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Mergers and Acquisitions

Chapte Introduction to
r
1
Mergers and Acquisition

We have been learning about the companies coming together to from


another company and companies taking over the existing companies to expand
their business.

With recession taking toll of many Indian businesses and the feeling of
insecurity surging over our businessmen, it is not surprising when we hear about
the immense numbers of corporate restructurings taking place, especially in the
last couple of years. Several companies have been taken over and several have
undergone internal restructuring, whereas certain companies in the same field of
business have found it beneficial to merge together into one company.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-
offs, tender offers, & other forms of corporate restructuring. Thus important issues
both for business decision and public policy formulation have been raised. No firm
is regarded safe from a takeover possibility. On the more positive side Mergers &
Acquisition’s may be critical for the healthy expansion and growth of the firm.
Successful entry into new product and geographical markets may require Mergers
& Acquisition’s at some stage in the firm's development. Successful competition in
international markets may depend on capabilities obtained in a timely and efficient
fashion through Mergers & Acquisition's. Many have argued that mergers increase
value and efficiency and move resources to their highest and best uses, thereby
increasing shareholder value. .

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Mergers and Acquisitions

To opt for a merger or not is a complex affair, especially in terms of the


technicalities involved. We have discussed almost all factors that the management
may have to look into before going for merger. Considerable amount of
brainstorming would be required by the managements to reach a conclusion. e.g.
a due diligence report would clearly identify the status of the company in respect
of the financial position along with the net worth and pending legal matters and
details about various contingent liabilities. Decision has to be taken after having
discussed the pros & cons of the proposed merger & the impact of the same on
the business, administrative costs benefits, addition to shareholders' value, tax
implications including stamp duty and last but not the least also on the employees
of the Transferor or Transferee Company.

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 Merger:-

Merger is defined as combination of two or more companies into a single


company where one survives and the others lose their corporate existence. The
survivor acquires all the assets as well as liabilities of the merged company or
companies. Generally, the surviving company is the buyer, which retains its
identity, and the extinguished company is the seller.

One plus one makes three this equation is the special alchemy of a merger or
acquisition. The key principle behind buying a company is to create shareholder
value over and above that of the sum of the two companies. Two companies
together are more valuable than two separate companies--at least, that's the
reasoning behind M&A.

Merger is also defined as amalgamation. Merger is the fusion of two or more


existing companies. All assets, liabilities and the stock of one company stand
transferred to Transferee Company in consideration of payment in the form of:

 Equity shares in the transferee company,


 Debentures in the transferee company,
 Cash
 A mix of the above modes.

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 Acquisition: -
In an acquisition, a company can buy another company with cash, with
stock, or a combination of the two. Another possibility, which is common in smaller
deals, is for one company to acquire all the assets of another company.
Example:
Company X buys all of Company Y's assets for cash, which means that Company
Y will have only cash (and debt, if they had debt before). Of course, Company Y
becomes merely a shell and will eventually liquidate or enter another area of
business.

 Methods of Acquisition:
An acquisition may be affected by: -

 Agreement
 With the persons holding majority interest in the company management like
members of the board or major shareholders
 commanding majority of voting power
 Purchase of shares in open market
 To make takeover offer to the general body of shareholders
 Purchase of new shares by private treaty
 Acquisition of share capital through the following forms of considerations
viz. means of cash, issuance of loan capital, or insurance of share capital.

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Mergers & Acquisitions rationale is particularly alluring to companies when times


are tough. Strong companies will act to buy other companies to create a more
competitive, cost-efficient company. The companies will come together hoping to
gain a greater market share or achieve greater efficiency. Because of these
potential benefits, target companies will often agree to be purchased when they
know they cannot survive alone.

In practice, however, actual mergers of equals don't happen very often. Often, one
company will buy another and, as part of the deal's terms, simply allow the
acquired firm to proclaim that the action is a merger of equals, even if it's
technically an acquisition. Being bought out often carries negative connotations.
By using the term "merger," dealmakers and top managers try to make the
takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining
together in business is in the best interests of both their companies. But when the
deal is unfriendly--that is, when the target company does not want to be
purchased--it is always regarded as an acquisition.

So, whether a purchase is considered a merger or an acquisition really depends


on whether the purchase is friendly or hostile and how it is announced. In other
words, the real difference lies in how the purchase is communicated to and
received by the target company's board of directors, employees and shareholders.

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Chapte
r Purpose and Terms of Mergers and
2 Acquisition

The purpose for an offer or company for acquiring another company shall
be reflected in the corporate objectives. It has to decide the specific objectives to
be achieved through acquisition. The basic purpose of merger or business
combination is to achieve faster growth of the corporate business. Faster growth
may be had through product improvement and competitive position.

Other possible purposes for acquisition are short listed


below: -

1.Procurement of supplies:

 To safeguard the source of supplies of raw materials or intermediary


product;
 To obtain economies of purchase in the form of discount, savings in
transportation costs, overhead costs in buying department, etc.;
 To share the benefits of suppliers economies by standardizing the
materials.

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2. Revamping production facilities:

 To achieve economies of scale by amalgamating production facilities


through more intensive utilization of plant and resources.
 To standardize product specifications, improvement of quality of
product, expanding
Market and aiming at consumer’s satisfaction through strengthening after
sale services
 To reduce cost, improve quality and produce competitive products to
retain and improve market share.

3. Market expansion and strategy:

 To eliminate competition and protect existing market


 To obtain a new market outlets in possession of the offeree
Strengthening retain outlets and sale the goods to rationalize distribution

4. Financial strength:

 To improve liquidity and have direct access to cash resource.


 To dispose of surplus and outdated assets for cash out of combined
enterprise.
 To enhance gearing capacity, borrow on better strength and the greater
assets backing.
 To avail tax benefits.
 To improve EPS (Earning Per Share).

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5. General gains:

 To improve its own image and attract superior managerial talents to manage
its affairs;
 To offer better satisfaction to consumers or users of the product.

6. Own developmental plans:

The purpose of acquisition is backed by the offer or company’s own


developmental plans. A company thinks in terms of acquiring the other
company only when it has arrived at its own development plan to expand its
operation having examined its own internal strength where it might not have
any problem of taxation, accounting, valuation, etc. but might feel resource
constraints with limitations of funds and lack of skill managerial personnel’s. It
has to aim at suitable combination where it could have opportunities to
supplement its funds by issuance of securities, secure additional financial
facilities, eliminate competition and strengthen its market position.

7. Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives


through alternative type of combinations which may be horizontal, vertical,
product expansion, market extensional or other specified unrelated
objectives depending upon the corporate strategies. Thus, various types of
combinations distinct with each other in nature are adopted to pursue this
objective like vertical or horizontal combination.

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8. Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of


cooperative spirit despite competitiveness in providing rescues to each other from
hostile takeovers and cultivate situations of collaborations sharing goodwill of
each other to achieve performance heights through business combinations. The
combining corporate aim at circular combinations by pursuing this objective.

9. Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration
between the two combining business houses. Such integration could be
operational or financial. This gives birth to conglomerate combinations. The
purpose and the requirements of the offeror company go a long way in selecting a
suitable partner for merger or acquisition in business combinations.

