EXECUTIVE SUMMARY

Page | 1

The topic selected by me is An Analytical View of Mergers and Acquisitions. This topic mainly deals with knowing the meaning, procedure, valuation techniques, financing techniques, role of Industry Life Cycle on M&A, Consideration involved in International Mergers and Restructuring. This topic mainly covers the Pre and Post merger success factors for adoption by firms involved in M&A activity, why mergers are not always successful, what motivates executives to initiate mergers and acquisitions what are the five sins of mergers and acquisitions, and pros and cons of Mergers.

OBJECTIVES

Page | 2

The main objectives of study are: To know why organisations go for M&As. To know how valuation is placed a firm in M&As. To see whether wealth maximisation mode is applicable to M&As. To improve the role of Intermediary professionals involved in M&A activity. To know pre and post merger success factors in M&A.

To know why mergers are not always successful. To analyse live case study on merger.

RESEARCH METHODOLOGY
Page | 3

For carrying out this dissertation, I have used secondary data i.e. data is collected from various sources (internet, company records, magazines, books, newspapers). I have used large secondary data from academic texts, financial software package and business journals and magazines. Since M&As is secretive activity till announcement of public officer for purchase of shares as per SEBI guidelines, it is impossible to get Company officials to fill-in structured questionnaires (to obtain primary data.) hence I resorted to personal interviews with key Company Officials to obtain primary data.

LIMITATIONS
Page | 4

Gathering of data was difficult as the data was collected from various newspapers, journals, company records, books etc.

Due to the time constraints, it was really very difficult to collect much data. As the data was collected from the past records, we can say that the data being collected would be misleading.

Page | 5

INTRODUCTION

Page | 6

Growth is an essential ingredient to the success and vitality of many companies. Growth can be either external or internal. In case of internal growth a firm acquires specific assets and finances them by the retention of earnings or external financing. External growth, on the other hand, involves the acquisition of another company. All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side M&As may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require M&As at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through M&As. Many have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing stakeholders value. To opt for a merger is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors, which the management may have to look into before going for merger. Considerable amount of brainstorming would be required by the managements to reach to a conclusion. E.g. a due diligence report would clearly identifies the status of the company in respect of the financial position along with the networth and pending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company.

MEANING

Page | 7

Mergers, takeovers, divestitures, spin off, and so on, referred to collectively as corporate restructuring, have become major force in the financial and economic environment all over the world. A merger is popularly understood to be a fusion of two companies. In United Kingdoms monopolies and Mergers Act of 1965 merger means two enterprises by or under the control of a body corporate ceasing to be distinct enterprises. Merger is often known as amalgamation, especially when merging two business entities. A company acquires an undertaking and the consideration thereof paid by cash, share and such other form as may be mutually agreed. Thus, essentially, in a merger, the Physical undertaking is required. Mergers are permanent form of combinations, which vest in management control and provide centralized administration, which are not available in combination of holding company and its party owned subsidiary. Shareholders in the selling company gain form the merger as the offered to induce acceptance of the merger offers much more price than the book value of shares. Amalgamation is an arrangement whereby the assets of two companies are vested in one which has its shareholders all or substantially all the shareholders of two companies. Amalgamations are governed by section 390 to 396 of the companies act. Acquisitions, is a preferred route of acquiring shares of the company when the buyers is Interested in a particular business of the seller company, and not in the whole company. Acquisition may be carried out in two ways. The company may adopt the route of Section 391 to 394 of the companies act 1956, which is applicable to a full merger. Alternatively, the transaction may be carried out in the form of an outright sale. A corporate acquisition is the purchase by one company (the bidder or acquiring firm) of a substantial part of the assets or securities of another (the target of acquired firm), normally for the purpose of Page | 8

restructuring the operation of the acquired entity. The purchase may be of a division of the target firm, or all or a substantial part of the targets voting shares (mergers or partial take-overs). Bids or sometimes directed towards the acquiring firms own shareholders, as in a minority buyout or in a leveraged buyout (LBO) where a group of investors typically involving the firms owns management acquires all the outstanding voting shares.

Takeover is normally an unfriendly acquisition by tender offer. Companies are sometimes consolidated into a new company. This happens when the two companies are about the same size. The shareholders of two companies which are consolidated give their share and are allotted shares in the new company through purchase of portion of shares sometimes acquisition of control is preferred to full acquisition and act as a holding company. Holding company is a firm that owns sufficient shares in one or more companies.

Types of Mergers

A. Vertical Mergers Page | 9

B. Horizontal Mergers C. Circular Mergers D. Conglomerate Mergers E. Reverse Merger A. Vertical Mergers In vertical type of merger, the company either expands backwards towards the source of raw material or forward in the direction of the customer. This is achieved by merging with either a supplier or buyer, using its product or intermediary material for final production. When merger or acquisition is done in the reverse order of the supply chain management it is known as backward integration while when it is done to acquire business of the buyer of the existing offering it is known as forward integration. B. Horizontal Mergers When two firms operating in the same line of business and catering to the same segment of customer or operating at the same stage of industrial process merge together it is known to be Horizontal type of merger. In simpler words when two competing firms merge together it is a horizontal merger. C. Circular Mergers Companies producing distinct products or providing distinct services seek amalgamation to share one or other common areas of operation like distribution network, agent network, service centers, research facilities etc to obtain economies by elimination of duplication of cost. Both the companies i.e. acquirer and target company get benefits in the form of economies of resource sharing and diversification. D. Conglomerate Mergers Amalgamation of two companies engaged in unrelated industries. Such mergers are for the Page | 10

purposes like utilisation of financial resources, to enlarge debt-procuring capacity, diversify the business risks, enter into new emerging fields, & also to take advantage of managerial synergies.

E. Reverse Merger There are two modes in which reverse merger are understood. First, the commonly known mode of reverse merger is the merger of a healthy company into a sick / loss-making company as compared to normal merger under which loss making company merges into profit making company. Most of the time this mode is construed synonymous to reverse merger. However, technically, it is categorized as tax friendly merger. Second mode of reverse merger is the merger of an unlisted company into a listed company. Technically, it is categorized as listing friendly merger.

The prime purpose behind reverse merger is to get benefits of set off against loss and other tax benefits available to loss making company, most of which are not available in normal merger. It also avoids necessity of getting special permission under tax laws (section 72A of Income Tax act, 1961 or under special statute for rehabilitation of sick industrial companies) other purposes behind reverse merger could be savings in stamp duty, public issue expenses, getting quotation on a stock exchange etc.

ASPECTS RELATING TO MERGERS AND ACQUISITIONS

Page | 11

There are several aspects relating to M&A that are worthy of study, important among of them are: 1. What are the basic forces that lead to M&As. How do these interact with one another? 2. What are the managers true motives for M&As. 3. Why do M&As occur more frequently at some times than at other times? What are segments of economy that stand to gain? 4. How mergers and acquisitions decisions could be evaluated. 5. What managerial process is involved in M&A decisions.

WHEN DOES A MERGER TAKES PLACE

Page | 12

The selection of a business partner in a merger depends on the purpose of the merger or the business objective. The merger could be between two related companies or non-related companies. The underlying reason for the merger is maximization of shareholders wealth. As with any investment decision the cost of merger should be evaluated in terms of net present value of its expected cash flow. The objective of the merger is value creation. The factors that are responsible for value creation are economies of scale, financial advantage, synergy and tax advantage.

Synergism: Merger helps in achieving operating economies. Marketing, accounting,

purchasing, and other operations can be consolidated. Mergers of firms manufacturing complimentary products would result in an increase in total demand for products of the acquiring company. The realization of such economies would enhance the value of the merged company. The whole larger than the sum of the parts. This is called Synergism. That is 2+2=5.

Complementary Resources: If two firms have complimentary resources, it may

make sense for them to merge. For example, a small firm with an innovative product may need the engineering capability and marketing reach of a big firm.

Economies of scale: In addition to operating economies, economies of scale and

reduction of average cost with increase in volume, may be realized when the merging companies are in the same line business. Such horizontal mergers eliminate duplication Page | 13

and concentrate a greater volume of activity in to a given facility. Vertical mergers where company expands forwards towards the consumer or backwards towards the source of raw material by giving a company control over distribution and purchasing also bring in economies. There can be diseconomies of scale too. If the scale of operations and the size of organization become too large and unwidely. The optimal scale of operation is the one at which unit cost is minimal. Beyond this optimal point the unit costs tend to increase. The fig below represent:

Average Cost

Optimal Scale

Scale of Operation

Behavior of Average Cost per Unit

Strategic Benefits: The strategic advantages may be

Page | 14

1. As a pre-emptive move it can prevent a competitor from establishing a similar position in industry. 2. It offers a special timing advantage because the merger alternative unable affirms to Leap frog several stages in the process of expansion. 3. It may entail less risk and even less cos. 4. In a saturated market simultaneous expansion ad replacement (through a merger) makes more sense than creation of addition capacity through internal expansion.

Managerial Effectiveness: More effective management may also give

rise to synergy. Very often the entrenched management which is efficient can only be dislodged may merge. Actually the acquisition makes sense if the acquirer can provide better management. Mergers can also convey information on underlying profitability of the bought company. Merger may give rise a positive signal if the stock is believed to undervalued.

Tax Shield: Tax factor often motivate a merger. In the case of carry

forward losses, a sick company with cumulative taxes loses may have little prospect of setting of such losses against future earning. By merging with a profit making company (under section 72A of the income tax act), the carry forward can be effectively utilized.

Holding company is often used as a device to acquire controlling interests.

With lower controlling interest the functions of the two companies are integrated to realize economies of scale. On the other hand, the price pay is much less that the Page | 15

purchased. Capital requirement for achieving the same result as in the case of merger is much less. The holding company benefits through its controlling interests from the leverage aggregation or assets with small investments.

Finally, hubris hypothesis suggest that excess premium paid for the target

company benefits share holders but the shareholders of the acquiring company suffer a diminishing in wealth. I stead of rational behavior, the bidder gets caught in hubris an animal like spirit of arrogant pride and confidence where they would like to acquire the company at any cost. Sometimes specific shareholders of a closely held company who has a

controlling interest may want their company acquired by another that has an established market for share. The shareholder of the closely held company by merging with the publicly held company may obtain an improvement in liquidity of their investments. Merger is effected through either purchase of asset of share toward that of

tender offer or friendly takeover is made. Is assets are purchased buyer avoids hidden or contingent liability. Its easy to negotiate assets purchased. Share my purchase from the market to acquire a controlling inertest and the

target company may maintain as a subsidiary or division or dissolve to merger. For merger, shareholders representing 75 percent of the value of shares of the Target Company must approve.

DUBIOUS REASONS FOR MERGER

Page | 16

Often mergers are motivated by desire to diversify lower financing cost, and achieve a higher rate of earnings growth. Though these objectives look worthwhile, prima-facie, they are not likely to enhance value. Diversification: A commonly stated motive for mergers is to achieve risk reduction through diversification. The extent, to which risk reduced, of course, depends on the correlation between the earning of the merging entities. While negative correlation brings greater reduction in risk. Positive correlation brings lesser reduction in risk. Lower Financing Costs: The consequence of larger size and greater earnings stability, many argue is to reduce cost of borrowing for the merged firm. The reason for this is that the creditors of the merged firm enjoy better protection than the creditors of the merging firm independently. If two firms A and B merger, the creditors of the merged firms (call it firm AB) are protected by equity of both the firms. While this additional protection reduces the cost of debt, it imposes an extra burden on the shareholders; shareholders of firm A must support the debt of firm B, and vice versa in an efficiently operating market, the benefit to shareholders form lower cost of debt would be offset by the additional burden by the-as a result there would be no net gain. Earning Growth: A merger may create the appearance of growth in earnings. This may stimulate a price rise if the investors are fooled.

An example may be given to illustrate this phenomenon.

Page | 17

Suppose Ram Limited acquires Shyam Limited. The pre merger financial position of Ram limited and Shyam Limited are shown in columns 1 and 2 of table 10.2 Ram Limited has superior growth prospects and commands price earning multiple of Shyam Limited. On the other hand, has inferior growth prospects and sells for a price earning multiple of 10. The merger is not expected to create ant additional value based on the pre merger market prices. The exchange ratio is 1:2 that is 1 share of Ram Limited as given in exchange for two shares of Shyam Limited. Financial position of Ram Limited and Shyam Limited Particulars Ram Ltd Before Merger Shyam Ltd Before Merger The Market Is 1 Rs2 Rs40 2 Rs2 Rs20 Rs2 Rs10 Rs20 ml Rs200 ml Smart 3 Rs2.67 Rs40 Rs2.67 Rs15 Rs40 ml Rs600 ml The Market Is Foolish 4 Rs2.67 Rs53.4 Rs2.67 Rs20 Rs40 ml Rs800 ml Ram Limited after merger

Earnings per share Price per

share Price-Earnings Rs2 ratio Number of Rs20

shares Total Earnings Rs20 ml Total Value Rs400 ml

If the market is smart, the financial position of Ram Ltd, after the merger, will be as shown in column 3 of the table above. Even though the earning per share rises the price-earning ratio falls because the market recognizes that the growth prospect of the combined firm will not be as bright as those of Ram Ltd alone. So the market price per share remains unchanged at Rs 40. Page | 18

Thus, the market value of the combined company is simply the sum of the market values of the merging companies. If the market is foolish, it may regards the 33 percent increase in earning per share as reflection of true growth. Hence the priceearning ratio will not fall. With the higher earning per share and an unchanged price-earning ratio, the market price per share of Ram Ltd will rise to Rs 53.4 this will lead to an increase in market value from Rs 600 to Rs 800 ml. Thus if the market is foolish, it may be mesmerized by the magic of earning growth. Such an illusion may work for a while in an inefficient market as the market becomes efficient the illusionary gains are bound to disappear.

Hostile Takeover:
A tender offer to purchase share of another company at a fixed price from shareholder who tender that may be made by the acquiring company. The tender offer allows the acquiring company to bypass the management of the company. Purchase of shares from the market or through the tender is likely to be expensive if the target board is not receptive. A hostile takeover through a proxy fight is resorted.

