MA are very important tools of corporate growth. A firm can achieve growth in several ways. It can grow internally or externally Internal Growth can be achieved if a firm expands its existing activities by up scaling capacities or establishing new firm with fresh investments in existing product markets. It can grow internally by setting its own units in to new market or new product. Mergers and Acquisitions have been the part of inorganic growth strategy of corporate worldwide. Post 1991 era witnessed growing appetite for takeovers by Indian corporate also across the globe as a part of their growth strategy. This series of acquisitions in metal industry was initiated by acquisition of Arcelor by Mittal followed by Corus by Tata’s. Indian aluminium giant Hindalco extended this process by acquiring Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled aluminium products. Hindalco Industries Ltd.,acquired Novelis Inc. to gain sheet mills that supply can makers and car companies.Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the leader in downstream aluminium rolled products. The acquisition of Novelis by Hindalco bodes well for both the entities. Novelis, processes primary aluminium to sell downstream high value added products. This is exactly what Hindalco manufactures. This makes the marriage a perfect fit. Currently Hindalco, an integrated player, focuses largely on manufacturing alumina and primary aluminium. It has downstream rolling, extruding and foil making capacities as well, but they are far from global scale. Novelis processes around 3 million tonnes of aluminium a year and has sales centers all over the world. In fact, it commands a 19% global market share in the flat rolled products segment, making it a leader.
Hindalco has completed this acquisition through its wholly-owned subsidiary AV Metals Inc and has acquired 75.415 common shares of Novelis, representing 100 percent of the issued and outstanding common shares AV Metals Inc transferred the common shares of Novelis to its wholly-owned subsidiary AV Aluminium Inc. The deal made Hindalco the world’s largest
aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as well as being India’s leading copper producer. Hindalco Industries Ltd has completed its
acquisition of Novelis Inc under an agreement in which Novelis will operate as a subsidiary of Hindalco.
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,
A mix of the above modes.
A merger in which two firms in the same industry combine.
Often in an attempt to achieve economies of scale and/or scope.
A merger in which one firm acquires a supplier or another firm that is closer to its existing customers.
Often in an attempt to control supply or distribution channels.
A merger in which two firms in unrelated businesses combine.
Purpose is often to ‘diversify’ the company by combining uncorrelated assets and income streams
Cross-border (International) MAs
A merger or acquisition involving a Canadian and a foreign firm an either the acquiring or target company.
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.
An acquisition may be affected by
agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power;
purchase of shares in open market;
to make takeover offer to the general body of shareholders;
purchase of new shares by private treaty;
Acquisition of share capital through the following forms of considerations viz. means of cash, issuance of loan capital, or insurance of share capital.
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 offered company being more co-operative.
De-merger or split or divisions of a company are the synonymous terms signifying a movement in the company.
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 is 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.
In 2007, there were a total of 676 MA deals and 405 private equity deals, in 2007, the total value of MA and PE deals was USD 70 billion, Total MA deal value was close to USD 51 billion, Private equity deals value increased to USD 19 billion
A¢â‚¬A¢ Globalization and increased competition
A¢â‚¬A¢ Concentration of companies to achieve economies of scale
A¢â‚¬A¢ Cash Reserves with corporate
A¢â‚¬A¢ Cross-border deals are growing faster than domestic deals
A¢â‚¬A¢ Private Equity (PE) houses have funded projects as well as made a few acquisitions in India
1. Tata Steel-Corus: $12.2 billion
On January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at $12.2 billion.
The deal is the largest Indian takeover of a foreign company till date and made Tata Steel the world’s fifth-largest steel group.
2. Vodafone-Hutchison Essar: $11.1 billion
On February 11, 2007, Vodafone agreed to buy out the controlling interest of 67% held by Li Ka Shing Holdings in Hutch-Essar for $11.1 billion.
This is the second-largest MA deal ever involving an Indian company.