Terms Relating to Merger and Acquisitions:

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1. Asset Stripping :

When a company acquires another and sells it in parts expecting that the funds
generated would match the costs pf acquisition, it is known as asset stripping.

2. Black Knight :
The company that makes a hostile takeover is known as the Black Knight.

Dawn Raid :

This is a process of buying shares of the target company with the expectation that
the market prices may fall till the acquisition is completed.

De-merger or Spin off :

During the process of corporate restructuring, a part of the company may beak up
and set up as a new company and this is known as demerger. Zeneca and Argos
are good examples in this regard that split from ICI and American Tobacco
respectively.

Carve –out:

This is a case of selling a small portion of the company as an Initial Public


Offering.

Greenmail:

Greenmail is a situation where the target company purchases back its own shares
from the bidding company at a higher price.

Grey Knight:

A grey knight is a company that takes over another company and its intentions are
not clear.

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Hostile Takeover:

Hostile bids occur when acquisitions take place without the consent of the
directors of the target company. This confrontation on the part of the directors of
the target company may be short lived and the hostile takeover may end up being
friendly. Most American\n and British companies like the phenomenon of hostile
takeovers while there is some more which do not like such unfriendly takeovers.

Macaroni Defense :

Macaroni Defense is a strategy that is taken up to prevent any hostile


takeovers. The issue of bonds that can be redeemed at a higher price if
the company is taken over does this.

3. Management Buy In :

When a company is purchased and the investors bring in their


managers to control the company, it is known as management buy in.

4. Management Buy Out :


In a management buy out, the managers of a company purchases it
with support from venture capitalists.

5. Poison Pill or Suicide Pill Defense :


This is a strategy that is taken by the target company to make itself less appealing
for a hostile takeover. The bondholders are given the right to redeem their bonds
at a premium before a takeover occurs.

Chapte
r
3 Types of mergers

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A merger refers to the process whereby at least two companies combine to form
one single company. Business firms make use of mergers and acquisitions for
consolidation of markets as well as for gaining a competitive edge in the industry.

Merger types can be broadly classified into the following five subheads as
described below.

They are Horizontal Merger, Conglomeration, Vertical Merger, Product-Extension


Merger and Market-Extension Merger.

 Horizontal Merger refers to the merger of two companies who are direct
competitors of one another. They serve the same market and sell the same
product.

 Conglomeration refers to the merger of companies, which do not either


sell any related products or cater to any related markets. Here, the two
companies entering the merger process do not possess any common business
ties.

 Vertical Merger is affected either between a company and a customer or


between a company and a supplier.

 Product-Extension Merger is executed among companies, which sell


different products of a related category. They also seek to serve a common
market. This type of merger enables the new company to go in for a pooling in

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of their products so as to serve a common market, which was earlier


fragmented among them.

 Market-Extension Merger occurs between two companies that sell


identical products in different markets. It basically expands the market base of
the product.

From the perspective of how the merge is financed, there are two
types of mergers:

 Purchase mergers
 Consolidation mergers.

Each has certain implications for the companies involved and for
investors

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Purchase Mergers:
As the name suggests, this kind of merger occurs when one company purchases
another one. The purchase is made by cash or through the issue of some kind of
debt instrument, and the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them
with a tax benefit. Acquired assets can be “written up” to the actual purchase
price, and the difference between book value and purchase price of the assets
can depreciate annually, reducing taxes payable by the acquiring company.

Consolidation Mergers:
With this merger, a brand new company is formed and both companies are bought
and combined under the new entity. The tax terms are the same as those of a
purchase merger.

Advantages of mergers and takeovers

Mergers and takeovers are permanent form of combinations which vest in


management complete control and provide centralized administration which are
not available in combinations of holding company and its partly owned subsidiary.

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Shareholders in the selling company gain from the merger and takeovers as the
premium offered to induce acceptance of the merger or takeover offers much
more price than the book value of shares. Shareholders in the buying company
gain in the long run with the growth of the company not only due to synergy but
also due to “boots trapping earnings”.

 Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholders,


manager’s ad promoters of the combing companies. The factors, which motivate
the shareholders and managers to lend support to these combinations and the
resultant consequences they have to bear, are briefly noted below based on the
research work by various scholars globally.

1. From the standpoint of shareholders:


Investment made by shareholders in the companies subject to merger should
enhance in value. The sale of shares from one company’s shareholders to
another and holding investment in shares should give rise to greater values i.e.
the opportunity gains in alternative investments. Shareholders may gain from
merger in different ways viz. from the gains and achievements of the company i.e.
through

o Realization of monopoly profits


o Economies of scales
o Diversification of product line
o Acquisition of human assets and other resources not available otherwise
o Better investment opportunity in combinations.

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2. From the standpoint of managers:

Managers are concerned with improving operations of the company, managing


the affairs of the company effectively for all round gains and growth of the
company which will provide them better deals in raising their status, perks and
fringe benefits. Mergers where all these things are the guaranteed outcome get
support from the managers. At the same time, where managers have fear of
displacement at the hands of new management in amalgamated company and
also resultant depreciation from the merger then support from them becomes
difficult.

3. Promoter’s gains:

Mergers do offer to company promoters the advantage of increasing the size of


their company and the financial structure and strength. They can convert a closely
held and private limited company into a public company without contributing much
wealth and without losing control.

4. Benefits to general public:

Impact of mergers on general public could be viewed as aspect of benefits and


costs to:

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 Consumer of the product or services


 Workers of the companies under combination
 General public affected in general having not been user or consumer or the
worker in the companies under merger plan.

(a) Consumers
The economic gains realized from mergers are passed on to consumers in the
form of lower prices and better quality of the product, which directly raise their
standard of living and quality of life. The balance of benefits in favour of
consumers will depend upon the fact whether or not the mergers increase or
decrease competitive economic and productive activity, which directly affects the
degree of welfare of the consumers through changes in price level, quality of
products, after sales service, etc.

(b) Workers community


The merger or acquisition of a company by a conglomerate or other acquiring
company may have the effect on both the sides of increasing the welfare in the
form of purchasing power and other miseries of life. Two sides of the impact as
discussed by the researchers and academicians are

Mergers with cash payment to shareholders provide opportunities for them to


invest this money in other companies, which will generate further employment and
growth to uplift of the economy in general.

Any restrictions placed on such mergers will decrease the growth and investment
activity with corresponding decrease in employment. Both workers and

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communities will suffer on lessening job opportunities, preventing the distribution


of benefits resulting from diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power is to be


understood as the ability to control prices and industries output as monopolists.
Such monopolists affect social and political environment to tilt everything in their
favour to maintain their power ad expand their business empire. These advances
result into economic exploitation. But in a free economy a monopolist does not
stay for a longer period as other companies enter into the field to reap the benefits
of higher prices set in by the monopolist. This enforces competition in the market,
as consumers are free to substitute the alternative products. Therefore, it is
difficult to generalize that mergers affect the welfare of general public adversely or
favorably. Every merger of two or more companies has to be viewed from different
angles in the business practices which protects the interest of the shareholders in
the merging company and also serves the national purpose to add to the welfare
of the employees, consumers and does not create hindrance in administration of
the Government polices.

