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Acquisitions

Acquisitions or takeovers occur between the bidding and the target company.

There may be either hostile or friendly takeovers. 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.

Mergers and Acquisitions Laws

Business firms opt for mergers and acquisitions mostly for consolidating a

fragmented market and also for increasing their operational efficiency, which give

them a competitive edge. Nations across the globe have promulgated Mergers and

Acquisitions Laws to monitor the functioning of the business units therein. An

estimate made in 2007 put the number of global competition laws at 106. They

possess merger control provisions.

While most mergers and acquisitions increase the operational efficiency of

business firms some can also lead to a building up of monopoly power. The anti-

competitive effects are achieved either through coordinated effects or unilateral

effects. Sometimes mergers and acquisitions tend to create a collusive market

structure.

However, free and fair competition is seen to maximize the consumers' interests

both in terms of quantity and price.

Mergers and Acquisitions Laws: the Global Perspective

As per global experience around 85% of acquisitions and mergers are devoid of

any competitive concerns. They get approval within a period of 30 to 60 days. The

remaining percentage of firms usually has a substantially long gestation period for

getting the legal approval. These cases are relatively complex and need a close

examination of the various aspects by the regulatory bodies. As per the guidelines

from "The International Competition Network" simple merger and acquisitions

cases should receive approval within a period of 6 weeks. The comparable time

frame for complex cases is 6 months. It may be noted that the 'Competition Network' mentioned above is actually an association of international competition

authorities.

Mergers and Acquisitions Laws: the Indian Perspective

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Indian competition law grants a maximum time period of 210 days for the

determination of the combination, which comprises acquisitions, mergers,

amalgamations and the like. One needs to take note of the fact that this stated time

frame is clearly distinct from the minimum compulsory wait period for applicants.

As per the law, the compulsory period of waiting for applicants can either be 210

days starting from the day of notice filing or receipt of the Commission's order,

whichever occurs earlier. The threshold limits for firms entering business

combinations are substantially high under the Indian law. The threshold limits are

set either in terms of the asset value or in terms the firm's turnover. Indian

threshold limits are greater than those for the EU. They are twice as high when

compared with UK.

The Indian law also provides for the modern day phenomenon of merger and

acquisitions, which are cross border in nature. As per the law domestic nexus is apre-requisite for notification on this type of combinations.

It can be noted that Competition Act, 2002 has undergone a recent amendment.

This has replaced the the voluntary notification regime with a mandatory regime.

Of the total number of 106 countries, which possess competition laws only 9 are

thought to be credited with a voluntary notification regime. Voluntary notification

regimes are generally associated with business uncertainties. Post-combination, if

firms are seen to be involved in anti-competitive practices de-merger shows the

way out.

Benefits of Mergers and Acquisitions

Merger refers to the process of combination of two companies, whereby a new

company is formed. An acquisition refers to the process whereby a company

simply purchases another company. In this case there is no new company being

formed. Benefits of mergers and acquisitions are quite a handful.

Mergers and acquisitions generally succeed in generating cost efficiency through

the implementation of economies of scale. It may also lead to tax gains and can

even lead to a revenue enhancement through market share gain.

The principal benefits from mergers and acquisitions can be listed as increased

value generation, increase in cost efficiency and increase in market share.

Mergers and acquisitions often lead to an increased value generation for the

company. It is expected that the shareholder value of a firm after mergers or

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acquisitions would be greater thanthe sum of the shareholder values of the parent

companies.

An increase in cost efficiency is effected through the procedure of mergers and

acquisitions. This is because mergers and acquisitions lead to economies of scale.

This in turn promotes cost efficiency. As the parent firms amalgamate to form a

bigger new firm the scale of operations of the new firm increases. As output

production rises there are chances that the cost per unit of production will come

down.