Vodafone Essar is owned by Vodafone 52%, Essar Group 33% and other Indian nationals 15%.
3. Hindalco-Novelis: $6 billion
Aluminium and copper major Hindalco Industries, the Kumar Mangalam Birla-led Aditya Birla Group flagship, acquired Canadian company Novelis Inc in a $6-billion, all-cash deal in February 2007.
Till date, it is India’s third-largest MA deal.
The acquisition would make Hindalco the global leader in aluminium rolled products and one of the largest aluminium producers in Asia. With post-acquisition combined revenues in excess of $10 billion, Hindalco would enter the Fortune-500 listing of world’s largest companies by sales revenues.
4. Ranbaxy-Daiichi Sankyo: $4.5 billion
Marking the largest-ever deal in the Indian pharma industry, Japanese drug firm Daiichi Sankyo in June 2008 acquired the majority stake of more than 50 per cent in domestic major Ranbaxy for over Rs 15,000 crore ($4.5 billion).
The deal created the 15th biggest drugmaker globally, and is India’s 4th largest MA deal to date
5. NTT DoCoMo-Tata Tele: $2.7 billion
Japanese telecom giant NTT DoCoMo picked up a 26 per cent equity stake in Tata Teleservices for about Rs 13,070 crore ($2.7 billion) in November 2008.
This is the 6th-largest MA deal involving an Indian company.
With a subscriber base of 25 million in 20 circles DoCoMo paid Rs 20,107 per subscriber to acquire the stake. DoCoMo picked up the equity through a combination of fresh issuance of equity and acquisition of shares from the existing promoters.
A· Tata steel buys Corus Plc : 12.1$ billion
A· Hindalco acquired novelis: 6$ billion
A· Tata buy jaguar and land rover: 2.3$ billion
A· Essar steel buys Algoma Steel: 1.58$ billion
A· Vodafone buys hutch: 11$ billion
A· POSCO to invest in building steel manufacturing plants and facilities in India by 2016
A· Goldman Sachs Plans investment in private equity, real estate, and private wealth management
Corus Group plc
Daewoo Electronics Corp.
Kenya Petroleum Refinery Ltd.
Oil and Gas
In year 2008..
A¢â‚¬A¢ MA deals in India in 2008 totaled worth USD 19.8 bn
A¢â‚¬A¢ Less compared to last year which stood at 33.1 bn $.
A¢â‚¬A¢ Decline of MA activity was in line with the global activity.
A¢â‚¬A¢ Cross border MA totaled 8.2 ban $ compared to 18.7 ban $.
The acquisition will expose Hindalco to weaker balance sheet. Besides the company will move from high margin metal business to low-margin downstream products business. The acquisition will more than triple Hindalco’s revenues, but will increase the debt and erode its profitability.The deal will create value only after the Hindalco’s expansion completion, and due to its highly leveraged position, expansion plans may get affected. Some of the customers of Novelis are significant to the company’s revenues, and that could be adversely affected by
changes in the business or financial condition of these significant customers or by the loss of their business. (The company’s ten largest customers accounted for approximately 40% of total net sales in 2005, with Rexam Plc and its affiliates representing approximately 12.5% of company’s total net sales in that year). Novelis profitability could be adversely affected by the inability to pass through metal price increases due to metal price ceilings in certain of the company’s sales contracts.
Adverse changes in currency exchange rates could negatively affect the financial results and the competitiveness of company’s aluminium rolled products relative to other materials.The Company’s agreement not to compete with Alcan in certain end-use markets may hinder Novelis ability to take advantage of new business opportunities. The end-use markets for certain of Novelis products are highly competitive and customers are willing to accept substitutes for the company products. Though the Hindalco-Novelis acquisition had many
synergies, some analysts raised the issue of valuation of the deal as Novelis was not a profit making company and had a debt of US $ 2.4 billion. They opined that the acquisition deal was over-valued as the valuation was done on Novelis’ financials for the year 2005 and not on the financials of 2006 in which the company had reported losses.
Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was not so common. The situation has undergone a sea change in the last couple of years. Acquisition of foreign companies by the Indian businesses has been the latest trend in the Indian corporate sector.
There are different factors that played their parts in facilitating the mergers and acquisitions in India. Favorable government policies, buoyancy in economy, additional liquidity in the corporate sector, and dynamic attitudes of the Indian entrepreneurs are the key factors behind the changing trends of mergers and acquisitions in India.
The Indian IT and ITES sectors have already proved their potential in the global market. The other Indian sectors are also following the same trend. The increased participation of the Indian companies in the global corporate sector has further facilitated the merger and acquisition activities in India.
Recently the Indian companies have undertaken some important acquisitions. Some of those are as follows:
Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982 million.
Tata Steel acquired Corus Group plc. The acquisition deal amounted to $12,000 million.
Dr. Reddy’s Labs acquired Betapharm through a deal worth of $597 million.
Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million.
Suzlon Energy acquired Hansen Group through a deal of $565 million.
The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729 million.
HPCL acquired Kenya Petroleum Refinery Ltd. The deal amounted to $500 million.
VSNL acquired Teleglobe through a deal of $239 million.
When it comes to mergers and acquisitions deals in India, the total number was 287 from the month of January to May in 2007. It has involved monetary transaction of US $47.37 billion. Out of these 287 merger and acquisition deals, there have been 102 cross country deals with a total valuation of US $28.19 billion.
NAV is the sum total of value of asserts (fixed assets, current assets, investment on the date of Balance sheet less all debts, borrowing and liabilities including both current and likely contingent liability and preference share capital). Deductions will have to be made for arrears of preference dividend, arrears of depreciation etc
The three steps necessary for valuing share are:
Valuation of assets
Ascertainment of liabilities
Fixation of the value of different types of equity shares.
This method also called profit earning capacity method is based on the assessment of future maintainable earnings of the business. While the past financial performance serves as guide, it is the future maintainable profits that have to be considered. Earnings of the company for the next two years are projected (by valuation experts) and simple or weighted average of these profits is computed
This method is applicable only in case where share of companies are listed on a recognized stock exchange. The average of high or low values and closing prices over a specified previous period is taken to be representative value per share.
It is clear from the findings of the earlier scientific studies and reports of consultants that MAs fail quite often and consequently, failed to create value or wealth for shareholders of the acquirer company. A definite answer as to why mergers fail to generate value for acquiring shareholders cannot be provided because mergers fail for a host of reasons. Some of the important reasons for failures of mergers are discussed below:
Size Issues: A mismatch in the size between acquirer and target is one of the reasons found for poor acquisition performance. Many acquisitions fail either because of ‘acquisition indigestion’ through buying too big targets or by not giving the smaller acquisitions the time and attention it required Moreover, when the size of the acquirer is very large when compared to the target firm, the percentage gains to acquirer will be very low when compared to the higher percentage gains to target firms. They find that the smaller acquirer companies do more profitable acquisitions while larger acquirer companies do deals that cause their shareholders to lose acquisitions.
Diversification: Very few firms have the ability to successfully manage the diversified businesses. Lot of studies found that acquisitions into related industries consistently outperform acquisitions into unrelated around 42% of the acquisitions that turned sour were conglomerate acquisitions in which the acquirer and acquired companies lacked familiarity with each other’s businesses. Unrelated diversification has been associated with lower financial performance, lower capital productivity and a higher degree of variance in performance for a variety of reasons including a lack of industry or geographic knowledge, a lack of focus as well as perceived inability to gain meaningful synergies. Unrelated acquisitions which may appear to be very promising may turn out to be a big disappointment in reality. For example, Datta et al. find that the presence of multiple bidders and the conglomerate acquisitions have a negative impact on the wealth of the bidding shareholders.
