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Introduction

An alliance occurs when two or more firms come together to create a unique organizational
identity. In a strategic alliance, the involved companies enter a legal agreement to share access
to trademarks, technologies and other assets. It is important to note that an alliance does not
form a new company. For example, Apple saw the potential of analytics in enhancing the user
experience across iPhones and entered an alliance with IBM.

In the case of a consolidation, two or more companies combine to form a larger company and
in the process, dissolve themselves. For instance, in 1987, consulting firm Klynveld Main
Goerdeler (KMG) merged with Peat Marwick Mitchell to create KPMG.
This paper explores the relevance of alliances and consolidation in the current Indian economy.

What led to Alliances and Consolidation?
Primarily, in banking sector consolidation can take place in three segments- privately
managed, the community dominated banks and state-owned banks. The reasons for the same
can be numerous but to pen down a few;

 To meet the needs of international banking standards (Basel 3), banks need capital, and the
government needs to infuse capital in several state owned banks to achieve those targets.
The growing NPAs and snail’s paced credit growth would hamper the set targets of
achieving Basel 3 norms
 With equity investors taking a backseat and refraining from investing in old private banks
with poor management
 The growing market of new private banks, who have created the hustle in banking sectors
by achieving efficiency in their operations, maintaining low NPAs and improving customer
satisfaction. It has put state owned banks under enormous pressure to hold on its customer
base, which has been eroding in last few years
 With the ever growing problem of Twin Balance Sheet (TBS), banking sector and the
corporate sector are under immense pressure. The corporates can’t repay their loans and
banks can not lend money due to high NPAs, leading to a deadlock in credit flow into the
system. If consolidated, the merged entities can abate these issues and can break the
deadlock

The pharma sector is also going through a critical period, and consolidation may just be the
right dose going forward. The few primary reasons for consolidation can be the need to expand
diversify the portfolio as most of the pharma companies cater to domestic and international
markets, need to get certified facilities outside India, access to multiple distribution channels
and enhance the presence in the market. Moreover, the ever growing pressure to reduce the
prices of medicines and make healthcare accessible to all has resulted in lowered margins. It
has contributed to the process of consolidation and alliances.

The Indian Telecom sector is now heading towards a stage of maturity with only a few
prominent players in the fray. Having 9-10 competitive mobile operators in a circle was not an

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Alliances and Consolidation

In nutshell. The Idea Cellular and Vodafone merger and Reliance Communication merger with MTS and Aircel along with other potential takeovers and mergers. The online real estate sector in India has numerous players having similar offering such as buying. better services. and acquisitions in e-commerce and on-demand service start- ups. the telecom industry is touted to get stable by the end of 2018. the optimism has led to expansions beyond measure for few companies and consolidation can play a pivotal role in the capital restructuring of those steel companies. now Indian telecom sector is up for a major consolidation that would ideally curtail the number of players to 3-4. which stands at Rs 1. Other than Tata Steel and JSW. The assets under stress of steel sector out of the total NPAs comprise around 29. retain talent. is the result of the maturity of the sector because of competitive pressures. In last decade. which was the fastest growing economy in the world has fallen to the fourth position as of August 2017. are on the rise and have found it difficult to generate positive cash flows because of cut throat price competition. On the consolidation curve. and much of it can be contributed to the advent of breakthrough technologies and few big players going all out to achieve maximum share. and it has already started gathering pace.5 lakh crore. stable prices. The consolidation in the steel industry is bound to happen in India. But. In such a circumstance. Essentially. it is favorable to have limited players with competitive offerings. the concentration is rising through acquisitions. consolidation allows firms to tackle competitive pressures. of the total loans to the industry. In maturing industry. It led to the merger of many players such as Housing. mergers. Commonfloor. selling and renting facilities.1 lakh crore. with investors becoming more prudent. It may lead to lower network usage. One of the major reason for the fall is the aftermath of demonetization. the next few years in the e. India. Future Group’s takeover of fabfurnish. The sector has a share of 10. India. The e-commerce space is on the cusp of ushering into maturity stage of industry life cycle. approximately Rs 3. technology and domain expertise through acquisitions. focus on long-term realizations and major improvement in capital efficiency.commerce may result in plentiful of consolidations and alliances. Excessive discounting to develop a customer base meant companies needed extreme efficiency to churn profitable number through volumes. The flip side of consolidation is that major players in tower companies would lose out on its substantial revenues because merged entities would likely to have a tower overlap. almost all other steel companies are under debt restructuring plans of the bank.aberration just a few years ago. The pressure created by restructuring and focus by the government of India to abate the impacts of bad loans in an industry would lead to consolidation and internal restructuring of a lot of companies in next two to three years. etc.com with PropTiger and Quikr with real estate Portal. when smaller market players 2 Alliances and Consolidation . Why are alliance and consolidation the way to go for the Indian Economy? The structured alliances and consolidations of companies will have sizeable positive impacts on the current scenario of the Indian economy.com.38%. which are in nascent phase or otherwise. The immediate effects of consolidation that industry can experience be reduced competition.24%. Flipkart’s deal with eBay. The consolidations. The acquisition of Jabong by Flipkart.

