Mergers and Acquisitions

DECLARATION
I, Deepa Karira of Smt Chandibai Himatmal Mansukhani College of TYBMS (Semester V) hereby declare that I have completed the project on FINANCIAL IMPACT OF MERGERS AND ACQUISITIONS in academic year of 2004-2005. The information provided is true and original to the best of my knowledge.
Students signature (Karira Deepa)
Mergers and Acquisitions
CERTIFICATE
I, Kunhal Jadhwani here by certify that Karira Deepa of Smt. Chandibai Himathmal Mansukhani College has done project on FINANCIAL IMPACT OF MERGERS AND ACQUISITION under my guidance for the year 2004-2005. The information permitted is true and original to best of my knowledge.
KUNHAL JADHWANI PROJECT CO-ORDINATOR
DINESH PANJWANI PRINCIPAL SMT. C.H.M COLLEGE ULHASNAGAR
Index
Topics Executive summary Objectives of mergers and Acquisitions Methodology Introduction to Mergers and Acquisitions Principle behind mergers and Acquisitions Distinction between mergers and Acquisitions Synergy How, Why, When do mergers happen? Why M& A Fail? Obstacles of making it work Problems encountered during mergers Dangers of mergers Types of Mergers Reasons for M&A Role of M&A bankers Tools used to assess targeting company Synergy-the premium for potential success Effect on stock price involved in mergers Steps in merger transaction Financial benefits of mergers Financial considerations in M&As M&A scene in India in 2004 M&A scene in India in 2005 Current examples of mergers acquiring benefits to a great extent Conclusion Bibliography Page no. 1-2 3 4 5 6 7 8-9 10-11 12-13 14 15-16 17 18-19 20-23 24 25-26 27-28 29 30-32 33-41 42-51 52-57 58-59 60-74 75 76
Acknowledgement
I have an immense pleasure in presenting this report .I would like to thank Mr. Kunal Jadhwani, my Project co-ordinator whose guidance and support helped me to complete this project. I would also like to thank all others who indirectly helped me in this project. Above all my sincere thanks to THE UNIVERSITY OF MUMBAI for giving consideration to this project.
EXECUTIVE SUMMARY
Mergers and acquisitions provide access to markets, distribution network, new technology and patent rights. "Most companies that are in business today are themselves the product of mergers. The only difference being the rationale for mergers has changed." The objective in the 1970s was the reduction of risks through diversification. In the 1980s, the merger mania was driven by a desire for vertical integration. In the 1990s, the urge to merge is aimed at helping companies concentrate on core businesses and achieving market leadership.
Mergers and Acquisitions Merger in simple words means (1) Acquisition in which the buyer absorbs all assets and liabilities. (2) More generally, any combination of two companies. The firm's activity in this respect is called M&A (Merger and Acquisition) The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies-- that's the reasoning behind M&A. There are various different types of mergers such as horizontal merger, vertical merger and Conglomerate merger. Merchant bankers play very important role in mergers. They act as intermediators between two companies. Mergers take place at certain time and during certain conditions. There are various different reasons for mergers and acquisitions. Mergers must be taking place for growth, or for obtaining economies of scale and many such other reasons must be there for a company thinking of going for mergers or Acquisitions. There are various different tools used for assessing targeting companies. There are various steps involved in the process of merger. The merger also affects the stock price of companies to a great extent.
The merging companies acquire many financial benefits as such of Merging and diversification, risk reduction and lower borrowing costs, unused debt capacity, tax losses and unused capital allowances. Mergers also put a great impact on the profitability of shareholders. M&A in India have shown a tremendous increase in recent years. Examples of mergers that took place recently and covered in this project are mergers between ICICI
Mergers and Acquisitions bank and Bank of Madura, bank of Punjab and Centurion bank, BPCL and Kochi refineries, Matrix and Strides.
OBJECTIVES OF THE PROJECT

To get a brief idea about merger & acquisitions. To know why do companies merge. To know how companies merge with each other To know the advantages and disadvantages of mergers 6
Mergers and Acquisitions To know the financial benefits of mergers and acquisitions.
METHODOLOGY There are two methods to collect the data- primary and secondary.
Technique applied: This project contains information collected from secondary sources i.e. books, newspapers and magazines.
MERGERS &ACQUISITIONS
Increased global competition, regulatory changes, fast-changing technology, need for faster growth and excess industry capacity have fuelled mergers and acquisitions in recent times
INTRODUCTION TO MERGER AND ACQUISITIONS: MERGER:

Combining of two or more companies generally by offering stockholders of one company Securities in acquiring company in exchange for surrender of their stock. Basically when two companies become one and this decision is usually mutual between both firms.
ACQUISITION:
When one company purchases a majority interest in acquired. Acquisition can either be friendly or unfriendly. A friendly acquisition occurs when target firm agreed the same agreement from target firm.
PRINCIPLE BEHIND MERGERS& ACQUISITIONS

One plus one makes three: this equation is the special alchemy of a merger or acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies-- that's the reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone
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DISTINCTION BETWEEN MERGER & ACQUISITION

Although they are often uttered in the same breath and used as though they were synonymous, the terms "merger" and "acquisition mean slightly different things. When a company takes over another one and clearly becomes the new owner, the purchase is called an acquisition, and new company stock is issued in its place. From a legal point of view, the target company ceases to exist and the buyer "swallows the business, and stock of the buyer continues to be traded. In the pure sense of the term, a merger happens when two firms, often about the same size, agree to go forward as a new single company rather than remain separately owned and operated. Simply allow the acquired firm to proclaim that the action is a merger of equals, even if its technically an acquisition. Being bought out often carries negative connotations. By using the term "merger," dealmakers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when this kind of action is more precisely referred to as a "merger of equals. "Both companies stocks are surrendered, and new company stock is issued in its place. In practice, however, actual mergers of equals don't happen very often. Often, one company will buy another and, as part of the deal 's terms, both CEOs agree that joining together in business is in the best interests of both their companies. But when the deal is unfriendly--that is, when the target company does not want to be purchased--it is always regarded as an acquisition. So, whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.
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SYNERGY
Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following: Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies--when placing larger orders, companies have a greater ability to negotiate price with their suppliers. Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can keep or develop a competitive edge. Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.
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That said, achieving synergy is easier said than done--it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes it works in Reverse. In many cases, one and one add up to less than two . Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the dealmakers. Where there is no value to be created, the CEO and investment bankers--who have much to gain from a successful M&A deal--will try to build up the image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price..
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HOW DO MERGERS HAPPEN?

Corporate mergers occur when two companies combine. In some cases both companies want to merge. This is called an Agreed merger. Another situation is where one company seeks to control another without its agreement. This is called a Hostile takeover. A company can offer either shares in its own company or cash to shareholders in order to persuade them to sell out. In a 'dawn raid' the acquiring company snaps up a substantial block of shares in the target company at the opening of the trading day - before the bid is known and speculation can push up the value of those shares.
WHY DO MERGERS HAPPEN?

There are many motivations for mergers. One reason is expansion: a larger, growing company may try to take over its smaller rivals in order to grow bigger. In some cases it is the smaller company that wants to expand, but is hampered by lack of capital. It seeks a larger partner who will put in the necessary investment. Other mergers seek to make cost-savings by integrating operations, sometimes on a world scale. And some mergers are defensive, responding to other mergers, which threaten the competitive position of a company.
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WHEN DO MERGERS HAPPEN?

Mergers tend to happen in waves. A stock market boom makes mergers much more attractive because it is relatively cheap to acquire other companies by paying for them in (high valued) shares. But falling share prices can also lead to a company being undervalued and hence an attractive acquisition. Some industries are forced into mergers by specific troubles facing that industry. Globalization and the regulatory environment also have a big impact on the likelihood of consolidation.
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WHY M&As CAN FAIL?

Its no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies, and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. Motivations behind mergers can be flawed and efficiencies from economies of scale may prove elusive. And the problems associated with trying to make merged companies work are all too concrete Flawed Intentions For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempts to imitate: somebody else has done a big merger, which prompts top executives to follow suit. A merger may often have more to do with glory seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later.
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On the other side of the coin, mergers can be driven by generalized fear Globalization, or the arrival of new technological developments, or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world.
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THE OBSTACLES OF MAKING IT WORK

Coping with a merger can make top managers spread their time too thinly, neglecting their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal. The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that people issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity. More insight into the failure of mergers is found in the highly acclaimed study from the global consultancy McKinsey. The study concludes that companies often focus too intently on cutting costs following mergers, while revenues and, ultimately, profits suffer. Merging companies can focus on integration and cost cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. But not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. But the promises made by dealmakers demand the careful scrutiny of investors. The success of mergers depends on how realistic the dealmakers are and how well they can integrate two companies together while maintaining day-to-day operations.
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PROBLEMS ENCOUNTERED DURING MERGERS:

problems encountered during amalgamation can be studied under the two heads:
The
1. Pre merger problems 2. Post-merger problems

