In this seminar paper we will study the various reasons for mergers and acquisitions of companies, and then we will look into the various Indian mergers and try to analyze the strategy adopted. In the end to conclude we can look at the forecasting of level of mergers and acquisitions activity in India.
INTRODUCTION
What are mergers and acquisitions? There is some confusion on the precise meaning of various terms relating to the forms of business combinations i.e. mergers, acquisitions, take over, consolidation etc. Sometimes, these terms are used interchangeably in broad sense, though there are legal distinctions between these types of combinations. They can be explained as:
MERGERS: This term refers to a situation where one company acquires the net asset of another company or companies and the later is/are dissolved. The acquired company pays the shareholders of the merged company/companies cash or securities and continues to operate with the resources of the merged company/companies together with its own resources.
ACQUISITIONS: It refers to acquiring of operative working device by one company over another. The control may be acquired either by purchase of mainstream of shares carrying voting rights exercisable at a general meeting of Board Of Directors of the other company. When a company takes over the control of another company through mutual agreement it is an acquisition, whereas if the control is acquired through hostile or unwilling acquisition, it is known as take-over.
MOTIVES FOR MERGERS & ACUISITIONS
The main logic used to describe M&A activity is that acquiring firms search for improved financial act. Following can be listed as the important reasons for M&A:
ECONOMIES OF SCALE: After the merger the restructured company can have a larger volume of operations as compared to the combined volumes of the companies combined earlier. It can, thus, enjoy the economies of scale by having intensive utilization of the production plant, distribution network, R&D facilities etc. The company however enjoy such a facility mainly whenever the merger is horizontal (same line of business are combined).
BETTER FINANCIAL PLANNING: Merger results in better financial planning and control. This can be understood by an example; a company having a long gestation period may merge with a company having a short gestation period. As a result of this merger, the profits coming from the company having a shorter gestation period can be utilized to improve the financial requirements of the other company. Thus when the other company with greater gestation period starts making profit, it will benefit the amalgamated company.
GROWTH: Merger helps in a faster development of balanced growth of the merged companies. Growth by acquisition is generally cheaper than the internal growth since numerous costs and risks involved in developing and embarking upon a new product or a new facility are almost avoided by acquisition of going concern. Thus, the company can achieve & maintain the desired growth rate by acquiring other companies.
TAX IMPLICATIONS: In many M&A schemes, tax implications play a crucial role in deciding the success or failure of a merger. A company with heavy cumulative losses may have little prospects of taking advantage of carrying forward the losses and meeting them out of future profits and thus taking advantages of tax benefits.
STABILISATION BY DIVERSIFICATION: By diversifying its operation the two merged companies can achieve stabilization. A company experiencing wide economic fluctuations and cyclical phases in earnings due to nature of its product or business may merge with another company which has totally different line of products or business. Thus, the merger would act as a safe guard against business cyclical fluctuations and bring stabilization in the earnings of the company.
ECONOMIC NECESSITY: According to financial viability of a company, the government may also direct the merger of two or more sick units into a single unit to make them financially viable. Similarly, it may also acquire the merger of a sick unit with a healthy unit in order to ensure better utilization of resources, improving returns on investment and better management. Rehabilitation of sick units may also become a social necessity since its closure may result in unemployment and other consequential problems.
PERSONAL REASONS: sometimes personal reasons can also become reasons of mergers. When the share holders of a closely held company may desire that their company be acquired by another company that has established market for its shares. This will also facilitate the valuation of their share holders for wealth tax purposes. Moreover, shareholders of such a merged company can also improve their liquidity position by selling some of their shares and diversifying their investments.
ELIMINATION OF COMPETITION: Competition is one of the biggest reasons for companies doing mergers and acquisitions. The mergers of two or more companies into one would result in elimination of competition between them. They would save on advertising cost and thus make available goods to the customer at a lower prices.
The above mentioned reasons are not an exhaustible list of merger or amalgamation. There may be some other factors. The changes in socio-economic conditions, economic, fiscal, trade and industrial policies of the Government, statues, governing the company may also necessitate mergers of companies for achieving long term economic and financial benefits to the company, its shareholders and the national economy as a whole, or to make a global presence.
MAJOR MERGERS AND ACQUISITIONS IN INDIA
A few years ago, every billion dollars hailed as the arrival of India Inc. on the global scene. Then came a global recession and the buyer the buyer to stumble, as conditions demand softened, and the debt used to finance these transactions was the proverbial millstone around the neck to recruit supporters. Globalizers suddenly gung-ho yesterday was transformed into the adventurers in the dark. Tata Steel, Tata Motors, Hindalco, Suzlon, etc. it's a long list of large cream hat India, which was tarred with the brush and possibly negligence.
