MERGERS AND ACQUISITIONS

Abstract— This paper is drafted so as to discuss the vital presence of the mergers and acquisition in the global business today. The content of the paper are more or less revolving around the Indian economy. It elaborates the past-present-future of the Indian business giants in the arena of mergers and acquisitions. The paper is convincing enough to prove that India is turning out to be significant player in terms of mergers and acquisitions.

Keywords- Mergers, Acquisitions, Amalgamation, Diversification.

I. INTRODUCTION

“When you have M&A (merger and acquisition) activity continuing, it's a sign of stronger economic activity ahead.”

-Peter Cardillo

Very true to the statement quoted above by Cardillo, Mergers and Acquisitions have turned into one of the well accepted facts and stimulus for the growth of a country’s economy and same goes out with India also.

As a result of a survey done by us in our college including the students and the faculty we could conclude that there are three basic condition, that are required to make happen, a merger or an acquisition, i.e. interest, cash and most importantly the environment.

Until upto a couple of years back, the news of Indian company acquiring American-European entities was very rare. However, the stone has turned now, as the news of Indian Companies acquiring foreign businesses are getting more common than the other way round. The contributors to this new acquisition trend are acclivitous Indian economy, extra cash with Indian corporates, Government policies and newly found dynamism in Indian businessmen. Indian corporates are now aggressively looking at North American and European markets to spread their wings and become the global players. Presence in the foreign market has been dominated so far by the IT and ITES companies however, other sectors are also now growing rapidly. . The increasing engagement of the Indian companies in the world markets, and particularly in the US, is not only an indication of the maturity reached by Indian Industry but also the extent of their participation in the overall globalization process.

II.REASONS FOR MERGERS AND ACQUISITIONS

The following are the major causes, that enforce corporates to go for mergers and acquisitions:-

1. International market expansion.

Globalization is the key for success in the present scenario of rapidly growing world economy. Corporates with a motto of exploring the resources and business want to capture the international market. With the increasing trend of globalization, the impact of globalization has lead to a fast changing environment the boundaries for business is diminishing day by day so is the movement of people between different countries and cultures. The requirements of multinational organizations like expansion plans in international market has continuingly increased the need to understand the cultural dimensions of different countries to achieve better results.

2. Diversification.

Companies often implement corporate-level acquisition strategies to achieve product diversification that can build core competencies. In fact, acquisition strategy is the most common means of implementing diversification. For each strategy discussed in the book, including diversification and merger and acquisition strategies, the company creates value only when its resources, capabilities, and core competencies are used productively.

Companies from different industries decide to use an acquisition strategy for several reasons; however, acquisition strategies are not without problems. When acquisitions contribute to poor performance, a company may deem it necessary to restructure its operations.

3. Strategic acquisition of key technologies and skills.

Acquisitions have always been a fundamental component of growth strategy. Through acquisition, companies can increase their customer base and expanded their business internationally.

An acquisition strategy is based on three objectives:

· To broaden the portfolio of our existing products and services we can offer our customers

· To enter new geographic regions

· To add new industry-specific applications to our product lines

Acquisitions also contribute to make a strong customer base, with new customers who can migrate to the broad product range.

4. Competitive developments

In response to the rapidly growing competition among he corporates, it becomes very necessary for the company to reduce its competitors by either a merger orby acquiring them.

III. PAST STATUS OF MERGERS AND ACQUISITIONS

Acquirer	Target company	Country Targeted	Deal value($m)	Industry
Tata Steel	Corus	UK	12000	Steel
Hindalco	Novelis	Canada	5,982	Steel
Videocon	Daewoo Electronics Corp.	Korea	729	Electronics
Dr. Reddy’s Labs	Betapharm	Germany	597	Pharmaceutical
Suzlon Energy	Hansen Group	Belgium	565	Energy
HPCL	Kenya Petroleum Refinery Ltd.	Kenya	500	Oil and Gas
Ranbaxy Labs	Terapia SA	Romania	324	Pharmaceutical
Tata Steel	Natsteel	Singapore	293	Steel
Videocon	Thomson SA	France	290	Electronics
VSNL	Teleglobe	Canada	239	Telecom

