“THE STUDY ON MERGERS AND ACQUISITIONS IN INDIA”

A PROJECT SUBMITTED TO
THE UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION
OF
THE DEGREE OF MASTER IN COMMERCE (ACCOUNTANCY)
UNDER THE FACULTY OF COMMERCE

SUBMITTED BY
PATIL SWAPNIL SUBHASH ANITA

UNDER THE GUIDANCE OF

ASST. PROF. NEELIMA KERALAVARMA

KERALEEYA SAMAJAM (REGD.) DOMBIVLI’S MODEL

COLLEGE, KHAMBALPADA, THALURLI EAST-421201

UNIVERSITY OF MUMBAI
DECEMBER 2021
 INDEX

Serial No. Description Page No.

1. Certificates (I)
2. Declaration (II)
3. Acknowledgement (III)
4. Chapter No. 1 Introduction 1-32
5. Chapter No. 2 Research Design 33
6. Chapter No. 3 Data Findings and Analysis 34-48
7. Chapter No. 4 Conclusion 49-51
9. Webliography and Bibliography 52
 KERALEEYA SAMAJAM (REGD.) DOMBIVLI’S MODEL
COLLEGE, KHAMBALPADA, THALURLI EAST-421201

Certificate
This is to certify that Mr. Swapnil Subhash Patil has worked and duty
completed his Project Work for the Degree of Master in Commerce
under the Faculty of Commerce in the subject of Accountancy and his
project is entitled, “The Study on Mergers and Acquisitions in India”
under my supervision.
I further certify that the entire work has been done by the learner under
my guidance and that no part of it has been submitted previously for any
Degree of any University.
It is his own work and facts reported by his personal findings and
investigation.

Name and Signature of

Guiding Teacher

Date of Submission:
 DECLARATION

I undersigned Mr. Patil Swapnil Subhash Anita here by, declare that
the work embodied in this project work titled “The Study on Mergers
and Acquisitions of India”, forms my own contribution to the research
work carried out under the guidance of Asst. Prof. Neelima
Keralaverma is a result of my own research work and has not been
previously submitted to any other University for any other Degree to
this or any other University.
Wherever reference has been made to previous works of others, it has

been clearly indicated as such and included in the bibliography.

I, here by further declare that all information of this document has

been document has been obtained and presented in accordance with

academic rules and ethical conduct.

PATIL SWAPNIL SUBHASH ANITA

(Master of Commerce in Accountancy)

Certified by

ASST. PROF. NEELIMA KERALAVARMA

 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the
depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to
do this project.

I would like thanks my Principal, CA. Dr. Ravindra P. Bambardekar for

providing the necessary facilities required for completion of this project.

I take this to thank our Coordinator, Dr. Thrivikraman M. V., for moral support
and guidance.

I would also like to express my sincere gratitude towards my project guide Asst.
Prof. Neelima Keralaverma whose guidance and care made the project successful.

I would like to thank my College Library, for provided various reference books
and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project.

PATIL SWAPNIL SUBHASH ANITA

 Chapter 1
Introduction to Mergers and Acquisitions
In today’s market the main objective of the firm is to make profits and create
shareholder wealth. Growth can be achieved by introducing new products and
services or by expanding with its present operations on its existing products. Internal
growth can be achieved by introducing new products however external growth can
be achieved by entering into mergers and acquisitions (Ghosh and Das, 2003).
Mergers and acquisitions as an external growth strategy has gained spurt because of
increased deregulation, privatization, globalization and liberalization adopted by
several countries the world over. Mergers and acquisitions have become an
important medium to expand product portfolios, enter new markets, and acquire
technology, gain access to research and development and gain access to resources
which would enable the company to compete on a global scale (Yadav and Kumar,
2005). However there have been instances where mergers and acquisitions are been
entered into for non-value maximizing reasons i.e., to just build the company’s
profile and prestige (Malatesta, 1983; Roll, 1986).

Consolidation in the form of mergers and acquisitions has been witnessed around
the world in almost all the industries ranging from automobile, banking, aviation,
oil and gas to telecom. Some of the biggest mergers in automobile like Daimler-
Benz and Chrysler, airlines Air France and KLM and telecom SBC and AT&T are
the ones which the world can never forget. Lot of research and investigation has
gone both in the field of economics and strategic management on the kind of
benefits which are derived out of mergers to both the acquiring and target company,
the customers and the society at large. However, one of the most widely used
investigations has been into the shareholder wealth maximization out of mergers
and acquisitions. The news of mergers is so sensitive that it can immediately impact
the price of the share months before the actual merger takes place for both the
involved companies. The information and news which can flow can bring in positive
or negative sentiments which would lead to a rise or fall in share price and ultimately
shareholders wealth. The perception of information about merger is such that it tries
to project the future increase or decrease in the cash flow derived out of the
combination.

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The following table would depict the change in share price of the acquiring
company on the day when the merger and acquisition announcement was made.

Acquiring Target Movement in

Company Company Price of the
Stock
Daimler- Chrysler +8%
Benz
Time AOL +9%
Warner
Vodafone Mannesman +6%
n
Air France KLM +4%

However, it is important to note that mergers and acquisitions do not regularly create
value for shareholders. Many mergers and acquisitions fail as well. Failure occurs
and it deteriorates the wealth of the shareholders when the integration process for
mergers and acquisitions does not work in a proper flow. Consulting firms also
estimate that almost two thirds of the firms who enter into mergers and acquisitions
result into failure which leads to divestures at a later stage.

Definition:

There are various strategic and financial objectives that influence mergers and
acquisitions. Two organizations with often different corporate personalities,
cultures and value systems are bought together. The terms ‘mergers’ and
‘acquisitions’ are often used interchangeably. In lay parlance, both are viewed as
the same. However, academics have pointed out a few differences that help
determine whether a particular activity is a merger or an acquisition.
A particular activity is called a merger when corporations come together to combine
and share their resources to achieve common objectives. In a merger, both firms
combine to form a third entity and the owners of both the combining firms remain
as joint owners of the new entity.

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An acquisition could be explained as event where a company takes a controlling
ownership interest in another firm, a legal subsidiary of another firm, or selected
assets of another firm. This may involve the purchase of another firm’s assets or
stock. Acquiring all the assets of the selling firm will avoid the potential problem
of having minority shareholders as opposed to acquisition of stock. However, the
costs involved in transferring the assets are generally very high.

There is another term, ‘takeover’ which is often used to describe different activities.
Gaughan says that this term is very vague. It is a broad term that sometimes refers
to hostile transactions and sometimes to both friendly and unfriendly mergers.
Takeover is slightly different than acquisition however the meaning of the later
remaining the same. When the acquisition is forced in nature and without the will
of the target company’s management it is known as a takeover. Takeover normally
undergoes the process whereby the acquiring company directly approaches the
minority shareholders through an open tender offer to purchase their shares without
the consent of the target company’s management. In mergers and acquisitions
scenario the terms mergers, acquisitions, takeover, consolidation and amalgamation
are used interchangeably.

3
 Types of Mergers and Acquisition:
Mergers are generally classified as either horizontal vertical or conglomerate
mergers. These types differ in their characteristics and their effects on the corporate
performances.

• Horizontal Mergers:
Mergers of corporations in similar or related product lines are termed as horizontal
mergers. These mergers lead to elimination of a competitor, leading to an increase
in the market share of the acquirer and degree of concentration of the industry.
However, there are strict laws and rules being enforced to ensure that there is fair
competition in the market and to limit concentration and misuse of power by
monopolies and oligopolies. In addition to increasing the market power, horizontal
mergers often tend to be used to protect the dominance of an existing firm.
Horizontal mergers also improve the efficiency and economies of scale of the
acquiring firm.

• Vertical Merger:

A vertical merger is the coming together of companies at different stages or levels

of the same product or service. Generally, the main objective of such mergers is to
ensure the sources of supply. In vertical mergers, the manufacturer and distributor
form a partnership. This makes it difficult for competing companies to survive due
to the advantages of the merger. The distributor need not pay additional costs to the
supplier as they both are now part of the same entity (learnmergers.com). Such
increased synergies make the business extremely profitable and drive out
competition.

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• Conglomerate Mergers:
Conglomerate mergers occur between firms that are unrelated by value chain or peer
competition. Conglomerates are formed with the belief that one central office would
have the know-how or knowledge and expertise to allocate capital and run the
businesses better than how they would be run independently. The main motive
behind the formation of a conglomerate is risk diversification as the successful
performers balance the badly performing subsidiaries of the group. Conglomerate
mergers can also be explained as a merger between companies which are not
competitors and also do not have a buyer seller relationship. The general
observation has been that such conglomerate mergers are not very successful.

• Financial Acquisitions:
Such acquisitions are not very commonly discussed while classifying mergers and
acquisitions. Such acquisitions are driven by the financial logic of transactions.
They generally fall under either Management Buyouts or Leveraged Buyouts.

