Mergers

&
Acquisitions

Authors:
Dr Vinod Kumar Sr. Dean & Director ( ICFP)
Dr prity sharma --- -------------

Chapter 1
The Evolution of Merger and Acquisition Activity5
History of M & A
Waves of Mergers & acquisitions
Upcoming Wave
The changing force
Indian scenario

Chapter 1
The Evolution of
Merger and Acquisition Activity___________________
1.1 Evolution of Merger & Acquisation
Since the beginning of the industrial economy in the late 1900s, there has been almost continuous merger
and acquisition activity all over the globe , more especially in the United States. The rest of the world did
experience prolonged merger activity, albeit not with the same intensity until recently. This activity, which
dramatically impacts how each industry is shaped, is likely to continue indefinitely.
Most historians believe that there have been Six waves of mergers, the first four occurring mainly in
the United States. The latest wave appears to be nearing its end and frequently has been described as
the first international merger wave. Although each wave is a product of its
own circumstances, they typically arise in strong bull markets and fade when the market declines
broadly. Each wave has expected as well as surprising consequences. Not only does each one
permanently reshape one or more particular industries forever, they normally prompt
legislatures and regulators to react in an attempt to reduce the level of merger activity often to no avail.
For example, in the United States, the fourth merger wave prompted state legislatures to enact statutes in
an effort to prevent hostile takeovers, and the Internal Revenue Service effectively levied tax penalties on
companies that used golden parachutes.In India too various rules & regulations have been enacted which
prominently included SEBIs takeover code to regulate the mergers & acquisations activities in India.
A history Mergers &Acquisitions :

Source: Boston Consultancy Group

FIRST WAVE OF MERGERS AROUND THE WORLD
Turn of the last century (18931907)
The mergers of the first wave consisted mainly of horizontal mergers, which resulted in a near
monopolistic market structure. This merger period is known for its role in creating large monopolies.
During the first wave, which is sometimes called the merging for monopoly wave, there were major
horizontal mergers in the basic manufacturing and transportation industries. This merger wave was
dominated by large steel and railroad mergers that led to a number of enormous trust monopolies (e.g. US
Steel, Bethlehem Steel). Other behemoths were created in the telephone, oil, and mining industries, driven
by men who are still remembered today: J.P. Morgan, John D. Rockefeller, and Andrew Carnegie. This
wave peaked between 1898 and 1902 and gradually died out due to the Panics of 1904 and 1907, and the
outbreak of World War1,New state laws that allowed the formation of holding companies facilitated this
consolidation. In fact, the process that J.P. Morgan used to consolidate the railroads, after nearly 200 of
them had become insolvent, became known as Morganization. This process involved having
stockholders of an insolvent railroad place their shares in a voting trust that he controlled until the
railroads debt was repaid an essentially risk-free proposition for him. The landmark consolidation
during this first wave was Andrew Carnegies $1.4 billion combination of 10 companies to form US Steel.
The monopolies created in the first merger wave were possible because companies were not constrained
by government regulation. In the US, Congress acted to limit this consolidation with the adoption of the
nineteenth-century Interstate Commerce Act and Sherman Antitrust Act, the first antitrust laws that US
regulators sought to enforce. Financial factors led to the end of the first merger wave. First, the ship
building trust collapse in the early 1900s brought to light the dangers of fraudulent financing. Secondly, the
stock market crash of 1904 followed by the banking panic of 1907, led to the closure of many banks and
paved the way for the formation of the Federal Reserve System. The era of easy availability of finance, one
of the basic ingredients of takeovers, ended resulting in the halting of the first wave.

Market Consolidation
(1897-1909)

Vertical Integrations
(1924-1930)

Market Consolidation
(1897-1909)

Waves
Of
Merger & Acquisitions
Over the past Century

Conglom

(1958-1

Upcoming Wave
Litigation Attacks of
Pvt. Equity / Venture Capitalists

Leverage Finance
(1997-1991)

Industry Consolidation
(2003-till date)

Internet Bubble
(1997-2003)

Diversification
(1995-1997)