An increase in market share is one of the plausible benefits of mergers and

acquisitions. In case a financially strong company acquires a relatively distressed

one, the resultant organization can experience a substantial increase in market

share. The new firm is usually more cost-efficient and competitive as compared to

its financially weak parent organization. It can be noted that mergers andacquisitions prove to be useful in the following situations:

Firstly, when a business firm wishes to make its presence felt in a new market.

Secondly, when a business organization wants to avail some administrative

benefits. Thirdly, when a business firm is in the process of introduction of new

products. New products are developed by the R&D wing of a company.

D e m e r g e r T h e t a i l p a r t o f M e r g e r .

M e r g e r a n d D e m e r g e r c a n b e r i g h t l y d e s c r i b e d a s t h e h e a da n d t a i l p a r t o f t h e s a m e c o i n . T h e d e m e r g e r p r o c e s s i s n o w

g a i n i n g i m p o r t a n c e m o r e a n d m o r e b e c a u s e o f t h e a d d e d

b e n e f i t s , s o c o r p o r a t e a r e n o m o r e o n l y i n t e r e s t e d i n g o i n g

f o r m e r g e r s b u t a l s o a r e o p t i n g f o r d e m e r g e r s . M e r g e r s h a v e

m a n y a d v a n t a g e s , s o t h e r e i s a l w a y s a q u e s t i o n w h e n 2 b i g

g i a n t j o i n i n g h a n d s b r i n g f r u i t f u l r e s u l t t o t h e e n t i t y f o r m e d

t h e n w h y t h e n e e d f o r d e m e r g e r .

D e m e r g e r a s t h e n a m e s u g g e s t c o n v e r s e o f M e r g e r / A c q u i s i t i o n ,

w h e r e t h e s h ar e h o l d e r s o r o w n e r o f t he p a r e n t c o m p a n y g a i n s d i r e c to w n e r s h i p o f t h e d e m e r g e d e n t i t y . O r i n o t h e r w o r d s D e m e r g e r r e f e r t o t h e p r o c e s s o f t h e s e p a r a t i o n o f c o m p a n i e s o r B u s i n e s s u n i t s

w h i c h a r e o p e r a t i n g u n d e r o n e s i n g l e u m b r e l l a . B e l o w i s t h ee x p l a n a t i o n o f h o w d e m e r g e r a f f e c t s t h e s h a r e h o l d e r s i n t e r e s t

b e f o r e a n d a f t e r t h e d e m e r g e r p r o c e s s .

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F i g u r e a b e f o r e D e m e r g e r F i g u r e b s h o w s a f t e r D e m e r g e r I n s i m p l e w o r d s w h e n o n e c o m p a n y , s a y X L t d .

h a v i n g 1 0 u n d e r t a k i n g s , t r a n s f e r s o n e o r m o r e o f i t s u n d e r t a k i n g s t oa n e w c o m p a n y , s a y Y L t d . , i t i s a c a s e o f d e m e r g e r . X L t d . i s t h e

d e m e r g e d c o m p a n y a n d Y L t d . i s t h e r e s u l t i n g c o m p a n y .

N o w w e a l l k n o w t h a t U n i t y i s t h e d i v e r s i t y , s o w h y t h e n g o f o r d e m e r g e r . T h e c a s e i s s i m i la r t o t h e d e b a t e J o i n t f a m i l y V s N u c l e a r

f a m i l y . W e a l l k n o w t h a t a J o i n t f a m i l y h a v e l o t s o f a d v a n t a g e sr e g a r d i n g a l l r o u n d d e v e l o p m e n t o f a c h i l d , s h a r i n g o f t h o u g h t s a n d

e m o t i o n s w i t h e a c h o t h e r , e c o n o m i e s o f s c a l e b y s h a r i n g e x p e n s e sa n d s a v i n g s w i t h e a c h o t h e r , b e t t e r c a p a b i l i t y t o a d j u s t w i t h

u n f o r e s e e n c i r c u m s t a n c e s a n d m a n y m o r e . B u t i t i s a l s o t r u e t h a t a l lt h a t s o u n d s w e l l i s n o t n e c e s s a r y w e l l a l l t i m e s . S o t h e p o p u l a r

p r o v e r b T w o u t e n s i l s b o u g h t t o g e t h e r w i l l d e f i n i t e l y p r o d u c es o u n d T h e s a m e t h e o r y m a y a p p l y h e r e s o t h e p r o c e s s o f d e m e r g e r

