Introduction

In every organisation’s life and in every economy’s life comes a time

when growth development and expansion seems to reach a plateau.
Across what is today called the developed countries, we are
witnessing such a Cycle, where iconic brands, companies and
institutions are being acquired and merged. And across the world into
Asia, transition economies like India, China are pumping in billions of
dollars to acquire a stake or control of some of the crown jewels of
American/European Business & Industry.

Until upto a couple of years back, the news that Indian companies
having acquired American-European entities was very rare. However,
this scenario has taken a sudden U turn. Nowadays, news of Indian
Companies acquiring a foreign business is more common than other
way round.

Buoyant Indian Economy, extra cash with Indian corporates,

Government policies and newly found dynamism in Indian
businessmen have all contributed to this new acquisition trend. Indian
companies are now aggressively looking at North American and
European markets to spread their wings and become the global
players.

The Indian IT and ITES companies already have a strong presence in

foreign markets, however, other sectors are also now growing rapidly.
The increasing engagement of the Indian companies in the world
markets, and particularly in the US, is not only an indication of the
maturity reached by Indian Industry but also the extent of their
participation in the overall globalization process.

The sectors attracting investments by Corporate India include metals,

pharmaceuticals, industrial goods, automotive components,
beverages, cosmetics and energy in manufacturing; and mobile
communications, software and financial services in services, with
pharmaceuticals, IT and energy being the prominent ones among
these.
 Year 2007 can be called as the year of mergers and aquisitions for
India. Besides the investments flowing into India, Indian corporations
currently loaded with excess cash are on an acquisitions spree.

ICICI bank’s Global Investment Outlook report, says the total

equity deals struck by Indian companies have crossed 50
billion USD in 2007. In the same timeframe last year the equity
deals stood at about 15 billion dollars in 2006.

Here are the top 10

acquisitions made by Indian
companies worldwide:
Deal
Target Country
Acquirer value Industry
Company targeted
($ ml)
Tata Corus Group
UK 12,000 Steel
Steel plc
Hindalco Novelis Canada 5,982 Steel
Daewoo
Videocon Electronics Korea 729 Electronics
Corp.
Dr.
Pharmaceutic
Reddy’s Betapharm Germany 597
al
Labs
Suzlon Hansen
Belgium 565 Energy
Energy Group
Kenya
HPCL Petroleum Kenya 500 Oil and Gas
Refinery Ltd.
Ranbaxy Pharmaceutic
Terapia SA Romania 324
Labs al
Tata
Natsteel Singapore 293 Steel
Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom
If you calculate top 10 deals itself account for nearly US $ 21,500
million. This is more than double the amount involved in US
companies’ acquisition of Indian counterparts. Graphical
representation of Indian outbound deals since 2000.

The largest overseas deal was the Videocon Group's acquisition of

Thomson's colour picture tube business in China, Poland, Mexico, and
Italy for a total of $290 million. The deal was paid for by an issue of
shares in two Videocon companies — Videocon International
(consumer durables) and Videocon Industries (oil and gas exploration).

The other large overseas deal was by pharmaceuticals Matrix

Laboratories, which acquired 100 per cent of the Belgian pharma
company, Docpharma for $263 million). UBS acted as the advisor to
Thomson and Matrix respectively. IT companies were active acquirers
with 13 deals worth $89 million.

From where has this confidence come in Indian Businesses ?

The outsourcing phenomenon, especially in IT Industry has helped

Indian companies in lot of direct and indirect ways. First and foremost,
it has ensured that Indian managers and executives are now far more
exposed to Western business culture and practices. Over a period of
time, the Indian offshore companies have created an image of reliable
low cost, yet high quality products and services. Outsourcing/
Offshoring companies have increased their profits exponentially. There
is a lot more cash available with Indian companies than ever before.
Their capacity to borrow large amount of cash has also gone high.

What does all this result into - Acquisitions.