Source: Boston Consulting Group/ New York Journal

SECOND WAVE
Between the end of World War I and the 1929 stock market crash (1919 to
1929)
Like the first wave, the second merger movement also began with an upturn in business activity. Several
industries were consolidated during the second merger wave. The result was an oligopolistic industry
structure rather than monopolies. The consolidation pattern which was established in the first merger
wave, continued in the second merger wave also. The combinations in this period occurred outside the
previously consolidated heavy manufacturing industries. The most active were the banking and the public
utilities industries. A large number of mergers occurred in industries like primary metals, petroleum
products, food products, chemicals and transportation equipment.After World War I, consolidation in the
industries that were the subject of the first wave continued, and more. This consolidation is sometimes
called the merging for oligopoly wave. For example, more than 8000 mining and manufacturing
companies disappeared through mergers or acquisitions during this period.
The wave ended with the market crash in 1929 and the Great Depression that followed. Mergers in this
wave were facilitated by the limited enforcement of antitrust laws and the federal governments
encouragement for the formation of business cooperatives to enhance the nations productivity as part of
the war effect. The firms were urged to work together, rather than compete with each other during
wartime. The government maintained these policies even after the war ended. The crash resulted in a
dramatic drop in the business and investment confidence. Business and consumer spending was curtailed,
thereby worsening the depression. After the crash, the number of corporate mergers declined dramatically.
Investment bankers played a key role in the first two phases of mergers. They exercised considerable
influence among the business leaders. A small number of investment bankers controlled the majority of
capital available for financing mergers and acquisitions. The investment banking industry was more
concentrated in those years than it is today.
As monopolies and oligopolies tried to grow even after they dominated their industries, vertical
integration became common. Of the 100 largest companies, 20% were holding companies. In fact,
merely 200 companies owned nearly half of the wealth in the United States. The US stock market rose at
an unprecedented rate the Dow hit 300 in 1928, which was a 500% increase in only three years, before
the bottom fell out of the market a year later. The largest US company, General Motors, got its start
during the second wave. Founder William Durant went on a merger
binge by forming a holding company and broadening the product line by merging and buying many of the
components suppliers of automobiles. The Second World War and the early post-war years were
accompanied by growth of the economy and an increase in merger activity. However, the merger
movement was much smaller than the earlier ones.
Economists pointed out that government regulations and tax policies are the motivating factors behind
mergers. During this period larger firms acquired smaller privately held companies for motives of tax relief.

Due to the high estate taxes, transfer of businesses within families was very expensive and hence these
businesses were sold to other firms. These mergers did not result in increased concentration because they
involved smaller companies, which did not represent a significant portion of the total industrys assets. As
this period did not feature any major technological changes or dramatic developments in the nations
infrastructure, the merger movement was smaller compared to the earlier ones.

THIRD WAVE
End of World War II until the early 1970s (1945 to 1973)
The merger activity reached its historically highest level during this period. This period is known as a
conglomerate merger period, as small or medium sized firms adopted a diversification strategy into
business activities outside their traditional areas of interest. During this period, relatively smaller firms
targeted larger firms for acquisition. 80% of the mergers that took place were conglomerate mergers that
were more than just diversified in their product lines. For example ITT acquired such diversified
businesses like car rental firms, bakeries, consumer credit agencies, luxury hotels, airport parking firms,
construction firms, etc. On the heels of post-World War II prosperity, a prolonged merger wave ensued.
During this period, which is sometimes called the conglomerate merger wave, numerous established
US companies embraced the diversified conglomerate paradigm. In addition, entirely new conglomerates
were built from the ground, such as International Telephone & Telegraph (ITT), Ling-Temco-Voight
(LTV), and Litton Industries. Diversification became widely accepted because management skills were
assumed to be easily transferable among industries.
Managers who believed in this philosophy
sought to build
the largest companies they could. Faced
with growing
antitrust scrutiny of both horizontal and
vertical
mergers, companies sought merger
partners
in
other industries to maintain steady
growth,
which
further
fueled
diversification. A good example of
diversification was the homegrown
conglomerate ITT.ITT merged with
nearly 250 companies in the span of a
decade, many of them in unrelated
businesses. It was only after the stock
prices of conglomerate companies
crashed in the late 1960s that
diversification gradually fell out of
favor.During this third wave, some
companies grew into multinationalsas
they expanded beyond territorial
borders. Tax incentives, decreasing trade
barriers, and falling transportation costs made investment abroad attractive to some US companies.
Pooling of interest accounting treatment became widely accepted in the US, and this also encouraged
companies to grow by acquisition. The merger wave gradually ended in the early 1970s as the Dow Jones
Industrial Average fell by more than a third (e.g. the largest conglomerates fell 86%, and computer and
technology stocks fell 77%) and a worldwide energy crisis began. This led to tight money for merger
activity and a devaluation of the US dollar. Investment bankers did not finance most of the mergers in this
period. The booming stock market prices provided equity financing to many of the conglomerate

takeovers. As the mergers financed through stock transactions were not taxable, they had an advantage
over cash transactions, which were subject to taxation. Many of the acquisitions that took place during
this period were followed by poor financial performance. Many of the mergers failed as managers of the
diverse enterprises often had little knowledge of the specific industries that were under their control. For
example, Revlon, a firm that has an established track record of success in the cosmetic industry, saw its
core cosmetic industry suffer when it diversified into unrelated areas such as health care.

