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INTRODUCTION

MERGER and ACQUISITION

A MERGER happens when two firms, often about same size, agree to go forward asa new single company rather than remain separately owned & operated by pooling

all their resources together, to create a sustainable competitive advantage. For example,both Daimler-Benz( Germany based automobile manufacturer) &Chrysler(US based automible manufacturer) ceased to exist when two firms merged,and a new company ’Daimler-Chrysler’ was created.

A merger is a combination of two companies into one larger company, both companystocks are surrendered and new co. stocks is issued.

When a Company takes over another one & clearly becomes the new owner ,the purchase is called ‘ACQUISITION’. Unlike mergers, acquisitions can sometimes beunfriendly. i.e., when a firm tries to takeover another by adopting hostile measures.

Acquisition - When one company takes over another and clearly established itself asthe new owner, the purchase is called an acquisition.

From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

Control of assets and operations is transferred to the acquiring firm and the acquired

firm is absorbed into the administrative framework by acquiring co.

TYPE OF MERGERS

• Horizontal mergers:

A horizontal merger involves two firms operating and competing in thesame kind of business activity.

Two co in direct competition

Same product line and markets

To enhance market strength

To increase the bargaining power

Textiles firm merges raw materials firm.- Example: Exxon – Mobil, Tata-Corus, Daimler –Chrysler

• Vertical mergers:

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Vertical mergers occur between firms in different stages of productionoperation.

Integration opf two co’s wherein they merge with either a supplier or acustomer

Create an extension of the supply chain

Related with production or distribution of products or services- Example: Helene Curtis and Unilever, Apple( computer manufacturer) and

Intel)processors for Apple computers)

• Conglomerate Mergers:

Conglomerate mergers involve firms engaged in unrelated types of business activity

Mergers done as a desire on the part of one co. to grow its financial wealth

Advantage- revenue in many type of industries

Majorly done by US corporations

- Example: General Electric buying NBC television, Omni conglomerate

• Concentric Mergers:- Based on specific management functions where as the conglomerate mergers are

based on general management functions- Example: Citigroup (principally a bank) buying Salomon Smith Barney (an

investment banker/stock brokerage operation

TYPES OF TAKEOVERS

A Tender offer is put forth before initiation of the takeover. Board of Director is thedeciding factor. Securities and Exchange commission is informed when acquiringcompany wishes to acquire more than 5% of the shares of the target firm.

• Friendly- If offer is approved by BOD it is a friendly merger. There is mutualagreement between both the firms and both see each other interest.

- Example: UK based Vodafone Air Touch(mobile phone group) and German basedMannesmann AG( telecommunication and engineering group)

• Hostile-1)If the Tender is not agreeable by the target firm but still themanagement team of the aggressive firm (raider) does not agree and continue with

the same it takes the nature of hostility.2) The management team does not inform the board at all and acquires

due to poor management, performance of target firm.A group acquires shares of a company from the open market in order to takecontrol of the company

- Example: Hewlett Packard’s takeover of Compaq, deal value-$25 billion,

Autoriders’ Hostile Takeover Bid for Saurashtra Cement.

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REASONS FOR M & A

1) Increased Market Power- Acquisition intended to reduce the competitive balance of the industry. Example: British Petroleum’s acquisition of U.S. Amoco

2) Overcome Barriers to Entry- Acquisitions overcome costly barriers to entry whichmay make “start-ups” economically unattractive. Example: Belgian-Dutch Fortis’acquisition of American Banker’s Insurance Group

3) Lower Cost and Risk of New Product Development- Buying established businessesreduces risk of start-up ventures. Example: Watson Pharmaceuticals’ acquisition of TheraTech

4) Increased Speed to Market- Closely related to Barriers to Entry, allows market entryin a more timely fashion. Example: Kraft Food’s acquisition of Boca Burger

5) Diversification- Quick way to move into businesses when firm currently lacksexperience and depth in industry. Example: CNET’s acquisition of my Simon

6) Reshaping Competitive Scope- Firms may use acquisitions to restrict its dependenceon a single or a few products or markets. Example: General Electric’s acquisition of NBC

PROBLEMS WITH M & A1) Integration Difficulties- Differing financial and control systems can make integration

of firms difficult. Example: Intel’s acquisition of DEC’s semiconductor division.