Table 1: (Top 10 acquisitions by Indian companies)

If you calculate, top 10 deals itself account for nearly US $ 21,500 million. This is more than double the amount involved in US companies’ acquisition of Indian counterparts. The graph also determines how fast and rapidly the Indian companies are marking their footsteps globally. It is very much noticeable that uptill 2002-03, the concept of mergers and acquisition was still immune to the Indian corporate giants, though they were capable and had enough of cash reserve with them. Post 2003, the trend took a step ahead and accedes into the era of Mergers and Acquisitions. But it was only after 2005-06, that it went out of the roof. Indian giants significantly captured the global market and thus became big hunters for acquisitions.

Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3 billion in 2005, and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be remembered in India’s corporate history as a year when Indian companies covered a lot of new ground. They went shopping across the globe and acquired a number of strategically significant companies. This comprised 60 per cent of the total Mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of Acquisitions were made with cash payments.

The total M&A deals for the year during January-May 2007 have been 287 with a value of US$ 47.37 billion. Of these, the total outbound cross border deals have been 102 with a value of US$ 28.19 billion, representing 59.5 per cent of the total M&A activity in India.

The total M&A deals for the period January-February 2007 have been 102 with a value of US$ 36.8 billion. Of these, the total outbound cross border deals have been 40 with a value of US$ 21 billion.

There were 111 M&A deals with a total value of about US$ 6.12 billion in March and April 2007. Of these, the number of outbound cross border deals was 32 with a value of US$ 3.41 billion.

There were 74 M&A deals with a total value of about US$ 4.37 billion in May 2007. Of these, the number of outbound cross border deals was 30 with a value of US$ 3.79 billion.

The sectors attracting investments by Corporate India include metals, pharmaceuticals, industrial goods, automotive components, beverages, cosmetics and energy in manufacturing; and mobile communications, software and financial services in services, with pharmaceuticals, IT and energy being the prominent ones among these.

Dominating the African Market

So far the foreign market that is heavily dominated by Indian corporates in terms of mergers and acquisition is the African Market. Africa has been a favourite destination for Indian tycoons to expand their business. Let us take a look of the domination of Indian companies so far over the African giants.

· Ranbaxy’s acquisition of Be-Tabs Pharma for $70 million announced in 2006.

· Apollo Tyres buying South Africa’s Dunlop Tyres for $66 million.

· Godrej Consumer Products bought Kinky brand of hair business for $33.2 million.

· Tata Communications and Neotel for an undisclosed amount.

IV. PRESENT SCENARIO OF MERGERS AND ACQUISITIONS

Today, the base on which mergers and acquisitions happen is a very simple statement, we all are aware of – “survival of the fittest”.

Some of the key foregrounds of the current scenario of mergers and acquisitions are as follows:-

· Upcoming of Business Restructuring which accounted for 83% of M&A’s

Eg. - Merger of Reliance Industries and Reliance Petroleum at $1.89 billion.

· Eight of the total deals in 2009 were cross-border deals valued at US$ 296.67 million. The total value of the outbound deals was US$ 52.22 million.

· 29.6% = US$ 17.4 billion rise in the total outward investment from India, excluding that were made by individuals and banks in 2007-08, largely due to acquisitions.

· Bharti’s proposed acquisition of 49 per cent stake in MTN worth up to US$ 23 billion.

· GMR International to acquire the 100 per cent ownership stake in Netherlands-based power producer InterGen NV.

· Dell’s proposed acquisition of Perot System.

· Nomura acquires stake in LIC mutual fund.

· Lanxess to buy Gwalior chemicals.

· Federal Bank to ‘takeover’ Thrissur based Catholic Syrian Bank amidst the opposition from the Church.

· Dorf Ketal acquires Sanmar unit.

· Zandu’s FMCG business to be merged into emami.

· EMC proposes to acquire Data domain.

Bharti – MTN hinged with each other

The most burning proposal out of all these which is still under progress and not finalized yet is Bharti-MTN. Let us discuss this proposed merger in detail.

