MERGERs and Acquisition 2

8/6/2019 MERGERs and Acquisition 2

1/63

1

MAJOR PROJECT REPORT

On

MERGERS AND ACQUISITIONS:

ANALYSIS OF KINGFISHER AIRLINES

AND

AIR DECAN MERGER

Submitted in the Partial fulfillment of the degree ofBachelors of Business Administration at

Guru Gobind Singh Indraprastha University, Delhi.

Ansal Institute of Technology


2/63

2

EVALUATION OF PROJECT

This is to certify that the project titled Mergers and Acquisitions : Analysis of itsMarket And Trends submitted by BBA, Semester6 of AIT affiliated to GGSIPUniversity, Delhi has been examined by the following examiners:

Internal Examiner External Examiner


3/63

3

CERTIFICATE

This is to certify that the project titled Mergers and Acquisitions: An Understanding

and Study submitted by of BBA General, Semester 6 of Ansal Institute Of Technology

(AIT) affiliated to GGSIP University, Delhi is original and authentic. This has been

carried/done under my supervision and guidance.

Supervisor


4/63

4

AKNOWLEDGEMENT

Any accomplishment requires the effort of many people and this work is not any

different.

I would also like to extend my sincere regards to my project faculty guide at Ansal

Institute Of Technology, Gurgaon for her guidance, suggestions and support in carrying

out this project. My learning has been immeasurable and working on this project has been

a great experience.

Last but not the least I also wish to thank everybody who helped me through the

successful completion of the project. The learning from this experience has been

immense and would be cherished throughout my life.


5/63

5

TABLE OF CONTENTS

Sr.No. Topic Page No.

1 Introduction to Mergers and Acquisitions 6

2

3

Mergers

Acquisitions

8

9

4

5

6

The Great Merger Movement of Mergers and Acquisitions.

Distinction between Mergers and Acquisitions

Types of Mergers

11

14

15

7

8

9

10

11

12

13

14

15

Motives behind Mergers and Acquisitions

Benefits and Drawbacks of Mergers and Acquisitions

Procedure of Mergers

Valuation of Mergers

Participants of Mergers and Acquisitions

Success and Failure of Mergers and Acquisitions

Difficulties of Mergers and Acquisitions

Financing Mergers and Acquisitions

Mergers and Acquisition Laws

17

22

25

28

30

31

34

36

37

16

17

18

19

20

21

22

2324

25

26

PART-II

TREND ANALYSIS AND MARKET ANALYSIS

STUDY OF MAJOR M&As

41

42

43

4559

65

69

Objectives

Research Methodology

Trends Overview

Major Mergers and Acquisitions

Data Interpretation and Analysis

Conclusion

Questionnaire


6/63

6


7/63

7

INTRODUCTION TO MERGERS & ACQUISITIONS

In a general sense, mergers and acquisitions are very similar corporate actions -

they combine two previously separate firms into a single legal entity. Significantoperational advantages can be obtained when two firms are combined and, in fact, the

goal of most mergers and acquisitions is to improve company performance and

shareholder value over the long-term.

The motivation to pursue a merger or acquisition can be considerable; a company that

combines itself with another can experience boosted economies of scale, greater sales

revenue and market share in its market, broadened diversification and increased tax

efficiency. However, the underlying business rationale and financing methodology for

mergers and acquisitions are substantially different.

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". The combined business,

through structural and operational advantages secured by the merger, can cut costs and

increase profits, boosting shareholder values for both groups of shareholders. 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.

A takeover, or acquisition, on the other hand, is characterized as the purchase of a smaller

company by a much larger one. This combination of "unequal" can produce the same

benefits as a merger, but it does not necessarily have to be a mutual decision. A larger

company can initiate a hostile takeover of a smaller firm, which essentially amounts

to buying the company in the face of resistance from the smaller company's management.

Unlike in a merger, 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


8/63

8

company essentially finances the purchase of the target company, buying it

outright for its shareholders.

In this context, it would be essential for us to understand what corporate restructuring and

mergers and acquisitions are all about.


9/63

9

MERGERS

Mergers involve the mutual decision of two companies to combine & become one

entity. The combined business can cut cost of operation & increase profit which will

boost shareholders value for both groups of shareholders. In Merger of two corporations,

shareholders usually have their shares in the old organization & are exchanged for an

equal numbers of shares in the merged entity.

According to the Oxford Dictionary merger means combining of two companies into

one. Merger is a fusion between two or more enterprises, whereby the identity of one or

more is lost and the result is a single enterprise. In merger the assets and liabilities of the

companies get vested in another company, the company that is merged losing its identity

and its shareholders becoming shareholders of the other company. All assets, liabilities

and the stock of one company are transferred to Transferee Company in consideration of

payment in the form of:

y Equity shares in the transferee company,

y Debentures in the transferee company,

y Cash, or

y A mix of the above modes.

In the pure sense, a merger happens when two firms, often of about the same size, agree

to go forward as a single new company rather than remain separately owned and

operated. This kind of action is more precisely referred to as a "merger of equals." For

example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged,

and a new company, Daimler Chrysler, was created.


10/63

10

ACQUISITION

Acquisition in general sense is acquiring the ownership in the property. In the

context of business combinations, an acquisition is the purchase by one company of acontrolling interest in the share capital of another existing company.

On the other hand, Acquisition means the purchase of a smaller company by much larger

one. A larger company can initiate an Acquisition of smaller firm which essentially

amounts to buy the company in the face of resistance from smaller companys

management. Unlike Mergers in an Acquisition the acquiring firm usually offers a cash

price per share to target firms shareholders.

Acquisition means an attempt by one firm to gain majority interest in the another firm

called target firm &dispose-off its assets or to take the target firm private by small group

of investors.

A company can buy another company with cash, stock or a combination of the two.

Anotherpossibility, which is common in smaller deals, is for one company to acquire all

the assets of another company.

An acquisition may be affected by;

(a)agreement with the persons holding majority interest in the company management

like members of the board or major shareholders commanding majority of voting

power;

(b)purchase of shares in open market;

(c) to make takeover offer to the general body of shareholders;

(d)purchase of new shares by private treaty;

(e)Acquisition of share capital through the following forms of considerations viz. means

of cash, issuance of loan capital, or insurance of share capital.


11/63

11

There are broadly two kinds of strategies that can be employed in corporate acquisitions.

These include:

I. Friendly Takeover:-

The acquiring firm makes a financial proposal to the target firms management

and board. This proposal might involve the merger of the two firms, the

consolidation of two firms, or the creation of parent/subsidiary relationship.

II. Hostile Takeover:-

A hostile takeover may not follow a preliminary attempt at a friendly takeover.

For example, it is not uncommon for an acquiring firm to embrace the target

firms management in what is colloquially called a bear hug.


12/63

12

THE GREAT MERGER MOVEMENT OF

MERGER & ACQUISITION

The Great Merger Movement was a predominantly U.S. business phenomenon that

happened from 1895 to 1905. During this time, small firms with little market shareconsolidated withsimilar firms to form large, powerful institutions that dominated their

markets. It is estimated thatmore than 1,800 of these firms disappeared into

consolidations, many of which acquiredsubstantial shares of the markets in which they

operated. The vehicle used were so-called trusts.To truly understand how large this

movement wasin 1900 the value of firms acquired inmergers was 20% of GDP. In

1990 the value was only 3% and from 19982000 is was around1011% of GDP.

