MERGERS AND ACQUISITIONS

INTRODUCTION

Definitions :

MERGER : When two companies become one entity with a new name, and agree upon shared control in the management of the new company, a merger is said to have taken place.

An example of this is the recent merger of Sandoz and Ciba-Geigy to form Novartis. The recent proposition for the merger of Coopers and Lybrand is an example of a merger wherein two of the world's largest financial consultants are coming together to make their business even more enterprising.

ACQUISITION : When two companies become one, but with the name and control of the acquirer, and the control goes automatically into the hands of the acquirer.

A classic example in this context is the acquisition of TOMCO by HLL.

JOINT VENTURES: When 2 companies have equity participation in a third company, then the venture is termed as a joint venture.

An example to this effect is the joint venture between Reliance, ONGC and Enron for the development of Pannamukta oil fields.

Mergers and acquisitions are undertaken by companies to achieve certain strategic and financial objectives. They involve the bringing together or two organizations with often disparate corporate personalities, cultures and value systems. Success of mergers may, therefore, depend on how well the organizations are integrated. There are a variety of stakeholders in the merging companies who have an interest in the success of the mergers. Shareholders and managers are two of the most important stakeholders, but others include employees, consumers, local communities and the economy at large. Mergers can have anti-competitive implications and hence in many countries they attract rigorous antitrust scrutiny. The actual conduct of takeover bids is in some countries highly regulated by statutory or non-statutory authorities. Such a regulation is particularly important in the case of hostile takeover bids.

Increasingly, mergers have assumed an international dimension due to global economic integration and the dismantling of barriers to trade and investment. Competition is becoming global and companies have to compete not only in their domestic markets, but also in foreign markets in order to maintain their competitive edge. This trend has caused not only higher levels of cross border takeover activity, but also organizational innovations such as strategic alliances to achieve the same competition objectives. The move away from the cosy familiarity of domestic acquisitions and into foreign ones is full of hazards, in addition to the thrills and opening up of new opportunities and advantages.

There is a widely held perception that companies making acquisitions and merging with other companies are unable to create value for their shareholders. In some case, the feverish atmosphere, the inexorable momentum and thrill of the chase of a hostile bid may drive managers to foolish excess in the bid premium they pay. The causes of failure may, in other cases, stem from the fragmented perspective that managers and other players in the acquisition game have of the merger and acquisition process. One consequence of failure is restructuring in the form of corporate divestments.

OBJECTIVES OF MERGERS AND ACQUISITIONS

The immediate objective of an acquisition is self-evidently growth and expansion of the acquirer's assets, sales and market share. A more fundamental objective may be the enhancement of shareholders' wealth through acquisitions aimed at accessing or creating sustainable competitive advantage for the acquirer. In modern finance theory, shareholder wealth maximization is posited as a rational criterion for investment and financing decisions made by managers.

Share holder wealth maximization may, however, be supplanted by the self-interest pursuit of managers making those decisions. According to the managerial utility theory, acquisitions may be driven by mangerial ego or desire for power, empire building or perquisites that go with the size of the firm.

Shareholder wealth maximization perspective

In this neo-classical perspective, all firms' decisions including acquisitions are made with the objective of maximizing the wealth of the shareholders of the firm. This means that the incremental cash-flows from the decision, when discounted at the appropriate discount rate, should yield zero or positive net present value. Under uncertainty, the discount rate is the risk-adjusted rate with a market-determined risk premium for risk.

With acquisitions, the shareholder wealth maximization criterion in satisfied when the added value created by the acquisition exceeds the cost of acquisition :

Added value from acquisition = value of acquirer and the acquired after acquisition - their aggregate value before

Increase in acquirer share value = Added value - Cost of Acquisition

Cost of Acquisition = Acquisition transaction cost + Acquisition premium

Acquisition Transaction cost = advisers' fees + regulator's fees + stock exchange fees + cost of underwriting + other expenses

Acquisition premium ( or control price) = Offer price paid to target - target's pre-bid price

When managers seek to enhance shareholders' wealth, they must not only add value, but also ensure that the cost of the acquisition dies not exceed that value. Value creation may occur in the target alone, or in both the acquirer and the acquired firm.

A few examples in this regard are as follows :

HLL and BBLIL merger - to gain synergy in operations, channel usage, etc.

