1

TABLE OF CONTENTS

SR. NO. TOPIC PAGE

NO.

1. ABSTRACT

INTRODUCTION
2.

3. STATEMENT OF THE PROBLEM

4. OBJECTIVES OF THE STUDY

5. HYPOTHESIS OF THE STUDY

6. SCOPE OF THE STUDY

7. LIMITATIONS OF THE STUDY

8. RESEARCH METHODOLOGY

9. LITERATURE REVIEW

10. PRIMARY DATA

(A) DATA ANALYSIS AND INTERPRETATION

(B) INTERVIEWS

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11. SECONDARY DATA

(A) CHAPTER 1: WHAT IS FUNDAMENTAL

ANALYSIS

(B) CHAPTER 2: ECONOMY ANALYSIS

(C) CHAPTER 3: INDUSTRY ANALYSIS

(D) CHAPTER 4: COMPANY ANALYSIS

(E) CHAPTER 5: TOP DOWN APPROACH

(F) CHAPTER 6: BOTTOM UP APPROACH

(G) CHAPTER 7: FINANCIAL STATEMENTS

(H) CHAPTER 8: RATIO ANALYSIS AND

INTERPRETATION

12. CASE STUDIES

(A) BATA INDIA LTD

(B) MMP INDUSTRIES LTD.

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13. CONCLUSION

14. BIBLIOGRAPHY

15. APPENDIX

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ABSTRACT

Indian enterprises were subjected to strict control regime before 1990s. This has led to haphazard
growth of Indian corporate enterprises during that period. The reforms process initiated by the
Government since 1991, has influenced the functioning and governance of Indian enterprises
which has resulted in adoption of different growth and expansion strategies by the corporate
enterprises. In that process, mergers and acquisitions (M&As) have become a common
phenomenon. M&As are not new in the Indian economy. In the past also, companies have used
M&As to grow and now, Indian corporate enterprises are refocusing in the lines of core
competence, market share, global competitiveness and consolidation. This process of refocusing
has further been hastened by the arrival of foreign competitors. In this backdrop, Indian
corporate enterprises have undertaken restructuring exercises primarily through M&As to create
a formidable presence and expand in their core areas of interest.

M&As have played an important role in the transformation of the industrial sector of India since
the Second World War period. The economic and political conditions during the Second World
War and post–war periods (including several years after independence) gave rise to a spate of
M&As. The inflationary situation during the wartime enabled many Indian businessmen to
amass income by way of high profits and dividends and black money (Kothari 1967). This led to
“wholesale infiltration of businessmen in industry during war period giving rise to hectic activity
in stock exchanges. There was a craze to acquire control over industrial units in spite of swollen
prices of shares. The practice of cornering shares in the open market and trafficking of managing
agency rights with a view to acquiring control over the management of established and reputed
companies had come prominently to light. The net effect of these two practices, viz of acquiring
control over ownership of companies and of acquiring control over managing agencies, was that
large number of concerns passed into the hands of prominent industrial houses of the country
(Kothari, 1967). As it became clear that India would be gaining independence, British managing
agency houses gradually liquidated their holdings at fabulous prices offered by Indian Business
community. Besides, the transfer of managing agencies, there were a large number of cases of
transfer of interests in individual industrial units from British to Indian hands. Further at that
time, it used to be the fashion to obtain control of insurance companies for the purpose of

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utilising their funds to acquire substantial holdings in other companies. The big industrialists also
floated banks and investment companies for furtherance of the objective of acquiring control
over established concerns.

The post-war period is regarded as an era of M&As. Large number of M&As occurred in
industries like jute, cotton textiles, sugar, insurance, banking, electricity and tea plantation. It has
been found that, although there were a large number of M&As in the early post independence
period, the anti-big government policies and regulations of the 1960s and 1970s seriously
deterred M&As. This does not, of course, mean that M&As were uncommon during the
controlled regime. The deterrent was mostly to horizontal combinations which, result in
concentration of economic power to the common detriment. However, there were many
conglomerate combinations. In some cases, even the Government encouraged M&As; especially
for sick units. Further, the formation of the Life Insurance Corporation and nationalization of the
life insurance business in 1956 resulted in the takeover of 243 insurance companies. There was a
similar development in the general insurance business. The national textiles corporation (NTC)
took over a large number of sick textiles units (Kar 2004).

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INTRODUCTION

The functional importance of M&As is undergoing a sea change since liberalisation in India. The
MRTP Act and other legislations have been amended paving way for large business groups and
foreign companies to resort to the M&A route for growth. Further The SEBI (Substantial
Acquisition of Shares and Take over) Regulations, 1994 and 1997, have been notified. The
decision of the Government to allow companies to buy back their shares through the
promulgation of buy back ordinance, all these developments, have influenced the market for
corporate control in India.

M&As as a strategy employed by several corporate groups like R.P. Goenka, Vijay Mallya and
Manu Chhabria for growth and expansion of the empire in India in the eighties. Some of the
companies taken over by RPG group included Dunlop, Ceat, Philips Carbon Black, Gramaphone
India. Mallya‟s United Breweries (UB) group was straddled mostly by M&As. Further, in the
post liberalization period, the giant Hindustan Lever Limited has employed M&A as an
important growth strategy. The Ajay Piramal group has almost entirely been built up by M&As.
The south based, Murugappa group built an empire by employing M&A as a strategy. Some of
the companies acquired by Murugappa group includes, EID Parry, Coromondol Fertilizers,
Bharat Pulverising Mills, Sterling Abrasives, Cut Fast Abrasives etc. Other companies and
groups whose growth has been contributed by M&As include Ranbaxy Laboratories Limited and
Sun Pharmaceuticals Industries particularly during the later half of the 1990s. During this
decade, there has been plethora of M&As happening in every sector of Indian industry. Even, the
known and big industrial houses of India, like Reliance Group, Tata Group and Birla group have
engaged in several big deals.

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STATEMENT OF PROBLEM

As merger is a combination of two or more company’s into an existing company or a new

company. Acquired co. transfer its assets, liabilities and shares to the acquiring company for cash
or exchange of shares. Need for Merger and Acquisition arises because in general, a merger can
facilitate the ability of two or more competitors to exercise market power interdependently,
through an explicit agreement or arrangement, or through other forms of behaviour that permits
firms implicitly to coordinate their conduct. It will be found to be likely to prevent or lessen
competition substantially when the parties to the merger would like to be in a position to exercise
a materially greater degree of market power in a substantial part of a market for two years or
more, than if the merger did not proceed in whole or in part. In short, a company can achieve its
growth objective by:

 Expanding its existing markets

 Entering in new markets

A company can expand internally or externally. If internally there is a problem due to lack of
resources and managerial skill it can to the same externally through mergers and acquisitions.
This helps a company to grow at a faster pace in a convinent and inexpensive way. Combination
of companies may result in more than the average profitability due to reduction in cost and
effective utilization of resources.

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OBJECTIVES

The project was undertaken to analyze why merger and acquisition is necessary from a
company‘s or a bank‘s point of view, when two or more of them are agree to combine their
operations, then what will happen to the merged co and to the surviving co.

Objectives are strategic decisions leading to the maximization of a company‘s growth by

enchancing its production and marketing operations. The numbers of reasons that are attributed
for the occurrences of the merger and acquisitions are:

 To limit competition.

 To utilise under-utilised market power

 To overcome the problem of slow growth and profitablility in one‘s own industry.

 To achieve diversification

 To gain economies of scale and increase income with proportionately less investment.

 To establish a transnational bridgehead without excessive start-up cost to gain access to a

foreign market.

 To utilise under-utilised resources—human, physical and managerial skills.

 To displace existing management

 To circumvent government regulations.

 To reap speculative gains attendant upon new security issue or change P/E ratio.

 To create an image of aggressiveness and strategic opportunism, empire building and to amass
vast economic powers of the company.

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 To maintain or accelerate a company‘s growth, particularly when the internal growth is

constrained due to paucity of resources.

 To enhance profitability, through cast reduction resulting from economies of scale, operating
efficiency and synergy.

 To diversify the risk of the company, particularly when it acquires those businesses whose
income streams are not correlated.

 To reduce tax liability because of the provision of setting off accumulated losses and
unabsorbed depreciation of one company against the profits of another.

 To limit the severity of competition by increasing the company‘s market power.

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SCOPE OF STUDY

The scope of the research extends to analyze growth of M & A in India, to know how much
M&A Can be useful for the economy. And also to know M&A In detail.

Limitations of the Studies and Research Dimension

The survey highlights the following limitations of the various studied examined above and some
of these issues are sought to be addressed in this paper.

1. Number of merger cases analysed by various studies is much less and have taken only mergers
and leaving acquisitions.

2. It is noticed that none of the studies dealt comprehensively on trend of M&As for the post
1991 period according to industry classifications groups.

3. From the survey of Indian M&As literature, it is mainly found that apart from growth and
expansion, efficiency gains and market power are the two important motives for M&As. Apart
from measuring post merger profitability of the merged entity, there have been no reported
works on these issues in the Indian context.

With this back drop, here an attempt has been made to address some of the above issues on the
Indian context which are as follows,

 The present paper has taken both M&As. Further, in order to carry out analysis of M&As in
India, our first task is to create an exhaustive data base as there is no official data bank and to
carry out trend analysis of M&As for various sectors of Indian industry.

 By using financial and accounting data, an attempt has been made to investigate the impact of
M&As on the performance of the companies.

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RESEARCH METHODOLOGY

RESEARCH METHODS

Primary as well as Secondary research was employed in this project.

