Economic Environment and Business

Assignment : Mergers and Acquisitions and Indian Industries

Submitted to Prof. SP Das

Submitted By Vidit Mediratta (U112119)

Mergers & Acquisitions: An Introduction

An outstanding feature of the liberalised Indian economy has been the rise of mergers and acquisitions. M&As continue to be the preferred option for businesses seeking to grow rapidly and change the rules of the game in their sector. This chase is gaining momentum and will continue in spite of the well known fact that very few mergers really yielded the intended results and the visualized pre-acquisition synergies are hard to be seen in post acquisition. It is equally true that in globalised competitive markets M&As drive, make or mar corporate success stories. M&As are not new to the ambitious entrepreneurial corporate houses of India. But hectic activities and interest have been kindled only after the initiation of reform process. The reason was, in pre-reform era, splitting of capacities were encouraged due to licensed raj, even at the cost of economies of scale and other related benefits. MRTP discouraged the building of big capacities. FERA also looked upon takeovers with contempt. More and more corporates have started re-inventing themselves post liberlisation. Historically Indian companies preferred to grow organically rather than through mergers and acquisition. A major reason is widespread family ownership of large corporations, governmental restrictions on foreign investment in certain industry sectors and relatively underdeveloped capital markets. Over the last few years, mergers and acquisitions have become much more important part of Indian landscape as Indian corporations recognised the need to improve their business fundamentals and competitive position, while more and more multinational corporations are looking for ways to enter this growing, dynamic market. The enactment of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997; provided the required framework and boost to corporate restructuring initiatives in India. Liberlisation provided the momentum by facilitating /easing the processes involved in acquisitions and amalgamations; making cross-border activity feasible. To name a few Tata Steel acquisition of Corus, Tata Motors acquisition of Daewoo Commercial Vehicle Company of South Korea , JLR of UK ; Hindalco acquisition of Novelis; Bharat Forge and Carl Dan Peddinghaus merger; Suzlon growth acquisitions (REpower). It was unimaginable even a decade ago that any Indian company could acquire a multibilliondollar acquisition of a company in the developed world. Some of these deals,like Tatas acquisition of Corus, are particulary audacious. At the time of acquisition, Tata Steel was the fifty-sixth- largest steel manufacture in the world, while Corus was the ninth. Hindalcos 2007 all cash $ 6 billion purchase of Canadian Novelis made it the worlds largest aluminum rolling company. How have Indian companies suddenly been able to pull off such large deals? The reasons are many. In business there is one simple rule: grow or die. Companies on a growth path will take away market share from competitors, create economic profits, and provide returns to stakeholders. Those that do not grow tend to stagnate and loose market share and destroy shareholder value. Mergers and Acquisition are vital part of any growing economy like India and importantly M&As are the critical means by which companies are able to provide returns to investors. Mergers and Acquisitions have played a variety of roles in Indian corporate history, ranging from corporate raiders, buying companies in a hostile manner, and acquisitions for growth and consolidation.

