MARGERS AND ACQUISITIONS: INDIAN & GLOBAL PERSEPECTIVE

ABSTRACT

The recent acquisition of Axon – A British Company by Infosys has boosted the morale of the Indian industry. The research paper focuses on the fundamentals of mergers and acquisitions and the related terminology. The merits of M&As , the importance of multi-cultural skills and India’s competitive strength are highlighted. It also dwelt at length about the M&As at the global level backed with statistical facts and figures. At the end it concluded that we can expect many more M&As as Indian economy is becoming robust.

KEY WORDS: Introduction, Merits of Mergers and Take Overs, Infosys Initiative, Indian Industry at Global Level, Multi-Cultural Skills, India’s Competitive Edge & Conclusion.

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“With a burgeoning Indian economy, a competitive private sector and a strong entrepreneurial spirit, Indian companies are increasingly seeking help in identifying and acquiring suitable domestic and overseas targets.” Pankaj Karna Grant Thornton, India.

INTRODUCTION:

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

Now days, there is too much talk of Indian companies taking over the companies in abroad. Infosys’s initiative to acquire Axon, and sometime back, Tata Steel’s take over of Corus has hit the headlines. It was a very bold initiative by Ratan Tata. Of course, there was a talk of paying too much price for the acquisition of Corus by the critics. Over all it has demonstrated and displayed the leadership capabilities of Indian business leaders.

We had hostile takeovers also in the past. Hostile take over means when one of the parties is not willing to be acquired by other company. Let us look at such instances also:

The take-over era was inaugurated way back in the early eighties, when Swaraj Paul brought his boisterous and street smart ways to shake up the quiet world of Indian board rooms and launched his bid for Escorts and DCM. Many other take-over artistes followed in his footsteps. R.P. Goenka cobbled together an industrial empire by taking over companies like Ceat and CESC. So did Manu Chhabra, buying companies like such as Shaw Wallace and Dunlop. The Ambanis almost succeeded in taking control of Larsen and Toubro (L&T) but were eventually checkmated by the government of the day, which instructed the Financial Institution (FI's) to keep their distance during take-over struggles.

Many global MNCs used to take over Indian companies in the past. During the preliberalisation era foreign companies were on the offensive mode to take over Indian companies. In post liberalization, things have changed better for the Indian industry. The Indian economy has looked up and is becoming a robust economy. As a result, the Indian industry changed its stance from being defensive to offensive.

In this context, let us briefly define what is ‘merger’, ‘demerger, ‘reverse merger’ ‘reverse takeover’ and ‘acquisition’. Merger is the combining of two or more entities into one, through a purchase acquisition or a pooling of interests. Differs from a consolidation in that no new entity is created from a merger . On the contrary, demerger is a corporate restructuring in which one part of a company is spun off as a new company, often with quoted status of its own. Examples in the UK include Zeneca, which was spun out of ICI, and Argos, which was spun out of British American Tobacco. Reverse takeover (reverse IPO) is the acquisition of a public company by a private company to bypass the lengthy and complex process of going public. The transaction typically requires reorganization of capitalization of the acquiring company. Acquisition is the acquiring control of a corporation, called a target, by stock purchase or exchange, either hostile or friendly. Acquisition is also called takeover.

The Oxford dictionary defines an acquisition as `an outright gain of something (especially useful)' and a merger, less rapaciously as: `the joining or gradually blending of two previously discrete entities' .

To put it succinctly, Merger refers to the process of two business units becoming one. On the other hand, takeover refers to the process of taking over of one unit by a relatively stronger business unit.

MERITS OF MERGERS AND TAKEOVERS:

Both merger and take over has many merits such as

· Competitive edge in the market. There is synergy in this and one plus one is three, six or just more than that. The raw material can be purchased in bulk quantity thereby reducing the cost of production. When the cost of the product or service is reduced, the company has better chances to have more profits as well as it can compete with others by slashing down the prices. In a nutshell, there is 'economies of scale' and increased ‘economic efficiency’.
· There is increase in market share in the same segment or sector thereby having better brand image and good will for the company.
· Increased benefits to the shareholder value. The benefits so gained are passed on to the shareholders thereby increasing their value.
· There could be tax benefits to the company in few cases.
· Consolidation in the sector wise and it eliminates the unhealthy small time players who are weak and cannot survive in the business.
· Many other strategic advantages.