Reverse Merger
Generally, a company with the track record should have a less profit earning or
loss making but viable company amalgamated with it to have benefits of
economies of scale of production and marketing network, etc. As a consequence
of this merger the profit earning company survives and the loss making company

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extinguishes its existence. But in many cases, the sick company’s survival
becomes more important for many strategic reasons and to conserve community
interest.

The law provides encouragement through tax relief for the companies that are
profitable but get merged with the loss making companies. Infact this type of
merger is not a normal or a routine merger. It is, therefore, called as a Reverse
Merger.

A reverse merger occurs when a private company that has strong prospects and
is eager to raise financing buys a publicly listed shell company, usually one with
no business and limited assets. The private company reverse merges into the
public company, and together they become an entirely new public corporation with
tradable shares.

Regardless of their category or structure, all mergers and acquisitions have one
common goal: they are all meant to create synergy that makes the value of the
combined companies greater than the sum of the two parts.

High Court discussed 3 tests for reverse merger

a. Assets of Transferor Company being greater than Transferee Company.


b. Equity capital to be issued by the transferee company pursuant to the
acquisition exceeding its original issued capital.

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c. The change of control in the transferee company clearly indicated that the
present arrangement was an arrangement, which was a typical illustration
of takeover by reverse bid.

Court held that prime facie the scheme of merging a prosperous unit with a sick
unit could not be said to be offending the provisions of section 72A of the Income
Tax Act, 1961 since the object underlying this provision was to facilitate the
merger of sick industrial unit with a sound one.

Salient features of reverse merger under section 72A:

1. Amalgamation should be between companies and none of them should be a


firm of partners or sole-proprietor. In other words, partnership firm or sole-
proprietary concerns cannot get the benefit of tax relief under section 72A
merger.

2. The companies entering into amalgamation should be engaged in either


industrial activity or shipping business. In other words, the tax relief under
section 72A would not be made available to companies engaged in trading
activities or services.

3. After amalgamation the “sick” or “financially unviable company” shall survive


and other income generating company shall extinct. In other words essential
condition to be fulfilled is that the acquiring company will be able to revive or
rehabilitate having consumed the healthy company.

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4. One of the merger partners should be financially unviable and have


accumulated losses to qualify for the merger and the other merger partner
should be profit earning so that tax relief to the maximum extent could be had.
In other words the company, which is financially unviable, should be technically
sound and feasible, commercially and economically viable but financially weak
because of financial stringency or lack of financial recourses or its liabilities
have exceeded its assets and is on the brink of insolvency. The second
requisite qualification associated with financial unavailability is the accumulation
of losses for past few years.

5. Amalgamation should be in the public interest i.e. it should not be against public
policy, should not defeat basic tenets of law, and must safeguard the interest of
employees, consumers, creditors, customers and shareholders apart from
promoters of company through the revival of the company.

6. The merger must result into following benefit to the amalgamated company i.e.
 Carry forward of accumulated business loses of the amalgamated company
 Carry forward of unabsorbed depreciation of the amalgamating company
 Accumulated loss would be allowed to be carried forward set of for eight
subsequent years.

7. Accumulated loss should arise from “Profits and Gains from business or
profession” and not be loss under the head “Capital Gains” or “Speculation”.

8. For qualifying carry forward loss, the provisions of section 72 should have not
been contravened.

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9. Similarly for carry forward of unabsorbed depreciation the conditions of section


32 should not have been violated.

10. Specified authority has to be satisfied of the eligibility of the company for the
relief under section 72 of the Income Tax Act. It is only on the recommendations
of the specified authority that Central Government may allow the relief.

11. The company should make an application to a “specified authority” for requisite
recommendation of the case to the Central Government for granting or allowing
the relief.

12. Procedure for merger or amalgamation to be followed in such cases is same as


in any other cases. Specified Authority makes recommendation after taking into
consideration the court’s direction on scheme of amalgamation.

Synergy

The success of a merger or acquisition depends on how well this


synergy is achieved.

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Synergy:
Synergy is the magic force that allows for enhanced cost efficiencies of the new
business. Synergy takes the form of revenue enhancement and cost savings.

By merging, the companies hope to benefit from the following:

1. Staff reductions as every employee knows, mergers tend to


mean job losses. Consider all the money
saved from reducing the number of staff
members from accounting, marketing and other
departments.

2. Economies of scale yes, size matters. Whether it's purchasing stationery


or a new corporate IT system, a bigger
company placing the orders can save more on
costs. Mergers also translate into improved
purchasing power to buy equipment or office
supplies--when placing larger orders,
companies have a greater ability to negotiate
price with their suppliers.

3. Acquiring new technology to stay competitive, companies need to stay on


top of technological developments and their
business applications. By buying a smaller
company with unique technologies, a large
company can keep or develop a competitive
edge.

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4. Improved market reach and industry visibility


Companies buy companies to reach new markets and grow revenues and
earnings. A merge may expand two companies' marketing and distribution, giving
them new sales opportunities. A merger can also improve a company's standing
in the investment community: bigger firms often have an easier time raising capital
than smaller ones.

That said, achieving synergy is easier said than done--it is not automatically
realized once two companies merge. Sure, there ought to be economies of
scale when two businesses are combined, but sometimes it works in reverse. In
many cases, one and one add up to less than two.

Sadly, synergy opportunities may exist only in the minds of the corporate leaders
and the dealmakers. Where there is no value to be created, the CEO and
investment bankers--who have much to gain from a successful M&A deal--will try
to build up the image of enhanced value. The market, however, eventually sees
through this and penalizes the company by assigning it a discounted share price.

Chapte
r Procedure for acquisition
4
And Acquisition

Doing the Deal


Start with offer:

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When the CEO and top managers of a company decide they want to do a
merger or acquisition, they start with a tender offer. The process typically begins
with the acquiring company carefully and discreetly buying up shares in the target
company, building a position.

Once the acquiring company starts to purchase shares in the open market, it
is restricted to buying 5% of the total outstanding shares

Working with financial advisors and investment bankers, the acquiring


company will arrive at an overall price that it's willing to pay for its target in cash,
shares, or both. The tender offer is then frequently advertised in the business
press, stating the offer price and the deadline by which the shareholders in the
target company must accept (or reject) it
.
The Target's Response
Once the tender offer has been made, the target company can do one of several
things:
1. Accept the terms of the offer: If the target firm's top managers and
shareholders are happy with the terms of
the transaction, they will go ahead with the
deal.

2. Attempt to negotiate: The tender offer price may not be high


enough for the target company's
shareholders to accept, or the specific terms
of the deal may not be attractive. In a
merger, there may be much at stake for the
management of the target. So, if they're not
satisfied with the terms laid out in the tender

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offer, the target's management may try to


work out more agreeable terms.