GUIDE TO VALUE CREATING M & A

The guns are booming, empowered by the new takeover code, and emboldened by the emergence of vulnerable quarries in a troubled economy, corporate India corner room Page | 19

buccaneers have unleashed the countrys third M&A wave. The new legal framework governing M&A activity has opened the doors to hostile takeovers, setting out objective guidelines and allowing the predator and the prey get on with their attack and defense maneuvers without the securities & Exchange board of India having to step in as arbitrator. Simultaneously, the market for corporate control has exploded, with M&A being accepted as vital means for corporate restructuring and redirecting capital towards efficient management. No wonder than, that in space of one blistering fortnight this past month, half a dozen M&A battles were initiated. The predator lurking within Rs 8,342.5- crore Hindustan Lever resurfaced with the negotiated acquisition of Rs 59.11 crore Lakme from the Rs 35,000- crore Tata Group. A potent takeover Sud, targeting a 20 percent stake, was fired at the Rs 1,162.78 crore Indian Aluminium by the Rs1,146.72- crore Sterlite Industries. Alarmed by the prospects of consolidation in the aluminium industry, the Rs 1,457.15-crore Hindalco immediately launched a broadside against the Rs 162.28-crore Pennar aluminium bidding for a 13 percent chunk of the company. The benefits of a successful acquisition are powerful, offering as they do dominate market shares, the strength of sheer size and unique competitive advantages. Only recently unfettered from the rigid shackles of government control and exposed to market forces corporate India will now have to chalk out and carry though long term corporate strategies To enhance competitiveness and sustainability. They will have to index internal ability, and to changes in their industries and in the overall economy-to best avail the opportunities available.

The prime motives behind employing M&A for restructuring

Page | 20

Rectifying the distortions of the past decades of the licence raj, where growth and diversification were led more by an ability to carry favour with the bureaucracy than by the virtues of value creation.

Consolidation of small and fragmented players. The compulsion to become world size because of the globalization of the economy, requiring corporation to focus their areas of core competence and to form alliances with global players.

The need to take advantage of the relaxation in government policy, which is allowing companies to take decisions that are based on economic realities.

The use of M&A as corporate strategy raises important issues

Page | 21

M&A may be critical to the healthy expansion of business as they evolve through success stages of growth and development. For, both internal and external growth may be compatible with the long-range evolution of the company. Successful entry into new geographic and product markets often requires the speed, accompanied by an existing infrastructural framework that only M&A can give access to. For these, as well as other reasons, some economists argue that M&As increase value through efficiency gains,

M&A IS BECOMING EASIER

Corporates restructuring is creating a market for both acquisition and disposal of business units. Two years of economic slowdown are causing shakeouts in many sectors, forcing losers to exit. Share prices are low enough to make acquisition of large equity stakes feasible in terms of price. A formal takeover code has laid out the mechanism for both hostile and negotiated takeover. The financial institutions are for the first time, willing to help the M&A game by selling their holding.

Since there is little scope for companies to learn from experience as M&A is a sporadic and time-consuming process. Importantly, how does a predator determine whether or not a planned acquisition will prove beneficial? The solution: Identify possible ways of improving future gains by carefully selecting the type mergers, the target company, the anticipated efficiencies, and a management strategy that will maximize potential synergy.

VALUE CREATION AS THE ULTIMATE OBJECTIVE OF M&A

Page | 22

The management challenge for any corporations is to optimize the allocation of scarce and expensive resources such as capital, labour, research, training, and in order to increase productivity. This in turn, will boost value. The corporate usually has several options, and must assess the viability of each route given the expected increase in value it can provide. As there is great uncertainly about the success of each strategy so far as long-term profitability is concerned, even well intentioned moves do not often improve shareholder value. M&A too should be placed within the framework of long range strategic planning. Thus the objective of buying or selling business units and bringing in accompanying changes in management should only be undertaken if M&A will yield value to the respective companies. The basic motive of M&A can than be understood as an attempt to create value. The equation: Synergy= Combined value of post M&A A&B MINUS (value of company a PLUS value of company B) Only if the synergy is positive will there be an economic justification for the merger. It must also be remembered that there are several costs to an M&A maneuver the price the opportunity the cost of the acquisition, and softer issue such as culture clashes, integration friction all of which lead to a price having to be paid the companies coming together; while it isnt easy to factor these in the attempt should be make a realistic assumption about such costs. Using these calculations, the acquirer can then work out what his real cost of acquisition is. Premium=price over market value PLUS

Other costs of integration Page | 23

The next step: Computing the actual value derived from the acquisition. Net Value Gain= Synergy MINUS premium From this simple analysis it is clear that mergers will fall if the expected synergy does not exceed the premium paid, thereby creating no value for the bidder. However, many companies do not realize that they to work specifically towards achieving these synergy. It is in fact, possible to synergy-by carefully selecting the type of the merger, the target, and an optimum management strategy. Thus, the acquirer should not only have a clear understanding of its motivation for the M&A move, but must also link a management strategy to the motivation for the acquisition. This will help the corporates improve their understanding of the correlation between strategy and value-creation enable them to index the possible gains from M&A, Endure realistic pricing, anticipate and, ultimately judge the impact on value.

FRAME WORK FOR OPTIMISING M&A VALUE

Page | 24

External growth M&A is not only difficult, but rarely value creating. Many acquisitions fail due to over-anticipated potential synergies, large premiums, different and opposing cultures, mixed and confusing goals. There is an acute need for a holistic analysis of the M&A process, which link strategy to the value drivers, in order to optimize the potential gains. What follows is simple framework call it the value strategy chain for mapping specific strategies.

THE VALUE CREATION FRAMEWORK

Transaction Costs Value of Synergies

Value of target to acquires

Standalone value of target (without any takeover premium)

Value of next best alternative (no merger therefore value of

Net value gained from acquisition

Value of acquirer

Combined Value

Price paid (Including Premium)

The Value-Strategy Chain Framework is a simple model for identifying strategies that will improve the net gains from M&A. its strategies to the element of valuation, or value drivers. The Page | 25

implementation of these strategies will improve the performance of specific value drivers by enhancing the efficiency of the merged company. To optimize synergies in M&A, companies might have to target more than one value drive, thereby implementing over lapping strategies. The Strategic Star benchmarks the relative position of these value drivers against industry analysis. This prioritises the value drivers that the acquisition should target.

IDENTIFYING THE M&A VALUE DRIVERS

To optimize the value gain, it is obvious that the synergy should be maximized while the premium is minimized. Thus: Value created through M&A =Increase in synergy MINUS decrease in premium INCREASING SYNERGY Synergies are possible from the efficiency gains that the post acquisition entity can tap. These gains accure due to improvements in management, financials, operations, and risk-control, as well from a reduction in some inefficiencies. If these synergies are to be exploited, the value of the combination must exceed the sum of its parts a) Achievement of progress and influence in industry. b) Increased productivity by reason of more efficient and effective utilization of all resources. c) Often it is cheaper to bye or acquires an existing firm than to build a new business plant. d) Under certain condition, market entry is more easily possible through acquisition of existing firms. Page | 26

e) Merger or acquisition not only secures for an expanding firm the necessary working plant and equipment more but also it may help the firm to avoid the problems of access to scarce raw materials.

According to Harry Levinson many mergers have been disappointing in their result and painful to their participants primarily due to psychological reasons. Research studies on the value of mergers have shown that the growth rate and profitability of the combined organization tend to decline as compared with the performance of the combining firms. Executives of the acquired firm lose their status, authority and even jobs. From the social point of view merger give rise to monopolistic conditions with increased concentration of economic and political power, higher prices, and other abuses of monopoly.

Guide Lines for Effective Mergers

Page | 27

Mergers and acquisition involve a complex set of decisions to be made as regards to financial arrangement, organizational changes, thus it is necessary thata) First, a separate plan and programme should be drawn up so as to ensure a smooth transition form the pre-merger to the post-merger stage: b) Secondly, a executive responsibilities should be realigned for necessary implementation of the plan and programmes: c) Thirdly, the management information system should be redesigned for effective top management control.

Due Diligence
Introduction Page | 28

Due diligence is carried out in order to determine the fair value of the target company and to assess the benefits and problems of the proposed acquisition or merger by inquiring into all the relevant aspects of the business to be acquired. Due Diligence are of following types: Business Due Diligence Industry Insights New start-ups Mergers and acquisitions in the industry Competitive environment Regulatory environment Social Standing or Public perceptions Availability of investment funds Trade Journals Reviews Industry future outlook as expressed by relevant trade associations Major factors affecting the industry; is the likelihood of the occurrence of Nature of the industry (Growing, Mature, Decline) Evaluate the industry in which the company operates in terms of :

Industry life cycle

such factors, implications for the industry as well as the company of occurrence of such factors Company Insights Comparative analysis Market Share Products, Services Financial Statement Ratios Size Management Page | 29

Fixed Assets Capital Structure Is the company average, above or below average in relation to its Value of Company's Goodwill. Impact on the goodwill due to change in Willingness of outside agencies (suppliers) to continue with new Restrictive Covenant terms in the Agreements Regular Customer Base

industry? Why? Explain. management management. Any change in terms of contract, etc.

Financial Due Diligence The objective of the financial due diligence is to establish the veracity of disclosed financial statements. However, review of internal control in terms of its effectiveness and adequacy, is an additional objective in the course of financial investment. The process of establishing the veracity of disclosed financial information generally involves Establishing fairness of accounting policies adopted Identification of off balance sheet items Establishing authenticity of the disclosed financial figures. Financial ratio analysis Under / over valuation of assets and liabilities Compliance with Accounting Standards Ensuring liquidity and solvency position

Human resource Due Diligence Human Resource due diligence involves the study of the employees of the company with respect to their expertise, leadership qualities and ability to manage the entity. It is important

Page | 30

to assess their qualifications, their pay structure, as well as the likelihood that they will remain with the company. Nos. of staff employed Employee turnover for last three years

Analyse whether over or under staffed and cost of rectifying the same. Any labour problems in the recent past? Attachment towards the management Wage increment contracts

Legal Due Diligence Legal due diligence is undertaken to achieve the following objectives To assess the impact of likely results of current and potentially pending litigation and result of recently concluded litigation, To ensure that the subject company has complied with the provisions of all the relevant statutes and there would be no potential liability on account of non compliance, To assess the current and anticipated future impact of government regulations on the entity's cost level. It covers the Companies Act, Direct Tax laws like Income Tax, Wealth Tax etc., Indirect Tax laws like Excise, Sales Tax etc., Labour Welfare laws like Provident Fund, Employees State Insurance Act etc. The information to be collected in Legal Due Diligence includes: Names and addresses of the company's attorneys Is a discussion with them appropriate, warranted? Make inquiries of the company's management and attorney regarding possible lawsuits, contract problems, etc. Does the company have good legal records? If not, why not? Assess the implications. Make inquiries of the company's management and legal concerning the likelihood of an unfavorable law suits. Assess the implications to the extent there might be legal problems, the company's investment risk might be significantly higher. Page | 31

Systems Due Diligence Systems due diligence is undertaken to ensure that there is proper management and adequate security of the data / information systems. Material Procurement systems Inventory Updating System Logistics Support Invoicing System Review of IT security policy and procedures, Review of software applications and operating systems, and Review of disaster recovery and business continuity plans. The result of the due diligence has got a direct bearing on determining the value and viability of the investment. The report normally outlines the current status of IT adopted, its scope, investment required for improvement and post investment action plan. Tax Due Diligence The analysis of various taxes is one of the most complex areas that is encountered during the investigation. The objectives of a tax due diligence are To analyse the impact of unpaid taxes/contingent liability To assess the impact of likely results of current and potentially pending litigation and result of recently concluded litigation, To assess the liability towards deferred taxes

Extraordinary event:
In the due diligence a serious note of any extraordinary event or items should be taken care of.

Page | 32

Why Are Management Mergers Not Always Successful?

Going by research evidence, merge have not been generally successful from the shareholders point of view. The question therefore is what prevents the successful consummation of merger? The possible reasons for failure of mergers may be one or more of the following lapses on the part of the management. 1. Failure management to establish merger objectives which fit into the overall corporate strategy. 2. Added synergy = Value of the combination MINUS sum of the parts Just how can the value of the combination be maximized? Value of combination = Discount Cash Flows of combination = (revenues minus cost) / risks

Amounting as it does to the post - M&A DCFS, this value can be enhanced by either increasing the revenues of the combined company, and/or reducing costs or the volatility of earnings.

Page | 33

What Motivates Executives To Initiate Mergers And Acquisition?

Various considerations underlie the decision of the companies to merger or to go in for acquisition of other companies. For a firm intending to acquire or take over another firm, merger may be desirable to enable the existing management to achieve one or more of the following goals: 1) To attain a higher growth rate than is possible through internal growth strategy. 2) To bring about an increase in the price earnings ratio and market price of shares. 3) To purchase a unit for better use of investable funds. 4) To reduce competition by acquiring competing firms. 5) To fill the gap in the existing product line. 6) To add new products (diversify) when the existing product has reached the peak in its life cycle.

Page | 34

7) To improve efficiency of operations and attain higher profitability through potential synergistic effects. OPTIMISING REVENUE GAINS THE VALUE DRIVER Managerial synergy targets total revenue gains and can be

measured by jump in market share. THE STRATEGY Management skills are an input to the production process, much as capital and other forms of labour. These skills can range from company-specific to generic management. The argument for taking over another company is the belief that some of these skills and resources are transferable. When M&A targets larger total revenues and not the cost cutting for value creation, this motivation provides the necessary efficiency to tackle horizontal or related mergers. THE PROBLEMS although many M&As are executed with these motives, managerial synergies often remain elusive. There are several reasons for this. Its very difficult for companies to accurately identify their relative managerial ability. There exists very little evidence of managerial synergy since transfer of skills are difficult. M&A is not necessary the only route for shareholders to replace inefficient managements. BOOSTING MARGINAL REVENUE THROUGH FINANCIAL SYNERGY THE VALUE DRIVER. An increase in revenue per unit, or marginal price of the companys product is possible when M&A leads to redirect its cash to industries more attractive than the one it was in before the acquisition. Return on investment (ROI) improves Page | 35

when marginal revenue rises, so long as costs and investments remain unchanged. The primary motive for these acquisition is channeling cash from unattractive industries to more attractive industries. THE STRATEGY. Empirical evidence suggests that in most cases of conglomerate

mergers, capital expenditure is the only functions that are brought under the supervision of the new management. This is probably because companies believe in their ability to induce financial synergy through M&A. REDUCING MARGINAL COST THROUGH OPERATING STRATEGY

THE SYNERGY MATRIX

MANAGERICAL SYNERGY
* M&A will either improve management practices or replace inefficient management attractive industries * Total revenue increases are measured by market shares gains

FINANCIAL STRATEGY
Cash / resources are channeled from unattractive to attractive industries Rising marginal revenue can be measured by improved return on in investment.

