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ACKNOWLEDGEMENT
S
I owe a great many thanks to a great many people who help and
supportedmeduringthewritingofthisproject.
I would like to express my intellectual debt of gratitude to PROF.
SAMIR KUMAR LOBWO, thementorfortheproject,fornotonly
guidingandsupervisingmethroughouttheprojectbutalsotakingpains
tomakenecessaryactionsasandwhenneeded. Thisprojecthasonlybeen
possiblebecauseofhim.Hehasbeenmyguideinarealsense.Itwasso
niceworkingunderhim
NextIwouldliketoextendmygratefulnessto Rev.Dr Fr.Dominic
Savio,St.Xaviers College (Autonomous under C.U.),and Prof.
S.Banerjee,DeanofCommerceandfacultymembersofcollegewithout
whomthisprojectwouldhavebeendistancereality.Iwouldalsoliketo
thanktheexaminerofmyproject.
Lastbutnottheleast;Iwouldliketothankmyfamilyandfriendsfor
theircontinuedsupportandcooperation.IhopeIhaveliveduptoalltheir
expectations.
ANURAG KHATRI
B.Com (Hons)
SEMESTER VI
Roll no.074
-1
PREFACE
Merger - It's the most talked about term today creating lot of excitement
and speculative activity in the markets. But before Mergers & Acquisitions (M&A)
activity speeds up, it has to actually pass through a long chain of procedures (both
legal and financial), which at times delays the deal.
With the liberalization of the Indian economy in 1991, restrictions on Mergers
and Acquisitions have been lowered. The numbers of Mergers and Acquisitions
have increased many times in the last decade compared to the slack period of
1970-80s when legal hurdles trimmed the M&A growth. To put things in
perspective, from 15 mergers in 1998, the number crossed to over 280 in FY01.
With a downturn in the capital markets, valuations have come down to historic
lows. It's high time that the consolidation game speeds up.
In simple terms, a merger means blending of two or more existing
undertakings into one, consequent to which each undertaking would lose their
separate identity. The most common reasons for mergers are, operating synergies,
market expansion, diversification, growth, consolidation of production capacities
-2
and tax savings. However, these are just some of the illustrations and not the
exhaustive benefits.
However, before the idea of Merger and Acquisition crystallizes, the firm
needs to understand its own capabilities and industry position. It also needs to
know the same about the other firms it seeks to tie up with, to get a real benefit
from a merger.
Globalization has increased the competitive pressure in the markets. In a
highly challenging environment a strong reason for merger and acquisition is a
desire to survive. Thus apart from growth, the survival factor has off late, spurred
the merger and acquisition activity worldwide.
OBJECTIVE OF STUDY:
To discuss the form of mergers and acquisitions.
To highlight the real motives of merger and acquisitions.
To focus on the considerations that are important in the mergers and
acquisitions negotiations.
-3
-4
performance and didn't create value for the shareholders having a negative effect
on profitability and vice-versa.
Contents
Chapters
Page No.
7-12
13-16
17-20
21-24
25-28
29-33
34-34
Chapter 8
35-56
Case Studies
Tata-Tetley: the controversial issue of success and failure.
Philips Stentor
Ranbaxy Daiichi & Sankyo
57-58
59
CONCLSION
BIBLIOGRAPHY
-6
Chapter
1
Introduction to Mergers
and Acquisition
We have been learning about the companies coming together to from another
company and companies taking over the existing companies to expand their
business.
With recession taking toll of many Indian businesses and the feeling of
insecurity surging over our businessmen, it is not surprising when we hear about the
immense numbers of corporate restructurings taking place, especially in the last
couple of years. Several companies have been taken over and several have
undergone internal restructuring, whereas certain companies in the same field of
business have found it beneficial to merge together into one company.
In this context, it would be essential for us to understand what corporate
restructuring and mergers and acquisitions are all about.