3. Execute a poison pill or some other hostile takeover


defense:
A poison pill scheme can be triggered by a target company when a hostile suitor
acquires a predetermined percentage of company stock. To execute its defense,
the target company grants all shareholders--except the acquirer--options to buy
additional stock at a dramatic discount. This dilutes the acquirer's share and
intercepts its control of the company.

Mergers and acquisitions can face scrutiny from regulatory bodies.

For example
If the two biggest long-distance companies in the United States, AT&T and Sprint,
wanted to merge, the deal would require approval from the Federal
Communications Commission. No doubt, the FCC would regard a merger of the
two giants as the creation of a monopoly or, at the very least, a threat to
competition in the industry.

Closing the Deal

Finally, once the target company agrees to the tender offer and regulatory
requirements are met, the merger deal will be executed by means of some
transaction. In a merger in which one company buys another, the acquirer will pay
for the target company's shares with cash, stock, or both.

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A cash-for-stock transaction is fairly straightforward, target-company shareholders


receive a cash payment for each share purchased. This transaction is treated as a
taxable sale of the shares of the target company.

If the transaction is made with stock instead of cash, then it's not taxable. There is
simply an exchange of share certificates. The desire to steer clear of the taxman
explains why so many M&A deals are carried out as cash-for-stock transactions.

When a company is purchased with stock, new shares from the acquirer's stock
are issued directly to the target company's shareholders, or the new shares are
sent to a broker who manages them for target-company shareholders. Only when
the shareholders of the target company sell their new shares are they taxed.

When the deal is closed, investors usually receive a new stock in their portfolio--
the acquiring company's expanded stock. Sometimes investors will get new stock
identifying a new corporate entity that is created by the M&A deal.

Why Mergers fail?

It's no secret that plenty of mergers don't work. Those who advocate mergers will
argue that the merger will cut costs or boost revenues by more than enough to
justify the price premium. It can sound so simple.

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Just combine computer systems, merge a few departments, use sheer size to
force down the price of supplies, and the merged giant should be more profitable
than its parts.

In theory, 1+1 = 3 sounds great, but in practice, things can go awry.

Historical trends show that roughly two thirds of big mergers will disappoint on
their own terms, which means they will lose value on the stock market.
Motivations behind mergers can be flawed and efficiencies from economies of
scale may prove elusive. And the problems associated with trying to make merged
companies work are all too concrete.

Flawed Intentions
For starters, a booming stock market encourages mergers, which can spell
trouble. Deals done with highly rated stock as currency are easy and cheap, but
the strategic thinking behind them may be easy and cheap too. Also, mergers are
often attempts to imitate, somebody else has done a big merger, which prompts
top executives to follow suit.

A merger may often have more to do with glory seeking than business strategy.
The executive ego, which is boosted by buying the competition, is a major force in
M&A, especially when combined with the influences from the bankers, lawyers
and other assorted advisers who can earn big fees from clients engaged in
mergers. Most CEOs get to where they are because they want to be the biggest
and the best, and many top executives get a big bonus for merger deals, no
matter what happens to the share price later.

V. E. S @ T. Y. B. M. S 28
Mergers and Acquisitions

On the other side of the coin, mergers can be driven by generalized fear.
Globalization, or the arrival of new technological developments, or a fast-changing
economic landscape that makes the outlook uncertain are all factors that can
create a strong incentive for defensive mergers. Sometimes the management
team feels they have no choice and must acquire a rival before being acquired.
The idea is that only big players will survive a more competitive world.

The Obstacles of making it Work


Coping with a merger can make top managers spread their time too thinly,
neglecting their core business, spelling doom. Too often, potential difficulties
seem trivial to managers caught up in the thrill of the big deal.

The chances for success are further hampered if the corporate cultures of the
companies are very different. When a company is acquired, the decision is
typically based on product or market synergies, but cultural differences are often
ignored. It's a mistake to assume that people issues are easily overcome.

For example

Employees at a target company might be accustomed to easy access to top


management, flexible work schedules or even a relaxed dress code. These
aspects of a working environment may not seem significant, but if new
management removes them, the result can be resentment and shrinking
productivity.

V. E. S @ T. Y. B. M. S 29
Mergers and Acquisitions

More insight into the failure of mergers is found in the highly acclaimed study from
the global consultancy McKinsey. The study concludes that companies often
focus too intently on cutting costs following mergers, while revenues and,
ultimately, profits suffer. Merging companies can focus on integration and cost
cutting so much that they neglect day-to-day business, thereby prompting nervous
customers to flee. This loss of revenue momentum is one reason so many
mergers fail to create value for shareholders.

Remember

Not all mergers fail. Size and global reach can be advantageous, and strong
managers can often squeeze greater efficiency out of badly run rivals. But the
promises made by dealmakers demand the careful scrutiny of investors.
The success of mergers depends on how realistic the dealmakers are and how
well they can integrate two companies together while maintaining day-to-day
operations.

Life after a merger or an acquisition

V. E. S @ T. Y. B. M. S 30
Mergers and Acquisitions

A recent Forrester report predicts a major shakeout in the offshore IT industry and
recommends that even large players align with each other to prepare for a
maturing market. They predict consolidation, not just at the small company level,
but among companies of all sizes.
We have recently witnessed the acquisition of Mphasis by EDS, one of the more
significant deals in the offshore space. In an industry that is seeing consolidation
at various levels, it is relevant to examine both the motives behind this trend and,
more important, look at what it takes to create a successfully merged entity.

Chapte
r CASE- STUDY
5

V. E. S @ T. Y. B. M. S 31
Mergers and Acquisitions

1. GlaxoSmithKline Pharmaceuticals Limited, India:


(Merger Success)

Glaxo India Limited and SmithKline Beecham Pharmaceuticals (India) Limited


have legally merged to form GlaxoSmithKline Pharmaceuticals Limited in India
(GSK). It may be recalled here that the global merger of the two companies came
into effect in December 2000.

Commenting on the prospects of GSK in India, Vice Chairman and Managing


Director, GlaxoSmithKline Pharmaceuticals Limited, India, Mr. V Thyagarajan
said,
“The two companies that have merged to become GlaxoSmithKline in Indi a have
a great heritage – a fact that gets reflected in their products
with strong brand equity.”

He added, “The two companies have a long history of


commitment to India and enjoy a very good reputation with
doctors, patients, regulatory authorities and trade bodies. At
GSK it would be our endeavor to leverage these strengths to
further consolidate our market leadership.”

GlaxoSmithKline, India

V. E. S @ T. Y. B. M. S 32
Mergers and Acquisitions

The merger in India brings together two strong companies to create a


formidable presence in the domestic market with a market share of about 7
per cent.

With this merger, GlaxoSmithKline has increased its reach significantly in India.
With a field force of over 2,000 employees and more than 5,000 stockiest, the
company’s products are available across the country. The enhanced basket of
products of GlaxoSmithKline, India will help serve patients better by
strengthening the hands of doctors by offering superior treatment and
healthcare solutions.

GlaxoSmithKline, Worldwide

GlaxoSmithKline PLC is the world’s leading research-based pharmaceutical and


healthcare company. With an R&D budget of over ₤2.3 billion (Rs.16, 130
crores), GlaxoSmithKline has a powerful research and development capability,
encompassing the application of genetics, genomics, combinatorial chemistry and
other leading edge technologies.

