Mergers & Acquisitions in Indian

Business
S.Rajagopalan
Mergers &Acquisitions (M&A) -Current
Status

Major source of corporate growth in India in

recent years.
Nearly 40% of direct investments have
been through M&A’s.
1998-1999 290 deals (Rs16,070 crores)
1999-2000 750 deals (Rs36,963 crores).

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 Major Users of the Acquisition
Mechanisms Were Indian
Companies, Accounting for 85% of
the Total Takeovers.
- “Impact of Takeover Code Regulations on
Corporate Sector in India”

SEBI working paper

 M&A Trends
1011 Companies have been taken over
since SEBI regulations came into existence
in 1997.
Basic purpose of all these takeovers include
Consolidation,Change in control of
management and substantial acquisition.
No of open offers grew from 2 in 1994 to 77
in 2000-01.
Majority of M&A deals have been on cash
basis.
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 Is There a Clear Rational in M&A?
 When groups like Asea and Brown Boveri merge ,
others like Alcatel or GEC or Siemens can’t
standby and say “ most mergers in the past haven't
worked , so why bother?
They have to respond.
And the easiest thing to do is to go for M&A
themselves !!!

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Mergers and Acquisitions happened
in electrical equipment, in
chemicals,in pharmaceuticals,in
steel,in automobiles,in computers, in
cement, in foods,in fashion – No
business is immune from this process
!!!
 M&A’s in Indian Business Scene

Prior to SEBI code in 1994, it was seen as

process to build industrial empires a
conglomerate of diverse businesses into one
group.
- Murugappa group, Hindujas, RPG group.
Today M&A have attempted to restructure
firms and achieve economies of scale to deal
with an increasingly competitive
environment.
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 M&A Trends in Industries

No of takeovers were more in finance and IT

industries but the amounts involved in these
industries were small.
On the basis of amounts spent the electronic
and electrical industry occupied the no1
position, followed by metals and cement
&construction.

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 Restructuring of Corporate India -
M&A as a tool

After a tentative response of the early years

of economic reforms Corporate India is now
into more decisive initiatives in Corporate
restructuring.
Consolidation at the Group and Industry
levels are through M&A s.
Transformation of ownership profile and
competitive structure of the Indian industry.

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 Mergers and Acquisitions

Acquisition Stands for Taking Over the

Management of the Firm.

Mergers Stand for Amalgamation of the

Firm With the Existing Parent Firm or
Joining of Hands Between Friendly
Companies

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Mergers and Acquisitions (M & A)

 Acquisition of companies can be “friendly” or

“hostile”.
 Merger involves friendly pooling of interest
undertaken by managements of companies of
roughly comparable sizes.
 In Indian context the term merger is used to
denote consolidation of separate legal
entities, not necessarily of similar sizes , into
one through a statutory process of
amalgamation.

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 Mergers and Acquisitions (M & A)

 Since the motives of merger and acquisition are

the same and both involve the transfer of
ownership and control of assets and the right to
manage corporate cash flows and the
difference between them is only a matter of
technical detail , the term mergers and
acquisitions are often used interchangeably.

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 M&A’s - Outcomes

Firm level positive results from M&A deals ,

however are yet to be established.
Shareholder values:
- positive impact (30%cases)
- no discernable impact (39% cases)
- destroyed shareholder value (31%of cases)
- Recent KPMG study

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 M&A’s - Shareholder Value
Consequences
 Even a hostile acquisition involving a
high premium could add to shareholder
value if there is opportunity for
synergistic and efficiency gains
e.G Aditya Birla group’s acquisition of
Indian rayons

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 Acquisitions - impact on
shareholder value

 Since most acquisitions involve

payment of huge premium to target
company’s shareholders over the pre-
bid market price of its shares , the
acquirer must be in a position to
extract considerable post-acquisitions
efficiency or synergistic gains to justify
the premium in present value terms
which alone would enhance the
shareholder value
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 Strategic Motives for Merger &
Acquisition

