INTRODUCTION Increased global competition, regulatory changes, fast-changing technolog y, need for faster growth and excess industry

capacity have fuelled mergers and acquisitions in recent times MERGER: Combining of two or more companies generally by offering stockholders of one com pany Securities in acquiring company in exchange for surrender of their stock. Basically when two companies become one and this decision is usually mutual betw een both firms. ACQUISITION: When one company purchases a majority interest in acquired. Acquisition can either be friendly or unfriendly. A friendly acquisition occurs when target firm agreed the same agreement from target firm.

1.1) PRINCIPLES BEHIND MERGERS & ACQUISITIONS One plus one makes three: this equation is the special alchemy of a merger or ac quisition. The key principle behind buying a company is to create shareholder va lue over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies-- that s the reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Stron g companies will act to buy other companies to create a more competitive, cost-e fficient company. The companies will come together hoping to gain a greater mark et share or achieve greater efficiency. Because of these potential benefits, tar get companies will often agree to be purchased when they know they cannot surviv e alone. 1.2) DISTINCTION BETWEEN MERGER & ACQUISITION 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 a company takes over another one and clearly becomes the new owner, the pur chase is called an acquisition, and new company stock is issued in its place. Fr om a legal point of view, the target company ceases to exist and the buyer "swal lows the business, and stock of the buyer continues to be traded. In the pure sense of the term, a merger happens when two firms, often about the same size, agree to go forward as a new single company rather than remain separa tely owned and operated. Simply allow the acquired firm to proclaim that the action is a merger of equals , even if its technically an acquisition. Being bought out often carries negative connotations. By using the term "merger," dealmakers and top managers try to ma ke the takeover more palatable. A purchase deal will also be called a merger whe n 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. Often, o ne company will buy another and, as part of the deal s terms, both CEOs agree t hat joining together in business is in the best interests of both their companie s. But when the deal is unfriendly--that is, when the target company does not wa nt to be purchased--it is always regarded as an acquisition. So, whether a purchase is considered a merger or an acquisition really depends o

n 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 recei ved by the target company s board of directors, employees and shareholders. 1.3) TYPES OF MERGERS Mergers can be of following types: 1) Horizontal merger: This is joining of two or more companies in same are a of business. Thus, in case of this merger, two or more companies which are pro ducing essentially the same products or providing the same services or which are in direct competition with each other joined together. For example, two booksel lers or two manufacturers of motorcycles may merge with each other. Such a merge r will be horizontal merger. Such a merger results in economies of scale, operating economies and elimination of duplication of facilities. The horizontal merger reduces competition and number of companies in an industry. However, it also tends to cr eate concentrate economic power. 2) Vertical merger: This is the joining of two or more companies involved in different stages of production or distribution of the same product or service . Thus in case of this merger, two or more companies which are engaged in the pr oduction of same goods or services but at different stages of production or rout es join together. For example, a coal mining company and a railway company, whic h carries coal to different industrial units, may merge together. Such a merger will be termed as vertical merger. The essential objective of such a merger is to ensure a source o f supply required for production of goods or services or ensures a ready market for the goods or services produced. However, this merger may also lead to increa se in concentration of economic power and consequential legal or social problems . 3) Conglomerate merger: This is joining of two or more companies whose bus iness is not related with each other either vertically or horizontally. The comp anies involved in the merger may be manufacturing totally different products. Of course, there may be some common features between them such as same channel of distribution or technological area. For example: a company engaged in manufactur ing activities may get itself merged with a company engaged in insurance busines s. The two businesses are totally different and, therefore such merger is termed as conglomerate merger. The basic objective behind this merger is the diversification of activit ies. Such a merger may also lead to concentration of economic power by virtue of controlling by the merged corporation different fields of business activities. 4) Preference for group structure: The above are the methods of effecting a combination between two, or indeed more companies. It appears that the majorit y of large business combinations make use of a group structure rather than a pur chase of assets or net assets. Such a structure is advantageous in that separate companies enjoying limited liability are already in existence. It follows that names and associated goodwill, of the original companies are not lost and in add ition, that it is not necessary to renegotiate contractual agreements. All sorts of other factors will be important in practice; some examples are the desire to retain staff, the impact of taxation and stamp duty and whether or not there is a remaining minority interest. A group structure also permits easy disinvestmen t by sale of one or more subsidiaries. 2.1) SYNERGY Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By me rging, the companies hope to benefit from the following: Staff reductions - As every employee knows, mergers tend to mean job losses. Con

sider all the money saved from reducing the number of staff members from account ing, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. Economies of scale - Yes, size matters. Whether it s purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on co sts. Mergers also translate into improved purchasing power to buy equipment or o ffice supplies--when placing larger orders, companies have a greater ability to negotiate price with their suppliers. Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can keep or develop a competi tive edge. Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies m arketing and distribution, giving them new sales opportunities. A merger can als o improve a company s standing in the investment community: bigger firms often h ave an easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done--it is not automatically r ealized once two companies merge. Sure, there ought to be economies of scale whe n two businesses are combined, but sometimes it works in Reverse. In many cases, one and one add up to less than two . Sadly, synergy opportunities may exist only in the minds of the corporate leader s and the dealmakers. Where there is no value to be created, the CEO and investm ent bankers--who have much to gain from a successful M&A deal--will try to build up the image of enhanced value. The market, however, eventually sees through th is and penalizes the company by assigning it a discounted share price.. 2.2) HOW DO MERGERS HAPPEN? Corporate mergers occur when two companies combine. In some cases both companies want to merge. This is called an Agreed merger. Another situation is where one company seeks to control another without its agre ement. This is called a Hostile takeover. A company can offer either shares in its own company or cash to shareholders in order to persuade them to sell out. In a dawn raid the acquiring company snaps up a substantial block of shares in the target company at the opening of the trading day - before the bid is known and speculation can push up the value of those shares. WHY DO MERGERS HAPPEN? There are many motivations for mergers. One reason is expansion: a larger, growing company may try to take over its smal ler rivals in order to grow bigger. In some cases it is the smaller company that wants to expand, but is hampered by lack of capital. It seeks a larger partner who will put in the necessary invest ment. Other mergers seek to make cost-savings by integrating operations, sometimes on a world scale. And some mergers are defensive, responding to other mergers, which threaten the competitive position of a company.

WHEN DO MERGERS HAPPEN? Mergers tend to happen in waves. A stock market boom makes mergers much more att ractive because it is relatively cheap to acquire other companies by paying for them in (high valued) shares. But falling share prices can also lead to a compan y being undervalued and hence an attractive acquisition. Some industries are forced into mergers by specific troubles facing that industr y. Globalization and the regulatory environment also have a big impact on the likel ihood of consolidation.