Organizations that commanded the greatest share of the market in 1905 sawthat

command disintegrate by 1929 as smaller competitors joined forces with each

other.However, there were companies that merged during this time such as DuPont,Nabisco, US Steel,and General Electric that have been able to keep their dominance in

their respected sectors todaydue to growing technological advances of their products,

patents, and brand recognition by theircustomers. These companies that merged were

consistently mass producers of homogeneousgoods that could exploit the efficiencies of

large volume production. Companies which hadspecific fine products, like fine writing

paper, earned their profits on high margin rather thanvolume and took no part in Great

Merger Movement.SHORT-RUN FACTORS

One of the major short run factors that sparked in The Great Merger Movementwas thedesire to keep prices high. That is, with many firms in a market, supply of the

product remainshigh. During the panic of 1893, the demand declined. When demand for

the good falls, asillustrated by the classic supply and demand model, prices are driven

down. To avoid this declinein prices, firms found it profitable to collude and manipulate

supply to counter any changes in demand for the good. This type of cooperation led to

widespread horizontal integration amongst firms of the era. Focusing on mass production

allowed firms to reduce unit costs to a much lower rate. These firms usually were capital-

intensive and had high fixed costs. Because new machines were mostly financed through

bonds, interest payments on bonds were high followed by the panic of 1893, yet no firmwas willing to accept quantity reduction during this period.

LONG-RUN FACTORS

In the long run, due to the desire to keep costs low, it was advantageous for

firms to merge and reduce their transportation costs thus producing and transporting from


13/63

13

one location rather than various sites of different companies as in the past. This resulted

in shipment directly to market from this one location. In addition, technological changes

prior to the merger movement within companies increased the efficient size of plants with

capital intensive assembly lines allowing for economies of scale. Thus improved

technology and transportation were forerunners to the Great Merger Movement. In partdue to competitors as mentioned above, and in part due to the government, however,

many of these initially successful mergers were eventually dismantled. The U.S.

government passed the Sherman Act in 1890, setting rules against price fixing and

monopolies. Starting in the 1890s with such cases as U.S. versusAddyston Pipe and Steel

Co., the courts attacked large companies for strategizing with others orwithin their own

companies to maximize profits. Price fixing with competitors created a greaterincentive

for companies to unite and merge less than one name so that they were not

competitorsanymore and technically not price fixing.

CROSS-BORDER MERGERS AND ACQUISITIONS

In a study conducted in 2000 by Lehman Brothers, it was found that, on

average, large M&A deals cause the domestic currency of the target corporation to

appreciate by 1% relative tothe acquirer's. For every $1-billion deal, the currency of the

target corporation increased in valueby 0.5%. More specifically, the report found that in

the period immediately after the deal is announced, there is generally a strong upward

movement in the target corporation's domestic currency (relative to the acquirer's

currency). Fifty days after the announcement, the target currency is then, on average, 1%

stronger.

The rise of globalization has exponentially increased the market for cross border M&A.

In 1996alone there were over 2000 cross border transactions worth a total of

approximately $256 billion. This rapid increase has taken many M&A firms by surprise

because the majority of them never had to consider acquiring the capabilities or skills

required to effectively handle this kind of transaction. In the past, the market's lack of

significance and a more strictly national mindset prevented the vast majority of small and

mid-sized companies from considering cross border intermediation as an option which

left M&A firms inexperienced in this field. This same reason also prevented the

development of any extensive academic works on the subject.

Due to the complicated nature of cross border M&A, the vast majority of cross border

actionshave unsuccessful results. Cross border intermediation has many more levels of

complexity to it than regular intermediation seeing as corporate governance, the power of

the average employee, company regulations, political factors customer expectations, and

countries' culture are all crucial factors that could spoil the transaction. However, with the

weak dollar in the U.S. and soft economies in a number of countries around the world, we


14/63

14

are seeing more cross-border bargain hunting as top companies seek to expand their

global footprint and become more agile at creating high-performing businesses and

cultures across national boundaries.

Even mergers of companies with headquarters in the same country are very much of thistype(cross-border Mergers). After all, when Boeing acquires McDonnell Douglas, the

two Americancompanies must integrate operations in dozens of countries around the

world. This is just as truefor other supposedly "single country" mergers, such as the $27

billion dollar merger of Swissdrug makers Sandoz and Ciba-Geigy.

A number of western government officials are expressing concern over the

commercialinformation for corporate acquisitions being sourced by sovereign

governments & stateenterprises.


15/63

15

DISTINCTION BETWEEN

MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were

synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner,

the purchase is called an acquisition. From a legal point of view, the target company

ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be

traded.

In the pure sense of the term, a merger happens when two firms, often of about the samesize, agree to go forward as a single new company rather than remain separately owned

and operated. This kind of action is more precisely referred to as a "merger of equals."

Both companies' stocks are surrendered and new company stock is issued in its place. For

example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged,

and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one

company will buy another and, as part of the deal's terms, simply allow the acquired firm

to proclaim that the action is a merger of equals, even if it's technically an acquisition.

Being bought out often carries negative connotations, therefore, by describing the deal as

a merger, deal makers and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together

is in the best interest of both of their companies. But when the deal is unfriendly - that is,

when the target company does not want to be purchased - it is always regarded as an

acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether

the purchase is friendly or hostile and how it is announced. In other words, the real

difference lies in how the purchase is communicated to and received by the target

company's board of directors, employees and shareholders.


16/63

16

TYPES OF MERGERS

There are three main types of mergers which are Horizontal merger, Vertical merger

& Conglomerate merger. These types are explained as follows;

1. Horizontal Merger:-

This type of merger involves two firms that operate & compete in a similar kind of a

business. Horizontal merger is based on the assumptions that it will provide economies of

scale from the larger combined unit. The economies of scale are obtained by the

elimination of duplication of facilities, broadening the product line, reduction in the

advertising cost. Horizontal mergers also have potentials to create monopoly power onthe part of the combined firm enabling it to engage in anti-competitive practices.

Examples: -

y Mumbai - Glaxo India Limited and Smith Kline Beecham Pharmaceuticals (India)

Limited have legally merged to form GlaxoSmithKlinePharmaceuticals Limitedin India (GSK). A merger would let them pool their research & development funds

and would give the merged company a bigger sales and marketing force.

y Merger of Centurion Bank & Bank of Punjab.

y Merger between Holicim & Gujarat Ambuja Cement ltd

2. Vertical Merger:-

A vertical Merger involves merger between firms that are in different stages of

production or value chain. A company involved in vertical merger usually seeks to merge

with another company or would like to takeover another company mainly to expand its

operations by backward or forward integration. The acquiring company through merger

of another units attempt to reduce inventory of raw materials and finished goods. The

basic purpose of vertical merger is to eliminate cost of searching raw materials. Vertical

merger takes place when both firm plan to integrate the production process and capitalize

on the demand for the product. A company decides to get merged with another company


17/63

17

when it is not in a position to get strong position in a market because of imperfect market

of intermediary product, scarcity of resources.

Example: - Among the Indian corporate that have emerged as big international players is

the Videocon group. The group became the third largest colour picture tube

manufacturer in the world when it announced the purchase of the colour picture tube

business of France-based Thomson SA, which includes units in Mexico, Poland and

China, for about Rs 1260 crore.

3. Conglomerate merger:-

Conglomerate mergers means mergers between firms engaged in unrelated types

of business activity. The basic purpose of such combination is utilization of financial

resources. Such type of merger enhances the overall stability of the acquirer company

and creates balance in the companys total portfolio of diverse products and

production processes and thereby reduces the risk of instability in the firms cash

flows.

Conglomerate mergers can be distinguished into three types:

I.Product extension mergers These are mergers between firms in related business

activities and may also be called concentric mergers. These mergers broaden the

product lines of the firms.

II.Geographic market extension mergers: These involve a merger between two

firms operating in two different geographic areas.

III.Pure conglomerates mergers: These involve mergers between two firms with

unrelated business activities. They do not come under product extension or market

extension.


18/63

18

MOTIVES BEHIND MERGERS & ACQUISITIONS

There are many reasons or factors that motivate companies to go for mergers and

acquisitions such as growth, synergy, diversification etc.