Motives for Mergers:

Factor affecting mergers change with the changing legal, political, economic and
social environments. Business Organization literature has identified two common
reasons which are derived out of mergers and acquisitions i.e., efficiency gain and
strategic rationale. Efficiency gain means the merger would result into benefits in
the form of economies of scale and economies of scope. Economies of scale and
scope are achieved because of the integration of the volumes and efficiencies of
both the companies put together. Secondly the strategic rationale is derived from
the point that mergers and acquisition activity would lead to change in the
structure of the combined entity which would have a positive impact on the profits
of the firm. However, we shall discuss these and various other factors that lead to
mergers and acquisitions. These factors are discussed below:
5
• Synergy:

Synergy has been described as 2+2=5. In other words, the whole would be greater
than the sum of its parts. It implies that the combined handling of different activities
in a single combined organization is better, larger or greater than what it would be
in two distinct entities.The word synergy comes from a Greek word that means to
co-operate or work together. Mergers theoretically revolve around the same concept
where two corporations with come together and pool in their expertise and resources
to perform better. Estimating synergies and its effect is an important decision in the
merger process, primarily for four reasons. Firstly, mergers are meant for value
creation and hence assessing the value that would be created by the synergies is
important. Secondly, assessing how investors would react to the merger deal is
another important consideration. Thirdly, managers need to disclose these strategies
and benefits of such deals to investors and hence their perfect estimation and
knowledge is important. Lastly, valuing synergies is important for developing post-
merger integration strategies. However important valuing synergies may be,
practically very few companies actually develop a transactional team, draw up a
joint statement regarding the objectives of the deal or solve the post-closing
operating and financial problems timely. Synergies can be further discussed as being
financial, operating or managerial synergies.

• Growth:
Growth is imperative for any firm to succeed. This growth can be achieved either
through organic or inorganic means. However, mergers (inorganic) are considered
a quicker and a better means of achieving growth as compared to internal
expansions (organic). Along with additional capacity, mergers bring with them
additional consumer demand as well. Mergers also brings with them access to
facilities, brands, trademarks, technology and employees. Although mergers sound
relatively easier and convenient compared to internal growth, there are risks in
actually realising the intended benefits. The convenience associated with growth
needs to be seen along with risks of running a larger corporation as well.

6
• Diversification and Risk Management:

One argument often presented in favour of mergers is that they help in diversifying
the group’s lines’ of businesses and hence helps reduce risk. Risk could be
interpreted as risk from the point of view of shareholders, lenders i.e. insolvency
risk, business risk, etc.

It point out that the probability of a financial failure of two individual corporations
is more than that in case of a conglomerate merger of the two. From the point of
view of a shareholder, the combination of the financial resources of two firms
reduces lenders risk as compared to the risk from combining the shares of individual
corporations.

Diversification often leads to possession of the necessary management and technical

and marketing expertise which leads to an increase in market share.
Different types of mergers can help reduce business risk in their ways. Vertical
integration reduces risk by controlling the production process. Horizontal mergers
reduce competition and hence reduce uncertainties. Conglomerate mergers put a
corporation’s eggs in several baskets and help it diversify. However, it is claimed
that conglomerate mergers are often done in the interest of managers since
shareholders can diversify their portfolios themselves.

• Tax Advantages:
Mergers can benefit the corporations and individuals in their own way by helping
them reduce the tax bill. However, with stricter laws, undue advantage taken by
corporations of tax reduction can be managed. Often large profitable corporations
merge with certain loss-making ones to help them take advantage of reduced
expenditure on taxation. However, small shareholders of acquired companies tend
to receive substantial tax benefits on merger with large corporations.

Loss making corporations can combine with fully taxable firms and can increase
the value of their own tax benefits. This happens because as per law, taxable firms
could offset losses and credits of an acquired firm with its current and future
7
 incomes. However, this could not happen in a visa versa situations. So, acquiring
corporations could benefit by means of a reduced tax bill. On the other hand,
shareholders of small acquired corporations also tend to have tax benefits. However,
these benefits are restricted to situations where they receive shares as the mode of
payment. They receive shares in a more stable, large and profit-making company
and also do not land up paying capital gains tax as their old share are not sold but
swapped as part of organizational restructuring.

Various other benefits also accrue as part of the merger activity. Assets can be
transferred within the group without giving rise to stamp duty. Capital assets can be
transferred on a no profit, no loss basis. Interest could be paid within group
companies so as to use it as a tax shield. Some nations also give tax reliefs to
corporations that acquire sick units.

• Managerial Hubris:
As cited in Moeller et al, 2004, Roll (1986) in his study concluded that managers of
acquiring firms often suffer from hubris and hence tend to overpay. This term refers
to the overconfidence in managers in terms of evaluating potential takeover targets.
Managers often fail due to negligence and overconfidence of managers because of
which they often make mistakes in selecting the right corporations. Managerial
hubris results in takeovers even in the absence of any synergy. Although managers
are equally likely to underestimate the synergies, more often they overestimate them
and are likely to overpay. While synergies lead to a positive correlation between
target and acquirer gains, hubris is likely to result in a negative correlation.

While hubris should ideally depend on every individual, managers of larger firms
are generally more prone to suffer from it. This probably happens because they are
probably socially more important as managers or large firms who have probably
succeeded in growing the firm. This is also likely because large firms tend to have
more funds at their disposal and hence mergers are easier for such firms.

8
• Increased Managerial Compensation and Rewards:
There is a tendency among managers, especially those of corporations where
ownership and control are distinct, to enter into mergers for the lure of a higher pay
packet and more rewards. This tends to happen in corporations where reward is
related to performances of employees. Such motives are often destructive in nature
and result in failed mergers.

Managers often prioritize personal gains over the benefits for the corporation. They
often enter into mergers and seek growth of the corporation only for the power and
prestige that is associated with corporate size. Leisure, staff and other forms of on-
the-job are other motives behind the growth policies of many managers.

It is seen that bidders and acquirers are rewarded handsomely in the form of high
managerial compensation and management dividends. Shareholders of the
acquiring company often tend to be losers in such cases. Managers tend to benefit
at the expense of shareholders. Hence only successful mergers that create true value
must be rewarded. Other issues that need to be addressed in mergers are the
differences between CEOs of merging companies on issues like control, authority
and power.

• Improved Market Standing:

Mergers are often carried out to achieve a better standing in the market by means of
an increased market share and by becoming a leading player in the concerned sector.
Reducing competition is another key concern when contemplating mergers. Often
it is necessary to protect a key source of supply from a competitor which can be
done through mergers. Market power is the ability of a corporation in a market to
profitably charge prices above the competitive level for a sustained period of time.

Mergers are regarded as being successful if they can result in an increase in market
power or can eliminate a threat of increased competition. Mergers are also used to
protect dominant positions. However, it has also been seen that the actual merger
does not provide much evidence that market control leads to an increase in
profitability.
9
• Empire Building:
The term empire building could be quite closely related to the previous points about
increasing market power and diversification. An empire would comprise of a cross
section of businesses which would boost the ego and the personal satisfaction of the
managers and at the same time also spread business risk. Controllers of large
organizations carry out mergers and acquisitions out of their personal whims and
fancies of building an empire.

Managers are often motivated by their egotistical need to exercise power who, like
to flex their muscles by engaging in empire-building. Often managers state
diversification as the motive while fulfilling their empire building ambitions.

• Free Cash Flow:

Cash flows available to suppliers or lenders of money after all operating expenses
and necessary investments in working capital and fixed capital are termed as free
cash flow. This cash flow is ‘free’ and available for managers to either reinvest or
distribute as dividends.

It pointed out that often when a firm has sufficient free cash flows at its disposal,
managers tend to enter into mergers and acquisitions as a means to use these funds
since other investments and buyback options do not prove to be that lucrative.
Managers tend to use this free cash flow for acquisitions as it increases their empire
and hence market power even though such acquisitions may not create shareholder
value. On the other hand, any distribution of cash flows as dividends would lead to
reduced resources at their disposal and loss of power.

10
Mergers and Acquisitions Process:
Merger and Acquisition Process is a great concern for all the companies who intend
to go for a merger or an acquisition. This is so because, the process of merger and
acquisition can heavily affect the benefits derived out of the merger or acquisition.
So, the Merger and Acquisition Process should be such that it would maximize the
benefits of a merger or acquisition deal.

The Merger and Acquisition Process can be divided in to some steps. The
stepwise implementation of any merger process ensures its profitability.

Step: 1 Preliminary assessment or business valuations In this first step of Merger

and Acquisition Process, the market value of the target company is assessed. In this
process of assessment not only the current financial performance of the company is
examined but also the estimated future market value is considered. The company
which intends to acquire the target firm, engages itself in an thorough analysis of
the target firm’s business history. The products of the firm, its’ capital requirement,
organizational structure, brand value everything are reviewed strictly.

Step: 2 Phase of proposal after complete analysis and review of the target firm’s
market performance, in the second step, the proposal for merger or acquisition is
given. Generally, this proposal is given through issuing an non-binding offer
document.

Step: 3 Exit plan When a company decides to buy out the target firm and the target
firm agrees, then the latter involves in Exit Planning. The target firm plans the right
time for exit. It considers all the alternatives like Full Sale, Partial Sale and others.
The firm also does the tax planning and evaluates the options of reinvestment.

Step: 4 Structured Marketing After finalizing the Exit Plan, the target firm
involves in the marketing process and tries to achieve highest selling price. In this
step, the target firm concentrates on structuring the business deal.