Pursuit of efficiency gains in mature or

highly competitive product markets
synergy- basic principle of 2+2 = 5
e.g 1. Formation of Novartis with merger of
Ciba and Sandoz
2. Glaxo holding plc’s acquisition of
Burroughs

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 Strategic Initiatives in M&A’s

Diversification: can be used as a tool to hedge

risk.Several companies /groups are pursuing the
acquisitions strategy to diversify their
product/market portfolio and enter many new
sectors getting opened up for the private sector.
 Torrent group which identified power as one of its
future business , acquired Ahmedabad electric
and Surat electric company in order to diversify
its risk in its existing line of Pharma business .
Essar group’s entry into the telecom sector
through 100% acquisition of sterling computers,
a telecom licensee.
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 Strategic Initiatives in M&A’s

Early entry and market penetration:

An early mover strategy can reduce the lead
time in establishing the facilities and distribution
channels.So acquiring companies with good
manufacturing facilities and distribution networks
or few brand of companies gives the advantage
of a rapid market share.
 Coca cola acquiring Parle brands;
Godrej Hicare in mosquito coils business with
Good knight, Jet, Banish brands.

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 Strategic Initiatives in M&A’s

Early entry and market penetration:

ICICI which has positioned itself as a wholesale
lender to financial supermarket acquire ITC
classic finance and Anagram finance in a bid to
penetrate retail market.These acquisitions have
helped ICICI to obtain a quick access to a well
dispersed distribution net work.

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 Strategic Initiatives in M&A’s
 Economies of scale:
When the industry reaches the maturity stage or
is in recession, there is a consolidation in the
industry to cut costs. In this case big players
acquire fragmented players or some big firms
merging together.
 India cements acquired Rasi cements and
Visaka cements;
Nicholas labs purchased Roche, Rhone
Phulone,Sumitra Pharma to consolidate its
position in Pharma sector.

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 Strategic Initiatives in M&A’s

Tax advantages:
some acquisitions are made with sole intention
to get a tax shield. This is more so in case of
acquiring sick companies where the acquirer
gets the tax shield in the form of unclaimed
depreciation and carry forward losses.
 Tax advantage was one of the reasons which
prompted the take over of Allwyn by Voltas.

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 Strategic Initiatives in M&A’s

Market entry:
A number of MNC’s has used the acquisition
route to enter/strengthen their presence in India,
to cut down beurocratic delays and long time
involved in setting manufacturing, distribution
facilities as well as in market development in a
Greenfield venture route.
 HJ Heinz’s Rs 2100 million acquisition of Glaxo
India’s family food business.
Wirlpool’s buying into Kelvinator India ltd.
Acquisition of SRF finance by GE capital.

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 Mergers and Amalgamations

Consolidation at the business/group levels:

There have been a large no of mergers /
amalgamations initiated with a view to effect
consolidation at the business and /or group
levels , to derive critical mass and size in
operations, to cut costs and achieve focus
and to eliminate intra group competition.

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 Mergers and Amalgamations

Illustrations :
ICICI bank with other ICICI companies
Escorts tractors with escorts ltd.
TVS whirlpool with whirlpool of India.
Mafatlal fine spinning with Mafatlal
industries ltd.

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 Financial Mergers - Illustrations

 The BPL merger (2500 crores) between BPL

Sanyo technologies, BPL refrigeration, BPL
Sanyo utilities and BPL ltd. Gave post merger
debt equity ratio of 1.14 could borrow as much
as 200 crores for funding any one of its
operations, while in pre merger scene two of
the companies were cut off from financing
opportunities.

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 Amalgamations - Illustrations

 Unilever merger of HLL and BBLIL

(turnover- Rs 3367crores and profits of
Rs 239 crores and reserves of Rs 670
crores) helps the new company to
finance Rs 300 crores the new thrust
area of foods,which would have been
difficult earlier for BBLIL on its own.