1. Growth: One of the most common reason for mergers is growth. There are two

broadways a firm can grow. The first is through internal growth. This can be slow and

ineffective if a firm is seeking to take advantage of a window of opportunity in which

it has a short-term advantage over competitors. The faster alternative is to merge and

acquire the necessary resources to achieve competitive goals.

Even though bidding firms will pay a premium to acquire resources through mergers,

this total cost is not necessarily more expensive than internal growth, in which the

firm has to incur all of the costs that the normal trial and error process may impose.

While there are exceptions, in the vast majority of cases growth through mergers and

acquisitions is significantly faster than through internal means.

Mergers can give the acquiring company an opportunity to grow market share

without having to really earn it by doing the work themselves - instead, they buy a

competitor's business for a price. Usually, these are called horizontal mergers. For

example, a beer company may choose to buy out a smaller competing brewery,

enabling the smaller company to make more beer and sell more to its brand-loyal

customers.

Example- RPG group had a turnover of only Rs. 80 crores in 1979, which has

increased to about Rs.5600 crores in1996. This phenomenal growth was due to the

acquisitions of several companies by the RPG group. Some of the companies

acquired are Asian Cables, Calcutta Electricity Supply and Company, etc.

2. Synergy: Another commonly cited reason for mergers is the pursuit of synergistic

benefits. The most commonly used word in Mergers & Acquisitions is synergy,

which is the idea of combining business activities, for increasing performance and

reducing the costs. Essentially, a business will attempt to merge with another business

that has complementary strengths and weaknesses. This is the new financial math that


19/63

19

shows that 1 + 1 = 3. That is, as the equation shows, the combination of two firms

will yield a more valuable entity than the value of the sum of the two firms if they

were operating independently.

Value(A + B) > Value (A) + Value (B)

Although many merger partners cite synergy as the motive for their transaction,

synergistic gains are often hard to realize. There are two types of synergy one is

derived from cost economies and other one is derived from revenue enhancement.

Cost economies are the easier to achieve because they often involve eliminating

duplicate cost factors such as redundant personnel and overhead. When such

synergies are realized, the merged company generally has lower per-unit costs.

Revenue enhancing synergy is more difficult to predict and to achieve. An example

would be a situation where one companys capability, such as research process, is

combined with another companys capability, such as marketing skills, to

significantly increase the combined revenues.

3. Diversification : Other reasons for mergers and acquisitions include diversification.

A company that merges to diversify may acquire another company engaged in

unrelated industry in order to reduce the impact of a particular industry's

performance on its profitability. The track record of diversifying mergers is generally

poor with a few notable exceptions. A few firms, such as General Electric, seem to be

able to grow and enhance shareholders wealth while diversifying. However, this is the

exception rather than a norm. Diversification may be successful, but it needs more

skill and infrastructure than some firms have.

4. Economies of scale: Yes, size matters. Whether it's purchasing stationery or a new

corporate it system, a bigger company placing the orders can save more on costs.

Mergers also translate into improved purchasing power to buy equipment or office

supplies - when placing larger orders, companies have a greater ability to negotiate

prices with their suppliers. This refers to the fact that the combined company can

often reduce duplicate departments or operations, lowering the costs of the company

relative to theoretically the same revenue stream, thus increasing profit.


20/63

20

5. Increase Market Share & Revenue: This reason assumes that the company will be

absorbing a major competitor and increasing its power (by capturing increased market

share) to set prices. 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.

Example-Premier and Apollo Tyres,

6. Increase Supply-Chain Pricing Power: By buying out one of its suppliers or one of

the distributors, a business can eliminate a level of costs. If a company buys out one

of its suppliers, it is able to save on the margins that the supplier was

previously adding to its costs; this is known as a vertical merger. If a company buys

out a distributor; it may be able to sale its products at a lower cost.

7. Eliminate Competition: Many mergers and acquisitions deals allow the acquirer to

eliminate future competition and gain a larger market share in its product's

market. The downside of this is that a large premium is usually required to convince

the target company's shareholders to accept the offer. It is not uncommon for the

acquiring company's shareholders to sell their shares and push the price lower in

response to the company paying too much for the target company.

8. Acquiring new technology: To stay competitive, companies need to stay on top of

technological developments and their business applications. By buying a smaller

company with unique technologies, a large company can maintain or develop a

competitive edge and vice versa.

9. Procurement of production facilities: Procurement of production facilities may be

the reason for acquiring company to go for mergers and acquisition. It is a kind of

backward integration. Acquiring Firms will take the decision of merging with another


21/63

21

firm who supplies raw material to acquiring firm in order to safeguard the sources of

supplies of raw material or intermediary product. It will help acquiring firm to bring

economies in purchasing of raw material. It will also help to cut down the

transportation cost.

Example- Videocon takes over Thomson picture tube in China to procure supply of

picture tube required for producing television sets.

10. Market expansion strategy: Many firms go for mergers and acquisitionsas a part

of market expansion strategy. Mergers and acquisitions will help the company to

eliminate competition and to protect existing market. It will also help the firm to

obtain new market for promoting their existing or obsolete products.

Example, Lenovo takes over IBM in India to increase market for Lenovo products

like desktops, laptops in India.

11. Financial synergy: Financial synergy may be the reason for mergers and

acquisitions. Following are the financial synergy available in case of mergers and

acquisitions;

I. Better credit worthiness- This helps companies to purchase good on credit,

obtain bank loan and raise capital in the market easily.

II. Reduces cost of capital- The investors consider big firms as safe and hence they

expect lower rate of return for the capital supplied by them. So the cost of capital

reduces after merger.

III. Increase debt capacity- After the merger the earnings and cash flows become

more stable than before. This increase the capacity of the firm to borrow more

funds.

IV. Rising of capital- After the merger due to increase in the size of the company,

better credit worthiness and reputation the company can easily raise the capital at

any time.

12.Own development plans: The purpose of mergers & acquisition is backed by the

acquiring companys own developmental plans. A company thinks in terms of


22/63

22

acquiring the other company only when it has arrived at its owndevelopment plan to

expand its operation having examined its own internal strength where it might not

have any problem of taxation, accounting, valuation, etc. but 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.

13.Corporate friendliness: Although it is rare but it is true that business houses exhibit

degrees of cooperative 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. The combining corporate aims at circular combinations by pursuing

this objective.

14.General gains:

I. To improve its own image and attract superior managerial talents to manage its

affairs.

II. To offer better satisfaction to consumers or users of the product.

15.Taxes: A profitable company can buy a loss maker to use the target's loss as their

advantage by reducing their tax liability. In the United States and many other

countries, rules are in place to limit the ability of profitable companies to "shop" for

loss making companies, limiting the tax motive of an acquiring company.

Ahmadabad Cotton Mills Merged with Arvind Mills ( Rs =3.34 crores)

Sidhaper Mills merged with Reliance Industries Ltd.(Rs. 3.34 crores)


23/63

23

BENEFITS & DRAWBACKS OF

MERGERS & ACQUISITIONS

BENEFITS

Mergers and acquisitions is the permanent combination of the business which vest

management in complete control of the business of merged firm. Shareholders in the

selling company gain from the mergers and acquisitions as the premium offered to induce

acceptance of the merger or acquisitions. It offers much more price than the book value

of shares. Shareholders in the buying company gain premium in the long run with the

growth of the company.

Mergers and acquisitions are caused with the support of shareholders, managers and

promoters of the combing companies. The advantages, which motivate the

shareholders and managers to give their support to these combinations and the

resulting consequences they have to bear, are briefly noted below.

y From shareholders point of view: - Shareholders are the owners of the company so

they must get be benefited from the mergers and acquisitions. Mergers and

acquisitions can affect fortune of shareholders. Shareholders expect that investment

made by them in the combining companies should enhance when firms are merging.

