Financial Services In Mergers & Acquisitions

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A PROJECT REPORT ON

FINANCIAL SERVICES IN MERGER

AND ACQUISITION ACTIVITY
SUBMITTED

TO THE UNIVERSITY OF MUMBAI

AS A PARTIAL REQUIREMENT FOR COMPLETING
THE POST GRADUATION OF
M.COM PART I (BANKING AND FINANCE)
SEMESTER -I
SUBMITTED BY:
VAIS ARTI SHANTILAL
ROLL NO: 53
UNDER THE GUIDANCE OF
SAPTGIRI

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SIES COLLEGE OF COMMERCE AND ECONOMICS,
PLOT NO. 71/72, SION MATUNGA ESTATE
T.V. CHIDAMBARAM MARG,
SION (EAST), MUMBAI 400022.

CERTIFICATE
This is to certify that Mr.__________________________________
__________________________________________________________
of M.Com (Banking and Finance) Semester I (academic year
2014-2015) has successfully completed the project on
______________________________________________________under the
Guidance of Dr. __________________________________________.
_________________
(Project Guide)
___________________
(External Examiner)

___________________
(Course Co-coordinators)
___________________
(Principal)

Place: _____________
Date: ___________

DECLARATION
I, __________________________________________________
Student of M.Com (Banking and Finance) Semester I (academic year
2014-2015) hereby declare that, I have completed the project on
______________________________________________________________.
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The information presented in this project is true and original

to the best of my knowledge.

___________________
Name:
Roll No.:
Place: _____________
Date:_____________

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ACKNOWLEDGEMENT
I would like to thank the University of Mumbai, for introducing
M.Com (Banking and Finance) course, thereby giving its students a
platform to be abreast with changing business scenario, with the help of
theory as a base and practical as a solution.
I am indebted to the reviewer of the project Dr. Aarti kalyanaraman
my project guide who is also our principal, for her support and guidance.
I would sincerely like to thank her for all her efforts.
Last but not the least; I would like to thank my parents for giving
the best education and for their support and contribution without which
this project would not have been possible.
______________________

Name :
Roll no:

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INDEX
SERIAL NO.

TOPIC

DECLARATION

ACKNOWLEDGEMENT

EXECUTIVE SUMMARY

OBJECTIVE OF STUDY

MERGER AND ACQUISITION-

PAGE NO

7-9

INTRODUCTION

DISTINGUISE BETWEEN

10-11

M&A AND ADVANTAGES

7

MOTIVES BENEFITS OF

12-13

MERGER BEHIND MERGER

8

STEPS OF M&A

14-15

REASONS OF M&A

16-18

10

RISK ASSOCIATES WITH

19

11

MERGER
LEGAL ASPECT OF MERGER

20-22

12

FINANCIAL SERVICES OF

23

13

M&A
LITERATURE REVIEW

24-34

14
15

M&A CONCLUSION
BIBLOGRAPHY

35
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Executive Summary
Merger - It's the most talked about term today creating lot of excitement and speculative activity in the
markets. But before Mergers & Acquisitions (M&A) activity speeds up, it has to actually pass through a
long chain of procedures (both legal and financial), which at times delays the deal.
With the liberalization of the Indian economy in 1991, restrictions on Mergers and Acquisitions have
been lowered. The numbers of Mergers and Acquisitions have increased many times in the last decade
compared to the slack period of 1970-80s when legal hurdles trimmed the M&A growth. To put things in
perspective, from 15 mergers in 1998, the number crossed to over 280 in FY01. With a downturn in the
capital markets, valuations have come down to historic lows. It's high time that the consolidation game
speeds up.
In simple terms, a merger means blending of two or more existing undertakings into one, consequent to
which each undertaking would lose their separate identity. The most common reasons for mergers are,
operating synergies, market expansion, diversification, growth, consolidation of production capacities
and tax savings. However, these are just some of the illustrations and not the exhaustive benefits.
However, before the idea of Merger and Acquisition crystallizes, the firm needs to understand its own
capabilities and industry position. It also needs to know the same about the other firms it seeks to tie up
with, to get a real benefit from a merger. Globalization has increased the competitive pressure in the
markets. In a highly challenging environment a strong reason for merger and acquisition is a desire to
survive. Thus apart from growth, the survival factor has off late, spurred the merger and acquisition
activity worldwide.

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Objective of study:

To discuss the form of mergers and acquisitions.

To highlight the real motives of merger and acquisitions.

To focus on the considerations those are important in the mergers and acquisitions negotiations.

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Mergers and Acquisition

Introduction:
Business combinations which may take forms of merger, acquisitions, amalgamation
and takeovers are important features of corporate structural changes. They have played an important
role in the financial and economic growth of a firm.
Merger is a combination of two or more companies into one company. One or more
companies may merge with an existing company or they may merge to form a new company. Laws
in India use the term amalgamation for merger. For example, Section 2(1A) of the Income Tax Act,
1961 defines amalgamation as the merger of one or more companies with another company or the
merger of two or more companies (called amalgamating company or companies) to form a new
company (called amalgamated company) in such a way that all assets and liabilities of the
amalgamated company and shareholders holding not less than nine-tenths in value of the shares in
the amalgamating company or companies become shareholders of the amalgamated company.
Merger or amalgamation may take two forms:

Merger through absorption

Merger through consolidation

Absorption:
In absorption, one company acquires another company. All companies except one lose their
identity in merger through absorption. The merger of Tata Oil Mills Ltd. (TOMCO) with Hindustan
Lever Ltd. (HLL) is an example of absorption

Consolidation:
In a consolidation, two or more companies combine to form a new company. In this form of merger,
all companies are legally dissolved and a new entity is created. In consolidation, the acquired
company transfers its asset, liabilities and shares to the acquiring company for cash or exchange of

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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.

