Mergers & Acquisitions : An introduction

An entrepreneur may grow its business either by internal expansion or by external expansion. In the case of internal expansion, a firm grows gradually over time in the normal course of the business, through acquisition of new assets, replacement of the technologically obsolete equipments and the establishment of new lines of products. But in external expansion, a firm acquires a running business and grows overnight through corporate combinations. These combinations are in the form of mergers, acquisitions, amalgamations and takeovers and have now become important features of corporate restructuring. They have been playing an important role in the external growth of a number of leading companies the world over. They have become popular because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalisation of businesses. In the wake of economic reforms, Indian industries have also started restructuring their operations around their core business activities through acquisition and takeovers because of their increasing exposure to competition both domestically and internationally. ergers and acquisitions are strategic decisions taken for maximisation of a company!s growth by enhancing its production and marketing operations. They are being used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional businesses in order to gain strength, expand the customer base, cut competition or enter into a new market or product segment. Mergers or Amalgamations A merger is a combination of two or more businesses into one business. "aws in India use the term !amalgamation! for merger. The Income Tax Act,1961 [Section 2(1A !defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than nine#tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. Thus, mergers or amalgamations may take two forms$#

Merger t"roug" A#sor$tion:% An absorption is a combination of two or more companies into an !existing company!. All companies except one lose their identity in such a merger. %or example, absorption of Tata %ertilisers "td &T%"' by Tata (hemicals "td. &T("'. T(", an acquiring company &a buyer', survived after merger while T%", an acquired company &a seller', ceased to exist. T%" transferred its assets, liabilities and shares to T(". Merger t"roug" &onsolidation:% A consolidation is a combination of two or more companies into a !new company!. In this form of merger, all companies are legally dissolved and a new entity is created. )ere, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. %or example, merger of )industan (omputers "td, )industan Instruments "td, Indian

*oftware (ompany "td and Indian +eprographics "td into an entirely new company called )(" "td. A fundamental characteristic of merger &either through absorption or consolidation' is that the acquiring company &existing or new' takes over the ownership of other companies and combines their operations with its own operations. Besides, there are three ma,or types of mergers$#

'ori(ontal merger:% is a combination of two or more firms in the same area of business. %or example, combining of two book publishers or two luggage manufacturing companies to gain dominant market share. )ertical merger:% is a combination of two or more firms involved in different stages of production or distribution of the same product. %or example, ,oining of a Tmanufacturing &assembling' company and a T- marketing company or ,oining of a spinning company and a weaving company. -ertical merger may take the form of forward or backward merger. .hen a company combines with the supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger. &onglomerate merger:% is a combination of firms engaged in unrelated lines of business activity. %or example, merging of different businesses like manufacturing of cement products, fertili/er products, electronic products, insurance investment and advertising agencies. "0T and -oltas "td are examples of such mergers.

Acquisitions and Ta*eo+ers An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies. .hen an acquisition is !forced! or !unwilling!, it is called a takeover. In an unwilling acquisition, the management of !target! company would oppose a move of being taken over. But, when managements of acquiring and target companies mutually and willingly agree for the takeover, it is called acquisition or friendly takeover. 1nder t"e Mono$olies and ,estricti+e -ractices Act, takeover meant acquisition of not less than 23 percent of the voting power in a company. .hile in t"e &om$anies Act (Section ./2 , a company!s investment in the shares of another company in excess of 45 percent of the subscribed capital can result in takeovers. An acquisition or takeover does not necessarily entail full legal control. A company can also have effective control over another company by holding a minority ownership.

