Merger Acquisition and Corporate Restructuring 1

2 Merger Acquisition and Restructuring

MERGERS,
ACQUISITIONS
AND
CORPORATE
RESTRUCTURING

Dr. Nishikant Jha

Ph.D. ICWA, PGDBM, M.Com., DCA, DCP

First Edition : 2011

MUMBAI  NEW DELHI  NAGPUR  BENGALURU  HYDERABAD  CHENNAI  PUNE  LUCKNOW  AHMEDABAD
 ERNAKULAM  BHUBANESWAR  INDORE  KOLKATA  GUWAHATI
Merger Acquisition and Corporate Restructuring 3

© Author
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4 Merger Acquisition and Restructuring

Preface

In today’s globalised economy, organisations have to now compete in

new ways. In a world of continuous redefinition of industry boundaries and
commingling technologies, one should strive for ‘opportunity share’ in future
markets. Therefore, the obvious need is for a new paradigm in strategic
management that engenders a longitudinal focus on restructuring process.
Strategic decisions such as disinvestment, new product launches,
acquisitions, mergers, etc., though quite in vogue for long, have become
more relevant today than in the past for creating new space for the existing
units to claim their pie in the opportunity share. Mergers and Acquisitions
are essentially meant to attain greater market share, acquire additional
brands; cannibalise competing brands; realise improved infrastructure; create
new synergies; capitalise on efficiencies and economies of scale or to
globalise in the shortest span of time. It also helps businesses capitalise
on organisational synergies and thereby reap significant financial advantages.
My central aim is to provide a conceptual framework that enables
executives to comprehend and develop a perspective of their own regarding
the events that the financial press keeps reporting under the section
‘Mergers and Acquisitions’. Secondly as I belive that management students
(MMS or MBA or PGDBM) would constitute a siseable part of my target
audience, I have made an attempt to cater to their special needs by
supplementing each chapter with case studies. Problems and questions that
pave the way for a quick assimilation of the theoretical understanding is
discussed.
This book is an unique presentation of subject matter in an orderly
manner. It is a student friendly book and a tutor at home. We hope the
teaching faculty and the student community will find this book of great use.
I am extremely grateful to CA Jinesh Shah who assisted me in writing
the book and
Mr. K. N. Pandey of Himalaya Publishing House for the devoted and untiring
personal attention accorded by them to this publication. I gratefully
acknowledge the immense contribution and suggestions from MMS faculties
of various Institutes.
Further suggestions are welcome from one and all for upgradation of
this book in the times to come.
Author
Merger Acquisition and Corporate Restructuring 5

Foreword
Merger and the Acquisitions (M&As) as strategic tools are looked upon
as innovative measures to restructure the business. The last decade was
marked with many M&A cases at the local, national and global level.
Mergers of Tata – Corus, Arcelor – Mittal are the major events in the
economic history of India. We are expecting many more M&As to happen in
the near future in the manufacturing as well as the services sector, across
the globe.
M&A is, “a process, where the idea needs to get transformed into
reality. This process requires knowledge, understanding and a lot of planning
at every stage, right from valuation of a firm to legal aspects as well as to
the proper documentation. Every stage in the process is a challenge and
the skill to make the right decision requires a strong knowledge base.”
Dr. Nishikant Jha has explained the entire process of corporate
restructing through M&A in a lucid and interesting way. The book is very
well-organised and the reader becomes fully equipped with the required
skill-set to execute the process of M&A. The book is aimed at providing an
in-depth understanding of M&A to the management students, but I believe
that it will be of great use to research scholars intellectuals and planners
having specific focus on this field. I am sure that the book will find a place
of pride in academic, research, public administration as well as in the
corporate libraries.
I highly appreciate the contribution of Dr. Nishikant Jha and congratulate
him for this successful endeavour.
Dr. Mrinalini Kohojkar
(Director)
(Thakur Institute of Management
Studies and Research)
6 Merger Acquisition and Restructuring

Syllabus

Mergers, Acquisitions and Corporate Restructuring

100 Marks
Course Content
1. Need for Restructuring
2. Various forms of Restructuring, viz., Mergers, Acquisitions,
Amalgamation, Slump Sales, De-Take Overs, Spin-off, etc. and
implications of these vis-a-vis strategic.
3. Valuation of business brands, human resource, capital intangible
assets, etc,
4. Statutory Regulation under Companies Act, SEBI Regulations, Listing
Agreements, allied bodies vis-a-vis compliance therewith.
5. Taxation aspects of restructuring, mergers, etc.
6. Leveraged buy-outs
7. Doctrine of due diligence
8. Other implications of take-overs mergers, etc.
9. Case studies of specific instances of Mergers, De-mergers, etc.
Merger Acquisition and Corporate Restructuring 7

Contents

1 Merger Acquisition and Corporate Restructuring 1 – 30

2 Various Forms of Restructuring 31 –73

3 Valuation of Business 74 – 222

4 Legal Aspects and Provisions of Companies Act, SEBI

Regulations, etc for Mergers, Amalgamations and Demergers
223 – 285

5 Taxation Aspects of Mergers and Amalgamations 286 – 399

6 Leveraged Buy-out 400 – 437

7 Doctrine of Due Diligence 438 – 481

8 Other Implications viz Procedural Aspects, Including

Documentation for Merger/Acquisition etc. 482 – 515

9 Case Studies 516 – 573

8 Merger Acquisition and Restructuring

Brief Contents
1. Merger Acquisition and Corporate Restructuring 1 – 30

 Introduction
 Motives Behind Mergers
 The Five-Stage (5-s) Model
 Mergers and Acquisitions in India
 Other Possible Purposes for Restructuring are Short Listed Below
 Growing Need for Corporate Restructuring
2. Various Forms of Restructuring 31 –73

 Introduction
 When to Restructure?
 Payment of Consideration
 Case Study I
 Case Study II
3. Valuation of Business 74 – 222

 Introduction
 Meaning and Valuation Approaches
 Choosing The Right Valuation Method
 Steps Method and Formula for Calculation of Goodwill
4. Legal Aspects and Provisions of Companies Act, SEBI
Regulations, etc for Mergers, Amalgamations and Demergers
223 – 285
 Operative Sections
 Steps To Be Followed By Transferee Company
 Annex I
 Annex II
5. Taxation Aspects of Mergers and Amalgamations 286 – 399

 Meaning of Amalgamation
 Cash Consideration
 The Form of Financing
 Stamp Duty Aspects of Mergers, Ergers and Amalgamations
 Filing of Various Forms in The Process of Merger/Amalgamation
Merger Acquisition and Corporate Restructuring 9

6. Leveraged Buyout 400 – 437

 Introduction
 Aspects of LBO Financing
 Structuring Leveraged Buyouts
 Sources of LBO Financing
7. Doctrine of Due Diligence 438 – 481
 Introduction
 M&A and Shareholder Value
 Shareholders or Stakholders?
 How M&A Can Lead to Governance Failure
 Theory of A Multinational Enterprise
 Motives Behinds International Mergers and Acquisitions
 Technology
 Government Policy
 Political and Economic Stability
 Different Labour Costs and Productivity
 Reasons for Failure of Mergers and Acquisitions
 Forging a New Corporate Culture
8. Other Implications viz Procedural Aspects, Including
Documentation for Merger/Acquisition etc. 482 – 515

 Introduction
 Procedural Aspects for Merger and Acquistions
 Amalgamation Through Bifr Under Sica, 1985
 Economic Considerations
 Strategic Management of Mergers
 Problems in Integration
 Managerial Challenges
9. Case Studies 516 – 573

   Case Study I
 Case Study II
 Parties to the Scheme
 Case Study III
10 Merger Acquisition and Restructuring

 PART A - Deals with the Introduction and Definitions

 PART B - Demerger of Manufacturing Division of Alums of Wada in to
Bharat
 PART C - General Terms and Conditions
 Case Study VI
 Case Study V
 Case Study VI
 Case Study VII
 Case Study VIII
 Case Study IX
 Case Study X
Merger Acquisition and Corporate Restructuring 11

C
H Merger Acquisition
A
P
T
E
R
1 and
Corporate Restructuring

INTRODUCTION
During the last few decades, the global industrial landscape has been
completely redrawn by the forces of globalisation, deregulation and
unprecedented technological development. Companies have responded to
the competitive pressures unleashed by these forces and they are today
vying with each other in search of excellence and competitive edge,
experimenting with various tools and ideas. The changing national and
international environment is radically altering the way business is conducted.
With the pace of change so great, corporate restructuring has assumed
paramount importance.
As a result of globalisation, today the business firms are operating in
highly competitive environment. In today’s business world, profitable growth
constitutes one of the prime objectives of the business organisations. It can
be achieved in two different methods:

Internal
 Through the process of introducing as developing new products.
 By expanding as enlarging capacity of the existing products.

