1

PROJECT
REPORT ON
MERGERS & June 28

ACQUISITIONS
CREATING
VALUE TO
2010
SHAREHOLDERS
WEALTH
The project is to find out the value creation done by mergers & acquisitions to
shareholders wealth if any & to find out if mergers can be used as a strategic tool by
organizations to enhance their efficiency and value creation done by them to o increase
the shareholders value.
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ACKNOWLEDGEMENT

It gives me immense pleasure to acknowledge all those who have given me things,

time and energy to supply all valuable facts and opinions that had helped me in bringing out

this project to fruition.

I take this opportunity to express my gratitude and indebtedness to Dr.R.P.Raya,

Head of the Department, Department of Management Studies, School of Management,

Pondicherry University for his support.

I am very much grateful to my project guide Dr. B. Charumathi, Reader, Department

of Management Studies, School of Management, Pondicherry University, for her guidance

and moral support rendered during the project period.

I thank Mr. SRIRAM CHIDAMBARAM, HEAD FINANCE e4e Business Solutions India

Ltd for constantly supporting and guiding me in achieving the prescribed objectives of my

project.

I would like to express my thanks to all the staff e4e Business solutions Chennai who

provided me all the support and help needed for the successful completion of my project.

I also express my gratitude to my parents, friends and above all the grace of the

almighty for helping me to accomplish my project.

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INTRODUCTION

1.1 Introduction to the topic

MERGERS &ACQUISITIONS CREATING VALUE TO SHAREHOLDERS WEALTH

We have been learning and listening to companies coming together and forming another company and
companies taking over another company to expand their business.

Mergers & Acquisitions is currently the most talked about term today creating a lot of excitement and
speculative activity in the markets. But before an M&A occurs it passes through a series of procedures
and activities before the deal actually occurs. The topic deals with finding out the various steps that a
company is involved in before an M&A occurs involving the company. It deals with the way
company looks at M&A as a tool for expanding their business, assets and increase their overall
strength and operational capability in the industry to stay ahead in the competition. The topic covers
the various steps involved in the actual process of M&A and also explains the various types of
M&A‘s with suitable examples. The success of any M&A is evaluated based on the ability of the deal
to create value and gain for the shareholders of the company as they are instantaneously affected by
the performance of the company after the merger or the acquisition has taken place. The topic tries to
find if mergers & acquisitions really create value to the shareholders and also looks at the gains made
by the company in the process.

The topic also looks at the corporate restructuring that happens with the M&A that has taken place.
The topic is an investigation to find if companies can use M&A as a way to survive and create profits
and value gain to its shareholders. The topic dwells into analyzing mergers and acquisitions that have
taken place in the national and international level. The study involves a comparative study of the
premerger and post merger scenarios in the company and analyse if the deal has been successful in its
objective and satisfied the parameter of creating value to its shareholder.

1.2 Need for the study

Rapid globalization and fast vanishing boundaries of geographies has lead to companies gaining
access to newer markets and territories creating an extremely competitive business scenario. The
increased competitive pressure in the markets has created a highly challenging environment in which
business decisions are of strategic and skilful importance .M&A is today perceived as a vital tool in
the survival of the organisation. Thus apart from growth, the survival factor has off late, spurred the
merger and acquisition activity worldwide.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, &
other forms of corporate restructuring. Thus important issues both for business decision and public
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policy formulation have been raised. Mergers & Acquisitions may be critical for the healthy
expansion and growth of the firm. Successful entry into new product and geographical markets may
require Mergers & Acquisitions at some stage in the firm's development. Successful competition in
international markets may depend on capabilities obtained in a timely and efficient fashion through
Mergers & Acquisitions. Many have argued that mergers increase value and efficiency and move
resources to their highest and best uses, thereby increasing shareholder value. The study is basically
aimed at identifying and evaluating this school of thought that M&A create value to the shareholders.
The following study aims to show that companies can use merger as a tool not only to grow but also
to thwart competition. This study is also used to show that the synergy is present at all stages of the
deal and that corporate restructuring is successfully integrated into the deal and has worked in case of
the companies selected for the study. Companies can use merger as a tool to grow, increase their
market share, to ward off competition, improve their performance etc. The decisions undertaken by
the company while undertaking M&A‘s can cause great anxiety to the stakeholders of the company
especially the shareholders , the study aims to find and establish the credibility of the tool called
M&A from the shareholders perspective.

1.3 Statement of the problem

To analyse and identify the use of M&A as tool to increase the shareholders wealth.

1.4 Objective of the study

To find- 1. Shareholders have gained from the merger

2. Gains prevail even after the merger

1.5 Research Methodology

The study type is analytical, quantitative & historical in nature

Analytical as facts and existing information is used for the analysis.
Quantitative as EVA is calculated and the variables are expressed in measurable terms.
Historical as the historical information is used for analysis and interpretation.

The sample size includes 20 Indian companies that merged from different industries. Mergers
considered where based on the fact that at least five years post merger data could be analysed so
mergers before 2005 where included more. The TATA Corus deal is given special relevance as
the deal is the highest ever that happened in corporate India even though it happened in 2007 it is
considered considering the money and value involved in it.

The sample size consists of the following companies

1) TATA STEEL – CORUS STEEL
2) ARCELOR- MITTAL
3) HP-COMPAQ
4) INDUSIND BANK-ASHOK LEYLAND FINANCE
5) JK TYRES-VIKRANT TYRES
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6) TVS MOTORS-LAKSHMI AUTO COMPONENTS LTD

7) ASHOK LEYLAND FINANCE-INDUS IND BANK
8) CADILLA HEALTH CARE- GERMAN REMEDIES LTD
9) SUPREME INDUSTRIES- SIPTAL CHEMICALS LTD
10) ASAHI INDIA GLASS LTD- FLOAT GLASS INDIA LTD
11) TVS AUTOLEC-SUNDARAM FASTNERS LTD
12) HINDUSTAN CHEMICALS- TATA CHEMICALS

COMPANY PROFILE

The project was undertaken for the summer internship program under E4E BUSINESS
SOLUTIONS INDIA PVT LTD, Chennai
e4e is $100 million multinational ITES and business Services Company based in Santa Clara,
California, USA. Founded in 2000 by Indian born Silicon Valley entrepreneur K B
Chandrasekhar the organisation currently has employee strength of 3500 across the globe with an
enviable client list of G2000 companies. The company has headquarters in Santa Clara,
California and has offices and business operations in Glasgow, UK, Bangalore & Chennai, India
& Malaysia.
e4e provides domain & contextual expertise in Managed services, Interactive entertainment
services & health care. Our domain experience across verticals like Banking, Insurance,
Technology, Telecom and Retail, has helped bring together the benefits of market penetration,
speed and flexibility for our Clients and their customers.
Our services include pre-sales engagement and post-sales support, new customer acquisition,
collection management, up-sell /cross-sell, customer service and back office solutions.
e4e provides scalable and differentiated managed services to enterprises through innovative use
of technology and business-specific domain experience that not only results in improvement of
performance and availability of their business services but also helps reduce operational costs.

e4e's comprehensive portfolio of services, give our customers the ability to stay on the cutting
edge of business infrastructure while remaining truly scalable and ultimately reducing operational
costs. e4e has a number of awards & accolades to its credit a few include rated one of the top 100
IT innovators by NASSCOM in 2007. Ranked 148th in the fastest growing American companies
in 2007 by INC 500. Ranked 6th in most exciting companies to work for in 2007 by NASSCOM.
E4e has been listed in 2008 among the world‘s most innovative providers of business and
technology services by CMP media in conjunction with neoIT.
 6

MERGERS & ACQUISITIONS: CONCEPTUAL FRAMEWORK

INTRODUCTION

―The decision to invest in a new asset would mean internal expansion for the firm. The new asset
would generate returns raising the value of the corporation. Mergers offer an additional means of
expansion, which is external, i.e. the productive operation is not within the corporation itself. For
firms with limited investment opportunities, mergers can provide new areas for expansion. In
addition to this benefit, the combination of two or more firms can offer several other advantages to
each of the corporations such as operating economies, risk reduction and tax advantage1.‖

Today mergers, acquisitions and other types of strategic alliances are on the agenda of most
industrial groups intending to have an edge over competitors. Stress is now being made on the
larger and bigger conglomerates to avail the economies of scale and diversification. Different
companies in India are expanding by merger etc. In fact, there has emerged a phenomenon called
merger wave.

The terms merger, amalgamations, take-over and acquisitions are often used interchangeably to
refer to a situation where two or more firms come together and combine into one to avail the
benefits of such combinations and re-structuring in the form of merger etc., have been attempted to
face the challenge of increasing competition and to achieve synergy in business operations.

WHAT IS A MERGER?

DEFINITION:

Merger refers to a situation when two or more existing firms combine together and form a new entity.
Either a new company may be incorporated for this purpose or one existing company (generally a
bigger one) survives and another existing company (which is smaller) is merged into it. Laws in India
use the term amalgamation for merger. The survivor acquires all the assets as well as liabilities of the
merged company or companies. Generally, the surviving company is the buyer, which retains its
identity, and the extinguished company is the seller. All assets, liabilities and the stock of one
company stand transferred to Transferee Company in consideration of payment in the form of

 Equity shares in the transferee company,

 Debentures in the transferee company,

 Cash, or

 A mix of the above modes.

 Merger through absorption

 Merger through consolidation

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Absorption Absorption is a combination of two or more companies into an existing company. All
companies except one lose their identity in a merger through absorption. An example of this type of
merger is the absorption of Tata Fertilizers Ltd.(TFL) TCL, an acquiring company (a buyer), survived
after merger while TFL, an acquired company ( a seller), ceased to exist. TFL transferred its assets,
liabilities and shares to TCL.

Consolidation A consolidation is a combination of two or more companies into a new company .In
this type of merger, all companies are legally dissolved and a new entity is created. In a consolidation,
the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or
exchange of shares. An example of consolidation is the merger of Hindustan Computers Ltd.,
Hindustan Instruments Ltd., and Indian Reprographics Ltd., to an entirely new company called HCL
Ltd.

In mergers usually the combined business helps in securing structural and operational advantage to
the companies which helps cut cost and create profit to the companies. In a merger usually the
shareholders usually have their shares in the old company exchanged for an equal number of shares in
the merged entity. Mergers are usually financed stock/share swaps. In a stock swap, owners of stocks
in both the companies receive an equivalent measure of stock in the newly formed company. Both
companies surrender their stocks and stock of the new company is issued as a replacement.

Ex: 1) Tata Steel‘s mega takeover of European steel major Corus for $12.2 billion. The biggest ever
for an Indian company. This is the first big thing which marked the arrival of India Inc on the global
stage in the year in the year 2007.

2) 1998 merger of American automaker Chrysler Corporation with German automaker Daimler
Benz to form Daimler Chrysler.

TYPES OF MERGERS

There are four types of mergers:

1) HORIZONTAL MERGERS:

It is a merger of two or more companies that compete in the same industry. It is a merger with a direct
competitor and hence expands as the firm‘s operations in the same industry. Horizontal mergers are
designed to produce substantial economies of scale and result in decrease in the number of
competitors in the industry.

Ex: 1) The merger of McDonalds with Burger King. 2) The merger of Tata Oil Mills Ltd. with the
Hindustan lever Ltd. was also a horizontal merger.
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In case of horizontal merger, the top management of the company being meted is generally, replaced,
by the management of the transferee company. One potential repercussion of the horizontal merger is
that it may result in monopolies and restrict the trade.

2) VERTICAL MERGERS :

It is a merger which takes place upon the combination of two companies which are operating in
the same industry but at different stages of production or distribution system. If a company takes
over its supplier/producers of raw material, then it may result in backward integration of its
activities. On the other hand, Forward integration may result if a company decides to take over the
retailer or Customer Company. Vertical merger may result in many operating and financial
economies. The transferee firm will get a stronger position in the market as its
production/distribution chain will be more integrated than that of the competitors. Vertical merger
provides a way for total integration to those firms which are striving for owning of all phases of
the production schedule together with the marketing network (i.e., from the acquisition of raw
material to the relating of final products).

Ex: 1) Car company Audi merging with tyre company Michelin. 2) An ice cream manufacturer
merging with a cone maker.

Vertical mergers help in eliminating and reducing cost of contracting, payment of collection
becomes easier, improved advertising; reduce cost of communicating and coordinating production
helping in better management of inventory.

3) CONCENTRIC MERGER:

In these, mergers the acquirer and target companies are related through basic technologies,
production processes or markets. The acquired company represents an extension of product line,
market participants or technologies of the acquiring companies. These mergers represent an
outward movement by the acquiring company from its current set of business to adjoining
business. The acquiring company derives benefits by exploitation of strategic resources and from
entry into a related market having higher return than it enjoyed earlier. The potential benefit from
these mergers is high because these transactions offer opportunities to diversify around a common
case of strategic resources.

They can also classify into product extension and market extension types. When a new product
line allied to or complimentary to an existing product line is added to existing product line
through merger, it defined as product extension merger, Similarly market extension merger help
to add a new market either through same line of business or adding an allied field . Both these
types bear some common elements of horizontal, vertical and conglomerate merger.

Ex: Merger between Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a
Product extension merger.

Merger between GMM Company Ltd. and Xpro Ltd. contains elements of both product extension
and market extension merger.
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4) CONGLOMERATE MERGER

These mergers involve firms engaged in unrelated type of business activities i.e. the business of
two companies are not related to each other horizontally ( in the sense of producing the same or
competing products), nor vertically( in the sense of standing towards each other n the relationship
of buyer and supplier or potential buyer and supplier). In a pure conglomerate, there are no
important common factors between the companies in production, marketing, research and
development and technology. In practice, however, there is some degree of overlap in one or more
of these common factors.

Conglomerate mergers are unification of different kinds of businesses under one flagship
company. The purpose of merger remains utilization of financial resources, enlarged debt capacity
and also synergy of managerial functions. However these transactions are not explicitly aimed at
sharing these resources, technologies, synergies or product market strategies. Rather, the focus of
such conglomerate mergers is on how the acquiring firm can improve its overall stability and use
resources in a better way to generate additional revenue. It does not have direct impact on
acquisition of monopoly power and is thus favored throughout the world as a means of
diversification.

HISTORY OF MERGERS

Triggered by economic factors mergers have been involved in five phases called merger waves

Period Name Facet

1889 - 1904 First Wave Horizontal mergers

1916 - 1929 Second Wave Vertical mergers

1965 - 1969 Third Wave Diversified conglomerate mergers

1981 - 1989 Fourth Wave Concentric mergers; Hostile takeovers; Corporate Raiding

1990 -2000 Fifth Wave Cross-border mergers

2003-present Sixth Wave Strategic mergers

First wave – This period was the survival of the fittest period with large companies absorbing the
smaller companies .Mergers occurred between companies which enjoyed monopoly over their
lines of production like rails, roads, electricity etc. and estimated 3000 companies disappeared in
this period. Majority of mergers in this period however ended in failures as they could not achieve
desired efficiency. The failure was fuelled by the economic slowdown of 1903 and the followed
by the stock market crash of 1904. Legal framework was also not supportive and a ruling was
passed that anti-competitive mergers could be halted by the Sherman Act 1890.
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Second wave- The ineffectiveness of the Sherman Act lead to passing of the Clayton Act 1914
which defined monopolistic practices and merger activities were restrained. The companies which
saw the maximum activity in this period were the mining and the metal industries. The firms were
asked to work together rather than compete. The stock market crash in 1929 and the Great
depression of 1930 lead to the end of this second wave.

Third wave- The tax reliefs and benefits given in this period lead to highest level of merger
activities in this period as capital markets recovered and booming of the economy took place after
the great depression. The diversification strategy of mergers happened and as adopted for the first
time in this period. Reports show that around 25000 firms disappeared in this period. However the
relatively low and bad performances of the companies lead to the end of this wave in 1968.

Fourth wave- Investment bans played an aggressive role in this period. M&A advisory services
became a lucrative source of income for Goldman Sachs. A remarkable feature of this period was
the common occurrence of foreign takeovers.

Fifth wave- Is inspired by globalization and deregulation of policies, stock market boom .Mergers
are occurring in all spheres of business and is a strategic business tool for growth and
development. It is mostly equity financed than debt financed. Mainly in telecommunication,
banking, defense, healthcare industries.

Sixth wave- A more pronounced merger activity started with 2003 with a bounty of new deals
coming into the table. It appears we are in the midst of sixth wave which is marked by high
transaction volumes , more consolidation and creation of large companies which are better
equipped in there operational standards creating higher performance and efficiency.

CAUSES OF MERGERS

An extensive appraisal of each merger scheme is done to patterns the causes of mergers. These
hypothesized causes (motives) as defined in the mergers schemes and explanatory statement
framed by the companies at the time of mergers can be conveniently categorized based on the
type of merger. The possible causes of different type of merger schemes are as follows:

1. Horizontal merger: These involve mergers of two business companies operating and
competing in the same kind of activity. They seek to consolidate operations of both
companies. These are generally undertaken to:

a) Achieve optimum size

b) Improve profitability

c) Carve out greater market share

d) Reduce its administrative and overhead costs.

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2. Vertical merger: These are mergers between firms in different stages of industrial
production in which a buyer and seller relationship exists. Vertical merger are an
integration undertaken either forward to come close to customers or backwards to come
close to raw materials suppliers. These mergers are generally endeavored to:

a) Increased profitability

b) Economic cost (by eliminating avoidable sales tax and excise duty payments)

c) Increased market power

d) Increased size

3. Conglomerate merger: These are mergers between two or more companies having
unrelated business. These transactions are not aimed at explicitly sharing resources,
technologies, synergies or product .They do not have an impact on the acquisition of
monopoly power and hence are favored through out the world. They are undertaken for
diversification of business in other products, trade and for advantages in bringing separate
enterprise under single control namely:

a) Synergy arising in the form of economies of scale.

b) Cost reduction as a result of integrated operation.

c) Risk reduction by avoiding sales and profit instability.

d) Achieve optimum size and carve out optimum share in the market.

4. Concentric company mergers:These mergers are aimed at restructuring the diverse unitsof
group companies to create a viable unit. Such mergers are initiated with a view to affect
consolidation in order to:

a. Cut costs and achieve focus.

b. Eliminate intra-group competition

c. Correct leverage imbalances and improve borrowing capacity.

d. Claim tax savings on account of accumulated losses that increase profits.

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e. Set up merged asset base and shift to accelerate depreciation.

ACQUISITIONS

An Acquisition usually refers to a purchase of a smaller firm by a larger one. Acquisition,

also known as a takeover or a buyout, is the buying of one company by another.

Acquisitions or takeovers occur between the bidding and the target company. There may be
either hostile or friendly takeovers. Acquisition in general sense is acquiring the ownership in the
property. In the context of business combinations, an acquisition is the purchase by one company
of a controlling interest in the share capital of another existing company.

