Merger and Acquisition

MERGER AND ACQUISITION

I. Introduction:

Until recently, mergers and acquisitions (M&A) activity was an insignificant part of capital flows to developing countries. It was not until the recent surge in capital flows, and the dominance of foreign direct investment (FDI) in the 1990s, that economists started to take a closer look at M&A. However, such a “look” has often been restricted to a simple reporting of the share of M&A activity in total FDI and its growth over time. However, the growing share of FDI in total capital flows directed to developing countries, coupled with the increase in the share of M&A in FDI flows, should have incited economists to study more carefully the behavior as well as the determinants of such activity. Surprisingly enough, the existing literature focusing on the aggregate M&A activity in developing countries is almost nonexistent. There are several reasons for this, most of which are related to the availability of data and the way M&A are reported and organized.

This study aims at filling the gap in the literature by empirically examining the determinants of aggregate M&A activity to developing countries in the 1990s using the SDC Platinum Worldwide Mergers and Acquisitions Database. In addition, by drawing on the literature pertaining to the determinants of FDI, this study offers a more comprehensive and accurate account of the forces shaping the two components of FDI: greenfield investment and M&A. A number of studies have examined the determinants of FDI in the 1990s. However, a number of questions have remained unanswered. This study should be regarded as another step toward unraveling some of these questions.More specifically, dissecting FDI and looking into one of its ingredients provides valuable insights on how internal and external factors affect M&A, greenfield investment, and ultimately FDI.

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II. Background:

The literature on M&A has roots in both financial economics and macroeconomics. If the focus is on the individual firm, then one has to rely on capital budgeting, information asymmetry, and other areas of corporate finance to explain a firm’s decision to acquire another. On the other hand, if the focus is to explain the “aggregate” behavior of M&A activity, then one has to concentrate on broad macroeconomic and financial indicators used to explain aggregate variables, such as investment. Nevertheless, it is possible that only micro data on M&A produces meaningful empirical results, whereas aggregate M&A activity is just a random variable with no distinct behavioral relation.

Shughart and Tollison (1984), using annual U.S data and univariate analysis, found that the aggregate merger level is a white-noise process. However, they emphasized that such a result should not be viewed as evidence against the existence of external determinants of aggregate M&A. Indeed, almost all empirical studies that have examined aggregate M&A activity have found evidence that variables such as the cost of capital, stock prices, and measures of aggregate activity significantly influence M&A activity.

The literature on the empirical determinants of M&A directed to developing countries is almost nonexistent. The only study that focuses on M&A directed to emerging markets is the study by Aguiar and Gopinath (2005). Aguiar and Gopinath develop a corporate finance-based theoretical model with testable predictions. Using firm-level data for five East Asian countries over the period 1981-2001, the authors verify that the liquidity crunch, faced by domestic firms as a result of the East Asia crisis, increased M&A activity. Other studies such as World Bank Global Development Finance that deal with capital flows, report M&A directed to developing countries as an aggregate percentage of FDI without analyzing the factors shaping its movement.

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III. Objectives:

To discuss the conceptual framework of mergers and acquisitions.

To focus on demarcations between various terms like mergers, acquisitions, takeovers, consolidations, reverse mergers, management buyouts etc.

Various Indian laws and statutes having a bearing on merger process have also been outlined and trends traced.

To examine the financial and strategic motives driving the mergers and acquisitions activity.

To deal with the changed forces affecting mergers, consequences of changed forces, merger movements, regulations of tender offers, global acts governing mergers and acquisitions.

To study the merger performance during the 1980’s and the factors affecting mergers and acquisitions and the cross border mergers.

To understand and anticipate the nature and types of post-closing challenges faced by both buyer and seller after the deal is completed.

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IV. Literature Review:

i. Introduction :

The decision to invest in a new asset would mean internal expansion for the firm. The new asset would generate returns raising the value of the corporation. Mergers offer an additional means of expansion, which is external, i.e. the productive operation is not within the corporation itself. For firms with limited investment opportunities, mergers can provide new areas for expansion. In addition to this benefit, the combination of two or more firms can offer several other advantages to each of the corporations such as operating economies, risk reduction and tax advantage.

Today mergers, acquisitions and other types of strategic alliances are on the agenda of most industrial groups intending to have an edge over competitors. Stress is now being made on the larger and bigger conglomerates to avail the economies of scale and diversification. Different companies in India are expanding by merger etc. In fact, there has emerged a phenomenon called merger wave.

The terms merger, amalgamations, take-over and acquisitions are often used interchangeably to refer to a situation where two or more firms come together and combine into one to avail the benefits of such combinations and re-structuring in the form of merger etc., have been attempted to face the challenge of increasing competition and to achieve synergy in business operations

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ii. Corporate Restructuring :

Restructuring of business is an integral part of the new economic paradigm. As controls and restrictions give way to competition and free trade, restructuring and reorganization become essential. Restructuring usually involves major organizational change such as shift in corporate strategies to meet increased competition or changed market conditions.

This activity can take place internally in the form of new investments in plant and machinery, research and development at product and process levels. It can also take place externally through mergers and acquisitions (M&A) by which a firm may acquire another firm or by which joint venture with other firms.

This restructuring process has been mergers, acquisitions, takeovers, collaborations, consolidation, diversification etc. Domestic firms have taken steps to consolidate their position to face increasing competitive pressures and MNC’s have taken this opportunity to enter Indian corporate sector. The different forms of corporate restructuring are summarized as follows:

Corporate Restructuring

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Expansion

Amalgamation Absorption Tender offer Asset

acquisition Joint Venture

Contraction

Demerger + Spin off

+ Equity carve out

+ Split off

+ Split up

Corporate Control

Going Private Equity Buyback Anti Takeover Leveraged

Buyouts

Expansion

Amalgamation:

This involves fusion of one or more companies where the companies lose their individual identity and a new company comes into existence to take over the business of companies being liquidated. The merger of Brooke Bond India Ltd. And Lipton India Ltd. Resulted in formation of a new company Brooke Bond Lipton India Ltd.

Absorption:

This involves fusion of a small company with a large company where the smaller company ceases to exist after the merger. The merger of Tata Oil Mills Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL) is an example of absorption.

Tender offer:

This involves making a public offer for acquiring the shares of a target company with a view to acquire management control in that company. Takeover by Tata Tea of consolidated coffee Ltd. (CCL) is an example of tender offer where more than 50% of shareholders of CCL sold their holding to Tata Tea at the offered price which was more than the investment price.

Asset acquisition:

This involves buying assets of another company. The assets may be tangible assets like manufacturing units or intangible like brands. Hindustan lever limited buying brands of Lakme is an example of asset acquisition.

Joint venture:

This involves two companies coming whose ownership is changed. DCM group and DAEWOO MOTORS entered into a joint venture to form DAEWOO Ltd. to manufacturing automobiles in India.

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There are generally the following types of DEMERGER:

Spinoff:

This type of demerger involves division of company into wholly owned subsidiary of parent company by distribution of all its shares of subsidiary company on Pro-rata basis. By this way, both the companies i.e. holding as well as subsidiary company exist and carry on business. For example Kotak, Mahindra finance Ltd. formed a subsidiary called Kotak Mahindra Capital Corporation, by spinning off its investment banking division.

Split ups:

This type of demerger involves the division of parent company into two or more separate companies where parent company ceases to exist after the demerger.

Equity carve out:

This is similar to spin offs, except that same part of shareholding of this subsidiary company is offered to public through a public issue and the parent company continues to enjoy control over the subsidiary company by holding controlling interest in it.

Divestitures:

These are sale of segment of a company for cash or for securities to an outside party. Divestitures, involve some kind of contraction. It is based on the principle if “anergy” which says 5-3=3!

Asset sale:

This involves sale of tangible or intangible assets of a company to generate cash. A partial sell off, also called slump sale, involves the sale of a business unit or plant of one firm to another. It is the mirror image of a purchase of a business unit or plant. From the seller’s perspective, it is a form of contraction: from the buyer’s point of view it is a form of expansion. For example, When Coromandal Fertilizers Limited sold its cement division to India Cement limited, the size of Coromandal Fertilizers contracted whereas the size of India Cements Limited expanded.

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Corporate controls

Going private:

This involves converting a listed company into a private company by buying back all the outstanding shares from the markets. Several companies like Castrol India and Phillips India have done this in recent years. A well known example from the U.S. is that of Levi Strauss & company.

Equity buyback:

This involves the company buying its own shares back from the market. This results in reduction in the equity capital of the company. This strengthens the promoter’s position by increasing his stake in the equity of the company.

Anti takeover defenses:

With a high value of hostile takeover activity in recent years, takeover defenses both premature and reactive have been restored to by the companies.

Leveraged buyouts:

This involves raising of capital from the market or institutions by the management to acquire a company on the strength of its assets.

Merger is a marriage between two companies of roughly same size. It is thus a combination of two or more companies in which one company survives in its own name and the other ceases to exist as a legal entity. The survivor company acquires assets and liabilities of merged companies. Generally the company which survives is the buyers which retiring its identity and seller company is extinguished.

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Amalgamation

Amalgamation is an arrangement or reconstruction. It is a legal process by which two or more companies are to be absorbed or blended with another. As a result, the amalgamating company loses its existence and its shareholders become shareholders of new company or the amalgamated company. In case of amalgamation a new company may came into existence or an old company may survive while amalgamating company may lose its existence.

According to Halsbury’s law of England amalgamation is the blending of two or more existing companies into one undertaking, the shareholder of each blending companies becoming substantially the shareholders of company which will carry on blended undertaking. There may be amalgamation by transfer of one or more undertaking to a new company or transfer of one or more undertaking to an existing company. Amalgamation signifies the transfers of all are some part of assets and liabilities of one or more than one existing company or two or more companies to a new company.

The Accounting Standard, AS-14, issued by the Institute of Chartered Accountants of India has defined the term amalgamation by classifying (i) Amalgamation in the nature of merger, and (ii) Amalgamation in the nature of purchase.

1. Amalgamation in the nature of merger:

As per AS-14, an amalgamation is called in the nature of merger if it satisfies all the following condition:

All the assets and liabilities of the transferor company should become, after amalgamation; the assets and liabilities of the other company.

Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its

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subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity share in the transferee company, except that cash may be paid in respect of any fractional shares.

The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

No adjustment is intended to be made in the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

Amalgamation in the nature of merger is an organic unification of two or more entities or undertaking or fusion of one with another. It is defined as an amalgamation which satisfies the above conditions.

2. Amalgamation in the nature of purchase:

Amalgamation in the nature of purchase is where one company’s assets and liabilities are taken over by another and lump sum is paid by the latter to the former. It is defined as the one which does not satisfy any one or more of the conditions satisfied above.

As per Income Tax Act 1961, merger is defined as amalgamation under sec.2 (1B) with the following three conditions to be satisfied.

1. All the properties of amalgamating company(s) should vest with the amalgamated company after amalgamation.

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2. All the liabilities of the amalgamating company(s) should vest with the amalgamated company after amalgamation.

3. Shareholders holding not less than 75% in value or voting power in amalgamating company(s) should become shareholders of amalgamated companies after amalgamation.

Amalgamation does not mean acquisition of a company by purchasing its property and resulting in its winding up. According to Income tax Act, exchange of shares with 90%of shareholders of amalgamating company is required.

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iii. Definition:

Acquisition :-

Acquisition refers to the acquiring of ownership right in the property and asset without any combination of companies. Thus in acquisition two or more companies may remain independent, separate legal entity, but there may be change in control of companies. Acquisition results when one company purchase the controlling interest in the share capital of another existing company in any of the following ways:

a) controlling interest in the other company. By entering into an agreement with a person or persons holding.

b) By subscribing new shares being issued by the other company.c) By purchasing shares of the other company at a stock exchange, andd) By making an offer to buy the shares of other company, to the existing shareholders of that company.

Merger :-

Merger refers to a situation when two or more existing firms combine together and form a new entity. Either a new company may be incorporated for this purpose or one existing company (generally a bigger one) survives and another existing company (which is smaller) is merged into it. Laws in India use the term amalgamation for merger.

Merger through absorption Merger through consolidation

Absorption

An absorption is a combination of two or more companies into an existing company. All companies except one lose their identity in a merger through absorption. An example of this type of merger is the absorption of Tata Fertilisers Ltd.(TFL) TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired

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company ( a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

Consolidation

A consolidation is a combination of two or more companies into a new company .In this type of merger, all companies are legally dissolved and a new entity is created. In a consolidation, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. An example of consolidation is the merger of Hindustan Computers Ltd., Hindustan Instruments Ltd., and Indian Reprographics Ltd., to an entirely new company called HCL Ltd.

Takeover :-

Acquisition can be undertaken through merger or takeover route. Takeover is a general term used to define acquisitions only and both terms are used interchangeably. A Takeover may be defined as series of transacting whereby a person, individual, group of individuals or a company acquires control over the assets of a company, either directly by becoming owner of those assets or indirectly by obtaining control of management of the company.

Takeover is acquisition, by one company of controlling interest of the other, usually by buying all or majority of shares. Takeover may be of different types depending upon the purpose of acquiring a company.

1. A takeover may be straight takeover which is accomplished by the management of the taking over company by acquiring shares of another company with the intention of operating taken over as an independent legal entity.

2. The second type of takeover is where ownership of company is captured to merge both companies into one and operate as single legal entity.

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3. A third type of takeover is takeover of a sick company for its revival. This is accomplished by an order of Board for Industrial and financial Reconstruction (BIFR) under the provision of Sick Industrial companies Act, 1985. In India, Board for Industrial and Financial reconstruction (BIFR) has also been active for arranging mergers of financially sick companies with other companies under the package of rehabilitation. These merger schemes are framed in consultation with the lead bank, the target firm and the acquiring firm. These mergers are motivated and the lead bank takes the initiated and decides terms and conditions of merger. The recent takeover of Modi Cements Ltd. By Gujarat Ambuja Cement Ltd. was an arranged takeover after the financial reconstruction Modi Cement Ltd.

4. The fourth kind is the bail-out takeover, which is substantial acquisition of shares in a financial weak company not being a sick industrial company in pursuance to a scheme of rehabilitation approved by public financial institution which is responsible for ensuring compliance with provision of substantial acquisition of shares and takeover Regulations, 1997 issued by SEBI which regulate the bail out takeover.

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iv. History of Mergers and Acquisitions:

Tracing back to history, merger and acquisitions have evolved in five stages andeach of these are discussed here. As seen from past experience mergers andacquisitions are triggered by economic factors. The macroeconomic environment,which includes the growth in GDP, interest rates and monetary policies play a keyrole in designing the process of mergers or acquisitions between companies ororganizations.

First Wave Mergers

The first wave mergers commenced from 1897 to 1904. During this phase mergeroccurred between companies, which enjoyed monopoly over their lines of production like railroads, electricity etc. the first wave mergers that occurred during the aforesaid time period were mostly horizontal mergers that took place between heavy manufacturing industries.

End Of 1st Wave Merger

Majority of the mergers that were conceived during the 1st phase ended in failuresince they could not achieve the desired efficiency. The failure was fuelled bythe slowdown of the economy in 1903 followed by the stock market crash of 1904.The legal framework was not supportive either. The Supreme Court passed themandate that the anticompetitive mergers could be halted using the Sherman Act.

Second Wave Mergers

The second wave mergers that took place from 1916 to 1929 focused on the mergers between oligopolies, rather than monopolies as in the previous phase. The economic boom that followed the post world war I gave rise to these mergers. Technological developments like the development of railroads and transportation by motor vehicles provided the necessary infrastructure for such mergers or acquisitions to take place. The government policy encouraged firms to work in unison. This policy was implemented in the 1920s.

The 2nd wave mergers that took place were mainly horizontal or conglomerate innature. Te industries that went for merger during this phase were producers ofprimary metals, food products, petroleum products, transportation equipments andchemicals. The investments banks played a pivotal role in facilitating the mergersand acquisitions.

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End Of 2nd Wave Mergers

The 2nd wave mergers ended with the stock market crash in 1929 and the greatdepression. The tax relief that was provided inspired mergers in the 1940s.

Third Wave Mergers

The mergers that took place during this period (1965-69) were mainly conglomerate mergers. Mergers were inspired by high stock prices, interest rates and strict enforcement of antitrust laws. The bidder firms in the 3rd wave merger were smaller than the Target Firm. Mergers were financed from equities; the investment banks no longer played an important role.

End Of The 3rd Wave Merger

The 3rd wave merger ended with the plan of the Attorney General to splitconglomerates in 1968. It was also due to the poor performance of theconglomerates. Some mergers in the 1970s have set precedence. The most prominent ones were the INCO-ESB merger; United Technologies and OTIS Elevator Merger are the merger between Colt Industries and Garlock Industries.