Indian companies are now eyeing Global markets instead of domestic

to move up the growth ladder. If you are a large company, you need to
have a presence in US and Europe. Managers and Executives of Indian
companies are taking much higher Risks than ever before.

Also, the regulatory changes have made the whole process of

acqusition much easier than ever before. Some restrictions like the
amount of Foreign exchange entering India have been relaxed. Net
result? Indian companies are flush with foreign exchange !

Overseas deals
While the INDATA survey is restricted to corporate finance activity
involving Indian targets, the volume of overseas acquisitions by Indian
companies can no longer be ignored. Indian companies continued to
acquire abroad continued in H1 2005. There were 43 overseas
acquisitions by Indian acquirers in H1 2005 compared to 60 in the
whole of 2004 (Table 2).

Reasons for mergers

We identify four key drivers for Indian companies considering overseas
acquisitions:
 • The need to capture new markets: Some 81 percent of
participants in the Accenture study said the key motivation for
going global was to find new markets to sustain top-line growth.

• The need to expand capabilities and assets: Many Indian

companies are seeking to expand their distinctive capabilities by
acquiring specific skills, knowledge and technology abroad,
which are either unavailable or of inadequate quality in India.

• The need to expand product or service portfolios:

Accenture's analysis reveals that most Indian companies are
endeavoring to increase market share by building the size of
their product and service portfolios.

• The pressure of domestic competition: Domestic

competition is pushing some Indian companies into less
competitive overseas markets, thereby spreading their risk
across geographies.

Similarly, the acquired companies can expect to receive their share of

benefits.
1. Assurance of continued operation.
2. Minimal workforce retrenchment
3. Access to funds, resources and markets of the parent company.

The most important benefit that the developing and transition

economies derive from outward investments is increased
competitiveness. This strengthens the arms of local companies and of
the MNCs to survive in a competitive milieu. Therefore, the more the
domestic industries invest abroad, the more the benefits to the home
economy.

Reasons for its failure

Revenue deserves more attention in mergers; indeed, a failure to focus on this important
factor may explain why so many mergers don’t 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.
It is said 2 out of 3 mergers fail for a number of reasons:
1. Lack of synergies, and cultural fit between two companies.
2. Uncertainty over the process of merger/acquisition, leading to
loss of confidence among key personnel and workforce.
3. Asset stripping of the acquired company.
4. Shuttering up the acquired company because it was a competitor
whose products duplicate what the parent company is producing.

Culture Shock.

Mergers are like marriages. The right partner must be selected after an
honest and meaningful courtship. There must be communication,
flexibility and mutual respect.

Organizational culture is a blend of an organization's values, traditions,

beliefs and priorities. Also, it helps determine and legitimize what sort
of behavior is rewarded in an organization.

The very minute that merger rumblings are heard in an organization,

the work climate begins to change. Employees become emotionally
confused and anxious, similar to how one might feel when a mate
makes an abrupt announcement demanding a divorce. The initial
feeling is one of betrayal.

Employees begin to divert time and energy to wonder how their career,
power and prestige will be impacted. Gossip within the organization
competes with production and then the competition can gain a
foothold.

Combining merged cultures requires a focus on one new vision and

one new mission, developed by a cross-section team of representatives
from both organizations. Problems typically occur when the larger or
stronger of the two organizations try to significantly influence the
integration.

