58466503 Chapters of Merger and Aqusition

MERGER & ACQUISITION IN INDIA

Merger & Acquisition in India

1.

Introduction to Mergers and Acquisition

1.1 Background

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. The phrase mergers and acquisitions (abbreviated

M&A) refers to the aspect of corporate strategy, corporate finance and management dealing

with the buying, selling and combining of different companies that can aid, finance, or help a

growing company in a given industry grow rapidly without having to create another business

entity.

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

& Acquisition’s may be critical for the healthy expansion and growth of the firm. Successful

entry into new product and geographical markets may require Mergers & Acquisition’s 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 net worth 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.

1.2. The Hubris theory of mergers and acquisitions

The Hubris theory (Roll, 1986) takes a hypothetical view that mergers and acquisitions


affect the value of merging firms. When a merger or acquisition announcement is made, the

shareholders of the bidding firm incur a loss in terms of the share price while those of the

target firm generally enjoy a rise in the share price.

The current reasoning behind this is that when a firm announces a merger offer to the

target, the share price of the target firm increases because shareholders in the target firm are

ready to transfer shares in response to the high premium that will be offered by the acquiring

firm. Roll (1986) says " ...the hubris hypothesis is very simple: decision-makers in acquiring

firms pay to much for their targets..." (p.213). This behaviour is sometimes attributed to the

overconfidence of the shareholders of the bidding firm, hence the term "hubris". The increase

in share price of a target firm finally drives up the value of the target firm. On the ether hand,

the shareholders of acquiring firms suffer a capital loss of share value because they must

allocate cash or additional shares to the target shareholders, and sometimes they overpay

(Bames, 1998). Singh (1998) points out that there are a number of studies supporting the

existence of bidder overpayment consistent with the Hubris hypothesis. Consequently, the

decrease in share prices of an acquiring firm will drive down the value of the bidding firm.

Therefore, a takeover offer drives up the value of acquired firms and drives down the value of

acquiring firms (McCardle and Viswanathan, 1994).

Roll (p. 197) says, "My purpose here is to suggest a different and less conclusive

interpretation of the empirical results. This interpretation may net mm out to be valid, but I

hope to show that it has enough plausibility to be at least considered in further

investigation". In view of this hypothesis, it is important to test whether this theory is able to

accurately predict behaviour under different conditions of mergers and acquisitions. An

important test of a theory is its ability to predict behaviour under real conditions (Kerlinger,

1992). Also theories of a speculative nature, such as the hubris hypothesis, must be"rigorously

and ruthlessly tested by observation or experiments" (Chalmers, 1982, p.38). If a theory

cannot be supported by observational or experimental tests, it must be replaced by ones that

make better predictions and have better empirical support.

Hubris hypothesis has been empirically tested by studies such as: Dodd and Ruback,

1977;Bishop et.al., 1987; Ravenscraft and Scherer, 1989; Franks and Harris, 1989; Zhang,


1995;Sudarsanam et.al., 1996; Grallon et.al, 1997; Maquieria et.al., 1998. These studies have

produced empirical evidence in support of the hubris theory.

1.3. Definitions of merger, acquisition and takeover

Merger

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.

In business or economics a merger is a combination of two companies into one larger

company. Such actions are commonly voluntary and involve stock swap or cash payment to

the target. Stock swap is often used as it allows the shareholders of the two companies to share

the risk involved in the deal.

A merger can resemble a takeover but result in a new company name (often combining the

names of the original companies) and in new branding; in some cases, terming the

combination a "merger" rather than an acquisition is done purely for political or marketing

reasons.


Merger is a financial tool that is used for enhancing long-term profitability by expanding their

operations. Mergers occur when the merging companies have their mutual consent as different

from acquisitions, which can take the form of a hostile takeover. The business laws in US vary

across states and hence the companies have limited options to protect themselves from hostile

takeovers. One way a company can protect itself from hostile takeovers is by planning

shareholders rights, which is alternatively known as “poison pill.

If we trace back to history, it is observed that very few mergers have actually added to the

share value of the acquiring company and corporate mergers may promote monopolistic

practices by reducing costs, taxes etc.

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.

Types of merger

Merger or acquisition depends upon the purpose of the offeror company it wants to achieve.

Based on the offeror 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. Merger types can be broadly classified into the following five subheads as

described below.

1. Horizontal Merger: - Refers to the merger of two companies who are direct competitors of

one another. They serve the same market and sell the same product.


2. Conglomeration: - Refers to the merger of companies, which do not either sell any related

products or cater to any related markets. Here, the two companies entering the merger process

do not possess any common business ties.

3. Vertical Merger: - Is effected either between a company and a customer or between a

company and a supplier.

4. Product-Extension Merger: - Is executed among companies, which sell different products

of a related category. They also seek to serve a common market. This type of merger enables

the new company to go in for a pooling in of their products so as to serve a common market,

which was earlier fragmented among them.

5. Market-Extension Merger: - Occurs between two companies that sell identical products in

different markets.

Merger basically expands the market base of the product as follows :-

1. Certified Mergers and Acquisitions

2. Horizontal Mergers

3. Vertical Mergers

4. Market Extension Merger and Product Extension Merger

5. Conglomerate Mergers

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1. Certified Mergers and Acquisitions:

There are a number of certified mergers and acquisitions advisory programs available at the

present time. With the help of these programs, a lot of commercial entities are getting involved

in merger and acquisition activities. These programs are offered by numerous merger and

acquisition consultants and agencies. Some of them are also conducting educational programs

and seminars for the purpose of educating financial professionals about the nuances of

certified mergers and acquisitions and growing the knowledge base of the merger and

acquisition professionals.

One of the most important certified merger and acquisition advisory programs is the

Certified Valuation Manager Program offered by the American Academy of Financial

Management (AAFM). The American Academy of Financial Management is also hosting a

number of Certified Valuation Manager Training Conferences throughout the year.

The certified mergers and acquisitions agencies help commercial enterprises or business

corporations in acquiring or taking over other companies and also in significant issues related

to mergers and acquisitions. These agencies also help business entities regarding management

buyouts (MBOs), finding acquisition lookup, sources of equity and debt financing, as well as

valuation of businesses.

In this modern-day world, the power of globalization, market liberalization and

technological advancement has contributed towards the formation of an increasingly

competitive and active commercial world, where mergers and acquisitions are more and more

utilized for achieving optimization of firm value and competitive benefits.

With the help of certified merger and acquisition advisory services, the clients can enjoy

instant accessibility to:

• A large number of certified business purchasers, which include multinational or

transnational corporations who are seeking to buy profitable companies

• A platform of the merger and acquisition professionals, sources of funding, transaction

makers, intermediaries and tax professionals

• Knowledgeable principals

• Advices on pricing and valuation


• Forward-looking transaction formation, which will lead to value addition.

The certified mergers and acquisition advisory services can be broadly categorized into the

following types:

• Business Valuation Services

• Funding Services (Acquisition financing, recapitalizations, financial reconstruction)

• Asset Disposal Services

• Acquisition Lookup

• Management Buyouts (MBOs)

• Certified Equipment and Machinery Estimation

2. Horizontal Mergers :

• 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.

• Horizontal mergers are those mergers where the companies manufacturing similar

kinds of commodities or running similar type of businesses merge with each other.

• Two companies that are in direct competition and share similar product lines and

markets. In the context of marketing, horizontal merger is more prevalent in comparison to

horizontal merger in the context of production or manufacturing.

• The principal objective behind this type of mergers is to achieve economies of scale in

the production procedure through carrying off duplication of installations, services and

functions, widening the line of products, decrease in working capital and fixed assets


investment, getting rid of competition, minimizing the advertising expenses, enhancing the

market capability and to get more dominance on the market.

• Never the less, the horizontal mergers do not have the capacity to ensure the market

about the product and steady or uninterrupted raw material supply.

• Horizontal mergers can sometimes result in monopoly and absorption of economic

power in the hands of a small number of commercial entities.

• According to strategic management and microeconomics, the expression horizontal

merger delineates a form of proprietorship and control. It is a plan, which is utilized by a

corporation or commercial enterprise for marketing a form of commodity or service in a

large number of markets.

Horizontal Integration

Sometimes, horizontal merger is also called as horizontal integration. It is totally opposite in

nature to vertical merger or vertical integration.

Horizontal Monopoly

A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally, a

monopoly is formed by both vertical and horizontal mergers.

Horizontal merger is that condition where a company is involved in taking over or acquiring

another company in similar form of trade. In this way, a competitor is done away with and a

wider market and higher economies of scale are accomplished. In the process of horizontal

merger, the downstream purchasers and upstream suppliers are also controlled and as a result

of this, production expenses can be decreased.

