Merger & Acquisition: The Exemplar Transformation

Team Name: Research Rats

Author 1:- Sunit Das
Author 2:- Abinash Abhisekh Baral
Batch: – (2019-2021)
2nd Year MBA- Rural Management (Xavier School of Rural Management, Xavier University, Bhubaneswar, Odisha)
Introduction

Mergers and Acquisitions are two words that are often used interchangeably and are
misunderstood. When company A and company B having similar size, combine their
resources to form an entirely new joint organization, it is called a Merger. In contrast, when
company A with a relatively bigger size takes over or absorbs the resources of company B
with a smaller size, it is called Acquisitions. Due to the negative undertone of Acquisitions,
many acquiring companies denote them as mergers even when it is not valid.

Growing Trends in M&A

According to the Bain & Company 2019 report, the Indian M&A landscape has witnessed
over 3600 M&A deals from 2015-2019 with the aggregate value of more than $310 billion. It
marked one of the largest deals that happened in the energy and technology sectors. Deal
volume in industries such as energy, industrial goods, and telecommunications & media have
represented more than 60% of deals by volume and value. Firms are trying to integrate
technology into their business process to get an edge over their competitors. So many cross-
industry M&A can be witnessed in the current scenario and in the coming years, where
technology will be the pivotal point for all the industries. The recent legislative and
regulatory changes will also impact the M&A scenario. The changes in the Companies Act
2013, securities regulations by SEBI, changes in FEMA 1999, and adjustments to
Competition Act 2002, Income Tax Act 1961, Insolvency and Bankruptcy Code 2016 will
affect the M&A in India.

Reliance-Future Group deal

Reliance Retail Ventures (RRV), a unit of the behemoth oil-to-telecom conglomerate

Reliance Industries Limited (RIL), is acquiring the retail-wholesale business logistics and
warehousing business from Kishore Biyani led Future Group for a lump sum of INR 24,713.
Future Group’s financial and insurance business was not part of the deal. Future Retail has
1388 stores, including Big Bazaar, Fashion at Big Bazaar (FBB), ezone, Easyday, Nilgiris,
Central and Brand Factory, and Foodhall. Biyani-Future Retail, Future Lifestyle Fashions,
and Future Supply Chain Solutions would be merged under one entity Future Enterprises
(FEL), and will be taken over by Reliance. Future Group was plagued by rising debt, which
was made severe with the onset of the COVID-19 pandemic. It had a rising debt of INR
12,778 as of September 2019. Future Retail alone has a gross debt of INR 2,657 crore as of
March 2019.
The rescue by Reliance will prevent Future Group from going bankrupt. The acquisition also
stopped a slew of salary and job cuts that its employees would have faced if the company had
gone bankrupt. With a supplement from the Reliance brand, it can potentially grow more vital
in the retail business. This deal will strengthen Reliance’s retail business and increase its

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 Merger & Acquisition: The Exemplar Transformation
Team Name: Research Rats
Author 1:- Sunit Das
Author 2:- Abinash Abhisekh Baral
Batch: – (2019-2021)
2nd Year MBA- Rural Management (Xavier School of Rural Management, Xavier University, Bhubaneswar, Odisha)
offline presence while increasing profits with improving scale. Reliance’s retail business
values at around INR 95000 crore. With the inclusion of Future’s estimated INR 35,000 crore
business, Reliance’s retail arm will become a whopping INR 1 30,000 crore business. It will
be five times bigger than Avenue Supermarts, the parent company of DMart, having a
business of INR 25,000 crore as of March 31, 2020.
Walmart- Flipkart deal

The recent acquisition of the retail giant Walmart from the USA with the stalwart of the e-
commerce Flipkart from India acquired Flipkart with a whopping amount of 16 million USD.
This acquisition by Walmart has helped to add a significant number of 175 million consumer
base into the bags of Walmart. With this, the penetration of Walmart into the Indian market
has raised a threat for Amazon, operating in Indian markets against Flipkart. The famous
supply chain arm (ekart) with which Flipkart been able to work across urban geographies
including 800 cities and accountable for 50,000 per day deliveries on an average when
getting leverage of the effective supply chain strategies followed by Walmart then the
operation across the Indian populace become unbeatable with an increased inefficiency.
Walmart has also proposed in its deal contract that it will be mapping 60 lakhs Kirana stores
in India for having a significant penetration in the Indian market sphere. Post-acquisition,
Flipkart got a valuation of its firm around 21 billion USD compared to pre-acquisition when
it was about 12 billion USD making it a highly valued start-up in the India eco-space. The
more significant benefit of Flipkart with this acquisition includes – Walmart developing
market infrastructure strategy for Flipkart, infusing its effective supply chain mechanism,
continuously improving the quality standards of its product offerings based on customer
feedback. Besides this, Sam’s club (retail warehouse club in the USA), which is owned and
operated by Walmart, will be beneficial for the Indian market segment, and the access of
strategy followed by Walmart (low cost and high volume) of products will satisfy the
psychological desire of the Indian consumer base. Similarly, Walmart will be enjoying the
prowess of Flipkart in Artificial Intelligence, technological adaptability, its extensive
consumer base, and the trustworthiness of the Flipkart brand from the Indian market.

Vodafone-Idea deal

The main reason for the merging of Vodafone and Idea in the telecom sector is to decrease
the supremacy of Reliance Jio, which had taken a jump to the first position due to ongoing
conflicts of Vodafone and Idea. With this merger, both the firms aim to enjoy the privilege of
synergy benefits, and with a larger scale of operation, they can boost up with their profit
margins. With the combined entities of both Vodafone and Idea, the valuation of the merger
was estimated around INR 12,000 crore. Considering the pre-merger scenario, Vodafone had
a market share of about 18.10 percent, and the Idea had a market share of 16.90 percent.
However, after the merger, the combined market share was around 35 percent, which was
dominant enough to pull down Bharti Airtel from its number one position. It helped the

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 Merger & Acquisition: The Exemplar Transformation
Team Name: Research Rats
Author 1:- Sunit Das
Author 2:- Abinash Abhisekh Baral
Batch: – (2019-2021)
2nd Year MBA- Rural Management (Xavier School of Rural Management, Xavier University, Bhubaneswar, Odisha)
merged firms to get the benefits of the integration of cost, which reflected an estimation of
INR 64,000 crore. The merger has drastically reduced the operational cost of both the firms
to 60 percent of the total cost spent. As a result, the saved amount is now being used to
improvise the quality and service provided by the firm. The Vodafone Idea merger has taken
a massive leap in terms of revenue market share of around 40 percent compared to Bharti
Airtel, which claims to have 32 percent. Since the core motive behind the merger of
Vodafone and Idea was to pull themselves out of indebtedness and as they were also facing
replication of their resources, so the only way that was left with the merged firms was to lay
off their employees.

Conclusion

With more foreign companies trying to set up shop in India, a merger or acquisition of an
Indian company is a convenient path to gain new and retain existing customers. The
government’s initiatives to expedite M&A, such as deemed approval under Green Channel
Route by the Competition Commission of India for specific categories, can help make India a
lucrative business place. According to the ‘Ease of Doing Business’ ranking by the World
Bank, India has moved 14 places up to 63rd. Key events such as the US-China trade war
leading uncertainty in the geopolitical scenario and the 17th Lok Sabha elections impacted
the investor sentiments in 2019. In 2020, the pandemic has put a halt to any business deals.
Although the government is taking measures to attract more industries to India, it will take
time to come to fruition.

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