1. Pre merger problems: These problems are as follows: (i)
Type of combination: The acquiring company has primarily

to decide whether it would like to have amalgamation or a merger or simply a takeover. The selection of the type of combination depends upon nature of business, size of the units, management philosophy, tax implications and other technical and legal considerations. A merger may be preferred to amalgamation if the acquiring company has a very high goodwill. Similarly the companies of the same size may prefer amalgamation to merger.
(ii)
Financial consideration: This refers to the amount to be

paid by the acquiring company to the acquired company. Its form has also to be determined, i.e., shares debentures and cash. The exchange ratio has to be fixed up. All these aspects are generally determined by the capital structure of the acquiring company.
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(iii)
Taxation aspects: The tax implications of the proposed

merger scheme have to be properly examined. The merger should not lead to increase in tax liability rather it should result in tax benefits to the merged company. It is, therefore, necessary that merger is done as per the requirements of the income tax act
2. Post merger problems: These problems are as follows: i. Duplication of functions, such as finance, marketing research and development has to be avoided. ii. The accounting methods, procedures and policies have to be made uniform for the amalgamated company. Particular care should be taken to see that uniformity is maintained in respect of accounting years, inventory valuation, fixed assets accounting, budgetary controlled techniques, costing, pricing, etc. iii. Registration of the merged company under proper laws has to be done for the purpose of sales tax, excise, etc. iv. All the creditors and customers have to be informed about the merger. v. Outstanding contracts in the name of the amalgamating companies have to be transferred to the amalgamated company. vi. Arrangement with bankers, appointments of auditors and solicitors have to be reviewed.
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Mergers and Acquisitions vii. Adequate care is taken to satisfy all conditions necessary for the amalgamation to be valid under the provisions of companies act, income-tax act, monopolies & restrictive trade practices act, etc.
DANGERS OF MERGERS:
Mergers involve the following dangers: 1. Elimination of healthy competition: Merger may involve absorption of small, efficient and growing units into a larger unit. Thus, it eliminates individual undertakings competent to offer stiff competition necessary for healthy growth of industrial units. 2. Concentration of economic power: It has already been stated above that all types of mergers have the inherent tendency of concentration of economic power. Monopolistic conditions may be created which are ultimately to the disadvantage of the consumers. 3. Adverse effect on national economy: Concentration of economic power, elimination of competition, etc., may ultimately result in deterioration in the performance of the merged undertakings. This is going to affect adversely the national economy. However, mergers are essential for the growth of the organization. Mergers, lead to economies of scale, maximum utilization of capacity, operating economies, mobilization of financial resources rehabilitation of sick units, reduction in cost, etc. the dangers of mergers are, therefore, more than off-set by advantages of mergers. However, every scheme of amalgamation or merger should be examined keeping in view its advantages and the dangers it would impose on the economy. The
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Mergers and Acquisitions scheme should be taken up only when it is to the advantage of economy in general and it is in public interest.
TYPES OF MERGERS
Mergers can be of following types: 1) Horizontal merger: This is joining of two or more companies in same area of business. Thus, in case of this merger, two or more companies which are producing essentially the same products or providing the same services or which are in direct competition with each other joined together. For example, two booksellers or two manufacturers of motorcycles may merge with each other. Such a merger will be horizontal merger. Such a merger results in economies of scale, operating economies and elimination of duplication of facilities. The horizontal merger reduces competition and number of companies in an industry. However, it also tends to create concentrate economic power. 2) Vertical merger: This is the joining of two or more companies involved in different stages of production or distribution of the same product or service. Thus in case of this merger, two or more companies which are engaged in the production of same goods or services but at different stages of production or routes join together. For example, a coal mining company and a railway company, which carries coal to different industrial units, may merge together. Such a merger will be termed as vertical merger.
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Mergers and Acquisitions The essential objective of such a merger is to ensure a source of supply required for production of goods or services or ensures a ready market for the goods or services produced. However, this merger may also lead to increase in concentration of economic power and consequential legal or social problems.
3) Conglomerate merger: This is joining of two or more companies whose business is not related with each other either vertically or horizontally. The companies involved in the merger may be manufacturing totally different products. Of course, there may be some common features between them such as same channel of distribution or technological area. For example: a company engaged in manufacturing activities may get itself merged with a company engaged in insurance business. The two businesses are totally different and, therefore such merger is termed as conglomerate merger. The basic objective behind this merger is the diversification of activities. Such a merger may also lead to concentration of economic power by virtue of controlling by the merged corporation different fields of business activities. 4) Preference for group structure: The above are the methods of effecting a combination between two, or indeed more companies. It appears that the majority of large business combinations make use of a group structure rather than a purchase of assets or net assets. Such a structure is advantageous in that separate companies enjoying limited liability are already in existence. It follows that names and associated goodwill, of the original companies are not lost and in addition, that it is not necessary to renegotiate contractual agreements. All sorts of other factors will be important in practice; some examples are the desire to retain staff, the impact of taxation and stamp duty and whether or not there is a remaining minority interest. A group structure also permits easy disinvestment by sale of one or more subsidiaries. 23
REASONS FOR MERGERS OR ACQUISITIONS

The following are the important reasons for mergers or acquisitions of firms: -
1. Increase in effective value:
The principal reason for these external
combinations is that the value of the company so formed by combining resources is greater than the sum of the independent values of the merged companies. For example: - if A Ltd. and B Ltd., merge and form a company C Ltd., the effective value of C Ltd. is expected to be greater than the sum of independent values of A Ltd. and B Ltd. symbolically it can be put as follows: V(C) > V (A) + V (B) Where V (C) = VALUE OF THE MERGED COMPANY V (A) = VALUE OF A Ltd. V (B) = VALUE OF B Ltd. Similarly in the case of acquisition, by acquiring the assets of Larsen and Turbo, Reliance industries have now the highest value of assets under its umbrella. This take-over has changed the Indian Corporate scene to a great extent.
2. Operating Economics: Combination of two or more companies results in a

number of operating economics. Duplicate facilities can be eliminated. Generally non-operations functions like Marketing, Accounting, Purchasing, computer resources and other similar operations can be consolidated and shared, leading to combining of strength of individual companies for optimized operations.
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3. Economies of scale: The amalgamated company can have larger volume of

operations as compared to the combined individual operations of the amalgamating companies. It can thus have economies of scale by having intensive utilization of production plants, distribution network, engineering services, researches and development facilities, etc. however such an advantage accrues only when the companies in the same line of business are combined, i.e., there is a horizontal merger. It may be noted that the amalgamated company can have economies of operations only up to a point beyond this point; increase in volume may cause more problems than remedy. The per unit average cost may start increasing rather than decreasing beyond this point, as shown in the following chart.
Average cost . Operations Optimum scale of operations
4. Tax implications: In several amalgamation schemes, tax implications play a

crucial role. A company with cumulative losses may have little prospects of taking advantage of carrying forward the losses and meeting them out of future profits and thus taking advantage of the tax benefits. However in case this company is merged with another profit making company, its losses can be set-off against the profits of profit making company resulting in substantial tax benefits to the amalgamated company.
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5. Elimination of competition: The combining of two or more companies under

the same name would result in elimination of competition between them. They would save in terms of advertising cost. This may probably benefit the customer, in terms of goods being available at lower prices.
6. Better financial planning: Mergers result in better financial planning and

control. For example: - a company having a long gestation period may merge itself with another company having short gestation period. As a result of this merger, the profits coming from the company having short gestation period can be used to improve the financial requirements of the company with long gestation period. Later, when the company with long gestation period starts giving profits, it will benefit the amalgamated company as a whole. Similarly the surplus funds of acquiring company may be more effectively utilized in the acquired company.
7. Growth: A company from its internal operations may not achieve the desired
rate of growth. A company may find that through external combination faster and balanced growth can be achieved. Growth by acquisition will also be cheaper and simpler in terms of cost and efforts involved as compared to internal expansion. This is because the need to introduce product line develops new market, acquire new production facilities and setting up a totally new administration is altogether avoided.
8. Stabilization through diversification: External combinations like merger,

amalgamation or acquisition, helps accompany in achieving stabilization in is earning by diversifying its scope of operations. A company experiencing wide economic fluctuations and cyclical phases in its earnings due to nature of its product or business may merge with another company, whose business cycle is different from its own.
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Mergers and Acquisitions This merger of companies with business cycles will bring consistent earnings to the business as a whole.
9. Dilution under FERA: A foreign company operating in India may merge with
an Indian company in order to meet the requirements of FERA for diluting its foreign shareholdings.
10. Backward/forward integration: The company, which does the assembly of

the products manufactured, by some other company may merge with that company for manufacturing and assembling the entire range of products under same roof. It may also merge with its main consumers. This would bring a better interaction between different functional areas, resulting in improved efficiency, reduced costs, effective control and reduction in prices for the companys products.
11. Personal reasons: The shareholders of a closely held company may desire that
another company that has established market for its shares acquire their company. This will also facilitate the valuation of their shareholders holdings for wealth tax purposes. Moreover, shareholders of such a company can also improve their liquidity position by selling some of their shares and diversifying their investments.
12. Economy necessity: The government may also direct the merger of two or more sick units into single unit to make them financially viable. Similarly, it may also require the merger of a sick unit with a healthy unit to ensure better utilization of resources, improving returns and better management. Rehabilitation of sick units may also become a social necessity since its closure may result in unemployment and other consequential problems. The reason listed above is not an exhaustive list of reasons for seeking external growth. Other factors like socio-economic conditions, economic, fiscal and trade 27
Mergers and Acquisitions policies of the government, statutes governing the company may induce, the mergers or acquisitions of companies for achieving in long term benefits to the company and its shareholders.
HOW DOES M&As BANKERS HELP COMPANIES TO MERGE?
The consultation experts for M&A are normally referred to as M&A bankers or executives. They work in the M&A department of Investment Banks, the financial services organization that chiefly cater to such demands of their corporate clients. Investment banks offer wide range of services to its clients. The services can be in different forms:
The investment bank approaches a prospective client with the suggestion to take over a company and expand its operations. The client comes to the investment bank and asks whether it should go for an M&A, in the first place.
The client recognizes the need to go in for M&A, but is not able to find a suitable partner. So the investment bank searches for a suitable partner, based on the profile of the client as well as its ideas and ambitions regarding growth. Either the investment bank or the client by itself would identify a company (say, X) for acquisition or merger. The M&A team would now go to the management of X representing the client, to convince X to sell out or merge with the client. The banker would also negotiate on behalf of the client to
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Mergers and Acquisitions determine the price to be paid, the mode of payment and other terms of the deal. (If X doesnt want to sell out, there might also be a case of hostile takeover bid)
TOOLS USED TO ASSESS THE TARGETING COMPANY