Acquisition:
A fundamental characteristic of merger (either through absorption or consolidation) is that the
acquiring company (existing or new) takes over the ownership of other companies and combine their
operations with its own operations. In an acquisition two or more companies may remain
independent, separate legal entity, but there may be change in control of companies. Hindustan lever
limited buying brands of Lakme is an example of asset acquisition.
Takeover:
A takeover may also define as obtaining of control over management of a company by another.
Under the Monopolies and Restrictive Trade Practices Act, takeover means acquisition of not less
than 25% of the voting power in a company. If a company wants to invest in more than 10% of the
subscribe capital of another company, it has to be approved in the shareholders general meeting and
also by the central government. The investment in shares of another companies in excess of 10% of
the subscribed capital can result into their takeover.
Demerger
It has been defined as a split or division. As the same suggests, it denotes a situation opposite to that
of merger. Demerger or spin-off, as called in US involves splitting up of conglomerate (multidivision) of company into separate companies.
This occurs in cases where dissimilar business are carried on within the same company, thus
becoming unwieldy and cyclical almost resulting in a loss situation. Corporate restructuring in such
situation in the form of demerger becomes inevitable. A part from core competencies being main
reason for demerging companies according to their nature of business, in some cases, restructuring in
the form of demerger was undertaken for splitting up the family owned large business empires into
smaller companies. The historical demerger of DCM group where it split into four companies (DCM

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Ltd., DCM shriram industries Ltd., Shriram Industrial Enterprise Ltd. and DCM shriram
consolidated Ltd.) is one example of family units splitting through demergers.

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.
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.

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DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were synonymous, the
terms merger and acquisition mean slightly different things. When one company takes over another
and clearly established itself as the new owner, the purchase is called an acquisition. From a legal
point of view, the target company ceases to exist, the buyer "swallows" the business and the
buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same size, agree
to go forward as a single new company rather than remain separately owned and operated. This kind
of action is more precisely referred to as a "merger of equals." Both companies' stocks are
surrendered and new company stock is issued in its place.
In practice, however, actual mergers of equals don't happen very often. Usually, one company will
buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the
action is a merger of equals, even if it's technically an acquisition. Being bought out often carries
negative connotations, therefore, by describing the deal as a merger, deal makers and top managers
try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together is in the
best interest of both of their companies. But when the deal is unfriendly - that is, when the target
company does not want to be purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the purchase
is friendly or hostile and how it is announced. In other words, the real difference lies in how the
purchase is communicated to and received by the target company's board of directors, employees and
shareholders.

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Types of Merger
There are four major types of mergers they can be explain as follows:
1 Horizontal Merger :
This is a combination of two or more firms in similar type of production, distribution or area of
business.
2 Vertical Merger :
This is a combination of two or more firms involved in different stages of production or
distribution. Vertical merger may take the form of forward or backward merger.
Backward merger: When a company combines with the supplier of material, it is called backward
merger.
Forward merger: When it combines with the customer, it is known as forward merger.
3. Conglomerate Merger :
This is a combination of firms engaged in unrelated lines of business activity. Example is
merging of different business like manufacturing of cement products, fertilizers products, electronic
products, insurance investment and advertising agencies.
4. Concentric Merger
Concentric merger are based on specific management functions where as the conglomerate mergers are
based on general management functions. If the activities of the segments brought together are so related
that there is carry over on specific management functions such as marketing research, Marketing,
financing, manufacturing and personnel.

Advantages of Merger and Acquisitions

1

Maintaining or accelerating a companys growth.

Enhancing profitability, through cost reduction resulting from economies of scale.

Diversifying the risk of company, particularly when it acquires those businesses whose income
streams are not correlated.

Reducing tax liability because of the provision of setting-off accumulated losses and unabsorbed
depreciation of one company against the profits of another.
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5

Limiting the severity of competition by increasing the companys market power.