2.3) FINANCIAL BENEFITS OF MERGERS AND ACQUISITIONS Merging and diversification Theory suggests that diversification for the purpose of risk reduction can only be justified from a shareholders viewpoint if default or bankruptcy would entail substantial costs. In the absence of such costs, the argument is that shareholde rs can always achieve such risk reduction for themselves by investing in a diver sified portfolio of equities on their own account, or by investing in unit trust s. However, there are a number of reasons why managers of the firm may take a di fferent view. From a shareholders view the costs of bankruptcy lie primarily in the legal cost of reorganization. There are, however, costs to other parties; for example, to m anagers. A bankruptcy may not only deprive a manager of his salaried job but als o undermine his value in the job market when he seeks alternative employment. Si nce the information is imperfectly disseminated, the bankruptcy may reflect unfa irly on the perceived competence of individual managers involved. The risk is no t easily diversified by managers whose main wealth is human capital: that is, in their ability to earn a high salary. In these circumstances a wise manager may reject some takeovers projects, which will be profitable to diversified sharehol ders. An alternative strategy would be to diversify the assets of the firm. One should not imagine the self-interest of managers in this regard is wholly at odds with the interest of shareholders. Managers and other employees in risky, undiversified companies will tend to demand higher salaries or other benefits to compensate for the risks entailed in working for such concerns. The resulting a dditional labour costs must be borne by the shareholders or owners. Furthermore, the managers who are exposed to unnecessary risks to their job security are mor e likely to bias investment decisions towards lower risk situations. This bias i s seldom in the interest of diversified shareholders. If it is not too costly, b oth shareholders and employees interest may be served by some degree of the company diversification. Diversification also provides a means of preserving goodwill. Only if the company stays in existence can it seize future opportunities to make profitable investments. Diversification helps to remove the risk of losing the value of such growth. Diversification may actually increase the portfolio of gro wth opportunities available to the merger partners, Once the managers and employees are protected in these ways, management can iden tify more closely with the interest of diversified shareholders when making inve stment decisions. When company diversification is too costly, shareholders often grant options to managers to purchase the company shares at fixed price. This provides a financial incentive for management to take decisions, which favo

rably affect shareholders wealth. The effectiveness of this method is limited b y the fact that it does not eliminate the managers vulnerability to the unique ri sk of capital projects. Share options in the company of employment increase an a lready large stake, which managers have in fortunes of that one enterprise. Ther e is some obvious scope here for devising imaginative compensation schemes to br ing executive incentives more closely in to line with the interest of diversifie d shareholders.

Risk reduction and lower borrowing costs When two firms merge the risk of the combined earning stream may be reduced as a result of the diversification effect. Table A Earnings of two companies before merger and after merger Earnings at the end of the y ear COMPANY A OUTCOME 1 150 OUTCOME 2 -50 COMPANY B OUTCOME 1 -30 OUTCOME 2 170 COMPANY A+B OUTCOME 1 120 OUTCOME 2 120 The above Table A shows how diversifying mergers can reduce the risk of merged companies earnings streams as compared with their pre merger state. The example is unrealistic because we assume the earnings of two companies move in opposite directions (that is earnings of two are perfectly negatively correla ted). At the end of the year there are only two possible outcomes for earnings ( called outcomes 1 and 2). In outcome 1 the operating earnings of the company A w ill be $ 150 while the operating earnings of company B will fall to -$30. In the outcome 2 the earnings of A will be -$50 and the earnings of B will rise to $12 0. Obviously the expected earnings of each company are risky move in different d irections. However, if the two companies merged, the operating earnings of the c ombined firms are $120 for each outcome, and therefore the merged firm is risk l ess. Of course, the assumption that the earnings of two firms are perfectly nega tively correlated is unrealistic, but the variability of earnings (or their rang e) would always be reduced unless the earning moved in lockstep. Thus, provided earnings of two firms are not perfectly positively correlated some risk reductio n, as a result of the merger, will always take place. But even when this is so, the question remains whether the value of two merged firms is greater than the s um of their individual parts. It might be argued that if the merged firms earning s are less risky, borrowings become cheaper; the lower borrowing costs provid e an incentive to merge. In this analysis, we must distinguish carefully between the effect of a merger upon outstanding debt and the effect of the merger on th e terms for raising additional debt. We shall discuss raising additional debt fi

rst. A merger of two companies reduces the risk to the combined earnings stream below the risk to the individual; companies pre-merger, if the two a earning streams are imperfectly correlated. As a consequence, the merged firms are able to borro w at a lower interests rate before the merger. The reason that the risk has been reduced is that when one of the firms would otherwise has defaulted; the surplu s of other firm is applied to the deficiencies of the first (this is known as t he coinsurance effect). Thus, the merger of the two firms reduces the risk of defa ult only because the shareholders give up some of the protection of limited liab ility; for without the merger the surplus of one firm would not be applied to th e debts of the other when it defaulted. This is easier to understand this problem when one considers an individual to co ntrols a business which ahs the protection of limited liability. Currently, his firm is borrowing from a bank at 3 per cent over the banks base interest rate. T he owner is wealthy; owing a large house and some stocks and bonds besides the s tock in his company. The bank suggests to the owner that if he would only guaran tee the loans of his company; the bank would gladly reduce the interest rate on the outstanding loans. Is the bank being generous? The answer is no! It is askin g the owner to permit his personal assets to be applied to any deficiencies of t he company, should default occur. It is asking the owner to give up the protecti on of limited liability. Put another way, it is asking for a merger of his perso nal assets and the assets of the firm. Consequently, a merger may reduce the ris k of the earning stream and the cost of borrowing, but this will not increase th e value of the firm since the lower interest rate charged by the bank merely ref lects the less risky claim it now holds. However, if there are defaults costs, ( such as legal costs attendant on liquidation) then a merger will reduce the prob ability of default and therefore reduce the expected value of default costs. The reduction in expected default cost will provide an incentive to merge. This sai d, the probability of default is usually small and the costs of default are also small (about 1% of the value of the assets according to the Warner, 1977). Thus the expected benefits to merging from this source may not be significant. Now consider the effect of a merger on the value of the equity when there exists debt outstanding in the two firms. If the earnings of the two firms are imperfe ctly correlated, the coinsurance effect of the merger will reduce the probabilit y of default to the combined debt holders. Debt holders will gain since previous ly agreed interest payments were based upon a higher probability of default. The shareholders suffer a corresponding loss equal to the gain of the debt holders. If the firms had not merged, a default by on firm would not have affected the o ther firms shareholders. Thus, shareholders must lose as a result of the coinsura nce of the debt. After the merger the value of limited liability, as an option t o the default, is reduced by virtue of a lower probability of default. Unused debt capacity It is often claimed, as often the firm does not utilize its debt capacity, it wi ll prove a valuable asset to any would-be bidder. However, Franks and Broyles (1 979) have shown that the advantages to debt financing are probably not very larg e and certainly not sufficient to justify bid premiums of 15% to 20% plus the co st of transacting the bid. Secondly the acquiring firm does not need to acquire control over the assets to obtain some advantage from the unused debt capacity. The acquiring firm needs only to buy the shares of the inadequately geared compa ny and borrow, using the purchase shares as collateral for the loan. Thus, the u nused debt capacity does not provide very much incentive for a merger. Tax losses and unused capital allowances A company that has made losses in the past is able to carry such losses forward and offset them against future taxable profits in order to reduce tax liabilitie s. For example, the (American) anaconda company made losses totaling hundreds of millions of dollars in 1971 as a result of the nationalization of its assets in Chile. Such losses could be offset against future profits in order to reduce ta x liabilities. However, anaconda might have tried to seek a merger with another company, which had sufficiently large taxable profits to absorb the tax losses i

mmediately. The benefit would derive from obtaining the reduction in tax liabili ties much earlier than the company could hope to do without the merger. A second tax reason for merging arises if the company is investing large sums i n capital equipment and so qualifies for capital allowances that cannot be absor bed by taxable profits when they occur. A merger with a profitable company can a bsorb the unused tax allowances at an earlier date than would otherwise be possi ble, as in the case of accumulated tax losses. When a company is investing heavi ly on its capital account, leasing can provide an alternative method to merging for the purpose of accelerating the benefit of tax shields.