Investors in a company that is aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company as high as possible, while the buyer will try to get the lowest price possible. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but dealmakers employ a variety of other methods and tools when assessing a targeting company. Here are just a few of them:
Comparative Ratios The following are two examples of the many comparative
metrics on which acquirers may base their offers:
P/E (price-to-earnings) ratio With the use of this ratio, an acquirer makes an offer
as a multiple of the earnings the target company is producing. Looking at the P/E for all the stocks within the same industry group will give the acquirer good guidance for what the target's P/E multiple should be.
EV/Sales (price-to-sales) ratio With this ratio, the acquiring company makes an
offer as a multiple of the revenues, again, while being aware of the P/S ratio of other companies in the industry.
Replacement Cost: In a few cases, acquisitions are based on the cost of replacing the
target company. For simplicity's sake, suppose the value of a company is simply the sum
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Mergers and Acquisitions of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets--people and ideas--are hard to value and develop.
Discounted Cash Flow (DCF): A key valuation tool in M&A, discounted cash flow
analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (operating profit + depreciation + amortization of goodwill capital expenditures cash taxes - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method
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SYNERGY: THE PREMIUM FOR POTENTIAL SUCCESS

For the most part, acquirers nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy: a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy. Let's face it; it would be highly unlikely for rational owners to sell if they would benefit more by not selling. That means buyers will need to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their company's future prospects. For buyers, the premium represents part of the post-merger synergy they expect can be achieved. The following equation offers a good way to think about synergy and how to determine if a deal makes sense. The equation solves for the minimum required synergy:
In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergers, which we discuss in part five, often prevent the expected benefits from being fully achieved. Alas, the synergy promised by dealmakers might just fall short.
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What to Look For? It's hard for investors to know when a deal is worthwhile. The burden of proof should fall on the acquiring company. To find mergers that have a chance of success, investors should start by looking for some of these simple criteria:
A reasonable purchase price - A premium of, say, 10% above the market price seems within the bounds of level-headedness. A premium of 50%, on the other hand, requires synergy of stellar proportions for the deal to make sense. Stay away from companies that participate in such contests.
Cash transactions - Companies that pay in cash tend to be more careful when calculating bids, and valuations come closer to target. When stock is used as the currency for acquisition, discipline can go by the wayside.
Sensible appetite An acquirer should be targeting a company that is smaller and in businesses that the acquirer knows intimately. Synergy is hard to create from companies in disparate business areas. And, sadly, companies have a bad habit of biting off more than they can chew in mergers. Mergers are awfully hard to get right, so investors should look for acquirers with
a healthy grasp of reality
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EFFECT ON STOCK PRICE OF TWO COMPANIES INVOLVED IN MERGERS AND ACQUISITIONS

When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. In general, the acquiring company's stock will fall while the target companys stock will rise. (Remember, we are generalizing here - there can be exceptions to this rule.) The reason the target company's stock usually goes up is that the acquiring company typically has to pay a premium for the acquisition: unless the acquiring company offers more per share than the current price of the target company's stock, there is little incentive for the current owners of the target to sell their shares to the takeover company. The acquiring company's stock usually goes down for a number of reasons. First, as we mentioned above, the acquiring company must pay more than the target company currently is worth to make the deal go through. Beyond that, there are often a number of uncertainties involved with acquisitions.
Here are some of the problems the takeover company could face during an acquisition:
A turbulent integration process: problems associated with integrating different workplace cultures. Lost productivity because of management power struggles
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Mergers and Acquisitions Additional debt or expenses that must be incurred to make the purchase Accounting issues that weaken the takeover company's financial position, including restructuring charges and goodwill. All these does not effect on stock for long term. If an acquisition goes smoothly, it will obviously be good for the acquiring company in the long run.
STEPS IN MERGER TRANSACTION

Generally, the merger transaction includes the following steps:
Screening and investigation of merger proposal:
When there is an
intention of acquisition or merger of other business unit, the primary step is that of screening and motive needs to be judged against three strategic criteria i.e. business fit, management and financial strength. Once the proposal fit into the strategic motive of the acquirer, then the proposed acquirer will collect all relevant information relating to the target company about share price movements, earnings, dividends, market share, management, shareholding pattern, gearing, financial position, benefits from proposed acquisition etc. this form of investigation will bring out the strengths and the weaknesses of both ones own company and the perspective merger candidate. The acquirer company should not only consider the benefits to be obtained but also be careful about the attendant risks. If the proposal is viable after through analysis from all angles, then the matter will be carried further.
Negotiation stage: The negotiation is an important stage in which the bargain is

made in order to secure the highest price by the seller and the acquirer keen to limit the price of the bid. Before e the negotiations start, the seller needs to decide the minimum price acceptable and the buyer needs to decide the maximum he is ready to pay. After the consideration is decided then the payment terms and
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Mergers and Acquisitions exchange ratio of shares between the companies will be decided the exchange ratio is an important factor in the process of amalgamation. This has to be worked out by valuing the shares of the both, transferor and transferee company as per the norms and methods of valuation of shares. Approved valuer or a firm of Chartered Accountants will evaluate the shares on the basis of audited accounts as on the transfer date.
Approval of proposal by Board of Directors: Deciding upon the

consideration of the deal and terms of payment, then the proposal will be put for the Board of Directors approval.
Approval of shareholders: As per the provisions of the Companies Act 1956,

the shareholders of the both seller and acquirer companies hold meeting under the directors of the respective High courts and consider the scheme of amalgamation. A separate meeting for both preference and equity shareholder is convened for this purpose.
Approval of creditors/ Financial institutions/ banks : Approvals from the

constituents for the scheme of merger and acquisition are required to be sought for as per the respective agreement/ arrangement with each of them and their interest is considered in drawing up the scheme of merger.
Approval of respective high court (s): Approval of respective high court of

seller and acquirer, confirming the scheme of amalgamation is required. The court shall issue orders for winding up of the amalgamating company without dissolution on receipt of the reports from the official liquidator and the Regional director that the affairs of the amalgamating company have not been conducted in a manner prejudicial to the interests of its members or to public interest.
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Approval of central government: Declaration of the central government on

the recommendation made by the specified Authority under section 72A of the income tax act, if applicable.
Integration stage: The structural and cultural aspects of the two organizations,
if carefully integrated in the new organization will lead to the successful merger and ensure that expected benefits of merger are realized
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FINANCIAL BENEFITS OF MERGERS AND ACQUISITIONS

Merging and diversification
Theory suggests that diversification for the purpose of risk reduction can only be justified from a shareholders viewpoint if default or bankruptcy would entail substantial costs. In the absence of such costs, the argument is that shareholders can always achieve such risk reduction for themselves by investing in a diversified portfolio of equities on their own account, or by investing in unit trusts. However, there are a number of reasons why managers of the firm may take a different view. From a shareholders view the costs of bankruptcy lie primarily in the legal cost of reorganization. There are, however, costs to other parties; for example, to managers. A bankruptcy may not only deprive a manager of his salaried job but also undermine his value in the job market when he seeks alternative employment. Since the information is imperfectly disseminated, the bankruptcy may reflect unfairly on the perceived competence of individual managers involved. The risk is not easily diversified by managers whose main wealth is human capital: that is, in their ability to earn a high salary. In these circumstances a wise manager may reject some takeovers projects, which will be profitable to diversified shareholders. An alternative strategy would be to diversify the assets of the firm.
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Mergers and Acquisitions One should not imagine the self-interest of managers in this regard is wholly at odds with the interest of shareholders. Managers and other employees in risky, undiversified companies will tend to demand higher salaries or other benefits to compensate for the risks entailed in working for such concerns. The resulting additional labour costs must be borne by the shareholders or owners. Furthermore, the managers who are exposed to unnecessary risks to their job security are more likely to bias investment decisions towards lower risk situations. This bias is seldom in the interest of diversified shareholders. If it is not too costly, both shareholders and employees interest may be served by some degree of the company diversification. Diversification also provides a means of preserving goodwill. Only if the company stays in existence can it seize future opportunities to make profitable investments. Diversification helps to remove the risk of losing the value of such growth. Diversification may actually increase the portfolio of growth opportunities available to the merger partners, Once the managers and employees are protected in these ways, management can identify more closely with the interest of diversified shareholders when making investment decisions. When company diversification is too costly, shareholders often grant options to managers to purchase the company shares at fixed price. This provides a financial incentive for management to take decisions, which favorably affect shareholders wealth. The effectiveness of this method is limited by the fact that it does not eliminate the managers vulnerability to the unique risk of capital projects. Share options in the company of employment increase an already large stake, which managers have in fortunes of that one enterprise. There is some obvious scope here for devising imaginative compensation schemes to bring executive incentives more closely in to line with the interest of diversified shareholders.
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Risk reduction and lower borrowing costs