Motives behind the Merger

Motives of merger can be broadly discussed as follows:
1. Growth:
One of the fundamental motives that entice mergers is impulsive growth. Organizations that
intend to expand need to choose between organic growth and acquisitions driven growth. Since the
former is very slow, steady and relatively consumes more time the latter is preferred by firms which are
dynamic and ready to capitalize on opportunities.
2. Synergy:
Synergy is a phenomenon where 2 + 2 =>5. This translates into the ability of a business
combination to be more profitable than the sum of the profits of the individual firms that were
combined. It may be in the form of revenue enhancement or cost reduction.
3. Managerial Efficiency:
Some acquisitions are motivated by the belief that the acquires management can better manage
the targets resources. In such cases, the value of the target firm will rise under the management control
of the acquirer.
4. Strategic:
The strategic reasons could differ on a case-to-case basis and a deal to the other. At times, if the two
firms have complimentary business interests, mergers may result in consolidating their position in the
market.
5. Market entry:
Firms that are cash rich use acquisition as a strategy to enter into new market or new territory
on which they can build their platform.
6. Tax shields:

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This plays a significant role in acquisition if the distressed firm has accumulated losses and
unclaimed depreciation benefits on their books. Such acquisitions can eliminate the acquiring firms
liability by benefiting from a merger with these firms.
7. Resource transfer:
Resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and
acquiring firm resources can create value through either overcoming information asymmetry or by
combining scarce resources.
8. Vertical integration:
Vertical Integration occurs when an upstream and downstream firm merges (or one acquires the
other). There are several reasons for this to occur. One reason is to internalize an externality
problem. A common example is of such an externality is double marginalization. Double
marginalization occurs when both the upstream and downstream firms have monopoly power; each
firm reduces output from the competitive level to the monopoly level, creating two deadweight
losses. By merging the vertically integrated firm can collect one deadweight loss by setting the
upstream firm's output to the competitive level. This increases profits and consumer surplus. A
merger that creates a vertically integrated firm can be profitable.

Benefits of Mergers
1. Limit competition
2. Utilizes under-utilized market power
3. Overcome the problem of slow growth and profitability in ones own industry
4. To achieve diversification
5. Gain economies of scale and increase income with proportionately less investment
6. Establish a transnational bridgehead without excessive start-up costs to gain access to a foreign
market.
7. utilize under-utilized resources- human and physical and managerial skills.
8. Displace existing management.
9. Circum government regulations.
10. Reap speculative gains attendant upon new security issue or change in P/E ratio.
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11. Create an image of aggressiveness and strategic opportunism, empire building and to amass vast
economic power of the company.

Steps of Merger and Acquisitions

There are three important steps involved in the analysis of merger and acquisitions can be explained as
follows:
1. Planning:
The most important step in merger and acquisition is planning. The planning of acquisition will
require the analysis of industry specific and the firm specific information. The acquiring firm will need
industry data on market growth, nature of competition, capital and labour intensity, degree of regulation
etc. About the target firm the information needed will include the quality of management, market share,
size, capital structure, profit ability, production and marketing capabilities etc,
2 Search and Screening :
Search focuses on how and where to look for suitable company for acquisition. Screening
process shortlists a few company from available companies. Detailed information about each of these
companies is obtained.
Merger objectives may include attaining faster growth, improving profitability, improving
managerial effectiveness, gaining market power and leadership, achieving cost reduction etc. These
objectives can be achieved in various ways rather than through merger alone. The alternatives to merger
include joint venture, strategic alliances, elimination of inefficient operations, cost reduction and
productivity improvement, hiring capable manager etc. If merger is considered as the best alternative,
the acquiring firm must satisfy itself that it is the best available option in terms of its own screening
criteria and economically most attractive.
3 Financial Evaluations:
Financial evaluation of a merger is needed to determine the earnings and cash flows, area of risk,
the maximum price payable to the target company and the best way to finance the merger. The acquiring
firm must pay a fair consideration to the target firm for acquiring its business. In a competitive market
situation with capital market efficiency, the current market value is the current market value of its share

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of the target firm. The target firm will not accept any offer below the current market value of its share.
The target firm in fact, expects that merger benefits will accrue to the acquiring firm.
A merger is said to be at a premium when the offer price is higher than the target firms pre
merger market price. The acquiring firm may pay the premium if it thinks that it can increase the target
firms after merger by improving its operations and due to synergy. It may have to pay premium as an
incentive to the target firms shareholders to induce them to sell their shares so that the acquiring firm is
enabled to obtain the control of the target firm.

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Reasons for Merger

The reason of merger can be broadly explain as follows:
1. Accelerated Growth:
Growth is essential for sustaining the viability, dynamism and value enhancing capability of a
firm. Growing operations provide challenges and excitement to the executives as well as opportunities
for their job enrichment and rapid career development. This help to increase managerial efficiency.
Other things being the same, growth must lead to higher profits and increase in the shareholders value. It
can be achieve growth in two ways:

Expanding its existing markets

Enhancing in new market

A firm may expand and diversify its markets internally or externally. If 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.
2. Enhanced Profitability
The combination of two or more firm may result in more than the average profitability due to
cost reduction and efficient utilization of resources. This may happen because of the following reasons:
a) Economies of Scale :
When two or more firm combine, certain economies are realized due to the larger volume of operations
of the combined entity. These economies arise because of more intensive utilization of production
capacities, distribution networks, engineering services, research and development facilities, and data
processing systems and so on.
b) Operating Economies :
In addition to economies of scale, a combination of two or more firm may result into cost reduction due
to operating economies. A combined firm may avoid or reduce functions and facilities. It can consolidate
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its management functions such as manufacturing, R & D and reduce operating costs. Foe example, a
combined firm may eliminate duplicate channels of distribution or create a centralized training center or
introduce an integrated planning and control system.
c) Strategic Benefits :
If a firm has decided to enter or expand in a particular industry, acquisition of a firm engaged in that
industry rather than dependence on internal expansion may offer strategic advantages such as less risk
and less cost.
d) Complementary Resources :
If two firms have complementary resources it may make sense for them to merge. For example, a
small firm with an innovative product may need the engineering capability and marketing reach of a
big firm. With the merger of the two firms it may be possible to successfully manufacture and market
the innovative product. Thus, the two firms, thanks to their complementary resources, are worth more
together than they are separately.
e) Tax Shields :
When a firm with accumulated losses and unabsorbed tax shelters merges with a profit making firm,
tax shields are utilized better. The firm with accumulated losses and unabsorbed tax shelters may not
be able to derive tax advantages for a long time. However, when it merges with a profit making firm,
its accumulated losses and unabsorbed tax shelters can be set off against the profits of the profit
making firm and tax benefits can be quickly realized.
3. Utilization of surplus funds:
A firm in a mature industry may generate a lot of cash but may not have opportunities for
profitable investment. Most managements have a tendency to make further investments, even though
they may not be profitable. In such a situation a merger with another firm involving cash
compensation often represents a more efficient utilization of surplus fund.
4. Managerial Effectiveness:

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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. Another allied benefit of a merger may be in the form of greater congruence
between the interests of managers and the shareholders. A common argument for creating a
favourable environment for mergers is that it imposes a certain discipline on the management.
5. Diversification of Risk:
A commonly stated motive for mergers is to achieve risk reduction through diversification.
The extent, to which risk is reduced, of course, depends on the correlation between the earnings of
the merging entities. While negative correlation brings greater reduction in risk. The positive
correlation brings lesser reduction in risk.

6. Lower Financing Costs:

The consequence of large size and greater earnings stability is to reduce the cost of borrowing for
the merged firm. The reason for this is that the creditors of the merged firm enjoy better protection
than the creditor of the merging firms independently.

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RISKS ASSOCIATED WITH MERGER

There are several risks associated with consolidation and few of them are as follows: 1)

When two companies merge into one then there is an inevitable increase in the size of the
organization. Big size may not always be better. The size may get too widely and go beyond the
control of the management. The increased size may become a drug rather than an asset.

2)

Consolidation does not lead to instant results and there is an incubation period before the results
arrive. Mergers and acquisitions are sometimes followed by losses and tough intervening periods
before the eventual profits pour in. Patience, forbearance and resilience are required in ample
measure to make any merger a success story. All may not be up to the plan, which explains why there
are high rate of failures in mergers.

3)

Consolidation mainly comes due to the decision taken at the top. It is a top-heavy decision and
willingness of the rank and file of both entities may not be forthcoming. This leads to problems of
industrial relations, deprivation, depression and demonization among the employees. Such a work
force can never churn out good results. Therefore, personal management at the highest order with
humane touch alone can pave the way.

4)

The structure, systems and the procedures followed in two banks may be vastly different, for
example, a PSU bank or an old generation bank and that of a technologically superior foreign bank.
The erstwhile structures, systems and procedures may not be conducive in the new milieu. A
thorough overhauling and systems analysis has to be done to assimilate both the organizations. This
is a time consuming process and requires lot of cautions approaches to reduce the frictions.

5)

There is a problem of valuation associated with all mergers. The shareholder of existing entities
has to be given new shares. Till now a foolproof valuation system for transfer and compensation is
yet to emerge.
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6)

Further, there is also a problem of brand projection. This becomes more complicated when
existing brands themselves have a good appeal. Question arises whether the earlier brands should
continue to be projected or should they be submerged in favour of a new comprehensive identity.
Goodwill is often towards a brand and its sub-merger is usually not taken kindly.

Legal aspects of Merger

Legal Procedures for Merger and Acquisition
The following is the procedures for merger or acquisition is fairly long dawn. Normally it involves
the following steps:
1. Permission for merger:
Two or more firm can amalgamate only when amalgamation is permitted under their memorandum
of association. Also, the acquiring firm should have the permission in its object clause to carry on the
business of the acquired company. In the absence of these provisions in the memorandum of association,
it is necessary to seek the permission of the shareholders, board of directors and the Company Law
Board before affecting the merger.
2. Information to the stock exchange:
The acquiring and the acquired companies should inform the stock exchange where they are listed
about the merger.
3. Approval of board of directors:
The boards of the directors of the individual firm should approve the draft proposal for
amalgamation and authorize the managements of companies to further pursue the proposal.
4. Application in the High Court:
An application for approving the draft amalgamation proposal duly approved by the board of
directors of the individual firm should be made to the High Court. The High Court would convene a
meeting of the shareholders and creditors to approve the amalgamation proposal. The notice of meeting
should be sent to them at least 21 days in advance.

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5. Shareholders and Creditors meetings:
The individual firm should hold separate meetings of their shareholders and creditors for
approving the amalgamation scheme. At least 75% of shareholders and creditors in separate meeting,
voting in person or by proxy, must accord their approval to the scheme.
6. Sanction by the High Court:
After the approval of shareholders and creditors on the petitions of the companies, the High Court
will pass order sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and
reasonable. If it deems so, it can modify the scheme. The date of the courts hearing will be published in
two newspapers and also the Regional Director of the Law Board will be intimated.
7. Filing of the Court order:
After the Court order its certified true copies will be filed with the Registrar of Companies.
8. Transfer of asset and liabilities:
The asset and liabilities of the acquired firm will be transferred to the acquiring firm in
accordance with the approved scheme, with effect from the specified date.

