Interim Report

On

MERGERS AND ACQUISITION IN

TELECOM SECTOR IN INDIA

By

PRABHAKAR CHOWDHURY

O7 BS 2873

IBS PUNE
Final Report

On

MERGERS AND ACQUISITION IN TELECOM SECTOR

IN INDIA

BY

PRABHAKAR CHOWDHURY

A report submitted in partial fulfillment of the requirements of MBA

program of

ICFAI Business School

TO

FACULTY GUIDE

PROF: ARUN PRASAD

2
INDEX

OVERVIEW
• Introduction 3

MEREGRS AND ACQUISITIONS: A BREIF

• Acquisitions 5
• Types of acquisitions 5

• Mergers 6
• Types of Mergers 6
• Difference between Mergers and acquisitions 7
• Motives behind M & A 9
• M&A marketplace difficulties 10

MEREGRS AND ACQUISITIONS IN TELECOM SECTORS

• Introduction 13
• In India 15
• Taking over of Hutchison Essar By Vodafone Group 17
• Conclusion 21
• References 22

3
INTRODUCTION
In every organization’s life and in every economy’s life comes a time when growth
development and expansion seems to reach a plateau. Across what is today called the
developed countries, we are witnessing such a Cycle, where iconic brands, companies and
institutions are being acquired and merged. And across the world into Asia, transition
economies like India, China are pumping in billions of dollars to acquire a stake or control of
some of the crown jewels of American/European Business & Industry.

Until up to a couple of years back, the news that Indian Companies having acquired by
American-European entities was very rare. However, this scenario has taken a sudden U turn.
Nowadays, news of Indian Companies acquiring a foreign business is more common than other
way round.

Buoyant Indian Economy, extra cash with Indian corporates, Government policies and newly
found dynamism in Indian businessmen have all contributed to this new acquisition trend. Indian
companies are now aggressively looking at North American and European markets to spread
their wings and become the global players.

The Indian IT and ITES companies already have a strong presence in foreign markets, however,
other sectors are also now growing rapidly. The increasing engagement of the Indian companies
in the world markets, and particularly in the US, is not only an indication of the maturity reached
by Indian Industry but also the extent of their participation in the overall globalization process.

The sectors attracting investments by Corporate India include metals, pharmaceuticals, industrial
goods, automotive components, beverages, cosmetics and energy in manufacturing; and mobile
communications, software and financial services in services, with pharmaceuticals, IT and
energy being the prominent ones among these.

Year 2007 can be called as the year of mergers and acquisitions for India. Besides the
investments flowing into India, Indian corporations currently loaded with excess cash are on an
acquisitions spree.

ICICI bank’s Global Investment Outlook report, says the total equity deals struck by Indian
companies have crossed 50 billion USD in 2007. In the same timeframe last year the equity
deals stood at about 15 billion dollars in 2006.

MERGERS AND ACQISITIONS: A BRIEF

4
ACQUISITION

An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another.
An acquisition may be friendly or hostile. In the former case, the companies cooperate in
negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board
has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by
a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or
longer established company and keep its name for the combined entity. This is known as a
reverse takeover.

TYPES OF ACQUISITION

• The buyer buys the shares, and therefore control, of the target company being purchased.
Ownership control of the company in turn conveys effective control over the assets of the
company, but since the company is acquired intact as a going business, this form of
transaction carries with it all of the liabilities accrued by that business over its past and all
of the risks that company faces in its commercial environment.
• The buyer buys the assets of the target company. The cash the target receives from the
sell-off is paid back to its shareholders by dividend or through liquidation. This type of
transaction leaves the target company as an empty shell, if the buyer buys out the entire
assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the
assets that it wants and leave out the assets and liabilities that it does not. This can be
particularly important where foreseeable liabilities may include future, unquantified
damage awards such as those that could arise from litigation over defective products,
employee benefits or terminations, or environmental damage. A disadvantage of this
structure is the tax that many jurisdictions, particularly outside the United States, impose
on transfers of the individual assets, whereas stock transactions can frequently be
structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral,
both to the buyer and to the seller's shareholders.

The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where
one company splits into two, generating a second company separately listed on a stock exchange.

MERGER

5
In business or economics a merger is a combination of two companies into one larger company.
Such actions are commonly voluntary and involve stock swap or cash payment to the target.
Stock swap is often used as it allows the shareholders of the two companies to share the risk
involved in the deal. A merger can resemble a takeover but result in a new company name (often
combining the names of the original companies) and in new branding; in some cases, terming the
combination a "merger" rather than an acquisition is done purely for political or marketing
reasons.