What drives Mergers & Acquisitions

What drives mergers and acquisitions?. Going beyond the overworked management phrase "synergies"; the strategic goals/ drivers are many. Economies of Scale : In many sectors, size counts. These deals enable companies leapfrog their larger rivals and improve their revenues .Take the example of ICICI acquisition of SCICI, ITC Classic and various NBFC asset acquisitions; to surpass IDBI in size. ICICI after converting from a developmental financial institution into a bank(ICICI bank), its acquisition of Bank of Madhurai and its strategic holdings in Federal Bank and New Bank of India all indicate the importance of size when banks are facing intense pressure to improve their reach, broaden their services while lowering their cost structures. Consolidation : As economies getting integrated, industries regroup into a smaller number of big companies. India is no exception.For example in the metal manufacturing sector,Sterlite Industries acquisition of BALCO, Hindustan Zinc; Hindalco Industries (makers of nonferrous metals ) acquisition Indian Aluminum Co. Ltd., Copper Business of Indo Gulf Corporation Ltd and acquisition of various copper mines.A wave of consolidation is occurring in various sectors post liberlisation. Take cement industry which witnessed a massive consolidation; Gujarath Ambuja Cements stake acquisition in ACC, ACC's acquisition of IDCOL cements; Grasim Industries acquisition of cement division of Larsen & Toubro (L&T),India Cements acquisition of Rassi Cements. Gain access to new products and technologies, new markets : Acquisitions of IT services companies are driven by the need to get access to products/building domain competencies. The acquisition of Australian IT service provider, Expert Information Services Pty Ltd by Infosys Technologies Ltd;Wipro's acquisition of US based IT consulting firm NerveWire Inc; Cognizant Technology Solutions acquisition of Infopulse, a Netherlands-based IT services firm providing software to the banking and financial services industry, or the Godrej Group acquisition of Upstream LLC, a US-based call centre company to augument its market position; are all examples of Indian IT companies strategic initiatives to gain access to markets;to built business consulting capabilities. Pharmaceuticals and auto-ancillary companies have turned to M&As in this way.Take the examples of Bharat Forge, acquisition of German firm Carl Dan Peddinghaus GmbH (CDP), Tata Motors (formerly Telco) buy out of Daewoo Commercial Vehicle Company of South Korea, Ranbaxy Laboratories Ltd buy of RPG (Aventis) SA, along with its fully owned subsidiary OPIH SARL, in France to get into a market where it did not have a presence. Create or gain access to distribution channels: A lack of distribution has been constraining the growth of companies and companies resort to M&As to again access/ strengthen their distribution channels. Reliance Infocomm acquisition of Flag Telecom, an international provider of wholesale telecom network transport and communications or Reader's Digest agreement with India Today Group, to get wider access to the Indian market through the India Today Group; Principal Mutual Fund an agreement with Sun F&C mutual Fund (a retail client base of over 70,000 investors ) to take over and manage its schemes in India ; are all examples to indicate how critical distribution channels play in driving M&As. Diversification : In earlier controlled/ licenced economy ; diversification was the rage. Though companies are increasingly confining /focusing on their core activities (stick to their

knitting ); diversification is still an acquisition driver for many Indian corporate houses. The BPO activities of many corporate houses say for example Godrej Group acquisition of Upstream LLC; Aditya Birla Group's flagship company Indian Rayon acquisition of TransWorks, a business process outsourcing (BPO) company or Reliance (Flag acquisition ) and Tata's (VSNL acquisition) foray in telecom sector etc indicate diversification drive still play an important role in M&As .Though these unrelated deals offered few opportunities for synergy, the acquiring companies profited because they managed the acquisitions well. There are many other motives why CEOs' resort to acquisitions. To list a few : Short term pressure : There is intense focus on quarterly earnings thanks to the availability of up-to-date financial information facilitated by technological advances like internet, cable television. Equity analysts are constantly focusing on quarterly growth figures; compelling CEOs' to look for ways and means to drive revenues quarter on quarter. Analysis of some of the recent acquisitions by listed IT companies substantiate role of short term pressure/considerations in driving takeovers. The quest for "bigness" : Many M&As are driven by the simple urge to be bigger/top of the league table. Scale and size play crucial role in today's oil companies, banks, pharma. Fear of being left alone: The acquisitions of rivals exerts tremendous pressure on companies to themselves acquire. The increasing bidding/participation of various corporate houses in Indian Govt. divestment of stakes in PSU telecom, metal companies; indicate the "fear of being left alone/loosing market share "; have a due share in driving takeovers.

Merger Process
Acquisition must stem from a well-defined corporate development process. Once a merger or acquisition is determined to be an appropriate alternative for growing the business, it typically involves a five-step process. The first three steps are concerned with pre-deal activities: identifying acquisition prospects, evaluating likely targets, and determining a realistic price. Step 4 is the negotiation phase, and the final step consists of integrating the two companies. The likelihood of success will be diminished sub-stantially if an acquirer fumbles the first four steps,. A well-planned post-merger integration strategy cannot make a bad deal good. On the other hand, a poorly executed post integration plan will invariably undermine an otherwise strategically sound, realistically priced transaction. Understanding Owns Strengths and Weakness Before a firm's strategy or acquisition goals can be met, top management must identify its own internal strengths and weaknesses in such areas as availability of management time to accomplish the mission .One should pay attention to target company finances, management quality, culture, research and development, marketing, reputation in the market place etc. Although this step may seem obvious, many corporations take it lightly and based on inadequate knowledge of their own strengths and weaknesses, develop acquisition criteria that can lead to failure. These evaluation may be deemed unnecessary by an acquisition team but in reality some important strenghts and weaknesses are over looked, specially those pertaining to the culture of the buying firm. Many strategic plans and analysis do not include an objective recognition of a company's culture. What is "Culture"? Culture can be said to embody the beliefs and values of a company's management that influences the behaviour of all the employees of the company. Culture includes management's perception of its image