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Financial Services of Merger And Acquisition

There are many ways in which a merger and acquisition can result into financial synergy. A merger
and acquisition may help in:

eliminating the financial constraint

deploying surplus cash

enhancing debt capacity

Lowering the financial cost.

It can be broadly explain as follows:

1. Financial Constraint:
A firm may be constrained to grow through internal development due to shortage of fund.
The firm can grow externally by acquiring another firm by the exchange of shares and thus, release
the financial constraints.
2. Surplus Cash:
A firm may be faced by a cash rich firm. 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 firm. 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 firm. If they sell
their shares they would pay tax at a lower, capital gain tax rate. The company would also be enabled
to keep surplus funds and grow through acquisition.
3. Debt capacity:
A merger of two firms, with fluctuating, but negatively correlated, cash flows, can bring
stability of cash flows of the combined firm. The stability of cash flows reduces the risk of
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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.
4. Financing cost:
Does the enhanced debt capacity of the merged firm reduce 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.

SOMETHING WRONG WITH A MERGER OR ACQUISITION

The extent and quality of the planning and research you do before a merger or acquisition deal will
largely determine the outcome. Sometimes situations will arise outside your control and you may
find it useful to consider and prepare for these risks.
An acquisition could become expensive if you end up in a bidding war where other parties are
equally determined to buy the target business. A merger could become expensive if you cannot agree
terms such as who will run the combined business or how long the other owner will remain involved
in the business. Both mergers and acquisitions can damage business performance because of time
spent on the deal and a mood of uncertainty.

Face pitfalls following a deal such as:

1) The target business does not do as well as expected.
2) The costs you expected to save do not materialize.
3) Key people leave.
4) The business cultures are not compatible.

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Indian context
Why Mergers and Acquisitions in India?

The factors responsible for making the merger and acquisition deals favorable in India are:

Dynamic government policies

Corporate investments in industry

Economic stability

ready to experiment attitude of Indian industrialists

Sectors like pharmaceuticals, IT, ITES, telecommunications, steel, construction, etc, have proved
their worth in the international scenario and the rising participation of Indian firms in signing M&A
deals has further triggered the acquisition activities in India.

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Literature Review
Recent examples from Indian merger & acquisition
1. Vodafone-Hutchison Essar: $11.1 billion
Vodafone has found its passage to India, but at what cost. The company, known for its expensive
telecom asset acquisition in the past, appears to be ready to pay top dollars for a fast growing mobile
operator in one of the fastest growing cell phone markets in the world. Assumptions of market
growth rates may have to be revised if current estimates of economic growth rates may not be
realized. Vodafone may need more than third partner to share this risk
On February 11, 2007, Vodafone agreed to buy out the controlling interest of 67% held by Li Ka
Shing Holdings in Hutch-Essar for $11.1 billion.
This is the second-largest M&A deal ever involving an Indian company.
Vodafone Essar is owned by Vodafone 52%, Essar Group 33% and other Indian nationals 15%.
Logic of the deal
The average monthly revenue per subscriber has been between $8 and $10 or between $100 and
$120 per year for almost all the cellular carriers in India. At the top end of the annual revenue of
$120 per subscriber, Vodafone is prepared to pay nearly seven times fiscal 2006 revenue. Assuming
30% growth in cellular subscriber base and no growth or decline in annual revenue per subscriber,
the deal values the company at five times the revenue in fiscal 2006. Not to forget, this is multiple of
revenue and not a multiple of operating earnings.
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The largest cell carrier, Bharti Airtel, has a market cap of $33 billion, and Reliance Communication
is valued at $22 billion. The current Vodafone deal values Hutch Essar at a roughly $800 per
subscriber, similar to what market values for other cell carrier companies. But then market assumes
that current subscriber growth rate of 50% will continue for many years to come.
If the subscriber base increases only on cheaper cost of service and innovative price plans, then the
current assumption of revenue growth may be difficult to attain. Future subscriber growth is likely to
come from smaller towns and rural areas that are not likely to pay more than $60 per year for the
telecom service and are going to demand handset that may cost less than $10. Of course, there is
market at the bottom end of the industry, but is it as profitable as at the top end?
Previous predictions of the lack of profitability in the cellular business in emerging markets, such as
India and China, have not proven to be correct. China now has 350 million subscribers, and India has
150 million. However, more than 50 million of these subscribers in India were added in the last
twelve months and their behavior and loyalty is still unpredictable.
Emerging Markets Rational
Cellular carriers around the emerging markets have found it difficult to justify the purchase price
above three times trailing revenue, but then there are very few markets growing as fast as markets in
India. If future growth is what is likely to help the current valuation, then investors have to ask two
more questions. What is going to drive this future growth and what will stem the decline in average
revenue per subscriber
SWOT ANALYSIS
Strengths

Diversified geographical portfolio with strong mobile telecommunications operations in Europe,

the Middle East, Africa, Asia Pacific and Australasia

Leading presence in emerging markets

Strategic alliances with Apple iPhone

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Increasing the range of products we can offer to customers, in particular in enterprise, and
providing us with the ability to compete with integrated competitors

Value for money %u2013 in the past three years we%u2019ve reduced costs more than five
times, which equates to savings of around 50% for our customers.
Opportunities

Focus on cost reductions improving returns

Majority stake in mobile sector in New Zealand

Research and development of new technologies

Focus on developing fixed landline and broadband market.

