The Significance of Mergers and Acquisition in India

The Signifi dealce of unions and Acquisition in IndiaThe term spinal fusions and encyclopaedism refers to the facet of incorpo layd finance, strategy and guidance dealing with buying and commercializeing or amalgamating diametrical companies that can help in financial aid or help in increasing the grocery shargon and issue without creating an proto(prenominal)(a)(prenominal) line of products entity.Important terms used in the world of conjugations acquisition, their instruct explanationMerger is defined as the combination of cardinal or to a greater extent companies into a single order where matchless survives and the other loses its incorporated existence. The survivor acquires the as gravels as easy as liabilities of the incorporated friendship or companies.Amalgamation Halsburys Laws of England describe amalgamation as a blending of two or more than than existing undertakings onto one undertaking, the sh atomic number 18holders of each blending fellowshi p becoming substantially the share holders in the comp each which is to carry on the blended undertaking. Section 2 (a) of Income Tax human action defines Amalgamation in relation to companies means the merger of two or more companies to cast one companion in some(prenominal)(prenominal) a manner thatall(a) the properties of the amalgamating conjunction or companies except before the amalgamated alliance by moral excellence of amalgamation gravel the properties of amalgamation.All the liabilities of the amalgamating caller-up or companies average before the amalgamation become the liabilities of the amalgamation become the liabilities of the amalgamated company by virtue of amalgamation.Shareholders retentivity not less than three-fourth in regard as of shares in the amalgamating company or companies becomes the shareholders of the amalgamated company by virtue of amalgamation.Consolidation is the fusion of two existing companies into a new company in which some(pren ominal) the existing companies snuff out. The small going away amid desegregation and merger is that in merger one of the two or more group meeting companies retains its identity magic spell in consolidation all the consolidating companies extinguish and an entirely new company is born.Acquisitions/Take everyplaces This refers to purchase of major(ip)ity send (controlling interest) in the share crown employ of an existing company by another company. It whitethorn be noted that in the case of coup although thither is miscellany in management, both the companies retain their separate legal identity.Leveraged Buyouts It means any takeover which is routed done a high degree of borrowings. In straightforward words a takeover with the help of debt.Management Buyouts It refers to the purchase of the spate part or whole of shareholding of the controlling / dominant group of shareholders by the existing mangers of the company.Sell strike General Term for divestiture of part or wh ole of the steadfastly by any one or physical body of means i.e. sale, spin off, split up etc.Spin Off A transaction in which a company distri notwithstandinges all the shares it owns in a subsidiary to its own shareholders on pro-rata basis then creates a new company with the same proportional shareholding pattern as in the set up company.Split Off A transaction in which some, but not all, shareholders of the parent company receive shares in a subsidiary, for pass on their parent company shares.Split Up A transaction in which a company spins off, all of its subsidiaries to it shareholders and ceases to exist. integrity Carve Out A transaction in which a parent company offers some commons stock of one of its subsidiaries to the general public, so as to bring in a cash infusion to the parent company without losing the control.TYPES OF unificationS AND ACQUISITIONSMergers can be classified into three categoriesOn the basis of movement in the industries plain MergersThese invol ves merger of two inviolables in operation(p) and competing in the same line of commercial enterprise activity. It is per variateed with a view to turn a larger firm, which may befool economies of scale in production by eliminating duplication of competitions, ontogenesis in foodstuff segments and function of better control over the grocery. It also helps firms in industries like pharmaceuticals, automobiles where huge amount is spent on RD to achieve a critical mass and reduce unit development bells. pattern India cements getting Raasi cementum.Vertical MergersThese take place surrounded by two or more firms engaged in variant stages of production. The main reason for vertical merger is to ensure ready take off of the materials, bring control over scarce raw materials, gain control over product specifications, affix in profitability by eliminating the margins of the previous supplier/ distributor and in some cases to avoid sales tax. pillow slip Tea Estate Ltd mergin g with Brooke Bond Ltd.Conglomerate MergersConglomerate merger refers to the merger of two or more firms engaged in unrelated line of stock activity. caseful GNFC acquiring Gujarat Scooters.Two central characteristics of cumulate mergers areA conglomerate firm controls a range of activities in various industries that require different skills in the specific managerial functions of research, applied engineering, production and commercializeing.The diversification is achieved primarily by external acquisitions and mergers and not by internal development.Consolidation MergersThis involves a merger of a subsidiary company with parent company. The reasons behind such mergers are to stabilize cash flows and to form pecuniary resource available for the subsidiary. In consolidation mergers, economic gains are not readily apparent as merging firms are under the same management. Still, Flow of funds mingled with parent and the subsidiary is obstructed by other consideration of laws s uch as taxation laws, Companies Act etc. on that pointfore, consolidation can make it easier for to infuse funds for revivification of subsidiaries.One the basis of method or climaxLeveraged buyoutsManagement buyoutsTakeover by workersOn the basis of result/relationFriendly TakeoversHostile TakeoversAcquisition is buying of Target smart set by another. It may be friendly or aggressive. In friendly acquisitions the companies cooperate and negotiate with each other whereas in aggressive the station company is not willing to be sold but it is with no antecedent knowledge. The word acquisition is used when a large company overtakes small but when the small overtakes large it is called reverse takeover or merger.MERGER MOTIVESThe merger motives are as followsGrowth Advantage / cabal BenefitsThe companies would always like to grow and best way to grow without much loss of time and resources is too inorganically by acquisition and mergers. composition Merger ofSCICI with ICICIITC Classic with ICICIAcquisition ofRaasi cement by India cementDharani Cement and Digvijay cement by GrasimModi cement by Gujarat Ambuja.DiversificationThe companies could diversify into different product lines by acquiring companies with diverse products. The purpose is to diversify business put on the line by avoiding putting all eggs into one basket.Example All Multi-product companiesSynergyWhen the companies combine their operations and realize results greater in measure out than mere additions of their assets, the synergy is said to have been resulted.Example Merger of Ranbaxy and Crossland Laboratories.Market Dominance / Market Share/ Beat CompetitionThe rife market share or market dominance has always operate the executives to look for acquiring hawkish companies and create a huge market empire.ExampleAcquisition of Tomco by Hindustan LeverComputer Associates International Acquired round twenty software companies.Consolidation in cement fabricationNicholas Piramal Ltd. has merged into itself.Technological ConsiderationsIt refers to enhancing production capacities to derive economies of scale.Example Acquisition of Corus by Tata. tax Benefits / Revival Of Sick UnitsSection 72 A provides for revival of macabre units by allowing accumulated losses of the sick unit to be clothed by the healthy units subject to compliances to the conditions of the provisions.Acquiring PlatformWhen a company would like to expand beyond geographical limits and acquire platform in the new place the best way would be to acquire the companies.Example Acquisition of Parle by Coke.METHODOLOGYANALYSISObjectiveTo inspect and die the trends and progress of MA in Indian market and corporation.To analyze twelvemonth- owlish trends with the variance.Hypotheses With the supra objective in mind certain hypotheses areNo major difference in the amount and calculate of deals in MA between the industries and between the yearsNo major changes between service and manufacturing field in MA ontogenyThe table 1 shows the trends of MAs in India from the year 2000 to 2007.Food BeveragesIndia is the second largest producer of nourishment Beverages, start being China. The food market is expected to be USD 182 one trillion million and it is two thirds of the total retail market in India. The carbonated drinks market is worth USD 1.5 one million million million whereas the market for juice is worth USD 0.25 billion. The market for fruit drinks is growing at 25%. The major reasons for MA concept commenced in this industry are deregulation, restructuring of parent companies, disinvestments and existing foreign players.Textile IndustryThe Indian textile industry was unorganized until liberalization of economy of India. After that at that place was an astounding growth in this industry and it is one of the largest in the world. 