and identity, the company's work ethic, and its attitudes to toward employees, customers, and the community. If the acquirer doest not explicitly identify its cultural match with the target firm, a tension-filled post acquisition period may ensure and result in the loss of management at both the acquirer and the acquired firm.

M & As in knowledge Indian Economy

Indian economy is undergoing great transformation from a pure agrarian economy to one increasingly leaning towards services. The assets involved in M&As are both physical and intellectual. They include intangible assets, for example research and development capability, patents, brands, managerial capability, customer relationships, distribution networks apart from physical assets. The new economy now has much wider geographical reach and offer better international services at lower cost. The rise of Indian software companies demonstrates the intellectual prowess of the economy. In the "new economy" the full market value of companies is derived as much from their intangible assets as from their tangible assets such as plants and buildings. By operating in a demanding price sensitive environment, Indian companies are forced to innovate and build low-cost business models if they are going to reach the countrys masses and still be profitable. Indias frugal engineering, where costs are controlled is well recognized by the world. Worlds cheapest car Nano is an example of transformation of Indian economy from agrarian to knowledge economy. In knowledge economy acquisitions gain momentum by offering entrepreneurial Indian business men manifold opportunities both in terms of knowledge arbitrage and innovative structuring of deals to gain scale. Ideas and daredevil attitude drive acquisitions not necessary size of the acquirer. M&As in "new emerging Indian economy" offer new opportunities and challenges different from M&As involving "old economy" companies. The reasons for the deals in "old economy" invariably include better exploitation of physical assets. The drivers for acquisitions in 'knowledge led economy" are different and the complexities involved in valuing intellectual assets and retaining them to make the acquisitions success, a daunting task even for best of leadership. They are notoriously difficult to manage. M&As in new economy are more prone to failure. Retention of talent, communications and integration of cultures assume greater importance in making the acquisitions success. To put it mildly, most of the time, the only people who can be confident of benefiting from the deals are the shareholders of the acquired business and a host of consultants; advisers, lawyers and merchant bankers. While it is only to be expected that some of the Indian acquirers will stumble because they have either overpaid or taken on too much debt in their innovative enthusiasm or overpaid due to their inability to value intangible assets of the target. There is little doubt, in spite of these difficulties, the overall upward deal trend remains unaffected.

The New Restructuring Wave

It is evident that it is the MNC sector that has been participating in the restructuring of the Indian corporate sector far more energetically and decisively. This is mainly because of greater strategic orientation and focus pursued at global level by most MNCs. Consequently, for most MNCs, it is mainly a matter of strategy implementation and operations in countries like India, rather than strategy formulation. Also, they have less historical baggage to carry than typical Indian industrial groups. Another important dimension has been the very deep pockets of the MNCs; and it is not surprising, that most large acquisition transactions in India

involve MNCs or their Indian arms. However there are indications that Indian business houses are also coming to terms with the fast pace of risks in an open economy and carry out corporate restructuring with less tentativeness and growing confidence. We believe that a host of business, economic and regulatory developments in the last couple of years or so strongly presage a new restructuring wave.

