan flights is 25 minutes compared to 45 minutes to 01 hour for an FSA. This enables the aircraft to fly longer number of hours. An Air Deccan plane flies for 11 hours a day as compared to 09 hours by other airlines.

2. Lower Distributions Costs – Air Deccan has a customized reservation system, which is not dependent on any of the Global Distribution Systems (GDS) like Amadeus and Galileo. FSA’s are dependent on the GDS, which entails charges, thereby increasing the ticket cost by approx $3.

3. All Economy Seating Configurations – There is no business class available, enabling more seats per aircrafts. An FSA would have 150 seats in an Airbus 320; where as Air Deccan has 180 seats on the same, which is 20% more.

4. Catering – Air Deccan does not support catering onboard its flights, which other than reducing the costs by the cost of food, also avoids time spent on loading, space for hot gallery, cleaning required thereon. This also helps avoid customer unhappiness over the choice

of food which is a problem faced by many airlines over the globe. Ready-to-Serve snacks are available at a cost onboard the flights.

5. Alternative Revenue Channels – Air Deccan earns revenues by providing branding opportunities in the interior and exterior of the aircraft, television ad spots, boarding cards, stowage bins. The revenues earned there in, help the company take care of its advertising costs which are not passed on the customer as in case of FSA’s.

6. E Ticketing – All reservations are done through the internet and no paper tickets are involved, thus entailing saving of ticket printing costs. The manpower required to handle the sales activity and accounts reconciliation is also considerably reduced.

7. Enhanced Cash Flow Management – With the internet based reservation system, all tickets are paid for upfront and no credit extended thus enabling optimal working capital utilization.

Key Facts and Figures

Air Deccan currently operates with a fleet of 43 planes. This includes:

A brand new fleet of 19 Airbus A320 aircraft with an average age of 1.5 years 24 ATR turboprop aircraft

Air Deccan holds a 22% market share in terms of passengers carried.

Air Deccan flies 9, 00,000 passengers every month.

Air Deccan operates 350 flights daily to 65 destinations countrywide.

Fleet Expansion

The company has acquired 30 Airbus A320s, which are to be deployed starting in 2007

The airline has also ordered 30 new ATR 72-500 aircraft (half to be leased), along with 3 second hand ATR 42-500s and 3 second hand ATR 72-500s. Deliveries will begin in May 2005 and be spread over a five year period with 6 to 8 aircraft delivered each year. As of June 2005, two of the 30 aircraft have been delivered.

On January 3rd 2006, Air Deccan placed a further order of 30 Airbus A320 aircraft taking their total orders of A320s to 62

All 62 A320 aircraft will be powered by IAE V2500 engines

Competitors

Air Deccan's phenomenal growth spurred the entry of more than half a dozen low-cost air carriers in India. Air Deccan faces stiff competition from Kingfisher Airlines, Spice Jet, Indigo and Go Air. The growth of these low-cost air carriers has also forced mainstream Indian airliners like Indian Airlines, Jet Airways and Air Sahara to lower their fares.

However, there is a lot of scope for the growth of the airline since the Indian air industry continues to remain largely under-penetrated.

Revenue: Air Deccan has reported a sizeable net loss for the first reporting period since it became a publicly traded company. In a statement to the National Stock Exchange of India (NSE) it reported a net loss of Rs. 3.4 billion ($74 million) for the 15- month period between 1 April 2005 and 30 June 2006. It originally hoped to break even in the current financial year but company executives does not expect to post profits until 2008 as a result of intense competition following the launch of several other new airlines. However Air Deccan announced a marginal profit of Rs. 9.64 crores on the back of a strong Oct-Dec 2006 quarter. The following figure depicts the current and the future earnings for the company. (Figure 1 – Air Deccan Earning Summary & Forecast)

Key Challenges

Funding for its expansion activities Mounting Losses - Air Deccan made a huge loss of Rs 356 crore for the trailing 12-month period ended March 2007 In a recent exposure by CNNIBN channel, Air Deccan had been accused of deliberate slowdown in check-in and overbooking, of which the latter is a violation of DGCA rules. Low cost airlines are not allowed to overbook since they do not refund the passenger fare nor do they offload the passengers to other airlines. The exposure claims that Air Deccan deliberately slows the check-in process and offloads many passengers with confirmed tickets as no shows. Moreover frequent delay and cancellation of Air Deccan flights is leading to customers going to other budget airlines; however this trend has been reversed lately with an improved on-time performance of more than 95% till Dec 2006.

Kingfisher Airline – A Review

Kingfisher Airline was launched in May 2005 by Dr. Vijay Mallya as a part of the UB Group, the world's second-largest alcohol manufacturer. In fact Dr. Mallaya had pitched for taking Air Deccan prior to the launch of his airlines. Dr. Mallaya’s vision was to build India's largest domestic carrier by 2010. Kingfisher targets the well-heeled passenger and the business traveler with promises of pampering customers with quality, full-flight service. It promises to consistently deliver a safe, value-based and

enjoyable travel experience to all our guests, with special emphasis on safety and world class customer service. Dr. Mallya wanted to build an organization with people who choose to be happy, and would also endeavor to influence their guests and co-workers to be happy. Each one of its employees would be held accountable for the successful execution of the airlines duties, commitments and obligations, and would strive to lead by example.

Key Facts and Figures

Kingfisher currently operates with a fleet of 28 planes. This includes a brand new fleet of 22 Airbus A320 aircrafts and 6 ATR turboprop aircraft

Kingfisher holds an 11% market share in terms of passengers carried.

Kingfisher operates over 110 flights daily to over 32 destinations countrywide.

Fleet Expansion

Kingfisher has placed orders for new aircrafts as per the details below:

Airbus A330-200 – 05 Nos.

Airbus A340-500 – 05 Nos.

Airbus A350-800 – 05 Nos.

Airbus A380-800 – 05 Nos.

Airbus A319-131 – 01 No.

Airbus A320-232 – 31 Nos.

Airbus A321-232 – 02 Nos.

Indian Aviation Industry – Primary Concerns

The long-term challenges lie in the high cost of operations due to factors unique to India. While aviation may have been opened up to all players, it is still over regulated.

Due to the monopoly of state owned oil firms jet fuel prices are up to two times higher than the international average.

In addition to the marketing charges and import and customs duties that oil companies levy, state governments also levy their own sales taxes ranging from 4% to 40%.

Another notable factor is that domestic carriers are not allowed to hedge their fuel costs while international airlines are allowed to do so. This is of high significance considering that fuel accounts for a third of airline operating costs in India, double the global average.

Manpower shortage is also an urgent concern. Due to the volume of new aircraft on order, India would need 3,000 pilots to add to the current 2,000 by 2010. Already, local carriers have had to hire 300 pilots from overseas. Air Deccan has 75 from as far away as Brazil, Nigeria, Romania, Philippines, and Australia.

The wages of the local recruits have to match the structure of the expatriates irrespective of whether LCA’s or FSA’s. For example salaries of pilots at Kingfisher range from US$5,000 to US$100,000 a month, on par with international standards.

The most alarming constraint is the lack of physical space to accommodate new aircraft.

Major domestic airports like Mumbai and Delhi have little to no overnight parking slots. Their single runways are also designed to turn around only 15 aircraft an hour, just a third of the global average; planes need to taxi and fly around in circles for 30 minutes before takeoff and landing. Even in metro airports, revenues from retailers make up only 20% of the total, versus 58% in Changi and 71% in Sydney as per a study by the credit-rating firm CRISIL.

The problem is compounded due to the lack of secondary airports in India. While India has over 400 airports, only 89 domestic ones are operational. All of these undermine the viability of low cost carriers.

Funding options for startup carriers as well as sources for fresh capital for existing airlines has become scarce. The banking industries as well as leading financial institutions are vary of putting in funds in the aviation sector in view of the mounting airline losses. This makes consolidation an attractive option for the enterprises in sector and will help them come out of the price war strategies.

Kingfisher & Air Deccan Merger – Key Features

On June 1, 2007 after a week of intense negotiation and subsequent agreement, the Board of Deccan Aviation Ltd. approved the allotment of

equity shares amounting to 26% of the expanded paid up capital of the company to United Breweries Holdings Ltd., and its nominees. The new shares were allotted at Rs.155 per share representing approximately a 10% premium to the current market price of the shares of Deccan Aviation Ltd. An initial investment of Rs.150 crores into Deccan Aviation Ltd. was already made against which shares were to be allotted and further investments of Rs.396 crores was to be made before the end of June.

When this investment process is complete, the UB Group will become the largest single shareholder in Deccan Aviation Ltd., and will be entitled to nominate 3 Directors on the Board.

The Board will comprise 12 Directors with 3 Directors being nominated by the UB Group, 3 will be nominated by the original promoters/institutional shareholders and the remaining 6 will be independent Directors to be nominated jointly by the UB Group and the current promoter and institutional shareholders.

While Captain G.R. Gopinath will continue as Executive Chairman, a new CEO will be appointed reporting directly to the Board of Directors.

United Breweries Holdings Ltd. will make an open offer to acquire minimum of 20% to all shareholders of Deccan Aviation Ltd. at a price of Rs.155/- in compliance with SEBI regulations.

Kingfisher Airlines and Air Deccan will, henceforth, work very closely together to exploit the significant synergies that exist in the areas of operations and maintenance, ground handling, vastly increased connectivity, feeder services, distribution penetration etc.

The Kingfisher-Air Deccan group will be the largest domestic airline with a fleet of 71 aircraft including 41 Airbus aircraft and 30 ATR aircraft. This combined airline powerhouse will cover all segments of air travel from low fares to premium fares and offer the maximum number of 537 daily flights covering the single largest network in India connecting 69 cities whilst taking advantage of unparallel synergy benefits arising from a common fleet of aircraft.

For the near future, Kingfisher will continue to serve the corporate and business travel segment while Air Deccan will focus on serving the low fare segment but with improved financial prospects for both carriers.

Kingfisher & Air Deccan Merger – Primary Advantages

The infusion of fresh equity will allow Deccan Aviation to restructure their loans, fund expansion, consolidating various infrastructure projects in conjunction with Kingfisher's infrastructure thereby making the operations profitable in the shortest possible time.

Dr. Mallya expects the airline to turn profitable in a year and puts the tangible benefits from joining hands to around Rs 300 crore a year.

The merger ensures that Kingfisher does not need to invest more in infrastructure or in spare planes, thereby reducing costs and increasing profitability.

Reduction of cost by sharing infrastructure

A formal understanding to end undercutting

Better bargaining power with the government for seeking reduction in fuel prices and a cut in airport taxes.

The combined share of the two carriers would increase to 33% of the domestic market marginally ahead of Jet Airways (22%) and Air Sahara (9%) combine. (As per data of April 07).

Kingfisher & Air Deccan – Key Synergies

1. Kingfisher and Air Deccan will now be able to access ground infrastructure at 65 airports, of which more than 28 are common to both the set ups.

2. On the most lucrative of routes, New Delhi-Mumbai, that on its own accounts for more than half of India's 33 million passenger traffic, the two carriers will now account for a total of 155 flights.

3. The new entity will have over 71 aircraft. (Refer Figure 2)

4. Reduce undercutting and associated price wars.

5. Kingfisher and Air Deccan have exactly the same fleet of aircraft, the same equipment in terms of engine, in terms of brakes and in terms of avionics. This provides a huge opportunity on saving in engineering and maintenance cost.

6. Apart from ground handling synergies, there is a whole host of items where duplication is completely unnecessary and can now be avoided.

7. The airlines will achieve perfect synergies in the backend (operations and maintenance, ground handling, vastly increased

connectivity, feeder services, distribution penetration) while preserving the front-end and that will enable both Deccan and Kingfisher to be profitable.

8. Kingfisher has placed orders for new aircrafts at higher prices as compared to Air Deccan. The alliance with Air Deccan may provide it the opportunity to renegotiate its rates with the manufactures thereby saving substantially.

9. Air Deccan and Kingfisher Airlines can now look at rationalizing their fleet and considering changes in the total fleet order of 90 aircraft.

10. According to Dr. Mallya kingfisher is considering swapping or switching in coordination with each other to rationalize the fleet structure.

11. Both airlines have orders for about 90 aircraft currently placed with European aircraft major - Airbus Industrie.

12. As per the existing laws Kingfisher Airlines would not be able to operate on international routes until 2010. However Air Deccan would be eligible from the second half of next year as its five-year ceiling is coming to an end. Kingfisher Airlines would also secure majority ownership of Air Deccan through a public offer that would be announced soon. It is already the biggest single shareholder of Air Deccan. Figure 2 – Aircraft Holdings (Post Consolidation)

Post Merger Development

Air Deccan, the common man's airlines, was no longer associated with its founder Captain Gopinath, when Vijay Mallya, UB Group chief, secured around 50% stake in the budget carrier and renamed the airline as “Kingfisher Red” w.e.f from 29 Aug' 08. With this, the name Deccan was removed from the brand and this change took place exactly five years after the LCC was founded.

On 29 August, the Deccan website announced that the airline was now 'Kingfisher' and the tickets would be sold on the latter's website with the flight code IT as Deccan's code DN was being withdrawn. The merged company was known as Deccan Aviation, entitled to go abroad. The brand was Kingfisher, under which there's a LCC - Kingfisher Red - and the full service carrier.

On the occasion of re-branding, Captain Gopinath told that consolidation was done to defend the interest of investors, vendors and employees. He further underlined the brand Deccan would continue and its model would

live through Kingfisher Red and other LCCs - Deccan Express and Logistics, Deccan Budget Hotels, and Deccan Charters. Of these, Deccan Express and Logistics, and Deccan Budget Hotels would be 100% owned by Captain Gopinath, while Deccan Charters would be co-owned by Captain Gopinath and Vijay Mallya.

All the three companies have big expansion plans. Deccan Express and Logistics has ordered 10 aircraft and Deccan Budget Hotels will set up budget hotels across India. Deccan Charters that deals in helicopters and small planes — is being hived off from Deccan Aviation and would get a separate air operator’s permit.

Conclusion

Though Aviation is a booming industry in India, rising fuel costs and stringent competition could be the area of concern. The aviation sector in India has been marked by fast-paced change in the past few years. Until liberalization, just the two government-owned carriers flew to both domestic and foreign destinations. From being a service that few could afford, the sector has now graduated to being a fiercely competitive industry with the presence of a number of private and public airlines and several consumer oriented offerings.