FOURTH WAVE 1980s

Following the recession in 1974-1975 the US economy entered a long period of expansion during which
the merger and acquisition trend went upward. Hostile mergers played a significant role in the fourth
wave. Takeovers are considered healthy or hostile by the reaction of the target companys board of
directors. If the board accepts the takeover it is considered friendly and if it opposes it, it is deemed to be
hostile.
The 1980s merger wave probably is more accurately characterized as a takeover wave. As the number
of hostile takeovers proliferated were recognized gradually as an acceptable tool for growing companies.
The first hostile takeover was made in 1974 by Morgan Stanley on behalf of Inco seeking to take over
ESB. This bid opened the door for the major investment banks to make hostile takeover bids on behalf of
raiders. However, hostile takeovers were viewed with disdain
during most of this period because corporate raiders, such as Carl Icahn, T. Boone Pickens, and Ronald
Perelman, profited handsomely by putting companies into play (i.e. forced them into being a target),
sometimes accepting greenmail to sell back equity to management, and sometimes taking over a
company to break it up and sell its assets. These raiders leveraged limited resources to make millions of
dollars for themselves and never really built anything.
In addition to hostile takeovers, junk bond financing and leveraged buyouts became commonplace and
were sources of quick albeit highly leveraged capital. Investment banker Drexel Burnham Lambert
led the charge in using new and controversial financing techniques to
facilitate the takeover of companies. Alongside the takeovers, a number of companies engaged in strategic
megamergers that featured the combination of worldwide resources. Increasingly,US companies sought
mergers or acquisitions as a response to global competition, such as Amoco and Exxon buying Canadian
oil companies. In addition, non-US companies increasingly bought US companies and other cross-border
companies as many of the largest companies in the world were formed in countries outside the US. The
best example of this was the 1989 United Kingdoms Beecham Group plcs acquisition of SmithKline
Beecham Corporation for $16 billion. In the mid-1980s, takeovers were somewhat slowed by the
development of the ultimate takeover device, the poison pill, and eventual judicial acceptance of them.
However, even after the stock market crash in October 1987, merger activity continued, and by 1988 there
were more than 200 buyout firms with aggregate assets of $30 billion to facilitate takeovers. The wave
ended amid the collapse of the junk bond market, the implosion of Drexel Burnham, and the serious loan
portfolio and capital problems faced by commercial banks in the US. In the aftermath of this wave, the
market was jarred by the insider trading scandals and
excesses that became evident, including the lawsuits brought by theUS government against some of the
best-known names in the market such as Ivan Boesky, a well-known arbitrageur, and Michael Milken, the
mastermind behind Drexel Burnham Lamberts novel financing techniques.
SIGNATURE TAKEOVER BATTLE

During the fourth wave, the signature takeover battle was the bidding war for RJR Nabisco in 1988. This
battle involved a proposed management buyout led by CEO F. Ross Johnson opposed by Kohlberg Kravis
Roberts (KKR), a takeover specialist. During the battle, RJR Nabiscos board faced immense pressure and
conflicting facts from its own management team, as each detail was widely reported in the media. The
result was a $25 billion leveraged buyout by KKR.
The fourth wave also witnessed the emergence of corporate raider. The raiders income came from the
takeover attempts. The raiders earned handsome profits without taking control over the management of
the target company. They attempted to takeover a target and later sell the target shares at a price higher
than that which was paid originally.
The fourth wave featured several other unique and interesting characteristics, which differentiate it from
the other waves. Investment bankers played an aggressive role. M&A advisory services became a
lucrative source of income for investment banks. The merger specialists at investment banks and law
firms developed many techniques to facilitate and prevent takeovers.
Another important feature is the increased use of debt to finance acquisitions. The yield on junk bonds
was significantly higher than that of investment grade bonds. Hence the ready availability of finance
helped even small firms to acquire large well-established firms. The phenomenon of leveraged buyout
emerged. This merger wave also featured innovations in acquisition techniques and investment vehicles.