Fourth Wave Merger

The 4th wave merger that started from 1981 and ended by 1989 was characterized by acquisition targets that wren much larger in size as compared to the 3rd wavemergers. Mergers took place between the oil and gas industries, pharmaceuticalindustries, banking and airline industries. Foreign takeovers became common withmost of them being hostile takeovers. The 4th Wave mergers ended with antitakeover laws, Financial Institutions Reform and the Gulf War.

Fifth Wave Merger

The 5th Wave Merger (1992-2000) was inspired by globalization, stock market boom and deregulation. The 5th Wave Merger took place mainly in the banking and telecommunications industries. They were mostly equity financed rather than debt financed. The mergers were driven long term rather than short term profit motives. The 5th Wave Merger ended with the burst in the stock market bubble.

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Hence we may conclude that the evolution of mergers and acquisitions has been long drawn. Many economic factors have contributed its development. There are several other factors that have impeded their growth. As long as economic units ofproduction exist mergers and acquisitions would continue for an ever-expandingeconomy.

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v. Mergers and Acquisitions Trends:

Trend essentially refers to the observed long-term movement in a time series data.Trend estimates are seasonally adjusted through an averaging process. Merger andacquisition trends provide an idea about the market movements.Merger and acquisition trends are seen to affect an economy's product market,money market, and labor market. Global markets are also considerably influenced by the merger and acquisition trends.

Global Merger and Acquisition Trends for 2006 and 2007

2007 and 2006 were marked by a spate of mergers and acquisitions all over theglobe in both developing and developed countries. The general trend was that,there was a decline in the number of public sector undertakings along with a hikein the number of private sector enterprises. This was due to the fact that manypublic sector organizations worldwide were either acquired by large private sectorenterprises or merged with them.

The explanation to this merger and acquisition trend as observed in 2006 and 2007lay in the robust growth recorded by the Private Equity Funds. The other factorspropelling this trend were the emphasis on short term earnings growth and thestrict regulatory structure of public sector enterprises.

This merger and acquisition trend towards increased privatization of public sectorholdings was observed in Europe, Brazil, North America, and China. Europe in that period hosted a strong investment market, which catered to the public to private sector transition of companies.

For China mergers and acquisitions from public to private business enterprises gotgovernment approval in 2006.

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vi. Benefits of Mergers and Acquisitions:

Merger refers to the process of combination of two companies, whereby a newcompany is formed. An acquisition refers to the process whereby a company simply purchases another company. In this case there is no new company being formed.

Benefits of mergers and acquisitions are quite a handful.

Mergers and acquisitions generally succeed in generating cost efficiency throughthe implementation of economies of scale. It may also lead to tax gains and caneven lead to a revenue enhancement through market share gain.

The principal benefits from mergers and acquisitions can be listed as increasedvalue generation, increase in cost efficiency and increase in market share.Mergers and acquisitions often lead to an increased value generation for thecompany. It is expected that the shareholder value of a firm after mergers oracquisitions would be greater than the sum of the shareholder values of the parentcompanies.

An increase in cost efficiency is effected through the procedure of mergers andacquisitions. This is because mergers and acquisitions lead to economies of scale.This in turn promotes cost efficiency. As the parent firms amalgamate to form abigger new firm the scale of operations of the new firm increases. As outputproduction rises there are chances that the cost per unit of production will comedown.

An increase in market share is one of the plausible benefits of mergers andacquisitions. In case a financially strong company acquires a relativelydistressed one, the resultant organization can experience a substantial increasein market share. The new firm is usually more cost-efficient and competitive ascompared to its financially weak parent organization.

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vii. Types of Mergers:

There are four types of merger are as follows:

a. Horizontal Merger :

Horizontal mergers are those mergers where the companies manufacturing similar kinds of commodities or running similar type of businesses merge with each other. The principal objective behind this type of mergers is to achieve economies of scale in the production procedure through carrying off duplication of installations, services and functions, widening the line of products, decrease in working capital and fixed assets investment, getting rid of competition, minimizing the advertising expenses, enhancing the market capability and to get more dominance on the market. Nevertheless, the horizontal mergers do not have the capacity to ensure the market about the product and steady or uninterrupted raw material supply. Horizontal mergers can sometimes result in monopoly and absorption of economic power in the hands of a small number of commercial entities. According to strategic management and microeconomics, the expression horizontal merger delineates a form of proprietorship and control. It is a plan, which is utilized by a corporation or commercial enterprise for marketing a form of commodity or service in a large number of markets. In the context of marketing, horizontal merger is more prevalent in comparison to horizontal merger in the context of production or manufacturing.

Horizontal Integration

Sometimes, horizontal merger is also called as horizontal integration. It istotally opposite in nature to vertical merger or vertical integration.

Horizontal Monopoly

A monopoly formed by horizontal merger is known as a horizontal monopoly.Normally, a monopoly is formed by both vertical and horizontal mergers. Horizontal merger is that condition where a company is involved in taking over or acquiring another company in similar form of trade. In this way, a competitor is done away with and a wider market and higher economies of scale are accomplished.

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In the process of horizontal merger, the downstream purchasers and upstreamsuppliers are also controlled and as a result of this, production expenses can bedecreased.

Horizontal Expansion

An expression which is intimately connected to horizontal merger is horizontalexpansion. This refers to the expansion or growth of a company in a sector that ispresently functioning. The aim behind a horizontal expansion is to grow its marketshare for a specific commodity or service.

Examples of Horizontal Mergers

Following are the important examples of horizontal mergers:

# The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond.

# The merger of Bank of Mathura with ICICI (Industrial Credit and InvestmentCorporation of India) Bank.

# The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply Company.

# The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar Cement.

Advantages of Horizontal Merger :

Horizontal merger provides the following advantages to the companies which aremerged:

1) Economies of scope

The notion of economies of scope resembles that of economies of scale. Economies of scale principally denote effectiveness related to alterations in the supply side, for example, growing or reducing production scale of an individual form of

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commodity. On the other hand, economies of scope denote effectiveness principally related to alterations in the demand side, for example growing or reducing the range of marketing and supply of various forms of products.

Economies of scope are one of the principal causes for marketing plans like product lining, product bundling, as well as family branding.

2) Economies of scale

Economies of scale refer to the cost benefits received by a company as the resultof a horizontal merger. The merged company is able to have bigger productionvolume in comparison to the companies operating separately. Therefore, the merged company can derive the benefits of economies of scale. The maximum use of plant facilities can be done by the merged company, which will lead to a decrease in the average expenses of the production.

The important benefits of economies of scale are the following:

# Synergy

# Growth or expansion

# Risk diversification

# Diminution in tax liability

# Greater market capability and lesser competition

# Financial synergy (Improved creditworthiness, enhancement of borrowing power, decrease in the cost of capital, growth of value per share and price earningratio, capital raising, smaller flotation expenses)

# Motivation for the managers

For attaining economies of scale, there are two methods and they are thefollowing:

# Increased fixed cost and static marginal cost

# No or small fixed cost and decreasing marginal cost

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One example of economies of scale is that if a company increases its productiontwofold, then the entire expense of inputs goes up less than twofold.

3) Dominant existence in a particular market.

b. Vertical Merger :

Vertical mergers refer to a situation where a product manufacturer merges with thesupplier of inputs or raw materials. In can also be a merger between a productmanufacturer and the product's distributor.

Vertical mergers may violate the competitive spirit of markets. It can be used toblock competitors from accessing the raw material source or the distributionchannel. Hence, it is also known as "vertical foreclosure". It may create a sortof bottleneck problem.

As per research, vertical integration can affect the pricing incentive of adownstream producer. It may also affect a competitors incentive for selectinginput suppliers. Research studies single out several factors, which point to thefact that vertical integration facilitates collusion. Vertical mergers may promotecollusion through an outlets effect. A corollary of vertical integration is thatintegrated business structures are able to perform better in crisis phases.

There are multiple reasons, which promote the vertical integration by firms. Someof them are discussed below.

# The prime reason being the reduction of uncertainty regarding the availabilityof quality inputs as also the uncertainty regarding the demand for its products.

# Firms may also enter vertical mergers to avail the plus points of economies ofintegration.

# Vertical merger may make the firms cost-efficient by streamlining itsdistribution and production costs. It is also meant for the reduction oftransactions costs like marketing expenses and sales taxes. It ensures that afirm's resources are used optimally.

.

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c. Conglomerate Mergers :

As per definition, a conglomerate merger is a type of merger whereby the twocompanies that merge with each other are involved in different sorts ofbusinesses. The importance of the conglomerate mergers lies in the fact that theyhelp the merging companies to be better than before.

Types of Conglomerate Mergers

There are two main types of conglomerate mergers the pure conglomerate mergerand the mixed conglomerate merger. The pure conglomerate merger is one where the merging companies are doing businesses that are totally unrelated to each other.

The mixed conglomerate mergers are ones where the companies that are merging with each other are doing so with the main purpose of gaining access to a wider market and client base or for expanding the range of products and services that are being provided by them.

There are also some other subdivisions of conglomerate mergers like the financialconglomerates, the concentric companies, and the managerial conglomerates.

Reasons of Conglomerate Mergers

There are several reasons as to why a company may go for a conglomerate merger.Among the more common reasons are adding to the share of the market that is owned by the company and indulging in cross selling. The companies also look to add to their overall synergy and productivity by adopting the method of conglomerate mergers.

Benefits of Conglomerate Mergers :

There are several advantages of the conglomerate mergers. One of the majorbenefits is that conglomerate mergers assist the companies to diversify. As aresult of conglomerate mergers the merging companies can also bring down thelevels of their exposure to risks.

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Implications of Conglomerate Mergers

There are several implications of conglomerate mergers. It has often been seenthat companies are going for conglomerate mergers in order to increase theirsizes. However, this also, at times, has adverse effects on the functioning of thenew company. It has normally been observed that these companies are not able toperform like they used to before the merger took place.

This was evident in the 1960s when the conglomerate mergers were the generaltrend. The term conglomerate mergers also implies that the two companies that aremerging do not even have the same customer base as they are in totally differentbusinesses.

It has normally been seen that a lot of companies that go for conglomerate mergersare able to manage a wide variety of activities in a particular market. Forexample, these companies can carry out research activities and applied engineeringprocesses. They are also able to add to their production as well as strengthen themarketing area that ensures better profitability.

It has been seen from case studies that conglomerate mergers do not affect thestructures of the industries. However, there might be significant impact if theacquiring company happens to be a leading company of its market that is notconcentrated and has a large number of entry barriers.

d. Co- generic Merger:

In these, mergers the acquirer and target companies are related through basic technologies, production processes or markets. The acquired company represents an extension of product line, market participants or technologies of the acquiring companies. These mergers represent an outward movement by the acquiring company from its current set of business to adjoining business. The acquiring company derives benefits by exploitation of strategic resources and from entry into a related market having higher return than it enjoyed earlier. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources.

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Western and Mansinghka classified co-generic mergers into product extension and market extension types. When a new product line allied to or complimentary to an existing product line is added to existing product line through merger, it defined as product extension merger, Similarly market extension merger help to add a new market either through same line of business or adding an allied field . Both these types bear some common elements of horizontal, vertical and conglomerate merger. For example, merger between Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a Product extension merger and merger between GMM Company Ltd. and Xpro Ltd. contains elements of both product extension and market extension merger.

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viii. Merger Procedure:

A merger is a complicated transaction, involving fairly complex legal considerations. While evaluating a merger proposal, one should bear in mind the following legal provisions.

Sections 391 to 394 of the Companies Act, 1956 contain the provisions for amalgamations. The procedure for amalgamation normally involves the following steps:

1. Examination of object Clauses:

The memorandum of association of both the companies should be examined to check if the power to amalgamate is available. Further, the object clause of the amalgamated company (transferee company) should permit it to carry on the business of the amalgamating company (transferor company ) .If such clauses do not exists, necessary approvals of the shareholders, boards of directors and Company Law Board are required.

2. Intimation to stock Exchanges:

The stock exchanges where the amalgamated and amalgamating companies are listed should be informed about the amalgamation proposal. From time to time, copies of all notices, resolutions, and orders should be mailed to the concerned stock exchanges.

3. Approval of the draft amalgamation proposal by the Respective Boards:

The draft amalgamation proposal should be approved by the respective boards of directors. The board of each company should pass a resolution authorizing its directors/executives to pursue the matter further.

4. Application to the National Company Law Tribunal (NCLT):

Once the draft of amalgamation proposal is approved by the respective boards, each company should make an application to the NCLT so that it can convene the meetings of shareholders and creditors for passing the amalgamation proposal.

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5. Dispatch of notice to shareholders and creditors:

In order to convene the meeting of shareholders and creditors, a notice and an explanatory statement of the meeting, as approved by the NCLT, should be dispatched by each company to its shareholders and creditors so that they get 21 days advance intimation. The notice of the meetings should also be published in two newspapers (one English and one vernacular). An affidavit confirming that the notice has been dispatched to the shareholders/creditors and that the same has been published in newspapers should be filed with the NCLT.

6. Holding of Meetings of shareholders and creditors:

A meeting of shareholders should be held by each company for passing the scheme of amalgamation. At least 75 percent (in value) of shareholders in each class, who vote either in person or by proxy, must approve the scheme of amalgamation. Likewise, in a separate meeting, the creditors of the company must approve of the amalgamation scheme.

7. Petition to the NCLT for confirmation and passing of NCLT orders:

Once the amalgamation scheme is passed by the shareholders and creditors, the companies involved in the amalgamation should present a petition to the NCLT for confirming the scheme of amalgamation. The NCLT will fix a date of hearing. A notice about the same has to be published in two newspapers. After hearing the parties the parties concerned ascertaining that the amalgamation scheme is fair and reasonable, the NCLT will pass an order sanctioning the same. However, the NCLT is empowered to modify the scheme and pass orders accordingly.

8. Filing the order with the Registrar:

Certified true copies of the NCLT order must be filed with the Registrar of Companies within the time limit specified by the NCLT.

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9. Transfer of Assets and Liabilities:

After the final orders have been passed by the NCLT, all the assets and liabilities of the amalgamating company will, with effect from the appointed date, have to be transferred to the amalgamated company.

10.Issue of shares and debentures:

The amalgamated company, after fulfilling the provisions of the law, should issue shares and debentures of the amalgamated company. The new shares and debentures so issued will then be listed on the stock exchange.

Important elements of merger procedure are:

A. Scheme of merger

The scheme of any arrangement or proposal for a merger is the heart of the process and has to be drafted with care. There is no specific form prescribed for the scheme. It is designed to suit the terms and conditions relevant to the proposal but it should generally contain the following information as per the requirements of sec. 394 of the companies Act, 1956:

1. Particulars about transferor and transferee companies

2. Appointed date of merger

3. Terms of transfer of assets and liabilities from transferor company to transferee company

4. Effective date when scheme will came into effect

5. Treatment of specified properties or rights of transferor company

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6. Terms and conditions of carrying business by transferor company between appointed date and effective date

7. Share capital of Transferor Company and Transferee Company specifying authorized, issued, subscribed and paid up capital.

8. Proposed share exchange ratio, any condition attached thereto and the fractional share certificate to be issued.

9. Issue of shares by transferee company

10.Transferor company’s staff, workmen, employees and status of provident fund, Gratuity fund, superannuation fund or any other special funds created for the purpose of employees.

11.Miscellaneous provisions covering Income Tax dues, contingent and other accounting entries requiring special treatment.

12.Commitment of transferor and Transferee Company towards making an application U/S 394 and other applicable provisions of companies Act, 1956 to their respective High court.

13.Enhancement of borrowing limits of transferee company when scheme coming into effect.

14.Transferor and transferee companies consent to make changes in the scheme as ordered by the court or other authorities under law and exercising the powers on behalf of the companies by their respective boards.

15.Description of power of delegates of Transferee Company to give effect to the scheme. Qualifications attached to the scheme which requires approval of different agencies.

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16.Effect of non receipt of approvals/sanctions etc.

B. Valuation in a merger: Determination of share exchange ratio

An important aspect of merger procedure relates to valuation of business relates to valuation of business in order to determine share exchange ratio in merger. Valuation is the means to assess the worth of a company which is subject to merger or takeover so that consideration amount can be quantified and the price of one company for other can be fixed. Valuation of both companies subject to business combination is required for fixing the consideration amount to be paid in the form of exchange of share. Such valuation helps in determining the value of shares of acquired company as well as acquiring company to safeguard the interest of shareholders of both the companies.

Broadly there are three(3) methods used for valuation of business:

1. Net Value Asset (NAV) Method

NAV is the sum total of value of asserts (fixed assets, current assets, investment on the date of Balance sheet less all debts, borrowing and liabilities including both current and likely contingent liability and preference share capital). Deductions will have to be made for arrears of preference dividend, arrears of depreciation etc. However, there may be same modifications in this method and fixed assets may be taken at current realizable value (especially investments, real estate etc.) replacement cost (plant and machinery) or scrap value (obsolete machinery). The NAV, so arrived at, is divided by fully diluted equity (after considering equity increases on account of warrant conversion etc.) to get NAV per share.

