Telecom Regulations & Policies

Assignment # 03
Mergers & Acquisitions

Submitted To:
Engr. Ghulam Shabbir

Submitted By:
Muhammad Kamran
07-TE-46
Department of Telecommunication Engineering
University of Engineering & Technology Taxila
Dated: 18-05-2011
Mergers & Acquisitions By Muhammad Kamran 07-TE-46

Mergers and Acquisitions

1-Introduction:
Mergers and acquisitions (M&A) is one of the main part of the corporate finance world. The aim
is to create a bigger company by taking at least two separates companies. Deals can be worth
millions of dollars, even billion sometimes (such as the merger between Microsoft and Yahoo!
for approximately $44.6 billion).

We often say that the perfect equation for a merger or an acquisition is one plus one makes three.
The key principle behind buying a company is to create more value for the shareholders. Two
companies together are normally stronger than two companies separate. Both bring its know-
how, experience, culture and so on.

There are different reasons why two companies decide to merger or to make an acquisition. It
could be because they want to create a more competitive, cost-efficient company, to reduce their
costs, for economies of scale reasons as well. Sometimes they know that they can
complementary, meaning by merging they can take advantage of both know-how and create a
better product because only one company cannot make it by its own.

2-Acquisition:
An acquisition it is when one company takes over another and clearly established itself as the
new owner. An Acquisition, also known as takeover, is the buying of one company (the ‘target’)
by another. For example Google's largest acquisition as of March 2008 is the purchase of
DoubleClik which is an advertising company.

An acquisition is the purchase of one company by another company. Consolidation is when two
companies combine together to form a new company altogether. An acquisition may be private
or public, depending on whether the acquiree or merging company is or isn't listed in public
markets. An acquisition may be friendly or hostile.Whether a purchase is perceived as a friendly
or hostile depends on how it is communicated to and received by the target company's board of
directors, employees and shareholders. It is quite normal 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).

• 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.
• Another type of acquisition is reverse merger, a deal that enables a private company to get
publicly listed in a short time period. A reverse merger occurs when a private company that has
strong prospects and is eager to raise financing buys a publicly listed shell company, usually one
with no business and limited assets.
• 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.

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2.1-Distinction Between Mergers And Acquisitions:

Although often used synonymously, the terms merger and acquisition mean slightly different
things. When one company takes over another and clearly establishes 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 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". The firms are often of about the same size. Both
companies' stocks are surrendered and new company stock is issued in its place. For example, in
the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when
they merged, and a new company, GlaxoSmithKline, 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. An example of this would be
the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at
the time.

2.2-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:

• Economy of scale: 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.
• Economy of scope: This refers to the efficiencies primarily associated with demand-side
changes, such as increasing or decreasing the scope of marketing and distribution, of
different types of products.
• Increased revenue or 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.
• Synergy: 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.
• Taxation: 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

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companies, limiting the tax motive of an acquiring company. Tax minimization strategies
include purchasing assets of a non-performing company and reducing current tax liability
under the Tanner-White PLLC Troubled Asset Recovery Plan.
• 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.[5]
• 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 internalise 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 downstream firm's output
to the competitive level. This increases profits and consumer surplus. A merger that
creates a vertically integrated firm can be profitable.[6]
• "Acq-hire": An "acq-hire" (or acquisition-by-hire) may occur especially when the target
is a small private company or is in the startup phase. In this case, the acquiring company
simply hires the staff of the target private company, thereby acquiring its talent (if that is
its main asset and appeal). The target private company simply dissolves and little legal
issues are involved. Acq-hires have become a very popular type of transaction in recent
years.
• Absorption of similar businesses under single management: similar portfolio invested
by two different mutual funds (Ahsan Raza Khan, 2009) namely united money market
fund and united growth and income fund, caused the management to absorb united
money market fund into united growth and income fund.

2.3-Modes of Mergers and Acquisitions:

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3-Types of Mergers:
Horizontal Merger: When companies decide to engage in a merger their reasons typically fall
into one of six categories. 5 The first type of merger is a horizontal merger. This is when two
companies who are currently in direct competition join together and share their product lines,
their markets, and their customer base.