FIFTH WAVE
1993 to the present
The current merger activity can be described as the fifth wave. There was once again increased activity of
mergers in 1992. Mega mergers, as in the fourth wave began to take place in the fifth wave also. The
number of hostile deals was less than strategic mergers.With the recovery of the US economy in 1992,
companies sought to expand and mergers were seen as a quick and efficient way to do so. Unlike the
deals of 1980s the transactions, of the 90s emphasized on strategy more than quick financial gains. Most
of the deals were financed through the increased use of equity. The current fifth wave appears to be an
international one, as many of the most notable mergers have been either entirely outside the United States
or have involved a non-US party. Overall, the worldwide volume of transactions rose from $322 billion in
1992 to $3.2 trillion in 2000. The clearest reflection of this trend is the $180 billion Vodafone AirTouchMannesmann AG combination, the largest in history.
In 2000 during this era there has been worldwide consolidation in many industries, such as the
automobile, telecommunications, airlines, and metal industries. In the highly regulated
industries, such as banking, the merger activity is mostly domestic, but even this
domestic consolidation is often a
response to international competition. Aside from the corporate recognition of the
need to grow globally, the primary reason for the increasing level of international
combinations is that the legislative and political climate has been quite favorable. In
particular, this may be a primary factor for the level of activity in Europe, from the
adoption of a single currency (i.e. the euro)
and an increasingly linked market to the widespread privatization of governmentcontrolled entities. Many European governments have significantly liberalized
longstanding restrictions that had prevented many cross-border deals, and continue
to do so. However, there are occasional setbacks, such as the recent rejection by
the European Parliament of a European Union Takeover Directive that had been
reached after 12 years of negotiation.

Even in the US, some major impediments to mergers and acquisitions activity have
been removed recently. For example, the Telecommunications Act of 1996 and the
partial repeal of the Glass-Steagall Act have directly caused consolidation in the
telecommunications and financial services industries. As the bureaucracy is slowly
lifted in the banking, telecommunications, and insurance industries, the pace of
merger activity has been breathtaking and unprecedented. Yet some obstacles
remain, such as the difficulty of undertaking a hostile takeover in the US banking
industry, as exemplified by the unsuccessful attempt in mid-2001 by SunTrust Bank
to interfere with the friendly deal between First Union and Wachovia.
In addition to the global nature of this wave, the pace of the fifth wave has been
boosted by the communications and technology revolution wrought primarily by the
Internet towards the end of
the twentieth century. The incredibly high valuations of many of these technology
companies enabled them to buy other technology companies to allow them to grow
or to fill in their product line. The biggest technology companies, such as Microsoft
and Cisco, regularly bought 10 or more companies each year. Other companies, like
AOL, bought old-economy companies, like Time-Warner, to create the
consummate clicks and bricks media company.
But there were almost 200 mergers of this size or greater last year in the US alone.
Emboldened by record high stock prices and faced with global competition, many
companies felt pressure to grow by merger or acquisition or wind up being targets
themselves.

1.2 The Upcoming Wave: PRIVATE EQUITY

The growing footprint of

private equity firms on the merger and acquisition and scope cannot be overstated. Private equity firms
played a role in over 25 percent of US deals last year and raised more than $200 billion in 2006 alone.
This trend has shown no signs of letting up as private equity deals have accounted for more than a third
of all merger activity this year. The rise of private equity has changed the face of M&A on a global
scale .Flush with cash from intuitional investors for super-changed returns , buyout funds also have the
ability to borrow quickly & cheaply from lenders flush with liquidity , giving them an edge in the search
for assets . Even in Asia the surge of PE has made it possible for majority of the M&A activities fruitfully.
As per Recent report of Reuters Pvt Equity firms or financial sponsors accounted 11% of Asian M&A
Activity in first half of 2007 .
The rise & recent fall of the latest wave of M&A has been fueled largely by private equitys excessive
dependence on debt. Corporate buyers are now back in the driver seat and armed with cash and
profitability to do deals. Sovereign wealth funds could also steps up their M&A activity.

Value of global cross-border M&As and MSCI World Index, 1988

2009

In developed countries, the number of mega deals declined from 274 in 2007 to 203 in 2008. In contrast,
in developing countries, M&A activity remained strong in 2008, with 41 mega deals concluded, compared
with 35 such deals in 2007. In the transition economiesthe number decreased: 7 in 2008 compared with
10 in 2007

Cross-border M&As (valued at over 1billion ) 1987 to 2009

1.3 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.