Horizontal Expansion

An expression which is intimately connected to horizontal merger is horizontal expansion.

This refers to the expansion or growth of a company in a sector that is presently functioning.


The aim behind a horizontal expansion is to grow its market share for a specific commodity or

service.

Examples of Horizontal Mergers:-

Following are the important examples of horizontal mergers:

• The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India

and Brook Bond

• The merger of Bank of Mathura with ICICI (Industrial Credit and Investment

Corporation of India) Bank

• The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power

Supply Company

• The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar

Cement

3. Vertical merger : (A customer and company or a supplier and company)

Vertical mergers refer to a situation where a product manufacturer merges with the supplier of

inputs or raw materials. In can also be a merger between a product manufacturer and the

product's distributor.

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) It has control over products specifications.

Vertical mergers may violate the competitive spirit of markets. It can be used to block

competitors from accessing the raw material source or the distribution channel. Hence, it is

also known as "vertical foreclosure". It may create a sort of bottleneck problem. As per

research, vertical integration can affect the pricing incentive of a downstream producer. It may

also affect a competitor’s incentive for selecting input suppliers.

There are multiple reasons, which promote the vertical integration by firms. Some of

them are discussed below.

• The prime reason being the reduction of uncertainty regarding the availability of

quality inputs as also the uncertainty regarding the demand for its products.

• Firms may also enter vertical mergers to avail the plus points of economies of

integration.

• Vertical merger may make the firms cost-efficient by streamlining its distribution and

production costs. It is also meant for the reduction of transactions costs like marketing

expenses and sales taxes. It ensures that a firm's resources are used optimally.

4. Market-extension merger and Product Extension Merger:

1) Market-extension merger: (Two companies that sell the same products in different

markets)

As per definition, market extension merger takes place between two companies that deal in the

same products but in separate markets. The main purpose of the market extension merger is to

make sure that the merging companies can get access to a bigger market and that ensures a

bigger client base.


Example of Market Extension Merger

A very good example of market extension merger is the acquisition of Eagle Bancshares Inc

by the RBC Century. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283

workers. It has almost 90,000 accounts and looks after assets worth US $1.1 billion.

Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in

the metropolitan Atlanta region as far as deposit market share is concerned. One of the major

benefits of this acquisition is that this acquisition enables the RBC to go ahead with its growth

operations in the North American market.

With the help of this acquisition RBC has got a chance to deal in the financial market of

Atlanta, which is among the leading upcoming financial markets in the USA. This move

would allow RBC to diversify its base of operations.

2) Product-extension merger : (Two companies selling different but related products in the

same market)

According to definition, product extension merger takes place between two business

organizations that deal in products that are related to each other and operate in the same

market. The product extension merger allows the merging companies to group together their

products and get access to a bigger set of consumers. This ensures that they earn higher

profits.

Example of Product Extension Merger

The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product

extension merger. Broadcom deals in the manufacturing Bluetooth personal area network

hardware systems and chips for IEEE 802.11b wireless LAN.

Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that

are equipped with the Global System for Mobile Communications technology.


It is also in the process of being certified to produce wireless networking chips that have high

speed and General Packet Radio Service technology. It is expected that the products of

Mobilink Telecom Inc. would be complementing the wireless products of Broadcom.

5. Conglomeration : (Two companies that have no common business areas)

As per definition, a conglomerate merger is a type of merger whereby the two companies that

merge with each other are involved in different sorts of businesses. The importance of the

conglomerate mergers lies in the fact that they help the merging companies to be better than

before.

Types of Conglomerate Mergers

There are two main types of conglomerate mergers:-

1. pure conglomerate merger

2. Mixed conglomerate merger.

1. Pure conglomerate merger

The pure conglomerate merger is one where the merging companies are doing businesses

that are totally unrelated to each other.

2. Mixed conglomerate merger

The mixed conglomerate mergers are ones where the companies that are merging with each

other are doing so with the main purpose of gaining access to a wider market and client base

or for expanding the range of products and services that are being provided by them There are

also some other subdivisions of conglomerate mergers like the financial conglomerates, the

concentric companies, and the managerial conglomerates.


Reasons of Conglomerate Mergers

There are several reasons as to why a company may go for a conglomerate merger. Among the

more common reasons are adding to the share of the market that is owned by the company and

indulging in cross selling. The companies also look to add to their overall synergy and

productivity by adopting the method of conglomerate mergers.

Benefits of Conglomerate Mergers

There are several advantages of the conglomerate mergers. One of the major benefits is that

conglomerate mergers assist the companies to diversify. As a result of conglomerate mergers

the merging companies can also bring down the levels of their exposure to risks.

Acquisition:

An Acquisition usually refers to a purchase of a smaller firm by a larger one. Acquisition, also

known as a takeover or a buyout, is the buying of one company by another.

The term acquisition means an attempt by one firm, called the acquiring firm, to gain a

majority interest in another firm, called target firm. In acquisition, two or more companies

may remain independent, separate legal entity, but there may be change in control of

companies.

Acquisitions or takeovers occur between the bidding and the target company. There may be

either hostile or friendly takeovers. 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.

The different types of acquisition are as follows:-


A. Reverse takeover: - Sometimes, however, a smaller firm will acquire management control

of a larger or longer established company and keep its name for the combined entity. This is

known as a reverse takeover.

i). Reverse takeover occurs when the target firm is larger than the bidding firm. In the course

of acquisitions the bidder may purchase the share or the assets of the target company.

ii). In the former case, the companies cooperate in negotiations; in the latter case, the takeover

target is unwilling to be bought or the target's board has no prior knowledge of the offer.

B. Reverse merger:- A deal that enables a private company to get publicly listed in a short

time period.

i). A reverse merger occurs when a private company that has strong prospects and is eager to

raise financing buys a publicly listed shell company, usually one with no business and

limited assets.

ii). Achieving acquisition success has proven to be very difficult, while various studies have

showed that 50% of acquisitions were unsuccessful. The acquisition process is very

complex, with many dimensions influencing its outcome.

Takeover:

In business, a takeover is the purchase of one company (the target) by another (the acquirer, or

bidder). In the UK, the term refers to the acquisition of a public company whose shares are

listed on a stock exchange, in contrast to the acquisition of a private company.

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

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completion of transaction is less in takeover than in mergers, top management of the offeree

company being more co-operative

There are different types of takeover:-

Friendly takeovers

Hostile takeovers

Reverse takeovers

1. Friendly takeovers :

Before a bidder makes an offer for another company, it usually first informs that company's

board of directors. If the board feels that accepting the offer serves shareholders better than

rejecting it, it recommends the offer be accepted by the shareholders.

In a private company, because the shareholders and the board are usually the same people or

closely connected with one another, private acquisitions are usually friendly. If the

shareholders agree to sell the company, then the board is usually of the same mind or

sufficiently under the orders of the shareholders to cooperate with the bidder. This point is not

relevant to the UK concept of takeovers, which always involve the acquisition of a public

company. Hostile takeovers

2. Hostile takeovers :

A hostile takeover allows a suitor to bypass a target company's management unwilling to agree

to a merger or takeover. A takeover is considered "hostile" if the target company's board

rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer without

informing the target company's board beforehand.

A hostile takeover can be conducted in several ways. A tender offer can be made where the

acquiring company makes a public offer at a fixed price above the current market price.

Tender offers in the USA are regulated with the Williams Act.

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An acquiring company can also engage in a proxy fight, whereby it tries to persuade enough

shareholders, usually a simple majority, to replace the management with a new one which will

approve the takeover.

Another method involves quietly purchasing enough stock on the open market, known as a

creeping tender offer, to effect a change in management. In all of these ways, management

resists the acquisition but it is carried out anyway.

3. Reverse takeovers :

A reverse takeover is a type of takeover where a private company acquires a public company.

This is usually done at the instigation of the larger, private company, the purpose being for the

private company to effectively float itself while avoiding some of the expense and time

involved in a conventional IPO. However, under AIM rules, a reverse take-over is an

acquisition or acquisitions in a twelve month period which for an AIM company would:

• Exceed 100% in any of the class tests; or

• Result in a fundamental change in its business, board or voting control; or

• In the case of an investing company, depart substantially from the investing strategy stated

in its admission document or, where no admission document was produced on admission,

depart substantially from the investing strategy stated in its pre-admission announcement or,

depart substantially from the investing strategy.

2. OBJECTIVE AND SCOPE

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The purpose for an offer or 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 Objective 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 objectives 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;

2. To standardize product specifications, improvement of quality of product,

expanding market and aiming at consumers satisfaction through strengthening after sale

services;

3. To obtain improved production technology and know-how from the offeree

company

4. 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 offeror company;

6. Strategic control of patents and copyrights.

(4) Financial strength:

1. To improve liquidity and have direct access to cash resource;

2. 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;

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:

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. 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 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 corporate aim at circular combinations

by pursuing this objective.


