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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

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Room No.06
SESSION 2008-11

ST.XAVIERS COLLEGE (KOLKATA)

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

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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.

To find out reason for merger in the banking sector.


To understand the implications and evaluation.

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METHODOLOGY: ACCOUNTING APPROACH


Accounting methodology using the benchmark approach is one of the commonly
and frequently used accounting approaches to asses the performance of a company
following a merger or an acquisition. This approach compares the financial
performance the acquiring companies with either a non-acquiring companies in the
same line of business of a smaller size or with companies which have never
engaged in a merger or acquisition deal.
Different ratios are employed to asses the financial performance of the company
like Return on Equity (ROE) and Return on Assets (ROA). Different values
required can be found in the balance sheet of the company. The income statement
is also a major part of financial statement of the company. The annual reports of
the company can be found on the internet or different published sources.
After conducting the ratio analysis, the next step is to compare the results with the
values of the benchmark company or companies, to compare the profitability. This
benchmark is usually one or more industry competitors in same line of business. If
the value of the ratios such as ROE and ROA is found to be less than that of the
benchmark group, one can conclude that the merger didn't result in improved

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performance and didn't create value for the shareholders having a negative effect
on profitability and vice-versa.

Strengths of accounting methodology


1)

Accounts are certified.

2) Used by investors in judging corporate performance. An indirect measure of


economic value creation.

Weakness of accounting methodology


1) Possibly non-comparable data for different years. Companies may change their
reporting practices. Also reporting principles and regulations change over time.
2) Backward looking.
3) Ignores value of intangible assets.
4) Sensitive to inflation and deflation because historic cost approach.
5) Possibly inadequate disclosure by companies. Great latitude in reporting
financial results.
6) Differences among companies in accounting policies adds noise.
Differences in accounting principles from one country to the next make crossborder comparison difficult.
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Contents
Chapters

Page No.

Chapter 1. Introduction to Mergers and Acquisition.

7-12

Chapter 2. Purpose of merger and acquisition.

13-16

Chapter 3. Types of Mergers.

17-20

Chapter 4. Advantages of mergers and takeovers.

21-24

Chapter 5. Consideration of Merger and Takeover.

25-28

Chapter 6. Procedure of Merger and Acquisition.

29-33

Chapter 7. Why Mergers fail?.

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
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Chapter
1

Introduction to Mergers
and Acquisition

BUSINESS FIRMS IN THEIR PURSUIT OF GROWTH,ENGAGE IN BROAD RANGE OF


RESTRUCTURING ACTIVITIES. ACTIONS TAKEN TO EXPAND OR CONTRACT A FIRMS BASIC
OPERATIONSO OR FUNDAMENTALLY CHANGE ITS ASSETS OR FINANCIAL STRUCTURE ARE
REFERRED TO AS CORPORATE RESTRUCTURING ACTIVITIES.
CORPORATE RESTRUCTURING IS A BROAD UMBRELLA THAT COVERS MANY
THINGS.ONE OF THE M IS THE MERGER OR TAKEOVER.FROM THE VIEWPOINT OF THE BUYER .
M&A REPRESENTT EXPANSION AND FROM THE PERSPECTIVE OF THE SELLER IT REPRESENTS
A CHANGE IN OWNERSHIP THAT MAY OR MAY NOT BE VOLUNTARY.IN ADDITION TO
MERGERS,TAKEOVERS,AND CONTESTS FOR CORPORATE CONTROL,THERE ARE OTHER TYPES
CORPORATE RESTRUCTURING LIKE DIVESTITURES,REARRANGEMENTS,AND OWNERSHIP
REFORMULATION

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.
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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:
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Merger is defined as combination of two or more companies into a single


company where one survives and the others lose their corporate existence. The
survivor acquires all the assets as well as liabilities of the merged company or
companies. Generally, the surviving company is the buyer, which retains its identity,
and the extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more
existing companies. All assets, liabilities and the stock of one company stand
transferred to transferee company in consideration of payment in the form of:
Equity shares in the transferee company,
Debentures in the transferee company,
Cash, or
A mix of the above modes.

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

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(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.