CLASSIFICATIONS OF MERGERS:

• Horizontal mergers take place where the two merging companies produce similar
product in the same industry.
• Vertical mergers occur when two firms, each working at different stages in the
production of the same good, combine.
• Co generic mergers occur where two merging firms are in the same general industry, but
they have no mutual buyer/customer or supplier relationship, such as a merger between a
bank and a leasing company. Example: Prudential's acquisition of Bache & Company.
• Conglomerate mergers take place when the two firms operate in different industries.

A unique type of merger called a reverse merger is used as a way of going public without the
expense and time required by an IPO.

The contract vehicle for achieving a merger is a "merger sub".

The occurrence of a merger often raises concerns in antitrust circles. Devices such as the
Herfindahl index can analyze the impact of a merger on a market and what, if any, action could
prevent it. Regulatory bodies such as the European Commission, the United States Department
of Justice and the U.S. Federal Trade Commission may investigate anti-trust cases for
monopolies dangers, and have the power to block mergers.

Accretive mergers are those in which an acquiring company's earnings per share (EPS)
increase. An alternative way of calculating this is if a company with a high price to earnings ratio
(P/E) acquires one with a low P/E.

Dilutive mergers are the opposite of above, whereby a company's EPS decreases. The company
will be one with a low P/E acquiring one with a high P/E.

The completion of a merger does not ensure the success of the resulting organization; indeed,
many mergers (in some industries, the majority) result in a net loss of value due to problems.
Correcting problems caused by incompatibility—whether of technology, equipment, or corporate
culture— diverts resources away from new investment, and these problems may be exacerbated

6
by inadequate research or by concealment of losses or liabilities by one of the partners.
Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency,
and conversely the new management may cut too many operations or personnel, losing expertise
and disrupting employee culture. These problems are similar to those encountered in takeovers.
For the merger not to be considered a failure, it must increase shareholder value faster than if the
companies were separate, or prevent the deterioration of shareholder value more than if the
companies were separate.

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. For example, both Daimler-Benz
and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler,
was created.

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 is technically an acquisition. Being bought out often
carries negative connotations, therefore, by describing the deal euphemistically 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. It is quite normal though for M&A deal communications to take
place in a so called 'confidentiality bubble' whereby information flows are restricted due to
confidentiality agreements (Harwood, 2005).

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BUSINESS VALUATION

The five most common ways to evaluate a business are

• asset valuation,
• historical earnings valuation,
• future maintainable earnings valuation,
• relative valuation (comparable company & comparable transactions),
• discounted cash flow (DCF) valuation

Professionals who valuate businesses generally do not use just one of these methods but a
combination of some of them, as well as possibly others that are not mentioned above, in order to
obtain a more accurate value. These values are determined for the most part by looking at a
company's balance sheet and/or income statement and withdrawing the appropriate information.
The information in the balance sheet or income statement is obtained by one of three accounting
measures: a Notice to Reader, a Review Engagement or an Audit.

Accurate business valuation is one of the most important aspects of M&A as valuations like
these will have a major impact on the price that a business will be sold for. Most often this
information is expressed in a Letter of Opinion of Value (LOV) when the business is being
valuated for interest's sake. There are other, more detailed ways of expressing the value of a
business. These reports generally get more detailed and expensive as the size of a company
increases; however, this is not always the case as there are many complicated industries which
require more attention to detail, regardless of size.

FINANCING M&A

Mergers are generally differentiated from acquisitions partly by the way in which they are
financed and partly by the relative size of the companies. Various methods of financing an M&A
deal exist:

Cash

Such transactions are usually termed acquisitions rather than mergers because the shareholders of
the target company are removed from the picture and the target comes under the (indirect)
control of the bidder's shareholders alone.

A cash deal would make more sense during a downward trend in the interest rates. Another
advantage of using cash for an acquisition is that there tends to lesser chances of EPS dilution for
the acquiring company. But a caveat in using cash is that it places constraints on the cash flow of
the company.

8
Financing

Financing capital may be borrowed from a bank, or raised by an issue of bonds. Alternatively,
the acquirer's stock may be offered as consideration. Acquisitions financed through debt are
known as leveraged buyouts if they take the target private, and the debt will often be moved
down onto the balance sheet of the acquired company.

Hybrids

An acquisition can involve a combination of cash and debt, or a combination of cash and stock of
the purchasing entity.