The three steps necessary for valuing share are:

1. Valuation of assets 2. Ascertainment of liabilities 3. Fixation of the value of different types of equity shares.

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All assets (value by appropriation method -

all liabilities - preference shares)

NAV =

Fully diluted equity shares

2. Yield Value Method

This method also called profit earning capacity method is based on the assessment of future maintainable earnings of the business. While the past financial performance serves as guide, it is the future maintainable profits that have to be considered. Earnings of the company for the next two years are projected (by valuation experts) and simple or weighted average of these profits is computed. These net profits are divided by appropriate capitalization rate to get true value of business. This figure divided by equity value gives value per share. While determining operating profits of the business, it must be valued on independent basis without considering benefits on account of merger. Also, past or future profits need to be adjusted for extra ordinary income or loss not likely to recur in future. While determining capitalization rate, due regard has to be given to inherent risk attribute to each business. Thus, a business with established brands and excellent track record of growth and diverse product portfolio will get a lower capitalization rate and consequently higher valuation where as a cyclical business or a business dependent on seasonal factors will get a higher capitalization rate. Profits of both companies’ should be determined after ensuring that similar policies are used in various areas like depreciation, stock valuation etc.

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3. Market Value Method

This method is applicable only in case where share of companies are listed on a recognized stock exchange. The average of high or low values and closing prices over a specified previous period is taken to be representative value per share.

Now, the determination of share exchange ratio i.e., how many shares of amalgamating company, are to be exchanged for how many shares of amalgamated company, is basically an exercise in valuation of shares of two or more of amalgamating company. The problem of valuation has been dealt with by Weinberg and Blank (1971) by giving the relevant factors to be taken into account while determining the final share exchange ratio. These relevant factors has been enumerated by Gujarat High court in Bihari Mills Ltd. and also summarized by the Apex court in the case of Hindustan Levers. Employees union vs. Hindustan Lever Ltd. (1995) as under.

1. The stock exchange prices of the shares of the companies before the commencement of negotiations or the announcement of the bid.

2. The dividends presently paid on the shares of two companies. It is often difficult to induce a shareholder to agree to a merger if it involves a reduction in his dividend income.

3. The relative growth prospects of the two companies.

4. The cover, (ratio of after tax earnings to divided paid during the year) for the present dividends of the two companies. The fact that the dividend of one company is better covered than the other is a factor which has to be compensated to same extent.

5. The relative gearing of the shares of the two companies. The gearing of an ordinary share is the ratio of borrowings to equity capital.

6. The value of net assets of the two companies.

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7. The voting strength in the company of shareholder of the two companies.

8. The past history of the prices of two companies.

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ix. Reverse Merger:

Normally, a small company merges with large company or a sick company with healthy company. However in some cases, reverse merger is done. When a healthy company merges with a sick or a small company is called reverse merger.

This may be for various reasons. Some reasons for reverse merger are:

a) The transferee company is a sick company and has carry forward losses and Transferor Company is profit making company. If Transferor Company merges with the sick transferee company, it gets advantage of setting off carry forward losses without any conditions. If sick company merges with healthy company, many restrictions are applicable for allowing set off.

b) The transferee company may be listed company. In such case, if Transferor Company merges with the listed company, it gets advantages of listed company, without following strict norms of listing of stock exchanges.

In such cases, it is provided that on date of merger, name of Transferee Company will be changed to that of Transferor Company. Thus, outside people even may not know that the transferor company with which they are dealing after merger is not the same as earlier one. One such approved in Shiva Texyarn Ltd.

Many times, reverse mergers are also accompanied by reduction in the unwieldy capital of the sick company. This capital reduction helps in unity of the accumulated losses and other assets which are not represented by the share capital of the company. Thus, a capital reduction aim rehabilitation scheme is an ideal antidote (by way of reverse merger) for sick company. For example Godrej soaps Ltd. (GSL) with pre merger turnover of 436.77 crores entered into scheme of reverse merger with loss making Gujarat Godrej innovative Chemicals Ltd. (GGICL) (with pre merger turnover of Rs. 60 crores) in 1994.The scheme involved reduction of share capital of GGICL from Rs. 10 per share to Re. 1 per share and later GSL would be merged with 1 share of GGICL to be allotted to every shareholder of GSL. The post merger company, Godrej Soaps Ltd. (with post-merger turnover of Rs. 611.12 crores) restructured its gross profit of 49.08 crores, higher turnover GSC’s pre-merger profits of Rs. 30 crores.

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The amalgamated company, GGICL reverted back to the old name of amalgamating company, Godrej Soaps Ltd. Thus, this innovative merger which was by way of forward integration in the name of GGICL was completed with the help of financial institutions like IDBI, IFCI, ICICI, UTI etc. All financial Institutions agreed to waive penal interest, liquidate damages besides finding of interest, reschedule outside loans and also lower interest rate on term loans.

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x. Laws statutes in India:

Various Laws governing merger in India are as follows:

1. Indian Companies Act, 1956

This has provisions specifically dealing with the amalgamation of a company or certain other entities with similar status. The most common form of merger involves as elaborate but time-bound procedure under sections 391 to 396 of the Act.

Powers in respect of these matters were with High Court (usually called Company Court). These powers are being transferred to National Company Law Tribunal (NCLT) by companies (second Amendment) Act, 2002.

The Compromise, arrangement and Amalgamation/reconstruction require approval of NCLT while the sale of shares to Transferee Company does not require approval of NCLT.

Sec 390 This section provides that “The expression ‘arrangement’ includes a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes, or by both these methods”

Sec 390(a) As per this section , for the purpose of sections 391 to 393,’Company’ means any company liable to be wound up under the Act.

Sec 390(b) As per this section, Arrangement can include reorganization of share capital of company by consolidation of shares of different classes or by division of shares of different classes.

Sec 390(c) As per this section, unsecured creditors who have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors. Thus, their separate meeting is not necessary.

Sec 391 This section deals with the meeting of creditors/members and NCLT’s sanction to Scheme.

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If majority in number representing at least three-fourths in value of creditors or members of that class present and voting agree to compromise or arrangement, the NCLT may sanction the scheme. NCLT will make order of sanctioning the scheme only if it is satisfied that company or any other person who has made application has disclosed all material facts relating to the company, e.g. latest financial position, auditor’s report on accounts of the company, pendency of investigation of company etc. NCLT should also be satisfied that the meting was fairly represented by members/creditors.

Sec 391(1) As per this sub-section, the company or any creditor or member of a company can make application to NCLT. If the company is already under liquidation, application will be made by liquidator. On such application, NCLT may order that a meeting of creditors or members or a class of them be called and held as per directions of NCLT.

Sec 391 (2) As per this sub-section, if NCLT sanction, it will be binding on all creditors or members of that class and also on the company, its liquidator and contributories.

Sec 391(3) As per this sub-section, Copy of NCLT order will have to be filled with Registrar of Companies.

Sec 391(4) As per this sub-section, A copy of every order of NCLT will be annexed to every copy of memorandum and articles of the company issued after receiving certified copy of the NCLT order.

Sec 391(5) In case of default in compliance with provisions of section 391(4), company as well as every officer who is in default is punishable with fine upto Rs 100 for every copy in respect of which default is made.

Sec 391(6) After an application for compromise or arrangement has been made under the section, NCLT can stay commencement of any suit or proceedings against the company till application for sanction of scheme is finally disposed of.

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Sec 391(7) As per this sub-section, Appeal against NCLT order can be made to National Company Law Appellate Tribunal (NCLAT) where appeals against original order the NCLT lies.

Sec. 392 This section contains the powers of NCLT to enforce compromise and arrangement

Sec 392 (1) As per this section, where NCLT sanctions a compromise or arrangement, it will have powers to supervise the carrying out of the scheme. It can give suitable directions or make modifications in the scheme of compromise or arrangement for its proper working.

Sec 392 (2) As per this section, if NCLT finds that the scheme cannot work, it can order winding up.

Sec 393 This section contains the rules regarding notice and conduct of meeting.

Sec.393 (1) Where a meeting of creditors or any class of creditors, or of numbers or any class of members, is called under section 391:-

a) With every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect, and in particular stating any material interests of the directors, managing directors, or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise and the effect on those interests of the compromise or arrangement if, and in so far as, it is different from the effect on the like interests of other person, and

b) In every notice calling the meeting which is given by advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.

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Sec 393 (2) As per this sub-section, if the scheme affects rights of debenture holders, statement should give details of interests of trustees of any deed for securing the issue of debentures as it is required to give as respects the companies directors.

Sec 393 (3) As per this sub-section, the copy of scheme of compromise or arrangement should be furnished to creditor/member free of cost.

Sec 393 (4) Where default is made in complying with any of the requirements of this section, the company and every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 50,000 and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company.

Provided that a person shall not be punishable under this sub-section, if he shows that the default was due to the refusal of any other person, being a director, managing director, manager or trustee for debenture holders, to supply the necessary particulars as to his material interests.

Sec 393 (5) As per this section, any director, managing director, manager or trustee of debenture holders shall give notice to the company of matters relating to himself which the company has to disclose in the statement, if he unable to do so, he is punishable with fine upto Rs.5,000.

Sec 394 This section contains the powers while sanctioning scheme of reconstruction or amalgamation.

Sec 394(1) NCLT can sanction amalgamation of a company which is being wound up with other company, only if Registrar of Companies (ROC) has made a report that affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.

Sec 394 (2) As per this sub-section, if NCLT issues such an order, NCLT can direct that the property will be vest in the transferee company and that the transfer of property will be freed from any charge.

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Sec 394 (3) As per this sub-section, Copy of NCLT order shall be filed with Registrar within 30 days. In case of default, company as well as every officer who is in default is punishable with fine upto Rs.500.

Sec 394A As per this section, if any application is made to NCLT for sanction of arrangement, compromise, reconstruction or amalgamation, notice of such application must be made to Central Government. NCLT shall take into consideration any representation made by Central Government before passing any order.

Sec 395 This section provides that reconstruction or amalgamation without following NCLT procedure is possible by takeover by sale of shares. Selling shareholders get either compensation or shares of the acquiring company. This procedure is rarely followed, as sanction of shareholders of at least 90% of value of shares is required, and not only of those attending the meeting. This procedure can be followed only when creditors are not involved in reconstruction and their interests are not affected.

Sec 395(1) As per this sub-section, the transferee company has to be give notice in prescribed manner to dissenting shareholder that it desires to acquire his shares. The transferee company is entitled and bound to acquire those shares on the same terms on which shares of approving share holders are to be transferred to the transferee company. The dissenting shareholder can make application within one month of the notice to NCLT. The NCLT can order compulsory acquisition or other order may be issued.

Sec 395(2) As per this sub-section, if the transferee company or its nominee holds 90% or more shares in the transferor company, it is entitled to and is also under obligation to acquire remaining shares. The transferee company should give notice within one month to dissenting shareholders. Their shares must be acquired within three months of such notice.

Sec395 (3) As per this section, if shareholders do not submit the transfer deeds, the transferee company will pay the amount payable to transferor company along with the transfer deed duly signed. The transferor company will then record name of the transferee company as holder of shares, even if transfer deed is not signed by dissenting shareholders.

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Sec395 (4) As per this section, The sum received by transferor company shall be kept in a separate account in trust for the dissenting shareholders.

Sec395 (4A) When the transferee company makes offer to shareholders of transferor company, the circular of offer shall be accomplished by prescribed information in form 35A. Offer should contain statement by Transferee Company for registration before it is sent to shareholders of Transferor Company.

Sec 396 This section contains the power to Central Government to order amalgamation.

Sec.396 (1) As per this sub-section, if central government is satisfied that two or more companies should amalgamate in public interest, it can order their amalgamation, by issuing notification in Official Gazette. Government can provide the constitution of the single company, with such property, powers, rights, interest, authorities and privileges and such liabilities, duties and obligations as may be specified in the order.

Sec 396(2) The order may provide for continuation by or against the transferee company of any legal proceedings pending by or against Transferor Company. The order can also contain consequential, incidental and supplemental provisions necessary to give effect to amalgamation.

Sec396 (3) As per this sub-section, every member, creditor and debenture holder of all the companies will have same interest or rights after amalgamation, to the extent possible. If the rights and interests are reduced after amalgamation, he will get compensation assessed by prescribed authority. The compensation so assessed shall be paid to the member or creditor by the company resulting from amalgamation.

Sec 396A This section deals with the preservation of books and papers of amalgamated company. Books and papers of the company which has amalgamated or whose shares are acquired by another company shall be preserved. These will not be disposed of without prior permission of Central Government. Before granting such permission, Government may appoint a person to examine the books and papers to ascertain whether they contain any evidence of commission of an offence in connection with formation or

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management of affairs of the company, or its amalgamation or acquisition of its shares.

2. Monopolies and Restrictive Trade practices Act, 1969 (MRTP 1969)

Certain Amendments in the MRTP Act were brought about in 1991. The Government has removed restrictions on the size of assets; market shares and on the requirement of prior government approvals for mergers that created entities that would violate prescribed limits. The Supreme Court, in a recent judgment, decided that “prior approval of the central government for sanctioning a scheme of amalgamation is not required in view of the deletion of the relevant provision of the MRTP Act and the MRTP Commission was justified in not passing an order restraining implementation of the scheme of amalgamation of two firms in the same field of consumer articles”.

3. Foreign Exchange Regulation Act 1973 (FERA 1973)

FERA is the primary Indian Law which regulates dealings in foreign exchange. Although there are no provisions in the Act which deal directly with transactions relating to amalgamations, certain provisions of the Act become relevant when shares in Indian companies are allotted to non- residents, where the undertaking sought to be acquired is a company which is not incorporated under any law in India. Section 29 of FERA provides that no foreign company or foreign national can acquire any share of an Indian company except with prior approval of the reserve Bank of India. The Act has been amended to facilitate transfer of shares two non residents and to allow Indian companies to set up subsidiaries and joint ventures abroad without the prior approval of the Reserve Bank of India.

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4. Income Tax Act, 1961

Income Tax Act, 1961 is vital among all tax laws which affect the merger of firms from the point view of tax savings/liabilities. However, the benefits under this act are available only if the following conditions mentioned in Section 2 (1B) of the Act are fulfilled:

a) All the amalgamating companies should be companies within the meaning of the section 2 (17) of the Income Tax Act, 1961.

b) All the properties of the amalgamating company (i.e., the target firm) should be transferred to the amalgamated company (i.e., the acquiring firm).

c) All the liabilities of the amalgamating company should become the liabilities of the amalgamated company, and

d) The shareholders of not less than 90% of the share of the amalgamating company should become the shareholders of amalgamated company.

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xi. Causes of Mergers:

An extensive appraisal of each merger scheme is done to patternise the causes of mergers. These hypothesized causes (motives) as defined in the mergers schemes and explanatory statement framed by the companies at the time of mergers can be conveniently categorized based on the type of merger. The possible causes of different type of merger schemes are as follows:

1. Horizontal merger

These involve mergers of two business companies operating and competing in the same kind of activity. They seek to consolidate operations of both companies. These are generally undertaken to:a) Achieve optimum size b) Improve profitability c) Carve out greater market shared) Reduce its administrative and overhead costs.

2. Vertical merger

These are mergers between firms in different stages of industrial production in which a buyer and seller relationship exists. Vertical merger are an integration undertaken either forward to come close to customers or backwards to come close to raw materials suppliers. These mergers are generally endeavored to:a) Increased profitability b) Economic cost (by eliminating avoidable sales tax and excise duty payments)c) Increased market power d) Increased size

3. Conglomerate merger

These are mergers between two or more companies having unrelated business. These transactions are not aimed at explicitly sharing resources, technologies, synergies or product .They do not have an impact on the acquisition of monopoly power and hence are favored through out the world. They are undertaken for diversification of business in other products, trade and for advantages in bringing separate enterprise under single control namely:

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a) Synergy arising in the form of economies of scale.b) Cost reduction as a result of integrated operation.c) Risk reduction by avoiding sales and profit instability.d) Achieve optimum size and carve out optimum share in the market

4. Reverse Merger

Reverse mergers involve mergers of profir making companies with companies having accumulated losses in order to:

a. Claim tax savings on account of accumulated losses that increase profits.b. Set up merged asset base and shift to accelerate depreciation.

5. Group company mergers

These mergers are aimed at restructuring the diverse units of group companies to create a viable unit. Such mergers are initiated with a view to affect consolidation in order to:

a. Cut costs and achieve focus.b. Eliminate intra-group competitionc. Correct leverage imbalances and improve borrowing capacity.