-7
All our daily newspapers are filled with cases of mergers, acquisitions, spinoffs, tender offers, & other forms of corporate restructuring. Thus important issues
both for business decision and public policy formulation have been raised. No firm is
regarded safe from a takeover possibility. On the more positive side Mergers &
Acquisitions may be critical for the healthy expansion and growth of the firm.
Successful entry into new product and geographical markets may require Mergers &
Acquisitions at some stage in the firm's development. Successful competition in
international markets may depend on capabilities obtained in a timely and efficient
fashion through Mergers & Acquisition's. Many have argued that mergers increase
value and efficiency and move resources to their highest and best uses, thereby
increasing shareholder value.
.
To opt for a merger or not is a complex affair, especially in terms of the
technicalities involved. We have discussed almost all factors that the management
may have to look into before going for merger. Considerable amount of
brainstorming would be required by the managements to reach a conclusion. e.g. a
due diligence report would clearly identify the status of the company in respect of the
financial position along with the networth and pending legal matters and details
about various contingent liabilities. Decision has to be taken after having discussed
the pros & cons of the proposed merger & the impact of the same on the business,
administrative costs benefits, addition to shareholders' value, tax implications
including stamp duty and last but not the least also on the employees of the
Transferor or Transferee Company.
MERGER:
-8
ACQUISITION:
Acquisition in general sense is acquiring the ownership in the property. In the
context of business combinations, an acquisition is the purchase by one company of
a controlling interest in the share capital of another existing company.
METHODS OF ACQUISITION:
An acquisition may be affected by
-9
(a) agreement with the persons holding majority interest in the company
management like members of the board or major shareholders commanding
majority of voting power;
(b) purchase of shares in open market;
(c) to make takeover offer to the general body of shareholders;
(d) purchase of new shares by private treaty;
(e) Acquisition of share capital through the following forms of considerations viz.
means of cash, issuance of loan capital, or insurance of share capital.
TAKEOVER:
A takeover is acquisition and both the terms are used interchangeably.
Takeover differs from merger in approach to business combinations i.e. the
process of takeover, transaction involved in takeover, determination of share
exchange or cash price and the fulfillment of goals of combination all are different in
takeovers than in mergers. For example, process of takeover is unilateral and the
offeror company decides about the maximum price. Time taken in completion of
transaction is less in takeover than in mergers, top management of the offeree
company being more co-operative.
- 10
Funds are an obvious requirement for would-be buyers. Raising them may not
be a problem for multinationals able to tap resources at home, but for local
companies, finance is likely to be the single biggest obstacle to an acquisition.
Financial institution in some Asian markets are banned from leading for takeovers,
and debt markets are small and illiquid, deterring investors who fear that they might
not be able to sell their holdings at a later date. The credit squeezes and the
depressed state of many Asian equity markets have only made an already difficult
situation worse. Funds apart, a successful Mergers & Acquisition growth strategy
must be supported by three capabilities: deep local networks, the abilities to manage
uncertainty, and the skill to distinguish worthwhile targets. Companies that rush in
without them are likely to be stumble.
unreliable, with different projections made by different departments within the same
company, and different projections made for different audiences. Banks and
investors, naturally, are likely to be shown optimistic forecasts.
- 12
Chapter
2
Purpose of
Mergers and
Acquisition
The purpose for an offeror company for acquiring another company shall be
reflected in the corporate objectives. It has to decide the specific objectives to be
achieved through acquisition. The basic purpose of merger or business combination
is to achieve faster growth of the corporate business. Faster growth may be had
through product improvement and competitive position.
Other possible purposes for acquisition are short listed below: -
(1)Procurement of supplies:
1. to safeguard the source of supplies of raw materials or intermediary product;
2. to obtain economies of purchase in the form of discount, savings in
transportation costs, overhead costs in buying department, etc.;
3. to share the benefits of suppliers economies by standardizing the materials.
- 13
2.
3.
4.
5.
6.
7.
5.
- 15
distinct with each other in nature are adopted to pursue this objective like
vertical or horizontal combination.
- 16
Chapter
3
Types of mergers
- 17
Summary
S.No.