 Primary research is the first-hand research that the researcher collects, by interacting with
the sample population and the conclusions and analysis he/she draws from the data that has
been obtained.
 Primary research in this project involved interacting with 103 individuals to understand
and comprehend if they use fundamental analysis in their daily investments.

 Secondary research is the background research done by the researcher on already existing
information regarding the topic.
 Secondary research in this project involved reading and examining various research papers,
articles, case study to understand Mergers & Acquisitions.

QUANTITATIVE DATA: SURVEYS

 This method captures information through the input of responses to a research instrument
containing questions (such as a Questionnaire).

 The main methods for distributing surveys are via a website, postal mail, phone, or in person.

 However, newer technologies are creating additional delivery options including through
wireless devices, such as smart phones and technologies wherein the information gets
recorded in real time and can be viewed and intercepted very easily through pie charts and
bar graphs.

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 Survey for this study was undertaken via an online questionnaire. Questions included views
of the people from various backgrounds.

QUALITATIVE DATA COLLECTION

 Qualitative data collection requires researchers to interpret the information gathered, most
often without the benefit of statistical support. If the researcher is well trained in interpreting
respondents’ comments and activities, this form of research can offer very good information.
However, it may not hold the same level of relevancy as quantitative research due to the lack
of scientific controls with this data collection method.

RESEARCH DESIGN

 The research design comprised a method of primary data collection using a survey given to
respondents. The design also included secondary data expressed through a review of past
literature in the concerned area, indicating that a certain segment of the study was
exploratory in nature.
 The design used descriptive tools such as pie chart and bar graphs to highlight the data
analysis.

Hypothesis of the study:

Hypothesis is a testable prediction which is expected to occur. It can be a false or a true

statement that is tested in the research to check its authenticity. The hypothesis should be clear
and precise. It should be limited in scope and must be specific.

There are two types of hypothesis, they are:

• Null Hypothesis (Ho)

• Alternate Hypothesis (Ha)

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HO – THERE IS NO SIGNIFICANT DIFFRENCE IN THE MEAN EFFECIENCY RATIO OF

THE SELECTED ACQUIRER COMPANY PRE MERGER & POST MERGER.

HA - THERE IS SIGNIFICANT DIFFRENCE IN THE MEAN EFFECIENCY RATIO OF THE

SELECTED ACQUIRER COMPANY PRE MERGER & POST MERGER.

RESEARCH INSTRUMENT

The research tool used was that of a survey comprising questions as well as personal interviews
that covered different areas of the research problem. The questions were multiple choice in
nature and closed ended and only one question was open ended. It was compulsory for all
respondents to answer all the questions. The survey was anonymous but certain demographic
details such as age and occupation were asked for. The questionnaire made is enclosed in the
annexure.

SAMPLE SIZE

Sample size is the number of respondents who have been surveyed or the number of people who
have filled up the questionnaire.

The sample size of my research project is 103 respondents.

SAMPLING UNIT

A decision has to be taken concerning a sampling unit before selecting samples. Sampling unit
may be a geographical one such as state, district, village or a construction unit such as house,
flat, etc.

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SAMPLING DESIGN

The study used the technique of Random Sampling for the survey.

This refers to a basic sampling design where a subset of the population is randomly selected to
be a part of the sample.

The sample of this study was limited to 103 respondents.

STATISTICAL TECHNIQUE

The study employed the use of bar graphs and pie charts to interpret and express the data in the
form of percentages.

Graphs allow for descriptive secondary analysis of data.

The survey had a total of 103 respondents. The responses to each question were expressed as
percentages and then a pie chart was prepared for each question, excepting a few. For those
exceptions a horizontal bar graph was prepared.

Each graph was accompanied by a key that contained the response options for the specific
question and the colour corresponding to each response in the chart.

The graphs allowed for interpretation of the responses from the point of view of which response
option had been chosen by the majority of the respondents versus a minority.

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Review of Literature
A survey of the available literature on M&As and its impact on the different aspects of corporate
entities has been carried out. Further, research studies specific to India and their limitations and
research dimensions for the present study has been found out. Evaluating the performance of
corporations involved in M&As has been the subject of a great deal of research. Khemani (1991)
states that there are multiple reasons, motives, economic forces and institutional factors that can
be taken together or in isolation, which influence corporate decisions to engage in M&As. It can
be assumed that these reasons and motivations have enhanced corporate profitability as the
ultimate, long-term objective. It seems reasonable to assume that, even if this is not always the
case, the ultimate concern of corporate managers who make acquisitions, regardless of their
motives at the outset, is increasing long-term profit. However, this is affected by so many other
factors that it can become very difficult to make isolated statistical measurements of the effect of
M&As on profit. The "free cash flow" theory developed by Jensen (1988) provides a good
example of intermediate objectives that can lead to greater profitability in the long run. This
theory assumes that corporate shareholders do not necessarily share the same objectives as the
managers. The conflicts between these differing objectives may well intensify when corporations
are profitable enough to generate "free cash flow," i.e., profit that cannot be profitably re-
invested in the corporations. Under these circumstances, the corporations may decide to make
acquisitions in order to use these liquidities. It is therefore higher debt levels that induce
managers to take new measures to increase the efficiency of corporate operations. According to
Jensen, longterm profit comes from the re-organization and restructuring made necessary by
takeovers.

Most of the studies on impact of M&As can be categorized according to whether they take a
financial or industrial organization approach. One way to measure the performance is to monitor
the share prices after the M&A deal is struck. Empirical studies of this type indicate that a target
firm‟s shareholders benefit and the bidding firm‟s shareholders generally lose (Franks & Harris,
1989). The most commonly employed financial approach examines trends in the share prices of
corporations involved in M&As and compares them with a reference group of corporations.
Corporate performance is considered to have improved if the returns to shareholders are greater
after the M&As. The results obtained using this approach, largely in the United States and also in

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Canada, show that corporate takeovers generally have favourable consequences for shareholders
of the target companies.

Another set of studies evaluate the impact of M&As in various measures of profitability before
and after M&As. This type of industrial organisation studies normally considers longer time
horizons than the share price studies. Most of the firms do not show significant improvement in
long term profitability after acquisition (Scherer, 1988). There are some studies which have
concluded that conglomerate M&As provide more favourable results than horizontal and vertical
M&As (Reid, 1968; Mueller, 1980). Many researchers have investigated, whether related
mergers in which the merging companies have potential economy of scale perform better than
unrelated conglomerate mergers. The evidence is inconclusive in terms of return to shareholders
(Sudersanam et al., 1993). In terms of accounting profitability, Hughes (1993) summarises
evidence from a number of empirical studies to show that conglomerate mergers perform better
than horizontal mergers. Poor corporate performance in post-merger period has been attributed to
numerous reasons – manager's desire for position and influence, low productivity, poor quality,
reduced commitment, voluntary turnover, and related hidden costs and untapped potential
(Buono, 2003). Ghosh ((2001) examined the question of whether operating cash flow
performance improves following corporate acquisitions, using a design that accounted for
superior pre- acquisition performance, and found that merging firms did not show evidence of
improvements in the operating performance following acquisitions. Kruse, Park and Suzuki
(2003) examined the long-term operating performance of Japanese companies using a sample of
56 mergers of manufacturing firms in the period 1969 to 1997. By examining the cashflow
performance in the five-year period following mergers, the study found evidence of
improvements in operating performance, and also that the pre and post-merger performance was
highly correlated. The study concluded that control firm adjusted long-term operating
performance following mergers in case of Japanese firms was positive but insignificant and there
was a high correlation between pre and post-merger performance. Marina Martynova, Sjoerd
Oosting and Luc Renneboog (2007) investigated the long-term profitability of corporate
takeovers in Europe, and found that both acquiring and target companies significantly
outperformed the median peers in their industry prior to the takeovers, but the profitability of the
combined firm decreased significantly following the takeover. However, the decrease became
insignificant after controlling for the performance of the control sample of peer companies.

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Due to the existence of strict government regulations, Indian companies were forced to go to new
areas where capabilities are difficult to develop in the short run. In pursuit of this growth
strategy, they often change their organization and basic operating characteristics to meet the
diversified businesses and management. In a study by Prahalad and others (1977), it has been
found that, Indian enterprises in both the private and public sectors are much diversified. This
diversification led to M&As. They also found that India has a large percentage of unrelated
diversifiers as compared to the USA, UK, France, Germany, and Italy (Kaul 1991, 2003).

The work of Rao and Rao (1987) is one of the earlier attempts to analyse mergers in India from a
sample of 94 mergers orders passed during 1970-86 by the MRTP Act 1969. In the post 1991
period, several researchers have attempted to study M&As in India. Some of these prominent
studies are; Beena (1998), Roy (1999), Das (2000), Saple (2000), Basant (2000), Kumar (2000),
Pawaskar (2001) and Mantravedi and Reddy (2008). There are few other studies which analyses
mergers as case studies only.

Impact Analysis: Some of these studies have made an attempt to study the impact of M&As on
the profitability of the merged companies. Das (2000) compares the pre merge and post merger
operating profit margin for a sample of 14 acquiring firms and find a decline in profitability in 8
of these companies after merger. The study of Saple (2000) supports these findings. It observes
that mergers did not lead to an improvement in performance as measured by profitability (return
over net assets) adjusted for the industry average. Beena (1998) also finds no significant
difference in the rate of return and profit margin between the periods before and after the
mergers. Overall the results point to the possibility of merger driven by managerial self-interest
motive of growth maximization.