Method of Acquisition

An acquisition may be affected by

a) agreement with the persons holding majority interest in the company management like
members of the board or major shareholders commanding majority of voting power;

b) purchase of shares in open market;

c) to make takeover offer to the general body of shareholders;

d) purchase of new shares by private treaty;

e) Acquisition of share capital through the following forms of considerations viz. means of
cash, issuance of loan capital, or insurance of share capital.

Types of Acquisitions

A. Reverse takeover: - Sometimes, however, a smaller firm will acquire management

control of a larger or longer established company and keep its name for the combined
entity. This is known as a reverse takeover.

a. 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.

b. In the former case, the companies cooperate in negotiations; in the latter case, the
takeover target is unwilling to be bought or the target's board has no prior knowledge of
the offer.

B. Reverse merger: - A deal that enables a private company to get publicly listed in a
short time period.

a. A reverse merger occurs when a private company that has strong prospects and is eager
to raise financing buys a publicly listed shell company, usually one with no business and
limited assets.
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b. Achieving acquisition success has proven to be very difficult, while various

studies have showed that 50% of acquisitions were unsuccessful. The acquisition process
is very complex, with many dimensions influencing its outcome.

TAKEOVER:

In business, a takeover is the purchase of one company (the target) by another

company (the acquirer, or bidder). In the UK, the term refers to the acquisition of a public
company whose shares are listed on a stock exchange, in contrast to the acquisition of a
private company

A ‗takeover‘ is acquisition and both the terms are used interchangeably. Takeover
differs from merger in approach to business combinations i.e. the process of takeover,
transaction involved in takeover, determination of share exchange or cash price and the
fulfillment of goals of combination all are different in takeovers than in mergers. For
example, process of takeover is unilateral and the offeror company decides about the
maximum price. Time taken in completion of transaction is less in takeover than in
mergers, top management of the offeree company being more co-operative.

There are three different types of takeovers

1) Friendly takeover

2) Hostile take over

3) Reverse take over

FRIENDLY TAKEOVERS

Before a bidder makes an offer for another company, it usually first informs that
company's board of directors. If the board feels that accepting the offer serves
shareholders better than rejecting it, it recommends the offer be accepted by the
shareholders.

In a private company, because the shareholders and the board are usually the same people
or closely connected with one another, private acquisitions are usually friendly. If the
shareholders agree to sell the company, then the board is usually of the same mind or
sufficiently under the orders of the shareholders to cooperate with the bidder.

HOSTILE TAKEOVERS

A hostile takeover allows a suitor to bypass a target company's management

unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the target
company's board rejects the offer, but the bidder continues to pursue it, or the bidder
makes the offer without informing the target company's board beforehand.

A hostile takeover can be conducted in several ways. A tender offer can be made
where the acquiring company makes a public offer at a fixed price above the current
market price. An acquiring company can also engage in a proxy fight, whereby it tries to
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persuade enough shareholders, usually a simple majority, to replace the management with
a new one which will approve the takeover.

Another method involves quietly purchasing enough stock on the open market, known as
a creeping tender offer, to effect a change in management. In all of these ways,
management resists the acquisition but it is carried out anyway.

REVERSE TAKEOVERS

A reverse takeover is a type of takeover where a private company acquires a public

company. This is usually done at the instigation of the larger, private company, the
purpose being for the private company to effectively float itself while avoiding some of
the expense and time involved in a conventional IPO.

REVERSE MERGER

Normally, a small company merges with large company or a sick company with healthy
company. However in some cases, reverse merger is done. When a healthy company
merges with a sick or a small company is called reverse merger. This may be for various
reasons. Some reasons for reverse merger are:

a) The transferee company is a sick company and has carried forward losses and Transferor
Company is profit making company. If Transferor Company merges with the sick transferee
company, it gets advantage of setting off carry forward losses without any conditions. If sick
company merges with healthy company, many restrictions are applicable for allowing set off.

b) The transferee company may be listed company. In such case, if Transferor Company
merges with the listed company, it gets advantages of listed company, without following strict
norms of listing of stock exchanges.

In such cases, it is provided that on date of merger, name of Transferee Company will be
changed to that of Transferor Company. Thus, outside people even may not know that the
transferor company with which they are dealing after merger is not the same as earlier
one. One such approved in Shiva Texyarn Ltd.

Many times, reverse mergers are also accompanied by reduction in the unwieldy capital
of the sick company. This capital reduction helps in unity of the accumulated losses and
other assets which are not represented by the share capital of the company. Thus, a capital
reduction aim rehabilitation scheme is an ideal antidote (by way of reverse merger) for
sick company. For example Godrej soaps Ltd. (GSL) with pre merger turnover of 436.77
crores entered into scheme of reverse merger with loss making Gujarat Godrej innovative
Chemicals Ltd. (GGICL) (with pre merger turnover of Rs. 60 crores) in 1994.The scheme
involved reduction of share capital of GGICL from Rs. 10 per share to Re. 1 per share
and later GSL would be merged with 1 share of GGICL to be allotted to every
shareholder of GSL. The post merger company, Godrej Soaps Ltd. (with post-merger
 15

turnover of Rs. 611.12 crores) restructured its gross profit of 49.08 crores, higher turnover
GSC‘s pre-merger profits of Rs. 30 crores.

The amalgamated company, GGICL reverted back to the old name of amalgamating
company, Godrej Soaps Ltd. Thus, this innovative merger which was by way of forward
integration in the name of GGICL was completed with the help of financial institutions
like IDBI, IFCI, ICICI, UTI etc. All financial Institutions agreed to waive penal interest,
liquidate damages besides finding of interest, reschedule outside loans and also lower
interest rate on term loans.

DISTINCTION BETWEEN MERGERS & ACQUISITIONS

Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things:-

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

 When merger happens when two firms, often of about the same size, 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".

 Both companies' stocks are surrendered and new company stock is issued in its place. A
purchase deal will also be called a merger when both CEOs agree that joining together is
in the best interest of both of their companies.

 But when the deal is unfriendly - that is, when the target company does not want to be
purchased - it is always regarded as an acquisition. This is challengeable.

 An acquisition can be either friendly or hostile. An example of a recent friendly takeover

was when Microsoft bought Fast Search and Transfer (OSE Stock Exchange, Ticker
FAST).CEO of the acquired company (FAST) revealed that they had been working with
Microsoft for more than 6 months to get the deal which was announced in January, 2008

Why M&A‘s?

The following section discusses and lays down the motive behind these mergers &
acquisitions and also explains the various advantages associated with mergers &
acquisitions.

MOTIVES OF MERGERS
 16

The purpose for an offeror company for acquiring another company shall be reflected in
the corporate objectives. It has to decide the specific objectives to be achieved through
acquisition. The basic purpose of merger or business combination is to achieve faster growth of
the corporate business. Faster growth may be had through product improvement and competitive
position.

Other possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or intermediary product;

2. To obtain economies of purchase in the form of discount, savings in transportation costs,

overhead costs in buying department, etc.;

3. To share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilities through more

intensive utilization of plant and resources;

2. To standardize product specifications, improvement of quality of product, expanding

3. Market and aiming at consumers satisfaction through strengthening after sale

Services;

4. To obtain improved production technology and know-how from the offered company

5. To reduce cost, improve quality and produce competitive products to retain and

Improve market share.

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(3) Market expansion and strategy:

1. To eliminate competition and protect existing market;

2. To obtain a new market outlets in possession of the offeree;

3. To obtain new product for diversification or substitution of existing products and to

enhance the product range;

4. Strengthening retain outlets and sale the goods to rationalize distribution;

5. To reduce advertising cost and improve public image of the offeree company;

6. Strategic control of patents and copyrights.

(4) Financial strength:

1. To improve liquidity and have direct access to cash resource;

2. To dispose of surplus and outdated assets for cash out of combined enterprise;

3. To enhance gearing capacity, borrow on better strength and the greater assets backing;

4. To avail tax benefits;

5. To improve EPS (Earning Per Share).

(5) General gains:

1. To improve its own image and attract superior managerial talents to manage its affairs;

2. To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company‘s own developmental plans.

A company thinks in terms of acquiring the other company only when it has arrived at its own
development plan to expand its operation having examined its own internal strength where it
might not have any problem of taxation, accounting, valuation, etc. But might feel resource
constraints with limitations of funds and lack of skill managerial personnel‘s. It has to aim at
suitable combination where it could have opportunities to supplement its funds by issuance of
 18

securities, secure additional financial facilities eliminate competition and strengthen its market
position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through alternative type
of combinations which may be horizontal, vertical, product expansion, market extensional or
other specified unrelated objectives depending upon the corporate strategies. Thus, various types
of combinations distinct with each other in nature are adopted to pursue this objective like vertical
or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite
competitiveness in providing rescues to each other from hostile takeovers and cultivate situations
of collaborations sharing goodwill of each other to achieve performance heights through business
combinations. The combining corporate aim at circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the two
combining business houses. Such integration could be operational or financial. This gives birth to
conglomerate combinations. The purpose and the requirements of the offeror company go a long
way in selecting a suitable partner for merger or acquisition in business combinations.

1. GROWTH 0R DIVERSIFICATION: - Companies that desire rapid growth in size or

market share or diversification in the range of their products may find that a merger can be
used to fulfill the objective instead of going through the tome consuming process of internal
growth or diversification. The firm may achieve the same objective in a short period of time
by merging with an existing firm. In addition such a strategy is often less costly than the
alternative of developing the necessary production capability and capacity. If a firm that
wants to expand operations in existing or new product area can find a suitable going concern.
It may avoid many of risks associated with a design; manufacture the sale of addition or new
products. Moreover when a firm expands or extends its product line by acquiring another
firm, it also removes a potential competitor.
 19

2. SYNERGISM: - The nature of synergism is very simple. Synergism exists when ever the
value of the combination is greater than the sum of the values of its parts. In other words,
synergism is ―2+2=5‖. But identifying synergy on evaluating it may be difficult, infact
sometimes its implementations may be very subtle. As broadly defined to include any
incremental value resulting from business combination, synergism in the basic economic
justification of merger. The incremental value may derive from increase in either operational
or financial efficiency.

 Operating Synergism: - Operating synergism may result from economies of scale,

some degree of monopoly power or increased managerial efficiency. The value may
be achieved by increasing the sales volume in relation to assts employed increasing
profit margins or decreasing operating risks. Although operating synergy usually is
the result of either vertical/horizontal integration some synergistic also may result
from conglomerate growth. In addition, some times a firm may acquire another to
obtain patents, copyrights, technical proficiency, marketing skills, specific fixes
assets, customer relationship or managerial personnel.

Operating synergism occurs when these assets, which are intangible, may be combined with the
existing assets and organization of the acquiring firm to produce an incremental value. Although
that value may be difficult to appraise it may be the primary motive behind the acquisition.

 Financial synergism

Among these are incremental values resulting from complementary internal funds flows more
efficient use of financial leverage, increase external financial capability and income tax
advantages.

a) Complementary internal funds flows

Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated by

merger. If so, financial synergism results in reduction of working capital requirements of the
combination compared to those of the firms standing alone.

b) More efficient use of Financial Leverage

Financial synergy may result from more efficient use of financial leverage. The acquisition firm
may have little debt and wish to use the high debt of the acquired firm to lever earning of the
combination or the acquiring firm may borrow to finance and acquisition for cash of a low debt
firm thus providing additional leverage to the combination. The financial leverage advantage must
be weighed against the increased financial risk.

c) Increased External Financial Capabilities

Many mergers, particular those of relatively small firms into large ones, occur when the acquired
firm simply cannot finance its operation. Typical of this is the situations are the small growing
firm with expending financial requirements. The firm has exhausted its bank credit and has
 20

virtually no access to long term debt or equity markets. Sometimes the small firm has encountered
operating difficulty, and the bank has served notice that its loan will not be renewed? In this type
of situation a large firms with sufficient cash and credit to finance the requirements of smaller one
probably can obtain a good buy bee. Making a merger proposal to the small firm. The only
alternative the small firm may have is to try to interest 2 or more large firms in proposing merger
to introduce, competition into those bidding for acquisition. The smaller firm‘s situations might
not be so bleak. It may not be threatened by non renewable of maturing loan. But its management
may recognize that continued growth to capitalize on its market will require financing be on its
means. Although its bargaining position will be better, the financial synergy of acquiring firm‘s
strong financial capability may provide the impetus for the merger. Sometimes the acquired firm
possesses the financing capability. The acquisition of a cash rich firm whose operations have
matured may provide additional financing to facilitate growth of the acquiring firm. In some
cases, the acquiring may be able to recover all or parts of the cost of acquiring the cash rich firm
when the merger is consummated and the cash then belongs to it.

d) The Income Tax Advantages

In some cases, income tax consideration may provide the financial synergy motivating a merger,
e.g. assume that a firm A has earnings before taxes of about rupees ten crores per year and firm B
now break even, has a loss carry forward of rupees twenty crores accumulated from profitable
operations of previous years. The merger of A and B will allow the surviving corporation to
utility the loss carries forward, thereby eliminating income taxes in future periods.

Counter Synergism

Certain factors may oppose the synergistic effect contemplating from a merger. Often another
layer of overhead cost and bureaucracy is added. Do the advantages outweigh disadvantages?
Sometimes the acquiring firm agrees to long term employments contracts with managers of the
acquiring firm. Such often are beneficial but they may be the opposite. Personality or policy
conflicts may develop that either hamstring operations or acquire buying out such contracts to
remove personal position of authority.

Particularly in conglomerate merger, management of acquiring firm simply may not have
sufficient knowledge of the business to control the acquired firm adequately. Attempts to maintain
control may induce resentment by personnel of acquired firm. The resulting reduction of the
efficiency may eliminate expected operating synergy or even reduce the post merger profitability
of the acquired firm. The list of possible counter synergism factors could goon endlessly; the
point is that the mergers do not always produce that expected results. Negative factors and the
risks related to them also must be considered in appraising a prospective merger.
 21

ADVANTAGES OF M&A

Mergers and takeovers are permanent form of combinations which vest in management complete
control and provide centralized administration which are not available in combinations of holding
company and its partly owned subsidiary.

Shareholders in the selling company gain from the merger and takeovers as the premium offered
to induce acceptance of the merger or takeover offers much more price than the book value of
shares. Shareholders in the buying company gain in the long run with the growth of the company
not only due to synergy but also due to ―boots trapping earnings‖. Mergers and acquisitions are
caused with the support of shareholders, manager‘s ad promoters of the combing companies. The
factors, which motivate the shareholders and managers to lend support to these combinations and
the resultant consequences they have to bear, are briefly noted below based on the research work
by various scholars globally.

SHAREHOLDERS VIEWPOINT

Investment made by shareholders in the companies subject to merger should enhance in value.

The sale of shares from one company‘s shareholders to another and holding investment
in shares should give rise to greater values i.e. the opportunity gains in alternative investments.
Shareholders may gain from merger in different ways viz. from the gains and achievements of the
company i.e. through

(a) realization of monopoly profits;

(b) economies of scales;

(c) diversification of product line;

(d) acquisition of human assets and other resources not available otherwise;

(e) better investment opportunity in combinations.

One or more features would generally be available in each merger where shareholders
may have attraction and favour merger.

MANAGERS VIEWPOINT

Managers are concerned with improving operations of the company, managing the affairs of the
company effectively for all round gains and growth of the company which will provide them
better deals in raising their status, perks and fringe benefits. Mergers where all these things are the
guaranteed outcome get support from the managers. At the same time, where managers have fear
of displacement at the hands of new management in amalgamated company and also resultant
depreciation from the merger then support from them becomes difficult.

PROMOTERS GAIN
 22

Mergers do offer to company promoters the advantage of increasing the size of their company and
the financial structure and strength. They can convert a closely held and private limited company
into a public company without contributing much wealth and without losing control.

GENERAL PUBLIC BENEFITS

Impact of mergers on general public could be viewed as aspect of benefits and costs to:

(a) Consumer of the product or services;

(b) Workers of the companies under combination;

(c) General public affected in general having not been user or consumer or
the worker in the companies under merger plan.

MERGER PROCEDURE

A merger is a complicated transaction, involving fairly complex legal considerations. While

evaluating a merger proposal, one should bear in mind the following legal provisions.

Sections 391 to 394 of the companies act, 1956 contain the provisions for amalgamations.
The various laws that govern takeovers include Clauses 40A and 40B of the listing agreement
the company has entered into with the Stock exchange also SEBI‘s (Substantial Acquisition
of share and takeovers) Regulation 1997.

The procedure for amalgamation normally involves the following steps:

1. Examination of object Clauses: The memorandum of association of both the companies

should be examined to check if the power to amalgamate is available. Further, the object
clause of the amalgamated company (transferee company) should permit it to carry on the
business of the amalgamating company (transferor company ) .If such clauses do not exists,
necessary approvals of the shareholders, boards of directors and Company Law Board are
required.

2. Intimation to stock Exchanges: The stock exchanges where the amalgamated and
amalgamating companies are listed should be informed about the amalgamation proposal.
From time to time, copies of all notices, resolutions, and orders should be mailed to the
concerned stock exchanges.
 23

3. Approval of the draft amalgamation proposal by the Respective Boards: The draft
amalgamation proposal should be approved by the respective boards of directors. The board
of each company should pass a resolution authorizing its directors/executives to pursue the
matter further.

4. Application to the National Company Law Tribunal (NCLT): Once the draft of
amalgamation proposal is approved by the respective boards, each company should make an
application to the NCLT so that it can convene the meetings of shareholders and creditors for
passing the amalgamation proposal.

5. Dispatch of notice to shareholders and creditors: In order to convene the meeting of

shareholders and creditors, a notice and an explanatory statement of the meeting, as approved
by the NCLT, should be dispatched by each company to its shareholders and creditors so that
they get 21 days advance intimation. The notice of the meetings should also be published in
two newspapers (one English and one vernacular). An affidavit confirming that the notice has
been dispatched to the shareholders/creditors and that the same has been published in
newspapers should be filed with the NCLT.

6. Holding of Meetings of shareholders and creditors: A meeting of shareholders should be

held by each company for passing the scheme of amalgamation. At least 75 percent (in value)
of shareholders in each class, who vote either in person or by proxy, must approve the scheme
of amalgamation. Likewise, in a separate meeting, the creditors of the company must approve
of the amalgamation scheme.

7. Petition to the NCLT for confirmation and passing of NCLT orders: Once the
amalgamation scheme is passed by the shareholders and creditors, the companies involved in
the amalgamation should present a petition to the NCLT for confirming the scheme of
amalgamation. The NCLT will fix a date of hearing. A notice about the same has to be
published in two newspapers. After hearing the parties the parties concerned ascertaining that
the amalgamation scheme is fair and reasonable, the NCLT will pass an order sanctioning the
same. However, the NCLT is empowered to modify the scheme and pass orders accordingly.

8. Filing the order with the Registrar: Certified true copies of the NCLT order must be filed
with the Registrar of Companies within the time limit specified by the NCLT.