Vertical Merger: A vertical merger is when a company, and perhaps one of their suppliers, join
together to be able to offer a contiguous, non-interrupted supply of merchandise to their
companies. An example might be an ice cream cone manufacturer merging with an ice cream
maker so that both products can be acquired from a single entity, thereby presumably making it
easier for the customer.

Market Extension Merger: A market extension merger is with two companies that sell the
same product in different markets. This is an interesting type of merger because companies can
be regional. Companies can have different segments of the marketplace in which they have
gained a reputation. By acquiring another company that has a foothold in another market, you
can automatically increase the markets that you address.
Product Extension Merger : A product extension merger is when two companies selling
different products in the same market merge. An example of this is the EMC/Data General
example where EMC sold at the high end and Data General sold at the low to mid range.

Conglomeration Merger: A conglomeration merger is where two companies who don’t have a
lot to do with one another decide to merge. The reason for this would be economies of scale, and
getting a larger identity and more assets to be able to leverage for loans and other financial
purposes.
Strategic Merger: a strategic merger is the newest type of merger that may involve some or all
of the features of the other merger types mentioned above.

De-Merger: Hive-off of an undertaking into a separate company

4-Types of Acquisitions:

Asset Purchase: In an asset purchase the buyer can pick and choose which assets
it wants to acquire and which liabilities it wants to assume. Unless it’s stated explicitly in the
purchase agreement, the buyer doesn’t get it.

Stock Purchase: In a stock purchase the buyer acquires the seller’s stock from shareholders,
all assets and liabilities, and off-balance sheet items as well.

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Comparison of Asset Purchase vs. Stock Purchase

ADVANTAGES of an Asset Purchase DISADVANTAGES of an Asset Purchase

Compared to a Stock Purchase Compared to a Stock Purchase
In an asset acquisition, the buyer is able to It is necessary for the selling company's assets
specify the liabilities it is willing to assume, to be re-titled in the name of the buyer. This is
while leaving other liabilities behind. In a not required in a stock transaction.
stock purchase, on the other hand, the buyer
purchases stock in a company that may have
unknown or uncertain liabilities.
If the purchase price exceeds the aggregate taxIn a stock transaction the buyer can normally
basis of the assets being acquired, the buyer obtain the selling company's nonassignable
receives a stepped-up basis in the assets equalcontracts, permits, and licenses without the
to the purchase price. consent of the other party to the contract,
permit, or license.
By purchasing assets rather than stock, the Asset purchases do not qualify for tax
buyer avoids the problems presented by treatment as a tax-free reorganization.
minority shareholders who refuse to sell their
shares.
Purchasing a business through an asset If the selling company does not have a large
acquisition is less complicated from a number of shareholders, a stock transaction
securities law perspective because the parties will normally be less complicated.
are not normally required to comply with state
and federal securities laws and regulations.
Goodwill can be amortized by the buyer for tax In states that impose sales or transfer taxes on
purposes over a period of fifteen years. the sale of assets, a stock transaction can avoid
some or all of these taxes that apply in the
event of an asset transaction.

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Pakistan Scenario
5-Controlling Authorities
• CCP (Competition Commission Pakistan)
• SECP (Security Exchange Commission of Pakistan)
• SBP (State Bank of Pakistan)
• High Court

5.1-Competition Commission Pakistan

Merger and Acquisition Office

The Competition Commission of Pakistan (Commission / CCP) aims to provide guidance and
facilitation to undertakings* in complying with the Competition Act 2010. In this spirit the
Commission has taken the initiative of establishing the “Acquisitions & Mergers Facilitation
Office”. * "Undertaking" means any natural or legal person, governmental body including a
regulatory authority, body corporate, partnership, association; trust or other entity in any way
engaged, directly or indirectly, in the production, supply, distribution of goods or provision or
control of services and shall include an association of underatakings.(Section 2(q) Competition
Act 2010).