MARKET VALUATION
* Inefficient valuation can be Corrected through M&A. * The price to earnings ratio improves

EXCHANGE INEFFICIENCY

VALUE CREATION

Vertical integration will circumvent market transaction Fall in total costs is reflected in improved gross margins.

COMPANY SPECIFIC RISKS

* Unsystematic risk can be reduced through specific diversification. * Discount rate (Beta) will fall

OPERATING SYNERGY
Economies of scale can be achieved through horizontal M&A Average cost, a proxy from marginal cost, will fall

Page | 36

THE VALUE DRIVER: Marginal costs decline due to economics of scale, achieved through improvements in operating efficiency arising from horizontal or related M&A. Since marginal cost-is used as a proxy. THE STRATEGY. The implicit assumption here is that the long run marginal cost curve declines as the quantity produced increase, forcing down average cost per unit. This is possible for several reasons. First the rationalization of customers and units produced. Second, achieving critical mass allows certain cost advantage both as buyer and seller, as intangible costs like marketing and overheads can be distributed over a largest production base in industries where these principle hold, it makes sense to acquire large production capacities through M&A thus, horizontal or related M&A, which increase the size of the operation, might result in cost reduction, and improve the competitive position of the combined company. Extensive research in the US, Europe, and Japan leads to the conclusion that mergers do not generally increase profitability and that the profitability of acquired firms declined after they were acquired. Company growth rates and market shares have been found either to decline or at best to remain unchanged. Conglomerate mergers in the 50s and the 60s reduced company efficiency and productivity. Vertical integration through merger can increase efficient. Cost of changes in organization is often greater that the benefits claimed by the promoters of takeovers. Higher the degree of diversification implied by the takeover the smaller the likelihood of success. For horizontal mergers in which the acquired firm is not large however the success rate is around 45 present. Before a merger the share price of an acquiring firm outperform the market. At the time of announcement of merger there is little change in the acquiring firms share price. The post

Page | 37

acquisition performance of acquiring companys share price is below pre merger performance and in many studies below that of the market. Finding form 19 studies indicate that merger and acquisition benefit acquired firms shareholders with a median gain of 19.7 percent, whereas acquiring firms shareholders suffer substantial losses continuing for up to several years after the merger. De Jong concludes that merger activity considerably increases national industrial concentration ratios. This perhaps is most evident and plausible reason for mergers and acquisitions.

INTERNATIONAL MERGERS AND RESTRUCTURING

International mergers are subject to many of the same influences and motivations as domestic mergers. However, they also present unique threats and opportunities. The issue of merger versus other means of achieving international business goals (such as import/export, licensing, joint ventures) builds on the fundamental issue in the theory of the firm whether to transact across markets or to internalize transactions using managerial coordination within the firm. When firm choose to merge internationally, it implies that they have concluded this would result in lower costs or higher productivity than alternative contractual means of achieving international goals. In horizontal merger, intangible assets play an important role in both domestic and international combinations. To exploit an intangible asset, such as knowledge, it may require merger because of the public good nature of the assets. Attempts to exploit intangible short of merger requires complex contracting, which is not only expensive, but likely to be incomplete (especially when compounded by the problems of dealing with a foreign environment) possibly leading to dissipation of the owners proprietary interest in the asset. Similarly, vertically integrated firms exist to internalize markets for intermediate products on both the domestic and international levels.

Page | 38

Among the special factors impacting international mergers more than domestic are tariff barriers and exchange rate relationships. Operating within a tariff barrier may be only means of obtaining competitive access to a large market, for instance, the European Common Market. Exchange rates are also important influence. A strong dollar makes US products more expensive abroad, but reduces the cost of acquiring foreign firms. The reverse holds when the dollar is weak, encouraging US exports and foreign acquisitions of US companies.

REASONS FOR INTERNATIONAL MERGERS

As already said though many of the motives for international mergers and acquisitions are similar to those for purely domestic transactions, there are some unique reasons in the international arena. These motives include the following: GROWTH: a. To achieve long-run strategic goals b. For growth beyond the capacity of saturated domestic market c. Market extension abroad and protection of market share at home d. Size and economies of scale required for effective global competition TECHONOLOGY: a. To exploit technological knowledge advantage b. To acquire technology when it is lacking EXTERNAL ADVANTAGE IN DIFFERENTIATED PRODUCTS: a. Strong correlation between multinationalisation and product differentiation is reported. This may indicate an application of parents (acquirers) good reputation. Page | 39

 GOVERNMENT POLICY: a. To circumvent protective tariff, quotas etc. b. To reduce dependence on exports EXCHANGE RATES: a. Impact on relative costs of foreign vs. domestic acquisitions b. Impact on value of repatriated profits.

POLITICAL AND ECONOMIC STABILITY: a. To invest in a safe, predictable environment

DIFFERENTIAL LABOUR COSTS, PRODUCTIVE OF LABOUR

TO FOLLOW CLIENTS (especially for banks, accounting firms, management consultancy firms and ancillaries)

DIVERSIFICATION: a. By product line b. Geographically c. To reduce systemic risk

RESOURCE-POOR DOMESTIC COMPANY: Page | 40

a. To obtain assured sources of supply The increasing globalization of competition in product market is extending rapidly into internationalization of takeover market. The best target to achieve a firms expansion goals may no longer be a domestic firm but a foreign one. International Merger and Acquisition activity has experienced substantial growth over last 20 years and shows no signs of abating in the future.

ROLE OF INDUSTRY LIFE CYCLE

The role of industry life cycle in mergers is in much dispute. It has never been supported by rigorous empirical evidence. But it represents a useful concept for organizing ideas on business activity if treated as suggested rather than a set fixed and established principles. In this spirit, the concept is used as a framework for indicating when different types of mergers may have an economic basis at different stages of an industrys development.

INTRODUCTION STAGE: Newly created firm may sell to outside larger firms in a mature or declining industry, thereby enabling larger firms to enter a new growth industry. These result in related or conglomerate mergers. The smaller firms may wish to sell because they want to convert personal income to capital gain and because they do not want to place large investments in the hands of managers who do not have a long record of success. Horizontal merger between smaller firms also occur, enabling such firms to pool management and capital resources. EXPLOITATION STAGE:

Page | 41

Mergers during this stage are similar to mergers in the introduction stage. The impetus for such mergers is reinforced by the more visible indications of prospective growth and profit and by the larger capital requirements of a higher growth rate.

MATURITY STAGE: Mergers are undertaken to achieve economies of scale in research, production and marketing in order to match the low cost and price performance of other firms, domestic or foreign. Some acquisitions of smaller firms by larger firms take place for rounding out management skills of the smaller firms and providing them with a wider financial base. DECLINING STAGE: Horizontal mergers are undertaken to ensure survival. Vertical mergers are carried out to increase efficiency and profit margins. Concentric merger evolving firms in related industries provided opportunities for synergy and carry over. Conglomerate acquisition of firms in growth industries are undertaken to utilize the accumulating cash position of mature firms in declining industries whose internal flow of funds exceeds the investment requirements of their traditions lines of business.

Page | 42

Pros and Cons of Mergers and Acquisition

1. As a growth strategy, mergers and acquisitions have been quite popular in all advanced countries. This is obviously because of the benefits expected to be derived by either or both the combining firms. a) Economies of large scale operation: b) Better utilization of funds to increase profits: c) Diversification of activities for stability and higher profits.

2. Managements failure to consider the relative merits of internal and external means of achieving corporate goals. 3. Lack of serious consideration of the financial stake. 4. Insufficient familiarity of the management of acquiring firms with the business of the acquired firms. Page | 43

5.

Lack of preparedness with post merger planning, organization and control.

MUCH TO LEARN
The common for business managers to think takeovers and mergers in times in times of industrial slowdown and recession. For investors though, mergers could possibly be the worst idea that a manager could explore. Demerger may be a better alternate, but few managements are receptive to such an idea. This attitude on the part of promoter-run managements smacks of unwanted arrogance, but earns little for investors. Late 80s and 90s witnessed an unending procession of failures. There have been the occasional successes, like that of Hindustan Lever with Lipton, Domma Domma and Brooke Bond. But millions have been sunk in to deals, the likes Orrisa synthetics with JK Corp Fibers with JCT, which turned out to be disasters in their own right. Yet, the industry refuses to see reason. Merger is an idea fraught with danger. This ominous generalization seems inescapable given the development of finance over the past 40 years. Business has seized upon new ideas jink bonds, leveraged buy outs, derivatives only to push them far past their sensible application to a seemingly inevitable disaster.

Page | 44

Three basic precepts which formulated during the past 40 years seem most enduring earnings can be bought if you cannot make them grow, do net fear additional debt and use derivatives to manager risk. Quite naturally, conglomerating seemed splendid to manage corporates yields running at 4-5 percent per annum. Weak accounting standards helped managements to report higher earning per share (EPS) virtually out of thin air in the wake of many acquisitions. So companies were off and running to leverage up and buy earning they could not increase on their own. Almost the entire expansions by the Birlas and Singhanias into the core sector had been funded through a liberal does of debt. Expansion linked tax benefits helped report higher EPS. It not that diversification is a wrong concept. Companies like General Electric (GE)have proven that there is value in diversification when done right. Also, companies need not grow to become sound investments. They can instead use their spare cash to increase dividends or buy back shares. But such moves are commonly interpreted as failure of imagination. Between 76 and 90, 35,000 mergers and acquisition worth $2.6 billion took place. Institutional investors helped. Pension, funds, midwife by Bethelhem Steels ground breaking agreement in 49 to underwrite employee retirement costs, rapidly made funds the big guys in the market place. Which along with the then strapping but still growing mutual funds (MFs) were assuming dominant status on the bourses. Between 50 and 70 assets with MFs leaped from $2.5bn to $51 bn. Institutional investors traded more frequently and dealt in ever-larger blocks of stock. That gave the market oceans of liquidity, making it simpler for predators to take huge position in target companies. The strategy worked at least until it reached investors. Profits for the 500 companies compromising the standard and poor (S&P)index, nearly quadrupled between 70 and 80. But stock prices, rattled by inflation and the oil price hikes of 73 and 79,and went no where. The DOW cleared 1000 for the first time in 72 reached it again in 73 dropped and then waited nine years to hit a new high. Do nothing stock prices only ratcheted up pressure to boost profits, often leading to bad decisions that would later have to ruefully undone.

Page | 45

The steady rise in debt that companies took on to grease the merger machines reflected a new scientific financial theory being drummed into business school graduates. During the late 50s and early 60s Merton Miller, Franco Modigliani and others has set a revolution in motion with scholarly treatises on capital structure, dividends and a host of related financial topics which won Nobel prizes for them. An important idea to emerge from the classroom was the blurring of the divide between debt and equity. Miller and Modigliani showed that at least theoretically the quantum of debt that a company carries does not mater as long as the business generates sufficient cash flow to meet its interest obligation. Their core insight about the acceptability of debt won converts and year after year companies leveraged higher and higher and yet survived. So much so that the value of deals announced during 95 alone hit $248.5 bn, surpassing the record of $246.9 attained in 88. Even as deals grew a qualitative change was moving in these acquisition were no longer creating conglomerates of the good old 60s,nor the debt laden leveraged buy outs of the 80s. These were strategic deals, designed to be smart, friendly, full of synergy and great for shareholders. The factors, which drove corporate to bye other firms, were low capital costs, strong cash flows and robust balance sheets in a low interest rate environment. Unfortunately costs of financing an acquisition are neither low in this country nor have managers been able to produce something that enhances earning. SRF is still struggling to keep its head over the waters. As always institutional shareholders have slept. Otherwise they might have demanded that firms focus on core business to maximize returns. May be push for demergers and sales. this reality is still to creep in.

Page | 46

WHY MERGERS AND ACQUISITIONS

The recent trends show a sharp increase in number of mergers and acquisitions happening worldwide leading to the question that what drives the corporate intelligentsia to adopt M&As as a corporate strategy. Analytical perspectives have to be put in to find out the reasons behind the consolidations happening in the corporate world. There are some basic reasons that cause M&As however, there is also a complex analysis behind recent increase in M&As. Mergers and Acquisitions have inherent capacities to deliver operational and other advantages to the corporations. These capacities become basic motives for corporate to adopt Mergers and Acquisition as a corporate strategy and the same have been observed as general drivers behind M&As. These capacities deliver: Operational and other synergies, Economies of scale, Increase in marketing, financial, human and other strengths, Moving forward or backward in the supply chain results in reduced overall costs, and Tax benefits

Page | 47

Moreover, mergers and acquisition being a strategic decision of an organization assumes great impotence and hence has to be executed only with clear and definite goal in consideration. The commonly observed goals behind M&As are: I. Expansion & Growth M&As as the strategy for growth and expansion, in corporate jargon popularly known as an inorganic growth strategy. Stagnation in this dynamic world is akin to being in coma. Thus no company can afford to stand still. Fulfilling growth objective of an organization, mergers and acquisitions are considered as plausible alternative. This is also in consonance with public companies. The shareholders have invested their funds on the assumption that their investment will not only provide adequate returns but also capital appreciation. Such appreciation would be possible only when the organization keeps expanding. As far as expansion is concerned, M&As can provide geographic spread, product range enhancement, customer base and segment increase. Moreover, managerial and operational skills grow with experience and time, which creates a surplus of these resources in the firm. Expansion ensures the best utilisation of such resources; the resulting synergy can be intelligently used for further expansion/diversification. II. Entry into new markets M&As provide an effective platform to enter into new markets. Adding to existing customer network through merger or acquisition is far more easier than creating a new network. However, it is critical to analyse whether it will be economically justifiable or not considering other parameters involved. Many times firms in the wake of cashing in on their core competence need to penetrate into new market with lesser luxury of time due to the intensified nature of competition, in such scenario M&As seem viable option to enter into the new markets. Product life cycle, business expansion, new products launching are other issues pertaining to M&As as entry strategy. Click for case studies Page | 48

III. Diversification M & A, are motivated with the objective to diversify the activity so as to avoid putting all the eggs in the same basket and obtain advantages of joining the resources for enhanced debt financing and diversified risk proposition to shareholders. Such transactions result in creating conglomerate organisations. But most critics hold that such diversification is dubious and do not benefit the shareholders as they get better returns by having diversified portfolios by holding individual shares of these firms. (e.g. Hindustan Lever Limited and Brooke Bond Lipton India Limited) Click for se studies IV. Surplus liquidity M&As can also occur due to surplus cash available with organisations. Deployment of such liquidity is a question having multiple options. Investing such cash into existing organisations by way of acquisitions is a worth considering option available with the CEOs. In recent trends, it has been observed for cash-rich companies that prefer is given to use the cash for M&As rather than distribute it as extra dividends to shareholders. That is why we see cash-rich firms making acquisitions more often even in non-related industries. Such M&As also result for stagnant industries merging their way into fresh woods and new pastures. Click for case studies V. Tax Saving Motives Many mergers are motivated by the aim of achieving benefits and concessions under the Direct and Indirect laws. The benefits like carry forward of losses, deductions for infrastructure industry, export incentives etc. can be utilised in a better manner by the combined entity. Click for case studies VI. Corporate Restructuring

Page | 49

M&As also emerge due to corporate restructuring exercises. Group companies formulate schemes of amalgamation among themselves as part of corporate restructuring to take benefits as mentioned above. M&As also work as a turnaround strategy for sick companies. Click for case studies VII. Other Motives Besides the points considered in the forgoing discussion there could be other strategic reasons behind M&As. Companies do acquisitions to create entry barriers for others, merge themselves with friendly corporations to avoid unwanted acquisitions, sometime demerger has to be implemented to comply with regulations like antitrust proceedings, competition act etc.