27% of foreign change is from textile exports. This industry is 3% of GDP and it involves 21% of the total recitation in the country. The m ajor reasons for growth of MA are the growth of handlooms, mental block of mills etc.Chemicals, Drugs and PharmaceuticalsThis sector accounts for 70% of the demands for drugs, formulations, tablets, chemicals etc. There are close 250 large and 8000 small manufacturers and suppliers in Pharma sector. The growth rate of this industry is almost 14%. The reason for the growth of MA in this sector is due to the fundamental changes in this sector and the emergence of WTONon-Metallic mineral ProductsThe major reasons for the growth of MA in this sector are mainly because the Indian economy has slowed down, SME are finding difficult to raise the funds and are not able to handle the pressure from global market. cultivation Technology and TelecomThe factors for the growth of MA are up-gradation and expansion of the telecommunication industry, services and net working.Automobiles and AncillariesGlobalization is approaching and pushing foreign players merge and upgrade the technology and inf rastructure, increase the product range and cut costs. Also there is huge competitive pressure due to the existing foreign players leading to growth in MA.The pie chart (Figure 2) gives the sector-wise division in 2007Figure 2 Sector-wise divisionAnalysis of MA in manufacturing and service sectors give in1 shows the Trends and progress in terms of procedure of deals and Table 2 in terms of treasure of deals.Table1 Industry-wise Trends Growth of MAs in India (Number of deals)Table2 Progress and Trends in MA in human body of deals (as calculated from Table1)Table 3 Industry-wise Trends Growth of MAs in India (in Rs. Cr.)Table 4 Progress and Trends in MA in value of deals (as calculated form Table 2)Number of Deals Value of deals The progress and trends of MA considered in second and value of deals in manufacturing and services sectors have been calculated by use t-test and ANOVA analysis. On the basis of Table 2 and Table 4 the number of deals in service sector is abase in t he first 4 years but reverses in the last 3 years. So there is no major association between these two sectorsTable5 nonpartisan ANOVA- Sector-wise Number of Deals (as calculated from Table 1)Table6 Two-way ANOVA-Sector-wise Value of Deals (as calculated from Table 3)ANALYSIS OF THE SURVEY DATARESEARCH AND FINDINGSFrom the calculations done above, it is observed that the number of deals has descendd from 1300 to 1007 i.e. almost 18%. There can be various reasons for this decrease, some are as followsThe slowdown of the economyWith no prior knowledge management makes a choice of MA leading to decrease in profitsEconomic crisis in the period of 2004-2007Dropping market detonatorizations and uncertainty in the economyFrom the above analysis it is concluded that native amount of deals increase by 613%In manufacturing sector the value of deals increased by 273% whereas it increased by 1217% in service sector total number of deals diminish by 18.5% i.e. from 1322 to 1075In manufacturin g sector the number of deals decreased by 844 to 440 i.e. 47.2% decrease whereas in service sector deals increased from 480 to 636 i.e. 33% increase.THEORIES OF MERGERThe phenomenon of merger and acquisitions has been explained by different theories as under cleverness Theories derivative instrument EfficiencyIf the management of firm A is more streamlined than the management of firm B and if after(prenominal) firm A acquires firm B, the efficiency of firm B is brought up to the level of efficiency of firm A, efficiency is increased by merger.FeaturesThere would be social gain as well as private gain.This may also be called managerial synergy hypothesis.LimitationsIf carried to its logical extreme, it would result in only one firm in the economy, the firm with greatest managerial efficiency. Inefficient / underperforming firms could repair performance by employing supererogatory managerial input through and through exact business / contracting.Inefficient ManagementInefficient Management refers to non performance up to its potential level. It may be managed by another group more efficiently.FeaturesInefficient Management represents management which is inept in absolute sense.Differential management theory is more likely to be basis for naiant merger uneconomical management theory could be basis for mergers between firms of unrelated business.LimitationsDifficult to differentiate differential management theory from inefficient theory.The theory suggests replacement of inefficient management. However empirical evidence does not support this.Operating SynergyOperating synergy or operational economies may be achieved in horizontal, vertical and even conglomerate mergers.Featurespossibility is based on the assumption that economies of scale do