8.

CORPORATE SECTOR DEVELOPMENTS

8.1 Mergers and Acquisitions (M&As)

The M&A activity in India’s corporate sector, domestic as well as trans-national, which
gained momentum in the second half of the 1990s, has waned somewhat in 2008. Favourable
government policies, buoyancy in economy, additional liquidity in the corporate sector, and
dynamic attitudes of the Indian entrepreneurs were the key factors behind the changing trends of
M&As in India. Acquisition of foreign companies by the Indian businesses has been the latest
trend in the Indian corporate sector.

Declining M&A Activity in 2008

In the last 3-4 years several Table 8.1: M&As: Total Deals
Volume Value
companies have undertaken M&A route (Number) (US $ billion)
Year/Month
as a way of improving competitiveness Volume Volume Value Value
2007 2008 2007 2008
and efficiency. In the year 2007, India’s I Domestic Deals 321 171 2.85
5.09
(78.6)
corporate sector had witnessed a spurt in 25.63
II Cross Border: 355 274 48.26
(-46.9)
private equity (PE) deals and mergers (a) Inbound 112 81 15.50 12.48
and acquisitions (M&As) – domestic as (b) Outbound 243 193 32.76 13.15
III. TOTAL M&As 30.72
676 445 51.11
well as trans-national – in order to grow (I + II) (-39.9)
10.42
IV. PE Investment 405 306 19.03
in size by adding manpower and to (-45.2)
70.14 41.13
facilitate expansion of the business. TOTAL (III + IV) 1081 751
(-41.4)
Note: Figures in brackets are percentage change
However, during the calendar over the previous year.
Source: Business Line, December 25, 2008.
year 2008, the overall M&A activities
and PE deals in the corporate sector have declined sharply as the appetite for such deals has been
falling largely on account of the cascading effect of the financial crisis in the US and global
economic slowdown.

The Grant Thorton’s preliminary Annual Deal Tracker report reveals that the total value
of M&A transactions in India (domestic and cross-border), have declined by 40% in the calendar
year 2008 to $30.72 billion compared to $51.11 billion in 2007. The total number of M&As

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deals has also declined by 52% to 445 in 2008 against 676 in 2007. The average M&A deal
value has been $69.03 million in 2008 against $93.55 million in the previous year - a fall of 26%.

Cross-border Deals

Of the total cross-border deals in 2008, there

were 193 outbound deals (Indian companies acquiring Daiichi-Sankyo’s acquisition of
Ranbaxy for $4.5 billion was the
businesses overseas) valued at $13.15 billion and 81 largest deal in 2008.
inbound deals (international companies acquiring
businesses in India) with an announced value of $12.48 billion. The value of inbound deals
dropped to $12.48 billion in 2008 from $15.50 billion in 2007, while outbound deals fell from
$32.76 billion in 2007 to $13.15 billion in 2008. Of $32.76 billion, $18.20 billion were from two
mega deals, Tata-Corus ($12.2 billion) and Hindalco-Novellis ($6 billion).

Domestic Deals

As indicated in Table 11.1, there were 171 domestic deals with an announced value of
$5.09 billion in 2008 as against $2.85 billion in 2007, registering a rise of 78.6%. In 2008, the
top 10 deals accounted for more than 64% of the total M&A transactions value, while in 2007
the top 10 deals had accounted for more than 73% of total deals.

PE Deals

A total number of 306 PE

In 2008, Providence Equity Partners’ (PEP)
investment in Aditya Birla Telecom for $640 million deals was announced in 2008, with
was the largest PE investment followed by
a total value of $10.42 billion,
Symphony Capital’s $450 million in DLF Assets.
against 405 deals with a value of
$19.03 billion in the previous year. A large proportion of PE investment was made in real estate,
infrastructure and telecom sectors. The top ten PE deals accounted for more than 29% of the total
PE investments.

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Mega Deals

There have been some significant outbound acquisitions by Indian companies in the
calendar year 2008, of which a major deal was of Tata Motors buying the luxury brands Jaguar
and Land Rover (JLR) from Ford Motor for US$ 2.3 billion in cash, the largest acquisition by an
Indian company in automobile business. The purchase price was less than half of what Ford paid
($2.5 billion each) to acquire the two brands. Ford had brought Jaguar in 1989 and Land Rover
from BMW in 2000. Tata Motors have raised US$ 3 billion (Rs 12,000 crore) through bridge
finance for 15 months from a group of banks, including JP Morgan, Citigroup and State Bank of
India (SBI) to finance the deal. This will be replaced by a combination of long-term debt and
equity. Tata Motors had appointed SBI as the sole lead manager to raise $3 billion for funding
the acquisition of Jaguar and other auto brands.

The other mega outbound deal was also of Tatas; Tata Chemicals Ltd (TCL) acquisition
of US-based soda ash-maker General Chemical Industries Products Inc (GCIP) for $1.05 billion
(about Rs 4,000 crore), to become the world's second-largest producer of soda ash. GCIP was a
profit-making and debt-free company, with a turnover of over $400 million.

Rising M&A Activity in the Automobile Sector

While M&A activities have been in general on low ebb in the year 2008, India’s
automobile sector has reported a rise in outbound transactions, in order to penetrate newer
markets and leverage its cost advantage. While Tata Motors emerged as the front runner in terms
of value, Mahindra & Mahindra (M&M) with its three Italian acquisitions – Grafica Ricerca,
Metalcastello and Engines Engineering, scored higher in number of deals. The JK Tyre’s
acquisition of Mexican company, Tornel for $67 million and Daimler AG’s 26% stake in Sutlej
Motors and Carburettors, represents another M&A deal in 2008.