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xii. Motives of Mergers:

Mergers and acquisitions are strategic decisions leading to the maximization of a company’s growth by enhancing its production and marketing operations. They have become popular in the recent times because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalization of business as a number of economies are being deregulated and integrated with other economies. A number of motives are attributed for the occurrence of mergers and acquisitions.

a. Synergies through Consolidation:

Synergy implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It is defined as ‘two plus two equal to five’ (2+2=5) phenomenon. Synergy refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. But apart from operating economies, synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarily of resources and skills and a widened horizon of opportunities.

An under valued firm will be a target for acquisition by other firms. However, the fundamental motive for the acquiring firm to takeover a target firm may be the desire to increase the wealth of the shareholders of the acquiring firm. This is possible only if the value of the new firm is expected to be more than the sum of individual value of the target firm and the acquiring firm. For example, if A Ltd. and Ltd. decide to merge into AB Ltd. then the merger is beneficial if

V (AB)> V (A) +V (B)

Where

V (AB) = Value of the merged entity

V (A) = Independent value of company A

V (B) = Independent value of company B

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A merger which results in meeting the test of increasing the wealth of the shareholders is said to contain synergistic properties. Synergy is the increase in the value of the firm combining two firms into one entity i.e., it is the difference value between the combined firm and the sum of the value of the individual firms. Igor Ansoff (1998) classified four different types of synergies. These are:

1. Operating synergy:

The key to the existence of synergy is that the target firm controls a specialized resource that becomes more valuable when combined with the bidding firm’s resources. The sources of synergy of specialized resources will vary depending upon the merger. In case of horizontal merger, the synergy comes from some form of economies of scale which reduce the cost or from increase market power which increases profit margins and sales. There are several ways in which the merger may generate operating economies. The firm might be able to reduce the cost of production by eliminating some fixed costs. The research and development expenditures will also be substantially reduced in the new set up by eliminating similar research efforts and repetition of work already done by the target firm. The management expenses may also come down substantially as a result of corporate reconstruction.

The selling, marketing and advertisement department can be streamlined. The marketing economies may be produced through savings in advertising (by reducing the need to attract each other’s customers), and also from the advantage of offering a more complete product line (if the merged firms produce different but complementary goods), since a wider product line may provide larger sales per unit of sales efforts and per sales person. When a firm having strength in one functional area acquires another firm with strength in a different functional area, synergy may be gained by exploiting the strength in these areas. A firm with a good distribution network may acquire a firm with a promising product line, and thereby can gain by combining these two strength. The argument is that both firms will be better off after the merger. A major saving may arise from the consolidation of departments involved with financial activities e.g., accounting, credit monitoring, billing, purchasing etc.

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Thus, when two firms combine their resources and efforts, they will be able to produce better results than they were producing as separate entities because of savings various types of operating costs. These resultant economies are known as synergistic operating economies.

In a vertical merger, a firm may either combine with its supplier of input (backward integration) and/or with its customers (forward integration). Such merger facilitates better coordination and administration of the different stages of business stages of business operations-purchasing, manufacturing and marketing –eliminates the need for bargaining (with suppliers and/or customers), and minimizes uncertainty of supply of inputs and demand for product and saves costs of communication.

An example of a merger resulting in operating economies is the merger of Sundaram Clayton Ltd. (SCL) with TVS-Suzuki Ltd. (TSL).By this merger, TSL became the second largest producer of two –wheelers after Bajaj. The main objective motivation for the takeover was TSL’s need to tide over its different market situation through increased volume of production. It needed a large manufacturing bas to reduce its production costs. Large amount of funds would have been required for creating additional production capacity. SCL also needed to upgrade its technology and increase its production. SCL’s and TCL’s plants were closely located which added to their advantages. The combined company has also been enabled to share the common R&D facilities.

2. Financial synergy:

Financial synergy refers to increase in the value of the firm that accrues to the combined firm from financial factors. There are many ways in which a merger can result into financial synergy and benefit. A merger may help in:

Eliminating financial constraint Deployment surplus cash Enhancing debt capacity Lowering the financial costs Better credit worthiness

Financial Constraint:

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A company may be constrained to grow through internal development due to shortage of funds. The company can grow externally by acquiring another company by the exchange of shares and thus, release the financing constraint.

Deployment of surplus cash:

A different situation may be faced by a cash rich company. It may not have enough internal opportunities to invest its surplus cash. It may either distribute its surplus cash to its shareholders or use it to acquire some other company. The shareholders may not really benefit much if surplus cash is returned to them since they would have to pay tax at ordinary income tax rate. Their wealth may increase through an increase in the market value of their shares if surplus cash is used to acquire another company. If they sell their shares, they would pay tax at a lower, capital gains tax rate. The company would also be enabled to keep surplus funds and grow through acquisition.

Debt Capacity:

A merger of two companies, with fluctuating, but negatively correlated, cash flows, can bring stability of cash flows of the combined company. The stability of cash flows reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt. The increased borrowing allows a higher interest tax shield which adds to the shareholders wealth.

Financing Cost:

The enhanced debt capacity of the merged firm reduces its cost of capital. Since the probability of insolvency is reduced due to financial stability and increased protection to lenders, the merged firm should be able to borrow at a lower rate of interest. This advantage may, however, be taken off partially or completely by increase in the shareholders risk on account of providing better protection to lenders.

Another aspect of the financing costs is issue costs. A merged firm is able to realize economies of scale in flotation and transaction costs related to an issue of capital. Issue costs are saved when the merged firm makes a larger security issue.

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Better credit worthiness:

This helps the company to purchase the goods on credit, obtain bank loan and raise capital in the market easily.

RP Goenka’s Ceat tyres sold off its type cord division to Shriram Fibers Ltd. in 1996 and also transfer’s its fiber glass division to FGL Ltd., another group company to achieve financial synergies.

3. Managerial synergy

One of the potential gains of merger is an increase in managerial effectiveness. This may occur if the existing management team, which is performing poorly, is replaced by a more effective management team. Often a firm, plagued with managerial inadequacies, can gain immensely from the superior management that is likely to emerge as a sequel to the merger. Another allied benefit of a merger may be in the form of greater congruence between the interests of the managers and the shareholders.

A common argument for creating a favorable environment for mergers is that it imposes a certain discipline on the management. If lackluster performance renders a firm more vulnerable to potential acquisition, existing managers will strive continually to improve their performance.

4. Sales synergy

These synergies occurs when merged organization can benefit from common distribution channels, sales administration, advertising, sales promotion and warehousing.

The Industrial Credit and Investment Corporation of India Ltd. (ICICI) acquired Tobaco Company, ITC. Classic and Anagram Finance to obtain quick access to a well dispersed distribution network.

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b. Diversification:

A commonly stated motive for mergers is to achieve risk reduction through diversification. The extent, to which risk is reduced, depends upon on the correlation between the earnings of the merging entities. While negative correlation brings greater reduction in risk, positive correlation brings lesser reduction in risk. If investors can diversify on their own by buying stocks of companies which propose to merge, they do not derive any benefits from the proposed merger. Any investor who wants to reduce risk by diversifying between two companies, say, ABC Company and PQR Company, may simply buy the stocks of these two companies and merge them into a portfolio. The merger of these companies is not necessary for him to enjoy the benefits of diversification. As a matter of fact, his ‘home-made diversification give him far greater flexibility. He can contribute the stocks of ABC Company and PQR Company in any proportion he likes as he is not confronted with a ‘fixed’ proportion that result from the merger.

Thus, Diversification into new areas and new products can also be a motive for a firm to merge an other with it. A firm operating in North India, if merges with another firm operating primarily in South India, can definitely cover broader economic areas. Individually these firms could serve only a limited area. Moreover, products diversification resulting from merger can also help the new firm fighting the cyclical/seasonal fluctuations. For example, firm A has a product line with a particular cyclical variations and firm B deals in product line with counter cyclical variations. Individually, the earnings of the two firms may fluctuate in line with the cyclical variations. However, if they merge, the cyclically prone earnings of firm A would be set off by the counter cyclically prone earnings of firm B. Smoothing out the earnings of a firm over the different phases of a cycle tends to reduce the risk associated with the firm.

Through the diversification effects, merger can produce benefits to all firms by reducing the variability of firm’s earnings. If firm A’s income generally rises when B’s income generally falls, and vice-a versa, the fluctuation of one will tend to set off the fluctuations of the other, thus producing a relatively level pattern of

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combined earnings. Indeed, there will be some diversification effect as long as the two firm’s earnings are not perfectly correlated (both rising and falling together). This reduction in overall risk is particularly likely if the merged firms are in different lines of business.

The diversification motive is based on the proposition that if two risky projects are combined, then the risk of combination will be less than the weighted average of the risk of these two projects. The greatest benefit from diversification can be obtained by continuing firms from different industries i.e., conglomerate mergers; where two firms poorly correlated cash flows merged to create a portfolio of a firms. But portfolio of firms in a conglomerate merger is costly as the acquisition of firms is a costly exercise. On the other hand, a shareholder can easily create a diversified portfolio of firms merely by holding the shares of diversified companies. This is much easier and cheaper than creating a portfolio of firms in conglomerate merger.

Thus, firms diversify to achieve:

Sales and growth stability Favorable growth developments Favorable competition shifts Technological changes

c. Accelerated Growth:

Growth is essential for sustaining the viability, dynamism and value-enhancing capability of company. A growth- oriented company is not only able to attract the most talented executives but it would also be able to retain them. Growing operations provide challenges and excitement to the executives as well as opportunities for their job enrichment and rapid career development. This helps to increase managerial efficiency. Other things being the same, growth leads to higher profits and increase in the shareholders value. A company can achieve its growth objective by:

Expanding its existing markets Entering in new markets.

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A company may expand and/or diversify its markets internally or externally. If the company cannot grow internally due to lack of physical and managerial resources, it can grow externally by combining its operations with other companies through mergers and acquisitions. Mergers and acquisitions may help to accelerate the pace of a company’s growth in a convenient and inexpensive manner.

Internal growth requires that the company should develop its operating facilities-manufacturing, research, marketing etc. Internal development of facilities for growth also requires time. Thus, lack or inadequacy of resources and time needed for internal development constrains a company’s pace of growth. The company can acquire production facilities as well as other resources from outside through mergers and acquisitions. Specially, for entering in new products/markets, the company may lack technical skills and may require special marketing skills and/or a wide distribution network to access different segments of markets. The company can acquire existing company or companies with requisite infrastructure and skills and grow quickly.

Mergers and acquisitions, however, involve cost. External growth could be expensive if the company pays an excessive price for merger. Benefits should exceed the cost of acquisition for realizing a growth which adds value to shareholders. In practice, it has been found that the management of a number of acquiring companies paid an excessive price for acquisition to satisfy their urge for high growth and large size of their companies. It is necessary that price may be carefully determined and negotiated so that merger enhances the value of shareholders.

For example, RPG Group had a turnover of only Rs.80 crores in 1979. This has increased to about Rs. 5600 crores in 1996. This phenomenal growth was due to the acquisitions of a several companies by the RPG Group. Some of the companies acquired are Asian cables, ceat, Calcutta Electricity Supply and company, SAE etc.

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d. Increased Market power:

A merger can increase the market share of the merged firm. The increased concentration or market share improves the profitability of the firm due to economies of scale. The bargaining power of the firm with labour, suppliers and buyers is also enhanced. The merged firm can also exploit technological breakthroughs against obsolescence and price wars. Thus, by limiting competition, the merged firm can earn super normal profit and strategically employ the surplus funds to further consolidate its position and improve its market power.

Merger is not only route to obtain market power. A firm can increase its market share through internal growth or ventures or strategic alliances. Also, it is not necessary that the increased market power of the merged firm will lead to efficiency and optimum allocation of resources. Market power means undue concentration which could limit the choice of buyers as well as exploit suppliers and labour.

e. Purchase of assets at bargain price:

Mergers may be explained by the opportunity to acquire assets, particularly land, mined rights, plant and equipment at lower cost than would be incurred if they were purchased or constructed at current market prices. If market prices of many stocks have been considerably below the replacement cost of the assets they represent, expanding firm considering constructing plants developing mines, or buying equipment. Often it has found that the desired asset could be obtained cheaper by acquiring a firm that already owned and operated the asset. Risk could be reduced because the assets were already in place and an organization of people knew how to operate them and market their products.

Many of mergers can be financed by cash tender offers to the acquired firm’s shareholders at price substantially above the current market. Even, so, the assets can be acquired for less than their current cost of construction. The basic factor underlying this is that inflation in construction costs not fully reflected in stock prices because of high interest rates and limited optimism (or downright pessimism) by stock investors regarding future economic conditions.

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f. Increased external financial capability:

Many mergers, particularly those of relatively small firms into large ones, occur when the acquired firm simply cannot finance its operations. This situation is typical in a small growing firm with expanding financial requirements. The firm has exhausted its bank credit and has virtually no access to long term debt or equity markets. Sometimes the small firms have encountered operating difficulty and the bank has served notice that its loans will not be renewed. In this type of situation, a large firm with sufficient cash and credit to finance the requirements of the smaller one probably can obtain a good situation by making a merger proposal to the small firm. The only alternative the small firm may have is to try to interest two or more larger firms in proposing merger to introduce completion into their bidding for the acquisition.

The smaller firm’s situation might not be so bleak. It may not be threatened by nonrenewable of a maturing loan. But its management may recognize that continued growth to capitalize on its markets will require financing beyond its means. Although its bargaining position will be better, the financial synergy of the acquiring firm’s strong financial capability may provide the impetus for the merger.

Sometimes the financing capability is possessed by the acquired firm. The acquisition of a cash rich firm whose operations have matured may provide additional financing to facilitate growth of the acquiring firm. In some cases, the acquiring firm may be able to recover all or part of the cost of acquiring the cash-rich firm when the merger is consummated and the cash then belongs to it.

A merger also may be based upon the simple fact that the combination will make two small firms with limited access to capital markets large enough to achieve that access on a reasonable basis. The improved financing capability provides the financial synergy.

g. Increased managerial skills:

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Occasionally, a firm will have good potential that it finds itself unable to develop fully because of deficiencies in certain areas of management or an absence of needed product or production technology. If the firm can not hire the management or develop the technology it needs, it might combine with a compatible firm that has the needed managerial personnel or technical expertise. Any merger, regardless of the specific motive for it, should contribute to the maximization of owner’s wealth.

h. Reduction in tax liability:

Under Income Tax Act, there is a provision for set-off and carry forward of losses against its future earnings for calculating its tax liability. A loss making or sick company may not be in a position to earn sufficient profits in future to take advantage of the carry forward provision. If it combines with a profitable company, the combined company can utilize the carry forward loss and save taxes with the approval of government. In India, a profitable company is allowed to merge with a sick company to set-off against its profits the accumulated loss and unutilized depreciation of that company. A number of companies in India have merged to take advantage of this provision.

The following is the list of some companies along with the amount of tax benefits enjoyed:

Orrisa synthesis merged with Straw product Ltd. (Rs. 16 crores)

Ahmadabad cotton Mills merged with Arvind Mills (Rs. 3.34 crores)

Sidhpur Mills merged with Reliance Industries Ltd. (Rs.3.34 crores)

Alwyn Missan merged with Mahindra and Mahindra Ltd. (Rs.2.47 crores)

Hyderabad Alwyn merged with Voltas Ltd. (Rs. 1600 crores)

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When two companies merge through an exchange of shares, the shareholders of selling company can save tax. The profits arising from the exchange of shares are not taxable until the shares are actually sold. When the shares are sold, they are subject to capital gain tax rate which is much lower than the ordinary income tax rate.

A strong urge to reduce tax liability, particularly when the marginal tax rate is high is a strong motivation for the combination of companies. For example, the high tax rate was the main reason for the post-war merger activity in the USA. Also, tax benefits are responsible for one-third of mergers in the USA.

i. Economies of Scale:

Economies of scale arise when increase in the volume of production leads to a reduction in the cost of production per unit. Merger may help to expand volume of production without a corresponding increase in fixed costs. Thus, fixed costs are distributed over a large volume of production causing the unit cost of production to decline. Economies of scale may also arise from other indivisibilities such as production facilities, management functions and management resources and systems. This happens because a given function, facility or resource is utilized for a large scale of operation. For example, a given mix of plant and machinery can produce scale economies when its capacity utilisation is increased. Economies will be maximized when it is optimally utilized. Similarly, economies in the use of the marketing function can be achieved by covering wider markets and customers using a given sales force and promotion and advertising efforts. Economies of scale may also be obtained fro the optimum utilisation of management resource and systems of planning, budgeting, reporting and control. A company establishes management systems by employing enough qualified professionals irrespective of its size. A combined firm with a large size can make the optimum use of the management resource and systems resulting in economies of scale.