as an aftereffect of demonetization. In the early 2000s. the amount of non- performing assets in banks have increased to more than 8 lakh crores. The recent trend of unprofitable start-ups being acquired (for instance. is an effective method to expand  Possibilities of consolidation and alliances give risk-averse entrepreneurs a reason to launch their start-ups. Many entrepreneurs shy away from launching companies as they are apprehensive of its long term profitability. Consolidation. the support of a bigger player would help them weather the storm. large scale projects would attract the attention of global investors  In India. consolidation has always helped economies internationally. when India has lost its position as the fastest growing economy in the world. Before the alliance. Alternatively. Keeping the entrepreneurial spirit alive is very important for a developing economy like India  Historically. Penetration. FreeCharge was acquired by Axis Bank) give entrepreneurs a possible fall-back option and hence they are more motivated to launch their companies. and Avanta group) will give Adani Power more assets to enable large scale power plants. accelerated consolidation in the energy sector (for instance. The bank has risen in rankings to 45th position. consolidation in banking would enable the better capability to finance such projects. Thus. any move of merging a small fragmented market into one with a sizeable reach. consolidation came to fore in developing economies like China and Korea to improve their competitive conditions 3 Alliances and Consolidation . most firms essentially target a key geography or a select section of customers. any consolidation would enhance the global reputation of the industry. the SBI was in the 52nd place among world banks regarding assets. of which more than 6 lakh crores are in public sector banks. The merging firms will also get access to the resources available to the other.are facing the heat of drastic developments in the economy. For example. For example. A consolidation would help combine their efforts and help tackle the issue more effectively  Creating of a major player will also facilitate envisioning of large scale infrastructure and the funding required for the same. development of strategies and considerable investment. the consolidation has transformed it into a banking giant with a balance sheet of $37 trillion in assets. It will help the resultant major deal with all the challenges that the sector is facing and will face eventually. in 2017 Adani Power has acquired power plants from Lanco Infrastructure. thus. it will help redirect global attention to the Indian economy  A consolidation with a stronger player will enhance the capital efficiency of the firm. In the current scenario. Below are some of the advantages:  Consolidation and alliances would result in the emergence of a few strong players instead of a lot of smaller players. otherwise. Consolidation with competitors who dominate other markets will make it easy for the firm to penetrate other markets. Let’s study the recent SBI consolidation as an example. More recently. Additionally. However. Ideal Energy. would involve extensive research. some banks in Japan underwent consolidation to battle accumulating non-performing assets and impending recession.

Thus. there are several challenges to establishing a successful consolidation. Similar fears regarding job losses drive their agitation. the merger proves to be a temporary relief and the problem remains unresolved. the Government has laid out plans for the consolidation of more public-sector banks. Also. with foreseeable needs. the resultant company should still work towards resolving the problem  Consolidation would also bring in significant overhead regarding merging the technological infrastructure of both the companies Conclusion Industry experts believe the future will see consolidation in a lot of industries. labor unions have already started retaliating against the proposed privatization of the IDBI bank  Economists and analysts also say that consolidations initiating by problems like NPA accumulation. autos. the loyal customers may not buy from the retailer unless they are reassured of the value retention  Human resources of all parties are affected by any consolidation where cost rationalization is involved. Some of them are:  In the Indian market. any variation in the image of the company will affect the loyalty of those customers. Pruning the existing workforce will lead to job losses. the consumers. They argue that in either case. Among the industries pointed out are e-commerce. there are a lot of stakeholders involved. the market and the industry. 4 Alliances and Consolidation . The markets for both the companies should be studied properly. bad loans accumulation and loss of market share are an escapist approach to the problem. post the SBI consolidation. its advantages and challenges. a merger would result in an industry major who has the potential to achieve global recognition.Challenges It is imperative that all consolidation activities are planned and in resonance. and BFSI. However. Chinese major Alibaba’s entry into the e-commerce market by investing into PayTm and Snapdeal is a powerful indication that is e-commerce industry is moving in this direction. For example. For example. the employees. The takeaway is that any merger should be backed the right reason and should not be a runaway from an issue. if properly done. if an Indian retailer merges with an international major. customers tend to associate with the company name and its values. those customers tend to be the most loyal customers. and it is possible to be apprehensive of impending consolidations due to the fear of losing their jobs  Employee unions would also react to any announcements of consolidation. alliances and consolidation bring with it. In most cases. In the current Indian economic scenario. Any merger would significantly affect the companies. Most the merger. Post consolidation. and strategies to tackle the consequences the merger can make on the market should be developed.

pdf 5) http://ficci.PDF 4) http://troindia.edu.com/content/dam/kpmg/pdf/2014/06/KPMG_Taking_the_India_story _forward.in/rdocs/Speeches/PDFs/PSM1645A1230B973D4C5C8DC85E01B 5AB35BB.bond.in/journal/ijcesr/vol4iss7part3/38-39.pdf 5 Alliances and Consolidation .References 1) http://epublications.org.pdf 3) https://rbidocs.kpmg.au/cgi/viewcontent.rbi.in/SPdocument/20849/Bank_Consolidation.pdf 6) https://assets.in/SPdocument/20849/Bank_Consolidation.cgi?article=1259&context=ijbf 2) http://ficci.