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 Step: 5 Origination of Purchase Agreement or Merger Agreement In this step,
the purchase agreement is made in case of an acquisition deal. In case of Merger
also, the final agreement papers are generated in this stage.

Step:6 Stage of Integration In this final stage, the two firms are integrated through
Merger or Acquisition. In this stage, it is ensured that the new joint company carries
same rules and regulations throughout the organization.

Merger and Acquisition Accounting:

M&A is done either by the purchase or pooling of interest’s methods. There are
some differences between these two accounting methods which are discussed in the
following below. in India it is also known as Accounting of Amalgamation
Following are two important merger and acquisition accounting method:

1. Pooling of Interests Method:

Pooling of interests is a method of accounting that allows the balance sheets of

two companies to be added together during an acquisition or merger. Pooling of
interests is one of the accounting that companies can choose to employ when
combining assets. The alternative would be the purchase method in which the
purchasing company adds the absorbed company's assets to its value. it is also
known as Net Assets Method is used when all the modes of discharging the purchase
consideration (e.g. Pref. Shares, Equity shares or cash payable to shareholders of
transferor company) are not given and hence where Net Payment Method cannot be
adopted. Under this Method, purchase consideration is ascertained by aggregating
the agreed values of only those assets which have been taken over by the transferee
company and deducting it from the agreed value of liabilities taken over.

2.Purchase Method:

‘Purchase Consideration’ under this method is taken as the aggregate of all

payments made in the form of shares, debentures, other securities and cash to the

12
shareholders of the transferor company. This method is also known as Net payment
method in amalgamation.

Computation of purchase consideration: For computing purchase

consideration, generally two methods are used:

Purchase Consideration using net asset method: Total of assets taken

over and this should be at fair values minus liabilities that are taken over at the
agreed amounts. Agreed value means the amount at which the transferor company
has agreed to sell and the transferee company has agreed to take over a particular
asset or liability.

Particulars Rs.

Agreed value of assets taken over XXX

Less: Agreed value of liabilities taken over XXX

Purchase Consideration XXX

2. Purchase consideration using payments method: Total of

consideration paid to both equity and preference shareholders in various forms.

Example: A. Ltd takes over B. Ltd and for that it agreed to pay Rs 5,00,000 in
cash. 4,00,000 equity shares of Rs 10 each fully paid up at an agreed value of Rs
15 per share. The Purchase consideration will be calculated as follows:

13
 Particulars Rs.

Cash 5,00,000

4,00,000 equity shares of Rs10 fully paid up at Rs15 60,00,000

per share

Purchase Consideration 65,00,000

Valuation related to Mergers and Acquisition:

Valuation related to mergers and acquisitions employ several procedures, namely,

the income-based procedure, the asset-based procedure and the market-based
procedure.

There are many factors that determine whether a particular company ought to be
bought or not, such as the financial soundness of the subject company. Along with
that, the financial trends over the past couple of years and the trends manifested in
the macroeconomic indicators also need to be judged. Valuation related to mergers
and acquisitions usually follow these three methods: market-based method, asset-
based method and income-based method. It may be felt that the market-based
method is the most relevant, but all three methods are significant depending upon
the situation prevailing during the course of the mergers as well as acquisitions.

• Market based method:

Valuation related to mergers and acquisitions estimated by the market-based

method, compares various aspects of the target company with the same aspects of
the other companies in the market. These companies (not the target company)
usually possess a market value, which has been established previously. Other

14
 aspects that need to be compared include book value and earnings, or total
revenue. Once all the data is collected, an extensive comparison is made to find
the value of the target/subject company.

• Asset based method:

Valuation related to mergers and acquisitions employ this method when the
subject or the target company is a loss-making company. Under such
circumstances, the assets of the loss-making company are calculated. Along with
this method, the market-based method and the income-based method may also be
employed. Valuations obtained from this method may generate very small value;
however, it is more likely to generate the actual picture of the assets of the target
company.

• Income based method:

Valuation related to mergers and acquisitions employing the income-based

method take the net present value into consideration. The net present value of
income, which is likely to be in the future, is taken into account by the application
of a mathematical formula.

Costs of Mergers and Acquisitions:

Costs of Mergers and Acquisitions are calculated in order to check to the viability
and profitability of any Merger or Acquisition deal. The different

Methods adopted for this cost calculation are the Replacement Cost Method,
Discounted Cash Flow Method and Comparative Ratio calculation method.

15
 Costs of Mergers and Acquisitions are very much important as it determines the
viability of any Merger or Acquisition. Any company finalizes a merger deal only
after calculating the cost of merger. In case of acquisition, when a company buys
out another firm, it calculates the costs in order to determine how beneficial will be
the takeover.

1) Comparative Ratios:
The following are two examples of the many comparative metrics on which

Acquirers may base their offers:

• P/E (Price-to-Earnings) Ratio:

With the use of this ratio, an acquirer makes an offer as a multiple of the Earnings
the target company is producing. Looking at the P/E for all the stocks within the
same industry group will give the acquirer good guidance for what the target’s P/E
multiple should be.

• E/V Sales (Enterprise – value – to – Sales Ratio or Price – to – Sales) Ratio:

With this ratio, the acquiring company makes an offer as a multiple of the Revenues
again. While being aware of the P/S ratio of other companies in the industry.

2) Replacement Cost:

Replacement Costs actually refers to the cost of replacing the target firm.
Generally, Target Company’s value is calculated by adding the value of all the
equipment’s, machinery and the costs of salary payments to the employees. So, the
company which wishes to acquire the target firm, offers price accounting to this
value. But, if the target firm does not agree on the price offered, then the other firm
can create a competitor firm with same costing. So, this idea of cost calculation is
referred as the calculation of Replacement Cost. But, it should be mentioned here
that, in case of the firms, where the main assets are not equipment’s and machinery,
but people and their skills, this type of cost calculation is not possible.

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3) Discounted Cash Flow (DCF):

A key valuation tool in M & A discounted Cash flow analysis determines a

company’s current values according to its estimated future cash flows. Forecasted
free cash flows (operating profit + Depreciation + amortization of goodwill – capital
expenditures – cash taxes - Change in working capital) are discounted to a present
value using the Company’s weighted average costs of capital (WACC).

Synergy: The Premium for Potential Success For the most part, acquiring nearly
always pay a substantial premium on the stock market value of the companies they
buy. The justification for doing so nearly always boils to the notion of synergy. A
merger benefits shareholders when a company’s post-merger share-price increases
by the value of potential synergy.

It would be highly unlikely for rational owners to sell if they would benefit more
by not selling. That means buyers will need to pay a premium if they hope acquire
the company, regardless of what pre-merger valuation tells them. For sellers, that
premium represents their company’s future prospects. For buyers, the premium
represents part of the merger synergy they expect can be achieved. The following
equation offers a good way to think about synergy and how to determine if a deal
makes sense. The equation solves for the minimum required synergy.

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Pre-Merger Value of Both Firms + synergy = Pre – Merger Stock
Price Post – Merger Number of Shares
In other words, the success of a merger is measured by whether the value
of the buyer is enhanced by the action. However, the practical constraints of merger
often prevent the expected benefits from being fully achieved

What to Look For

It’s hard for investors to know when a deal is worthwhile. The burden of a proof
should fall on the acquiring company. To find mergers that have a chance of success,
investors should start by looking for some of these criteria:

• A Reasonable Purchase Price:

A premium of say, 10% above the market price seems within the bounds of level
headedness. A premium of 50 %, on the other hand, requires synergy of stellar
proportions for the deal to make sense. The investors should stay away from
companies that participate in such contents.

• Cash transaction:
Companies that pay in cash tend to be more careful when calculating bids, and
valuations come closer to target. When stock is used as the currency for acquisition,
discipline can go by the way side.

• Sensible Appetite:
An acquiring company should be targeting a company that is smaller or in business
that the acquiring company knows intimately. Synergy is hard to create from
companies in disparate business areas.
Mergers are awfully hard to get right, so investors should look for acquiring
companies with a healthy grasp of reality. In other words, the success of a merger
is measured by whether the value of the buyer is enhanced by the action. However,
the practical constraints of merger soften prevent the expected benefits from being
fully achieved.

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 The Deal of Merger or Acquisition:

The deal of merger or acquisition has been scripted below. Prior to the deal of
merger or acquisition is actually struck, there are many factors, which determine the
success of the entire process.

The commencement of the process of mergers and acquisition is marked with a

“tender offer”. A tender offer is an offer wherein the purchase of all or some of the
shares belonging to the shareholders is intended. The price fixed for the same is of
a premium rate as compared to the market price. The laws formulated by the SEC
or Securities And Exchange Commission necessitates that if a company or an
individual acquires 5% stock in a company, the same should be conveyed to the
SEC. A tender offer may either be a “friendly” one or an “unfriendly” one. A
company, which intends to acquire a company eventually, buys out all the shares of
the target company. However the limit is restricted to only 5% and the outstanding
shares are reported as SEC. Declaration about the number of shares (the ones, which
have been bought and the outstanding ones) are made before the SEC.

