Cross-border merger and acquisition with special reference to India


By

Dr. Vijay Kumar Sharma
Associate Professor
Department of Commerce
Himachal Pradesh University
Shimla

Rakesh Kumar Sharma
Senior Lecturer of Management
Ansal Institute of Technology
Gurgaon
 


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

Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. There are 15 different types of actions that a company can take when deciding to move forward using M&A. Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. In the United States, business laws vary from state to state whereby some companies have limited protection against hostile takeovers. One form of protection against a hostile takeover is the shareholder rights plan, otherwise known as the "poison pill".

Historically, mergers have often failed to add significantly to the value of the acquiring firm's shares. Corporate mergers may be aimed at reducing market competition, cutting costs (for example, laying off employees, operating at a more technologically efficient scale, etc.), reducing taxes, removing management, "empire building" by the acquiring managers, or other purposes which may or may not be consistent with public policy or public welfare. Thus they can be heavily regulated, for example, in the U.S. requiring approval by both the Federal Trade Commission and the Department of Justice.

Cross-Border Merger and Acquisition:

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 to the acquirer's. For every $1-billion deal, the currency of the target corporation increased in value by 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 1996 alone 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 actions have unsuccessful results. Cross border intermediation has many more levels of complexity to it then 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.[3][4] Because of such complications, many business brokers are finding the International Corporate Finance Group and organizations like it to be a necessity in M&A today.

Table 1.1 Largest M&A deals worldwide since 2000:

Rank

Year

Acquirer

Target

Transaction Value
(in Mil. USD)

%

1

2000

Merger : America Online Inc. (AOL)

Time Warner

164,747

21.83

2

2000

Glaxo Wellcome Plc.

SmithKline Beecham Plc.

75,961

10.06

3

2004

Royal Dutch Petroleum Co.

Shell Transport & Trading Co

74,559

9.87

4

2006

AT&T Inc.

BellSouth Corporation

72,671

9.62

5

2001

Comcast Corporation

AT&T Broadband & Internet Svcs

72,041

9.54

6

2004

Sanofi-Synthelabo SA

Aventis SA

60,243

7.98

7

2000

Spin-off : Nortel Networks Corporation

 

59,974

7.95

8

2002

Pfizer Inc.

Pharmacia Corporation

59,515

7.89

9

2004

Merger : JP Morgan Chase & Co.

Bank One Corporation

58,761

7.79

10

2006

Pending: E.on AG

Endesa SA

56,266

7.45

   

Total

 

754,738

100

Source: Institute of Mergers, Acquisitions and Alliances Research, Thomson Financial


Table: 1.1 and fig.1.1 show the ten largest M&A deals worldwide since 2000. Table and figure reflects that the largest M & A deal during last 6 year was between American Online Inc and. Time Warner of worth $ 164,747 million during 2000, which account 21.83% of total transaction value of top ten worldwide merger and acquisition deals.  While second largest deal was between Glaxo Wellcome Plc. & SmithKline Beecham Plc. Of US $ 75,961 million which was also occurred during 2000, which was 10.06 % of total transaction value of top ten worldwide M & a deals  & third largest deal was between Royal Dutch Petroleum Co. Shell Transport & Trading Co of worth US $ 74,559 million, it is 9.87 % of total transaction value of top ten worldwide M & a deals.

Cross-border Merger and acquisition: India

Until upto a couple of years back, the news that Indian companies having acquired American-European entities was very rare. However, this scenario has taken a sudden U turn. Nowadays, news of Indian Companies acquiring a foreign businesses are more common than other way round.

Buoyant Indian Economy, extra cash with Indian corporates, Government policies and newly found dynamism in Indian businessmenhave all contributed to this new acquisition trend. Indian companies are now aggressively looking at North American and European markets to spread their wings and become the global players.

The Indian IT and ITES companies already have a strong presence in foreign markets, however, other sectors are also now growing rapidly. The increasing engagement of the Indian companies in the world markets, and particularly in the US, is not only an indication of the maturity reached by Indian Industry but also the extent of their participation in the overall globalization process.

Table1.2:  The top 10 acquisitions made by Indian companies worldwide:

Acquirer

Target Company

Country targeted

Deal value ($ ml)

Industry

Tata Steel

Corus Group plc

UK

12,000

Steel

Hindalco

Novelis

Canada

5,982

Steel

Videocon

Daewoo Electronics Corp.