The sector, being a growth sector, is expected to do good over a long term. According to estimates by a top analyst at the International Air Transport Association (IATA), the investment needed by the Indian aviation industry is around $90 billion in the next 24 years and this provides big opportunities for investors world-wide.

The Centre for Asia Pacific Aviation (CAPA) is of the view that the industry could get even bigger with $40 billion investment potential in the next five to seven years. Though estimates are diverse, there is consensus on the boom in India which could be turn out to be biggest the global aviation industry has seen so far. To catalyze the growth process, the government is finalizing a new civil aviation policy. The new policy is expected to address all issues that will benefit the aviation sector in the long run.

Analysts estimate domestic airline companies to mobilize over $500 million in the next 12-16 months through the IPO route. However, this would largely depend on the government's success in pushing through the IPOs of Indian Airlines and Air-India. The low-cost airlines are likely to perform below par in the near future, though there could be growth prospects over the long-term.

With domestic air travel forecast to grow by 25 percent a year for the next five years, the Indian aviation market is booming, and carriers, the

government, and aircraft manufacturers are working overtime to keep up with demand. The main drivers of traffic growth they say are economic upswing, concentration of population, wealth and industries leading to higher propensity to travel and increasing liberalization. And add to this there are penetrations of low-cost carriers which are offering exceptionally low airfare that can be compared with railway AC fares. India is the only country where the number of air travellers a year equals the number of rail passengers in a day.

Delta Airlines and Northwest Airlines Merger

Introduction

Airline mergers and acquisitions are on the rise across the globe. Theses mergers and acquisitions are highly strategic involving several considerations.

Moreover airline mergers and acquisitions bear serious implications for travellers as well as airline employees. Important issues related to airline mergers and acquisitions are time, approvals, efficiency, competition, passenger benefits and strife.

The airlines industry is abuzz with news of mergers and acquisitions. In the last few years airline mergers and acquisitions have been a growing trend in several countries across the globe. However mergers and acquisitions in the aviation industry are highly strategic in nature and are undertaken after taking into consideration several important factors.

Some of the important factors considered by airlines in taking merger and acquisition decisions are –

Strategically an airline would like to merge with or acquire an airline that operates in routes different from its own. This helps in expanding service coverage and avoiding overlapping of flight schedules;

The quality of service and brand image of the other airline; If the other airline has any partnership with a rival group of airlines; From the point of view of customers mergers and acquisitions may lead

to increased airfares because of reduced competition in the aviation industry;

Airline mergers and acquisitions also have important impacts on the employees of the participating airlines – layoffs; new job rules; salary concerns.

Delta Airlines: Review

Delta Airlines is one of the major US airlines which, together with its Delta Connection partners, serves a worldwide network of over 325 destinations in the US and more than 60 countries in the Americas, Africa, the Caribbean, Europe and the Pacific. Adding services in conjunction with its Sky Team and worldwide code-share partners, Delta serves around 500 worldwide destinations in 105 countries, operating from six US hubs. Connection is an extensive feeder network,

while Delta Shuttle provides non-stop, high frequency working day services linking New York, Boston and Washington, D.C. On 14 September 2005 Delta filed for Chapter 11 bankruptcy protection, emerging one year ahead of schedule on 30 April 2007.

Delta Airlines has come up with code share agreements with number of airlines, to maintain its international stance. The airlines, with which Delta has signed the code share agreements, include American Eagle, Avianca, China Airlines, Emirates Airlines, Midwest Airlines, Royal Air Maroc and U.S. Helicopter.

Delta Airlines currently flies to as many as 375 destinations, in 88 countries across the world. In India, Delta Airlines flies to Mumbai. Until the carrier merged with Northwest Airlines, it had an all-Boeing fleet. Currently, the fleet of Delta Airlines consists of 484 aircrafts, which includes McDonnell Douglas MD-90, McDonnell Douglas MD-88, Boeing 777-200LR, Boeing 777-200ER, Boeing 767-400ER, Boeing 767-300ER, Boeing 767-300, Boeing 757-200, Boeing 737-800 AND Boeing 737-700.

Northwest Airlines: Review

Northwest began on October 1, 1926, flying mail between Minneapolis/St. Paul and Chicago.

Passenger service began in 1927.

On July 15, 1947, Northwest pioneered the Great Circle route to Asia, with service to Tokyo, Seoul, Shanghai, and Manila.

Reservations Centres: Chisholm, Minn.; Minneapolis/St. Paul; Seattle/Tacoma; Sioux City, Iowa; Tampa, Fla.

Maintenance Bases: Minneapolis/St. Paul; Tokyo

Pilot Bases: Anchorage; Detroit; Honolulu; Memphis, Tenn.; Minneapolis/St. Paul

Flight Attendant Bases: In the United States: Boston, Detroit, Honolulu, Los Angeles, Memphis, Minneapolis/St. Paul, New York Kennedy/La Guardia, San Francisco and Seattle/Tacoma. International locations include Bangkok, Thailand; Hong Kong; Manila, Philippines; Osaka, Japan; Beijing; Singapore; Taipei, Taiwan; Tokyo

In Flight Office: Amsterdam

Fleet: The airline operates a fleet of aircraft including Boeing 747s, and 757s, McDonnell-Douglas DC-9s and Airbus A330s, A320s and A319s.

Northwest also is one of the world's largest cargo airlines, operating a dedicated fleet of 14 B747 freighters. It is the only U.S. combination carrier (passenger and cargo service) to operate dedicated 747 freighters.

MERGER AT A GLANCE

Delta Air Lines and Northwest Airlines Merger – Key Features

US-based Delta Airlines Inc. (Delta) and Northwest Airlines Inc. (Northwest) announced their merger plans on April 14, 2008 which was approved by the United States Department of Justice (DOJ) on October 29, 2008. Northwest Airlines became a wholly owned subsidiary of Delta Airlines. The merger was expected to create the world's largest airline in terms of global traffic and second largest airline in terms of revenues. Costs of Delta, Northwest merger amount to $199M.

The new airline would rank as the largest carrier in the USA's domestic market, and as the top U.S. carrier in providing service across the Pacific, to Europe, to Africa and the Middle East, and as the No. 2 U.S. carrier to Latin America and the Caribbean.

The new airline retained the name Delta and was headquartered in Atlanta. Delta chief executive Richard Anderson would head the new company.

Northwest brand are gradually being phased out and replaced by Delta's brand. Delta and Northwest will continue to operate their own aircraft until the integration process is complete.

The merger was expected to save costs by combining airport operations of the two airlines and sharing information technology. A great sense of urgency was associated with cutting costs because of huge fuel costs, tough competition from low-cost carriers, recession and the mounting losses were pushing the companies into imminent liquidation. The companies have projected to cut $2 billion (for combined entity) a year in expenses once they combine by mid of 2010.

A Delta-Northwest deal would combine Delta's strong Atlanta hub and its trans-Atlantic route network, with Northwest's extensive Asia presence that includes a hub in Tokyo. Customers were also expected to benefit from the merger, as they would get access to a global route system.

The merger was projected to be a costly process for Delta, which, as of December 31, 2008, had $3.3 billion in cash, cash equivalents and short-term investments, of which $2.8 billion was unrestricted. Delta had projected that it would have an additional $1 billion available under a revolving credit facility, resulting in a total of $3.8 billion in unrestricted liquidity.

Market analysts and bankers opined that Delta would need at least $5 billion to $6 billion in capital to pay for the deal and run through the integration process. This process would cover the market cap of Northwest and for all the logistics of a merger. Delta had a market cap of $4.9 billion while Northwest's market cap stands at about $4.3 billion in the pre-merger scenario.

Northwest shareholders would receive 1.25 new Delta shares for each Northwest share. Delta pilots would get 3.5% stake in the new company. Other employees of both companies would receive 4% of the new company's stock.

Merger would lead Delta to eliminate overlapping flights leaving consumers with fewer choices and higher prices; to lesser competition and to finalizing a combined seniority list of pilots of both the airlines would be a major challenge.

In reality, the merger already is facing challenges, ranging from lawmakers and consumers worried about reduced competition, abandoned hubs and higher prices for both domestic and international flights, to distrustful employees and some industry veterans who have seen past proposals crater before consummation.

The stock market signalled its concerns as shares of both the carriers tumbled on a day when the Dow Jones industrial average rose 60 points. After the day of announced merger-plans, Northwest shares fell 8.4%, or 94 cents, to $10.28. Delta's stock price fell 12.6%, or $1.32 a share, to $9.16. As a result, Delta will give current Northwest shareholders in exchange for their Northwest shares to about $2.7 billion, from the $3.1 billion.

The proposed merger, which the airlines hope to close by mid of 2010, faces opposition from two Northwest unions, representing pilots and ground workers, and some powerful members of Congress.

The airline narrowed its loss in the fourth quarter of 2007, despite a 26 percent rise in fuel price. It posted a net loss of $70 million on $4.7 billion in revenue, compared with a net loss of about $2 billion on $4.3 billion in revenue in the fourth quarter of 2006. Delta's operating

expenses in the fourth quarter increased 10 percent, or $445 million. Of this amount, increased fuel costs represented almost $370 million, including fuel prices paid under its contract carrier arrangements.

The new airline, called Delta began delivering excellent service to customers in 66 countries and more than 375 worldwide cities – more than any other airline; with a dedicated base of approximately 75,000 worldwide employees; and with a best-in-class cost structure and strong liquidity balance that better positions the company to adapt to the weakening global economy.

Frequent flier programs have been combined after merger closes, if all approvals are obtained by then. All current hubs would be kept. Booking and Travelling will continue to use the operations of the merged entity as if there were no merger. Boarding of NW and DL will be done as if there have been no merger, till the tickets are endorsed by DL on NW and NW on DL.

Antitrust regulators in both the USA and the European Union cleared their previous request for antitrust immunity for their international alliance venture, which will allow them to cooperate not only in selling seats on their trans-Atlantic flights, but to share sensitive marketing data, to cooperate in determining which carrier will fly which routes and at what times, and to share revenues and costs from those joint venture operations as if they were already one company.

International competition issues already have been addressed by the (U.S. Department of Transportation) and the European Union's competition authorities.

There are no reasons for significant antitrust issues in the domestic market because the merger is almost entirely an "end-to-end" combination of complementary route networks. Only 2% of Northwest seats are flown in direct competition with Delta's seats, and only 3% Delta's seats compete directly with Northwest's. The two carriers compete head-to-head on only 12 routes, including eight on which there are least two other competing carriers.

Fast-growing low cost carriers continue to provide plenty of competition in the domestic market for big, full-service global network airlines. Low-cost airlines such as Southwest Airlines now carry about a third of all U.S. travellers, up from less than 15% of the domestic market in the mid-1990s.

The fleet integration actually works quite well because of common fleet types except the 757-200s. Combined entity will have a fleet that

includes 800 mainline jets, plus about 650 regional jets, a total fleet of about 1,450 planes and the ability to match the right plane to the right market anywhere in the world. Lots of benefits will come from being able to put the exact right airplane on any given route both in domestic and international market segments.

Pilots’ speculations about pay cuts and financial losses, coupled with the disturbances to be caused by relocation of the bases due to merger, have arrived a deal with their management that assures them that they won't lose any position or money in merger integration. The agreement provides for annual pay raises starting in 2009 and a 3.5% equity stake in the company if the merger goes through. The pilots would get the increased pay and benefits in exchange for letting Delta adjust their flying to integrate the carriers.

Employees share in success of combined company with equity stake. Later, Delta will distribute an equity stake to substantially all U.S.-based employees with international employees participating through cash payments in lieu of stock.

Delta has already invested significant resources to ensure a seamless transition for customers, including receiving clearance from the Federal Aviation Administration (FAA) of the airline’s plan to achieve a Single Operating Certificate over the next 14-16 months; adding extra staffing and technology at check-in counters and kiosks to provide added customer assistance beginning today; and posting complete merger information at www.delta.com and www.nwa.com to provide customers added assistance.

Delta Air Lines & Northwest Airlines Merger – Primary Advantages

Competition: With the merger of Delta-Northwest and United-Continental mergers, the number of major hub-and-spoke domestic air carriers would go from six to four, with these two merged entities controlling about 37 percent of the domestic air travel market.

Passengers: may face reduced frequency as per the route rationalization of the merging carriers and hike in fares as a result of reduction in capacity due to route rationalization.

Consolidation: is less about dominating the U.S. market and more about expanding domestic carriers' international reach at a time when the industry is becoming more global.

Improving the Balance-sheet: Reducing high cost debt and strengthening buying power for more acquisitions of the airlines across

the world at cheaper rates, with established infrastructure, also are important factors.

Creating the World’s Largest Airliners: Delta + Northwest = Delta

Delta Air Lines and Northwest Airlines, proposed merger would be the largest U.S. airline deal ever, creating a global giant with more than 800 jets, 6,400 daily flights and nearly $32 billion in annual revenue. The carriers estimate the value of the new company at $17.7 billion dollars, far above their current market value. The Delta-Northwest merger would create a global juggernaut that would appeal to large global corporations eager to negotiate bulk travel deals with a carrier that can meet nearly all of their travel needs around the world.

Conclusion for the Merged Entity:

Delta-Northwest posted $10.5 billion loss, for the year ending 31.12.2008.

With industry returning to consistent profitability, airlines are expecting the need to push through big fare increases, which to date have been resisted by some discount carriers and by customers. This also necessitates of starting the LCC by the Big Players.

Through the first three quarters of 2009, Delta has achieved $500 million in synergy benefits from its merger with Northwest Airlines, reaching its 2009 target ahead of plan. The company now expects to generate $700 million in total merger synergies in 2009. Synergies achieved to date include improved revenue from increased market share and Delta's affinity card agreement. In addition, cost reductions have been achieved from streamlined overhead, facilities and technology, elimination of dedicated freighter flying and supply chain savings.

The company is on track in its integration efforts and expects to obtain a Single Operating Certificate by the end of 2009.