Tata Tea acquiring tea gardens - backward integration, provides better stability against price fluctuations.

Increases shareholder value with increasing profits. Also reduces tax burden, sales tax in buying tea saved.

HLL - TOMCO merger - increased the size of HLL market and got a number of soap brands on a golden platter.

Managerial perspective

The modern corporate economy is characterized by large corporations with widespread diffusion of ownership from control, the relation between shareholders and managers may be viewed as one between a principal and his/ her agent. In this agency model, managers as agents may not always act in the best interest of the principal. The cost to the shareholders of such behaviour is called the agency cost and represents loss of value to the shareholders.

Managers may act in disregard of their principal's interest in order to promote their own self-interest. In the acquisition context, such self-interest pursuit may result in bad acquisitions and loss of shareholder value. Acquisitions lacking in value creating rationale may be undertaken to satisfy managerial objectives such as an increase in firm size.

Where the acquisition does have value creating potential, it may be overestimated. Managers may overpay for the acquisition or incur high transaction costs by launching hostile bids. Managers may make genuine errors in estimating the value creating potential, since such an estimation is often based on incomplete information, about the target at the time of the bid.

Disentangling managers' true intentions from their decisions poses problems both before and after a takeover. Ex ante, managers can be very persuasive about the merits of an acquisition and the potential for shareholder wealth increase. Ex post, managerial intentions may be obscured by alternative explanations for acquisitions failure.

Managerial motives in acquisition

1. To pursue growth in firm size as managerial remuneration, perks, status and power are a function of firm size. This strategy may be followed when their compensation is a function of sales growth.

2. To develop their currently underused managerial talent and skills (self-fulfillment motive) - when any firm is in a declining industry it may have to diversify to retain its best managerial staff whom they would have lost to industries that are more competitive and which enjoy greater potential.

3. To diversify risk and minimize costs of financial distress and bankruptcy (job-security motive). This is self evident.

4. To avoid being taken over (job-security again) this is not a plausible motive. e.g. RJR Nabisco was taken over in a hostile leveraged buyout at $ 25 million. Thus size need not be adequate protection.

Thus these motives are not mutually exclusive but they are mutually reinforcing.

The recent spate of mergers and acquisitions in India can also be attributed to the recently announced takeover code. The new takeover code has created a market for takeovers. It has made mergers and acquisitions easy. So companies which were starting new businesses to increase size found an easier route through the takeover code. It made M&A easy and companies had whole strategic teams scouting for lucrative companies for takeover.

MERGERS AND ACQUISITIONS AND BUSINESS STRATEGY

Whatever the fundamental objective of the managers in acquiring other companies, such acquisitions must form part of the business and corporate strategies of the acquirer. Business strategy is aimed at creating sustainable competitive advantage for the firm. Such an advantage may stem form economies of scale and scope, or market power, or access to unique strengths which the acquired company may possess.

Often the acquirer may aim to transfer its 'superior' management skills to the target of acquisition and thereby enhance the earning power of the target's assets. Here the added value can be created even when the target remains a stand-alone entity, and does not depend upon any possible synergy between the acquirer and the acquired. The acquirer is pursuing a corporate strategy of value creation through efficiency improvements in the target.

An acquisition may also fulfil the acquirer's corporate strategy of building a portfolio of unrelated businesses. The aim here may be risk reduction if the earnings streams of the different businesses in the portfolio are highly positively correlated. In an efficient capital market framework, the ability of this strategy to create value for shareholders is open to doubt.

Analytical Framework For Generic Strategies

Thus we have seen the decision to acquire another firm is a strategic decision, which requires a lot of thought and evaluation. By this it is meant that the company strategists should try to identify and quantify opportunities available to them. These are done by using the frameworks mentioned below. Each of these models map out market attractiveness and company strengths. This way strategic investable opportunities are identified.