DE-MERGER OR CORPORATE SPLITS OR DIVISION:


De-merger or split or divisions of a company are the synonymous terms
signifying a movement in the company.

What will it take to succeed?

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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.

Assess target quality:


To say that a company should be worth the price a buyer pays is to state the
obvious. But assessing companies in Asia can be fraught with problems, and several
deals have gone badly wrong because buyers failed to dig deeply enough. The
attraction of knockdown price tag may tempt companies to skip crucial checks.
Concealed high debt levels and deferred contingent liabilities have resulted in large
deals destroying value. But in other cases, where buyers have undertaken detailed
due diligence, they have been able to negotiate prices as low as half of the initial
figure.
Due diligence can be difficult because disclosure practices are poor and
companies often lack the information buyer need. Moreover, most Asian
conglomerates still do not present consolidated financial statements, leaving the
possibilities that the sales and the profit figures might be bloated by transactions
between affiliated companies. The financial records that are available are often
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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.

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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.

(2)Revamping production facilities:


1.

to achieve economies of scale by amalgamating production facilities


through more intensive utilization of plant and resources;

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2.
3.
4.
5.
6.
7.

to standardize product specifications, improvement of quality of


product, expanding
market and aiming at consumers satisfaction through strengthening
after sale
services;
to obtain improved production technology and know-how from the
offeree company
to reduce cost, improve quality and produce competitive products to
retain and
improve market share.

(3) Market expansion and strategy:


1. to eliminate competition and protect existing market;
2. to obtain a new market outlets in possession of the offeree;
3. to obtain new product for diversification or substitution of existing products
and to enhance the product range;
4. strengthening retain outlets and sale the goods to rationalize distribution;
5. to reduce advertising cost and improve public image of the offeree company;
6. strategic control of patents and copyrights .

(4) Financial strength:


1.
2.

to improve liquidity and have direct access to cash resource;


to dispose of surplus and outdated assets for cash out of combined
enterprise;
3.
to enhance gearing capacity, borrow on better strength and the greater
assets backing;
4.
to avail tax benefits;
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5.

to improve EPS (Earning Per Share).

(5) General gains:


1. to improve its own image and attract superior managerial talents to manage its
affairs;
2. to offer better satisfaction to consumers or users of. the product

(6) Own developmental plans:


The purpose of acquisition is backed by the offeror companys own
developmental plans.
A company thinks in terms of acquiring the other company only when it has
arrived at its own development plan to expand its operation having examined
its own internal strength where it might not have any problem of taxation,
accounting, valuation, etc. but might feel resource constraints with limitations
of funds and lack of skill managerial personnels. It has to aim at suitable
combination where it could have opportunities to supplement its funds by
issuance of securities, secure additional financial facilities, eliminate
competition and strengthen its market position.

(7) Strategic purpose:


The Acquirer Company view the merger to achieve strategic objectives
through alternative type of combinations which may be horizontal, vertical,
product expansion, market extensional or other specified unrelated objectives
depending upon the corporate strategies. Thus, various types of combinations

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distinct with each other in nature are adopted to pursue this objective like
vertical or horizontal combination.

(8) Corporate friendliness:


Although it is rare but it is true that business houses exhibit degrees of
cooperative spirit despite competitiveness in providing rescues to each other
from hostile takeovers and cultivate situations of collaborations sharing
goodwill of each other to achieve performance heights through business
combinations. The combining corporates aim at circular combinations by
pursuing this objective.

(9) Desired level of integration:


Mergers and acquisition are pursued to obtain the desired level of integration
between the two combining business houses. Such integration could be
operational or financial. This gives birth to conglomerate combinations. The
purpose and the requirements of the offeror company go a long way in
selecting a suitable partner for merger or acquisition in business
combinations.

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Chapter
3

Types of mergers

Merger or acquisition depends upon the purpose of the offeror company it


wants to achieve. Based on the offerors objectives profile, combinations could be
vertical, horizontal, circular and conglomeratic as precisely described below with
reference to the purpose in view of the offeror company.

