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ACQUISITION
An acquisition or takeover is the purchase of one business or company by another company or other business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on a public stock market. An additional dimension or categorization consists of whether an acquisition is friendly or hostile. Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome. "Serial acquirers" appear to be more successful with M&A than companies who only make an acquisition occasionally. Mergers and acquisitions are strategic decisions taken for maximisation of a company's growth by enhancing its production and marketing operations. They are being used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional businesses in order to gain strength, expand the customer base, cut competition or enter into a new market or product segment.
capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarities of resources and skills and a widened horizon of opportunities. Diversifying the risks of the company, particularly when it acquires those businesses whose income streams are not correlated. Diversification implies growth through the combination of firms in unrelated businesses. It results in reduction of total risks through substantial reduction of cyclicality of operations. The combination of management and other systems strengthen the capacity of the combined firm to withstand the severity of the unforeseen economic factors which could otherwise endanger the survival of the individual companies. A merger may result in financial synergy and benefits for the firm in many ways: By eliminating financial constraints By enhancing debt capacity. This is because a merger of two companies can bring stability of cash flows which in turn reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt By lowering the financial costs. This is because due to financial stability, the merged firm is able to borrow at a lower rate of interest. Limiting the severity of competition by increasing the company's market power. A merger can increase the market share of the merged firm. This improves the profitability of the firm due to economies of scale. The bargaining power of the firm vis--vis labour, suppliers and buyers is also enhanced. The merged firm can exploit technological breakthroughs against obsolescence and price wars.
TYPES OF MERGERS
Horizontal merger: - it is a combination of two or more firms in the same area of business. For example, combining of two book publishers or two luggage manufacturing companies to gain dominant market share. Vertical merger:- is a combination of two or more firms involved in different stages of production or distribution of the same product. For example joining of a TV manufacturing (assembling) company and a TV marketing company or joining of a spinning company and a weaving company Vertical merger may take the form of forward or backward merger. When a company combines with the supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger.
Conglomerate merger: - is a combination of firms engaged in unrelated lines of business activity. For example, merging of different businesses like manufacturing of cement products, fertilizer products, electronic products, insurance investment and advertising agencies. L&T and Voltas Ltd are examples of such mergers.
Abstract of case
In the year 2007, the world's largest telecom company in terms of revenue, Vodafone Plc (Vodafone) made a major foray into the Indian telecom market by acquiring a 52 percent stake in the Indian telecom company, Hutchison Essar Ltd (Hutchison Essar), through a deal with the Hong Kong-based Hutchison Telecommunication International Ltd. (HTIL). It was the biggest deal in the Indian telecom market. Vodafone's main motive in going in for the deal was its strategy of expanding into emerging and high growth markets like India. In 2007, India had emerged as the fastest growing telecom market in the world outpacing China. But it still had low penetration rates, making it the most lucrative market for global telecom companies. Though Hutchison Essar was one of the established players in this market, HTIL had exited India as the urban markets in the country had become saturated. Future expansion would have had to be only in the rural areas, which would lead to falling average revenue per user (ARPU) and consequently lower returns on its investments. HTIL also wanted to use the money earned through this deal to fund its businesses in Europe. Vodafone had to face many obstructions in clinching the deal - initial opposition for the Indian partner of HTIL, Essar Ltd., aggressive bidding by competitors, as well as regulators who took their time to approve the deal. But in the end, Vodafone bagged the deal outbidding other competitors. Though some critics felt that Vodafone had overpaid for Hutchison Essar, Vodafone contended that the price was worth paying as the deal would help it get a massive footprint in one of the most competitive telecommunication markets in the world.
Whilst Hutch Essar and Bharti will continue to compete independently, Vodafone and Bharti have entered into a MOU relating to a comprehensive range of infrastructure sharing options in India between Hutch Essar and Bharti
Infrastructure sharing is expected to reduce the total cost of delivering telecommunication services, especially in rural areas, enabling both parties to expand network coverage more quickly and to offer more affordable services to a broader base of the Indian population
Financial assumptions
As part of the operational plan, Vodafone expects to increase capital investment, particularly in the first two to three years, with apex as a percentage of revenues
reducing to the low teens by FY2012. The operational plan results in an FY2007-12 EBITDA CAGR percentage around the mid-30s. Cash tax rates of 11-14% for FY2008-12 are expected due to various tax incentives and will trend towards approximately 30-34% in the long term. As a result of this operational plan, the transaction meets Vodafones stated financial investment criteria, with a ROIC exceeding the local risk adjusted cost of capital in the fifth year and an IRR of around 14%.
PRINCIPAL BENEFITS
The principal benefits to Vodafone of the transaction are: Accelerates Vodafones move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market India is the worlds 2nd most populated country with over 1.1 billion inhabitants India is the fastest growing major mobile market in the world, with around 6.5 million monthly net adds in the last quarter India benefits from strong economic fundamentals with expected real GDP growth in high single digits Hutch Essar delivers a strong existing platform in India nationwide presence with recent expansion to 22 out of 23 licence areas (circles) 23.3 million customers as at 31 December 2006, equivalent to a 16.4% nationwide market share year-on-year revenue growth of 51% and an EBITDA margin of 33% in the six months to 30 June 2006 experienced and highly respected management team Driving additional value in Hutch Essar accelerated network investment driving penetration and market share growth infrastructure sharing MOU with Bharti plans to reduce substantially network opex and capex potential for Hutch Essar to bring Vodafones innovative products and services to the Indian market, including Vodafones focus on total communication solutions for customers
Vodafone and Hutch Essar both expected to benefit from increased purchasing power and the sharing of best practices Increases Vodafones presence in higher growth emerging markets proportion of Group statutory EBITDA from the EMAPA region expected to increase from below 20% in the financial year ending 31 March 2007 (FY2007) to over a third by FY2012
THE AFTERMATH
On March 22, 2007, Vodafone signed a shareholder agreement with its Indian partner, Essar, according to which Vodafone would hold a 52% and Essar would continue to hold a 33% stake. Some other minority shareholders, such as Asim Ghosh (Ghosh), Infrastructure development finance company (IDFC) and Analjit Singh together would continue to hold the remaining 15 per cent stake in the company. Vodafone planned to bring world class branding to India after the 'Hutch' brand was replaced by the Vodafone brand name. Vodafone wanted to build up its numbers in the Indian market mostly by expanding into the rural areas.
Vodafone also wanted to launch a 3G service in the Indian market as soon as the government declared the 3G policy. Rather than using the 3G services as a premium product targeted at upscale segment, Vodafone wanted to take 3G to the rural areas to provide hi-speed data services to the rural masses.