3. LIMITATIONS

1 Merge is a situation where one firm goes exist into

existence so due to this the process of industrialization

bears negative effect.

2 For merge and acquisition, there are number of

unethical activities take place like Greenmail, Golden

parachute due to this they create unethical

environment.

3 Due to merge or acquisition the acquiree firm’s

employees bear negative effect.

4 Now a day, mostly hostile takeover take place, which

considered unethical for society.

5 The practice of golden parachute compensates for top

management but do not compensate middle and lower

level management.


4. THEORETICAL PERSPECTIVE OF MERGERS AND

ACQUISITIONS

4.1 . Stages of mergers

Tracing back to history, merger and acquisitions have evolved in five stages and each of these

are discussed here. As seen from past experience mergers and acquisitions are triggered by

economic factors.

The macroeconomic environment, which includes the growth in GDP, interest rates and

monetary policies play a key role in designing the process of mergers or acquisitions between

companies or organizations.

First Wave Mergers

The first wave mergers commenced from 1897 to 1904. During this phase merger occurred

between companies, which enjoyed monopoly over their lines of production like railroads,

electricity etc.

The first wave mergers that occurred during the aforesaid time period were mostly horizontal

mergers that took place between heavy manufacturing industries.

End of 1st Wave Merger

Majority of the mergers that were conceived during the 1st phase ended in failure since they

could not achieve the desired efficiency. The failure was fuelled by the slowdown of the

economy in 1903 followed by the stock market crash of 1904. The legal framework was not

supportive either. The Supreme Court passed the mandate that the anticompetitive mergers

could be halted using the Sherman Act.

Second Wave Mergers


The second wave mergers that took place from 1916 to 1929 focused on the mergers between

oligopolies, rather than monopolies as in the previous phase. The economic boom that

followed the post World War I gave rise to these mergers. Technological developments like

the development of railroads and transportation by motor vehicles provided the necessary

infrastructure for such mergers or acquisitions to take place.

The government policy encouraged firms to work in unison. This policy was implemented in

the 1920s. The 2nd wave mergers that took place were mainly horizontal or conglomerate in

nature. Te industries that went for merger during this phase were producers of primary metals,

food products, petroleum products, transportation equipments and chemicals. The investments

banks played a pivotal role in facilitating the mergers and acquisitions.

End of 2nd Wave Mergers

The 2nd wave mergers ended with the stock market crash in 1929 and the great depression.

The tax relief that was provided inspired mergers in the 1940s.

Third Wave Mergers

The mergers that took place during this period (1965-69) were mainly conglomerate mergers.

Mergers were inspired by high stock prices, interest rates and strict enforcement of antitrust

laws.

The bidder firms in the 3rd wave merger were smaller than the Target Firm. Mergers were

financed from equities; the investment banks no longer played an important role.

End of the 3rd Wave Merger

The 3rd wave merger ended with the plan of the Attorney General to split conglomerates in

1968. It was also due to the poor performance of the conglomerates. Some mergers in the

1970s have set precedence.

The most prominent ones were the INCO-ESB merger; United Technologies and OTIS

Elevator Merger are the merger between Colt Industries and Garlock Industries.

Fourth Wave Merger


The 4th wave merger that started from 1981 and ended by 1989 was characterized by

acquisition targets that wren much larger in size as compared to the 3rd wave merger. Mergers

took place between the oil and gas industries, pharmaceutical industries, banking and airline

industries. Foreign takeovers became common with most of them being hostile takeovers. The

4th Wave mergers ended with anti takeover laws, Financial Institutions Reform and the Gulf

War.

Fifth Wave Merger

The 5th Wave Merger (1992-2000) was inspired by globalization, stock market boom and

deregulation. The 5th Wave Merger took place mainly in the banking and telecommunications

industries.

They were mostly equity financed rather than debt financed. The mergers were driven long

term rather than short term profit motives. The 5th Wave Merger ended with the burst in the

stock market bubble. Hence we may conclude that the evolution of mergers and acquisitions

has been long drawn. Many economic factors have contributed its development.

4.2. The Hypotheses of mergers and acquisitions

The following are some of the theoretical frameworks concerning the rationale for

mergers and acquisitions.

4.2.1. Value maximising hypothesis

This hypothesis originates in economic theory (Manne, 1965) which views mergers

and acquisitions as an activity that may generate a valuable asset. Under this

hypothesis, the managers of firms have a primary goal of maximising shareholder

wealth (Firth, 1980; Sudarsanam et.al., 1996; Gonzalez et.al, 1997). According to this

hypothesis, a merger or acquisition should generate a positive economic gain to the

merging firms or at least non negative returns (Baradwaj et.al, 1992). Hence, any

merger or acquisition activity should meet the same criteria as any other investment


decision (Halpem, 1983). Most mergers and acquisitions are value maximising

activities whose aim is to boost shareholder wealth. If this objective cannot be met by

the managers of firms engaging in mergers and acquisitions, they may not proceed with

the merger proposal or may reject any merger offer, and therefore, in this case, the

ability to pick a good takeover target is essential (Powell, 1997) Managers should not

conduct any merger or acquisition if there are no positive gains expected through the

merger of their firms. If the firms' value increases as a result of a merger or acquisition,

it indicates that the firms involved in a merger or acquisition are assumed to be value

maximisers (Asquith and Kim, 1982; Malatesta, 1983). Even if, for example, at the

beginning of making a merger proposal shows a negative net present value investment,

it does not mean that this merger proposal does not generate any gain to the

shareholders of merging firms. The gain raised from mergers and acquisitions may

come after the announcement of merger offers or after the outcome of mergers is

known.

Financial motivations and synergy effects are among those which are consistent with

the value maximising hypothesis (Choi and Philippatos, 1983; Halpem, 1983).

Maquieira et.al. (1998) argue that financial synergies can arise from various aspects of

the merging firms, such as from a reduction of default risk which finally reduces

borrowing costs and diversification of equity risk for shareholders. Haugen and

Langetieg (1975) conclude that it is possible to minimise the risks of insolvency and

bankruptcy by merging with another firm. In addition, Berger et.al. (1998) point out

that mergers and acquisitions can generate a static effect which means the combination

of assets of merging firms becomes bigger than before. The bigger the assets, the

greater the possibility of the merging firms displaying a better wealth effect for the

shareholders.

4.2.2. Non -value maximising hypothesis


This hypothesis, proposed by Halpem (1973, 1983), takes the view that any merger or

acquisition has no economic gains for the merging firms. The positive returns are not

the objective of the firm conducting a merger attempt, and therefore, the bidding firms

are not interested in the profitability of a merger. According to Halpem, it is not

necessarily important for the managers of the firms who engage in mergers and

acquisition to display positive returns for their shareholders.

In this type of merger, the merging firms, especially the acquiring ones, will seek some

other objectives beyond the positive economic gains for their firms, such as to

maximize sales growth, to control a conglomerate empire, to lift company image, to

enter a new market which is not possible without a merger or acquisition due to

govemment regulations, to change the target market, to expand to a new geographic

market, to acquire qualified managers and expertise, and so on.

Meanwhile, a study by Healy, Palepu and Ruback (1997) finds that strategic takeovers

that can be categorised as non-value maximising activity (takeovers that typically

involved stock payment for firms in similar businesses) generate more gains than

financial takeovers (takeovers that generally involved cash payments for firms in

unrelated businesses). This result is very interesting because, in fact, the non-value

maximising merger often out performs the value maximising merger. Most non-value

maximising mergers are horizontal mergers which are subject to government

restrictions and regulations because the non-value maximising mergers sometimes

create monopoly and oligopoly. The involvement of governments, as part of an

antitrust policy, is essential to protect public interests against an increase in the use of

market power in setting prices (Akhavein et.al, 1997).

A study by Berger et.al. (1998) discovered that some mergers and acquisitions in the

U.S. Banking Industry are also driven by some non-value maximising objectives, for

example, to consolidate the merging firms, to refocus small business lending. Studies


by Bhagat, Sleifer and Vishny (1990), and Kaplan and Weisbach (1992) point out that

operating synergies can only be created in mergers between firms in the same or

related industries.