4.5. Poor Organization Fit

:
Organizational fit is described as “the match between
administrative practices, cultural practices and personnel
characteristics of the target
and acquirer” (Jemison and Sitkin 28]). It influences the ease with
which two
organizations can be integrated during implementation. Machhi [36]
states that
organisation structure with similar management problem, cultural
system and
structure will facilitate the effectiveness of communication pattern and
improve the
company’s capabilities to transfer knowledge and skills. Need for
proper
organization fit is stressed by Hubbard [27]. Mismatch of organization
fit leads to
failure of mergers.
4.6. Poor Strategic Fit: A Merger will yield the desired result only if
there is
strategic fit between the merging companies. But once this is assured,
the gains will
outweigh the losses (Maitra [38]). Mergers with strategic fit can
improve
profitability through reduction in overheads, effective utilization of
facilities, the
ability to raise funds at a lower cost, and deployment of surplus cash
for expanding
business with higher returns. But many a time lack of strategic fit
between two
merging companies, especially lack of synergies results in merger
failure. Strategic
fit can also include the business philosophies of the two entities (return
on
investment versus market share), the time frame for achieving these
goals (short-
term versus long term) and the way in which assets are utilized (high
capital
investment or an asset stripping mentality). Sudarsanam, Holl and
Salami [55] find
that marriage between companies with a complementary fit in terms of
liquidity
slack and surplus investment opportunities is value creating for both
groups of
shareholders. The absence of strategic fit between the companies may
destroy the
value for shareholders of both the companies.
P&G –Gillette merger in consumer goods industry is a unique case of
acquisition
by an innovative company to expand its product line by acquiring
another innovative
company, was described by analysts as a perfect merger (Chaturvedi
and Sinha [14]).
4.8. Paying Too Much (Over paying): In a competitive bidding
situation, a
company may tend to pay more. Often highest bidder is one who
overestimates value
out of ignorance. Though he emerges as the winner, he happens to be
in a way the
unfortunate winner. This is called winners curse hypothesis (Roll [49];
Chandra
[13]). Abyankar, Ho, and Zhao [1] find that the benchmark portfolio of
acquirer
dominates the merger portfolio of acquirers that paid highest premiums to
the target
firms. He views that overpayment may be a possible reason for the long-run
underformance of some acquiring firms. Moeller, Schlingemann and Stulz [40]
find
overall, the abnormal return associated with acquisition announcements for
small
firms exceeds the abnormal returns associated with acquisition
announcements for
large firms by 2.24 percent. They point out that the large firms offer larger
acquisition premiums than small firms and enter into acquisitions with
negative
dollar synergies. Variaya and Ferris [57]’s empirical findings also subscribe to
the
overpayment hypothesis.
When the acquirer fails to achieve the synergies required to compensate the
price,
the M&A fail. More one pays for a company, the harder he will have to work
to
make it worthwhile for his shareholders (Banerjee [8]).When the price paid is
too
much, how well the deal may be executed, the deal may not create value
(Koller
[30]).
4.14. Failure to Examine the Financial Position: Examination of the
financial
position of the target company is quite significant before the takeovers are
concluded. Areas that require thorough examination are stocks, salability of
finished
products, value and quality of receivables, details and location of fixed
assets,
unsecured loans, claims under litigation, and loans from the promoters. A
London
Business School study in 1987 highlighted that an important influence on the
ultimate success of the acquisition is a thorough audit of the target company
before
the takeover (Arnold [5]). When ITC took over the paper board making unit of
BILT
near Coimbatore, it arranged for comprehensive audit of financial affairs of
the unit.
Many a times the acquirer is mislead by window-dressed accounts of the
target
(Hariharan [24]).
4.22. Other Causes: Apart from the causes mentioned above there may be
other
reasons for failure of mergers which include: cash acquisitions resulting in
the
acquirer assuming too much debt (Business India [10]); mergers between
two weak
companies; ego clashes between the top managements of the companies to
the
M&As and subsequently lacking coordination especially in the case of
mergers
between equals; inadequate attention to people issues while the due
diligence process
is carried out; failure to retain the key people and best talent (Zainulbhai
[60]);
growth in strategic alliances as a cheaper and less risky route to a strategic
goal than
takeovers; loss of identity of merging companies after the merger; expecting
results
too quickly after the takeover; and spending too much time on new activity
neglecting the core activity.

What will it take to succeed?

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 stumble.
TATA GROUP THE EPITOME OF ACQUISITIONISTS

One Indian group epitomizes the current trend: The Tatas have been
the most aggressive and successful Indian group in acquiring prized
overseas assets.