External
By acquisitions of exisiting business firms in the forms of mergers,
acquisitions, amalgamations, takeovers, absorption, consolidation, etc.
Both of the above methods have their own strengths and weaknesses.
In the competitive world, the growth of the firm should be quick and
sustainable. The internal growth usually involves a longer implementation
period and also entails greater uncertainties. The external growth expedites
12 Merger Acquisition and Restructuring

the pace of growth as the acquired firm already has the facilities as market
acceptable products. Hence, a growing firm may be in constant search for
indentifying potential firms which may be merged. The firm will opt for
merger if it maximises the wealth of shareholders. M and A have become
universal practice in the corporate world for securing, survival growth,
expansion and globalisation of the enterprises and achieving multitude of
objectives. M&A have started taking place in India in the recent years.
Corporate restructuring is the partial dismantling or otherwise re-
organising a company for the purpose of making it more efficient and
therefore, more profitable. The process of corporate restructuring often
occurs after buy-outs, corporate mergers and acquisitions, divestiture,
demergers and bankruptcy.
In a rapidly changing world, companies are facing unprecedented turmoil
in the global markets. Severe competition, rapid technological change, and
rising stock market volatility have increased the burden on managers to
deliver superior performance and value for their shareholders.
In response to these pressures, an increasing number of companies
around the world are dramatically restructuring their assets, operations,
and contractual relationships with shareholders, creditors, and other financial
stakeholders. Corporate restructuring has facilitated thousands of
organisations to re-establish their competitive advantage and respond more
quickly and effectively to new opportunities and unexpected challenges.
Corporate restructuring has had an equally profound impact on the many
more thousands of suppliers, customers, and competitors that do business
with restructured firms.
One of the most high-profile features of the business and investment
worlds is corporate restructuring. In the case of mergers and acquisitions,
the potential acquiring firm has to deal with the management and
shareholders of the other firm. Corporate restructuring is carried out
internally in the firm with the consent of its various stakeholders. Corporate
restructuring has gained considerable importance due to the following
reasons:
 Intense competition
 Globalisation
 Technological Change
 Initiation of Structural reforms in the industry due to LPG (shedding
non-core activities)
 Foreign investment
It involves significant re-orientation, re-organisation or realignment of
assets and liabilities of the organisation through conscious management
action to improve future cash flow stream.
Merger Acquisition and Corporate Restructuring 13

Meaning
Corporate restructuring is an episodic exercise, not related to
investments in new plant and machinery which involves a significant change
in one or more of the following:
 Pattern of ownership and control
 Composition of liability
 Asset mix of the firm
It is a comprehensive process by which a company can consolidate its
business operations and strengthen its position for achieving the desired
objectives:
 Staying
 Synergetic
 Competitive
 Successful
Restructuring is the act of partially dismantling and re-organising a
company for the purpose of making it more efficient and therefore more
profitable. It generally involves selling of portions of the company and
making severe staff reductions. Restructuring is often done as part of a
bankruptcy or of a takeover by another firm, particularly a leveraged buyout
by a private equity firm.
The rationale behind corporate restructuring is to conduct business
operations in more efficient, effective and competitive manner in order to
increase the organisation’s market value of share, brand power and synergies.

Characteristics
The selling of portions of the company, such as a division that is no
longer profitable or which has distracted management from its core business,
can greatly improve the company’s balance sheet. Staff reductions are often
accomplished partly through the selling or closing of unprofitable portions
of the company and partly by consolidating or outsourcing parts of the
company that perform redundant functions left over from old acquisitions
that were never fully integrated into the parent organisation.
Other characteristics of restructuring can include:
 Changes in corporate management (usually with golden parachutes)
 Retention of corporate management
 Sale of underutilised assets
 Outsourcing of operations such as payroll and technical support to
a more efficient third party
 Moving operations such as manufacturing to lower-cost locations
14 Merger Acquisition and Restructuring

 Re-organisation of functions such as sales, marketing, and distribution

 Renegotiation of labour contracts to reduce overhead
 Refinancing of corporate debt to reduce interest payments
 Forfeiture of all or part, of the ownership share by pre-structuring
stockholders.

Need and Rationale of Restructuring

The important rationale behind every corporate restructuring are:
 To flatten organisation so that it could encourage culture of initiatives
and innovations
 To increase focus on core areas of work and to get closer to the
customer.
 To reduce cost/reduce level of hierarchy/reduce communication
delay.
 To reshape the organisation for the new era.
 To develop organisation on the guidelines of consultant/stake holder
We have been learning about the companies coming together to form
another company and companies taking over the existing companies to
expand their business. With recession taking toll of many Indian businesses
and the feeling of insecurity surging over our businessmen, it is not
surprising when we hear about the immense numbers of corporate
restructurings taking place, especially in the last couple of years. Several
companies have been taken over and several have undergone internal
restructuring, whereas certain companies in the same field of business
have found it beneficial to merge together into one company.

D id y o u r e a d t o m o r r o w ’s n e w s p a p e r ?

2
2

All our daily newspapers are filled with cases of mergers, acquisitions,
spin-offs, tender offers and other forms of corporate restructuring. Thus,
important issues both for business decision and public policy formulation
have been raised. No firm is regarded safe from a takeover possibility. On
the more positive side, Mergers and Acquisitions may be critical for the
healthy expansion and growth of the firm. Successful entry into new
Merger Acquisition and Corporate Restructuring 15

product and geographical markets may require Mergers and Acquisitions at

some stage in the firm’s development.
Generally, most of the corporate growth occurs by internal expansion,
when a firm’s existing divisions grow through normal capital budgeting
activities. Nevertheless, if the goals are easily achieved within the firm, it
may mean that the goals are too small. Growth opportunities come in a
variety of other forms and a great deal of energy and resources may be
wasted if an entrepreneur does not wait long enough to identify the various
dynamics which are already in place. The most remarkable examples of
growth and often the largest increases in stock prices are a result of
mergers and acquisitions. M&As offer tremendous opportunities for companies
to grow and add value to shareholders’ wealth. M&As is a strategy for
growth and expansion. M&As increase value and efficiency and thereby,
increase shareholder’ value. M&As is a generic term used to represent
many different types of corporate restructuring exercises.
Successful competition in the international markets may depend on
capabilities obtained in a timely and efficient fashion through Mergers and
Acquisitions. Many have argued that mergers increase value and efficiency
and move resources to their highest and best uses, thereby increasing
shareholder value. To opt for a merger or not is a complex affair, especially
in terms of the technicalities involved.
In this context, it would be essential for us to understand what corporate
restructuring and mergers and acquisitions are all about.
The concept of restructuring involves embracing new ways of running
an organisation and abandoning old ones. It requires organisations to
constantly reconsider their organisational design and structure,
organisational systems and procedures, formal statements on organisational
philosophy and may also include values, leader norms and reaction to
critical incidences, criteria for rewarding, recruitment, selection, promotion
and transfer. A company that has been restructured effectively will generally
be leaner, more efficient, better organised, and better focused on its core
business
Reconstruction is a scheme of compromise or arrangement entered into
by a company with its members and creditor with a view to reconstituting
its financial structure. It is a process by which the assets and liabilities
of a company are revalued, the losses suffered by the company are written
off by a deduction of the paid-up value of shares and or varying the rights
attached to different classes of shares and compounding with the creditors.
Reconstruction may be external or internal. Internal reconstruction is
effected without the company being liquidated. External reconstruction on
the other hand, is brought about by liquidating the company. In this case,
the business of the company is transferred to another company consisting
substantially of the same shareholders with a view to its being continued
by the transferee company. External Reconstruction is in fact covered under
the category of amalgamation in the nature of merger.
16 Merger Acquisition and Restructuring