9. Transfer of Assets and Liabilities: After the final orders have been passed by the NCLT, all
the assets and liabilities of the amalgamating company will, with effect from the appointed
date, have to be transferred to the amalgamated company.
 24

10. Issue of shares and debentures: The amalgamated company, after fulfilling the provisions
of the law, should issue shares and debentures of the amalgamated company. The new shares
and debentures so issued will then be listed on the stock exchange.

CHANGE FORCES CONTIBUTING TO M&A ACTIVITIES

1. Technological changes (technological requirements of firm has increased)

2. Economies of scale and complimentary benefits (growth opportunities among
Product areas are unequal)
3. Opening up of economy or liberalization of economy
4. Global economy (increase in competition)
5. Deregulation
6. New industries were created.
7. Negative trends in some economies.
8. Favourable economic & financial conditions (real time financial planning and
Control information requirements have increases).
9. Widening inequalities in income & wealth
10. High valuation on equities.
11. Requirement of human capital has grown relative to physical assets.
12. Increase in new product line.
13. Distribution and marketing methods have changed.

VALUATION IN A MERGER

Evidence regarding the effects of mergers comes to us from many different sources. Much of
the evidence comes from the finance literature where the main focus is on the ultimate effect
of a merger on the stockholders of the acquiring and target firms. One common technique for
examining the effects of a merger or acquisition employs the stock market's reaction to the
event. ―Event studies‖ utilize the assumption of efficient financial markets (i.e., the notion
that the price of a firm‘s stock reflects all available information bearing on the expected future
profitability of the firm) to assess the perceived consequences of mergers and acquisitions. A
relatively long period before the event is used to estimate the "normal" relationship between
the individual firm's stock price and the price of the broad market (or of a matched sample of
firms). A change in this normal relationship around the time of the event represents an
"abnormal" movement - the stock price movement that is unique to the event. The abnormal
movements are summed over the event "window" (say, five days around the event date) and
statistical tests are performed to see if the abnormal movement during the window of time is
significant when firm A announces that it intends to acquire firm B, one can check the
abnormal movement in the stock prices of each firm to see if the market has a particular
reaction (either positive or negative) to the announced transaction and whether the market
thinks that the buyer, seller, or both are expected to profit by the deal.
 25

A second approach to measuring merger effects involves examining the accounting data for
firms before and after an acquisition to determine the changes associated with the merger.
These studies may focus on accounting rates of return, profit margins, cash flow returns,
expense ratios, or any number of other accounting and financial measures of firm
performance. Each measure has its proponents and critics. These studies try to control for
confounding factors by comparing the post acquisition changes in financial performance to
industry averages or (better yet) to multiple regression based estimates of what would have
occurred absent the acquisition. Recently, studies have appeared that have combined the
accounting measures and stock market event study approaches.

Broadly classifying the various methods of valuation of Merger & Acquisition include the
following:

1) Valuation based on assets- The worth of the firm no doubt depends on the tangible and
intangible assets of the firm. The value of the firm may be defined as

Value of all assets-External liabilities = Net assets. The assets of the firm may be valued
on the basis of the book value or realizable value.

The book value of the asset uses the latest balance sheet of the firm as the value of the
assets. From the total value of the assets the external liabilities of the firm is deducted to
find the net worth of the firm. The net worth may be divided by the equity shares to find
out the value per share of the firm. The realizable value of the firm is the current market
price of the assets of the firm and external liabilities are deducted to find the net worth of
the firm.

2) Valuation based on earning- In this method the PAT ( Profit after tax) is multiplied by the
price- Earnings ratio to find out the worth

MARKET PRICE PER SHARE= EPS *PE RATIO

The earning based valuation can also be made in terms of earning yield as follows

EARNING YIELD= EPS/MPS * 100. Value can also be found by

VALUE= EARNINGS/CAPITALIZATION RATE*100

3) Market value approach- This approach is based on the actual market price of the
securities settled between buyer and seller. The price of the security in the free market
will be its most appropriate value. Market price is affected by the factors like demand and
supply position of money market. Market value is device that can be applied any time.

4) Earnings per share- According to this approach the value of the M&A is a function of the
impact of M&A on the earnings per share. As the market price of the share is a function
of EPS and price-earnings ratio the future EPS will have an impact on the market value of
the firm.

5) Economic value added- EVA is based on the concept of economic return which refers to
the excess of the after tax return on capital employed over the cost of capital employed.
 26

6) Market value added- MVA is another concept used to measure the performance and as a
measure of the value of the firm. MVA is determined by measuring the total amount of
funds that have been invested in the company (based on cash flow) and comparing with
the current market value of the securities of the company.

WHAT IS VALUE CREATION?

According to Copeland et al (2000) value is created in the real market by earning a return
on the investment greater than the opportunity cost of capital. Thus the more you invest at
a return above the cost of capital the more value you create. This implies that growth
creates more value as long as the return on the capital exceeds the cost of capital. They go
on to mention that one should select the strategies that maximize the present value of
expected cash flows or economic profits. The returns that shareholders earn depend
primarily on changes in the expectations more than actual performance of the company.
Dalborg (1999) pointed out that value is created when the returns to shareholder, in
dividend and share-price increases, exceed the risk adjusted rate of return required in the
stock market (the cost of equity). He said that the total shareholder return must be higher
than the cost of equity to truly create value. Hogan et al (1999) state that in a competitive
environment, shareholders value is created when a company invests in projects that earn a
return in excess of the cost of capital.

―Value‖ is one of the most basic concepts in economics, philosophy, ethics and sociology,
yet is perhaps one of the least well-defined and most misunderstood. It is not only true to
say that value means different things to different people, we need to recognize that value
is dynamic and its definitions change with circumstances. Value management, value
analysis, functional analysis vocabulary, defines value as:

―Value is defined as the relationship between the contribution of the function (or VA
Subject) to the satisfaction of the need and the cost of the function.‖

This definition applies not only to the value of the firm‘s products or services to its
customers, but also the value those sales create for the company, and through the cash
flow created from them, of the firm to its owners, stakeholders, shareholders etc. The
primary function of business is to sell a product or service to a customer, since without
that transaction none of the other functions of the business create value for its
stakeholders. At this individual transaction level, the customer has needs which he
expects the product or service to satisfy, and the firm is in business to produce product or
deliver a service and offers this to the customer at a price. The selling price either set or
negotiated for this transaction is the buyer‘s cost of the satisfaction of his need. In our
definition, the value of the product or service to the buyer is the benefit the buyer expects
to obtain from it divided by its cost, and unless this is perceived to be greater than unity
(i.e. the perceived or expected benefits exceed the selling price), there will be no sale.
Assuming that the business has a viable product or service to offer to the market, and that
at least some of its target market perceive this to have value, the firm will make sales and
generate revenues. The anticipated existence of this cash flow from future sales that
 27

creates value of the firm to its stakeholders is the creation of value in the firm. The
intrinsic value of the business is therefore the sum of its expected future after-tax cash
flows (i.e. the revenues expected to be generated from its sales less the cost of the assets
and other inputs used in their creation, and of the business entity itself), adjusted by a
discount rate that appropriately reflects the relevant risk of the business, its products and
its markets. For businesses, their shareholder value is equal to the intrinsic value,
however for publicly-listed companies their shareholder value is determined by the
capital market in which the shares are traded, and the company has a fluctuating ―market
value‖ which is simply the share price at any time multiplied by the number of shares
outstanding at that time. In a perfect capital market, i.e. one where all information is
immediately reflected in the share price of the company, the market value (and hence the
shareholder value) equals the intrinsic value.

The fundamental objective of the business corporation is to increase the value of its
shareholders. Shareholder value is added when the resulting increase in market value
exceeds net capital inflows (i.e. new share issues and/or a conversion of convertible
debentures) less payments to shareholders in the form of dividends or share buy-backs on
the market in the period. Shareholder value is created when the shareholder value added
exceeds the required return to equity, i.e. the return that shareholders expect to earn in
order to feel sufficiently remunerated for the risk they have taken. As the intrinsic value
of the company is the sum of its future net after-tax cash flows discounted at a rate to
reflect their uncertainty or risk (as so far as this is perceived by its investors and debt
holders), it can be increased by improving one or more of three main variables: the cash
flows deriving from the company‘s existing assets; the expected rate and duration of
growth in its cash flows; and the cost of its capital . The company‘s intrinsic value is
increased when its management (at the corporate or business unit level) takes actions
which proportionately increase one (or preferably both) of the first two or decrease the
last. In order for shareholder value to be created the company‘s management has to:

1) Produce continuous earnings flow through its operational decisions;

2) Invest wisely for future growth; and

3) Communicate with the investment community proactively and reliably.

Creating shareholder value is the key to success in today's marketplace. There is

increasing pressure on corporate executives to measure, manage and report the creation of
shareholder value on a regular basis. In the emerging field of shareholder value analysis,
various measures have been developed that claim to quantify the creation of shareholder
value and wealth. More than ever, corporate executives are under increasing pressure to
demonstrate on a regular basis that they are creating shareholder value. This pressure has
led to an emergence of a variety of measures that claim to quantify value-creating
performance. Creating value for shareholders is now a widely accepted corporate
objective. The interest in value creation has been stimulated by several developments.

* Capital markets are becoming increasingly global. Investors can readily shift
investments to higher yielding, often foreign, opportunities.
 28

* Institutional investors, which traditionally were passive investors, have begun exerting
influence on corporate managements to create value for shareholders.

* Corporate governance is shifting, with owners now demanding accountability from

corporate executives. Manifestations of the increased assertiveness of shareholders
include the necessity for executives to justify their compensation levels, and well-
publicized lists of underperforming companies and overpaid executives.

* Business press is emphasizing shareholder value creation in performance rating

exercises.

* Greater attention is being paid to link top management compensation to shareholder

returns.

From the economist's viewpoint, value is created when management generates revenues
over and above the economic costs to generate these revenues. Costs come from four
sources: employee wages and benefits; material, supplies, and economic depreciation of
physical assets; taxes; and the opportunity cost of using the capital.

Under this value-based view, value is only created when revenues exceed all costs
including a capital charge. This value accrues mostly to shareholders because they are the
residual owners of the firm.

Shareholders expect management to generate value over and above the costs of resources
consumed, including the cost of using capital. If suppliers of capital do not receive a fair
return to compensate them for the risk they are taking, they will withdraw their capital in
search of better returns, since value will be lost. A company that is destroying value will
always struggle to attract further capital to finance expansion since it will be hamstrung
by a share price that stands at a discount to the underlying value of its assets and by
higher interest rates on debt or bank loans demanded by creditors.

Wealth creation refers to changes in the wealth of shareholders on a periodic (annual)

basis. Applicable to exchange-listed firms, changes in shareholder wealth are inferred
mostly from changes in stock prices, dividends paid, and equity raised during the period.
Since stock prices reflect investor expectations about future cash flows, creating wealth
for shareholders requires that the firm undertake investment decisions that have a positive
net present value (NPV).

Although used interchangeably, there is a subtle difference between value creation and
wealth creation. The value perspective is based on measuring value directly from
accounting-based information with some adjustments, while the wealth perspective relies
mainly on stock market information. For a publicly traded firm these two concepts are
identical when (i) management provides all pertinent information to capital markets, and
(ii) the markets believe and have confidence in management.

DISCOUNTED CASH FLOW APPROACH

The true economic value of a firm or a business or a project or any strategy depends on
the cash flows and the appropriate discount rate (commensurate with the risk of cash
 29

flow). There are several methods for calculating the present value of a firm or a
business/division or a project. In following pages we will discuss three main methods that
are mostly used under discount cash flow approach.

The first method uses the weighted average cost of debt and equity (WACC) to discount
the net operating cash flows. When the value of a project with an estimated economic life
or of a firm or business over a planning horizon is calculated, then an estimate of the
terminal cash flows or value will also be made. Thus, the economic value of a project or
business is:

Economic Value=Present Value of net operating cash flows+ Present value of

terminal value

The second method of calculating the economic value explicitly incorporates the value
created by financial leverage. The steps that are involved in this method of estimation of
the firm's total value are as follows:

1. Estimate the firm's unlevered cash flows and terminal value

2. Determine the unlevered cost of capital
3. Discount the unlevered cash flows and terminal value by the unlevered cost of capital.
4. Calculate the present value of the interest tax shield discounting at the cost of debt.
5. Add these two values to obtain the levered firm's total value.
6. Subtract the value of debt from the total value to obtain the value of the firm's shares.
7. Divide the value of shares by the number of shares to obtain the economic value per
share.

The third method to determine the shareholder economic value is to calculate the value
of equity by discounting cash flows available to shareholders by the cost of equity. The
present value of equity is given as below:

Economic value of equity= Present value of equity cash flows+ Present value of
terminal investment.

ECONOMIC VALUE ADDED

The concept of Economic Value Added (EVATM) has been propounded as an economic measure of
the extent to which a company adds value to shareholders' wealth. In most companies today the search
for value is being challenged by a seriously out of date financial management system.. Value Added
(EVA) is a measurement tool that provides a clear picture of whether a business is creating or
destroying shareholder wealth. EVA measures the firm‘s ability to earn more than the true cost of
capital.

Value creation, today, for a competitive advantage and to have edge over other – is a widely accepted
business objective over profit maximization and wealth maximization. Value is created when all the
stake holders perceive a significant difference in quality or benefits, with the result that the offer is
capable of commanding a premium relative to competitors offer. Traditionally the methods of
measurement of corporate performance are many.. For evaluation of the efficiency of any decision,
value creation or value addition aspect is of utmost importance in the present backdrop of corporate
 30

governance. In order to maximize shareholder value, decisions must be made as to how best to
allocate capital, how to evaluate investment opportunities and how to measure performance.

Economic Value Added (EVA) is a comprehensive measure of operating performance. It measures

the change in financial worth of an enterprise from one year to the next. It is a more comprehensive
financial measurement tool than net income (revenues minus expenses) alone, because it includes the
cost of the capital used to generate that income.

In simple words EVA is ―The monetary value of an entity at the end of a time period minus the
monetary value of that same entity at the beginning of that time period corporate finance ―Economic
Value Added or EVA is an estimate of economic profit. What separates EVA from other performance
metrics such as EPS, EBITDA, and ROIC is that it measures all of the costs of running a business—
operating and financing.EVA MODEL

ECONOMIC VALUE ADDED

Adjusted operating profit Weighted average cost of Capital employed

before interest after tax capital

Fixed Investment WC
Profit Interest Tax
asset
before Cost of Cost of
interest debt equity

Current Current
Income Expenses Interest assets liabilities
without Tax rate
interest

Interest rate

Cost of goods sold Selling & distribution Risk free rate Adjustment for
expense systematic rates
 31

4M‘s of EVA

Measurement

EVA is the most accurate measure of corporate performance over any given period. Management
System

A firm‘s true value comes in using EVA as the foundation for a comprehensive financial management
system that encompasses all the policies, procedures, methods and measures that guide operations and
strategy. The EVA system covers the full range of managerial decisions, including strategic planning,
allocating capital, pricing acquisitions or divestitures, setting annual goals-even day-to-day operating
decisions.

Motivation

To instil both the sense of urgency and the long-term perspective of an owner, Stern Stewart designs
cash bonus plans that cause managers to think like and act like owners because they are paid like
owners.

Mindset

When implemented EVA financial management and incentive compensation system transforms a
corporate culture. By putting all financial and operating functions on the same basis, the EVA system
effectively provides a common language for employees across all corporate functions.

Expert view on EVA

Baatz (1994), commented that it is but one of many tools being developed to account for thecapital
invested in an organization by the true owners of that organization - the shareholders.

Dodd and Chen (1996,) observed that EVA is the difference between companies adjusted net
operating profit (after taxes) in a particular year and it total cost of capital.

According to George Athanassakos (2007), the Value-based management (VBM) is a management

philosophy that uses analytical tools and processes to focus an organization on the single objective of
creating shareholder value.

COMPONENTS OF EVA

Net Operating Profit after Taxes

Calculating Net Operating Profit after Taxes (NOPAT)

NOPAT is easy to calculate. From the income statement we take the operating income and subtract
taxes. Operating income is sales less cost of sales and less selling, general and administrative
expenses.

Net Operating Income

 32

Net Operating Income or NOI is a means of expressing pure operating results. In other words,
financial results of NOI do not have the impact of financing (borrowing), investing, or accounting
adjustments, which can distort a purely operational analysis. NOI is the amount of money generated
exclusively from operations

Calculating Cost of Capital

Many businesses don‘t know their true cost of capital, which means that they probably don‘t know if
their company is increasing in value each year. There are two types of capital, borrowed and equity.
The cost of borrowed capital is the interest rate charged by the bondholders and the banks. Equity
capital is provided by the shareholders. An investor‘s expected rate of return on an investment is equal
to the risk free rate plus the market price for the risk that is assumed with the investment. The risk of a
company can be decomposed into two parts. An investor can eliminate the first component of risk by
combining the investment with a diversified portfolio. The diversifiable component of risk is referred
to as non-systematic risk. The second component of risk is non-diversifiable and is called the
systematic risk. It stems from general market fluctuations which reflect the relationship of the
company to other companies in the market. The non-diversifiable risk creates the risk premium
required by the investor. In the security markets the non-diversifiable risk is measured by a firm‘s
beta. The higher a company‘s non-diversifiable risk, the larger their beta. As the beta increases the
investor‘s expected rate of return also increases. (Levy, 1982) - 9 -

Measuring Capital Employed

Accounting profits differ from economic profits. Under generally accepted accounting principles,
most companies appear to be profitable. However, many actually destroy shareholder wealth because
they earn less than the full cost of capital. EVA overcomes this problem by explicitly recognizing that
when capital is employed it must be paid for. In financial statements, created using generally accepted
accounting principles, companies pay nothing for equity capital. As discussed earlier, equity capital is
very expensive. Economic profits are defined as total revenues less total costs, where costs include the
full opportunity cost of the factors of production. The opportunity cost of capital invested in a
business is not included when calculating accounting profits.

Long Term Debt

Long Term Debt includes bonds, mortgages and long term secured financing

CALCULATION OF EVA

EVA is sales less operating cost (including taxes) less all financing costs. Put another way EVA is
NOPAT less the all cost of capital, equity as well as debt.

EVA=NOPAT-(Cost of capital*Total capital) OR EVA= (ROTC – Cost of capital)* Total capital

The EVA implementation process generally involves the following steps:

Obtaining senior management commitment

Evaluating corporate and financial strategy, position, and alternatives

Understanding where, how and why value is created in your markets and company
 33

Defining an action based value improvement plan

Re-engineering financial management to focus on value creation

Strengthening and aligning incentive compensation with value

Educating line managers

Communicating with investors

RATIONALE FOR USING EVA

EVA is the gain or loss that remains after assessing a charge for the cost of all types of capital
employed. What an accountant calls profits in an income statement includes a charge for the debt
capital employed which is commonly referred to as interest expense. However, an income statement
does not include a charge for the equity capital that was employed during the accounting period.
Therefore, EVA goes beyond conventional accounting standards by including a provision for the cost
of equity capital. The cost of equity needs to be factored into business investment decisions in order to
enhance shareholder value.