The sale of shares from one companys shareholders to another and holding

investment in shares should give rise to greater values. Following are the advantages

that would be generally available in each merger and acquisition from the point of

view of shareholders;

1. Face value of the share is increased.

2. Shareholders will get more returns on the investments made by them in the

combining companies.

3. Sale of shares from one companys shareholder to another is possible.

4. Shareholders get better investment opportunities in mergers and acquisitions.


24/63

24

y From managers point of view: - Managers are concerned with improving operations

of the company, managing the affairs of the company effectively for all round gains

and growth of the company which will provide them better deals in raising their

status, perks and fringe benefits. Mergers where all these things are the guaranteed

outcome get support from the managers.

y From Promoters point of view: -

1. Mergers offer companys promoters advantages of increase in the size of their

company, financial structure and financial strength.

2. Mergers can convert closely held and private limited company into public

limited company without contributing much wealth and losing control of

promoters over the company.

y From Consumers point of view: - Consumers are the king of the market so they

must get some benefits from mergers and acquisitions. Benefits in favour of the

consumer will depend upon the fact whether or not mergers increase or decrease

competitive economic and productive activity which directly affects the degree of

welfare of the consumers through changes in the price level, quality of the products

and after sales service etc.

Following are the benefits that consumers may derive from mergers and

acquisitions transactions;

1. Low price & better quality goods: - The economic gains realized from

mergers and acquisitions are passed on to consumers in the form of low priced

and better quality goods.

2. Improve standard of living of the consumers: - Low priced and better

quality products directly improves standard of living of the consumers.


25/63

25

DRAWBACKS

Merger or acquisition of two companies in the same field or in diverse field may involve

reduction in the number of competing firms in an industry and tend to dilute competition

in the market. They generally contribute directly to the concentration of economic power

and are likely to lead the merger entities to a dominant position of market power. It may

result in lesser substitutes in the market, which would affect consumers welfare. Yet

another disadvantage may surface, if a large undertaking after merger because of

resulting dominance becomes complacent and suffers from deterioration over the years in

its performance. Following are some disadvantages of mergers and acquisitions;

y Creates monopoly- when two firms merged together they get dominating

position in the market which may lead to create monopoly in the market.

y Leads to unemployment-Raiders shouldnt have the right to buy up firms they

have no idea how to run the employees who have spent their lives building up

the firm should be making the decisions.

y Raiders become filthy rich without producing anything, at the expense of

hardworking people who do produce something.

y M&A damages the morale and productivity of firms.

y Corporate debt levels have risen to dangerous levels.y Managers pressured to forego long-term investment in favour of short-term profit.

y Shareholders may be payed lesser dividend if the firm is not making profits. There

may be a possibility that shareholders would be paid less returns on investment if

the company is not earning enough profit.

y Corporate raiders use their control to strip assets from the target, make a quick

profit, destroying the company in the process, throwing people out of work.


26/63

26

PROCEDURE OF MERGER

1. Search for merger partner- The first step in mergers is to search for merger partner.

The top management may use their own contact in the same line of economic activity

or in the other diversified field which could be identified as a better merger partners.

Such identification should be based on the detail information of the merger partners

collected from public and private sources.

2. Agreement between the two companies- The beginning of actual merger procedure

starts with agreement between the merging companies, but mere agreement does not

provide legal cover to the transaction unless it is sanctioned by the Court under

section 391 of Companies Act 1956.

3. Scheme of merger The scheme of merger should be prepared by the companies

which have taken decision of merging. There is no specific form prescribed for

scheme of merger but scheme should contain following information;

y Particulars about the merging companies.

y Main terms of transfer of assets and liabilities from transferor to transferee.

y Conditions of conducting business.

y Particulars about share capital of merging companies specifying authorized

capital issued capital and paid up capital.

y Description of proposed profit sharing ratio and any condition attached to it.

y Conditions about payment of dividend.

y Status of employees of the merging companies and also status of provident

fund, gratuity fund or any funds created for the benefits of existing employees.

y Treatment of debit balance of merging companies.

y Miscellaneous provisions covering income tax dues, contingencies and other

accounting entries.


27/63

27

4. Approval of Board Of Directors for the scheme- The scheme for merger must be

approved by the respective Board Of Directors of transferor and transferee

companies.

5. Approval of scheme by financial institutions- The Board of Directors should in factapprove the scheme after it has been approved by the financial institutes, debenture

holders, banks which have granted loans to the companies. Approval of Reserve Bank

of India is also needed.

6. Application to the Court- The next step is to make an application under section

39(1) of Indian Companies Act 1956 to the High Court for getting permission for

merging between companies.

7. Approval of scheme by the Court- On the receipt of the application for merger the

Court will decide whether to approve the scheme of merger or not. Once the Court

has approved the application then firms can merged.

8. Transfer of assets and liabilities- The High Court has the power to give order for

transfer of any property from Transferor Company to Transferee Company. By the

virtue of such order assets and liabilities of the Transferor Company shall

automatically stand transferred to Transferee Company.

9. Allotment of shares to shareholders of transferor company- By the virtue of

sanctioned scheme of merger, the shareholders of Transferor Company are entitled to

get shares in Transferee Company in the exchange of ratio provided under the said

scheme.

10.Intimation to stock exchanges- After merger is effected; the company which takes

over assets and liabilities of the Transferor Company should apply to the Stock

Exchanges where its securities are listed, for listing the new shares allotted to the

shareholders of the company.

11.Public announcement- Public announcement of merger is mandatory as required

under SEBI regulations. The Transferee Company shall appoint merchant bank to

make a public announcement of merger on the behalf of Transferee Company. Public

announcement shall be made at least in one national English daily one Hindi daily


28/63

28

and one regional language daily newspaper of that place where the shares of that

company are listed and traded. Public announcement should be made within four days

from finalization of negotiations or entering into any agreement of merger. Public

announcement should contain following information;

y Paid up share capital of the transferee company, the number of fully paid up

and partially paid up shares.

y The minimum offer price for each fully paid up or partly paid up share.

y Mode of payment of consideration.

y Salient features of the agreement, if any, such as the date, the name of the

seller, the price at which the shares are being acquired, the manner of payment

of the consideration and the number and percentage of shares in respect of

y which the acquirer has entered into the agreement to acquire the shares or the

consideration, monetary or otherwise, for the acquisition of control over the

transferee company, as the case may be;

y Objects and purpose of the mergers and acquisitions and the future plans of

the transferor company for the transferee company. Provided that where the

future plans are set out, the public announcement shall also set out how the

transferor proposes to implement such future plans.

y The date by which individual letter of offer would be posted to each of the

shareholder.

y The date of opening and closure of the offer and the manner in which and the

date by which the acceptance or rejection of the offer would be communicated

to the share holders.

y The date by which the payment of consideration would be made for the shares

in respect of which the offer has been accepted.

y Approvals of banks or financial institutions required, if any;

y Such other information as is essential for the shareholders to make them

informed about the offer.


29/63

29

MERGERS AND ACQUISITIONS VALUATION MATTERS

Investors in a company that are aiming to take over another one must determine

whether the purchase will be beneficial to them. In order to do so, they must ask

themselves how much the company being acquired is really worth. Naturally, both sides

of a mergers and acquisitions deal will have different ideas about the worth of a target

company. The seller will tend to value the company at highest price as possible, while the

buyer will try to get the lowest price that he can. There are, however, many legitimate

ways to value companies. The most common method is to look at comparable companies

in an industry, but deal makers employ a variety of other methods and tools when

assessing a target company. Following are some methods that are employed by the

merging firms;

1. Comparative Ratios - The following are two examples of the many comparative

metrics on which acquiring companies may base their offers:

y Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring

company makes an offer that is a multiple of the earnings of the target company.

Looking at the P/E for all the stocks within the same industry group will give the

acquiring company good guidance for what the target's P/E multiple should be.

y Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring

company makes an offer as a multiple of the revenues, again, while being aware

of the price-to-sales ratio of other companies in the industry.