Comparing the pre merger profitability of the firms involved with the industry average, Saple
(2000) finds that the target firms were better than industry averages while the acquiring firms
had lower than industry average profitability. Overall, acquirers were high growth firms which
had improved the performance over the years prior to the merger and had a higher liquidity. The
target firms, on the other hand, were firms with higher than industry profitability, which had
deteriorated over the period just prior to merger. When pre-merger profitability (an index of
efficiency of a company) of acquirer and target companies is compared, Das (2000) finds the
acquiring companies had higher pre-merger profitability in 18 of the 25 merge cases considered.

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This is also confirmed from the findings of Roy (1999) and Beena (1998). Further, he compares
the pre-merger average net sales (an index of firm size) for the acquirer and target firms and
finds that in 86 percent of the cases, acquiring companies had higher pre-merger sales. Another
study shows that merger did not lead to excess profits for the acquiring firm (Pawaskar, 2001).
Mantravedi and Reddy (2008) investigated Indian acquiring firms and found that there are minor
variations in terms of impact on operating performance following mergers, in different sectors of
Indian industries.

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PRIMARY DATA
THE BELOW IS THE LIST OF QUESTIONS INCLUDED IN SURVEY:

1) Name
2) Age
3) Designation
4) How do you feel about the current environment with regards to M & A activity?
5) Why do you think the current climate is more favourable for M & A?
6) Do you think the companies need to grow and merge significantly to compete in this
dynamic market?
7) What minimum assets do you feel companies in India needs to attain in order to be
competitive?
8) What do you think will be the ideal platform for the companies to commincate with their
customers regarding the M & A activity?
9) How good are companies at learning from previous integrations and avoiding similar
pitfalls in the near future?
10) Will the M & A activity set Indian companies to enter into a league of international giants?
11) What according to you is the impact of M & A on the economy of the country?
12) Do you think M & A could give only temporary relief but not real remedies to problems
faced by the companies ? If yes , comment your views below

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QUESTION 1:

AGE?

ANALYSIS:

MOST OF THE RESPONDENTS WERE FROM THE AGE OF 20 TO 30.

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QUESTION 2:

DESIGNATION?

ANALYSIS:

MAXIMUM NO.OF RESPONDENTS I.E. 71.8% WERE STUDENTS FOLLOWED BY 21.4%

OF TEACHERS AND REMAINING FROM OTHER PROFESSIONS.

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QUESTION 3:

How do you feel about the current environment with regards to M & A activity?

ANALYSIS:

MAXIMUM NO.OF RESPONDENTS I.E. 48.5% ARE IN THE FAVOUR OF M&A,

FOLLOWED BY 33% NEUTRAL & 18.4% WERE LESS IN FAVOUR OF M&A.

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QUESTION 4:

Why do you think the current climate is more favourable for M & A?

ANALYSIS:

MAXIMUM NO.OF RESPONDENTS I.E. 31.4% FEEL THAT THE CURRENT CLIMATE
IS FAVOURABLE FOR M & A BECAUSE OF STRONG PENENTRATION THROUGH
NETWORK BUILT, FOLLOWED BY 25.5% COMPLIANCE & RISK CONSISTENCY &
21.6% COMPANIES HAVE MORE CAPITAL & OTHER REASONS.

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QUESTION 5:

Do you think the companies need to grow and merge significantly to compete in this dynamic
market?

ANALYSIS:

MORE THAN HALF OF RESPONDENTS I.E. 53.4% FEEL THAT COMPANIES NEED TO
GROW AND MERGE SIGNIFICANTLY TO COMPETE IN THIS DYNAMIC MARKET,
WHEREAS 28.2% FEEL THAT COMPANIES NEED NOT GROW AND MERGE TO
COMPETE IN THIS MARKET.

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QUESTION 6:

What minimum assets do you feel companies in India needs to attain in order to be
competitive?

ANALYSIS:

36.3% RESPONDENTS FEEL THAT 10+ M ASSETS SHOULD BE ATTAIN IN ORDER

TO BE COMPETITIVE, WHEREAS 35.3% & 28.4% FEELS 10 M 5M IS ENOUGH
RESPECTIVELY.

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QUESTION 7:

What do you think will be the ideal platform for the companies to commincate with their
customers regarding the M & A activity?

ANALYSIS:

MAXIMUM NO.OF RESPONDENTS ARE INCLINED TOWARDS A SOLIDARITY THAT

NEWSPAPER IS THE IDEAL PLATFORM FOR THE COMPANIES TO COMMUNICATE
WITH THEIR CUSTOMERS REGARDING M&A ACTIVITY.

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QUESTION 8:

How good are companies at learning from previous integrations and avoiding similar pitfalls in
the near future?

ANALYSIS:

THE ABOVE ARE THE RATINGS GIVEN BY RESPONDENTS FOR THE ABOVE
QUESTION.

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QUESTION 9:

Will the M & A activity set Indian companies to enter into a league of international giants?

ANALYSIS:

MAXIMUM NO.OF RESPONDENTS I.E. 68.9% BELIEVE THAT M&A WILL HELP
INDIAN COMPANIES TO ENTER INTO A LEAGUE OF INTERNATIONAL GIANTS.

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QUESTION 10:

What according to you is the impact of M & A on the economy of the country?

ANALYSIS:

MAXIMUM NO.OF RESPONDENTS BELIEVE THAT M&A ACTIVITIES WILL HIT THE
COUNTRY POSITIVELY.

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QUESTION 11:

Do you think M & A could give only temporary relief but not real remedies to problems faced
by the companies ? If yes , comment your views below

THE ABOVE IS THE HIGHLIGHTS OF RESPONSES RECEIVED FOR THE QUESTION.

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SECONDARY DATA

CHAPTER 1 :-
M&A- A Global Phenomenon :-

Be it industrial sector or services sector, M&As have become way forward in today‘s world. In a
free market economy, companies have to keep evolving to remain competitive. Adaptability to
changes in the market becomes a crucial factor for survival. M&As as a style of doing business
got a fillip in the 1980s in the post oil-shock world. USA led the change with over 55000 M&As
reported in the decade. This activity gained further momentum in the nineties and even more so
in the new millennium. Merger between Arcelor and Mittal steel to become the largest steel
manufacturer in the world is a recent development which was followed with great interest by all
of us.

What drives M&As? Theoretically, consolidation can be with two basic motives. One, A motive
to maximize value for stakeholders and two, non-value maximizing motives. In a perfect capital
market all activities of any company will be to maximize shareholder value. In reality, value
maximization comes from cost reduction or revenue growth.

MERGER AND ACQUISITON AN OVERVIEW

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate
strategy, corporate finance and management dealing with the buying, selling and combining of
different companies that can aid, finance, or help a growing company in a given industry grow
rapidly without having to create another business entity.

Acquisition

An acquisition, also known as a takeover or a buyout or "merger", is the buying of one company
(the ‗target‘) by another. An acquisition, or a merger, may be private or public, depending on
whether the acquiree or merging company is or isn't listed in public markets. An acquisition may
be friendly or hostile. Whether a purchase is perceived as a friendly or hostile depends on how it

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is communicated to and received by the target company's board of directors, employees and
shareholders. It is quite normal though for M&A deal communications to take place in a so
called 'confidentiality bubble' whereby information flows are restricted due to confidentiality
agreements (Harwood, 2005). In the case of a friendly transaction, the companies cooperate in
negotiations; in the case of a hostile deal, the takeover target is unwilling to be bought or the
target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do, turn
friendly at the end, as the acquiror secures the endorsement of the transaaction from the board of
the acquiree company. This usually requires an improvement in the terms of the offer.
Acquisition usually refers to a purchase of a smaller firm by a larger one. 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. Another type of
acquisition is reverse merger, a deal that enables a private company to get publicly listed in a
short time period. 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. Achieving acquisition success has proven to be very difficult, while various
studies have shown that 50% of acquisitions were unsuccessful] The acquisition process is very
complex, with many dimensions influencing its outcome. There is also a variety of structures
used in securing control over the assets of a company, which have different tax and regulatory
implications:

 The buyer buys the shares, and therefore control, of the target company being purchased.
Ownership control of the company in turn conveys effective control over the assets of the
company, but since the company is acquired intact as a going concern, this form of
transaction carries with it all of the liabilities accrued by that business over its past and all of
the risks that company faces in its commercial environment.
 The buyer buys the assets of the target company. The cash the target receives from the sell-
off is paid back to its shareholders by dividend or through liquidation. This type of
transaction leaves the target company as an empty shell, if the buyer buys out the entire
assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the
assets that it wants and leave out the assets and liabilities that it does not. This can be
particularly important where foreseeable liabilities may include future, unquantified damage

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awards such as those that could arise from litigation over defective products, employee
benefits or terminations, or environmental damage. A disadvantage of this structure is the tax
that many jurisdictions, particularly outside the United States, impose on transfers of the
individual assets, whereas stock transactions can frequently be structured as like-kind
exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the
seller's shareholders.
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation
where one company splits into two, generating a second company separately listed on a stock
exchange.

Distinction between mergers and acquisitions

Although often used synonymously, the terms merger and acquisition mean slightly different
things.

[This paragraph does not make a clear distinction between the legal concept of a merger (with
the resulting corporate mechanics - statutory merger or statutory consolidation, which have
nothing to do with the resulting power grab as between the management of the target and the
acquirer) and the business point of view of a "merger", which can be achieved independently of
the corporate mechanics through various means such as "triangular merger", statutory merger,
acquisition, etc.]