Below are some of M & A more than Indian companies in recent years.
Hindalco Industries purchased Canada-based firm Novelis Inc. in February 2007
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US $6.0 billion approximately was the value which Hindalco (An Aditya Birla Group company which is a leader in aluminium and copper) paid in order to acquire Novelis(Novelis Inc. which was a Canadian company headquartered in Toronto involved in aluminum rolling), which was an all-cash transaction. The acquisition also included approximately US $2.4 billion of debt.
After the merger of Novelis into Hindalco, there will be an establishment of a global integrated aluminium producer with low-cost alumina and aluminium production facilities which will be combined to get high-end aluminium rolled product competencies.
The outcome of this merger made Hindalco the biggest rolled aluminium products manufacturer and 5th-largest integrated aluminium manufacturer in the world.
Novelis, a global leader in aluminium rolled products and aluminium has the potential to re-cycle aluminium having a global market share of approximately 19%.
Hindalco has a 60% share in the currently small but potentially high-growth Indian market for rolled products.
Hindalco is currently lowest cost producers of primary aluminium in the world & has the potential to become a globally strong player. Thus Novelis acquisition will give this company instantaneous scale and strong a global footprint.
During 2006 the company reported net sales of US $7.4 billion and net loss of US $170 million in nine months, on account of low aluminium prices on LME (London Metal Exchange).
The major motive for Hindalco had for acquiring Novelis was that, Novelis was expecting a full year loss of US $263 million in 2006, however the company is expecting to be in black with US $68 million profit in 2007. The total free cash flow is expected to be US $175 million in 2006.
After the merger, Novelis will work as a forward integration for Hindalco, because the company is expected to ship primary aluminium to Novelis for downstream value addition.
Novelis has a rolled product capacity of approximately 3 million tons while Hindalco at the moment is not having any surplus capacity of primary aluminium.
Advantage of this merger is that Hindalco's Greenfield expansion will give it a primary aluminium capacity of approximately 1 million tons, but in order to achieve this level the company will require a minimum 3-4 years to all the capacities to come into operation.
Novelis profitability is adversely related to aluminium prices and higher aluminium prices on LME in near future can't be ruled out. However, we expect the aluminium prices to be softening in long term and this would be positive for Novelis.
Looking at the factors mentioned above, we can say that Hindalco's profitability is expected to remain under stress and this will bounce back in 2009-10. The profitability will be accretive only in 2010-11.
The debt component of Novelis stood at US $2.4 billion and additional US $2.8 billion will be taken by Hindalco to finance the deal. This will put tremendous pressure on profitability due to high interest burden.
Hindalco's existing expansion will a sum of ` 25,000 crore and as a result debt and interest burden of the company will increase further.
Fortis Healthcare's merger with Wockhardt hospitals in August, 2009
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Fortis Healthcare's merger with Wockhardt hospitals is a big example of a horizontal merger where same line of business are combined i.e. both belong to the field of health care. Prior to the take-over of Wockhardt, Fortis already has about 28 hospitals which has present throughout the nation. Also in the past history of Fortis's mergers was Escorts hospital in 2005 which cost them a sum of more than ` 585crore. Fortis Healthcare Ltd. (Fortis) acquired 10 hospitals of the Wockhardt Hospitals, a subsidiary of Wockhardt Ltd. for ` 9.09 billion.
This merger will not only benefit both the health care companies but will also raise the standard of quality of hospitals and make available to the common people of india the better quality health treatment at a comparative lesser price. Thus this merger acted as a win win situation for both the companies as well as the people.
The reasons stated below can be the drivers which led Fortis Healthcare to decide to take over the Wockhardt hospital acquisition:
Fortis Healthcare was looking at a 74% undertaking in Wockhardt Hospitals before the merger.
After the merger took place, Fortis Health care could achieve its desire of providing about 6,000 beds and finally becoming a US$ 1 billion income generating corporation by 2012.
It can also be said that this deal in one knock has extremely increased impression, reduced opposition, and allowed contact to a great medical team and operational hospitals for Fortis.
Looking from Wockhardt Hospitals point of view, they too had a benefit from the acquisition by Fortis. Wockhardt hospitals had a huge sum of debt amounting up to of ` 34 billion and the acquisition helped to reduce this amount to a less considerable amount of `5 billion.
Another advantage which Wockhardt hospitals had from this merger was that, it too got an opportunity to expand, though under the repositioned brand name of Fortis.
Considering both the pros and cons of this deal, the merger would definitely reinforce Fortis's situation in the healthcare industry in India.
TATA Chemicals (TCL) acquisitions
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Tata Chemicals (TCL) which is a `12000 cr company is one of only company which is in the elite groups of companies which has risen to perform merger and acquisitions in India.