(A) Vertical combination:


A company would like to takeover another company or seek its merger with that
company to expand espousing backward integration to assimilate the resources
of supply and forward integration towards market outlets. The acquiring company
through merger of another unit attempts on reduction of inventories of raw
material and finished goods, implements its production plans as per the
objectives and economizes on working capital investments. In other words, in
vertical combinations, the merging undertaking would be either a supplier or a
buyer using its product as intermediary material for final production.
The following main benefits accrue from the vertical combination to the acquirer
company i.e.
(1) it gains a strong position because of imperfect market of the intermediary
products,scarcity of resources and purchased products;
(2) has control over products specifications.

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(B) Horizontal combination :


It is a merger of two competing firms which are at the same stage of industrial
process. The acquiring firm belongs to the same industry as the target company.
The main purpose of such mergers is to obtain economies of scale in production
by eliminating duplication of facilities and the operations and broadening the
product line, reduction in investment in working capital, elimination in
competition concentration in product, reduction in advertising costs, increase in
market segments and exercise better control on market.

(C) Circular combination:


Companies producing distinct products seek amalgamation to share common
distribution and research facilities to obtain economies by elimination of cost on
duplication and promoting market enlargement. The acquiring company obtains
benefits in the form of economies of resource sharing and diversification.

(D) Conglomerate combination:


It is amalgamation of two companies engaged in unrelated industries like DCM
and Modi Industries. The basic purpose of such amalgamations remains
utilization of financial resources and enlarges debt capacity through re-organizing
their financial structure so as to service the shareholders by increased leveraging
and EPS, lowering average cost of capital and thereby raising present worth of the
outstanding shares. Merger enhances the overall stability of the acquirer
company and creates balance in the companys total portfolio of diverse products
and production processes.
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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

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WITH A VISION OF BEING IN THE TOP

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Chapter
4

Advantages of mergers and takeovers

Mergers and takeovers are permanent form of combinations which vest in


management complete control and provide centralized administration which are not
available in combinations of holding company and its partly owned subsidiary.
Shareholders in the selling company gain from the merger and takeovers as the
premium offered to induce acceptance of the merger or takeover offers much more
price than the book value of shares. Shareholders in the buying company gain in the
long run with the growth of the company not only due to synergy but also due to
boots trapping earnings.

Motivations for mergers and acquisitions


Mergers and acquisitions are caused with the support of shareholders,
managers ad promoters of the combing companies. The factors, which motivate the
shareholders and managers to lend support to these combinations and the resultant
consequences they have to bear, are briefly noted below based on the research work
by various scholars globally.

(1) From the standpoint of shareholders


Investment made by shareholders in the companies subject to merger should
enhance in value. The sale of shares from one companys shareholders to another
and holding investment in shares should give rise to greater values i.e. the
opportunity gains in alternative investments. Shareholders may gain from merger in
different ways viz. from the gains and achievements of the company i.e. through
(a) realization of monopoly profits;
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(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.

One or more features would generally be available in each merger where


shareholders may have attraction and favour merger.

(2) From the standpoint of managers


Managers are concerned with improving operations of the company, managing
the affairs of the company effectively for all round gains and growth of the company
which will provide them better deals in raising their status, perks and fringe benefits.
Mergers where all these things are the guaranteed outcome get support from the
managers. At the same time, where managers have fear of displacement at the hands
of new management in amalgamated company and also resultant depreciation from
the merger then support from them becomes difficult.
(3) Promoters gains
Mergers do offer to company promoters the advantage of increasing the size
of their company and the financial structure and strength. They can convert a
closely held and private limited company into a public company without
contributing much wealth and without losing control.

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(4) Benefits to general public


Impact of mergers on general public could be viewed as aspect of benefits and
costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or consumer
or the worker in the companies under merger plan.
a) Consumers
The economic gains realized from mergers are passed on to consumers
in the form of lower prices and better quality of the product which
directly raise their standard of living and quality of life. The balance of
benefits in favour of consumers will depend upon the fact whether or
not the mergers increase or decrease competitive economic and
productive activity which directly affects the degree of welfare of the
consumers through changes in price level, quality of products, after
sales service, etc.
(b) Workers community
The merger or acquisition of a company by a conglomerate or other
acquiring company may have the effect on both the sides of increasing
the welfare in the form of purchasing power and other miseries of life.
Two sides of the impact as discussed by the researchers and
academicians are: firstly, mergers with cash payment to shareholders
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provide opportunities for them to invest this money in other companies