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j. Vertical Integration:

Vertical integration is a combination of companies of companies business with the business of a supplier or customer generally motivated by a pure desire:

a) To secure a source of supply for key materials or sources

b) To secure a distribution outlet or a major customer for the company’s products.

c) To improve profitability by expanding into high margin activities of suppliers and customers.

Thus, vertical merger may take place to integrate forward or backward. Forward integration is where company merges to come close to its customers. A holiday tour operator might acquire chain of travel agents and use them to promote his own holiday rather than those of rival tour operators. So forward or downstream vertical integration involves takeover of customer business.

Backward integration occurs when a company comes close to its raw materials or suppliers. The real gain can be achieved by integrating backward if raw material market is not perfectly competitive and firm has to buy raw materials at monopolistic prices hence merge to obtain control of supplies. There are many reasons why firms want to be integrated vertically at different stages. Some of these reasons are technological economies like avoidance of reheating and transportation cost as in the case of iron and steel producer. Transactions within a firm might eliminate costs of searching for prices, contracting, advertising, costs of communicating and co-ordination. Proper planning for production and inventory management may improve due to more efficient information flow within a single firm. Further, these merger help avoid inefficient market transactions and result in reduced exchange inefficiencies.

Tata Tea’s acquisition of consolidated coffee which produces coffee beans and Asian Coffee, which possesses coffee beans, was also backward integration which helped reduce exchange inefficiencies by eliminating market transactions. The recent merger of Samtel Electron services (SED) with Samtel Color Ltd. (SCL)

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entailed backward integration of SED which manufactures electronic components required to make picture tubes with SCL, a leading maker of color picture tube.

Thus, when companies engaged at different stages of production or value chain merge, economies of vertical integration may be realized. For example, the merger of a company engaged in oil exploration and production (like ONGC) with a company engaged in refining and marketing (like HPCL) may improve coordination and control

Vertical integration, however, is not always a good idea. If a company does everything in-house, it may not get the benefit of outsourcing from independent suppliers who may be more efficient in their segments of the value chain.

k. Early entry and market penetration:

An early mover strategy can reduce the lead time taken in establishing the facilities and distribution channels. So, acquiring companies with good manufacturing and distribution network or few brands of a company gives the advantage of rapid market share.

The ICICI, a leading financial institution secured a foot hold in retail network through acquisition of Anagram Finance Company and ITC classic. Anagram had a strong retail franchise, distribution network of over fifty branches in Gujarat, Rajasthan and Maharashtra and a depositor base of over two lakhs depositors. ICICI was therefore attracted by the retail portfolio of Anagram which was active in lease and hire purchase, car purchase, truck finance, and customer finance. These acquisitions thus helped ICICI to obtain quick access to well dispersed distribution network.

Further, market penetration means developing new and large markets for a company existing products. Market penetration strategy is generally pursued within markets that are becoming more global. Cross border merger are a means of becoming or remaining major players in such markets. Hence, this strategy is mainly adopted by

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MNC’s to gain to new markets. They prefer to merge with a local established company which knows behavior of market and has established customer base. One such example is Indian market. Few instances of MNC’s related mergers are:

1. Whirlpool Corporation’s entry into India by acquiring Kelvinator India.

2. Coca Cola while re-entering India market in 1993 acquired Parle, the largest player in market with several established brands and nationwide bottling and marketing network.

3. H.J. Heinz entered into India through acquisition of Glato Industries.

4. HLL acquired Dollops, Kwality, Milk food to gain an entry into ice cream market with the help of their marketing networks, production facilities, brands etc.

l. Revival of sick companies:

An important motive for merger is to turn around a financially sick company through the process of merger. Amalgamation taking place under the aegis of Board for Industrial (BIFR) fall under this category.

BIFR found revival of ailing companies through the means of their with healthy company as the most successful route for revival of their financial wealth. Firstly, the purpose is to revive a group of sick companies by merging it with groups of healthy company by obtaining concessions from financial institution and government agencies and obtaining benefits of tax concessions u/s 72A of Income Tax Act, 1961. Secondly, it also helps to preserve group reputation. Some of the group companies which have amalgamated through the BIFR include Mahindra Missan Allwyn with Mahindra and Mahindra, Hyderabad, Allwyn with Voltas etc.

m. Consolidation at Group level:

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Group company mergers are generally initiated with a view to affect consolidation to derive critical mass to cut costs in order to achieve focus and eliminate competition. Such mergers within group are also aimed at restructuring their diverse units to create a more viable unit, to revive sickness, improve borrowed capital. There are few other micro economic reasons to decide on mergers with group consideration as their sole consideration:

To achieve economies of scale

To reduce cost of administration and management expenses in companies within same group.

To bifurcate business by floating separate products this is referred to as demerger.

Example of restructuring and consolidation within the group companies is the case of Nirma Ltd. merging with it, its group companies, Nirma detergents, Nirma soaps and detergents, Shina soaps and detergents and Nirma chemicals. The objective was to make Nirma a strong and resilient corporate entity capable of facing global competition by restructuring management, sizable reduction in management costs and increased professionalism.

Merger of Videocon groups Videocon Narmada Electronics with its flagship company Videocon International led to operating efficiencies by controlling costs under one head.

n. Following Parent’s Footsteps:

Some of mergers in India belonging to Multinational giants take place as a result of direct fall out of mergers of their parent companies taking place in their home countries.

Some instances of such mergers are listed below:

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1. As per the dictates of their parent companies, their two Indian counter parts, visa. The General Electric Company of India Ltd. and The English Electric Company of India Ltd. were merged from Ist April 1992 and changed their name to GEC. Alsthen India Ltd.( just like the GEC, Alsthen N.V. Ltd. formed by merger of two largest industrial groups The General Electric company plc. U.K. and Alcatel Alsthen, France)

2. Consequent of the merger of Grand plc. and Guiness plc. In London in Dec. 1997, their Indian offspring’s IDL Ltd. and united Distilleries India Ltd. both liquor companies followed this in India.

3. Novartis India (51% of Novartis AG) was formed in India by the merger of Hindustan ciba Giegy and Sandoz India Ltd. in 1996 following the merger of their global parents.

o. Increase Promoter’s stake:

Another motive for merger could be to increase the stake of promoters. Thus, ‘A’ company which is family owned could be merged with ‘B’ company which is a listed company with family stake in it. By the process of merger, the family stake could be consolidated without going through the complications of SEBI guidelines of 4th august 1994. So, mergers could be motivated by the need to enhance promoter’s holdings in post- merger company.

For instance, Nanda family’s holding in escorts Ltd. was 20% before merger. Its merger with Escorts Tractors Ltd. increased their holding by another 20%. Similarly, merger of Reliance Polythylene and Reliance Polypropylene into Reliance Industries swap ratio of 100: 30 and 100:25 respectively resulted in an increase in Ambani’s stake from 23% to 37%. The higher stakes helps to ward off takeover bids.

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p. Defensive Maneuver:

Merger can be used as shields for protection from raiders. A merger or acquisition can be used by a company as defensive maneuver to resist takeover by another company. If a firm feels that it could be acquired by another firm, it may consider getting involved in a merger game. In doing so, it is able to expand its size, making its acquisition very expensive. Also, by increasing market capitalization of the merged company’s threat of takeover can be tackled. For instance, merger of Jindal Ferro Alloys with Jindal Strips helped Jindal Ferro Alloys improve its share price from Rs. 65 to Rs. 170 and market capitalization of Rs. 160 crores to Rs. 550 crores with the help of swap ratio of forty five Jindal strips for every hundred Jindal Ferro alloy shares.

q. Acquire Global Competitive strength:

With competitive forces resulting from globalization and deregulation, many industries have forced most corporate to consolidate. European and Asian market have become more receptive to merger and acquisitions. On the one hand, European countries face competitive pressures from creation of single Euro currency, on the other hand, Asian crisis has forced most Asian nations to look to the west for technological and capital support. Hence, merger are planned to acquire global competitive strength.

After the pitched Battle against Multi National Company (MNC) in domestic arena, Indian companies have also felt the need of becoming global. The globalized business environment thus demands that Indian Industries also restructured. Its size and capacities are small as compared to MNC’s. Industries have to increase its capacity, induct new technology and development markets. Globalization has thus resulted in major implications for industrial competitiveness by lowering the cost of labour and opening markets to a great number of producing firms. To meet the opportunities thrown open by fast growing world, generic market and to acquire global competitive strength. Cross border mergers and acquisitions are being

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resorted to such mergers provide opportunities for taking up larger projects. Also the merged company is able to compete more effectively with increased size.

The recent acquisition of Tetley, the world’s largest Tea brands by Tata tea, the world’s largest integrated tea company has been driven by the fact that Tetley fits perfectly into Tata tea’s globalization drive and could be a perfect launch vehicle to achieve greater synergies in global arena. The acquisition has brought with it, greater market penetration, helped improve operating efficiencies and resulted in instant expansion of product lines of Tata tea –Tetley combines.

The process of globalization and increasing integration of Indian economy with the international market will have its impact sooner or later.

Ansoff suggested a number of reasons that are attributed to the occurrence of mergers and acquisitions. For example, it is suggested that mergers and acquisition are intended to:

Limit competition Utilize under-utilization market power Overcome the problem of slow growth and profitability in one’s own industry Achieve diversification Gain economies of scale and increase income with proportionately less investment Establish a transnational bridgehead without excessive start-up costs to gain access to a foreign market Utilize under-utilized resources-human and physical and managerial skills Displace existing management Circumvent government regulations Reap speculative gains attendant upon new security issue or change in P/E ratio Create an image of aggressiveness and strategic opportunism empire building and to amass vast economic powers of the economy.

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xiii. The Change Forces:

The increased pace of M&A activity in recent years has reflected powerful change forces in the world economy. Ten change forces are identified:

1. The pace of technological change has accelerated.

2. The costs of communication and transportation have been greatly reduced.

3. Hence markets have become international in scope.

4. The forms, sources, and intensity of competition have expanded.

5. New industries have emerged.

6. While regulations have increased in some areas, deregulation has taken place in other industries.

7. Favorable economic and financial environments have persisted from 1982 to 1990 and from 1992 to mid-2000.

8. Within a general environment of strong economic growth, problems have developed in individual economies and industries.

9. Inequalities in income and wealth have been widening.

10. Valuation relationships and equity returns for most of the 1990s have risen to levels significantly above long-term historical patterns.

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Overriding all are technological changes, which include personal computers, computer services, software, servers, and the many advances in information systems, including the Internet. Improvements in communication and transportation have created a global economy. Nations have adopted international agreements such as the General Agreement on Tariffs and Trade (GATT) that have resulted in freer trade. The growing forces of competition have produced deregulation in major industries such as financial services, airlines, and medical services.

The next set of factors relates to efficiency of operations. Economies of scale spread the large fixed cost of investing in machinery or computer systems over a larger number of units. Economies of scope refer to cost reductions from operations in related activities. In the information industry, these would represent economies of activities in personal computer (PC) hardware, PC software, server hardware, server software, the Internet, and other related activities. Another efficiency gain is achieved by combining complementary activities, for example, combining a company strong in research with one strong in marketing. Mergers to catch up technologically are illustrated by the series of acquisitions by AT&T.

Another major force stimulating M&A and restructuring activities comprises changes in industry organization. An example is the shift in the computer industry from vertically integrated firms to a horizontal chain of independent activities. Dell Computers, for example, has been very successful concentrating on PC sales with only limited activities in the many other segments of the value chain of the information industry.

The economic and financial environments have also been favorable for deal making. Strong economic growth, rising stock prices and relatively low interest rates have favored internal growth as well as a range of M&A activities.

Individual entrepreneurship has responded to opportunities and, in turn, created further dynamism in industrial activities. Examples are Bill Gates at Microsoft, Andrew Grove at Intel, Jack Welch at General Electric, John Chambers at Cisco Systems, and Bernie Ebbers at MCI WorldCom, among the many.

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xiv. Consequences of the Changed Forces:

The change forces are having major impacts. The technological requirements for firms have increased. The requirements for human capital inputs have grown relative to physical assets. The knowledge and organizational capital components of firm value have increased. Growth opportunities among product areas are unequal. New industries have been created. The pace of product introductions has accelerated. Economic activity has shifted from manufacturing to services of increasing sophistication. Distribution and marketing methods have changed. The value chain has deconstructed in the sense that more activities are performed by specialist firms. Forces for vertical integration have diminished in some areas, but increased in others. Changes in the organization of industries have taken place. Industry boundaries have become increasingly blurred. The forms and number of competitors have been increasing. New growth opportunities have attracted such large flows of resources that unfavorable sales-to-capacity relationships have developed, even in new industries such as telecommunications and e-commerce. The decline and failure rates of firms in some sectors have accelerated. Strategy formulation and revisions are more important. Real-time financial planning and control information requirements have increased.

These impacts have expanded opportunities and risks. A wide range of adjustment processes have been used by firms in response to their increasingly changing environment.

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xv. Factors Affecting Mergers:

There are several factors that motivate the mergers and acquisitions. These factors can be broadly summarized into two categories:

1. Exogenous Factors Affecting Mergers:

Accounting .

The availability of pooling accounting for mergers has been a significant factor in the 1990s merger activity. Pooling avoids dilution of earnings brought about by the recognition and mandatory amortization of goodwill when a merger is accounted for as a purchase. As pooling came under increasing pressure from the SEC and the FASB, its impending demise, first at the end of 2000 and then in the first-half of 2001, undoubtedly acted as a stimulant for some mergers, but it is not possible to gauge accurately how many deals were undertaken in 1999 and 2000 to beat the deadline. Now, at the beginning of 2001, the FASB is proposing that purchase accounting replace pooling but that goodwill should not be automatically written down, but instead should be subjected to a periodic impairment test. An impairment charge would be taken when the fair value of goodwill falls below its book value.

This method of accounting could be even more favorable for mergers than pooling in that it will avoid amortization of goodwill and not saddle the merged companies with the restrictions against share repurchases and asset dispositions that encrust the pooling rules. Thus, accounting will basically be a neutral factor in 2001 and the foreseeable future, neither significantly stimulating nor restraining mergers. However, the new purchase accounting will make hostile exchange offers practical for the first time in the United States and therefore might be a greater stimulant to merger activity than presently thought.

Arbitrage .

Arbitrageurs, together with hedge funds and activist institutional investors, are a major factor in merger activity. They sometimes band together to encourage a company to seek a merger and sometimes to encourage a company to make an unsolicited bid for a company with which they are dissatisfied. By accumulating large amounts of stock of a company to be acquired, they can be, and frequently

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are, a factor in assuring the shareholder vote necessary to approve a merger. They will continue to be a force both facilitating and promoting mergers.

Currencies .

Fluctuations in currencies have an impact on cross-border mergers and current conditions in the foreign exchange markets have contributed to the slowdown in merger activity. The sharp decline in the Euro during 2000 was a deterrent to European acquisitions of U.S. companies. The strong dollar and weak Asian currencies led to a significant increase in acquisitions by U.S. companies in Asia. The recent strength in the Euro has not had time to become a factor in mergers. The uncertainty as to the U.S. economy, the U.S. trade deficit and the strength of the dollar portend at best slow growth of cross-border acquisitions of U.S. companies.

Deregulation.

The worldwide movement to market capitalism and privatization of state controlled companies has led to a significant increase in the number of candidates for merger. The concomitant change in attitude toward cross-border mergers has had a similar effect.

Hostile Bids .

With the demise of the financially motivated bust-up bids of the 1970s and 1980s, and the shift to strategic transactions, major companies have been willing to make hostile bids. General Electric, IBM, Johnson & Johnson, AT&T, Pfizer, Wells Fargo and Norfolk Southern are some of the companies that have done so. In addition there has been a dramatic increase in hostile bids in Europe. The $202 billion record-setting bid by Vodafone for Mannesmann being the prime example. The willingness of continental European governments to step back and let the market decide the outcome of a hostile bid has opened the door and led to a significant increase in European hostile bid activity. In the U.S. the success rate for strategic hostile bids by major companies has similarly led to an increase in activity.

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LBO Funds .

The growth of LBO funds from a humble beginning in the 1970s to the mega-funds of the 1990s has been a significant factor in acquisitions. With tens of billions of dollars of equity to support leverage of two to three to one, these funds have the capability of doing major deals and will continue to be an important factor.

If so, that restraint on mergers will be ameliorated. A special feature of the collapse in the telecommunications, media and technology stocks is that there are now many good companies with low stock market values and a need for fresh capital that may be met only through merger with a stronger company.

2. Autogenous Factors Affecting Mergers:

The foregoing external factors are essentially beyond the ability of companies to control or even to influence significantly. While they basically determine whether a particular merger is doable at a particular time, they do not explain why companies want to merge. What are the autogenous businesses reasons driving merger activity? There is no single or simple explanation and again no ranking in importance is possible. Experience indicates that one or more of the following factors are present in all mergers:

Obtaining market power .