MOTIVE BEHIND RESTRUCTURING

As a contemporary corporate orthodoxy, external growth alternatives and corporate restructuring have become obvious part of strategic thinking in every kind of corporate houses. Just a decade ago the area was nonchalantly attributed to big and influential corporate. This strategic phenomenon of small and medium enterprises. Large number of enterprises is structured considering the then environment like taxation policy, industrial & commerce policy, world trade policy etc. with drastic change in the environment, such structure remained no more compatible. Hence new thought process emerged and restructuring came on the table. However, due to lack of in-house expertise, time and cost constraints, involvement of various agencies and legal complainces, even desired restructurings are not implemented. WHAT IS TO BE ACHIEVED THROUGH RESTRUCTURING Optimum business scale, focus or core competence- the optimum business scale implies the scale at which the product or services reduce at minimum possible cost. The same can be achieved say expansion through mergers and acquisition. While specialization refers to focus Page | 50

on activity or activities and mastering on the same can be achieved through demeger, hive off and sell off. Optimum Capital Structure Capital is free to move globally opening new sources through access to foreign capital markets. Revival of ailing business Maximization of shareholder values Other benefits in the process such as synergy of operations- consolidation of market share reduction of time and money while entering the new market/ foreign market, reducing uncertainty of market share, keeping out competition, exit route for promoters, listing advantage realization of stock market valuations.

FIVE SINS OF ACQUISITIONS

The American Management Association examined 54 big mergers in the late 1980s and found that roughly one-half of them led to fall in productivity or profits or both. As Warren Hellman sys so many mergers fail to deliver what they promise that there should be a presumption of failure. The burden of proof should be on shoeing that anything really good is likely to come out of one. It appears that acquisitions are plagued by five sins: straying too far afield, striving for bigness, leaping before looking, overplaying and failing to integrate well. Straying Too Far A Field: Very few firms have the ability to successfully manage diverse business. As one study revealed, 42 percent of the acquisition that turned source were conglomerate acquisition in which the acquirer and the acquired lacked familiarity with each others business. The temptation to stray into unrelated areas that appear exotic and very promising is often strong. However that reality is that such forays are often very risky.

Page | 51

Striving for Bigness: Size is perhaps a very important yardstick by which most organization, business or otherwise judge themselves. Hence there is a strong tendency on the part of managers whose compensation is significantly influenced by size to build big empire. The concern with size may lead to unwise acquisitions. Hence when evaluating an acquisition proposal keep the attention focused on how it will create value for shareholders and not on how it will increase the size of the company.

Leaping Before Looking: Failure to investigate fully business of the seller is rather common. The problems are (a) the seller may exaggerate the worth of intangible assets (brand image, technical know how, patents and copyrights and so on) (b) The accounting reports may be deftly windows dressed and (c) the buyer may not be able to assess the hidden problems and contingent liabilities or may simply brush them aside because of its infatuation with the target company. Veterans in this game strongly argue that the negotiating parties must searchingly examine the other sides motivations.

Overpaying: In a competitive bidding situation, the nave ones tend to bid more. Often the highest bidder is one who overestimates value out of ignorance. Though the merges as the winner happens to be in a way the unfortunate winner. This is referred to as the winners curse hypothesis. As Copeland et al say In the heat of deal, the acquirer may find it all too easy to bid up the price beyond the limits of a reasonable valuation. Remember the winners curse if you are the winner in a bidding war, why did your competitors drop out?

Page | 52

Failing to integrate well: Even the best strategy can be ruined by poor implementation. A precondition for the success of an acquisition is the proper post-acquisition integration of two different organizations. This is a complex task, which may not be handled well.

Page | 53

MANAGING AN ACQUISITIONS PROGRAM

As the chances of failure in an acquisition are high, it should be planned carefully. It pays to develop a disciplined acquisition program consisting of the following steps: 1. Manage the pre-acquisition phase 2. Screen candidates 3. Evaluate the remaining candidates 4. Determine the mode of acquisition Page | 54

5. Negotiate and consummate the deal 6. Manage the post-acquisition Step 1: Manage the pre acquisition Phase A good starting point for the mergers and acquisition program is to do a through valuation of your own company. This will enable you to understand well companys strengths and weakness and deepen your insights into the structure of your industry. (it will also help you in identifying ways and means of enhancing the value of your firm so that you can minimize the chances of yourself becoming a potential acquisition candidate). Armed with this knowledge you can do brain storming that will through up worthwhile acquisition ideas. Look for opportunities that strengthen or leverage the core business or provide functional economies of scale or result transfer of skill or technology. Of course the entire exercise of identifying acquisition targets must be kept very confidential. Should be market come to know of a proposed takeover, the price of target will rise and perhaps jeopardize the deal itself.

Step 2: Screen Candidates The ideas generated in the brainstorming sessions and the suggestions received from various quarters (merchant bankers, consultants planner and so on) will have to be filtered. Use screening criteria that make sense in your companys situation. For example you may eliminate companies that are: Too large (market capitalization of equity in excess of Rs100crore )or Too small (revenues less than Rs10crore ) or Page | 55

Engaged in a totally unrelated activity or Commanding a high price earnings multiple (in excess of 25 ) or Not export oriented (exports account for less than 20 percent of the turnover) or Not amenable to acquisition (existing management is not inclined to relinquish control)

Step 3: Evaluation must cover in great detail the following aspects

Operations, plant facilities, distribution network, sales personnel and finances (including hidden and contingent liabilities). Pay special attention to the quality of management. Experienced, competent, and dedicated management is a scarce resource. When a company is acquired, the quality of its management is as, if not more, important as the rest of its assets. Value each candidate as realistically range between 20 percent and 60 percent of the pre acquisition market value, formulate a clear and coherent strategy that will enable you to earn the premium you will most probably have to pay.

Step 4: Determine the Mode of Acquisition

As discussed earlier, the three major modes of acquisition are merger, purchase of assets, and takeover. In addition, one may look at leasing a facility or entering into a management contract. Through these do not tantamount to acquisition, they give the right to use and manage a complex of assets at a much lesser cost and commitment. They may eventually lead to acquisition. The choice of the mode of acquisition is guided by the regulations governing them, the time frame the acquirer has in mind, the resources the acquirer wishes to deploy, the degree of control the acquirer wants to exercise, and the extent to which the acquirer is willing to assume contingent and hidden liabilities. Page | 56

Step 5: Negotiate and Consummate the Deal

For successful negotiation you should know how much is the value of the acquisition candidate to you, to the present owner, and to the potential acquirers. While negotiating the deal remembers the following advice of Copeland et al Your objective should be to pay one dollar more than the value to the next highest bidder, and an amount that is less than the value of you. This implies that you should identify not only the synergies that you would derive but also what other acquirers may obtain. Further, you should assess the financial condition of the existing owners and others potential acquirers. Negotiation requires considerable skill. As Copeland at al says: Negotiation is an art. You should choose your negotiating team carefully. The best number crunches are usually not the best negotiators. Know the financial condition of the other side. Know the ownership structure of the target company. And develop your bidding strategies in advance. In general, acquirers gain a toehold in the target company by buying up to 10 percent of its stock somewhat stealthily in the open market or through privately negotiated deals. Once the percent limit is reached, SEBI guidelines require disclosure, which almost invariably leads to a run-up in the price. Thus the relatively lower cost of pre announcement purchase helps in reducing the average cost of acquisition.

Step 6: Manage the post-acquisition

Generally after the acquisition, the new controlling group tends to be much more ambitious and is inclined to assume a higher degree of risk. It seeks to (a) quicken the pace of action in an otherwise staid organization, (b) encourage a proactive, rather than a reactive, stance toward external developments, and (c) emphasize achievement over adherence to organizational procedures. The changes sought to be introduced by the new controlling group are likely to challenge deepseated values, beliefs, styles, traditions, and practices. This may induce a sense of insecurity and Page | 57

discomfort- and even repugnance and hostility-in some quarters. Such reactions arise partly because they genuinely believe that the objectives, strategies, values and style of the new controlling group may not sub serve the interest of the organization. Many competent professional managers believe that managing a complex multi-technology enterprise requires a cultures and set of values which may be alien to the new group. Hence it depends upon the new group to make adjustments in their values and styles and introduces changes, which are worked out co-operatively. Mutual trust and confidence should be the bedlock for introducing changes meant to galvanize the enterprise to reach greater heights of achievement.

In this context, two basic guidelines should be borne in mind:

Anticipate and solve problems early: The path of acquisition is strewn with problems. They may arise on account of differences in administrative procedures, accounting systems, and production methods and standards. More important, they stem from reaction of people affected by the merger. The merging firms, obsessed by the merger passion, may cavalierly brush aside such to be made to think through the implications of the merger, anticipate problems that may Rockwell, Jr., a veteran of mergers: the more thorns we extract at the outset, the less chance of infection later on.

Treat people with dignity and concern: Making a merger work says Willard F Rockwell, Jr., is the art of taking over a company without overtaking it. While acquiring a company, treat people-management, employees, creditors, suppliers, customers-with dignity and concern. Effort should be made to rock the boat as little as possible. Try to retain the management with minimal interference, assure employees about their future with the organization, and maintain relations with suppliers, customers, and others. If some changes are envisaged, disseminate information Page | 58

effectively. Clarity is the most potent antidote against morbid imagination. When people are informed clearly about how their interests will be affected in the new setup, they imagine less and their apprehensions dissolve.

Mergers & Acquisitions: Accounting

Amalgamation is a special type of transaction which involves the sale or purchase of the entire business of a company and not merely sale of some assets. All over the world the accounting for amalgamations is done on the basis of specific Accounting Standards issued for this purpose. Accounting Standard 14 issued by the Institute of Chartered Accountants of India and International Accounting Standard 22 deal with the accounting treatment for amalgamations. Considering the special and extraordinary features of the accounting for amalgamations, I have discussed all the aspects related to the Annual Accounts of companies such as accounting treatment, disclosure requirements, Notice to shareholders, Auditors Report, Directors Report and Notes to Accounts.

Page | 59

Methods of Accounting Accounting Standards (AS) International Accounting Standards (IAS) Disclosures in Accounting Statements Notices Director's Report Auditor's Report Notes Of Accounts ACCOUNTING STANDARDS (AS) Although the accounting treatment for amalgamations is covered by Accounting Standard 14, the knowledge of some other accounting standards is also essential for the proper accounting of transactions arising from an amalgamation. Following are the AS | AS 1 | AS 2 | AS 3 | AS 6 | AS 7 | AS 9 | AS 11 | AS 13 | AS 14 | AS 16 |

NOTICES An amalgamation has to approved by the Shareholders of the Transferor and Transferee companies. The Transferor and Transferee Company have to convene separate meetings of their Shareholders for taking their consent to the Scheme of Amalgamation. DIRECTOR'S REPORT The perusal of the Directors Report in the Annual Accounts of companies gives us an idea of the management's thinking on various issues. AUDITOR'S REPORT The comments made by the Auditors on the accounting treatment given to the transactions arising out of an amalgamation is an important piece of information for the shareholders, Page | 60

creditors, customers, analysts, government authorities and other concerned persons as any amalgamation directly affects their financial interests.. NOTES TO ACCOUNTS The Notes to Accounts throw light on the accounting treatment given in the Annual Accounts.