which will generate further employment and growth to uplift of the
economy in general. Secondly, any restrictions placed on such mergers
will decrease the growth and investment activity with corresponding
decrease in employment. Both workers and communities will suffer on
lessening job opportunities, preventing the distribution of benefits
resulting from diversification of production activity.
(c) General public
Mergers result into centralized concentration of power. Economic power
is to be understood as the ability to control prices and industries output
as monopolists. Such monopolists affect social and political
environment to tilt everything in their favour to maintain their power ad
expand their business empire. These advances result into economic
exploitation. But in a free economy a monopolist does not stay for a
longer period as other companies enter into the field to reap the
benefits of higher prices set in by the monopolist. This enforces
competition in the market as consumers are free to substitute the
alternative products. Therefore, it is difficult to generalize that mergers
affect the welfare of general public adversely or favorably. Every merger
of two or more companies has to be viewed from different angles in the
business practices which protects the interest of the shareholders in
the merging company and also serves the national purpose to add to
the welfare of the employees, consumers and does not create hindrance
in administration of the Government polices.

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Chapter
5

Consideration of
Merger and Takeover

Mergers and takeovers are two different approaches to business


combinations. Mergers are pursued under the Companies Act, 1956 vide sections
391/394 thereof or may be envisaged under the provisions of Income-tax Act, 1961 or
arranged through BIFR under the Sick Industrial Companies Act, 1985 whereas,
takeovers fall solely under the regulatory framework of the SEBI Regulations, 1997.

MINORITY SHAREHOLDERS RIGHTS


SEBI regulations do not provide insight in the event of minority shareholders
not agreeing to the takeover offer. However section 395 of the Companies Act, 1956
provides for the acquisition of shares of the shareholders. According to section 395
of the Companies Act, if the offerer has acquired at least 90% in value of those
shares may give notice to the non-accepting shareholders of the intention of buying
their shares. The 90% acceptance level shall not include the share held by the offerer
or its associates. The procedure laid down in this section is briefly noted below.
1. In order to buy the shares of non-accepting shareholders the offerer must have
reached the 90% acceptance level within 4 months of the date of the offer, and
notice must have been served on those shareholders within 2 months of
reaching the 90% level.

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2. The notice to the non-accepting shareholders must be in a prescribed manner.


A copy of a notice and a statutory declaration by the offerer (or, if the offerer
is a company, by a director) in the prescribed form confirming that the
conditions for giving the notice have been satisfied must be sent to the target.
3. Once the notice has been given, the offerer is entitled and bound to acquire
the outstanding shares on the terms of the offer.
4. If the terms of the offer give the shareholders a choice of consideration, the
notice must give particulars of options available and inform the shareholders
that he has six weeks from the date of the notice to indicate his choice of
consideration in writing.
5. At the end of the six weeks from the date of the notice to the non-accepting
shareholders the offerer must immediately send a copy of notice to the target
and pay or transfer to the target the consideration for all the shares to which
the notice relates. Stock transfer forms executed on behalf of the nonaccepting shareholders by a person appointed by the offerer must also be
sent. Once the company has received stock transfer forms it must register the
offerer as the holder of the shares.
6. The consideration money, which is received by the target, should be held on
trust for the person entitled to shares in respect of which the sum was
received.
7. Alternatively, if the offerer does not wish to buy the non-accepting
shareholders shares, it must still within one month of company reaching the
90% acceptance level give such shareholders notice in the prescribed manner
of the rights that are exercisable by them to require the offerer to acquire their
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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
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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.

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Chapter
6

Procedure for Takeover


and Acquisition

PUBLIC ANNOUNCEMENT:
To make a public announcement an acquirer shall follow the following procedure:

1. Appointment of merchant banker:


The acquirer shall appoint a merchant banker registered as category I with
SEBI to advise him on the acquisition and to make a public announcement of offer on
his behalf.

2. Use of media for announcement:


Public announcement shall be made at least in one national English daily one
Hindi daily and one regional language daily newspaper of that place where the shares
of that company are listed and traded.

