The rise of globalization has exponentially increased the market for cross border Mergers and Acquisition This rapid increase has taken many M&A firms as surprise because the majority of them never had to consider acquiring the capabilities or skills required to effectively handle this kind of transaction. In the past, the market's lack of significance and a more strictly national mindset prevented the vast majority of small and mid-sized companies from considering cross border intermediation as an option which left M&A firms inexperienced in this field.
SCOPE OF MERGER & ACQUISITION
Merger & Acquisition has become a daily transaction nowadays. Mergers and acquisitions are an important area of capital market activity in restructuring a corporation and had lately become one of the favored routes for growth and consolidation. The reasons to merge, amalgamate and acquire are varied, ranging from acquiring market share to restructuring the corporation to meet global competition. One of the largest and most difficult part of a business merger is the successful integration of the enterprise networks of the merger partners. The main objective of each firm is to gain profits. M&A has a great scope in sectors like steel, aluminium, cement, auto, banking & finance, computer software, pharmaceuticals, consumer durable food products, textiles etc. It is an indispensable strategic tool for expanding product portfolio's, entering into new market, acquiring new technologies and building new generation organization with power and resources to compete on global basis.
MOTIVE BEHIND M&A
The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance:
SYNERGIES: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.
INCREASED REVENUE/INCREASED MARKET SHARE: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.
CROSS SELLING: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts or, a manufacturer can acquire and sell complementary products.
ECONOMIES OF SCALE: For example, managerial economies such as the increased opportunity of managerial specialization. Another examples are purchasing economies due to increased order size and associated bulk-buying discounts.
TAXES: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.
GEOGRAPHICAL OR OTHER DIVERSIFICATION: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence while investing in the company. However, this does not always deliver value to shareholders.
RESOURCE TRANSFER: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.
VERTICAL INTEGRATION: Vertical Integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalize an externality problem. A common example of such an externality is double marginali7ation. By merging, the vertically integrated firm can collect one deadweight loss by setting the upstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.
However, on average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity. Therefore, includes additional motives for merger and acquisition that may not add value of shareholders.
DIVERSIFICATION: While this may hedge a company against a downturn in an individual industry, it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.
MANAGER'S CONFIDENCE: It increases confidence of managers, but manager's overconfidence about expected synergies from M&A may result in overpayment for the target company.
FACULTY OF COMMERCE & MANAGEMENT STUDIES
G.G.D.S.D(P.G) COLLEGE , PALWAL (HARYANA)
U. EMPIRE BUILDING: Managers have larger companies to manage and hence more power.
MANAGER'S COMPENSATION: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company- the shareholders); although some empirical studies show that compensation is linked to profitability rather than mere profits of the company.
The economics of scale can be gained with a larger base.
To reduce competition and product diversification.
To expand by establishing their presence in the host country.
To adopt the technologies from other companies rather than spending time and money in developing it themselves.
To reduce foreign exchange.
13. OTHER OBJECTIVES : In addition to above, M&A serves following purposes : Classification of M&A
Accounting Standard 14 classifies amalgamations (also referred as business combination) into two categories for the purpose of accounting :
Amalgamation in the nature of merger and
Amalgamation in the nature of purchase.
AS 14 provides that in case of amalgamation in the nature of merger, pooling of interest method is to be applied, whereas for other cases purchase method is to be applied. This standard is applicable only if two or more entities are merged to form a new entity. In case of takeover of majority interest which does not yield to formation of a new merged entity, AS 14 is not applicable.
PREREQUISITES OF M&A
In order to apply pooling of interest method (in case of merger scenario) five conditions have to be fulfilled i.e.
Transfer of all assets and liabilities to transferee company
90% of shareholders of transferor company should become shareholder of transferee company
Consideration for purchase should be paid by issue of equity share of transferee company
Continuation of business of the acquired company and
No adjustment to be made for assets and liability taken over.
HUMAN RESOURCE ISSUES
The investor analyses the average salary of the employees, ratio of outsourced employee to total employees, salary range vis a vis Industry trend and chances of salary increase to be made. The investor also tries to find out whether any Golden Parachute has been issued to senior management which has to be borne by the merged entity. The results of due diligence exercise help to unearth startling facts and assist the investment banker to revise the valuation. From the acquirer's perspective, some change management problems can be avoided by solving them before the deal closes. For example, if the due diligence reveals that the workforce of the target company is inflated, then he may insist for its rationalization as a precondition to deal closure.
M&A BY INDIAN MULTINATIONALS AT FOREIGN TURF SURPASS DOMESTIC TAKEOVERS
The first nine months of 2010-11 (April-December) have witnessed more than threefold increase in value terms in the Merger & Acquisitions growing from US$ 13.54 billion in the corresponding period to US$ 58.73 billion. The study undertaken by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) says the number of deals also rose to 222 from 129 during the same period last year.
The major mergers and acquisitions occurred in telecom followed by energy, metal & mining, pharmaceutical and BFSI sectors. During the first nine months of FY 2010-11 eleven telecom sector topped the list with 28.26 per cent share of the total valuation of M&A deals that took place in India, followed by energy sector accounted for 23.59 per cent, metal & mining sector accounted for 23.19 per cent while pharmaceutical and BFSI sector accounted for 8.20 per cent and 5.74 per cent respectively.