A truly global organization with a wide geographic spread, GlaxoSmithKline has its
corporate headquarters in the West London, UK. The company has over 100,000
employees and supplies its products to 140 markets around the world. It has one
of the largest sales and marketing operations in the global pharmaceutical
industry.

About merger
Glaxo Wellcome Plc and Smith-kline Beecham Plc announced a £114bn "merger
of equals" between the two companies on January 17. The merger comes almost

V. E. S @ T. Y. B. M. S 33
Mergers and Acquisitions

two years since a previous attempt to bring them together broke down after
disagreements between senior managers.

The merger will create the world's largest pharmaceutical company with annual
sales of over £15bn and a research and development budget of £2.4bn.

CEO of SmithKline said, “The time is right and the market is right for what we are
doing.” As definitely he was correct because drug market was having boom period
at that time, since the boom period is still there.

The merger was too successful that the company was formed with a 7.3 percent
share of the global pharmaceuticals market even Other major pharmaceutical
companies had market shares around 4 to 4.5 per cent and even a
merged Pfizer Warner-Lambert would only reach 6.7 per cent.

7.3 %
Glaxo
SmithKline
6.7 %
Pfizer Warner -
Lambert

The company has base in UK, since there they have more than 80 % of
shareholders, while it has operational base in united states, the world largest
pharmaceutical market.

V. E. S @ T. Y. B. M. S 34
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The company has 5 % of sale in UK compare to 50 % in US.

Dr Jean-Pierre Garnier (chief operating officer, Smithkline Beecham, and chief


executive designate, GSK) said:

"This is a merger of strong with strong, in contrast to some other mergers in this
industry."

Competitive advantage for the newly merged company are:

1. Enhanced R&D productivity "Money and scale are important, but you also
need quality." The two companies have 13 compounds and 10 vaccines
currently in phase III development. Both companies were leaders in genomics
and bioinformatics.

2. Superior marketing power Over 40,000 employees in sales and marketing,


including 8,000 representatives in the US, making the company the marketing
partner of choice.

3. Superior consumer marketing skills, these will be much more important


than ever before. The market was being changed by direct-to-consumer

V. E. S @ T. Y. B. M. S 35
Mergers and Acquisitions

advertising and e-marketing via the Internet. Many of the company's products
would be switched to over-the-counter status in the future.

4. Operational excellence Efficiency savings of over £750m would be


achieved over three years, on top of savings of £570m already achieved.
Savings of £250m would be made by streamlining research and development.
This money would be reinvested.

5. A talented management team Both sides had previous experience of


integrating companies after mergers.

2. Standard Chartered Grindlay’s (Acquisition Success)

It has been a hectic year at London-based Standard Chartered Bank, going by its
acquisition spree across the Asia-Pacific region. At the helm of affairs, globally, is

V. E. S @ T. Y. B. M. S 36
Mergers and Acquisitions

Rana Talwar, group CEO. The quintessential general, he knew what he was up
against when he propounded his 'emerging stronger' strategy of growth
through consolidation of emerging markets for the turn of the Millennium loads of
scepticism.

The central issue: Stan Chart’s August 2000 acquisition of ANZ Grindlay’s Bank,
for $1.3 billion.

Everyone knows that acquisition is the easy part, merging operations is not. And
recent history has shown that banking mergers and acquisitions, in particular, are
not as simple to execute as unifying balance sheets. Can StandardChartered
proposed merger with ANZ Grindlays be any different?

The '1' refers to the new entity, which will be India's No 1 foreign bank once the
integration is completed. This should take around 18 months; till then, ANZ
Grindlays will exist separately as Standard Chartered Grindlays (SCG).

The '2' and '3' are Citibank and Hong Kong and Shanghai Banking Corp (HSBC),
India's second and third largest foreign banks, respectively.

That makes the new entity the world's biggest 'emerging markets' bank. By way of
strengths, it will have treasury operations that will probably go unchallenged as
the country's most sophisticated. Best of all, it will be a dynamic bank. Thanks to
pre-merger initiatives taken by both banks, it could per- haps boast of the
country's fastest growing retail-banking business.

StandardChartered is rated highly on other parameters too. It is currently


targeting global cost-savings of $108 million, having reported a profit-before-tax of
$650 million in the first half of 2000, up 31 per cent from the same period last

V. E. S @ T. Y. B. M. S 37
Mergers and Acquisitions

year. Net revenue increased 6 per cent to $2 billion for the same period.
Consumer banking, a typically low-profit business which accounted for less than
40 per cent of its global operating profits till four years ago, now brings in 55 per
cent of profits. So the company's global report card looks fairly
good.

StandardChartered knows it should not let its energy dissipate. It has been
growing at a claimed annual rate of 25 per cent in the last two years, well over the
industry average of 10 per cent.

Growth rate

25 % 10 %

Standard chartered Industry average

But maintaining this pace won't prove easy, with Citibank and HSBC just
waiting to snip at it. The ANZ Grindlays acquisition had happened just before that,
though the process started in early 1999, at Stan Chart’s headquarters in London.
At first, it was just talk of a strategic tie-up with ANZ Grindlays, which had the
same colonial British antecedents.

But this plan was abandoned when it became evident that all decision-
making would vacillate between Melbourne and London, where the two are
headquartered. By December, ANZ had expressed a willingness to sell out, and
StanChart initiated the due-diligence proceedings. It wasn't until March that a few
senior Indian bank executives were let into the secret.

V. E. S @ T. Y. B. M. S 38
Mergers and Acquisitions

Now, it's time to get going. A new vehicle, navigators in place, engines revving
and map charted, the road ahead is challenging and full of promise. To steer clear
of trouble is the only caution advised by industry analysts, as the two banks
integrate their businesses. Skeptics don't see how StanChart can really be greater
than the sums of its part.

The aggression, though, is not as raw as it sounds. Behind it all is a


strategy that everyone at StanChart seems to be in synchrony with. And behind
that strategy is Talwar, very much the originator of the oft-repeated phrase uttered
by every executive - "getting the right footprint". The other key words that tend to
find their way into every discussion are 'focus' and 'growth'.

StanChart India's net non-performing loans, as a percentage of net total


advances, are reported at just 2 per cent for 1999-2000. In terms of capital
adequacy too, the banks are doing fine. StanChart has a capital base of 9.5 per
cent of its risk-weighted assets, while SCG has 10.9 per cent. So, with or without
a safety net provided by the global group, the Indian operations are on firm
ground.

3. Deutsche – Dresdner Bank (Merger Failure)

The merger that was announced on march 7, 2000 between Deutsche Bank and
Dresdner Bank, Germany’s largest and the third largest bank respectively was
considered as Germany’s response to increasingly tough competition markets.