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ST. XAVIERS COLLEGE, KOLKATA

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)

Total number and percentage of shares proposed to be acquired


from public subject to minimum as specified in the sub-regulation
(1) of Regulation 21 that is:
a) The public offer of minimum 20% of voting capital of the
company to the shareholders;
b) The public offer by a raider shall not be less than 10% but more
than 51% of shares of voting rights. Additional shares can be
had @ 2% of voting rights in any year.

(3)

The minimum offer price for each fully paid up or partly paid up
share;

(4)

Mode of payment of consideration;

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ST. XAVIERS COLLEGE, KOLKATA

(5)

The identity of the acquirer and in case the acquirer is a company,


the identity of the promoters and, or the persons having control
over such company and the group, if any, to which the company
belong;

(6)

The existing holding, if any, of the acquirer in the shares of the


target company, including holding of persons acting in concert with
him;

(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

ST. XAVIERS COLLEGE, KOLKATA

(10)

The specified date as mentioned in regulation 19;

(11)

The date by which individual letters of offer would be posted to each


of the shareholders;

(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)

The date by which the payment of consideration would be made for


the shares in respect of which the offer has been accepted;

(14)

Disclosure to the effect that firm arrangement for financial


resources required to implement the offer is already in place,
including the details regarding the sources of the funds whether
domestic i.e. from banks, financial institutions, or otherwise or
foreign i.e. from Non-resident Indians or otherwise;

(15)

Provision for acceptance of the offer by person who own the shares
but are not the registered holders of such shares;

(16)

Statutory approvals required to obtained for the purpose of


acquiring the shares under the Companies Act, 1956, the
Monopolies and Restrictive Trade Practices Act, 1973, and/or any
other applicable laws;
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ST. XAVIERS COLLEGE, KOLKATA

(17)

Approvals of banks or financial institutions required, if any;

(18)

Whether the offer is subject to a minimum level of acceptances from


the shareholders; and

(19)

Such other information as is essential fort the shareholders to make


an informed design in regard to the offer.

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ST. XAVIERS COLLEGE, KOLKATA

Chapter
7

Why Mergers fail?

Why Mergers Fail?


Revenue deserves more attention in mergers; indeed, a failure to focus on this
important factor may explain why so many mergers dont pay off. Too many
companies lose their revenue momentum as they concentrate on cost synergies or
fail to focus on post merger growth in a systematic manner. Yet in the end, halted
growth hurts the market performance of a company far more than does a failure to
nail costs.

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ST. XAVIERS COLLEGE, KOLKATA

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

Value of deal:$431.3 million

Tata Tea made its Global Depository Receipt issue for part- funding this

acquisition.

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ST. XAVIERS COLLEGE, KOLKATA

Tata tea limited

Owned by India's Tata group


Set up in 1964 as a joint venture with UK based James Finlay and Company
World's second largest manufacturer and distributor of tea
Largest tea brand in India
Operations in 40 countries around the world
It is one of India's first multinational companies

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ST. XAVIERS COLLEGE, KOLKATA

Tetley Tea

Found in 1822 by Joseph and Edward Tetley

largest tea company in the United Kingdom

Inventor of the tea bag

Tetley blends, packs, markets and distributes tea products

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ST. XAVIERS COLLEGE, KOLKATA

Group holding structure

Comparison of Tata Tea & Tetley


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ST. XAVIERS COLLEGE, KOLKATA

(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

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ST. XAVIERS COLLEGE, KOLKATA

POST-MERGER FINANCIAL PERFORMANCE


Merger
implication

Tata tea pre


acquisition

Tetley pre
acquisition

Consolidated post acquisition

Position in
the value
chain

40 % turnover
from packet
tea/tea bags

100 % turnover Company has move up the value chain-80


from packet
%
tea/tea bags
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)

70 % of Tata tea req. outsourced from 20


countries
( reduction of risk arising out of
fluctuation in
production arising out of different
factors).