Before going for merger considerable amount of brainstorming would be

required by the managements to reach a conclusion. E.g. A due diligence
report would clearly identify the status of the company in respect of the
financial position along with the net worth and pending legal matters and
details about various contingent liabilities. Decision has to be taken after
having discussed the pros and cons of the proposed merger and the impact
of the same on the business, administrative costs benefits, addition to
shareholders’ value, tax implications including stamp duty and last but not
the least also on the employees of the Transferor or Transferee Company.
India’s emergence as one of the fastest growing major economies of the
world has been supported by the economic policy measures initiated
particularly since the 1990s. After the tentativeness of the early years of
reform, restructuring of companies started in a big way in the early 90’s
with the impact and fruits of LPG (Liberalisation, Privatisation and
Globalisation), when the Indian economy unleashed immense opportunities
for growth and leadership in both the new age businesses as well as real
economy businesses. As Indian companies stood on the threshold of the
next phase of growth, several of them found themselves required to make
more decisive choices in respect of the portfolio of businesses in their fold.
In the process, Indian companies – the public sector included ­were
increasingly called upon to pursue focused growth through mergers and
acquisition on the one hand, and divestiture and demerger on the other.

Restructuring-underlying Issues
Corporate restructuring, which includes many forms of business and
financial activities as seen above, raises several questions like:
 Are they good or bad for the economic health of the nation?
 Do they divert the energies of managers from bonafide economic
activity to financial manipulation?
 Do they use up financial resources which otherwise would be employed
in real investment activities?
 Why has such heightened merger activity been a phenomenon in the
last 20 years?
To answer these questions we need to look at the theory or theories
explaining these restructuring activities. We will try to explain this gradually
as we progress into the subsequent chapters.
We begin with explaining the major merger movements that have taken
place in the United States since the 1890s.

Merger Waves
United States has witnessed five periods of merger activity, often
referred to as merger waves, each wave having been dominated by a
particular type of merger. These periods were characterised by high-level
of cyclic activity, that is, high levels of mergers followed by periods of
relatively fewer mergers. All the merger movements occurred when the
Merger Acquisition and Corporate Restructuring 17

economy experienced sustained high growth rates and coincided with

particular developments in business environments, because firms are
motivated to make large investment outlays only when the business prospects
are favourable. When such favourable business prospects are joined with
changes in competitive conditions directly motivating a new business strategy,
M&A activity will be stimulated.
The First Wave -1897-1904
The mergers of the first wave consisted mainly of horizontal mergers,
which resulted in a near monopolistic market structure. This merger period
is known for its role in creating large monopolies. The first billion-dollar
mega merger deal between U Steel and Carnegie Steel took place during
this period. The resulting steel giant merged 785 separate firms. At one
time, US Steel accounted for as much as 75 per cent of the steel-making
capacity of the United States.
Some of today’s industrial giants originated in the first merger wave.
These include General Electric, Navistar International (formerly International
Harvester; Du-Pont Inc., Standard Oil, Eastman Kodak and American Tobacco
Inc. Some of these companies like American Tobacco (enjoyed 90 per cent
market share) and Standard Oil (enjoyed 85 per cent market share) were
truly dominant firms by the end of the first merger wave. During this wave,
there were 300 major combinations covering many industrial areas and
controlling 40 per cent of the nation’s manufacturing capital. More than
3000 companies disappeared during this period as a result of mergers.
Another feature of this wave is the formation of trusts, where the
investor invested funds in a firm and entrusted their stock certificates with
directors who (ensured that they received the dividends for their trust
certificates. These trusts were formed by dominant business leaders, such
as JP Morgan of the House of Morgan and John D Rockefeller of Standard
Oil and National City Bank, as a response to the poor performance of many
of the nation’s businesses as they struggled with the weak economic climate.
They used their voting powers to force multiple mergers in certain industries
in an effort to reduce the level of competition allowing the surviving companies
to enjoy certain economies of scale. Liberalisation of corporate laws was
also one of the reasons behind the resounding success of this merger wave.
This merger movement accompanied major changes in economic
infrastructure and production technologies. It followed the completion of
transcontinental railroad system, the advent of electricity, and the increased
use of coal. The completed rail system resulted in the development of a
national economic market and thus, the merger activity represented to a
certain extent the transformation of regional firms into national firms.
As firms expanded, they exploited economies of scale in production and
distribution. In pursuit of economies of scale, an expansion process took
place in many manufacturing industries in the US economy. The expansion
of the scale of business also required greater managerial skills and lead
to specialisation in management.
 18 Merger Acquisition and Restructuring

Financial factors led to the end of the first merger wave. First, the
shipbuilding trust collapse in the early 1900s brought to light the dangers
of fraudulent financing. Secondly, the stock market crash of 1904 followed
by the banking panic of 1907 led to the closure of many banks and paved
the way for the formation of the Federal Reserve System. The era of easy
availability of finance, one of the basic ingredients of takeovers, ended
resulting in the halting of the first wave. Further, the application of anti-
trust legislations, which was earlier lenient, became very stringent. The
Federal Government under President Theodore Roosevelt and subsequently,
under President William Taft made a crackdown on large monopolies. For
example, Standard Oil was broken into 30 companies such as Standard Oil
of New Jersey (subsequently renamed Exxon), Standard Oil of New York
(renamed Mobil), Standard Oil of California (renamed Chevron) and Standard
Oil of Indiana (subsequently renamed Amoco).

Table 1.1
Year 1897 1898 1899 1900 1901 1902 1903 1904
Number of Mergers 69 303 1208 340 423 379 142 79
Source: // Mergers, Acquisitions and Corporate, Restructurings//, by Patrick A Gaughan.

The Second Wave -1916-1929

Like the first wave, the second merger movement also began with an
upturn in business activity. Several industries were consolidated during the
second merger wave. The result was an oligopolistic industry structure
rather than monopolies. The consolidation pattern which was established
in the first merger wave, continued in the second merger wave also. The
combinations in this period occurred outside the previously consolidated
heavy manufacturing industries. The most active were the banking and the
public utilities industries. A large number of mergers occurred in industries
like primary metals, petroleum products, food products, chemicals and
transportation equipment.
A large portion of the mergers in the 1920s represented product-
extension mergers like IBM and General Foods, market-extension mergers
like in food retailing, departmental stores, and vertical mergers in the
mining and metal industries.
The second merger period witnessed the formation of many prominent
corporations that still operate today. These include General Motors, IBM,
Union Carbide Corporation and John Deere.
Between 1926 and 1930, a total of 4,600 mergers took place, and
between 1919 and 1930, 12,000 manufacturing, mining, public utility, and
banking firm disappeared. The development of a nationwide rail transportation
system combined, with the growth of motor vehicle transportation, continued
to transform local markets into national markets. The proliferation of radios
in homes as a major source of entertainment enhanced the competition
among firms. Marketers took advantage of this new advertising medium to
Merger Acquisition and Corporate Restructuring 19

start national brand advertising. This led to the beginning of the era of mass
merchandising.
Mergers in this wave were facilitated by the limited enforcement of
antitrust laws and the federal government’s encouragement for the formation
of business co-operatives to enhance the nation’s productivity as part of the
war effect. The firms were urged to work together, rather than compete
with each other during wartime. The government maintained these policies
even after the war ended.
The second merger wave came to an end when the stock market
crashed on October 29, 1929. The crash resulted in a dramatic drop in the
business and an investment confidence. Business and consumer spending
was curtailed, thereby worsening the Depression. After the crash, the
number of corporate mergers declined dramatically.
Investment bankers played a key role in the first two phases of mergers.
They exercised considerable influence among the business leaders. A small
number of investment bankers controlled the majority of capital available for
financing mergers and acquisitions. The investment banking industry was
more concentrated in those years than it is today.