The merger was to create the most powerful banking group in the world with the
balance sheet total of nearly 2.5 trillion marks and a stock market value around

V. E. S @ T. Y. B. M. S 39
Mergers and Acquisitions

150 billion marks. This would put the merged bank for ahead of the second largest
banking group, U.S. based citigroup, with a balance sheet total amounting to 1.2
trillion marks and also in front of the planned Japanese book mergers of
Sumitomo and Sukura Bank with 1.7 trillion marks as the balance sheet total.

The new banking group intended to spin off its retail banking which was not
making much profit in both the banks and costly, extensive network of bank
branches associated with it.

The merged bank was to retain the name Deutsche Bank but adopted the
Dresdner Bank’s green corporate color in its logo. The future core business lines
of the new merged Bank included investment Banking, asset management, where
the new banking group was hoped to outside the traditionally dominant Swiss
Bank, Security and loan banking and finally financially corporate clients ranging
from major industrial corporation to the mid-scale companies.

With this kind of merger, the new bank would have reached the no.1
position of the US and create new dimensions of aggressiveness in the
international mergers. But barely 2 months after announcing their
agreement to form the largest bank in the world, negotiations for a
merger between Deutsche and Dresdner Bank failed on April 5, 2000.

What happened?

The union of the two previous competitors should be carried out "by agreement”,
areas that overlapped should not be shut down or broken up but merged and
integrated. Although they intended a reduction of 16,000 jobs, this was to proceed
by "socially acceptable" means. This was insisted upon by both the union
representatives on the supervisory board as well.

V. E. S @ T. Y. B. M. S 40
Mergers and Acquisitions

From the outset, the international investors rejected this concept of a socially
acceptable merger. After a short initial rise, the share values of the two institutions
slumped by almost 30 percent.
Banking analysts, on whose assessments large investors rely, stated that this type
of merger would "set free too little synergy". 30 %

One banking analyst explained that in order to obtain the "large reduction of
costs necessary", the Dresdner Bank would have had to go down. The reduction
of 16,000 jobs announced could only have been the start.

Only the shares of the insurance company Allianz AG increased, rising over 20
percent on the first day after news of the agreement to merge. The Allianz had
contrived the merger plans and was regarded as the actual winner. It
owns a 21.7 percent share in the Dresdner Bank and has wanted to
dispose of this for some time in order to concentrate on its own
business.

20 %

The Allianz is also interested in the retail banking business, which has become
unattractive to the banks, in order to utilise these structures to sell their insurance.
In the merger plan, it was intended that the Allianz would take a majority holding in
the new Bank 24, which would retain the majority of the two banks' smaller
customers. A third point concerned asset management. In return for its share of
the Dresdner Bank, the Allianz was to receive DWS, the asset management arm
of the Deutsche Bank, Germany's market leader with investments of 175 billion
marks.

V. E. S @ T. Y. B. M. S 41
Mergers and Acquisitions

Shareholders of the two banks did not look kindly on the fact that the Allianz was
to receive the golden egg without requiring any effort of its own. The more
negotiations over the merger—which at first had only been roughly discussed in a
small circle—turned to the details, the more open the contradictions and
differences became.

On the one hand, the pressure from the workforce increased. There were several
demonstrations by bank staff as it became increasingly clear that it was mainly
Dresdner Bank employees from the branches and central administration who were
on the blacklist.

The boards of directors also lost control concerning the distribution of highly paid
jobs in middle management. Many started to look around for new employers
offering safer prospects. The dependency of their salary levels on the banks'
share value (now sinking) also played a role.

There was a nation-wide outcry by customers after a member of the Dresdner


board announced that the merged bank was only interested in customers with
over 200,000 marks. Those with less would be transferred to the new Bank 24.
Many customers consequently moved their accounts over to the competition.
The main point at issue became the fate of the bank's investment arm, DKB
(Dresdner Kleinwort Benson), which the executive committee of the Dresdner
Bank did not want to relinquish under any circumstances.

Apart from asset management, investment banking- i.e. the trade with securities
and the consultancy business concerning mergers, acquisitions and floatations—
forms part of the most profitable business of the financial markets, with high profits
arising from the stock market boom and the rapidly increasing wave of mergers.

V. E. S @ T. Y. B. M. S 42
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Over 50 percent of bank profits are made within this area. Breuer wanted to
position the new bank at the highest place internationally in this sector.
In the preliminary negotiations it had been agreed that DKB would be integrated
into the new major bank. But from the outset these considerations encountered
resistance in the leading echelons of Deutsche Asset Management, the Deutsche
Bank's investment arm, also situated in London.

Deutsche Asset Management had only just integrated London's Morgan Grenfell
and the American Bankers Trust, aggressively headhunting whole teams of
investment bankers with top salaries. Meanwhile, this division alone now
contributed over 60 percent of Deutsche Bank's profits, which in the past year
amounted to about 2.6 billion euro. In this area, Deutsche Bank was among the
top 10 in the world.

The top people at Deutsche Asset Management were not ready to undertake a
new process of integration with DKB. The investment business is driven by expert
teams, which concentrate on certain industries or countries. Only in this way is it
possible to grow or even survive in this hotly contested market, which serves
internationally mobile investors. International comparisons are constantly drawn in
this market, so that only those succeed who score above the average, the so-
called benchmark.
Moreover, the administration and controlling departments would have almost
completely overlapped with the structures of Deutsche Bank, so that almost
nobody from DKB could have been taken over into Deutsche Asset Management,
which had already developed to be a global player, without losing profits. Among
the leading staff, nobody was prepared for a new round of haggling for positions
with the people from DKB. There would only have been jobs for some of the
expert teams.

V. E. S @ T. Y. B. M. S 43
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"Either Dresdner Kleinwort Benson is completely sold off, or at the most a


few hundreds of its 7,500 workforce will be taken over. Another version is
out of the question. We will not let our business be ruined," were
widespread opinions.

The Deutsche Bank's London investment bankers were not prepared to


compromise and used the weight of the share they contributed to the profits to
pressure Breuer. After the merger was announced, they immediately dispatched a
message via the Financial Times that either the DKB was smashed up or sold off.
Walter from the Dresdner Bank was not prepared for this, since DKB was
considered his "pearl". At a press conference on March 9, Breuer had to publicly
assure the distrustful Walter that statements about the sale of DKB were "absolute
nonsense" and that this company was a "jewel".

However, Breuer did not succeed in getting the investment bankers onto his side.
Their division head Edson Mitchell, one of the most successful investment
bankers with an annual salary of over 10 million marks, continued to exert
enormous pressure on Breuer via Joseph Ackermann, the division's chief
executive. Finally, Breuer capitulated to the pressure of his subordinates.

At the last joint session of the two boards of directors on April 5, he placed himself
completely on the side of Ackermann, which led to the withdrawal of the Dresdner
Bank from the merger negotiations. Made to look foolish by his own staff, the
otherwise independent and self-assured Breuer stepped forward with trembling
voice to publicly explain the failure of the merger.

Conclusion

V. E. S @ T. Y. B. M. S 44
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The Financial Times hit the nail on the head concerning the failed merger when it
remarked that Breuer got a bloody nose in the attempt to combine American
behaviour with German culture. The conclusion is that those who wish to become
"global players" on the international financial markets must adhere to their rules.