B u t t h i s i s p r o b a b l y o n e o f t h e r e a s o n f o r D e m e r g e r .T h e r e a r e o b v i o u s l y v a r i o u s r e a s o n s f o r D e m e r g e r s w h i c h v a r y f r o m

c o m p a n y t o c o m p a n y , c o u n t r y t o c o u n t r y a n d i n d u s t r y t o i n d u s t r y. B u t s o m e c o m m o n r e a s o n s m a y b e :

1 . T o a d j u s t w i t h c h a n g i n g e c o n o m i c a n d p o l i t i c a l c o n d i t i o n s .2 . P a r e n t c o m p a n y s i n a b i l i t y t o m a x i m i z e r e t u r n , t h u s g i v i n g c h a n c e

f o r o t h e r s .

3 . C o r r e c t io n o f a n y f a l s e i n v e s t m e n t d e c i s i o n m a d e r e g a r d i n g s t e p p i n gi n t o a t o t a l l y d i f f e r e n t f i e l d o f n o e x p e r t i s e .

4 . T o r a i s e c a p i t a l g a i n s f r o m t h e a s s e t s a c q u i r e d a t t h e t i m e o f

u n d e r p e r f o r m a n c e o f t h e e n t i t y .

5 . U t i l i z a t i o n o f f i n a n c i a l a n d h u m a n r e s o u r c e s f o r b e t t e r p r o f i t a b l eo p p o r t u n i t i e s c o m p a r e d t o t h e p r e v a i l i n g e n t i t y .

6 . S e l l i ng o f u n w a n t e d s u r p l u s i n t h e b u s i n e s s t h e r e b y c a r r y i n g o u t t h e

r e s t r u c t u r i n g / r e o r g a n i z a t i o n s t r a t e g y a n d g e t r i d o f t h e s i c k e n t i t y .

7 . O n e m o r e r e a s o n f o r d e m e r g e r c a n b e f a c i l i t a t i n g I n d i a n e n t i t y t o g e td e m e r g e d f r o m t h e f o r e i g n e n t i t y w i t h w h o m i t h a s m e r g e d b e f o r e s o

t h a t f o r e i g n c o m p a n y d r a w s o u t i t s i n v e s t m e n t .

8 . M a x i m i z a t i o n o f s h a r e h o l d e r s v a l u e s i n c e i t i s f e l t t h a t t h e v a l u eo f t h e b u s i n e s s w h e n s e p a r a t e d w i l l b e m o r e t h a n t h e v a l u e o f t h e

g r o u p .

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9 . T o F o c u s m o r e o n t h e a c t i v i t i e s o f v a r i o u s b u s i n e s s u n i t s w h i c h i sn o t p o s s i b l e b y t h e g i a n t c o r p o r a t e . ( S i m i l a r t o t h e p r o p o s i t i o n o f

f o r m i n g a s e p a r a t e s t a t e f o r b e t t e r a d m i n i s t r a t i o n a n d d e v e l o p m e n t J h a r k a n d a n d B i h a r ) .

1 0 . T o g e t r e l i e f f r o m s t r i c t g o v e r n m e n t r e g u l a t i o n s w h i c h t h e e n t i t y m a yf a c e b e f o r e d e m e r g e r a s a r e s u l t o o t h e r b u s i n e s s .

1 1 . R a t i n g o f t h e c o r p o r a t e b e c o m e s a n e a s y a f f a i r r e l a t i n g t o t h e s p e c i f i c

b u s i n e s s i n w h i c h t h e y h a v e t h e e x p e r t i s e .