exist in this industry and prior to merger, firms are operating at the levels of activity that impinge on short of achieving the potential for economies of scale.Economies of scale arise because of indivisibilities such as people, equipment belt which provide increasing returns if spread over a large number of units of output.Pure DiversificationDiversification of the firm can provide the managers and employees with suppose security and opportunity for promotion and other things being equal, results in lower costs. Even for owner manager diversification is valuable as attempt premium for undiversified firm is higher.Diversification has value for many reasons claim for diversification by managers, other employeesPreservation of organizational and reputation capitalFinancial and tax advantagesDiversification helps preserving reputational capital of the firm, which will be disoriented if firm is liquidated.Strategic Realignment to Changing EnvironmentStrategic planning is refer with firms environment and constituencies, not just operating decisions. The speed of adjustment through merger would be quicker than internal development.FeaturesStrategic planning approach to mergers implies either the possibilities of economies of scale or tapping an underused capacity in the firms present managerial capabilities.By external diversification the firm acquires management skills for augmentation of its present capabilities.A competitive market for acquisitions implies that the net present value from merger and acquisition investment is likely to be small. Nonetheless if synergy can be used as a base for still additional investments with controlling net present values, the strategy may succeed.Agency troublesAgency problem arises when a manager owns a fraction of monomania shares of the firm. This partial ownership may cause managers to work less vigorously than other wise and / or consume more perquisites, (luxurious offices, company cars, membership of clubs) because majority owners expatriate most of the cost.Agency costs includeCost of structuring a set of contractsCost of monitoring and controlling the expression of agents by principals.Cost of hold fast to guarantee t hat agents will make optimal decisions or principles will be compensated for consequences of sub-optimal decisions.Residual loss i.e. welfare loss experienced, by the principals arising from the variation between agents decisions and decisions to maximise principals warfare. This residual loss can arise because the cost of full enforcement of contracts exceeds the gain grounds.Takeover as solution to Agency ProblemsAgency problems can be controlled by organizational or market mechanismA number of compensation plantments and market for managers may mitigate agency problems. hold market gives rise to external monitoring device, because stock prices summaries the implications of decisions made by managers. Low stock prices exert pressure on managers to change their behavior and to stay in line with interest of shareholders.When these mechanisms are not sufficient, market for takeover provides an external control device of last resort.A takeover through a tender offer or proxy post ulate enables outside managers to gain control of decision process of Target association, while circumventing the existing managers and Board of Directors.Free Cash flow hypothesis compensate out of free cash flow can play an important role in dealing with conflict between managers and shareholders. Payout of free cash flow reduces the amount under control of managers and reduces their power. Further they are subject to monitoring in capital market when they seek to finance additional investment with new capital. A free cash flow moldiness be paid out to shareholders if firm is to be efficient and to maximize share price.Further they are subject to monitoring in capital market when they seek to finance additional investment with new capital. Managers arrange cash flows also by issuing debts / leveraging. In leveraged buyouts, increased debt increases risk of bankruptcy cost in addition and agency costs. Optimum debt / Equity Ratio will be where the marginal cost of debt equals marg inal benefit of debt.Market PowerMergers increase a firms market share. It is argued that larger tidy sum of operations through Mergers and Acquisitions result in economies of scale. But it is not decipherable whether this price required by the selling firm will rightfully make acquisition route more economical method of expanding a firms capacity either horizontally or vertically.An objection often embossed against permitting a firm to increase its market share by merger is that it will result into undue concentration in the industry.Value increase by RedistributionValue increases under merger on account of redistribution among the stake holders of the firm. Shifts are from the Bond