A Few Common Models Are as follows :

A simple model of this analysis is the Boston Consulting Group (BCG) Matrix shown below. This matrix classifies a firm's portfolio of businesses on two dimensions - market growth rate and the firm's relative share of that market. Market growth rate is used as a proxy for the attractiveness of the market. When demand for the products sold in a market rises rapidly, firms have more profitable opportunities MARKET GROWTH Slow Fast ÚÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ¿ ³ ³ ³ ³ ³ ³ High ³ Cash Cow ³ Star ³ ³ ³ ³ Market ³ ³ ³ Share ÃÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ´ ³ ³ ³ ³ ³ Question ³ Low ³ Dog ³ Mark ³ ³ ³ ³ ³ ³ ³ ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÁÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÙ

Porter's 5 Force Model

1. Market Penetration that is increasing market share in its existing products.

2. Market extension with the firm selling its existing products in new geographical markets.

3. Product Extension in which the firm sells new products related to its existing ones in its present market.

4. Diversification in which the firm sells new products in new markets.

Thus the strategy followed by any firm depends on the firm's evaluation of market attractiveness, competitive strength, and potential for Value creation by matching these strengths with demands made by the market.

Product Life Cycle Model and Ansoff Product And Market Strategic Choice Model are other common models generally adopted to help devise a takeover or acquisition strategy for the firm.

Strategy formulation is a loosely sequential process which consists of the following broad steps:

Strategic Situation Analysis: By this we mean the company's analysis of the present scenario, its strengths and weaknesses. How they match with the opportunities and threats that the market analysis throws up.

Strategic Choice Analysis: By this it is meant a forward looking scenario building analysis by the company. Where does it see itself in the future, what kind of capability must it build to reach that position it sees for itself and most importantly how should it go about building these capabilities.

After the corporate has done its homework that is it has identified segments of the market to invest in. Now it is time for the next part of the strategy and that is Market Entry. The different entry level strategies available to any corporate are

1. Organic Growth

2. Acquisitions or Strategic Alliances

The choice of entry strategy depends upon the market scenario which is defined by:

1. Level of Competition

2. Start-up risks (to greenfield ventures)

3. Availability of organizational resource for organic growth.

4. Advantage of Speed of Entry.

THE DYNAMICS OF THE TAKEOVER PROCESS

Another aspect of the acquisition process which may determine its success is the market dynamics external to the firm. Takeovers have been referred to as the market for corporate control, with rival management teams competing for the right to manage the corporate assets of the target. In this market, as in others, there are intermediaries whose profitability depends upon the volume of takeovers they handle.

The incentives that some of the intermediaries, such as merchant bankers, have in M & A deals may create conflicts of interest between bidders and their advisers. Such incentives may lead to pressures for 'closing the deal'. In this event, acquirers, unable to resist such pressures, may overpay for the targets, and post-acquisition added value may not match, let alone exceed, this overpayment. It is, therefore, necessary to understand the dynamics of the takeover process.

ECONOMIC CONSEQUENCES OF TAKEOVERS

In addition to shareholders and managers, employees, consumers and communities in which the operations of the acquired and acquirer firms are located are also affected by takeovers.

Takeovers often lead to rationalization of operations of the firms involved as well as renegotiation of the terms of employment. There have been instances of acquirers attempting to reduce the value of pension benefits which employees of the acquired company had enjoyed. Rationalization may also lead to plant closures and consequent redundancies, with often devastating impact on local communities.

When the acquisition is driven by the desire to achieve market dominance or increased market power, the shareholders and manager groups may gain from the merger, but to the detriment of consumer. such reduction in competition may also have long-term consequences for the competitiveness and growth of the economy as a whole. For these reasons, takeovers in many countries are subject to antitrust screening. The antitrust authorities have statutory powers to block a merger or allow it subject to certain acceptable conditions.

CROSS-BORDER ACQUISITIONS

There has been a substantial increase in the amount of funds flowing across nations in search of takeover candidates. Cross- border acquisitions pose many of the same problems as domestic ones, as regards identifying appropriate targets with high value creation potential, the scope for overpayment and post-acquisition integration. However, these problems may be of higher order of magnitude in cross-border mergers because of the acquirer's lack of familiarity with the acquired firm's environment and organizational culture. Acquirers need to sensitize themselves to the cultural and other nuances of targets in foreign countries before they venture abroad.

CORPORATE DIVESTMENTS

Acquisitions and divestments together constitute corporate restructuring. The ease with which divestments could be carried out has endowed firms with a great deal of flexibility and capacity to adapt their business and corporate strategies to the changing environment. Firms can reconfigure their businesses less traumatically than in the past, and with greater speed, when they find a particular business fits ill with their changed strategic vision.