The prominent PE investments in the year 2008 include Goldman Sach’s arm, Golbot
Holding 3.68% stake in M&M for $175 million, AIG Global Investment’s $20 million in
Uniparts and 14.50% in Kinetic Engineering and Phi Advisors’ 10% in M&M’s subsidiary First
Choice.

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Prospects for M&As in 2009

At present, the uncertainty in global financial markets seems to have dented the M&A
transactions in India. Business analysts forecast that in the year 2009 the M&A activity will by
and large remain subdued. The appetite for such deals is falling due to lower business activity at
the back of decelerated growth in their production owing to slowdown in consumer demand.

In fact, a number of M&A deals are put on hold due to price mismatch. For instance, the
acquirer (buyer) and the sellers are quoting different valuations as in the current uncertain
economic environment, buyers’ fear that valuations might fall further, while sellers fear that
valuations might rise after they sell. However, there is a view that the current slowdown may
open up more opportunities to invest in, as valuations are much more attractive than they were
six months ago.

8.2 Highlights of Union Budget 2009-10

Contrary to expectations, there was no change in corporate taxation rate and surcharge
rate from the existing. However, the Minimum Alternate Tax (MAT) has been hiked by 5
percentage points from 10% to 15%. However there is some relief to companies that pay MAT,
as the period allowed to carry forward the tax credit has been extended to 10 years from 7 years.
It may be recalled that in May 2009, the Confederation of Indian Industries (CII) had called for
removal of surcharge on corporate tax.

Some of the other key measures announced in the Union Budget 2009-10 with reference
to the corporate sector are as follows:

(i) Abolishment of Fringe Benefit Tax (FBT).

(ii) Extension of sunset clause for units operating in free trade zones, export-oriented units
and set up for reconstruction and revival of a power generating unit, to assessment year
2011-12.
(iii) New provisions introduced with respect to taxability of Limited Liability Partnerships.
(iv) There has been no change in Cenvat rate which will benefit most of the sectors of the
economy as more than 80% of industrial goods come under its purview.
(v) Rolling out of Goods and Service Tax (GST) from next year.

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Industry-wise Measures and its Implications

Measures Implications
Cement
Excise duty and customs duty for cement remains
Cement prices are not
unchanged.
expected to be affected
So also, duties on cement clinkers remain unchanged.
Steel
CENVAT Duty unchanged Prices will not be affected
Pharmaceuticals
Reduction in customs duty on specified
life saving drugs (LSDs) to be reduced and Will lower the prices of life savings drugs
exemption of CVD on imports of LSD
Construction
Will lower the prices of blocks
Excise duty on prefabricated
which would result in minor improvement in
concrete blocks removed.
margins of construction players.
Textiles
Excise duty on man-made fibres The prices of polyester are expected
and yarn has been increased by 4% to 8%. to increase by Rs 2.5 per kg
Media and Entertainment
Customs duty of 5% imposed on set-top boxes Prices of set top-boxes will increase
Non-ferrous Metals
No change in CENVAT rate ‘ Prices of non-ferrous metals are not
on all goods expected to be affected
Paper
Customs and excise duty unchanged Prices of paper will remain same.

8.3 Deals and New Ventures

Power and automation technology group ABB has been awarded a contract worth Rs 165
million from Power Transmission Corporation of Uttarakhand Ltd for three substations in north
India.

Engineering firm McNally Bharat Engineering has bagged an order worth Rs 81.93 crore
from National Thermal Power Corporation (NTPC) for supply and installation related works.

Gammon Infrastructure Projects in consortium with two other firms, including state-run
MMTC, has bagged an Rs 500 crore project from the Paradip Port Trust for the development of
deep draught iron ore berth at Paradip.

Anil-Ambani-led Reliance Infrastructure has bagged IT consultancy contracts from five

electricity distribution companies in Karnataka.

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 BHEL has won a contract worth Rs 170 crore from Chennai Petroleum Corporation for
setting up gas turbine based cogeneration power plant at its Manali refinery.

Parle Bisleri is planning to set up 25 new bottling plants across the country in the current
fiscal year as a part of its growth strategy. Apart from setting up new plants, the company is also
expanding the capacity of its existing plants.

8.4 Other Highlights

Libya has become the third African company to ban the import of Indian drugs, after
Nigeria and Uganda. Though there is no official confirmation from the Libyan Embassy about
the ban, exporters from the country have approached the Pharmaceuticals Export Promotion
Council (Pharmexcil) in India as customs officials in Libya have denied them landing permission
and some consignments have been seized.

Reliance Industries has decided to move the Supreme Court to challenge the High Court
Order’s order asking it to supply 28 mmcsmd of K-G D6 gas to Reliance Natural Resources
(RNRL) at $2.34 per mmbtu for 17 years. RIL is likely to file its petition in July. However,
RNRL on June 19 had filed a caveat before the apex court to guard against any ex-parte hearing
on the matter.

The Bombay High Court has sanctioned the merger of Reliance Industries Ltd (RIL) and
Reliance Petroleum (RPL), but stayed its own order to enable those who are against the merger
to file an appeal.

8.5 Summing Up

In the year 2009 the M&A activity will by and large remain subdued as the appetite for
such deals is falling on account of lower business activity at the back of decelerated growth in
their production due to slowdown in consumer demand.

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