Although EVA is couched in financial analysis, its primary purpose is to shape management behavior.
EVA can be used as a performance measure to evaluate an overall company, a division within a
company, a location within a division, or an individual manager. By setting goals, EVA can become a
motivational tool at various levels of management. EVA can also be used in downsizing decisions.

Perhaps the real key to appreciating EVA lies in its simplicity. Often times non-financial managers
are hard pressed to understand financial tools; EVA can help to facilitate communication thereby
enhancing coordination within a company. Managers need to train to recognize the opportunity to
strive for an increase in economic value added. Once properly trained, managers can then pinpoint
key financial focal concerns germane to decisions.

EVA is both a measure of value and also a measure of performance. The value of a business depends
on investor‘s expectations about the future profits of the enterprise. Stock prices track EVA far more
closely than they track earnings per share or return on equity. A sustained increase in EVA will bring
an increase in the market value of the company. As a performance measure, Economic Value Added
forces the organization to make the creation of shareholder value the number one priority. Under the
EVA approach stiff charges are incurred for the use of capital. EVA focused companies concentrate
on improving the net cash return on invested capital.

CASH FLOW RETURN ON INVESTMENT

In essence, CFROI is a “real” (i.e., adjusted for the effect of inflation) rate of return measure which
identifies the relationship between the cash generated by a business relative to the cash invested in it.
It is argued that CFROI provides an accurate measure of the economic performance of a business, free
from potential accounting distortions relating to issues such as inflation and variations in asset ages.
 34

As well as providing a “superior” measure of current performance, it is also promoted as “the

performance measure which best predicts future cash generation‖.

In its more sophisticated form, CRFOI incorporates the principles of the internal rate of return (IRR)
concept, which is more often associated with the appraisal of capital investment opportunities.
Specifically, CFR OI represents the “discount rate” that “discounts” the future annual cash flows
that are expected to arise over the average life of a firms ’ assets, back to current cash value (i.e.
adjusted for inflation) of the firm‘s net operating assets.

TOTAL BUSINESS RETURN

Total business returns (TBR) is the internal equivalent of the external total shareholder returns (TSR)
measure, which considers capital gains and dividends received by shareholders. The (TBR) approach
is claimed to overcome the principal weakness with any short-term performance measure (including
cash flow, EP/EVA‚ and CFROI), as it incorporates the long term effect on the value of the business
of decisions and actions taken in a particular period.

This is because TBR combines the cash flow performance of a business with the change in value that
occurred during the period. Effectively, TBR represents an internal rate of return measure that equates
the beginning value of a business with net free cash flows arising in the period, plus the value of the
business at the end of the period. The accuracy of TBR therefore depends upon the accuracy of the
valuation of the business at the start and end of the relevant period.

ANALYSIS & INTERPRETATION

MERGERS & ACQUISITIONS: AN OVERVIEW

This section provides a comprehensive picture on the merger & acquisition scene in India across
various sectors and the international trends in mergers & acquisitions. The process of mergers &
acquisitions has gained substantial importance in today‘s corporate world. This process is extensively
used in restructuring the organisation. In India the concept of mergers and acquisitions was initiated
by government bodies. Some well known financial organisations also took the necessary initiative to
restructure the corporate sector of India by merger& acquisition policies.

The economic reforms of 1991 have opened up a whole new set of challenges both in the domestic
and international sphere. The increased competition in the global market has prompted Indian
companies to go for mergers & acquisitions as an important strategic choice. The trends of mergers &
acquisitions in India have changed over the years and its effect has been diverse across the different
sectors of the Indian economy. India has emerged as one of the top countries in mergers &
acquisitions with the year 20007-08 alone accounting for deals worth $100 billion. Among the
different sectors that have resorted to mergers & acquisitions in recent time‘s telecom, finance,
FMCG, automobile industry and steel industry are worth mentioning. Till recent past acquisition of
recent foreign companies by Indian entrepreneurs was no a common sight. The situation has
undergone a sea change and the acquisition of foreign companies by Indian companies is the recent
trend in the mergers & acquisition scenario. There are different factors that play their part in
facilitating this phenomenon. The Indian economy has been growing with a rapid pace and has been
emerging at the top, be it IT, R&D, pharmaceutical, infrastructure, energy, consumer retail, telecom,
financial services, media, and hospitality etc. It is second fastest growing economy in the world with
GDP touching 9.3 % in 2007-08 being the highest in the world.. This growth momentum was
 35

supported by the double digit growth of the services sector at 10.6% and industry at 9.7% in the first
quarter of 2008-09. Investors, big companies, industrial houses view Indian market in a growing and
proliferating phase, whereby returns on capital and the shareholder returns are high. Both the inbound
and outbound mergers and acquisitions have increased dramatically. All these have lead to an increase
in the merger activities of the country. When it comes to mergers & acquisitions in India the month of
January to May involved monetary transactions worth US $ 47.37 billion out of these US $ 28 billion
involved cross country deals.

CROSS BORDER M&A‘s: A recent trend

Businesses were competitive locally expanded to the national arena. Competitiveness in the national
arena is now forcing business to go global. The days of regional differentiation are over. Old
strategies that professed ―Small is Beautiful‖ or offered lessons on how companies could ―survive in a
niche‖ are no longer viable. Yes it is true that there are still micro-cosmos that that thrive at the small
business level and there is a new generation of savvy entrepreneurs who will develop and continue to
fuel healthy business in the shadows of corporate juggernauts well into the future. One of the most
important situations that they eventually face is the key to their survival: acquire or be acquired. In
other words the only optimal size is big- grow bigger than last year, grow larger and faster than the
competitors. Stagnation or slow growth is a sure recipe for disaster.

Globalization is a strong force that enables industrial consolidation. During the Asian economic crisis
in 1997 and 1998, global organizations such as International Monetary Fund, The World Bank and the
WTO assisted and encouraged countries including Thailand, South Korea and Indonesia to restructure
their financial institutions and open up their economies by reducing trade barriers. A direct result of
these policies was that global financial services companies began to acquire and buy equity stakes in
financial service players in each of these economies. From 1998 to 2000, Thailand experienced a
wave of acquisition activity. Globalization has had a number of drivers including advances in
information and communication technology, advances in travel, the reduction of barriers to trade and
the growth of overseas markets that could no longer be ignored. What characterizes the current
business environment is that we now see all industries are potentially global, and see all industries
taking part in the game.

The fact to be noticed is that why are there are so many mergers and takeovers happening at such a
rapid pace?
―The history of the world, my sweet, is who gets eaten and who gets to eat.‖ – SWEENEY TODD

There is a variety of drivers and motivating factors at play in the M&A world. Apart from personal
glory (or greed), M&A deals are often driven by many justifiable market-consolidation, expansion or
corporate diversification motives. And, of course, ever present as an inspirational force in M&A is the
old reliable financial, generally tax related motivation.

Expansion is one of the primary reasons to cross the borders as the national limits fail to provide
growth opportunities. One has to look outside its boundaries and play out in the global arena to seek
new opportunities and scale new heights. With the habit of creating an empire it becomes difficult for
these entrepreneurs to stay within its limits. The simple fact is that most key players in many markets
have already extracted a significant proportion of the available value from the domestic resources.
 36

They have improved profitability through better cost management and through efficiency gains
realized after domestic consolidation. Another reason is to gain monopoly, the company which has
been acquired by the acquirer is always a company which is trembling financially but had something
to offer the acquiring company. It may be the market share or intellectual capital or other reasons but
one thing that the acquirer looks is for is the untapped resources to be exploited which can lead the
company a step higher in the ladder of success.

Globalization is a key to help in the rapidity of the M&A as it is globalization that integrates world
economies together and many nations have opened themselves, the countries have made laws and
regulations that attract new companies to come into the country and make it easy for the companies to
easily perform their operation of M&A.

There are also new forces in play that make cross-border expansion more feasible and capable of
creating value. For example, international deregulation is removing old barriers. Institutional investors
are taking a more global perspective. Customer profiles across markets are becoming more
homogeneous. At this point a question that arises, what are the legal implications to a cross border
merger?
“The decisions of the courts on economic and social questions depend on their economic and social
philosophy”-ROOSEVELT
The answer to this question needs has been dealt in many dimensions of law .

International law prescribes that in a cross-border merger, the target firm becomes a national of the
country of the acquirer. Among other effects, the change in nationality implies a change in investor
protection, because the law that is applicable to the newly merged firm changes as well. More
generally, the newly created firm will share features of the corporate governance systems of the two
merging firms. Therefore:
· Cross-border mergers provide a natural experiment to analyse the effects of changes–both
improvements and deteriorations, in corporate governance on firm value.

· FDI plays an important role with the cross border mergers and takeovers as they are followed by
sequential investment by foreign acquirer sometimes large especially in special circumstances such as
that of privatization.

· Cross border M&A can be followed by newer and better technology (including organizational and
managerial practices) especially when acquired firms are reconstructed to increase the efficiency of
their operations.

· Cross border M&A leads to employment opportunity over time only when the sequential
investments take place and if the linkages of the acquired firm are retained or strengthened.

The value of cross-border mergers and acquisitions (M&A) grew over 700% during 2000 to a value of
$720 billion in late 2008. Differences in tax and financial reporting policies across countries lead to a
number of different opportunities, motivations and risks, yet there have been few empirical studies
that have investigated how differing accounting and tax policies across countries affect cross-border
M&A decisions.

Cross-border takeover bids are complex transactions that may involve the handling of a significant
number of legal entities, listed or not, and which are often governed by local rules (company law,
market regulations, self regulations, etc.). Not only a foreign bidder might be disadvantaged or
 37

impeded by a potential lack of information, but also some legal incompatibilities might appear in the
merger process resulting in a deadlock, even though the bid would be ‗friendly‘. This legal
uncertainty may constitute a significant execution risk and act as a barrier to cross-border
consolidation.

In some cases, legal structures are not only complex but also prevent, de jure or de facto, some
institutions to be taken over or even merge (in the context of a friendly bid) with institutions of a
different type. Such restrictions are not specific to cross-border mergers, but could provide part of the
explanation of the low level of cross-border M&As, since consolidation is possible within a group of
similar institutions (at a domestic level) whereas it is not possible with other types of institutions
(which makes any cross-border merger almost impossible).

In some countries, the privatization of financial institutions has sometimes been accompanied by
specific legal measures aimed at capping the total participation of non-resident shareholders in those
companies or imposing prior agreement from the Administration (i.e. golden shares). Some of such
measures were clearly discriminatory against foreign institutions, when it came to consolidation.

The European Court of Justice has indicated that such measures were not justified by general-interest
reasons linked to strategic requirements and the need to ensure continuity in public services when
applied to commercial entities operating in the traditional financial sector. Tax problems also occur
and it is one of the ways to get out of tax hassles as when a strong company acquires a financially
poor company the amount of profit earned is less in the first year therefore the tax burden on the
company will be less.

Mergers and acquisitions are complex processes. Despite some harmonized rules, taxation issues are
mainly dealt within national rules, and are not always fully clear or exhaustive to ascertain the tax
impact of a cross-border merger or acquisition. This uncertainty on tax arrangements sometimes
require seeking for special agreements or arrangements from the tax authorities on an ad hoc basis,
whereas in the case of a domestic deal the process is much more deterministic.

In a pending case (Marks & Spencer), the European Court of Justice has been asked whether it is
contradictory to the EC treaty to prevent a company to reduce its taxable profits by setting off losses
incurred in other member states, while it is allowed to do so with losses incurred in subsidiaries
established in the state of the parent company.

Specific domestic tax breaks may favour specific, non-harmonized products or services, with the
result that every institution has to provide this service or product if it wants to remain competitive. In
such a situation, a merger between two entities located in that domestic market may yield synergies of
scale, whereas it will be more difficult to exploit comparable synergies for a foreign institution taking
over a domestic one, while not being entitled to the tax break in their home state.

In some cases, there may be discriminatory tax treatments for foreign products or services, i.e.
products or services provided from a Member State different from the one where it is sold. Therefore,
a cross-border group will be at a disadvantage when trying to centralize the ―industrial functions‖ (e.g.
asset management functions) as in the case of overall domestic group. Since the latter may keep all its
value chain within the country and still benefit from synergies.

The impact of taxation on dividends may influence the shareholders‘ acceptance of a cross-border
merger. Even though a seat transfer or a quotation in another stock market might be justified for
 38

economic reasons, groups of shareholders could be opposed to such an operation if it implies higher
non-refundable withholding tax, and thus lower returns on their investments.

What are the challenges in cross-border mergers and acquisitions?

―Marriage of two lame ducks will not give birth to a race horse.‖

The exponential rise in stock prices, due to mergers and acquisitions will have a ripple effect on the
whole economy, technology innovation, market roll ups and mergers in addition to splits, spin offs
and even corporate breakdown, may happen at speeds never encountered before. Along with this will
come uncharted innovations in information technology and knowledge management and an explosion
of new services, new products, new industries and new markets? The convergence of all this
interconnectedness, interoperability and the value chain rationalization will turbo charge corporate
development to a speed that will make unwary executives dizzy.

These all are the management challenges and whatever it takes, management must step up to the
challenge. This mends learning to manage the knowledge and information while staying in the
driver‘s seat.

Executives will also confront perhaps the biggest bugaboo of all, complacency. The old watchword
about fighting the lethargy that comes with contentment will be revived in the future .throughout
history, long term market dominance has characteristically bred complacency among industry leaders.
Few can stay lean, mean hungry once the corporate coffers are brimming with success and profit. But
the biggest challenge to a cross border merger and takeover are the cultural issues. Interviews of over
100 senior executives involved in these 700 deals over a two year period revealed that the
overwhelming cause of failure is the people and the cultural differences. Difficulties encountered in
mergers and acquisitions are amplified in cross cultural situations, when companies involved are from
two or more different countries. Up to the point in the transaction, where the papers are signed, the
merger and acquisition business is predominantly financial valuing of the assets, determining the price
and due diligence. Before the ink is dry, however this financially driven deal becomes a human
transaction filled with emotions and trauma and survival behaviour, the non linear, often the irrational
world of human beings in the midst of changes. In the case of international mergers and acquisition,
the complexity of these processes is often compounded by the differences in national cultures. People
living and working in different countries react to the same situation or events in a very different
manner. Therefore a company involved in an international merger or acquisition needs to consider
these differences right from the design stage if it is to succeed.

Individual preoccupation on ―How is it all going to impact me?‖ weakens the commitment to the job
at hand. This in turn translates people looking in for work in other companies. Often a firm in midst of
transition loses its own talent, strengthening the competition. In countries where people identify
largely with groups; people tend to look for support within their group. In France and Italy people
caught in midst of mergers and acquisition often turn to unions. If unions cannot provide answers
because they have been excluded from the negotiation process, they are likely to go on strikes. These
strikes may do much more damage to organization than any other factor.

Employees‘ reluctance within the target company of a cross-border deal might also pose a threat to
the successful outcome of the transaction. Indeed, employees may not accept to be managed from
another country. A public opposition to the project may influence analysts‘ assessment.
 39

Cross-border mergers may imply a change in the place of quotation, or even in the currency of
quotation. Shareholders‘ acceptance of quotation changes may be limited, even all risks or tax impacts
are eliminated. Indeed, the place of quotation may have an important symbolic value.

Given that cross-border mergers are complex and need to overcome a number of execution risks (as
evidenced in this document), there might be an impact on shareholders‘ and analysts‘ apprehension of
failure risk when it comes to cross-border mergers.

Consumers may mistrust foreign entities, meaning that all parameters being equal, a local incumbent
may have an advantage over a competitor identified as foreign. This explains why foreign institutions
often prefer to keep a local brand.

Of course, some of these challenges are not new-but the penalties for mis-steps will be greater and
swifter than in the past. There are no longer any safe havens. It is expected that by 2015 there won‘t
be 50-60 undisputed global industry leaders as they exist today; there will be hundreds, each in its
respective industry. Companies in such dominant positions will deal with high volumes of merger
transactions- perhaps 10 or more per year. The companies will have to keep in minds that cross border
mergers are not only business proposals but a corporate marriage of both the entities which require
deeper and insightful solutions. The merger and acquisition activity in the past few years have become
quite predictable and this trend is going to grow parallel with the desire and competitiveness of the
society. Now let time be the emperor and decide the fate of this growing trend.

MERGERS ACROSS DIFFERENT SECTORS

MERGERS IN BANKING SECTOR

Mergers and acquisitions in banking sector have become familiar in the majority of all the
countries in the world.

A large number of international and domestic banks all over the world are engaged in merger and
acquisition activities. One of the principal objectives behind the mergers and acquisitions in the
banking sector is to reap the benefits of economies of scale. With the help of mergers and acquisitions
in the banking sector, the banks can achieve significant growth in their operations and minimize their
expenses to a considerable extent.

Another important advantage behind this kind of merger is that in this process, competition is
reduced because merger eliminates competitors from the banking industry. Mergers and acquisitions
in banking sector are forms of horizontal merger because the merging entities are involved in the
same kind of business or commercial activities. Sometimes, non-banking financial institutions are also
merged with other banks if they provide similar type of services. In the context of mergers and
acquisitions in the banking sector, it can be reckoned that size does matter and growth in size can be
achieved through mergers and acquisitions quite easily.

Growth achieved by taking assistance of the mergers and acquisitions in the banking sector may be
described as inorganic growth. Both government banks and private sector banks are adopting policies
for mergers and acquisitions. In many countries, global or multinational banks are extending their
operations through mergers and acquisitions with the regional banks in those countries. These
mergers and acquisitions are named as cross-border mergers and acquisitions in the banking sector or
international mergers and acquisitions in the banking sector. By doing this, global banking
 40

corporations are able to place themselves into a dominant position in the banking sector, achieve
economies of scale, as well as garner market share. Mergers and acquisitions in the banking sector
have the capacity to ensure efficiency, profitability and synergy. They also help to form and grow
shareholder value. In some cases, financially distressed banks are also subject to takeovers or mergers
in the banking sector and this kind of merger may result in monopoly and job cuts. Deregulation in the
financial market, market liberalization, economic reforms, and a number of other factors have played
an important function behind the growth of mergers and acquisitions in the banking sector.
Nevertheless, there are many challenges that are still to be overcome through appropriate measures.
Mergers and acquisitions in banking sector are controlled or regulated by the apex financial authority
of a particular country. For example, the mergers and acquisitions in the banking sector of India are
overseen by the Reserve Bank of India (RBI).

MERGER IN TELECOM SECTOR

Telecommunications industry is one of the most profitable and rapidly developing industries in the
world and it is regarded as an indispensable component of the worldwide utility and services sector.
Telecommunication industry deals with various forms of communication mediums, for example
mobile phones, fixed line phones, as well as Internet and broadband services. Currently, a slew of
mergers and acquisitions in Telecom Sector are going on throughout the world. The aim behind
such mergers is to attain competitive benefits in the telecommunications industry. The mergers and
acquisitions in Telecom Sector are regarded as horizontal mergers simply because of the reason that
the entities going for merger or acquisition are operating in the same industry that is
telecommunications industry.