Poor Organization Fit: Organizational fit is described as "the match between administrative practices, cultural practices and personnel characteristics of the target and acquirer" 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 management. Mismatch of organization fit leads to failure of mergers.
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. 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
Striving for Bigness: Size is an important element for success in business. Therefore, there is a strong tendency among managers whose compensation is significantly influenced by size to build big empires the concern with size may lead to acquisitions. Size maximizing firms may engage in activities which have negative net present value Therefore when evaluating an acquisition it is necessary to keep the attention focused on how it will create value for shareholders and not on how it will increase the size of the company. finds that the results of his study are consistent with the takeovers being motivated by maximization of management utility reasons, rather than by the maximization of shareholders wealth.
Poor Cultural Fit: The relationship between cultural fit and acquisition implementation is highly related. It is difficult to undergo a successful implementation without adequately addressing the issues of cultural fit. Cultural fit between an acquirer and a target is often one of the most neglected areas of analysis prior to the closing of a deal. However, cultural due diligence is every bit as important as careful financial analysis. Lack of cultural fit between the merging firms will amount to misunderstanding, confusion and conflict.
Limited Focus: If merging companies have entirely different products, markets systems and cultures, the merger is doomed to failure. Added to that as core competencies are weakened and the focus gets blurred the effect on bourses can be dangerous. Purely financially motivated mergers such as tax driven mergers on the advice of accountant can be hit by adverse business consequences. Conglomerates that had built unfocused business portfolios were forced to sell non-core business that could not withstand competitive pressures. The Tatas for example, sold their soaps business to Hindustan Lever i.e. merger of Tata Oil Mill Company with Hindustan Lever Limited (Banerjee ).
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, saleability 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 ). 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
Failure to Take Immediate Control: Control of the new unit should be taken immediately after signing of the agreement. ITC did so when they took over the BILT unit even though the consideration was to be paid in 5 yearly instalments. ABB puts new management in place on day one and reporting systems in place by three weeks
Failure of Top Management to follow Up: After signing the MA agreement, the top management should be very active and should make things happen. Initial few months after the takeover determine the speed with which the process of tackling the problems can be achieved. It is very rarely that the bought out company is firing on all cylinders and making a lot of money. Top management follow-up is essential to go with a clear road map of actions to be taken and set the pace for implementing once the control is assumed
Failure of Leadership Role: Some of the roles leadership should take seriously are modeling, quantifying strategic benefits and building a case for MA activity and articulating and establishing high standard for value creation. Walking the talk also becomes very important during MAs
Mergers and acquisition has become very popular over the years especially during the last two decades owing to rapid changes that have taken place in the business environment. Business firms now have to face increased competition not only from firms within the country but also from international business giants thanks to globalization, liberalization, technological changes and other changes. Generally the objective of MAs is wealth maximization of shareholders by seeking gains in terms of synergy, economies of scale, better financial and marketing advantages, diversification and reduced earnings volatility, improved inventory management, increase in domestic market share and also to capture fast growing international markets abroad. But astonishingly, though the number and value of MAs are growing rapidly, the results of the studies on the impact of mergers on the performance from the acquirers’ shareholders perspective have been highly disappointing. In this paper an attempt has been made to draw the results of some of the earlier studies while analyzing the causes of failure of majority of the mergers. While making the merger deals, it is necessary not only to look into the financial aspects of the deal but also to analyse the cultural and people issues of both the concerns for proper post-acquisition integration and for making the deal successful. But it is unfortunate that in many deals only financial and economic benefits are considered while neglecting the cultural and people issues.
Thus in nut shell we can say that MA have become common in our country’s business set up. There is a tremendous need for people to grow and become global players expanding their business spheres.
If success is to be achieved in MA cohesive, well integrated and motivated workforce is required who is willing to take on the challenges that arise in the process of MA and there should be proper organization among employees and they should be provided with proper working conditions.
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