Corporate Control and Powerplay in Merger and Acquisition


By

Mr. Arindam Banerjee
Faculty (Finance)
Master School of Management
F-17, Shastrinagar, Meerut
 


INTRODUCTION AND ABSTRACT

Business strategy often fails to take into consideration various figures related to profitable merger and acquisition. It is often driven   by   the passion to convert a dream into reality. It often goes beyond the economic/financial models, cost benefits analysis and is influenced by the desire to grow, diversify and attain leadership in the market and gain competitive advantage.

A very good example can be highlighted would be the merger of Mittal steel with Arcelor to create the world's largest steel company. Eyebrows were raised when Laxmi Mittal in June paid nearly 40% prices higher than the initial offer in January which was approximately 25% higher than the prevailing market price. But today when the analysts look at the deal which has appreciated nearly by 10 %, doubts raised has been already answered.

Hurdles which came in way of converting this acquisition to reality like price negotiation, high risk in taking over arcelor ,doubts over strategy adopted etc has been mitigated and it is felt that the decision to acquire has been the right decision and the various question raised before the acquisition has been diluted.

With Tatas acquiring Corus, an Anglo Dutch company for a takeover price of $12.10 billion, and winning the high voltage tussle with Brazil's CSN to acquire Corus is just a glimpse of the future ahead of the highly competitive environment and display of the corporate control and power play in merger and acquisition.

With Tatas acquiring Corus, being the hottest news of 2007, and world is now slowly beginning to realize the strategic intent of the Indian Companies which are being watched more closely than before.

Abstract -----
The article tries to explore the merger and acquisition as a strategic tool available in the hands of the management of the company to gain competitive advantage by exploiting synergies. It further tries to explore the corporate control and power play involved in merger and acquisition, various tactics that should be adopted to be successful in Indian Incorporation. An Attempt has also been made in the paper regarding Tata acquiring Corus and its justification.


In today's global environment where business is becoming more and more complex companies may have to grow to survive; and one of the best way to grow is by merging with another company or acquiring other companies''. Renowned consultant Jacalyn Sherriton, Mr. RobertMcgarvey in an interview to the 'ENTREPRENEUR'.

Truly said, in this era of LPG (Liberalisation, Globalisation and Privatization) merger and acquisition has become a buzzword in the Indian corporate world today .In mathematics 1 + 1 is always equal to 2 but in corporate world it has always been a endeavor to make 1+1 =3. this is exactly what we define as synergy effect. It is the very reason why merger and acquisition has become so popular today.

In simple terms merger can be defined as a process involving a transaction in which one  entity combines with another entity to form a new entity .While acquisition is a process involving a transaction by which one entity with the latter losing its identity. One of the major difference that can be highlighted in case of merger and acquisition in that merger generally takes place in friendly environment where the representative of both the entities sit and discuss the due diligence process which ensure successful combination of both the entities while acquisition  can be defined as the hostile take over by which one entity purchase the majority of outstanding shares of another company.

To quote the words of federal bank's chairman and CEO Mr. Venugoplan "Unless you have the size you cannot survive the cut throat competition" as federal bank tries entering into wealth management foray and buying stake in Asset Management Company.

If we take this year 2007 it would be quite surprising to note that around 45 deals of strategic merger and  acquisition worth   $14.59 Billion were announced by Indian companies which was 72%  of the total strategic M & A that happened  the previous year. i.e. 2006. These 45 deals of strategic M & A has been announced in January 2007.

BREAK UP OF DOMESTIC DEALS AND CROSS BORDER DEALS IN JANUARY 2007

Nature of deal

n.o of deals

Value(Billion)

Domestic Deal

22

$.30

Cross Border Deals

23

$14.29

Total

45

$14.59


The above data just shows a glimpse of the hectic merger and acquisition deals that is likely to follow this year. The quantum of strategic M & A is expected to sky rocket this year with multi billion dollar  Hutch deals in its final leg and some  big ticket overseas acquisition on the cards including Ranbaxy and Cipla's  interests in the generic business of Merck this year would definitely see a sharp spike in M & A by Indian Incorporation.

One of the important reasons for merger and acquisition can be attribute to the fact that such transaction result in two firms involved to be worth more than one firm. This is exactly what we call synergy effect. It includes combining the strength of two firms and diluting the weakness that is present in one firm, so as to potentially use it to gain competitive advantage.

Often we see small businesses merging or selling out to some other company. This brings in the concept of harvesting. In this situation, the transaction is intended to release the value locked up in small business for the benefits of owner and investors. The impetus for a small business owner to pursue a sale or merger may involve the need to diversify his/ her investment or an inability to finance independently.

A very good example can be highlighted in that of the merger between ICICI Ltd and ICICI Bank who merged to create country's first universal Bank, a one stop shop for financial services with the total assets of  Rs 950 Billion only second to the state owned State Bank of India.

Often we see that merging or acquiring result in the reduction of cost and risk involved in diversification in unrelated field. The cost involve in diversifying in unrelated field is lot. By merging or acquiring the company which is in that field may result in reducing cost as cost involve to diversify in unrelated field may result in setting up plants etc which may have a lot of impact on fixed cost incurred by the company. So by merging it has already set up a field where it can provide its expertise for betterment of that unrelated area to help in achieving of more profitability.

Often we see that Merger and Acquisitions as a strategy has failed to bring in the results. It may be due to the fact that optimum strategy  were not followed ,poor focus  and issues related to cultural and social differences were not properly taken care of.

It should always be kept in mind that the risk involved in merger Acquisition is very high .Some of the largest investment bank in the world are involved in the process of merger and acquisition of the largest MNC in the world .