Recent achievements include:

Creating the world's largest airline loyalty program by combining the Northwest World-Perks program and Delta Sky-Miles;

Relocating the Northwest System Operations Centre from Minneapolis to Delta's Operations Control Centre in Atlanta;

Transitioning reservations agents in five pre-merger Northwest call centres to the Delta Reservations system;

Continuing pilot & flight attendant training to prepare for single carrier operations;

Renegotiating more than 600 corporate contracts to date, generating incremental business traffic;

Re-branding more than 240 airports to provide consistent Delta branding at more than 98% of airports served worldwide; and

Painting more than 230 pre-merger Northwest aircraft in the Delta livery.

Key points include:

Delta's net income for the September 2009 quarter was $51 million, or $0.06 per share, excluding $212 million in special items. This result it is $115 million better than prior year on a combined basis.

Delta's reported net loss for the September 2009 quarter was $161 million, or $0.19 per share.

Delta raised $600 million in incremental liquidity, addressed 40% of 2010 debt maturities and ended the September 2009 quarter with $5.8 billion in unrestricted liquidity.

Delta has achieved $500 million in merger benefits in the first three quarters of 2009, reaching its 2009 target ahead of plan.

Delta's 2010 system capacity is expected to decline approximately 3% compared to 2009.

Delta's operating revenue grew 32% to $7.6 billion in the September 2009 quarter compared to the prior year period as a result of its merger with Northwest Airlines. On a combined basis, total operating revenue declined $2.0 billion, or 21%, and total unit revenue (RASM) declined 17%.

On a combined basis:

Total operating revenue declined 21% versus prior year due to the global economic recession.

Passenger revenue decreased 22%, or $1.8 billion, compared to the prior year period due to the global economic recession and a 4% capacity reduction. Passenger unit revenue declined 18%, driven by a 19% decline in yield.

Cargo revenue declined 51%, or $187 million, reflecting lower volume and yields. Freighter capacity was 38% lower leading Delta to discontinue freighter flying.

Other, net revenue grew 4%, or $34 million, primarily due to increased baggage fee revenue.

In September 2009 quarter, Delta's operating expenses increased $1.8 billion year over year due to the impact of the company's merger with

Northwest Airlines, partially offset by lower fuel price. On a combined basis, excluding special items, operating expense decreased $2.1 billion due to lower fuel expense, productivity improvements and merger benefits.

Amicable to all and without much significant pay-cuts and job-cuts, the combined entity is successfully integrating the labour related issues.

As the both the Airlines are still flying under different names, and till May-2010, the commercial integration will be completed with the adaption of one single code: DL-006.

Key stats and ratios

Q3 (Sep '09) 2008

Net profit margin -2.13% -39.31%

Operating margin 1.60% -36.63%

EBITD margin - -31.05%

Return on average assets -1.45% -23.04%

Return on average equity -68.70% -162.41%

Employees 81,740

Shows the improvement of the Financial Health of the merged entity:

Delta Air Lines reached its mark of realizing $500 million in synergy benefits from its merger with Northwest in September and expects to exceed USD700 million by year end.

Delta’s major focus on increasing liquidity: USD5.8 billion in Sep-2009, increasing liquidity, retiring debt and enhancing premium traffic. To that end, the carrier has renegotiated over 600 corporate contracts and increased corporate passenger numbers to more than what the two carriers produced individually, in the preceding year.

The September quarter with $5.8 billion in unrestricted capital.

The merger is running about six months ahead of schedule and we are on track to realize a $2 billion annual run rate resulting from the synergies of the merger.

Refinance 2010 obligations which are now down about 55% to USD1.5 billion in obligations.

Delta/Northwest synergies. While it has achieved most milestones including the October merging of World-perks and Sky-Miles, remaining action includes the single operating certificate expected by the end of 2009 and the technology cutover in the first quarter of 2010. The first quarter will also see the balance of the Northwest fleet completed in new livery (with the Delta branding over it).

The pursuit will then be the merging of employee representation and seniority lists, with remaining dissent employees.

The merger is headed to be successful with complete integration and looking good revenue model with general rise in the economic environment, the world over.

Adidas – Reebok Merger

Adidas chairman and CEO Herbert Hainer called the Reebok deal, "A once-in-a-lifetime opportunity to combine two of the most respected and well-known companies in the worldwide sporting goods industry. Together, we will expand our geographic reach--particularly in North America; and create a footwear, apparel and hardware offering that addresses a broader spectrum of consumers and demographics."

Introduction Mergers and Acquisitions (M&A) had become quite common in the sporting goods industry during the late 1990s and the early 2000s. The sporting goods industry has seen many mergers and acquisitions (M&A) driven by rising competition and industrial growth. In 1997, Adidas acquired the Salomon Group for $1.4 billion. In 2003, Nike acquired Converse for $305 million and in 2004 Reebok acquired The Hockey Company for $330 million.

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.

Pre-merger, 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).

Adidas and Reebok claimed that the merger was decided upon because of the realization that their individual (company) goals would be best accomplished by joining instead of competing. Nike International Inc. (Nike) was the common competitor for both Reebok and Adidas. 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 and Adidas did not have to cover all China segments.

Competition with Nike and PumaNike 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.

COMPANY OVERVIEW: Adidas

The story of Adidas dates back to the year 1920 when Adolf Dassler produced a handmade shoe fitted with black spikes. On July 01, 1924, Adi and his brother Rudolf Dassler started a company under the name "Dassler Brothers OHG". In the year 1927, the company enhanced its capacity by taking on a new factory on lease. The company's shoes made their debut at the 1928 Olympics in Amsterdam. The company introduced tennis shoes in 1931. In the year 1935, the turnover of the company exceeded 400,000 Reichsmark. In 1938, a second production facility was bought in Germany. In 1948, the brothers decided to part ways. By August 18, 1949, Adidas was registered as a company -'Adi' from Adolf and 'Das' from Dassler. Adi registered the "Three Stripes" as his official logo. Rudolf set up another sporting goods company named Puma. In 1956, Adi's son Horst Dassler promoted Adidas strongly during the Olympic Games at Melbourne. He also signed a licensing agreement with the Norwegian Shoe factory, located in Norway.

In 1959, Horst was assigned the job of establishing production facilities in France. A factory in Schweinfeld, Germany was started in the same year. In 1960, Adidas was the dominant brand at the Olympic Games held in Rome; 75% of the track and field athletes used Adidas shoes. Adidas stepped into the production of apparel and balls (soccer balls, basketball balls) in 1961and started manufacturing track suits in 1962.

The company launched its first jogging shoe called, "Achille" in 1968. The "Trefoil Logo" was introduced in 1972. The essential feature of the logo was three leaves representing the Olympic spirit, joining the three continental plates. Adidas AG acquired the Salomon Group with the brands Salomon, Taylor-Made, Mavic and Bonfire in December 1997. The new company is named Adidas-Salomon AG. The Salomon Group was sold to Amer Sports in October 2005. The new Adidas Group is focusing even more on its core strength in the athletic footwear and apparel market as well as the growing golf category.

COMPANY OVERVIEW: Reebok Reebok is an American-inspired, global brand that creates and markets sports and lifestyle products built upon a strong heritage and authenticity in sports, fitness and women’s categories. The brand is committed to designing products and marketing programs that reflect creativity and the desire to constantly challenge the status quo.

History of brand development:

Reebok's UK based ancestor company was founded for one of the best reasons possible: athletes wanted to run faster. So, in the 1890s, Joseph William Foster made some of the first known running shoes with spikes in them. By 1895, he was in business making shoes by hand for top runners; and before long his fledgling company, J.W. Foster and Sons, developed an international clientele of distinguished athletes. The family-owned business proudly made the running shoes worn in the 1924 Summer Games by the athletes celebrated in the film "Chariots of Fire.

In 1958, two of the founder's grandsons started a companion company that came to be known as Reebok, named for an African gazelle. In 1979, Paul Fireman, a partner in an outdoor sporting goods distributorship, spotted Reebok shoes at an international trade show.  He negotiated for the North American distribution license and introduced three running shoes in the U.S. that year.  At $60, they were the most expensive running shoes on the market.

By 1981, Reebok's sales exceeded $1.5 million. In 1982, Reebok introduced the first athletic shoe designed especially for women; a shoe for a hot new fitness exercise called aerobic dance. The shoe was called the Freestyle and with it Reebok anticipated and encouraged three major trends that transformed the athletic footwear industry: the aerobic exercise movement, the influx of women into sports and exercise and the acceptance of well-designed athletic footwear by adults for street and casual wear. Explosive growth followed, which Reebok fueled with new product categories, making Reebok an industry leader.

In the midst of surging sales in 1985, Reebok completed its initial public offering (stock symbol is NYSE: RBK). A year later, Reebok made its first strategic acquisition, The Rockport Company. Rockport was a pioneer in using advanced materials and technologies in traditional shoes and the first company to engineer walking comfort in all types of dress and casual shoes. In the late 1980s, Reebok began an aggressive expansion into overseas markets and Reebok products are now available in more than 170 countries and are sold through a network of independent and Reebok-owned distributors.

Creating innovative products that generate excitement in the market place has been a central corporate strategy ever since Reebok introduced the Freestyle. In the late 1980s, a particularly productive period began with The Pump technology and continues today, with breakthrough concepts and technologies for numerous sports and fitness activities.

In 1992, Reebok began a transition from a company identified principally with fitness and exercise to one equally involved in sports by creating several new footwear and apparel products for football, baseball, soccer, track and field and other sports. That same year, Reebok began its partnership with golfer Greg Norman, resulting in the creation of The Greg Norman Collection. In 2000, Reebok and the National Football League announced an exclusive partnership that serves as a foundation of the NFL’s consumer products business. The NFL granted a long-term exclusive license to Reebok beginning in the 2002 NFL season to manufacture market and sell NFL licensed merchandise for all 32 NFL teams. The

license includes on-field uniforms, sideline apparel, practice apparel and an NFL-branded footwear and apparel collection. In 2002, Reebok launched Rbk – a collection of street-inspired footwear and apparel hook-ups designed for the young man and woman who demand and expect the style of their gear to reflect the attitude of their lives: cool and edgy, authentic and inspirational. In 2005, Reebok launched its largest global integrated marketing & advertising campaign in nearly a decade - "I Am What I Am", a multi-faceted campaign.

The Sporting Goods IndustryThe US market is the largest market for sporting goods. Experts estimate that the US sporting goods market will grow at a rate of approximately 8.9% between 2004 and 2008 to reach a value of $51 billion, forming 47.6% of the world market. It is estimated that 33% of the athletic footwear purchased by the US consumers is used for sports and fitness activities and bought on the basis of price, comfort ability and fashion. In 2004, 40% of the consumers of sports apparel lay in the age group 12-24. T-shirts and running shoes were considered as the top selected categories. In 2004, sports apparel retail sales in the US were worth $38.8 billion - compared with $37 billion in 2003. Athletic footwear retail sales were $16.4 billion in 2004, compared with $15.9 billion in 2003. These mergers were prompted by the increasing competition and growth in the industry.

Integration IssueAdidas said the companies would grow as a combined entity but would retain separate management. The companies also ruled out any workforce reductions. The new entity would continue to have separate headquarters and their individual sales forces. The companies would also keep most of the distribution centers independent and would have separate advertising programs for their brands. Hainer 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 declared that the deal would involve investment in both Adidas and Reebok and would guide the companies towards effective consolidation

The merging companies were alike in many ways. Both the companies had a reputation of using cutting-edge technologies to produce innovative products and both had eminent brand ambassadors from the sports and entertainment worlds. Thus, the merger would help spreading the global appeal of the brands in places where they had not made a mark as individual brands. However, there were some doubts about the success of

the merger because the merger would not generate much synergy as the individual brand identities would be maintained even after the merger.

Acquisition will facilitate:

I. A stronger competitive platform

i) World leader in Athletic footwear and apparel.ii) Strong positions in three key regions vis, America, Europe and Asia.iii) Better balanced geographic sales.

II. A complete Range of Product under one umbrella - Soccer, Running, Basketball, Hockey, Golf, Baseball, Tennis, Lifestyle etc.

III. Higher efficiency through combined sales and marketing scale.

IV. Better utilization of available distribution capacities,

V. Remove duplicate IT system & simplify overlapping functions.

VI. Improve warehousing facilities.

Financial Highlights:a. US$59.00 in cash per Reebok share, for an offer value of Euro 3.2

billion.b. Including net cash and minorities, total transaction value of Euro 3.1

billion.c. Annual cost synergies estimated at Euro 125 million, and substantial

revenues opportunities from a more complete coverage of all consumer segments

Adidas – performance after acquisition Adidas AG reported its fourth quarter results for 2007 which were

helped by lower purchasing costs resulting from its acquisition of Reebok and improved sales.

Its net income rose to €21 million (US$31.9 million) from €13 million a year earlier.

Sales increased to €2.4 billion (US$3.7 billion) compared with nearly €2.3 billion in 2006.

In 2007, total yearly earnings were €551 million (US$837.9 million), up 14 percent from €483 million in 2006. Sales for the year rose marginally to €10.3 billion (US$15.6 billion) from €10 billion in 2006.

Adidas vs. Reebok unit performance after acquisition:

In 2007, Adidas brand had sales worth €7.1 billion (US$10.8 billion) while Reebok had sales worth €2.3 billion (US$3.5 billion). Last year, in 2006 the Adidas brand had sales worth €6.6 billion to Reebok’s €2.5 billion. 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) totalling $6.5 billion, 13 percent higher than such orders reported for the same period last year. Meanwhile, Nike announced (Mar 3, 2008) that it had completed its acquisition of Umbro Plc. which was an effort to consolidate its position in the football market where Adidas has performed well.

The Track AheadAnalysts had varied opinions about the deal. Some analysts felt that Adidas could beat Nike to become the industry leader. Al Ries said that, "The biggest benefit is that it removes a competitor. Now, all they need to do is to focus all their efforts on competing with Nike." However, a few analysts opined that it was impossible to dislodge Nike from its No. 1 position. Nike was a preferred brand because of its fashion status, colors, and combinations. Although Adidas was perceived to have good quality products that offered comfort and Reebok was perceived as a 'cool' brand, Nike was perceived as having both 'hip-ness' and quality.

Adidas purchase of Reebok began to show payoffs but could have gained even more from the purchase had it re-branded Reebok as highly fashionable line of shoes meant for multipurpose use and active lifestyles. This was not too difficult as Reebok had already begun to focus more on fashionable footwear before its purchase.