When one company takes over another and clearly establishes itself as the new owner, the
purchase is called an acquisition. From a legal point of view, the target company ceases to exist,
the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms agree to go forward as a single
new company rather than remain separately owned and operated. This kind of action is more
precisely referred to as a "merger of equals". The firms are often of about the same size. Both
companies' stocks are surrendered and new company stock is issued in its place. For example, in
the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when
they merged, and a new company, GlaxoSmithKline, was created.

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In practice, however, actual mergers of equals don't happen very often. Usually, one company
will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that
the action is a merger of equals, even if it is technically an acquisition. Being bought out often
carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal
makers and top managers try to make the takeover more palatable. An example of this would be
the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to in the time.

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.

Business valuation

The five most common ways to valuate a business are

1. asset valuation,
2. historical earnings valuation,
3. future maintainable earnings valuation,
4. relative valuation (comparable company & comparable transactions),
5. discounted cash flow (DCF) valuation

Professionals who valuate businesses generally do not use just one of these methods but a
combination of some of them, as well as possibly others that are not mentioned above, in order to
obtain a more accurate value. The information in the balance sheet or income statement is
obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an
Audit.

Accurate business valuation is one of the most important aspects of M&A as valuations like
these will have a major impact on the price that a business will be sold for. Most often this
information is expressed in a Letter of Opinion of Value (LOV) when the business is being
valuated for interest's sake. There are other, more detailed ways of expressing the value of a
business. These reports generally get more detailed and expensive as the size of a company

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increases, however, this is not always the case as there are many complicated industries which
require more attention to detail, regardless of size.

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Financing M&A
Mergers are generally differentiated from acquisitions partly by the way in which they are
financed and partly by the relative size of the companies. Various methods of financing an M&A
deal exist:

Cash

Payment by cash. Such transactions are usually termed acquisitions rather than mergers because
the shareholders of the target company are removed from the picture and the target comes under
the (indirect) control of the bidder's shareholders.

Specialist M&A advisory firms

Although at present the majority of M&A advice is provided by full-service investment banks,
recent years have seen a rise in the prominence of specialist M&A advisers, who only provide
M&A advice (and not financing). These companies are sometimes referred to as Transition
companies, assisting businesses often referred to as "companies in transition." To perform these
services in the US, an advisor must be a licensed broker dealer, and subject to SEC (FINRA)
regulation. More information on M&A advisory firms is provided at corporate advisory.

Motives behind M&A

The dominant rationale used to explain M&A activity is that acquiring firms seek improved
financial performance. The following motives are considered to improve financial performance:

Economy of scale: This refers to the fact that the combined company can often reduce its fixed
costs by removing duplicate departments or operations, lowering the costs of the company
relative to the same revenue stream, thus increasing profit margins.

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

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Increased revenue or market share: This assumes that the buyer will be absorbing a major
competitor and thus increase its market power (by capturing increased market share) to set
prices.

Cross-selling: For example, a bank buying a stock broker could then sell its banking products to
the stock broker's customers, while the broker can sign up the bank's customers for brokerage
accounts. Or, a manufacturer can acquire and sell complementary products.

Synergy: For example, managerial economies such as the increased opportunity of managerial
specialization. Another example are purchasing economies due to increased order size and
associated bulk-buying discounts.

Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage
by reducing their tax liability. In the United States and many other countries, rules are in place to
limit the ability of profitable companies to "shop" for loss making companies, limiting the tax
motive of an acquiring company.

Geographical or other diversification: This is designed to smooth the earnings results of a

company, which over the long term smoothens the stock price of a company, giving conservative
investors more confidence in investing in the company. However, this does not always deliver
value to shareholders

Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the
interaction of target and acquiring firm resources can create value through either overcoming
information asymmetry or by combining scarce resources

Vertical integration: Vertical integration occurs when an upstream and downstream firm merge
(or one acquires the other). There are several reasons for this to occur. One reason is to
internalise an externality problem. A common example is of such an externality is double
marginalization. Double marginalization occurs when both the upstream and downstream firms
have monopoly power, each firm reduces output from the competitive level to the monopoly
level, creating two deadweight losses. By merging the vertically integrated firm can collect one
deadweight loss by setting the downstream firm's output to the competitive level. This increases
profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable

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However, on average and across the most commonly studied variables, acquiring firms' financial
performance does not positively change as a function of their acquisition activity. Therefore,
additional motives for merger and acquisition that may not add shareholder value include:

Diversification: While this may hedge a company against a downturn in an individual industry it
fails to deliver value, since it is possible for individual shareholders to achieve the same hedge
by diversifying their portfolios at a much lower cost than those associated with a merger.

Manager's hubris: manager's overconfidence about expected synergies from M&A which
results in overpayment for the target company.

Empire-building: Managers have larger companies to manage and hence more power.

Manager's compensation: In the past, certain executive management teams had their payout
based on the total amount of profit of the company, instead of the profit per share, which would
give the team a perverse incentive to buy companies to increase the total profit while decreasing
the profit per share (which hurts the owners of the company, the shareholders); although some
empirical studies show that compensation is linked to profitability rather than mere profits of the
company.

Effects on management

A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that
mergers and acquisitions destroy leadership continuity in target companies‘ top management
teams for at least a decade following a deal. The study found that target companies lose 21
percent of their executives each year for at least 10 years following an acquisition – more than
double the turnover experienced in non-merged firms.

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CHAPTER 2 :-
The Great Merger Movement

The Great Merger Movement was a predominantly U.S. business phenomenon that happened
from 1895 to 1905. During this time, small firms with little market share consolidated with
similar firms to form large, powerful institutions that dominated their markets. It is estimated that
more than 1,800 of these firms disappeared into consolidations, many of which acquired
substantial shares of the markets in which they operated. The vehicle used were so-called trusts.
To truly understand how large this movement was—in 1900 the value of firms acquired in
mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 it was around
10–11% of GDP. Organizations that commanded the greatest share of the market in 1905 saw
that command disintegrate by 1929 as smaller competitors joined forces with each other.
However, there were companies that merged during this time such as DuPont, US Steel, and
General Electric that have been able to keep their dominance in their respected sectors today due
to growing technological advances of their products, patents, and brand recognition by their
customers. The companies that merged were mass producers of homogeneous goods that could
exploit the efficiencies of large volume production. However more often than not mergers were
"quick mergers". These "quick mergers" involved mergers of companies with unrelated
technology and different management. As a result, the efficiency gains associated with mergers
were not present. The new and bigger company would actually face higher costs than
competitors because of these technological and managerial differences. Thus, the mergers were
not done to see large efficiency gains, they were in fact done because that was the trend at the
time. Companies which had specific fine products, like fine writing paper, earned their profits on
high margin rather than volume and took no part in Great Merger Movement.

Short-run factors

One of the major short run factors that sparked in The Great Merger Movement was the desire to
keep prices high. That is, with many firms in a market, supply of the product remains high.
During the panic of 1893, the demand declined. When demand for the good falls, as illustrated
by the classic supply and demand model, prices are driven down. To avoid this decline in prices,

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firms found it profitable to collude and manipulate supply to counter any changes in demand for
the good. This type of cooperation led to widespread horizontal integration amongst firms of the
era. Focusing on mass production allowed firms to reduce unit costs to a much lower rate. These
firms usually were capital intensive and had high fixed costs. Because new machines were
mostly financed through bonds, interest payments on bonds were high followed by the panic of
1893, yet no firm was willing to accept quantity reduction during that period.

Long-run factors

In the long run, due to the desire to keep costs low, it was advantageous for firms to merge and
reduce their transportation costs thus producing and transporting from one location rather than
various sites of different companies as in the past. This resulted in shipment directly to market
from this one location. In addition, technological changes prior to the merger movement within
companies increased the efficient size of plants with capital intensive assembly lines allowing for
economies of scale. Thus improved technology and transportation were forerunners to the Great
Merger Movement. In part due to competitors as mentioned above, and in part due to the
government, however, many of these initially successful mergers were eventually dismantled.
The U.S. government passed the Sherman Act in 1890, setting rules against price fixing and
monopolies. Starting in the 1890s with such cases as U.S. versus Addyston Pipe and Steel Co.,
the courts attacked large companies for strategizing with others or within their own companies to
maximize profits. Price fixing with competitors created a greater incentive for companies to unite
and merge under one name so that they were not competitors anymore and technically not price
fixing.

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Merger waves

The economic history has been divided into Merger Waves based on the merger activities in the
business world as:

Cross-border M&A

In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A
deals cause the domestic currency of the target corporation to appreciate by 1% relative to the
acquirers.

The rise of globalization has exponentially increased the market for cross border M&A. In 1997
alone there were over 2333 cross border transactions worth a total of approximately $298 billion.
This rapid increase has taken many M&A firms by surprise because the majority of them never
had to consider acquiring Due to the complicated nature of cross border M&A, the vast majority
of cross border actions have unsuccessful anies seek to expand their global footprint and become
more agile at creating high-performing businesses and cultures across national boundaries

Even mergers of companies with headquarters in the same country are very much of this type
(crossborder Mergers). After all,when Boeing acquires McDonnell Douglas, the two American
companies must integrate operations in dozens of countries around the world. This is just as true
for other supposedly "single country" mergers, such as the $29 billion dollar merger of Swiss
drug makers Sandoz and Ciba-Geigy (now Novartis).

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CHAPTER 3
Types of Mergers & Acquisitions
Merger types can be broadly classified into the following five subheads as described below.
They are

 Horizontal Merger
 Conglomeration,
 Vertical Merger,
 Product-Extension Merger
 Market-Extension Merger.