When two firms merge the risk of the combined earning stream may be reduced as a result of the diversification effect. Table A Earnings of two companies before merger and after merger
Earnings at the end of the year COMPANY A OUTCOME 1 OUTCOME 2 COMPANY B OUTCOME 1 OUTCOME 2 COMPANY A+B OUTCOME 1 120 -30 170 150 -50
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OUTCOME 2
120
The above Table A shows how diversifying mergers can reduce the risk of merged companies earnings streams as compared with their pre merger state. The example is unrealistic because we assume the earnings of two companies move in opposite directions (that is earnings of two are perfectly negatively correlated). At the end of the year there are only two possible outcomes for earnings (called outcomes 1 and 2). In outcome 1 the operating earnings of the company A will be $ 150 while the operating earnings of company B will fall to -$30. In the outcome 2 the earnings of A will be -$50 and the earnings of B will rise to $120. Obviously the expected earnings of each company are risky move in different directions. However, if the two companies merged, the operating earnings of the combined firms are $120 for each outcome, and therefore the merged firm is risk less. Of course, the assumption that the earnings of two firms are perfectly negatively correlated is unrealistic, but the variability of earnings (or their range) would always be reduced unless the earning moved in lockstep. Thus, provided earnings of two firms are not perfectly positively correlated some risk reduction, as a result of the merger, will always take place. But even when this is so, the question remains whether the value of two merged firms is greater than the sum of their individual parts. It might be argued that if the merged firms earnings are less risky, borrowings become cheaper; the lower borrowing costs provide an incentive to merge. In this analysis, we must distinguish carefully between the effect of a merger upon outstanding debt and the effect of the merger on the terms for raising additional debt. We shall discuss raising additional debt first.
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Mergers and Acquisitions A merger of two companies reduces the risk to the combined earnings stream below the risk to the individual; companies pre-merger, if the two a earning streams are imperfectly correlated. As a consequence, the merged firms are able to borrow at a lower interests rate before the merger. The reason that the risk has been reduced is that when one of the firms would otherwise has defaulted; the surplus of other firm is applied to the deficiencies of the first (this is known as the coinsurance effect). Thus, the merger of the two firms reduces the risk of default only because the shareholders give up some of the protection of limited liability; for without the merger the surplus of one firm would not be applied to the debts of the other when it defaulted. This is easier to understand this problem when one considers an individual to controls a business which ahs the protection of limited liability. Currently, his firm is borrowing from a bank at 3 per cent over the banks base interest rate. The owner is wealthy; owing a large house and some stocks and bonds besides the stock in his company. The bank suggests to the owner that if he would only guarantee the loans of his company; the bank would gladly reduce the interest rate on the outstanding loans. Is the bank being generous? The answer is no! It is asking the owner to permit his personal assets to be applied to any deficiencies of the company, should default occur. It is asking the owner to give up the protection of limited liability. Put another way, it is asking for a merger of his personal assets and the assets of the firm. Consequently, a merger may reduce the risk of the earning stream and the cost of borrowing, but this will not increase the value of the firm since the lower interest rate charged by the bank merely reflects the less risky claim it now holds. However, if there are defaults costs, (such as legal costs attendant on liquidation) then a merger will reduce the probability of default and therefore reduce the expected value of default costs. The reduction in expected default cost will provide an incentive to merge. This said, the probability of default is usually small and the costs of default are also small (about 1% of the value of the assets according to the Warner, 1977). Thus the expected benefits to merging from this source may not be significant. Now consider the effect of a merger on the value of the equity when there exists debt outstanding in the two firms. If the earnings of the two firms are imperfectly 41
Mergers and Acquisitions correlated, the coinsurance effect of the merger will reduce the probability of default to the combined debt holders. Debt holders will gain since previously agreed interest payments were based upon a higher probability of default. The shareholders suffer a corresponding loss equal to the gain of the debt holders. If the firms had not merged, a default by on firm would not have affected the other firms shareholders. Thus, shareholders must lose as a result of the coinsurance of the debt. After the merger the value of limited liability, as an option to the default, is reduced by virtue of a lower probability of default.
Unused debt capacity

It is often claimed, as often the firm does not utilize its debt capacity, it will prove a valuable asset to any would-be bidder. However, Franks and Broyles (1979) have shown that the advantages to debt financing are probably not very large and certainly not sufficient to justify bid premiums of 15% to 20% plus the cost of transacting the bid. Secondly the acquiring firm does not need to acquire control over the assets to obtain some advantage from the unused debt capacity. The acquiring firm needs only to buy the shares of the inadequately geared company and borrow, using the purchase shares as collateral for the loan. Thus, the unused debt capacity does not provide very much incentive for a merger.
Tax losses and unused capital allowances

A company that has made losses in the past is able to carry such losses forward and offset them against future taxable profits in order to reduce tax liabilities. For example, the (American) anaconda company made losses totaling hundreds of millions of dollars in 1971 as a result of the nationalization of its assets in Chile. Such losses could be offset against future profits in order to reduce tax liabilities. However, anaconda might have tried to seek a merger with another company, which had sufficiently large taxable profits to absorb the tax losses immediately. The benefit would derive from obtaining the 42
Mergers and Acquisitions reduction in tax liabilities much earlier than the company could hope to do without the merger. A second tax reason for merging arises if the company is investing large sums in capital equipment and so qualifies for capital allowances that cannot be absorbed by taxable profits when they occur. A merger with a profitable company can absorb the unused tax allowances at an earlier date than would otherwise be possible, as in the case of accumulated tax losses. When a company is investing heavily on its capital account, leasing can provide an alternative method to merging for the purpose of accelerating the benefit of tax shields.
EVIDENCE OF THE PROFITABILITY OF MERGERS TO SHAREHOLDERS

Increasing shareholder value is generally held to be the paramount objective of most M&As today. However, experience from most M&As in the mid-1980s is not very encouraging in this regard. The much slower growth levels in the 1990s and the high premiums usually paid to shareholders of target companies, mean that the restructuring needed to achieve satisfactory cost savings from mergers can only be obtained with much deeper cost cutting, imperiling the ability of merged companies to achieve the higher levels of sales revenue required to repay merger-related debt and increase shareholder value. At its most basic, creating shareholder value means that the market favors firms that increase the productive use of their assets by increasing turnover ratios, margins and profitability. Increasing sales growth adds shareholder value as long as reinvestment earns returns that exceed the firms cost of capital. Conversely, firms without such opportunities destroy shareholder value by reinvesting and should return the money to shareholders through dividend increases or share buy-backs. The KPMG study cited
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Mergers and Acquisitions above reports that shareholder value maximization is specified by only 20 per cent of executives polled in the survey as an objective of M&As. The basic argument that M&As increase shareholder value through exploitation of synergies is based on the assumption that the combined organization can be operated in a way that generates greater value than would be the sum of the value generated by the stand-alone companies (the 2+2>4 equation) Evidence in US on profitability of mergers, as measured by the stock market, is fairly unambiguous: the shareholders of acquired firms gain substantially whereas the shareholders of the acquiring firms either gain or do not lose. For example, Mandelker examined 241 mergers in the USA and measured the effect of the merger on the stock market prices of the merging firms. He calculated the incremental returns to the merger by subtracting from the returns of each company that proportion estimated to be attributable to movements in the market. As shown in Table A mandelkar found that bid premiums of about 14% were obtained in bid month. In fact, this understates the true bid premium, since there was evidence that the market anticipated the merger prior to the month of the bid (and therefore the part of bid premium). The acquiring companies were also found to have gained but the gains were small at 3% and were not statistically significant. The evidence in UK is rather mixed. Firth examined a sample of UK mergers for the period 1969 to 1975 and found that although acquired firms gained substantially (28%), acquiring firms suffered significant abnormal losses. After adjusting for differences in size, firth found that the gains to acquired firms were virtually entirely offset by losses to acquiring firms. This contrasts with the evidence of franks, Broyles and Hecht who examined a sample of 71 mergers in the Breweries and distilleries industry and found that bid premiums average 26% and acquiring companies earned around 35. These latter results would suggest that stockholders gained from mergers: they are supported by a much larger sample of 1814
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Mergers and Acquisitions mergers by franks and Harris who found that acquired companies either gained and acquiring companies either gained or did not lose.
Author
Period
Sample Size
Gains
to Gains
to
acquiree (%) Halpern (USA) Mandelkar (USA) Asquith (USA) Firth (USA) Franks (USA) Hecht (UK) 1969-75 1955-72 434 71 28.00# 26 1946-71 320 9.7 1948-67 241 14+ 1950-65 78 30.4
acquiror (%) 6.2
3.0*
0.6
-6.3 3*
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Franks, Harris (UK)
1955-85
1814
23.3
*Not statistically significant + Estimated over 60 days straddling merger announcement, most of gain (34%) occurred in 30 days prior # Loss over 60 days, all occurring in 20 days after bid. If significant, and solely due to bid, it is large in PV terms (since average acquiror much bigger than acquiree)
The results of those share price studies contrast rather sharply with those of accounting based studies (for example those of Singh and Meeks) which show declines in accounting measures of profitability subsequent to merger)
FINANCIAL CONSIDERATIONS IN MERGERS, AMALGAMATIONS AND ACQUISITIONS