1 2 . C h a n g e s i n I T a c t 1 9 9 9 , w h i c h h a v e m a d e d e m e r g e r s t a x n e u t r a lh a v e m o t i v a t e d t h e c o m p a n i e s t o g o f o r d e m e r g er s

1 3 . S p l i t b e t w e e n f a m i l y m e m b e r s l e a d t o t h e d e m e r g e r g a i n i n g i t s

i m p o r t a n c e .

R e a s o n s a r e u n e n d i n g a n d c o n t i n u e t h e r e a f t e r .

S o m e o f t h e l i v e e x a m p l e s o f D e m e r g e r s c a s e s w h i c h t o o k p l a c e

i n I n d i a1 . D e m e r g e r o f D a b u r I n d i a i n J u l y 2 0 0 3 F M C G g r o u p a n d P h a r m a

g r o u p - b e n e f i c i a l f o r b o t h t h e g r o u p A f t e r d e m e r g e r F M C G G r o u pr e g i s t e r e d a c o m p o u n d e d a n n u a l s a l e s g r o w t h o f a r o u n d 1 2 p e r c e n t

o v e r t h e p a s t t h r e e y e a r s , w i t h n e t s a l e s o f R s 1 , 0 4 8 . 5 c r o r e a n d n e tp r o f i t o f R s 7 2 c r o r e i n 2 0 0 2 - 0 3 .

F o r T h e p h a r m a c y b u s i n e s s , o n t h e o t he r h a n d , n e t s a le s h a v ed o u b l e d i n t h r e e y e a r s . T h i s d i v i s i o n r e p o r t e d a n e t p r o f i t o f R s

1 3 . 1 c r o r e o n n e t s a l e s o f R s 1 8 4 c r o r e i n 2 0 0 2 - 0 3 .P h a r m a B r a n d h a v e a l r e a d y 2 0 % m a r k e t s h a r e i n o n c o l o g y p r o d u c t s

a n d h a v e a l s o g o t v a r i o u s p r o d u c t s f o r e x p o r t i n g t o 2 7 c o u n t r i e s .

R e a s o n f o r t h e a b o v e d e m e r g e r b e t t e r g r o w t h f o r b o t h t h ee n t i t y . T h e m a i n r e a s o n f o r t h e d e m e r g e r w a s t o h a r m o n is e s t r a t e g i e s ,c r e a t e o p e r a t i o n a l e f f i c i e n c i e s a n d m a x i m i z e p h a r m a s p e n e t r a t i o n

i n t o g l o b a l m a r k e t t h e m a i n g r o w t h d r i v e r s d u r i n g t h e f i s c a l w e r e i t sg l o b a l l y e x p a n d e d a n t i - c a n c e r r a n g e o f p r o d u c t s a n d b r a n d s l i k e L i v -

f i t , U l g e l , H o n i t u s a n d C o n t r a s t i n .T h e r e a f t e r D a b u r P h a r m a h a v e n o t l o o k e d b e h i n d d e v e l o p m e n t

c a m e o n e b y o n e b y s t r a t e g i c a l l i a n c e w i t h A b b o t t L a b o r a t o r i e s f o r g e n e r i c o n c o l o g y p r o d u c t s i n t h e U n i t e d S t a t e s , N o v e m b e r 0 3 ,

2 0 0 3 . F o l l o w e d b y D a b u r P h a r m a A c q u i r i n g S a l e s & D i s t r i b u t i o nB u s i n e s s i n T h a i l a n d - J a n u a r y 0 9 , 2 0 0 7 , A g r e e m e n t w i t h S p a n i s h

m a r k e t O c t 2 0 0 7 , L a u n c h o f I r i n o t e c a n i n j e c t i o n i n I t a l y &D e n m a r k - m a r c h 1 1 2 0 0 8 a n d m a n y m o r e .