Predictable Margins highly Margins were


margins
correlated with not correlated
tea cycles
to tea cycles

Margins hedged

Global
footprints

Global presence

Domestic
operations

UK and US
accounts for
bulk sales

- 40

ST. XAVIERS COLLEGE, KOLKATA

In order to evaluate the consequences of the M&A activity, I compared


the financial performance of Tata Tea Ltd., with the performance of its
competitor Hindustan Lever Ltd., a subsidiary of Unilever.
Hindustan Lever Ltd.(HLL) is one of the largest producer of tea and
two major brands Lipton and Brooke Bond. HLL has also been
involved in M&A activities over the last decade. Hence HLL
constituted the benchmark company. By comparing the financial
performance of HLL and Tata Tea Ltd., I tested the following
hypothesis:
Hypothesis
M&A activity have a negative impact on Tata Tea's profitability that is
ROA and ROE of the company are negative and lower than that of
competitors.
Table below show the net sales, EBIT, ROA, net income (loss) and
ROE of Tata Tea and Hindustan Lever Ltd. for the periods between
2001 and 2007.

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ST. XAVIERS COLLEGE, KOLKATA

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

*ROA is calculated as net income/total assets


**ROE is calculated as net income/total shareholder's equity.

- 42

Total
Equity
(INR millions)
89698
96799
97863
97524
104897
116126
156555
108485

ROE**
% per year
99
84
82
85
90
89
73
86

ST. XAVIERS COLLEGE, KOLKATA


Table : Profitability of Hindustan Lever Ltd. over the periods of 2001 to 2007
YEAR

2001
2002
2003
2004
2005
2006
2007
Av.

Net Sales Net Income Total


(INR
(INR
Assets
millions) millions)
(INR
millions)
67441
14188
39563
71232
17358
40423
74103
24359
34198
77002
22483
36157
88632
23870
42118
96820
24240
40300
105447
22050
48553
82954
21221
40187

ROA* %
per year

35
43
71
62
56
60
45
48

Total Equity ROE** %


(INR
per year
millions)
304369
365887
209270
213872
209270
230562
272348
257940

*ROA is calculated as net income/total assets


**ROE is calculated as net income/total shareholder's equity.

CASE STUDY 2
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4
4
11
10
11
10
8
8

ST. XAVIERS COLLEGE, KOLKATA

Philips - Stentor deal


Oracle Corp. acquired BEA Systems Inc. on July 6, 2005
Value of deal : $ 280 million

Stentor will be incorporated into the Healthcare IT business of Philips' Medical

Systems division

Philips and Stentor will continue to pursue their


shared vision for healthcare IT

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ST. XAVIERS COLLEGE, KOLKATA

Philips

Founded in 1891

World's leading and Europe's largest electronics company

Activities in three interlocking domain

Operations in more than 60 countries around the world

Enjoys market leadership position in a number of products

Global sales in 2004 : $30.03 billion

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ST. XAVIERS COLLEGE, KOLKATA

Stentor
Founded in 1998

leader in the distribution, management, and storage of digital medical images

Stentor is an ISO 13485 certified medical device manufacturer

Stentor is an ISO 13485 certified medical device manufacturer

In July 2004, Stentor got Customer Value Enhancement Award

Annual revenue:$17,500,000

CASE STUDY 3

Ranbaxy - Daiichi deal


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ST. XAVIERS COLLEGE, KOLKATA

>

Daiichi-Sankyo acquired 34.8% stake in Ranbaxy on 11 th

June 2008
>

Value of deal : $ 2.4 billion

>

Deal

scheduled to be completed by March

2009
>

Daiichi Sankyo to pick another 9.4%

>

M. Singh to remain C.E.O. and M.D. of the

company

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ST. XAVIERS COLLEGE, KOLKATA

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

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ST. XAVIERS COLLEGE, KOLKATA

How did Daiichi-Sankyo acquire Ranbaxy?


Date of
Acqusition

Particulars

October 15, 2008 Acquisition of


shares under
open offer
pursuant to SEBI
Regulation. @
Rs.737/- per
share
October 20, 2008 Allotment of
Shares on
preferential Basis
@ Rs.737/- per
share.
October 20,2008 Acquisiton of
Shares from the
then promoters
of Company @
Rs.737/- per
share.(First
Trans.)
November 07,
Acquisition of
2008
Shares from the
then promoters
of Company @
Rs.737 per
share.(Second
Trans.)
TOTAL

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

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ST. XAVIERS COLLEGE, KOLKATA

Shareholding Pattern of

Ranbaxy Laboratories Ltd.

