PONDICHERRY UNIVERSITY

SCHOOL OF MANAGEMENT
DEPARTMENT OF BANKING TECHNOLOGY

MERCHANT BANKING AND FINANCIAL SERVICES

ASSIGNMENT ON

MERGER & ACQUISITIONS

SUBMITTED TO, SUBMITTED BY,

DR. S.SUDALAI MUTHU. JOBIN JOHN,

READER, BANKING TECHNOLOGY V.GANESH

FIRST YEAR, MBA (BT).

 Merger & Acquisitions

MERGER

In business or economics a merger is a combination of two companies into one larger company.
Such actions are commonly voluntary and involve stock swap or cash payment to the target.
Stock swap is often used as it allows the shareholders of the two companies to share the risk
involved in the deal. A merger can resemble a takeover but result in a new company name
(often combining the names of the original companies) and in new branding; in some cases,
terming the combination a "merger" rather than an acquisition is done purely for political or
marketing reasons.

ACQUISITION

An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by
another. An acquisition may be friendly or hostile. In the former case, the companies cooperate
in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's
board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller
firm by a larger one.

Steps involved in M&A:

1. Review of objectives: The first and foremost step in M&A is that the merging companies
must undertake the review of the purpose for which the proposal to merge is to be
considered. Major objectives of merger include attaining faster growth, improving
profitability, improving managerial effectiveness, gaining market power and leadership,
achieving cost reduction, etc. the review of objectives is done to assess the strengths
and weaknesses, and corporate goals of the merging enterprise.
2. Data for analysis: After reviewing the relevant objective of acquisition the acquiring
firm needs to collect detailed information pertaining to financial and other aspects of
the firm and the industry. Industry centric information will be needed to make an
assessment of market growth, nature of competition, ease of entry, capital and labour
intensity, degree of regulation, etc. similarly, firm-centric information will be needed to
 assess quality of management, market share, size, capital structure, profitability,
production and marketing capabilities etc. the date to be collected serves as the criteria
for evaluation.

Review of objectives

Data for analysis

Analysis of Information

Fixing price

Finding merger value

FIG 1. Diagrammatic representation of steps involved in M & A

3. Analysis of Information: After collecting both industry-specific and firm-specific

information, the acquiring firm undertakes analysis of data and the pros and cons are
weighed. Data is to be analyzed with a view of determine the earnings and cash flows,
area of risk, the maximum price payable to the target company and the best way to
finance the merger.
4. Fixing price: Price to be paid for the company being acquired shall be fixed taking into
consideration the current market value of share of the company being acquired. The
price shall usually be above the current market price of the share. A merger may take
place at a premium. In such a case, the firm would pay an offer price which is higher
that the target firm’s pre-merger market value.
5. Finding merger value: Value created by merger is to be found so that it is possible for
the merging firms to determine their respective share. Merger value is equal to the
 excess of combined present value of the merged firms over and above the sum of their
individual present values as separate entities. Any cost incurred towards the merging
process is subtracted to arrive at the figure of net economic advantage of the merging
this advantage is shared between the shareholders of the merging firms.

Merger – Types

Mergers are of different types as discussed below:

1. Horizontal merger: Where two or more companies that compete in the same industry
amalgamate, it is a case of ‘horizontal merger’. The objective of horizontal merger is to
expand the firm’s operations in the same industry through the substantial economies of
scale and through the elimination of competition. The merger of Tata oil Mills Ltd. With
the Hindustan Level ltd. Is an example of a horizontal merger. The amalgamation of
Daimler-Benz and Chrysler is another popular example of a horizontal merger. Under
horizontal merger combination of two or more firms that are engaged in similar type of
production, distribution or area of business takes place. For instance where two or
more cement manufacturing companies are combined, it makes the form of ‘horizontal
merger’.
2. Vertical merger: A company is said to be adopting a vertical integration strategy where
it seeks to participate in other links in the value chain by remaining in the same industry
by acquiring suppliers or production technology, or acquiring sales or distribution
capacity. Where two or more companies that operate in the same industry but at
different stages of production or distribution system amalgamate, it is a case of ‘vertical
merger’. Vertical merger happens by means of combination of two or more firms that
are engaged in different stages of operation, production or distribution. For instance,
where a company that manufactures laptops combines with a company that markets
laptops, it is a case of a vertical merger.

Vertical merger may take the form of either a forward merger or a backward merger. A
backward merger happens where a manufacturing company joins with a company that
supplier raw material. On the other hand, a forward merger happens where a company
that supplies raw material joints hands with a company the manufacturers. Example of
forward merger is Reliance purchasing FLAG Telecom Group. Reliance Gateway, a
wholly-owned subsidiary of Reliance Infocomm, has signed an amalgamation agreement
with Flag Telecom Group for this acquisition.