In the majority of the developed and developing countries around the world, mergers and
acquisitions in the telecommunications sector have become a necessity. This kind of mergers also
assists in creation of jobs. Both transnational and domestic telecommunications services providers are
keen to try merger and acquisition options because this will help them in many ways.
They can cut down on their expenses, achieve greater market share and accomplish market control.
Mergers and acquisitions in the telecommunications sector have been showing a prosperous trend in
the recent past and the economists are advocating that they will continue to do so. The majority of
telecommunication services providers have understood that in order to grow globally, strategic
alliances and mergers and acquisitions are the principal devices.

Private sector investment and FDI (Foreign Direct Investment) have also boosted the growth of
mergers and acquisitions in the telecommunications sector. Over the last few years, a phenomenal
growth has been witnessed in the number of mergers and acquisitions taking place in the
telecommunications industry. Economic reforms have spurred the growth in the mergers and
acquisitions industry of the telecommunications sector to a satisfactory level. Mergers and
acquisitions in Telecom Sector can also have some negative effects, which include monopolization of
the telecommunication products and services, unemployment and others.

However, the governments of various countries take appropriate steps to curb these problems. In
countries like India, mergers and acquisitions have increased to a considerable level from the mid
1990s. In the United States, the mergers and acquisitions in the telecommunications sector are going
on in a full-fledged manner.
 41

The mergers and acquisitions in the telecommunications sector are governed or supervised
by the regulatory authority of the telecommunication industry of a particular country, for instance the
Telecom Regulatory Authority of India or TRAI. The regulatory authorities always keep a tab on the
telecommunications industry so that no monopoly is formed.

Following are the benefits provided by the mergers and acquisitions in the telecommunications
industry:

 Building of infrastructure in a more convenient way

 Licensing options for mergers and acquisitions are often found to be easier

 Mergers and acquisitions offer extensive networking advantages

 Brand value

 Bigger client base

 Wide array of products and services

MERGERS IN PHARMACEUTICAL SECTOR

There are several causes of mergers and acquisitions in the global pharmaceutical
industry. Among them are the absence of proper research and development facilities, gradual expiry
of patents and competition within specific pharmaceutical genres. The high profile product recalls
have also played a major role in the continuing mergers and acquisitions in the industry. In the Indian
pharmaceutical market there are a number of companies that have entered into merger and acquisition
agreements in the context of the global market scenario. These companies would be selling off the
non-core business divisions like Over-the-Counter. This is expected to further the consolidation in the
mid-tier as far as the pharmaceutical industry in Europe is concerned.

The sheer number of companies acquiring parts of other companies has shown that the
Indian pharmaceutical industry is ready to be a dominant force in this scenario. In the recent times
Nicholas Piramal has taken the ownership of 17% of Biosyntech that is a major pharmaceutical
packing organization in Canada. Torrent has got the ownership of Heumann Pharma, a general drug
making company and, formerly, a subsidiary of Pfizer. Matrix has acquired Vorin, a major
pharmaceutical company of Belgium. Sun Pharmaceutical Industries is set to make acquisitions in
pharmaceutical companies in the US and has set aside $450 million to execute these plans. In
Bangalore, Strides Arcolab has aimed at acquiring 70 percent in a pharmaceutical facility in Italy that
is worth $10 million. There are a number of opportunities for the major pharmaceutical products and
services providers in the Indian pharmaceutical sector as the price controls have been relaxed and
there have been significant changes in the medicinal requirements of the Indians. The manufacturing
base in India is also strong enough to support the major international pharmaceutical companies.
This may be said as the Indian pharmaceutical market is varied as well as economical. It is expected
that in the coming years the Indian pharmaceutical companies would be executing more mergers and
acquisitions. It is expected that the regulated pharmaceutical markets in the United States and Europe
 42

would be the main areas of operation. In the recent years the Indian pharmaceutical companies have
been venturing into mergers and acquisitions so that they can gain access to the big names of the
international pharmaceutical scenario.

One of the major features of the mergers and acquisitions in the pharmaceutical sector of the Asia-
Pacific region has been the integration of the local pharmaceutical companies. This has happened
especially in India and China. Acquisition has made it convenient for a number of companies to do
business in various pharmaceutical markets. Previously the pharmaceutical markets of Europe were
closed to the companies of other countries due to the difference in language. There were also other
problems for companies like the trade barriers for instance.

As per the figures of mergers and acquisitions in pharmaceutical sector, from the year 2004, there
have been more mergers and acquisitions in the pharmaceutical sector in the Asia-Pacific region
compared to North America. The combined financial value of the mergers and acquisitions in Asia-
Pacific region has been greater than North America. One of the major merger and acquisition deals in
the Asia-Pacific region in the recent years has been the merger of Fujisawa and Yamanouchi in Japan.
This deal was worth $7.9 billion. In the same period the Asia-Pacific region has experienced the
highest percentage of growth in the mergers and acquisitions in pharmaceutical sector. In the same
period the rate of growth in the Asia-Pacific region has been 37%. In Western Europe the rate of
growth has been 11% and in North America it has been 20%. The pharmaceutical market in Eastern
Europe has not experienced any increase in the rate of mergers and acquisitions.

MERGERS IN THE STEEL INDUSTRY- TATA CORUS DEAL

“There are not many opportunities for producers in emerging low-cost markets to gain
access to the markets of Europe other than by acquiring a company like Corus,”
John Quigley (Editor, Industry Publication Steel week

Mergers in the steel industry is given special reference here because the anlysis of any merger is not
complete without the anlaysis of the TATA CORUS deal which is the biggest deal in corporate India
so far. So the deal is given an indepth analysis of how the deal went through including the formation ,
the intial stages of the deal and important events that happened in the deal and finally the EVA
analysis of the deal.

Thousands of Indians didn‘t offer prayers for Tata Steel to clinch the deal for the Anglo-Dutch steel
maker Corus, as they have for the recovery of hospitalized Bollywood superstars. Nor did they erect
40-foot billboards of a smiling Ratan Tata, chairman of Tata Steel, after he won Corus. And the stock
markets were clearly concerned about the Tata Steel‘s new debt load. But despite all this, euphoria
gripped the nation. Finance minister P. Chidambaram offered unspecified help, if needed, to close the
deal; fellow steel magnate Lakshmi Niwas Mittal cheered the acquisition, and excited TV
newsreaders gushed. India‘s first Fortune 500 MNC was born.

Tata acquired Corus, which is four times larger than its size and the largest steel producer in the U.K.
The deal, which creates the world's fifth-largest steelmaker, is India's largest ever foreign takeover
and follows Mittal Steel's $31 billion acquisition of rival Arcelor in the same year. Over the past five
years, Indian companies had made global acquisitions for over $10 billion. The Tata bid almost equals
this amount. Most of them have averaged $100 to 200 million.

THE GLOBAL STEEL INDUSTRY

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The current global steel industry is in its best position in comparing to last decades. The price has
been rising continuously. The demand expectations for steel products are rapidly growing for coming
years. The shares of steel industries are also in a high pace. The steel industry is enjoying its 6th
consecutive years of growth in supply and demand. And there is many more merger and acquisitions
which overall buoyed the industry and showed some good results. In global steel industry the
consumption of steel has been decreased drastically in 2007, in comparison to 2006. According to
International Iron and Steel Institute (IISI) till 201 the average demand for steel would be 4.9 per cent
per year. But during 2010 and 2015 the growth is expected to be 4.2 per cent. In fact IISI forecasts the
global steel demand would be 1.32 billion tones by 2010 and 1.62 billion tones by 2015. Much of this
demand growth is expected to be generated from countries like China and India. Among the major
steel producing countries the production of steel has increased from 2005-2006 except Brazil. China is
the highest steel producing country in the world with a production of 355.8 million tones in 2005 and
418.8 million tones in 2006. And for this increasing demand of steel market it is not possible for a
single company to capture the market alone. In that production process Tata may play a vital role. For
that reason IISI is giving its opinion in favor .In the long term, there is astrong possibility for the
industry to benefit from greater pricing power resulting from further expected consolidation, a lower
cost structure, and a continuation of the cyclical decline of the U.S. dollar.

CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY

The countries like China, Japan, India and South Korea are in the top of the above in steel production
in Asian countries. China accounts for one third of total production i.e. 419m ton, Japan accounts for
9% i.e. 118m ton, India accounts for 53m ton and South Korea is accounted for 49m ton, which all
 44

totally becomes more than 50% of global production. Apart from this USA, BRAZIL, UK accounts
for the major chunk of the whole growth.

The steel industry has been witnessing robust growth in both domestic as well as international
markets. In this article, let us have a look at how has the steel industry performed globally in 2007.

Capacity: The global crude steel production capacity has grown by around 7% to 1.6 bn in 2007 from
1.5 bn tonnes in 2006. The capacity has shown a growth rate of 7% CAGR since 2003. The additions
to capacity over last few years have ranged from 36 m tonnes in 2004 to 108 m tonnes in 2007. Asian
region accounts for more than 60% of the total production capacity of world, backed mainly by
capacity in China, Japan, India, Russia and South Korea. These nations are among the top steel
producers in the world.

Production: The global steel production stood at 1.3 bn tonnes in 2007, showing an increase of 7.5%
as compared to 2006 levels. The global steel production showed a growth of 8% CAGR between 2003
and 2007. China accounts for around 36% of world crude steel production followed by Japan (9%),
US (7%), Russia (5%) and India (4%). In 2007, all the top five steel producing countries have showed
an increase in production except US, which showed a decline.

Rank Country Production (mn tonnes) World share (%)

1 China 489 36.0%

2 Japan 120 9.0%

 45

3 US 98 7.0%

4 Russia 72 5.0%

5 India 53 4.0%

6 South Korea 51 3.5%

Consumption: The global steel consumption grew by 6.6% to 1.2 bn tonnes as compared to 2006
levels. The global finished steel consumption showed a growth of 8% CAGR, in line with the
production, between the period 2003 and 2007. The finished steel consumption in China and India
grew by 13% and 11% respectively in 2007. The BRIC countries were the major demand drivers for
steel consumption, accounting for nearly 80% of incremental steel consumption in 2007.

Rank Country Consumption (mn tonnes) World share (%)

1 China 408 36.0%

2 US 108 9.0%

3 Japan 80 6.7%

4 South Korea 55 4.6%

5 India 51 4.2%

6 Russia 40 3.3%

Source: JSW Steel AR FY08

Outlook: As per IISI estimates, the finished steel consumption in world is expected to reach a level of
1.75 bn tonnes by 2016, growth of 4% CAGR over the consumption level of 2007. The steel
consumption in 2008 and 2009 grew above 6%

Indian Steel Industry

India, which has emerged among the top five steel producing and consuming countries over the last
few years, backed by strong growth in its economy.

Capacity: Steel capacity increased by 6% to 60 m tonnes in FY08. It registered a robust growth of

8% CAGR between the period FY04 and FY08. The capacity expansion in the country was primarily
through brown field expansions as it requires lower investments than a greenfield expansion.
 46

Fig-3

Production: Steel production has registered a growth of 6% to reach a level of 54 m tonnes in FY8.
The production has grown nearly in line with the capacity expansion and registered a growth of 7%
CAGR with an average capacity utilization of 92% between the period FY04 and FY08. India is
currently the fifth largest producer of steel in the world, contributing almost 4% of the total steel
production in world. The top three steel producing companies (SAIL, Tata Steel and JSW Steel)
contributed around 45% of the total steel production in FY08.

Fig-4
 47

Consumption: Steel consumption has increased by 10% to 51.5 m tonnes in FY08. Consumption
growth has been exceeding production growth since past few years. It grew at a CAGR of 12%
between FY04 and FY08. Construction & infrastructure, manufacturing and automobile sectors
accounted for 59%, 13% and 11% for the total consumption of steel respectively in FY08. Although
steel consumption is rapidly growing in the country, the per capita steel consumption still stands at 48
kgs. Moreover, in the rural areas in the country, it stands at a mere 2 kg. It should be noted that the
world‘s average per capita steel consumption was 189 kg and while that of China was 309 kg in 2007.

Fig-5

Trade equations: India became net importer of steel in FY08 with estimated net imports of 1.9 m
tonnes. In the past few years, its exports have remained at more or less the same levels while on the
other hand, imports have increased on the back of robust demand and capacity constraints in the
domestic markets. The imports showed a growth of around 48% while exports declined by around 6%
in FY08.

Outlook: As per IISI estimates, the demand for steel in India are expected to grow at a rate of 9% and
12% in 2008 and 2009. The medium term outlook for steel consumption remains extremely bullish
and is estimated at an average of above 10% in the next few years.

Tata Vs Corus

Corus
The Corus was created by the merger of British Steel and Dutch steel company, Hoogovens.
Corus was Europe‘s second largest steel producer with a production of 18.2 million tonnes and
revenue of GDP 9.2 billion (in 2005). The product mix consisted of Strip steel products, Long
products, Distribution and building system and Aluminum. With the merger of British Steel and
Hoogovens there were two assets the British plant asset which was older and less productive and the
Dutch plant asset which was regarded as the crown jewel by every one in the industry. They have
union issues and are burdened with more than $ 13 billion of pension liabilities. The Corus was
 48

making only a profit of $ 1.9 billion from its 18.2 million tonnes production per year (compared to $
1.5 billion form 8.7 million tone capacity by Tata).

The Corus was having leading market position in construction and packaging
in Europe with leading R&D. The Corus was the 9th largest steel producer in the world. It opened its
bid for 100 % stake late in the 2006. Tata (India) & CSN (Companhia Siderurgica Nacional) emerged
as most powerful bidders.

CSN (Companhia Siderurgica Nacional)

CSN (Companhia Siderurgica Nacional) was incorporated in the year 1941. The company
initially focused on the production of coke, pig iron castings and long products. The company was
having three main expansions at the Presidente Vargas Steel works during the 1970‘s and 1980‘s. The
first completed in the year 1974, increased installed capacity to 1.6 million tons of crude steel. The
second completed in 1977, raised capacity to 2.4 million tons of crude steel. The third completed in
the year 1989, increased capacity to 4.5 million tons of crude steel. The company was privatized by
the Brazilian government by selling 91 % of its share.

The Mission of CNS is to increase value for the shareholders. Maintain position as
one of the world‘s lowest-cost steel producer. Maintain a high EBITDA and strengthen position as a
global player. CNS is having fully integrated manufacturing facilities. The crude steel capacity was
5.6 million tons. The product mix consisted of Slabs, Hot and Cold rolled Galvanized and Tin mill
products. In 2004 CSN sold steel products to customers in Brazil and 61 other countries. In 2002, 65
% of the steel sales were in domestic market and operating revenues were 70 %. In 2003, the same
figures were 59 % and 61 % and in 2004 the same figures were 71% and 73 %. The principal export
markets for CSN were North America (44%),Europe(32%) and Asia(11%).

Tata Steel & Indian steel industry

Tata steel, India‘s largest private sector steel company was established in the 1907.The Tata
steel which falls under the umbrella of Tata sons has strong pockets and strong financials to support
acquisitions. Tata steel is the 55th in production of steel in world. Tata Steel holds a very vital place in
Indian business history, because it has introduced some of the unique concepts like 8-hour working
days, leave with pay and pension system for the first time in India and the first player to start rapid
industrialization process. In the later part the concepts invented and implemented by Tata became
lawful and compulsory practice for the Indian employees. From Tata Steel, Tata has started investing
in various other businesses like; Oil mills, Airlines, Publishing, Motors, Consultancy services etc in a
short span of 30 years. In the year 1945 Tata entered into tea business by the name of Tata Tea, which
was called as Tata Finlay earlier. Tata also entered into exports as Tata Exports, which is the most
successful and the largest export house in India. During the entire business in India Tata has seen
many ups and downs, in different fields of business. If we will look at the company‘s financial
status/condition, it will give some idea about the condition and performance of the company across
the years.
 49

Production capacity of Tata steel is given in the table below:-

The product mix of Tata steel consist of flat products and long products which are in the lower value
chain. The Tata steel is having a low cost of production when compared to Corus. The Tata steel was
already having its capacity expansion with its indigenous projects to the tune of 28 million tones.

Indian Scenario

After liberalization, there have been no shortages of iron and steel materials in the country.
Apparent consumption of finished (carbon) steel increased from 14.84 Million tonnes in 1991-92 to
39.185 million tonnes (Provisional) in 2005-06. The steel industry which was facing a recession for
some time has staged a turn around since the beginning of 2002. Demand has started showing an
uptrend on account of infrastructure boom. The steel industry is buoyant due to strong growth in
demand particularly by the demand for steel in China. The Steel industry was de-licensed and de-
controlled in 1991 & 1992 respectively. Today, India is the 7th largest crude steel producer of steel in
the world. In 2005-06, production of Finished (Carbon) Steel was 44.544 million tonnes. Production
of Pig Iron in 2005-06 was 4.695 Million Tonnes. The share of Main Producers (i.e. SAIL, RINL and
TSL) and secondary producers in the total production of Finished (Carbon) steel was 36% and 64%
respectively during the period of April-November, 2006. India‘s major market for steel and steel
items include USA, Canada, Indonesia, Italy, West Asia, Nepal, Taiwan, Thailand, Japan, Sri Lanka
and Belgium. The major steel items of export include HR coils, plates, CR and galvanized products,
pipes, stainless steel, wire rods and wires. With the fall in prices along with depressed domestic
demand, India has been increasing exports to overcome the excess supply situation. This has resulted
in antidumping actions being taken by developed countries like USA, EU and Canada. The trade
 50

action by some countries against Indian steel industry has, to some extent, affected India‘s exports to
these countries. The Government of India and the Indian steel producers are trying to combat such
actions despite such efforts being very expensive and involving time-consuming procedures.

Corus decides to sell Reasons for decision:

 Total debt of Corus is 1.6bn GBP

 Corus needs supply of raw material at lower cost

 Though Corus has revenues of $18.06bn, its profit was just $626mn (Tata‘s revenue was $4.84
bn & profit $ 824mn)

 Corus facilities were relatively old with high cost of production

 Employee cost is 15 %( Tata steel- 9%)

Tata Decides to bid: Reasons for decision:

 Tata is looking to manufacture finished products in mature markets of Europe.

 At present manufactures low value long and flat steel products while Corus produces high
value stripped products

 A diversified product mix will reduce risks while higher end products will add to bottom line.

 Corus holds a number of patents and R & D facility.

 Cost of acquisition is lower than setting up a green field plant and marketing and distribution
channels

 Tata is known for efficient handling of labour and it aims at reducing employee cost and
improving productivity at Corus

 It had already expanded its capacities in India.

 It will move from 55th in world to 5th in production of steel globally.

Tata Steel Vs CSN: The Bidding War

There was a heavy speculation surrounding Tata Steel's proposed takeover of Corus ever
since Ratan Tata had met Leng in Dubai, in July 2006. On October 17, 2006, Tata Steel made an offer
of 455 pence a share in cash valuing the acquisition deal at US$ 7.6 billion. Corus responded
positively to the offer on October 20, 2006.