Starting with the 19th Century railroad and oil mergers, a prime motivation for merger has been to gain and increase market power. Left unrestrained by government regulation it would be a natural tendency of businesses to seek monopoly power.

The 19th Century Interstate Commerce Act and Sherman Antitrust Act were the governmental response to the creation of trusts to effectuate railroad and oil mergers.

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Sharing the benefits of an improved operating margin through reduction of operating costs .

Many of today's acquisitions involve a company with a favorable operating margin acquiring a company with a lower operating margin. By improving the acquired company's operations, the acquirer creates synergies that pay for the acquisition premium and provide additional earnings for the acquirer’s shareholders. Acquiring firms may reallocate or redeploy assets of the acquired firm to more efficient uses. Additionally, intra-industry consolidating acquisitions provide opportunities to reduce costs by spreading administrative overhead and eliminating redundant personnel.

Sharing the costs and benefits of eliminating excess capacity .

The sharp reductions in the defense budget in the early 1990s resulted in defense contractors consolidating in order to have sufficient volume to absorb fixed costs and leave a margin of profit. The Defense Department encouraged the consolidations to assure that its suppliers remained healthy. The pressure to control healthcare costs has had a similar impact in the healthcare industry. The mega-mergers of, and joint-venture consolidation of refining and marketing operations by, oil and gas companies is another example of an effort to reduce costs by eliminating overcapacity.

Integrating back to the source of raw material or forward to control the means of distribution .

Over the years vertical integration has had a mixed record. Currently it has a poor record in media and entertainment, particularly where "hardware" companies have acquired "software" companies. However, vertical integration continues to be a motivation for a significant number of acquisitions, and, as noted below, is being widely pursued as a response to the Internet. The acquisition of Time Warner by AOL is an example

The advantage or necessity of having a more complete product line in order to be competitive .

This is particularly the case for companies such as suppliers to large retail chains that prefer to deal with a limited number of vendors in order to control costs of

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purchasing and carrying inventory. A similar situation has resulted in a large number of mergers of suppliers to the automobile manufacturers.

The need to spread the risk of the huge cost of developing new technology .

This factor is particularly significant in the aerospace/aircraft and pharmaceutical industries.

Response to deregulation .

Banking, insurance, money management, healthcare, telecommunications, transportation and utilities are industries that have experienced mid-1990s mergers as a result of deregulation. Examples are the acquisition of investment banks and insurance companies by commercial banks following the relaxation of restrictions on activities by commercial banks, and the cross-border utility mergers following the relaxation of state utility regulation.

Concentration of management energy and focus .

The 1990s witnessed a recognition by corporate management that it is frequently not possible to manage efficiently more than a limited number of businesses. Similarly, there has been recognition that a spinoff can result in the market valuing the separate companies more highly than the whole. These factors resulted in the spinoff or sale of non-core businesses by a large number of companies. The amendment to the tax law eliminating new Morris Trust spinoff/merger transactions had a dampening effect on the level of spinoff/merger activity, but spinoffs have continued as a frequently used means of focusing on core competencies.

Response to industry consolidation .

When a series of consolidations takes place in an industry, there is pressure on companies to not be left out and to either be a consolidator or choose the best partner. Current examples of industries experiencing significant consolidation are banking, forest products, food, advertising and oil and gas. A recent study by J.P. Morgan shows that size has a major impact on a company’s price earnings multiple. Larger companies have significantly higher multiples than smaller companies with the same growth rate.

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The receptivity of both the equity and debt markets to large strategic transactions .

When equity investors are willing to accept substantial amounts of stock issued in mergers and encourage deals by supporting the stock of the acquirer, companies will try to create value by using what they view as an overvalued currency. When debt financing for acquisitions is also readily available at attractive interest rates, companies will similarly use what they view as cheap capital to acquire desirable businesses.

Pressure by institutional shareholders to increase shareholder value.

Institutional investors and other shareholder activists have had considerable success in urging (and sometimes forcing) companies to restructure or seek a merger. The enhanced ability of shareholders to communicate among themselves and to pressure boards of directors has had a significant impact. Boards have responded by urging management to take actions designed to maximize shareholder value, resulting in divestitures of non-core businesses and sales of entire companies in some cases. In other cases, shareholder pressure has been the impetus for growth through acquisitions designed to increase volume, expand product lines or gain entrance to new geographic areas.

Less management resistance to takeovers.

The recognition by boards of directors that it is appropriate to provide incentive compensation, significant stock options and generous severance benefits has removed much of the management resistance to mergers. So too the ability of management to obtain a significant equity stake through an LBO has been a stimulant to these acquisitions.

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xvi. Mergers and Acquisitions in India:

The process of mergers and acquisitions has gained substantial importance intoday's corporate world. This process is extensively used for restructuring thebusiness organizations. In India, the concept of mergers and acquisitions wasinitiated by the government bodies. Some well known financial organizations alsotook the necessary initiatives to restructure the corporate sector of India byadopting the mergers and acquisitions policies. The Indian economic reform since1991 has opened up a whole lot of challenges both in the domestic andinternational spheres. The increased competition in the global market has promptedthe Indian companies to go for mergers and acquisitions as an important strategicchoice. The trends of mergers and acquisitions in India have changed over theyears. The immediate effects of the mergers and acquisitions have also beendiverse across the various sectors of the Indian economy.

Mergers and Acquisitions Across Indian Sectors

Among the different Indian sectors that have resorted to mergers and acquisitionsin recent times, telecom, finance, FMCG, construction materials, automobileindustry and steel industry are worth mentioning. With the increasing number ofIndian companies opting for mergers and acquisitions, India is now one of theleading nations in the world in terms of mergers and acquisitions.The merger and acquisition business deals in India amounted to $40 billion duringthe initial 2 months in the year 2007. The total estimated value of mergers andacquisitions in India for 2007 was greater than $100 billion. It is twice theamount of mergers and acquisitions in 2006.

Mergers and Acquisitions in India: The Latest Trends

Till recent past, the incidence of Indian entrepreneurs acquiring foreignenterprises was not so common. The situation has undergone a sea change in thelast couple of years. Acquisition of foreign companies by the Indian businesseshas been the latest trend in the Indian corporate sector.There are different factors that played their parts in facilitating the mergersand acquisitions in India. Favorable government policies, buoyancy in economy,additional liquidity in the corporate sector, and dynamic attitudes of the Indianentrepreneurs are the key factors behind the changing trends of mergers andacquisitions in India.The Indian IT and ITES sectors have already proved their potential in the globalmarket. The other Indian sectors are also following the same trend. The increased

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participation of the Indian companies in the global corporate sector has furtherfacilitated the merger and acquisition activities in India.

Major Mergers and Acquisitions in India

Recently the Indian companies have undertaken some important acquisitions. Some of those are as follows:

Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982million. Tata Steel acquired Corus Group plc. The acquisition deal amounted to$12,000 million. Dr. Reddy's Labs acquired Betapharm through a deal worth of $597million. Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million.

Suzlon Energy acquired Hansen Group through a deal of $565 million. Theacquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729million. HPCL acquired Kenya Petroleum Refinery Ltd.. The deal amounted to $500million. VSNL acquired Teleglobe through a deal of $239 million.When it comes to mergers and acquisitions deals in India , the total number was287 from the month of January to May in 2007. It has involved monetary transaction of US $47.37 billion. Out of these 287 merger and acquisition deals, there have been 102 cross country deals with a total valuation of US $28.19 billion.

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xvii. Recent Mergers And Acquisitions:

Mergers and Acquisitions have been very common incidents since the turn of the20th century. These are used as tools for business expansion and restructuring.Through mergers the acquiring company gets an expanded client base and theacquired company gets additional lifeline in the form of capital invested by thepurchasing company. The recent mergers and acquisitions authenticate such a view.

The Long Success International (Holdings) Ltd merged with City Faith Investments Ltd on the 8th of April 2008. The value of the merger was US $3.2 million. The agency in this instance was Bermuda Monetary Authority, Hong Kong Stock Exchange and other regulatory authority that was unspecified.

Novartis AG acquired 25% stake in Alcon Inc. This acquisition was worth 73,666million common shares of the company. They bought this stake from Nestle SA for$10.547 billion by paying $143.18 for every share. It was a privately negotiatedtransaction that needed to have a regulatory approval. Simultaneously, Novartis AG also received an offer of 52% interest that was equivalent of 153.225 million common shares of Alcon Inc.

Kinetic Concepts acquired each and every remaining common stock of LifeCell Corp for $51 for each share. Their total offer was $1.743 billion. The deal was done in accordance to regulatory approvals and the conventional closing conditions.

Kapstone Paper & Packaging Corp acquired the kraft paper mill as well as otherassets of MeadWestVaco.Corp. They paid them $485 million. The deal was conducted as per the regulatory approvals, receipt of financing and conventional closing conditions. This deal included a lumber mill in Summerville, hundred percent interest in Cogen South LLC. The Chip mills in Kinards, Elgin, Andrews and Hampton in South Carolina are also parts of this deal.

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xviii. Mergers and Acquisitions in Banking Sector:

Mergers and acquisitions in banking sector have become familiar in the majority ofall the countries in the world. A large number of international and domestic banksall over the world are engaged in merger and acquisition activities. One of theprincipal objectives behind the mergers and acquisitions in the banking sector isto reap the benefits of economies of scale.

With the help of mergers and acquisitions in the banking sector, the banks canachieve significant growth in their operations and minimize their expenses to aconsiderable extent. Another important advantage behind this kind of merger isthat in this process, competition is reduced because merger eliminates competitorsfrom the banking industry.

Mergers and acquisitions in banking sector are forms of horizontal merger becausethe merging entities are involved in the same kind of business or commercialactivities. Sometimes, non-banking financial institutions are also merged withother banks if they provide similar type of services.

Through mergers and acquisitions in the banking sector, the banks look forstrategic benefits in the banking sector. They also try to enhance their customerbase.

In the context of mergers and acquisitions in the banking sector, it can bereckoned that size does matter and growth in size can be achieved through mergersand acquisitions quite easily. Growth achieved by taking assistance of the mergersand acquisitions in the banking sector may be described as inorganic growth. Bothgovernment banks and private sector banks are adopting policies for mergers andacquisitions.

In many countries, global or multinational banks are extending their operationsthrough mergers and acquisitions with the regional banks in those countries. Thesemergers and acquisitions are named as cross-border mergers and acquisitions in thebanking sector or international mergers and acquisitions in the banking sector. Bydoing this, global banking corporations are able to place themselves into adominant position in the banking sector, achieve economies of scale, as well asgarner market share.

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Mergers and acquisitions in the banking sector have the capacity to ensureefficiency, profitability and synergy. They also help to form and grow shareholdervalue.

In some cases, financially distressed banks are also subject to takeovers ormergers in the banking sector and this kind of merger may result in monopoly andjob cuts.

Deregulation in the financial market, market liberalization, economic reforms, anda number of other factors have played an important function behind the growth ofmergers and acquisitions in the banking sector. Nevertheless, there are manychallenges that are still to be overcome through appropriate measures.Mergers and acquisitions in banking sector are controlled or regulated by the apexfinancial authority of a particular country.

For example, the mergers and acquisitions in the banking sector of India are overseen by the Reserve Bank of India (RBI).

xix. Mergers and Acquisitions in Telecom Sector:

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The number of mergers and acquisitions in Telecom Sector has been increasing significantly. Telecommunications industry is one of the most profitable and rapidly developing industries in the world and it is regarded as an indispensable component of the worldwide utility and services sector. Telecommunication industry deals with various forms of communication mediums, for example mobile phones, fixed line phones, as well as Internet and broadband services.

Currently, a slew of mergers and acquisitions in Telecom Sector are going on throughout the world. The aim behind such mergers is to attain competitive benefits in the telecommunications industry.

The mergers and acquisitions in Telecom Sector are regarded as horizontal mergers simply because of the reason that the entities going for merger or acquisition are operating in the same industry, that is telecommunications industry.

In the majority of the developed and developing countries around the world, mergers and acquisitions in the telecommunications sector have become a necessity. This kind of mergers also assists in creation of jobs.

Both transnational and domestic telecommunications services providers are keen to try merger and acquisition options because this will help them in many ways. They can cut down on their expenses, achieve greater market share and accomplish market control.

Mergers and acquisitions in the telecommunications sector have been showing a prosperous trend in the recent past and the economists are advocating that they will continue to do so. The majority of telecommunication services providers have understood that in order to grow globally, strategic alliances and mergers and acquisitions are the principal devices.Private sector investment and FDI (Foreign Direct Investment) have also boosted the growth of mergers and acquisitions in the telecommunications sector.

Over the last few years, a phenomenal growth has been witnessed in the number of mergers and acquisitions taking place in the telecommunications industry. The reasons behind this development include the following:

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# Deregulation

# Introduction of sophisticated technologies (Wireless land phone services)

# Innovative products and services (Internet, broadband and cable services)

Economic reforms have spurred the growth in the mergers and acquisitions industry of the telecommunications sector to a satisfactory level.

Mergers and acquisitions in Telecom Sector can also have some negative effects, which include monopolization of the telecommunication products and services, unemployment and others. However, the governments of various countries take appropriate steps to curb these problems.

In countries like India, mergers and acquisitions have increased to a considerable level from the mid 1990s..

The mergers and acquisitions in the telecommunications sector are governed or supervised by the regulatory authority of the telecommunication industry of a particular country, for instance the Telecom Regulatory Authority of India or TRAI. The regulatory authorities always keep a tab on the telecommunications industry so that no monopoly is formed.

Significant Mergers and Acquisitions in Telecom Sector

Following are the important mergers and acquisitions that took place in thetelecommunications sector:

* The takeover of Mobilink Telecom by Broadcom. This can also be described asa suitable example of product extension merger

* AT&T Inc. taking over BellSouth.

* The taking over of Hutchison Essar by the Vodafone Group. Now it has becomeVodafone Essar Limited.Benefits Provided by the Mergers and Acquisitions in the Telecommunications Sector

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Following are the benefits provided by the mergers and acquisitions in thetelecommunications industry:

* Building of infrastructure in a more convenient way

* Licensing options for mergers and acquisitions are often found to be easier

* Mergers and acquisitions offer extensive networking advantages

* Brand value

* Bigger client base

* Wide array of products and services

xx. Cross-border Mergers:

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Cross border mergers and acquisitions are playing an important role in the growth of international production. ``Not only they dominate FDI flows in developing countries, they have also begun to take hold as a mode of entry into developing countries and economies in transition.

FACTORS TO CONSIDER IN A CROSS-BORDER TRANSACTION

Although the basic merger or acquisition is the same worldwide, undertaking a cross-border transaction is more complex than those conducted ‘‘in market’’ because of the multiple sets of laws, customs, cultures, currencies, and other factors that impact the process.

How should the transaction be financed?

The financial structure of the transaction might be impacted by which country the target is in. For example, from a valuation perspective, ‘‘flow-back’’ can have a negative impact on the acquirer’s stock price and cause regulatory problems (i.e. stock ‘‘flowing’’ back to the acquirer’s home jurisdiction). Other types of considerations include the change in the nature of the investments held by institutional investors caused by a stock exchange merger – these investors may be compelled under their own investment guidelines to sell newly acquired stock in the acquirer; and the possible change in the tax treatment of dividends that encourages the sale of the stock (e.g. foreign tax credit is useless to US tax-exempt investors).The following are issues for an acquirer to address when structuring the transaction.

» If the transaction involves issuing stock, will the stock be common or preferred stock, and will the stock be issued directly to the target the transaction. or to the target’s stockholders? Is the acquirer prepared to be subject to the laws of the target’s country if it issues stock in the transaction, particularly the financial disclosure laws?

» After issuing stock, how will the acquirer’s stockholder base be composed? How many shares are held by cross-border investors? Does the new composition shift stockholder power dramatically? Will any of the new stockholders cause problems?

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» If the transaction involves debt, where will the debt be issued, from ‘‘in country’’ or cross-border? What type of debt will be issued – senior, secured, unsecured, or mezzanine?

» If the transaction involves cash, will cash be raised by raising capital in the public markets, and if so, in which market will the stock be issued? If cash financing is obtained in the target’s country, can the acquirer comply with any applicable margin requirements, such as those promulgated by the Federal Reserve Board in the US?

How are the customs and cultures of the parties different?

Before contemplating the transaction, the acquirer should be able to express a clear vision of how the target will be operated and funded. This will be necessary to share with the target and its employees and shareholders, as well as with its own shareholders.