METHODS OF ACCOUNTING There are two methods of accounting depending upon the method of amalgamation Amalgamation in the nature of merger Pooling of Interest Method

Amalgamation in the nature of purchase - Purchase Method. Pooling of interest method Under this method, the assets, liabilities and reserves (whether capital, revenue or arising on revaluation) of the Transferor Company are recorded at their existing carrying amount and in the same form as at the date of amalgamation. The balance to the Profit & Loss Account of the Page | 61

Transferor Company is aggregated with the corresponding balance of the Transferee Company or transferred to the General Reserves, if any. If, at the time of amalgamation, the Transferor Company and Transferee Company have conflicting accounting policies, a uniform set of accounting policies should be adopted following the amalgamation. The effect of change in accounting policies on the financial statements should be reported in accordance with AS 5. The difference between the amount recorded as share capital issued (plus additional consideration in the form of cash or other assets) and the amount of share capital of the Transferor Company should be adjusted in reserves. Thus goodwill or capital reserve does not arise in this case. The salient features of this method are briefly given as under: Applicable for merger amalgamation Total incorporation of final figures through journal Adjustments through reserves only No amalgamation adjustment a/c is required

Purchase method Under this method, assets and liabilities of the Transferor Company are incorporated at their existing carrying amounts or, alternatively, the consideration should be allocated to individual assets and liabilities on the basis of their fair value on the date of amalgamation. The reserves (whether capital or revenue or arising on revaluation) of the transferor company, other than the statutory reserves, should not be included in the financial statement of the transferee company except as stated in paragraph 5.4 Any excess of the amount of the consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognized in the transferee companys financial statements as goodwill arising on amalgamation. If the amount of consideration is lower than the value of net assets acquired, the difference is treated as Capital Reserve. The goodwill arising on amalgamation should be Page | 62

amortised on a systematic basis over its useful life. The amortisation period should not exceed 5 years unless a somewhat longer period can be justified. Where the requirements of the relevant statute for recording the statutory reserves in the books of the transferee company are complied with, statutory reserves of the transferor company should be recorded in the financial statements of the transferee company. The corresponding debit should be given to a suitable account head (e.g. Amalgamation Adjustment A/c) which should be disclosed as a part of Miscellaneous expenditure or other similar category in the balance sheet. When the identity of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account should be reversed. Implications of purchase method i. Large capital base of the company in case of purchase method of accounting. ii. Assets are reflected at fair market value iii. Higher depreciation charge and amortisation of goodwill, which will result into dent in future profit. Profit will not be heavily inflated. Thus, in short the main features are as under: applicable for purchase amalgamation partial incorporation of final figures adjustment through goodwill or capital reserves Amalgamation adjustment account for statutory reserves required.

Difference between Pooling of Interest Method and Purchase Method

Page | 63

The essential difference between Pooling of Interest Method and Purchase Method is that carry forward of the revenue reserves of the merged company is not permitted in the latter method. Thus, the benefits of the reserves of the merged entity cannot be enjoyed by the shareholders. Under the Purchase Method these reserves which have been presumably built over time and comprise shareholders own funds, are either transferred to the capital reserve account or to the goodwill account, as the case may be. Even where these reserves are transferred to a goodwill account, the same is adjusted against the profits of the amalgamated entity. Where it is converted into capital reserve of the company, it cannot be utilised to pay dividend and the same is adjusted with either some capital gain, or loss made by the company. In both cases, real worth of these reserves is lost to the shareholders. The method of accounting is relevant only for Transferee Company for incorporating the assets and liabilities and not for the Transferor Company.

Authorities Involved
There are number of authorities and persons involved as required by the statute and specialized nature of activity to be carried out. The tasks categorized in stages like framing, sanctioning and implementation of the scheme of amalgamation. Some of these authorities and persons are listed below: Judiciary High Court of the State where Registered Offices of Companies involved in merger are situated Page | 64

Government Registrar of Companies Official Liquidators Regional Director - Company Law Board Central Government Authorities under respective statutes whose permission /approval is required in the course of merger Professionals Chartered Accountants Company Secretaries Merchant Banker Advocates Counselors Venture capitalists Financial institutions

Consideration
The consideration is given to the transferor company or to its shareholders. The discharge of purchase consideration has to be planned carefully as the financial and tax implications of each mode of discharge are different. Hence, the consideration to be given in the transaction of M&As is an issue of strategic consideration. The consideration can be in the form of

Page | 65

Shares Equity Preference shares ( with and without voting rights) Debentures Cash Distribution of assets of Transferee Company Takeover of liabilities of Transferor company

If the consideration is paid in such a manner that shareholders holding 90% of the shares in the transferor company become the shareholders of the transferee company, then the requirements of all the Indian laws and Accounting Standards are satisfied.

Costs involved
Proper structuring of a merger transaction can lead to substantial savings in costs like stamp duty, income tax etc. The various costs that have to be incurred to complete a merger are : Administrative expenses Expenses relating to holding the Extraordinary General Meeting including printing & posting of notices, Advertisement Expenses, Page | 66

Individual notices for hearing of petition - printing & posting. Legal Expenses Filing fees Drafting the schemes of amalgamation Auditors' Expenses Advocates fees Duties and taxes Stamp Duty Income tax for the Transferor Company and its shareholders Click for Stamp Duty Calculation Loss of concessions Income tax deductions, concessions etc. Sales tax benefits Excise duty concessions such as SSI Exemptions, CENVAT etc.

Documentation
1. Documents for Internal Use 2. Documents for statutory requirement Documents for statutory requirement

Page | 67

Scheme of Amalgamation The Scheme of Amalgamation is basically a contract between two companies and the basis of the whole restructuring process. The scheme has to be submitted to all authorities with other documents required. A Scheme normally contains the following clauses: Definition clause Definitions of Transferor and Transferee Company, Appointed date, Effective date, Undertaking etc. Date Clause giving: operative date of the scheme provisions for Transferor Company's staff, workmen and Share Capital clause giving details of share capital of both the companies. Clause giving details of assets and liabilities getting transferred Consideration to be discharged & Exchange Ratio Clause giving details of obligations /liabilities under Contracts, Deeds, Pending Legal proceedings Treatment of reserves in the books of Transferee Company Restrictions on Transferor Company to do business until the Effective

Bonds, Trade marks & other instruments getting transferred

employees and terms of their employment in Transferee Company Scheme should provide for continuity of service of employees of Transferor Company and terms should not be less favorable than their existing terms of employment Clauses giving : Expenses incurred to be borne by which Company Any other details required to be disclosed with the scheme. Page | 68

Some special information relating to the scheme. Application All the companies involved are required to make application to The High Court to obtain directions for holding various meetings of shareholders & creditors or dispensation thereof for approval of the scheme. The copy of the Application is given under Form 33. Contents of the Application

Names of the transferor/transferee company Names of Directors Share capital-Authorised, Issued and Paid up Address of Registered Office Date of incorporation Date of commencement of business Latest Audited Balance Sheet Scheme of arrangement with creditors Copy of scheme of Amalgamation (Annexure) Prayer for holding meetings of shareholders and creditors Draft an

Application Format of Application

Court Order on Application

Page | 69

The High Court to which application is made for seeking permission to file the petition passes an order either allowing or rejecting the application. The contents of the order are as follows: Object clause to contain amalgamation as one of the objectives Scheme approved by the Board of Directors & advertisement of the same Prayer has to be made for the transfer of asset ( specific asset) Inform court of the consideration of transfer Confirmations required to be taken considering the interests of both the Prayer for dispensation of meeting if confirmation for secured/unsecured

to be given

shareholders & the members creditors has already been taken (This is compulsory in case of Transferor Company. The Transferee Company may do it only to keep its creditors informed about the merger.) Conveying the meeting of different class of shareholders Decide upon the time, place, chairperson of the meeting Notice to be given regarding publication of notices in two languages. One

in English & the other in a vernacular language & also in the Govt. Gazette. Petition After complying with various directions issued by the Honourable High Court, companies are required to make petition to the court, and after the scheme is approved by all of the above parties, the company is required to file petition to the Court. This petition is in form no 40. The contents of the petition are as follows: Appointed Date Registered Office Page | 70

Date of incorporation Share Capital - Authorised, Issued and Paid up Objects of the Petitioner company Details of shareholders and creditors meetings held Prayer for sanctioning the scheme Copy of Memorandum and Articles of Association of Transferor and Copy of Audited Accounts of Transferor and Transferee companies Scheme of amalgamation Copy of Chairman's Report

Transferee companies

Valuation Report General Content of Valuation Report Purpose of the report Sources of information Scope and limitations Assumptions Company Profile i. Background ii. Business Profile iii. Registered Office iv. Authorised, issued ad subscribed capital v. Management Strengths and weakness vi. Shareholding pattern Approach and methodology for valuation Computation under different methods Final Value Page | 71

Document required by various parties

For the High Court I. With Application II. With Petition I. With Application Application ( Summons for directions in Form No. 33) Director's Affidavit ( Form No 34 ) Vakalatnama Memorandum of registered office address Copy of M.O.A & A.O.A ( both companies ) Balance sheet & Profit & Loss Account of Both Companies Scheme of Amalgamation Confirmations of creditors (Secured & Unsecured) in the case of Summons for direction to convene the meeting of the members of the Minutes of order Copy of Petition ( Form 40 ) Vakalatnama Copy of Balance Sheet & Profit & Loss A/c Memorandum of registered office address Copy of M.O.A & A.O.A ( both companies ) Scheme of Amalgamation with explanatory statement u/s 393 Valuation Report for exchange ratio Chairman's Report ( Form 39 ) Directors Affidavit Copy of Court order on Application ( Form 35 ) Page | 72

Transferor Company may also be enclosed if possible to avoid their meetings transferor & transferee companies to approve of the scheme( form no 35 ) II. With Petition

For Shareholders Notice convening the meeting of the Equity Shareholders mentioning the following (to be signed by the chairman appointed by The Court) by giving 21 days clear notice & under certificate of posting under the authority of the Chairman appointed by the Court specifying therein date ,time and place of meeting and name of person appointed as chairman or alternate chairman by The Court To Attach form of Proxy Copy of Scheme of Amalgamation Explanatory statements pursuant to Sec 393 of the Companies Act, 1956

including details of shareholding of directors of both the companies in both the companies For Regional Director - Company Law Board (official Liquidator) Notice of petition with all enclosures to be served on official Liquidator All details required to be furnished are as required by the questionnaire by Transferor Company and on ROC by both cos issued upon the company. Some of them are as under Whether the company has complied with all the formalities as Whether all details in regards to documentation have been filed

required to be done under the law. with the R.O.C.

For Registrar of Companies I. Company Law Board II. After Merger is approved Page | 73

I.

Company Law Board R.O.C. R.O.C. looks into whether all requirements are complied and if not satisfied it can file affidavit in the court stating its objectives Copy of application and petition should be filed with R.O.C. Whether all details in regards to documentation have been filed with the

II.

After Merger is approved

Copy of Order sanctioned by the Hon'ble High Court. Scheme of Amalgamation. Changed M.O.A & A.O.A ( Amend through Scheme ) Any other document which has to be filed as per the requirements of the also being done at the same time then procedure for the same etc. Companies Act, 1956.i.e. if, say, change of name or change in object clause is

Page | 74

SOURCES OF FINANCE
A. Internal Accruals In India to finance mergers and acquisitions the most commonly resorted way is Internal Accruals. Most of the time the decision of M&A is based upon the ability of the company to finance the transaction with its internal accruals. A reason, which can be ascribed to it, is that the commercial banks, financial institutions and other commercial lenders are not very keen on financing M&As. However the scenario is changing due to successful implementation of some genuine and focused restructuring, the robustly perused disinvestment program of government coinciding with the regime of decreasing interest rate and huge cash reserves of banks. Suppliers of credit financing are now changing their attitude towards M&A transaction and more than willing to finance.
A.

Initial Public Offer (IPO) To finance the M&A transaction through public offer is to cashing in on the public standing of the company. It should be noted that this is a time consuming process and could be successful if planned well in advance considering the time required for completion of the issue. Though equity is risk free finance the success of the offer depends upon the reputation of the company among the investors and the perception about the transaction.

A. Issuance of Other Instruments M&A transaction could also be financed by way of issuance of debt instruments. It varies from the equity as it does not result in dilution of stake and also the investors know the rate of returns while the company knows the amount of liability.

Page | 75

B. Debt Financing Perhaps the best way to demonstrate the "merits of an acquisition" is to seek maximum financing from ones bankers. This can be the acid test. If the bankers have a major stake in either company, you may rest assured the transaction will get their attention. Assuming the bankers are astute, their appraisal of the transaction can be valuable to the purchaser. If the acquisition is based on "fair value" and is "truly synergistic", the transaction "is a salable commodity" to most prudent bankers. Further, there is available wide gamut of instruments so that company can choose the most suitable. These include, revolving credits, term loans, bridge loans, private placement, operating and capital leases, securities credits among others. B. Leveraged Buyouts (LBOs) A leveraged buyout refers to a transaction of acquisition, which has been heavily financed by debt. This technique is used when the company to be acquired has got good cash surpluses, which can be used to retire the debt or have a low gearing i.e. a lower proportion of debt in the total financial resources. It may also be used where the acquiring company plans to sell some non-core businesses of the target company and to raise cash to pay the debt. In the international scenario a large pool of funds for M&A comes from Leveraged Buyouts (LBO), however it is not legally permitted in India. B. Seller Financing If Seller financing is available on reasonable terms, that may provide the most convenient basis for financing or partial financing. If on the other hand the terms are less reasonable than those obtainable from the buyers bankers, convenience may be too costly.
C.

Special Purpose Vehicle (SPV) Special Purpose Vehicle (SPV) referees to the establishment of an exclusive mechanism for carrying out the transaction of M&A. The SPV mechanism is not a single standard way of carrying out the transaction, perhaps it is expert-defined way through which Page | 76

maximum strategic issues are handled innovatively by creating suitable SPV. The strategic issues obviously include the issue of financing of the transaction.

A FINANCIAL CYCLE: The Debt-Equity Clock & Financing of M&A

Corporate price is an outcome of the capital structure of the transaction as expressed by interests most stake (Senior and subordinated debt holders, top management and key equity holders) and what their recourse to the project is times of distress (i.e. the terms of repayment, or who will be paid back first). In this context, one can delineate a cycle of causalities triggering or dissuading Mergers and Acquisitions. Equity takeovers are more likely to occur: When money is made cheap and abundant to counteract recession When the stock prices of the acquirer are high relative to target stock prices, thus encouraging stock-for-stock exchange. A simple causality model can be formulated: the so called Debt/Equity Clock. When the equity proportion of the total capital structure is high then it is time to borrow. When the debt proportion is high, then it is time to issue equity. The probable D/E ratio for any one period is described by the rotating diameter of the clock, which ticks according to shifting or gearing in interest rates and rates of inflation and to a lesser extent to changes in volume of money supply. As stock prices rise, corporate debt-equity ratio shift in such a way that firms are able to support more debt financing, at least ostensible. More debt financing at lower interest rates is made available, as low inflation encourages Central Banks to lower interest rates which in turn expand liquidity. As bank lending capacity is allowed to expand, cheap debt financing is available for acquisition of assets bearing price that have been suppressed by a previous recession induced by earlier inflation fighting. Internal cash flows are also made free for acquisitions. The Page | 77

attractiveness of acquiring is thus regulated or determined by slippage factor or the negative correlation between price increases for depreciating old assets and the inflated prices of new assets. Importantly, as stock prices rise, the acquirers D/E ratio decreases and the company is capable of supporting more debt financing. At the same time, creative financing maneuvers with convertible, stripped and covenants feature also increases as the corporate finance departments of large banks vie for M&A corporate clients. These departments also become more involved in servicing the strategic planning and other ancillary requirements of their corporate clients. The D/E clock ticks forward into the hours of debt. What the D/E clock does not reveal is declining financial health. This occurs when new stock issues are used to service debt. Merton miller asserts that markets are self correcting mechanism. If corporations issue more debt than public wants, than interest rates change to discourage it. The bond ratings are downgraded because of leverage increases. The debt/equity clock also does not reveal shifts in the levels of internal cash flows and internal financing. An Icarus Trap (debt degradation) is created by the facile extensions of loans to acquirers so that the overall quality of debt is downgraded in such a way that borrowing is more improbable thereafter (i.e. D /E clock is accelerated).