The total price the acquiring company is ready to pay for the target company and its
assets is worked out with assistance from investment bankers as well as the financial
advisors. Thereafter the tender offer is published informing the shareholders about
the offer price as well as deadlines for either rejecting the offer or accepting it.

Reaction of the target company:

The target company responds to the above course of action in any one of the
following ways:

(I) Agree with the offer terms:

In the event it is felt by the top-level executives and managers that the offer price
may be accepted, the deal of merger or acquisition is struck.

19
(II) Try to negotiate:

If the terms offered by the acquiring company are not acceptable, then the
shareholders of the target company will try to negotiate the deal of merger or
acquisition. The shareholders and the top-level management of the subject company
will try to work out issues so that they do not lose their jobs and simultaneously see
the interest of the target company.

(III) Looking for a White Knight:

A White Knight is referred to another company, which would like to go

for a friendly takeover of the subject company, thereby saving the target
or the subject company from falling prey to that company, which is
intending for a hostile takeover of the target company.

(IV) Using a Poison Pill:

The target company uses a Poison pill wherein it attempts to make its assets or
shares less appealing to the company, which is attempting the tale over. The target
company may do it by two methods:

(a) By using a “flip in”: Permits the prevailing shareholders of the target
company to buy shares at a discounted rate.

(b) By using a “flip over”: Permits the shareholders to buy stakes of the
acquiring company at a discounted rate after the merger has taken place.

Closure of the deal of merger or acquisition

When the tender offer has been finally agreed upon by the target company and after
fulfilling certain regulatory criteria, the deal of merger or acquisition is executed
wherein some kind of transaction takes place. During the course of the transaction,
the company, which buys the target company, makes payment with stock, cash or
with both.

20
Mergers and Acquisitions Strategies:

It is extremely important in order to derive the maximum benefit out of a merger or

acquisition deal. It is quite difficult to decide on the strategies of merger and
acquisition, especially for those companies who are going to make a merger or
acquisition deal for the first time. In this case, they take lessons from the past
mergers and acquisitions that took place in the market between other companies and
proved to be successful.

Through market survey and market analysis of different mergers and acquisitions,
it has been found out that there are some golden rules which can be treated as the
Strategies for Successful Merger or Acquisition Deal.

Before entering in to any merger or acquisition deal, the target company’s market
performance and market position is required to be examined thoroughly so that the
optimal target company can be chosen and the deal can be finalized at right price.

Identification of future market opportunities, recent market trends and customer’s

reaction to the company’s products are also very important in order to assess the
growth potential of the company. After finalizing the merger or acquisition deal, the
integration process of the companies should be started in time. Before the closing
of the deal, when the negotiation process is on, from that time, the management of
both the companies require to work on a proper integration strategy. This is to
ensure that no potential problem crop up after the closing of the deal. If the company
which intends to acquire the target firm plans restructuring of the target company,
then this plan should be declared and implemented within the period of acquisition
to avoid uncertainties. It is also very important to consider the working environment
and culture of the workforce of the target company, at the time of drawing up
Merger and Acquisition Strategies, so that the labourers of the target company do
not feel left out and become demoralized.

21
Impact of Mergers and Acquisitions:

Just as mergers and acquisitions may be fruitful in some cases, the impact of
mergers and acquisitions on various sects of the company may differ. In the article
below, details of how the shareholders, employees and the management people are
affected has been briefed. Mergers and acquisitions are aimed at improving profits
and productivity of a company. Simultaneously, the objective is also to reduce
expenses of the firm. However, mergers and acquisitions are not always successful.
At times, the main goal for which the process has taken place loses focus. The
success of mergers, acquisitions or takeovers is determined by a number of factors.
Those mergers and acquisitions, which are resisted not only affects the entire work
force in that organization but also harm the credibility of the company. In the
process, in addition to deviating from the actual aim, psychological impacts are also
many. Studies have suggested that mergers and acquisitions affect the senior
executives, labour force and the shareholders.

Employees:

Impact Of Mergers and Acquisitions on workers or employees:

Aftermath of mergers and acquisitions impact the employees or the workers the
most. It is a well-known fact that whenever there is a merger or an acquisition, there
are bound to be layoffs. In the event when a new resulting company is efficient
business wise, it would require a smaller number of people to perform the same
task. Under such circumstances, the company would attempt to downsize the labour
force. If the employees who have been laid off possess sufficient skills, they may in
fact benefit from the lay off and move on for greener pastures. But it is usually seen
that the employees those who are laid off would not have played a significant role
under the new organizational set up. This accounts for their removal from the new
organization set up. These workers in turn would look for re-employment and may
have to be satisfied with a much lesser pay package than the previous one. Even
though this may not lead to drastic unemployment levels, nevertheless, the workers
will have to compromise for the same. If not drastically, the mild undulations
created in the local economy cannot be ignored fully.

22
Management at the top:

Impact of mergers and acquisitions on top level management:

Impact of mergers and acquisitions on top level management may actually involve
a “clash of the egos”. There might be variations in the cultures of the two
organizations. Under the new set up the manager may be asked to implement such
policies or strategies, which may not be quite approved by him. When such a
situation arises, the main focus of the organization gets diverted and executives
become busy either settling matters among themselves or moving on. If, however,
the manager is well equipped with a degree or has sufficient qualification, the
migration to another company may not be troublesome at all.

Shareholders:
Shareholders of the acquired firm:

The shareholders of the acquired company benefit the most. The reason being, it is
seen in majority of the cases that the acquiring company usually pays a little excess
than it what should. Unless a man lives in a house he has recently bought, he will
not be able to know its drawbacks. So that the shareholders forgo their shares, the
company has to offer an amount more than the actual price, which is prevailing in
the market. Buying a company at a higher price can actually prove to be beneficial
for the local economy.

Shareholders of the acquiring firm:

They are most affected. If we measure the benefits enjoyed by the shareholders of
the acquired company in degrees, the degree to which they were benefited, by the
same degree, these shareholders are harmed. This can be attributed to debt load,
which accompanies an acquisition.

Pros and Cons of Merger and Acquisitions:

A look at the pros and cons of mergers. Are mergers in the public interest or are
mergers just beneficial for top executives and shareholders? When looking at
mergers it is important to look at the subject on a case-by-case basis as each merger
23
 has a different possible benefits and costs. These are the most likely advantages and
disadvantages of a merger.

Pros:

1. Network Economies:

In some industries, firms need to provide a national network. This means there are
very significant economies of scale. A national network may imply the most
efficient number of firms in the industry is one. For example, when T-Mobile
merged with Orange in the UK, they justified the merger on the grounds that:

“The ambition is to combine both the Orange and T-Mobile networks, cut out
duplication, and create a single super-network. For customers it will mean bigger
network and better coverage, while reducing the number of stations and sites –
which is good for cost reduction as well as being good for the environment.”

2. Research and development:

In some industries, it is important to invest in research and development to discover

new products / technology. A merger enables the firm to be more profitable and
have greater funds for research and development. This is important in industries
such as drug research.

3. Other Economies of Scale:

The main advantage of mergers is all the potential economies of scale that can arise.
In a horizontal merger, this could be quite extensive, especially if there are high
fixed costs in the industry. Note: if the merger was a merger or conglomerate
merger, the scope for economies of scale would be lower.

4. Avoid Duplication:

In some industries it makes sense to have a merger to avoid duplication. For

example, two bus companies may be competing over the same stretch of roads.

24
 Consumers could benefit from a single firm with lower costs. Avoiding duplication
would have environmental benefits and help reduce congestion.

5. Regulation of Monopoly:

Even if a firm gains monopoly power from a merger, it doesn’t have to lead to higher
prices if it is sufficiently regulated by the government. For example, in some
industries the government have price controls to limit price increases. That enables
firms to benefit from economies of scale, but consumers don’t face monopoly
prices.

6. Greater Efficiency:

Redundancies can be merited if they can be employed more efficiently.

7. Protect an industry from closing:

Mergers may be beneficial in a declining industry where firms are struggling to
stay afloat. For example, the UK government allowed a merger between Lloyds
TSB and HBOS when the banking industry was in crisis.

8. Diversification:
In a conglomerate merger two firms in different industries merge. Here the benefit
could be sharing knowledge which might be applicable to the different industry.
For example, AOL and Time-Warner merger hoped to gain benefit from both new
internet industry and old media firm.

9. International Competition:
Mergers can help firms deal with the threat of multinationals and compete on an
international scale.

10.Mergers may allow greater investment in R&D:

This is because the new firm will have more profit which can be used to finance
risky investment. This can lead to a better quality of goods for consumers. This is
important for industries such as pharmaceuticals which require a lot of investment.

25
 Cons:

1. Higher Prices:
A merger can reduce competition and give the new firm monopoly power. With less
competition and greater market share, the new firm can usually increase prices for
consumers. For example, there is opposition to the merger between British Airways
(parent group IAG) and BMI. This merger would give British Airways an even
higher percentage of flights leaving Heathrow and therefore much scope for setting
higher prices. Richard Branson (of Virgin) states:

“This takeover would take British flying back to the dark ages. BA has a track record
of dominating routes, forcing less flying and higher prices. This move is clearly
about knocking out the competition. The regulators cannot allow British Airways
to sew up UK flying and squeeze the life out of the travelling public. It is vital that
regulatory authorities, in the UK as well as in Europe, give this merger the fullest
possible scrutiny and ensure it is stopped.