When two or more companies are combined, there has to be some financial consideration for the amalgamating or acquired company. The financial consideration is generally in the form of exchange of shares. This requires that the relative value of each firms share by evaluated and a particular exchange ratio is determined. This exchange ratio reflects the relative weightage of the firms under consideration. The determination of the exchange ratio is, therefore based on the value of the shares of the company involved in the merger. The basic objective of merger is to maximize owners wealth in the long run. Hence, a successful merger would be one that increases the earnings per share (EPS) and the market price of the share of the
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Mergers and Acquisitions amalgamated company over what they would have been if the merger had not taken place. The following are the three different approaches for determining the exchange ratio:
1.Earnings Approach 2.Market Value Approach 3.Book Value Approach
1. Earnings Approach
In evaluating a possible merger or acquisition, the acquiring firm must consider the effect the merger will have on the earnings per share of the merged or amalgamated corporation. This can be understood with following illustration: Illustration 1. : A Ltd. is considering the acquisition of B Ltd. the financial data at the time of acquisition is as follow: A Ltd. B Ltd.
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Mergers and Acquisitions Net Profit after tax (RS/ LAKHS) Number of Shares (Lakhs) Earning per Share (RS.) Market price per Share (RS.) Price Earning Ratio 5 75 15 30 6 6 2.50 2.40 24 10
Assuming that the net profit, after tax of the two companies would remain the same after amalgamation (i.e., it would be RS 36 lakhs), explain the effect on EPS of the merged company under each of the following situations: (a) A Ltd. offers to pay RS. 30 per share to the shareholders of B L td. (b) A Ltd. offers to pay RS. 40 per share to the shareholders of B L td.
The amount in both the cases is to be paid in the form of shares of A Ltd.
SOLUTION: Situation (a) In case A Ltd. offers to pay RS. 30 per share the share exchange ratio
would be 30/75 = 0.4. In other words, A Ltd. would give 4 share for everyone share of B Ltd. the total number of shares to be issued by A Ltd. to the shareholders of B Ltd. would, therefore, amount to 1,00,000 (i.e., 2,50,000 * 4). The total number of shares of A Ltd. after acquisition of B Ltd. would now increase to 7,00,000. The Earning per share (EPS) of the amalgamated company will now be RS. 5.14 calculated as follows:
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Mergers and Acquisitions Total net profit after interest and tax Total number of shares
= 3,60,000 / 7,00,000
=RS 5.14
Thus, as a result of amalgamation, the EPS of A Ltd. will improve from RS. 5 to RS. 5.14. However, the former shareholders of B Ltd would experience a reduction in EPS. Their EPS would now amount to 5.14 * .4 = RS. 2.05, which is lower than RS 2.4 before merger.
Situation (b): - In case A Ltd. offers RS 40 per share to the shareholders of B Ltd.,
the exchange ratio would be 40/75 = 0.533 share of A Ltd. for each share of B Ltd. Thus, A Ltd. would issue in all 1,33,250 (i.e., 2,50,000 * 0.533) shares to the shareholders of B Ltd. the EPS of the merged company would be RS. 4.91, i.e., 36,00,000 / 7,33250. Thus on the account of merger, there is a dilution in the earning per share of A Ltd. however the former shareholders of B L td. Would stand to gain. The EPS amount to RS 2.62 (i.e., RS 4.91 * .533) as compared to the EPS of RS 2.4 before merger.
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COMMENTS: It may be noted that initial increases and decreases in earnings per share, are both possible in case of merger. Generally the dilution in EPS will occur wherever the P/E ratio of the acquired company calculated on the basis of price paid exceed the P/E ratio of the acquiring company and vice versa. In situation (a), the price offered by A Ltd. per share of B Ltd is RS 30 and the EPS of B Ltd. is RS 2.4, which would become the earnings of A Ltd. after merger. Thus the price-earning ratio on account of merger would be RS. 30/2.4 = 12.5. Since, this is lower than the P/E ratio of A Ltd. before merger (i.e., 15) the EPS of A Ltd. after amalgamation increases to RS 5.14. In situation (b), the price earnings (P/E) ratio offered for merger is 40/2.4 = 16.7, which is higher than the P/E ratio of A Ltd. before merger. Hence the EPS of A Ltd. after merger would get diluted.
FUTURE EARNINGS
In case the decision acquired by another company is solely based on the initial impact of earnings per share, the initial dilution in earnings per share would stop any company from acquiring another. This type of analysis does not take into account the possibility of future growth in earnings due to merger. Merger generally results in higher earnings for the merged companies as compared to the earnings of individual companies before merger. In the illustration given previously, it has been assumed that the total earnings of A Ltd. after merger would continue to remain at RS 36 lakhs(i.e., the total net profits after tax of A Ltd. and B Ltd.) and hence, a higher exchange ratio was not justified.
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Mergers and Acquisitions However if the earnings of B Ltd. are expected to grow at a faster rate than those of A Ltd., a higher exchange ratio may be justified, despite the fact that there is initial dilution in EPS of A Ltd. the higher growths in earnings of B Ltd may result eventually in higher EPS of A Ltd. relative to earnings without merger. This can be illustrated by a graph: -
M2 Expected EPS of A Ltd M1 0 t
With merger
Without merger
Years (future)
There is an initial dilution of EPS from OM2 to OM1. The dilution in EPS is eliminated after Ot years after which the EPS becomes higher with merger as compared to EPS without merger. Moreover, earnings of the amalgamated company need not necessarily be the sum earnings of amalgamating companies. Due to the synergy effect and because of operating economies, the earnings after merger may be higher than the sum of earnings of two companies. This would result in a higher EPS for shareholders of amalgamated company.
2. Market value Approach

According to this approach, the exchange ratio is determined keeping in view the market value of the companys shares involved in the merger. The market price of the companys shares reflects, to a great extent, the confidence of the investors, earnings potentials and the financial positions of the company concerned.
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Mergers and Acquisitions The exchange ratio is determined as follows: Market price per share of the acquired company Market price per share of the acquiring company For example, if A, Ltd. whose market value of a share is RS 50 is acquiring B Ltd. whose market value of a share is RS 25 the share exchange ratio will be 0.5 (25/50). In other words, A Ltd. would issue one share for every two shares of B Ltd. or in case B Ltd has a share capital of RS 10,000 shares.
The determination of the exchange ration the basis of market price involve following difficulties: 1. The market price is easily available for those shares, which are quoted at a stock exchange. 2. Market prices keep on fluctuating. 3. Market prices can be manipulated or influenced on account of extraneous factors.
Capitalized value of EPS

On account of the above difficulties, companies prefer to determine the market value on the basis of capitalized value of earning per share for determining the exchange ratio. This involves the taking of following steps: 1. Determination of average annual future earning : - The future annual average earning is determined on the basis of the past performance of the company, future growth 52
Mergers and Acquisitions prospects, etc. for this purpose profits of last few years are generally used applying suitable weights. The weighted annual average earning so calculated is divided by number of equity shares to get earnings per share.
2. Determination of a capitalization rate: - This is the normal rate of earnings

expected from the type of the company whose shares are to be evaluated. In case of some industries, the rate of capitalization is fixed by the government while in other cases; it is fixed keeping in view the average profits earned by the industry in general.
3.Determination of market value: - The market value per share is determined as

follows: Earnings per share Capitalization rate For example, if the EPS is RS 30 and the capitalization rate is 15%, the market value of share will be RS. 20 (i.e., 30 *100/15). 4. Determination of the exchange ratio: The exchange ratio can now be determined as follows: Market price per share of the acquired company Market price per share of acquiring company
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3.Book value approach

According to this approach, the exchange ratio is determined according to the book values of the concerned companies shares. The book value of a share is determined as follows: Shareholders funds Number of equity shares Net worth No. of equity shares After determining the book value of the shares of the companies to be merged, the exchange ratio is determined as follows: Book value per share of acquired company Book value per share of acquiring company
The book value approach has several limitations. Some of the severe limitations are as follows: 1. The net worth of the company on which the book value of the share is based x can be easily be manipulated by the accounting practices employed by the company. 2. The book value does not give proper consideration to the earning capacity of the company. On the account of the above limitations, the book value approach is generally not followed as a basis for valuation in most mergers. However, this approach becomes important in those cases when the book value per share of a company is significantly higher than the market value of its shares.
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Fair value of the share

The approaches used for determination of exchange ratio are hardly used singly in practice. Normally share exchange ratio is determined the of fair value of concerned companies shares. The fair value of share infact may be the average of values calculated according to all 3 approaches, explained earlier. Having determined the fair value of the shares of the companies going in for merger, the exchange ratio can be determined as follows: Fair value per share of acquired company Fair value per share of acquiring company Moreover to certain extent, the exchange ratio also depends upon negotiations between companies. Both the companies would desire that the market price per share after the merger should be equal to or greater than the market price per share prevailing before the merger. This sets the boundaries for the exchange ratios to be negotiated. The
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Mergers and Acquisitions upper boundary would be the maximum exchange ratio agreeable to the acquiring company so that the market price of the share after the merger at least remains the same as that before the merger.
The lower boundary would be the minimum exchange ratio acceptable to the acquired company so that the market price of its shares after the merger at least remains the same as that before merger. The final exchange ratio would lie anywhere between these two limits depending upon the negotiations.
M&A SCENE IN INDIA------ A TEPID H1 2004