3. Diagonal Merger: A company is said to be adopting a diagonal integration strategy

where it pursues an acquisition that involves both horizontal and vertical elements.
Under this merger strategy, content and intellectual property ownership is combined
 with distribution technology and infrastructure, resulting in so entirely new media
industry.
4. Forward merger: In a forward merger, the shareholders of the target company
exchange their shares for the shares of the acquiring company and all of the assets and
liabilities of the target company are automatically transferred to the acquire.

5. Reverse merger: In a reverse merger, the shareholders of the acquiring company

exchange their shares for shares of the target company. It is a case of the acquiring
company merging into the target company. Where a prosperous and profit making
company acquires a loss-making sick company with substantial erosion in its net worth,
it is a case of ‘reverse merger’.
6. Forward triangular merger: In a forward triangular merger, a subsidiary company is
formed by the parent company for the purpose of engaging in the merger deal. A
parent company funds a subsidiary formed for this purpose. The stock of the parent
company is transferred to the target company by the subsidiary.
7. Reverse triangular merger: In a reverse triangular merger, the parent company funds a
subsidiary company with stock of the parent. The shareholders of the target company
exchange their stock for the stock of the parent company, which is held by the
subsidiary company.
8. Conglomerate merger: A company is said to be adopting a conglomerate merger
strategy where it makes acquisitions across different industries. Where several firms
engaged in unrelated lines of business activity combine together to for a new company,
it takes the form of ‘conglomerate merger’.

A conglomerate takeover or merger involves the coming together of two companies in

different industries i.e. the businesses of the two companies are into related to each
other horizontally (in the sense of producing the same or competing products), or
vertically (in the sense of standing towards each other in the relationship of supplier and
buyer, or potential supplier and buyer). Examples: Cardinal Healthcare-Allegiance; AOL-
Time Warner; Phillip Morris-Kraft; Citicorp-Travelers Insurance; PepsiCo-Pizza Hut;
Proctor & Gamble-Clorox.

A co generic merger is said to take place where the companies that are getting merged
are engaged in complementary activities and not in direct competitive activities,
amalgamate to form a new company. The coming together of a car manufacturer with a
scooter manufacturer is an example of a co generic merger.

Conglomerate takeovers or mergers may in turn be classified according to the purpose

of the dominant party. The dominant party may itself be a ‘fully-fledged conglomerate’
company, i.e. a holding company staffed by professional managers exercising
 management control over a substantial number of subsidiaries in a wide range of
industries.

To dominant party may be a ‘financial conglomerate’, i.e. the group may have been put
together largely on the basis of financial engineering by the holding company, usually be
exchanging its highly priced quoted securities (frequently in the form of convertible
securities) for shares of companies in a wide range of industries.

9. Negotiated merger: Where merger of two or more companies takes place after
protracted negotiations, it is a case of ‘negotiated merger’. Under this type of merger,
the acquiring firm negotiates directly with the management of the target firm. The
merging companies willingly reach an agreement for the merger proposal. Accordingly,
of the parties to the agreement fall to reach an agreement, the merger proposal will be
terminated and dropped out. The merger of ITC Classic Ltd., with ICICI Ltd., is an
example of a negotiated merger.
10. Arranged merger: Where merger of a financially sick company takes place with another
sound company as part of package of financial rehabilitation under the initiative of a
financial body, it is a case of an ‘arranged merger’. Merger schemes are crafted in
consultation with the lead bank, the target firm and the acquiring firm. These are
motivated mergers and the led bank takes the initiative and decides the terms and
conditions of merger.
11. Agreed merger: Where the directors of target firm agree to the takeover or merger,
accept the offer in respect of their own shareholdings (which might range from nil or
negligible to controlling shareholdings) and recommend other shareholders to accept
the offer, it is a case of ‘agreed takeover or merger’. The directors may agree right from
the start or after early negotiations or even after public opposition to the bid (which
may or may not have resulted in an improvement in the terms of the proposed offer).
12. Unopposed merger: Where the directors of the target firm, while making a deal with
the acquiring firm, do not oppose the offer or recommend rejection, it is a case of
‘unopposed merger’.
13. Defended merger: Where the directors of a target firm decide to oppose the bid,
recommending shareholders to reject the offer and perhaps taking further defensive
action, it takes the form of a ‘defending merger’. The decision to defend may be with
the intention of stopping the takeover (which in turn may be prompted either by the
genuine belief of the directors that it is in the interests of the company to remain
independent or by a desire of the directors to protect their own personal positions) or
persuading the bidder to improve its terms.
14. Competitive merger: Where a second bidder (and perhaps even a third bidder) comes
into the scene with a rival bid, it is a case of a ‘competitive merger’. This may be an
 independent action on the part of the rival bidder or it may be at the invitation of the
directors of the target firm, who deciding that a takeover is inevitable, feel that the
company comes under the control of a bidder selected by them rather than the original
bidder.