2. Less Choice:

A merger can lead to less choice for consumers.

3. Job Losses:

A merger can lead to job losses. This is a particular cause for concern if it is an
aggressive takeover by an ‘asset stripping’ company – A firm which seeks to merge
and get rid of under-performing sectors of the target firm.

4. Diseconomies of Scale:

The new firm may experience dis-economies of scale from the increased
size. After a merger, the new bigger firm may lack the same degree of
26
 control and struggle to motivate workers. If workers feel they are just
part of a big multinational they may be less motivated to try hard.

Causes of Failures of Mergers and Acquisitions:

Pitfalls of mergers are the reasons for failures and the pitfalls of
mergers are:

1. Poor Strategic Fit.

2. Cultural and Social Differences.

3. Incomplete and Inadequate due diligence.

4. Poorly Managed Integration.

5. Paying too much.

6. Limited focus.

7. Failure to get the figures audited.

8. Failure to make immediate control.

9. Failure to set the place for integration.

10. Incompatibility of partners.

11. Failures to adopt the product to local taste.

Largest Mergers and Acquisitions of India:

The practice of mergers and acquisitions has attained considerable significance in
the contemporary corporate scenario which is broadly used for reorganizing the
27
 business entities. Indian industries were exposed to plethora of challenges both
nationally and internationally, since the introduction of Indian economic reform in
1991. The cut-throat competition in international market compelled the Indian firms
to opt for mergers and acquisitions strategies, making it a vital premeditated option.

Why Mergers and Acquisitions in India?

The factors responsible for making the merger and acquisition deals favorable in
India are:

• Dynamic government policies

• Corporate investments in industry
• Economic stability
• “0Ready to experiment” attitude of Indian industrialists
Sectors like pharmaceuticals, IT, ITES, telecommunications, steel, construction,
etc, have proved their worth in the international scenario and the rising participation
of Indian firms in signing M&A deals has further triggered the acquisition activities
in India.

28
 Top Indian Mergers and Acquisitions:

Mergers and acquisitions (M & A) is the area of corporate finances, management

and strategy dealing which deals with purchasing and/or joining with other
companies.

TOP MERGER & ACQUISITION DEALS IN INDIA:

1. TATA STEEL-CORUS:
Tata Steel is one of the biggest ever Indian’s steel company and the Corus is
Europe’s second largest steel company. In 2007, Tata Steel’s takeover European
steel major Corus for the price of $12.02 billion, making the Indian company, the
world’s fifth-largest steel producer. Tata Sponge iron, which was a low-cost steel
producer in the fast-developing region of the world and Corus, which was a high-
value product manufacturer in the region of the world demanding value products.
The acquisition was intended to give Tata steel access to the European markets.

2. VODAFONE-HUTCHISON ESSAR:
Vodafone India Ltd. is the second largest mobile network operator in India by
subscriber base, after Airtel. Hutchison Essar Ltd (HEL) was one of the leading
mobile operators in India. In the year 2007, the world’s largest telecom company in
terms of revenue, Vodafone made a major foray into the Indian telecom market by
acquiring a 52 percent stake in Hutchison Essar Ltd, a deal with the Hong Kong
based Hutchison Telecommunication International Ltd. Vodafone main motive in
going in for the deal was its strategy of expanding into emerging and high growth
markets like India. Vodafone’s purchase of 52% stake in Hutch Essar for about $10
billion. Essar group still holds 32% in the Joint venture.

3. HINDALCO-NOVELIS:
Hindalco industries Ltd. is an aluminum manufacturing company and is a subsidiary
of the Aditya Birla Group and Novelis is the world leader in aluminum rolling,
producing an estimated 19percent of the world’s flat-rolled aluminum products. The
Hindalco Company entered into an agreement to acquire the Canadian company

29
 Novelis for $6 billion, making the combined entity the world’s largest rolled-
aluminum Novelis operates as a subsidiary of Hindalco.

4. RANBAXY-DAIICHI SANKYO:
Ranbaxy Laboratories Limited is an Indian multinational pharmaceutical company
that was incorporated in India in 1961 and Daiichi Sankyo is a global
pharmaceutical company, the second largest pharmaceutical company in Japan. In
2008, Daiichi Sankyo Co. Ltd., signed an agreement to acquire the entire
shareholders of the promoters of Ranbaxy Laboratories Ltd, the largest
pharmaceutical company in India. Ranbaxy’s sale to Japan’s Daiichi at the price
of $4.5 billion.

5. ONGC-IMPERIAL ENERGY:
Oil and Natural Gas Corporation Limited (ONGC), national oil company of India.
Imperial Energy Group is part of the India National Gas Company, ONGC Videsh
Ltd (OVL). Imperial Energy includes 5 independent enterprises operating in the
territory of Tomsk region, including 2 oil and gas producing enterprises. Oil and
Natural Gas Corp. Ltd (ONGC) took control of Imperial Energy UK Based firm
operating in Russia for the price of $1.9 billion in early 2009. This acquisition was
the second largest investment made by ONGC in Russia.

6. STERLITE- ASARCO:
Sterlite is India’s largest non-ferrous metals and mining company with interests and
operations in aluminum, copper and zinc and lead. Sterlite has a world class copper
smelter and refinery operations in India. Asarco, formerly known as American
Smelting and Refining Company, is currently the third largest copper producer in
the United States of America. In the year 2009, Sterlite Industries, a part of the
Vedanta Group signed an agreement regarding the acquisition of copper mining
company Asarco for the price of $ 2.6 billion. The deal surpassed Tata’s $2.3 billion
deal of acquiring Land Rover and Jaguar. After the finalization of the deal Sterlite
would become third largest copper mining company in the world.

30
7. TATA MOTORS-JAGUAR LAND ROVER:
Tata Motors Limited (TELCO), is an Indian multinational automotive
manufacturing company headquartered in Mumbai, India and a subsidiary of the
Tata Group and the Jaguar Land Rover Automotive PLC is a British multinational
automotive company headquarters in Whitley, Coventry, United Kingdom, and now
a subsidiary of Indian automaker Tata Motors. Tata Motors acquisition of luxury
car maker Jaguar Land Rover was for the price of $2.3 billion. It certainly landed
Tata Motors in a lot of troubles.

8. RIL-RPL MERGER:
Reliance Industries Limited (RIL) is an Indian Conglomerate holding company
headquartered in Mumbai, India. Reliance Petroleum Limited was set up by
Reliance Industries Limited (RIL), one of India’s largest private sector companies
based in Ahmedabad. Currently, Reliance Industries taking over Reliance
Petroleum Limited (RPL) for the price of 8500 crores or $1.6 billion.

9. Flipkart- Myntra:
The huge and most talked about takeover or acquisition of the year. The seven year
old Bangalore based domestic e-retailer acquired the online fashion portal for an
undisclosed amount in May 2014. Industry analysts and insiders believe it was
a $300 million or Rs 2,000 crore deal. Flipkart co-founder Sachin
Bansal insisted that this was a “completely different acquisition story” as it was not
“driven by distress”, alluding to a plethora of small e-commerce players either
having wound up or been bought over in the past two years. Together, both company
heads claimed, they were scripting “one of the largest e-commerce stories”.

10. Asian Paints- Ess Ess Bathroom Products:

Asian paints signed a deal with Ess Ess Bathroom products Pvt Ltd to acquire its
front end sales business for an undisclosed sum in May, 2014. “The company on
May 14, 2014 has entered into a binding agreement with Ess Ess Bathroom Products
Pvt. Ltd and its promoters to acquire its entire front-end sales business including
brands, network and sales infrastructure,” Asian Paints said in a filing to the BSE

31
 on Wednesday. Ess Ess produces high end products in bath and wash segment in
India and taking them over led to a 3.3% rise in share price for Asian paints.

11.Ranbaxy- Sun Pharmaceuticals:

Sun Pharmaceutical Industries Limited, a multinational pharmaceutical company

headquartered in Mumbai, Maharashtra which manufactures and sells
pharmaceutical formulations and active pharmaceutical ingredients (APIs)
primarily in India and the United States bought the Ranbaxy Laboratories. The deal
is expected to be completed in December, 2014.Ranbaxy shareholders will get 4
shares of Sun Pharma for every 5 Ranbaxy shares held by them. The deal, worth
$4 billion, will lead to a 16.4 dilution in the equity capital of Sun Pharma.

12. TCS- CM:

Tata Consultancy Services (TCS), the $13 billion flagship software unit of the Tata
Group, has announced a merger with the listed CMC with itself as part of the
group’s renewed efforts to consolidate its IT businesses under a single entity. At
present, CMC employs over 6,000 people and has annual revenues worth Rs 2,000
crores. The deal was inked a few days back. TCS already held a 51% stake in CMC.

13.Yahoo-Bookpad:
The search engine giant, Yahoo, acquired the one year old Bangalore based startup
Bookpad for a little under $15 million, though the exact amount has not been
disclosed by either of the two parties concerned. While the deal value is relatively
small, this was the first acquisition made by Yahoo, and was much talked about and
hence finds a mention in our list. Bookpad was founded by three IIT Guwahati pass
outs and allows users to view, edit and annotate documents within a website or an
app.