4.2.3. Managerial hypothesis

Mueller (1969) proposes that mergers can be used by the managers of firms as a tool to

achieve their own personal interests. Under this hypothesis, managers conduct mergers

or acquisitions if they contribute to their personal wealth (Agrawal and Knoeber, 1998;

Ghosh and Ruland, 1998). Bishop et.al (1987) call this hypothesis an anti takeover

theory, because managers act to maximise their own utility. These objectives, however,

basically do not always maximise shareholder returns (Firth, 1980). Therefore,

managers' acquisition decisions are not designed to enhance shareholder wealth. Lev

(1983) also argues that the increase in the power of the managers boosts their own

interest at the expense of that of their companies' shareholders.

Furthermore, Amihud and Lev (1981) comment that managers engage in mergers and

acquisitions to minimise their human capital risk. In addition, merger activities can be

seen by the managers as an attempt to diversify their human capital risks (Morck,

Shleifer and Vishny, 1990). Mergers and acquisitions allow managers to limit their

risks by creating larger but less risky firms (Maquieira et.al, 1998). This argument is

logical when the risk to the new merging firm is divided and shared to some people,

leading managers to reduce their risks to the minimum possible.

The managerial hypothesis is consistent with the argument from Larcker (1983) who

states that managers focus on the short term, and always try to maximise their available

utility in their firm. Again, this argument is logical because most managers are hired

for a certain period of time, and consequently they will try to maximise their wealth

before at the end of a contract. Therefore, when a merger or acquisition provides a


manager with large personal benefits, he is more willing to sacrifice the market value

of the firm (Morck et.al., 1990).

On the other hand, shareholders prefer to maximise the share price, which is more a

long term outlook. To minimise this conflicting interest between managers and

shareholder objectives, it is very common for firms to provide their managers with

share options. By holding shares or options in their firms managers have a vested

interest and are morally responsible for maximising their own interests as well as

shareholder wealth.

4.2.4. Inefficient management hypothesis

Mergers or acquisitions can also be viewed as a response to inefficient management.

This scenario is seen by investors as a response to a situation where the incumbent

management has pursued inefficient policies, and consequently, the firm becomes an

acquisition target (Asquith, 1983; Malatesta, 1983).

Inefficient management can be identified from several indicators, for example, poor

earnings, undervalued shares and low P/E ratio. These indicators signal inefficient

management and demonstrate that the resources in the target firms are not utilised

efficiently and properly which motivates the bidding firms to takeover the target firm

(Dodd and Ruback, 1977). If the firm is acquired, the bidding firm will employ a new

management team who will manage the resources more efficiently.

Organisation effectiveness can be considered as part of efficient management. Mergers

maximise the resources from the combining firms, thus, the organisation's performance

becomes effective. It also increases productivity through combining two or more

resources one of which is underutilised.


Furthermore, the new management may change the organisation stmcmre, from a

centralized to a decentralised stmcture (Senn, 1994). This change makes the

organisation more effective in handling day to day activity, because it can react more

quickly to problems which arise. If an organisation can work efficientiy, it maximises

its available resources.

5. Methodology and Procedure for Takeover and Acquisition

In this chapter we will be able to know the procedure and method for takeover and acquisition

of a company and procedure of merging of a bank.

5.1 Methods of Acquisition:

An acquisition may be affected by

(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.

5.2 Procedure of merger:

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.

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 there in 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;

(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. 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;

(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.

5.3 Procedure of Bank Merger

The procedure for merger either voluntary or otherwise is outlined in the respective

state statutes/ the Banking regulation Act. The Registrars, being the authorities vested with

the responsibility of administering the Acts, will be ensuring that the due process prescribed

in the Statutes has been complied with before they seek the approval of the RBI. They

would also be ensuring compliance with the statutory procedures for notifying the

amalgamation after obtaining the sanction of the RBI.

Before deciding on the merger, the authorized officials of the acquiring bank and the

merging bank sit together and discuss the procedural modalities and financial terms. After

the conclusion of the discussions, a scheme is prepared incorporating therein the all the

details of both the banks and the area terms and conditions.

Once the scheme is finalized, it is tabled in the meeting of Board of directors of

respective banks. The board discusses the scheme thread bare and accords its approval if

the proposal is found to be financially viable and beneficial in long run.

After the Board approval of the merger proposal, an extra ordinary general meeting of

the shareholders of the respective banks is convened to discuss the proposal and seek their

approval.

After the board approval of the merger proposal, a registered valuer is appointed to

valuate both the banks. The valuer valuates the banks on the basis of its share

capital,market capital, assets and liabilities, its reach and anticipated growth and sends its

report to the respective banks.


Once the valuation is accepted by the respective banks , they send the proposal along

with all relevant documents such as Board approval, shareholders approval, valuation report

etc to Reserve Bank of India and other regulatory bodies such Security & exchange board

of India (SEBI) for their approval.

After obtaining approvals from all the concerned institutions, authorized officials of

both the banks sit together and discuss and finalize share allocation proportion by the

acquiring bank to the shareholders of the merging bank (SWAP ratio)

After completion of the above procedures , a merger and acquisition agreement is signed by

the bank.

5.4. Event time

The event time ( t ) is defined as the day of the announcement of merger offers made by the

bidding or acquiring firms. Hence, the announcement day is considered as " day 0" or t=0.

Furthermore, the day when the results of mergers and acquisitions are known (whether this is

at more than 50% or less than 50%) is also considered as "day 0" or t =0.

The event time t=0 is the day on which the share prices of the acquiring and target firms

fluctuate to follow the new information as a result of a merger announcement or an outcome

announcement. Because the share prices have reacted to this new information, these ultimately

affect the return of the bidding and target shares. Therefore, the announcement day (t=0) is the

best starting point from which to measure the abnormal return of mergers and acquisitions.

5.5. Event window

If a long term measurement is used, the size of the participating firms must be controlled

(Gregory, 1997). Failure to control the size effect produces a biased result because size effect

emerges on the long term measurement (Dimson and Marsh, 1986; Brown and Da Silva Rosa,

1997; Gregory, 1997). Some recent studies (for example. Ran and Vermaelen, 1998; Fama,

1998) stress that long term measurements tend to generate some anomalies because size


effects and the model used for computing abnormal returns are sensitive to long term

measurements. This implies that the shorter the period of measurement, the better the results,

because bias is minimised and the merger effect on share prices surrounding the

announcement of merger proposals and also surrounding the announcement of merger

outcomes is maximised.

The event window is the duration for measuring the effect of the announcement of mergers

and acquisitions on share prices and abnormal returns. The length of the event window is

considered some days before and some days after the announcement of merger and acquisition

say as 10 days prior to the announcement of mergers and acquisitions to 10 days after the

announcement of mergers and acquisitions.

The length of an event window can be written as t = -10, for the measurement of share prices

and abnormal returns 10 days prior to the announcement of mergers and acquisitions, and t =

10, for the measurement of share prices and abnormal returns 10 days after the announcement

of mergers and acquisitions. t = 10, for the measurement of share prices and abnormal returns

10 days after the outcome of mergers and acquisitions is known (whether this is at more than

50% or less than 50%).


6. Analysis of Data

6.1 CASE STUDY I: ICICI BANK LTD

ICICI Bank was originally promoted in 1994 by ICICI limited, an Indian financial institution,

and was its wholly owned subsidiary. ICICI was formed in 1955 at the initiative of the World

Bank, the Government of India and representatives of the Indian industry.

The principal objective was to create a development financial institution for providing

medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI

transferred its businesses from a development financial institution offering only project

finance to a diversified financial services group offering a wide variety of product and

services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In

1999, ICICI became the first Indian company and the first bank or financial institution from

non-Japan Asia to be listed on NYSE.

After consideration of various corporate structuring alternatives in the context of the emerging

competitive scales in the Indian banking industry, and the move towards universal banking,

the management of ICICI and ICICI Bank formed the view that the manager of ICICI with

ICICI Bank would be the optimal strategic alternative for both entities, and would create the

optimal legal structure for the ICICI group’s universal banking, strategy.


The merger would enhance the value for ICICI shareholders through the merged entity’s

access to low-cost deposits, greater opportunities for earning fee-based income and the ability

to participate in the payment system and provide transaction-banking services.

The merger would enhance value for ICICI Bank shareholders through a large capital base and

scale of operation, seamless access to ICICI’s strong corporate relationship built up over five

decade, entry into new business segment, higher market share in various business segment,

particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries.

In October 2001, the board of director of ICICI and ICICI Bank approved the merger of ICICI

and its two wholly owned retail finance subsidiaries ICICI personnel financial services limited

and ICICI Bank.

The merger was Approved by shareholder of ICICI and ICICI Bank in January 2002, by the

high court of Gujarat at Ahmadabad in April 2002.Consequent to the merger, the ICICI

group’s financing and banking operation, both wholesale and retail, have been integrated in a

single entity.