holders to stock holders and from labor to stock holders and / or consumers.DE-MERGER AND invalidate MERGERDE-MERGERDe-merger essentially means bonafide separation of the key business assets and reorganizing the business in such a manner that though there is separation in favor of another company, atleast 50% of the equity stake in two companies continues to be common. Section 2 (19AA) was introduced by Finance Act of 1999 defining De-MergerExamplesSterlite Industries and Sterlite OpticalSterlite which was a diversified company with presence both in non-ferrous metal as well as Telecom cables obstinate to de-merge both the business into separate companies. The spin off was done in the ratio of 11.Raymonds LtdRaymonds sold of Cement and Steel business to become one again, a purely fabric and garment company. The whole exercise fetched Raymonds Rs. 1140 crores. This enabled it to reduce high cost debts as well as buyback its own shares. Thus financially as well as in terms of shareholder value it was a correct step.REVERSE MERGERReverse merger takes place when a healthy company merges into a financially weak company. Under the Companies Act there is no difference between regular merger and reverse merger. It is like any other amalgamation.On Amalgamation merger automatically makes the transport company empower to the benefits of carry forward and set off of loss and unabsorbed depreciation of the transferor company. There is no need to comply with Section 72 of Income Tax Act.On amalgamation being effective, the weak companys nurture may be changed into that of a healthy company.ExampleCase Study- Kirloskar rock oil Engines merging into Prashant Khosla Pneumatics LtdIn April, 1994, Kirloskar Oil Engines Ltd. (KOEL) took over the management control of Prashant Khosla Pneumatics Ltd. (PKPL) a Delhi Based Company having its works at Nasik.PKPL became a sick unit as on thirty-first March, 1994 and went into BIFR in June 1994. ICICI was appointed as Operating Agency who invited bids for PKPL for revival. KOEL made a bid although PKPL was already under its control. KOELs bid was accepted and confirmed by BIFR.Main objective in the takeover was to make use of PKPLs engine plant for KOELs large engine activity.PKPL take over added to KOELs assets, two plan ts dictated at MIDC, Nasik on MIDC leased land of 80,000 sq. mtrs.A scheme for revival of PKPL through reverse merger of KOEL with PKPL was submitted to BIFR and was sanctioned in February 1996.Accordingly, KOEL merged in PKPL, and name of PKPL stood changed KOEL on 1st March, 1996 which was the effective date of amalgamation.Again of merged company for 1994-95 was held in April 1996 and consolidated accounts for the year ended 31st March, 1995 were adopted. suss out of 7 months for holding AGM was condoned by BIFR.This merger did not affect in any way KOEL shareholders.PKPL capital of Rs. 218 lakhs was reduced by 95% to 11 lakhs and KOEL shares were exchanged for PKPL shares in the merged company in the ratio of 1 for 20.PKPL shareholders were paid 5% dividend for 1994-95 and full dividend for 1995-96.56% of PKPLs capital held by its holding company was transferred at agreed price of Rs. 75 lakhs to KOEL associate company which subsequently got shares in the merged company.The sc heme provided for certain matters without going through the formalities under companys Act, under powers of BIFR such asChange of name of carry-over Company from PKPL to KOEL.Memorandum of association (MOA), articles of association (AOA) of Transferor Company becomes MOA and AOA of conveyance Company.Auditors of Transferee Company to automatically cease to hold office and auditors of the transferor company to become auditors of the transferee company.MD and ED of Transferor Company to continue as such in Transferee Company without reappointment and without break.Authorized capital of Transferee Company to stand increased from Rs. 5 crores to Rs. 27 crores.Transferee Company to allot to shareholders of Transferor Company, shares in Transferee Company.Share certificates of Transferor Company not to be called back and replaced by new certificates.ICICI to be issued 4,75,000 equity shares in transferee company without complying with Section 81 (1A) and SEBI guidelines on preferential issue.Stamp art on transfer of property and share certificates was salve.Premium payable to MIDC saved only loans for fee paid.PKPL revival resulted into both the plants being operative- Direct employment to more than 300 people working. institutionalise MERGER SCENARIOKey travel to successful Post Acquisition Management (Figure 3)Figure 3 go for lucky AcquisitionSuccess constitutes two important factorsMeeting the objectives intensify shareholder valueShort lived mergers Some ExamplesMerger of ICICI and readWhen employees of Anagram Finance heard that ailing firm was to be merged with ICICI there was a