3.1) WHY M&As CAN FAIL? Its no secret that plenty of mergers don t work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to ju stify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies, and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 s ounds great, but in practice, things can go awry. Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. Motivati ons behind mergers can be flawed and efficiencies from economies of scale may pr ove elusive. And the problems associated with trying to make merged companies wo rk are all too concrete Flawed Intentions For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, m ergers are often attempts to imitate: somebody else has done a big merger, which prompts top executives to follow suit. A merger may often have more to do with glory seeking than business strategy. Th e executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best , and many top executives get a big bonus for merger deals, no matter what happe ns to the share price later. On the other side of the coin, mergers can be driven by generalized fear Globali zation, or the arrival of new technological developments, or a fast-changing eco nomic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels t hey have no choice and must acquire a rival before being acquired. The idea is t hat only big players will survive a more competitive world.

3.2) OBSTACLES OF MAKING IT WORK Coping with a merger can make top managers spread their time too thinly, neglect ing their core business, spelling doom. Too often, potential difficulties seem t rivial to managers caught up in the thrill of the big deal. The chances for success are further hampered if the corporate cultures of the co mpanies are very different. When a company is acquired, the decision is typicall y based on product or market synergies, but cultural differences are often ignor ed. It s a mistake to assume that people issues are easily overcome. For example , employees at a target company might be accustomed to easy access to top manage ment, flexible work schedules or even a relaxed dress code. These aspects of a w orking environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity. More insight into the failure of mergers is found in the highly acclaimed study from the global consultancy McKinsey. The study concludes that companies often f ocus too intently on cutting costs following mergers, while revenues and, ultima tely, profits suffer. Merging companies can focus on integration and cost cuttin g so much that they neglect day-to-day business, thereby prompting nervous custo mers to flee. This loss of revenue momentum is one reason so many mergers fail t o create value for shareholders. But not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. But the p romises made by dealmakers demand the careful scrutiny of investors. The success of mergers depends on how realistic the dealmakers are and how well they can in tegrate two companies together while maintaining day-to-day operations.

3.3) PROBLEMS ENCOUNTERED DURING MERGERS: The problems encountered during amalgamation can be studied under the two heads: 1. Pre merger problems 2. Post-merger problems 1. Pre merger problems: These problems are as follows: (i) Type of combination: The acquiring company has primarily to decide wheth er it would like to have amalgamation or a merger or simply a takeover. The sele ction of the type of combination depends upon nature of business, size of the un its, management philosophy, tax implications and other technical and legal consi derations. A merger may be preferred to amalgamation if the acquiring company ha s a very high goodwill. Similarly the companies of the same size may prefer amal gamation to merger. (ii) Financial consideration: This refers to the amount to be paid by the acq uiring company to the acquired company. Its form has also to be determined, i.e. , shares debentures and cash. The exchange ratio has to be fixed up. All these a spects are generally determined by the capital structure of the acquiring compan y.

(iii) Taxation aspects: The tax implications of the proposed merger scheme hav e to be properly examined. The merger should not lead to increase in tax liabili ty rather it should result in tax benefits to the merged company. It is, therefo re, necessary that merger is done as per the requirements of the income tax act 2. Post merger problems: These problems are as follows: i. Duplication of functions, such as finance, marketing research and develo pment has to be avoided. ii. The accounting methods, procedures and policies have to be made uniform for the amalgamated company. Particular care should be taken to see that uniform ity is maintained in respect of accounting years, inventory valuation, fixed ass ets accounting, budgetary controlled techniques, costing, pricing, etc.

iii. Registration of the merged company under proper laws has to be done for the purpose of sales tax, excise, etc. iv. All the creditors and customers have to be informed about the merger. v. Outstanding contracts in the name of the amalgamating companies have to be transferred to the amalgamated company. vi. Arrangement with bankers, appointments of auditors and solicitors have t o be reviewed. vii. Adequate care is taken to satisfy all conditions necessary for the amalg amation to be valid under the provisions of companies act, income-tax act, monop olies & restrictive trade practices act, etc. 4.1) HOW DOES M&As BANKERS HELP COMPANIES TO MERGE?

The consultation experts for M&A are normally referred to as M&A bankers or exec utives. They work in the M&A department of Investment Banks, the financial servi ces organization that chiefly cater to such demands of their corporate clients. Investment banks offer wide range of services to its clients. The services can b e in different forms: The investment bank approaches a prospective client with the suggestion to take over a company and expand its operations. The client comes to the investment bank and asks whether it should go for an M&A , in the first place. The client recognizes the need to go in for M&A, but is not able to find a suita ble partner. So the investment bank searches for a suitable partner, based on th e profile of the client as well as its ideas and ambitions regarding growth. Either the investment bank or the client by itself would identify a company (say, X) for acquisition or merger. The M&A team would now go to the manageme nt of X representing the client, to convince X to sell out or merge with the c lient. The banker would also negotiate on behalf of the client to determine the price to be paid, the mode of payment and other terms of the deal. (If X doesnt w ant to sell out, there might also be a case of hostile takeover bid)

5.1) DANGERS OF MERGERS: Mergers involve the following dangers: 1. Elimination of healthy competition: Merger may involve absorption of sma ll, efficient and growing units into a larger unit. Thus, it eliminates individu al undertakings competent to offer stiff competition necessary for healthy growt h of industrial units. 2. Concentration of economic power: It has already been stated above that all types of mergers have the inherent tendency of concentration of economic pow er. Monopolistic conditions may be created which are ultimately to the disadvant age of the consumers. 3. Adverse effect on national economy: Concentration of economic power, el imination of competition, etc., may ultimately result in deterioration in the pe rformance of the merged undertakings. This is going to affect adversely the nati onal economy. However, mergers are essential for the growth of the or ganization. Mergers, lead to economies of scale, maximum utilization of capacity , operating economies, mobilization of financial resources rehabilitation of sic k units, reduction in cost, etc. the dangers of mergers are, therefore, more tha n off-set by advantages of mergers. However, every scheme of amalgamation or mer ger should be examined keeping in view its advantages and the dangers it would i mpose on the economy. The scheme should be taken up only when it is to the advan tage of economy in general and it is in public interest.

5.2) REASONS FOR MERGERS OR ACQUISITIONS The following are the important reasons for mergers or acquisitions of firms: 1. Increase in effective value: The principal reason for these external combinations is that the value of the co mpany so formed by combining resources is greater than the sum of the independen t values of the merged companies. For example: - if A Ltd. and B Ltd., merge and form a company C Ltd., the effective value of C Ltd. is expected to be greater than the sum of independent values of A Ltd. and B Ltd. symbolically it can be p ut as follows: V(C) Where V (C) = V V > V (A) + V (B) VALUE OF THE MERGED COMPANY (A) = VALUE OF A Ltd. (B) = VALUE OF B Ltd.