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 Global Mergers

In case of global mergers of MNC’s, their

Indian affiliates merge by default.Though the
merger is a part of global strategy rather
than local market compulsions, it has
repercussions in local markets.
E.G merger of ANZ Grindlays and standard
chartered led to large scale business and
manpower restructuring in local operations.

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 M&A’s Success – Valuation Issue

Acquirer’s perspective
Sellers perspective
Lender’s perspective
Investor’s perspective

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 Acquirers Perspective

Increase the synergy

- managerial synergy
- exchange inefficiency thru vertical integration
- operating synergy
- financial synergy
Decrease the premium

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 Sellers Perspective

Good price.
Better business relationship.
Better management and employee care.

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 Lender’s Perspective

Creating shareholder value.

Better corporate governance.
Better portfolio.

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 Investor’s Perspective

Addition of wealth.
Potential growth of merged entity / predator
firm.

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 Valuations - Illustrations

Coca cola offered the price to Parle soft

drinks equal to its turnover for the brands.
Colgate offered 2.5 times the turnover of oral
hygiene business of Ciba for complete
acquisition of business including people and
distribution network.

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 Valuations - Illustrations
 Whirlpool corporation has paid 330 crores for its
51% stake in Kelvinator India which is the average
share price for previous six months.
 Khaitans of Williamson Magor paid a price of Rs
290 crore to union carbide for Eveready battery
business ( 150 crores for future earnings, 100 cr
for brand value and 40 crores for giving the
management stake in the company ).

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 M&A – Implementation Issues

Faulty strategy and economic forces

are often cited for dismal performance
in post acquisition phase.
People issues often figure prominently
when we analyse the failures in M&A
areas.

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 M&A – People Issues

Unfocused leadership.
Leaving stakeholders in the dark.
Failure to develop a plan for retaining key
employees.
Losing external focus.
Ignoring – or avoiding – the cultural issues.

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Mergers & Acquisitions

Takeover process

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 SEBI Takeover code Nov’1994

 Acquirer holding more than 5% shares in a company must

disclose his shareholding to the company and all stock
exchanges where the share is listed.
 In negotiating takeovers , acquirer cannot acquire more
than 10% share in a company unless he makes a public
offer for another 20%shares at acquisition price or average
price of previous six months.
 In open market takeovers , acquirer cannot acquire more
than 10% shares unless he makes a public offer at a price
not lower than the highest open market price paid by him or
average price of previous six months.

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 The M&A Game :Attacking moves

 Tender offer : open offer to all shareholders to buy

their stakes. Usually made after bidder has already
picked up an equity stake.
 Street sweep : Accumulating large amounts of
stock in a company before making an offer. Target
is left with no choice but to give in.
 Bear hug: Pressurizing management of target
company by threatening to make an open offer.
The board capitulates straightaway.

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 The M&A Game :Attacking moves

 Marketing sweep: Soften resistance by luring away

suppliers and infrastructure support. Target
company is forced to give in.
 Strategic alliance: Disarm opposition by
partnership rather than a buy out. Assert control
within and take over target.
 Brand Power : Bring powerful brands in to an
alliance. Displace partner’s brands, and buy out
the weakened company.

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 The M&A Game : Defensive moves

 Poison Pill: Low price preferential issue to

shareholders to enlarge capital base. Makes
hostile takeover too expensive.
 Poison Put: bonds that encourage shareholders to
cash in at higher prices. Resultant cash drainage
makes target unattractive.
 White Knight: An appeal to company to buy all ,or
part of company. Buyer promises not to dislodge
the management.

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 The M&A Game : Defensive moves

 White Square: A sell out shares to a company

which is not interested in takeover. former owners
retain control.
 Green mail: Repurchase of the shares cornered by
the raider. The profits made the raider are, after all,
akin to blackmail.
 Pac-man defense: A counter bid for the raider’s
company. Forced to defend himself, the predator
must call off his raid.