Approach to Corporate Restructuring

Almost every company in India is struggling with this issue of what to change, and how to change in response to or in anticipation of changes in market dynamics. Corporate restructuring is a broad term that denotes significant reorientation or realignment of the investment (assets) and / or financing (liabilities) structure of a company through conscious management action with a view to drastically alter the quality and quantum of its future cash flow streams. This broad definition includes such corporate actions as mergers, acquisitions, divestitures, demergers (spin offs) and debt - equity changes. The term corporate restructuring is being increasingly used as a euphemism for corporate shrinkage through divestitures and perhaps even more commonly for man power reduction. Restructuring is a set of "articulated actions undertaken by firms to restore competitiveness that has eroded substantially. These measures are taken in response to major changes in the firms environment, especially final demand, competition and technology. Restructuring alludes in general to a radical change in the portfolio of businesses or in the financial structure of a firm. Restructuring can include divestiture, mergers, acquisitions and new sub contracting relationships with ancillary industries. Moreover, restructuring may also imply organizational and ownership changes, including privatization. Restructuring radically alters a firms structure, asset - mix and / or organization so as to enhance the firms value. These alterations have a significant impact on the firms balance sheet by redeploying assets (through acquisitions, divestitures and / or work force reduction) or by exploiting unused financial capacity. Take the example of three A.V. Birla group entities where financial synergy, and not product synergy, was the driver for the restructuring. The drivers of restructuring in India are so varied and diverse , truly representative of diverse continental India in all its hue. Case Example: Take the case of Aditya Birla Group companies consolidation. The Aditya Birla Group, in a major consolidation exercise, has decided to merge Indo Gulf Fertilisers Ltd and Birla Global Finance Ltd into Indian Rayon Industries Ltd. After the merger, Indian Rayon will be renamed Aditya Birla Nuvo. The entire restructuring is one of the major consolidations of its kind in the country. Not product synergy and no operational synergy among the group companies to be merged. Financial synergy, and not product synergy, was the driver for the merger of the three A.V. Birla group entities. The merger was a practical necessity from Group point of view. Financial synergy of group consolidation as expounded by Mr Kumar Mangalam is; the "value businesses" of Indo Gulf Fertilisers and Indian Rayon create more money than they need. Of course, some money will be required for debottlenecking and expansion but any further investment in these sectors will be counterproductive, says Mr Birla. The creation of Aditya Birla Nuvo will allow this money to be channelled into the four identified high growth sectors under it. The four growth sectors are insurance, retail, telecom and BPO. All in all Aditya Birla Nuvo will be a "power house operating company," says Mr Birla. Indo-Gulf and the businesses of Indian Rayon ensure efficiency, predictable profits and cash flow; the four high growth businesses will step in to absorb this cash flow, and to very

good effect. Other opportune factors that propelled this consolidation include; opportunity for more consolidation in the mutual fund sector, doubling of its retail and mall space , the buyout of Cingular's stake in IDEA Cellular (along with the Tatas, another joint venture partner) will entail an investment of Rs 660 crore in the near future if the deal goes through. Mr Birla also mentioned there is already some synergy in financial products. Indian Rayon (which has 74 per cent stake in Birla Sun Life) and Birla Global Finance have complementary portfolios and distribution channels and have opportunities to cross sell."Post merger, there will be two sets of businesses the brick and mortar businesses of fertilisers, carbon black, viscose filament yarn and textiles that will be the focused value segment and the high growth segment comprising garments, financial services, IT and IT-enabled services and telecom. We believe that our future growth engine will be the high growth segment. The value businesses will throw up the cash to make this happen". The pool of unused cash waiting to be tapped as of now is to the tune of Rs 764 crore, he said. On benefits to the shareholders, Mr Birla said Indo Gulf shareholders would get better value for investment in Indian Rayon. Similarly Birla Global shareholders would get to move beyond mutual funds, into life insurance. The company would also look at pension funds and banking as when the regulatory framework allows it, he said. For conglomerates in India, there is often a lack of clarity on the promoter holdings in various businesses, thanks to numerous cross-holdings. As they operate some of their high growth businesses through unlisted, associate companies, investors are denied direct exposure to these nascent, but promising plays. A round of restructuring could, in such cases improve valuations significantly simply through disclosures that clarify several issues of importance to investors. While asset and capital restructuring can be termed as external, organizational restructuring may be referred to as internal; this is based on the significance and impact of the restructuring process on a company internal or external stake holders.