The Tatas’ acquisitions have spanned the range of products, brands,

industries and geographies

From Automobiles, to Tea, Coffee, IT, Chemicals, Steel, Telecom,

Hotels, the Tatas

have pumped in huge sums of money. And their hunger for

acquisitions shows no signs of abating.

Aggressive, Yet Respected

No other business house in India can boast the kind of unbroken

century-old lineage that is the proud legacy of Tatas. And it was this
legacy that swung the acquisition of Jaguar & Land Rover in Tatas
favour.

IMPACT ON INDIA
This Tata buy-out of these two brands is much more than mere
acquisition of a company. It is a strong positive message that
Tata is sending across the globe about Indian companies and
India itself !

For all the billions that will be going out of the country, much more is
expected to come
Into India through these acquisitions.

But why M&As? Six reasons, according to the former Ranbaxy

CEO, Mr D. S. Brar, drive M&As:
• Accessing new markets
From hotels across UK, France, Australia, to Steel and
Automobiles, the
Tatas get to access new markets, which are otherwise difficult to
prise open.

• Maintaining growth momentum,

The Tatas clearly have serious ambitions of becoming strong
global players.
And this cannot come through organic growth or internal
expansion.

• Acquiring visibility and international brands

Corus, Jaguar and Land Rover have brought the Tatas global
attention,
The development of Nano is another instance of the Tatas desire
to
meet the world on their terms.

• Buying cutting-edge technology rather than importing it,

Corus will give Tatas a whole mix of premium quality steel
products.
Jaguar & Land Rover are expected to bring a whole raft of new
technologies and
processes, and engineering expertise.

• Developing new product mixes.

• Improving operating margins and efficiencies, and taking on the

global competition.

SUCCESS ASSURED?
The Tatas have shown that they are cut from a different cloth. None of
the factors above
can be said to apply to the Tatas; their intentions are clear: Live, Let
Live, Grow & Flourish With Tatas.

CASE STUDY 1

GlaxoSmithKline Pharmaceuticals Limited, India

(Merger Success).
Mumbai -- Glaxo India Limited and SmithKline Beecham Pharmaceuticals
(India) Limited have legally merged to form GlaxoSmithKline Pharmaceuticals Limited
in India (GSK). It may be recalled here that the global merger of the two companies came
into effect in December 2000.

Commenting on the prospects of GSK in India, Vice Chairman and Managing

Director, GlaxoSmithKline Pharmaceuticals Limited, India, Mr. V Thyagarajan said,
“The two companies that have merged to become GlaxoSmithKline in India have a great
heritage – a fact that gets reflected in their products with strong brand equity.” He
added, “The two companies have a long history of commitment to India and enjoy a very
good reputation with doctors, patients, regulatory authorities and trade bodies. At GSK
it would be our endeavor to leverage these strengths to further consolidate our market
leadership.”

GlaxoSmithKline, India

The merger in India brings together two strong companies to create a formidable
presence in the domestic market with a market share of about 7 per cent.
 With this merger, GlaxoSmithKline has increased its reach significantly in India.
With a field force of over 2,000 employees and more than 5,000 stockiest, the company’s
products are available across the country. The enhanced basket of products of
GlaxoSmithKline, India will help serve patients better by strengthening the hands of
doctors by offering superior treatment and healthcare solutions.

GlaxoSmithKline, Worldwide
GlaxoSmithKline plc is the world’s leading research-based pharmaceutical and
healthcare company. With an R&D budget of over ₤2.3 billion (Rs.16, 130 crores),
GlaxoSmithKline has a powerful research and development capability, encompassing the
application of genetics, genomics, combinatorial chemistry and other leading edge
technologies.

A truly global organization with a wide geographic spread, GlaxoSmithKline has

its corporate headquarters in the West London, UK. The company has over 100,000
employees and supplies its products to 140 markets around the world. It has one of the
largest sales and marketing operations in the global pharmaceutical industry.
 CASE STUDY 2
Deutsche – Dresdner Bank (Merger Failure)

The merger that was announced on march 7, 2000 between Deutsche Bank and
Dresdner Bank, Germany’s largest and the third largest bank respectively was considered
as Germany’s response to increasingly tough competition markets.