sigh of relief. But two months later, reality was bitter. Out of 450 cater only 140 were repaired and all others were given pink slips with 3 months fracture pay.Takeover of Merind by WockhardtThere was exodus of top management team up of Merind.CIBA and Sandoz merged to form Novartis115 out of 120 managers of new corporate office were Sandoz people with Sandoz Indias erstwh ile MD John Simon ailing the shareholders.POST MERGER INTEGRATIONSEVEN RULES BY MAX HABECK- FRITZ MICHAEL TRAM day-dreamGuide post merger Integration with a clear and vivid vision derived from through business due diligence.Research Findings78% of mergers are mistakenly driven by fit, and not vision.Around 58% of mergers fail.Examples M A Cases That Have Failed On Account Of Lack of Vision or Unrealistic VisionAT T and NCRIn the late mid-eighties American Telephone and Telegraph still had assets such as tam-tam Labs to go with long distance telephone services it kept after the 1984 anti-trust break up. The company had a grand vision of a scientific synergy between its expertise in telecommunications and NCRs expertise in computing machine technology.After years of intense searching, hampered by management changes as well as cultural frictions, no synergies were found. The presumed fit between telecommunication equipment and computer hardware failed to turn up. AT T spun off the remains of NCR almost five years later at a loss of round $ 3.5 billion, nearly half of what it initially paid.Sony PicturesSony acquired capital of South Carolina Pictures in 1989 for $ 5 billion. However, Columbia had difficulties in generating the successful software to begin with. Rapidly rising salaries of stars and inadequacy of success at box office culminated in Sony making operating loss of around $ 500 million. The company wrote off $ 2.7 billion. The losses were attributed to abandonment of large number of projects and settlement of outstanding lawsuits.However, instead of divesting the unit, Sony made management changes and imposed stricter controls. Columbia is now a part of Sony Pictures Entertainment, which represented just fewer than 10% of Sony Groups Worldwide Sales of around $ 50 billion.Examples of in(predicate) cases of M A driven by VisionAcquisition of Salomon Inc. by CitigroupFord Motor Acquisition of AB Volvo.Leadership- Its Critical Establish It prontoResearch FindingsLeaderships urgency is often neglected. Some 39% of all companies face a leadership vacuum because they failed to make the establishment of leadership a priority.A merger without strong leadership in place from its early days will drift quickly and drift is deadly.Growth- Merge to Grow, point On added Value not on Efficiency SynergiesResearch Findings76% of the companies surveyed focused too heavily on efficiency synergies. 30% of the companies virtually ignored attractive growth opportunities such as cross selling possibilities or knowledge sharing in research and development.Most Successful Growth through MergersCisco SystemsThis fortune 500 company has bad since its founding in 1984, thanks to a combination of organic growth and successful integration of 25 acquisitions. Cisco has almost quadrupled its revenue since 1995 to $ 8.5 billion and its net income tripled to $ 1.3 billion. It holds a market share of around 80% routers and switches which form t he internet infra structure.Making mergers is and will continue to be absolutely essential for Cisco to maintain its rapid growth and enhance its competitive advantages.CONCLUSIONThe practice of Mergers and Acquisitions and restructuring of business entities has achieved a lot of importance and importee in todays corporate world. Due to the cut-throat competition in the global market pushed Indian companies to opt for this strategic option in order to harbour in the marketplace.There are various factors for making MA deals structural in India such as Government policies are dynamic, stability in the economy, ready-to-experiment approach of the firms etc.Some additional and recent facts or so MAThe value of MA is increasing every year in India it almost increased seven fold to USD 4.2 billion in August 2010 from USD 629 billion in 2009The number of deals (outbound) increased to USD 3.35 billion in 2010 from USD 60 millionThe number of domestic deals increased from 20 to 27 but th e value of deals decreased from USD 521 million to USD 364 million in2010.From the study it is observed that companies get mingled in MAs to increase the shareholders earnings by increasing the revenue or decreasing the cost. It also increases the market share provided if management is careful about the MA and has a prior knowledge of it.Synergy should be achieved with MA but at times it does not happens so the companies need to work to control the synergy and allow new company to go ahead and look for new business growth possibilities.