Mergers and Acquisitions in India - A general Analysis - Corporate law
The Indian economy has been growing with a rapid pace and has been emerging at the top, be it IT, RandD, pharmaceutical, infrastructure, energy, consumer retail, telecom, financial services, media, and hospitality etc. It is second fastest growing economy in the world with GDP touching 9.3 % last year. This growth momentum was supported by the double digit growth of the services sector at 10.6% and industry at 9.7% in the first quarter of 2006-07. Investors, big companies, industrial houses view Indian market in a growing and proliferating phase, whereby returns on capital and the shareholder returns are high. Both the inbound and outbound mergers and acquisitions have increased dramatically. According to Investment bankers, Merger and Acquisition (MandA) deals in India will cross $100 billion this year, which is double last year's level and quadruple of 2005.
In the first two months of 2007, corporate India witnessed deals worth close to $40 billion. One of the first overseas acquisitions by an Indian company in 2007 was Mahindra and Mahindra's takeover of 90 percent stake in Schoneweiss, a family-owned German company with over 140 years of experience in forging business. What hit the headlines early this year was Tata's takeover of Corus for slightly over $10 billion. On the heels of that deal, Hutchison Whampoa of Hong Kong sold their controlling stake in Hutchison-Essar to Vodafone for a whopping $11.1 billion. Bangalore-based MTR's packaged food division found a buyer in Orkala, a Norwegian company for $100 million. Service companies have also joined the MandA game.
The taxation practice of Mumbai-based RSM Ambit was acquired by PricewaterhouseCoopers. There are many other bids in the pipeline. On an average, in the last four years corporate earnings of companies in India have been increasing by 20-25 percent, contributing to enhanced profitability and healthy balance sheets. For such companies, MandAs are an effective strategy to expand their businesses and acquire global footprint.
Mergers or amalgamation, result in the combination of two or more companies into one, wherein the merging entities lose their identities. No fresh investment is made through this process. However, an exchange of shares takes place between the entities involved in such a process. Generally, the company that survives is the buyer which retains its identity and the seller company is extinguished.
Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies are often faced with decisions concerning these actions - after all, the job of management is to maximize shareholder value. Through mergers and acquisitions, a company can (at least in theory) develop a competitive advantage and ultimately increase shareholder value. The said terms to a layman may seem alike but in legal/ corporate terminology, they can be distinguished from each other:
# Merger: A full joining together of two previously separate corporations. A true merger in the legal sense occurs when both businesses dissolve and fold their assets and liabilities into a newly created third entity. This entails the creation of a new corporation.
# Acquisition: Taking possession of another business. Also called a takeover or buyout. It may be share purchase (the buyer buys the shares of the target company from the shareholders of the target company. The buyer will take on the company with all its assets and liabilities. ) or asset purchase (buyer buys the assets of the target company from the target company)
In simple terms, A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals", whereas an acquisition or takeover on the other hand, is characterized the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. In an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders
# Joint Venture: Two or more businesses joining together under a contractual agreement to conduct a specific business enterprise with both parties sharing profits and losses. The venture is for one specific project only, rather than for a continuing business relationship as in a strategic alliance.
# Strategic Alliance: A partnership with another business in which you combine efforts in a business effort involving anything from getting a better price for goods by buying in bulk together to seeking business together with each of you providing part of the product. The basic idea behind alliances is to minimize risk while maximizing your leverage.
# Partnership: A business in which two or more individuals who carry on a continuing business for profit as co-owners. Legally, a partnership is regarded as a group of individuals rather than as a single entity, although each of the partners file their share of the profits on their individual tax returns.
Many mergers are in truth acquisitions. One business actually buys another and incorporates it into its own business model. Because of this misuse of the term merger, many statistics on mergers are presented for the combined mergers and acquisitions (MandA) that are occurring. This gives a broader and more accurate view of the merger market .