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 Chapter 2
Research Design
The Present Study is titled as “The study on Mergers and Acquisitions in

India”

Objective of Study:
• To critically analyse the impact of mergers and acquisitions on the operating
performance of the firm in India
• To strategically evaluate the impact on shareholders wealth post-merger and
acquisition.

• Data and Methodology:

In Present Study, Secondary Data is use. Secondary Data collected from Books,
Magazines, Journals, Newspaper and Websites.

• Scope of the Study:

The main aim of the research is to analyze the impact of mergers and acquisitions
on the operating performance of the firm.

• Limitations of the Study:

For the purpose of the present study secondary data is used. Secondary data and
Inferences were made. It may not have answer the researcher specific question

• Chapter Layout:
The present study is arranged as follows:
Chapter 1- Introduction- ‘The study on mergers and acquisition in
India’
Chapter 2- Deals with Research Design
Chapter 3- Deals with Data Analysis
Chapter 4- Conclusion
33
 Chapter 3

Data Findings and Analysis

This section would cover the analysis for the sample companies under the research.
Each and every sector would be analyzed with its synergy and financial operations
post-merger and pre-merger. The section would be able to generate the analysis and
impact of mergers and acquisitions on the shareholders wealth.

Aviation Industry – Overview

The Indian airline industry underwent liberalization in the year 1990 when private
sector companies were allowed to start its business. Many companies like Damania,
East-West, Air Sahara and NEPC entered the market but after nearly a decade none
of them survived. However, in today’s scenario there have been number of private
airline companies operating in this sector with players like Air Deccan, Kingfisher,
Jet Air, Go Air, Spice Jet and many other players. The Indian aviation has only 2
state-controlled airline companies i.e. Air India and Indian Airlines. Sahara Airlines
is one of the oldest private sector airline companies in India which commenced
business in 1991 and then was rebranded as Air Sahara in 2000. Similarly, the state-
owned domestic airline company Indian Airlines was rebranded as ‘Indian’ under
its plan to revamp the position in the airline industry. Later the government
announced the merger of Air India and Indian which would build an airline giant in
India. Jet Airways is one private player which operated both on domestic and
international routes in India and holds a major share in the aviation industry in India.
Spice Jet, Go Air and Air Deccan are the low cost no frill airline companies in India.
Kingfisher Airlines is the closes competitor to private players and it operates in both
domestic and international routes.

34
• Kingfisher Airlines and Air Deccan Merger

One of the significant moves in the airline industry was the merger between Air
Deccan the first low-cost carrier in India and Kingfisher Airline. Air Deccan has
created waves in the airline industry by offering people the lowest cost flying
experience and shifted rail travelers to airline travelers.

However, Air Deccan and Kingfisher Airlines have now merged and known as
Kingfisher Aviation. The merger started when Kingfisher Airlines owner Dr. Vijay
Mallya bought 26% controlling stake in Air Deccan (Indian Express, 2007).

Financial Analysis
The merger between Kingfisher Airlines and Air Deccan took place in the year
2006. Hence below analysis has been done two years prior to the merger i.e., during
2004-05 and 2005-06 and two years after the merger i.e., 2007-08 and 2008-09
respectively.

KINGFISHER AIRLINES 2004-05 2005-06 2006-07 2007-08 2008-09

Operating Profit Margin 10.2% -1.3% -21.9% -51.5% -26.5%

Gross Operating Margin -4.0% -24.6% -21.0% -47.8% -33.9%

Net Profit Margin -6.4% -27.5% -23.6% -13.1% -30.5%

Return on Capital
15.4% -9.8% 7.5% -19.6% -24.4%
Employed

Return on Net Worth -143.0% -347.5% -287.4% -129.8% -809.0%

Debt-Equity Ratio 20.8 4.6 6.3 6.4 4.7

EPS -63.0 -347.5 -31.0 -13.9 -118.5

PE -1.9 -0.3 -4.6 -9.6 -0.4

35
 The results for Kingfisher Airlines shareholders have been very similar to the results
of Jet Airways. Kingfisher airlines has seen operating margins fall to a negative
26.5% and gross operating margin fall to a negative 33.9. Similarly, the net profit
margin and return on capital employed has also be negative for the firm post-merger
basis. The EPS for Kingfisher Airlines has fallen quite sharply since the number of
shareholders has increased but with that the profit after tax has not increased an
instead has fallen. Shareholder’s wealth of Kingfisher airlines has deteriorated
significantly post-merger with Air Deccan. The P/E ratio of the firm also states that
the stock has been undervalued over the years and does not look that an immediate
upward movement in share price or EPS basis which the P/E will go up

• Jet Airways and Air Sahara merger

Jet Airways started its business operations in 1993 and is now the largest company
in the airline industry in terms of market share. The company has a fleet size of 88
aircraft and flies to over 60 destinations worldwide with over 360 flights scheduled
for a single day.

Financial Analysis:
The acquisition between Jet Airways and Air Sahara took place in the year 2006.
Hence below analysis has been done two years prior to the merger i.e., during 2004-
05 and 2005-06 and two years after the merger i.e., 2007-08 and 2008-09
respectively.

36
 JET AIRWAYS 2004-05 2005-06 2006-07 2007-08 2008-09
Operating Profit Margin 33.2% 24.8% 14.7% 8.6% 5.2%

Gross Operating Margin 24.0% 19.8% 6.6% 4.1% -6.4%

Net Profit Margin 9.0% 7.9% 0.4% -2.9% -3.5%

Return on Capital
31.6% 21.2% 13.8% 6.3% 4.0%
Employed

Return on Net Worth 22.4% 21.1% 1.3% -13.7% -31.1%

Debt-Equity Ratio 1.7 2.3 2.9 6.5 12.6

EPS 45.4 52.4 3.2 -29.3 -46.6

PE 27.6 18.5 195.8 -17.7 -3.3

On carefully looking at the above figures it can be seen that the operating margins
of Jet Airways were very strong in the year 2004-05. Later the operating margins
started slowing down in the coming years. Post merger the operating margins of Jet
Airways had gone down to 5.2% from an earlier five year high of 33.2%. Gross
Profit margin

was at a very strong 24% in 2004-05 however post-merger it has moved into a
negative territory of (6.4%). Return on capital employed proves the efficiency with
which the business is maintained. Looking at the post-merger results the
shareholders who act as owners would surely be disappointed with only 4% return
compared to 31.6% in 2004-05. Similarly, the Return on Net worth for the company
has also gone negative and post-merger it has not added any significant value for
the shareholders. The debt equity ratio of the firm at current level is around 10 times

37
 higher than in the year 2004-05 which shows the level of leverage which the
company wants to drive on. The EPS which is the crude factor for any shareholder
has seen a dip of -46.6%. Looking at the P/E ratio clearly shows that the stock has
been highly undervalued and shareholders wealth has been deteriorated.

Overall, it can be seen that Jet Airways has been able to post positive operating
margins post-merger however Kingfisher Airlines have failed to do that. Kingfisher
Airlines also has a negative return on capital employed compared to Jet Airways.
But on the other parameters like Earnings per share, Return on Net Worth and Net
Profit Margin have been negative for both the companies. It can thus be inferred
that mergers and acquisitions have not created enough shareholder wealth post-
merger.

Banking Industry - Overview

Since 1991 when Indian banking sector went under liberalization the industry has
been sound, strong and well regulated. On comparison with any other banking
sector in the world the current position of Indian banking sector is robust. As of
2009, there were total 171 Scheduled Banks in the country out of which 86 were
regional rural banks. Collectively till March, 2009 there were 56,640 branches of
all the scheduled commercial banks put together and more than 27,000 ATMs.
Indian banks have continued to make their presence felt in international markets.
During 2008 and 2009, Indian banks started with 20 representative offices and
subsidiaries in overseas markets. Till 2009, there were 32 foreign banks which were
operating in India with over 290 branches. The largest bank in India is State Bank
of India (SBI).

• HDFC Bank and Centurion Bank of Punjab Merger:

HDFC Bank (Housing Development Finance Corporation) was established in the
year 1994 immediately when the government of Indian liberalized the sector. At
present the bank has a network of 1412 branches across India and over 3,295 ATMs
in more than 528 cities in India (www.hdfcbank.com)

HDFC Bank and Centurion Bank of Punjab underwent a merger in early 2008. The
38
share swap ratio of the merger was 1:29 i.e. for every 29 share of Centurion Bank
of Punjab shareholders would get 1 share of HDFC Bank (Business Standard, 2008).
According to Deepak Parekh (Chairman of HDFC), “It is a win-win situation for
all the stakeholders, shareholders, employees and customers of the bank”

HDFC Bank 2004-05 2005-06 2006-07 2007-08 2008-09

Operating Profit Margin 41.7% 36.8% 40.0% 37.6% 24.1%

Gross Operating Margin 30.8% 26.3% 30.5% 28.6% 18.0%

Net Profit Margin 27.6% 24.9% 20.1% 15.7% 13.7%

Return on Capital
2.6% 2.3% 3.1% 2.9% 2.1%
Employed

Return on Net Worth 18.9% 21.1% 21.5% 13.8% 14.9%

Debt-Equity Ratio 9.21 11.39 11.05 9.15 9.67

EPS 27.63 35.65 43.34 44.92 52.82

PE 19.26 21.60 21.92 31.19 20.82

HDFC Bank is one of the strongest banks in the Indian banking sector with a high
capital adequacy ratio and good year on year results. However on testing the pre
merger and post merger numbers it can be clearly seen that compared to pre merger
ratio the post merger ratios have taken a beating on all parameters like operating
margin, gross profit margin, net profit margin, return on capital employed and return
on net worth. The only significant positive factor for the shareholders has been that
the EPS has risen sharply thanks to a robust profit made by the company and a good
integration process. The P/E ratio of the company has been at significant levels
which is very similar to the pre merger levels. Overall HDFC Bank shareholders
would not be happy on other parameters however the firm has been able to generate
good earning per share even post-merger and the valuation of the company is also

39
 stable at 20 times its earnings.