INFOSYS INITIATIVE:

At a time when India’s pharmaceutical major Ranbaxy sold its stake, the India’s technology titan - Infosys ‘s acquisition of Axon has boosted the morale of Industry industry. It is one of the mega mergers from the belt of Infosys as it wanted to consolidate its position its field. Infosys acquisition of Axon is indeed a feather in the cap of Indian industry especially in the IT sector.

The analysts are bullish about the company-Axon , which is the world's largest independent consultancy within systems, applications, products in data processing (SAP), and laud its recent efforts to enhance margins and diversify its revenue stream across a large roster of clients.

Infosys wanted its presence felt in Europe and it wanted to grow and did not mind for paying little more than what was required. Because had Infosys negotiated for lesser price other Indian IT players would have entered who were also ready to price little more for the same. "(It's) hard to get everything aligned and satisfied," Mr. Gopalakrishnan , CEO and MD said in an interview. "There are companies out there - the only thing is they may not want to be acquired, or the valuation may be too high." And he further said, Infosys has about $US2 billion in cash or cash equivalents, which could be used for deals. "We have the money available for one, or two, or more, or a significantly larger acquisition, if need be,"

Infosys had agreed to buy British consultancy Axon Group Plc for £407m (US$753m), as Infosys wants to look beyond uncertain American economy. The deal is to be completed by November 2008. Infosys said the acquisition would “accelerate the achievement of some of Infosys’ current strategic corporate objectives, including the continued expansion consulting capabilities” .

CEO of Infosys, Kris Gopalakrishnan said, “We are excited about this acquisition. The strategic combination of our groups will accelerate the realization of our common aspirations – that of becoming the most respected provider of business transformational services in the global market place. We hold the management and employees of Axon in high regard and look forward to welcoming them to the Infosys Group.”

Commenting on this acquisition, "This is a landmark transaction for the Indian IT industry as it reflects the tremendous growth of the industry," says Madan Menon , country head of global banking and markets for India at ABN AMRO, which is advising Infosys.

But the benefits of geographical diversification for Infosys are indisputable. Axon derives 61% of its revenues from Europe, the Middle East and Africa, 34% from North America and just 5% from the Asia-Pacific. Infosys currently derives less than 30% of its revenues from Europe and the potential to better penetrate the continent are a key driver of the deal, say sources.

Some bankers suggest that this deal will herald a slew of large acquisitions by Indian firms. Indian IT companies are sitting on cash piles making it easy to finance such expansion ambitions.

INDIAN INDUSTRY AT GLOBAL LEVEL:

“Throughout 2007, mainland China and India experienced a raging bull market and while the uncertainty in the financial markets has removed some of the shine, 2007 has left a public listing as an aspiration for many business owners in these countries.” Fiona Owen Grant Thornton, UK

Indian industry has huge appetite for mergers and acquisitions ever since the economy has been opened up due to liberalization, globalization and privatization. The world is watching Indian industry very closely and it seems that there would be too many M&As in the near future. Indian entrepreneurs are looking for North American and European markets to make their presence felt and also to encash the existing opportunities across the globe.

Here are the top 10 acquisitions made by Indian companies worldwide:

Acquirer Target Company Country targeted Deal value ($ ml) Industry
Tata Steel Corus Group plc UK 12,000 Steel
Hindalco Novelis Canada 5,982 Steel
Videocon Daewoo Electronics Corp. Korea 729 Electronics
Dr. Reddy’s Labs Betapharm Germany 597 Pharmaceutical
Suzlon Energy Hansen Group Belgium 565 Energy
HPCL Kenya Petroleum Refinery Ltd. Kenya 500 Oil and Gas
Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom

If you calculate top 10 deals itself account for nearly US $ 21,500 million. This is more than double the amount involved in US companies’ acquisition of Indian counterparts. Let us look at the graphical representation of Indian outbound deals since 2000.


