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Indian business has entered an era where mergers and acquisitions have taken a front seat. A year after India's largest telco Bharti Airtel called off merger talks with South Africa's MTN, both companies recently announced that they had restarted talks to create a global powerhouse with revenues over $ 20 billion and a footprint stretching from the Cape of Good Hope across the African continent, West Asia and the Indian subcontinent. The potential deal, which seeks to tiptoe around the emotional sensitivities that scuppered their merger talks last year, will catapult the combine into the league of the top five telecom operators globally, with over 200 million customers. By any yardstick, the Bharti - MTN deal, if it goes through, will usher in the next round of the Indian telecom M&A story. At an estimated ticket size of $ 23 billion, this will be the biggest cross-border deal that India Inc has been involved in, and nearly twice as much as what British telco Vodafone paid to acquire a little over half of Hutchison Telecom International's Indian operations in early 2007. Before we analyse the case, let us understand the concept of Merger and the strategy behind mergers. Mergers and Acquisitions in India In India we find that the mergers have passed to different phases. In India Mergers between the same group companies have been in place for a long time. This used to happen because the capacities for the production were fixed during license permit raj and the group having the licenses used to merge the loss making companies with the profit making companies. This used to help them as taking over the loss making used to lower the tax burden as the losses on the balance sheet can be written out over a period of time and licenses could also be utilised through the better management by the profit making companies managers. The first wave of the hostile takeovers in India started not very long ago in the early eighties. The best case for this was the bids for the Escorts and DCM by the Swaraj Paul of the Capro group of Industries. He that time tried to acquire these companies with the help of the present day government of Indira Gandhi. The bids were unsuccessful but a number of people following his path made an industrial empire through these ways. The foremost names, which come to mind, are of R. P. Goenka and Manu Chhabria. What is a Merger? A merger occurs when two companies combine to form a single company. Both the companies should be of approximately of equal size. One or more companies may merge with an existing company or they may merge to form a new company. Laws in India use the term amalgamation for
companies like to use their 'paper' (i. An e. The demand made by a section of minority shareholders that the government should appoint the valuer for . and Indian Reprographics Ltd.demergers tend to go in and out of fashion. merger or amalgamation of Hindustan Computers Ltd.e. Think of a cone supplier to an ice cream maker. Indian software company Ltd. shares) to acquire other companies.. For e. (TFL) by Tata chemicals Ltd.g. All companies lose their separate identities in a merger through absorption. Vertical merger: A customer and company or a supplier and company. Demergers Like their opposite . Merger or amalgamation may take two forms: Merger through absorption Merger through consolidation Absorption Absorption is a combination of two or more companies into an existing company.the merger of two or more companies with another company or the merger of two or more companies to form a new company.. TCL an acquiring company survived after the merger while TFL an acquired company ceased to exist. For e. TFL transferred its assets and liabilities and shares to TCL. and the merchant banks who earn their fees from corporate activity will start to look at demerger possibilities for their clients. Cross Border Mergers The government is set to allow mergers of Indian companies with foreign companies. of this type of merger is the absorption of Tata Fertilisers Ltd.mergers . mergers and IPOs are less popular. Hindustan Instruments Ltd. In this form of merger all companies are legally dissolved and a new entity is created. Each participant has been given full access to the other participant and all material issues have been resolved between the managements. Types of Mergers Horizontal merger: Two companies that are in direct competition in the same product lines and markets.g.merger. In a market of falling prices. Conglomerate mergers: Two companies that have no common business areas. Sec 2 (1A) Of the Income Tax Act 1961 defines amalgamation as . Market-extension merger: Two companies that sell the same products in different markets. Consolidation A consolidation is a combination of two or more companies into a new company. In a merger existing stockholder of both companies involved retain a shared interest in the new corporation. in 1986 to an entirely new company called HCL Ltd. When share prices are rising.g. In a consolidation the acquired company transfers its assets and liabilities and shares to the acquiring company for cash or exchange of shares. (TCL). Product-extension merger: Two companies selling different but related products in the same market. so their advisers encourage merger activity.