Indian Industry Mergers and Acquisitions

Corporate India is witnessing a restructuring revolution. The somewhat guarded, tentative response of the early years of economic reforms is slowly giving place to more decisive initiatives in corporate restructuring. Consolidation at the group and industry levels through mergers and acquisitions, strategic divestitures to permit sharper focus, strategic alliances and to a lesser extent demergers and spin - offs etc; are transforming the ownership profile and competitive structure of the Indian Industry. Almost every company in India is struggling with this issue of how to face change and to face change effectively what to restructure. As India moves away from a sellers market into a buyers one, corporate India is compelled to reassess the way they operate and how to respond. Coping with uncertainty, which accelerated with the opening up of the Indian economy to the winds of competition in the mid-1980s; is one of the key drivers for corporate restructuring in India. The pace and extent of firm level or enterprise level restructuring varied depending upon the competitive structure at the industry /economy levels, the structural flexibility, capital market expectations and the regulatory environment. For example, there is broad consensus that the significant improvement in the competitive position of the US and to an extent the UK industries in the 90's has come about on account of the wide spread restructuring carried out by the companies in these countries. The problems of Indian industries in pre-liberlisation flow, not inconsiderably, from the inability

of the companies to carry out decisive and comprehensive restructuring on account of structural rigidities, high tolerance level of capital markets, and somewhat interwoven ownership structure of corporate share-holding. Demergers are carried out for a variety of reasons, and the number is steadily growing. In India typically demerger is carried out as an arrangement under sections 391 to 394 of the Companies Act, much in the same manner as an amalgamation or merger. Consequently the process calls for the involvement of and approval by High Courts. As part of liberlisation process Government carried out number of changes in tax policies to facilitate demergers. The Income Tax Act has been amended to remove any ambiguity regarding the tax liability arising from demerger. The Income Tax Act provides for the explicit exemption of capital gains tax for companies and shareholders on demerger as also for the carry forward of the unabsorbed business loss and depreciation by the resulting companies. Demergers are not a new phenomenon and corporate India resorted to demergers for variety of reasons. To illustrate the point few examples are mentioned here. DCM Ltd. Demerger into DCM Ltd., DCM Shriram Industries Ltd., DCM Engineering Industries Ltd., and Rath Foods Ltd.; Hoechst India Ltd split into Hoechst India Ltd. and Hoechst Schering AgrEvo Ltd.; Sandoz (India) Ltd.into Clariant (India) Ltd. and Sandoz India Ltd.; KCP Ltd demerged into KCP Ltd. and KCP Sugar and Industries Corporation Ltd; Hindustan Ciba-Geigy Ltd demergerd into Hindustan Ciba-Geigy Ltd. and Ciba Speciality Chemicals (India) Ltd.etc. In the case of some (e.g., DCM, HCL, KCP), demerger involved reduction of capital in the "parent" company, while no capital reduction was involved in respect of others. One may recall that the demerger of DCM Ltd. arose from the division of business interests amongst the 4 promoter groups, whereas in the case of HCL, this was on account of the need to induct Hewlett Packard in HCL's computer-related business. In the case of Hoechst, Sandoz, Hindustan Ciba and Cyanamid, demerger in India followed restructuring at the parent company level. Demerger in Apple Industries Ltd., Ramco Industries Ltd. and Blue Star Ltd. was to capture the high stock market valuation of the information technology businesses to the resultant companies into which the IT divisions of these companies were transferred. In some of these cases splitting up of the company has certainly helped in ensuring greater transparency and managerial accountability in these companies. Some of these demergers were undertaken to induct strategic partner into the demerged entity. The spur these demergers in India are varied from family reasons to genuine business considerations, though everybody vouch safe vociferously commitment to core competency and focus. Impressive growth potential in the auxiliary businesses have seen companies demerging their businesses in a bid to unlock the inherent value of the demerged company. The point to be remembered is, demerger is not just a convenient way of hammering out settlements; promoters have to be sure that such a move will result in value creation. If a company is confident of sustaining each of the businesses in the long run and creating value for each of them, then only it should attempt demergers. Take the case of Reliance Group demerger. The igniting reason is issue of succession. Demerger which results in a split in businesses; meets the family need. Take another example .Great Eastern Shipping, is taking the oilfield service operations out of the flagship service leaving it as a pure shipping company. The articulated reason as per Mr.K.M.Sheth, Executive Chairman of GE Shipping, the entire restructuring of the business through the demerger route is aimed at providing greater focus to each of the businesses of the company as well as to unlock shareholder value. Mr.Bharat Sheth will manage the shipping operations, whilst his cousin Vijay Sheth will head the offshore oilfield services business.