5.1.1-Introduction: The Merger & Acquisition Department operates under the supervision
of Member (Merger & Acquisition). Its functions and responsibilities include detection of
Merger and acquisition cases from newspapers, websites of all stock exchanges, SECP etc and
overview of any merger/acquisition of shares or assets /joint venture etc. under Section 11 of the
Competition Act, 2010 (the Act). It also operates “Acquisitions & Mergers Facilitation Office”
(AMFO), the purpose of which is to facilitate the undertakings which are contemplating merger
or acquisition (as defined in the Competition Act 2010) and want to get informal and non binding
view of the Commission.

5.2.2-Law: Section 11(1) of the Act envisages a prohibition and defines the offence, i.e. any
merger which substantially lessens competition by creating or strengthening dominant position is
barred under law. Section 11(2) of the Act, a non obsante mandatory provision requires the
undertakings intending to merge or making transactions regarding acquisition of assets/shares
which meet the thresholds provided in Regulation 4 of the Competition (Merger Control)
Regulations, 2007 to submit application for clearance by the Commission.

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5. 3.3-Procedure : The undertakings meeting the thresholds are required to submit

application in the prescribed form available in the Schedule to the Competition (Merger Control)
Regulations, 2007 (Link button) along with the fee prescribed in Regulation 5(6) of the
Regulations. On receipt of the pre-merger application, complete in all respects, the Commission
examines and scrutinizes it in the light of the provisions of the Act as well as the Regulations.

6-Examples of Merger & Acquisition in Pakistan

M&A activity has grown in Pakistan in the recent years. The Competition (Merger Control)
Regulations 2007 (the regulations) regulate the mergers and Acquisitions in Pakistan.

1) NIB Bank Ltd Merger with PICIC Commercial Bank:

The above two banks merge on 31st Dec 2007.The type of Merger was horizontal. Now NIB
Bank is the 7th largest bank of Pakistan with 240 branches. Merger with PICIC was in order to
expand the business and enhance in innovative products to increase market shares.
2) Acquisition of Union bank :
After the acquisition of Union Bank in Sep 2006, the new entity Standard Chartered Bank
Limited was incorporated in Pakistan as a subsidiary of Standard Chartered PLC.

3) Acquisition of WOL/DANCOM ONLINE by Link dot Net:

LINKdotNET also expanded its operations and acquired WOL and DANCOM ONLINE
to become the largest ISP in the country, representing the largest horizontal M&A
transaction in this sector.

4) PTCL acquired by Etisalat:

It is a horizontal type of merger & acquisition. Despite having 53% voting rights and the
right to appoint five out of nine directors of PTCL, Etisalat is accounting for its
investment as an associate using the Equity method, due to some control impediments
involving financial and operating decision making of PTCL.

5) Wazir Ali Industries Acquired by Dalda Foods (Pvt) Ltd:

Dalda Foods (Pvt) Ltd acquired Wazir Ali Industries, thereby eliminating competitors in
the edible oil market of the country by acquiring the famous ‘Tullo’ brand, which was a
horizontal M&A activity. This resulted in increased market share of the edible oil sector
for the acquirer.

Other Mergers& Acquisition in Pakistan include:

Merger of Yousuf sugar Mills Limited with Abdullah Sugar Mills Limited on 24 June
2008

Merger of Crescent Bahuman Energy and Crescent Bahuman Textile Limited with and in
to Crescent Bahuman limited.

Acquisition of shares of MCB Bank Limited by Malayan Banking Berhad.

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Acquisition of shares of Pakistan Cement Company Limited by Lafarge S.A

Acquisition of Pak Arab Fertilizer Limited by Fatima Group/Arif Habib Group

Acquisition of Suzuki Motorcycles Pakistan Limited by Pak Suzuki Motor Company

Limited.

Acquisition of Allied Bank Ltd by Ibrahim Group.

In Pakistan, banks have chosen to acquire & merge with other banks in order to comply
with the statutory requirement of raising their paid up capital to at-least Rs.6 billion by
the end of 2009. Although, some of the banks have tackled the requirement of capital
adequacy by increasing their paid up capital, however M&A has become a business
reality in the country. This has involved merger of investments banks with their
mainstream banks as well as acquisition of smaller banks by the larger banks.