It is not possible to force "German culture"—i.e., the traditions of mutually


acceptable decisions and social equilibrium, which characterised Germany after
the Second World War—onto global capitalism. Global competition leaves no
more room for deviations from the profit yardstick.

If some Dresdner Bank staff popped the champagne corks on hearing news that
the merger had failed (because they believed to have avoided losing their jobs),
they are deluding themselves. The failure of this fusion does not mean an end to
the wave of mergers, but only that in future they will be carried out more ruthlessly
and more brutally.

The pressure of the international financial markets continues to intensify and a


whole wave of hostile take-over will follow. The entire German banking system will
be turned upside-down and a previously unknown degree of aggressiveness will
feature in the merger and take-over of banks.

A member of the Deutsche Bank board of directors said afterwards that following
the experiences of the past weeks he would never again agree to a "merger of
equals". And a Deutsche Bank investment banker put forward the view that "such
a fusion can only be hard and brutal".

Following the failure, rumours immediately began to circulate that different


international banks wanted to take over Dresdner Bank, such as Citibank, Chase
Manhattan or the Dutch ABN Amro. Despite its recent record profits, announced

V. E. S @ T. Y. B. M. S 45
Mergers and Acquisitions

almost at the same time as the merger failure, the Dresdner Bank remains a
candidate for take-over.

International analysts assess its yield is too weak, and say that it has no clear
strategy and is set up badly.

Deutsche Bank supervisory board said, "The game of roulette continues. But
nobody knows where the ball will stay.... The wave of mergers in banking
continues apace."

An expert commented, "Too many finance houses in Germany are sharing too
little market.... Anyway, we are only at the start. And after the private banks, the
savings banks will soon follow. Also the credit cooperatives face a wave of
mergers."

4. TATA – TETLEY
(Controversial Issue over Success And Failure)

The Tata group was infusing a fresh 30 million pounds into Tata tea that had been
used to buy an 85.7% stake in the UK-based Tetley last year.

V. E. S @ T. Y. B. M. S 46
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Tata Tea’s much hyped acquisition of Tetley, one of the world’s biggest tea
brands, isn’t proceeding according to the plan. 15 months ago, the Kolkata based
Rs 913 crores Tata Tea’s buyout of the privately held The Tetley Group for Rs
1843 crores had stunned corporate watchers and investment bankers alike. It was
a coup! An Indian company had used a leveraged buyout to snag one of the
Britain’s biggest ever brands. It was by far, the biggest ever leveraged buyout by
an Indian company.

Tata Tea didn’t pay cash upfront. Instead, it invested 70 million pounds as equity
capital to set up Tata Tea. It borrowed 235 million to buy the Tetley stake. The
plan was that Tetley’s cash flows would be insulated from the debt burden.

When Tata Tea took the big gamble to buy Tetley, its intent was very clear. The
company had established a firm foothold in the domestic market and had a
controlling position in growing tea. Going global looked like the obvious thing to
do. With Tetley, the second largest brand after Lipton in its bag, Tata Tea looked
ready to set the Thames on fire.

Right from the start, Tetley was never a easy buy. In 1996, Allied Domecq, the
liquor and retail conglomerate had put Tetley on the block. Even then Tata Tea,
nestle, Unilever and Sara lee had put in bids, all under 200 million pounds.

Allied wanted to cash on the table. Tata Tea didn’t have enough of its own. The
others bids also did not go through. Eventually, Tetley group together with a
consortium Of financial investors like Prudential and Schroders, bought the entire
equity stake for 190 million pounds in all cash deal. Two years later, Tetley went
for an IPO, hoping to raise 350-400 million pounds. But the IPO never took place.
Soon afterwards, the investors began looking for exit options. Tetley was once
again on the block.

V. E. S @ T. Y. B. M. S 47
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It was until Feb 2000 that the due diligence was completed. By this time, the
Tata's were ready with their offer. They would pay 271 million pounds to buy the
entire Tetley equity and the funds would go towards first paying off Tetley’s 106
million debt. The balance would go the owners.

The offer price did not include rights to Tetley coffee business, which was sold to
the US-based Rowland Coffee Roasters and Mother Parker’s Tea and Coffee in
Feb 2000 for 55 million pounds.

For Tetley new owners, too, the problems were only just beginning. The deal
hinged on Tetley’s ability, over and above covering its own debts, to service the
loans Tata Tea had taken for the acquisition. That’s where reality bites.

Consider the facts. When Tata Tea acquired Tetley through Tata Tea, it sunk in
70 million pounds as equity and borrowed 235 million pounds from a consortium
to finance the deal. Implicit in the LBO was that Tetley’s future cash flows would
fund the SPV’s interest and principal repayment requirements. At an average
interest rate of 11.5%, Tetley needed to generate 22 million pounds in interest
alone on a loan o 190 million pounds. Add to this the interest on the high cost
vendor loan notes of 30 million pounds—it worked out to be 4.5 million and the
charges on the working capital portion, amounting to 2 million pounds per annum.
All this works out to about 28 million pounds in interest alone per year.

At the same time, it also has to pay back the principal of 110 million pounds over a
nice period through half yearly installments. This works out to 12 million pounds
per year. If you were to assume that depreciation and restructuring charges were
pegged at last year’s levels, the bill tots up to 48 million pounds a year. In FY
1999, the Tetley’s cash flows were 29 million pounds.

V. E. S @ T. Y. B. M. S 48
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Some of the problems could have been obviated if Tetley’s cash flows had
increased by 40 % in FY 2001 over the previous year. That way, the company
would have covered both its own commitments as well as of the Tata's. But the
situation worsened. Major UK retailers clamped down on grocery prices last year.
That substantially reduced Tetley’s pricing flexibility.

Besides, the UK tea markets have been under pressure for some time now.
According to the UK government’s national food survey, there has been a
substantial fall in the consumption of mainstream teas- tea-bag black teas drunk
with milk and sugar. Also the tea drinking population in UK has come down from
77.1% to 68.3% in 1999. On the other hand, natural juices and coffee have
consistently increased their market share.

Tea drinking population 1999

77.1 %

68.3 %

So, when it was confronted by Tetley’s sliding performance, what options did Tata
Tea have? On its own, it could not do much. The last year has been one of the
worst years for the Indian tea industry and Tata Tea has also been affected. The
drop in tea prices and a proliferation of smaller brands in the organized segment
have taken toll on Tata Tea’s performance.

V. E. S @ T. Y. B. M. S 49
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In FY 2001, Tata Tea’s net profit fell by 19.59% from Rs 124.63 crores to Rs
100.21 crores. Income from operations declined by 8.72%.

124.63 cr.

100.21 cr.

19.59 %

But letting Tetley sink under the weight of the interest burden would have been an
unthinkable option, given the prestige attached to the deal.

Thus from the above case we infer that Tata had to shell out a lot of money to
cover all the debts of Tetley which was found not worthy enough by the general
public.

But Tata still calls it to be a success whereas in reality it


is a failure.