• Oriental Bank of Commerce and Global Trust Bank Merger:

Oriental Bank of Commerce is a public sector bank which was established in the
year 1943. Immediately after nationalization in 1980s the bank started gaining
momentum and it increases its branch network across India. At present it has a
branch network of 530 branches and 505 ATMs.

Financial Analysis:
The merger between Oriental Bank of Commerce and Global Trust Bank took place
in the year 2005. Hence below analysis has been done two years prior to the
merger
i.e., during 2002-03 and 2003-04 and two years after the merger i.e., 2005-06 and
2006-07.
Oriental Bank of 2002- 2003- 2004- 2005- 2006-
Commerce 03 04 05 06 07
Operating Profit Margin 35.2% 46.4% 66.5% 71.0% 76.0%

Gross Operating Margin 38.4% 50.2% 34.5% 28.9% 25.1%

Net Profit Margin 13.9% 20.8% 20.3% 13.5% 11.2%

Return on Capital
3.4% 3.7% 1.9% 1.7% 1.5%
Employed

Return on Net Worth 21.7% 25.6% 21.8% 10.8% 10.4%

Debt-Equity Ratio 14.50 13.59 14.60 9.88 11.54

EPS 23.74 35.64 37.72 22.24 23.19

PE 2.78 8.16 8.14 10.57 7.98

(Appendix 4)
Oriental Bank of Commerce is a public sector bank in India and is posting favorable
numbers year on year. Post-merger the operating profit margins of the company has
raised sharply from 35% in 2002-03 to 76% in 2006-07. However, the gross profit
margin of the company has seen a dip since 2003-04. The return on capital
40
 employed and return on net worth for the shareholders has also dropped sharply,
however it is still in the positive zone. The debt equity ratio of the company has
been at an average of close to 12.5% over the five-year period. Similarly, the EPS
of the firm has been maintained at Rs 23 pre and post-merger. The valuation of the
company measured by its P/E ratio has moved to close to 8 times its earnings.
However, the stock still remains undervalued compared to its other peers. Overall,
the shareholders have not gained significantly out of the merger and the pre-merger
and post-merger performance has been maintained at the similar level.

Oil and Gas Sector Overview:

Oil and gas are an industry of great importance for a developing country like India.
The industry supports many industries together like transportation, aviation,
manufacturing and other ancillary sectors which collectively account for 15% of the
GDP. Domestic crude oil production fell marginally from 34 million ton in 2007-
2008 to 33.5 million tons in 2008-2009. In the same time, production of natural gas
went up from 32.4 billion cubic meters in 2007-08 to 32.8 billion cubic meters in
2008-09. India is slowly emerging as one of the hubs for refining oil products
because of the cost advantage compared to other Asian countries. India is the fifth
largest in the world with refining capacity and holds close to three percent of the
global oil refining capacity. The government of India has taken several initiatives
in this sector. It has allowed 100% foreign direct investment in all the private
refineries and 26% in all the government owned refineries across the country
through the automatic approval route.

• Reliance Industries Limited and IPCL Merger:

Reliance Industries Limited is one of the largest private sector companies in India
and the second largest group in the world in terms of annual turnover. This company
was found by one of the legends of Indian industry Mr. Dhirubhai Ambani
(www.ril.com) Reliance as a group has foray into oil and gas, retail, power,
telecommunications, logistics, infrastructure and entertainment. However, the
41
businesses have now split between two brothers i.e. Mukesh Ambani and Anil
Ambani.

IPCL was established in the year 1969 by government of India. IPCL was the second
largest petrochemical industry in India just next to Reliance Industries. IPCL has a
installed capacity of over 130,000 tons.

One of the biggest mergers in the Indian oil and gas sector was between Reliance
Industries Limited and Indian Petroleum Corporation Limited (IPCL) in the year
2007. The swap ratio of the merger was fixed at 1:5. This means that for every five
shares of IPCL the shareholders would get 1 share of RIL. This is a horizontal
acquisition which would have positive impact the valuation and cash flows of the
company post-merger.

Financial Analysis
The merger between Reliance Industries Limited and Indian Petroleum Corporation
Limited took place in the year 2006. Hence below analysis has been done two years
prior to the merger i.e., during 2004-05 and 2005-06 and two years after the merger
i.e., 2007-08 and 2008-09 respectively.

RIL 2004-05 2005-06 2006-07 2007-08 2008-09

Operating Profit Margin 19.4% 17.6% 17.3% 17.5% 16.0%

Gross Operating Margin 21.6% 18.4% 17.5% 18.1% 17.4%

Net Profit Margin 11.5% 11.2% 10.4% 14.6% 10.4%

Return on Capital
Employed 23.8% 21.0% 22.7% 19.7% 18.6%

Return on Net Worth 18.7% 18.2% 17.1% 23.9% 15.0%

Debt-Equity Ratio 0.46 0.44 0.44 0.45 0.47

42
 EPS 54.5 65.2 78.5 134.2 105.4

PE 8.3 12.2 17.4 17.5 14.4

RIL is one of the biggest companies in the oil and gas sector in India. Pre-merger
the company has a good operating margin ratio of 19.4% which was one of the best
in the Indian oil industry however post-merger the ratio has dropped down
significantly. Similar pattern was seen with respect to gross profit margin and net
profit margin. In the longer run RIL has always pleased its shareholders, however
two years post-merger both the return on net worth and return on capital employed
saw a sharp drop of over 3%. The only positive point for the company has been that
its shareholders would be pleased with the year-on-year growth in EPS. The
company has always taken decisions which are in favors of its shareholders which
can be seen the EPS being almost doubled in the frame of five years. The valuation
of the company has increased based on the P/E multiple which is 14 times its net
earnings. On all the other financial parameters, RIL has seen a tremendous drop
post-merger with only EPS being on the positive side.

• Indian Oil Corporation Limited and IBP Merger:

IOC (Indian Oil Corporation) came into being in the year 1959. IOC operates mainly
in the downstream segment which involves refining and marketing of oil and petrol
based products. It operates into aviation turbine fuel, petrol spirit, high speed diesel
and liquefied petroleum gas. It also has three subsidiaries CPCL, BRPL and IOBL
(www.iocl.com)

IBP is one of the oldest companies in the oil and gas sector in India which was
established in the year 1909. The company is Indo-Burma Petroleum based
company operating in India. IBP is mainly engaged into the storage, distribution
and marketing of petrol based products in India. It is mainly engaged into industrial
and cryogenic containers.
Indian Oil Corporation and IBP Merger took place in 2007 with a share swap ratio
of 1.25: 1. This means that for every IOC shareholders would get 125 shares for
every 100 IBP shares held.

43
Financial Analysis

The acquisition between Indian Oil Corporation and IBP took place in the year
2006. Hence below analysis has been done two years prior to the merger i.e. during
2004-05 and 2005-06 and two years after the merger i.e. 2007-08 and 2008-09
respectively.

IOCL 2004-05 2005-06 2006-07 2007-08 2008-09

Operating Profit
5.3% 4.5% 5.0% 4.6% 4.4%
Margin

Gross Operating
5.8% 5.1% 5.2% 5.2% 2.3%
Margin

Net Profit Margin 3.5% 2.8% 3.5% 2.8% 1.0%

Return on Capital
Employed 19.7% 16.6% 20.3% 17.9% 18.2%

Return on Net Worth 18.8% 16.8% 21.5% 16.9% 6.7%

Debt-Equity Ratio 0.67 0.90 0.78 0.86 1.02

EPS 42.17 42.37 64.65 58.51 24.79

PE 10.39 13.78 6.19 7.61 15.61

Indian Oil Corporation with its merger with IBP has seen deterioration in the overall
shareholder wealth for the company. The operating margin pre merger for the
company was at 5.3% which dropped to 4.4% after the merger. Similarly gross
profit margins for the company went down half from 5.8% in 2004-05 to 2.3% in
2008-09. Return on Capital employed and Return on net worth has also dropped
significantly post merger. The net profit margin for the company has dropped from
3.5% to 1% in 2008-09. Overall the merger of IOCL and IBP has not been able to
create enough wealth for its shareholders.