Horizontal Merger

Horizontal mergers are those mergers where the companies manufacturing similar kinds of
commodities or running similar type of businesses merge with each other. The principal
objective behind this type of mergers is to achieve economies of scale in the production
procedure through carrying off duplication of installations, services and functions, widening the
line of products, decrease in working capital and fixed assets investment, getting rid of
competition, minimizing the advertising expenses, enhancing the market capability and to get
more dominance on the market.

Nevertheless, the horizontal mergers do not have the capacity to ensure the market about the
product and steady or uninterrupted raw material supply. Horizontal mergers can sometimes
result in monopoly and absorption of economic power in the hands of a small number of
commercial entities.

According to strategic management and microeconomics, the expression horizontal merger

delineates a form of proprietorship and control. It is a plan, which is utilized by a corporation or
commercial enterprise for marketing a form of commodity or service in a large number of
markets. In the context of marketing, horizontal merger is more prevalent in comparison to
horizontal merger in the context of production or manufacturing.

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Horizontal Integration

Sometimes, horizontal merger is also called as horizontal integration. It is totally opposite in

nature to vertical merger or vertical integration.

Horizontal Monopoly

A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally, a

monopoly is formed by both vertical and horizontal mergers. Horizontal merger is that condition
where a company is involved in taking over or acquiring another company in similar form of
trade. In this way, a competitor is done away with and a wider market and higher economies of
scale are accomplished.

In the process of horizontal merger, the downstream purchasers and upstream suppliers are also
controlled and as a result of this, production expenses can be decreased.

Horizontal Expansion

An expression which is intimately connected to horizontal merger is horizontal expansion. This

refers to the expansion or growth of a company in a sector that is presently functioning. The aim
behind a horizontal expansion is to grow its market share for a specific commodity or service.

Examples of Horizontal Mergers

Following are the important examples of horizontal mergers:

-The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook
Bond

-The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of
India) Bank

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-The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply
Company

-The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar Cement

Advantages of Horizontal Merger:

Horizontal merger provides the following advantages to the companies which are merged:

1) Economies of scope

The notion of economies of scope resembles that of economies of scale. Economies of scale
principally denote effectiveness related to alterations in the supply side, for example, growing or
reducing production scale of an individual form of commodity. On the other hand, economies of
scope denote effectiveness principally related to alterations in the demand side, for example
growing or reducing the range of marketing and supply of various forms of products. Economies
of scope are one of the principal causes for marketing plans like product lining, product
bundling, as well as family branding.

2) Economies of scale

Economies of scale refer to the cost benefits received by a company as the result of a horizontal
merger. The merged company is able to have bigger production volume in comparison to the
companies operating separately. Therefore, the merged company can derive the benefits of
economies of scale. The maximum use of plant facilities can be done by the merged company,
which will lead to a decrease in the average expenses of the production.

The important benefits of economies of scale are the following:

- Synergy

- Growth or expansion

- Risk diversification

- Diminution in tax liability

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- Greater market capability and lesser competition

- Financial synergy (Improved creditworthiness, enhancement of borrowing power, decrease in

the cost of capital, growth of value per share and price earning ratio, capital raising, smaller
flotation expenses)

- Motivation for the managers

For attaining economies of scale, there are two methods and they are the following:

-Increased fixed cost and static marginal cost

-No or small fixed cost and decreasing marginal cost

one example of economies of scale is that if a company increases its production twofold, then the
entire expense of inputs goes up less than twofold.

Conglomeration
As per definition, a conglomerate merger is a type of merger whereby the two companies that
merge with each other are involved in different sorts of businesses. The importance of the
conglomerate mergers lies in the fact that they help the merging companies to be better than
before.

Types of Conglomerate Mergers

There are two main types of conglomerate mergers – the pure conglomerate merger and the
mixed conglomerate merger. The pure conglomerate merger is one where the merging
companies are doing businesses that are totally unrelated to each other.

The mixed conglomerate mergers are ones where the companies that are merging with each other
are doing so with the main purpose of gaining access to a wider market and client base or for
expanding the range of products and services that are being provided by them

There are also some other subdivisions of conglomerate mergers like the financial
conglomerates, the concentric companies, and the managerial conglomerates.

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Reasons of Conglomerate Mergers

There are several reasons as to why a company may go for a conglomerate merger. Among the
more common reasons are adding to the share of the market that is owned by the company and
indulging in cross selling. The companies also look to add to their overall synergy and
productivity by adopting the method of conglomerate mergers.

Benefits of Conglomerate Mergers

There are several advantages of the conglomerate mergers. One of the major benefits is that
conglomerate mergers assist the companies to diversify. As a result of conglomerate mergers the
merging companies can also bring down the levels of their exposure to risks.

Implications of Conglomerate Mergers

There are several implications of conglomerate mergers. It has often been seen that companies
are going for conglomerate mergers in order to increase their sizes. However, this also, at times,
has adverse effects on the functioning of the new company. It has normally been observed that
these companies are not able to perform like they used to before the merger took place.

This was evident in the 1960s when the conglomerate mergers were the general trend. The term
conglomerate mergers also implies that the two companies that are merging do not even have the
same customer base as they are in totally different businesses.

It has normally been seen that a lot of companies that go for conglomerate mergers are able to
manage a wide variety of activities in a particular market. For example, these companies can
carry out research activities and applied engineering processes. They are also able to add to their
production as well as strengthen the marketing area that ensures better profitability.

It has been seen from case studies that conglomerate mergers do not affect the structures of the
industries. However, there might be significant impact if the acquiring company happens to be a
leading company of its market that is not concentrated and has a large number of entry barriers.

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Vertical Merger

Vertical mergers refer to a situation where a product manufacturer merges with the supplier of
inputs or raw materials. In can also be a merger between a product manufacturer and the
product's distributor.

Vertical mergers may violate the competitive spirit of markets. It can be used to block
competitors from accessing the raw material source or the distribution channel. Hence, it is also
known as "vertical foreclosure". It may create a sort of bottleneck problem.

As per research, vertical integration can affect the pricing incentive of a downstream producer. It
may also affect a competitors incentive for selecting input suppliers. Research studies single out
several factors, which point to the fact that vertical integration facilitates collusion. Vertical
mergers may promote collusion through an outlets effect. A corollary of vertical integration is
that integrated business structures are able to perform better in crisis phases.

There are multiple reasons, which promote the vertical integration by firms. Some of them are
discussed below.

- The prime reason being the reduction of uncertainty regarding the availability of quality inputs
as also the uncertainty regarding the demand for its products.

- Firms may also enter vertical mergers to avail the plus points of economies of integration.

- Vertical merger may make the firms cost-efficient by streamlining its distribution and
production costs. It is also meant for the reduction of transactions costs like marketing expenses
and sales taxes. It ensures that a firm's resources are used optimally.

Product Extension Merger

Product-Extension Merger is executed among companies, which sell different products of a
related category. They also seek to serve a common market. This type of merger enables the new
company to go in for a pooling in of their products so as to serve a common market, which was
earlier fragmented among them.

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According to definition, product extension merger takes place between two business
organizations that deal in products that are related to each other and operate in the same market.
The product extension merger allows the merging companies to group together their products
and get access to a bigger set of consumers. This ensures that they earn higher profits.

Example of Product Extension Merger

The acquisition of Mobil ink Telecom Inc. by Broadcom is a proper example of product
extension merger. Broadcom deals in the manufacturing Bluetooth personal area network
hardware systems and chips for IEEE 802.11b wireless LAN.

Mobil ink Telecom Inc. deals in the manufacturing of product designs meant for handsets that
are equipped with the Global System for Mobile Communications technology. It is also in the
process of being certified to produce wireless networking chips that have high speed and General
Packet Radio Service technology. It is expected that the products of Mobilink Telecom Inc.
would be complementing the wireless products of Broadcom

Market Extension Merger

Market-Extension Merger occurs between two companies that sell identical products in different
markets. It basically expands the market base of the product

As per definition, market extension merger takes place between two companies that deal in the
same products but in separate markets. The main purpose of the market extension merger is to
make sure that the merging companies can get access to a bigger market and that ensures a
bigger client base.

Example of Market Extension Merger

A very good example of market extension merger is the acquisition of Eagle Bancshares Inc by
the RBC Centura. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It
has almost 90,000 accounts and looks after assets worth US $1.1 billion.

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Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in
the metropolitan Atlanta region as far as deposit market share is concerned. One of the major
benefits of this acquisition is that this acquisition enables the RBC to go ahead with its growth
operations in the North American market.

With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta ,
which is among the leading upcoming financial markets in the USA. This move would allow
RBC to diversify its base of operations.

Difference between Market Extension Merger and Product Extension Merger

The difference between market extension merger and product extension merger lies in the fact
that the later is meant to add to the existing variety of products and services offered by the
respective merging companies; while, in case of the former the two merging companies are
dealing in similar products.

In case of the market extension merger the two merging companies are operating in the same
market and as far as product extension merger is concerned the two merging companies are
operating in different markets.

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CHAPTER 4 :-

WHAT CONSTITUTES A MERGER ?

In general terms, section 91 deems a "merger" to occur when direct or indirect control over, or
significant interest in, the whole or a part of a business of another person is acquired or
established. The principal issue is the interpretation of the words "significant interest". The
acquisition or establishment of a significant interest in the whole or a part of a business of
another person is considered to occur when a person acquires or establishes the ability to
materially influence the economic behaviour of the business of a second person; (e.g., block
special or ordinary resolutions or make decisions relating to pricing, purchasing, distribution,
marketing or investment). In general, a direct or indirect holding of less than a 10 percent voting
interest in another entity will not be considered a significant interest.A significant interest may
be acquired or established pursuant to shareholder agreements, management contracts and other
contractual arrangements involving incorporated or non-incorporated entities.