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

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

Within a general environment of strong economic growth, problems have developed in

individual economies and industries.

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.

M&A activities in India

Indias business environment has become increasingly amenable to M&A, particularly cross-border
transactions. Over recent years, Indian companies have faced few difficulties in accessing finances to
purchase companies much larger than themselves they have gradually turned to debt, private equity and
foreign lenders and are benefiting from the increasingly sophisticated domestic banking sector. Some
companies have also been affected by the tightening of credit after the subprime crises but other, cashrich companies may find that they have a renewed competitive advantage in bidding against firms whose
usual sources of finance have become constrained. Moreover, if large numbers of distressed assets
become available at affordable prices in economies that have been hit by the crunch, some ambitious
Indian companies have prepare for a potential shopping spree.
Indian companies have also benefited from a series of regulatory policies that have progressively relaxed
controls on the flow of capital out of the country this has been partly due to government efforts to
balance the economys significant and growing capital inflows. Also, Indias sizeable foreign exchange
reserves of around US$ 265 billionnow the fourth largest in the world, having grown from less than

US$1 billion in 1991give the Reserve Bank of India a greater capacity to convert domestic currency to
overseas currency on behalf of corporates, allowing them to fund overseas acquisitions more readily.
Confidence has been an important factor that has been particularly visible in the case of Indias M&A
boom. Success stories are shared through the media on a daily basis; business titans are continually
venerated for their astute acquisition decisions, and the M&A option is given more credence and validated
in the minds of CEOs as an effective means for global growth.
A string-of-pearls approach to growth
A key characteristic of the new wave of Indian M&A is the tendency to build a series of smaller stakes in
different businesses and often industries; a string-of-pearls approach that allows companies to rapidly
expand their growth opportunities and extend their geographical footprint.
For many Indian companies, the process of building a portfolio of complementary businesses is intuitive
as it fits the traditional conglomerate approach which has been so successful in India and many other
emerging markets. In many cases, Indian companies have gained experience and confidence by venturing
into similar markets in emerging economies before tackling more sophisticated mature markets.
As markets liberalize and companies globalize, the competitive dynamics of some industries can be
fundamentally affected by players that dominate the global market through sheer scale. This may become
an increasingly common occurrence as large state-backed corporations from emerging economies like
Russia and China continue their global expansion. In these industries, Indian companies with limited
global reach may not have much choice but to compete at that larger scale.

Above all, the new wave of Indian M&A is being powered by a desire for growth, usually
rapid growth and often global growth.
Mergers and Acquisitions aim towards Business Restructuring and increasing competitiveness and
shareholder value via increased efficiency. In the marketplace it is the survival of the fittest.
Indian Government has been taking proactive measures to The Finance Act,1999 clarified many issues
relating to Business Reorganisations thereby facilitating and making business restructuring tax neutral. As
per Finance Minister this has been done to accelerate internal liberalisation and to release productive
energies and creativity of Indian businesses. The year 1999-00 has notched-up deals over Rs. 21000 cr.
Which is over 1% of India's GDP. This level of activity was never seen in Indian corporate sector.
Infotech, banking, media, pharma, cement, power are sectors which are more active in mergers and
acquisitions.

Source: KPMG

Reasons for hectic activity -What's driving the deal mania?

Liberalisation is the one main reason. With liberalisation, came death of licensing and capacity
controls. Bureaucratic hurdles coming in the way of industrial development are being removed.
Protected markets and near monopoly situations have disappeared. Inefficient units are finding
difficult to survive.
Opening up of Indian economy by reduction/removal of quantitative and qualitative restrictions.
India is a signatory to WTO agreements. Increasing competition have forced entrepreneurs to
reexamine and restructure their businesses
Fight between scale and specialization.

Access to foreign capital markets. FERA liberalisation-FEMA-liberised foreign investments-large

Indian market opening up-insurance-telecom-banking-finance-services-infrastructure-consensus
among major political parties -failure of soviet union and realization of socialism failure
Maximisation of Shareholder values Competitive advantages. Support to sick companies-synergy
of operations-consolidation of market share-reduction of time and money in entering the
market/foreign market-reducing uncertainty of market share-buying out competition- Realisation
of stock market valuations.
Inorganic growth through acquisitions.

Exit route for promoters.

Listing advantage.