Let us look at the Mergers and Acquisitions at the global level as stated below:

Statistical data :
91 acquisitions in 2000 valued in excess of $47.1 billion.
46 acquisitions in 2001 valued in excess of $6.5 billion.
37 acquisitions in 2002 valued in excess of $4.7 billion.
48 acquisitions in 2003 valued in excess of $2.8 billion.
45 acquisitions in 2004 valued in excess of $22.1 billion.
45 acquisitions in 2005 valued in excess of $18.5 billion.
57 acquisitions in 2006 valued in excess of $10.7 billion.
58 acquisitions in 2007 valued in excess of $19.9 billion.
19 acquisitions in 2008 valued in excess of $2.1 billion.

Since the year 2008 is yet to complete we find only 19 acquisitions valued in excess of $2.1 billion. Research reveals that across the globe there is huge appetite for Mergers and Acquisitions in the Privately Held Businesses.

MULTI-CULTURAL SKILLS:

The global scenario has changed drastically especially after the liberalization and privatization in India. The rapid growing technology has made the globe smaller. People began understanding, respecting and adopting the cultures of other countries. At the global level it is essential to focus on multicultural skills. The cultural gap amongst all the countries is getting narrowed down. And there are more efforts and avenues to grasp various cultural diversities across the world. Many companies across the world are coming to India and setting up their shops. It demonstrates and displays the strength of the Indian economy.

In the past we have seen global MNCs and now we are witnessing Indian MNCs shopping across the globe and acquiring number of strategically significant companies. In the past, Indian companies fell prey to global predators and now there is a U turn where Indian companies have turned out to be predators.

INDIA’S COMPETITIVE ADVANTAGE :

India has much inherent strength as a result the Indian economy is all set to conquer the world. Presently Indian economy is impacted by US economy and whenever there is changes in the American economy the spill over is felt across Asian markets. And in the near future Indian economy will be independent and will be shielded from American economy. Below are the few competitive advantages India has:

· Gateway to international markets in SAARC countries.
· Well-developed research and development (R&D) infrastructure.
· Largest resources of untapped natural resources.
· World’s largest democracy.
· Information technology base, in terms of both software and hardware.
· Technical and marketing expertise.
· English as the preferred business language.
· A vibrant capital market with 25 stock exchanges with over 9,000 listed companies.
· The largest supplier of cost-effective technical and non-technical manpower.
· Conducive environment for foreign investments by providing freedom of entry, investments, location, choice of technology and import/exports.
· A well-organized judicial system with a hierarchy of courts.
· Legal protection for intellectual property rights.
· A transparent approach for promoting domestic and foreign investment.
· Declining share of agriculture and allied industries in the GDP. The Economic Survey 2000-01 reveals that the contribution of services sector to the GDP is 40 per cent whereas agriculture and industry contribute 30 per cent.
· Increased investments in the priority and high growth sectors such as software, electronics, food processing, oil and gas, power, electronics and telecommunications, chemicals, electrical equipment, food processing etc.,
· A well organized banking system with a network of 63,000 branches supported by a number of national and state-level financial institutions.
· Offers a large market (middle class population of over 25 to 35 crore with increasing purchasing power).
· Current account convertibility and capital account convertibility for foreign investors.
· Increase in the number of joint ventures or wholly-owned subsidiaries most of the domestic companies consolidated around their area of core competence by typing up with foreign companies to acquire new technologies, management expertise and access to foreign markets.
· Deregulation of interest rates with a greater freedom to banks to assess credit requirements.
· Large and solid infrastructure throughout the country.
· Simplified systems for administration in government departments.
· Special investment and tax incentives for exports and certain sectors such as power, electronics and software.
· Lower tariffs for trade.
· A transparent approach for promoting domestic and foreign investment.
· Significantly large manufacturing capabilities through latest technologies.

CONCLUSION:

“When a piece of a log is subjected to severe pressure becomes charcoal. And if it is subjected to extreme pressure results in a diamond. Entrepreneurs are made from men like that”.

The Indian economy is bullish with the GDP growing. The growing number of M&As is a sign of India’s economic strength. And the global economy began taking Indian economy seriously. Indians need not to go overseas to work. Rather they should work with in India itself so as to make Indian economy more vibrant. There are plenty of opportunities with in India itself. The foreign countries are getting more benefits by making use of Indian talent and expertise. What we get in return is far lesser than what we Indians invest in terms of abilities and capabilities to other countries. It is time Indians realized their inherent strengths and stayed in India itself.

THE END