Agreeing to the takeover, Leng said, "This combination with Tata, for Corus shareholders and
employees alike, represents the right partner at the right time at the right price and on the right terms."
In the first week of November 2006, there were reports in media that Tata was joining hands with
Corus to acquire the Brazilian steel giant CSN which was itself keen on acquiring Corus. On
November 17, 2006, CSN formally entered the foray for acquiring Corus with a bid of 475 pence per
share. In the light of CSN's offer, Corus announced that it would defer its extraordinary meeting of
 51

shareholders to December 20, 2006 from December 04, 2006, in order to allow counter offers from
Tata Steel and CSN...

Financing the Acquisition

By the first week of April 2007, the final draft of the financing structure of the
acquisition was worked out and was presented to the Corus' Pension Trusties and the Works Council
by the senior management of Tata Steel. The enterprise value of Corus including debt and other costs
was estimated at US$ 13.7 billion

The deal

The deal (between Tata & Corus) was officially announced on April 2nd, 2007. This deal is a 100%
acquisition and the new entity will be run by one of Tata‘s steel subsidiaries. As stated by Tata, the
initial motive behind the completion of the deal was not Corus‘ revenue size, but rather its market
value. Even though Corus is larger in size compared to Tata, the company was valued less than Tata
(at approximately $6 billion) at the time when the deal negotiations started.

But from Corus‘ point of view, as the management has stated that the basic reason for supporting this
deal were the expected synergies between the two entities. Corus has supported the Tata acquisition
due to different motives. However, with the Tata acquisition Corus has gained a great and profitable
opportunity to make an exit as the company has been looking out for a potential buyer for quite some
time. The total value of this acquisition amounted to ₤6.2 billion (US$12 billion). The official press
release issued by both the company states that the combined entity will have a pro forma crude steel
production of 27 million tones in 2007, with 84,000 employees across four continents and a joint
presence in 45 countries, which makes it a serious rival to other.

The Integration Efforts

Industry experts felt that Tata Steel should adopt a 'light handed integration‘ approach, which meant
that Ratan Tata should bring in some changes in Corus but not attempt a complete overhaul of
Corus'systems (Refer Exhibit XI and Exhibit XII for projected financials of Tata-Corus). N
Venkiteswaran, Professor, Indian Institute of Management, Ahmedabad said, ―If the target company
is managed well, there is no need for a heavy-handed integration. It makes sense for the Tatas to allow
the existing management to continue as before.

The Synergies

Most experts were of the opinion that the acquisition did make strategic sense for
Tata Steel. After successfully acquiring Corus, Tata Steel became the fifth largest producer of steel in
the world, up from fifty-sixth position.There were many likely synergies between Tata Steel, the
lowest-cost producer of steel in the world, and Corus, a large player with a significant presence in
value-added steel segment and a strong distribution network in Europe. Among the benefits to Tata
Steel was the fact that it would be able to supply semi-finished steel to Corus for finishing at its
plants, which were located closer to the high-value markets.

The Pitfalls

Though the potential benefits of the Corus deal were widely appreciated, some analysts had doubts
about the outcome and effects on Tata Steel's performance. They pointed out that Corus' EBITDA
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(earnings before interest, tax, depreciation and amortization) at 8 percent was much lower than that of
Tata Steel which was at 30 percent in the financial year 2006-07.

The Road Ahead

Before the acquisition, the major market for Tata Steel was India. The Indian market accounted for
sixty nine percent of the company's total sales. Almost half of Corus' production of steel was sold in
Europe (excluding UK). The UK consumed twenty nine percent of its production.

After the acquisition, the European market (including UK) would consume 59 percent of the merged
entity's total production.

TATA CORUS TIMELINE

September 20, 2006 : Corus Steel has decided to acquire a strategic partnership with a Company that
is a low cost producer

October 5, 2006 : The Indian steel giant, Tata Steel wants to fulfill its ambition to Expand its business
further.

October 6, 2006 : The initial offer from Tata Steel is considered to be too low both by Corus and
analysts.

October 17, 2006 : Tata Steel has kept its offer to 455p per share.

October 18, 2006 : Tata still doesn‘t react to Corus and its bid price remains the same.

October 20, 2006 : Corus accepts terms of ₤ 4.3 billion takeover bid from Tata Steel

October 23, 2006 : The Brazilian Steel Group CSN recruits a leading investment bank to offer advice
on possible counter-offer to Tata Steel‘s bid.

October 27, 2006 :Corus is criticized by the chairman of JCB, Sir Anthony Bamford, for its decision
to accept an offer from Tata.

November 3, 2006 : The Russian steel giant Severstal announces officially that it will not make a bid
for Corus

November 18, 2006 : The battle over Corus intensifies when Brazilian group CSN approached the
board of the company with a bid of 475p per share

November 27, 2006 : The board of Corus decides that it is in the best interest of its will shareholders
to give more time to CSN to satisfy the preconditions and decide whether it issue forward a formal
offer

December 18, 2006 : Within hours of Tata Steel increasing its original bid for Corus to 500 pence per
share, Brazil's CSN made its formal counter bid for Corus at 515 pence per share in cash, 3% more
than Tata Steel's Offer.
 53

January 31, 2007 : Britain's Takeover Panel announces in an e-mailed statement that after an auction
Tata Steel had agreed to offer Corus investors 608 pence per share in cash

April 2, 2007 : Tata Steel manages to win the acquisition to CSN and has the full voting support form
Corus‘ shareholders

EVA ANALYSIS

NOPAT CALCULATED FOR TATA

TAX EAT before

YEAR EBIT interest

2005 6,064.77 1,823.82 4,240.95

2006 6,136.80 1,734.38 4,402.42

2007 7,275.87 2,040.47 5,235.40

2008 8,830.95 2,380.28 6,450.67

2009 9,779.51 2,114.87 7,664.64

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WACC CALCULATED

debt kd div eqty ke Value of wgt kd wgt ke wacc

firm

2739.70 8.35 719.51 553.67 129.95 3293.37 6.95 21.85 28.79

2516.15 6.69 719.51 553.67 129.95 3069.82 5.49 23.44 28.93

9645.33 2.60 943.91 580.67 162.56 10226.00 2.46 9.23 11.69

18021.69 5.16 1168.93 730.78 159.96 18752.47 4.95 6.23 11.19

26946.18 5.53 1168.95 730.78 159.96 27676.96 5.38 4.22 9.61

TOTAL CAPITAL EMPLOYED

YEAR investment wc fa tce

2005 2,432.65 1,872.66 7098.72 11,404.03

2006 4,069.96 1,157.73 9268.95 14,496.64

2007 6,106.18 2,497.44 20330.36 28,933.98

2008 4,103.19 4,367.45 41708.96 50,179.60

2009 42,371.78 3,487.68 52070.75 97,930.21

EVA CALCULATED

YEAR NOPAT TCE WACC ko EVA

2005 4240.95 11404.03 28.79 3283.74 957.21

2006 4402.42 14496.64 28.93 4193.17 209.25

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2007 5235.40 28933.98 11.69 3381.65 1853.75

2008 6450.67 50179.60 11.19 5613.92 836.75

2009 7664.64 97930.21 9.61 9406.47 -1741.83

Similarly NOPAT for CORUS

EAT before
YEAR EBIT TAX interest
2005 560 120 440
2006 476 107 369
WACC CALCULATED

92.00 1323.00 6.95 385.00 3435.0 11.21 4758.00 1.93 8.09 10.03

183.00 1259.00 14.54 263.00 3616.0 7.27 4875.00 3.75 5.39 9.15

TOTAL CAPITAL EMPLOYED

year investments
WC FA

2005 118 2041 2781

2006 71 2044 2663

EVA ADDED

year nopat TCE WACC ko EVA

2005 440 4940 10.03 495.25 -55.25

2006 369 4778 9.15 437.13 -68.13

EVA CALCULATED POST & PRE ACQUISITION

ECONOMIC VALUE ADDED

year TATA CORUS TATA

CORUS

2005 957.2145894 -55.24590164

 56

2006 209.2453227 -68.12574359

2007 1853.751698

2008 836.7538804

2009 -1741.83263

We find that EVA or the shareholder value created for TATA steel has been much higher than
CORUS before the acquisition similarly the NOPAT is also higher. The value or wealth created by
TATA for its shareholders is positive in nature and that of Corus is negative, similarly the Net
operating profit of TATA has also been higher. The year of the merger has created the maximum
value to the shareholders as the synergy effect of the merger has helped them gain the maximum value
as the EVA is highest in the year 2007. EVA has been on the positive side in 2008 as well after the
merger , but the year 2009 has seen the EVA dip to negative side for TATACORUS for the first time
this can also be attributed to the global financial crisis and the general slow growth of the steel
industry. The exact result with respect to the shareholder wealth creation can be calculated over
another five years. The merger however has created value to its shareholders going by the result of the
years 2007-2008 as maximum value to the shareholders has been created in these two years.

“I believe this will be the first step in showing that Indian industry can in fact step
outside the shores of India in an international marketplace and acquit itself as a global
player.”
Ratan Tata

ARCELOR MITTAL DEAL

Mittal Steel
Mittal Steel is the world's largest and most global steel company, with shipments of 49.2 million tons
and revenues of over $28.1 billion in 2005. They own steel-making facilities in 16 countries, spanning
 57

four continents. They employ 224,000 people spanning 49 different nationalities. Their shares are
listed on the New York and Amsterdam stock exchanges.

Mittal Steel has set the pace for the consolidation and globalization of the world steel industry. They
have taken on a range of acquisitions, many of them formerly public sector-owned companies, and
made successes of them. In the process they have spread best practice and modern production
techniques throughout their plants. Their capital investment programme is unmatched in the industry.

Their 5000 strong customer base, spanning 150 countries, includes household names in the
automotive, engineering and appliance sectors. A force in every segment of the steel market, Mittal
Steel produces a broad range of high-quality finished and semi-finished products for the flat and long
products markets.

Mittal Steel is among the most efficient steel producers in the world. They encompass all aspects of
modern steelmaking, combining both integrated and mini-mill facilities and producing much of the
iron ore and coking coal used in their furnaces. They are also among the most advanced steel makers,
operating a range of modern technologies. They have pioneered the use of direct reduced iron (DRI)
as a raw material source and are now the world‘s biggest producer of DRI. With two technical
research facilities, their product development teams are ready to meet the needs of the most
demanding customers.

Lakshmi N. Mittal – Profile

Mr. Lakshmi N. Mittal is the Chairman and CEO of Mittal Steel Company. He founded the
company in 1976 and has been responsible for the strategic direction and development of its
businesses. Mittal Steel is the only truly global steel producer in the world with operations on 14
countries, spanning 4 continents. Mr. Mittal‘s ability to guide the company in its identification,
acquisition and turnaround of steel assets has led to its emergence as one of the world‘s fastest
growing steel producers. Mr. Mittal began his career working in the family‘s steelmaking business in
India, and has over 30 years of experience working in steel and related industries. Over the years, Mr.
Mittal has also championed the development of integrated mini-mills and the use of Direct Reduced
Iron or ―DRI‖ as a scrap substitute for steelmaking and led the consolidation process of the global
steel industry. Other related activities of Mittal Steel include shipping, power generation and
distribution, and mining.

Following the transaction combining Ispat International and LNM Holdings to form Mittal Steel in
December 2004, together with the simultaneous announcement of the acquisition of International
Steel Group in the US to form the world‘s largest steel producer, Mr. Mittal was awarded Fortune
magazine‘s “European Businessman of the Year 2004”. Previously, he was awarded “Steelmaker of
the Year” in 1996 by New Steel in the USA, and the “Willy Korf Steel Vision Award” in June 1998,
for outstanding vision, entrepreneurship, leadership and success in global steel development from
American Metal Market and PaineWeber‘s World Steel Dynamics.

Mr. Mittal is an active philanthropist and a member of various trusts. Mittal Steel is a significant
contributor to local community and welfare activities for employees in countries where the Group
operates. Mr. Mittal is a member of the Foreign Investment Council in Kazakhstan, the International
Investment Council in South Africa, the World Economic Forum‘s International Business Council and
 58

the International Iron and Steel Institute‘s Executive Committee. He is a Director of ICICI Bank
Limited and is on the Advisory Board of the Kellogg School of Management in the U.S.. He was born
in Sadulpur in Rajasthan, India on June 15, 1950, and graduated from St. Xavier‘s College in Calcutta
where he received a Bachelor of Commerce degree. He is married to Usha Mittal, and has a son,
Aditya Mittal and a daughter, Vanisha Mittal.

Mittal Steel Growth Timeline

Year Acquired Description

1989 Iron & Steel A modern technologically advanced Steel Complex. Renamed as
Company Of Trinidad Caribbean Ispat.
& Tobago

1992 Sibalsa Mexico‘s Third Largest Steel Producer. Renamed as Ispat

Mexicana.

1994 Sidbec-Dosco Canada‘s number four steel maker is bought from the
Government of Quebec and renamed Ispat Sidbec.

1995 Hamburger Germany‘s fourth largest producer of wire rod, renowned for its
Stahlwerke mini-mill expertise and renamed as Ispat Hamburger Stahlwerke.

The Group buys a 5.5 million tons pa blast furnace steel plant in
Kazakhstan, renamed Ispat Karmet.

Karmet

1998 Inland Steel Company Ispat International buys America‘s fourth largest steelmaker,
Inland Steel Company and renames it Ispat Inland.
 59

1999 Unimétal Ispat International buys the French company, Unimetal Group,
including Trefileurope and SMR, from Usinor.

2001 ALFASID LNM Holdings buys 70 per cent of ALFASID from the Algerian
government and renames it Ispat Annaba.

LNM Holdings acquires SIDEX, an integrated steelworks in

SIDEX Galati, being privatized by the Romanian government. Renames it
Ispat Sidex.

2002 Business assistance LNM Holdings signs a business assistance agreement with the
agreement signed with South African steel producer, Iscor. LNM subsequently takes
Iscor control of Iscor in June 2004. Ispat Iscor has now been renamed
Mittal Steel South Africa.

2003 Nova Hut LNM Holdings signs an agreement to buy Nova Hut, the largest
steel producer in the Czech Republic, from the Czech
government. The acquisition, at an all-in cost of $905 million,
takes effect in January 2003 and the company is renamed Ispat
Nova Hut.

2004 Polski Huty Stali LNM Holdings buys a controlling holding in Poland‘s leading
steel producer, Polski Huty Stali, and renames it Ispat Polska Stal
(IPS). The company boasts a capacity of over 6.5 million tons a
year but is close to bankruptcy at the time of acquisition.

LNM Holdings buys Bosnia‘s BH Steel, committing itself to the

biggest ever investment in Bosnia by a foreign company.

BH Steel

LNM adds to its downstream activities in the Balkans with the

acquisition of hot and cold rolling mills in Skopje, Macedonia.
The two mills, dormant for two years, are renamed Ispat Skopje.

LNM Holdings and Ispat International announce their merger - to

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Macedonian facilities form Mittal Steel. At the same time, Mittal Steel announces an
from Balkan Steel agreed takeover of International Steel Group of the US in a cash
and shares deal worth $4.5 billion. Once the proposed acquisition
is completed, it will create the world‘s largest steel maker with a
stock market worth of around $21 billion and a combined
capacity of 70 million tons of steel a year. The enlarged Mittal
Steel will span the globe with around 30 per cent of its assets in
North America, 30 per cent in Europe and the remaining 40 per
Creation Of Mittal cent split between Asia and Africa. Chairman Lakshmi Mittal
Steel and Proposed declares his intention to make the Group ‗the lowest cost steel
Acquisition Of producer in every market.‘
International Steel.

2005 Acquisition of stake Mittal Steel announces a share purchase agreement to acquire
in Hunan Valin 36.67 per cent of Hunan Valin Steel Tube & Wire, one of China‘s
top ten steelmakers with annual capacity of 8.5 million tonnes.
The move marks Mittal Steel‘s entry into the Chinese steel
industry.

The acquisition of ISG is completed and the company is merged

with Mittal Steel‘s existing US operation, Ispat Inland, and
ISG Acquisition subsequently re-named Mittal Steel USA.
Completed

Mittal Steel restructures its European business, merging its

western European operations with its central and eastern
European operations to form one unified business structure –
Mittal Steel Europe Mittal Steel Europe.
Created

Mittal Steel signs a mining development agreement with the

Government of Liberia, giving Mittal Steel access to about one
billion tonnes of iron ore resources in the west of the country.

MDA with Liberian

Govt. Kryvorizhstal is acquired for $4.8 billion following a public
auction in Kiev. Kryvorizhstal is Ukraine‘s leading steelmaker
with annual steel production of 7.7 million tonnes and more than
one billion tonnes of iron ore resources. Company subsequently
renamed Mittal Steel Kryviy Rih.
 61

Acquisition of
Kryvorizhstal
Mittal Steel signs a Memorandum of Understanding with the
State of Jharkhand, India. Mittal Steel expects to invest $9 billion
establishing mining and steel making operations in the state.

Mittal Canada enters into definitive agreement for the acquisition

of Norambar Inc., Stelfil Ltée and Stelwire Ltd. from Stelco Inc.
Transaction completed in February 2006 at a cost of C$30 million

MOU with Jharkhand,

India

Acquisition of Stelco
subsidiaries

Arcelor

Arcelor was created by the merger of Aceralia, Arbed and Usinor, and the determination of these
three European groups to mobilize their technical, industrial, and commercial synergies in a joint
venture to create a global leader with the ambition of becoming a major player in the steel industry.

Officially launched on February 19, 2001, the merger became effective on February 18, 2002, when
the Arcelor share was listed on several stock exchanges. The choice of the name Arcelor was
announced on December 12, 2001.

Aceralia

1902 : Creation of AHV

1950 : Creation of ENSIDESA

1973 : ENSIDESA (absorption of UNINSA)

1991 : Establishment of CORPORACION de la SIDERURGIA INTEGRAL

 62

1994: Establishment of CSI Corporacion Siderurgica, by utilizing the profitable assets of

Corporacion de la Siderurgia Integral. Operations begin in 1995.

1997: Creation of ACERALIA CORPORACION SIDERURGICA and strategic alliance with the
Arbed Group.