Factoring

Factoring can provide the necessary extra to make a merger or sale work. Hybrid can work as ad
e-denit

Specialist M&A advisory firms

Although at present the majority of M&A advice is provided by full-service investment banks,
recent years have seen a rise in the prominence of specialist M&A advisers, who only provide
M&A advice (and not financing). To perform these services in the US, an advisor must be a
licensed broker dealer, and subject to SEC (FINRA) regulation. More information on M&A
advisory firms is provided at corporate advisory.

MOTIVES BEHIND M&A

The dominant rationale used to explain M&A activity is that acquiring firms seek improved
financial performance. The following motives are considered to improve financial performance:

• Synergies: This refers to the fact that the combined company can often reduce its fixed
costs by removing duplicate departments or operations, lowering the costs of the
company relative to the same revenue stream, thus increasing profit margins.
• Increased revenue/Increased Market Share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by capturing increased
market share) to set prices.
• Cross selling: For example, a bank buying a stock broker could then sell its banking
products to the stock broker's customers, while the broker can sign up the bank's
customers for brokerage accounts. Or, a manufacturer can acquire and sell
complementary products.

9
 • Economies of Scale: For example, managerial economies such as the increased
opportunity of managerial specialization. Another example are purchasing economies due
to increased order size and associated bulk-buying discounts.
• Taxes: A profitable company can buy a loss maker to use the target's loss as their
advantage by reducing their tax liability. In the United States and many other countries,
rules are in place to limit the ability of profitable companies to "shop" for loss making
companies, limiting the tax motive of an acquiring company.
• Geographical or other diversification: This is designed to smooth the earnings results of
a company, which over the long term smoothens the stock price of a company, giving
conservative investors more confidence in investing in the company. However, this does
not always deliver value to shareholders (see below).
• 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.[1]
• 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.[2]

However, on average and across the most commonly studied variables, acquiring firms’ financial
performance does not positively change as a function of their acquisition activity. [3] Therefore,
additional motives for merger and acquisition that may not add shareholder value include:

• Diversification: While this may hedge a company against a downturn in an individual

industry it fails to deliver value, since it is possible for individual shareholders to achieve
the same hedge by diversifying their portfolios at a much lower cost than those associated
with a merger.
• Manager's hubris: manager's overconfidence about expected synergies from M&A
which results in overpayment for the target company.
• Empire building: Managers have larger companies to manage and hence more power.
• Manager's compensation: In the past, certain executive management teams had their
payout based on the total amount of profit of the company, instead of the profit per share,
which would give the team a perverse incentive to buy companies to increase the total
profit while decreasing the profit per share (which hurts the owners of the company, the
shareholders); although some empirical studies show that compensation is linked to
profitability rather than mere profits of the company.
10
EFFECTS ON MANAGEMENT

A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that
mergers and acquisitions destroy leadership continuity in target companies’ top management
teams for at least a decade following a deal. The study found that target companies lose 21
percent of their executives each year for at least 10 years following an acquisition – more than
double the turnover experienced in non-merged firms.[4]

M&A MARKET PLACE DIFFICULTIES

No marketplace currently exists in many states for the mergers and acquisitions of privately
owned small to mid-sized companies. Market participants often wish to maintain a level of
secrecy about their efforts to buy or sell such companies. Their concern for secrecy usually arises
from the possible negative reactions a company's employees, bankers, suppliers, customers and
others might have if the effort or interest to seek a transaction were to become known. This need
for secrecy has thus far thwarted the emergence of a public forum or marketplace to serve as a
clearinghouse for this large volume of business. In some states, a Multiple Listing Service (MLS)
of small businesses for sale is maintained by organizations such as Business Brokers of Florida
(BBF). Another MLS is maintained by International Business Brokers Association (IBBA).

At present, the process by which a company is bought or sold can prove difficult, slow and
expensive. A transaction typically requires six to nine months and involves many steps. Locating
parties with whom to conduct a transaction forms one step in the overall process and perhaps the
most difficult one. Qualified and interested buyers of multimillion dollar corporations are hard to
find. Even more difficulties attend bringing a number of potential buyers forward simultaneously
during negotiations. Potential acquirers in an industry simply cannot effectively "monitor" the
economy at large for acquisition opportunities even though some may fit well within their
company's operations or plans.