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 It’s smart to shop for companies…

 They offer extra production capacities.

 The bidder can enter new markets.
 The buyer can widen his product range and
increase market share.
 In a highly capital intensive industries it’s cheaper
to buy a company than to set up a new project.

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 Successful Takeovers

 Asea Brown Boveri T/O Flakt India Ltd

 Ajay Piramal group T/O Roche products
 BBLI T/O Kissans , Dollops (cadbury) , Kwality
Icecreams
 EID Parry T/O Falcon ceramics
 Ceat T/O Fibreglass Pilkington
 Pepsi Foods T/o Duke& Sons

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 Takeover Bids

 Ceat Tyres , Apollo tyres B/F Premier Tyres

 Siemens B/F Punjab communications
 Electolux B/F Eureka Forbes
 Alcatel B/F Priyaraj electronics
 Henkel B/F SPIC Fine chemicals
 Gillette B/F Melhotras
 Bombay Dyeing , Torrent B/F Ahmedabad Electric

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 Takeover – Strategic Options

 Look for candidates with net operating losses, but with

strong turnaround prospects i.e companies with losses in a
reasonably good industry or loss making companies with
good brands. (TOMCO with Hamam,501,OK, Moti fitted the
bill perfectly with HLL)
 Seek cash rich companies which are not exploiting their
potential to the fullest or which have undervalued assets
(real estate). e.g Ceat had 20 crores
cash reserves at the time of take over by RPG

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 Takeover – Strategic Options

 Prospect for undercapitalised companies where

the promoter’s stake is low , to mount a hostile
attack. - Swaraj Paul’s
ill fated attempts on DCM and Escorts are more
appropriate today.
 Watch out for family run business where the
promoter has no successor and wants to retire. e.g
takeover of Perfect machine tools by Sandesra
group

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 Takeover – Strategic Options

 Scan for Synergy - like

Tata tea for entering coffee business took over
Consolidated coffee which has coffee plantations
and Asians coffee which processes the beans into
coffee

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 Takeover –How best to play this game ?

 How to identify the target

 Mounting a primary market raid
 Mounting a secondary market raid

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 How to identify a target company ?
 Look for companies where promoter’s stake is less than
20%. Shortlist those where you have more than one group
each having less than 10%.
 Search for state owned companies , where its holdings are
less than 26% and rest is widely held.
 Look for companies with high growth potential; large assets
; low capital bases with fully depreciated assets ; or with
large tracts of real estates or securities ;
 Match the ownership criteria with performance criteria to
home on the ideal target.

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 How to Zero on the right take over target ?

Knock out criteria Companies in universe

Size Too large equity i.e >350

crores
Size Too small – revenues <50
crores
Preferred approach Not over 10 % of revenues
in unattractive segments
Overall performance In default –for Sales tax, IT,
Bankruptcy.
Availability Likely to be hostile in a
takeover attempt
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 Mounting a primary market raid at IPO stage

 Select a company that is promoted by a technocrat or an

entrepreneur. In most cases they will have modest cash
reserves.
 Make an estimate of the degree of oversubscription by
consulting primary market broker.
 On this basis , apply for an amount of shares large enough
to ensure that allotment matches or exceeds the promoter’s
stake.
 Purchase more shares after the scrip is listed to corner
sizable holding.

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 Mounting a secondary market raid

 Do not buy shares from the market. Make offers

thru brokers to financial institutions and mutual
funds.
 Track down foreign institutional investors, NRI’s
and foreign shareholders. Offer them a 10-15%
premium on the market price for their holdings.

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 Mounting a secondary market raid

 After cornering shares , make offers , under the

guise of a portfolio manager, to other India
shareholders.
 Ensure that adverse news about target’s prospects
gets publicity.
 Initiate stock market purchases on all stock
exchanges where the scrip is listed.

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