In Pakistan there have been instances of conglomerate mergers for example Fatima
Group and Arif Habib Group acquiring 51% stakes in Pakarab Fertilizer Ltd and
Azgard Nine Ltd acquiring Pak-American Fertilizer Ltd.

Mergers and acquisitions (M&A) usually aim at creating shareholder value over
and above that of the sum of the two (or more) companies. This aim is achieved
through synergy of merging companies that takes the form of revenue enhancement
and cost savings of the new business.

7-Top 10 mergers and acquisitions in China:

The Aluminum Group of China took over eight aluminum companies. In addition, the
Aluminum Group of China acquired Shanghai Non-Ferrous Metals (Group) Company
Ltd., which is a major copper firm in China

Fujian Sedrin Brewery was acquired by InBev. This happened on 23rd January, 2006.
InBev is the biggest beer brewery in the world and Fujian Sedrin is a prominent brewer in
the southeastern region of China. After this merger, InBev has achieved the position of
one of the biggest brewers in China.

In the month of April, 2006 the biggest meat processor of China, Shuanghui Group was
taken over by Rotary Vortex Ltd., which is a wholly-owned subsidiary company of
Goldman Sachs.

In the month of June 2006, the Baosteel Group acquired 5 percent stake of Handan Steel.
Furthermore, the Baosteel Group acquired stakes in eight steel manufacturing companies
and Xinjiang Ba Yi Iron & Steel Company Ltd.

In the month of July, 2006, the largest home appliance retailing company of China, Gome
Electrical Appliances Holding Ltd. acquired its competitor China Paradise Electronics
Retail Ltd., which ranked as the 3rd biggest home appliance retailing company in China.

For a period spanning March to November 2006, a mass reconstruction of China World
best Group Company Ltd. was performed by China Resources Holding Company Ltd.

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and ultimately it acquired 100% stake with the help of the subsidiary companies of China
World best Group Company Ltd. China Resources Holding Company Ltd. is one of the
most prominent enterprises in the pharmaceutical and textile sector of China.

In the month of September 2006, Yanbian Highway Construction was taken over by
Beijing Guangfa Securities. This was a backdoor listing and it never happened before.
After this contract, the name of Beijing Guangfa Securities was changed to Guangfa
Securities

In the month of October 2006, the sulfide and organic silicone operations of French Luo
Sulphadiazine Company were acquired by the China National Bluestar (Group)
Corporation. This deal was inclusive of manufacturing equipments, patents, as well as
sales channels. Following this acquisition, Blue Star has achieved the position of the
biggest investor from China in Europe. In the month of January 2006, China National
Bluestar Group carried out the acquisition of Adisseo, the second biggest producer of
animal nutrition supplements in the world.

In the month of November 2006, 85.6% stake of Guangdong Development Bank of
China was acquired by a six-organization syndicate headed by Citigroup Incorporated.
The other five companies involved in this acquisition are the following:

China Guodian Corporation

China Life Insurance Group
PricewaterhouseCoopers
CITIC Trust
IBM

In the month of June 2006, Richard Li Tzar Kai, a Hong Kong based big business leader
decided to sell off his stake in PCCW, however, this move was powerfully defended by
China Netcom, which is the second largest stakeholder in that company. The schemes for
stake transfers were voted against by the minority stakeholders, as well. In order to
strengthen its regulatory status, China Netcom formed a joint venture with a
telecommunications company in Spain and in this way, it was able to maintain 28%
regulatory shareholding.

8-Telecommunications Industry Mergers And Acquisitions

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.
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 assists in creation of jobs.

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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

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

Bigger client base

Brand value

Wide array of products and services

Recent Mergers & Acquisitions include:

Intel Technologies Inc. acquired by Cisco Systems, Inc.

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Vertica acquired by Hewlett-Packard Company.

Qik,Inc acquired by Skype

Scrap blog ,Inc acquired by Mixbook

Triplt,Inc acquired by Concur Technologies,Inc.

Gist acquired by Research in Moon.

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