The Anticompetitive Threshold

In general, a merger will be found to be likely to prevent or lessen competition substantially

when the parties to the merger would more likely be in a position to exercise a materially greater
degree of market power in a substantial part of a market for two years or more, than if the merger
did not proceed in whole or in part. Market power can be exercised unilaterally or
interdependently with other competitors. To date, most of the mergers that the Director has
concluded would likely have prevented or lessened competition substantially have raised
concerns about the ability of the merging parties to unilaterally exercise market power. However,
the Guidelines indicate that a merger can also facilitate the ability of two or more competitors to
exercise market power interdependently, through an explicit agreement or arrangement, or
through other forms of behaviour that permit firms implicitly to coordinate their conduct. In the
assessment of the extent to which market power will likely be acquired or entrenched as a result
of a merger, the focus is primarily upon the price dimension of competition. Nevertheless,
competition can be substantially prevented or lessened with respect to service, quality, variety,

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advertising or innovation, where rivalry in the market in respect of these dimensions of

competition is important.

Market Definition

Outlines the conceptual framework that underlies the approach taken to market definition, and
describes the various factual criteria that are typically assessed in the case-by-case application of
this framework. In general, a relevant market is defined as the smallest group of products and the
smallest geographic area in relation to which sellers could impose and maintain a significant and
nontransitory price increase above levels that would likely exist in absence of the merger.In most
contexts, the Bureau considers a 5 percent price increase to be significant, and a one year period
to be nontransitory. However, a different price increase or time period may be employed where
the Director is satisfied that the application of the 5 percent or one year thresholds would not
reflect market realities, Where potential competition from new entrants or expansion by fringe
firms within the market would require significant construction or adaptation of facilities, or
overcoming significant difficulties related to marketing and distribution, it is considered
subsequent to market definition, in the assessment of whether new entry into the relevant market
would ensure that competition would not likely be prevented or lessened substantially.

Evaluative Criteria

Addresses the various evaluative criteria that are analyzed in the determination of the likely
effects of a merger on competition in a relevant market. The first matter discussed is the
significance of information relating to market share and concentration. Mergers generally will
not be challenged on the basis of concerns relating to the unilateral exercise of market power
where the post-merger market share of the merged entity would be less than 35 percent.
Similarly, mergers generally will not be challenged on the basis of concerns relating to the
interdependent exercise of market power, where the share of the market accounted for by the
largest four firms in the market post-merger would be less than 65 percent. Notwithstanding that
market share of the largest four firms may exceed 65 percent, the Director generally will not
challenge a merger on the basis of concerns relating to the interdependent exercise of market

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power where the merged entity's market share would be less than 10 percent. These thresholds
merely serve to distinguish mergers that are unlikely to have anticompetitive consequences from
mergers that require further analysis, of various qualitative assessment criteria such as those
highlighted in section 93. No inferences regarding the likely effects of a merger on competition
are drawn from evidence that relates solely to market share or concentration. In all cases, an
assessment of market shares and concentration is only the starting point of the analysis.

The Guidelines then address the seven qualitative assessment criteria specifically mentioned in
section 93 of the Act, together with two additional criteria that are often important to consider.
As is the case with high market share and concentration, the presence of impediments to new
competition that would impose on entrants a significant cost disadvantage, irrecoverable costs, or
time delays is generally a necessary, but not sufficient precondition to a finding that competition
is likely to be prevented or lessened substantially. In the absence of such impediments, a
significant degree of market power generally cannot be maintained. Where future entry or
expansion by fringe firms within the market would likely occur on a sufficient scale within two
years to ensure that a material price increase could not be sustained beyond this period in a
substantial part of the relevant market, the Bureau would likely conclude that the merger does
not require enforcement action.

Similarly, information relating to either the failing firm or the effective remaining competition
factors can be sufficient to warrant a decision not to challenge a merger. In cases where one of
the merging parties is likely to exit the market in absence of the merger, and there are no
alternatives to this exit that would result in a materially higher degree of competition than if the
merger proceeded, the merger will generally not be found to be likely to contravene the Act.
Likewise, where the degree of effective remaining competition that would remain in the market
is not likely to be reduced, the merger likely will not be challenged.

The Efficiency Exception

Address in detail the approach taken to the efficiency exception provisions of section 96. These
provisions become operative where a merger has been found to be likely to substantially prevent
or lessen competition. The review of submissions relating to efficiency gains focuses primarily
upon quantifiable production related efficiency gains. However, qualitative dynamic efficiencies

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can in certain circumstances also receive significant weight. The total efficiency gains that would
not likely be attained if the merger did not proceed are balanced against the effects of any
prevention or lessening of competition likely to be brought about by the merger. The focus of the
evaluation of the magnitude of these anticompetitive effects is upon the part of the total loss
likely to be incurred by buyers or sellers that is not merely a transfer from one party to another
but represents a loss to the economy as a whole, attributable to the diversion of resources to
lower valued uses.

Adoption of M&A as a key Strategic tool

There are strategic needs for and benefits of M&A which needs to be looked at before
consolidating.

> Gaining market share as a complement / supplement to organic growth

> Rapid expansion or access to new markets / products

> Acquisition of partners‘ capabilities and customers i.e. if you cant beat them then buy them.

> Getting a jump on competition

For this to happen there are a certain market requirements that need to be achieved.

> Mature market / saturation reached

> Availability of attractive targets

> Transparent company information

> Wide range of funding options

Also there needs to be a proper regulatory backup which is very essential for any market to have
proper investors and an easy procedure for consolidation.

> Accommodating regulations

> Open to foreign ownership / competition

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> Repatriation conditions not too onerous . M&A is accepted as a critical aspect of strategic
planning and a key component of business strategy execution.

CHAPTER 5 :-

ROLE OF STRATEGIC INVESTMENT IN M&A

There can also be a possibility of Strategic Investments where traditional M&A is not possible.
Strategic Partnership occurs when majority or full ownership is not available. This could lead to
reduced initial financial commitment. There is also possibility of future expansion. This would
also give an opportunity to study the market i.e. get to know the local government and the
domestic market. A Strategic Partnership would also help to evaluate the target company better.
For successful partnerships there needs to good macroeconomic conditions and market
conditions and also good deal conditions viz reasonable market valuation, willing buyer and
seller and also commercial standards in the non-price business terms.

For serious buyers, acquiring a strategic stake is a viable alternative even though the ultimate aim
is to have full control and ownership.

Conditions for a Successful Partnership

A successful partnership requires market, business and deal features combined in a conducive
and ―deal-friendly fashion

Conditions for a Successful Partnership

A successful partnership requires market, business and deal features combined in a conducive
and ―deal-friendly‖ fashion

1) Macroeconomic factors

 Accommodating regulations & practical-minded government

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 Strong underlying economic growth

 Workable business infrastructure (e.g. legal, communications & accounting framework)

2) Business Conditions

Market receptivity to foreign ownership of operating businesses

Critical mass of possible targets

Stable markets

Availability of funding

3) Deal Conditions

“Willing Buyer + Willing Seller”

Reasonable market valuation

Commercial (and international) standards in non-price business terms

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CHAPTER 6 :-
Mergers as a source of competitive advantage
In the changing economic and business environment characterized by speed, flexibility and
responsiveness to customers, ‗size‘ has a lot to contribute to staying ahead in the competition. It
is in this context that mergers and acquisitions (M & A‘s) as a tool to gain competitive strength
comes into the forefront with ‗Partnering for competitiveness‘ being a recognized strategic
argument for the same. In fact, as Michael Porter (1985) states, ‗the primary reason for M & A‘s
is to achieve synergy by integrating two business units in a combination that will increase
competitive advantage‘. Competitive advantage accrues since through M & A‘s, firms seek
strategic positioning, industry-wide consolidation, increased market share and shareholder value,
synergy through economies of scale, revenue enhancement, risk reduction, shared cost of product
development and improved access to markets and new technologies. However, it is also a fact
that many M &A‘s have produced disappointing results with three out of four mergers and
acquisitions failing to achieve their financial and strategic objectives. While many reasons have
been advanced for the failure ranging from financial, organizational, to people related; it remains
true that M & A‘s pose strategic challenges for both academicians and researchers.

While M & A‘s have become a global trend, the resurgence in the Indian economy would
provide a momentum to such activity in the near future, driven by factors such as boom in the
financial markets, rising stock prices, persistently low interest rates, Specifically, sectors such as
Banking, Pharma, and Telecom are reported to drive the M & A‘s as per an ASSOCHAM study.

The Indian banking industry is today witnessing a spate of mergers and acquisitions. This
phenomenon is indicative of a global trend wherein banking is witnessing the twin trends of
consolidation and convergence. This is driven by the need to acquire strength through bigger size
and therefore be able to compete on a global scale in a competitive and deregulated banking
environment.

It is to be noted that the situation facing the Indian banking industry is in contrast to that
prevailing more than a decade back wherein the Indian banking sector was a monopoly
dominated by the State Bank of India. M & A‘s in the banking sector were initiated through the

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recommendations of the Narasimham Committee on banking sector reforms which suggested

that 'merger should not be viewed as a means of bailing out weak banks.