In the first half of 2004, corporate financial deals in India continued the flat trend scene since mid-2002. INDATA-----a database on the Indian mergers and acquisitions market developed by India advisory partners, London-------- recorded 195 deals valued at RS 124 billion ($2.8 billion) between January and June 2004 (Rs 1 billion =Rs 1 crore). While the total deal value was not much higher than in the second half of 2003 (Rs 118 billion, $2.6 billion), the average deal value was higher by 64% at Rs 635 million ($14.1 million) as compared to Rs 387 million ($8. 6 million). There were 6 deals of 5 billion compared to 3 in H12003 and only 4 in FY 2003. Interestingly, on e of the 5 largest deals in H1 2004 was a private equity transaction. Private equity deals continued for 21% of all deals by value.
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Mergers and Acquisitions It had been a bad year for investments banks, with transaction values dwindling. While the stock market reacted sharply to the new government at the center overseas companies (including private equity investors) in fact made larger acquisition by value than Indian companies ---- represented 64% of all deals.
SECTORS, PLAYERS, KEY DEALS

The information technology (IT) sector dominated the M&A scene once again with the largest contribution by value as well as number of deals, with 40 deals adding up to 39% of the total deal value. This is remarkable jump as compared to the first half of 2003 when IT deals made up a mere 5%. Despite poor performance in H1 2003, IT has emerged as the dominant sector in 2003 with a 17 % share of the total deal value. Telecom sector came second with 9 deals contributing 25% by value. Few other sectors contributed significantly, barring power (10%) and pharmaceuticals and health care (8%).
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Sector breakup of deals by value H1 2004

telecom 25%
Information technology 39%
Media 1% Foods 1% textiles 1% pharmaceuticals & healthcare 8% power 10%
others 5% Engineering 5%
Automotive &auticomponents 2%
finance 3%
INFORMATION TECHNOLOGY: -All sub-sectors of the IT industry were active

in H1 2004. The largest deal in INDATA in H1 2004 is Singapore based electronics 58
Mergers and Acquisitions manufacturer flextronics acquisition of 75% stake in Hughes software systems for Rs 13.9 billion ($310 million) from the promoters, Hughes network services (direct TV group). The deal included an open offer for a 20% stake to the shareholders of Hughes software. Hughes software systems supplies software to telecom companies worldwide. Warburg pincus increased its stake in Moser Baer from 24% to 35.5% by paying Rs 6.75 billion (4150 billion) for a preferential allotment of global depository receipts (GDRs) representing 14.7 million underlying shares and 5.4 million warrants. Moser Baer manufactures CD-ROMs and other optical media, which it exports to over 80 countries. Despite the controversies around outsourcing to India, IBM bought 100% of business process outsourcing (BPO) service provider Daksh services for RS 6.75 billion ($150 million). Before the acquisition, general Atlantic partners, Actics (formerly CDC capital) and Citigroup held 65% of the Daksh, and the promoters and the senior management held the remaining 35%. The BPO sub sector saw significant activity with nine deals totaling Rs 10.8 billion ($239 billion). Another notable deal was the acquisition by Internet and long-distance telecom service provider VSNL (part of the TATA group) of Dishnet DSL,s internet business from sterling InfoTech for Rs 2.8 billion ($62 million). The acquisition will give VSNL access to Dishnet Internet subscribers and its network of over 600 cyber cafs. And, finally ebay acquired 1005 of Internet auction web site BAAZI.com for Rs 2.3billion ($51 million) from its promoters Avnish bajaj and Suvir Sujan. Baazee is one of the few dotcom survivors in India and has 1,000,000 registered users although it is still not into profits. This deal suggests that overseas companies have faith in the potential of the online commerce market in India and in the increasing sophistication of Internet users in India
Telecom: 59
Mergers and Acquisitions The frantic deal activity in telecom was driven by consolidation of mobile service operations .A last-minute entry from the telecom sector became the second largest deal in H1 2004. Hutchison Essar (A joint venture between Hutchison whampoa of Hong Kong and the Essar group) announced the acquisition of 100% of Aircel, a GSM cellular operator in Tamilnadu. The all-cash RS 12 billion ($267 million) deal will allow the company to use Aircels licenses and offer hutch to Aircels 1.1million subscribers, of which 31% are in chennai. Hutch, the third largest mobile operator after Bharti and reliance had only about 196,000 subscribers in chennai before the deal. Hutchison acquired the stake from the sterling InfoTech, a company promoted by Mr. C. Sivasankaran.Sterling has acquired 21% of Aircel (then named RPG cellular services) from vodaphone in H1 2003 and the remaining 79% from the RPG Group in December2003. This deal is first intracircle merger transaction since the announcement of the intra-circle merger guidelines by the Telecom Regulatory Authority of India (TRAI) in February. However, inter-circle consolidation began in January with Idea Cellulars acquisition of 100% of Escotel Mobile communications for Rs.2.75 billion ($61 million) in cash. Escotel was a joint venture between the Escorts group (51%) and First Pacific of Hong Kong (49%). Just as the Idea-Escotel-deal was being completed in June, came the announcement of AT&T selling its 33% stake in Idea cellular to Singapore Technologies Telemedia and Telekom Malaysia for Rs 90 billion ($200 million). This is third largest deal in India in 2004 so far. The other major deal this year, was Bharti televentures acquisition of 67.5% stake in Hexacom from Shyam Telecom for Rs 4.3 billion ($96 million). Before the deal, Shyam Telecom had exercised its first right of refusal and increased its stake in Hexacom from 40% to 67.5% for Rs 1 billion ($23 million).
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Privatization: No privatization deals occurred in H1 2004, although there was small number of IPOS of state owned companies. The new-Congress-Government, with left alliance partners, is likely to keep all mention of privatization to the minimum in the near term. Almost immediately on taking charge, the Minister for chemicals and Fertilizers, Mr. Ram Vilas Paswan, overruled the negotiation that has been under way for the acquisition of Hindustan Antibiotics by the private sector Sun pharmaceuticals.
Private Equity: The first half of 2004 saw 29 private equity deals contributing Rs 26.5 billion ($589 million), compared to 74 deals worth Rs 33.2 billion ($738 million) in the whole of 203. The increasing size of private equity deals reirates the rising comfort levels that Indian companies enjoy with international private equity investors. The IT sector received the lions share of private equity through 11 deals totaling Rs 11.1 billion ($248 million). The major deal in the sector was in IT hardware with Warburg Pincus expansion of its stake in Moser Baer from 24% to 35.5%. Warburg pincus paid Rs 6.75 billion ($150 million) for a preferential allotment of equity. Source: Business Line CORPORATE PRIVATE EQUITY FINANCE DEALS DEALS IN INDIA IN INDIA
Value of deals in Rs billon Rs billon
300 60 250 50 200 40 30 150 20 100 10 50 0 0 FH1999 SH2001 FH1999 SH1999 SH1999 FH2000 FH2000 SH2000 SH2000 FH2001 FH2001 SH2001 FH2002 FH2002 SH2002 SH2002 FH2003 FH2003 SH2003 SH2003 FH2004 FH2004 61 VALUE VALUE OF OF PE DEALS DEALS NUMBER NUMBER OF OF PE DEALS DEALS
300 60 250 50 200 40 30 150 20 100 10 50 0 0
ITS MERGER MANIA IN 05,DEALS AT $5.4BN IN 5 MONTHS.

M&As in India have touches $5.4bn in first 5 months (till may end) of this calender year, which works out to 3% of the Asia pacific deal value. Asia pacific contributed to 23% of global volumes, which stood at $680bn for the first quarter, & 18% of global volumes ($971bn) from January to May. The M&A activity in Asia pacific has gone-up, with total deals for first quarter at $130bn, more than double that of the first quarter of 04, when it was at $56bn.total M&As volumes in the region for last calendar year were at $234bn, while till may end it was $179bn. JPMORGANS global M&A review has analyzed activity across a no. of countries in sectors such as banking, property, healthcare & pharmaceuticals. The ub Shaw Wallace deal has been listed among the top 10 deals in the consumer/healthcare sector in asia-pacific.ub groups McDowell & co & its affiliates entered into an agreement with the promoters of Shaw Wallace, to acquire its 54.5% stake in the co. for Rs 325 per share. The other major deal, which had been announced early this year, was the holcim-acc deal. Incidentally no transaction from china has been figured in the top-10 deals. Mittal steels $300-m acquisitions of huan valin steel tube & wire in china has figured among the top-10 deals in natural resources. There has been an increased interest in India. The last 2 years there attracted barely any interest from MNCS, which kicked off after the IBM-daksh deal. The developed markets itself was going through a bad patch between 01 & 03. The last 10 years have also seen a lot of domestic consolidation across sectors. For eg. The top 4 62
Mergers and Acquisitions companies in the cement sector had a total capacity of 35% while the top 3 would currently account for 53% of the market, said Vedika Bhandarkar, MD &head investment banking, JP MORGAN chase. Out of the total volumes of $179bn in M& A-Japan contributed the highest, at 61% & also 6 of the largest deals, followed by the Australias 16%, south Korea & china at 5% each, Indonesia 4%, Hongkong & India is 3%, Taiwan 2% Singapore & Malaysia at 1% each. The financial sector contributed the highest volume of 43% in the region, followed by diversified industries. At 26%, natural resources at 12%, consumer/healthcare at 115 TMT 5%. The largest M&AS deal announced in Asia was in the Japanese banking system- Mitsubishi Tokyo financial & UFJ holdings for a value of $41.4bn. The US contributed for the largest volume in the first quarter, at 475, followed by Europe at 28%, Asia at 22%, Canada 2%& Latin America at 1%. The largest global deal was P&Gs 457-bn merger with Gillette. According to the study, 6 of the 10 largest deals were in the US, 2 in Japan & 2 in the Europe. The second largest deal in the financial sector was Stan charts takeover of Korea first bank for $3.3bn in an all cash deal, the largest Stan charts in history. According to the report, the$ 3.1 bn acquisition by the standard chartered & Phillip Morris demonstrates the continued interest in Asian markets. There is unlikely to be a lot of action in the Indian financial sector on the back of new RBI guidelines as compared to acquisitions in their Asian markets. domestic & overseas acquisition by India corporate renewed interest by foreign firms & also private equity players on Indian companies are likely to be the main themes for M&AS in India going forward, MS Bhandarkar added.
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CURRENT EXAMPLES OF MERGERS ACQUIRING BENEFITS TO A GREAT EXTENT