Similarly in the case of acquisition, by acquiring the assets of Larsen and Turb o, Reliance industries have now the highest value of assets under its umbrella. This take-over has changed the Indian Corporate scene to a great extent. 2. Operating Economics: Combination of two or more companies results in a numbe r of operating economics. Duplicate facilities can be eliminated. Generally nonoperations functions like Marketing, Accounting, Purchasing, computer resources and other similar operations can be consolidated and shared, leading to combinin g of strength of individual companies for optimized operations. 3. Economies of scale: The amalgamated company can have larger volume of operat ions as compared to the combined individual operations of the amalgamating compa nies. It can thus have economies of scale by having intensive utilization of pro duction plants, distribution network, engineering services, researches and devel opment facilities, etc. however such an advantage accrues only when the companie s in the same line of business are combined, i.e., there is a horizontal merger. It may be noted that the amalgamated company can have economies of operations on ly up to a point beyond this point; increase in volume may cause more problems t han remedy. The per unit average cost may start increasing rather than decreasin g beyond this point, as shown in the following chart.

Average cost . Operations 4. Tax implications: In several amalgamation schemes, tax implications play a c rucial role. A company with cumulative losses may have little prospects of takin g advantage of carrying forward the losses and meeting them out of future profit s and thus taking advantage of the tax benefits. However in case this company is merged with another profit making company, its losses can be set-off against th e profits of profit making company resulting in substantial tax benefits to the amalgamated company. 5. Elimination of competition: The combining of two or more companies under the same name would result in elimination of competition between them. They would s ave in terms of advertising cost. This may probably benefit the customer, in ter ms of goods being available at lower prices. Optimum scale of operations

6. Better financial planning: Mergers result in better financial planning and c ontrol. For example: - a company having a long gestation period may merge itself with another company having short gestation period. As a result of this merger, the profits coming from the company having short gestation period can be used t o improve the financial requirements of the company with long gestation period. Later, when the company with long gestation period starts giving profits, it wil l benefit the amalgamated company as a whole. Similarly the surplus funds of acq uiring company may be more effectively utilized in the acquired company. 7. Growth: A company from its internal operations may not achieve the desired r ate of growth. A company may find that through external combination faster and b alanced growth can be achieved. Growth by acquisition will also be cheaper and s impler in terms of cost and efforts involved as compared to internal expansion. This is because the need to introduce product line develops new market, acquire new production facilities and setting up a totally new administration is altoget her avoided. 8. Stabilization through diversification: External combinations like merger, ama lgamation or acquisition, helps accompany in achieving stabilization in is earni ng by diversifying its scope of operations. A company experiencing wide economic fluctuations and cyclical phases in its earnings due to nature of its product o r business may merge with another company, whose business cycle is different fro m its own. This merger of companies with business cycles will bring consistent e arnings to the business as a whole. 9. Dilution under FERA: A foreign company operating in India may merge with an I ndian company in order to meet the requirements of FERA for diluting its foreign shareholdings. 10. Backward/forward integration: The company, which does the assembly of the pr oducts manufactured, by some other company may merge with that company for manuf acturing and assembling the entire range of products under same roof. It may als o merge with its main consumers. This would bring a better interaction between d ifferent functional areas, resulting in improved efficiency, reduced costs, effe ctive control and reduction in prices for the companys products. 11. Personal reasons: The shareholders of a closely held company may desire that another company that has established market for its shares acquire their compan y. This will also facilitate the valuation of their shareholders holdings for wea lth tax purposes. Moreover, shareholders of such a company can also improve thei r liquidity position by selling some of their shares and diversifying their inve stments. 12. Economy necessity: The government may also direct the merger of two or more sick units into single unit to make them financially viable. Similarly, it may a lso require the merger of a sick unit with a healthy unit to ensure better utili zation of resources, improving returns and better management. Rehabilitation of sick units may also become a social necessity since its closure may result in un employment and other consequential problems. The reason listed above is not an exhaustive list of reasons for seeking external growth. Other factors like socio-economic conditions, economic , fiscal and trade policies of the government, statutes governing the company ma y induce, the mergers or acquisitions of companies for achieving in long term be nefits to the company and its shareholders.

5.3) EFFECT ON STOCK PRICE OF TWO COMPANIES INVOLVED IN MERGERS AND ACQUISITIONS When a firm acquires another entity, there usually is a predictable short-term e ffect on the stock price of both companies. In general, the acquiring company s stock will fall while the target companys stock will rise. (Remember, we are gene ralizing here - there can be exceptions to this rule.) The reason the target company s stock usually goes up is that the acquiring comp any typically has to pay a premium for the acquisition: unless the acquiring com pany offers more per share than the current price of the target company s stock, there is little incentive for the current owners of the target to sell their sh ares to the takeover company. The acquiring company s stock usually goes down for a number of reasons. First, as we mentioned above, the acquiring company must pay more than the targ et company currently is worth to make the deal go through. Beyond that, there ar e often a number of uncertainties involved with acquisitions. Here are some of the problems the takeover company could face during an acquisit ion: A turbulent integration process: problems associated with integrating different workplace cultures. Lost productivity because of management power struggles Additional debt or expenses that must be incurred to make the purchase Accounting issues that weaken the takeover company s financial position, includi ng restructuring charges and goodwill. All these does not effect on stock for lo ng term. If an acquisition goes smoothly, it will obviously be good for the acqu iring company in the long run. 5.4) SYNERGY: THE PREMIUM FOR POTENTIAL SUCCESS For the most part, acquirers nearly always pay a substantial premium on the stoc k market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy: a merger benefits shareholders when a company s post-merger share price increases by the value of potential synergy. Let s face it; it would be highly unlikely for rational owners to sell if they w ould benefit more by not selling. That means buyers will need to pay a premium i f they hope to acquire the company, regardless of what pre-merger valuation tell s them. For sellers, that premium represents their company s future prospects. F or buyers, the premium represents part of the post-merger synergy they expect ca n be achieved. The following equation offers a good way to think about synergy a nd how to determine if a deal makes sense. The equation solves for the minimum r equired synergy: In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergers, which we discuss in part five, often prevent the expected benefits from being fu lly achieved. Alas, the synergy promised by dealmakers might just fall short.

5.5) STEPS IN MERGER TRANSACTION Generally, the merger transaction includes the following steps: Screening and investigation of merger proposal: When there is an intention of a cquisition or merger of other business unit, the primary step is that of screeni ng and motive needs to be judged against three strategic criteria i.e. business fit, management and financial strength. Once the proposal fit into the strategic motive of the acquirer, then the proposed acquirer will collect all relevant in formation relating to the target company about share price movements, earnings, dividends, market share, management, shareholding pattern, gearing, financial po sition, benefits from proposed acquisition etc. this form of investigation will bring out the strengths and the weaknesses of both ones own company and the persp