2. Replacement Cost - In a few cases, acquisitions are based on the cost of replacing

the target company. For simplicity's sake, suppose the value of a company is simply

the sum of all its equipment and staffing costs. The acquiring company can literally

order the target to sell at that price, or it will create a competitor for the same cost.

Naturally, it takes a long time to assemble good management, acquire property and

get the right equipment. This method of establishing a price certainly wouldn't make

much sense in a service industry where the key assets - people and ideas - are hard to

value and develop.


30/63

30

3. Discounted Cash Flow (DCF) - A key valuation tool in mergers and acquisitions,

discounted cash flow analysis determines a company's current value according to its

estimated future cash flows. Forecasted free cash flows (net income +

depreciation/amortization - capital expenditures - change in working capital) are

discounted to a present value using the company's weighted average costs of

capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this

valuation method.


31/63

31

PARTICIPANTS TO MERGERS AND ACQUISITIONS

Mergers and Acquisitions process requires highly skilled and qualified group of

advisers. Each advisor specializes in a specific aspect of the merger and acquisitionprocess. The role played by such advisers or professional experts are as follows;

1. Investment bankers: Investment banking is one of the most important department in

the process of mergers and acquisitions. It is fee based adviser department which

works with the company that wish to acquire other company or with industries that

wish to purchase a smaller industry. The main role of investment banks is to provide

finance for mergers and acquisitions transactions.

2. Lawyers: The legal framework surrounding a typical transaction has become so

complicated that no one individual can have sufficient expertise to address all the

issues. In large and complicated transactions, legal teams consists of more than one

dozen lawyers each of them represents specialized aspects of law. Lawyers are

expected to perform all legal proceedings.

3. Accountants: Services provided by accountants include advice on the optimal tax

structure, financial structuring and performing financial due diligence. A transaction

can be structured in many different ways, with each having different tax implications

for the parties involved. Tax accountants are vital in determining the appropriate tax

structure. Accountants also perform the role of auditors by reviewing the transferor

companys financial statements and operations through a series of interviews with

senior and middle level managers.

4. Valuation experts: They may be appointed either by the bidder or the Transferor

Company to determine the value of the transferor company. They build models that

incorporate various assumptions such as costs or revenue growth rate.

5. Institutional investors: They include public and private pension funds, insurance

companies, banks, mutual funds. Collection of institutions can influence firms

action. They invest their money in the company.


32/63

32

SUCCESS & FAILURE OF MERGERS & ACQUISITIONS

Factors responsible for successful mergers and acquisitions

The success of merger depends upon many critical factors but the main factor is that

Transferor Company should buy Transferee Company at right time, at right place and at

right cost. Just because of company is for sale and another company can afford buying

that company is not good reason to do a deal. The success of mergers and acquisitions

depend on how realistic deal makers are and how well they can integrate two companies

while maintaining day-to-day operations. There are several key ingredients that need to

come together for merger and acquisitions to be successful;

I. Strategy- Strategy is the basis for any merger and acquisition. Company should

be able to express in one sentence the motive behind merger and acquisition. If

the transferor company is not able to express the motive for doing a deal for

merger then the deal should not be done. There are many strategic reasons to buy

a company some of them are listed as follows;

y Acquire Innovative technical skills.

y Obtain new markets and customer.

y Enhance product line.

II. Motive- Buying company i.e. transferor company does not know reasons why

another company is being sold. It should ask reasons for selling the company.

Transferor Company should also try to know what selling company knows about

the business that they are not telling potential buyers. After knowing all reasons

for selling a company buying company would be in a position to decide whether

to go for a deal or not. If they are going for deal then buying company should

decide appropriate price for the deal. Buying company should also examine its

own motive for wanting to acquire the company, whether it is good asset for the

company that would enhance the market of buying company.

III. Price- A low price does not always equate to a good deal, but higher the price; it

is fewer cushions for unexpected problems. Buying company is often forced to


33/63

33

pay more price than they want to pay for the deal. In a competitive situation the

buying company needs to decide how much it is willing to pay and not exceed

that level, even if it means losing the company. However, in any merger and

acquisition there is a pricing range, based on different assumptions of the future

performance of the merger and acquisition. The buying company has to decide the

price to offer for the deal, or how risk will be divided between shareholders of

merging company. .

IV. Post Merger Management- For a merger to succeed much work a remains after

the deal has been signed. The strategy and business model of the old firms may no

longer be appropriate when a new firm is formed. Each firm is unique and

presents its own set of problems and solutions. It takes a systematic effort to

combine two or more companies after they have come under a single ownership.

V. DUE DILIGENCE- Due diligence means, A large part of what makes a deal

successful after completing it, is what is being done before completing it. Before

the closing of the deal, the buyer should engage in a thorough due diligence

review of the sellers business. The purpose of the review is to detect any financial

and the business risk that the buyer might inherit from the seller. The due

diligence team can identify ways in which assets, process and other resources can

be combined in order to realize cost saving and other expected synergies. The

planning team can also try to understand the necessary sequencing of events and

resulting pace at which the expected synergies may be realized.

Factors responsible for failure of mergers and acquisitions

As there are many factors responsible for success of mergers similarly there are many

factors responsible for failure of the merger. The main factor is buying wrong company at

wrong time, at wrong place and by paying wrong price. If the process through which

merger is executed is faulty then it will affect merger adversely. Historical trends show

that roughly two thirds of big mergers will disappoint on their own terms, which means

they will lose value on the stock market. Some of reasons for failure of mergers and

acquisitions are listed below;


34/63

34

I. Payment of high price- The merger fails when the maximum price is paid to

buy another company. In such situation shareholders of Transferee Company

will receive more cash but the shareholders of Transferor Company will pay

more cash. As a result of this deal for merger will fail.

II. Culture clash- Lack of proper communication, differing expectations and

conflicting management styles due to differences in corporate culture contribute

to failure in implementing plan and therefore, failure of mergers and

acquisitions.

III. Overstated synergies: - An acquisition can create opportunities of synergy by

increasing revenues, reducing costs, reducing net working capital and improving

the investment intensity. Over estimation of such synergies may lead to a failure

of this merger. Inability to prepare plans leads to failure of mergers and

acquisitions.

IV. Failure to integrate operations- Once firms are merged management must be

prepared to adapt plans in favour of changed circumstances. Inability to prepare

plans leads to failure of mergers and acquisitions.

V. Inadequate due diligence- The process of the due diligence helps in detecting

any financial and business risks that the buyer might inherit from the seller.

Inadequate due diligence results in the failure of the mergers and acquisitions.


35/63

35

DIFFICULTIES IN MERGERS AND ACQUISITIONS

No marketplace currently exists for the mergers and acquisitions of privately-owned

small to mid-sized companies. Market participants often wish to maintain a level of

secrecy about their efforts to buy or sell such companies. Their concern for secrecy

usually arises from the possible negative reactions a company's employees, bankers,

suppliers, customers and others might have if the effort or interest to seek a transaction

were to become known. At present, the process by which a company is bought or sold

can prove difficult, slow and expensive.

A transaction typically requires six to nine months and involves many steps. Locating

parties with whom to conduct a transaction forms one step in the overall process and

perhaps the most difficult one. Qualified and interested buyers of multimillion dollar

corporations are hard to find. Even more difficulty is to bring a number of potential

buyers forward simultaneously during negotiations. Potential acquirers in industry simply

cannot effectively "monitor" the economy at large for acquisition opportunities even

though some may fit well within their company's operations or plans.

An industry of professional "middlemen" (known variously as intermediaries,

business brokers, and investment bankers) exists to facilitate mergers and acquisitions

transactions. These professionals do not provide their services cheaply and generally

resort to previously-established personal contacts, direct-calling campaigns, and placing

advertisements in various media. In servicing their clients they attempt to create a one-

time market for a one-time transaction. Many but not all transactions use intermediaries

on one or both sides.