Name
Type
Main Points.
1.
Ranbaxy Ind
Horizontal Vertical
-Growth& Expansion
-Market leadership
-Enteringnew frontiers
-Strong brand
presence -High quality
human resources
-Strong R&D
2.
Sun pharma
Horizontal Vertical
3.
Reliance Industries
Vertical Horizontal
4.
Tata Power
Mainly Vertical
5.
Sterlite Industries
Vertical Conglomerate
6.
Zuary Industries
Conglomerate
-Aggressive growth
-Domestic market
leadership
Global leadership
-Eyeing synergistic
flows in the areas
of feed stock,
product range
-Strong R&D
-Strategic alignments
-Strong leadership in
power & energy -Focus
on R&D
-Market leadership -Cost
efficiency -Global player
-Accelerated growth
-Increasing product
portfolio
- 19
- 20
(b)
(c)
(d)
(e)
economies of scales;
diversification of product line;
acquisition of human assets and other resources not available otherwise;
better investment opportunity in combinations.
- 22
- 24
Chapter
5
Consideration of
Merger and Takeover
- 25
shares. The notice must state that the offer is still open for acceptance and
specify a date after which the right may not be exercised, which may not be
less than 3 months from the end of the time within which the offer can be
accepted. If the offerer fails to send such notice it (and its officers who are in
default) are liable to a fine unless it or they took all reasonable steps to secure
compliance.
8. If the shareholder exercises his rights to require the offerer to purchase his
shares the offerer is entitled and bound to do so on the terms of the offer or on
such other terms as may be agreed. If a choice of consideration was originally
offered, the shareholder may indicate his choice when requiring the offerer to
acquire his shares. The notice given to shareholder will specify the choice of
consideration and which consideration should apply in default of an election.
9. On application made by an happy shareholder within six weeks from the date
on which the original notice was given, the court may make an order
preventing the offerer from acquiring the shares or an order specifying terms
of acquisition differing from those of the offer or make an order setting out the
terms on which the shares must be acquired.
In certain circumstances, where the takeover offer has not been accepted by
the required 90% in value of the share to which offer relates the court may, on
application of the offerer, make an order authorizing it to give notice under the
Companies Act, 1985, section 429. It will do this if it is satisfied that:
a. the offerer has after reasonable enquiry been unable to trace one or more
shareholders to whom the offer relates;
b. the shares which the offerer has acquired or contracted to acquire by virtue of
acceptance of the offerer, together with the shares held by untraceable
- 27
shareholders, amount to not less than 90% in value of the shares subject to
the offer; and
c. the consideration offered is fair and reasonable.
The court will not make such an order unless it considers that it is just and
equitable to do so, having regard, in particular, to the number of shareholder who has
been traced who did accept the offer.
- 28
Chapter
6
PUBLIC ANNOUNCEMENT:
To make a public announcement an acquirer shall follow the following procedure:
- 29
3. Timings of announcement:
Public announcement should be made within four days of finalization of
negotiations or entering into any agreement or memorandum of understanding to
acquire the shares or the voting rights.
4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBI
Regulations. Therefore, it is required that it should be prepared showing therein the
following information:
(1)
paid up share capital of the target company, the number of fully paid
up and partially paid up shares.