0"at dri+es Mergers & Acquisitions1

2conomies o3 Scale$ In many sectors, si/e counts. These deals enable companies leapfrog their larger rivals and improve their revenues .Take the example of I(I(I acquisition of *(I(I, IT( (lassic and various 6B%( asset acquisitions7 to surpass I8BI in si/e. I(I(I after converting from a developmental financial institution into a bank&I(I(I bank', its acquisition of Bank of adhurai and its strategic holdings in %ederal Bank and 6ew Bank of India all indicate the importance of si/e when banks are facing intense pressure to improve their reach, broaden their services while lowering their cost structures. &onsolidation$ As economies getting integrated, industries regroup into a smaller number of big companies. India is no exception.%or example in the metal manufacturing sector,*terlite Industries acquisition of BA"(9, )industan :inc7 )indalco Industries &makers of non#ferrous metals ' acquisition Indian Aluminum (o. "td., (opper Business of Indo ;ulf (orporation "td and acquisition of various copper mines.A wave of consolidation is occurring in various sectors post liberlisation. Take cement industry which witnessed a massive consolidation7 ;u,arath Ambu,a (ements stake acquisition in A((, A((!s acquisition of I8(9" cements7 ;rasim Industries acquisition of cement division of "arsen 0 Toubro &"0T',India (ements acquisition of +assi (ements. 4ain access to ne5 $roducts and tec"nologies, ne5 mar*ets: 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, =xpert Information *ervices >ty "td by Infosys Technologies "td7.ipro!s acquisition of 1* based IT consulting firm 6erve.ire Inc7 (ogni/ant Technology *olutions acquisition of Infopulse, a 6etherlands# based IT services firm providing software to the banking and financial services industry, or the ;odre, ;roup acquisition of 1pstream ""(, a 1*#based call centre company to augument its market position7 are all examples of Indian IT companies strategic initiatives to gain access to markets7to built business consulting capabilities. >harmaceuticals and auto#ancillary companies have turned to 0As in this way.Take the examples of Bharat %orge, acquisition of ;erman firm (arl 8an >eddinghaus ;mb) &(8>', Tata otors &formerly Telco' buy out of 8aewoo (ommercial -ehicle (ompany of *outh ?orea, +anbaxy "aboratories "td buy of +>; &Aventis' *A, along with its fully owned subsidiary 9>I) *A+", in %rance to get into a market where it did not have a presence. &reate or gain access to distri#ution c"annels: A lack of distribution has been constraining the growth of companies and companies resort to 0As to again access< strengthen their distribution channels. +eliance Infocomm acquisition of

%lag Telecom, an international provider of wholesale telecom network transport and communications or +eader!s 8igest agreement with India Today ;roup, to get wider access to the Indian market through the India Today ;roup7 >rincipal utual %und an agreement with *un %0( mutual %und &a retail client base of over @5,555 investors ' to take over and manage its schemes in India 7 are all examples to indicate how critical distribution channels play in driving 0As. 6i+ersi3ication: In earlier controlled< licenced economy 7 diversification was the rage. Though companies are increasingly confining <focusing on their core activities &stick to their knitting '7 diversification is still an acquisition driver for many Indian corporate houses. The B>9 activities of many corporate houses say for example ;odre, ;roup acquisition of 1pstream ""(7 Aditya Birla ;roup!s flagship company Indian +ayon acquisition of Trans.orks, a business process outsourcing &B>9' company or +eliance &%lag acquisition ' and Tata!s &-*6" acquisition' foray in telecom sector etc indicate diversification drive still play an important role in 0As .Though these unrelated deals offered few opportunities for synergy, the acquiring companies profited because they managed the acquisitions well.

T7$es o3 Mergers and Acquisitions

There are many types of mergers and acquisitions that redefine the business world with new strategic alliances and improved corporate philosophies. %rom the business structure perspective, some of the most common and significant types of mergers and acquisitions are listed below$ 'ori(ontal Merger This kind of merger exists between two companies who compete in the same industry segment. The two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits. This kind substantially reduces the number of competitors in the segment and gives a higher edge over competition. )ertical Merger -ertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. In this form, the companies in merger decide to combine all the operations and productions under one shelter. It is like encompassing all the requirements and products of a single industry segment. &o%4eneric Merger (o#generic merger is a kind in which two or more companies in association are some way or the other related to the production processes, business markets, or basic required technologies. It includes the extension of the product line or acquiring components that are all the way required in the daily operations. This kind offers great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and strategic requirements.

&onglomerate Merger (onglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations. All the merged companies are no way related to their kind of business and product line rather their operations overlap that of each other. This is ,ust a unification of businesses from different verticals under one flagship enterprise or firm.

-rocess o3 Merger and Acquisition

erger and acquisition process is the most challenging and most critical one when it comes to corporate restructuring. 9ne wrong decision or one wrong move can actually reverse the effects in an unimaginable manner. It should certainly be followed in a way that a company can gain maximum benefits with the deal. 8ollo5ing are some o3 t"e im$ortant ste$s in t"e M&A $rocess: 9usiness )aluation Business valuation or assessment is the first process of merger and acquisition. This step includes examination and evaluation of both the present and future market value of the target company. A thorough research is done on the history of the company with regards to capital gains, organi/ational structure, market share, distribution channel, corporate culture, specific business strengths, and credibility in the market. There are many other aspects that should be considered to ensure if a proposed company is right or not for a successful merger. -ro$osal -"ase >roposal phase is a phase in which the company sends a proposal for a merger or an acquisition with complete details of the deal including the strategies, amount, and the commitments. ost of the time, this proposal is send through a non#binding offer document. -lanning 2xit .hen any company decides to sell its operations, it has to undergo the stage of exit planning. The company has to take firm decision as to when and how to make the exit in an organi/ed and profitable manner. In the process the management has to evaluate all financial and other business issues like taking a decision of full sale or partial sale along with evaluating on various options of reinvestments. Structuring 9usiness 6eal After finali/ing the merger and the exit plans, the new entity or the take over company has to take initiatives for marketing and create innovative strategies to enhance business and its credibility. The entire phase emphasi/e on structuring of the business deal. Stage o3 Integration This stage includes both the company coming together with their own parameters. It includes the entire process of preparing the document, signing the agreement, and negotiating the deal. It also defines the parameters of the future relationship between the two.