By the end of 2008, Nike's 36 percent worldwide market share dwarfs the 21.8 percent share for Adidas. Adidas was consistently dragged down by the once-mighty Reebok brand, which contributed about 6 percent to its parent's total.

In order to re-brand Reebok, Adidas Group should first phase out its high performance athletic shoe line and reposition itself in the casual footwear and active footwear market within the next 3-4 years. The high performance athletic shoe line can be absorbed into the Adidas brand. Adidas Group should consider opening Reebok retail outlets that market

Reebok as highly fashionable or begin marketing Reebok at more upscale department stores such as Macy’s and Nordstrom. By the same token, it should end marketing Reebok at lower end retailers such as Footlocker.

Emerging markets in Asia and Latin America can give Adidas significant leverage over Nike. Already, Adidas has the lead over Nike in markets such as India and Japan and is tied with Nike for leadership in China. Sales growth in Latin America has been tremendous as the company saw a 38% increase in sales in 2007. Adidas can gain significant ground over Nike in emerging markets if it first tries to prevent external competition in these markets by forming strategic partnerships with local apparel manufacturers in attempt to control local manufacturers’ competitive strengths. They can cooperate with local manufacturers, so as to get some critical information about how this foreign market works. By that way they will also come closer to the local government, and they will generally get the first mover advantages. Moreover, after cooperating with the local manufacturer, Adidas can be the medium for the local manufacturer to export his goods. For instance, in China, Adidas competes with local manufacturer Li Ning, in addition to Nike. These additional manufacturers make it tougher for Adidas to compete with Nike as they eat a large amount of Adidas’ market share.

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HDFC Bank Ltd and Centurion Bank of Punjab Merger

INTRODUCTION

In order to nurse corporate health and growth pattern of developing and developed countries especially eradicating sickness in industries, the concept of mergers and acquisitions is very popular in current scenario. Moreover, it is significantly popular concept after 1990s in India on the birth of liberalization and globalisation. The basic crux of Mergers and Acquisitions are consolidating the process of survival of existing undertakings, large groups absorbing small entities, cooperation of international business units welcoming to participate in the development of nation’s economic growth and prosperity, to eliminate industrial sickness, to take tax advantages, or free from stringent formalities of official procedures and red tape and corporate restructuring and reorganization to meet challenges in the stiff competitive open market economy demand such a task of mergers and acquisition.

While the banking system in India has done fairly well in adjusting to the new market dynamics, it would not be clichéd to reiterate that greater challenges lie ahead. Amalgamation in the Indian Banking Industry are the most happening arena apropos the ballooning effect of NPA (Non Performing assets).Deregulation, favourable economic, financial conditions and the structural legal changes have strategically made the” survival of the fittest” theorem as a reality in the Indian Banking Sector.

In the past, mergers were initiated by regulators to protect the interest of depositors of weak banks. But it is now expected that market led mergers may gain momentum in the coming years. The smaller banks with firm financials as well as the large ones with weak income statements would be the obvious targets for the larger and better run banks. The pressures on capital structure are expected to trigger a phase of consolidation in the banking industry and the pace would be swifter than we one can conceive.

Bank mergers in India have often been viewed as shotgun marriages: A strong bank takes over a weaker institution, usually one that is about to go belly-up, at the behest of the country's central banker. Sometimes the deal doesn't make sense, but regulators force it through.

 Keeping  in  view  the  structure  of  the  Commercial  banks  in  India and  the  growth  of  the Economic  reforms,  M&A are  most  sought  after means  of reconstruction. The  economic  reforms  brought  about  a comprehensive  change  in  the  competitive landscape  of  the  Indian

Banking  System  forcing  man  of  the  incumbent  banks  to  adopt mergers  and  acquisitions  with  the  objective  of  restructuring themselves  in  order  to enhance  their  efficiency,  profitability,  and competitive  strength.  In  addition,  the Government introduced  policy initiatives  aimed  at  deregulation  and  encouragement  of mergers  with a view  to  increasing  the  size,  profitability,  and  financial  strength  of Indian Banks  thereby enhancing  their  capability  to  compete  globally. This  climate  of  relaxed merger  regulations fostered  an  increase  in the  number  of  merger  deals  among  Indian firms.  In  light  of  this, the dearth  of  empirical  studies  examining  efficiency  benefits flowing  from these  mergers is  surprising.

HDFC BANK: Review

Promoted in 1995 by housing development finance corporation (HDFC), India’s leading housing finance company, HDFC Bank is one of India’s premier banks providing a wide range of financial products and services to its over 11 million customers across over three hundred cities using multiple distribution channels including a Pan-India network of branches, ATMs, phone banking, net banking and mobile banking.

Within a relatively short span of time, the bank has emerged as a leading player in retail banking, wholesale banking, and treasury operations, its three principal business segments.

The bank’s competitive strength clearly lies in the use of technology and the ability to deliver world class service with rapid response time.

Over the last 13 years, the bank has successfully gained market share in its target customer franchises while maintaining healthy profitability and assets quality.

As on December 31, 2007, the bank had a network of 754 branches and 1,906 ATMs in 327 cities. For the quarter ended December 31, 2007, the bank reported a net profit of Rs. 4.3 billion, up 45.2%, over the corresponding quarter of previous year. Total balance sheet size too grew by 46.7% to Rs.1, 314.4 billion.

Centurion Bank of Punjab: Review

Centurion Bank of Punjab, the leading private sector bank, serves individual consumers, small and medium businesses and large corporations with a full range of financial products and services for investing, lending and advice on financial planning.

The bank offers its customers an array of wealth management products such as mutual funds, life and general insurance and has established a leadership ‘position’. The bank is also strong player in foreign exchange services, personal loans, mortgages and agricultural loans. Additionally the bank offers a full suite of NRI banking products to overseas Indians.

On August 29, 2007, Lord Krishna Bank (LKB) merged with Centurion Bank of Punjab. This merger has further strengthened the geographical reach of the bank in major town and cities across the country.

Centurion Bank of Punjab now operates on a strong nationwide franchise of 394 branches and 452 ATMs in 180 locations across the country, supported by employee base of over 7,500 employees.

In addition to being listed on the Indian stock exchanges, the bank’s shares are also listed on the Luxembourg stock exchange.

The bank is capitalized to support rapid growth, and its high fixed operating costs suggest that profitability is leveraged to asset growth. Centurion's acquisition of Bank of Punjab has substantially bolstered its distribution franchise, widened its product and customer mix, and gives it the

Platform to aggressively expand its balance-sheet; which it has hitherto achieved quite well. It is predominantly a Consumer bank – with almost 70% of its loans are in relatively high yield segments. Bank Muscat is the largest shareholder in the bank post-merger with a 20.5% stake; Keppel Corp holds 9.0% and 18.6% is held through GDRs. Sabre Capital and BOP promoters hold 4.4% and 5.0%stakes in the bank, respectively.

Merger of HDFC Bank & Centurion Bank of Punjab

Merger of HDFC Bank and Centurion Bank of Punjab (CBoP) is the largest merger in recent times and perhaps the beginning of the consolidation wave in the BFSI sector. The merger is a smooth exercise when it comes to the marriage of technology at both banks. With further liberalization, post-2009, an account of WTO regulations, there would be greater accessibility for foreign banks to Indian shores and vice-versa.

Merger with Centurion Bank of Punjab in the swap ratio of 1:29

The boards of both the banks approved the merger in the ratio of 1:29 (1 share of HDFC Bank for 29 shares of CBoP). This merger is neutral for

HDFC Bank on as a long term perspective. However on a short term basis, it is negative for HDFC Bank’s stand-alone financials and shareholders. At the current price, CBoP is richly valued compared to HDFC bank despite its lower banking franchise, inferior return ratios and higher NPAs. CBoP’s asset book constitutes about 20% of that of HDFC Bank; while its profit is merely 11%.Following is a summary of the key business parameters across HDFC Bank and CBoP.

Shareholding pattern as on 31st Dec 2007

HDFC Bank CBoPFace Value 10.00 1.00 Promoter’s holding

No. of shares % of holding

No. of shares % of holding

Indian Promoters 82443000 23.28

NA NA

Subtotal 82443000 23.28

NA NA

Non Promoter’s holding Institutional Investors

Banks Fin. Inst. And Insurance

10068939 2.84

1142025 0.06

FII’s 94087619 26.57

501898631 26.80

Subtotal 116142534 32.80

512107247 27.34

Other InvestorsPrivate Corporate Bodies 28598234

8.08 782415732 41.77

NRI's/OCB's/Foreign Others

6019811 1.70

13299320 0.71

Govt 3841342 1.08

Directors/Employees 11080829 0.59

Others 78110019 22.06

287341856 15.34

Subtotal 116569406 32.92

1093907310 58.40

General public 38920380 10.99

266724046 14.24

Grand total 354075320 100.00

1872738603 99.99

Main Highlights of Merger

The merger was effected using the ‘pooling of interest’ method. The bank’s main task was to harmonize the accounting policies and, as a result, HDFC Bank took a hit of Rs. 7 bn to streamline the policies of erstwhile CBoP itself. Of this Rs. 7 bn, around 70% went toward the harmonization of accounting policies relating to loan- loss provisioning and depreciation of assets, and the balance 30% reserves write-offs were toward the merger-related restructuring costs like stamp duty, HR and IT integration expenses.

The loan book size of erstwhile CBoP was close to Rs. 150 bn, largely constituted by retail loans with only around 15% of corporate loans. In terms of asset quality, the gross NPAs at the end of March 2008 were around 3.8% and net NPAs at around 1.7%. The harmonizing was done to bring in more stringent provisioning requirements for identifying NPAs, as the existing norms of the erstwhile CBoP were comparatively more relaxed. The duration of CBoP’s lending portfolio is around 18-20 months so the risk of incremental slippage would continue in near future; however the bank is confident of its strong recovery management process and anticipates lesser pain.

The CASA ratio at the end of June 2008 was 45%. This in line with expectations of analysts as CBoP had a much lower CASA ratio of around 25% compare to 56% of Pre-merged HDFC Bank. By the end of the year, the target CASA ratio is around 47-48%. This would primarily be driven by an increasing contribution of low-cost deposits from the erstwhile CBoP’s branches.

Of the total non- interest income of CBoP, fee income constituted around 50% which was generated mainly through distribution of insurance products (Aviva) and from processing fees. In line with regulatory and operational issues, these streams of income have temporarily been discounted. This aspect act as a drag on the ‘other income’ of the merged entity and it would take 2-3 quarters for the issues to be addressed. Till these issues are resolved positively, the ‘ other income’ growth (primarily the fee income) would remain muted for the merged entity.

The cost/income ratio of the merged entity has increased to around 56% from 50% levels for standalone HDFC Bank. The increase was expected as CBoP’s C/I ratio was around 60%. HDFC Bank has retained almost all the employees of CBoP and expects to achieve full synergies and efficiencies, in terms of the restructured HR and IT processes, in the next 2-3 quarters. By Q4FY09, the technology and IT-platforms would be

completely integrated to support efficient performance. The aim is to reduce C/I ratio to around 52-53% by the end of FY09.

KEY BUSINESS PARAMETERS (Rs Million) HDFC Bank CBoPBranches (Nos) 754 394ATM (Nos) 1906 452Customer A/C (M) 10 2Debit cards (M) 5.0 1.1Credit cards (M) 3.5 0.2LIABILITIESDeposits 993,869 207,100CASA Deposits 505,630 50,740CASA Ratio % 51 25Share capital 3,541 1,873NETWORTH 113,584 19,633Other liabilities 206,942 27,306Total liabilities 1,314,395 254,309ASSETSAdvances 713,868 150,835Retail 364,073 90,228Other assets 600,527 103,204GoodwillTOTAL ASSETS 1,314,395 254,309NET NPAs 2,798.0 2544.0

COMPARATIVE VALUATIONS

CBoP’s current valuations are significantly higher versus HDFC Bank when compared on traditional valuation parameters such as P/BV and P/E. However, on franchise-based valuation parameters, the valuation appears comparable.

HDFC Bank Dec 2007 CBoP Dec 2007

Price as per agreed swap ratio (Rs)

1,475 51

Fully Diluted MCAP (M) 524,658 112,158Current P/BV (Dec-07) 4.6 5.7 FY08EBV Rs 333.9 11.8EPS Rs 45.6 1.0P/B (X) 4.4 4.3P/E (X) 32.3 51.4ROE % 17.7 10.6 FY09EBV Rs 382.8 12.8EPS Rs 63.0 1.3P/B (X) 3.9 4.0P/E (X) 23.4 38.7

ROE % 17.6 10.9

Franchise Based Valuation

HDFC Bank Dec 2007 CBoP Dec 2007

MCAP/Branch Rs (M) 695.8 284.7MCAP/customer A/C (E) Rs 52,465.8 44,863.3MCAP/total deposits (X) Rs 0.5 0.5MCAP/CASA Deposits (X) 1.0 2.2MCAP/ Total Assets (X) 0.4 0.4

Post Merger: Review

Branch expansion/Size The biggest benefit to HDFC Bank from this acquisition would be

addition of 394 of CBoP’ branches, concentrated in the states of NCR (55), Punjab (78), Haryana (28), Maharashtra (39) and Kerala (91).

About 60% of CBoP’ advances are to retail (v/s 50% for HDFC Bank) with dominance in the areas of mortgages, personal loans, 2-wheelers and commercial vehicles (CVs).

Both banks earn higher net interest margins — HDFC Bank is at 4%+ and CBoP is at ~3.6%. Moreover, the banks have a similar business model and philosophy underlined by a thrust on branch network expansion, retail assets, high margin business and strong fee income sources.

HDFC Bank emerged as the biggest private bank in terms of branches

HDFC Bank has always maintained that fast branch expansion is a key ingredient that will sustain its high CASA deposits and margins.

This merger with CBoP would result in the combined entity having 1148 branches at present, which is the largest branch distribution network for a private bank in India (ICICI Bank currently has 955 branches).

This apart, HDFC Bank would gain dominance in states like Punjab, Haryana, Delhi, Maharashtra and Kerala.

Positive aspects of the merger: Increased footprint and metro presence; Cost-income ratio has room for improvement; Enhanced management bandwidth to enable entry in to

International business; and Senior managements of high calibre

Negatives: Merger likely to be EPS dilutive due to valuations for the next two

years; and

Integration of LKB branches may pose a challenge.