ective merger candidate. The acquirer company should not only consider the benef its to be obtained but also be careful about the attendant risks. If the proposa l is viable after through analysis from all angles, then the matter will be carr ied further. Negotiation stage: The negotiation is an important stage in which the bargain is made in order to secure the highest price by the seller and the acquirer keen t o limit the price of the bid. Before e the negotiations start, the seller needs to decide the minimum price acceptable and the buyer needs to decide the maximum he is ready to pay. After the consideration is decided then the payment terms a nd exchange ratio of shares between the companies will be decided the exchange r atio is an important factor in the process of amalgamation. This has to be worke d out by valuing the shares of the both, transferor and transferee company as pe r the norms and methods of valuation of shares. Approved valuer or a firm of Cha rtered Accountants will evaluate the shares on the basis of audited accounts a s on the transfer date. Approval of proposal by Board of Directors: Deciding upon the consideration of t he deal and terms of payment, then the proposal will be put for the Board of Dir ectors approval. Approval of shareholders: As per the provisions of the Companies Act 1956, the s hareholders of the both seller and acquirer companies hold meeting under the dir ectors of the respective High courts and consider the scheme of amalgamation. A separate meeting for both preference and equity shareholder is convened for this purpose. Approval of creditors/ financial institutions/ banks: Approvals from the constit uents for the scheme of merger and acquisition are required to be sought for as per the respective agreement/ arrangement with each of them and their interest i s considered in drawing up the scheme of merger. Approval of respective high court (s): Approval of respective high court of sell er and acquirer, confirming the scheme of amalgamation is required. The court sh all issue orders for winding up of the amalgamating company without dissolution on receipt of the reports from the official liquidator and the Regional director that the affairs of the amalgamating company have not been conducted in a manne r prejudicial to the interests of its members or to public interest. Approval of central government: Declaration of the central government on the rec ommendation made by the specified Authority under section 72A of the income tax act, if applicable. Integration stage: The structural and cultural aspects of the two organizations , if carefully integrated in the new organization will lead to the successful me rger and ensure that expected benefits of merger are realized.

5.6) TOOLS USED TO ASSESS THE TARGETING COMPANY Investors in a company that is aiming to take over another one must determine wh ether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of an M&A deal will have different ideas about the worth o f a target company: its seller will tend to value the company as high as possibl e, while the buyer will try to get the lowest price possible. There are, however, many legitimate ways to value companies. The most common met hod is to look at comparable companies in an industry, but dealmakers employ a v ariety of other methods and tools when assessing a targeting company. Here are j ust a few of them: Comparative Ratios The following are two examples of the many comparative metric s on which acquirers may base their offers: P/E (price-to-earnings) ratio With the use of this ratio, an acquirer makes an o ffer as a multiple of the earnings the target company is producing. Looking at t he P/E for all the stocks within the same industry group will give the acquirer

good guidance for what the target s P/E multiple should be. EV/Sales (price-to-sales) ratio With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the P/S ratio o f other companies in the industry. Replacement Cost: In a few cases, acquisitions are based on the cost of replacin g the target company. For simplicity s sake, suppose the value of a company is s imply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competito r for the same cost. Naturally, it takes a long time to assemble good management , acquire property and get the right equipment. This method of establishing a pr ice certainly wouldn t make much sense in a service industry where the key asset s--people and ideas--are hard to value and develop. Discounted Cash Flow (DCF): A key valuation tool in M&A, discounted cash flow an alysis determines a company s current value according to its estimated future ca sh flows. Forecasted free cash flows (operating profit + depreciation + amortiza tion of goodwill capital expenditures cash taxes - change in working capital) ar e discounted to a present value using the company s weighted average costs of ca pital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival th is valuation method How to Look For? It s hard for investors to know when a deal is worthwhile. The burden of proof s hould fall on the acquiring company. To find mergers that have a chance of succe ss, investors should start by looking for some of these simple criteria: A reasonable purchase price - A premium of, say, 10% above the market price seem s within the bounds of level-headedness. A premium of 50%, on the other hand, re quires synergy of stellar proportions for the deal to make sense. Stay away from companies that participate in such contests. Cash transactions - Companies that pay in cash tend to be more careful when calc ulating bids, and valuations come closer to target. When stock is used as the cu rrency for acquisition, discipline can go by the wayside. Sensible appetite An acquirer should be targeting a company that is smaller and in businesses that the acquirer knows intimately. Synergy is hard to create from companies in disparate business areas. And, sadly, companies have a bad habit o f biting off more than they can chew in mergers. Mergers are awfully hard to get right, so investors should look for acquirers wi th a healthy grasp of reality. 5.7) EVIDENCE OF THE PROFITABILITY OF MERGERS TO SHAREHOLDERS Increasing shareholder value is generally held to be the paramount objective of most M&As today. However, experience from most M&As in the mid-1980s is not very encouraging in this regard. The much slower growth levels in the 1990s and the high premiums usually paid to shareholders of target companies, mean that the re structuring needed to achieve satisfactory cost savings from mergers can only be obtained with much deeper cost cutting, imperiling the ability of merged compan ies to achieve the higher levels of sales revenue required to repay merger-relat ed debt and increase shareholder value. At its most basic, creating shareholder value means that the market favors firms that increase the productive use of their assets by increasing turnover ratios, margins and profitability. Increasing sales growth adds shareholder value as long as reinvestment earns re turns that exceed the firms cost of capital. Conversely, firms without such oppor tunities destroy shareholder value by reinvesting and should return the money to shareholders through dividend increases or share buy-backs. The KPMG study cite d above reports that shareholder value maximization is specified by only 20 per cent of executives polled in the survey as an objective of M&As. The basic argument that M&As increase shareholder value through exploitation of synergies is based on the assumption that the combined organization can be opera

ted in a way that generates greater value than would be the sum of the value gen erated by the stand-alone companies (the 2+2>4 equation) Evidence in US on profitability of mergers, as measured by the stock market, is fairly unambiguous: the shareholders of acquired firms gain substantially wherea s the shareholders of the acquiring firms either gain or do not lose. For exampl e, Mandelker examined 241 mergers in the USA and measured the effect of the merg er on the stock market prices of the merging firms. He calculated the incremental returns to the merger by subtracting from the returns of each company that proportion estimated to be attributable to move ments in the market. As shown in Table A mandelkar found that bid premiums of ab out 14% were obtained in bid month. In fact, this understates the true bid premi um, since there was evidence that the market anticipated the merger prior to the month of the bid (and therefore the part of bid premium). The acquiring compani es were also found to have gained but the gains were small at 3% and were not st atistically significant. The evidence in UK is rather mixed. Firth examined a sa mple of UK mergers for the period 1969 to 1975 and found that although acquired firms gained substantially (28%), acquiring firms suffered significant abnormal losses. After adjusting for differences in size, firth found that the gains to acquired firms were virtually entirely offset by losses to acquiring firms. This contrast s with the evidence of franks, Broyles and Hecht who examined a sample of 71 mer gers in the Breweries and distilleries industry and found that bid premiums aver age 26% and acquiring companies earned around 35. These latter results would sug gest that stockholders gained from mergers: they are supported by a much larger sample of 1814 mergers by franks and Harris who found that acquired companies ei ther gained and acquiring companies either gained or did not lose.