Types of MergersFrom the perception of business organizations, there is a whole host of different mergers. However, from an economist point of view i.e. based on the relationship between the two merging companies, mergers are classified into following:
# Horizontal merger- Two companies that are in direct competition and share the same product lines and markets i.e. it results in the consolidation of firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini
# Vertical merger- A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship eg. Ford- Bendix, Time Warner-TBS.
# Conglomerate merger- generally a merger between companies which do not have any common business areas or no common relationship of any kind. Consolidated firma may sell related products or share marketing and distribution channels or production processes. Such kind of merger may be broadly classified into following:
# Product-extension merger - Conglomerate mergers which involves companies selling different but related products in the same market or sell non-competing products and use same marketing channels of production process. E.g. Phillip Morris-Kraft, Pepsico- Pizza Hut, Proctor and Gamble and Clorox
# Market-extension merger - Conglomerate mergers wherein companies that sell the same products in different markets/ geographic markets. E.g. Morrison supermarkets and Safeway, Time Warner-TCI.
# Pure Conglomerate merger- two companies which merge have no obvious relationship of any kind. E.g. BankCorp of America- Hughes Electronics.
On a general analysis, it can be concluded that Horizontal mergers eliminate sellers and hence reshape the market structure i.e. they have direct impact on seller concentration whereas vertical and conglomerate mergers do not affect market structures e.g. the seller concentration directly. They do not have anticompetitive consequences.
The circumstances and reasons for every merger are different and these circumstances impact the way the deal is dealt, approached, managed and executed. .However, the success of mergers depends on how well the deal makers can integrate two companies while maintaining day-to-day operations. Each deal has its own flips which are influenced by various extraneous factors such as human capital component and the leadership. Much of it depends on the company's leadership and the ability to retain people who are key to company's on going success. It is important, that both the parties should be clear in their mind as to the motive of such acquisition i.e. there should be census- ad- idiom. Profits, intellectual property, costumer base are peripheral or central to the acquiring company, the motive will determine the risk profile of such MandA. Generally before the onset of any deal, due diligence is conducted so as to gauze the risks involved, the quantum of assets and liabilities that are acquired etc.
Legal Procedures for Merger, Amalgamations and Take-overThe basis law related to mergers is codified in the Indian Companies Act, 1956 which works in tandem with various regulatory policies. The general law relating to mergers, amalgamations and reconstruction is embodied in sections 391 to 396 of the Companies Act, 1956 which jointly deal with the compromise and arrangement with creditors and members of a company needed for a merger. Section 391 gives the Tribunal the power to sanction a compromise or arrangement between a company and its creditors/ members subject to certain conditions. Section 392 gives the power to the Tribunal to enforce and/ or supervise such compromises or arrangements with creditors and members. Section 393 provides for the availability of the information required by the creditors and members of the concerned company when acceding to such an arrangement. Section 394 makes provisions for facilitating reconstruction and amalgamation of companies, by making an appropriate application to the Tribunal. Section 395 gives power and duty to acquire the shares of shareholders dissenting from the scheme or contract approved by the majority.
And Section 396 deals with the power of the central government to provide for an amalgamation of companies in the national interest. In any scheme of amalgamation, both the amalgamating company or companies and the amalgamated company should comply with the requirements specified in sections 391 to 394 and submit details of all the formalities for consideration of the Tribunal. It is not enough if one of the companies alone fulfils the necessary formalities. Sections 394, 394A of the Companies Act deal with the procedures and the requirements to be followed in order to effect amalgamations of companies coupled with the provisions relating to the powers of the Tribunal and the central government in the matter of bringing about amalgamations of companies.
After the application is filed, the Tribunal would pass orders with regard to the fixation of the dates of the hearing, and the provision of a copy of the application to the Registrar of Companies and the Regional Director of the Company Law Board in accordance with section 394A and to the Official Liquidator for the report confirming that the affairs of the company have not been conducted in a manner prejudicial to the interest of the shareholders or the public. Before sanctioning the scheme of amalgamation, the Tribunal has also to give notice of every application made to it under section 391 to 394 to the central government and the Tribunal should take into consideration the representations, if any, made to it by the government before passing any order granting or rejecting the scheme of amalgamation. Thus the central government is provided with an opportunity to have a say in the matter of amalgamations of companies before the scheme of amalgamation is approved or rejected by the Tribunal.