Problems for M&A in INDIA

Indian corporates are largely promoter-controlled and managed. The ownership stake quite often, inhibit rational judjement on this sensitive issue. It is difficult for either of the two promoters to voluntarily relinquish management control in favour of the other, as a merger between two companies implies. In some cases, the need for prior negotiations and concurrence of financial institutions and banks is an added stumblingblock/ rider. The reluctance of financial institutions and banks to fund acquisitions directly is also slowing the process of consolidation of capacities in Indian industry through M&A. The BIFR route, although tedious, is preferred at times for obtaining financial concessions Lack of Exit Policy for restructuring / downsizing is coming in the way for aggressive acquistions to derive economies of scale.

Valuation is still evolving in India and acceptable/referral benchmarks are yet to be evolved.

How can Indian industries derive value from Mergers and Acquisitions
Acquirers are likely to realise value only if the following four cornerstones form integral part of an acquisition strategy. Strategic Vision Strategic vision is where all acquisitions should begin. Management's vision of the acquisition must be clear to large constituent groups say customers, suppliers, lenders, and employees and flexible to face unknown circumstances. The vision must be a continuous guide to the actual operating plans of the acquisition. If the vision does not translate into real actions acquisitions are unlikely to realise value and pave the way for deterioration of shareholder value. Operating Strategy Without an operating strategy the vision is just words. Actions must speak louder than words. Operating strategy should enable the acquirer to improve along the value chain of the businesses that competitors find it difficult to respond .Unfortunately most acquirers do very little pre-acquisition planning. Most acquisitions have no real operating strategy on the day the deal is completed. Acquisitions are often an attempt to divert attention away from a failing core business with the hope that the acquisition might provide cure for the acquirer. Vision and operating strategy are necessary but not enough to ensure positive performance gains from an acquisition. The other two cornerstones are - systems integration, and power and culture. Systems Integration Systems integration focuses on the physical integration plans that must be in place to implement the strategy. That is integration of sales forces, information and control systems, distribution systems, and marketing efforts.

Systems integration issues must be carefully considered before the acquisition and must support a clearly defined operating strategy. Management must decide which operations will be integrated and which will be stand-alone. If value unlocking gains are expected to come from cost savings, they must emerge from eliminating duplication. Systems integration planning must lie at the heart of this strategy. This means that future systems integration plans must be planned well in advance, and in considerable depth and detail, before the acquirer calculates a acquisition price for the target. Otherwise the acquirer will not know what he is paying for and even worse, will not know when the acquisition is simply a resource drain. Acquirers must understand that there can be very different and distinct post - acquisition integration environments. depending upon whether the: 1. The company is acquired as a stand-alone. 2. The target is to become part of the acquirer's operations. 3. The target and acquirer are to be completely integrated. Different degrees of integration can pose different types of problems. If they are poorly considered, they can damage the underlying businesses. Power and Culture Power and culture focuses on the reward and incentive systems and the control of information and decision processes at various levels of the organization. Most acquirers often more concerned about the financials than the soft side of acquisition management. Cultural tensions can undercut mergers and imperil synergies.Culture in simple terms nothing but "shared set of norms, values, beliefs, and expectations" This shared set of norms, values, beliefs, and expectations is developed over time and passed down through the generations of managers.As a result companies may have very different information and decision processes and incentive and reward systems. But the issue for acquirers is not whether the cultures are similar or different but whether the changes necessary to support the strategy will clash with either culture.The relevant issues in merger context are : (1) When will problems of conflict and cooperation arise? And (2) How will they be solved? Problems are expected to arise due to differences in standard operating procedures, such as conduct of performance evaluations, chain of command, methods of communication and approvals.The larger problems stem from the reshuffling of power. It is the uncertainty and ambiguity surrounding acquisition events that will cause executives and employees in general to defend positions they have build. Key executives or knowledge workers who are crucial to the business may leave in anticipation of these problems. The solution to the problem lie in the incentive and other reward systems established for the new company. It is essential to have clearly defined incentives that will drive the desired cooperation and coordination between the acquiring and acquired company.

References:
http://mergersindiainfo.com/intro/maintro01.html http://www.mergersindia.com/mergeronline/ http://www.mergersandacquisitions.in/merger-and-acquisition-in-india.htm http://www.sify.com/finance/india-s-mergers-and-acquisition-value-and-top-financialadvisors-imagegallery-others-kmrsbwidchj.html http://wiki.answers.com/Q/List_of_major_mergers_and_acquisitions_in_India