Key Synergies:

Wider distribution reach: 32% of CBoP branches are in metros: The merger will add close to 394 branches to HDFC Bank’s network of 750 branches, almost 50% increase in the existing network, while adding close to 19% to its asset base. In view of RBI’s stringent license policy, metro licenses have been hard to come by for most banks. With the merger, HDFC Bank’s metro branches will increase by 44% in one shot, while its non metro branches will increase by 57%. HDFC Bank’s branches are currently spread throughout the country, whereas CBoP has a strong presence in Punjab, Maharashtra, and with the acquisition of LKB, now in Kerala as well.

Scope to enhance productivity: CBoP’s, merger with a larger organization like HDFC Bank gives significant scope for operating leverage

with economies of scale. There is also scope for improvement in utilization ratios with improvement in branch and employee productivity to near HDFC Bank’s levels.

Complementary Overlay: CBoP has traditionally been strong in high yielding SME and retail segments, while HDFC Bank has an enviable retail deposit franchise. With the merger, CBoP’s ability to grow its loan book will complement HDFC Bank’s deposit franchise. On the product portfolio side, both the banks have a strong foothold in vehicle financing, which is a natural synergy.

INR mn HDFC Bank CBoP Merged entity

Business/branch 2,289 908 1,812

Business/employee 80 65 77

Assets/branch 1,762 645 1,376

Assets/employee 61 46 58

Chart 2: Retail loan break up

Higher productivity to help bring down cost to income ratio: Improvement in productivity levels will help HDFC Bank lower CBoP’s cost to income ratio over the medium term. High cost to income ratio, mainly due to lower productivity of some merged branches and employees, has played a big role in restraining CBoP’s return ratios.

Strong and experienced management team may help add international business: CBoP has a strong and experienced management team. The management has demonstrated its capability to integrate diverse organizations by successfully reaping synergies of the merger with Bank of Punjab. We expect the CBoP team to strengthen HDFC Bank’s management bandwidth and consequently the latter may add international banking to its services kitty.

Benefits to accrue over medium term: The merger is positive from a strategic perspective; however, from minority shareholders’ perspective it is EPS dilutive, at least till FY09E. Consequently, near term stock

performance is likely to be capped due to this EPS dilution. With better utilization of branches and rationalization of employees with organic expansion of business, the merger is likely to be EPS neutral in FY10E. We expect 34% growth in balance sheet and 37% growth in EPS CAGR over FY08-10E. The proposed issuance to HDFC is likely to provide adequate capitalization and enable strong organic expansion over the next two years. The stock is trading at 3.0x FY10E adjusted book (post merger) and 19.0x FY10E earnings.

POST MERGER CONSOLIDATION

At a swap ratio of 1:29, it would lead to dilution of 21% for HDFC Bank. HDFC Bank would issue 76m shares (fully diluted) to CBoP shareholders. The merger would worsen HDFC Bank’s RoEs, CASA ratio and asset in the near term and make valuations additionally expensive.

Snapshot of the merged entities HDFC Bank CBoP Merged

(Dec 07) (Dec 07) (Dec 07)

Branches Nos 754 394 1148

ATM Nos 1906 452 2358

Liabilities

Deposits 993,869 207,100 1,200,969

CASA Deposits 505,630 50,740 556,730

CASA Ratio(%) 51 25 46

Share Capital 3541 1873 4301

Net Worth 113,584 19,633 225742

Net worth net of goodwill

Other liabilities 206,942 27,306 234,248

Total liabilities 1,314,395 254,039 1,660,959

Total liabilities Ex Goodwill 1,314,395 254,039 1,660,959

Assets

Advances 713,868 150,835 864,703

Retail 364,073 90,228 454,301

Other assets 600,527 103,204 703,731

Goodwill 92,525

Total Assets Ex Goodwill 1,314,395 254,039 1,660,959

Net NPA (%) 0.4 1.7 0.6

Net NPAs (Rs. M) 2,798.0 2,544.0 5,342.0

FY07 PAT (Rs.M) 11,415 1,214 12,629

FY08E PAT (Rs.M) 16,211 1,966 18,176

FY07 RoE (%) 17.7 10.6 1

Basis for determining Exchange Ratio: Analysis

Valuations based on 31, Dec 2007

1. Market Price Method

SER = Market Price of CBoP / Market Price of HDFC Bank = 51/1475= .0003458

No. of shares to be exchanged (NSE)= SER X Pre merger no. of shares of CBoP= .0003458 X 18,730 lacs= 6.476834 lacs

No of shares after merger= Equity shares (HDFC) + No of shares to be exchanged = 3,541 lacs + 6.47683 lacs

No. of shares after merger = 3547.4768 lacsPost merger combined EPS= (PAT of HDFC Bank + PAT of CBoP)/No. of shares after merger

Combined EPS = 11,415(m) + 1,214(m) / 3547.4768 lacs

= 35.599

2. Earning per shareSER= EPS of CBoP / EPS of HDFC Bank

EPS = Profit after tax / No. Of shares outstanding EPS of CBoP = 1,22.92 (crore) / 187.3 (crore) = .67

EPS of HDFC Bank = 1119.07 (crore) / 35.408 (crore)= 31.6 SER = 0.67 / 31.6 = 0.021That means 21 shares of HDFC Bank will be exchanged for 1000 shares of CBoP.

3. Net Asset Value Method (Based on 31st March 2007)

NAV per share = Net worth of company / No. Of outstanding shares

Net worth of CBoP = Share capital + reserves & surplus = 156.69 cr + 1239.41 cr= 1396.1 cr

No of outstanding share = 156.69 crNAV per share = 1396.1 cr / 156.69 crore = 8.909

Note: Par value per share is 1

4. EBITDA multiple (Based on 31, March 2007) = Enterprise value / EBITDA

Enterprise value = Market value equity + Market value debtEBITDA = Earning before interest, tax, depreciation and

amortizationMarket value equity= market price * no of outstanding sharesMarket value of CBoP equity = 59.10 *156.69 cr

= 9260.38 croreMarket value of Debt of CBoP = 14,863.72 crore

Enterprise value of CBoP= 24,124.10 croreEBITDA = 1,646.53 crore

EBITDA Multiple = 24124.10 / 1,646.53 = 14.65 Note: Closing price of CBoP (NSE) on 31, Dec 2007 was Rs. 59.10 5. Sales Multiple = Enterprise value / Net sales of current year

Enterprise value of CBoP = 24,124.10 croreNet sales on March, 2007 = 1268.53 croreSales Multiple= 24,124.10 / 1,268.53 = 19.017

CONCLUSION:Market price method: SER= .0003458EPS method: SER= .021EBITDA multiple of CBoP = 14.65Net asset value method: NAV per share (CBoP) = 8.909SALES multiple of CBoP = 19.017

Performance Pattern of Consolidated Corporate – HDFC Bank

HDFC Bank has strong distributional reach — 1,412 branches across 528 cities at March end 2009, up from 761 branches in 327 cities in the preceding year. It has the capital strength, with a capital adequacy of 15 per cent, 6 per cent above the regulatory floor. And it will get stronger when Rs 4,000 crore of warrants issued to parent HDFC are exercised in November (the parent has to hold 22 per cent in the bank). More recently, HDFC Bank overtook ICICI Bank to become the second-largest bank by market capitalization after the State Bank of India (SBI).

HDFC Bank’s deposit base is built on a very stable retail base: current, savings and retail term deposits make up about 80 per cent. That also means that its costs are low, and margins can be high. It also has a strong technology platform that supports its client servicing capabilities. All of this gives HDFC Bank the foundation for the shift from a hitherto conservative stance to one of qualified aggression.

Today, HDFC Bank hawks the full retail suite — credit cards, auto, personal and gold loans, and advances against shares. It hawks the home loans of parent HDFC. In 2008-09, it sold Rs 3,500 crore of such loans every month. And nearly 60 per cent of its total credit — Rs 98,883 crore at end-March 2009, up by 55 per cent over the previous year — is accounted for by retail. The number of savings accounts has increased by over 70 per cent and the total customer base has increased to about 19 million (of which 2 million were added through CBoP) from about 11.6 million in FY08. Credit card issuance moderated in FY09 — outstanding credit cards grew 14 per cent versus a compounded annual growth rate of 64 per cent over FY04-FY08.

But the CBoP merger has come with costs too. HDFC Bank has charged Rs 690 crore to CBoP reserves due to harmonisation of accounting policies including non-performing asset (NPA) provisions besides other merger related expenses. The CBoP merger has led to a net worth accretion of about Rs 1,340 crore versus CBoP’s net assets of approximately Rs 2,090 crore.

HDFC Bank’s profit after tax for FY09 was Rs 2,245 crore, despite its larger footprint. HDFC Bank’s cost to income ratio at 53.6 per cent was one of the highest amongst private banks in FY09. It was 45 per cent for Axis Bank and ICICI Bank. HDFC Bank’s employee base of 52,000-

plus is 52 per cent higher than ICICI Bank’s (while total assets are 52 per cent lower) and 155 per cent higher than Axis Bank’s (while total assets are just 24 per cent higher).

In the CBoP merger, HDFC Bank managed a quick integration despite being on different platforms — i-flex’s ‘Flexcube’ and Infosys’s ‘Finacle’. HDFC Bank is now powered by ‘Flexcube’. And if a bank can get 28 per cent of its transactions to move online in seven years, it cuts down costs. Yet the success of the Casa story could change at HDFC Bank.

The other headache is dud loans. During the fourth quarter, the bank’s stock of NPAs shot up by 119 per cent to Rs 1,988 crore. But, 42 per cent of this was from CBoP’s books. On a standalone basis, the bank’s NPAs rose 27 per cent to Rs 1,153 crore. Provisioning also had to go up to Rs 657 crore. But the bank’s net non-performing loans are still just 0.6 per cent.

Growth in Net Interest Income (NII) at 13% yoy was lower than expected. NII growth also appeared low on a yoy basis due to much stronger NIMs in 4QFY2008 of 4.4% on account of substantial zero-cost capital market floats enjoyed by the Bank in that period.

The Bank’s Fee Income grew at a robust 46% yoy to Rs715cr driven by the Retail Segment comprising cards, third-party distribution, processing fees, etc. as well as the Wholesale Segment comprising Cash Management Services and commission income on LCs, BGs, etc. The Bank also booked substantial Treasury gains of Rs244cr, partly on sale of HTM investments. Forex and Derivative linked income was also strong at Rs153cr.

By the end of FY2009, the Bank had restructured loans amounting to Rs120cr, of which Rs69cr were NPAs. In addition, the Bank disclosed that applications received for loan restructuring, which were pending amounted to Rs305cr, of which Rs254cr were NPAs.

The Bank recorded 34% yoy growth in Net Profit to Rs631cr, which was however marginally below our estimates on account of the lower-than-expected NII. Since the 4QFY2008 numbers don’t include effect of the merger with Centurion Bank of Punjab (CBoP) and standalone numbers for CBoP are not available for 4QFY2009, yoy comparisons are not on a like-to-like basis.

Outlook and Valuation

HDFC Bank is among the most competitive banks in the Indian Banking Sector and is poised to maintain its profitable growth over the long term. Bank’s competitive advantages, driving gains in CASA market share and traction in multiple Fee Revenue streams, can support up to 5% higher core sustainable RoEs vis-à-vis Sectoral averages over the long term, creating a material margin of safety in our Target valuation multiples. At the CMP, the stock is trading at 17.3x FY2010E EPS of Rs63 and 2.5x FY2010E ABV of Rs445. We maintain a Buy on the stock, with a Target Price of Rs 1,366, implying an upside of 25%.

Don’t integrate your acquisitions, partner with them Instead of rushing to integrate businesses they’ve bought overseas, they should allow their acquisitions to continue operating independently, almost as if there has been no change of ownership. Each organization focuses on what it does best even as it learns to use the resource and capabilities of the other to achieve its goals.

Partnering entails keeping an acquisition structurally separate and maintaining its own identity and organization.

The acquirers retain the senior executives, particularly the CEOs and give them the same power and autonomy they used to enjoy. The new parents simply lay down their values to serve as a beacon and create a fresh sense of purpose in their acquisitions. In a nutshell, the acquirer treats the acquired organization as it would a partner in a strategic alliance. By doing so, emerging multinationals are able to manage acquisitions’ organizational drivers in a non-threatening way, reduce the unintended consequences of integration, and create an environment in which companies can easily share knowledge and best practices.

Big business groups from several developing countries, the AV Birla Group, the Mahindra Group, and the Tata Group in India; the Ulker Group in Turkey; Neusoft in China; and AmBev in Brazil, among others – are using this light-handed M&A style. The Tata Group’s Chairman Ratan Tata summed up their approach in 2004 when his group acquired South Korea’s Daewoo Commercial Vehicle Company. “Tata Motors will operate Daewoo as a Korean company in Korea, managed by Koreans,” he stated, “but it will work as part of a global alliance with its Indian counterpart.”

Cross-border acquisitions are notoriously tough to pull off. After the takeovers, the buyers’ stock prices registered a gain of 1.76% after adjusting for other major factors, suggesting that the acquisitions were responsible for the increase. That’s exceptional; most cross-border takeovers destroy shareholder value. A cross-section of employees in 10 U.S. and European companies recently acquired by Indian firms said they were “happy” with their new owners. Again, this is surprising, considering that M&A frequently results in disgruntled employees and an exodus of top talent. Thus, emerging giants could become acquirers of choice globally.

Emerging multinationals have persisted with the partnering approach despite the economic environment of the past two years. Never have

companies had to place greater emphasis on reducing costs and improving efficiencies. Yet companies from developing countries have given their overseas acquisitions a great deal of managerial freedom – and financial support – to deal with the crisis as they see fit.

What’s so different about Partnering?

Companies have to make decisions about five issues after a takeover.

Organisational structure: Most takeovers result in two organizations becoming one. Merging goals, procedures and reporting relationships yields economies of scale and scope, and reduces operational and overhead costs. In stark contrast, most emerging multinationals have allowed the acquisitions to remain separate organizations, and have given them almost complete operational freedom even when they are in the same or related businesses. Tetley and Corus (Tata Group acquisitions) operate as stand-alone businesses despite having had new owners for three or more years.