The existence of an intercorporate market in corporate assets does not require that the ownership of the legal entity owning those assets has to change before the portfolio of its businesses can be reshuffled. Thus a predatory acquisition followed by asset stripping is not the only mechanism available for transferring assets to those who can exploit their potential to the full. Provided firms are perceptive enough to see when a particular business in their portfolio has outlived its strategic raison d'être, they could use the divestment mechanism to improve the value of their businesses, and thereby avoid falling into the hands of asset strippers.

STRATEGIC ALLIANCES AS ALTERNATIVES TO ACQUISITIONS

In recent years, many companies have sough to advance their strategic goals through strategic alliances in preference to straight acquisitions. This preference has resulted partly from the 'failure' of many acquisitions. But strategic alliances also have certain inherent advantages. Since they are created to achieve specific and fairly narrowly defined strategic objectives, there is a greater clarity of purpose than in 'fuzzy' acquisitions. Further, with these ventures and alliances, the problem of post-acquisition integration does not arise.

There are, however, pitfalls in strategic alliances which are co-operative arrangements among actual or potential rivals. This paradoxical cooperative-competitive game is not easy to manage. Often joint ventures fall apart for organizational reasons because of cultural conflicts or divergent managerial philosophies between the venture partners.

MERGERS AND AMALGAMATIONS IN INDIA

Mergers and amalgamations were hitherto not resorted to extensively by the Indian corporate sector for strategic purposes. In 1996, the Indian capital market witnessed several big mergers than at any time in the past - mega ones being the Rs.2,108 crore Bangalore-based Brooke Bond Lipton India Ltd. (BBLIL) with the Rs.3,775 crore Mumbai-based Hindustan Lever Ltd (HLL), McLeod Russel-Eveready and those in the Ciba-Sandoz stable. In the Ajay Piramal group, Nicholas Piramal India, Piramal Healthcare and Boehringer Mannheim India are merging. The M. A. Chidambaram group started a restructuring exercise in 1995 through mergers. In the past, only a few mega-mergers had created market sensations. Notable amongst them were the merger of Tata Oil Mills Co. Ltd. with HLL and prior to that the merger of Lipton India Ltd with Brooke Bond India Ltd making it the largest tea company in India. The merger scenario has undergone rapid transformation in the post-structural reforms era. Various market reforms initiated by the Government in the form of de-regulation have forced the Indian companies to acquire competitive edge for survival and further expansion.

MERGER REGULATIONS

The basic regulations covering mergers exist in section 391 of the Companies Act, 1956, which enables a company to compromise or make arrangement with creditors and members. This can be done in the following ways :

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them.

Procedural formalities

The process effecting a merger is quite complex and elaborate in nature which can be summed up as follows :

1

(a) Preparation of draft scheme of merger.

(b) Approval of the same by the board of directors of the companies intending to merge.

(c) Application to the concerned High Court to convene general meetings of the respective companies for obtaining approvals of the shareholders to the proposed scheme of merger.

(d) Obtaining approval of the High Court for convening such meeting including fixation of time, place, quorum and appointment of Chairman.

(e) Giving Notice of the petition to the Central Government.

(f) Holding the general body meetings and obtaining approvals of the shareholders.

(g) Submission of the particulars of the general body meetings to the High Court where the following resolutions need to be passed :

-- Resolution approving the scheme of mergers to be passed by three fourths majority in value of shareholders and authorizing the directors to implement the scheme.

-- Resolution for increasing the authorized capital of the company, if necessary.

(h) Submitting petition to the High Court by the respective companies for obtaining the Court's final order which may be given on the basis of the report of the Official Liquidator.

(i) Filing the certified true copy of the court's order with the concerned Registrar of Companies.

(j) Annexing a copy of the order of the High Court to every copy of the memorandum of association after filing the certified copy of the order as aforesaid, and

(k) Allotment of shares or other instruments as per the approved scheme of merger.

Legal Aspects Involved In Mergers And Acquisitions:

The basic regulation that is enforceable is Section 391 of the companies act which talks about the reorganization of share capital, consolidation of shares and the division of shares into classes.