BPCL merger: Who got the better deal?
The recent announcements of a possible merger of Kochi Refineries with its parent, BPCL has led to a spur in the stock prices of the former (gained over 6% during the week). On the other hand, BPCL has lost nearly 2% over the same period. Let us now analyze the benefits of the merger from the point of view of a standalone refiner (Kochi Refineries) and the oil marketing major (BPCL): Snapshot FY04 Capacity (MTPA) Sales (Rs m) 3-yr CAGR EBDITA (%) NPM (%) RONW (%) ROA (%) P/E (x) P/CF (x) P/BV (x) BPCL Kochi 8.7 7.5 482,543 98,921 5.0% 11.4% 5.9% 10.2% 3.5% 5.6% 29.0% 29.6% 9.5% 12.2% 17.8 4.6 1.8 3.8 3.7 1.3
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Mergers and Acquisitions Kochi Refineries:
Integrated business: Kochi Refineries, which has a capacity of 7.5 MTPA (million tonnes per annum) is currently a standalone refinery (i.e. only refining and no retail presence). While the company has no expertise in the retail space, the merger would enable it to come under the umbrella of BPCL, which has a major market share in the retail fuels segment (22% of volumes sold through retail outlets in FY04). Further, with Kochi Refineries crude requirements being met by BPCLs imports, the marketing major would ensure optimum crude mix to produce value added products, thereby resulting in higher refining margins.
Strong balance sheet of the parent: Kochi Refineries has planned capacity expansion by 3 MTPA. The merger with BPCL would enable Kochi Refineries to have better finance options in terms of its parents balance sheet strength.
Diversified revenue structure: The merger would enable the company to withstand the volatility in gross refining margins (GRM). Currently, the refining margins are at record highs of nearly US$ 5 per barrel. However, with the merger, Kochi Refineries could enter into the marketing segment with BPCLs expertise and this would enable it to diversify its revenue structure and profitability, which is heavily dependent on gross refining margins.
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BPCL:
Strong downstream presence: Currently, BPCL has a refining capacity of nearly 8.7 MTPA (million tones per annum), while more than 50% of its sales requirements are met through purchase from external sources (from subsidiaries and other marketing majors). As a result of this merger, BPCL would be able to reduce its external dependence on other sources and at the same time, have better control over products.
Refining margins to compensate: Post FY04, the oil-marketing majors have been witnessing an acute squeeze in marketing margins, while refining margins have remained robust (as refinery gate prices are linked to import parity prices and prices in the international markets have increased). Due to political considerations, the oil-marketing majors were not allowed to increase product prices in line with costs and as a result, the PSUs witnessed a net loss per liter of petrol and diesel sold during 1QFY05. However, high refining margins have enabled these companies to overcome the marketing blips, to some extent. To put things in perspective, BPCLs standalone Mumbai refinery witnessed GRM of US$ 4.6 per barrel while the same for Kochi Refineries is hovering at US$ 5 per barrel. BPCL is currently trading at Rs 348, implying a P/E multiple of 17.8x annualized 1QFY05 earnings while on the other hand, Kochi Refineries is trading at Rs 170, implying a P/E multiple of 3.8x its annualized 1QFY05 earnings. However, we believe, 1QFY05 performance of the oil marketing major was largely due to political repercussions while the current merger would help the company withstand such pressure going forward. On the other hand, Kochi Refineries would benefit from the strong marketing presence of its parent assuring product off take and the strong balance sheet size would enable the company to raise debts more efficiently. However, to boil it down to one major beneficiary over the other, we believe that Kochi Refineries has got a better deal as compared
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Mergers and Acquisitions to BPCL. In the short term, BPCL shall benefit on account of high refining margins compensating for marketing margins. However, over the long-term, with crude prices likely to fall (and are falling) and product demand stabilizing, refining margins are likely to decline. Being a standalone refinery, Kochi Refineries has little bargaining power and as a result of the merger, it would have an integrated retail presence and better revenue model.
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ICICI Bank: Marriage to benefit?

ICICI Bank has announced a merger with the 57-year-old Bank of Madura Ltd. (BOM) in an all share deal. The boards of the both the banks have approved the merger and decided the share exchange ratio of two shares of ICICI Bank for every one share of BOM. The shareholders of BOM stand to gain with this merger ratio. BOM with an extensive network of 263 branches has a significant presence in Southern India. The merger will enable ICICI Bank to spread its network (currently 106 branches) to 16 states without seeking the RBIs permission for branch expansion. The merged entity will have an asset base of over Rs 160 bn and deposits base of over Rs 131 bn. The merger will give ICICI Bank a huge presence in the South which is an important market given the high rate of economic development, as most of the technology companies are South based leading to higher income per head. Financial Snapshot (Rs m) Total assets Deposits Total revenues Profit after taxes OPM NPM Number of shares (m) FDEPS (Rs) DPS (Rs) Book value/share (Rs) ICICI Bank Bank of Madura 120,630 97,280 12,650 1,467 31.8% 16.8% 196.8 7.5 1.5 61.9 39,880 33,950 4,030 524 33.3% 13.0% 11.8 44.5 5.5 232.8
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Mergers and Acquisitions In terms of financials also BOM compares well with ICICI Bank. Both the banks have high capital adequacy ratios (CAR), compared to 9% stipulated by the RBI. This will allow the combined entity to grow efficiently. However, BOMs non-performing assets (NPAs) ratio to net advances is comparatively higher than the ICICI Bank. NPA ratio is a critical factor in measuring the performance of banks. After the merger, the total number of employees of the bank will increase to 4,000 (2,600 employees of BOM). Although in terms of computer literacy BOM is likely to be able to cope up with the tech savvy ICICI Bank, the key concern would be integrating the widely varied cultures prevailing in the two banks. Also the productivity per employee of the combined entity may come down after the merger. Key Ratios Particulars CAR NPAs as a % of net advances ROA
Interest spread as a % of total assets
ICICI Bank Bank of Madura 17.6% 1.5% 0.9%

1.5%
15.8% 4.8% 1.1%

2.3%
The current market capitalization of ICICI Bank at Rs 33 bn is 22 times higher than the market cap of BOM. The advancement of ICICI Bank, geographical presence and the productivity per employee. If the merger ratio turns out to be favorable, the shareholders of BOM stand to gain. Comparative Valuations Particulars Market Price (Rs) PER (x) Dividend yield Price/Book value (x) ICICI Bank Bank of Madura 170 22.7 0.9% 2.7 132 3.0 4.2% 0.6
ICICI Bank has found synergies with BOM in terms of geographic base and customer base (BOM currently has over 1 million customer base). Also based on the 69
Mergers and Acquisitions Price/Book value ratio and PER, BOM trades at a significant discount compared to other private sector banks. Last year, HDFC Bank acquired Times Bank triggering consolidation in the banking sector. The recent announcement by ICICI Bank clearly points out one thing - there is value to be unlocked in many old private sector banks, which are fundamentally strong and are available at low valuations in the markets.
MERGER OF BANK OF PUNJAB AND CENTURION BANK: -
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Mergers and Acquisitions The making of a merger The merger of Bank of Punjab and Centurion Bank is great news for Bop shareholders and good for Centurion shareholders. Finally, here is a bank merger. Centurion Bank and Bank of Punjab (BoP) have decided to get into wedlock. For the purpose of the merger, every nine shares held in Centurion will equal four shares in BoP. Considering that BoP posted a loss of Rs 61.25 crore in FY05, this is not bad at all. BoP's book value now stands at about Rs 17 and the bank gets a valuation of almost two times its book. Analysts say that if it had not been for the merger, BoP's price would have crashed heavily considering its dismal performance last fiscal. That is not to say that the merger is not good for Centurion shareholders. Centurion Bank, too, will benefit since it will gain from BoP's reach and SME business. Centurion has already pumped in capital, cleaned up its books and is all set to grow. The merger will give it the requisite scale, which is becoming all-important with growing competition in the sector. Shailendra Bhandari, who now heads Centurion Bank, will head the new bank Centurion Bank of Punjab. Rana Talwar, who is currently the chairman of Centurion Bank, will continue to be the chairman of the merged entity. Needless to say, the management comes with a rich experience in the sector. Share price of both the banks have run up since talks of the merger gained momentum two months ago - Centurion Bank gained 13.36 per cent to Rs 14 while BoP ran up 13 per cent to Rs 30.85 till the merger was announced.
A synergistic merger
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Mergers and Acquisitions BoPs decision to merger was not dictated by the potential benefits of the merger. It was more by force. The fact is that BoP had been scouting for investors to increase its CAR (currently, 12.68 per cent). However, the Reserve Bank of India (RBI) denied BoP the approval for a preferential allotment of shares to foreign investors. It is only incidental that there are synergies arising out the merger. The two banks are present in different parts of the country - while BoP is based in the north, Centurion Bank is present in the southern and western regions. Also, BoP is strong in rural areas and has a decent agricultural portfolio. It also has strengths in the small- and medium-size enterprises segment. Its good match for Centurion, which had a limited revenue stream, consisting of retail, two-wheeler and personal loans. The merger gives it a wider revenue stream. That Centurion Bank is ready with its capital and has the ability to generate retail assets only adds makes growth prospects brighter for the merged entity. Analysts believe the merger will give the new bank a chance to grow and hold up against competition. While the union may not create a bank with a size to reckon with, it will provide the combined entity the impetus to grow and carve a niche for itself. Expansion, however, seems a while away. Right now, the bank will focus on integration of branches and product offerings, according to Bhandari. As things stand today, the merged entity will have 235 branches and extension counters, 2.2 million customer base and total assets worth Rs 9395 crore. It will have a capital adequacy ratio (CAR) of 16.1 per cent and a considerably high net interest margin of 4.8 per cent.
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Numbers in the game