Reducing

the

impact

of

global

warming

by

reducing

their

carbon

foot

print

Threats

Ongoing price reductions due to competitive pressures

New entrants: Growing range of providers of converged fixed and mobile services

Expanding presence of mobile virtual network operators

Weaknesses

Total Telecommunication not nearly as strong as Telecom.

Wholesaling the lines through Telecom thereby gaining less profit.

Lack of systems and tools to backup the new processes.

Lack of skilled employee (Technicians, engineers, accountants) availability in New Zealand

Market.

2. Hindalco-Novelis: $6 billion
Aluminium and copper major Hindalco Industries, the Kumar Mangalam Birla-led Aditya Birla
Group flagship, acquired Canadian company Novelis Inc in a $6-billion, all-cash deal in February
2007.Till date, it is India's fourt-largest M&A deal. The acquisition would make Hindalco the global
leader in aluminum rolled products and one of the largest aluminum producers in Asia. With postacquisition combined revenues in excess of $10 billion, Hindalco would enter the Fortune-500
listing of world's largest companies by sales revenues.
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Company overview
HINDALCO INDUSTRIES LIMITED
Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is structured into two
strategic businesses aluminum and copper with annual revenue of US $14 billion and a market
capitalization in excess of US $ 23 billion. Hindalco commenced its operations in 1962 with an
aluminum facility at Renukoot in Uttar Pradesh. Birla Copper, Hindalco's copper division is situated
in Dahej in the Bharuch district of Gujarat. Established in 1958, Hindalco commissioned its
aluminum facility at Renukoot in eastern U.P. in 1962 and has today grown to become the country's
largest integrated aluminum producer and ranks among the top quartile of low cost producers in the
world. The aluminum division's product range includes alumina chemicals, primary aluminum
ingots, billets, wire rods, rolled products, extrusions, foils and alloy wheels. It enjoys a domestic
market share of 42 per cent in primary aluminum, 63 per cent in rolled products, 20 per cent in
extrusions, 44 per cent in foils and 31 per cent in wheels.
Hindalco has launched several brands in recent years, namely Aura for alloy wheels, Freshwrapp for
kitchen foil and ever last for roofing sheets. The copper plant produces copper cathodes, continuous
cast copper rods and precious metals like gold, silver and platinum group metal mix. Sulphuric acid,
phosphoric acid, di-ammonium phosphate, other phosphatic fertilizers and phosphor-gypsum are also
produced at this plant. Hindalco Industries Limited has a 51.0% shareholding in Aditya Birla
Minerals which has mining and exploration activities focused in Australia. The company has two
R&D centers at Belgaum, Karnataka and Taloja, Maharashtra.

NOVELIS
Novelis is the world leader in aluminum rolling, producing an estimated 19 percent of the world's
flat-rolled aluminum products. Novelis is the world leader in the recycling of used aluminum
beverage cans. The company recycles more than 35 billion used beverage cans annually. The
company is No. 1 rolled products producer in Europe, South America and Asia, and the No. 2
producer in North America. With industry-leading assets and technology, the company produces the
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highest-quality aluminum sheet and foil products for customers in high -value markets including
automotive, transportation, packaging, construction and printing. Our customers include major
brands such as Agfa -Gevaert, Alcan, Anheuser-Busch, Ball, Coca-Cola, Crown Cork & Seal,
Daching Holdings, Ford, General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull,
Tetra Pak, ThyssenKrupp and others. Novelis represents a unique combination of the new and the
old. Novelis is a new company, formed in January 2005, with a new velocity, a new philosophy and a
new attitude. But Novelis is also a spin-off from Alcan and, as such, draws on a rich 90-year history
in the aluminum rolled product marketplace. Novelis has a diversified product portfolio, which
serves to the different set of industries vis--vis it has a very strong geographical presences in four
continents.
Novelis was always a problem child. It was born in early 2005 as a result of a forced spin-off from
its parent, the $ 23.6-billion aluminum giant and Canada-based Alcan. In 2003, Alcan won a hostile
offer to wed French aluminum company Pechiney. But the marriage produced an unwanted child
Novelis. Both Alcan and Pechiney had bauxite mines, facilities to produce primary aluminum, and
rolling mills to turn the raw metal into products such as stock for Pepsi and Coke cans and
automotive parts. But the US and European anti-trust proceedings ruled that the rolled products
business of either Alcan or Pechiney had to be divested from the merged entity. Alcan cast out its
rolled products business to form Novelis. It is now the worlds leading producer of aluminum-rolled
products with a 19 per cent global market share. But in the spin-off process, Novelis ended up
inheriting a debt mountain of almost $2.9 billion on a capital base of less than $500 million. That
was just the beginning of its troubles. The situation is worse now. Though it marginally reduced debt,
it made some losses too. On a net worth of $322 million, Novelis has a debt of $2.33 billion (most of
it high cost). Thats a debt-equity ratio of 7.23:1