The merger was to create the most powerful banking group in the world with the
balance sheet total of nearly 2.5 trillion marks and a stock market value around 150
billion marks. This would put the merged bank for ahead of the second largest banking
group, U.S. based citigroup, with a balance sheet total amounting to 1.2 trillion marks
and also in front of the planned Japanese book mergers of Sumitomo and Sukura Bank
with 1.7 trillion marks as the balance sheet total.

The new banking group intended to spin off its retail banking which was not
making much profit in both the banks and costly, extensive network of bank branches
associated with it.

The merged bank was to retain the name Deutsche Bank but adopted the Dresdner
Bank’s green corporate color in its logo. The future core business lines of the new
merged Bank included investment Banking, asset management, where the new banking
group was hoped to outside the traditionally dominant Swiss Bank, Security and loan
banking and finally financially corporate clients ranging from major industrial
corporation to the mid-scale companies.

With this kind of merger, the new bank would have reached the no.1 position of
the US and create new dimensions of aggressiveness in the international mergers.
But barely 2 months after announcing their agreement to form the largest bank in the
world, negotiations for a merger between Deutsche and Dresdner Bank failed on April 5,
2000.

The main issue of the failure was Dresdner Bank’s investment arm, Kleinwort
Benson, which the executive committee of the bank did not want to relinquish under any
circumstances.
 In the preliminary negotiations it had been agreed that Kleinwort Benson would
be integrated into the merged bank. But from the outset these considerations encountered
resistance from the asset management division, which was Deutsche Bank’s investment
arm.

Deutsche Bank’s asset management had only integrated with London’s

investment group Morgan Grenfell and the American Banker’s trust. This division alone
contributed over 60% of Deutsche Bank’s profit. The top people at the asset management
were not ready to undertake a new process of integration with Kleinwort Benson. So
there was only one option left with the Dresdner Bank i.e. to sell Kleinwort Benson
completely. However Walter, the chairman of the Dresdner Bank was not prepared for
this. This led to the withdrawal of the Dresdner Bank from the merger negotiations.

In economic and political circles, the planned merger was celebrated as

Germany’s advance into the premier league of the international financial markets. But
the failure of the merger led to the disaster of Germany as the financial center.
 CASE STUDY 3
Standard Chartered Grindlay’s (Acquisition
Success)

It has been a hectic year at London-based Standard Chartered Bank, going by its
acquisition spree across the Asia-Pacific region. At the helm of affairs, globally, is Rana
Talwar, group CEO. The quintessential general, he knew what he was up against when
he propounded his 'emerging stronger' strategy - of growth through consolidation of
emerging markets - for the turn of the Millennium: loads of scepticism. The central issue:
Stan Chart’s August 2000 acquisition of ANZ Grindlays Bank, for $1.3 billion.

Everyone knows that acquisition is the easy part, merging operations is not. And
recent history has shown that banking mergers and acquisitions (MERGERS &
ACQUISITION’s), in particular, are not as simple to execute as unifying balance sheets.
Can Stan Chart’s proposed merger with ANZ Grindlays be any different?

The '1' refers to the new entity, which will be India's No 1 foreign bank once the
integration is completed. This should take around 18 months; till then, ANZ Grindlays
will exist separately as Standard Chartered Grindlays (SCG). The '2' and '3' are Citibank
and Hong Kong and Shanghai Banking Corp (HSBC), India's second and third largest
foreign banks, respectively.

That makes the new entity the world's biggest 'emerging markets' bank. By way of
strengths, it will have treasury operations that will probably go unchallenged as the
country's most sophisticated. Best of all, it will be a dynamic bank. Thanks to pre-merger
initiatives taken by both banks, it could per- haps boast of the country's fastest growing
retail-banking business.