Independence doesn’t result in dramatically lower costs, but it does allow emerging giants to avoid the mistakes that doom many takeovers. When companies merge, the process disrupts operations and activities in both organizations. Creating common procedures and reporting relationships is complex and consumes significant chunks of top management’s time. In the process, organizational morale dips and employee turnover soars. These hidden costs, many emerging multinationals have found, outweigh the monetary benefits of structural integration.

Reducing costs is not the only reason why emerging multinationals pursue M&A. They acquire to expand into new markets or gain control of brands and new technologies. By keeping acquisitions at a distance, they can take full advantage of overseas companies’ identities and prevent their own antecedents from clouding established brands. For instance, VIP Industries, India’s largest luggage producer, acquired Carlton International, the maker of high-end luggage in the UK, in 2001. The company now manufactures the Carlton line in India, but it maintains a very different organization in the UK, so that it can preserve the British essence of the brand.

Business activities: Emerging giants don’t entirely forgo synergies; they go after them selectively and in stages. At first, they look for activities that, if coordinated, will yield cost savings or enhance revenues without disrupting either company’s core business.

Raw material purchases are usually a good place to score quick wins. They set up a buying team consisting of an equal number of managers

from each company, so that each would become aware of the other’s quality standards.

Sharing operational know-how is often the next step. The key word is sharing. Knowledge usually flows from the acquirer to the acquired. However, emerging multinationals use a best-in-class philosophy to make decisions. Teams consider best practices, processes and ideas from both companies before choosing which ones to follow. As a result, Tata Steel implemented some Corus technologies – reducing the heating time of its coke ovens, for example, from 24 days to nine – and Corus picked up some Tata Steel technologies – reducing consumption of scrap and energy in its hot metal steel-making process, for instance.

Most emerging giants give overseas acquisitions the latitude to make strategy, but they align their planning templates and budgeting calendars with their own.

It’s tempting to leave the quest for synergy to middle managers, but senior executives are better placed to spot opportunities.

Immediate steps: They would retain all senior executives and employees. They would not change the companies’ names, identities, or reporting set-ups. Post-acquisition decisions would be guided by a “best of three” evaluation philosophy, taking into account best practices, processes, and ideas from all three companies.

Top management: Companies usually replace their acquisitions’ top management teams as one of the first steps of integration, and are a way of aligning the vision, strategy, and operating routines of the two companies.

Most emerging multinationals instead do everything they can to keep top teams intact. They believe the buyer’s confidence in the company, its strategy, and the quality of its talent. As a result, the acquirers don’t lose human and social capital; in fact, they can harness all that for the benefit of both parties. Familiar faces reduce post merger uncertainty among customers, suppliers, and employees; indeed, this approach has the added benefit of creating a positive organizational climate after a takeover.

Is this a feasible strategy? Judging by the number of emerging giants that have been successful in retaining CEOs, it is.

Operational autonomy: Most companies end up with precious little operational autonomy after they’ve been acquired. They don’t get much of a free hand. Moreover, it’s clear who the buyer is – and who has been

bought. By contrast, emerging multinationals, assume that incumbent teams know their customers, organizations, and rivals best.

Such freedom slows the pace of change, but it has distinct advantages. Independence minimizes the likelihood of poor performance after a takeover; acquirers often make bad decisions because they don’t understand the acquisition’s business. It also helps prevents the decision-making paralysis that can set in when mangers don’t understand the acquirers’ expectations. Many of the CEOs we spoke to felt lucky to have a parent willing to invest in them, and also a tremendous responsibility to deliver results.

Some emerging multinationals have placed one or two of their senior executives in the acquired organization. The job of those executives is not to oversee or second-guess CEOs but to act as bridges. They also help the acquired company’s executives understand the new boss – and vice versa.

Vision and values: The “soft” stuff is tough to tackle, so executives usually focus first on generating synergies. By contrast, most emerging multinationals communicate values, ethics and business philosophies immediately after a takeover. Structural separation and operational autonomy deliver results only when an acquisition understands the parent’s values.

In the Tata Group, for example, acquired companies must immediately sign and practice the principles enshrined in the Tata Business Excellence Model and the Tata Code of Conduct.

In the partnering approach, the corporate centre acts as the custodian of values and business principles, provides support services, outlines the broad direction for major sectors, facilitates best-practice sharing between companies, and monitors performance. The centre doesn’t thrust practices on the acquisitions; it works collaboratively, helping top management teams appreciate the benefits and encouraging them to implement key practices. “When we acquire a company, we do not go in like conquerors,” explains R. Gopalakrishnan, the Tata Group’s executive director. “We go in with a collaborative mind-set and seek alignment in terms of our values.

Why Partnering may be for every company?

It’s interesting to speculate about how broadly applicable the partnering approach is. After all, some of the drivers of the approach are more characteristic of emerging multinationals.

One, they often buy companies that own powerful brands or state-of-the-art technologies and have strong management teams, so it’s natural that they would retain their acquisitions’ identities and management.

Two, emerging multinationals’ resources and those of overseas acquisitions are often complementary – not substitutable.

Three, some emerging multinationals simply lack the capabilities to manage complex overseas integrations.

Finally, the conglomerate management style that’s prevalent in emerging markets predisposes these acquirers to the partnering approach.

The most striking prototype of the approach is, undoubtedly, the Renault-Nissan partnership. In 1999, when Renault acquired a 36% stake in Nissan (which it later upped to 44%), its senior executives emphasized that they weren’t taking over the company. Although Renault did appoint Carlos Ghosh as Nissan’s CEO then, it still saw the deal as a partnership that would maintain the two companies’ distinctive practices and systems, yet allow them to capitalize on scale and synergy. Mutual respect for culture and individuality was paramount.

The two companies created several mechanisms to benefit from the union: an alliance board to decide policy issues and fashion strategy; deputations of some senior executives from each company to the other to oversee functions at which they excelled; and multi-tiered, cross-functional, and cross-company teams to identify areas of cooperation. Renault and Nissan shared best practices in product design, procurement, and manufacturing, and over time, consolidated chunks of their supply chain and manufacturing platforms. By 2006, companies’ sales, market share and efficiency had shot up. Their respective market capitalisations grew by 300% between 1999 and 2006, while that of the global automobile industry rose by 27%. The global slowdown has affected Renault-Nissan, as it has all automakers, but the two companies’ fate would surely have been worse had they not teamed up.

The partnering approach does have limitations. The benefits usually associated with the coming together of two companies are slower to materialize. For instance, because of the acquirer’s non-intrusive nature, its capacity to achieve substantial cost reductions, especially by eliminating jobs and sacking employees, is limited.

To conclude, some companies are better suited than others to adopt the partnering approach. Organisations with collaborative, inclusive cultures will have an easier time using the approach than companies with a hierarchical, command-and-control style. The partnering approach

requires leaders with a higher than average tolerance for ambiguity. Respect for new ideas is critical since executives must recognize the strengths of the acquired company and resist the urge to impose their way of doing things. These traits are encoded in the DNA of some organizations, but others will have to develop them. After all, the partnering approach embodies the best of both alliances and acquisitions.

M&A in India: Opportunities & Challenges With globalisation of markets and rapid technological changes, companies are finding Mergers & Acquisitions (M&A) as a very essential strategy for growth & for maintaining sustainable competitive advantage. M&A enhance the size and scale of operations of the companies. Objectives like exploring new markets & new products are reasons for increase in international M&A. India has increasingly established its presence on the global M&A scene, consummating several decades of significant sizes in terms of global standards. Examples of companies, acquiring entities equal to or even bigger than themselves, are not uncommon but it seems that India’s biggest conglomerates are lying low now. The turmoil in the global financial markets and the slowdown in the domestic markets have affected corporate India’s growth plans. However, the time is appropriate for outbound acquisitions by Indian companies because of attractive valuations at which global companies are available currently. It appears that there could be more acquisitions in the future. At present, the conditions for M&A deals are more conducive for smaller companies. The spate of M&A activities is all set to accelerate in the near future.

In the last few years, many Indian companies are pursuing a rapid growth strategy by expanding in the global markets through M&A. For them, the M&A route has been a quick path to pursue competitive business globally. India Inc. has always had a very high appetite for growth. The Indian corporate industry has made investments for expansion, increased its capacity and has successfully countered competition. M&A have increased tremendously over the years. Many Indian companies have been harbouring global ambitions and are taking steps to increase their footprints in the global markets.

Benefits of M&A

Synergy with the existing businesses of the buyer company: Videocon’s ambition of becoming a major player in the global consumer durables market came a step nearer to fruition when it clinched the $ 729 million (Rs 3,280.05 cr) deal to buy South Korea’s, Daewoo Electronics, in partnership with Ripplewood Holdings, a US based private equity fund. This is believed to be the largest ever deal the group has undertaken and help the company gain host of manufacturing and R&D facilities spread across the world. In July 2007, Hyderabad-headquartered, Rain commodities Ltd. (RCL) bought CII Carbon LLC of the US for $ 595 mn and moved from being Asia’s largest to becoming the world’s largest player in Calcined petroleum coke (CPC). The market share of RCL increased from 3-4% to 14-16% in the important and organized western market. The buy

out of CII Carbon, besides enhancing the size and scale, also provided benefits in the form of synergy which resulted in savings to the tune of millions of dollars.

M&A make the entities involved more strong: Acquisitions of Atlanta based Novelis at $6 bn by Hindalco, a flagship company of Aditya Birla group, is the second largest overseas takeover after Tata’s $12.1 bn deal for Corus. This is India Inc.’s biggest acquisition in North America. The acquisition made Hindalco the world’s largest aluminium rolling company and fifth largest integrated aluminium manufacturer. Aditya Birla group also entered the Fortune 500 league.

Discover Raw material sources & high end talent: Over the years, many Indian companies have made acquisitions that have been immensely beneficial to them and the benefits have gone beyond size and scale. Some companies have found assured supply of raw materials, while others have managed to obtain high end talent. RCL has been able secure an assured supply of raw materials, such as anode grade green petroleum coke, after buying out CH carbon in the US. It has become the world’s largest maker of CPC, a raw material that is used to make aluminium and titanium dioxide. The other benefits relate to long term relationships with CH Carbon suppliers and also diversified customer base that is spread across the western world. The Acquisition also brought CH Carbon’s proprietary technical know how which is being utilised to optimise the operations of RCL India. For instance, one of the technologies of CH Carbon has helped in reducing fuel consumption in the Kilns by 50-60%, implying savings of $2 mn annually just by using a single technology.

M&A provides the opportunity for widespread marketing operations: Dr Reddy’s laboratories managed to pull off the largest outbound pharma deal of 2006, when it acquired Germany’s Beta Pharm Arzneimittel GmbH for $572 mn (Rs 2,574 cr). Beta Pharm has a share of more than 31 % in the German market for generic drugs and is amongst the fastest growing companies in the company.

M&A helps to access markets that are still unexplored: Ranbaxy Laboratories made a string of acquisitions in 2006 to expand globally, the most important being the $324 mn (Rs 1,458 cr) takeover of Terapia, the largest independent generic company in Romania. The deal gave Ranbaxy access to European markets. Going global is every promoter’s favourite mantra. United Phosphorous limited (UPL) has made 26 Acquisitions since 1994. The buy outs have been across the globe, right from developed countries such as the US, UK, Japan & France to developing countries such as Argentina & South Africa. The Acquisitions have enabled UPL to enter

areas where it didn’t have a presence and where creating one would have been time & resource consuming. The buy out of the Dutch seed maker, Advanta was triggered by the impact of Bio Technology on the agro chemical sector. UPL’s Acquisitions have helped it to become a global major in generic crop protection, with a diversified geographical crop presence. Over the past 5 years in which UPL has made 16 Acquisitions, its revenue has increase 4.3 times and net profit has risen 6.7 times.

M&A reduces level of vulnerability: Tata Steel’s takeover of Anglo Dutch giant, Corus, is an important landmark in the history of Indian M&A. the $12.1 bn is corporate India’s biggest takeover to date. The Tata Corus deal marked the consolidation of Steel producers who were so far too fragmented to dictate price to an organised group of consumers. The acquisition brought Tata into the big league. The combined entity is the fifth largest in the world.

Chance to create a global company: ONGC Videsh paid $1.5 bn (Rs 6,750 cr) for a 15% stake in Brazilian oil-field BC-10 block, which is located in the Campos basin, and is believed to have massive oil reserves. The company is now a serious contender in the global oil and gas space.

Strengthening the buyer’s presence: Tata Tea acquired 30% stake in the US based energy brands Inc. for $677 mn (Rs 3,046.5 cr). The deal would give the Indian company a comfortable foothold in the US market for tea, vitamins, and water & fruit juices. In 2003-04, Mumbai based Plethico pharmaceuticals, acquired a 51% stake in Rezlov, Kazakhstan for around Rs 100 cr and shifted from being a humble over the counter player to an herbal and nutraceutical major with a diversified international presence. From Kazakhstan, Plethico entered into the US by buying out Chatsworth (Los Angeles, California) – headquartered, Natrol Inc. for $82 mn. Soon after the acquisition of Natrol Plethico acquired a 20 % stake in Tricon, a Dubai based retail pharmacy chain, for $20 mn. Plethico has thus, emerged as company with an international presence as the acquisition gave the company a foothold in the US and the other markets like Europe, Australia, New Zealand, Hong Kong and China. Now it also has a presence in the CIS (with Rezlove), Africa, South East Asia, Latin America and the GCC (Gulf Cooperation Council). The acquisitions accounted for 45% of the Plethico’s consolidated revenues.

Cost Arbitrage: The cost advantage of the acquired entity in terms of value addition to its human resource pool is an important factor in M&A deal.

Growth of M&A in recent years in India

Table –I: Largest M&A deals in India

M&A Deal Amount ($ bn)

Tata – Corus 12.2

Vodafone – Hutch 10.0

Hindalco – Novelise 6.0

Ranbaxy – Daiichi 4.5

ONG – Imperial 2.8

NTT – DoCoMo – Tata Com 2.7

HDFC – Centurion Bank of Punjab 2.4

Tata Motors - Jaguar 2.3

Suzlon – Repower 1.7

RIL - RPL 1.7

The India industry has been steadily moving towards building competitive enterprises globally. A very encouraging increase in both inbound and outbound M&A is indicative of this trend. A rise in cross border M&A activity has the backing of healthy performance at home, strong management capabilities and access to competitive financing. India Inc. is spreading its wings beyond border and acquiring foreign assets to serve global markets. India Inc. is in the mode of expansion – with M&A fast becoming the most preferred route. The frequency of the deal has also accelerated. The easy availability of funds, speed of execution and the growing confidence of the India Inc. are some of the contributory factors, giving momentum to the growth. It is a part of the phenomenon associated with the growth of an economy. Table I reveals largest M&A deals by Indian companies.

