A

PROJECT REPORT
ON
ACQUISITION OF
IPCL BY RELIANCE

Submitted To:

Dr. Sneha Shukla

Submitted By:

Mahek Patel (09062)

Arpit Shah (09118)

Jayprakash Sharma (09096)

Vikas Shah (09093)

Hardik Surti (09105)

 INDEX

Sr. No. Topic Page No.

1 Corporate Restructuring 1
2 Reliance Group 5
3 IPCL 7
4 Acquisitions of IPCL by Reliance 8
5 Motives and Synergy 9
 Chapter 1

 Corporate Restructuring
Corporate Restructuring is defined as any change in business capacity or portfolio carried
out by an inorganic route or a change in the capital structure of a company that is not part
of its ordinary course of business or any change in the ownership of or control over the
management of the company or a combination thereof.

 Various Forms of Corporate Restructuring

The various forms of Corporate Restructuring are as follows.

1. Merger

2. Consolidation

3. Acquisition

4. Divestiture

5. Demerger

6. Carve Out

7. Joint Venture

8. Reduction of Capital

9. Buy-back of securities

10. Delisting of Securities

Companies carry out Corporate Restructuring activities for various advantages associated
with it. A company having loss making subsidiary can get rid of it through divestiture. A
company wanting to take advantage of economies of scale and economies of scope can
acquire firms in that sector. A project which involves huge investment and there is huge
risk in that can be carried out through Joint Venture which reduces risk and investment by
single company. A company having huge cash reserves can utilize the reserves in buying
back the securities. Thus an organization may use various forms of restructuring for
restructuring depending upon its requirements and the advantages associated with the
form of restructuring.

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Among the above forms of Corporate Restructuring, Mergers and Acquisitions are most
widely used by companies.

 Mergers and Acquisitions

Although often used synonymously, the terms merger and acquisition mean slightly
different things. When one company takes over another and clearly establishes itself as
the 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.

A merger happens when two firms agree to go forward as a single new company rather
than remain separately owned and operated. This kind of action is more precisely referred
to as a "merger of equals". The firms are often of about the same size. Both companies'
stocks are surrendered and new company stock is issued in its place.

 Reasons behind M&A

 Economy of scale:

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.

 Economy of scope:

This refers to the efficiencies primarily associated with demand-side changes, such as
increasing or decreasing the scope of marketing and distribution, of different types of
products.

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  Increased revenue or 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.

 Synergy:

For example, managerial economies such as the increased opportunity of managerial

specialization. Another example are purchasing economies due to increased order size
and associated bulk-buying discounts.

 Taxation:

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. Tax minimization strategies include
purchasing assets of a non-performing company and reducing current tax liability under
the Tanner-White PLLC Troubled Asset Recovery Plan.

 Geographical or other diversification:

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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
in investing in the company. However, this does not always deliver value to shareholders.

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  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
internalise an externality problem. A common example is of such an externality is double
marginalization. Double marginalization occurs when both the upstream and downstream
firms have monopoly power, each firm reduces output from the competitive level to the
monopoly level, creating two deadweight losses. By merging the vertically integrated
firm can collect one deadweight loss by setting the downstream firm's output to the
competitive level. This increases profits and consumer surplus. A merger that creates a
vertically integrated firm can be profitable.

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 Chapter 2
 Reliance Group

The Reliance Group, founded by Dhirubhai H. Ambani, is India's largest private sector
enterprise, with businesses in the energy and materials value chain. Group's annual revenues are
in excess of US$ 44 billion. The flagship company, Reliance Industries Limited, is a Fortune
Global 500 company and is the largest private sector company in India.

Backward vertical integration has been the cornerstone of the evolution and growth of Reliance.
Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical
integration - in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil
and gas exploration and production - to be fully integrated along the materials and energy value
chain.

The Group's activities span exploration and production of oil and gas, petroleum refining and
marketing, petrochemicals (polyester, fibre intermediates, plastics and chemicals), textiles, retail
and special economic zones.

Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fibre
producer in the world and among the top five to ten producers in the world in major
petrochemical products.

Major Group Companies are Reliance Industries Limited (including main subsidiary Reliance
Retail Limited) and Reliance Industrial Infrastructure Limited

 Products

The Company expanded into textiles in 1975. Since its initial public offering in 1977, the
Company has expanded rapidly and integrated backwards into other industry sectors, most
notably the production of petrochemicals and the refining of crude oil.

The Company from time to time seeks to further diversify into other industries. The Company
now has operations that span from the exploration and production of oil and gas to the
manufacture of petroleum products, polyester products, polyester intermediates, plastics,
polymer intermediates, chemicals and synthetic textiles and fabrics.

The Company's major products and brands, from oil and gas to textiles are tightly integrated and
benefit from synergies across the Company. Central to the Company's operations is its vertical
backward integration strategy; raw materials such as PTA, MEG, ethylene, propylene and normal
paraffin that were previously imported at a higher cost and subject to import duties are now
sourced from within the Company. This has had a positive effect on the Company's operating

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margins and interest costs and decreased the Company's exposure to the cyclicality of markets
and raw material prices. The Company believes that this strategy is also important in maintaining
a domestic market leadership position in its major product lines and in providing a competitive
advantage.

The Company's operations can be classified into four segments namely:

• Petroleum Refining and Marketing business

• Petrochemicals business
• Oil and Gas Exploration & Production business
• Others

The Company has the largest refining capacity at any single location.