The number of M&A activities in the past nine months shows that the Indian telecom sector is all set to take on the global markets. There were 10 inbound, outbound and domestic M&A deals which took place in telecom sector during April-December 2010, valuing to US$ 16.60 billion; representing 28.26 per cent share in total valuation of the M&A deals that occurred during the period.
Other sectors like IT/ITES, Auto/Auto components, hospitality, steel, consumer durable, real estate, media & entertainment, logistics, consumer non durable and healthcare which witnessed 146 M&A deals for an amount totaling to US$ 6.48 billion, contributing only 11.04 per cent share in total M&A deals.
The cross border inbound, outbound and domestic M&A deals occupied 16.63 per cent, 41.96 per cent and 41.41 per cent share in total deals with 21, 98 and 103 number of deals respectively, during the period April-December, 2010.
TELECOM SECTOR
The major merger and acquisition outbound deal in telecom sector was India's leading telecommunications service provider Bharti Airtel acquire Zain's African mobile services operations in 15 countries. The deal involved a transaction of US$ 10700 million. In another one deal Bharti Airtel acquired 100 per cent stake of Telecom Seychelles Ltd for US$ 62 million.
ENERGY SECTOR
The biggest domestic M&A deal in energy sector was Anil Dhirubhai Ambani Group's (ADAG's) gas transportation company, Reliance Natural Resources Ltd (RNRL), merged with its sister firm Reliance Power (R-Power) for US$ 10686 million. Switzerland based ABB Ltd, the leading power and automation technology, increase the stake in its Indian subsidiary from 52.11 per cent to 75 per cent for the US$ 965 million.
There were only 6 deals that took place during April -December, 2009 in energy sector for a value of US$ 40.69 million, which increased to 13 outbound and domestic deals for US$ 13847.94 million, representing 23.59 per cent share of the total deals occurred during April-December, 2010.
Other major deal in energy sector India's most valuable company Reliance Industries (RIL) picked up 45 per cent stake in Texas, US-based Pioneer Natural Resources Co. for US$ 1320 million and 60 per cent stake in the Marcellus Shale Acreage in the US for US$ 392 million. India's major Power producer JSW Energy agreed to buy Canada's CIC Energy Corp for C$422 million (US$ 414.5 million)
In another deal India's SBI Macquarie Infrastructure Fund acquired 12 per cent stake in Adhunik Power and Natural Resources for US$ 26.93 million. Oil and gas logistics provider Aegis Logistics acquired Shell Gas (LPG) India for an undisclosed amount and Simplex Realty Ltd buys 100 per cent shares in Simplex Renewable Resources Pvt. Ltd.
METAL & MINING
A total of 7 deals occurred during April-December, 2009 in the metal & mining sector that valued US$ 832.86 million, which increased to 11 deals for US$ 13618.29 million, representing 23.19 per cent share of the total deals that took place during April-December 2010.
The major M&A deal that took place in metal & mining sector India's largest nonferrous metals and mining company Vedanta Resources Plc acquires 62.4 percent stake in Cairn Energy's Indian subsidiary for US$ 8480 million and in other one deal Vedanta Resources Plc agreed to pay Anglo American Plc US$ 1338 million for zinc mines in Africa and Ireland.
PHARMACEUTICAL SECTOR
A total of 5 deals occurred during April-December, 2009 in the pharmaceutical sector that valued US$ 949.6 million, which increased to 16 deals for US$ 4815.07 million, representing 8.20 per cent share of the total deals that took place during April-December, 2010.
The major M&A deal that took place in pharmaceutical sector was USA based drugrnaker Abbot Laboratories (ABT) made a major push into the Indian healthcare market and acquired the generics drug unit of Piramal Healthcare for US$ 3720 million.
BFSI SECTOR
In Banking, Financial Service and Insurance (BFSI) there were 26 M&A deals that took place during April-December, 2010 for US$ 3273.14 million, contributing a share of 5.74 per cent.
The major M&A deal that occurred in the BFSI sector was India's Hinduja Group acquired Luxembourg-based KBL European Private Bankers SA for US$ 1690 million (US$ 1.69 billion) to expand its wealth-management business in Europe. Other deal in BFSI sector India's largest private sector bank ICICI Ltd. acquired Bank of Rajasthan for US$ 648 million.
CONCLUSIONS
With the increasing number of Indian companies opting for mergers and acquisitions, India is now one of the leading nation in the world in terms of mergers and acquisitions. Till few years ago, rarely did Indian companies bid for American- European entities. Today, because of the buoyant Indian economy, supportive government policies and dynamic leadership of Indian organizations, the world has witnessed a new trend in acquisitions. Indian companies are now aggressively looking at North American and European markets to spread their wings and become global players. Almost 85 per cent of Indian firms are using Mergers and Acquisitions as a core growth strategy. Thus, we can say that M&A has become a day to day transaction nowadays.