Page | 78

PROCEDURE
A merger has to be implemented according to the procedure prescribed by the various rules and regulations. A thorough knowledge of the procedural formalities is essential for the timely completion of a merger.The procedure for merger is given below: Prepare scheme of amalgamation The scheme of amalgamation has to be prepared giving all the proper clauses and subclauses wherever necessary. Board meeting Call for board meeting of both the transferor & transferee co's. This involves the following Notice & agenda of meeting accompanied by approval of the scheme, ratio, & person authorized to make representations in the high court with relation to the scheme. "Effective date " of the above coming into existence to be clearly mentioned. After board meeting the following matters to be looked into In case of co's listed on the stock exchange, notification of the same should be made. Press release of the above for members Seek consent of financial institutions/banks/trustees to debenture holders

Application to the high court Both the companies has to be made accompanied by the following documents

Form 33 : summons for direction to convene the meeting. Form 34 : affidavit Form 35: order by judge is summons convening meeting of members of transferor & transferee COs to approve the scheme. Appointment of chairman Fix quorum for the meeting Page | 79

Extraordinary general meeting Following procedure to be adopted Notices to be sent in the name of the chairman Draft to be approved by the registrar of the high court Place where the meeting to be held Documents to be sent are statement u/s 393, copy of scheme, & a proxy form.

If advertised in the newspaper, the same should be in a manner, as the court may direct not less than 21 days before the meeting. At the meeting Question & answer session. Decision by poll - vote by majority Chairman of the meetings to submit a report in form 39 within time limit fixed by the judge (i.e. within seven days of the meeting ) After the scheme is approved by the members the co's must within seven days of the filing of report by the chairman, present a petition to the court for confirmation of scheme. Copy to be served upon the regional director, company law board. Petition All correspondences to be addressed to the regional director, CLB Court fixes date for hearing of petition Official liquidator himself scrutinizes the books of the transferor co or nominates a chartered accountant from his panel & accordingly reports on his findings. Registrar of companies After the court obtains the inspection report it orders for dissolution from the date specified in the order.

Page | 80

It is important that a certified copy of the approved scheme, memorandum and articles of association along with the courts order be filed with the registrar of companies within 14 days from the date of which the order has been passed( Form 41 )

Budgeting M&As
Restructuring being a strategic decision of management has to be evaluated considering the benefits envisaged and the costs involved in the restructuring planned for. The benefits are broadly distinguished as financial and other benefits. The other benefits may include creating entry barriers for competitors, use inorganic mode of growth as an entry strategy, concentration on core-competence etc. However, most of the time benefits are envisaged in financial terms, which are also the easiest way to evaluate the rightness or otherwise of the decision. In other words the decision of M&A is like any other decision of capital budgeting. The capital budgeting decisions are generally evaluated by applying the conventional methods like, payback period, discounted cash flow technique, internal rate of returns etc., however the said techniques can not be applied as it is to evaluate the M&A decisions mainly due to involvement of both qualitative and quantitative factors. Well, the fundamentals of capital budgeting can be applied to evaluate the M&A decisions if the evaluator can identify the all factors of costs and benefits and express them in monitory terms. The complexity, however, relates to visualize all costs and benefits as well as time of their accrual. We tried to identify some general costs and benefits involved in M&As. As the costs and benefits occurring in different restructuring are inherently different we have distinguished them accordingly. Further more the costs and benefits also vary case-to-case basis; the factors we have consider are general and mode of their evaluation is indicative.

Page | 81

THE INTERMEDIARY PROFESSIONALS INVOLVED IN M&A ACTIVITY AND THEIR ROLE

Management Consultants Management consultants are to be appointed to work out best possible solution from the gamut of options available. Consultants can guide solutions as being dedicated firms better knowledge management and awareness of trends, external factors. Corporate Lawyers / Solicitors The lawyers complete the execution and procedural formalities by providing the following services: Drafting of various documents like scheme, application, petition, replying to objections if any raised by persons effected by or interested in the scheme Representation before the honorable High Court and complying with various court rules Working out other legal matters like labour, stamp duty, title of properties, rights of creditors. Merchant Bankers Merchant bankers are mainly related to placement of shares and relevant SEBI compliances. Their role pertains to: Advising on take-over and acquisitions Comply with various SEBI regulations Comply with various stock exchange and listing requirements Work on and negotiate deal Page | 82

 Carry out valuation To structure a deal Professionals like: Charted Accountants Chartered Accountants are usually involved in the initial stages of the deal. The assignments relating to the mode of restructuring, investment required, structuring the transaction etc. are usually carried out by Chartered Accountants. They are also involved in conducting due diligence and valuating enterprises to advice on purchase consideration. The services rendered by a Chartered Accountant include: Structuring the deal considering financial, tax and promoters angle Negotiating the deal He does financial, legal structural and tax due delegance Working out tax benefits, possible tax concessions, tax breaks to be lost etc. Raising finance for any acquisition or take over deal, also advise on the nature in which finance to be raised Company Secretaries As all the mergers are under Companies Act, 1956, the company secretary lays a very important role, which is: Organizing various meetings as may be stipulated by the law in the course of any merger or acquisition and taking care of procedures for meeting called for of various class of shareholders like equity or preference, creditors both secured and unsecured, Preparing notices to be published in news papers for meetings and final hearings of petition, Liaison with lawyers and counsels for the mergers or with merchant bankers in case of acquisitions and with labour consultants and taking care of all issues out of the same. Bankers, financial institutions, venture capitalists The role mainly is to fund the deal. Besides: Work as a advisor/consultants for restructuring of capital and debt Helping in findings out appropriate partners Page | 83

 Raise or provide seed capital

Raise money by way of IPO or right issue.

Page | 84

Merger of Reliance Petroleum Limited with Reliance Industries Limited

After seven years, this is the second merger of Reliance Petroleum Limited (RPL) with Reliance Industries Ltd. (RIL). RIL and RPL directors finally gave the green signal to merge the two companies on March 2, 2009. The merger would be finalized within April 1, 2009. Under the merger deal, shareholders of RPL would get one RIL share for 16 RPL shares. RIL would issue 692 million new shares to shareholders worth $1.69 billion. This will increase RILs equity base from Rs 15.74 billion to Rs. 16.43 million. After this merger, promoter holdings in RIL would decrease by 2% to 47% and RIL would also cancel its holdings in RPL and no treasury stock will be created. INTRODUCTION OF MERGED ENTITIES Reliance Industries Limited Reliance Industries Limited (RIL) is India's largest private sector company on all major financial parameters with a turnover of Rs. 1,39,269 crore (US$ 34.7 billion), cash profit of Rs. 25,205 crore (US$ 6.3 billion), net profit (excluding exceptional income) of Rs. 15,261 crore (US$ 3.8 billion) and net worth of Rs. 81,449 crore (US$ 20.3 billion) as of March 31, 2008. RIL is the first private sector company from India to feature in the Fortune Global 500 list of 'World's Largest Corporations' and ranks 103rd amongst the world's Top 200 companies in terms of profits. RIL is amongst the 30 fastest climbers ranked by Fortune. RIL features in the Forbes Global list of the world's 400 best big companies and in the FT Global 500 list of the world's largest companies. RIL ranks amongst the 'Worlds 25 Most Innovative Companies' as per a list compiled by the US financial publication-Business Week in collaboration with the Boston Consulting Group. Reliance Petroleum Limited Reliance Petroleum Limited (RPL) is a subsidiary of Reliance Industries Limited. RPL is setting up a greenfield petroleum refinery and polypropylene plant in a Special Economic Zone at Jamnagar in Gujarat. With an annual crude processing capacity of 580,000 barrels per stream day (BPSD), RPL will be the sixth largest refinery in the world.

Page | 85

This merger follows Reliance Industries philosophy of creating enduring value for all our stakeholders. It is a significant step in our goal to be among the largest global corporations.
Merger Details: Under the terms of the proposed merger: The exchange ratio recommended by both boards is 1 (one) share of RIL for every 16 (sixteen) shares of RPL which means that RPL shareholders will receive 1 (one) share of RIL for every 16 (sixteen) RPL shares held by them. RIL will issue 6.92 crore new shares, thereby increasing its equity capital to Rs 1,643 crore.
The appointed date of merger of RPL with RIL is 1st April 2008.

RIL will cancel its holding in RPL.

Based on the recommended merger ratio, RIL will issue 6.92 crore new equity shares to

the existing shareholders of RPL. This will result in a 4.4% increase in equity base from Rs 1,574 crore to Rs 1,643 crore. Consequently, the promoter holding in RIL will reduce from 49.0% to 47.0%. Advisors to the merger are as follows: Valuation Advisors : Ernst & Young Pvt. Ltd. and Morgan Stanley India Co. Pvt. Ltd. JM Financial Consultants Pvt. Ltd. and Kotak Mahindra Capital Co Ltd. DSP Merrill Lynch Ltd. (for RIL) and Citigroup Global Markets India Pvt. Ltd (for RPL) Amarchand & Mangaldas & Suresh A. Shroff & Co. PriceWaterhouse and Coopers Pvt. Ltd.

Transaction Advisors : Fairness Opinion Legal Advisor Tax Advisor : : :

OUTCOME OF MERGER
Creates one-fourth of the worlds total complex refining capacity Becomes the world's single-largest refining hub Becomes the world's 17th largest refining company Becomes the worlds fifth largest polypropylene producer

Page | 86

Derives synergies from combined operations crude sourcing, product placement, supply chain optimization Acquires flexibility in operations planning, higher utilisation of combined cash flows

Highlights of this Merger:

Merger is Indias largest ever RPL shareholders to receive 1 (one) share of RIL for every 16 (sixteen) shares of RPL RILs holding in RPL to be cancelled. No fresh treasury stock created RIL to be among the top 10 private sector refining companies globally RIL to become the worlds largest producer of Ultra Clean Fuels at single location Merger to unlock greater efficiency from scale and synergies Merger to be EPS accretive RIL to have 3.7 million shareholders The merged entity is likely to report a cash profit of Rs 29,197 crore in FY10, compared to an estimated Rs 20,757 crore RIL. The entire value of the current RIL-RPL merger deal is about Rs. 85 billion. In the countrys history, it is the 10th biggest merger deal and the first billion dollar deal of 2009. Last year, only five such billion-dollar merger deals took place and in 2007 four deals worth more than $1.7 billion took place between Indian companies. Create a behemoth with a total refining capacity of 1.24 million barrels of crude a day, which is a quarter of the world's total complex refining capacity.

The merger will result in RIL:

Operating two of the worlds largest, most complex refineries Owning 1.24 million barrels per day (MBPD) of crude processing capacity, the largest refining capacity at any single location in the world Emerging as the worlds 5th largest producer of Polypropylene. Will become a top company in respect of Market Capitalization.
Top 10 in market capitalisation Company Market cap* Reliance with RPL 2,33,382.30 NTPC 1,51,881.37 ONGC 1,47,829.38 Bharti Airtel 1,20,850.81 Infosys 70,509.16 MMTC 70,297.75 ITC 69,028.86 Bhel 68,351.68 SBI 65,207.89 NMDC 60,085.03

Page | 87

Figures involved in the Merger Market capital (RIL) Market capital (RPL) Total : Rs. 1,990.9327 billion : Rs. 342.9 billion : Rs. 2333.8327 billion

Number of shares RPL Reliance stake (75.38%) Non promoter stake (24.62%) No of RPL shares for 1 RIL share No of RIL shares to be issued to non promoter Number of shares RIL(1) Shares entitled to RPL shareholders(2) Treasury shares cancelled(3) Total shares post merger(1+2-3) Treasury shares existing 12.7%(4) Equity net of treasury earlier(1-4) Equity net of treasury post RPL merger Existing promoter stake Post merger promoter stake Promoter dilution

: : : : : : : : : : : 339.21 16.00 157.30 164.22 19.98 137.32

450.00 110.79

6.92 28.13 21.20

: : :

2.07%

144.25 49.03% 46.96%

The RIL-RPL combined capital would exceed the No.2 Company in the Sensex by more than Rs. 800 billion. Number of shareholders (RIL) Number of shareholders (RPL) : 2,222,947 : 2,147,699

* All figures in Crores unless specified # As on date 2nd March, 2009 Page | 88

Merger Benefits and Synergies: The merger will unlock significant operational and financial synergies that exist between RIL and RPL. It creates a platform for value-enhancing growth and reinforces RILs position as an integrated global energy company. The merger will enhance value for shareholders of both companies. The merger is EPS accretive for RIL. Through this merger, RIL consolidates a world-class, complex refinery with minimal residual project risk, while complementing RILs product range. There will be further gains from reduced operating costs arising from synergies of a combined operation. The merger is expected to reduce the earnings volatility for RPL shareholders and allows them to participate in the full energy value chain of RIL. The merger certainly offers immense synergies. Reliance Petroleum's Jamnagar refinery supplies a critical raw material, naphtha, to Reliance Industries for the cracker unit at its Hazira complex. This quantity is estimated to be around 2.5 million tonnes per annum. Besides this, the Jamnagar refinery also supplies another 1.5 million tonnes per annum of aromatic naphtha for the paraxylene/PTA plants in the Jamnagar complex. In addition to this, the refinery also supplies about 1.8 million tonnes per annum of C3 (a refinery output) stream for extraction of propylene, which is used for the production of polypropylene at the Jamnagar complex of Reliance Industries. With the merger, all these transactions would turn into inter-divisional transfers from inter-company transfers as they are now. The Reasons for Merger: The classic strategy of the group has been to execute and commission large, capital-intensive projects on the balance-sheet of new companies and, once the project is implemented or operations stabilise, merge them with RIL. The advantage in this is that RIL is protected from the risks of project execution while its balance-sheet is insulated from taking on large equity or debt burden. For years, Reliance group has been following this pattern. First it creates a new company to expand its business and then integrates it with the parent company after the new company starts to make profit. This practice is used to protect RIL shareholders from the risk of failure. This is the fourth time Reliance parent company acquired its subsidiary. Earlier, Reliance Textiles Ltd, Reliance Petrochemicals Ltd, Reliance Polyethylene Ltd and Reliance Polypropylene Ltd. were created as separate entities. Page | 89

A strategic move: I believe it is a strategic move by the promoters of RIL to enjoy economies of scale, capitalize cash flow of RPL, source finance for E&P business and minimize cost of capital. The basic intention of raising finance for RPL as a separate SEZ unit was to transfer risks of commencing a Brownfield refinery. Now that the refinery is ready to commence RIL is planning to combine it with its own entity. Dividend Distribution Tax: The merged entity will save on dividend distribution tax paid by RPL on distributing dividends at 17.99% to its shareholders.