They could be a solution to the problem of weak banks but only after cleaning up their balance
sheet.' One of the first initiatives in this regard i.e. the HDFC-Times Bank merger in 1999
created history since it signaled ‗size‘ as a competitive advantage, that mergers amongst strong
banks can be both a means to strengthen the base, and of course, to face the cut-throat
competition. Prior to this private bank merger, there have been quite a few attempts made by the
government to rescue weak banks and synergise the operations to achieve scale economics;
unfortunately these proved futile. Subsequently, we witnessed two more mega mergers in the
history of Indian M & A‘s, one the merger of Bank of

Madhura with ICICI Bank, and second that of Global Trust Bank with UTI Bank, (the new bank
being called UTI-Global bank).

The future outlook of the Indian banking industry is that a lot of action is set to be seen with
respect to M & A‘s, with consolidation as a key to competitiveness being the driving force. Both
the private sector banks and public sector banks in India are seeking to acquire foreign banks. As
an example, the State Bank of India, the largest bank of the country has major overseas
acquisition plans in its bid to make itself one of the top three banks in Asia by 2008, and among
the top 20 globally over next few years. Some of the PSU banks are even planning to merge with
their peers to consolidate their capacities. In the coming years we would also see strong
cooperative banks merging with each other and weak cooperative banks merging with stronger
ones.

While there would be many benefits of consolidation like size and thereby economies of scale,
greater geographical penetration, enhanced market image and brand name, increased bargaining
power, and other synergies; there are also likely to be risks involved in consolidation like
problems associated with size, human relations problems, dissimilarity in structure, systems and
the procedures of the two organizations, problem of valuation etc which would need to be
tackled before such activity can give enhanced value to the industry.

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CHAPTER 7 :-
THEORETICAL PERSPECTIVE

Value created by Merger

A merger will make sense to the acquiring firm if its shareholders benefits. Merger will create an
economic advantage (EA) when the combined present value of the merged firms if greater than
the sum of their individual present values as separate entities. For example: if firm P and Q
merge than they are separately worth Vp and Vq, respectively and worth Vpq in combination,
then the economic advantage will occur if:

Vpq>(Vq+Vp)

And it will be equal to:

EA= Vpq-(Vq+Vp)

Suppose that firm p acquires firm Q. After merger P will gain the present value of Q i.e. VQ, but
it will also have to pay a price (say in cash) to Q. Thus, the cost of merger of P is:

Cash paid-Vq

For P, the net economic advantage of merger (NEA) is positive if the economic advantage
exceeds the cost of the merging.

Thus

Net economic advantage = economic advantage-cost of merging

NEA= (Vpq-(Vq+Vp))

Represent the benefits resulting form operating efficiencies and synergy whentwo firms merge.
If the acquiring firm pays cash equal to the value of the acquiring firm value of the acquired
firm.

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i.e. cash paid-Vq=0.

Then the entire advantage of the merger will accrue to the shareholder of the acquiring firm. In
practice the acquiring firm and the acquired firm may share the advantage between themselves.

The acquiring firm can issue share to the target firm instead of paying cash. The effect will be
the same if the share are exchanged in the ratio of cash-to-be-paid to combined value of the
merged firms.

COST AND BENEFIT OF MERGER

When a company ‗A‘ acquires another company say‘B‘, then it is capital investment decision
for company ‗A‘ and it is capital disinvestment decision for company ‗B‘. Thus, both the
companies need to calculate the Net Present Value (NPV) of their decision.

To calculate the NPV to company ‗A‘ there is a need to calculate the benefit and cost of the
merger.

The benefit of the merger is equal to the difference between the value of the combined identity
(PVab) and the sum of the value of both firms as a separate enitity. It can be expressed as:

Benefit= (PVab)-(PVa+PVb)

Assuming that compensation to firm B is paid in cash, the cost of the merger from the point of
view of firm A can be calculated as

Cost = Cash-PVb

Thus,

NPV for A = Benefit-Cost = (PVab-(PVa+PVb))-(Cash-PVb)

The net present value of the merger from the point of view of firm B is the same as the cost of
the merger for ‗A‘. Hence,

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NPV to B = (Cash-PVb)

NPV of A and B in case the compensation is in stock

In the above scenario, we assumed that compensation is paid in cash. However in real life
compensation is paid in terms of stock. In that case, cost of merger needs to be calculated
carefully. It is explained with thr help of an illustration—

Firm A plans to acquire Firm B. Following are the statistics of firms before the merger

A B

Market price per Rs. 50 Rs. 20

share

Number of Shares 5,00,000 2,50,000

If Market Value of Firm A is 25million

If Market Value of Firm B is 5 million

The merger is expected to bring gains, which have a PV of Rs. 5 million. Firms A offers
1,25,000 shares to the shareholders of firm B.

The cost in this case is defined as:

Cost = PVab-PVb

Where A represents the fraction of the combined entity received by shareholders of B. In the
above example, the share of B in the combined entity is:----

Alpha = 1,25,000/(5,00,000+1,25,000) = 0.2

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Assuming that the market value of the combined entity will be equal to the sum of present value
of the separate entities and the benefits of merger. Then,

PVab = PVa+PVb+Benefit = 25+5+5=Rs. 35 million

Cost = a PVab-PVb = 0.2*35-5=Rs. 2 million

Thus

NPV to A = Benefit-Cost = 5-2 = Rs. 3milliom

NPV to B = Cost to A = 2 million

THEORIES IN MERGER AND ACQUISITION

Underlying Sources of Predicted Outcomes Related

Theories Problems Prescriptions

Anxiety theory Uncertainty and Low productivity Self- Top-down

anticipated negative centered behaviors communication
impact on career and
job

Prolonged anxiety Mental and On-going communication

and Physical Speeding up transition
uncertainty illness
Lack of motivation

Social identity theory Loss of old Sense of loss, anger, and grief Disengagement
organizational Denial and refusal of change Efforts (grieving
Identity meetings)

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Interacting with other Intergroup bias & Creating a new identity

Organization‘s conflict Acts of Fostering cross- organizational
members noncompliance arrangements and activities

Acculturation theory Contact with or Acculturative stress & Fostering

adjustment resistance multiculturalism
to different Interorganizational tension Facilitating intercultural
organizational and Conflict learning
culture

Role conflict theory Ambiguous Low productivity Two-way

and conflicting roles Low job satisfaction communication
Leadership of role
clarification

Job Changes in Job satisfaction & Post-M&A job redesign

characteristics theory post-M&A Commitment Job-transfer training
job environments Absenteeism/Turnover

Organizational justice Perceived fair Psychological withdrawal Fair and

theory treatment of Turnover objective human
surviving and resource management
displaced employees Equal participation in
decision making.

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CHAPTER 8 :-
Descriptions of The Stages of Mergers and Acquisitions Integration Process

Stages Descriptions

Pre-merger stage
• Consideration of possible M&A.
• M&A related discussions are confined to top level
management.
• Information leaks cause various rumors and
speculations.
• The organizations are still relatively stable.

Initial planning
and formal
combination stage
• The merger is officially announced.
• Reason, vision, goal, direction of merger are clarified.
• Decisions on management changes,
staffing, organizational structure are made.
• Old organizational entities are dissolved and a new
organization is legally created.
• Joint committees or teams are formed to develop
concrete guidelines and plans of the structural, procedural and
operational integration.

Operational
• Organizations go through actual integration of

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combination stage organizational functions and operations.

• Interactions between the two organizational members
are extended to all work units.
• Employees‘ tasks, roles, bosses, and workplaces are
reassigned.
• Employees learn new ways of doing things and new
cultural expectations.

• Changes and adjustments are continued but gradually

Stabilization stage
diminished.
• Norms and roles are stabilized, and new routines take
place.
• Renewed expectation, cooperation, and inter-unit
tolerance.

• Possibility of prolonged uncertainty, continual

drifting, and lack of directions.

The Foreign Experience

One of the primary reasons for allowing foreign banks to enter in a country is to improve the
quality and the efficiency of banking services and to bring more efficiency and transparency in
the financial sector. Across the world, the entry of foreign banks in a country has usually been
found to benefit the end consumers as it has led to increased credit availability, more efficient
banking and a higher rate of economic growth. The entry of foreign banks has especially
benefited developing countries where the foreign entrants are more efficient than the local banks
and raise the overall level of competition. However, the implications of foreign bank entry on the
stability of the domestic banking sector has been widely debated. This is especially the case for
developing countries where the financial sector is still not very robust and economic crisis have

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occurred in the past. Foreign banks are considered detrimental to the stability of the economy
because they expedite capital flight during troubled times and worsen economic crisis scenarios.
During the South East Asian crisis, these banks were the first to withdraw from the market. They
are also accused of ―cherry picking‖ or choosing only the more attractive clients for doing
business with, leaving the domestic banks to deal with the more risky ones.

The examples of some countries are discussed in the following sub-sections.

1. South Africa

Before the entry of foreign banks, the four big local banks in South Africa, Standard, Nedcor,
FNB and Absa had 80-85% of the domestic market share. After the restriction on this entry were
removed, firms like Deutche, Meryll Lynch and ABN Amro entered the higher end of the market
in corporate, investment and private banking by acquiring local players in some cases and now,
have become the country‘s top equity houses. The local banks have been relegated to the retail
market which they still dominate. The entire sector has become more competitive with
incidences of mergers and the emergence of niche players.

The local banks have been unable to compete with the foreign owned banks on price parameters
owing to the latter‘s lower cost of funds and have also been forced to decrease their cost-income

ratios. At the same time, they have superior local knowledge and the advantage of an established
customer base and are still favored by some local corporates. To reduce their costs, the domestic
banks have started cutting down their branch networks and exploring alternative less-costly
delivery channel like phone banking and net banking. For instance, Nedcor has reduced its
branched by 36 % and have reduced their cost-income ratio to 58.7% form 70%. Absa has
consolidated its operation and increased focus on its core competencies instead of being all
things to all people. The increase in competition has also led to higher attrition rates of about
35% among the employee base of domestic banks. Salaries of the employees with local
experience are increasing as foreign banks offer their recruits esops and generous bonus.