After the year 2006, TCL who are the maker of fertiliser, soda ash and table salt performed 3 global acquisitions of soda ash plants. The latest M&A done by TCL was one of the biggest and was valued at just over $1 billion and was done when other companies were trying to be stable because of the ill effects of recession in 2008. TCL completely acquired The General Chemicals Industrial Products a US based company for an amount of `4,800 crore. Before this massive take over TCL had a noteworthy acquisition of a UK based firm known as Brunner Mond and the valuation of that merger and acquisition was approximately `508 crore, in which the Tata Chemical had a majority of 63.5% stake. Tata Chemical after under taking these M&A, became the 2nd largest producer of soda ash in the World and thy only lag behind the Solvay of Belgium.
All mergers or take overs do not start paying off immediately, initially even Tata Chemicals started to face the decline, they were under the load of achieving that size and scale which was expected from them after this acquisition. From the following facts and figure we can make out what happened in the initial phase. Even though the company made great sales (sales climbed up to `12,341cr) but the net profit decreased (fell to just `760cr ) and this happened for the year ended on March 2009.
The above mentioned figures were among the worse in records for the company, but they alteast maintained to make profit in comparison to other firms like Suzlon, Tata Steel etc. which were still facing many problems till next quarter.
The company started showing progress a little later which was evaluated from the fact that the debt to equity ratio of Tata Chemicals was 1.31 at the end of the next quarter as compared to last years' 1.29. whereas the the same debt to equity ratio for other companies like Suzlon, Tata Steel, Hindalco had increased by more than 50% of their last financial year.as a result of the mergers the company could increase its financial position to `1254 cr the end of the June quarter and also along with that it could pay back its debt of about `440 cr which was a clear indicator that the company was gaining a stability in its liquidity.
The company hence showed great volumes in sales as the fast moving consumer goods where not influenced by the recession and as Tata Chemicals are into the manufacturing of Soda ash (used in detergent making) and table salt they emerged as the successful winners after their M&A.
The mergers which the Tata Chemicals performed where also made looking at the other benefits arriving because of them; firstly both the take overs were done from a low cost arrangement. This type of take overs is beneficial in both good and bad times. If we consider the US or Kenya acquisition both of them had plenty of deposits of soda ash which were not synthetic but natural. The advantage lies here, that the cost of production is more expensive in case of synthetic than by natural deposit ($60 per ton for natural and $120 per ton for synthetic) even though the selling price remaining the same for both the processes.
M&A ACTIVITIES IN FUTURE
Well after looking at the great amount of M&A which took place till 2010 in India the question is will the M&A activities would be of the level that was in 2009-10. A simple answer to this could be YES, but in order to achieve that one must consider that Indian economy is still recovering from the recession. So actually the recapture in the initial part of 2010 will answer this question more correctly. Since India still lags behind in the technological aspects but in terms of profitability it leads, so the type of mergers which the big guns of business in India prefer is generally Cross-country M&A. The in-country acquisitions also take place but that are not that great and are generally done to increase the brand image of companies.
Some of the other main factors that will enhance the mergers and acquisitions deals in India can include the economic stability. The sustained growth rate averaging in India is about 6.5 percent more than what was in last decade. This makes India one of the fastest growing nations in the world. The rise in the gross domestic product (G.D.P) can be another reason why Indian companies can favor M&A.
Various sectors in India like IT, steel, pharmaceuticals, telecommunications etc. have shown a tremendous growth in the international market and the rising participation of such kinds of sector firms in signing M&A deal has a bright future ahead.
Year 2010 has been quite diversified turnarounds in terms of M&A - it began with most of the corporate sector following a very defensive kind of approach bearing in mind the global financial confusion.
It is anticipated that post 2010 would see further consolidation in the US and Europe, and this is likely to result in a number of overseas opportunities being available to India.
CONCLUSION
Based upon the above research of the analysis of companies, it can be seen that industries which have a large amount of M&As can result into a greater comparative size of the growth which it will have in the near future, the higher amount of profit generated, it also decreases the risk associated with an particular industry, and also helps in managing the inventory stocks properly.
Hence, we can notice that the rise in the amount of M&As in current years is mostly along with the simple reason, that M&A actions in a particular sector are increased as a consequence of some kind of blow that resulted the progress chances of that sector. Also, if we look at individual companies we notice that the growth sizes of opportunities the company is inversely proportional to the debt to asset ratio, and hence it will have a greater capacity to hold finance.
In this paper we went through some of the reasons why companies opt for doing mergers and acquisitions. Then we tried to analyze the some major Indian acquisitions and figured out that Indian companies have the experience and potential of making successful acquisition even in tough times. Then we saw the current environment in India and tried to predict the level of M&A activities in future.