Section 23 of the MRTP Act also said that no mergers and acquisitions were possible unless approved by the Central Govt. This section is now defunct.

The Industrial Policy statement, 1991, first talked about structural reforms to ensure partnerships and go for global competition.

What is a REVERSE MERGER:

In this case a profit making unit takes over a sick unit(declared sick under the Sick Industrial Companies Mergers Act, Special Provision). This was however to take advantage of provisions in the Income Tax Act, 1961. The conditions however were :

-Net assets of the amalgamating co should be greater than the amalgamated company.

-equity capital issued by the amalgamated co. pursuant to acquisition should be greater than the original issued capital.

-control of the amalgamated company goes to the amalgamating company.

(REF: Chartered Secretary, March 1997)

SEBI Takeover Code:

-Acquirer holding more than 5% shares must disclose so at the time of acquisition.

-In a negotiated takeover, acquirer cannot have more than 10% shares in a company unless he makes a public offer for another 20% share at acquisition price.

-In open market takeovers, acquirer cannot acquire more than 10% shares unless he makes a public offer at a price not lower than highest open market price paid by him or the average price of the last 6 months.

Some cases of Indian Mergers

The year 1996 saw the three-way merger of Indrad Auto, MAC Industrial Products and South India Corporation. While the Videocon group decided to merge Videocon Narmada and Videocon International, four group companies of the Onida group _ Mirc Electronics, Monica Electronics, Onida Saka and Onida Savak _ have similar plans. The year ended with the mega ICICI-SCICI merger.

Most mergers were justified in terms of operational and financial synergies, economies of size, pooling of resources, tax benefits, and so on. What can one expect of these mergers? A look at the international scene could provide some useful leads. While mergers have started hotting up only now in the Indian market, the US market has seen two such phases (apart from the current one) when merger activities peaked, first in the mid-1960s and then in the late 1980s.

Many of the studies abroad on mergers are divided into ex-ante market reactions and ex-post analysis. A summary of the ex-ante studies shows that the shareholders of the acquired company generally tend to gain more than the those of the acquiring company. While the average returns of the former category worked out to around 20 per cent, for the latter it was only 2-3 per cent.

The ex-post analysis studied the success or failures of mergers. A merger was considered successful if the post-tax earnings as percentage of equity invested in the acquisition had exceeded the acquirers opportunity cost of capital. In sum, the probability of success was at best about 50 per cent. However, it was found that the probability of success could be improved by having strong core businesses, buying companies in related areas where chances of achieving real economic synergies are the highest, and buying smaller companies that can easily be integrated in the post- acquisition phase.

The major reasons cited for the failure of mergers were over- optimistic appraisal of market potential, over-estimation of synergies, overbidding, and poor post-acquisition integration. Merger activity display a cyclical phenomenon in line with the peaks and troughs in industrial activity. The merger route is generally preferred as external investment and is believed to be a more than a substitute for internal investment. However, an active market for corporate control (which has now been facilitated by the takeover code) dramatically reduces the chances of success for acquiring companies. Even where the acquisitions are in related areas and the companies are small enough to be easily aid integrated post-merger, the success rate was found to be just 50 per cent. Only time will tell the success or failure of the Indian mergers in 1996.

When word seeped out last March that India's Gujarat Gas Co. was up for sale, buyers stampeded to its door. Enron, Shell, Total, British Gas, First Pacific, Bharat Petroleum, and Hindustan Oil Exploration all expressed interest in acquiring the $35 million company, which supplies gas to households in the prosperous state of Gujarat. Eventually, British Gas acquired a 61% stake for $60 million.

India is becoming a hot new hunting ground for deals. Since the Gujarat Gas sale, at least 200 Indian mergers and acquisitions have taken place in industries across the board. In 1997, India's M&A activity was around $800 million, a number that Arthur Andersen predicts will double this year.

EAGER BUYERS. Driving the boom is the progress India has made in opening its economy to global forces. Exposed to competition, India's family-controlled conglomerates are finding they suffer from shortfalls in capital and technology. As a result, many companies are focusing on core businesses and shedding unrelated assets. Foreign companies are also selling to other foreigners or local entrepreneurs. Favorable changes in the securities laws have made these deals even easier.