An industry of professional "middlemen" (known variously as intermediaries, business brokers,

and investment bankers) exists to facilitate M&A transactions. These professionals do not
provide their services cheaply and generally resort to previously-established personal contacts,
direct-calling campaigns, and placing advertisements in various media. In servicing their clients
they attempt to create a one-time market for a one-time transaction. Stock purchase or merger
transactions involve securities and require that these "middlemen" be licensed broker dealers
under FINRA (SEC) in order to be compensated as a % of the deal. Generally speaking, an
unlicensed middleman may be compensated on an asset purchase without being licensed. Many,
but not all, transactions use intermediaries on one or both sides. Despite best intentions,
intermediaries can operate inefficiently because of the slow and limiting nature of having to rely
heavily on telephone communications. Many phone calls fail to contact with the intended party.
Busy executives tend to be impatient when dealing with sales calls concerning opportunities in
11
which they have no interest. These marketing problems typify any private negotiated markets.
Due to these problems and other problems like these, brokers who deal with small to mid-sized
companies often deal with much more strenuous conditions than other business brokers. Mid-
sized business brokers have an average life-span of only 12-18 months and usually never grow
beyond 1 or 2 employees. Exceptions to this are few and far between. Some of these exceptions
include The Sundial Group, Geneva Business Services and Robbinex.

The market inefficiencies can prove detrimental for this important sector of the economy.
Beyond the intermediaries' high fees, the current process for mergers and acquisitions has the
effect of causing private companies to initially sell their shares at a significant discount relative
to what the same company might sell for where it already publicly traded. An important and
large sector of the entire economy is held back by the difficulty in conducting corporate M&A
(and also in raising equity or debt capital). Furthermore, it is likely that since privately held
companies are so difficult to sell they are not sold as often as they might or should be.

Previous attempts to streamline the M&A process through computers have failed to succeed on a
large scale because they have provided mere "bulletin boards" - static information that advertises
one firm's opportunities. Users must still seek other sources for opportunities just as if the
bulletin board were not electronic. A multiple listings service concept was previously not used
due to the need for confidentiality but there are currently several in operation. The most
significant of these are run by the California Association of Business Brokers (CABB) and the
International Business Brokers Association (IBBA) These organizations have effectivily created
a type of virtual market without compromising the confidentiality of parties involved and
without the unauthorized release of information.

One part of the M&A process which can be improved significantly using networked computers is
the improved access to "data rooms" during the due diligence process however only for larger
transactions. For the purposes of small-medium sized business, these data rooms serve no
purpose and are generally not used. Reasons for frequent failure of M&A was analyzed by
Thomas Straub in "Reasons for frequent failure in mergers and acquisitions - a comprehensive
analysis", DUV Gabler Edition, 2007.

MERGERS AND ACQUSITIONS IN TELECOM SECTORS:

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

Currently, a slew of mergers and acquisitions in Telecom Sector are going on throughout the
12
world. The aim behind such mergers is to attain competitive benefits in the telecommunications
industry.

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

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

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

Mergers and acquisitions in the telecommunications sector have been showing a prosperous
trend in the recent past and the economists are advocating that they will continue to do so. The
majority of telecommunication services providers have understood that in order to grow globally,
strategic alliances and mergers and acquisitions are the principal devices.

Private sector investment and FDI (Foreign Direct Investment) have also boosted the growth of
mergers and acquisitions in the telecommunications sector.

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

• Deregulation
• Introduction of sophisticated technologies (Wireless land phone services)
• Innovative products and services (Internet, broadband and cable services)
Economic reforms have spurred the growth in the mergers and acquisitions industry of the
telecommunications sector to a satisfactory level.

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

In countries like India, mergers and acquisitions have increased to a considerable level from the
mid 1990s. In the United States, the mergers and acquisitions in the telecommunications sector
are going on in a full-fledged manner.

13
The mergers and acquisitions in the telecommunications sector are governed or supervised by the
regulatory authority of the telecommunication industry of a particular country, for instance the
Telecom Regulatory Authority of India or TRAI. The regulatory authorities always keep a tab on
the telecommunications industry so that no monopoly is formed.

FOLLOWING ARE THE IMPORTANT MERGERS AND ACQUISITIONS THAT TOOK

PLACE IN THE TELECOMMUNICATIONS SECTOR:

• The takeover of Mobilink Telecom by Broadcom. This can also be described as a suitable
example of product extension merger
• AT&T Inc. taking over BellSouth
• The acquisition of eScription Inc. by Nuance Communications Inc.
• The taking over of Hutchison Essar by the Vodafone Group. Now it has become
Vodafone Essar Limited
• China Communications Services Corporation Ltd. taking over China International
Telecommunication Construction Corporation
• The acquisition of Ameritech Corporation by SBC (Southwestern Bell Corporation)
Communications
• The merger of GTE (General Telephone and Electronics) with Bell Atlantic
• The acquisition of US West by Qwest Communications
• The merger of MCI Communications Corporation with WorldCom

