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The Takeover of Raasi Cements
The Takeover of Raasi Cements
The Beginning
When India cements was passing through difficult times, in 1987-89 ,the then IDBI chairman S.S.Nadkarni had requested Mr.Raju to takeover the ailing company. But he had refused saying, One should not close in on a weak colleague. It all started when Raasi, suspecting the possibility of takeover from one of Indias big corporate houses, Kotak Mahindra, sought the help of ICL . ICL started accumulating Raasi shares from the market , and it was too late when Mr.Raju realised that ICL was in possession of larger number of shares than it was told to accumulate .ICL had already acquired about 9 percent stake in Raasi cements.
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The Climax
Raju also had the option of making a counter-offer to his shareholders, and weaning away potential sellers from Srinivasan. But this was an expensive option, (Raju needed approximately Rs 100 crore to make a counter bid) and he did not seem to have the funds to pull it off. In March 1998, realizing his predicament, Raju began to negotiate with Srinivasan to sell his 33% shares in the company. The battle of takeover saw India Cements end up paying a price that was around 60 percent above the then ruling market price of Raasis shares. However, this cost, according to some estimates was much lower when compared to the cost required for setting up a greenfield plant. The Rs 380-crore deal was one of the biggest ever acquisitions in Indian corporate history, and the first successful hostile takeover.
Poison pills :
Poison pills are any type of defensive maneouvre which a company might try in order to protect itself against unwanted takeover bids, eg stock issues, special distributions, spin-offs and management pay-outs. A corporate provision to combat hostile takeovers. The poison pill allows shareholders to acquire additional shares at below market price, thereby increasing the number of shares outstanding and making the takeover prohibitively expensive.
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Cont
Retaining SVCL was of strategic importance for both ICL and Raju. Having lost control of Raasi, Raju had no other foundation to build his empire on. On the other hand, ICL could further consolidate its presence in South India if it could control SVCL. The use of Poisson pill stretched the acquisition price too far thereby diluting the advantages of ICL . In October 1999 Raju sold his disputed 39.5% stake in SVCL to ICL in an out-of-court compromise settlement for Rs 1.15 billion. By the end of 2000, SVCL became a subsidiary of ICL.
Post-Merger results
ICL succeeded in bringing down the power & fuel costs, which ranged from34-37 percent to 28-29 percent. Advertising and marketing costs declined by more than 50 percent, from Rs.7.45 crores in FY 199798 to Rs.3.60 crores in FY 1998-99. The company embarked on a major technological up-gradation drive as well as capacity expansion. As a result of these post-merger measures, the company scaled up its capacity to ten million tons. Furthermore, it successfully stepped up its sales in Tamil Nadu and Kerala , achieving market share of 32 percent and 29 percent respectively.
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FINANCIAL SYNERGY
Debt raising ability of combined firm can be greater than the sum of the 2 firms ability before the merger. Substantial tax savings in investment income Economies of scale in flotation and transaction cost of securities. In a major drive to bring down the cost of debt and improve leverage, ICL intiated several measures after merger.
Along with Raasi, came its loss making paper and ceramics divisions. But ICL sold off the subsidiaries of Raasi and merged the cement division of the company with itself wef April 1st 1998. But the burden of acquisition financing was very high. Increase of debt has lead to increase in the cost of debt. Lack of realisation of financial synergy is evident from the PAT figures that has reduced from 8%-4% in 2001.
OPERATING SYNERGY
The basic premise of operating synergy is that economies of scale arise due to indivisibilities such as people and equipment which provide increased returns. During FY 1998-99 the combined cement capacity of ICL increased upto 8mn tpa. The company was able to reduce the cost through freight rationalisations, lower power and fuel consumption and by efficiently utilising its existing resources. As a result of efficient energy management , it was able to reduce the per ton power consumption from 114 units to 97 units.
Cont
The combines efforts to cut down employee costs resulted in reduction in manpower by 1012 employees during the year under Voluntary Retirement Scheme (VRS). Concerted efforts on brand building and value addition helped it achieve greater penetration in some parts of southern region. Its market share in the entire region increased from 15 percent in 1997-98 to 25-26 percent in 199899.However, this was much below the pre-merger expectations of 30-35 percent.
CONCLUSION
While the sales and margins have not improved to a desired level, the cost-cutting measures have already started yielding results. But the performance of combined company in the face of tough market conditions is not totally disappointing. It would be hasty to conclude that the merger has brought desired results. Synergies expected in the areas of sales expenses and material costs. Neither distribution nor material cost synergies were realized.
Thank You
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