The following tables analyses the financial performance of ICICI Bank Limited from the Year

1997 to 2004

Sales position and assets turnover of ICICI Bank

Year Net sales Increase over

previous period

(%)

Total Assts (Rs.

cr.)

Assets Turnover

Ratio

1997 221.76 - 1781.86 0.1241998 344.26 35.58 3279.43 0.1041999 634.19 45.71 6981.67 0.092000 1042.09 39.14 12072.62 0.862001 1442.48 27.75 19736.59 0.0732002 2724.73 47.06 104959.5 0.0252003 10771.83 74.7 107760.3 0.0992004 11509.26 6.4 126149.6 0.091


Table 6.1 shows the Sales position and Assts Turnover of ICICI Bank.

The net Sales have been rising especially after the merger in 2001. In 2002, sales have

increased by 47.06% and in 2003 by 74.71%. The percentage increase was less in 2004 i.e.

6.4% over the previous year. But overall there has been an improvement in the sales position

after the merger.

The Assts turnover ratio has declined from 0.124 (1997) to 0.86 (2000) and 0.073 (2001) (pre-

merger). In the year 2004 it has slightly improved to 0.091. The bank needs to further improve

the ratio so that it reaches 1.0 beyond which the assets of a company are supposed to be fully

utilized.

Table 6.2: Profitability Position of ICICI Bank

Year PAT (Rs. Cr.) PBDIT as % of sales (%)

PBIT as % of sales (%)

PAT as % of sales (%)

ROI (%)

1997 40.13 79.52 74.99 1706 2.251998 5.22 78.97 73.63 14.28 1.531999 63.35 84.08 80.58 9.17 0.92000 105.3 79.95 77.48 11.27 0.872001 161.1 74.93 72.38 9.77 0.812002 258.3 69.97 67.62 5.93 0.242003 1206.18 74.69 69.99 -507 1.192004 1637.11 82.11 77.42 14.11 1.29

Table 6.2 shows the profitability position of ICICI Bank.

The PAT has seen a significant improvement especially after the merger.

In 2001, PAT were Rs. 161.1 crore, the level went up to Rs. 258 crore in 2002. There was

sizeable jump at Rs. 1206 crore in 2003 and Rs. 1637 crore in 2004.

The PBDIT as percentage of sales has also gone up from 74.93% in 2001 to 82.11% in 2004

(after the merger).


PBIT as percentage of sales has almost remained the same at around 72% in 2001 and slightly

improved in 2004 at 77.42%.

The PAT as percentage of sales was 17.06% in 1997 but declined to 9.77% in 2001 (the year

of the merger), reduced to 5.93% in 2002 and also a negative in 2003 but in 2004 it has gone

up to 14.11%.

The ROI was 2.25% in 1997 it declined to 0.81% in 2001 (the year of the merger) and has

now improved in 2004 at 1.29%.

Overall, the operational performance of the Bank has enhanced after the merger as indicate by

its PAT and ROI.

The single most important reason for the merger was synergies between the two institutions.

The only problem faced due to this merger was to raise lot of funds and the biggest challenge

was to meet the government regulation. And after analysis that there has been an increase in

sales by 50% in fee income in 2004 and by 80% in 2005 due to the merger.

6.2 CASE STUDY II: CASE STUDY ON MERGING OF ADIDAS AND REEBOK

COMPANIES

Reebok Companies Profile

http://www.google.co.in/imgres?imgurl=http://i53.photobucket.com/albums/g77/sds254/LOGOS/Suppliers/Reebok/reebok-logo2.gif&imgrefurl=http://media.photobucket.com/image/reebok%20logo/sds254/LOGOS/Suppliers/Reebok/reebok-logo2.gif?o=19&usg=__A10kyWgya0TKeNLM5vg1guZujpc=&h=168&w=350&sz=6&hl=en&start=26&zoom=1&itbs=1&tbnid=qI4MecqYtgjZZM:&tbnh=58&tbnw=120&prev=/images?q=reebok+logo&start=20&hl=en&sa=N&gbv=2&ndsp=20&tbs=isch:1

http://www.google.co.in/imgres?imgurl=http://dobetterwithdetter.com/sitebuildercontent/sitebuilderpictures/.pond/adidaslogo.JPG.w180h154.jpg&imgrefurl=http://dobetterwithdetter.com/id65.html&usg=__Vv7_Mwy4I4B61ORTlkL_NKxpGWU=&h=154&w=180&sz=8&hl=en&start=9&zoom=1&itbs=1&tbnid=VyLdeIOJ6A3g3M:&tbnh=86&tbnw=101&prev=/images?q=adidaslogo&hl=en&gbv=2&tbs=isch:1


Reebok International Limited, a subsidiary of German sportswear giant Adidas, is a producer

of athletic footwear , apparel, and accessories. Joe and Jeff Foster founded Mercury Sports. In 1960,

Joe and Jeff Foster renamed the company Reebok in England, having discovered the name in a

dictionary won in a race by Joe Foster as a boy. The name comes from the Afrikaans spelling

of rhebok, a type of African antelope or gazelle. The dictionary was a South African edition, hence

the spelling.

In 1979, United States camping equipment distributor Paul B. Fireman saw a pair of Reeboks at an

international trade show and negotiated for the rights to sell them in North America, where they did

very well despite being pricier than competitors Adidas, Nike and Puma.

In 1999, Reebok developed a new innovative fabric that holds any dirt picked to avoid creating mess.

The fabric was later specifically used for all Reebok socks.

Adidas Companies Profile

Adidas is a major German-based sports apparel manufacturer and parent company of the Adidas

Group, which consists of the Reebok sportswear company, TaylorMade-adidas golf company

(including Ashworth), and Rockport. Besides sports footwear, the company also produces other

products such as bags, shirts, watches, eyewear and other sports and clothing related goods. The

company is the largest sportswear manufacturer in Europe and the second biggest sportswear

manufacturer in the world, after its U.S. rival Nike.

The company's clothing and shoe designs typically feature three parallel bars, and the same motif is

incorporated into Adidas's current official logo. The "Three Stripes" were bought from the Finnish

sport company Karhu Sports in the 1950s. The company revenue for 2009 was listed at €10.38 billion

and the 2008 figure at €10.80 billion.

The Deal :

http://en.wikipedia.org/wiki/Euro_sign

http://en.wikipedia.org/wiki/Revenue

http://en.wikipedia.org/wiki/Karhu_Sports

http://en.wikipedia.org/wiki/Logo

http://en.wikipedia.org/wiki/Three_stripes

http://en.wikipedia.org/wiki/Nike,_Inc.

http://en.wikipedia.org/wiki/Rockport_(company)

http://en.wikipedia.org/wiki/Ashworth_(clothing)

http://en.wikipedia.org/wiki/Golf

http://en.wikipedia.org/wiki/TaylorMade-adidas

http://en.wikipedia.org/wiki/Reebok

http://en.wikipedia.org/wiki/Germany

http://en.wikipedia.org/wiki/Gazelle

http://en.wikipedia.org/wiki/Antelope

http://en.wikipedia.org/wiki/Rhebok

http://en.wikipedia.org/wiki/Afrikaans_language

http://en.wikipedia.org/wiki/Athletic_shoe

http://en.wikipedia.org/wiki/Adidas


In August 2005, German adidas-Salomon AG announced plans to

acquire Reebok at an estimated value of € 3.1 billion ($3.78 billion).

At the time, Adidas had a market capitalization of about $8.4 billion,

and reported net income of $423 million a year earlier on sales of

$8.1 billion. Reebok reported net income of $209 million on sales of about $4 billion. While

analysts opined that the merger made sense, the purpose of the merger was very clear. Both

companies competed for No. 2 and No. 3 positions following Nike (NKE).

Why Merger?

Nike was the leader in U.S. and had made giant strides in Europe even surpassing Adidas in

the soccer shoe segment for the first time. According to 2004 figures by the Sporting Goods

Manufacturers Association International, Nike had about 36%, Adidas 8.9% and Reebok

12.2% market share in the athletic-footwear market in the U.S. Adidas was the No. 2 sporting

goods manufacturer globally, but it struggled in the U.S. – the world’s biggest athletic-shoe

market with half the $33 billion spent globally each year on athletic shoes. Adidas was

perceived to have good quality products that offered comfort whereas Reebok was seen as a

stylish or hip brand. Nike had both and was a favorite brand because of its fashion status,

colors, and combinations. Adidas focused on sport and Reebok on lifestyle. Clearly the

chances of competing against Nike were far better together than separately. Besides Adidas

was facing stiff competition from Puma, the No. 4 sporting-goods brand. Puma had then

recently disclosed expansion plans through acquisitions and entry into new sportswear

categories. For a successful merger, the challenge was to integrate Adidas’s German culture of

control, engineering, and production and Reebok’s U.S. marketing- driven culture.