Arbed

1882 : Establishment of the parent company

1886 : Beginning of Thomas steel production in Luxembourg

1911 : Merger of the 3 largest steelmakers in Luxembourg and creation of Arbed

1920 : Creation of TradeARBED

1922 : Creation of Cia Siderurgica Belgo-Mineira in Brazil

1962 : Creation of SIDMAR in Belgium

1985 : Majority shareholding in ALZ through SIDMAR

1992 : Control is taken of the former Maxhütte (ex-GDR) and establishment of Stahlwerk
Thüringen

1993 : Organization of the Group in business sectors

1993/97 : Conversion to electric steel production in Luxembourg

1995 : Majority shareholding in Klöckner Stahl, now STAHLwerke BREMEN

1997 : Strategic partnership with ACERALIA (formerly CSI) in Spain

1998 : Integration of ARISTRAIN in Spain - Majority shareholding in Belgo-Mineira

1999 : Takeover of UCIN in Spain

2000 : Sale of the shareholding in Samitri

Usinor

1948: Creation of Usinor, which takes over from Forges et Aciéries du Nord et de l'Est and Hauts
Fourneaux, Forges et Aciéries de Denain-Anzin

1948 : Creation of Sollac, which takes over from the Lorraine steel industry
 63

1964 : Creation of Sacilor, the origin of which dates back to the Wendel group

1981 : Nationalization of Usinor and Sacilor

1986 : Merger of Usinor and Sacilor

1990 : Sollac absorbed by Usinor

1991 : Ugine absorbed by Sacilor

1994 : Special steels grouped together within the Aster holding company

1995 : Privatization of Usinor-Sacilor

1997 : Usinor-Sacilor becomes Usinor

1998 : Acquisition of Cockerill-Sambre, owner of EKO Stahl

1999 : Re-organization of the Usinor group

The Initial Bid and the Rejection

January 14: LN Mittal talked to Arcelor CEO Guy Dolle about the possibility of Mittal Steel
acquiring Arcelor. Guy Dolle categorically turns Mittal down.

January 27: Mittal Steel launches a formal takeover bid for $22 billion dollars.

January 29: Arcelor rejected the offer and the French government said it has "great concerns" about
the merger. Arcelor has plants in France.

The market sent Arcelor's Paris-listed shares soaring 29%, to EURO 28.6. Mittal shares listed in
Amsterdam closed up 6.2%, at EURO 27.63. Steel shares around the world also rose.

Mittal said that Arcelor Chief Executive Guy Dolle wasn't positive about the approach, but he was
confident Arcelor's shareholders will back the bid.

A tie-up between the two companies would create a company with $70 billion a year in revenue and
the most global production capacity in the industry. Arcelor is primarily a European producer while
Mittal is scattered around the globe.

The next largest producers after Mittal and Arcelor are Nippon Steel Corp and Posco.
 64

Mittal would become the leader in providing steel to the automotive industry in Europe and the U.S.,
and would lead in the North American Free Trade Area in appliances and packaging.

Hostility and Racism

There was a lot of hostility by Arcelor‘s Management Board as they felt that Mittal Steel was
resorting to underhanded techniques to merge with them. They dismissed the idea of a merger with a
"company of Indians".

The European Union said it was against racial discrimination and the issue would be treated only on
commercial considerations.

There was a lot of controversy where racist remarks were made against LN Mittal.

The bid stirred up passions amongst politicians, other leaders, and common man. With the European
Commission being accused of protectionism and racism, Arcelor's CEO, Guy Dolle, offered a laundry
list of ills in Mittal Steel because of which the merger should not take place.

In London, a columnist for The Guardian spoke of how the bid unleashed a new wave of 'economic
patriotism,' adding that Mittal and his family were often portrayed as aliens -- 'the Indians' -- rather
than as global entrepreneurs.

Increasing Offers and Pressure

April 19: Mittal Chairman and Chief Executive Lakshmi Mittal calls Arcelor Chairman Joseph
Kinsch to ask for "friendly discussions'' about revising his proposal in return for support from
management.

April 28: Mittal tells Kinsch he is ready to make "significant corporate governance changes'' and
revise the offer.

May 4: Kinsch says the offer is "wholly inadequate'' and Arcelor has significant concerns about the
real value of Mittal shares.

May 9: Mittal Steel says it is ready to revise the offer and make corporate governance changes "in the
event of a recommended deal.''

May 10: Arcelor Chief Executive Guy Dolle describes as "insufficient'', Mittal's offer to revise its bid.

May 11: Arcelor says it has filed a lawsuit in the United States against Mittal for copying a type of
steel for the auto industry.

May 12: Both companies announce better-than-expected results, although profits suffer due to higher
costs of raw materials. Arcelor toughens its stance, announcing plan to spend up to $9.5 billion to buy
back almost a quarter of its shares.

May 18: Mittal formally launches its offer.

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May 19: Mittal raises its offer by 34 percent, bringing it up to $32.90 billion and says it would reduce
the Mittal family's stake in the company.

May 26: Arcelor announces a deal with Severstal that will give it a controlling stake in Russia's
steelmaker and $16.4 billion for 32 percent of Arcelor.

June 2: European Union antitrust regulators approve Mittal bid on condition the new combined steel
giant sell off some of its facilities if the bid succeeds.

June 6: The European Commission approved the Mittal-Arcelor merger.

June 9: Arcelor confirms it has held talks with Mittal on the term of its bid.

June 12: Arcelor rejects Mittal revised bid and recommends shareholders accept deal with Severstal.
Arcelor says the revised offer still undervalues the company and urges shareholders to support the
Severstal merger instead, but mandates its board to explore possible improvements to the Mittal offer
at a later date. Mittal says it won't budge on price, but is prepared to make changes related to
corporate governance.

June 20: In a bid to woo Arcelor, Severstal revised the terms of its merger proposal, saying that
majority owner Mr. Alexei Mordashov would settle for 25 per cent of the new group rather than the
initially proposed 32.3 per cent and raised its offer by about 2 billion.

June 19: Arcelor cancels shareholder meeting on share buyback amid growing shareholder
opposition.

June 21: Market regulators in France, Spain, Luxembourg and Belgium suspend Arcelor shares,
saying they want more clarity on the state of talks with Mittal and Severstal.

June 24: Talks on between Mittal Steel and Arcelor

June 25: Arcelor's board agrees to sweetened bid from Mittal worth about $32.3 billion.

June 30: Paving the way for a merger between Arcelor and Mittal Steel, an overwhelming majority of
shareholders of the Luxembourg-based firm vote down a merger proposal from Russia's Severstal.

57.95% per cent of Arcelor shareholders voted against the Severstal offer.

In the process, they accept Mittal Steel's $32.3 billion offer, which was approved by the Board of
Arcelor on June 25 after a five-month long battle.

Arcelor had recommended acceptance of share and cash from Mittal Steel valuing at about $32.3
billion, which creates a group with 3, 20, 000 employees producing about 116 million tonnes of steel
annually, accounting for about 10% of the world market.

Arcelor chairman Joseph Kinsch told shareholders that the long fight with Mittal was worth it, saying
the India-born steel tycoon L N Mittal and the markets had finally recognised Arcelor's "true value."

"We have created in five months more than EURO 12 billion in value," Kinsch said.

Snapshot View of the Merger

 66

Transaction highlights

• Arcelor Mittal: A merger of equals with shared management for successful integration

– Ownership of 50.5% for Arcelor investors and 49.5% for Mittal Steel investors

• Recommended transformational merger of the world‘s two largest steel companies with unrivalled
global footprint

• The undisputed industry leader

• Creation of company with unprecedented scale and diversification to manage cyclicality, stabilize
earnings and increase shareholder returns

• Annual synergies increased by 60% to €1.3bn (US$1.6bn)

The Combined Vision

 Combination driven by simple and compelling industrial logic, spurring consolidation in a

fragmented industry

 Creation of European-based global champion best positioned to capture new market

opportunities

 New entity will capitalize on strong European heritage and presence, as well as leading
position in North America

 Enjoy unparalleled access to new high-growth markets: Central and Eastern Europe, Africa,
China and Latin America

 Company will be able to service global customers with broad and deep product offering

 High level of direct access to raw materials making group more profitable and less cyclical
than most of its peers
 67

The Combined Strategy

 Consolidate regional high-end leadership into global customer platform

 Achieve industrial excellence through state of the art assets sustained by sound capital
expenditure and best in class R&D

 Realize commercial leadership through strong distribution channels

 Capture growth in BRICET countries, utilizing existing leadership in high-end products in

mature economies

 Accelerate growth in key emerging markets such as India and China

 Achieve cost leadership and operational excellence across product range

 Maintain high level of vertical integration to hedge against raw materials price fluctuations

 Focus on people management and social responsibility

A Win-win transaction for all stakeholders

From Mittal Point Of View

 Merger would take consolidation to a new horizon.

 Successful distribution business in Europe.

 Mittal Co. to have leadership position in high end segments in Western Europe with
strong R&D capabilities.

 Low Cost slab manufacturing in Brazil that can be expanded for export to Europe and
North America.

 Increased free float and liquidity

From Arcelor Point Of View

 Mittal Company will accomplish Arcelor‘s stated plan in the most efficient way.

 Arcelor becomes a global player.

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 Operations in high-growth economies with low-cost, profitable assets and local operating
expertise in numerous emerging markets.

 Leadership position in high-end segments in North America, with strong R&D

capabilities.

 Access to very low cost slab potential in Ukraine to serve West Europe.

 Access to raw materials and upstream integration.

Key Contract Terms

 Other offers

Arcelor has agreed they will accept no other offer for Arcelor shares unless it is a superior
offer for the entire share capital of Arcelor

o No break-up fee required in contract

o If shares are issued under the Strategic Alliance Agreement, corporate governance rules
and certain other conditions terminate

 Standstill

Mittal family has agreed to a standstill at 45% of share capital. Exceptions in certain
circumstances - consent of a majority of the independent directors or in case of passive
crossing of such thresholds

 Lock up

Mittal family has agreed to a 5-year lock-up, subject to certain exceptions, including the
right to dispose of up to 5% of the share capital after the 2nd year

Increased identified synergies

Marketing and trading (US$570m)

 69

• Accelerated growth of distribution in developing regions e.g., CEE, CIS, Africa

• Cross selling through enlarged and enhanced product portfolio

• Optimisation of order book for cross product flows and logistical savings

Manufacturing and process optimization (US$470m)

• Benchmarking and best practice alignment across all operating assets

• Optimization of utilization of assets through selected mill product specialization

(e.g., productivity gains with better sequencing rates, fewer changeovers)

• Logistical and mill optimisation through transfers of semi finished products

Purchasing (US$500m)

• Scale effects on standardization of procurement contracts

• Optimisation and efficiencies from maintenance services, subcontracting, spare

parts and consumables

• Logistics savings on optimisation of raw material flows

SGA (US$60m)

• IT synergies

• Reduction in external contracts e.g., consulting services

• Duplication in commercial network avoided

Unmatched Financial Strength

 70

Arcelor Mittal pro-forma key

Arcelor Mittal (US$bn)
financials

Revenue 2005 US$77.4bn

EBITDA 2005 US$14.4bn

Margin (%) 18.6%

Net Debt Q1-06 * US$24.0bn

Gearing 56%

Net Debt / EBITDA 1.7x

Cash flow from operations 2005 US$9.7bn

Capex 2005 US$4.1bn

Free cash flow 2005 US$5.6bn

Financial policy for sustainable shareholder value creation

 Efficient capital structure and return of excess cash to shareholders

 30% dividend payout ratio over the cycle

 Unparalleled financial flexibility to pursue internal and external growth opportunities

 Commitment to investment grade credit rating

 Maintain high returns on capital

CONCLUSION

The largest steel company in the world is created, a company larger than the next 3 largest steel
companies combined. According to the press releases issued by the companies, ―Consolidation
creates value in the steel industry‖.

Arcelor is the number 1 steel producer in the world by revenue.

Mittal is the number 1 steel producer in the world by shipments.

• Both companies have been leaders in steel industry consolidation

• Consolidation is contributing to increased discipline by producers

 71

• Combination of top two players takes consolidation to a new level

Arcelor is primarily a European player, while Mittal has interests all around the world. Together,
they form

• World‘s number 1 steel company

• Leading positions in 5 major markets

• 61 plants, 27 countries

• Numerous international partnerships and Joint Ventures

• Opportunity to grow in China and India

Why has LN Mittal not concentrated on India so far? One can speculate that he was going at it
step by step, conquering the world markets one by one and now, only India is left.

Till now, he has shown virtually no interest in the Indian market.

Recently, he has shown interest in investing large amounts of money in Jharkhand and Orissa,
amounting to about Rs. 40,000 crore.

Logically his next stop would be Asia, as China and India are the fastest growing steel
consumption markets. In 2005, the US witnessed a 15.4% fall in consumption, and the fall in EU
was 11.7%. Total global consumption still managed to rise 5.3%, thanks to a massive 25.9% rise
in demand in China and an impressive 7-8% demand in India.

Some analysts say that Mittal had to pay a much higher price than was actually required to merge
with Arcelor. He also did not get the best deal that he could have, as his controlling stake in the
newly formed Arcelor-Mittal is lower than what was originally aimed for.

Mittal Steel is the world's largest steel producer at 70 million tonnes a year, almost double the
world's second largest producer - Arcelor. October 2005 saw the first battle between the big two-
Mittal and Arcelor, both bid for Ukraine's largest steel mill - Kryvorizhstal in an open televised
bid. Mittal beat Arcelor to the $4.8 billion deal, much more than the $3 billion at what analysts
had valued Kryvorizhstal.

Reports suggest that it was this bidding war with Arcelor that gave L N Mittal's son Aditya, the
CFO of Mittal Steel, the idea of taking over Arcelor. His reason was that it would eliminate any
future messy battles.
 72

Why was the deal so important for LN Mittal? In a snapshot, the Mittal-Arcelor combine would
have an even larger share of the global steel market and would be able to get a better grip over
steel pricing.

Severstal had to be paid legal fees as they had been completely cut out of the deal. Now Severstal
has threatened a legal battle and a fresh bid. If that happens, the immediate future, at least, will
not be glinting enough to Mittal‘s advantage.

It has been a win-win transaction for both parties.

• Creating the undisputed leading global steel company

• Growth and value creation opportunities maximized through unique global platform

• Step change in steel industry consolidation

• Significant synergy potential

• Financial strength and strategic flexibility reinforced

• Leadership in R&D/product development

• Significant free float and liquidity

• Re-rating potential

• Positive for all stakeholders

In the end, a European company had to finally give in and merge with “a company of Indians”.

HP-COMPAQ MERGER

The merger of HP and Compaq is a very good example of ―Horizontal Mergers‖. HP is one of the
leading computer and printer technological company whereas Compaq has almost the same profile.
They may differ in some products line but their core is the same that is computers industry. Both
companies operate in the market with a distinctive image, and the worth is excellent. HP & Compaq
belong to same industry and have the same stages of production that‘s why this merger is called
horizontal merger.

Company Introduction:
Bill Hewlett and Dave Packard were the founders of one of the Technological giant
companies in US, Hewlett Packard. The company started its business in 1939 with the
product of an electronic test instrument used by sound engineers. Its business has been
expanded to 170 countries having 371,000 employees as their workforce all over the world. In
2009 HP‘s ranking in fortune 500 companies is 9th. Revenues is coming and company is enjoying
good place in the market.
 73

Another marvelous invention made by Rod Canion, Jim Harris and Bill Murto was
opening the ―Compaq Computer Corporation‖. The company was inaugurated in 1982
and merged with HP in 2002 making a deal of $87 billion and emerged as a technology giant

Transaction Summary
Structure: Stock-for-stock merger
Exchange Ratio: 0.6325 of an HP share per Compaq share
Current Value: Approximately $25 billion
Ownership: HP shareholders 64%; Compaq shareholders 36%
Accounting: Purchase

HP & COMPAQ SYNERGY

Cost leadership:

The synergy benefit followed by HP and Compaq is the cost leadership. According to Fiorina (CEO)
after merger the cost of material purchased has been reduced by 3% - 4% of both the companies. Here
HP focuses upon reduced cost and to capture more market share. The company is quiet successful in
doing so, as the gross profit ratio has been decreased from 2001 (28.61%) to 2003 (25.51%) and the
objective of cost reduction has been achieved.

Strong Growth:

According to Fiorina there is a huge opportunity in the market and industry, which promotes
stronger as well as a stable growth. Predicting the trends in the industry, will change and expected
to grow by 10% so company should align their objectives along with this growth pattern in order
to sustain in the market. According to the figures 2002 sales of HP was $56,588 million which
was increased by 29.11% and reached up to $73,061 million in 2003 which once again got
projection of 9.37% and reached the level of $79,905 million in 2004. Here the objective of the
company to grow has been achieved after doing merger. The uniqueness of boosting the sale of
Compaq is the use of direct selling approach whereas HP lack in this facility, so after merger they
both got benefitted from it that after merger both the companies remain successful in reduction of
their selling and administrative expenses.

HP’s GROSS PROFIT RATIOS (2001 - 2003)

Years 2003 2002 2001

GP Ratio 25.51% 25.81% 28.61%

Bringing forth their utilities for improvement to their products technology wise and providing
better value added services to their customers is another benefit drawn.

Customer is very much simplification oriented. Focusing them Craig Barrett (CEO, Intel Corp)
commented "Combining their hardware skills and service efforts get them much closer to critical
mass across the board". With the merger there hardware and software companies worked a lot
 74

which resulted in higher sales and decreased costs. Following are the figures of net sales
generated by HP

(HP’s Net Sales from 2002 – 2004)

Year 2004 2003 2002

Net Sales 79,905(millions) 73,061(millions) 56,588(millions

One other benefit drawn from this synergy is the increase size of the company Whereas some extra
employees who tends to be the burden on the organization were downsized to rectify the business
processing and cut the additional cost. Beside this there is a rapid growth shown in the value of assets.
According to financial analysts assets of the company has been increased in 2001-2002 and in 2002-
2007 by 28%. The main reason for this gradual uplifting trend drives from the benefits of merger.

Downsizing:

The essence of this merger is not just to cover the technological and market gap on both the sides of
the companies, but also to cut shot those employees who possess burden on the organization.
According to Moller & Brady (2007) the company estimated to do cost reduction by rightsizing the
employees‘ upto $2.5 billion. The management sets this target and achieved it so well that it helped
them to reduce further $500 million in the next 18 months (Moeller & Brady, 2007).Companies
policies were growing more and better with the passage of time after merger.

ANALYSIS

2009 RESULTS

VALUATION RATIO: HPQ

Price Earnings Ratio (TTM) 16.72%
Price to Cash Flow 8.67
Price to Sales (TTM) 0.79

PER SHARE RATIO: HPQ

Dividend per Share (TTM) 0.32
Earnings per Share (EPS) 3.14
Dividend Yield 0.62%
Dividend Payout Ratio 10.19%

FINANCIAL STRENGTHS: HPQ

Quick Ratio 0.91
Current Ratio 1.22
Return on Equity Ratio (ROE) 19.49
Return on Assets (ROA) 7.14
Return on Invested Capital (ROIC) 14.27
Inventory Turnover 12.06
 75

Particulars 2000 2001 2002 2003 2004 2009

Net Income $ 3697 408 -903 2539 3497 7660
Total Assets $ 34009 32584 70710 74708 76138 114799
Return on Assets % 10.87 1.25 -1.28 3.40 4.59 6.67

Return on assets (ROA) is basically used to compare the efficiency of the management, as how best
the firm‘s assets are being used to generate what quantity of income. It provide grounds for the top
managers to evaluate the working and efficiency of their management. HP and Compaq got merged in
2002 and the graphs replicates that HP has shown its quality of work at 10.87% in 2000. This is
because of their focused vision and the changing trend in the market. During this time revenues were
at the peak and company is involved in specialization, thus resulted in making lot of money and
showing efficient use of the company assets. After that a declining trend has been viewed so much so
that in 2002 it has gone to losses. The trenches of decreased sale and decreased revenues could not
remain all the time. One reason quoted by the CEO is that HP has gone for merger with Compaq, and
concentrated majorly in expansion of their business. This fact cannot be forgotten as the deal marked
itself as one of the biggest in the telecom sector making a transaction of $87 million. Before the sun
rise of year 2003 HP suggested new policies and changing the structure of the management. Fiorina‘s
primary focus in to reduce the expenses and to reduce the purchasing cost of the raw material.
According to facts she was successful in doing so. The cost of raw material has been decreased by 4%
after the merger. After the merger employees costs has been reduced and company has moved
towards specialized people for specialized place. A sudden rise in efficiency has been seen from the
management and the ROA increased to 3.40% in 2003. This trend showed growth in the subsequent
years and now in 2009 it has been raised to 6.67%, which shows the company‘s advancement and
positive attitude towards the changing environment of market.