Author Period Sample Size Gains to acquiree (%) Gains to acquiror (%) Halpern (USA) 1950-65 78 30.4 6.2 Mandelkar (USA) 1948-67 241 14+ 3.0* Asquith (USA) 1946-71 320 9.7 0.6 Firth (USA) 1969-75 434 28.00# -6.3 Franks (USA) Hecht (UK) 1955-72 71 26 3* Franks, Harris (UK) 1955-85 1814 23.3 1 *Not statistically significant + Estimated over 60 days straddling merger announcement, most of gain (34%) occu rred in 30 days prior # Loss over 60 days, all occurring in 20 days after bid. If significant, and sol ely due to bid, it is large in PV terms (since average acquirer much bigger than acquiree) The results of those share price studies contrast rather sharply with those of a ccounting based studies (for example those of Singh and Meeks) which show declin es in accounting measures of profitability subsequent to merger) 5.8) FINANCIAL CONSIDERATIONS IN MERGERS, AMALGAMATIONS AND ACQUISITIONS When two or more companies are combined, there has to be some financial consider ation for the amalgamating or acquired company. The financial consideration is g enerally in the form of exchange of shares. This requires that the relative valu e of each firms share by evaluated and a particular exchange ratio is determined. This exchange ratio reflects the relative weightage of the firms under consider ation. The determination of the exchange ratio is, therefore based on the value of the shares of the company involved in the merger. The basic objective of merger is t o maximize owners wealth in the long run. Hence, a successful merger would be one that increases the earnings per share (EPS) and the market price of the share o

f the amalgamated company over what they would have been if the merger had not t aken place. The following are the three different approaches for determining the exchange ratio: 1.Earnings Approach 2.Market Value Approach 3.Book Value Approach

1. Earnings Approach In evaluating a possible merger or acquisition, the acquiring firm must consider the effect the merger will have on the earnings per share of the merged or amalgamated corporation. This can be understood with following illustration: Illustration 1. : A Ltd. is considering the acquisition of B Ltd. the financial data at the time of acquisition is as follow: A Ltd. B Ltd. Net Profit after tax (RS/ LAKHS) 0 6 Number of Shares (Lakhs) 6 2.50 Earning per Share (RS.) 5 2.40 Market price per Share (RS.) 75 24 Price Earning Ratio 15 10 3

Assuming that the net profit, after tax of the two companies would remai n the same after amalgamation (i.e., it would be RS 36 lakhs), explain the effec t on EPS of the merged company under each of the following situations: (a) A Ltd. offers to pay RS. 30 per share to the shareholders of B L td. (b) A Ltd. offers to pay RS. 40 per share to the shareholders of B L td. The amount in both the cases is to be paid in the form of shares of A Ltd. SOLUTION: Situation (a) In case A Ltd. offers to pay RS. 30 per share the share exchange r atio would be 30/75 = 0.4. In other words, A Ltd. would give 4 share for everyone share of B Ltd. the total number of shares to be issued by A Ltd. to the shareholders of B Ltd. would, therefore, amount to 1,00,000 (i.e., 2,50,000 * 4). The total number of shares of A Ltd. after acquisition of B Ltd. would now incre ase to 7,00,000. The Earning per share (EPS) of the amalgamated company will now be RS. 5.14 calculated as follows: Total net profit after interest and tax Total number of shares = 3,60,000 / 7,00,000 =RS 5.14 Thus, as a result of amalgamation, the EPS of A Ltd. will improve from RS. 5 to RS. 5.14. However, the former shareholders of B Ltd would experience a reduction in EPS. Their EPS would now amount to 5.14 * .4 = RS. 2.05, which is lower than RS 2.4 b efore merger. Situation (b): - In case A Ltd. offers RS 40 per share to the shareholders of B Ltd., the exchange ratio would be 40/75 = 0.533 share of A Ltd. for each share o

f B Ltd. Thus, A Ltd. would issue in all 1,33,250 (i.e., 2,50,000 * 0.533) shares to the shareholders of B Ltd. the EPS of the merged company would be RS. 4.91, i.e., 36 ,00,000 / 7,33250. Thus on the account of merger, there is a dilution in the earning per share of A Ltd. however the former shareholders of B L td. Would stand to gain. The EPS am ount to RS 2.62 (i.e., RS 4.91 * .533) as compared to the EPS of RS 2.4 before m erger. COMMENTS: It may be noted that initial increases and decreases in earnings per share, are both possible in case of merger. Generally the dilution in EPS will occur wherev er the P/E ratio of the acquired company calculated on the basis of price paid e xceed the P/E ratio of the acquiring company and vice versa. In situation (a), the price offered by A Ltd. per share of B Ltd is RS 30 and th e EPS of B Ltd. is RS 2.4, which would become the earnings of A Ltd. after merge r. Thus the price-earning ratio on account of merger would be RS. 30/2.4 = 12.5. Since, this is lower than the P/E ratio of A Ltd. before merger (i.e., 15) the EPS of A Ltd. after amalgamation increases to RS 5.14. In situation (b), the price earnings (P/E) ratio offered for merger is 40/2.4 = 16.7, which is higher than the P/E ratio of A Ltd. before merger. Hence the EPS of A Ltd. after merger would get diluted. FUTURE EARNINGS In case the decision acquired by another company is solely based on the initial impact of earnings per share, the initial dilution in earnings per share would stop any company from acquiring another. This type of analysis does not take int o account the possibility of future growth in earnings due to merger. Merger gen erally results in higher earnings for the merged companies as compared to the ea rnings of individual companies before merger. In the illustration given previously, it has been assumed that the total earning s of A Ltd. after merger would continue to remain at RS 36 lakhs(i.e., the tota l net profits after tax of A Ltd. and B Ltd.) and hence, a higher exchange ratio was not justified. However if the earnings of B Ltd. are expected to grow at a faster rate than those of A Ltd., a higher exchange ratio may be justified, desp ite the fact that there is initial dilution in EPS of A Ltd. the higher growths in earnings of B Ltd may result eventually in higher EPS of A Ltd. relative to e arnings without merger. This can be illustrated by a graph: M2 Expected EPS of With merger

A Ltd

M1

Without merger

Years (future)

There is an initial dilution of EPS from OM2 to OM1. The dilution in EPS is elim inated after Ot years after which the EPS becomes higher with merger as compared to EPS without merger. Moreover, earnings of the amalgamated company need not necessarily be the sum ea rnings of amalgamating companies. Due to the synergy effect and because of opera ting economies, the earnings after merger may be higher than the sum of earnings of two companies. This would result in a higher EPS for shareholders of amalgam ated company.

2. Market value Approach According to this approach, the exchange ratio is determined keeping in view the market value of the companys shares involved in the merger. The market price of the companys shares reflects, to a great extent, the confidence of the investors, earnings potentials and the financial positions of the company concerned. The exchange ratio is determined as follows: Market price per share of the acquired company Market price per sh are of the acquiring company For example, if A, Ltd. whose market value of a share is RS 50 is acquiring B Lt d. whose market value of a share is RS 25 the share exchange ratio will be 0.5 ( 25/50). In other words, A Ltd. would issue one share for every two shares of B L td. or in case B Ltd has a share capital of RS 10,000 shares. The determination of the exchange ration the basis of market price involve follo wing difficulties: 1. The market price is easily available for those shares, which are quoted at a stock exchange. 2. Market prices keep on fluctuating. 3. Market prices can be manipulated or influenced on account of extraneous factors. Capitalized value of EPS On account of the above difficulties, companies prefer to determine the market v alue on the basis of capitalized value of earning per share for determining the exchange ratio. This involves the taking of following steps: a. Determination of average annual future earning: - The future annual average e arning is determined on the basis of the past performance of the company, future growth prospects, etc. for this purpose profits of last few years are generally used applying suitable weights. The weighted annual average earning so calculat ed is divided by number of equity shares to get earnings per share. b. Determination of a capitalization rate: - This is the normal rate of earnings expected from the type of the company whose shares are to be evaluated. In case of some industries, the rate of capitalization is fixed by the government while in other cases; it is fixed keeping in view the average profits earned by the i ndustry in general. c. Determination of market value: - The market value per share is determined as follows: Earnings per share Capitalization rate For example, if the EPS is RS 30 and the capitalization rate is 15%, the marke t value of share will be RS. 20 (i.e., 30 *100/15). d. Determination of the exchange ratio: The exchange ratio can now be determine d as follows: Market price per share of the acquired company Market price per share of acquiring company