The 1940s
The Second World War and the early post-war years were accompanied
by growth of the economy and an increase in merger activity. However, the
merger movement was much smaller than the earlier ones.
Economists pointed out that government regulations and tax policies
are the motivating factors behind mergers. During this period, larger firms
acquired smaller privately-held companies for motives of tax relief. Due to
the high estate taxes, transfer of businesses within families was very
expensive and hence these businesses were sold to other firms. These
mergers did not result in increased concentration because they involved
smaller companies, which did not represent a significant portion of the total
industry’s assets.
As this period did not feature any major technological changes or
dramatic developments in the nation’s infrastructure, the merger movement
was smaller compared to the earlier ones.
The Third Wave - 1965-1969
The merger activity reached its then historically highest level during
this period. This was due to the booming economy of this period. This period
is known as a conglomerate merger period, as small or medium-sized firms
adopted a diversification strategy into business activities outside their
traditional areas of interest. During this period, relatively smaller firms
targeted larger firms for acquisition. Eighty per cent of the mergers that
took place were conglomerate mergers that were more than just diversified
in their product lines. For example, ITT acquired such diversified businesses
like car rental firms, bakeries, consumer credit agencies, luxury hotels,
airport, parking firms, construction firms, etc.
 20 Merger Acquisition and Restructuring

The conglomerate movement was due to the tougher antitrust

enforcement. Armed with tougher laws, the federal government adopted a
stronger antitrust stance, coming down heavily on both horizontal and
vertical mergers. Firms with financial resources, which sought to expand,
found that the only available alternative was to form conglomerates.
The rapid growth in management science accelerated the conglomerate
movement. With the wide acceptance of management principles, graduates
believed that they possessed the broad-based skills necessary to manage a
wide variety of organisational structures. Hence such managers believed
that they could manage the corporate organisation that spanned various
industry categories. The belief that conglomerate mergers could be
manageable became a reality.

Table 1.2
Year 1963 1964 1965 1966 1967 1968 1969 1970
Number 1361 1950 2125 2377 2975 4462 6107 5152
of Mergers
Source: “Mergers, Acquisitions and Corporate Restructurings”, by Patrick A Gaughan.

Around 6000 mergers took place in the US economy during this period
and which led to the disappearance of around 25,000 firms. Because most
of these mergers were conglomerates, they did not result in increased
industrial concentration.
Investment bankers did not finance most of the mergers in this period.
The booming stock market prices provided equity financing to many of the
conglomerate takeovers. As the mergers financed through stock transactions
were not taxable they had an advantage over cash transactions, which were
subject to taxation.
Many of the acquisitions that took place during this period were followed
by poor financial performance. Many of the mergers failed as managers of
the diverse enterprises often had little knowledge of the specific industries
that were under their control. For example, Revlon, a firm that has an
established track record, (success in the cosmetic industry), saw its core
cosmetic industry suffered when it diversified into unrelated areas such as
healthcare.
The Fourth Wave - 1981-1989
Following the recession in 1974-1975, the US economy entered a long
period (expansion during which the merger and acquisition trend went
upward). Hostile mergers played a significant role in the fourth wave.
Takeovers were considered healthy or hostile by the reaction of the target
company’s board of directors. If the board accepts the takeover, it is considered
friendly, and if it opposes it, it is deemed to be hostile.
Although the number of hostile deals were not very high, the figure was
significant in terms of value of mergers and acquisitions. The size and
prominence of the merger and acquisition targets, distinguishes the fourth
Merger Acquisition and Corporate Restructuring 21

merger period from the other three waves. The fourth wave was a period of
mega-mergers. Some of the largest firms in the world (Fortune 500 firms),
became the target of acquirers.

Table 1.3
Year 1981 1982 1983 1984 1985 1986 1987 1988 1989
Number of Mergers 2395 2346 2533 2543 3001 3336 2032 2258 2366
Source: “Mergers, Acquisitions and Corporate Restructurings”, by Patrick A Gaughan.

There was a great degree of concentration within the oil industry, as

it experienced a high level of merger activity. The oil and gas industry
accounted for 21.6 per cent of the total dollar value of mergers and
acquisitions between 1981 and 1985. Another industry, which experienced
high level of merger activity, is the drugs and medical equipment industry.
Deregulation in some of the industries was the main reason behind the
disproportionate number of mergers and acquisitions. For example,
deregulation of the airline industry led to numerous acquisitions and
consolidations in this industry.
The fourth wave also witnessed the emergence of corporate raider. The
raider’s income came from the takeover attempts. The raiders earned
handsome profits without taking control over the management of the target
company. They attempted to takeover a target and later sell the target
shares at a price higher than what was paid originally.
The fourth wave featured several other unique and interesting
characteristics, which differentiate it from the other waves. Investment
bankers played an aggressive role. M&A advisory services became a lucrative
source of income for investment banks. The merger specialists at investment
banks and law firms developed many techniques to facilitate and prevent
takeovers.
Another important feature is the increased use of debt to finance
acquisitions. The yield on junk bonds was significantly higher than that of
investment grade bonds. Hence, the ready availability of finance helped
even small firms to acquire large well-established firms. The phenomenon
of leveraged buyout emerged. This merger wave also featured innovations
in acquisition techniques and investment vehicles. The investment bank,
Drexel Burnham Lambert pioneered the growth of the junk bond market.
The Fifth Wave - 1992-Till Date
The current merger activity can be described as the fifth wave. There
was once again increased activity of mergers in 1992. Mega-mergers, as in
the fourth wave, began to take place in the fifth wave also. The number of
hostile deals was less than strategic mergers.
With the recovery of the economy in 1992, companies sought to expand
and mergers were seen as a quick and efficient way to do so. Unlike the
deals of 1980s,the transactions of the 90s emphasised on strategy with
 22 Merger Acquisition and Restructuring

quick financial gains. Most of the deals were financed through the increased
use of equity.
Deregulation and technological changes led to high level of merger
activity in the fifth wave. Banking, Telecommunications, Entertainment,
and Media industries were some of the leading consolidating industries.
There was a dramatic growth in the banking sector in the 1990s as the
banks grew larger than the central banks. Banks looked to take advantage
of the economies of scale in this industry by expanding into new markets
and found mergers and acquisitions to be the fastest way to do so.
There was a movement towards the oligopolistic market structure due
to the volume of consolidating mega-mergers that occurred in many
industries. As companies acquired or merged with other companies, the
number of competitors declined. The resulting companies were large and
only a few competitors commanded a relatively high market share. For
example, in Beverages industry companies like Coco-Cola with 44.5 per cent
market share, Pepsi with 31.4 per cent market share and Cadbury Schweppes
with 14.4 per cent market share were the few major competitors.

Table 1.4
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Number 2074 1877 2574 2663 2997 3510 5848 7800 7809 9278 9566 7528
of Mergers
Source: “Mergers, Acquisitions and Corporate Restructurings”, by Patrick A Gaughan.

The phenomenon of globalisation led to the breaking up of geographical

barriers for entry into another country. The growth in the merger activity
was no longer confined to US companies. US firms aggressively purchased
foreign firms. Later, by 1995, foreign firms made major purchases of US
firms. The fifth wave spread to Europe in the late 1990s.