M&A activities in India started picking up in 2004, after nearly three pale years. It seemed to shed its yesteryears inhibitions and the emphasis was more focused on growth through M&A. according to Bloomberg, in the calendar year 2004.M&A activity spurted by 111.51% in volume over the previous year, with $9.3 bn (Rs. 40,920cr) worth of deals announced. What was also noteworthy was that, not only the number and the size of the deals, but also the quality of the deals and range of participants improved. The year 2004 witnessed many IT companies striking deals

overseas. Assets acquisitions in the manufacturing sector were largely by the top line houses of Birla, Tata and Reliance. Even mid size and smaller companies were looking for growth through M&A route. The restructuring activity over the last several years and cost cutting has made the companies to think big, particularly in IT and pharmacy sectors. The activities in 2004 can be best referred to as a dress rehearsal.

In 2005 also, the conditions for M&A were very conducive. The capital markets were buoyant and there was no dearth of capital to fund the M&A transactions. The corresponding figures (number of deals and values) of M&A deals for the year 2005 were 192 and $9.5bn (Rs 4,275 cr) respectively. The value of inbound deals was often large although their numbers were usually small. In 2005, there were 56 inbound deals (valued at 45.2bn), in comparison to 136 out bound ones (valued at$4.3bn). Telecom had a large share of inbound deals with Maxis and Apollo hospitals agreeing to put more than $1mn in Aircel. With the $1.5bn Vodafone Bharti deal, the Telecom sector dominated the inbound activity for 2005. The year 2006 can be called the year in which business finally got on top of the M&A game. The year was characterized by several large deals. According to data compiled by Grant Thornton, in 2006, Indian companies completed 266 cross border deals, collectively valued at $15.3 bn (Rs 68,850 cr). According to the study, 42% of India Inc.’s outbound M&A deals took place in Europe in the year. In absolute terms, Indian companies spent $4.2 bn (Rs 18,900 cr) on European acquisitions during 2006. It’s noteworthy that all the sectors witnessed an increase in M&A activity. The year 2006 can be called the big story for global mergers & acquisitions. Chevron picked up a stake in Reliance Petroleum, Ranbaxy bought Terapia and Holcim took over Gujarat Ambuja cements and ACC.

In 2006, Indian companies established their credentials as serious M&A players overseas as well as at home. The year 2007 looked well on the path of being a watershed year. Within the second month of the year itself, the volumes of India M&A touched $50 bn. M&A experts were of the opinion that before the end of 2007, India would easily hit $100 bn mark. The month of February in 2007began with Tata steel’s $12.1 bn acquisition of UK steel maker, Corus. Corporate India was on a deal rampage in this month. Close on the heels of Tata-Corus deal another mega deal, Aditya Birla group company Hindalco Industries’ $6 bn acquisition of Canada based Novelis was significant. What was noteworthy was that the average size per deal more than doubled since the same period the previous year. With assets available at attractive prices, it was thought that M&A activity would increase over the next two years. However, the sub-prime crisis that developed into a global financial crisis took its toll on the global M&A activity. The recession induced fear

factor and the non availability of funds have led to a sharp decline in the number of M&A deals during the first quarter of 2009. A report on Asia Pacific (APAC) region has valued the transactions during the first quarter of 2009at just $91 bn, compared to transactions valued at $164 bn witnessed in the comparable quarter of 2008. The deals in APAC region accounted for 18.4% of the value of the global deals. While cross border deals accounted for more than 50% of the overall deals put through in the quarter, the value of outbound deals decreased by as much as 70%. India witnessed deals worth $3.7 bn in 2009 which includes two mega deals, Reliance Petroleum merging with Reliance Industries, a deal valued at $1.75 bn, and Sterlite Industries acquiring Asarco Inc for $1.7 bn. India occupied the sixth position, when ranked by M&A deal value, the top positions being occupied by Australia, Japan, Hong Kong, China and South Korea, which collectively accounted for deals worth $78 bn.

Opportunities and Challenges of M&A in India

Indian companies have increasingly established their presence on the global M&A scene, consummating several deals of significant sizes, even by global standards. India Inc. seems to be in an expansive mode. It has finally gathered the confidence of taking giant strides in a competitive environment. Indian companies have made most of the acquisitions at reasonable prices. Cultural integration is the main determinant of success of M&A transactions. The incredible diversity of India has enabled the companies to stand in excellent stead. Indian companies are very good at facing & overcoming geographical boundaries, language barriers and adapting to an alien culture. The Indian corporate sector is slowly beginning to leave an indelible mark on foreign markets. Indian businesses are accessing new markets, resources and clients and people of varied ethnic hues are on the payrolls of Indian firms. The desire and need to expand and grow in size as well as in stature has led to significant rise in M&A activities. The overriding ambition to become big & competitive in M&A deals and to acquire assets has been on the increase. Geographical boundaries are no longer important and the confidence of Indian corporate sector is very high. Indian business is finally ready to take on the world with multi billion dollar outbound deals. It seems that India Inc. has put its foot on the accelerator and is running ahead on the path of growth. The Tata – Corus deal and subsequent multi billion dollar deals like that Hindalco-Novelis, Tata Motors – Jaguar Land Rover and Suzlon – Repower, are a signal Indian business is finally ready to take on the globe.

India is recovering faster from the slump, compared to the other economies. Therefore, the Indian companies would be attracted to buy

assets at distressed rates in other countries. Huge cash reserves and compelling valuations are encouraging India Inc. to explore the possibility of overseas acquisitions. After a relatively calm period and lessened activity, India Inc. is displaying renewed interest in cracking deals. December 2008 saw vigorous activities in terms of outbound M&A deals. Pirmal healthcare, Wipro and Rolta led the wave with Acquisitions which ranged from $10 mn (Rs 48.7 cr) to $ 127 mn (Rs 618 cr). It seems that there is going to be a revival of interest in M&A deals. Globally, valuations are down and many Indian companies also have sizeable cash in their books to crack the deals. Time is appropriate for outbound acquisitions by Indian companies because of attractive valuations at which global companies are available currently. It appears that there could be more acquisitions like Wipro Citigroup or WNS-Aviva deals going forward, as these may be important for both the buyers & sellers in the current situation. Indian companies will continue to be among significant acquirers in the international market.

In the present scenario, experts are of the opinion that a company that used to be valued at 1.5 times its sales revenue can now be negotiated at a value equivalent to its sales. When valued on the basis of EBITDA, a company that is usually priced at 12-15 times its EBITDA can currently be acquired at -8 times its EBITDA. However, due to the economic downturn, Indian companies too are cautious & watchful. They are making an attempt to ensure that there are appropriate business synergies with the target companies. Piramal Healthcare did its preparation well before acquiring Minrad International for $40 mn (Rs 195 cr). Experts are of the view that a growing number of Indian companies are on the prowl of acquisitions. It is not just Indian companies but overseas companies are also eager for M&A deals in India. Indian companies are looking attractive at current valuations and probably more inbound deals could also be seen in the near future.

As Indian companies are making overseas acquisitions and spreading their wings globally, they could also be exposed to global risks. The global cyclical downturn in an industry and a slowdown in the global economy have impacted the growth of the companies. There is also the danger that India Inc. would pile up its debts to finance the deals. If the returns from the operations are not high enough, servicing such debt could pose problems. There are various other problems also in making overseas Acquisitions. Sometimes it is difficult for a foreign company to believe the fact that a company from a developing country wants to acquire it. Different cultural norms are the biggest challenge for any cross border Acquisition, as they can make or mar a deal.

A Launch pad for the Indian Multinational It’s been a struggle to cope with softer demand conditions and debt repayments, but there’s little doubt that India Inc.’s best bet of gaining global size and scale is by acquiring assets overseas.

Of course, the imperatives for buying huge assets overseas are not – and should not be – just to gain critical mass; new geographies, raw material security, new skills and higher technology are some of the provocations for buying abroad. Equally important, though, Indian promoters need to get two things crystal clear before acquiring: Are they buying at the right point in the business cycle; and the strategic rationale for buying that business. As Frank Hancock, Managing Director & Head (M&A), Barclays Capital India, puts it: “When seen with the benefit of hindsight, if there’s a single lesson to be learnt, it could be that timing is critical.” However, Hancock is quick to add: “But in considering whether going ahead with an acquisition makes sense at a particular point of the cycle, the promoter must also decide whether he might be foregoing a unique opportunity in case he decides to pass.”

That’s the judgment call Indian CEOs have to make: When to go for the kill, and when to walk away. To be sure, M&A looks sexiest when economies are booming, and a feel-good air prevails. Conversely, acquisitions look like mindless disasters when markets bottom out and gloom sets in. The situation currently is somewhere in between, although still closer to the gloom than to the boom times. Yesterday’s acquirers are frantically trying to make their buyouts work. They’re making progress. Tata Steel, which acquired Corus in 2007 for $ 12.2 billion, hurtled into the red in June’09 quarter, courtesy a huge drop in steel demand and, therefore, sales; this was followed by restructuring moves at the British steel maker’s capacities. Recently, Tata Steel reported 6,000 job cuts at Corus, and in the quarters ahead, increased capacity utilization and lower costs are expected to come to the Indian steel maker’s rescue. Tata Motors, which was snowed under debt of $ 2 billion used to finance the $ 2.2 billion acquisition of Jaguar-Land Rover, succeeded in reporting a profit at the consolidated level for the September-ended quarters, after skidding into the red in the June 2009 quarter. Similarly, Novelis, the Canadian aluminium major that Aditya Birla Group Company Hindalco bought for $ 6 billion in 2007 showed quarterly profits in June and September after three quarters of losses. The important lesson learnt in the last decade is that Indian companies have the management abilities to handle big acquisitions and turn them around.”

The good news for Indian acquirers, big and small, is that availability of finance isn’t an issue. In fact, at the time when the proposed merger of Bharti Airtel and MTN of South Africa fell through, there were 10 banks standing by with $500 million each to book their place on the deal wagon. Rather than finance, what Indian promoters need to be more concerned about is what they’re going to do with the asset after they buy it. Just because there is a sale sign, would one go and buy?

Indeed, there are a lot of “sale” signs today. Almost the whole of Europe is on sale. What is important is to understand the asset before buying it. That understanding should dictate the financing. For instance, if turnaround is targeted for three years, a one-year bridge loan may be suicidal. A five-year financing option is what’s needed.

It is not as if overseas acquisitions are not an imperative for all Indian promoters – certainly not for those sitting on businesses that are thriving because of domestic consumption or for those in the business of building infrastructure like power plants, ports, roads, railways and airports. Businesses like financial services, healthcare, leisure and education will benefit as disposable incomes increase, and the purchasing power of non-urban consumers rises.

One way for such domestic market focuses businesses to gain size and scale is via consolidation. Telecom, for instance, is one sector that’s crying for consolidation with, at last count, some 17 players battling one another. Similarly, banking is one sector that needs mergers. Consider these possibilities, however, impractical they are: If all India-listed banks (roughly 50 of them) were to be merged into one entity, their combined market cap would be $100 billion, making it the seventh-largest global bank. Another unlikely but thought-provoking scenario: If SBI and India’s top two private sector banks, ICICI Bank and HDFC Bank, were to come together, they would equal the size of Citigroup, which is today the 10th largest global bank. A more likely scenario: The country’s top six nationalized banks being merged; based on their current values, the combined market cap would exceed $ 40 billion, and help this entity find a place in the global top 10 list. The point of painting these scenarios is not to advocate just unlikely mergers, but to show the potential that exists for consolidation in Indian banking.

A section of investment bankers make a case for Bharti acquiring one or two domestic players rather than going abroad. Yet, shopping for assets in less-penetrated markets – like Africa, which is what Bharti attempted – is inevitable as growth reaches near-saturation levels back home. Similarly, Indian banks could look overseas – but then to consider large

buys, you need to get into a decent size and shape back home first. “The mandates are very specific now, there are no trends and there are no hot sectors.”

The cream of India Inc. – and that includes public sector giants – has to start thinking as big as the Chinese companies are doing. In February, 2008, Aluminium Corp. of China along with Alcoa Inc. bought a 12 per cent holding in UK-listed Rio Tinto for $ 14 billion. In June 2009, China Petroleum Corp. – or Sinopec – acquired Addax Petroleum, one of Africa’s biggest producers of oil, for $7.2 billion. India will once again be able to grab a chair at the big table of high-stakes M&A if RIL succeeds in picking up Lyondell Basell.

M&A: Valuation Matters Investors in a company that are aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. 

Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. 

There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. Here are just a few of them: 

1. Comparative Ratios - The following are two examples of the many comparative metrics on which acquiring companies may base their offers:  Price-Earnings   Ratio   (P/E Ratio)  - With the use of this ratio, an

acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be. 

Enterprise-Value-to-Sales   Ratio   (EV/Sales)  - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other companies in the industry.

2. Replacement Cost  - In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose

the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop.

3. Discounted Cash Flow  (DCF) - A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (net income + depreciation/amortization - capital expenditures - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.

Synergy: The Premium for Potential Success 

For the most part, acquiring companies nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy; a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy. 

Let's face it, it would be highly unlikely for rational owners to sell if they would benefit more by not selling. That means buyers will need to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their company's future prospects. For buyers, the premium represents part of the post-merger synergy they expect can be achieved. The following equation offers a good way to think about synergy and how to determine whether a deal makes sense. The equation solves for the minimum required synergy: 

 

In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergers, which we discuss in part five, often prevent the expected

benefits from being fully achieved. Alas, the synergy promised by deal makers might just fall short. 

What to Look For 

It's hard for investors to know when a deal is worthwhile. The burden of proof should fall on the acquiring company. To find mergers that have a chance of success, investors should start by looking for some of these simple criteria: 

A reasonable purchase price - A premium of, say, 10% above the market price seems within the bounds of level-headedness. A premium of 50%, on the other hand, requires synergy of stellar proportions for the deal to make sense. Stay away from companies that participate in such contests.