The sellers are finding eager buyers. Ajay Piramal has been diversifying away from his family's textile mills into the high-growth area of pharmaceuticals. Piramal has acquired three subsidiaries of foreign drug makers, including Hoffman-La Roche Inc., and merged them into Nicholas Piramal India Ltd. Its stock has advanced almost 75% since last March.

While some foreigners are departing, tired of bureaucracy and poor infrastructure, others are betting on a boom in India. General Electric Co. has bought out its local partners' stakes in some lighting and medical-equipment businesses. Anglo-Dutch giant Unilever Group's Indian subsidiary, Hindustan Lever Ltd. (HLL), has become the market leader in hair oil and soaps through local acquisitions. In fact, HLL has a full-fledged M&A department.

India's financial services, in particular, have seen a flurry of M&A activity. As the sector undergoes massive reform, smaller players are getting gobbled up. With an eye to cornering India's vast retail banking market, Industrial Credit & Investment Corp. of India (ICICI), the country's premier financial institution, has acquired ITC Classic, the finance arm of tobacco-maker Indian Tobacco Co., a division of Britain's BAT Industries. This has expanded ICICI's investor base by 700,000, useful for its plans to sell mutual funds and insurance. GE Capital has spent $20 million to acquire SRF Finance, a transportation-finance company, to further its plans to capture the consumer-finance market.

SHARE SWAPS. To step up the pace of consolidation deals even more, Uday Kotak, of Bombay investment bank Kotak Mahindra, wants India's public-sector giants to get in the game. "The big deals will come when Suzuki [Motor Co.] or the Indian government wants to sell out of their joint car-making venture, or when the State Bank of India merges with ICICI. That's the real juice," he says.

Hurdles remain. The lack of consolidated financial statements and stringent accounting standards can make it hard to assess the real value of companies, says Nanda Menon, assistant director at Jardine Fleming India. And, he says, local banks have little expertise in financing deals. Consequently, mergers and acquisitions are largely financed by private means or share swaps. Other deterrents are the 8% duties paid on all asset transfers. And India's pampered labor unions can create delays and complications. Litigation by unions delayed Hindustan Lever's acquisition of Tata's Tomco by nearly six months.

Despite the difficulties, analysts say the merger market will only get bigger as consolidation occurs in telecom, auto parts, cement, steel, and chemicals. "The time is ripe," says Gaurav Dalmia of First Capital, which advises companies on acquisitions. "In three years, M&A will reach its peak in India." Adds Nimish Kampani, chairman of J.M. Financial, which advised Gujarat Gas: "Indians are realizing that buying and selling companies is like buying and selling shares: It's not a bad thing." If it boosts growth and creates jobs, it can in fact be quite a good thing.

"Leaders, business or otherwise, seldom are deficient in animal spirits, and often relish increased activity and challenge. The corporate pulse never beats faster than when an acquisition is in prospect."

-- Warren Buffet in the 1981 Annual report of Berkshire Hathaway

The word `takeover' has become the corporate world's equivalent of the abracadabra that transports ordinary scrips to magic heights, all in a jiffy. Scrips which for years on end languish in the market with per share earnings that can, at charitable best, be described as nondescript, come to life suddenly at the mere hint of a takeover. And if this magic word happens to be uttered by more than one corporate body, there is no limit to the highs the stock can scale.

In the case of Ahmedabad Electricity (AEC), it all started on August 10, 1995, the day the Gujarat-based Torrent group, through its investment companies, made an open offer to acquire a controlling interest in AEC. Until then, the scrip was languishing at Rs. 61, on a per share earnings of Rs. 1.30; which is not surprising considering the minimal prospects for any steep increase in earnings. But it surged by 30 per cent in the month following the announcement. And when, a month later, Bombay Dyeing, through another open offer, upped Torrent's bid by Rs. 25, ittable if it depended too much on borrowings. The mixed economy, he said, was still the best thing for India.

EVALUATION OF MERGERS AND ACQUISITIONS

For a merger to be successful, it is extremely important that the M&A be properly evaluated. The value of the merged entity should be greater than the sum of the individual values of the single entities. For this, a proper model for evaluation are to be followed. A few models are described below :

Due Diligence

Under the due Diligence principle, the value of the merged entity should be greater than the sum of the individual entities. The share value has to increase and also the value of the firm should increase as a whole. The company should be in a position to command better financial terms from financial institutions. Otherwise the managers will not be doing due Diligence to their duty.