Table 1.5 Major Mergers in the Telecom Sector

Acquirer Vodafone MCI World Com Bell Atlantic AT&T
Target Cellular Mannesman Spirit GTE
Acquirer SBC US West Bell Atlantic SBC
Target Ameritech Global Crossing NYNEX Pacific Telesis

The emergence of Internet and the intelligent application of information

technology have resulted in a paradigm shift in the operations of firms. The
impact of the wave is most visible in sectors such as telecommunications,
entertainment and media, banking and financial services.
Merger Acquisition and Corporate Restructuring 23

Table 1.6 Major Mergers in Media and Entertainment Sector

Acquirer America On-Line (AOL) Viacom Walt Disney AT&T
Target Time Warner CBS Capital Cities ABC Media One

Major M&A in the 1990s

Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999:
Rank Year Purchaser Purchased Transaction value
(in mil. USD)
1 1999 Vodafone Air touch PLC Mannesmann 1,83,000
2 1999 Pfizer Warner-Lambert 90,000
3 1998 Exxon Mobil 77,200
4 1999 Citicorp Travelers Group 73,000
5 1999 SBC Communications Ameritech Corporation 63,000
6 1999 Vodafone Group Air Touch
Communications 60,000
7 1998 Bell Atlantic GTE 53,360
8 1998 BP Amoco 53,000
9 1999 Qwest Communications US WEST 48,000
10 1997 World com MCI Communications 42,000

Major M&A from 2000 to Present

Top 9 M&A deals worldwide by value (in mil. USD) since 2000:

Rank Year Purchaser Purchased Transaction value

(in mil.USD)
1 2000 Fusion: America Online Time Warner
Inc. (AOL) 1,64,747
2 2000 Glaxo Wellcome Plc. SmithKline Beecham
Plc. 75,961
3 2004 Royal Dutch Petroleum Shell Transport and
Co. Trading Co. 74,559
4 2006 AT&T Inc. BellSouth Corporation 72,671
5 2001 Comcast Corporation AT&T Broadband
Internet Svcs 72,041
6 2004 Sanofi-Synthelabo SA Aventis SA 60,243
24 Merger Acquisition and Restructuring

7 2000 Spin-off: Nortel

Networks Corporation 59,974
8 2002 Pfizer Inc. Pharmacia Corporation 59,5159
9 2004 JP Morgan Chase Bank One
and Co Corp 58,761
8 2008 Inbev Inc Anheuser Busch
Companies Inc 52,000

M&A Trends
Cross-border
Cross-border M&A
M&A and and
Private Private
Equity deals
Equity deals (Sep-oct
(Sep-Oct 2005) 2006)
Key
Key Deals
Deals of of Sep-Nov2005
Sep--Nov
2005
Vodafone – Bharti US $ 1,500 mn

Oracle – I-flex US $ 593 mn

HPCL – KRPL US $ 500 mn

Huber – Micro Inks US $ 220 mn

Bharat Forge –
Imatra Klista AB US $ 56 mn

MBT – US’ Axes US $ 54 mn

Nicholas Piramal –
Avecia Pharma US $ 17 mn

Source: Grant Thornton India (Volume V 2005) 3

3

MOTIVES BEHIND MERGERS

The primary objectives of Mergers and Acquisition are diversification,
market expansion, improving competitive position, etc. Generally, two or
more firms have to act for mergers. One of them is the buyer and the other
is the seller. Both these firms have motives for combination. A different
rationale can be assigned at both individual and collective levels which
influence sellers and buyers to opt for Mergers and Acquisitions.

The Buyers Motives

The Motivation for Buyers are as Follows
 To increase the value of the firm’s stock – that is, merger often
leads to increase in stock price and/or Price Earning Ratio
 To increase the growth rate of the firm
Merger Acquisition and Corporate Restructuring 25

 To make a good investment- a firm may make better use of funds

by purchasing instead of ploughing the same funds into internal
expansion
 To improve the stability of the firms’ earnings and sales. This is done
by acquiring firm’s whose earnings and sales complement the firm’s
peak and valleys
 To balance or fill out the product line
 To diversify the product line when the current products have reached
their peak in the life cycle
 To reduce competition by purchasing a competitor
 To acquire a needful resource quickly. For e.g. High-quality technology
or highly innovative management
 For Tax reasons- it may be desirable to purchase a firm with prior
tax losses which will offset current or future earnings
 To increase efficiency and profitability, especially if there is synergy
between the two companies

The Sellers’ Motives

The motivation for sellers are as follows:
 To increase the value of the owners stock and investment in the
firm
 To increase the firm’s growth rate by receiving more resources from
the acquiring company
 To acquire resources to stabilise operations and make them more
efficient
 For Tax reasons- if the firm is owned by a family or an individual,
a merger makes it easier to deal with estate tax problems
 To help diversify the owning family’s holdings beyond the present
firm
 To deal with top management problems such as Management
Succession for an entrepreneur or dissension among the top managers

Advantages of Mergers and Acquisitions

The most common advantages of mergers and acquisitions are:
 Maintaining or accelerating profitable growth of a company
 Enhancing profitability through cost reduction resulting from:
— Economies of scale
— Operating Efficiency
— Synergy
26 Merger Acquisition and Restructuring

 Diversifying the risk of the company by way of acquiring the business

of different income streams
 Reducing tax liability by way of setting off accumulated losses or
unabsorbed depreciation of one company against the profits of another
 Enhancing the market power of the company

Merger Process
Mergers and acquisition activity should take place within the framework
of long-range planning by business firms. The merger decisions involve the
future of the firm. Hence, it is useful to understand the planning process
involved in mergers. The planning processes can utilise formal procedures
or develop through informal communications throughout the organisation.
The strategies, plans, policies and procedures are developed in the process
of mergers. The strategic planning in merger is behaviour and a way of
thinking that requires diverse inputs from all segments of the organisation.
For profitable and smooth flow of mergers, the entire process can be divided
into three phases as explained below:
Formulation of the Vision
The acquiring company must formulate the future vision of merger
moves in advance. The following vision should be identified while planning
for mergers and acquisitions.
 Growth: The vision for an organisation defines its purpose, where
it is heading, and what it intends to do once it gets there. The vision
includes a well-defined set of core values and beliefs that define a
company’s culture and purpose.
 Competition: The vision should identify the distinct set of
competencies that will enable the organisation to deliver the unique
value required to remain competitive as it moves forward. It should
describe clearly the expectations for what the company will look like
and how it will operate over time. Targets should be identified and
evaluated in a manner consistent with the company’s vision.
Pre-Merger Planning
A coherent pre-merger planning process should target companies with
the desired capabilities, get the deal done, and lay the groundwork for a
successful integration through rigorous planning and building of trust among
the players.
Post-Merger Process
The post-merger process should be focused on cultural integration,
retention of key people, and capturing well-defined sources of value as
quickly and efficiently as possible.
Merger Acquisition and Corporate Restructuring 27

Basic Steps in Strategic Planning in Mergers

Any merger and acquisition involves the following critical activities in
strategic planning processes. Some of the essential elements in strategic
planning processes of mergers and acquisitions are as listed below:
(1) Assessment of changes in the organisation environment
(2) Evaluation of company capacities and limitations
(3) Assessment of expectations of stakeholders
(4) Analysis of company, competitors, industry, domestic economy and
international economies
(5) Formulation of the missions, goals and polices
(6) Development of sensitivity to critical external environmental changes
(7) Formulation of internal organisational performance measurements
(8) Formulation of long-range strategy programmes
(9) Formulation of mid-range programmes and short-run plans
(10) Organisation, funding and other methods to implement all of the
proceeding elements
(11) Information flow and feedback system for continued repetition of all
essential elements and for adjustment and changes at each stage
(12) Review and evaluation of all the processes.
In each of these activities, staff and line personnel have important
responsibilities in the strategic decision-making processes. The scope of
mergers and acquisition sets the tone for the nature of mergers and
acquisition activities and in turn affects the factors which have significant
influence over these activities. This can be seen by observing the factors
considered during the different stages of mergers and acquisition activities.
Proper identification of different phases and related activities smoothen the
process involved in mergers.

