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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.