3.Book value approach According to this approach, the exchange ratio is determined according to the bo ok values of the concerned companies shares. The book value of a share is determi ned as follows: Shareholders funds Number of equity shares

Net worth No. of equity sh ares After determining the book value of the shares of the companies to be merged, th e exchange ratio is determined as follows: Book value per share of acquired company

Book value per share of acquiring company The book value approach has several limitations. Some of the severe limitations are as follows: 1. The net worth of the company on which the book value of the share is bas ed x can be easily be manipulated by the accounting practices employed by the co mpany. 2. The book value does not give proper consideration to the earning capacit y of the company. On the account of the above limitations, the book value approach is generally no t followed as a basis for valuation in most mergers. However, this approach beco mes important in those cases when the book value per share of a company is signi ficantly higher than the market value of its shares.

a. Fair value of the share The approaches used for determination of exchange ratio are hardly used singly i n practice. Normally share exchange ratio is determined the of fair value of con cerned companies shares. The fair value of share infact may be the average of va lues calculated according to all 3 approaches, explained earlier. Having determined the fair value of the shares of the companies going in for mer ger, the exchange ratio can be determined as follows: Fair value per share of acquired company Fair value per share of acquiring company Moreover to certain extent, the exchange ratio also depends upon negotiations be tween companies. Both the companies would desire that the market price per share after the merger should be equal to or greater than the market price per share prevailing before the merger. This sets the boundaries for the exchange ratios t o be negotiated. The upper boundary would be the maximum exchange ratio agreeabl e to the acquiring company so that the market price of the share after the merge r at least remains the same as that before the merger. The lower boundary would be the minimum exchange ratio acceptable to the acquire d company so that the market price of its shares after the merger at least remai ns the same as that before merger. The final exchange ratio would lie anywhere between these two limits depending u pon the negotiations. 6.1 CURRENT EXAMPLES OF MERGERS ACQUIRING BENEFITS TO A GREAT EXTENT IN 2010 India Inc Runs Up an M&A Bill of Rs 1.8 Lakh Cr in H1 The value of mergers and acquisitions that India Inc snapped up in the first hal f of the year surged over seven times to a staggering USD 38 billion or over Rs 1.8 lakh crore, led by big ticket deals in the telecom and pharma sectors. The mergers and acquisitions (M&As) activity involving domestic firms witnessed a surge with the deal value reaching USD 38 billion in the first half of the yea r compared to the same period last year, global consultancy firm Grant Thornton

said in the latest issue of Dealtracker. "The deal values are very close to the heightened level of M&A transaction value that was seen in 2007. The number of deals for the first half of 2010 is the hi ghest-ever historically," Grant Thornton partner for specialist advisory service s Srividya CG said. The significant increase in activity is driven by some of the large deals includ ing the merger of Reliance Infratel s tower assets with GTL Infrastructure for U SD 10.86 billion, Bharti Airtel s USD 10.7 billion acquisition of Zain s African assets and Abbott s acquisition of the domestic formulation business of Piramal Healthcare for around USD 3.72 billion. The largest contributor to the deal value has been the telecom sector followed b y several others such as pharma/ healthcare, banking and financial services, met als and ores, the study notes. Interestingly, seven deals have been announced already which have are valued bil lion-dollar-plus --which is a record for the first six months of a year. Another report from VCCEdge, the financial research platform of VCCircle.Com, st ates the M&A deal value during this April-June period touched USD 24.8 billion a gainst USD 2.8 billion in the year-ago period. "The second quarter of this year saw some big tickets deals, which sent the tota l M&A deal value soaring. This signaled the return of investor confidence and li quidity to the market," the VC Edge report notes. In June, the total M&A and PE (including qualified institutional placement) deal s were valued at USD 13.74 billion (67 deals) compared to USD 1.38 billion (43 d eals) and in the same month of 2009, says the Grant Thornton report. Further, total value of outbound deals (domestic firms acquiring businesses outs ide the country) was USD 0.13 billion (17 deals) in June. While, total value of inbound deals (foreign companies or their arms acquiring domestic businesses) wa s USD 0.41 billion (6 deals) in June. The Grant Thornton report says the most prominent region where outbound acquisit ions have seen the highest include Africa, followed by Belgium, Britain and the US. The largest acquirer of Indian businesses has been the US so far this year, in t erms of both volume and value, it added.

Corporate Indias M&As rise to $42.76 bn: New Delhi: Corporate Indias shopping spree for October remained unabated with 46 merger and acquisition transactions (M&A) worth over $530 million taking place d uring the period and the year-to-date deal touching a whopping $42.76 billion in value terms. According to global consultancy firm Grant Thornton, there were 46 M&A deals wor th $530 million in October 2010. So far this year corporate India has announced 546 M&A deals worth $42,759 milli on -- the highest in the last two years both in terms of value as well as number of deals. Outbound deals, wherein Indian companies acquired businesses outside India, were

the flavour of the month as deals worth $390 million were struck in this space. The total value of inbound deals where foreign companies acquired Indian busines ses amounted to $100 million. The total value of domestic deals in October 2010 was $40 million. The major merger and acquisition deals in October include Fortis Healthcares acqu isition of Quality HealthCare for $195 million, followed by Venkateshwara Hatche ries takeover of Blackburn Rovers for $68.09 million. The top five M&A deals accounted for 78% of the total value, Grant Thornton said . A sector wise analysis shows that pharma, healthcare and biotech sector attracte d the maximum deals as five transactions were struck in this space amounting to $250 million. This was followed by banking and financial services ($68.39 million) and IT and ITeS ($56.22 million). Meanwhile, the total value of M&A, PE (private equity) and QIP (qualified instit utional placement) deals in October stood at $1.88 billion. While PE deals amounted to $310 million through 26 transactions, there were 10 Q IPs valued at $1.04 billion during the period under review. The primary market was also very active in October as 19 initial public offers v alued at $1.22 billion were raised taking the total amount raised through IPO du ring the January-October period to $3.10 billion. MERGER OF BANK OF PUNJAB AND CENTURION BANK: The making of a merger The merger of Bank of Punjab and Centurion Bank is great news for Bop shareholde rs and good for Centurion shareholders. Finally, here is a bank merger. Centurio n Bank and Bank of Punjab (BoP) have decided to get into wedlock. For the purpos e of the merger, every nine shares held in Centurion will equal four shares in B oP. Considering that BoP posted a loss of Rs 61.25 crore in FY05, this is not ba d at all. BoP s book value now stands at about Rs 17 and the bank gets a valuati on of almost two times its book. Analysts say that if it had not been for the me rger, BoP s price would have crashed heavily considering its dismal performance last fiscal. That is not to say that the merger is not good for Centurion shareh olders. Centurion Bank, too, will benefit since it will gain from BoP s reach an d SME business. Centurion has already pumped in capital, cleaned up its books and is all set to grow. The merger will give it the requisite scale, which is becoming all-importa nt with growing competition in the sector. Shailendra Bhandari, who now heads Ce nturion Bank, will head the new bank Centurion Bank of Punjab. Rana Talwar, who is currently the chairman of Centurion Bank, will continue to be the chairman of t he merged entity. Needless to say, the management comes with a rich experience i n the sector. Share price of both the banks have run up since talks of the merge r gained momentum two months ago - Centurion Bank gained 13.36 per cent to Rs 14 while BoP ran up 13 per cent to Rs 30.85 till the merger was announced.