The ADDYY and RBK Merger – Impossible is Nothing


On January 31, 2006, adidas closed its acquisition of Reebok International Ltd. The

combination provided the new adidas Group with a footprint of around €9.5 billion ($11.8

billion) in the global athletic footwear, apparel and hardware markets.

Adidas-Salomon AG Chairman and CEO Herbert Hainer said, “We are delighted with the

closing of the Reebok transaction, which marks a new chapter in the history of our Group. By

combining two of the most respected and well-known brands in the worldwide sporting goods

industry, the new Group will benefit from a more competitive worldwide platform, well-

defined and complementary brand identities, a wider range of products, and a stronger

presence across teams, athletes, events and leagues.”

Hainer also said, “The brands will be kept separate because each brand has a lot of value and

it would be stupid to bring them together. The companies would continue selling products

under respective brand names and labels.”

Adidas plus Reebok is equal to better competition with giant Nike

In 2006, Adidas (the German athletic apparel and the world’s second-biggest sports goods

maker after Nike) acquired Reebok in a US$3.1 billion deal. The merger was aimed at helping

Adidas increase its share in the U.S. market and better compete with market leader Nike Inc.

and fourth ranked Puma AG. At the time experts felt that the merger made sense. But the key

challenge was to unite Adidas’s German culture of control, engineering, and production and

Reebok’s U.S. marketing- driven culture.

The Reebok acquisition was seen as a key factor in growing the Adidas brand in developing

and fashion-oriented markets of Asia like China, Korea, and Malaysia. Moreover, Reebok

already had marketing tie-ups in China (with Yao Ming) and Adidas did not have to cover all

China segments


Conclusion

Year-end order backlog represents firm future revenues from contracts signed up to that date.

Order backlog is a key indicator of future sales for retailers and Reebok’s lower order backlog

remains the key question mark. Order backlog of brand Adidas was excellent up 17 percent

which can be partly attributed to the Euro 2008 soccer championship and Beijing Olympics

this year. However, Reebok’s order backlog was down 8 percent (down 20 percent in North

America). Nike reported worldwide futures orders for athletic footwear and apparel

(scheduled for delivery from December 2007 through April 2008) totaling $6.5 billion, 13

percent higher than such orders reported for the same period last year.

Meanwhile, Nike announced (Mar 3, 2008) that it has completed its acquisition of Umbro Plc.

Nike’s Umbro takeover is an effort to consolidate its position in the football market where

Adidas has performed well. Last year, Nike’s CEO Mark Parker outlined a brave plan to

increase the company’s business to $23 billion in revenue by 2011. Will Nike do it or will the

Adidas-Reebok merger spoil its plans, still remains to be seen.

6.3 CASE STDY III: Case Study on merging of Kingfisher Airlines and Air

Deccan

Air Deccan Profile

Air Deccan, the airline was previously operated by Deccan Aviation. It was started by

Captain G. R. Gopinath and its first flight took off on 23 August 2003

http://en.wikipedia.org/wiki/G._R._Gopinath

http://en.wikipedia.org/wiki/Deccan_Aviation

http://www.google.co.in/imgres?imgurl=http://www.todaytechno.info/air_deccan_logo_00002.gif&imgrefurl=http://www.todaytechno.info/&usg=__GZlubN5iyn_6hzqLjcXYG_RAbjk=&h=116&w=187&sz=6&hl=en&start=1&zoom=1&itbs=1&tbnid=rNl7igcNOnDrLM:&tbnh=63&tbnw=102&prev=/images?q=air+deccan+logo&hl=en&gbv=2&tbs=isch:1

http://www.google.co.in/imgres?imgurl=http://4.bp.blogspot.com/_AcBUSVxs82w/THYyY8BgYqI/AAAAAAAAg2k/XKL2Bx3yNXU/s1600/Kingfisher-Airlines-Logo.jpg&imgrefurl=http://symbolphotos.blogspot.com/2010/08/kingfisher-airlines-logo-photos.html&usg=__BJaINC98kmJM9PbrMOADAQl4w5s=&h=325&w=400&sz=37&hl=en&start=1&zoom=1&itbs=1&tbnid=tQyqbjgNoyiFRM:&tbnh=101&tbnw=124&prev=/images?q=kingfisher+airlines+logo&hl=en&gbv=2&tbs=isch:1


from Hyderabad to Vijaywada. It was known popularly as the common man's airline, with is

logo showing two palms joined together to signify a bird flying. The tagline of the airline was

"Simpli-fly," signifying that it was now possible for the common man to fly. The dream of

Captain Gopinath was to enable "every Indian to fly at least once in his lifetime." Air Deccan

was the first airline in India to fly to second tier cities

like Hubballi, Mangalore, Madurai and Visakhapatnam from metropolitan areas like

Bangalore and Chennai.

Kingfisher Profile

Kingfisher Airlines is an airline group based in India. Its head office is Kingfisher House

in Vile Parle (East), Mumbai.[3][4] Kingfisher Airlines, through its parent company United

Breweries Group, has a 50% stake in low-cost carrier Kingfisher Red.

Kingfisher Airlines is one of six airlines in the world to have a 5-star rating from Skytrax,

along with Asiana Airlines, Cathay Pacific, Malaysia Airlines, Qatar Airways and Singapore

Airlines. Kingfisher operates more than 375 daily flights to 71 destinations, with regional and

long-haul international services. In May 2009, Kingfisher Airlines carried more than a million

passengers, giving it the highest market share among airlines in India.

Merger

Air Deccan airlines merged with Kingfisher Airlines and decided to operate as a single entity

from April, 2008. It would be known by a different name-Kingfisher Aviation. The merger is

based on recommendations of Accenture, the global consulting firm. KPMG was asked to do

the valuation and the swap ratio was decided accordingly. The merger came through on as

Vijay Mallya from Kingfisher airlines bought 26% of the stake in Air Deccan. The unification

http://en.wikipedia.org/wiki/Singapore_Airlines

http://en.wikipedia.org/wiki/Singapore_Airlines

http://en.wikipedia.org/wiki/Qatar_Airways

http://en.wikipedia.org/wiki/Malaysia_Airlines

http://en.wikipedia.org/wiki/Cathay_Pacific

http://en.wikipedia.org/wiki/Asiana_Airlines

http://en.wikipedia.org/wiki/Skytrax

http://en.wikipedia.org/wiki/Kingfisher_Red

http://en.wikipedia.org/wiki/Low-cost_carrier

http://en.wikipedia.org/wiki/United_Breweries_Group

http://en.wikipedia.org/wiki/United_Breweries_Group

http://en.wikipedia.org/wiki/Kingfisher_Airlines#cite_note-3

http://en.wikipedia.org/wiki/Kingfisher_Airlines#cite_note-2

http://en.wikipedia.org/wiki/Mumbai

http://en.wikipedia.org/wiki/Vile_Parle

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/Chennai

http://en.wikipedia.org/wiki/Metropolitan_area

http://en.wikipedia.org/wiki/Visakhapatnam

http://en.wikipedia.org/wiki/Madurai

http://en.wikipedia.org/wiki/Mangalore

http://en.wikipedia.org/wiki/Hubballi

http://en.wikipedia.org/wiki/Vijaywada

http://en.wikipedia.org/wiki/Hyderabad,_Andhra_Pradesh


of the two carriers had to be sanctioned not only by the two panels, but also by the

institutional investors, independent directors, and other shareholders. Air Deccan had four

independent directors-which included prominent persons like IIM Prof Thiru Naraya, Tennis

player Vijay Amritraj, and A K Ganguly, Former MD Nabisco Malaysia.

After the merger, the company has a combined fleet of 71 aircrafts, connects 70 destinations

and operates 550 flights in a day. The combined entity has a market share of 33%. Gopinath

would continue as the Executive Chairman and Malay would take charge as Vice Chairman.

The charter service of the respective airlines would be hived off and operate as a separate

entity. Post merger, KingFisher would operate as a single largest (private) airline in the sub-

continent. Besides, operational synergies (engineering, inventory management and ground

handling services, maintenance and overhaul), the management and staff of both the airlines

would be integrated. They would be stronger vis-a vis lessors, aircraft

manufacturers (Airbus in this case), and will also spend less on training and employees.Costs

would also reduce which is associated with maintenance of aircraft. The savings in cost would

be lower by about 4-5% (Rs 300 crores) (Business Standard, June 3, 2007, 4) which is a large

sum. It would result in a saving of 3 billion in the first year itself through the sharing of

aircraft and workers. (Business Standard, June 13, 2007, p-13.)