India Inc is heading towards creating a milestone by proposing its biggest ever Merger & Acquisition deal, worth $23 billion. The aforementioned amount emerges out of payment by cash and stocks for stakes, by both the entities in each others company. The largest deal by an Indian Company so far has been that of Tata steel’s takeover of the European giant, “Corus” worth $12 billion. As per the agreement, MTN and its shareholders would acquire around 36 per cent economic interest in Bharti Airtel. While, the Sunil Mittal-promoted Bharti Airtel would acquire 49 per cent stake in South African telecom giant MTN. The two giants, if combined, will be a part of the top five operators globally.

A number of operators including those from China, Russia and Europe were keen to grab stake in MTN, given its pan African presence across 21 countries. Though no operator other than Bharti has so far confirmed the interest in the South African company. Some analyst still forecast counter bids over the near future. The deal is undoubtedly an excellent opportunity for the Indian giant, as they will be marking their footprints in African telecom market which has been dominated by local operators and European majors, including Vodafone Group and France Telecom.

The only key issue so far in terms of Bharti-Airtel is to raise a heavy amount of capital, as much as $20 billion to acquire a 51% stake in MTN. Bharti, will also be required to dilute its equity, as will MTN. The talks of merger between the two entities broke off last year when a dispute of, who would take over the merged entity, came up. A merger would create an emerging markets giant with more than 200 million customers across India, Africa and the Middle East. When asked by Reuters if a deal would be reached by MTN's half-year results announcement on August 27, Azmi Mikati, the chief executive of M1 Group said: "Most probably". The Lebanese Mikati family holds about 10 per cent of MTN through the M1 Group.

"There are no major issues holding up the proceedings -- it just takes time to finalize and address all the issues," said Mikati, who is also a non-executive member of MTN's board, according to the latest annual report.

Bharti Airtel has appointed E&Y to study the books of the South African telco. MTN has given PwC the mandate to carry out a similar process on Bharti’s books. As per stated by Bharti Airtel chairman Sunil Mittal, both Telco’s would retain the current management structure and operate as separate companies until they were able to implement a full merger within the next couple of years.

The two giants will also have to qualify well, in the eyes of Government and the law. In South Africa, the deal would require approval from the country’s telecom regulator — Independent Communications Authority of South Africa (ICASA) — as well as the Competition Tribunal of SA. In India, the two sides will need a go-ahead from the department of telecom (DoT) as well as the Foreign Investment Promotion Board (FIPB).

Based on the current scenario, we can draw certain possible outcomes regarding the future of this deal:-

1) Deal will collapse:- The two sides are still independent to part away their ways, but this outcome sounds very unlikely.

2) Extension again:- Due to the outburst of stakeholders coming due to long uncertainty of the deal, further extension sounds impractical.

3) The deal is clinched:- This, obviously sounds the most likely outcome as the talks have proceeded smoothly. The current stage of negotiations indicate that both the parties are serious enough to consummate the deal,"

We can do nothing but to wait and watch these two benchmark companies coming together on a single platform. The merger of course forecasts a great future to coming ahead for us and India Inc as whole.

V. FUTURE FORECAST OF MERGERS AND ACQUISITIONS

Though we say that, the future is never known, but still we can forecast the best possibilities in the field of Mergers and acquisition. We can do so because of the rapid expansion of all the big companies globally. They intend to grow more and more. The scenario has become just like fishes in the sea. A bigger fish will always engulf the smaller one. Some of the forecast that we can make keeping the current needs and trends in mind are as follows. We have given our forecast alongwith the data to substantiate it.

Forecast 1:-

Companies going to take turn towards merging the rural market in their main domain.

Reference data 1:-

1. Mahindra finance wants to focus on the needs of housing and rural India.

2. Max New York is eager to tap the insurance market in the villages.(keeping small premiums)

3. More than 3 mn households are added every year in rural India.(Source-CRISIL)

4. Avg. Household income in rural India---2.28 L pa

5. Rural housing loan is expected to grow by 22% till 2010-11(could be more than Rs 34000 crore.

Forecast 2 :-

Indian banking and finance system will be globally competitive.