Consideration Computation:
- 50

ST. XAVIERS COLLEGE, KOLKATA

(A) How Much Did Daiichi-Sankyo Pay?


Nature of Transaction

Acquisition Consideration
(in Million Yens)

Open market share purchases

169,407

Share purchases from founding


family
Share purchases by issuance of
new shares
Direct acquisition related
expenditures
Total

Gain from Promoters 230,970


Money Infused in Ranbaxy s
Balance Sheet 85,001
2,974
488,354

(B) How did Daiichi-Sankyo value Ranbaxy?


Assets & Liabilities

Value Attributed

Book value of assets and liabilities.


(Cash, Inventory etc.)
Inventories
(Increase in inventories to fair value)
Tangible assets (Land)
Intangible assets (Leasehold land)
Intangible assets (Increase in
current products, etc. to fair value)
In-process R&D expenses
Deferred tax liability
Minority Interest

Goodwill
Total Consideration

78.80
2.00
10.00
5.90
41.0
6.90
(20.00)
(45.00)
408.70
488.30

Valuation of Ranbaxy Laboratories Ltd.


- 51

ST. XAVIERS COLLEGE, KOLKATA

Particulars
Price paid per share by Daiichi

Amount (Rs.)

52 week high / low as on 11th June


2008 for Ranbaxy share.
Valuation of 63.92% stake by Daiichi
Valuation of 100% equity of
Ranbaxy as per the deal
Enterprise valuation of Ranbaxy (on
a fully diluted basis).
Market capitalization of Ranbaxy as
on 30th May 2009 (conclusion of
deal).

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.

Annual Results of Ranbaxy in Detail:


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ST. XAVIERS COLLEGE, KOLKATA

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

Admin and selling expenses

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

Net profit / loss

571.98

-1,032.33

617.72

386.45

223.7

Extra ordinary item

-938.92

-22.6

53.68

Prior year adjustments

210.21

210.19

186.54

186.34

186.22

Agg.of non-prom. shares (Lacs)

1462.05

1444.31

2323.26

2243.2

Agg.of non promotoHolding (%)

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

Research and development

Depreciation

Equity capital
Equity dividend rate

IMPACT :
- 53

ST. XAVIERS COLLEGE, KOLKATA

Impact of Ranbaxy deal on Daiichi-Sankyo Balance Sheet


Particulars

In Yens billion

Net profit / (loss) for


Daiichi-Sankyo in FY2008

97.6

Net profit / (loss) for


Daiichi-Sankyo in FY2009

(215.5)

Net cash used in investing


activities in FY2008

49.4

Net cash used in investing


activities in FY2009

413.8

Short term bank loans in


FY2008

0.1

Short term bank loans in


FY2009

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.

ST. XAVIERS COLLEGE, KOLKATA

Ranbaxys exposure to the US dollar.


US FDA invocation may affect overall business in the country.
The anticipated synergies may fail to realize if Ranbaxy faces
regulatory hurdles world over.

Post Acquisition Objectives


To develop new drugs to fill the gaps and take advantage of
Ranbaxys strong areas.
To overcome its current challenges in cost structure and supply chain.

To match the competitor's strategy.

BENEFITS TO RANBAXY AFTER MERGER


Company will become one of the top 5 in generic business.

Access to Daiichi advanced R & D.

Access to Japanese drug market.

BENEFITS TO DAIICHI SANKYO AFTER MERGER

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ST. XAVIERS COLLEGE, KOLKATA

Strengthen the position of the company.


Faces intense competition from generics in its home market.
Acquisition will provide low cost manufacturing .
Market access to over 60 countries .

EFFECT OF THE DEAL ON STOCK MARKET


Expectation was near around Rs. 737 per share .
Ranbaxy fell 3 % to Rs. 543 on the BSE.

THREE MAIN REASONS :


Low acceptance ratio.
Capital gains tax will have to be paid on share through open
Offer.
Market are not affected even if 30 % dilution in Equity.