(2)
(3)
The minimum offer price for each fully paid up or partly paid up
share;
(4)
- 30
(5)
(6)
(7)
Salient features of the agreement, if any, such as the date, the name
of the seller, the price at which the shares are being acquired, the
manner of payment of the consideration and the number and
percentage of shares in respect of which the acquirer has entered
into the agreement to acquirer the shares or the consideration,
monetary or otherwise, for the acquisition of control over the target
company, as the case may be;
(8)
The highest and the average paid by the acquirer or persons acting
in concert with him for acquisition, if any, of shares of the target
company made by him during the twelve month period prior to the
date of the public announcement;
(9)
Objects and purpose of the acquisition of the shares and the future
plans of the acquirer for the target company, including disclosers
whether the acquirer proposes to dispose of or otherwise encumber
any assets of the target company:
Provided that where the future plans are set out, the public
announcement shall also set out how the acquirers propose to
implement such future plans;
- 31
(10)
(11)
(12)
The date of opening and closure of the offer and the manner in
which and the date by which the acceptance or rejection of the offer
would be communicated to the share holders;
(13)
(14)
(15)
Provision for acceptance of the offer by person who own the shares
but are not the registered holders of such shares;
(16)
(17)
(18)
(19)
- 33
Chapter
7
- 34
Case Studies
Chapter
8
CASE STUDY 1
TATA-Tetley Deal
TATA tea acquired Tetley tea in February 29, 2000
In 1993, Tata Tea set up Tata Tetley Ltd, with the Tetley group, in Cochin
The company also set up Tata Tea, Great Britain for this acquisition
Tata Tea made its Global Depository Receipt issue for part- funding this
acquisition.
- 35
- 36
Tetley Tea
- 37
(3/31/00) (3/31/01)
Tata Tea
Tetley
Turn Over
$207 million
$417 million
Operating Profit
$36.0 million
$42.6 million
Employees
59,740
1,100
Tea Estates
54
Key Markets
India
Britain,Canada,
Australia,United States
OPERATIONAL SYNERGIES
- 39
Tetley pre
acquisition
Position in
the value
chain
40 % turnover
from packet
tea/tea bags
Increased
outsourcin
g
Produced 90 % Outsourced
of the tea
entire tea req.
requirements in from 35
house
countries
(procurement
of 3m kg of tea
every week)
Margins hedged
Global
footprints
Global presence
Domestic
operations
UK and US
accounts for
bulk sales
- 40
- 41
Table : Profitability of Tata Tea Ltd. over the periods of 2001 to 2007
YEAR
Net Sales
Net Income
2001
2002
2003
2004
2005
2006
2007
Av.
(INR millions)
67441
71232
74103
77002
88632
96820
105447
82954
(INR millions)
89116
81606
80648
83845
95024
104017
114611
92695
Total
Assets
(INR millions)
146923
15230
154024
142017
152908
169743
270461
169768
ROA*
% per year
60
53
52
59
62
61
42
55
- 42
Total
Equity
(INR millions)
89698
96799
97863
97524
104897
116126
156555
108485
ROE**
% per year
99
84
82
85
90
89
73
86
2001
2002
2003
2004
2005
2006
2007
Av.
ROA* %
per year
35
43
71
62
56
60
45
48
CASE STUDY 2
- 43
4
4
11
10
11
10
8
8
Systems division
- 44
Philips
Founded in 1891
- 45
Stentor
Founded in 1998
Annual revenue:$17,500,000
CASE STUDY 3
>
June 2008
>
>
Deal
2009
>
>
company
- 47
DAIICHI-SANKYO COMPANY
LIMITED
Established in Sept. 28th 2005.(JAPAN)
> Japans second largest drug maker company
>Ranked 22nd drug maker in the world
>Providing a stable supply of top-quality pharmaceutical products
>CEO :TAKASHI SHODA
>Workforce : 16,237 People.
>Major Industry : Ethical Drug Manufactures.
>Annual Sales in FY07: US$ 8.7 Bn
- 48
Particulars
Number of
Shares
% of Holding
92,519,126
22.01
46,258,063
11.00
81,913,234
19.49
48,020,900
11.42
268,711,323
63.92
- 49
Shareholding Pattern of
Consideration Computation:
- 50
Acquisition Consideration
(in Million Yens)
169,407
Value Attributed
Goodwill
Total Consideration
78.80
2.00
10.00
5.90
41.0
6.90
(20.00)
(45.00)
408.70
488.30
Particulars
Price paid per share by Daiichi
Amount (Rs.)
737.00
593/300
19804 Crores.
30982 Crores.
$ 8.5 Billion .
10434 Crores.
Global down turn due to the financial crisis has made Daiichi take a huge
hit on its balance sheet due to the acquisition of Ranbaxy.