THE FIVE-STAGE (5-S) MODEL

Mergers and acquisitions are transactions of great significance not only
to the companies themselves but also to many other constituencies such
as workers, managers, competitor communities and economies. Hence, the
mergers and acquisition process needs to be viewed as a multi-stage
process with each stage giving rise to distinct problems and challenges to
companies understating such transactions. To understand the nature and
sources of these problems we need a good understanding of the external
context in which mergers and acquisitions take place. This context is not
purely economic but includes political, sociological and technological contexts
as well. The context is also ever-changing. Thus, merger and acquisition
could be regarded as a dynamic response to these changes.
28 Merger Acquisition and Restructuring

The five-stage model conceptualises the merger and acquisition process

as being driven by a variety of impulses, not all of them reducible to rational
economic paradigms. Both economic and non-economic factors affect the
merger and acquisition process. The five stages of merger and acquisition
process under 5-S model can be divided as below:
(1) Corporate strategy development
(2) Organising for acquisitions
(3) Deal structuring and negotiation
(4) Post-acquisition integration
(5) Post-acquisition audit and organisational learning
The brief explanation of the above stages of merger is given below:

Stage 1: Corporate Strategy Development

Corporate strategy is concerned with the ways of optimising the portfolios
of businesses that a firm currently owns and with how this portfolio can’
be changed to serve the interests of the corporation’s stakeholders. Merger
and acquisition can serve the objectives of both corporate and business
strategies, despite their being the only one of several instruments.
Effectiveness of merger and acquisition in achieving these objectives depends
on the ‘conceptual and empirical validity of the models upon which corporate
strategy is based. Given an inappropriate corporate strategy model, mergers
and acquisitions is likely to fail to deliver sustainable competitive advantage.
Corporate strategy analysis has evolved in recent years through several
paradigms- industry structure-driven strategy, competition among strategic
group, competence or resource-based competition, etc.

Stage 2: Organising for Acquisitions

One of the major reasons for the observed failure of many acquisitions
may be that firms lack the organisational resources and capabilities for
making acquisitions. It is also likely that the acquisition decision-making
processes within firms are far from the models of economic rationality that
one may assume. Thus, a pre-condition for a successful acquisition is that
the firm organises itself for effective acquisition making. An understanding
of the acquisition decision process is important, since it has a bearing on
the quality of the acquisition decision and its value creation logic. At this
stage the firm lays down the criteria for potential targets of acquisitions
consistent with the strategic objectives and value creation logic of the firm’s
corporate strategy and business model.

Stage 3: Deal Structuring and Negotiation

This stage consists of:
 Valuing target companies
 Choice of advisers (investment banker, lawyers, accountants, etc) to
the deal
Merger Acquisition and Corporate Restructuring 29

 Obtaining and evaluating about the target from the target as well
as from other sources
 Performing due diligence
 Determining the range of negotiation parameters
 Negotiating the positions of senior management of both firms in the
post-merger dispensation
 Developing the appropriate bid and defence strategies and tactics
within the parameters set by the relevant regulatory regime, etc.

Stage 4: Post-acquisition Integration

At this stage, the objective is to put in place a managed organisation
that can deliver the strategic and value expectations that drove the merger
in the first place. The integration process also has to be viewed as a project
and the firm must have the necessary project management capabilities and
programme with well-defined goals, teams, deadlines, performance
benchmarks, etc. Such a methodical process can unearth problems and
provide solutions so that integration achieves the strategic and value creation
goals. One of the major problems in post-merger integration is the integration
of the merging firm’s information systems. This is particularly important in
mergers that seek to leverage each company’s information on customers,
markets or processes with that of the other company.

Stage 5: Post-acquisition Audit and Organisational Learning

The importance of organisational learning to the success of future
acquisitions needs much greater recognition, given the high failure rate of
acquisitions. Post­merger audit by internal auditors can be acquisition-
specific as well as being part of an annual audit. Internal auditor has a
significant role in ensuring organisational learning and its dissemination.

MERGERS AND ACQUISITIONS IN INDIA

During the licensing era, several companies had indulged in unrelated
diversifications depending on the Time Warner availability of licenses.
Takeover bids, mergers and amalgamations were not rare. The companies
thrived in spite of their inefficiencies because the total industry capacity
was restricted due to licensing. Over a period of time, the companies
became conglomerates with a sub-optimal portfolio of assorted businesses.
Despite the unfavourable economic environment, the corporate sector
has witnessed incidents of takeover bids from time to time. Since 1986
onwards, both friendly takeover bids on negotiated basis and hostile bids
through hectic buying of equity shares of select companies from the market
have been reported frequently. Instances of corporate raids by non-resident
Indians as well as Indian industrial entrepreneurs on domestic corporate
undertakings were many. For example, NRI’s during 1988 made the following
raids on corporate undertakings in India:
30 Merger Acquisition and Restructuring

Swaraj Paul and Sethia groups attempted raids on Escorts Ltd. and
DCM Ltd., but did not succeed. The Hindujas raided and took over Ashok
Leyland and Ennore Foundries and secured strategic interests in IDL
Chemicals and Astra IDL. The Chhabria Group acquired stake in Shaw
Wallace, Dunlop India and Falcon Tyres.
Prominent industrial groups in the country have also been active in
takeover bids. For example, the Goenka group from Kolkata successfully
took over Ceat Tyres, Herdilla Chemicals, Polychem, etc. The Oberoi Group
has taken over Pleasant Hotels of the Rane Group. Mahindra and Mahindra
has taken over Allwyn Nissan; the Jindal Group has acquired Shalimar
Paints. History was created by Tata Tea in September 1988, when it made
a public offer to takeover Consolidated Coffee Ltd and acquired 50 per cent
of the company’s equity from resident shareholders in December 1989.
Four companies, namely Hindustan Computers, Hindustan Reprographics,
Hindustan Telecommunications and Indian Computer Software Co., were
merged to form HCL Ltd.
There has also been an active arrangement of takeover of sick
undertakings by the Board for Industrial and Financial Reconstruction
(BIFR). Some of the takeovers arranged by BIFR are, takeover of Hyderabad
Allwyn Ltd by Voltas Ltd, Mahindra Nissan Allwyn Ltd by Mahindra and
Mahindra, and Miami Pharma Ltd by Lakme.

MODES OF M&A IN INDIA

M&A

Amalgamations Acquisitions

Merger De-merger Asset Purchase Stock Purchase

Slump Sale Itemised Sale

Merger Acquisition and Corporate Restructuring 31

The major reasons for restructuring are:

 To induce higher earnings
 To leverage core competencies
 Divestiture and networking
 To ensure clarity in vision, strategy and structure
 To provide proactive leadership
 Empowerment of employees
 Re-engineering process.
Induce Higher Earnings: The two basic goals of corporate restructuring
may include higher earnings and the creation of corporate value. Creation
of corporate value largely depends on the firm’s ability to generate enough
cash.
Leverage Core Competence: With the concept of organisational learning
gaining momentum, companies are laying more emphasis in exploiting the
rise on the learning curve. This can happen only when companies focus on
their core competencies. This is seen as the best way to provide shareholders
with increased profits.
Divestiture and Networking: Companies, while keeping in view their
core competencies, should exit from peripherals. This can be realised
through entering into joint ventures, strategic alliances and agreements.
Ensure Clarity in Vision, Strategy and Structure: Corporate
restructuring should focus on vision, strategy and structure. Companies
should be very clear about their goals and the heights that they plan to
scale. A major emphasis should also be made on issues concerning time
frame and the means that influence their success.
Provide Proactive Leadership: Management style greatly influences
the restructuring process. All successful companies have clearly displayed
leadership styles in which managers relate on a one-to-one basis with their
employees.
Empowerment: Empowerment is a major constituent of any restructuring
process. Delegation and decentralised decision-making provides companies
with effective management information system.
Re-engineering Process: Success in a restructuring process is only
possible through improving various processes and aligning resources of the
company. Redesigning a business process should be the highest priority in
a corporate restructuring exercise.
32 Merger Acquisition and Restructuring

OTHER POSSIBLE PURPOSES FOR RESTRUCTURING ARE SHORT

LISTED BELOW
(1) Procurement of Supplies
(1) To safeguard the source of supplies of raw materials or intermediary
product;
(2) To obtain economies of purchase in the form of discount, savings in
transportation costs, overhead costs in buying department, etc;
(3) To share the benefits of suppliers economies by standardising the
materials.