BENEFITS PROVIDED BY THE MERGERS AND ACQUISITIONS IN THE

TELECOMMUNICATIONS-SECTOR

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

• Building of infrastructure in a more convenient way

• Licensing options for mergers and acquisitions are often found to be easier
• Mergers and acquisitions offer extensive networking advantages
• Brand value
• Bigger client base
• Wide array of products and services

REASONS FOR THE GROWTH OF INDIAN TELECOMMUNICATION INDUSTRY

In recent times mergers and acquisitions in the Indian telecommunication industry have been
driven by a few important factors -

14
 • The inclusion of internet (including broadband) and cable services in the telecom sector.
• New technologies like wireless fixed phone services.
• Deregulation in the telecom sector.

Rules related to mergers and acquisitions in the Indian telecommunication industry

Certain regulatory and statutory norms pertaining to mergers and acquisitions in the Indian
telecommunications sector are laid down by the Indian government and its authorized agencies.
These include -

• Mergers and acquisitions require approval from the Department Of Telecommunications

(DOT)
• Mergers are allowed in the same service area.
• Mergers or acquisitions in a service area should not lead to less than 3 operators in that
area.
• Mergers and acquisitions should not lead to monopoly.
15
 TAKING OVER OF HUTCHISON ESSAR BY THE
VODAFONE GROUP
Britain's Vodafone announced on February 11 that it had decided to pay $11.1 billion in cash and
assume $2 billion in debt to buy a 67% stake in Hutchison Essar, one of India's largest mobile
operators with more than 22 million subscribers. Vodafone's purchase of the controlling interest
in Hutchison Essar -- or Hutch, as it is commonly called -- from Hong Kong-based shipping and
real estate baron Li Ka-Shing values the company at nearly $19 billion, which is twice as much
as the first round of bidders in January thought it was worth.

The growth numbers explain most of the market's fervor. India's cell phone user population
doubled during the past year to 150 million at the end of 2006. More than 6 million new
16
subscribers are signing up for mobile services each month, making India the world's fastest
growing mobile market. Cell phones are not just a way to keep in touch with loved ones in a
country that loves to talk, but in a booming economy they also become workstations for millions
in India's unorganized sectors. Vodafone's India-born CEO Arun Sarin said in a speech in
Barcelona recently that he expects the 150 million subscriber base -- which represents a
penetration rate of just 13% -- to grow to 500 million in a few years. Much of this growth is
expected to come from more than 600,000 villages where millions of Indians live. "We are really
excited to move into the rural areas," Sarin said in his speech.

The numbers are justified based on a prediction of higher value-added services, and also some
sense of how mobile phones can be used for marketing. He says these value-added services could
go beyond ring tones and text messaging to bringing television and advertising to handsets.

Vivek Gupta, managing director of consulting firm A.T. Kearney's Indian operation, believes
that Vodafone's Hutch deal is good for shareholders of both companies as well as consumers.
"This is a deal priced to perfection," he says. "It is a good strategic fit all around." Gupta says
that this transaction secures Vodafone's position as a major player in the global telecom industry
and gives the company a strategic presence in Asia. Like other global telecom firms, Vodafone is
looking for growth in Asia because markets like the U.S. -- which has an 80% penetration rate
for cell phones -- offer little growth potential.

17
Vodafone will face me-too competitors as it attempts to increase revenue and profitability with
value- added services in the face of the lower ARPUs (average revenue per user) that industry
analysts predict. ARPUs for Indian mobile phone service providers range from $10 to $20 a
month, and Hutchison Essar currently occupies the top slot.

One of the key issues in valuations is the reliability of revenue recognition, and that will come
with more post-paid subscribers than prepaid," he says. "The U.S. market has more post-paid
subscribers than prepaid ones." Market estimates put prepaid mobile phone users in India at
about 80% of the total

Bapna says a major hurdle Vodafone will face with its acquisition is ensuring synergies and
integration across the two companies. "This is where the rubber meets the road. The high-
growth, high-volume and low-margin Indian market is significantly different from the rest of
Vodafone's acquisitions. Vodafone will do well to emulate the lean model of Bharti Airtel, but it
also has the opportunity to segment the consumer base and exercise price and service quality
differentiation."