Further, by devising a more optimal routing strategy it could help in rationalizing the fares.

Before the merger Air Deccan recorded a net loss of Rs 213.17 crores on revenue of Rs437.82

crores for 2006-07. The company had also raised Rs 400 crores through an IPO inMay 2006.

The merger will create a more competitive business in scale and scope to emerge as market

leader.

Air Deccan began its operations with one aircraft and with one flight but after the alignment

with Kingfisher Airlines, has a total fleet of seventy one aircrafts-41 Airbus and 30 ATR

aircraft (Business Standard, June 7, 2007, p-8). It operates 537 flights (Business Standard,

June 3, 2007, p-4) and covers 70 destinations. It offers point to point service.

After the merger, it is expected that Kingfisher will focus more on the international routes

while Air Deccan will give it a wider domestic reach. Also Air Deccan plans to continue as a

low cost carrier while Kingfisher will function as a full-service carrier. There will be immense


synergies as both operate Airbus. The average age of the Air Deccan fleet is 6.1 years as of

Apr 2006.* Air Deccan operates a fleet of 43 aircraft comprising 20 brand new Airbus A320

aircraft and 23 ATR aircraft. The Airbus aircraft serve metro routes while ATR are utilized

for Tier II and III cites and also for small airports. The newly formed company plans to revisit

their fleet plan in coordination with each other to rationalize the fleet structure. Working on

these lines the company has already placed orders from the European aircraft major, Airbus

Industries for about 90 aircrafts. These

include five of the largest aircraft-A380, the first of which is slated to be delivered to

Kingfisher by 2011.

It is also India’s largest private sector helicopter charter company, which pioneered

helitourism in India. It offers point to point service. It has a secondary hub at

Chennai.*Deccan Aviation is the largest private sector helicopter charter company in India. It

has a fleet of 12 helicopters and small aircraft deployed in 8 bases across India. These bases

are at Bangalore, Mumbai, Delhi, Ranchi, Hyderabad, Surat, Katra and Colombo (Sri Lanka).

There are many changes that have taken place. This period of consolidation in the sky gives a

good signal to the airlines industry. It may lead to reducing the over-capacity existing in the

market and thereby stabilizing prices, increasing yields and bringing down costs. The era of

cheap fares might also come to an end.

Conclusion

It’s a capital intensive industry, With few scale efficiencies, Within a partly regulated

infrastructure, Free market entry Price competency This was the right decision to merge for

achieving all of the above objectives.


7. Finding, Infrences and Recommendation

7.1 Recent Mergers and Acquisitions

Mergers and Acquisitions have been very common incidents since the turn of the 20th century.

These are used as tools for business expansion and restructuring.

Through mergers the acquiring company gets an expanded client base and the acquired

company gets additional lifeline in the form of capital invested by the purchasing company.

7.2 Major Mergers and Acquisitions 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.

7.3 Mergers and Acquisitions in India

The process of mergers and acquisitions has gained substantial importance in today's corporate

world. This process is extensively used for restructuring the business organizations.

In India, the concept of mergers and acquisitions was initiated by the government bodies.

Some well known financial organizations also took the necessary initiatives to restructure the

corporate sector of India by adopting the mergers and acquisitions policies.

The Indian economic reform since 1991 has opened up a whole lot of challenges both in the

domestic and international spheres. The increased competition in the global market has

prompted the Indian companies to go for mergers and acquisitions as an important strategic

choice.

The trends of mergers and acquisitions in India have changed over the years. The immediate

effects of the mergers and acquisitions have also been diverse across the various sectors of the

Indian economy.

India has emerged as one of the top countries with respect to merger and acquisition deals. In

2007, the first two months alone accounted for merger and acquisition deals worth $40 billion

in India.


7.3.1 Mergers and Acquisitions across Indian Sectors

Among the different Indian sectors that have resorted to mergers and acquisitions in recent

times, telecom, finance, FMCG, construction materials, automobile industry and steel industry

are worth mentioning.

With the increasing number of Indian companies opting for mergers and acquisitions, India is

now one of the leading nations in the world in terms of mergers and acquisitions.

The merger and acquisition business deals in India amounted to $40 billion during the initial 2

months in the year 2007. The total estimated value of mergers and acquisitions in India for

2007 was greater than $100 billion. It is twice the amount of mergers and acquisitions in 2006.

7.3.2 Mergers and Acquisitions in India: The Latest Trends

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.


7.4 Mergers and Acquisitions in Banking Sector

Mergers and acquisitions in banking sector have become familiar in the majority of all the

countries in the world.

A large number of international and domestic banks all over the world are engaged in merger

and acquisition activities. One of the principal objectives behind the mergers and acquisitions

in the banking sector is to reap the benefits of economies of scale. With the help of mergers

and acquisitions in the banking sector, the banks can achieve significant growth in their

operations and minimize their expenses to a considerable extent.

Another important advantage behind this kind of merger is that in this process, competition is

reduced because merger eliminates competitors from the banking industry. Mergers and

acquisitions in banking sector are forms of horizontal merger because the merging entities are

involved in the same kind of business or commercial activities. Sometimes, non-banking

financial institutions are also merged with other banks if they provide similar type of services.

In the context of mergers and acquisitions in the banking sector, it can be reckoned that size

does matter and growth in size can be achieved through mergers and acquisitions quite easily.

Growth achieved by taking assistance of the mergers and acquisitions in the banking sector

may be described as inorganic growth. Both government banks and private sector banks are

adopting policies for mergers and acquisitions. In many countries, global or multinational

banks are extending their operations through mergers and acquisitions with the regional banks

in those countries.

These mergers and acquisitions are named as cross-border mergers and acquisitions in the

banking sector or international mergers and acquisitions in the banking sector. By doing this,

global banking corporations are able to place themselves into a dominant position in the

banking sector, achieve economies of scale, as well as garner market share. Mergers and

acquisitions in the banking sector have the capacity to ensure efficiency, profitability and

synergy. They also help to form and grow shareholder value.


In some cases, financially distressed banks are also subject to takeovers or mergers in the

banking sector and this kind of merger may result in monopoly and job cuts. Deregulation in

the financial market, market liberalization, economic reforms, and a number of other factors

have played an important function behind the growth of mergers and acquisitions in the

banking sector. Nevertheless, there are many challenges that are still to be overcome through

appropriate measures. Mergers and acquisitions in banking sector are controlled or regulated

by the apex financial authority of a particular country. For example, the mergers and

acquisitions in the banking sector of India are overseen by the Reserve Bank of India (RBI).

Change in scenario of Banking Sector

1. The first mega merger in the Indian banking sector that of the HDFC Bank with Times

Bank, has created an entity which is the largest private sector bank in the country.

2. The merger of the city bank with Travelers Group and the merger of Bank of America with

Nation Bank have triggered the mergers and acquisition market in the banking sector world

wide.

3. Europe and Japan are also on their way to restructure their financial sector thought merger

and acquisitions. Merger will help banks with added money power, extended geographical

reach with diversified branch Network, improved product mix, and economies of scale of

operations. Merger will also help banks to reduced them borrowing cost and to spread total

risk associated with the individual banks over the combined entity. Revenues of the

combine entity are likely to shoot up due to more effective allocation of bank funds.

4. ICICI Bank has initiated merger talks with Centurion Bank but due to difference arising

over swap ration the merger didn’t materialized. Now UTI Bank is egeing Centurion Bank.

The proposed merger of UTI Bank and Centurion Bank will make them third largest private

banks in terms of size and market Capitalization State Bank of India has also planned to

merge seven of its associates or part of its long-term policies to regroup and consolidate its

position. Some of the Indian Financial Sector players are already on their way for mergers

to strengthen their existing base.


5. In India mergers especially of the PSBS may be subject to technology and trade union

related problem. The strong trade union may prove to be big obstacle for the PSBS mergers.

Technology of the merging banks to should complement each other NPA management.

Management of efficiency, cost reduction, tough competition from the market players and

strengthen of the capital base of the banks are some of the problem which can be faced by

the merge entities. Mergers for private sector banks will be much smoother and easier as

again that of PSBS.

7.5 Mergers and Acquisitions in Telecom Sector

The number of mergers and acquisitions in Telecom Sector has been increasing significantly.

Telecommunications industry is one of the most profitable and rapidly developing industries

in the world and it is regarded as an indispensable component of the worldwide utility and

services sector. Telecommunication industry deals with various forms of communication

mediums, for example mobile phones, fixed line phones, as well as Internet and broadband

services. Currently, a slew of mergers and acquisitions in Telecom Sector are going on

throughout the world.