STRATEGIC RATIONALE FOR ACQUISITION

This acquisition was a very good strategic move from Hindalco. Hindalco will be able to ship primary
aluminum from India and make value-added products.'' The combination of Hindalco and Novelis
establishes an integrated producer with low-cost alumina and aluminum facilities combined with highend rolling capabilities and a global footprint. Hindalcos rationale for the acquisition is increasing scale
of operation, entry into highend downstream market and enhancing global presence. Novelis is the
global leader (in terms of volume) in rolled products with annual production capacity of 2.8 million
tones and a market share of 19 per cent. It has presence in 11 countries and provides sheets and foils to
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automotive and transportation, beverage and food packaging, construction and industrial, and printing
markets. Hindalcos rationale for the acquisition is increasing scale of operation, entry into highend
downstream market and enhancing global presence. Novelis is the global leader (in terms of volumes) in
rolled products with annual production capacity of 2.8 million tones and a market share of 19 per cent. It
has presence in 11 countries and provides sheets and foils to automotive and transportation, beverage
and food packaging, construction and industrial, and printing markets. Acquiring Novelis will provide
Aditya Birla Group's Hindalco with access to customers such as General Motors Corp. and Coca-Cola
Co. Indian companies, fueled by accelerating domestic growth, are seeking acquisitions overseas to add
production capacity and find markets for their products. Tata Steel Ltd. spent US $12 billion last month
to buy U.K. steelmaker Corus Group Plc. Novelis has capacity to produce 3 million tonne of flat- rolled
products, while Hindalco has 220,000 tone ..
``This acquisition gives Hindalco access to higher-end products but also to superior technology,''
Hindalco plans to triple aluminum output to 1.5 million metric tone by 2012 to become one of the
world's five largest producers. The company, which also has interests in telecommunications,
cement, metals, textiles and financial services, is the world's 13th-largest aluminum maker. After the
deal was signed for the acquisition of Novelis, Hindalco's management issued press releases
claiming that the acquisition would further internationalize its operations and increase the company's
global presence. By acquiring Novelis, Hindalco aimed to achieve its long-held ambition of
becoming the world's leading producer of aluminum flat rolled products. Hindalco had developed
long-term strategies for expanding its operations globally and this acquisition was a part of it.
Novelis was the leader in producing rolled products in the Asia-Pacific, Europe, and South America
and was the second largest company in North America in aluminum recycling, metal solidification
and in rolling technologies worldwide. The benefits from this acquisition cane discussed under the
following points:

Post acquisitions, the company will get a strong global footprint.

After full integration, the joint entity will become insulated from the fluctuation of LME Aluminium
prices.

The deal will give Hindalco a strong presence in recycling of aluminum business. As per aluminum
characteristic, aluminum is infinitely recyclable and recycling it requires only 5% of the energy
needed to produce primary aluminum.

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Novelis has a very strong technology for value added products and its latest technology Novelis
Fusion is very unique one.

It would have taken a minimum 8-10 years to Hindalco for building these facilities, if Hindalco takes
organically route.

SWOT ANALYSIS OF deal

Strengths

It will give Cost advantage to the new company

It will help in communicating effectively in various cross border business

It will raise the R&D & hence more innovation will be applied

It will increase its Loyal customers & hence will have market leadership

Strong management team will help in making Strong brand equity & Strong financial position

The Supply chain is perfect for performing various jobs.

Weaknesses

Bad communication

Diseconomies to scale

Over leveraged financial position

Low R&D

Low market share

No online presence

Not innovative

Not diversified

Poor supply chain

Weak management team

Weak real estate

Weak, damaged brand

Ubiquitiouegory, products, services

Opportunities

Acquisitions
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Financial Services In Mergers & Acquisitions

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Asset leverage

Financial markets (raise money through debt, etc)

Emerging markets and expansion abroad

Innovation

Online

Product and services expansion

Takeovers
Threats

Competition

Cheaper technology

Economic slowdown

External changes (government, politics, taxes, etc)

Exchange rate fluctuations

Lower cost competitors or imports

Maturing categories, products, or services

Price wars

Product substitution

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

HDFC Bank approved the acquisition of Centurion Bank of Punjab for Rs 9,510 crore ($2.4 billion)
in one of the largest mergers in the financial sector in India in February, 2008.
CBoP shareholders got one share of HDFC Bank for every 29 shares held by them. Post-acquisition,
HDFC Bank became the second-largest private sector bank in India.
The acquisition was also India's 8th largest ever.