15. Tender offer: Where a bid is made by an acquiring firm to acquire controlling interest in
a target firm by purchasing the shares of the target firm at a fixed price. It is a case of
‘tender offer’. Under this type of merger, the acquiring firm directly approaches the
shareholders of the target firm and makes them sell their shareholdings at a fixed price.
The offer prices is generally fixed at a level higher than the current market price in order
to induce the shareholders to divest their holding in favor of the acquiring firm.
16. Diversification: Diversification is a case of ‘conglomerate merger’. Diversification
consists of a company, deriving all or the greater part of its revenue from the particular
industry, acquiring subsidiaries operating in other industries for one or more of the
following reasons.
 To obtain greater stability of earnings through spreading activities in different
industries with different business cycles or to diversify out of a static or dying
industry.
 To employ spare resources, whether or capital or management
 To obtain benefit of economies of scale, particularly in regard to “staff” functions
(such as personnel, advertising, accounting and financial) where there are some
common factors.
 To make the company too large to be likely to be the object of a takeover or perhaps
to make it a less attractive object in the case of defensive diversification.
 To provide an outlet for the ambitions of management, here antimonopoly laws
make further acquisitions (or perhaps even growth) in the company’s own field
impracticable.

Conglomerate takeovers and mergers do not usually raise anti-monopoly questions, but
may do so where it is feared that the firm may abuse its market power, such as by
exerting pressure on firms from which some companies in the group purchase supplies
to place business with other companies in the group, and it is also argued that a decision
by a company to enter a new field by acquisition reduced by one to number of potential
competitors in that field in so far as the acquiring company might otherwise have
entered the field direct.
Major Merger and acquisitions

Proposed M&A

Merger of SBI associate banks

State Bank of India (SBI) plans Merger of remaining five associate banks with itself in the next
12-18 months. State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala,
State Bank of Mysore and State Bank of Hyderabad. In the last two years, SBI merged two
associates namely State Bank of Saurashtra and State Bank of Indore. State Bank of Saurashtra
amalgamation took place in August 2008 while State Bank of Indore merged with the parent
last year.

Bharti Airtel and South Africa's MTN : $23 billion

The proposed merger between Bharti Airtel and South Africa's MTN would be India's biggest-
ever M&A deal. The potential value of the Bharti Airtel-MTN deal would amount to $23 billion.
As per the exploring 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 10 largest M&A transactions involving an Indian company until now

1. Tata Steel-Corus: $12.2 billion

On January 30, 2007, Tata Steel purchased a 100% stake in the Corus
Group at 608 pence per share in an all cash deal, cumulatively valued at
$12.2 billion.The deal is the largest Indian takeover of a foreign company till date and made
Tata Steel the world's fifth-largest steel group. Merchant banks which were involved in the
deal was ABN AMRO and Deutsche Bank
 2. Vodafone-Hutchison Essar: $11.1 billion

On February 11, 2007, Vodafone agreed to buy out the controlling interest of 67%
held by Li Ka Shing Holdings in Hutch-Essar for $11.1 billion. This is the second-
largest M&A deal ever involving an Indian company. Vodafone Essar is owned by Vodafone
52%, Essar Group 33% and other Indian nationals 15%. Standard Chartered Plc has been the
merchant banker for Essar Group, while Vodafone were given advise on the deal by the
merchant bankers UBS AG,switzerland and Goldman Sachs Group Inc .

3. Hindalco-Novelis: $6 billion

Aluminium and copper major Hindalco Industries, the Kumar Mangalam Birla-led
Aditya Birla Group flagship, acquired Canadian company Novelis Inc in a $6-billion, all-cash deal
in February 2007.Till date, it is India's third-largest M&A deal. The acquisition would make
Hindalco the global leader in aluminium rolled products and one of the largest aluminium
producers in Asia. With post-acquisition combined revenues in excess of $10 billion, Hindalco
would enter the Fortune-500 listing of world's largest companies by sales revenues. UBS along
with ABN AMRO & Bank of America were the merchant banks in the deal.