Often we see that the stock prices falls immediately after the news arrives for the deal is announced. There is always a question in mind of the investor that whether the merges can retain the original values of the business and the synergy involved would be positive to justify the premium paid.

The element of risk involved in merges and Acquisition in different from ordinary investment decision. Since the merger and Acquisition are so complex it is very difficult to evaluate transaction, define associate cost and benefit and handle the resulting tax and legal issues.

Mergers depend upon strategic fits which is also so very difficult to measure. Replacing the existing management and the issues involved in the corporate control often increases the complexity of merges. It also affects the value of the firm which in turn affects the value of the stocks and bonds finally creating an upward/downward trend in stock exchange.                                                                                        

It may be concluded that basically 4 parameters has to be looked into while evaluating a merger i.e. strategic, tactical, fiscal and human. One has to mitigate the risk involved and get right decision for success of merger & acquisition.

To quote ----  

'To win without risk is to triumph without glory'

Analysis of Tata acquiring Corus & its Justification

With Tatas acquiring Corus has been a talking point in the industry circle, an attempts has been made to provide a detail analysis of the deal with its justification.

One of the important advantages for Tata steel acquiring Corus would be increase its global presence and it will give access to market in Europe& elsewhere.                                                                                              

By paying 608 pence a share to acquiring Corus ,the price paid would be largely seen to be much higher than the actual value but by acquiring Corus, Tata Steel have shown how important this acquisition is for them in their strategic vision. One of the critical viewpoints regarding Tata Acquiring Corus can be analyzed from the viewpoint Corus's financial strength doesn't have anything special to be boasted about. Their steel facilities are very old and their cost of production is also fairly high. Just because of higher steel prices they were getting higher return. By operating in oligopolistic market where the entire steel member could come together to cut production whenever needed to save price. If these protections are taken away, then European market will come under pressure and market may be flooded by cheap import from Chinese counterpart and Corus may become a liability for Tata.

But if seen in another angle Tata acquiring Corus can be boost for Tata as they will get the advantage of R &D facilities owned by Corus and the combined entity will make it as the world's fifth largest steel making company thus improving Tata steel's bargaining position with both suppliers as well as customers.                                                        

Conclusion

The market in Asia Pacific region sees a   robust growth in the year 2007. In spite of high financing cost. Merger and Acquisition boom have resulted in the volatility of the prices of the shares in stock market and in turn affecting the credit policies of the company.

'Deal sizes are increasing continuously over the past few years and this trend is likely to continue''.                                                                         

Raj Bal Krishnan, director DSP Merrill lynch said the number may be going bigger but the main reason being 1) size 2)Newer geography 3) Diversification of risk.

Ranbaxy acquiring Merck's generic business generally classified as a stragic move towards acquiring and stepping stone towards globalizations.

With recent cases of ICICI Bank  to take over Sangli  Bank,Iflex  in talks to buy the Asia Pacific Operations of Capco for $ 100 150 Million shows the increasing trend in merger and acquisition that has become a a strategic tools in the hands of the managers to counterattack the increased heat of competition.

Some of the biggest merger & acquisition are still on cards with a global mega asset hunt AV Birla group is said to be eyeing Norwegian Aluminum maker Norsk Hydro.

Some of the important outbound sector for merger & acquisition includes    1) Pharmacy   2) metal
3) mining.

In India especially with liberalization of FERA, MRTP act and industrial licensing, corporate are seriously looking into the aspect of merger & acquisition as an external growth and attain competitive advantage in market.

Thus  with globalization of economy and the pace at which technological changes are accelerating, merger and acquisition remain as the effective tool in the hands of management to gain competitive advantage and beat competition where one firm tries to the other.

Thus we can conclude that merger has been cases in which the merger & acquisition have failed to bring in the optimum result but still the success rate surpasses   the failures rates. With the  globalization  of economy and the pace at which the technological  changes are accelerating merger and acquisition remains a effective tool in the hands of  the management  to gain competitive advantage  and beat  competition where one firm tries to outbid  the other firm.

LARGEST MERGER IN THE LAST MELLENIUM

The datas below give an overview regarding  the largest merger that have  occurred  in the last mellenium

BUYER

SELLER

PRICE OFFERED (in millions)

PFIZER

WARNER-LAMBERT

$82399.6

EXXON

MOBIL

$81429.8

SBC  COMMUNICATION

AMERITECH

$75233.5

VODAFONE GROUP

AIR TOUCH COMMUNICATION

$62768

BRITISH PETROLEAM COMPANY

AMOCO

$56482

AT & T

MEDIA ONE GROUP

$55795

NATIONAL BANK

BANK AMERICA

$43158

WORLD COM

MCI COMMUNICATION

$42459.2

TRAVELLERS GROUP

CITICORP

$36031.6

QWEST COMMUNICATION INTERNATIONAL

US WEST

$34748

VIACOM

CBS

$34454

NORWEST

NELL FORGO & CO

$31660.2

DAIMLER  BENZ

CHRYSLER

$31156

BELL ATLANTIC

GTE

$52845.8

AT & T

TELE COMMUNICATION

$52525


REFRENCE

1) MANAGEMENT ACCOUNTANT   PUBLISHED BY  ICWAI

2) JAMES C. VAN HORNE, Fundamentals of  Financial Management,New Delhi Tata Mcgraw Hill.

3) Http://www.indiainfoline.com

4) www.gisdevelopment.net
 


Mr. Arindam Banerjee
Faculty (Finance)
Master School of Management
F-17, Shastrinagar, Meerut
 

Source: E-mail July 22, 2007

         

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