Despite best intentions, intermediaries can operate inefficiently because of the slow

and limiting nature of having to rely heavily on telephone communications. Many phone

calls fail to contact with the intended party. Busy executives tend to be impatient whendealing with sales calls concerning opportunities in which they have no interest. These

marketing problems typify any private negotiated markets.

The market inefficiencies can prove detrimental for this important sector of the

economy. Beyond the intermediaries' high fees, the current process for mergers and

acquisitions has the effect of causing private companies to initially sell their shares at a


36/63

36

significant discount. Furthermore, it is likely that since privately-held companies are so

difficult to sell they are not sold as often as they might or should be.

Previous attempts to streamline the mergers and acquisitions process through

computers have failed to succeed on a large scale because they have provided mere

"bulletin boards" hence; it becomes difficult to maintain secrecy. There is a need of a

method for efficiently executing mergers and acquisitions transactions without

compromising the confidentiality of parties involved and without the unauthorized

release of information which is difficult rather almost impossible. It's no secret that

plenty of mergers don't work.

Those who advocate mergers will argue that the merger will cut costs or boost

revenues by more than enough to justify the price premium. It can sound so simple: just

combine computer systems, merge a few departments, use sheer size to force down the

price of supplies and the merged giant should be more profitable than its parts but to

apply all these things in practical is very difficult. In other words, in theory, 1+1 = 3

sounds great, but in practice, it is not so easy.

Another difficulty may be Government rules and regulations.Countries like India do

not allow foreign companies to enter into the domestic market. Thus foreign companies

are forced to merge with Indian company to enter into Indian market even though they

have the power and funds to enter in India alone that is without merging with any other

company.

Example- 1) Wal-Mart is trying to enter into Indian market by merging with

Bharti telecom.

Historical trends show that roughly two thirds of big mergers will disappoint on their

own terms, which means they will lose value on the stock market. The motivations that

drive mergers can be flawed and efficiencies from economies of scale may prove elusive.

In many cases, the problems associated with trying to make merged companies work are

all too concrete.


37/63

37

FINANCING MERGERS AND ACQUISITIONS

Mergers are generally differentiated from acquisitions partly by the way in which they

are financed and partly by the relative size of the companies. Various methods of

financing an M&A deal exist:

1. Cash- Payment by cash such transactions are usually termed acquisitions rather than

mergers because the shareholders of the target company are removed from the picture

and the target comes under the control of the acquirer's shareholders alone.

2. Financing- Financing cash can be borrowed from a bank, or raised by an issue of

bonds. Mergers and Acquisitions financed through debt are known as leveraged

buyouts, and the debt will often be moved down onto the balance sheet of the

acquired company. A cash deal would make more sense during a downward trend in

the interest rates. Another advantage of using cash for mergers and acquisition is that

there tends to lesser chances of EPS dilution for the acquiring company. But a caveat

in using cash is that it places constraints on the cash flow of the company.

3. Hybrids- Mergers and acquisition can involve a combination of cash and debt, or a

combination of cash and stock of the purchasing entity.

4. Factoring-Factoring can provide the necessary extra to make a merger or sale work.

Hybrid can work as ade-denit.


38/63

38

MERGERS AND ACQUISITIONS LAWS

Business firms opt for mergers and acquisitions mostly for consolidating a fragmented

market and also for increasing their operational efficiency, which give them a

competitive edge. Nations across the globe have promulgated Mergers and AcquisitionsLaws to monitor the functioning of the business units therein. An estimate made in 2007

put the number of global competition law sat 106. They possess merger control

provisions.

While most mergers and acquisitions increase the operational efficiency of business firms

some can also lead to a building up of monopoly power. The anti-competitive effects are

achieved either through coordinated effects or unilateral effects. Sometimes mergers and

acquisitions tend to create a collusive market structure.However, free and fair competition is seen to maximize the consumers' interests both interms of quantity and price.

MERGERS AND ACQUISITIONS LAWS: THE GLOBAL PERSPECTIVE

As per global experience around 85% of acquisitions and mergers are devoid of anycompetitiveconcerns. They get approval within a period of 30 to 60 days.

The remaining percentages of firms usually have a substantially long gestation period for

getting the legal approval. These cases are relatively complex and need a close

examination of the various aspects by the regulatory bodies.

As per the guidelines from The International Competition Network simple merger and

acquisitions cases should receive approval within a period of 6 weeks. The comparable

timeframe for complex cases is 6 months.It may be noted that the 'Competition Network' mentioned above is actually anassociation of international competition authorities.

MERGERS AND ACQUISITIONS LAWS: THE INDIAN PERSPECTIVE

Indian competition law grants a maximum time period of 210 days for the determination

of thecombination, which comprises acquisitions, mergers, amalgamations and the like.

One needs totake note of the fact that this stated time frame is clearly distinct from the

minimum compulsorywait period for applicants.As per the law, the compulsory period of waiting for applicants can either be 210 daysstarting from the day of notice filing or receipt of the Commission's order, whicheveroccurs earlier.

The threshold limits for firms entering business combinations are substantially high under

the Indian law. The threshold limits are set either in terms of the asset value or or in terms


39/63

39

the firm's turnover. Indian threshold limits are greater than those for the EU. They are

twice as high when compared with UK.

The Indian law also provides for the modern day phenomenon of merger and

acquisitions, which are cross border in nature. As per the law domestic nexus is a pre-

requisite for notification on this type of combinations.It can be noted that Competition Act, 2002 has undergone a recent amendment. This has

replaced the voluntary notification regime with a mandatory regime. Of the total number

of 106 countries, which possess competition laws only 9 are thought to be credited with a

voluntary notification regime. Voluntary notification regimes are generally associated

with business uncertainties.Post-combination, if firms are seen to be involved in anti-competitive practices de-mergershows the way out.

MORE ON INDIAN MERGERS AND ACQUISITIONS LAWS

Indian Income Tax Act has provision for tax concessions for mergers/demergers between

two Indian companies. These mergers/demergers need to satisfy the conditions pertaining

to Section2(19AA) and section 2(1B) of the Indian Income Tax Act as per the applicable

situation.

In case of an Indian merger when transfer of shares occur for a company they are entitled

to aspecific exemption from the capital gains tax under the Indian I-T tax Act. These

companies can either be of Indian origin or foreign ones.

A different set of rules is however applicable for the 'foreign company mergers'. It is asituation where an Indian company owns the new company formed out of the merger of

two foreign companies.

It can be noted that for foreign company mergers the share allotment in the merged

foreign company in place of shares surrendered by the amalgamating foreign company

would be termed as a transfer, which would be taxable under the Indian tax law.

Also as per conditions set under section 5(1), the 'Indian I-T Act' states that, global

income accruing to an Indian company would also be included under the head of 'scope

of income' for the Indian company.

CERTIFIED MERGERS AND ACQUISITIONS

There are a number of certified mergers and acquisitions advisory programs available at

the present time. With the help of these programs, a lot of commercial entities are getting

involved in merger and acquisition activities. These programs are offered by numerous


40/63

40

merger and acquisition consultants and agencies. Some of them are also conducting

educational programs and seminars for the purpose of educating financial professionals

about the nuances of certified mergers and acquisitions and growing the knowledge base

of the merger and acquisition professionals.

One of the most important certified merger and acquisition advisory programs is theCertifiedValuation Manager Program offered by the American Academy of Financial

Management(AAFM). The American Academy of Financial Management is also hosting

a number ofCertified Valuation Manager Training Conferences throughout the year.