The aim behind such mergers is to attain competitive benefits in the telecommunications

industry. The mergers and acquisitions in Telecom Sector are regarded as horizontal mergers

simply because of the reason that the entities going for merger or acquisition are operating in

the same industry that is telecommunications industry.

In the majority of the developed and developing countries around the world, mergers and

acquisitions in the telecommunications sector have become a necessity. This kind of mergers

also assists in creation of jobs. Both transnational and domestic telecommunications services

providers are keen to try merger and acquisition options because this will help them in many

ways.


They can cut down on their expenses, achieve greater market share and accomplish market

control. Mergers and acquisitions in the telecommunications sector have been showing a

prosperous trend in the recent past and the economists are advocating that they will continue

to do so.

The majority of telecommunication services providers have understood that in order to grow

globally, strategic alliances and mergers and acquisitions are the principal devices.

Private sector investment and FDI (Foreign Direct Investment) have also boosted the growth

of mergers and acquisitions in the telecommunications sector. Over the last few years, a

phenomenal growth has been witnessed in the number of mergers and acquisitions taking

place in the telecommunications industry.

The reasons behind this development include the following:

• Deregulation

• Introduction of sophisticated technologies (Wireless land phone services)

• Innovative products and services (Internet, broadband and cable services)

Economic reforms have spurred the growth in the mergers and acquisitions industry of the

telecommunications sector to a satisfactory level. Mergers and acquisitions in Telecom Sector

can also have some negative effects, which include monopolization of the telecommunication

products and services, unemployment and others.

However, the governments of various countries take appropriate steps to curb these problems.

In countries like India, mergers and acquisitions have increased to a considerable level from

the mid 1990s. In the United States, the mergers and acquisitions in the telecommunications

sector are going on in a full-fledged manner.

The mergers and acquisitions in the telecommunications sector are governed or supervised by

the regulatory authority of the telecommunication industry of a particular country, for instance

the Telecom Regulatory Authority of India or TRAI. The regulatory authorities always keep a

tab on the telecommunications industry so that no monopoly is formed.


Significant Mergers and Acquisitions in Telecom Sector

Following are the important mergers and acquisitions that took place in the

telecommunications sector:

• The takeover of Mobilink Telecom by Broadcom. This can also be described as a

suitable example of product extension merger

• AT&T Inc. taking over BellSouth

• The acquisition of Scription Inc. by Nuance Communications Inc.

• The taking over of Hutchison Essar by the Vodafone Group. Now it has become

Vodafone Essar Limited

• China Communications Services Corporation Ltd. taking over China International

Telecommunication Construction Corporation

• The acquisition of Ameritech Corporation by SBC (Southwestern Bell

Corporation) Communications

• The merger of GTE (General Telephone and Electronics) with Bell Atlantic

• The acquisition of US West by Qwest Communications

• The merger of MCI Communications Corporation with WorldCom

Following are the benefits provided by the mergers and acquisitions in the telecommunications

industry:

• Building of infrastructure in a more convenient way

• Licensing options for mergers and acquisitions are often found to be easier

• Mergers and acquisitions offer extensive networking advantages

• Brand value

• Bigger client base

• Wide array of products and services


7.6 Mergers and Acquisitions in Pharmaceutical Sector

There are several causes of mergers and acquisitions in the global pharmaceutical industry.

Among them are the absence of proper research and development facilities, gradual expiry of

patents and competition within specific pharmaceutical genres. The high profile product

recalls have also played a major role in the continuing mergers and acquisitions in the

industry.

Mergers and Acquisitions in Indian Pharmaceutical Sector

In the Indian pharmaceutical market there are a number of companies that have entered into

merger and acquisition agreements in the context of the global market scenario. These

companies would be selling off the non-core business divisions like Over-the-Counter. This is

expected to further the consolidation in the mid-tier as far as the pharmaceutical industry in

Europe is concerned.

The sheer number of companies acquiring parts of other companies has shown that the Indian

pharmaceutical industry is ready to be a dominant force in this scenario. In the recent times

Nicholas Piramal has taken the ownership of 17% of Biosyntech that is a major

pharmaceutical packing organization in Canada.

Torrent has got the ownership of Heumann Pharma, a general drug making company and,

formerly, a subsidiary of Pfizer. Matrix has acquired Docpharma, a major pharmaceutical

company of Belgium.

Sun Pharmaceutical Industries is set to make acquisitions in pharmaceutical companies in the

US and has set aside $450 million to execute these plans. In Bengaluru, Strides Arcolab has

aimed at acquiring 70 percent in a pharmaceutical facility in Italy that is worth $10 million.

Opportunities for Pharmaceutical Companies


There are a number of opportunities for the major pharmaceutical products and services

providers in the Indian pharmaceutical sector as the price controls have been relaxed and there

have been significant changes in the medicinal requirements of the Indians.

The manufacturing base in India is also strong enough to support the major international

pharmaceutical companies from the performance perspective.

This may be said as the Indian pharmaceutical market is varied as well as economical. It is

expected that in the coming years the Indian pharmaceutical companies would be executing

more mergers and acquisitions. It is expected that the regulated pharmaceutical markets in the

United States and Europe would be the main areas of operation.

In the recent years the Indian pharmaceutical companies have been venturing into mergers and

acquisitions so that they can gain access to the big names of the international pharmaceutical

scenario.

One of the major features of the mergers and acquisitions in the pharmaceutical sector of the

Asia-Pacific region has been the integration of the local pharmaceutical companies. This has

happened especially in India and China. Acquisition has made it convenient for a number of

companies to do business in various pharmaceutical markets. Previously the pharmaceutical

markets of Europe were closed to the companies of other countries due to the difference in

language. There were also other problems for companies like the trade barriers for instance.

Mergers and Acquisitions in Global Pharmaceutical Sector

This deal was worth $7.9 billion. In the same period the Asia-Pacific region has experienced

the highest percentage of growth in the mergers and acquisitions in pharmaceutical sector. In

the same period the rate of growth in the Asia-Pacific region has been 37%. In Western

Europe the rate of growth has been 11% and in North America it has been 20%. The

pharmaceutical market in Eastern Europe has not experienced any increase in the rate of

mergers and acquisitions.


Since the year 2004 there has been an increase in the mergers and acquisitions in the global

pharmaceutical sector. This was reflective of the increase in the mergers and acquisitions in

other industries at the same period. There was 20% increase in the number of deals, which

stood at 1,808. There were eight deals with the value of more than $1 billion. This was three

more than 2003. The total financial value of the deals was $112 billion and this was an

increase of 53%. However, these figures do not include the acquisition of Aventis by Sanofi-

Synthelabo that was worth $60 billion. This is the biggest acquisition in the pharmaceutical

industry after the merger of Pharmacia and Pfizer in 2002.

7.7 Inferences

Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholders, manager’s 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 company’s 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;

(b) Economies of scales;

(c) Diversification of product line;


(d) Acquisition of human assets and other resources not available otherwise;

(e) Better investment opportunity in combinations.

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

have attraction and favor 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) Promoter’s 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.

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of benefits and costs to:

(b) Consumer of the product or services;

(c) Workers of the companies under combination;

(d) 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:

1. Mergers with cash payment to shareholders 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.

2. 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.

8. Conclusions

The following conclusions have been drawn from the study:

1. Post liberalization, most Indian business houses are undergoing major structural changes,

the level of restructuring activity is increasing rapidly and the consolidations through M&A

have reached every corporate boardroom.

2. Most of the mergers that took place in India during the last decade seemed to have followed

the consequence of mergers in India corroborate the conclusions of research work in U.S.

with most of the M&A are taking place in India to improve the size to withstand

international competition which they have been exposed to in the Post-liberalization

regime.

3. The M&A activity is undertaken with the objective of financial restructuring and to avail of

the benefits of financial restructuring. Nowadays, before financial restructuring, it has

become a pre-requisite that companies need to merge or acquire. Moreover, financial


restructuring becomes easier because of M&A. the small companies cannot approach

international markets without becoming big i.e. without merging or acquiring.

4. Market capitalalisation of a company sometimes is found to be going up or down without

any corresponding change in the EVA and MVA since the stock may be strong because of

the general bullish scenario in the market, s is observed in most of the cases in our study.

9. SUMMARY

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”.


10. BIBLIOGRAPHY

Books: -

• Merger, Acquisition and corporate restructuring in India (Rachna jawa)

• Financial services 3rd edition (M.Y.khan)

Website: -

• www.google.com

• www.wikipedia.com

• www.icicidirect.com

• www.mergersindia.com

• www.mergerdigest.com

http://www.mergerdigest.com/

http://www.mergersindia.com/

http://www.icicidirect.com/

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58466503 Chapters of Merger and Aqusition

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