Dec ' 09
Dec ' 08
Dec ' 07
Other income
276.39
91.26
439.7
79.57
209.66
Stock adjustment
-35.26
-180.92
-40.66
-48.65
-30.96
1,602.08
1,548.90
1,513.34
1,657.24
1,535.85
728.4
480.07
421.61
342.28
301.65
Excise
44.69
48.15
82.00
expenses
422.58
413.94
382.82
486.36
Expenses capitalised
Other expenses
1,663.65
1,984.15
1,171.49
1,032.27
1,049.47
Provisions made
148.2
125.39
118.73
111.76
101.33
Taxation
489.93
-594.37
156.69
60.11
-22.34
571.98
-1,032.33
617.72
386.45
223.7
-938.92
-22.6
53.68
210.21
210.19
186.54
186.34
186.22
1462.05
1444.31
2323.26
2243.2
34.78
34.36
62.27
60.19
OPM (%)
17.23
5.33
13.43
14.08
1.88
Raw material
Power and fuel
Employee expenses
Dec ' 06
Dec ' 05
Depreciation
Equity capital
Equity dividend rate
IMPACT :
- 53
In Yens billion
97.6
(215.5)
49.4
413.8
0.1
264.3
Analysis :
Risks in the deal for Daiichi-Sankyo :
- 54
Reason
Recording of 351.3 billion
in extraordinary losses due
to a one-time.
write-down of goodwill
pertaining to the
investment in Ranbaxy.
It is due to the cash
acquisitions of shares in U3
Pharma and Ranbaxy.
Which entailed cash
outflows.
Borrowings for the
acquisition of Ranbaxy's
share +240.0 billion
Increase by consolidation of
Ranbaxy.
- 55
- 56
CONCLUSION
Merger and acquisition the most talked about term today creating lot of
excitement and speculative activity in the markets. However, before the
idea of M&A crystallizes, the firm needs to understand its own capabilities
and industry position. It also needs to know the same about the other firms
it seeks to tie up with, to get a real benefit from a merger. A mergers and
Acquisitions activity is that the divesting firm moves from diversifying
strategy to concentrate on core activities in order to improve and increase
competitiveness. Globalization has increased the competitive pressure in
the markets. In a highly challenging environment a strong reason for M&A
is a desire to survive. Thus apart from growth, the survival factor has off
late, spurred the M&A activity worldwide. Some such factors are listed
below:
Management reputation
Marketing network
Technology level
Financial performance
Future earnings
- 58
Bibliography
Books :
Mergers and Acquisitions
Mergers and Acquisition
: ICFAI Book
:CA Final Study material
Newspaper:
The Economic Times
Web Sites:
www.google.com
www.mca.gov.in
www.wikipedia.com
www.businessstandard.com
- 59
NOTES
In
d
us
tr
y
Motive
Equus
McKann Erikson India
June 1996
March 1998
Hindustan Thompson
Associates
Bates Carion
Ind Travels
Sita Travels
June 1998
Jan 2000
August 1999
Jan 2000
SOTC
Karvy Consultants
SB Billimoria
May 1997
April 1996
June 1996
Increase stake
Entry in Indian market
Entry in Indian market
SR Batliboi
Wyatt India
Macmillan India
Jan 1997
March 1998
May 1997
April 1996
June 1999
BFL Software
June 1998
April 1999
July 1999
Sept 1999
- 60
Tata IBM
Sept 1999
- 61
NOTES
Table 1: Share of M and As in FDI
Year
1997
1998
1999
(Jan-Mar)
Total
Inflows in India.
FDI Inflows
M and A Funds
($ million)
($ million)
3200
2900
1300
1000
Share of M and A
Funds in Inflows
(Percent)
40.6
34.5
1400
7100
500
2800
35.7
39.4
Total
13
7
12
48
65
32
79
256
- 62
Number
Amount
(Rs. Million)
19
13,661
718
36
37,360
1,038
32
87
36,420
87,440
1,138
1,005
- 63