The certified mergers and acquisitions agencies help commercial enterprises or

businesscorporations in acquiring or taking over other companies and also in significant

issues related tomergers and acquisitions. These agencies also help business entities

regarding management


41/63

41

Part-II

TREND AND MARKET ANALYSIS

&

STUDY OF MAJOR M&As


42/63

42

Objective

i. To understand the current trends in the Mergers and Acquisition Markets.

ii. To understand the employees perceptions towards Mergers and Acquisitions.

iii. To get the views of different professional advisors on the Mergers and Acquisitions

market..

iv. To understand some of the major Mergers and Acquisitions of the decade in the Indian

markets.


43/63

43

Research Methodology

The project is divided into two parts. The first part of the project deals with Mergers and

Acquisitions as a concept on a whole. I have researched about the basic knowhow of

Mergers and Acquisitions, the history of the industry and the present state by using

secondary data. The first part of the project is descriptive study giving an overview of the

Mergers and Acquisitions. The first part of the project is collected through secondary data

obtained from the internet, newspaper, magazines whereas the second part of the project

relating to the Trends in Mergers and Acquisitions and the analysis of the M&A Market

in India and the senior executives perception of Mergers and Acquisitions is covered

using primary data.

Both primary and secondary data are required in this study.Primary data is the first hand

information collected directly from respondents. The tool used here is questionnaire.

Primary Data is collected through surveys conducted among existing executives and

employees working in todays Global Work Environment,including some top level

executives from some of the big MNCs functioning in Gurgaon.

The survey process involved two phases: First phase included identification and selection

of the target audience to be studied and to determine the parameters on which

respondents will justify their preferences. A questionnaire was designed to collect the

needed information from the respondents. The Second Phase involves collection of the

primary data by making the respondents fill up questionnaires.


44/63

44

TRENDS & OVERVIEW

IN MERGERS AND ACQUISITIONS

Airline mergers and acquisitions are on the rise across the globe. Theses mergersand acquisitions are highly strategic involving several considerations.

Moreover airline mergers and acquisitions bear serious implications for travelers as wellas airline employees. Important issues related to airline mergers and acquisitions aretime, approvals, efficiency, competition, passenger benefits and strife.

The airlines industry is abuzz with news of mergers and acquisitions. In the last fewyears airline mergers and acquisitions have been a growing trend in several countriesacross the globe. However mergers and acquisitions in the aviation industry are highlystrategic in nature and are undertaken after taking into consideration several important

factors.

Some of the important factors considered by airlines in taking merger and acquisitiondecisions are -

y The coverage area of the other airline. Strategically an airline would like to merge with or

acquire an airline that operates in routes different from its own. This helps in expanding

service coverage and avoiding overlapping of flight schedules.

y The quality of service and brand image of the other airline.

y If the other airline has any partnership with a rival group of airlines.

From the point of view of customers mergers and acquisitions may lead to increasedairfares. This is because mergers and acquisitions reduce the number of operatorsthereby reducing competition and pushing up prices in the aviation industry.

Airline mergers and acquisitions also have important impacts on the employees of theparticipating airlines.

The major concerns that airline employees are faced with in case of mergers andacquisitions are -

y Layoffs - Mergers and acquisitions in most cases are accompanied by layoffs.

y New job rules.

y Salary concerns - The new acquiring airline or the new group arising out of a merger

may not pay the old salaries.


45/63

45

y Pensions and other benefits.

y Seniority - A senior employee of an airline that is acquired may find himself to be not

considered senior by the new employer.

Some of the important issues related to airline mergers and acquisitions are -

y Time - Airline mergers and acquisitions take much longer time to materialize than

mergers and acquisitions in other industries. This is due to the fact that a lot of

considerations are involved from costs to operational issues which are generally large in

magnitude and complex in nature.

y Approvals - Approvals are required from governments, often from different levels and

different authorities to establish airline mergers and acquisitions.y Efficiency -Airline mergers and acquisitions can lead to cost efficiency of the

operators by the elimination of overlapping routes. For the travelers however, this often

leads to lesser frequency of flights.

y Competition - Mergers and acquisitions in the airline industry help to reduce

competition significantly. This helps airlines to achieve higher operating margins. On the

other hand, passengers may face higher airfares.

y Passenger Benefits -Passengers, who are enlisted for frequent-travel schemes and

other similar ones, will have higher mileage pints.

y Strife - Airline mergers and acquisitions are often accompanied by strife related to

seniority issues, new work rules, etc.


46/63

46

y MERGER OF INDIAN AIRLINES AND AIR INDIA

The merger of Air India and Indian Airlines cleared the last legal hurdle on 24 th

August 2007 with corporate affairs ministry giving its green signal, setting the creation of

mega national airline. State-owned carriers Air-India and Indian Airlines)were formally

merged on Friday after the Ministry of Corporate Affairs gave its formal approval to the

merger of the two carriers, which will have a combined fleet of 112 carriers.

The merger carrier would have about 34000 employees and equity base of Rs 150 crore.

Air India would have total fleet of 112 by 2011-12 when all the planes ordered by two

carriers are delivered.

The two airlines were merged into a new company -- National Aviation Company of

India Ltd-- a government release said.

V Thulasidas will be the chairman while Vishwapati Trivedi will be managing director of

the new company that will fly under the brand name 'Air India'. The merged entity will

operate on the domestic and as well as international sectors, the release said.

Air-India will have a combined fleet of 112 aircraft and will be among the top 10 airlines

in Asia and among the leading 30 airlines globally.As a part of its fleet acquisition

program of 112 aircraft, the new airline will induct 21 new aircraft this year including

seven Boeing 777s, 10 A-320s and 4 Boeing 737-800 this year. Air India has already

launched its inaugural flight between Mumbai and New York as a joint entity from

August 1. This is the first time a national carrier is offering a non-stop flight between

India and the United States.

Air India has already launched its inaugural flight between Mumbai and New York as a

joint entity from August 1. This is the first time a national carrier is offering a non-stop

flight between India and the United States.


47/63

47

Air India will have two more brands along with the main carrier, its low-cost arm Air

India Express (which will operate on international and domestic sectors) and Air India

cargo.

The airline also plans to tie up with one of the aircraft manufacturer for a maintenance,

repair and overhaul facility which will also serve as a strategic business unit for the

airline the statement said.


48/63

48

y MERGER OF MITTAL AND ARCELOR

It seems that finally Arcelor is relenting. Some rumors state that Arcelor's CEO Guy

Dolle may recommend Mittal's offer to the board. Some say that Mittal will increase his

bid. It seems the 5 month long saga may be reaching its climax soon.

June 23 - Mittal Steel Co., the world's largest steelmaker, said it's approaching an

agreement to buy Arcelor SA that would end a five-month struggle and lead to the

biggest steel-industry merger.

The two companies will continue talks on Mittal's 24 billion-euro ($30 billion) offer

today and tomorrow, Sudhir Maheshwari, Mittal's managing director for business

development and treasury, said in an interview today. Luc Scheer, a spokesman for

Arcelor inLuxembourg, declined to comment. Arcelor's board is scheduled to meet June

25.

Mittal may increase its offer by 3 billion euros, which would value each Arcelor share at

40.62 euros, according to Bloomberg calculations before it was 36.04 euros per Arcelor

share.

Mittal has already increased its offer, first made Jan. 27, by 34 percent. As part of the

improved terms, billionaire Chairman Lakshmi Mittal agreed to eliminate his preferential

voting rights inthe combined company.

Mittal is now offering to give Arcelor shareholders more than half the new company's

shares and keep Dolle as CEO, the Wall Street Journal reported today. Lakshmi Mittal

would probably be chairman or president, according to the report.

Mittal needs Arcelor to control 10 percent of global steel production. If Arcelor merges

with Mittals, it will replace Mittal as the world's biggest producer of steel.


49/63

49

Mittals Steel shareholders on Tuesday approved the merger with Arcelor Mittal, paving

the way for the merger between Mittal and Arcelor, expected to conclude later this year.