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2. Latin America :-

The entry of foreign banks in Latin American occurred in the post 1995 period when regulatory
limitations of foreign ownership were eased after a severe banking crisis. Today, foreign banks
own a majority of assets in almost all the Latin American countries (except Brazil). The entry of
the foreign banks also led to sector-wide financial reforms, better regulations and better
accountability through increased disclosure requirements.

Source: http://ideas.repec.org/a/fip/fednci/y2002ijannv.8no.1.html
By Mishra, Garima and Goyal, Rashi, IIM Ahemdabad

On The world and the Indian Banking, 26th August 2006

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During 1995-2000, both the foreign and domestic private banks outperformed the state owned
banks. Also, the local banks that had been acquired by the foreign sector banks did not
substantially outperform the ones that were under domestic control. This indicates that both
domestic and foreign markets can co-exist in the market. However, in terms of other financial
parameters, foreign banks had more asset liquidity and a higher rate of loan growth than
domestic banks. They also relied less on deposit financing and had better loan recovery records,
which made them more efficient then the latter.

3. South East Asia- Korea :-

Though foreign banks had entered the Korean market as early as1967, substantial foreign

investment in Korea however, began only in the mid-1990‘s after the relaxation of entry
restrictions by the government. By 2000, 43 banks from 16 countries had established Korean
branches and the total assets of these branches rose to 41.5 billion dollars in 2000 from a mere
6.5 million dollars in 1967. According to a study by Byungyoon Lee, the entry of the foreign
banks helped the domestic banks to improve their cost efficiency due to competitive pressures,
without affecting their profitability.

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Figure 1

Source: By Mishra, Garima and Goyal, Rashi, IIM Ahemdabad

On The world and the Indian Banking, 26th August 2006

4. Central and Eastern Europe (CEEC)

In a study of short term effects of foreign bank entry in ten selected CEEC countries,
theconsequences of foreign bank entry were found to be dependent on factors like degree
offoreign bank ownership, development of the banking market and the economic development of
the country. It was found that in the short term, the competition in the banking sector increased

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and there was an associated decrease in the before-tax profits, non-interest income, average loan
interest rate and loan loss provisions of the existing domestic sector banks. This decrease in
income and loan loss provisions and increase in overhead costs of the banks due to the entry of
the foreign banks was more pronounced for the less developed markets than for the more
develop ones. Also, the impact of foreign bank entry in terms of non-interest income and loan
loss provisions was lesser on the domestic banks which had a greater market share.

From the preceding examples, it is clear that allowing foreign entry is helpful if not essential for
the development and betterment of the financial markets. Though, in the short term the
profitability of the domestic banks takes a hit (as seen by the CEEC example) and there are
incidences of mergers and acquisition, in the long term, the domestic banks are able to
effectively compete with the entrants. Increased competition would only weed out the
inefficiencies in the domestic sector and force the incumbents to become more profitable either
by cost cutting and consolidation or through a renewed focus on their core competencies as is
successfully being done by the South African banks.

CONSODILATION AND HUMAN RESOURCE MANGEMENT

In order to meet the global standards and to remain competitive, banks will have to recruit
specialists in various field such as Treasury management, Credit, Risk Management, IT related
services, HRM, etc. in keeping with the segmentation and product innovation. As a
complementary measure, fast track merit and performance based promotion from within would
have to be institutionalized to inject dynamism and youthfulness in the workforce. To
institutionalize talent management, the first priority for the banking industry would be to spot,
recognize and nurture the talent from within. Secondly the industry has to attract the best talent
from the market to maintain the required competitive edge among global players. The critical
issue is how talent is integrated and sustained in the bank. Therefore proper system of talent
management should be put in place by all the banks.

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CHAPTER 9 :-

LAW & POLICY FOR MERGER & ACQUISITION—INDIAN

PERSPECTIVE

Basic objectives of Competition Act, 2002

 To prevent practices having adverse effect on competition.

 To promote and sustain competition in markets.

 To protect the interest of consumers; and

 To ensure freedom of trade carried on by other participants in markets.

ROADMAP TO MERGER AND ACQUISITION

 Section 6 of the Act provides for regulation of ―combination‖ having an adverse effect on
competition by Competition Commission.

 ―Combination ― includes acquisition of enterprises by persons, the acquisition of control

by enterprises, and the merger or amalgamation of enterprises when the asset value and
turnover involved both in India and ourside certain thresholds.
 ―Combination ― taken place outside India or party to it outside India also covered under
the purview of the Act.
 Factors such as actual and potential level of competition, degree of consolidation in the
market and degree of countervailing power are taken into account when determining
whether a combination has an adverse effect on competition.
 Reporting of such combination by parties to the Comission under Section 6 optional and not
mandatory.
 Enterprises with a lower asset value and turnover than threshold are excluded from the
purview of the Act.

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 Share subscriptions, financing facilities and acquisitions by public financial institutions,

foreign institutional investors, bank and venture capital funds exempted from purview of the
Act.
 Combinations that are found to have a negative impact on competition are to be rendered
void ab initio by the Commission.
 Unlike abuse of dominance, which demands evidence of actual abuse, combinations that are
merely likely to have an adverse effect on competition are prohibited.
 No enquiry by the Commission after expiry of one year from the date on which such
combination has taken effect.
 Modification to combination permissible during inquiry before the Commission.

CRITICAL ISSUES

 Bar to initiate inquiry after expiry of one year from effect of a ―combination‖.

 Likely logistical limitations of the Commission to be able to take cognizance of every violate
―combination‖
 Overlapping of powers with that of High Courts and Securities & Exchange Board of India

(SEBI) as regarded merger/acquisition.

 Across-border ―combination‖ specifically involving Multinational Corporations

 Time bound disposal as provided does not seem realistic in view of likely workload

 No residuary provision available to the Commission to inquire into a combination not falling
within laid down criteria but giving rise to appreciable adverse effect on compeititon in
the relevant market.
 No provision empowering the Commission to seek co-operation and co-ordination directly

from their counter parts abroad.

 Trained/Skilled professional manpower

 Infrastructure support system.

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CHAPTER 10 :-

Merger waves :-

The economic history has been divided into Merger Waves based on the merger activities
in the business world as (1990s) :-

Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999:

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Major M&A in the 2000s :-

Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2009:

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CONCLUSION

Mergers and Acquisitions (M&A) have immensely evoked and still continue to capture scholars‘
interests. More so, M&A in the banking sector evokes high interest simply for the fact that after
decades of strict regulations, easing of the ownership & control regulations has led to a wave of
M&A in banking industry throughout the world.

Considering the changed environment conditions, we believe that M&A in the Indian

Banking are an important necessity. The reasons include (a) fragmented nature of the Indian
banking sector resulting in poor global competitive presence and position; (b) large
intermediation costs and consequent probability in increasing its risk profile; and (c) meet the
new stringent international regulatory norms. While a fragmented Indian banking structure may
very well be beneficial to the customers (given increased competition due to lower market power
of existing players), at the same time this also creates the problem of not having any critical mass
to play the game at the global banking industry level. This has to be looked at significantly from
the state‘s long-term strategic perspective. Given that economic power is increasingly used as a
tool by nations to defend their position, to signal power, to signal intent, and to establish their
supremacy over others hence owning and managing large powerful global banks would be an
obvious interest for every country.

Consolidation through M&A may be requirement of future. M&A of future should aim at
creation of strong entity and to develop ability to withstand the market shocks instead of
protecting the interests of depositors of weak banks. The M&As in the banking sector should be
driven by market related parameters such as size and scale; geographical and distribution
synergies and skills and capacity. The emerging market dynamics like falling interest rate
regime which makes the spread thinner; increasing focus on retail banking, enhanced quest for
rural credit, felt need for increasing more profits especially from operations, reduction of NPA's

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in absolute terms, need for more capital to augment the technology needs, etc are the major
drivers for mergers and acquisitions in the banking sector.

M&As are no substitute for poor assets quality, lax management, indifference to technology up
gradation and lack of functional autonomy and operational flexibility. The banking system will
have to be managed by competent and independent people having adequate power and full
operational autonomy.

With increasing globalisation, attaining size advantages will become critical for Indian banks.
Combined with the need to attain higher capital standards under Basel II Accord, consolidation
in the Indian Banking industry will become imminent. However, the issues that need to be
addressed include maximizing synergies in terms of regional balance, network of branches, HR
culture, and asset commonality and legacy issues in respect of technology. In the present
scenario, we must develop small number large banks of global size instead of large number of
smaller banks as we are having now.

Mergers and Acquisitions 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.

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Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in
the banking sector. They also try to enhance their customer base.

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 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).

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Bibliography:
WEB LINKS :-

 https://www.investopedia.com/terms/m/mergersandacquisitions.asp
 https://corporatefinanceinstitute.com/resources/knowledge/deals/mergers-acquisitions-ma/
 https://www.wallstreetmojo.com/mergers-and-acquisitions/
 https://www.edupristine.com/blog/mergers-acquisitions
 https://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html

ARTICLES :-

 https://economictimes.indiatimes.com/topic/mergers-and-acquisitions
 https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/m-a-trends-
report.html
 https://www.izito.co.in/ws?q=us%20mergers%20and
%20acquisitions&asid=iz_in_ga_1_cg1_04&mt=b&nw=s&de=c&ap=&ac=481&cid=15234
510889&aid=131364397164&lo

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