(2) Revamping Production Facilities

(1) To achieve economies of scale by amalgamating production facilities
through more intensive utilisation of plant and resources;
(2) To standardise product specifications, improvement of quality of
product;
(3) Market and aiming at consumers satisfaction through strengthening
after-sales services;
(4) To obtain improved production technology and know-how from the
offered company;
(5) To reduce cost, improve quality and produce competitive products to
retain and improve market share.

(3) Market Expansion and Strategy

(1) To eliminate competition and protect existing markets;
(2) To obtain a new market outlet in possession of the offeree;
(3) To obtain new products for diversification or substitution of existing
products and to enhance the product range;
(4) Strengthening retail outlets and sale of the goods to rationalise
distribution;
(5) To reduce advertising costs and improve public image of the offeree
company;
(6) Strategic control of patents and copyrights.

(4) Financial Strength

(1) To improve liquidity and have direct access to cash resource;
(2) To dispose of surplus and outdated assets for cash out of combined
enterprise;
Merger Acquisition and Corporate Restructuring 33

(3) To enhance gearing capacity, borrow on better strength and the

greater assets backing;
(4) To avail tax benefits;
(5) To improve EPS (Earning Per Share).

(5) General Gains

(1) To improve its own image and attract superior managerial talents
to manage its affairs;
(2) To offer better satisfaction to consumers or users of the product.

(6) Own Developmental Plans

The purpose of restructuring is backed by the offer or company’s own
developmental plans.
A company thinks in terms of acquiring the other company only when
it has arrived at its own development plan to expand its operation having
examined its own internal strength where it might not have any problem
of taxation, accounting, valuation, etc. But it might feel resource constraints
with limitations of funds and lack of skill managerial personnel. It has to
aim at suitable combination where it could have opportunities to supplement
its funds by issuance of securities; secure additional financial facilities,
eliminate competition and strengthen its market position.

(7) Strategic Purpose

The Acquirer Company views the merger to achieve strategic objectives
through alternative type of combinations which may be horizontal, vertical,
product expansion, market extensional or other specified unrelated objectives
depending upon the corporate strategies. Thus, various types of combinations
distinct with each other in nature are adopted to pursue this objective like
vertical or horizontal combination.

(8) Corporate Friendliness

Although it is rare but it is true that business houses exhibit degrees
of co-operative spirit despite competitiveness in providing rescues to each
other from hostile takeovers and cultivate situations of collaborations, sharing
goodwill of each other to achieve performance heights through business
combinations, combining corporate aim at circular combinations by pursuing
this objective.

(9) Desired Level of Integration

Mergers and acquisitions are pursued to obtain the desired level of
integration between the two combining business houses. Such integration
could be operational or financial. This gives birth to conglomerate
combinations. The purpose and the requirements of the offeror company go
34 Merger Acquisition and Restructuring

a long way in selecting a suitable partner for merger or acquisition in

business combinations.

GROWING NEED FOR CORPORATE RESTRUCTURING

Liberalisation in the’ 90s and the recession in the economy have
created new challenges for the Indian corporate sector. The policy of
decontrol and liberalisation, together with globalisation of the economy, has
exposed the corporate sector to rigorous domestic and global competition.
Greater competition, freer imports, lack of economies of scale, over-creation
of capacities, unwanted diversifications, funds constraints, and cost and
time over-runs have become some of the new-found areas of concern.
Therefore, restructuring of corporate India has now become a major theme.
Companies are engaging in various efforts to consolidate themselves in
areas of their core competence and divest those businesses where they do
not have any competitive advantage. Consequently, as an option, mergers
and acquisitions are emerging as the key corporate activities. The changes
in government regulations will make M&A an even more viable business
strategy.
According to the Securities and Exchange Board of India (SEBI) working
paper titled II “Impact of Takeover Code Regulations on Corporate Sector in
India - A Critical’ Appraisal”, the major users of the acquisition mechanisms
were Indian companies, which accounted for 85 per cent of the total
takeovers.
Since SEBI (Substantial Acquisitions of Shares and Takeovers)
Regulations 1997 came into existence, 1,011 companies have been taken
over for various purposes, which include consolidation, change in control in
management and substantial acquisition. The most important objective of
the acquisitions has been change in the management control. The number
of open offers grew from two in 1994 to 98 in 2001-02. Bulk of M&A deals
has been on cash basis.
Among the industries where the takeovers were more common, the
Finance and Information Technology industries scored heavily on the number
of companies acquired, but the amounts involved in these industries were
small. On the basis of amounts spent, the electronic and electrical industry
occupied the first position, followed by metals, cement and construction.
Since entry barriers are low in the new economy, the rate of creation
of new companies is extremely high and so are the chances of M&As. Since
most Internet start-ups are small, unilocational outfits, staffed by fewer
people compared to brick and mortar behemoths, the actual process of
integration is less burdensome and less painful. M&As enabled the widening
of the portfolio of products and services, increase geographical coverage, and
reduce the marketing costs and gestation period.
Very often, M&As have been found useful to consolidate the market
position for instance, in the cement industry, the French firm, Lafarge
bought the cement unit owned by Tisco, and Gujarat Ambuja acquired DLF
Merger Acquisition and Corporate Restructuring 35

Cement and half of Tata’s share in ACC to capture the major share of the
market between the two of them. It is easier to acquire companies than set
up additional capacities.
The bidding war for licenses for the fourth cellular company to operate
in each of India’s 21 telecom zones shook up the country’s fledgling cellular
market. This forced some smaller groups to sell out because their pockets
were not deep enough to bid for more licenses or to pump in funds to grow
their business. The larger ones consolidated their market share through
buyouts.
In case of global mergers of multinational companies, their Indian
setups merge by default. Though the merger then is a part of global strategy
rather than local market compulsions, it has effects on the Indian market
too. Like it happened, when ANZ Grindlays Bank and Standard Chartered
Bank merged (leading to large-scale business and manpower restructuring
in their respective Indian outfits) or the HP-Compaq merger (which is
expected to shake up the computer hardware market in India). However, the
firm-level positive results from M&A deals, are yet to be strongly recognised.
A recent KPMG (a leading CA firm) study found that only 30 per cent of
cases of M&As in India created shareholders’ value. In 39 per cent of such
deals, there was near discernible difference, while in 31 per cent of cases,
the shareholder value was diluted. The findings, though shocking to most,
stems from imperfections, which exist in most economies and more distinctly
in India.
The Indian banking sector, with too many loss-making units, could have
possibly benefited from mergers, but M&As have failed to perform. The
efficient operation of the takeover mechanism requires that vast quantities
of information be widely available, which is not the case in India. Besides,
there are huge transaction costs involved in takeovers, which hamper the
efficiency of the mechanism. If information about a firm’s operation is, or
is perceived to be, asymmetric, it may pay rational managers even in
rational markets to be narrow-minded. This would lead to short-term
measures and to lower rates of investment than would otherwise be the
case. The first to get hit, in this circumstance, is the shareholders’ value.
The empirical findings are contrary to the expected results, mainly
because increase of shareholders’ value is not always the only motivator for
M&As. Often mergers are initiated because companies face the threat of
existence. The threat may be caused from the size or nature of a particular
market or from demand from greater economies of scale, or when
multinationals with access to relatively cheaper source of capital, seek to
gain a market share through acquiring domestic firms.
In sectors where intangible asset advantages like brand names add to
the cost of capital advantage, the pressure on domestic firms to be taken
over is quite high. Hence, the number of M&As have increased drastically
in lifestyle associate product markets like fast moving consumer goods,
white goods and automobiles.
 36 Merger Acquisition and Restructuring

Hence, when market compulsions and cost considerations drive M&A

shareholders’ value is likely to be maintained at the same level. It requires
great management skills to amalgamate different operational cultures,
re-orient manpower to common goals and streamline activities to core
strengths to reap fruits of M&A deals.