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HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab
(CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector in India. CBoP
shareholders will get one share of HDFC Bank for every 29 shares held by them.
This will be HDFC Banks second acquisition after Times Bank. HDFC Bank will jump to the 7th
position among commercial banks from 10th after the merger. However, the merged entity would
become second largest private sector bank.
The merger will strengthen HDFC Bank's distribution network in the northern and the southern
regions. CBoP has close to 170 branches in the north and around 140 branches in the south. CBoP
has a concentrated presence in the in the Indian states of Punjab and Kerala. The combined entity
will have a network of 1148 branches. HDFC will also acquire a strong SME (small and medium
enterprises) portfolio from CBoP. There is not much of overlapping of HDFC Bank and CBoP
customers.
The entire process of the merger would take about four months for completion. The merged entity
will be known as HDFC Bank. Rana Talwar's Sabre Capital would hold less than 1 per cent stake in
the merged entity from 3.48 in CBoP, while Bank Muscat's holding will decline to less than 4 per
cent from over 14 per cent in CBoP. HDFC shareholding falls to will fall from 23.28 per cent to
around 19 per cent in the merged entity
Mr. Rana Talwar, Chairman of Centurion Bank, has been offered a seat on the Board as nonexecutive director and Mr. Shailendra Bhandari, Managing Director, Centurion Bank, has been
invited to join as the Executive Director on the board post merger.
According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri, Integration
will be smooth as there is no overlap. In an interview, he mentioned that at 40% growth rate there
will be no lay-offs. The integration of the second rung officials should be smooth as there is hardly
any overlap.
The boards of the two banks will meet again on February 28 to consider the draft scheme of
amalgamation, which will be subject to regulatory approvals. HDFC Bank will consider making a
preferential offer to its parent Housing Development Finance Corp Ltd (HDFC). The move would
allow HDFC to maintain the same level of shareholding in the bank
Company profile
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Housing Development Finance Corporation Limited, more popularly known as HDFC Bank Ltd,
was established in the year 1994, as a part of the liberalization of the Indian Banking Industry by
Reserve Bank of India (RBI). It was one of the first banks to receive an 'in principle' approval from
RBI, for setting up a bank in the private sector. The bank was incorporated with the name 'HDFC
Bank Limited', with its registered office in Mumbai. The following year, it started its operations as a
Scheduled Commercial Bank. Today, the bank boasts of as many as 1412 branches and over 3275
ATMs across India.
Tech-Savvy
HDFC Bank has always prided itself on a highly automated environment, be it in terms of
information technology or communication systems. All the braches of the bank boast of online
connectivity with the other, ensuring speedy funds transfer for the clients. At the same time, the
bank's branch network and Automated Teller Machines (ATMs) allow multi-branch access to retail
clients. The bank makes use of its up-to-date technology, along with market position and expertise,
to create a competitive advantage and build market share.
SWOT analysis
Strengths
1. HDFC is the strongest and most venerable play on Indian mortgages over the long term. The
management

of

the

bank

is

termed

to

be

one

of

the

best

in

the

country.

2. HDFC has differentiated itself from its peers with its diversified network and revamped
distribution strategy.
3. HDFC has been highly proactive in passing on the cost and benefit to customers.
4. Besides the core business, HDFCs insurance, AMC, banking, BPO, and real estate private equity
businesses are also growing at a rapid pace and the estimated value of its investments/subsidiaries
Weaknesses
1. High dependence on individual loans.
2. Major stake held by American financial groups which are under stress due to economic slowdown.
Opportunity
1 it has vast opportunity in fast growing insurance business in the country.
2. Rural markets are still untapped.
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Threats
1. Loss of market share to commercial banks and HFCs
2.

Higher

than

expected

increase

in

funding

cost

MERGERS AND ACQUISITIONS: CONCLUSION

Countries that are seeking mergers in India for enhancing the trade scenario are Canada, Holland,
Belgium, Italy, Sweden, Norway, Poland, Germany, Spain and the United Kingdom. Globalization
and mergers in India is an important standpoint of any corporate executive on every detail of mergers
and acquisitions implemented around the world. Mergers in India may include mergers, joint
ventures, acquisitions, takeovers, and other kinds of cross-border transactions. The trends and growth
of mergers and acquisition dealings has led to a noticeable increase in the globalization and mergers
in India.
One size doesn't fit all. Many companies find that the best way to get ahead is to expand ownership
boundaries through mergers and acquisitions. For others, separating the public ownership of a
subsidiary or business segment offers more advantages. At least in theory, mergers create synergies
and economies of scale, expanding operations and cutting costs. Investors can take comfort in the
idea

that

merger

will

deliver

enhanced

market

power.

By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned
management incentives. Additional capital can fund growth organically or through acquisition.
Meanwhile, investors benefit from the improved information flow from de-merged companies.
M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in
M&A. The most beneficial form of equity structure involves a complete analysis of the costs and
benefits

associated

with

the

deals.

The relation between globalization and mergers in India are quite noteworthy. The important
elements of Indian mergers for globalization can be cited as follows:
1.

M&A is a good growth strategy in context of globalization Corporate in India have been
experiencing a surge in the revenue growth due to cross border mergers and the figures are only to
go up more.

2.

Most Indian companies have a clear M&A strategy the market strategy is clearing for most
corporate. That is why when finalizing a deal, there arises no confusion.
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Top M&A markets The top M&A markets are US, India and UK

Bibliography

www.wikipedia.com

www.google.com

www.tatagroup.org

www.vodafone.com

www.hutchinessar.com

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