:$erating t"e )enture After signing the agreement and entering into the venture, it is equally important to operate the venture. This operation is attributed to meet the said and pre#defined expectations of all the companies involved in the process. The 0A transaction after the deal include all the essential measures and activities that work to fulfill the requirements and desires of the companies involved.

-ro#lems o3 Merger and Acquisition in India

It!s a well known fact that a good number of mergers fail because of various factors including cultural differences and flawed intentions. ost companies when sign an agreement often get a create a bigger picture of their expectations as they believe in pure concept of higher capital gains when two are combining together. This belief is not always true as conditions in the market and economy often rules the operation and functioning of any company. The history of merger and acquisitions have revealed that almost two thirds of the mergers taking place experience failure and feel disappointed on their own terms and pre defined parameters. At times even the motivation driving the mergers can prove to be intangible. There are many factors contributing to the failure and elements that are problems of mergers and acquisition. There are many aspects that should be understood and analy/ed before signing an agreement because even one small mistake in taking a decision can completely dump both the companies with an irreversible impact. Some o3 t"e $rominent issues 5it" regards to 3ailure o3 M&A are as 3ollo5s: A flawed intention in terms of unethical motivation or high expectations can eventually lead to failure of the merger. If any company desires high capital gain along with glory and fame irrespective of the corporate strategy defined to fulfill the requirements of the company, the merger fails. Any kind of agreement based completely on the optimistic stock market condition can also lead to failure as stock market is an uncertain entity. In such cases more risks are involved with the prevailing merger. (ultural difference is also a big problem in case of a merger. .hen two companies from different corporate cultures come together it becomes a really challenging task to integrate the cultures of both the companies. It is certainly difficult to maintain the difference and move ahead for success without any kind of integration.

,ecent Mergers
;lobal 0A is one of the most happening and fundamental element of corporate strategy in today!s world. any companies around the world have merged with each other with a motive to expand their businesses and enhance revenue. In the span of few years there are many companies coming together for betterment across the globe. +ecent mergers and acquisitions 2544 are "ipton +osen 0 ?at/ in 6ew Aork, *ullivan 0 (romwell ""> in 6ew Aork, *laughter 0 ay in "ondon, allesons *tephen Baques in *ydney, and 9sler )oskin 0 )arcourt ""> in Toronto. =ven in India merger and acquisition has become a fashion today with a cut throat competition in the international market. There are domestic deals like >enta homes acquiring Agro 8utch Industries, A(( taking over =ncore (ement and Addictive, 8almia (ement acquiring 9rissa (ement, =delweiss (apital acquiring Anagram (apital. All these are recent merger and acquisition 2545 valued at about 1*8 2.4C billion. A$art 3rom t"ese t"ere are ot"er success3ul mergers in India as 3ollo5s: Tata (hemicals took over British salt based in 1? with a deal of 1* D 4E billion. This is one of the most successful recent mergers and acquisitions 2545 that made Tata even more powerful with a strong access to British *alt!s facilities that are known to produce about F55,555 tons of pure white salt annually. erger of +eliance >ower and +eliance 6atural +esources with a deal of 1* D44 billion is another biggest deal in the Indian industry. This merger between the two made it convenient and easy for the +eliance power to handle all its power pro,ects as it now en,oys easy availability of natural gas. Airtel acquired :ain in Africa with an amount of 1* D 45.@ billion to set new benchmarks in the telecom industry. :ain is known to be the third largest player in Africa and being acquired by Airtel it is deliberately increasing its base in the international market. I(I(I Bank!s acquisition of Bank of +a,asthan at aout +s E555 (rore is a greta move by I(I(I to enhance its market share across the Indian boundaries especially in northern and western regions. %ortis )ealthcare acquired )ong ?ong!s Guality )ealthcare Asia "td for around +s FF2 (rore and is now on move to acquire the largest dental service provider in Australia, the 8ental (orp at about +s H35 (rore.