Indian M&AS in 2001-2002

Mergers and Acquisitions (M&As) have been a major source of corporate growth in
India in the recent years. Nearly 40 per cent of foreign direct investments in India
have been through M&As. According to the data compiled by the Centre for Monitoring
Indian Economy (CMIE), there were 1,344 M&A deals in 2001-2002. However, in
terms of absolute numbers, this involved ` 35,360 crore in 2001-2002, compared to
` 33,649 crore the previous year. The new factor in the fiscal year 2001-02 was
disinvestment, which made up for over 10 per cent of the total amount. A pickup in
the open offers and buybacks also spurred M&A activity. The number of open offers
was the highest in the last three years with 98 open offers amounting to ` 4,788
crore of which 30 were from multinationals, Buy-back activities also spurred with 30
offers during the fiscal amounting to ` 2,509 crore. The Central Government was
able to secure ` 3,881 crore through disinvestment. Different stake in companies
and hotel properties, thus accounting for over 10 per cent of the total M&A amount.
The largest contributor towards the M&A activity was the communication industry
followed by chemicals and the financial services sector. Consolidation initiatives by
Bharti, BPL, and the Birla-AT&T combine saw M&A deals of over 7000 crore.

Source: The Economic Times, April 17, 2002.

M&As, which lead to higher market concentration do not effectively

result in higher market power. Theorists of industrial organisation have not
found a direct correlation between the two variables and have supported a
case to case study which evaluate whether M&As generate greater economic
efficiency or undue exclusive rights Most nations follow the US model where
antitrust provisions are implied in generalities, leaving the courts free to
interpret specific practices.
In India, the Monopolies and Restrictive Trade Practices (MRTP) Act
defines dominance specifically (regardless of whether consumer interests
were harmed or not) – to be not more than 25 per cent. The Act does not
take into account antitrust practices of extra-territorial origin. With cross-
border M&As getting increasingly popular, there could also be a conflict of
laws of different countries.
The Competition Act, 2002, which has replaced the MRTP Act, 1969,
defines dominant position as a position of strength, enabling a firm to
operate independent of prevailing competitive forces, affecting competitors’
and consumers’ interests,
In such an atmosphere, where competition laws are still in a fluid state,
M&As take effect on a level playing field and the protection of interests of
producers and consumers alike will still take some time. Till then, it is
unlikely to expect large-scale productivity increases or FDI inflows through
Merger Acquisition and Corporate Restructuring 37

M&As. However, companies are going in for strategic alliances, mergers,

acquisitions or even hostile takeovers to gain market power.

Multiple Choice Questions

(1) Which of the following restructuring activities does not result in an
expansion of a firm?
(a) Joint Ventures
(b) Mergers
(c) Divestitures
(d) Acquisitions
(e) None of the above.
(2) Which of the following activities is/are not associated with spin-off?
(a) Creation of a new legal entity
(b) Distribution of shares to a portion of existing shareholders in a
subsidiary in exchange for parent company stock
(c) Distribution of shares on pro rata basis to existing shareholders
of the parent company
(d) Separation of control
(e) All of the above
(3) Firm X plans to sell off a part of the firm via an equity offering to
outsiders. Which of the following means shall be applied by the
company for executing its plan?
(a) Equity Carve-out
(b) Spin-off
(c) Split-Up
(d) Divestiture
(e) Tender Offer.
(4) Changes in the company byelaws to make the acquisition of a
company more difficult or more expensive are referred to as
(a) Takeover
(b) Anti-takeover Amendments
(c) Corporate Control
(d) Proxy Contests
(e) None of the above.
(5) Which of the following activities does not involve a change in the
ownership structure?
(a) Share Repurchase
38 Merger Acquisition and Restructuring

(b) Going Private

(c) Exchange Offers
(d) Leveraged Buyout
(e) Proxy Contest.
(6) Which of the following is referred to as “a going private transaction”
initiated by incumbent management?
(a) Management Buyout
(b) Leveraged Cash out
(c) Management Buy-in
(d) Leveraged Recapitalisation
(e) None of the above.
(7) A transaction which forms one economic unit from two or more
previous units is called
(a) Joint Venture
(b) Merger
(c) Corporate Control
(d) Divestiture
(e) None of the above.
(8) According to Prescott and Visscher, firm specific informational assets
known organisation capital includes
(a) information used in assigning employees to tasks that they can
best fulfill
(b) information used in matching employees for the formation of
teams.
(c) information that each employee acquires about other employees
and about the organisation itself.
(d) Both (a) and (c) above.
(e) All of the above.
(9) Investment opportunities can take the form of
(i) internal investment where there is expansion of existing projects
or the addition of new projects internally
(ii) external investment in the form of mergers
(iii) restructuring.
(a) (i) only
(b) (ii) only
(c) (iii) only
Merger Acquisition and Corporate Restructuring 39

(d) Both (i) & (ii) above

(e) All of the above.
Answer (1) c; (2) b; (3) a; (4) b; (5) e;
(6) a; (7) b; (8) e; (9) e;

Theory Questions
(1) Why do corporates go for restructuring exercises? Discuss the various
forms of restructuring exercises that are being practiced by corporates
across the globe.
(2) Mergers are not a new phenomenon, the history of mergers dates
back to the 19th century. Narrate the history of merger movement.
(3) Explain meaning, characteristies and rationale of restructuring.
(4) Explain motives behind merger in details.
(5) Describe the process and steps in strategic Planning of Margers.
(6) What are the visions that should be identified while planning for
M&A?
(7) State the critical activities in strategic planning processes.
(8) Discuss the “5-S” model in details.
(9) Explain “M&A” in India with examples.
(10) Discuss the purposes for restructuring.

Case Study
Read the case study carefully and answer the following question.
(1) What do you mean by internal development/internal growth? What
decides for the company to go for internal growth strategies or
external growth strategies (mergers and acquisitions)?
Internal development and mergers are mutually supportive activities.
Growing companies adopt various forms of M&As and other restructuring
practices depending on the existing opportunities and limitations. The
characteristic and competitive structure of an industry will affect the
strategies employed The factors and situations favouring M&As in part
relate to industry characteristics. In an industry with excess capacity,
horizontal mergers can be used to close down high-cost firms to decrease
industry supply and to boost efficiency in the balance firms. In addition, a
number of industries, earlier operating on small-scale operations, have
been rolled up into bigger units. The larger units have been able to achieve
economies of scale not achieved by smaller individual units.
A few more advantages of M&As or external growth may also be
highlighted. An acquisition helps the acquirer to acquire a firm already in
40 Merger Acquisition and Restructuring

place with a historical track record. Some complexities are still possible, but
can be eased off to some extent by appropriate due diligence. An acquisition
usually involves paying a premium, but the cost of acquiring a company may
be estimated in advance.
An acquisition may also represent acquiring a segment divested from
another firm. The logic is that the segment can be managed in a better way
when added to the activities of the buying firm. Another important motive
for M&As is to increase the strength of the acquiring firm. For example, the
exceptional growth of Cisco Systems was achieved by acquisition of companies
with the technology and talent to expand capabilities.

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