4. Ranbaxy-Daiichi Sankyo: $4.5 billion

Marking the largest-ever deal in the Indian pharma industry, Japanese drug firm
Daiichi Sankyo in June 2008 acquired the majority stake of more than 50 per cent in domestic
major Ranbaxy for over Rs 15,000 crore ($4.5 billion). The deal created the 15th biggest drug
maker globally, and is India's 4th largest M&A deal to date. Nomura Securities Co., Ltd., the
Japan headquartered investment bank, acted as the exclusive financial advisor. Religare
Capital Markets Limited, a wholly owned subsidiary of Religare Enterprises Limited, were the
exclusive financial advisor to Ranbaxy

5. ONGC-Imperial Energy: $2.8 billion

The Oil and Natural Gas Corp took control of Imperial Energy Plc for $2.8
billion, in January 2009, after an overwhelming 96.8 per cent of London-listed firm's total
shareholders accepted its takeover offer. Speaking about India's fifth largest M&A deal, ONGC
chairman R S Sharma said the company owed the acquisition to government support, which has
seen OVL in the past seven years increase its number of projects to 39 in 17 countries, from just
a single project in Vietnam. Deutsche Bank advised ONGC and Merrill Lynch advised Imperial
energy.
 6. NTT DoCoMo-Tata Teleservices: $2.7 billion

Japanese telecom giant NTT DoCoMo picked up a 26 per cent equity stake in
Tata Teleservices for about Rs 13,070 crore ($2.7 billion) in November 2008.This is the 6th-
largest M&A deal involving an Indian company. With a subscriber base of 25 million in 20 circles
DoCoMo paid Rs 20,107 per subscriber to acquire the stake. DoCoMo picked up the equity
through a ombination of fresh issuance of equity and acquisition of shares from the existing
promoters. Investment bank Lazard and Co. has been the advisor for Tata firm while NTT has
taken advise from merchant bank JPMorgan.

7. HDFC Bank-Centurion Bank of Punjab: $2.4 billion

HDFC Bank approved the acquisition of Centurion Bank of Punjab for Rs

9,510 crore ($2.4 billion) in one of the largest mergers in the financial sector in India in
February, 2008.CBoP shareholders got one share of HDFC Bank for every 29 shares held by
them. Post-acquisition, HDFC Bank became the second-largest private sector bank in India. The
acquisition was also India's 7th largest ever. Merchant banks Ernst & Young and Dalal & Shah
have been appointed to determine the share swap ratio.

8. Tata Motors-Jaguar Land Rover: $2.3 billion

Creating history, one of India's top corporate entities, Tata Motors, in March
2008 acquired luxury auto brands -- Jaguar and Land Rover -- from Ford Motor
for $2.3 billion, stamping their authority as a takeover tycoon. Beating compatriot Mahindra
and Mahindra for the prestigious brands, just a year after acquiring steel giant Corus for $12.1
billion, the Tata’s signed the deal with Ford, which on its part chipped in with $600 million
towards JLR's pension plan. Tata Motors' buyout of JLR is India's 8th-largest in
history. Merchant banks involved in this deal included SBI Caps, HSBC, JP Morgan and Citi
bank.

9. Sterlite-Asarco: $1.8 billion

Anil Agarwal-led Sterlite Industries Ltd's $1.8 billion Asarco LLC buyout deal is
the ninth biggest-ever merger and acquisitions deal involving an Indian firm,
and the largest so far in 2009.This is despite the deal size falling by almost $1
billion, from a projected estimate of $2.6 billion in May 2008, due to devaluation of mining
assets and a sharp fall in copper prices. Sterlite , the Indian arm of the London-based Vedanta
Resources Plc, acquired Asarco in March 2008. Lehman Brothers was the merchant banker for
Asarco and ABN AMRO was the merchant banker for Sterlite.

10. Suzlon-RePower: $1.7 billion

Wind power major Suzlon Energy in May 2007 acquired

the German wind turbine manufacturer REpower for $1.7 billion. The deal now ranks as the
country's 10th largest corporate takeover.RePower is one of Germany's leading manufacturers
of wind turbines, with a 10-per cent share of the overall market. Suzlon is now the largest wind
turbine maker in Asia and the fifth largest in the world. Yes Bank was the investment banker
involved in the deal.

11. RIL-RPL merger: $1.68 billion

Reliance Industries in March 2009 approved a scheme of amalgamation of its

subsidiary Reliance Petroleum with the parent company. The all-share
merger deal between the two Mukesh Ambani group firms was valued at
about Rs 8,500 crore ($1.68 billion).This makes it India's 11th largest M&A transaction till date.
Post-merger, RPL shareholders received one fully paid equity share of Rs 10 each of the
company for every 16 fully paid equity shares of Rs 10 each of RPL held by them. The RIL-RPL
merger swap ratio was at 16:1. The merger became effective from April 1, 2008.The merchant
bankers involved in the deal were Ernst & Young Pvt Ltd, Morgan Stanley India Co Pvt Ltd, JM
financial consultants Pvt Ltd, Kotak Mahindra Capital Co ltd, DSP Merill Lynch Ltd, Citigroup
global Markets India Pvt Ltd.
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