Cash transactions - Companies that pay in cash tend to be more careful when calculating bids and valuations come closer to target. When stock is used as the currency for acquisition, discipline can go by the wayside.

Sensible appetite – An acquiring company should be targeting a company that is smaller and in businesses that the acquiring company knows intimately. Synergy is hard to create from companies in disparate business areas. Sadly, companies have a bad habit of biting off more than they can chew in mergers.

M&A Regulations in India Mergers and Acquisitions (“M&A”) is the route most often adopted for corporate growth and expansion in India. This section describes inter alia the main regulatory clearances and approvals required to carry out proposed M&A activity in India. The main ways of obtaining control of a public company are (i) a merger or amalgamation under a scheme of arrangement; (ii) the acquisition of a company’s shares; (iii) the reconstruction of a “sick” company.

Merger in corporate business means fusion of two or more corporations by the transfer of all properties and liabilities to a single corporation. The term ‘amalgamation’ is used synonymously with the term merger, and has the same verbal meaning as that of merger. The expressions ‘amalgamation’ and ‘merger’ are not precisely defined in the Companies Act, 1956 (“CA56”) though these terms are freely and interchangeably used in practice. However, the Income Tax Act, 1961 (“IT Act”) defines the term ‘amalgamation’ as the merger of one or more companies to form one company in such a manner that all the properties and liabilities of the amalgamating company (s), before the amalgamation, become the properties and liabilities of the amalgamated company, pursuant to the amalgamation, and not less than three-fourth shareholders of the amalgamating company become the shareholders of the amalgamated company.

The term ‘takeover’, which also becomes relevant in the context of the present article, is neither defined in the CA56 nor in the Securities and Exchange Board of India Act, 1992 (“SEBI Act”), or in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulation 1997 (“Takeover Code”). In commercial parlance, the term takeover denotes the act of a person or a group of persons (acquirer) acquiring shares or voting rights or both, of a company (target company), from its shareholders, either through private negotiations with majority shareholders, or by a public offer in the open market with an intention to gain control over its management. Thus, the term ‘takeover’ may be described as the process whereby the majority of the voting capital of a company is bought through secret acquisition of shares or through a public offer to the shareholders. 

Indian Legal Issues involved in M&A

1. SEBI Takeover Regulations/Company Law in M&A:

Mergers are primarily supervised by the High Court(s) and the Ministry of Company Affairs. The SEBI regulates takeovers of companies that have

shares listed on any stock exchange in India. The main corporate and securities law provisions governing mergers and takeovers are:

Sections 108A to 108I of CA56, which place restrictions on the transfer and acquisition of shares where the shareholdings of the bidder or transformer would either:

o Result in a dominant undertaking; or

o In case of a pre-existing dominant undertaking, result in an increase in the production, supply, distribution or control of goods and services by it.

Section 390 to 394 of CA56, which govern the schemes of arrangement between companies and their respective shareholders and creditors, under the supervision of the relevant High Court.

The Takeover Code, which sets out procedures governing any attempted takeover of a company that has its shares listed on one or more recognized stock exchange(s) in India. Regulation 10, 11, and 12 of the Takeover Code, which deal with public offers, do not apply to a scheme framed under the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”), or to an arrangement or reconstruction under any Indian or foreign law (Regulation 3 (1) (j), Takeover Code).

The Takeover Code, however, does not apply to the following acquisitions:

1. Allotment of shares made in public issue or in right issue;2. Allotment of shares to underwriters in pursuance of underwriting

agreement;3. Inter-se transfer between group, relative, foreign collaborators and

Indian promoters who are shareholders, acquirer and persons acting in concert with him;

4. Acquisition of shares in the ordinary course of business by a registered stockbroker on behalf of his client, market maker, public financial institutions in their own account, banks and financial institutions as pledgees, international financial institutions, and merchant banker or promoter of the target company under a scheme of safety net;

5. Exchange of shares received in a public offer made under the Takeover Code;

6. Transmission of shares in succession or inheritance;7. Acquisition of shares by government companies and statutory

corporations. However, acquisition in a listed public sector undertakings, through the process of competitive bidding process of the Central Government is not exempted;

8. Transfer of shares by state level financial institutions to co-promoters under an agreement;

9. Transfer of shares venture capital funds or registered venture capital investors to a venture capital undertaking or to its promoters pursuant to an agreement;

10. Acquisition of shares in pursuance of a scheme of rehabilitation of a sick company, amalgamation, merger or de-merger;

11. Acquisition of shares of an unlisted company. However, if such acquisition results in acquisition or change of control in a listed company, the exemption will not be available;

12. Acquisition of global depository receipts and American depository receipts so long as they are not converted into shares carrying voting rights.

Section 17, 18 and 19A of the SICA, which regulate schemes formulated by the Board for Industrial and Financial Reconstruction, a statutory body established under the SICA, for the reconstruction and amalgamation of “sick” companies (that is, any company which, at the end of any financial year, has accumulated losses equal to or exceeding the entire net worth). The Sick Industrial Companies (Special Provisions) Repeal Act 2003 (“SICA Repeal”), which repeals the SICA, has been enacted but has not yet come into force. Similarly, while the Companies (Second Amendment) Act, 2002 has introduced Chapter VIA in the CA56, which makes substantial amendments to the regime governing sick companies, these provisions are also yet to come into effect (there is no indication as to when these provisions are likely to come into force). As a result, SICA continues to be valid and binding.

There are also rules governing the acquisition of shares in an Indian company by a non- resident.

2. Due Diligence in M&As:

The purpose of the due diligence exercise is to identify any issues that may affect the bid including, but not limited to, the price of the bid. Generally, the bidder (in case of recommended as well as hostile bids) will want to determine the following about the target company:

Its capital structure including shareholding pattern. The composition of its board of directors.

Any shareholders’ agreement or restrictions on the shares, for example, on voting rights or the right to transfer the shares.

Its level of indebtedness.

Whether any of its assets have been offered as security for raising any debt.

Any significant contracts executed by it.

The status of any statutory approvals, consents or filings with statutory authorities.

Employee details.

Significant litigation, show cause notices and so on relating to the target and/or its areas of business.

Any other liability, existing or potential.

Public Domain

Information on a target that is in the public domain and is accessible to the bidder includes its:

Constitutional documents; Annual reports and annual returns filed with statutory authorities,

giving information on shareholdings, directors and so on.

Quarterly and half-yearly reports, in the case of listed companies (in accordance with the standard listing agreement prescribed by the SEBI).

A listed company must inform the stock exchanges of important decisions taken by its board of directors.

3. Contractual Issues in M&As:

While economic and business reasons may be the factors behind both M&As, contractual and legal formalities involved are rather different. Share sale and purchase/acquisition agreement, asset and business transfer agreements, representations and warranties, indemnity, non-compete and non solicitation, confidentiality, governing law, post completion matters and indemnities are significant agreements and clauses to effectively execute M&As.

Contents of a Share Purchase Agreement

Condition precedent – The condition precedents incorporated in a share purchase agreement may include obtaining necessary approvals from various governmental regulatory bodies that may be necessary to effectively execute the share purchase agreement and the proper functioning of the target company.

Management and Control – The devising of an appropriate governance structure of the target company is of great importance for effective management, growth and success of the target company. The share purchase agreement should explicitly set out the participation of the acquirer and also the rights, obligations and duties of the management of the target company including that of the board of directors, nominee directors and the chairman.

Intellectual Property Rights – If the merger involves a transfer, assignment or right to use an intellectual property such as trademark, copyright, know-how, etc. the same should be protected in the share purchase agreement.

Non-Competition/Conflict of Interest – The non-compete clause in a share purchase agreement is incorporated with intent to restrain the contracting party from carrying out any independent activity in competition to that of the target company.

Deadlock Provision – The parties may have similar or dissimilar thinking patterns. Therefore, there has to be a mechanism for resolving any issues on which there is a deadlock between the parties. The chairman may be given a casting vote to avoid such a problem. 

Confidential Information – The share purchase agreement can make all the provisions contained in or related to or arising from the share purchase agreement to be confidential in nature

Survival Clause – It may be prudent to provide for certain obligations contained in or related to or arising from the share purchase agreement to survive pursuant to the termination of the share purchase agreement.

4. Intellectual Property Law and M&As:

In case of M&A of companies, all the assets of the transferor company including intellectual property assets such as patents, copyrights, trademarks and designs vest in the transferee. Where the transferor company owns the intellectual property assets, such assets are transferred to the transferee company under the scheme of arrangement.

Unregistered trademark/copyright is transferable as any other right in a property under the scheme of arrangement framed under section 394 of CA56. In case of registered trademarks/copyrights and patents, the transferee company has to apply to the respective Registry for registering its title pursuant to the order of the High Court sanctioning the scheme.

The transmission/transfer of the trademark/copyright rights in the license may be permitted in an instance where the licensor himself assents to such transfer of a license subsequent to a merger.

5. Exchange Control Issues:

The Foreign Direct Investment (“FDI”) regime in India has progressively liberalized and the Government of India recognizes the key role of FDI in economic development of a country. With very limited exceptions, foreign entities can now invest directly in India, either as wholly owned subsidiaries or as a joint venture. In an international joint venture, any proposed investment by a foreign entity/individual in an existing entity may be brought in either through equity expansion or by purchase of the existing equity.

Where the transfer of shares is by way of sale under a private arrangement, by a person resident in to a person resident outside India the price of the shares will not be less than the ruling market price in case of shares listed on a stock exchange or the value of the shares calculated as per the guidelines issued by the erstwhile Controller of Capital Issues and certified by a Chartered Accountant. In either of the cases the sale consideration must be remitted into India through normal banking channels. Lastly, to affect the transfer, a declaration in the form FC TRS should be filed with an authorized dealer along with the a consent letter indicating the details of transfer, shareholding pattern of the investee company after the acquisition of shares by a person resident outside India showing equity participation of residents and non residents, certificate indicating fair value of shares from a chartered accountant or in case of a public listed company copy of the broker’s note and an undertaking from the buyer to the effect that he is eligible to acquire shares in accordance with the FDI policy.

6. Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”) and      Competition Act, 2002 (“CA02”):

The MRTP Act aims towards controlling monopolistic, restrictive and unfair trade practices, which curtail competition in trade and industry. Monopolistic trade practice includes a trade practice unreasonably preventing or lessening competition in the production, supply or distribution of any goods or in the supply of any services. Sections 108A to 108I incorporated in CA56 restrict the transfer of shares by body or bodies corporate under the same management holding 10% or more of the subscribed share capital of any company without intimating the Central government of the proposed transfer.

The Competition Commission can investigate any combination, which is a merger or acquisition where any of the following apply:

The parties jointly have assets exceeding INR 10 billion (about US$ 227 million) or turnover of more than INR 30 billion (about US$682 million) in India, or assets of US$ 500 million (about EUR 413 million) or turnover of more than US$ 1.5 billion (about EUR 1.2 billion) in India or outside India.

The group to which the company will belong after the acquisitions and the company jointly have assets exceeding INR 40 billion (about US$ 909.6 million) or turnover of more than INR 120 billion (about US$ 2.7 billion) in India, or assets of US$ 2 billion (about EUR 1.7 billion) or turnover of more than INR 120 billion (about US$ 2.7 billion) in India, or assets of US$ 2 billion (about EUR 1.7 billion) or turnover of more than US$ 6 billion (about EUR 5 billion) in India or outside India.

The bidder already has direct or indirect control over another enterprise engaged in the production, distribution or trading of a similar, identical or substitutable good or service, and the acquired enterprise and this other enterprise jointly have assets exceeding INR 10 billion or turnover of more than INR 30 billion in India, or assets of US$ 500 million or turnover of more than US$ 1.5 billion in India or outside India.

The enterprise after the merger or acquisition has assets exceeding INR 10 billion or turnover of more than INR 30 billion in India, or assets of US$ 500 million or turnover of more than US$ 1.5 billion in India or outside India.

While investigating the combination, the Competition Commission must examine whether it is likely to cause, or causes, an adverse effect on competition within the relevant market in India. The Competition Commission has 90 days from the date of publication of details of the combination by the parties to pass an order approving, prohibiting or requiring modification of the combination, or to issue further directions. If it does not do this, the combination is deemed approved. There is no obligation to suspend the combination while the investigation is taking place.     

7. Tax Implications in M&As:

Amalgamations and De-mergers attract the following taxes:-

Capital Gains Tax  – Under the IT Act, gains arising out of the transfer of capital assets including shares are taxed. However, if the resultant company in the scheme of amalgamation or de-merger is an Indian Company, then the company is exempted from paying capital gains tax on the Transfer of Capital Assets.

Tax on transfer of Share  – Transfer of Shares may attract Securities Transaction Tax and Stamp Duty. However, when the shares are in de-materialized form then no Stamp duty is attracted.

Tax on transfer of Assets/Business  – Transfer of property also attracts tax which is generally levied by the states. 

o Immovable Property – Transfer of Immovable Property attracts Stamp Duty and Registration fee on the instrument of transfer.

o Movable Property - The transfer of Movable Property attracts VAT which is determined by the State and also Stamp Duty on the Instrument of transfer.

Transfer of tax Liabilities –

o Income Tax  – The predecessor is liable for all Income Tax payable till the effective date of restructuring. After the date of restructuring, the liability falls on the successor.

o Central Excise Act  – Under the Central Excise Act, when a registered person transfers his business to another person, the successor should take a fresh registration and the predecessor should apply for deregistration. In case the predecessor has CENVAT Credit, the same could be transferred.

o Service Tax  – As regards service tax, the successor is required to obtain fresh registration and the transferor is required to surrender his registration certificate in case it ceases to provide taxable services. The provisions regarding transferring the CENVAT credit are similar to the Central Excise provisions.

o Value Added Tax  – Usually statutes governing levy of VAT specify for an intimation of change of ownership and name to the relevant authority, but these statutes do not provide any specific guidelines with regard to the transfer of tax credit. The obligation of the predecessor and the successor is joint and several.

There is a growing need to bring a change in the present law but a coordinated approach should be taken while bringing amendments in the CA56. The change is required to provide for maximum flexibility and to provide equal opportunities to economic players in the global market. This would also help in bringing Indian law in consonance with the law regarding mergers in other countries.