A synergistic merger BoPs decision to merger was not dictated by the potential benefits of the merger. It was more by force. The fact is that BoP had been scouting for investors to i ncrease its CAR (currently, 12.68 per cent). However, the Reserve Bank of India (RBI) denied BoP the approval for a preferential allotment of shares to foreign investors. It is only incidental that there are synergies arising out the merger . The two banks are present in different parts of the country - while BoP is based in the north, Centurion Bank is present in the southern and western regions. Al so, BoP is strong in rural areas and has a decent agricultural portfolio. It als o has strengths in the small- and medium-size enterprises segment. Its good match

for Centurion, which had a limited revenue stream, consisting of retail, two-wh eeler and personal loans. The merger gives it a wider revenue stream. That Centu rion Bank is ready with its capital and has the ability to generate retail asset s only adds makes growth prospects brighter for the merged entity. Analysts beli eve the merger will give the new bank a chance to grow and hold up against compe tition. While the union may not create a bank with a size to reckon with, it wil l provide the combined entity the impetus to grow and carve a niche for itself. Expansion, however, seems a while away. Right now, the bank will focus on integr ation of branches and product offerings, according to Bhandari. As things stand today, the merged entity will have 235 branches and extension counters, 2.2 mill ion customer base and total assets worth Rs 9395 crore. It will have a capital a dequacy ratio (CAR) of 16.1 per cent and a considerably high net interest margin of 4.8 per cent.

How the bride and the groom look (Rs crore) Centurion Bank Bank of Punjab FY05 FY04 % Change FY05 Interest income 346.09 333.79 3.68 328.59 Interest expended 168.21 203.82 -17.47 Net interest income 177.88 129.97 36.86 Other income 64.46 62.98 2.35 69.06 Net profit 25.11 -105.14 123.88 -61.25 EPS (Rs) 0.31 -3.22 109.63 -5.83 Advances 2634 1556 69.28 2416.99 Deposits 3530 3029 16.54 4306.62 CAR (%) 23.1* 4.4 1870 bps 9.23 PE (x) 45.16 NA P/BV (x) 2.9 1.78 Price as on July 1, 2005 (Rs) 14 Area of presence South and West North * Post-$80 million GDR (Rs 350 crore) issue and Numbers in the game

FY04 339.93 193.67 134.92 132.42 37 3.52 2353.46 4136.88 12.68

% Change -3.34 211.82 -8.57 128.11 5.32 -47.85 -265.54 -265.63 2.7 4.1 -345 bps 30.85

exercise of greenshoe option

Centurion Bank posted a healthy set of numbers for FY05. Net interest income ros e 36.86 per cent to Rs 177.88 crore on the back of a fall in interest expended. The bank also saw a turnaround in the last fiscal, registering a 123.88 per cent rise in net profit to Rs 25.11 crore against a loss of Rs 105.14 crore in the p revious year. Advances rose impressively by 69.23 per cent to about Rs 2,634 crore. Th e bank also reduced its non-performing assets (NPAs) by 180 basis points to 2.5

per cent. BoP posted a net loss Rs 61.25 crore in FY05 because of a fall in both interest income and other income. The loss was also triggered by a huge increas e in provision - up 84.6 per cent to Rs 104.9 crore. This means that the bank wa s on a clean-up spree before the merger, which is positive for the new entity. A dvances for FY05 were 2.7 per cent higher at Rs 2,416.99 crore against FY04 whil e deposits for the same period were 4.10 per cent higher at Rs 4,306.62 crore. C enturion Bank now trades at a 12-month trailing P/E of 48.23 times - abnormally high since it has just posted a turnaround. It has a price-to-adjusted book valu e of 3.49 times Meanwhile, BoP trades at a P/E of 20.59 - which is again quite h igh given its low earnings. Valuations look stretched after the run-up these ban ks have witnessed Analysts are of the opinion that real story has to be viewed f rom a long-term perspective Clearly; the merger gives both the banks an edge to move forward in a highly competitive and scale-driven sector. The credentials of the management also lend credibility to the bank.

have

WHATS HOT ABOUT THE TWO? MATRIX STRIDES Is an active pharmaceutical Ingredients major Has a good knowledge base (has over 200 scientists) and track record Has already filed for 46 DMFs; 24 more are planned Has filed fro 29 patents and 9 novel polymorphs Comes with eight out of 11 APIs and intermediate plants that the new entity will Is one of the largest exporters of branded generics Makes formulations by way of capsules, tablets and liquid injectibles One of the worlds top five manufacturers of soft gel capsules Runs the only globally- dedicated soft gel facility for hormones Does contract research and manufacturing for global pharma majors

STRENGTH IN NUMBERS:-If the merger goes through, the new entity will emerge vast ly stronger. MATRIX STRIDES NEW ENTITY Revenues RS 637 crore RS 462 Crore RS 1,099 Crore Profits RS 130 Crore RS 44 Crore RS 174 Crore Market Cap RS 2,794 Crore RS 959 Crore RS 3,753 Crore Industry Rank by Revenues # 12 #15 # 7 # Of Employees 2,000 1,300 3,300 Strength APIs Formulations APIs + Formulations Key markets Europe, US, India, ANZ, Japan, SAARC Africa, Asia, Latin America, Eur ope US, Canada. Canada, US, Europe Latin America, Africa, Asia, India The other benefits are: An ability to shave common costs, better leverage R&D ex penses and manufacture products at lower prices hence, better margins. The glee could also be because the merger will put matrix-strides combine amongst the top 10-pharma companies in India. Actually with a market Cap of RS 3,753 crore, it comes in as the ninth most valuable company in the industry. In terms of facilit y the merged company will have six bulk drug units, five intermediate plants, ni ne formulations sites and operations in 70 countries, including plants in India, US and Latin America. By the end of current year, it hopes to file 70 drug mast

er files or DMFs (for bulk drug approvals by the USFDA) and 20 ANDAS (abbreviate d new drug applications, or generic copies). Bulk of ANDAS will be from strides, but will also include a few from matrix. In other words the global markets will see the emergence of another strong generics player from India, in addition to existing majors such as Ranbaxy, Dr. Reddys, Cipla and Sun. CONCLUSION One size doesnt fit all. Many companies find that the best route forward is expan ding ownership boundaries through mergers and acquisitions. For others, separati ng the public ownership of a subsidiary or business segment offers more advantag es. At least in theory, mergers create synergies and economies of scale, expandi ng operations and cutting costs. Investors can take comfort in the idea that a m erger will deliver enhanced market power . M&A comes in all shapes and sizes, and investors need to consider the complex is sues involved in M&A. The most beneficial form of equity structure involves a co mplete analysis of the costs and benefits associated with the deals. Hence next time whenever we read a news release that says that a company is usin g a poison pill to ward off a takeover attempt, we will now know what it means. More importantly, we will know that we have the opportunity to purchase more sha res at a cheap price. M&A has an entire vocabulary of its own, expressed through some of the rather creative strategies employed in the process. Hopefully by do ing this project we are at least a bit wiser in the wacky world of M&A terminolo gy. By understanding what is happening to our holdings during a takeover or atte mpted takeover, we may one day even save money.