Competitive Advantage: The RPL refinery will be one of the most complex refineries in the world with a Nelson Complexity Index of 14.0 (measure of secondary refining capacity relative to its primary distillation capacity). This will enable the refinery to process various 'challenged crude' varieties to produce superior quality products that meet stringent specifications and command price premiums. This is a significant competitive advantage in the current industry landscape of increasingly heavy and sour new crude finds.

Back in 2002, the merger of the original RPL was backdated to be effective from April 1, 2001 and speculation then was that this was done to mask the under-performance of RIL by combining the cash-rich RPL business with itself. Going by this logic, chances are high that the current merger will also be with retrospective effect from April 1, 2008.

The merger of the original RPL in 2002 benefited RIL in terms of a large depreciation cover along with other tax benefits as RPL supplied a couple of products to RIL. In the present instance, the merged RIL will benefit tremendously from the tax benefits that the new RPL enjoys by virtue of its location in a special economic zone (SEZ).

For investors of RPL, even though it may be seem to be a losing proposition, in the current market situation, it would make sense for them to convert their holding into a larger company which has a wide variety of businesses rather than invest in a company with a single income stream.

The merged entity would be an EPS accretive merger. The reason they said this is, the equity dilution was only 4.4% of RILs expanded equity and they expect RPL to Page | 90

contribute more than that and that would mean that it would be accretive to the RIL share holders and RIL equity from that perspective.

The merger will diversify the risk of minority shareholders of RPL by shifting from standalone refinery to an integrated unit like RIL. The downturn of the refining sector post global slowdown had increased risks for RPL as standalone unit. Merger with RIL would expose RPL shareholders towards relatively stable exploration business, integrated refining and petro chemical business and emerging retail business.

RIL will now be able to add a new, state-of-the-art refinery asset to its balance-sheet with just a tiny equity expansion. RIL holds 70.38 per cent of RPLs equity now; Chevron holds 5 per cent with the balance 24.62 per cent with the public.

RPL is currently operating its second refinery. The initiative to build this new refinery started in May 2006. In the IPO, it was listed as a separate public entity. More than Rs. 81 billion was raised through the IPO to build the latest RPL refinery.

Consolidation Benefits:

The combined refining capacity of RIL (33 million tonnes) and RPL (29 million tonnes) is 62 million tonnes per year. All the oil products refined in these refineries, including petrol, diesel and liquefied petroleum gas (LPG), will be exported to markets in Europe and the US.

Merging the two companies will give RIL greater muscle in negotiating crude prices. It will be able to export the refined products on a proportionate basis and also have the added advantage of either selling the balance products in the domestic market or the export market, depending on where it is able to get a good price

Integrated energy companies have higher valuations as against the standalone refiners. The merger would unlock synergies in crude sourcing and product placement and lead to greater flexibility in operations planning, RILs chief financial officer Alok Agarwal said, adding that it would reduce operating costs.

Page | 91

RILs 33 million tonne per annum (mtpa) refinery at Jamnagar together with RPL's newly built 29 mtpa export oriented refinery would make it the largest refining company in India. It would displace state-owned Indian Oil Corporation (IOC) with 50.7 mtpa refining capacity.

Previously, Chevron was the 13th largest oil refining company with a refining capacity of more than 61 million tonnes per year. Now, it has been removed by the new RIL. The capacity of the merged RIL would also replace the state-run Indian Oil Corporation which was ranked 18th on the list worlds largest oil refineries with an annual capacity of refining 50.7 million tonnes.

Post 2002 merger, RIL gained a production capacity of 33 million tonnes per year. Currently, RPL has only the second refinery that started to operate in December 2008. RIL has all the assets and RPL has only the second refinery. After the second merger, Reliance Industries would become the thirteenth largest refining company in the world with 25% of the worlds crude refining capacity.

Currently, RIL is an EOU refinery and RPL is a Special Economic Zone (SEZ) refinery. RIL has a refining capacity of 660,000-barrels per day. The second refinery of RPL was commissioned on December 25, 2008. It was supposed to make its first dispatch in January 2009. The refinery will be fully commissioned by April 2009. It has a refining capacity of 580,000 barrels per day. After becoming fully commissioned, RPL would become the sixth largest oil-refining unit in the world. The combined production capacity (1.24 Million barrels/day) would make Jamnagar one of largest oil producing hubs of the world, beating Paraguana refinery in Venezuela.

In the list of world's largest refining companies, RIL will become the 17th largest firm after the merger. The list is led by Exxon Mobil with a massive 5.6 million barrels per day (mbpd), followed by Shell with 4.6 mbpd and Sinopecs 3.8 mbpd refining capacities.

The merger would result in RIL operating two of the worlds largest, most complex refineries; emerging as the worlds fifth largest producer of polypropylene; and becoming the worlds largest producer of ultra clean fuels at a single location. Page | 92

 The merger would help source crude oil for the integrated refinery complex and aid marketing of fuels such as gasoline and diesel globally at a time when demand was slumping. Standalone net debt-to-equity will rise 14 percentage points to 41% but there is little change at the consolidated level (around 43%). Consolidated return ratios in FY1011(estimated) will rise by 20-60 basis points while FY09 book value adjusted for revaluation and depreciation changes will reduce 2.3% to Rs 711/share.

Financial Benefits:
Cost saving: The RPL refinery has been set up at a capital cost of less than US$10,000 per barrel per day (BPD). This is substantially lower than the capital cost being incurred by other refineries globally. According to International Energy Agency (IEA), capital cost for new refinery projects is in excess of US$20,000 per barrel per day. Positive Free Cash Flow (FCF): RPL has incurred Rs 27,000 crores towards commissioning its Jamnagar refinery project in Gujarat. This refinery is now undergoing trials and has made revenues of $300 million in early product deliveries. The plant is expected to be fully operational soon thus generating positive cash flow for the company. This cash flow will act as a ready source of financing for RIL's investment in other projects or/and other business verticals.

The merger came as a solution for idle cash accruals of RPL post commencement of refinery. Doom in global demand and global capacity additions made further upgradation of new refinery unlikely. The cash generated is unlikely to be idle post merger since it could be deployed in exploration and retail business of the combined entity of RIL. Cash generation out of RPL could be used to deploy in exploration business in long term rather than seeking support from external borrowing. Similarly short term working capital requirements for RPL could be fulfilled by surplus cash in balance sheet of RIL. Thus we believe this merger could reduce cost of capital of the combined entity.

The biggest benefit for RIL seems to be using additional cash flows generated by RPL which can be used to step up investment and expansion of its oil & gas exploration business. RPL will start generating cash. A smart thing is to merge RPL with RIL, which can use the RPL cash flows to fund its expansion

RPL is expected to report a profit of about Rs 4,500 crore in 2009-10 while RIL expects to post a profit of more than Rs 19,000 crore in 2009-10. Page | 93

 To get SEZ benefits, the refinery project had to be housed in a separate company. The refinery would not have been eligible for the tremendous benefits from its SEZ status had it been just a project on RILs balance-sheet.

The merger simplified the groups corporate structure, giving RIL access to an additional 30 per cent of cash flow generation from RPL that it did not currently have, for a small cash consideration. Yet another factor motivating the merger may be the continuity of tax benefit accruing from a special economic zone for another five years. Merged entity will enjoy tax benefits because of its location in a special economic zone (SEZ). Such benefits include income-tax exemption for 100 per cent of profits derived from exports in the first five years of operations of the RPL refinery and 50 per cent of profits for the next five years. Besides, the new refinery will not have to pay excise duty and service tax for products and services, respectively, sourced from within India. It will also be exempt from stamp duties on land transactions and loan agreements.

The RIL refinery enjoyed a ten-year tax holiday, sales tax deferment and other tax rebates, all of which ended a couple of years back when it sought an export-oriented unit. But the Jamnagar refinery is set to lose its EoU status, entailing tax incentives, next month as the term expires.

I-T exemption for 100 % of profits derived from exports in the first 5 years of operations of the RPL refinery. I-T exemption for 50% of profits for the next five years.

Operational Synergies:

The RPL refinery is located adjacent to the existing refinery and petrochemicals complex of RIL, thus offering significant synergies. Through exchange of best practices and leveraging mutual strengths, RPL will gain significantly in the areas of operational efficiency, logistics, cost effective crude sourcing, optimised product placement and risk management. Also, transfer pricing cost will be eliminated and tax position will remain neutral. Page | 94

 Merger can improve the product slate of RIL with more focus towards light and middle distillates. It could also facilitate access to various quality of crude oil globally thus minimizing cost. The product mix would be flexible enough to optimize production to earn better refining margins.

The merger is to take effect from April 1, 2008 then the advantage would be that according to various court decisions they would be able to set off the expenses which have been incurred including pre-operative expenses against the profits of RIL. The Supreme Court has held in several cases that where two different divisions belong to the same company, if there is unity of management and control and financial interdependence then they are deemed to be in same business. Therefore, they would be entitled to set off the expenses, even the pre-operative expenses, against the profit of the existing unit. So that could be another reason for this merger.

Additionally RIL will save on transfer pricing on use of KG Basin gas and other related products between the two companies. The company will also save on taxes to be paid arising out of the transfer resulting in savings of about $1-1.5 for every barrel of crude processed, analysts said. The savings will occur at a time when refining margins are under pressure because of a slump in oil prices.

Through this merger, RIL consolidated a complex refinery with minimal residual project risk, while complementing RILs product range. There would be further gains from reduced operating cost arising from synergies of combined operations

RIL would have almost one-fourth of the worlds complex refining capacity, which refers to the ability to blend crude of varying quality, including those of very low quality. Further RIL, particularly the RPL unit, would have the capability to supply petroleum products meeting California environmental standards, believed to be the worlds toughest. Page | 95

 Further, it would have the capability to supply ultra-low sulphur diesel to western markets. Post merger, RILs capability to process many varieties of crude would increase substantially.

The larger size will also enable efficient sourcing of crude oil from any country of the world and greater flexibility in operation.

Negative sides: After the merger, people would not be able to know the true performance of RPL and RIL in the last quarter of the last fiscal year. Many industry experts believe that the merger is a way to cover up the potential loss. I have already mentioned about the coincidental similarities in the dates of the two mergers but there is also another similarity. The first RIL-RPL merger took place in the first quarter of 2002. In the last three quarters of 2001, RILs petrochemical business did not do so well. The companys revenue margin fell down significantly. After seven years, the history repeats. Due to economic meltdown, earnings of RIL has came down in the last quarter of 2008; the first significant decline in the last 12 quarters. In the first quarter of fiscal year 2009-2010, the price of oil came down to $12-$15. The first merger also enabled RIL to receive tax benefits. Since the second RPL refinery is situated at SEZ, RIL would also get huge tax benefits. This includes 100% tax exemption for profits generated in the first five years of operations of the RPL refinery. The new RPL refinery would not have to pay excise duty and service tax for products and services that are procured from inside India. The new RPL refinery will also be exempted from paying stamp duties on land transactions and loan agreements. Another major negative side of the merger is that the RIL shareholders will be benefited from the exchange not RPL shareholders. In 2002, the exchange ratio was one RIL share for eleven RPL shares. Currently, the exchange ratio is one RIL share for sixteen RPL shares.

Conclusion: The merger will increase RILs size and output. However, all the countries are suffering from economic crisis. At this point in time, not many countries would buy oil. Moreover, too much production would bring down the oil price and start building inventory. Reliance Industry officials will have to carefully study these issues.

Page | 96

Page | 97

FINDINGS
FIGURES OF INDIAN M & As IN PAST FEW YEARS: Year 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 Factors driving consolidation Category 1 The parent company amalgamates sick subsidiaries with the company in Seek credible rehabilitation. Category 2 There were companies seeking to consolidate the core business activities of The group firms which will boost their balance sheet and networth to Mount strategic takeovers. Category 3 Promoters proposing to merge investment subsidiaries with the parent to Streamline the shareholding in the group companies. Major consolidation in Sectors (Rank wise) 1 2 Pharmaceutical Auto ancillaries Page | 98 No. of Mergers & Acquisitions 6092 7000 8057 9250 10600 Transactions Value $ 536 Billion $ 720 Billion $ 970 Billion $1250 Billion $1700 Billion

3 4 5 6 7

Steel Entertainment Finance Software Cement

Overall Merger and Acquisition activities:

Before the RIL-RPL merger, the biggest merger deal was Tata Telecoms tower subsidiary acquiring 49% stake in Quippo Telecom for $533 million. The biggest take over deal was the Corus take over by Tata Steels. Corus was one of the largest steel companies in Europe. The deal was worth $12.2 billion.

The second largest was Hutch Essar take over by British telecom giant Vodafone for $10 billion.