Particulars 2000 2001 2002 2003 2004 2009

Net Income $ 3697 408 -903 2539 3497 7660
Shares $ 1947 1939 3044 3043 3015 2440
EPS $ 1.90 0.21 -0.30 0.83 1.16 3.14

The contrast between the net revenue earned by the company and the number of shares gives the total
earnings per share. It is considered as one of the best tool used to formulate the performance of the
firm to the public. In the year 2000 the EPS of HP is at its hike as compared with the past decade i.e
$1.90. With the advent of acquisition with Compaq there was less availability of income left with the
company. Hp utilized almost all of its revenue gathered from the past fiscal year 2001-2002 to make
this acquisition successful.

In the year 2002 EPS decreased below the bottom line i.e. -0.30. This is because of; Hp is expanding
their business and paid whatever the value of Compaq be and the value of all the assets, liabilities as
well. As a result less money is available with the company. In the consecutive years of 2003 and 2004
the management reduced their costs and worked together for product differentiation.

Particulars 2000 2001 2002 2003 2004 2009

Net Income $ 3697 408 -903 2539 3497 7660
 76

Total Equity $ 14209 13953 36262 37746 37564 40517

Return on Equity% 26.02 2.92 -2.49 6.73 9.31 18.91

ROE basically refers to as how much the income is generated out of the business from the
total shareholders‘ equity as represented in the balance sheet. In the year 2000 the ROE
figures were 26.02% which was the best as compared with the previous decade. The company
is making good use of the wealth provided by the shareholders. Whereas in the year 2001
there is a decrease in the equity and the net revenue, but the fluctuation is greater this time as
a result ROE decreased to 2.92%. The reason could be that the company is planning for the
acquisition. In 2003 they first got the fruit of synergy with an overall increase in percentage to
6.73%. With the passage of time technological, financial and R&D departments made drastic
improvements. Entering the market with innovative products and providing best quality to the
customers are the tools used by HP during these subsequent years, thus resulted in an increase
in ROE up to 18.91 till 2009. It has been concluded that the merger of HP and Compaq
resulted in financial distress but later it has been proved that the merger was a great success.
Combining the company‘s base in terms of profit, assets, and technology started showing its
effects in the market and towards its competitor‘s i.e. DELL. After mergers the figures prove
that the company is making efficient use from the synergy strategy & providing greater value
to its shareholders.

INDUS IND BANK- ASHOK LEYLAND FINANCE

It was in 1994 that Srichand P Hinduja, head of the Hinduja Group, conceived the vision of
IndusInd Bank - the first of the new-generation private banks in India - and through collective
contributions from the NRI community towards India's economic and social development,
brought the Bank into being. The Bank's commitment to technology was evident in the fact
that it launched Internet banking in 1996, way ahead of any of the other players in the
industry.
 77

IndusInd Bank derives its name and inspiration from the Indus Valley civilisation. The Bank
combines a spirit of innovation with sound business and trade practices. Continuing this
tradition, IndusInd Bank has become the first commercial Bank to achieve certification for its
'Entire Network of Branches' under the ISO 9001:2000 Quality Management System.

Now, IndusInd Bank is on an accelerated growth path and has chosen the retail banking to be
the thrust area. At the same time, the Bank would maintain the prime quality of assets. With a
decade of experience behind it, IndusInd Bank is now poised at the threshold of much bigger
things to come. Bhaskar Ghose, Managing Director, IndusInd Bank revealed this today at a
press conference in the commercial capital of India - Mumbai. He said, "The Bank has been
earning profits from its very first year of operations and has also been shareholder friendly in
the sense that dividends have always been given in this decade-long existence."

The financial performance of the Bank has been very impressive, to say the least. IndusInd
reported a net profit of Rs 178 crores for the period April-December 2003, compared to Rs 68
crores for the same nine-month period in the last financial year - a growth of 162%. A 61%
increase in operating profit - from Rs 188 crores in April-December 2002 to Rs 302 crores in
April-December 2003 - has also been seen. This has resulted in EPS being 91% for the year
2003.
Contributing to this sterling performance is the closely managed treasury operations of the
bank. The focus of the bank is on building relationships, development of new products and
services, technology up gradation, and increasing the number of branches as well as offsite
ATMs to service customers better. Technology has always been a cornerstone for the Bank,
and the technology subsidiary will be utilized to its fullest extent to help the Bank attain
technological excellence. The Bank has introduced a new paradigm in internet banking - on-
line access to personal bankers - which has been made possible by the Bank's investment in
advanced technology solutions in partnership with Dublin-based CR2, a global provider of
channel banking and card payment solutions. At present, IndusInd Bank has 61 branches, 12
Extension counters and 80 offsite ATMs. The Bank has displayed its commitment to global
benchmarks in retail banking by proactively adopting the requirements of ISO certification
for its entire network.

Ashok Leyland finance was India‘s second largest NBFC with assets over Rs 3000 crores at
the time of merger and a reported client base of 5 Lakhs with around 500 offices across India
and a demonstrated capability to generate high quality assets/revenues. The merger was
approved by RBI on 16th June, 2003 a merger between Hinduja groups NBFC Ashok Leyland
with Indus bank. IndusInd Bank's proposed merger with Ashok Leyland Finance Ltd.
(ALFIN) further strengthened the retail focus. The merger has helped in consolidation,
augmenting our customer base and increasing the Bank's geographical penetration. It
combines the strong points of two institutions - the Bank's capacity to mobilise stable and
economically-priced funds and the NBFC's ability to ensure superior returns through high-
yielding loans. The synergy is ideal, since there is very little overlap between the products
offered by ALFIN and those offered by the Bank. This business mix along with the new
initiatives would help the merged entity to derisk its operations from sectoral fluctuations.
The 500,000 strong client base of ALFIN will also be available to IndusInd Bank for cross
 78

selling the Bank's retail products and services. This will add impetus to the process of broad-
basing the retail operations.

EVA ANALYSIS

THE EVA calculated is similar to that as described in the first sample and all the mergers
analysed have been calculated in the same manner so the steps have been omitted and only
the final EVA of the premerger & post merger scenario has been added.

ECONOMIC VALUE ADDED

year ind ask indask

2001 412.9236 179.7

2002 442.4567 152.94

2003 382.3554

2004 680.6126

2005 687.238

2006 749.1794

2007 1078.277

2008 1371.972

2009 1693.863
 79

The EVA analysis clearly shows that IndusInd bank clearly has higher EVA than ASFL
before the merger even though both has had a positive EVA and created wealth for its
shareholders. The merger created same value in the merger year but the synergy effect has
helped in creating shareholder value in the next five years with value increasing as the year
progressed and touching the highest point in the year 2009. This merger has created value to
its shareholders. The EVA both companies has been on the positive side creating higher value
after merger and has been maintained throughout high shareholder value and there has been
an alignment of interests.

JK TYRES – VIKRANT TYRES

JK Tyre & Industries Limited engages in the manufacture and distribution of tires, tubes, and
flaps for the transportation industry primarily in India and Mexico. The company offers tires
for trucks, buses, light commercial vehicles, passenger vehicles, and farm vehicle tires. It also
provides truck radials, car radials, and off the road tires. In addition, the company franchises
retail stores under the JK Tyre Steel Wheels brand name. It exports its products to the United
States, Europe, South America, and the Middle East. The company was formerly known as
J.K. Industries Limited and changed its name to JK Tyre & Industries Limited in April 2007
in order to capture the brand ‗JK Tyre‘ and its value in the company‘s name. JK Tyre &
Industries Limited. The company was incorporated as a private limited company in West
Bengal in 14th February, 1951. Until 31st March 1970, the company was engaged in the
managing agency business. Thereafter, the company decided to undertake manufacturing
activities and obtained a letter of intent in February 1972 for the manufacture of automobile
tyres and tubes. JK Tyre & Industries manufactures and supplies tyres and tubes, and steel-
 80

belted radial tyres. The Company manufactures Radial and Bias 4-wheeler tyres for trucks,
buses passenger cars, LCV, tractor etc.

EVA ANALYSIS

year jktyres vktyres jk

2001 -15.61 -4.85

2002 -49.11 -2.11

2003 -3.34

2004 -
52.97

2005 -
14.96

2006 43.25

2007 90.70

2008 23.85

This merger has been a case of both companies unable to create shareholders value with EVA
being negative for both the companies. The importance of analysing the post merger scenario
over a larger time frame can be gauged from the merger as the company creates a positive
EVA 3 years after the merger and consistently maintains the EVA . However the value has
 81

followed a sinusoidal effect in this case with EVA changing from negative to positive. One
major finding of this merger is that the EVA value has been minimum in the year 2004 when
the economy of the country was developing and was in a transitional stage and stabilizing the
value created after the economic growth started from 2005 onwards.

CADILLA HEALTH CARE-GERMAN REMEDIES

Cadila Healthcare' is an Indian pharmaceutical company head quartered

at Ahmedabad in Gujarat state of western India. The company is the fifth largest
pharmaceutical company in India, with US$290m in turnover in 2004. It is a significant
manufacturer of generic drugs. Cadila Pharma have developed a drug named Roserin which
has reduced the cost of curing TB by 33%. Cadila Laboratories was founded in 1952 by
Ramanbhai Patel (1925-2001), formerly a lecturer in the L.M. College of Pharmacy, and his
business partner Shri Indravadan Modi. The company evolved over the next four decades into
one of India's established pharmaceutical companies.

In 1995 the Patel and Modi families split, with the Modi family's share being moved into a
new company called Cadila Pharmaceuticals Ltd. and Cadila Healthcare became the Patel
family's holding company. Cadila Healthcare did its IPO on the Bombay Stock Exchange in
2000. Its stock code on the Bombay exchange is 532321.

In 2001 the company acquired Indian pharmaceutical company called German Remedies.

German remedies was incorporated on 25th November, as a private Limited Company under
the name German Remedies, Ltd. in 1952

The name was changed to German Remedies & Trading Co., Ltd. The trading department
was closed in 1962 and the name was changed to German Remedies Private Ltd. It became a
public limited company on 22nd May, 1973. The Company entered into agreements with
West German companies for scientific and technical collaboration in respect of the products
manufactured by the Company. German Remedies is engaged in the manufacture of
antibiotics, pharmaceutical drugs, pharma chemicals, oilmat gel, powder, liquids, oral and
injectibles. The merger of CHL with GRL will yield benefits of synergy and help entry into
new therapeutical markets. The company is a leader in gastrointestinal and vaccines segments
with strong brands. The merged company will rank 4th in the domestic formulation market
with 3.5% market share and will have a portfolio of 292 products. There is no overlap of
brands between the two companies. CHL is giving thrust to exports and has objective to
achieve 25% revenues from exports after merger. Post merger the company commands a
market share of 3.82 %.As per the ORG report of January 2001, CHL occupies 6th rank and
GRL occupies 30thrank in the domestic formulations market. The merged company is likely to
occupy 4thposition with about 3.5% market share. The merger will give CDL an entry into
respiratory (21% sales), female healthcare (35%), gastro intestinal (13%) and anti-cancer
segments dominated by GRL. CHL has presence in the cardiovascular, anti-infective,
gastrointestinal and biological segments. There is no overlap of products between the two
companies.
 82

EVA ANALYSIS

year german cadila cadila

2001 -11.69 -100.12
2002 -43.44 9.32
2003 40.10
2004 29.21
2005 42.29
2006 96.19806
2007 62.13841
2008 66.67568

The merger here shows that both the companies have been in negative side of EVA and
shareholder wealth creation was minimal in nature with position of shareholder value created
of Cadila reducing before the merger and that of German remedies improving before the
merger. From the shareholder point of view the merger has been a success since the EVA or
the shareholder value created has increased consistently after the merger for the next five
years as the EVA has been strengthened by the increased synergy effect with EVA remaining
on the positive side since the merger. This shows that the merger has created value to
shareholders wealth.
 83

ASAHI INDIA- FLOAT GLASS INDIA

EVA CALCULATED

ECONOMIC VALUE ADDED

asahi
year india floatglass asahifloat
2001 26.35108 50.881438
2002 28.41652 64.617446
2003 67.751963
2004 88.60224
2005 89.985342
2006 91.592764
2007 73.471265
2008 60.666116
2009 114.39524

The merger is another example of shareholder value creation . The EVA of both the
companies have been positive before the merger as well. The shareholder value created is
however higher in the post merger scenario . The EVA after merger has been higher
continuously for every year for the next five years after the merger. The synergy effect has
worked well in this merger and shareholder value has been greatly enhanced by the merger
with peak values achieved in three years continuously from 2004-06 followed by a still higher
peak value in the year 2009.
 84

SUPREME INDUSTRIES- SIPTAL CHEMICALS

year Supreme siptal Supreme

2001.00 15.03 1.61
2002.00 20.46 3.20
2003.00 -2.64
2004.00 25.87
2005.00 26.17
2006.00 25.29
2007.00 -5.92
2008.00 13.57

The EVA analysis shows that the merger was a fruitful one for the shareholders with the
value created increasing after the merger considerably. Supreme industries has had a very
high EVA value before the merger as compared to siptal , the merger can be classified as a
strategic merger with long term goals . The merger of this type is called conglomerate merger
as the company is trying to expand its business portfolio as well as creating shareholder value.
Except for a small deviation in 2008 , the merger has been highly encouraging to
shareholders.
 85

TVS AUTO COMPONENTS- LAKSHMI MACHINE WORKS

EVA CALCULATED

year LAKSHMI TVS TVS

MACHINESWORKS AUTO

2001 7.062241 37.67504

2002 10.40786 9.588555

2003 15.68628 25.98239

2004 -59.44277

2005 -26.33756

2006 11.080588

2007 -12.52265

2008 -14.5645

2009 -11.24062

The merger has been a failure as far as wealth creation of the shareholders are concerned .
Both companies performed better before the merger , but post merger the wealth created to
 86

shareholders has been decreased as EVA has been on the negative side with only a small
revival in the year 2006. The performance of TVS was better in the premerger scenario and
became worse after the merger for the shareholders.

TVS AUOLEC-SUNDARAM FASTNERS

SUNDARAM
YEAR TVS SUNDARAM FASTNERS
2001 2.9608748 26.165176
2002 4.4779562 12.460539
2003 9.0046442 22.986791
2004 51.19032
2005 71.74779
2006 60.62181
2007 80.56082
2008 61.04515
2009 101.6119

As can be seen from the charts the value creation for the shareholders has increased more than
twice after the merger due to the synergy effect. Both Sundaram Fastners and TVS have had
 87

EVA positive. The acquisition made by Sundaram has been a strategic one with enhanced
value for its shareholders. So the merger has helped in creating higher value in all the five
years post the merger with the highest value in the year 2009 and the merger has been lesser
effect by the economic crisis though there has been a dip in the EVA during 2006 & 2008 but
still has created the higher than the lowest EVA created in the year 2004.

HINDUSTAN CHEMICALS-TATA CHEMICALS

YEAR HINDCHEM TATACHEM TATACHEM

2002 -14.1975 -104.2966
2003 22.32682 -101.1674
2004 -154.5406
2005 104.98431
2006 174.09607
2007 -37.48959
2008 -34.77342
2009 145.00253

The merger was kind of hostile in nature as TATA was clearly struggling to create shareholder value.
The merger however helped in increasing the shareholder value of TATA after the merger. The
merger however was capable of creating shareholders value. The shareholder value was effected in
the two years because the economic crisis however the EVA has risen again in the year 2009 creating
value to its shareholders. We can infer that the merger has created value to its shareholders of both the
companies more than that when both the companies where separate entities so the merger is a success
in creating value to its shareholders.
 88

RESULTS & CONCLUSION

1) From the above EVA analysis it can be inferred that mergers create values to the
company & its shareholders. It can be concluded that companies in the sample size
considered have gained after the merger.

2) Out of the twelve mergers considered for the sample nine have been clear examples
of shareholder value creation. The three sample mergers have shown mixed or
negative results with mergers only creating a small change in the wealth created or
EVA has been negative.

3) The results show 70% success in the sample size selected companies has shown
positive results and there has been an increase in the EVA of the companies and they
are performing exceedingly well post merger.

4) Based on the significant value of EVA post merger we can infer that mergers &
acquisitions are a strategic tool in creating value to its shareholders.

5) Mergers create synergy effect which improves the economies of scale, operational
efficiency, and market share.

6) The mergers which are horizontal in nature have a better ad higher chance of creating
shareholder value.

7) The mergers which are also done in order to eliminate competition and create market
share also help create value.

8) The mergers or acquisitions which are done following the merger or acquisition done
by a particular industry leader has done is less likely to succeed in creating value to
its shareholder.

9) The risk of stagnation in the industry can be avoided by making vertical mergers or
diversification of the company i.e. a company should use horizontal mergers while
being in the expansion phase and use a vertical merger when the company is in the
maturity phase to create value to its shareholders.
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REFERENCES

1. http://www.m-and-a-explained.com/

2. http://www.manda-
institute.org/docs/m%26a/kpmg_01_Unlocking%20Shareholder%20Value%20-
%20The%20Keys%20to%20Success.pdf

3. http://www.ftc.gov/be/workpapers/wp243.pdf

4. http://www.vjim.edu.in/Mergers.pdf

5. http://www.fenwick.com/docstore/publications/Corporate/M&A_List.pdf

6. http://media.wiley.com/product_data/excerpt/79/04714143/0471414379.pdf

7. www.directorsandboards.com/BBFall06.pdf

8. http://www.investopedia.com/university/mergers/mergers2.asp

9. http://www.efmaefm.org/efma2005/papers/262-van-frederikslust_paper.pdf

BOOKS REFERRED

1. MERGERS & ACQUISITIONS FROM A to Z

2. MERGERS & ACQUISITIONS – CURRENT ISSUE

3. SHAREHOLDER VALUE CREATION- CSES WORKING PAPER

4. MAXIMISING SHAREHOLDER VALUE – TECHNICAL REPORT

5. VALUE CREATION THROUGH M&A – EUROPEAN JOURNAL