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ST. XAVIERS COLLEGE, KOLKATA

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:

The company's business prospects and nature of its business

The prospects for industry in which the company operates

Management reputation

Goodwill and brand value

Marketing network

Technology level

Efficiency level in terms of employees

Financial performance

Future earnings

The legal implications

Government policy in general and in particular for that industry


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ST. XAVIERS COLLEGE, KOLKATA

Current valuations of shares in stock markets

The M&A game in the Indian context has already made a


healthy start. However, the structural and legal problems are adversely
affecting the growth rates. Although, the government has realized this fact,
it is yet to become proactive. With the entry of multinationals into the Indian
markets, consolidation would be the best way to survive and to gain market
share.
Finally mergers and acquisitions are more common than hostile
takeovers in the financial services sector. The traditional challenges of
cultural differences are very much present. The values involved in mergers
and acquisitions are increasing and international bank mergers and
acquisitions are more often carried outside the European Economic area.
While small bank mergers and acquisitions are mostly carried out for cost
efficiency, large bank merger and acquisitions often have an element of
strategic re-positioning.

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ST. XAVIERS COLLEGE, KOLKATA

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

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ST. XAVIERS COLLEGE, KOLKATA

NOTES
In
d
us
tr
y

Table 5: Acquisitions in the New Series Industries.


Acquirer/Bidder
Target
Date

Adver WPP Group plc


tising McCann-Erickson
Agenc Worldwide
y
WPP Group plc
Bates Worldwidde
Trave Carlson Wagonlit
l
Kuoni,
Agenc Switzerland
y
Kuoni Travel
Busin Jardine Flemming
ess
Coopers and
Servic Laybrand
es
Ernst and Young
Watson Wyatt
Publi Macmillan UK
shing
McGraw Hill
Polygram
International
Holding Bv
Softw Baring India
are
Investments,
Mauritius
Baring Private
Equity Partners
(India)
Martek Holdings
Incorporation
IBM

Motive

Equus
McKann Erikson India

June 1996
March 1998

Entry in Indian market


Buyout joint venture partner

Hindustan Thompson
Associates
Bates Carion
Ind Travels
Sita Travels

June 1998

Buyout joint venture partner

Jan 2000
August 1999
Jan 2000

Buyout joint venture partner


Entry in Indian market
Entry in Indian market

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

Buyout joint venture partner


Buyout joint venture partner
Increase stake

Tata McGraw Hill


Polygram India

April 1996
June 1999

Buyout joint venture partner


Buyout joint venture partner

BFL Software

June 1998

Entry in Indian market

Synergy Log-In Systems

April 1999

Entry in Indian market

Mascon Global Ltd.

July 1999

Entry in Indian market

IBM Global Services

Sept 1999

Buyout joint venture partner

- 60

ST. XAVIERS COLLEGE, KOLKATA


IBM

Tata IBM

Sept 1999

- 61

Buyout joint venture partner

ST. XAVIERS COLLEGE, KOLKATA

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

Source: Economic Times December 23,1998 and June 21,1999

Table 2: MNE Related M and As in India.


Year
Mergers
Acquisitions
1993-94
4
9
1994-95
7
1995-96
12
1996-97
2
46
1997-98
4
61
1998-99
2
30
1999-2000
(up to Jan 2000)
5
74
Total
17
239

Total
13
7
12
48
65
32
79
256

Source: Kumar based on RIS-ICDRC Database

Table 3: Consideration involved in Select


MNE Related Acquisition.
Total
Percent
Consideration
Share
(Rs. Million)
All deals (87)
87449
100.00
Top 10 deals
50371
66.75
Top 20 deals
6999
80.04
Bottom 20 deals
773
00.79
Source: Kumar based on RIS-ICDRC Database

- 62

ST. XAVIERS COLLEGE, KOLKATA


Table 4: Average size of Acquisition
Deals
Types of
Acquirer
Existing MNE
affiliates
Foreign
corporations
Foreign parents
of existing
affiliates
All cases

Number

Amount
(Rs. Million)

Average per deal


(Rs. Million)

19

13,661

718

36

37,360

1,038

32
87

36,420
87,440

1,138
1,005

Source: Kumar based on RIS-ICDRC Database.

- 63