How the bride and the groom look Centurion Bank (Rs crore) FY05 FY04 Interest income Bank of Punjab % FY05 Change 328.59 FY04 % Change -3.34
346.09 333.79 3.68
339.93
Interest 168.21 203.82 -17.47 193.67 expended Net interest income Other income
211.82
-8.57
177.88 129.97 36.86
134.92
128.11
5.32
64.46
62.98
2.35
69.06
132.42
-47.85
Net profit 25.11 EPS (Rs) 0.31 Advances 2634 Deposits CAR (%) PE (x) P/BV (x) 3530
123.88 -61.25 105.14 -3.22 1556 3029 109.63 -5.83 69.28 16.54 1870 bps
37 3.52
-265.54 -265.63
2416.99 2353.46 2.7 4306.62 4136.88 4.1 9.23 NA 1.78 12.68 -345 bps
23.1* 4.4 45.16 2.9
Price as on July 1, 14 2005 (Rs) Area of South and West presence
30.85
North 73
* Post-$80 million GDR (Rs 350 crore) issue and exercise of greenshoe option
Centurion Bank posted a healthy set of numbers for FY05. Net interest income rose 36.86 per cent to Rs 177.88 crore on the back of a fall in interest expended.
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Mergers and Acquisitions The bank also saw a turnaround in the last fiscal, registering a 123.88 per cent rise in net profit to Rs 25.11 crore against a loss of Rs 105.14 crore in the previous year. Advances rose impressively by 69.23 per cent to about Rs 2,634 crore. The bank also reduced its non-performing assets (NPAs) by 180 basis points to 2.5 per cent. BoP posted a net loss Rs 61.25 crore in FY05 because of a fall in both interest income and other income. The loss was also triggered by a huge increase in provision - up 84.6 per cent to Rs 104.9 crore. This means that the bank was on a clean-up spree before the merger, which is positive for the new entity. Advances for FY05 were 2.7 per cent higher at Rs 2,416.99 crore against FY04 while deposits for the same period were 4.10 per cent higher at Rs 4,306.62 crore. Centurion Bank now trades at a 12-month trailing P/E of 48.23 times - abnormally high since it has just posted a turnaround. It has a price-toadjusted book value of 3.49 times Meanwhile, BoP trades at a P/E of 20.59 - which is again quite high given its low earnings. Valuations look stretched after the run-up these banks have witnessed Analysts are of the opinion that real story has to be viewed from a long-term perspective Clearly; the merger gives both the banks an edge to move forward in a highly competitive and scale-driven sector. The credentials of the management also lend credibility to the bank.
Pharma sector rides consolidation wave
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Matrix-strides merger
As the impact of WTO regulations kick in, Indian pharma players are learning to collaborate and consolidate to grow. If the industry is to be believed, the Matrix-Strides merger is only the beginning of the shakeout that the pharma sector is set to witness over the next few years. Though this is the first big merger in the post-patent era, over the last one year, mid-cap pharma companies have been particularly aggressive in forging global alliances, buying brands and investing in international companies and joint ventures. The merger of two entities has the potential to increase the competitive force of the combined entity exponentially as it is a coming together of a coalition of companies allowing the merged entity to tap into a vast network of partnerships.
Matrix lab, strides to merge, create RS 1,000 crore powerhouse

Hyderabad- based matrix laboratories 7 Bangalore- based strides Acrolab Ltd have decided to merge into a single entity matrix strides laboratories. Matrix labs and strides Acrolab would merge to create a combined entity with over Rs 1,000 cr. in turnover and Rs 170 crore in profits. The new company--- matrixstrides ---will find a place among top 10 Indian pharma companies by turnover, and would be one of the largest integrapharma companies in the country. From day 1 the co. will be operational in over 70 countries with manufacturing operations in India, USA & Latin America. On the research & development front, the new entity is expected to complete 70 DMF (drug master file) filings & 20 ANDA filings by the end of current year.
For the year ended march 05, matrix reported revenues of RS 637 crore and a net profit of RS 130 crore matrix has recommended a dividend of 60% for 04 -05. It is being called the largest acquisition ever executed by an Indian pharmaceutical company. Less than 20 days after acquiring strides acrolab, an over RS 400 crore, banglore based formulations company, N. Prasad, Chairman and CEO of the RS 637 crore matrix 76
Mergers and Acquisitions laboratories, announced his companies move to acquire a controlling stake in Belgian drug company docpharma NV for $263 million (RS 1,157.2 crore). Matrix will finance the transaction through a combination of cash in hand and bank borrowings. Later, it may consider a public issue, the proceeds from which may be used to retire the bank loan. The deal places matrix among the top five-pharma companies in the country. It currently ranks #12.
Financial impact of matrix strides merger

Compelling chemistry
In a first-of-its kind deal, bulk drug maker matrix labs and formulations manufacturer strides acrolab have merged to create a vertically integrated pharma major. Its also a sign of things to come in the industry. The impact is that the new entity will be vertically integrated. Again matrix will be strong in US and Europe (besides India), while strides has beachheads in Latin America, Africa and Asia, besides the US and Europe
WHATS HOT ABOUT THE TWO?
MATRIX
STRIDES
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Mergers and Acquisitions Is an active pharmaceutical Is one of the largest exporters of branded generics Makes formulations by way of
Ingredients major Has a good knowledge base (has over 200 scientists) and track record Has already filed for 46 DMFs; 24 more are planned Has filed fro 29 patents and 9 novel polymorphs Comes with eight out of 11 APIs and intermediate plants that the new entity will have
capsules, tablets and liquid injectibles One of the worlds top five
manufacturers of soft gel capsules Runs the only globally- dedicated soft gel facility for hormones Does majors contract for research global and pharma
manufacturing
STRENGTH IN NUMBERS: -If the merger goes through, the new entity
will emerge vastly stronger.
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MATRIX Revenues Profits Market Cap RS 637 crore RS 130 Crore RS 2,794 Crore
STRIDES RS 462 Crore RS 44 Crore RS 959 Crore #15
NEW ENTITY RS 1,099 Crore RS 174 Crore RS 3,753 Crore #7
Industry Rank by # 12 Revenues # Of Employees Strength Key markets Europe, US, India, ANZ, Japan, SAARC 2,000 APIs
1,300 Formulations
3,300 APIs Formulations +
Africa, Asia, Latin America, Europe US, Canada.
Canada, US, Europe Latin America, Africa, Asia, India
The other benefits are: An ability to shave common costs, better leverage R&D expenses and manufacture products at lower prices hence, better margins. The glee could also be because the merger will put matrix-strides combine amongst the top 10-pharma companies in India. Actually with a market Cap of RS 3,753 crore, it comes in as the ninth most valuable company in the industry. In terms of facility the merged company will have six bulk drug units, five intermediate plants, nine formulations sites and operations in 70 countries, including plants in India, US and Latin America. By the end of current year, it hopes to file 70 drug master files or DMFs (for bulk drug approvals by the USFDA) and 20 ANDAS (abbreviated new drug applications, or generic copies). Bulk of ANDAS will be from strides, but will also include a few from matrix. In other words the global markets will see the emergence of another strong generics player from India, in addition to existing majors such as Ranbaxy, Dr. Reddys, Cipla and Sun.
CONCLUSION
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Mergers and Acquisitions One size doesnt fit all. Many companies find that the best route forward is expanding ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power . M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.
Hence next time whenever we read a news release that says that a company is using a poison pill to ward off a takeover attempt, we will now know what it means. More importantly, we will know that we have the opportunity to purchase more shares at a cheap price. M&A has an entire vocabulary of its own, expressed through some of the rather creative strategies employed in the process. Hopefully by doing this project we are at least a bit wiser in the wacky world of M&A terminology. By understanding what is happening to our holdings during a takeover or attempted takeover, we may one day even save money.
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Bibliography
Websites: www.investopedia.com www.channelingstock.com www.economictimes.com
Books and Magazines Books

Laws and Practices of mergers and Acquisitions by Jayant Thakhur Financial Management by Philip A Vale Financial Management by Ravi Kishore
Newspapers and Magazines

Business World Business today Economic times India Times Business Line
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