Public relations are important in winning the hearts of the target’s employees, communities, and shareholders. One cultural issue is whether the target will still be managed ‘‘in country,’’ or whether it will be part of a regional center or managed solely from the acquirer’s headquarters. Employees worry about overseas managers and communities wonder about loss of jobs. From a financial perspective, investors will want pro forma information to understand how the combined company will operate going forward. This may require disclosure of financial information to which the target’s investors are accustomed, but which is new for the acquirer.

What level of due diligence is appropriate?

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Due diligence is critical in a cross-border transaction since there is a greater likelihood for undesirable surprises to surface after an agreement has been reached initially. It is important to establish in the formal agreement what type of due diligence is permitted and what the consequences are of finding certain types of surprises.

The acquirer should ensure that it has adequate access to the target’s documentation and personnel to facilitate the due diligence process. In addition to access to all financial information, the acquirer should review the target’s loan agreements, severance plans, and other employee agreements to see if the target’s change in control would impose any previously undisclosed costs or obligations (e.g. constitute an event of default so as to accelerate outstanding indebtedness).

Similarly, any other major agreements should be reviewed, such as licensing and joint venture agreements, to determine whether any benefits may be lost due to the pending change in control.

The target’s charter and bylaws should be checked to see if they have any peculiar provisions that might make it more difficult for the acquirer to gain full control of the target. For example, the acquirer should determine whether the target has a shareholder rights plan or poison pill, or has a provision that requires a super-majority vote to approve mergers.

Are there any significant tax or currency issues?

The acquirer should structure the transaction with a complete understanding of the tax implications. This requires an analysis of the interplay of local law and tax treaties as well as the expectation of where future revenues and deductions will be derived. Based on the acquirer’s own tax preferences, it may desire current income (i.e. dividends) or capital gain, and should structure the transaction accordingly.

The acquirer must also take care to consider the volatility of any currencies that are implicated in the transaction and ensure that it has adequate protection from downward swings in them before the transaction is closed. If it cannot tolerate the currency risk that is involved in the target’s operations, the acquirer should consider the ongoing impact of a volatile currency after the transaction is complete.

xxi. Post Closing Challenges:

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The closing of a merger or acquisition usually brings a great sigh of relief to the buyer, seller, and their respective advisors. Everyone has worked hard to ensure that the process went smoothly and that all parties are happy with the end result. But the term closing can be misleading in that it suggests a sense of finality, when in truth the hard work, particularly for the buyer, has just begun.

Often one of the greatest challenges for the buyer is the post-closing integration of the two companies. The integration of human resources, the corporate cultures, the operating and management information systems, the accounting methods and financial practices, and related matters are often the most difficult part of completing a merger or acquisition. It is a time of fear, stress and frustration for most of the employees who were not on the deal team and may only have limited amounts of information regarding their roles in the post-closing organization. Estimates are as high as three out of every five M&A deals results in an ineffective plan for the external integration of the two companies. And even if there is a plan, well they don’t always work out as anticipated. The consequences of a weak or ineffective transition plan are the buyer’s inability to realize the transaction’s true value, wasted time and resources devoted to solving post-closing problems, and in some cases, even litigation.

A Time of Transition

Post-closing challenges raise a wide variety of human fears and uncertainties that must be understood and addressed by both buyer and seller. The fear of the unknown experienced by the employees of the seller must be addressed and put to rest; otherwise, the employees’ stress and distraction will affect the seller’s performance and the viability of the transaction. The need to quickly integrate the two corporate cultures also raises personal and psychological issues that must be addressed. Once word of a deal leaks out to employees, the uncertainty associated with the change will likely lead to widespread insecurity and fear of job loss at all levels of the organization.

Many of the fears experienced by the employees of both buyer and seller result from expectations of downsizing to cut costs, avoid duplication, and achieve the economies of scale potential provided by the transaction.

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Another common problem is the psychological consequences of ‘‘seller’s remorse,’’ particularly when the seller remains on-site in a consulting capacity or even as a minority owner. The seller can be so accustomed to managing the business that he/she may not be open to changes in strategies or policies implemented by the buyer.

The seller undermines the buyer’s efforts or contradicts its authority. These sellers often want the benefit of the bargain but seem unwilling to accept the burden of the bargain and relinquish control of the company. These problems are particularly common in mergers where the management and flow of the deal may be one of shared objectives and values as opposed to an acquisition that more clearly has a designated quarterback.

In attempting to realize the true value of a merger or acquisition, the buyer must coordinate a smooth and efficient post-closing process. Important issues that need to be managed fall into three areas—people, places, and things. Some issues are addressed in the closing documents. Most require forethought in order to anticipate potential pitfalls. The bottom line is that if the buyer doesn’t plan to address the following issues, the chances for not fully realizing success are greatly increased.

1. Staffing Levels and Other People Problems

One of the primary areas that an acquiring company looks to in order to realize the projected return on its investment is the new company’s level of staffing. If a certain number of employees can be eliminated, it is more likely that earnings projections will be met or exceeded. The hard part is deciding who stays, and in what positions, and who goes. Much of this depends on the nature of the acquisition. On the one hand, if the terms dictate that the acquired firm is to maintain its independence, it is much more difficult to reduce staffing levels. On the other hand, if the acquired firm is absorbed into the acquirer, staff cutbacks are probably appropriate and healthy. This is the greatest source of employee fear and is the fuel that powers the rumor mill. But some of these fears are valid. An April 2005 report published by Challenger, Gray & Christmas recommended that job cuts following M&A deals in the first quarter of 2005 soared to nearly 77,000, over six times the rate of the last

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quarter of 2004 and three times the rate of the first quarter of 2004. The biggest cuts came in the telecom and high tech industries.

The first step in determining staffing levels is to divide the workforce into management and staff/labor. These two groups must be distinguished because the terms of employment are often quite different. Management is often party to employment contracts, and receives deferred compensation, stock options, and other issues, while staff can be protected by union contracts and/or federal or state employment laws.

Management

In many ways, management staffing is a much easier problem to resolve. Most employment agreements and/or management benefits can be quantified to determine the cost of such decisions. This should have been examined during the due diligence process and worked into the pricing for the transaction.

The primary task of resolving the level of management staffing is to determine where there are redundancies and who the most qualified candidates are. Such a process is normally driven by the acquiring company, but it is not a bad idea to involve the acquired company as well. Only in this way can a true evaluation be made. Not consideration of all candidates fairly may result in a lower return on the investment.

All candidates must be evaluated objectively. It is often difficult to do so because emotions often cloud the judgment of the evaluators. For the acquiring company, choosing the incumbent management team is an easy decision. However, a formal evaluation of all candidates can lead to a stronger, more diverse team. While change can be difficult, it is necessary to embrace the change inherent in acquisitions to enhance your chances of success.

Labor

Labor is often protected by union contracts and labor laws. This limits the options available when deciding who should stay and who should go. However, it should not

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prevent the buyer from evaluating all employees. By evaluating first and then worrying about possible protections, the buyer gains a much better sense of the quality of the workforce that does ultimately remain.

The same rules apply to evaluating labor as to evaluating management. Be objective. Be balanced. Be honest. The buyer shortchanges itself by not doing so. Develop a selection methodology by targeting certain employees for layoff or retention based on performance and experience. Make sure that the applied criteria are documented and objective and are supported by a performance evaluation and that any review of personnel files and performance evaluations is confidential. This may require the formation of a review committee made up of representatives from each organization to ensure that the terminations occur according to agreed upon procedures.

Once the selections are made, they must be examined from a legal point of view. The following is a list of legal considerations to be examined:

• Employment agreements that may contain conditions that are unacceptable to the buyer or conditions that may be triggered in the event of a merger or acquisition.

• Employees on family leave workers ’ compensation, or disability, which has certain rights to comparable positions upon their return to work, which may or may not be consistent with staffing plans after the acquisition.

• Whistle-blowers who could bring claims of wrongful discharge.

• WARN (Worker Adjustment and Retraining Notification) notices, which must be sent 60 days in advance by the seller to its employees if there is a plan to close facilities.

• Union contracts that could fall under the National Labor Relations Act (NLRA), which protects the rights of union, as well as nonunion, employees on matters of wages, hours, and working conditions.

• Race, religion, or sex discrimination for which the buyer may be held accountable under civil rights legislation, even if claims are filed based on events that occurred before the acquisition.

• Age discrimination under the Age Discrimination in Employment Act (ADEA) and/or Older Workers Benefit Protection Act (OWBPA), which protects workers

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against changes in the workforce or changes in benefit plans that would discriminate against workers over 40 or make age-based distinctions..

• Problems that could develop under the Occupational Health and Safety Act (OSHA) if current compliance is not verified and the cost of future compliance is not factored into operating results.

• To ensure that the employees being acquired are legally able to work in the United States, the burden of compliance is on the employer under the Immigration Reform and Control Act (IRCA).

• Lack of compliance with the Drug-Free Workplace Act and various government contract laws can lead to suspended payments or terminated contracts for a seller that is a federal government contractor.

The bottom line is that the buyer needs to conduct a thorough labor and employment review. This entails all manner of documents related to such issues. Each transaction is unique in that the above issues will apply in differing degrees.

Customers

When a buyer acquires a business, one of the most valuable assets is the customer base. One of the post-closing challenges is to determine the profitability of the customers. Often the acquired company has legacy customers that they have been unwilling or unable to terminate if the customer is unprofitable or difficult to manage. The acquirer should review all customers for profitability and sustainability. It makes little sense to keep a customer if it is not possible to make a profit on the relationship, unless the customer enables the merged company to penetrate a new market or if the customer helps achieve scale economies, thereby enabling other customers to be profitable. However, even in these cases, there is a limit to the amount of losses that make financial sense. In addition, the customer may be a direct competitor of the buyer or of one of the buyer’s customers. As a result, it is important to evaluate the seller’s customer base. It may be necessary to discount the value of the acquisition to account for a customer base that is unprofitable or duplicative and that provides little additional strategic value.

Perhaps more important, however, is for the seller to transfer the goodwill of its customers to the buyer. A disgruntled employee can very quickly destroy this

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goodwill and perhaps jeopardize a significant income stream on which the value of the acquisition was based.

The key steps to transferring this goodwill are:

Personal introductions to customer contacts Social events to acquaint customers with the new owners Letters from both the seller and buyer that thank customers for their business and announce the new management and plans for the merged entity

Vendors

Suppliers are much more often overlooked than customers. After all, any vendor can easily be replaced. Since this is often true, it is necessary for the buyer to conduct a thorough review of the existing suppliers to ensure that the seller is getting the best prices and terms. However, there are certain suppliers whose replacement would cause significant disruption. This can occur in situations where there is only one supplier of a given product or service, or if the supplier is an integral part of a just-in-time inventory system.

Essential vendors are a key component of the continued success and uninterrupted operations of a company.

Of special importance are suppliers that provide professional services—in particular, bankers, accountants, and lawyers. The standard assumption is that the combined company will use the buyer’s professional suppliers, but this may not always be desirable or feasible. If a buyer is purchasing a business in a different industry, the bankers may not have the appropriate expertise. The legal counsel of the seller may be better suited to deal with certain local matters or be more cost-effective. The accountants of the seller may be providing outsourcing of certain tasks for which it may not be practical to change immediately. These factors should be considered carefully before any key relationships are terminated. Ultimately, it may be best to continue to use both firms for certain purposes, subject to any potential conflicts of interests being resolved.

2. Problems Involving Places

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Often one of the larger expenses on the income statement, rent and/ or lease payments are a natural place for a buyer to focus on when evaluating the efficiencies to be gained by a merger. It would seem to be an easy issue to resolve: In acquiring this company, we can reduce the staff by x percent, which means that we need x percent less of square footage in which to work. In addition, the staff has x percent more square footage per employee than our company. As a result, total square footage can be reduced by x percent, thereby saving $x. But very few decisions in a merger or acquisition can be resolved with a simple mathematical equation. There usually are people involved, and with people come emotions and unpredictability.

This has to be accounted for when looking at space, just as much as when examining staffing levels. When examining the space requirements of the combined entity, it is certainly helpful to consider the square footage. The space should be evaluated to determine if the rent is more or less expensive than other company space and if the amount of space is more than is needed. This will go a long way toward helping to cut expenses in order to reach the target return.

However, there must also be human considerations. How long have the employees been in this space? How does the commute compare to where they might be relocated? How much interaction is required between the staff being relocated and staff in a different location? How much reconfiguration of the office and facilities of each company will be required to accommodate additional staff or functions? How much productivity can be expected from these people during the course of the move?

Non-consideration of these and other related questions can open up a can of worms. Location is a factor that can effect the overall integration of the buyer by the seller and can lead to significant turnover. It is taken very personally by many employees. Our suggestion is to take steps to maximize your efficiency of space and property but to do so considering the human elements of the changes.

3. Corporate Identity

Now that the two companies have become one, it only stands to reason that the merged entity is different from what existed before. Yet this is a point that can often

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be forgotten when it comes to corporate identity. Since there is essentially a new company, it may be important to consider a new corporate identity in the form of the company name and/or logo.

This may seem obvious, but the real issue goes much deeper. A corporate identity defines what makes a corporation unique. The company name and logo are merely manifestations of that identity. Before such issues can be decided, it must be determined what the corporation stands for, where it is going, and how it is different from other corporations. Only then does it make sense to put a name on it and identify an image with it.

There are several aspects of a corporation that go into its identity. These include market share, industry group identification, customer base, employees, and direction. Most, if not all, of these aspects are altered in some way as the result of a merger or acquisition. The key is to identify what changes have occurred and respond to them by shaping the image or identity that is communicated to the public.

4. Legal Issues

Following the closing of the transaction, there are many legal and administrative tasks that must be accomplished by the acquisition team to complete the transaction. The nature and extent of these tasks will vary, depending on the size and type of the financing method selected by the purchaser. The parties to any acquisition must be careful to ensure that the jubilation of closing does not cause any post-closing matters to be overlooked.

In an asset acquisition, these post-closing tasks typically include the following:

• Final verification that all assets acquired are free of liens and encumbrances

• Recording of financing statements and transfer tax returns

• Notification of the sale to employees, customers, distributors, and suppliers

• Adjustments to bank accounts and insurance policies

In addition to the above, a stock acquisition may also include the following:

• Filing articles of amendment to the corporate charter or articles of merger

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• Completion of the transfer of all stock certificates

• Amendments to the corporate bylaws

• Preparation of all appropriate post-closing minutes and resolutions

Such actions require legal counsel familiar with the issues of corporate governance and intellectual property. While the buyer’s legal counsel attends to these matters, management can more readily focus on the other aspects of the business combination for which they are better qualified and more effective.

5. Minimizing the Barriers to Transition

No matter how hard you try and how well you anticipate the issues that need to be addressed, the natural response of most people is to avoid change. As a result, it is important to be aware of the various aspects of change management and address them as well. The primary emotion that will be encountered in dealings with various groups will be fear. There will be fear on the part of employees, as relates to such things as job security, workplace location, and reporting structure. But you may also have to deal with fear on the part of customers (the buyer may discontinue a product line) and suppliers (the buyer may already have someone to supply that good).

Communication

The primary tool for dealing with fear, and many of the other emotions that surface during the course of acquisition transition, is communication. If a merger is thought of as the beginning of a marriage, think of the amount of communication that is necessary in the first few weeks and months of such a relationship. As with any relationship, a lack of communication typically means a lack of success.

In a merger, the two keys to effective communication are to determine

(1) the importance of the information and (2) who should communicate it. Information should be communicated in the order of its importance. This means that

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you want to first communicate that information that affects people directly, including changes in:

• The organization, especially who is staying and who is leaving

• Reporting structures

• Job descriptions and responsibilities

• Title, compensation, and benefits

• Job location and operating procedures

As a result of the importance of this information, the person doing the communicating is also important. A trusted person from the seller’s side, along with an important person from the buyer’s side, works best. This will assist in the transition and add credibility to the process.

The next most important information is the introduction of the new management team and the transition to new managers and employees. It is a bit disconcerting to walk the halls in an organization and not know people. Think of how it feels on the first day of a new job. Well, that’s how it feels for all the employees of an acquired company. By making an effort to introduce the key players, people are more comfortable. They can place a name with a face and know who is being referred to in discussions. This can help overall efficiency because employees will be focusing on doing their job rather than wondering who someone is and how that person might affect their career. It also helps in the socialization process among the employees, which in turn contributes to efficiency! This, of course, is more difficult as organizations grow larger. Finally, communicate the new reporting structure and have individual managers introduce the two sides when there will be day-today interaction. If possible, have the prior manager make some kind of handover to the new. Some kind of group meeting or social gathering among the employees of various departments, especially those that interact regularly, can go a long way in making everyone more comfortable with the new faces, functions, and procedures.