Reference data 2:-

1. The Banking and finance system will improve competitiveness through a process of consolidation either through mergers and acquisitions or through strategic alliances.

2. Restructuring of banking sector in India is strongly expected through merger and amalgamation by experts in order to make them more capitalized, automated and technology oriented so as to provide environment more competitive and customer friendly.

Forecast 3 :-

Telecommunication giants to focus on value addition.

Reference data 3:-

1. Network operators and service providers may have to merge with content developers to add value to their services.

2. Process of expansion very keen in reply to the growing competition by 2020.

3. Changes in business models by telecomm giants will bring a significant restructuring of the industry through new partnerships and through mergers and acquisitions.

Forecast 4 :-

Acquiring the foreign companies, specially from US.

Reference data 4:-

• During 2008-09, Singapore, the Netherlands, Cyprus, the UK, the US and Mauritius together accounted for 81 per cent of the amount of proposals for outward FDI (US$ 5 million and above).

• Western economy in distress, values of companies coming down making it vulnerable to be acquired.

• Expected deal sizes to be around $15-20 million up to $300 million

• Increasing interest in the traditional overseas markets such as the UK and US and also across Europe especially in larger markets such as France and Germany.

• Indians already marked their footsteps as major global acquirer due to Tata –Corus ($12billion), Suzlon – Hansen ($565million), Dr Reddy's Labs – Betapharm ($570 million) deals.

Forecast 5 :-

Mergers in BPO and KPO sectors.

Reference data 5:-

1. Certain sectors such as the BPO/KPO, where larger suppliers look to scale up and fill spare capacity. It also sees increased M&A activity in India in spin-offs of Captive BPO operations by global corporates.

2 Over the next five years the Indian BPO and KPO industry would see over 100 mergers and acquisitions and IPOs, (by Trade body Assocham and Evalueserve)

3. Most of the 20 mega deals, involving M&As and IPOs, would be undertaken only by a group of 10 large companies.

4. Small and medium-sized BPO vendors would witness considerable acquisition and funding activity in the short term, whereas larger vendors will look for opportunities to diversify

5. Indian BPO/KPO industry will also see consolidation and the likely creation of few listed global players

Forecast 6 :-

Acquiring the foreign companies, specially from US.

Reference data 6:-

• During 2008-09, Singapore, the Netherlands, Cyprus, the UK, the US and Mauritius together accounted for 81 per cent of the amount of proposals for outward FDI (US$ 5 million and above).

• Western economy in distress, values of companies coming down making it vulnerable to be acquired.

• Expected deal sizes to be around $15-20 million up to $300 million

• Increasing interest in the traditional overseas markets such as the UK and US and also across Europe especially in larger markets such as France and Germany.

• Indians already marked their footsteps as major global acquirer due to Tata –Corus($12billion), Suzlon – Hansen($565million), Dr Reddy's Labs – Betapharm($570 million) deals

Forecast 7 :-

Integration of oil companies will result in global majors

Reference data 7:-

• Nowhere in the world are there so many public sector companies in the same business.

• The burgeoning demand for petroleum and gas, the government had completely opened the exploration and production sector for private participation.

• Merging all oil PSUs into one mega firm or creating two oil behemoths by merging HPCL and BPCL with ONGC and Oil India Ltd with IOC.

• Merging all the oil PSUs would create a monolith, ranking 34 in the Fortune 500's list of global majors.

• This brings about better efficiencies in the upstream as well as downstream sides of the activity and also reduces the cost of production as well as the price.

• The percentage of oil to be imported will also come down.

And there are many more sectors that show promising attitude towards M & A’s. To quote few, we have:-

1} SERVICE SECTOR

2} AVIATION SECTOR

3} HEALTHCARE

4} AUTOMOBILE

and many more……

VI. CONCLUSION

To conclude, we would say that mergers and acquisitions are going to become a significant mission of ech and every sector in near future. The best way to become a market leader is to finish the competition from the market. This can be done using either of the two weapons:

MERGER AND ACQUISITION

VII. REFERENCES

1. Personal research at college.

2. Discussions with the faculty.

3. Newspapers

4. CNBC interviews