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2 . R e l i a n c e i n d u s t r i e s D e m e r g e r - A u g u s t 2 0 0 5 R e l i a n c e I n d u s t r i e s , w h i c h f o c u s e s o n e x p l o r a t i o n a n d p r o d u c t i o n

( E & P ) , r e f i n i n g a n d r e t a i l i n g , a n d p e t r o c h e m i c a l s i s u n d e r t h ec h a i r m a n s h i p o f M u k e s h A m b a n i a n d h i s y o u n g e r b r o t h e r A n i l t o o k

c h a r g e o f b u s i n e s s e s c o m p r i s i n g R e l i a n c e C o m m u n i c a t i o n V e n t u r e s ,

R e l i a n c e E n e r g y V e n t u r e s , R e l i a n c e C a p i t a l V e n t u r e s , a n d R e l i a n c eN a t u r a l R e s o u r c e s .

T h e r e a s o n p r o b a b l y w a s r i f t b e t w e e n b r o t h e r s b u t t h e m o v e h a s b e n e f i t e d b o t h .

E a r l i e r R e l i a n c e w a s b a s i c a l l y i n t o i n d u s t r i a l p r o d u c t s b u t n o w w i t hd e m e r g e r i t h a s e n t e r e d i n t o o t h e r s e g m e n t s l i k e r e l i a n c e

t e l e c o m m u n i c a t i o n w i t h a v i s i o n t o b r i n g m o b i l e c o m m u n i c a t i o nt o p o s t c a rd c o s t . A n d o t h e r p r i v at e s a r e f i g ht i n g b a c k t o br e a k t h e

i m a g e w h i c h R e l i a n c e m o b i l e h a v e c r e a t e d i n t h e m i n d o f c u s t o m e r sb y t h e s l o g a n k a r l o D u n i y a M u t t h i M e .

E v e n t h e n e w e r e n t i t y u n d e r A n i l A m b a n i i s t r y i n g t o t a p t h eu n t a p p e d f o o d p r o c e s s i n g s e g m e n t . A l s o R I L i s m a k i n g i t s w a y i n t o

r e t a i l i n d u s t r i e s b y d e v e l o p i n g a m o d e l o f p r o m o t i n g p a r t n e r s h i pw i t h f a r m e r s , l o g i s t i c s o p e r a t i o n s , s m a l l s h o p k e e p e r s , t r a d e r s . T h e

d e m e r g e r s h a v e n o t a f f e c t e d M u k e s h P e t r o c h e m i c a l b u s i n e s s a n d h eg a i n e d t h e p o s i t i o n o f n o 1 r a n k i n g b u s i n e s s t y c o o n a l l o v e r t h e

w o r l d t h e r e b y d e f e a t i n g B i l l g a t e s .

3 . D e m e r g e r o f L & T c e m e n t d i v i s i o n t o a n e w e n t i t y C E M C O . T h ed e m e r g e r p r o c e s s n e e d t o t a k e p l a c e i n 3 st e p s .

I n t h e i s t p h a s e L & T w o u l d h i v e o f f t h e c e m e n t b u s i n e s s i n t o as e p a r a t e c o m p a n y , U l t r a T e c h C e m C o , w h e r e i t w i l l h o l d 2 0 p e r c e n t .

T h e b a l a n c e 8 0 p e r c e n t w i l l b e h e l d b y t h e e x i s t i n g L & Ts h a r e h o l d e r s p r o p o r t i o n a t e l y.

I n t h e s e c o n d p h a s e , G r a s i m w i l l b u y 8 . 5 p e r c e n t i n C e m C o f r o mL & T a t R s . 3 4 2 . 6 0 p e r s h a r e a n d m a k e a n o p e n o f f e r f o r a n o t h e r 3 0

p e r c e n t a t t h e s a m e p r i c e .I f f u l l y s u b s c r i b e d , t h e o p e n o f f e r w i l l m a k e t h e A d i t y a B i r l a

g r o u p ' s h o l d i n g i n C e m C o t o 5 1 p e r c e n t a n d L & T w i l l r e a l i z e R s .3 6 2 c r o r e s o n s a l e o f i t s s t a k e i n U l t r a T e c h C e m C o .