6. Post-Merger Task Force

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One of the tools through which communication can be made more effective is a post-merger task force. Such an entity should be composed of a representative group from both sides of the transaction and should be formed after the due diligence process. The role of such a group, which needs to be defined and communicated early, is to uncover, evaluate, and resolve post-merger problems.

The importance of effectively communicating the role of the task force cannot be emphasized enough. Failure to do so will limit its effectiveness and call into question the resolve of the new organization. In a very real sense this is the first operating decision to be seen by the seller’s employees and thus it will greatly influence the new employees’ perception of the acquiring organization.

The composition of the task force has a bearing on its effectiveness and the integrity of the buyer, as viewed by the seller’s employees. As a result, the CEO should probably avoid making him or herself a member. An honest assessment of those being considered for the task force will go a long way toward establishing its credibility. If one of the members from the seller’s side is an employee who is not respected by the majority of the workforce, people will not take the task force seriously.

The role of the task force is best kept simple. It can serve as a conduit from labor to management to resolve problems that arise during the course of the merger. In this way, a dialogue can be opened and people will get the impression that actions are being taken to address concerns. The task force can also be used to organize the information that needs to be communicated to the new employees. The amount of information to be communicated can be overwhelming, and the way it is communicated can also cause problems. The task force can serve to communicate the issues in order of importance and to address them accurately. This helps prevent the grapevine from disseminating erroneous information. Creating the dialogue and organizing the information serve to help reduce or eliminate the fear.

Once its work is completed, the task force must be dissolved. This is easier said than done, as it is much easier to say when the merger activity begins than to define when it is over. The first sign that the end of the task force’s life is near is when all the information deemed to be important in relation to the merger has been disseminated. An additional indication is the amount of information flowing back from the

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employees to the task force has significantly waned. Nonetheless, it is often helpful to give the task force a set life at its beginning—60 or 90 days—and to evaluate the situation at that time. The final call will come from the CEO, when it is determined that the value of the task force has been expended and it is now time to get to work to realize the true value of the combination.

The importance of a well-planned and smooth post-closing transition cannot be emphasized enough. Without the proper attention to these matters, the value of the transaction may never be realized. This will require assembling a team with proven implementation skills and a desire to see the transaction work. The sheer number of issues that need to be addressed can seem overwhelming at first glance. But the importance of these issues in the success of a business combination cannot be overemphasized. By planning properly, paying attention to the details, and picking the right people for the job, a buyer will gain confidence in its ability to successfully integrate the seller into its operations. This will serve to encourage further growth through mergers and acquisitions.

V. Case- Study:

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HINDALCO - NOVELIS ACQUISITION: CREATING AN ALUMINIUM GLOBAL GIANT

Abstract

'We look upon the aluminium business as a core business that has enormous growth potential in revenues and earnings,' 'Our vision is to be a premium

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metals major, global in size and reach .... The acquisition of Novelis is a step in this direction'-Kumar Mangalam Birla, Chairman, Hindalco Industries

Last decade witnessed growing appetite for takeovers by Indian corporate across the globe as a part of their inorganic growth strategy. In this chain Indian aluminium giant Hindalco acquired Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled aluminium products. Hindalco Industries Ltd., acquired Novelis Inc. to gain sheet mills that supply can makers and car companies. Strategically, the acquisition of Novelis takes Hindalcoonto the global stage as the leader in downstream aluminium rolled products. The transaction makes Hindalco the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as well as being India's leading copper producer.

The case study attempts to analyze the financial and strategic implications of this acquisition for the shareholders of HINDALCO. The case explains the acquisition deal in detail and highlights the benefits of the deal for both the companies.

Followings are the main issues to be discussed for critical review of this case:

What is the strategic rational for this acquisition?

Were the valuation for this acquisition was correct?

What are financial challenges for this Acquisition?

What is the future outlook of this acquisition?

Introduction:

Mergers and Acquisitions have been the part of inorganic growth strategy of corporate worldwide. Post 1991 era witnessed growing appetite for takeovers by

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Indian corporate also across the globe as a part of their growth strategy. This series of acquisitions in metal industry was initiated by acquisition of Arcelor by Mittal followed by Corus by Tata’s. Indian aluminium giant Hindalco extended this process by acquiring Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled aluminium products. Hindalco Industries Ltd.,acquired Novelis Inc. to gain sheet mills that supply can makers and car companies.

Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the leader in downstream aluminium rolled products. The acquisition of Novelis by Hindalco bodes well for both the entities. Novelis, processes primary aluminium to sell downstream high value added products. This is exactly what Hindalco manufactures. This makes the marriage a perfect fit.Currently Hindalco, an integrated player, focuses largely on manufacturing alumina and primary aluminium. It has downstream rolling, extruding and foil making capacities as well, but they are far from global scale. Novelis processes around 3 million tonnes of aluminium a year and has sales centers all over the world. In fact, it commands a 19% global market share in the flat rolledproducts segment, making it a leader.

Hindalco has completed this acquisition through its wholly-owned subsidiary AV Metals Inc and has acquired 75.415 common shares of Novelis, representing 100 percent of the issued and outstanding common shares AV Metals Inc transferred the common shares of Novelis to its wholly-owned subsidiary AV Aluminium Inc. The deal made Hindalco the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as well as being India's leading copper producer. Hindalco Industries Ltd has completed its acquisition of Novelis Inc under an agreement in which Novelis will operate as a subsidiary ofHindalco.

Industry Overview:

a. Global :

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Globally, newer packaging applications and increased usage in automobiles is expected to keep the demand growth for aluminium over 5% in the long-term. Asia will continue to be the high consumption growth area led by China, which has been and is expected to continue to register double-digit growth rates in aluminium consumption in the medium-term. With key consuming industries forming part of the domestic core sector, the aluminium industry is sensitive to fluctuations in performance of the economy. Power, infrastructure and transportation account foralmost 3/4th of domestic aluminium consumption. With the government focusing towards attaining GDP growth rates above 8%, the key consuming industries are likely to lead the way, which could positively impact aluminium consumption. Domestic demand growth is estimated to average in the region of over 8% over the longer-term. Lowering of duties reduces the net tariff protection for domestic aluminium producers. Aluminium imports are currently subject to a customs duty of 5% and an additional surcharge of 3% of the customs duty. The customs dutyhas been reduced in a series of steps from 15% in 2003 to 5% in January 2007. With reduction in import duties, domestic realization of aluminium majors, namely Hindalco and Nalco, is likely to be under pressure, as the buffer on international prices is reduced. Moreover, with greater linkage to international prices, volatility in financials could increase. However, producers are moving downstream to negate the higher volatility.

b. India:

The Indian aluminium sector is characterized by large integrated players like Hindalco and National Aluminium Company (Nalco). The other producers of

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primary aluminium include Indian Aluminium (Indal), now merged with Hindalco, Bharat Aluminium (Balco) and Madras Aluminium (Malco) the erstwhile PSUs, which have been acquired by Sterlite Industries.

Consequently, there are only three main primary metal producers in the sector.

The per capita consumption of aluminium in India is only 0.5 kg as against 25 kg. in USA, 19kg. in Japan and 10 kg. in Europe. Even the World’s average per capita consumption is about 10 times of that in India. One reason of low consumption in the country could be that consumption pattern of aluminium in India is vastly different from that of developed countries. The demand of aluminium is expected to grow by about 9 percent per annum from present consumption levels.

This sector is going through a consolidation phase and existing producers are in the process of enhancing their production capacity so that a demand supply gap expected in future is bridged.

However, India is a net exporter of alumina and aluminium metal at present. In order to develop a guideline for energy management policy for the plants comprising the aluminium industry, it was decided to undertake a questionnaire survey that was followed up by plant visits.

Features of Indian Aluminium Industry:

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Highly concentrated industry with only 5 primary plants in the country.

Controlled by only a few players.

Electricity, coal and furnace-oil are primary energy inputs.

All plants have their own captive power units for cheaper and un-interrupted

power supply.

Energy is 40% of manufacturing cost for metals and 30% for rolled

products.

Energy management is a critical focus in all the plants.

Each plant has an Energy Management Cell.

High cost of technology is the main barrier in achieving high energy

efficiency.

Company Over-view :

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a. About Hindalco Industries

Hindalco Industries a flagship company of Aditya Birla Group is structured

into two strategic business alliances- copper and aluminium.

It has an annual revenue of US $ 14 bn and market capitalization in

excess of US $ 23bn.

It commenced its operations in 1962 and today it has grown to become

the country’s largest integrated aluminium producer.

It also ranks among the top quartile of low cost producers in the world.

The aluminium division’s product range includes alumina chemicals,

primary aluminium ingots, billets, rolled products, extrusions, wire rods,

foils and alloy wheels.

Shareholding Pattern:

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Operations In India:

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Global Presence:

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Hindalco: Impressive Growth:

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Hindalco Growth Path:

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Consolidated Hindalco:

Hindalco Business:

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Domestic Market Share:

Division Market Share [ % ]

Primary aluminium 42

Rolled products 63

Extrusions 20

Foils 44

Wheels 31

Sales Revenue Of Aluminium Business:

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Production Capacities:

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Expansion Plans:

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Stock Highlights:

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Stock Reactions:

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Company Growth v/s Industry Growth:

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Peer Comparison:

FY 08- A Challenging Year:

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Consolidated Financial Highlights:

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Future Outlook:

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b. About Novelis :

It is the world leader in aluminium rolling.

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It produces an estimated 19% of the world’s flat rolled aluminium

products.

It is the world leader in the recycling of used aluminium beverage cans.

It is the no. 1 rolled products producer in Europe, South- America and

Asia and the no.2 producer in North- America.

Some of its customers include- Coca- Cola, Ford and General Motors.

The company had 36 operating facilities in 11 countries as of December

31, 2005.

Global Presence:

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Product Portfolio:

Novelis Supplies World Leaders:

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Leader In Auto Sheet Maker:

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Leader In Can Sheet Market:

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Attractive Industry Fundamentals:

Significant barriers to entry exist in the aluminium rolled products

industry:

1. Large capital cost.

2. Long lead times to install cost competitive plants.

3. Technological requirements, premium on “ know-how.”

4. Customer qualifications demand.

Rising service, quality and efficiency demands of large global

customers.

Continued growth in aluminium consumption particularly China and

India.

Price structure insulates producer from the variability of primary

aluminium prices.

Novelis Regional Overview:

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Balanced Portfolio And Market Position:

World Of Novelis:

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Market Share Of Aluminium Rolled Products:

Diversified Presence:

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Growth Platforms For Novelis Fusion:

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Investments For Strategic Growth:

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Growth Model:

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Past Performance Novelis:[ Million $ ]

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Rationale For Acquisition

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The combination of Hindalco and Novelis establishes an integrated producer

with low cost alumina and aluminium facilities combined with high-end

rolling capabilities and a global foot-print.

Hindalco will be able to ship primary aluminium form India and make

value added products.

The acquisition will increase Hindalco’s scale of operation , entry into a

high-end downstream market and enhancing global presence.

Novelis is a global leader [in terms of volume] in rolled products with an

annual capacity of 2.8 million tonnes and a global market share of 19%.

Novelis has a capacity to produce 3 million tonne while Hindalco has a

capacity of 2,20,000 tonne.

Hindalco plan to triple aluminium output to 1.5 million metric tonne by

2012 to become the world’s 5th largest producer.

By acquiring Novelis, Hindalco fulfilled it’s dream to become the

world’s largest producer of aluminium flat rolled products.

This acquisition gives access for Hindalco to high-end products and also

superior technology.

This deal will give Hindalco a strong presence in recycling of aluminium

business.

It would have taken a minimum of 8-10 years for Hindalco for building

these facilities.

Hindalco also get the fusion technology of Novelis which increases the

formability of aluminium.

According to reports it would take 10 years and US $12bn to build the

29 plants that Novelis has with capacity close to 3 million tonnes.

The purchase strategically shifts Hindalco from an upstream aluminium

producer to a downstream producer

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Facts About The Bid:

Unlike the Tata-CSN shootout, the bidding was low profile.

The identity of other bidders and the price they offered are not known,

though Birla said that the bidding was very competitive.

Hindalco made only one bid- 44.93$.That won the deal.

Rules Of The Deal:

If 66.66% of the shareholders okay the deal, remaining shareholders will be

compelled to sell their share to Hindalco under the Canadian law.

If the 66.66% approval is not obtained, Birla has the right to walk away from

the deal.

Hindalco made the Novelis board sign a $100- million breakfee, the price

Novelis has to pay if it finds another buyer.

There was also a clause of ‘new buyer premium ’of a ‘few dollars a share’

over the 44.93$ per price- only at that price can Novelis entertain a fresh

rival bid.

So if a new bidder enters, it has to cough up atleast $5 a share more than

what Hindalco did.

Facts Of The Deal:

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The deal was an all cash transaction of US $6 bn, which included debt of

US $ 2.4bn.

Hindalco will pay $ 44.93 in cash for each outstanding common share of

Novelis, around 15% premium to the market price.

The agreement requires 66.66 per cent of Novelis shareholders present and

voting to tender their shares. Otherwise, Hindalco will walk away. If this

condition is satisfied, the remaining one-third of shareholders will be

"squeezed out," (will have to sell to Hindalco).

Post-acquisition, over 50 per cent of the group's business could come

from operations outside India, which is currently at 30 per cent.

Also, 20 per cent of the group's total workforce would also be based outside

India.

After the merger Hindalco will emerge as the largest rolled aluminium

products maker and 5th largest integrated aluminium manufacturer in

the world.

Novelis brings in high technology support.

Novelis has a global market share of 19% while Hindalco enjoys a share of

60% in the rolled products market.

The Novelis acquisition will give Hindalco a strong global foot-print .

Novelis is operating in 11 countries with around 12,500 employees.In 2005,

the company reported net sales worth US $8.4bn and net profit of US $90

mn.

Novelis reported net sales of US $7.4 bn and net loss of US $170 million in

nine months during 2006, on account of low contract prices.

Novelis has a rolled product capacity of 3 million tonne while Hindalco at

this moment does not have any surplus capacity.

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Hindalco’s Greenfield expansion will give it a primary aluminium

capacity of approximately 1 million tonne, but it will take around 3-4

years for all these to come into operation.

Considering these factors, Hindalco’s profitability is expected to remain

under pressure and this will bounce back in 2009-10

The debt burden of Novelis stood at US $2.4bn and additional US

$2.8bn will be taken by Hindalco to finance the deal.

This will put tremendous pressure on profitability due to high interest

burden.

Hindalco’s current expansion plans will cost Rs 25,000 crores and as a

result debt burden and interest will increase further.

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Funding Structure:

Funding Pattern:

The Novelis acquisition of US $6bn is been funded through US $3.1bn of

loan.

Hindalco personally will contribute USD 450 million.

Aditya Birla group company Essel Mining will contribute USD 300 million.

Hindalco plans to raise USD 2.8 bn of debt through 2 special purpose

vehicles.

US $455mn through liquidation of investments.

Existing loan of US $2.4bn will be replaced by term loan of US $1bn and

high yield bonds of US $1.4bn.

Financial Challenges:

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The acquisition will expose Hindalco to a weaker balance sheet.

The company will move from high margin metal business to low margin

downstream products business.

The acquisition will more than triple Hindalco’s revenues, but will increase

the debt burden and erode profitability.

Risk Factors:

The deal will create value only after completion of Hindalco’s expansion

plans, and due to its highly leveraged position, its plans may get affected.

Novelis profitability could be adversely affected by the inability to pass

through metal price increases due to metal price ceilings in certain of the

company’s sales contracts.

Some of the customers are significant to the company’s revenues and any

change in their business or financial conditions could adversely affect the

company’s business.

Adverse changes in currency exchange rates could negatively affect the

financial results and competitiveness of company’s aluminium rolled

products relative to other materials.

Unexpected fall in aluminium prices could adversely impact earnings.

The end-use markets for certain products of Novelis products are highly

competitive and customers are willing to accept substitutes for the company

products.

FUTURE:

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Future Of Aluminium:

Investment Required:

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Financials:

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1. Consolidated:

2. Standalone Performance: [ Hindalco ]

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3. Consolidated Balance Sheet:

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4. Segmental Performance:

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5. Aluminium- Sales Volume/ Realization:

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6. Operational Performance:

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7. Production Growth:

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8. Key Ratios- Aluminium:

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SWOT Analysis:

Strengths:

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1) Post acquisition of Novelis, Hindalco has become the world leader in flat-

rolled aluminium products and recycling of aluminium cans.

2) It is also the leading producer in primary aluminium and alumina in Asia.

3) It has a strong geographical presence- North and South America, Asia and

Europe.

Weakness:

1) The R&D expenditure is very low compared to industry standards.

Opportunities:

1) Strong growth in demand for aluminium.

Threat:

1) Prices of primary metals are highly volatile.

2) Disruption in production due to external factors.

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Merger and Acquisition

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