Mittal Steel won approval from 98.8 % of its shareholders present or represented by

proxy voting to merge with Arcelor Mittal. Mittal Steel, incorporated in the Netherlands,

is finalizing its merger with Arcelor in a two-step process, to create a company governed

by Luxembourg law, Mittal Steel said during its extraordinary shareholders meeting held

in Amsterdam.


50/63

50

y ACQUISITION OF UNITED SPIRITS LTD. WHYTE AND

MACKAY

Scottish spirits maker Whyte & Mackay, popularly identified by its iconic double

red lion symbol,was made a part of the United Breweries (UB) Group. United Spirits Ltd

(USL), the flagship of the UB Group, had acquired 100 per cent equity in Whyte &

Mackay for 595 million (about Rs 4,783 crore) in Glasgow, Scotland.

The acquisition plugs a "missing link" in the UB product portfolio by giving the company

the strong presence it needed in the scotch whiskey market.

The acquisition pushes USL's consolidated sales up to 75 million cases per annum. USLclosed 2006-07 at 66.4 million cases, he said.

Due to the shortages and rapidly increasing prices of Scotch Whisky, United Spirits

Limited needed a reliable supply source to secure their future considering that we use

scotch in our Indian blends. The potential for premium Scotch Whisky in India is

enormous and, with the acquisition of Whyte & Mackay they now have a strong portfolio

of internationally recognised brands that they will immediately introduce into the Indian

market and use their strong distribution muscle fully to their advantage.

In addition United Spirits Ltd. now has access to international distribution and can look

forward to exporting their brands from India.

Product Portfolio

Whyte & Mackay recorded sales of 9 million case and case equivalents in the last 12

months. The leading Scotch whiskey distiller owns brands including The Dalmore, Isle of

Jura, Glayva, Fettercairn, Viadivar vodka and Whyte & Mackay blended Scotch.

The company has 140 brands, some dormant, but that can be revived, he said. USL will

look to bring the W&M brands into India and China and there will be a revamp of the

product portfolio depending on the requirements of these markets, he said.


51/63

51

Global demand for Scotch whisky is showing strong growth and prices are increasing

rapidly, Dr Mallya said. W&M's bulk scotch inventories of 115 million litres will allow

USL the opportunity to meet their growing requirements for their brands in India.

Financial Details

Explaining the corporate structure of the deal, Mr Mallya said that W&M is a 100 per

cent subsidiary of USL, through an intermediary holding company established for the

purpose. Acquisition finance for the transaction to United Spirits was provided by ICICI

Bank and Citibank. The debt of 325 million was extended by ICICI to the intermediary

holding company, while 310 million was extended by Citibank to USL, said the UB

Group President (finance), Mr Ravi Nedungadi.

In the day of consolidated statements, these financial details would be reflected in the

company's accounts, he added. "I have repeatedly stated that we will not over pay in any

acquisition and I am satisfied that the price agreed is attractive. Further, the combined

profits of United Spirits and Whyte & Mackay are expected to be earnings accretive from

the first completed year of operations after accounting for the cost of funds applied to the

acquisition," Mr Mallya said.

Mr Vivian Imerman, Chairman and Chief Executive Officer and majority shareholder in

W&M, will remain in the group as a Strategic Advisor to Mr Mallya. The acquisition

brings into USL's fold The Invergordon Distillery, near Inverness. W&M also owns four

malt whisky distilleries in Scotland and a bottling facility in Grangemouth.

United Spirits shares closed at Rs 895.20, up 6.88 per cent, on BSE on Wednesday.


52/63


53/63

53

DATA INTERPRETATION AND ANALYSIS

1.How strong will the overall Indian M&A market be during the next 12 months?

64 percent of survey respondents saw the future of the M&A market as strong orsomewhat positive. Advisors were slightly more confident than company respondents onthe future of the Indian M&A market. 38 percent of respondents had a neutral view of themarket.

2. Which of the following is most responsible for fueling current Indian M&A

active?

In a continued trend, about 48 percent of respondents feel current M&A activity isbeing fueled by private equity buyers. However, 26 percent of respondents saidstrategic buyers have the most influence. Foreign buyer currently just at a 10% areplaying an important role in this matter, since they are in the race to establishthemselves in the growing Indian markets by merging with existing firms.

64%

32%

4%

STRONG NEUTRAL WEAK

26%

48%

6%10%

4%6%

STRATEGIC BUYERS PRIVATE EQUITY BUYERS

STRONG ECONOMY FOREIGN BUYERS

ROBUST FINANCIAL MARKETS OTHERS


54/63

54

3. What is your outlook for the Indian economy, generally, over the next 12

months?

74 percent of respondents have a Positive outlook for the Indian economy in the nextyear, considering that we are growing at a rate of 8 percent, making India stand amongstthe fastest growing economies in the world. India also has the youngest population and isthe main source for Human resources in an aging world. 20 percent have a Neutraloutlook.

4. Which of the following buyers will INCREASE their presence the most in the

Indian M&A Market over the next 12 months (as a percentage of total

transactions)?

Survey results indicate that there is more emphasis on Foreign Buyers since inflow ofFDIs is increasing at a rapid rate. Thus fuelling the economic growth in the country.

74%

20%6%

POSITIVE NEUTRAL NEGATIVE

20%

22%58%

STRATEGIC BUYERS FINANCIAL BUYERS FOREIGN BUYERS


55/63

55

5. Which of the following types of buyers have been most responsible for high

company valuations over the past 12 months?

24 percent of respondents thought strategic buyers had the most influence driving up dealvaluations. Opinions regarding financial and foreign buyers were that 50 percent ofparticipants felt financial buyers were most responsible for high valuations and 10percent of participants felt foreign buyers had the most influence.

6. What sector will see the most M&A activity, globally, in the next 12 months?

20 percent of company respondents selected the automotive industry, 18 percent chosetechnology, and 10 percent chose biotechnology and life sciences as the industry whichwill see the most global activity in the coming year. 18 percent of respondents selectedenergy, 18 percent said technology, and 16 percent named the automotive industry.

24%

50%

10%

16%

STRATEGIC BUYERS FINANCIAL BUYERS FOREIGN BUYERS NONE OF THE ABOVE

12%

10%

12%

18%4%

20%

10%

14%

0%

FINANCIAL SERVICES HEALTHCARE

MANUFACTURING(NON-AUTOMOTIVE) TECHNOLOGY

TELECOMMUNICATIONS AUTOMOTIVE

BIOTECHNOLOGY AND LIFE SCIENCES ENERGY


56/63

56

7. Where will the most foreign buyers in the Indian M&A market come from in the

next 12 months?

Respondents agreed that most foreign buyers in the Indian M&A market will come from

China. Survey analysts note that Chinese investors in the M&A market are generallymore visible shoppers because they tend to come to the market in groups. The secondchoice was the United States of America (24 percent). After USA, respondents pointed toUnited Kingdom (14 percent)

8. What is the single biggest challenge you encounter when dealing with INBOUNDcross-border mergers and acquisitions?

Those respondents who felt that the most foreign buyers in the Indian M&A market willcome from China are most concerned about doing effective due diligence (36 percent),followed by labor issues (30 percent).

2%2%

44%

2%

8%

24%

14%

4%

AUSTRALIA BRAZIL CHINA FRANCE GERMANY USA UNITED KINGDOM OTHERS

36%

6%16%

30%

10%

2%

DOING EFFECTIVE DUE DILIGENCEABSENCE OF A PREDICTABLE LEGAL ENVIRONMENT

CORRUPT LEGAL COMPLIANCEIMPACT ON EMPLOYEES AND LABOR ISSUES

IMPACT ON STAKEHOLDERSOTHERS


57/63

57

9. In the next 12 months, do you believe your company will be involved in an

acquisition?

60 percent of all respondents who identified themselves as a com

Documents

MERGERs and Acquisition 2