Korea

729

Electronics

Dr. Reddy's Labs

Betapharm

Germany

597

Pharmaceutical

Suzlon Energy

Hansen Group

Belgium

565

Energy

HPCL

Kenya Petroleum Refinery Ltd.

Kenya

500

Oil and Gas

Ranbaxy Labs

Terapia SA

Romania

324

Pharmaceutical

Tata Steel

Natsteel

Singapore

293

Steel

Videocon

Thomson SA

France

290

Electronics

VSNL

Teleglobe

Canada

239

Telecom


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

Figure 1.2


Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3 billion in 2005 , and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be remembered in India's corporate history as a year when Indian companies covered a lot of new ground. They went shopping across the globe and acquired a number of strategically significant companies. This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of acquisitions were made with cash payments.

Table 1.3: Cross-border Merger and acquisition: India
(US $ Million)

Year

Sales

Purchases

2000

1219

910

2001

1037

2195

2002

1698

270

2003

949

1362

2004

1760

863

2005

4210

2649

Total

10873

8249

Source: UNCTAD world investment report 2006


Table 1.3  & figure 1.3 exhibit Cross –border merger and acquisition in India for  the period 2000 to 2005. Table shows the  cross border sales deals during 2000 were 1219 US $ million  while purcahse deal were  910 US $ million.But during 2005, these have been increased  to 4210 US $ million and 2649 US $ million. While overall sales are 10,873 US $ million and purchase deals were 8249 US $ million during last five years. So table clearly depicts that our cross border merger and acquisition sales deals are more then purchase deals.

Table 1.4: Foreign acquisition by Indian firms 2000-2006


Table 1.4: Reflects the foreign acquisition by Indian firms during last 6 years. Table clearly depicts that % of foreign acquisition by Indian firms was highest in IT/Software and BPO sector, i.e., 29.4% while foreign acquisition by Indian firms in pharmaceuticals & healthcare sector was 20.3% during last 6 years Which was second highest. Number of foreign acquisition is also highest in IT/Software and BPO sector i.e., 90 firms while pharmaceuticals & healthcare sector and other sectors are in second number with 62 foreign acquisition. While in the automotive, chemical & fertilizers, Consumer goods, metals and mining and  oil and gas sectors,  the number of firms acquired by Indian firms were 27 firms, 19 firms, 17 firms, 15 firms and 14 firms respectively.

Refrences :

1. Lien, Kathy (2005-10-12). Mergers And Acquisitions - Another Tool For Traders. Investopedia. Retrieved on 2007-06-17.
2. Finklestein, Sydney. Cross Border Mergers and Acquisitions. Dartmouth College. Retrieved on 2007-08-09.
3. Platt, Gordon. Cross-Border Mergers Show Rising Trend As Global Economy Expands. findarticles.com. Retrieved on 2007-08-09.
4. Top Mergers & Acquisitions (M&A) Deals. Institute of Mergers, Acquisitions and Alliances (MANDA). Retrieved on 2007-06-17.
5. Straub, Thomas: Reasons for frequent failure in Mergers and Acquisitions - A comprehensive analysis, Deutscher Universitätsverlag, Wiesbaden 2007. ISBN 978-3835008441.
6. UNCTAD world Investment Report-2006.
7. Davidow, Thomas. Family Business Resolution with Thomas Davidow, Ed.D.. M&A Today. Retrieved on 2007-08-08.
8. Watson, Thomas (2001). Family Circus. Canadian Business. Retrieved on 2007-08-09.
9. Whorf, John. Selling from a Position of Strength. M&A Today. Retrieved on 2007-08-08.
10. Robbins, Doug. The Robbinex Three Phase Selling Process. M&A Today. Retrieved on 2007-08-07.
11. King, Lori. M&A Today Now Online at nvst.com. Writenews. Retrieved on 2007-08-07.
12. http://en.wikipedia.org/wiki/Mergers_and_acquisitions/10-9-07
13. http://ibef.org/accessed /accessed on 11/01/08
14. http://trak.in/tags/business/2007/08/16/indian-mergers-acquisitions-changing-indian-business/ accessed on 11/01/08
15. http://www.themanager.org/me/restructuring.htm / accessed on 11/08/07
 


Dr. Vijay Kumar Sharma
Associate Professor
Department of Commerce
Himachal Pradesh University
Shimla

Rakesh Kumar Sharma
Senior Lecturer of Management
Ansal Institute of Technology
Gurgaon
 

Source: E-mail January 21, 2008

          

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