StanChart is rated highly on other parameters too. It is currently targeting global

cost-savings of $108 million in 2001, having reported a profit-before-tax of $650 million
in the first half of 2000, up 31 per cent from the same period last year. Net revenue
increased 6 per cent to $2 billion for the same period. Consumer banking, a typically low-
profit business which accounted for less than 40 per cent of its global operating profits till
four years ago, now brings in 55 per cent of profits. So the company's global report card
looks fairly good.

StanChart knows it mustn't let its energy dissipate. It has been growing at a claimed
annual rate of 25 per cent in the last two years, well over the industry average of below
10 per cent. But maintaining this pace won't prove easy, with Citibank and HSBC just
waiting to snip at it. The ANZ Grindlays acquisition had happened just before that,
though the process started in early 1999, at Stan Chart’s headquarters in London. At first,
it was just talk of a strategic tie-up with ANZ Grindlays, which had the same colonial
British antecedents.

But this plan was abandoned when it became evident that all decision-making
would vacillate between Melbourne and London, where the two are headquartered. By
December, ANZ had expressed a willingness to sell out, and StanChart initiated the due-
diligence proceedings. It wasn't until March that a few senior Indian bank executives
were let into the secret. Now, it's time to get going. A new vehicle, navigators in place,
engines revving and map charted, the road ahead is challenging and full of promise. To
steer clear of trouble is the only caution advised by industry analysts, as the two banks
integrate their businesses. Sceptics don't see how StanChart can really be greater than the
sum of its parts.

The aggression, though, is not as raw as it sounds. Behind it all is a strategy that
everyone at StanChart seems to be in synchrony with. And behind that strategy is Talwar,
very much the originator of the oft-repeated phrase uttered by every executive - "getting
the right footprint". The other key words that tend to find their way into every discussion
are 'focus' and 'growth'.

StanChart India's net non-performing loans, as a percentage of net total

advances, is reported at just 2 per cent for 1999-2000. In terms of capital adequacy
too, the banks are doing fine. StanChart has a capital base of 9.5 per cent of its risk-
weighted assets, while SCG has 10.9 per cent. So, with or without a safety net
provided by the global group, the Indian operations are on firm ground.
 CASE STUDY 4
TATA – TETLEY (Controversial Issue over Success And Failure).

The Tata group was infusing a fresh 30 million pounds into Tata tea that had been
used to buy an 85.7% stake in the UK-based Tetley last year. Already high on a heady
brew of a fresh buy and caffeine, most missed what Krishna Kumar's statement meant.

Tata Tea’s much hyped acquisition of Tetley, one of the world’s biggest tea
brands, isn’t proceeding according to the plan. 15 months ago, the Kolkata based Rs 913
crore Tata Tea’s buyout of the privately held The Tetley Group for Rs 1843 crore had
stunned corporate watchers and investment bankers alike. It was a coup! An Indian
company had used a leveraged buyout to snag one of the Britain’s biggest ever brands. It
was by far, the biggest ever leveraged buyout by an Indian company.

Tata Tea didn’t pay cash upfront. Instead, it invested 70 million pounds as equity
capital to set up Tata Tea. It borrowed 235 million to buy the Tetley stake. The plan was
that Tetley’s cash flows would be insulated from the debt burden.

When Tata Tea took the big gamble to buy Tetley, its intent was very clear. The
company had established a firm foothold in the domestic market and had a controlling
position in growing tea. Going global looked like the obvious thing to do. With Tetley,
the second largest brand after Lipton in its bag, Tata Tea looked ready to set the Thames
on fire.