The Company is:

• Largest producer of Polyester Fibre and Yarn

• 4th largest producer of Paraxylene (PX)
• 5th largest producer of Polypropylene (PP)
• 7th largest producer of Purified Terephthalic Acid (PTA) and Mono Ethylene Glycol
(MEG)
 Manufacturing Facilities
Reliance Industries Limited operates world-class manufacturing facilities across the country at
Allahabad, Barabanki, Dahej, Hazira, Hoshiarpur, Jamnagar, Nagothane, Nagpur, Naroda,
Patalganga, Silvassa and Vadodara

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 Chapter 3
 IPCL

Indian Petrochemicals Corporation Limited (IPCL) is a petrochemicals company in India.

It was established on March 22, 1969, with a view to promote and encourage the use of
plastics in India. Its business consists of polymers, synthetic fibre, fibre intermediaries,
solvents, surfactants, industrial chemicals, catalysts, adsorbents and polyesters. The
Company operates three petrochemical complexes, a naphtha based complex at Vadodara
and gas based complex each at Nagothane near Mumbai and at Dahej on Narmada
estuary in bay of Khambhat. The Company also operates a catalyst manufacturing facility
at Vadodara

The construction of first petrochemicals complex began in 1970 at Vadodara in the state
of Gujarat and commercial production at this complex commenced in 1973. Second
petrochemicals complex was commissioned in 1992 at Nagothane in the state of
Maharashtra and the third complex was commissioned in 1997 at Gandhar in the state of
Gujarat.

In June 2002, the Government of India as a part of its disinvestment programme divested
26% of its equity shares in favour of Reliance Petroinvestments Limited (RPIL), a
Reliance Group Company. RPIL acquired an additional 20% equity shares through a cash
offer in terms of SEBI (Takeover Regulations) and currently holds 46% of Company's
equity shares.

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 Chapter 4
 Acquisition of IPCL by Reliance
Reliance acquired 26% stake in IPCL from Government of India and later issued open
offer for further 20% shares.

In year 2002, Government had invited tenders for sale of 26 its 26% stake in IPCL.
Nirma, Indian Oil Corporation and Reliance had bid for the 26 % stake. Nirma bade Rs.
110 per share, IOC bade 131 Rs per share and Reliance bade highest of all Rs 231 per
share. Reliance’s bid price was at 74% premium to IPCL’s last traded price.

Reliance paid Rs. 1491 Crore to Government of India in all-cash deal for 26% stake in
IPCL.

After acquiring government’s 26% stake in IPCL. Reliance had made an open offer to
IPCL’s shareholders for acquiring 4.96 crore shares (20% stake). The offer opened on
24th July 2002 and closed on 22nd August 2002. The offer price was Rs. 231 per share.
Against offer of 4.96 crore shares, Reliance’s open offer was oversubscribed by 74
percent. Reliance invested Rs. 1,147 crore for acquiring the 20% stake through open
offer.

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 Chapter 5

 Motives and Synergies

Monopoly Theory
The motive of acquisition of IPCL by Reliance can be explained by Monopoly theory.
This theory explains Mergers and Acquisitions as being planned and executed to achieve
market share and market power, at times including power.

Monopoly theory works in three ways

a) Market Leaders trying to consolidate their position further.

b) Profitable and cash-rich companies trying to gain market leadership

c) Market entry strategy

Through the acquisition of IPCL, Reliance tried to consolidate its leadership position.
With the acquisition, Reliance could control at least two-third of the total Indian
petrochemicals market for all kinds of products put together, whereas in case of specific
products like HDPE, LDPE, PVC, PP, MEG etc. its market share went up to 80 to 90
percent.

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 Synergies
Synergies add to the enterprise valuation. Value is created by pooling various resources
of the acquirer and target companies. Synergies can be broadly classified as

a) Revenue Generating Synergies

b) Cost Reduction Synergies

Synergies from acquisition of IPCL

 Operations Synergy

The acquisition resulted into cost reduction through operations synergy. It reduced
manpower costs and overheads

Manpower Costs

IPCL had 13,740 employees. On per ton basis, it was believed that IPCL’s manpower
cost was around 210% higher than Reliance’s cost. Thus after acquisition IPCL’s cost per
ton will reduce to a great extent.

Overheads

IPCL’s overheads per ton were Rs. 1532 which were 2.5 times reliance’s overheads.
Within this cost pool over 35% goes towards repairs and maintenance – a reflection on
the age of IPCL’s plants. Cutting repairs & maintenance overheads would involve
refurbishment of existing operations, which would require upfront capital investments.

 Marketing Synergy

The polymer market in India is fragmented – buyers are small and spread out across the
country. As a result, IPCL and RIL will have a significant overlap on sales and
distribution costs. External analysts think IPCL spends around Rs 519/ton of product;
RIL, on the other hand, spends Rs 532/ton of external sales. The duplication of channel
infrastructure can be reduced. It is pertinent to remember here that the sharing of
synergies between RIL and IPCL could be an issue – IPCL is still a 33%-owned

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government company, with its own set of minority shareholders. Realising the potential
pool of synergies might get stuck on sharing issues.

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  Improvement of pricing power

Management control over IPCL will make RIL the clear number-one player in the Indian
petrochemicals market, with dominant market shares across key polymer segments, along
with dominant market shares in ethylene glycol and other products. This will improve
Reliance’s pricing power in the market.

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