it would be mandatory on both the merging and the transferee company to get their shares/ assets valued by independent valuers appointed by their respective boards. The idea is that every Indian shareholder would receive Indian Depository Receipts or foreign securities in lieu of his shares. a merger with another firm involving cash compensation is a good option. certain economies are realized due to the larger volume of operations of the combined entity. Such a firm must distribute generous dividends and in some cases even buy back its shares. weaknesses. each company must identify its strategic direction after thoroughly analyzing its strength. Utilization of Surplus funds: A firm may generate a lot of cash but may not have the opportunity for profitable investment. The process contains the following elements: Analysing the Industry Trends SWOT Analysis The Right Merger Partner Within the context of a strategic plan. 4. In the former case. As for the latter. 2. it may make sense for them to merge. Economies of scale: When two or more firms combine. it would be better to acquire a firm already engaged in that industry rather than internal expansion as it offers an edge over the competitor gives a special timing advantage and involves lesser risk and cost.dollar . 4. 2. the paper has said. the right merger partner will offer one or more of the following attributes: 1. This would enhance their standing in the market. 3. Instead.companies planning to merge.assets basis Geographic expansion Expertise in an area of service that has been targeted through the strategic plan. But mostly management has the tendency to invest further even where it is not profitable. the former loses its identity and its shareholders obtain automatic right to the foreign company's shares. opportunities. Reasons Supporting Merger 1. Product diversification Cost reductions on a per . and threats (SWOT).of. Strategic Benefit: While opting for expansion. When an Indian company is merged into a foreign company. he becomes a holder of security with a trading right in India. Here. Complementary Resources: If two firms have complementary resources. the Indian shareholder becomes a member of the foreign company. . Decision to Mergers In order to assess the right time to merge. The boards would ratify the "formal valuation" and the merger negotiations would be on the basis of value fixed by the valuers. 3.
Management Styles: Various organization follow different types of management styles and in merger or acquisition these management styles don't meet. flexible work schedules or even a relaxed dress code. Hutchison first acquired Facel in Gujarat. . a company can come to dominate the market they compete in. Reducing Operation Cost: Major manufacturers buying out a warehousing chain in order to save on warehousing costs. Middle East and Asia. but cultural differences are often ignored. It's a mistake to assume that people issues are easily overcome.5.AT&T (now Idea) starting to buy out smaller cellular operators with one or two circle operations. but if new management removes them. while tying two complementary products together. and then BPL. and Birla . Hutchison (now Vodafone). to expand its footprint in Maharashtra. Pay Pal's merger with eBay is a good example. By merging with major competitors. Jersey Islands and Sri Lanka. employees at a target company might be accustomed to easy access to top management. These aspects of a working environment may not seem significant. giving them a free hand with regard to pricing and buyer incentives. will catapult Bharti to the top five in the global pecking order. while expanding the corporation as a whole. Tamil Nadu and Kerala. The first large M&A deal began with Tata Cellular merging with Birla-AT&T. It should be ensured that the management style is defined clearly as this would affect the future success of the company. the decision is typically based on product or market synergies. resulting in hampering the process as a whole and affecting the overall performance of the newly formed company. which has 100 million subscribers across Africa. as it may trigger litigation regarding monopoly laws. This form of merger may cause problems when two dominating companies merge. Bharti's foray into an emerging market like Africa is important. This was followed by their acquisition of Escotel and RPG. the result can be resentment and shrinking productivity. Bharti made multiple acquisitions in the late 90's to 2002. Today. The foray into these smaller markets came through a process of license bidding though the MTN deal could change a lot of things. M&As in the Indian telecom sector started in the late 90s with companies like Bharti. Tax benefit: It helps to use the losses as a tax write-off to offset the profits. 6. as well as making a profit directly from the purchased business. MTN. When a company is acquired. Drawbacks of Mergers Cultural Differences: The chances for success are further hampered if the corporate cultures of the companies are very different. Organisational Structure: In this case it has to be ensured that of the two organization which have merged to form a new company who would be heading the newly formed organization. It helps in the company adopting a de-risking strategy in case the Indian markets start to slow down. particularly amongst large corporations. as it allowed eBay to avoid fees they had been paying. Can trigger monopoly law: Increasing one's market share is another major use of the merger. According to experts. For example. Bharti has over 100 million subscribers in India and has a small overseas presence in areas like Seychelles.
this will be India's biggest-cross border deal. in December 2008. aligning Bharti's market-leading Indian business with MTN's market-leading African and Middle Eastern operations. will result in Bharti Airtel getting a 49% stake in MTN and the South African telco a 36% "economic interest" in Bharti Airtel. The second largest deal in terms of valuation was more recently.Drawbacks of Mergers Of the 15 M&A deals struck since 2005. If it goes through.8 billion in 2007. when NTT Do-CoMo bought 26% of Tata Tele for $ 2. representing an enterprise value of $ 10.66 billion which placed the enterprise value of Hutchison's mobile footprint in India at $ 18.38 billion for Tata Tele.2 billion in 2006. if it works out. Potential transaction between Bharti and MTN will create a leading telecom service provider group. The tortuous formula. eclipsing Tata Steel's acquisition of European steel major Corus for $ 12.7 billion. . the largest was Vodafone's 67% acquisition of Hutchison Essar for $ 13.
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