The powers and functions of the central government in this regard are exercised by the Company Law Board through its Regional Directors. While hearing the petitions of the companies in connection with the scheme of amalgamation, the Tribunal would give the petitioner company an opportunity to meet all the objections which may be raised by shareholders, creditors, the government and others. It is, therefore, necessary for the company to keep itself ready to face the various arguments and challenges. Thus by the order of the Tribunal, the properties or liabilities of the amalgamating company get transferred to the amalgamated company. Under section 394, the Tribunal has been specifically empowered to make specific provisions in its order sanctioning an amalgamation for the transfer to the amalgamated company of the whole or any parts of the properties, liabilities, etc. of the amalgamated company. The rights and liabilities of the employees of the amalgamating company would stand transferred to the amalgamated company only in those cases where the Tribunal specifically directs so in its order.
The assets and liabilities of the amalgamating company automatically gets vested in the amalgamated company by virtue of the order of the Tribunal granting a scheme of amalgamation. The Tribunal also make provisions for the means of payment to the shareholders of the transferor companies, continuation by or against the transferee company of any legal proceedings pending by or against any transferor company, the dissolution (without winding up) of any transferor company, the provision to be made for any person who dissents from the compromise or arrangement, and any other incidental consequential and supplementary matters to secure the amalgamation process if it is necessary. The order of the Tribunal granting sanction to the scheme of amalgamation must be submitted by every company to which the order applies (i.e., the amalgamating company and the amalgamated company) to the Registrar of Companies for registration within thirty days.
Motives behind M and A
These motives are considered to add shareholder value:
# Economies of Scale: This generally refers to a method in which the average cost per unit is decreased through increased production, since fixed costs are shared over an increased number of goods. In a layman's language, more the products, more is the bargaining power. This is possible only when the companies merge/ combine/ acquired, as the same can often obliterate duplicate departments or operation, thereby lowering the cost of the company relative to theoretically the same revenue stream, thus increasing profit. It also provides varied pool of resources of both the combining companies along with a larger share in the market, wherein the resources can be exercised.
# Increased revenue /Increased Market Share: This motive assumes that the company will be absorbing the major competitor and thus increase its 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 brokers customers, while the broker can sign up the bank' customers for brokerage account. Or, a manufacturer can acquire and sell complimentary products.
# Corporate Synergy: Better use of complimentary resources. It may take the form of revenue enhancement (to generate more revenue than its two predecessor standalone companies would be able to generate) and cost savings (to reduce or eliminate expenses associated with running a business).
# Taxes : A profitable can buy a loss maker to use the target's tax right off i.e. wherein a sick company is bought by giants.
# Geographical or other diversification: this is designed to smooth the earning results of a company, which over the long term smoothens the stock price of the 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 and interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. Eg: Laying of employees, reducing taxes etc.
# Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.
Advantages of MandA's:
The general advantage behind mergers and acquisition is that it provides a productive platform for the companies to grow, though much of it depends on the way the deal is implemented. It is a way to increase market penetration in a particular area with the help of an established base. As per Mr D.S Brar (former C.E.O of Ranbaxy pharmaceuticals), few reasons for MandA's are:
# Accessing new markets
# maintaining growth momentum
# acquiring visibility and international brands
# buying cutting edge technology rather than importing it
# taking on global competition
# improving operating margins and efficiencies
# developing new product mixes
In real terms, the rationale behind mergers and acquisitions is that the two companies are more valuable, profitable than individual companies and that the shareholder value is also over and above that of the sum of the two companies. Despite negative studies and resistance from the economists, MandA's continue to be an important tool behind growth of a company. Reason being, the expansion is not limited by internal resources, no drain on working capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate industry - increase firm's market power.
With the FDI policies becoming more liberalized, Mergers, Acquisitions and alliance talks are heating up in India and are growing with an ever increasing cadence. They are no more limited to one particular type of business. The list of past and anticipated mergers covers every size and variety of business -- mergers are on the increase over the whole marketplace, providing platforms for the small companies being acquired by bigger ones.
The basic reason behind mergers and acquisitions is that organizations merge and form a single entity to achieve economies of scale, widen their reach, acquire strategic skills, and gain competitive advantage. In simple terminology, mergers are considered as an important tool by companies for purpose of expanding their operation and increasing their profits, which in fašade depends on the kind of companies being merged. Indian markets have witnessed burgeoning trend in mergers which may be due to business consolidation by large industrial houses, consolidation of business by multinationals operating in India, increasing competition against imports and acquisition activities. Therefore, it is ripe time for business houses and corporate to watch the Indian market, and grab the opportunity.
The author can be reached at: [email protected] /
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