Right from the start, Tetley was never a easy buy. In 1996, Allied Domecq, the
liquor and retail conglomerate, had put Tetley on the block. Even then Tata Tea, nestle,
Unilever and Sara lee had put in bids, all under 200 million pounds. Allied wanted to
cash on the table. Tata Tea didn’t have enough of its own. The others bids also did not go
through. Eventually, Tetley group together with a consortium of financial investors like
Prudential and Schroders, bought the entire equity stake for 190 million pounds in all
cash deal. Two years later, Tetley went for an IPO, hoping to raise 350-400 million
pounds. But the IPO never took place. Soon afterwards, the investors began looking for
exit options. Tetley was once again on the block.
 It was until Feb 2000 that the due diligence was completed. By this time, the
Tata's were ready with their offer. They would pay 271 million pounds to buy the entire
Tetley equity and the funds would go towards first paying off Tetley’s 106 million debt.
The balance would go the owners.

The offer price did not include rights to Tetley coffee business, which was sold to
the US-based Rowland Coffee Roasters and Mother Parker’s Tea and Coffee in Feb 2000
for 55 million pounds.

For Tetley new owners, too, the problems were only just beginning. The deal
hinged on Tetley’s ability, over and above covering its own debts, to service the loans
Tata Tea had taken for the acquisition. That’s where reality bites.

Consider the facts. When Tata Tea acquired Tetley through Tata Tea, it sunk in 70
million pounds as equity and borrowed 235 million pounds fro ma consortium to finance
the deal. Implicit in the LBO was that Tetley’s future cash flows would fund the SPV’s
interest and principal repayment requirements. At an average interest rate of 11.5%,
Tetley needed to generate 22 million pounds in interest alone on a loan o 190 million
pounds. Add to this the interest on the high cost vendor loan notes of 30 million pounds
—it worked out to be 4.5 million and the charges on the working capital portion,
amounting to 2 million pounds per annum. All this works out to about 28 million pounds
in interest alone per year.

At the same time, it also has to pay back the principal of 110 million pounds over
a nice period through half yearly installments. This works out to 12 million pounds per
year. If you were to assume that depreciation and restructuring charges were pegged at
last year’s levels, the bill tots up to 48 million pounds a year. In FY 1999, the Tetley’s
cash flows were 29 million pounds.

Some of the problems could have been obviated if Tetley’s cash flows had
increased by 40 % in FY 2001 over the previous year. That way, the company would
have covered both its own commitments as well as of the Tata's. But the situation
worsened. Major UK retailers clamped down on grocery prices last year. That
substantially reduced Tetley’s pricing flexibility.

Besides, the UK tea markets have been under pressure for some time now.
According to the UK government’s national food survey, there has been a substantial fall
in the consumption of mainstream teas- tea-bag black teas drunk with milk and sugar.
Also the tea drinking population in UK has come down from 77.1% to 68.3% in 1999.
On the other hand, natural juices and coffee have consistently increased their market
share.

So, when it was confronted by Tetley’s sliding performance, what options did
Tata Tea have? On its own, it could not do much. The last year has been one of the worst
years for the Indian tea industry and Tata Tea has also been affected. The drop in tea
prices and a proliferation of smaller brands in the organized segment have taken toll on
Tata Tea’s performance. In FY 2001, Tata Tea’s net profit fell by 19.59% from Rs
124.63 crore to Rs 100.21 crore. Income from operations declined by 8.72%.

But letting Tetley sink under the weight of the interest burden would have been an
unthinkable option, given the prestige attached to the deal.

Thus from the above case we infer that Tata had to shell out a lot of money to
cover all the debts of Tetley which was found not worthy enough by the general public.

But Tata still calls it to be a success whereas in reality it is a failure.

Conclusion
The giant positive strides that Brand India has taken in last few years
are nothing less than astonishing. Indian Businessmen and
Entrepreneurs are set out to revamp Indian image that will be boasting
world’s biggest corporation’s in near future. All the sectors, be it Steel,
manufacturing, Information technology, Auto and FMCG are all buzzing
with Mega Indian acquisitions.

One size doesn't fit all. Many companies find that the best way to get ahead is to expand
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.

By contrast, de-merged companies often enjoy improved operating performance thanks to

redesigned management incentives. Additional capital can fund growth organically or through
acquisition. Meanwhile, investors benefit from the improved information flow from de-merged
companies.

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