Other such major billion dollar mergers are: Aditya Birla group taking over Hindalcos Novellis- $6 billion. Daiichi taking over Ranbaxy- $4.5 billion. Oil and Natural Gas Corporation taking over Imperial Energy- $2.8 billion. NTT DoCoMo taking over Tata Tele- $2.7 billion. HDFC Bank taking over Centurion Bank of Punjab -$2.4 billion. Tata Motors taking over Jaguar Land Rover-$2.3 billion. Suzlon taking over German RE Power- $1.7 billion. The highest deal value in India of $378 million was Hewlett Packards buy out of Digital GlobalSoft, followed by the combined entitys acquisition of HP Indias software business. Page | 99

A study shows that in the first half of 2003, M&A activities concentrated mainly in chemicals with 36% followed by telecom at 17%, logistics at 14% and oil and gas at 13%. Globally, 8073 deals were struck, out of which $557 billion worth transactions were closed this half.

Four key factors that shall drive the corporate M&A market in the near term

Corporations are less risk adverse. Acquirers are now more willing to assume some risk in order to do transactions that build growth. This is specially true of companies in sectors least hit by the most recent downturn primarily those in consumer focused industries like food, retail, consumer electronics, homebuilders and building supplies. The boardroom wants growth. Sentiment in the corporate boardroom in beginning to shift from corporate governance and risk management issues to examining new ways to grow and gain competitive advantage. Also, acquisitions present an attractive option, since organic growth only gets you so far.

Private equity worries about interest rates and deal pricing Higher interest rates combined with strong pricing will make it difficult for private equity to generate traditional returns on conventional investments. At the same time, a sharp rise in interest rates could shut the window on IPO transactions, severely limiting private equity options for exiting mature investments. Cross border activity will remain slow Both European and North American companies have been focusing on organic growth and lower risk domestic transactions, and will continue to do so for the rest of the year. While a lot of direct investment is flowing into Asia particularly into China companies are Page | 100

lowering their risk profiles through strategic alliances, rather than acquisitions. Thats unlikely to change any time in the near term.

PRE AND POST MERGER SUCCESS FACTOR

All mergers and acquisition are not successful. Majority of them fail due to various reasons and the most common reasons ascribed are:
1.

The clash of corporate culture; and companies from outside the sector or because of bad timings or unperceived sector obsolescence.

2. Acquisition price being too high. Perhaps because of high P/E ratios pushed by

DRUCKER has suggested 5 commandments for successful acquisitions: 1. Acquirer must contribute something to the acquired company. 2. a common core of unity is required 3. acquirer must respect the business of acquired company 4. Within a year or so, acquiring company must be able to provide top management to the acquired company. 5. Within the first year of merger, managements in both companies should receive promotions across the entities. Patricia L Anslinger and Thomas E. COPELAND OF Mc KINSEY & Company based on their research work (1996) find that successful corporate and financial buyers use 7 key operating principles. These principles affect almost every stage of acquisition process, from the identification of candidates to post merger management. We may have a look on them:
1.

Insist on innovative Operating Strategies: since the early 1980s high profile
leveraged buyouts such as Duracell International, Uniroyal and RJR Nabisco have Page | 101

attracted widespread attention. Much of fanfare has focused on negotiation tactics, savvy financial structures and prices. Little attention however, has been given to the other 2200 plus buyouts that have occurred in the time period and to the fundamental changes in operating practices that have generated positive returns for many of those companies. Although many observes believe that LBO firms uncover hidden gems in the marketplace, more often they merely focus on improving operations. For instance, Sunglass Hut Internationals acquisition by Desai Capital illustrate that the largest source of value creation in successful acquisitions comes from operating performances, not from financial leverage, market timing or industry selection. After acquiring Sunglass Hut, Desai Capital concentrated on growing revenues rapidly and created a new strategy to do so. Since the initial acquisitions in 1988, Sunglass Hut has grown from 150 stores to 800 and has racked upon impressive 37% in annual returns by acquiring, in its turn, smaller stores and implementing a new store format. The company replaced clerks who knew little about sunglasses with trained customer-service specialists, introduced an extensive product assortment instead of relying on two or three popular lines, and instituted a low price regional strategy.

2.

Dont do the deal if you cant find leader: As per survey 65% of respondents
believed that managerial talent is the single most important instrument for creating value. Acquirers ensure that they have the right managers in 3 ways:

They evaluate current executives They look for managers within the organization who are not yet in leadership positions They hire outside industry experts 85% of acquirers kept reacquisition managers in their positions. In other instances, leaders were found within the company who had not got chance to carry out their vision. When acquirers look for outside industry experts, they tend to find outstanding persons at large corporations. For instance Stephen Rabinowitz as President of General Electric lighting and later Vice-president of Allied Signal Braking Systems was hired to turn General Cable Page | 102

Corporation around 1994 after Wassall acquired it. Within 18 months of acquisition they turnaround was achieved. However, when financial targets are not met, successful acquirers do not hesitate to replace managers. Financial buyers impose taller hurdles for management than corporate acquirers who are reluctant to replace managers so as not to disrupt a Companys culture.

3.

Offer Big Incentive to Top Level Executives: Finding and motivating the right
managers is so successful acquirers offer Senior executives significant ownership stakes (usually 10% to 20%). If all goes well, these managers can become millionaires. Why offer such big carrots? B. Charles Amiss, a Clayton, Dubilier & Rice partner explains, Managers are more committed to doing the difficult work restructuring, growing and otherwise fixing on acquisition when some or all of their Net Worth in on line. Creating annual returns in excess of 35%, as these managers must, requires a great deal of commitment and effort. Incentives are especially important when new managers are recruited into a Company. In that case, substantial inside potential often is needed to woo outstanding executives away from comfortable and relatively low-risk jobs. In most of the cases, executives are obliged to purchase enough stock so that their shareholding constitute a large part of their net worth. These holdings are often referred to as pain equity a way to ensure that managers cannot afford to fail. Thermo Electron Corporation has created 40 millionaires in this way. However, Equity stakes are not the only motivating factors. Other forms of rewards such as public recognition and future advancements (within large corporate parents) are also needed to make the difficulties and uncertainties worthwhile to managers.

4. Link Compensation to Changes in Cash Flows: Besides issuing equity

upfront successful acquirers motivate executives with carefully designed First, it is reward for current efforts a symbol of recognition, a pat on the back. Second, and more important, it provides a foundation a common vocabulary for communication between managers and owners so that managers will keep cash flows in mind when making daily operating decisions. Page | 103 compensation schemes tied to change in cash flow. This serves 2 objectives:

5. Push the pace of Change: When it comes to identifying opportunities, time is

critical, says Charlie Peters, Vice-president of Development and Technology at Emerson Electric. Most of the actions required to create value are taken in the first two years after the deal is closed. Both public and acquires agree that pushing that pace of change disciplines managers and sharpen priorities. It gives people in the organization a sense of urgency and challenge. The acquisition should immediately follow fast-paced changes whether in procurement practices, inventory programs, sales-force alignment, reduction in costs or brand strategy etc.

6. Foster Dynamic Relationship Among owners, Managers and Board: One

critical difference between successful acquirers and most corporations is the level of interaction among managers, directors and shareholders. Rather than erect a multi-tier, bureaucratic structure, successful acquirers create flat organizations. Other successful acquirers keep acquired business separate from other operating units, even if that policy precludes exploitation of potential synergies. They believe that giving acquired business a high degree of autonomy is essential. More than 80% of successful acquirers allow top level managers to have the final say in operational decisions as long as financial targets are met. The rest 20% make major operational decisions jointly. Successful acquirers also carefully structure the Board of Directors of acquired company. The recast board typically consists of one to three managers from the acquired company, one or two industry experts and 2 or 3 representative of ownership group. Financial buyers generally use outsiders on their boards to provide an independent point of view.

7. Hire the Best Acquirers: One often overlooked aspect of acquisitions is selecting
the deal makers. These individuals make judgments that are often critical to success or failure of transaction. Here also the difference between the financial buyers and corporate acquirers may lead to some differences in value creation. Page | 104

Financial buyers hire highly skilled professionals with outstanding professional and educational credentials. Corporate acquirers pursue a different strategy for building their acquisition teams. They tend to hire people with less deal making experience, preferring to develop their own talent. Corporate investment professionals generally possess fewer advanced degrees and come from less prestigious schools. They are also significantly less then their counterparts at financial firms. Due to this reasons, generally corporate acquirers loose something by not hiring the same type of people as financial buyers do.

Trends in Mergers
India
Indian industries are undergoing structural changes in the post-liberalisation period. Competitive pressures are high not only due to deregulation but also due to globalisation. As a part of the restructuring program, the first merger wave in India is underway in the second half of the 1990s. The total number of M&A deals in 1999-2000 was estimated, it 765, which is 162 per cent higher than the total number of estimated deals in the previous year (292). What is noticeable during 1999-2000 is the rise in the number of, approvals in each month of the year (average of around 64), as compared to the months in the previous year (average number 24). During the current fiscal year up to September, the total number of deals was relatively lower at 194, at decline of 44.1 per cent as compared to the total number of deals during the corresponding period in the previous year. Along with the rise in the number of M&A deals, the amount involved in such deals has risen over time. During 1999-2000, M&As were worth Rs.36, 963 crore, which was 130 per cent higher than the amount of M&A deals in the previous year (Rs. 16,070 crore). During the current year up to September, the deals were made worth Rs. 10,261 crore, which is 36.9 per cent lower than the amount of deals made during the corresponding period of the previous year. The total number of mergers in 1999-2000 was 193, which is 141.3 per cent higher than the total number of mergers in 1998-99 from the limited available data, it appears that mergers account for around one fourth of total M&A deals in India. It implies that takeovers or Page | 105

acquisitions are the dominant feature of M&A activity in India, similar to the trend in most of the developed countries.

International
There have been at least four distinct merger waves in the corporate history of the USA. The exact timing of these episodes were: 1897-1902, 1926-29, 1965-69 and 1988-90 (Boff &, Herman, 1989).

During the first wave, eight industries, namely, primary metals, food products, petroleum products, chemicals, transport equipment, fabricated metal products, machinery and bituminous coal experienced the greatest merger activity (Nelson, 1959). The bulk of the M&As, were horizontal among these industries. The second wave is characterised by vertical M&As. The industries, which witnessed largest merger activity, were primary metals, petroleum products, food products, chemicals and transport equipments - leading to integration of manufacturing, suppliers and distributors. While the first merger wave is treated as "merger for monopoly", the second merger wave is termed as "merger for oligopoly In the third wave both horizontal and vertical merger were regulated through anti trust laws, there was a surge of conglomerate M&As offers a mixed picture with hostile takeovers and leveraged buyouts (LBOs) dominating the composition of M&As. One of the notable features in the fourth wave of M&As is that they assumed an international dimension. The current wave of M&As (since the mid- 1990s) may be treated as the fifth wave. According to the World Investment Report 2000 (UN 2000). M&As completed worldwide have grown over the past two decades (1980, 1999) at an annual average rate of 42 per cent and reached $ 2.3 trillion in 1999 in relation to GDP, total M&As in the world were hardly 0.3 percent in 1980, which rose to 2 percent in 1990 and further to 8 percent in 1999. During this period, crossPage | 106

border M&As hovered around 25 percent in terms of both value and the number of total M&As transactions. Cross-border M&As have assumed significance since the late 1980s mainly because of gradual liberalisation and globalisation. Although the bulk of the cross-border M&As continue to be concentrated among the developed countries, they have emerged as an important mode of FDI flows to the developing countries. The total value of cross-border M&As increased from USS 74.5 billion in 1987 to US $ 720.1 billion in 1999.

A LONG- RUN MACRO ECONOMIC VIEW OF M&A WAVES

Phase shift causalities can be schematized:

T -> PG -> S -> BC -> R transfer -> LW + CS -> M&A

(T) = technology, the sum of products in a product group (PG) = products groups, or derivatives of new technologies (S) (R) = sector, the sum of product groups = resource or production factor values which are eventually affected by the impact of changing technology indirectly causing migration and other locations shifts (LW) = long wave stir (CS) = corporate strategies/structures to adapt to chasing factor value shifts Companies merge, acquire or divest (M&As), accordingly. New technologies drive out old thrusting in new product groups (or clusters) begetting and obliterating entire sectors at a Page | 107 (BC) = the business cycle, the sum of sectors

time. Factor values adjust accordingly. Labour migrates and resources are transferred, dumped or revalued. Companies change expansion strategies and corporate structure to forces of technological growth. Firms divest of divisions that have become obsolete, redundant or no longer related to core activity. They acquire companies that lead them more quickly and less dearly down the strategically designated profitability path. If factor shifts include changes in capital costs, then the financial motivations for corporate change are even greater.

Page | 108

CONCLUSION
Growth is an essential ingredient to the success and vitality of enterprise. All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. No firm is regarded safe from a takeover possibility. On the more positive side M&As may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require M&As at some stage in the firms development. Many have argued that mergers increase value and efficiency and move resources to their highest and the best uses, thereby increasing stakeholders value. To opt for M&A is a complex affair, especially in terms of the technicalities involved. We have to bring out the factors, which the management may have to look into before going for merger or acquisition. Considerable amount of brainstorming would be required by the managements to reach to a conclusion. E.g. a due diligence would clearly identifies the status of the company in respect of the financial position along with the networth and ending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed deal. As in the case of direct taxes, the central government has provided various innovative provisions to encourage M&A, state government also needs to take similar steps under indirect taxes like Sales Tax, Stamp Duty etc.

Page | 109

In India, SEBI regulations are the reference point in most deals. On has to know the rules and how SEBI would react to be successful as regards his motives for any M&A deals. There are still some loopholes and ambiguity in the revised SEBI Code. There is still lot of clearance to be obtained in M&A deals e.g. Company Law, MRTP, High Courts, Merchant Bankers etc. which should be lessened if not altogether removed. There is good scope for M&A activity particularly in B group share companies due to their low capitalization and higher replacement cost of their assets. The M&A may not be linked to any particular industry segment now as in all segment M&A are taking place.

Page | 110

BIBLIOGRAPHY

1. Megalomania Mergers & Mergers : John Roberts 2. Mergers, Restructuring & Corporate Control: J. Fred Weston, K. Wong S Chung, Susan E Hoag 3. The Anatomy of a Merger : Alexander Post 4. Takeover, Acquisition & Mergers : O.P. Kharbandu 5. Journals: Business World, Business India, Financial Analyst 6. Financial Dailies: ET and Business Standard.

Page | 111