I n t h e t h i r d s t e p , L & T E m p l o y e e W e l f a r e F o u n d a t i o n w i l l a c q u i r et h e B i r l a ' s 1 5 . 3 p e r c e n t s t a k e i n t h e r e s i d u a l e n g i n e e r i n g c o m p a n y .

V a r i o u s o t h e r d e m e r g e r s h a v e t a k e n a r o w G r e a t E a s t e r n S h i p p i n g ,w h i c h i s d e m e r g i n g i t s o f f s h o r e b u s i n e s s ; E v e r e a d y I n d u s t r i e s

s e p a r a t e d i t s t e a b u s i n e s s i n t o M c L e o d R u s s e l l ; A u t o a n c i l l a r yc o m p a n y R a n e M a d r a s t r a n s f e r r e d i t s i n v e s t m e n t s i n t o s e p a r a t e

c o m p a n y a n d t h e i n v e s t m e nt c o m p a n y w a s a l s o l i s t e d . T h e d e m e r g e r l i s t a l s o i n c l u d e s V a r d h m a n S p i n n i n g a n d M o r a r j e e R e a l i t i e s . A l s o

d e m e r g e r s o f B a j a j A u t o g r o u p a r e o n t h e p r o c e s s . G a b r i e l I n d i a i sa l s o l o o k i n g a t d e m e r g i n g i t s e n g i n e b e a r i n g s d i v i s io n a n d m a y a l s o

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s e l l i t s M u m b a i p r o p e r t y . C a i r n I n d i a o n t h e r e o r g a n i z a t i o n o f C a i r nE n e r g y P L C ' s I n d i a n b u s i n e s s p r i o r t o f l o t a t i o n .

S o n o w t r e n d i s c h a n g i n g , a f t e r t h e l o n g m e r g e r p r o c e s s t a k i n g p l a c e, d e m e r g e r i s n o w t a k i n g i t s s e a t . T h e m a i n a i m b e h i n d d e m e r g e r i s t o

c o n c e n t r a t e o n t h e s p e c i f i c b u s i n e s s i n w h i c h t h e y h a v e e x p e r t i s e

a n d a l l o w o t h e r b u s i n e s s u n i t s t o r a i s e t h e i r o w n c a p i t a l . A l s o w ea r e a w a r e o f t h e c o n c e p t o f s h a r e h o l d e r w e a l t h m a x i m i z a t i o n w h i c h i s t h e r e b y e n h a n c e d m o r e d u e t o d e m e r g e r s t h a n b y m e r g e r s .

Trends & Future of M & A in India

We are seeing some distinct trends in the Indian corporate scene as regards consolidation and

restructuring:

y In all Joint Ventures between Indian and foreign corporate, the Indian partner is slowly beingphased out of the partnership. Take the Toyota-Kirloskar JV or Shriram Honda as examples.The MNC line of thinking is very clear: a clear majority implies clear direction and a clear

focus. Apart from the help in setting up the distribution channels or handling variousgovernment compliance, there is little value that Indian companies can add to the JV, not to

mention their inability to provide periodic infusions of huge cash.

y Cross border acquisitions will increase as strong Indian companies especially from thesoftware sector, seek to buyout or buy into strategic niche companies abroad.

y Global competitive pressures are increasingly reflected in India and Indian companies haveso far shown their ability to innovatively counter it.

Ultimately, it is the business model, its scalability, and its niche, driven by informationtechnology that will determine the future of any company be it in the service or manufacturing

industry. Which business model delivers greater value will increasingly drive Mergers andAcquisitions in India tomorrow.