Thumb rule for Acquisitions

The initial value of the each firm is taken as 150% the turnover in the previous period. The final value should increase by at least one and a half times the value of the acquirer.

Asset and brand valuation

The combined value of assets and the increase in the brand as a result of acquisition can be used as a basis to measure the value of the acquisition. Various methods are prescribed for asset and brand valuation. But the method used must be consistently followed for both the firms for the valuation to be valid.

Depreciation and Replacement cost

The depreciation cost and replacement cost method takes into account the depreciation cost and replacement cost of the assets got by the acquirer and the transaction costs included should be greater than the premium he has paid for it.

Future Cash Flows from Individual Assets, Brands, etc.

This is the most common value of calculating the value of an acquisition. The cash flows are discounted at a rate of 18% in India, by convention (and at a rate of 30% in China). The future cash flows from the merged firms should exceed the individual cash flows for the firms. In the case of synergies and integrations, this is affected by the savings in taxes. In the case of diversification, the risk is reduced and for other strategic acquisitions, the value of shareholders' wealth increases.

A Framework for Evaluating value of acquisition ³ ÃÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ¿ stand alone value of acquirer ³ ³ ³ ÀÄÄÄÄÄÄÄ¿ stand alone value of target ³ ³ ³ ÀÄÄÄ¿ ³ ³ ³value of synergy ³ ÃÄÙ transaction costs ³ ³ ÃÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ´ combined value ³ ³ ³ ³ ³ ÚÄÄÄÄÄÄÄÄÄÄÄÄÙ value of the next alternative ³ ³ ³ ³ price of target to acquirer ÃÄÄÄÄÄÄÄÄÄÄÄÄÄÄ´ ³ ³ price paid inclusive of premium ³ ³ ³ ÚÄÄÄÄÄÄÄÄÙ ³ ³ net value of takeover ÀÄÄÄÄÄÙ (Ref: Business Today, June 1996)

MANAGING THE PROCESS:

Below are some do s and don't s of the merger process, in the form of examples. It clearly brings out that the success of a merger depends on the willingness and the trust that exists between both the parties negotiating the merger. Otherwise, it could result in loss of a large amount of managerial time, which could be put into other value adding activities. Hostile takeovers have always proved to be value degrading even though the method is still used. Negotiated takeovers have been the most successful, both in India and worldwide. Trust, synergy and increase of share holders' wealth are the main considerations to be looked into.

How not to go about the acquisition:

There has to be a synergy between the cash crunch company and the cash flush company, as also between the global vision and no vision, between the technology and no technology. An example to this effect is that between Reliance and L&T. While they could have fit into this category well, yet they failed because of culture clash, poor communication, no confidentiality. It almost became an acquisition rather than a merger.

How to go about it:

Let us consider the case of HLL and TOMCO:

* A Business research cell of HLL identified TOMCO as the target.

* The CEO formed core groups of three each consisting of the CEO, Legal and Finance.

* There was extreme confidentiality, and negotiated at high price to thwart competition, and subsequently , the price was bid down. The operation was called "Project Clover"

* Trust and faith was built and an assurance was given regarding no retrenchments as also no brand phase outs.

Post Integration: Business integration manager was primarily to operationalise synergy, ensure that there was no channel duplication. Manufacturing facilities were integrated and use of monopoly power to reduce receivables.

The Effect: TOMCO's losses were reduced from 13.4 crores to 94 lakhs in a year, which was phenemenon in itself.

CONCLUSION

Mergers and acquisitions in India have grown on a rampant scale after the introduction of the takeover code. This has created a market for M&A and M&A specialists in the form of consultants, merchant bankers, managers, etc. Corporate India has been quick to grab the opportunity and try for the maximum success rate. In a short time, it has also been learnt that Mergers and acquisitions are not a panacea for corporate ills. Negotiated takeovers with the proper synergy to back them and managerial willingness to manage the process smoothly have resulted in the few successes that were seen in India.

References :

1. Mergers and Acquisitions - P. Sudarsanam

2. Chartered Secretary Jan-97, March-97

3. Business Today Nov-'96, June-'97.