5. Chrysler and Daimler-Benz


The takeover of Chrysler Corporation by Daimler-Benz in a $38 billion stock deal
is a powerful demonstration of the globalization of the world economy. The largest
industrial company in Germany, and in Europe as a whole, is acquiring one of the

V. E. S @ T. Y. B. M. S 50
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biggest American corporations, creating a transnational giant with a work force of


410,000 and an annual output of over $130 billion.

The combination is the largest industrial merger in history and the biggest-ever
acquisition of an American company by an overseas concern. The merged
company, to be called DaimlerChrysler, will be the fifth largest auto maker in
terms of the number of vehicles produced, ranking after GM, Ford, Toyota and
Volkswagen.

In terms of the value of the vehicles, DaimlerChrysler, will rank third. If


DaimlerChrysler were a country, it would rank 37th in the world in terms of Gross
Domestic Product, just behind Austria, but well ahead of six other members of the
European Union--Greece, Portugal, Norway, Denmark, Finland and Ireland.
Unlike auto industry mergers, which frequently involved the gobbling up of small
or failing companies by more powerful rivals, the Daimler-Chrysler deal involves
two highly profitable companies, with combined net earnings of $5.7 billion in
1997.
Daimler-Benz has rebounded from losses in the early 1990s to post record profits,
while Chrysler makes a larger profit per vehicle than any other auto manufacturer.

The driving force behind the combination is the necessity to create ever-larger
globally-based enterprises which can compete in all the major markets of the
world, and especially in the three main centers of world capitalism:
 North America
 Europe
 Asia

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Before the merger, Chrysler and Daimler-Benz were essentially regional


producers--Chrysler with the third-largest market share in North America, Daimler-
Benz controlling the luxury market in Europe.

Chrysler was compelled to sell its European and Latin American operations during
its financial crises of the 1980s and early 1990s. It sold only 17,713 vehicles
outside North America, compared to nearly a quarter of a million vehicles in its
home market. Daimler-Benz opened its first plant outside Europe and it began
assembling a sport-utility version of the Mercedes-Benz at a plant in Tuscaloosa,
Alabama.

In the wake of the merger, financial commentators and auto industry analysts
predicted that the remaining regional auto manufacturers would be compelled to
combine into global-scale firms in order to compete with GM, Ford, Toyota, Honda
and the new DaimlerChrysler. They cannot remain nationally limited
manufacturers, selling to a national market. As one analyst told the Times of
London, "The country flags have come down and the flag of profitability has gone
up."

What happened?

Daimler-Benz has cut 40,000 jobs since 1995, when Schrempp became CEO, and
officials at the German company said that one of the most attractive features of

V. E. S @ T. Y. B. M. S 52
Chrysler job reduction graph
Mergers and Acquisitions

Chrysler was its "expertise" at cutting jobs and slashing costs. Chrysler has
shrunk from 160,000 to 79,000 workers since the early 1980s.

1,60,000

79,000

Whatever the short-run impact of the merger, a principal goal of every such
combination is to consolidate operations and achieve economies of scale, which
inevitably involves the destruction of jobs.

By 2002, Chrysler figured, there would be 80 more assembly plants


than the market demanded, an overcapacity equal to six Chrysler Corporations
but this gigantic surplus of productive capacity is "excess" only from the
standpoint of capitalism, because it means that far more cars can be produced
than can be sold at a profit.

This productive capacity cannot be put to use, within the framework of the profit
system, to meet the needs of people all over the world for cheap and convenient
transportation. Instead, it looms over the industry, insuring that the next downturn

V. E. S @ T. Y. B. M. S 53
Mergers and Acquisitions

in the business cycle will have dire consequences for autoworkers and the
working class worldwide.

The Daimler-Benz takeover of Chrysler is part of an enormous outflow of capital


from Germany, as giant corporations like Hoechst, Bertelsmann's, Siemens and
Volkswagen buy foreign companies or invest in new plant and equipment outside
the country.

The goal of this investment is to achieve higher profits by obtaining labor at


cheaper rates than these corporations currently pay within Germany itself.
Volkswagen has purchased Skoda, the biggest Czech manufacturer, while
Siemens acquired the electrical equipment business of Westinghouse and now
has more than half its corporate work force outside Germany.

Daimler-Benz has bought or built plants throughout the former Soviet bloc. Its
most recent excursion in search of low-paid labor is to Alabama, where labor
costs were less than half the $29-an-hour which the company pays in Stuttgart
and other German cities.

The takeover of Chrysler is likely to followed by a further shift in production by the


merged company from Germany to North America, slashing the jobs of German
workers while, in the short term, maintaining or even temporarily increasing the
number of jobs in the US and Canada.

This explains the enthusiastic support for the merger from the union bureaucrats
of the United Auto Workers and the Canadian Auto Workers. They count on
increasing their dues income at the expense of their counterparts in the German

V. E. S @ T. Y. B. M. S 54
Mergers and Acquisitions

IG Metall. Moreover, the UAW and CAW bureaucrats hope that Daimler-Benz
officials will extend to America the corporatist policies carried out in Germany
under the rubric of "co-determination." Under the German system, union officials
are given half the seats on the corporation's board and play a more substantial
role in the administration of the business than their American counterparts.

Co-determination, however, has nothing to do with genuine industrial democracy,


workers' control or socialism. It is only a more developed form of the labor-
management collaboration, which the UAW has embraced over the past two
decades, sacrificing the jobs and living standards of autoworkers in return for well-
paid perks and posts for union bureaucrats.

The Chrysler-Daimler merger demonstrates the urgent necessity for the working
class to develop an international strategy to fight the attacks of globally organized
capital. It demonstrates the backwardness and stupidity of those, from union
bureaucrats to middle class ex-radicals, who seek to limit the working class to
struggles within a national framework, or waged by purely trade union methods. It
underscores the incapacity of the old nationally based labor organizations to
provide an effective means of struggle for the working class.

Conclusion

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The Chrysler-Daimler merger is another powerful proof that only the perspective
of socialist internationalism offers a way forward for working people. The cultures
were very different. It was a much more limited undertaking.

This merger has a lot of promise, but the difference between the promise and the
reality is yet to be seen. And if there's one major difference here, it is this--not
simply cultural approach in terms of a German and American culture--but a very
different approach to building cars.

And the way in which that works out, the way the labor issues work out, it will be
essential to seeing whether or not they will be popping champagne 10 years down
the road.

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Conclusion

One size doesn’t fit all. Many companies find that the best route forward is
expanding ownership boundaries through mergers and acquisitions. For others,
separating the public ownership of a subsidiary or business segment offers more
advantages.

At least in theory, mergers create synergies and economies of scale, expanding


operations and cutting costs. Investors can take comfort in the idea that a merger
will deliver enhanced market power.

By contrast, de-merged companies often enjoy improved operating performance


thanks to redesigned management incentives. Additional capital can fund growth
organically or through acquisition. Meanwhile, investors benefit from the improved
information flow from de-merged companies.

M&A comes in all shapes and sizes, and investors need to consider the complex
issues involved in M&A. The most beneficial form of equity structure involves a
complete analysis of the costs and benefits associated with the deals.

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Bibliography

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