Essar is a natural partner. It is already there in the joint venture. We are talking to several
companies. We will see who we can have as partner on a long-term basis. Vodafone's bid has

18
advantages over an offer of roughly the same amount by Reliance, because there would be less
regulatory risk involved and much of Hutch's management and work force would remain intact.

are set to roll out next generation networks. In addition, the Indian market is considered less
saturated than many markets in Europe and Asia, offering strong growth potential.

Operator's Outlook

Mobile phone penetration in India is very low (one in eight people have a mobile phone).
Hutchison Essar has historically enjoyed higher ARPU than other Indian operators and is viewed
as a high-end urban operator. Also, the post-paid to prepaid ratio for Hutch is much higher than
that of other operators-a very attractive proposition for any buyer.

Indian operators such as Reliance Communication will gain from Hutch's premium brand/image
in the market, strong network and a dominant market position as a result of the acquisition.
Reliance, primarily a CDMA operator and the second largest cellular operator in the country, has
been looking to enhance its operations in the GSM space and Hutchison Essar fits in very well
with this strategy

Hutchison Essar was pegged at $9-9.5 billion in June 2005 and at that time if Hutch had made its
intentions clear, of selling its stake, it would have been the most sought after buying target. But
since then it has come a long way and is now valued at $22 billion, which is undoubtedly on the
higher side. Though buying Hutchison Essar would provide a much-needed fillip to Reliance
Communications and Vodafone's businesses, as the former is keen to ramp-up its GSM
operations while the latter would get a smooth entry in the Indian telecom market-but the
unrealistic bid-up is likely to result in low value, even over the long run.

Research Says
We would peg We believe
Using our local analysts' SOTP
the Hutch- Vodafone that the deal
valuation of $15.5 billion for
Essar value at Valuations of seems to be is likely to
Hutchison Essar's enterprise
close to $17 $20 billion for offering a value
value and deducting $1.1
billion, with a Hutch-Essar large Hutchison
billion of net debt for end 2007
$11-12 billion are expensive premium... Essar's equity
leaves an equity value for the
price for the -Lehman -CLSA Asia at $14-15
theoretical maximum 74% of
67% stake Brothers Pacific billion
$10.8 billion
-The Smart Markets -Man
-Goldman Sachs
Cube Financial

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In an ideal scenario, Hutchison Essar value should be pegged at around $18-19 billion, with a
$12.1-12.7 billion price for the 67% stake. This is based on multiple valuation methodologies
and after including a premium to be paid for the prized asset.

At $14 billion, analysts estimate Hutchison Essar's enterprise value/EBITDA at 20.6 times year-
to-March 2007 earnings, well above Bharti's 16.2 times.

In the present scenario, it will definitely be valued at a higher price, somewhere near $7 billion
for its 33% stake in Hutchison Essar. In an ideal situation, it won't be able to fetch $5.9-6.3
billion and in case it buys the remaining 67%, it will have to cough-up $13 bn. Also, if it decides
to sell-off the entire stake at a later stage, it might not be able to make much profit in this
venture, as it is very unlikely that the bid would be raised further from the current level of $22
bn. At this level, shelling out $15 billion to sell at $22 billion is not a good business proposition
for any operator, especially when it can easily get $5-7 billion for its 33% stake.

CONCLUSION

M&As have become very popular over the years especially during the last two decades owing to
rapid changes that have taken place in the business environment. Business firms now have to
face increased competition not only from firms within the country but also from international
business giants thanks to globalization, liberalization, technological changes, etc. Generally the
objective of M&As is wealth maximization of shareholders by seeking gains in terms of synergy,
economies of scale, better financial and marketing advantages, diversification and reduced
earnings volatility, improved inventory management, increase in domestic market share and also
to capture fast growing international markets abroad. But astonishingly, though the number and
value of M&As are growing rapidly, the results of the studies on the impact of mergers on the
performance from the acquirers' shareholders perspective have been highly disappointing. In this
paper an attempt has been made to draw the results of only some of the earlier studies while
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analyzing the causes of failure of majority of the mergers. Making the mergers work successfully
is not that easy as here we are not only just putting the two organizations together but also
integrating people of two organizations with different cultures, attitudes and mindsets.
Meticulous pre-merger planning including conducting proper due diligence, effective
communication during the integration, committed and competent leadership, speed with which
the integration plan is integrated all this pave for the success of M&As. While making the
merger deals, it is necessary not only to make analysis of the financial aspects of the acquiring
firm but also the cultural and people issues of both the concerns for proper post-acquisition
integration.

REFENCES
www.econoywatch.com

www.ibef.com

www.finance.mapsofworld.com

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