2) Inadequate Evaluation of Target- “Winners Curse” bid causes acquirer to overpay for firm. Example: Marks and Spencer’s acquisition of Brooks Brothers.

3) Large or Extraordinary Debt- Costly debt can create onerous burden on cashoutflows. Example: AgriBioTech’s acquisition of dozens of small seed firms

4) Inability to Achieve Synergy- Justifying acquisitions can increase estimate of expected benefits. Example: Quaker Oats and Snapple

5) Overly Diversified- Acquirer doesn’t have expertise required to manage unrelated businesses. Example: GE--prior to selling businesses and refocusing

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6) Managers Overly Focused on Acquisitions- Managers may fail to objectively assessthe value of outcomes achieved through the firm’s acquisition strategy. Example:Ford and Jaguar

CASE:TATA CORUS MERGER

ABOUT THE DEAL

• TATA Acquired CORUS on 2nd April 2007 which is 4 times larger than its size.

• The deal price was $ 12 Billion.

• TATA Steel,the winner of the auction for CORUS declares a bid of 608 Pence per share.

• In 2005 when the deal was started the price per share was 455 pence.

• TATA Surpassed the final bid from Brazilian steel maker ‘COMPANHIA

SIDERURGICA NACIONAL’ (CSN) of 603 pence per share.• The combined entity has become the world’s fifth largest steelmaker after the

deal.

• For this deal TATA has finance only 4 Billion $ from internal company resources.

• TATA Have secured funding commitments from its advisors.

• These advisors were Deutshe bank, ABN Amro and Standard Chartered.

IMPORTANCE OF THE DEAL

For TATA

• The initial motive behind the deal was not CORUS revenue size but rather itsmarket value.

• To compete on global scale because then TATA was just at 56th rank in steel production.

• CORUS holds a number of Patents and R & D facility.

• Acquiring Corus will give Tata access to European customers of steel.

• Acquisition cost will be lower then setting up new green field plants andmarketing channel.

• TATA manufactures Low Value ,long and flat steel products ,while Corus

produce High Value Stripped products.• Technology Benefit and economies of scale

For CORUS

• To extend its Global reach through TATA.

• To get access to Indian Ore reserves, as well as virgin market for steel.

• To get access to low cost materials.

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• Saturated market of Europe.

• Better facilities and lower cost of production

• Employee cost was 15 % (TATA- 9%)

• Profit margin was 3.4% (TATA- 17%)

BENEFITS -TATA AND CORUS

• Tata- lowest cost steel producers & Corus -fighting to keep its productions costsunder control .

• Tata- strong retail and distribution network in India and SE Asia. Powerfulcombination of high quality developed and low cost high growth markets

• Technology transfer and cross-fertilization of R&D capabilities .

• Core values:continuous improvement and Ethics, creating value in steel, customer focus etc

• Economies of Scale and increase in profitability• Backward integration for Corus and Forward integration for Tata Steel.

PITFALLS

• High value paid. Approximately 7.7 times its Enterprise Value.

• Corus’ EBITDA was at 8% which was much lower as compared to TataSteel’s 30%.

• Debt of US $ 6.14 was raised against the cash flows of Corus. It was a risky

proposition.• Tata’s debt equity ratio was adversely affected to 2.74:1 from 1.1 which it wasmaintaining earlier.

• Fast consumption of Tata Steel’s captive iron ore reserves as productioncapacity increased from 5.3 million ( estimated for 50 years at this capacity) to 27million tons of steel per annum.

FINAL WORD ON THE DEAL

• If TATA steel were to create, from scratch, 19 million tonnes of steel making

capacity comparable in quality to what Corus possesses, It would end up investing70% to 85% more than it is paying now.

• Besides, setting up a new factory, a 3 to 5 years project if everything goes well,has great execution risk.

• With Corus in its fold, Tata steel can confidently target becoming one of the top 3steel makers globally by 2015 . the company would have an aggregate capacity beyond 50 million tones per annum, if all the planned Greenfield capacities go onstream by then.

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• We can conclude that if the acquisitions well planned , executed and the necessary precautions taken for the deal a company can achieve its strategic objectives andthus ensure its growth through acquisition.

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