44
 Steel Industry Overview:

Steel is one of the most widely used commodities in the world. The consumption of
steel in an economy reflects the growth pattern of related industries like
manufacturing, housing, automobile and infrastructure. The Indian steel industry is
more than 100 years old and till 1990 the industry was operating in a regulated
market. Deregulation in the industry took place in the year 1991-92. Since then India
has now become the fifth largest producer of steel in the world. In 2009 the steel
industry in India produced close to 53 million tonnes and accounts for close to seven
percent of the total world steel production. The National Steel Policy of India has
aimed to produce up to 110 million tonnes of steel by 2020. However the Ministry
of Steel is projecting that with the current pace of production it should touch 124
million tonnes by 2012. The greatest opportunity for India lies in the fact that the
per capita consumption of steel is very less at 35 kg compared to 250 kg in China
and an average of 150 kg in the world.

• Steel Authority of India Limited (SAIL) and IISCO Merger:

Steel Authority of India Limited is one of the largest integrated iron and steel
producer in India. It is mainly into hot rolled and cold rolled steel products. It has
five integrated plants and three special steel plants which are strategically located
in East India close to the iron ore and coal deposits. The company is a government
owned public sector undertaking with 86% share (www.sail.co.in). Steel Authority
of India Limited (SAIL) and Indian Iron and Steel Company (IISCO) underwent
a merger in the year 2006 (The Hindu, 2006).

Financial Analysis

The merger between Steel Authority of India Limited and IISCO took place in the
year 2006. Hence below analysis has been done two years prior to the merger i.e.
during 2003-04 and 2004-05 and two years after the merger i.e. 2006-07 and 2007-
08 respectively.

45
 SAIL 2003-04 2004-05 2005-06 2006-07 2007-08
Operating Profit Margin 20.7% 36.5% 23.2% 28.1% 28.2%

Gross Operating Margin 49.3% 36.5% 24.5% 31.0% 31.0%

Net Profit Margin 11.6% 23.7% 14.2% 18.1% 18.9%

Return on Capital
Employed 36.5% 69.4% 44.3% 51.4% 49.7%

Return on Net Worth 49.9% 66.1% 31.8% 35.8% 32.7%

Debt-Equity Ratio 1.72 0.56 0.34 0.24 0.13

EPS 6.08 16.51 9.72 15.02 18.25

PE 5.43 3.76 8.54 7.59 10.80

Steel Authority of India has seen mixed post merger results on different
parameters. Some of the financial parameters where it has seen a drop has been
Gross Operating Margin where the margins have dropped from 49% to 31% in
2007-08 (post merger). The return on net worth for the company has also dropped
from 50% in 2003-04 to 32% in 2007-08. However the EPS for SAIL shareholders
has increased significantly from Rs 6 in 2003-04 to Rs 18 in 2007-08. The P/E
multiple has been in the range of 10 times its earnings in 2007-08. Overall the
merger has been positive post merger on certain financial parameters however it
has taken beating on other three indicators.

46
• JSW and SISCOL Merger
JSW Steel is part of the O P Jindal Group which is one of the largest steel companies
in India with a steel production capacity of 4 million tonnes per annum. JSW Steel has
a strong presence in flat steel products and it is one of the largest galvanized steel
exporters in the country. Currently the company is fulfilling its buying requirements
from both open market and through its own mines. However it can only fulfil 30%
requirements from its own mines (www.jsw.in).

JSW Steel went for merger with Southern Iron and Steel Company Ltd (SISCOL) in
the year 2007. The share swap ratio of the merger was fixed at 1:22. This means that
for every 22 shares held for SISCOL, shareholders would get 1 share of JSW.

Financial Analysis
The merger between JSW Steel and SISCOL took place in the year 2008. Hence below
analysis has been done two years prior to the merger i.e. during 2005-06 and 2006-07
and one year after the merger i.e. 2008-09.

JSW Steel 2005-06 2006-07 2007-08 2008-09

Operating Profit Margin 27.8% 32.8% 29.5% 20.4%

Gross Operating Margin 28.0% 28.1% 27.8% 16.4%

Net Profit Margin 14.2% 15.0% 15.2% 3.3%

Return on Capital
24.3% 30.0% 24.1% 11.7%
Employed

Return on Net Worth 19.8% 23.1% 22.5% 5.8%

Debt-Equity Ratio 0.94 0.75 0.98 1.42

EPS 55.40 79.26 92.42 24.52

47
 PE 5.60 6.22 8.86 8.69

JSW Steel merger took place in the year 2007-08 and post merger the shareholders
wealth has not increased. The operating margins for the company have shown a
tremendous drop of 8% in the last four years. Similarly the gross operating margins
have dipped over 12% from 28% in 2005-06 to 16% in 2008-09. The most significant
impact was on Net profit margin. The shareholders of JSW who have witnessed 14%
of net profit margin are now able to live with a margin of 3% post merger. Shareholders
wealth got further deteriorated with sharp fall in return on net worth and return on
capital employed. EPS of JSW steel has taken a serious beating with Rs 55.4 in 2005-
06 to Rs 24.5 in 2008-09. The company is trading at a multiple of 8.6 times its earnings
however compared to SAIL it seems undervalued because of its dip in net profit margin
and EPS. The post merger scenario has not been financially healthy for the shareholders
of JSW Steel.

All the four industries and the merger studied under that have shown the results which
state that on most of the indicators shareholders have not been able to create wealth for
themselves. On certain specific mergers the EPS parameter has been positive however
overall the merger has not been in the favour of the shareholders as it has failed to create
wealth for its shareholders. On this basis it can be inferred that post merger shareholders
of the acquiring firm do not create any form of wealth for them.

48
 Chapter 4
Conclusion

Mergers have been the prime reason by which companies around the world have
been growing. The inorganic route has been adopted by companies forced by
immense competition, need to enter new markets, saturation in domestic
markets, thrust to grow big and maximize profits for shareholders. In the
changing market scenario, it has become very important for firms to maximize
wealth for shareholders. Many researchers have shown significant findings out
of their research. The Hubris hypothesis in fact states that the announcement of
a merger or acquisition does not lead to return for shareholders since the
acquisition would only lead to transfer of the wealth from the bidding
shareholders to the target shareholders.
This research has been carried out in four sectors namely aviation, banking and
finance, oil and gas and steel.

Within the airline space it was seen that the acquiring firms i.e., Jet Airways and
Kingfisher Airlines were not able to create significant wealth for its
shareholders. Jet Airways Operating Margin started dipping from a high of 33%
pre-merger in 2004-05 to 5.2% in 2008-09. Similarly gross operating margin,
net profit margin, return on net worth, and EPS started going down significantly.
This was also accompanied by a high debt to equity ratio for Jet Airways. A
similar post-performance analysis was also seen for Kingfisher Airlines who
deteriorated the shareholders wealth considerably. All the financial parameters
were going down post-merger.

The banking sector in India is said to be one of the strongest sectors at present
in the global scenario. Both the acquiring firms i.e., HDFC Bank and Oriental
Bank of Commerce saw positive financial ratios post-acquisition however when
compared to the pre-merger figures it had gone down significantly. Return on
net Worth for both the firms went down post-merger. However only the EPS
remained positive for both the companies and quite stagnant compared to pre-
merger. Overall, the post-merger performance was not able to create enough
wealth for shareholders because of dip in net profit margins and net worth.

49
The steel sector was studied with mergers done by acquiring firms like JSW
Steel and SAIL. It was found that EPS for SAIL had gone up post-merger
creating value for shareholders however the performance post-merger from JSW
Steel showed that EPS had fallen significantly. SAIL went positive post-merger
on parameters like Operating Profit Margin, Net Profit Margin and Return on
Capital Employed. However, the situation form JSW was the opposite.

Oil and Gas was another sector which was studied for the research. The merger
of acquiring firms i.e., IOCL and RIL were studied. RIL was only able to create
high level of EPS for the shareholders and failed to succeed on other parameters
post-acquisition. Its Return on Net Worth, Return on Capital Employed, Gross
Margin, Net Margin had reduced significantly post-merger. Similar results were
also obtained for IOCL who was not able to prove its strength on the financial
parameters chosen for the study. The EPS of IOCL went down by half post-
merger.

It can be clearly concluded that other than the steel sector on certain parameters,
mergers have not been able to create enough shareholders wealth for the
acquiring firm.

Overall, the study conducted by the researcher shows that financial performance
and acquiring company’s shareholders wealth gets deteriorated post-acquisition.
However, the aviation, banking, oil and gas and steel sector were further
analyzed with the help of an interview. It was understood from the interview
that operationally and financially the merger would prove successful in the long
run as it offers great synergies to the shareholders of both the acquiring firm and
the target firm.

The research had analyzed specific acquiring cases and the findings have been
constant. It has been seen that synergistically the mergers have been very strong
and looks very definite to drive value for the shareholders of the acquiring firm’s
shareholders.

Mergers and Acquisitions are entered into for creating a win-win situation for
all the concerned stakeholders of the company. The overall research has
discussed the way mergers and acquisitions are created and their analysis of the

50
pre and post financial performance has been studied. The study has shown that
in the Indian context mergers and acquisitions haven’t been able to create
enough shareholder wealth post acquisition for the combined entity. However,
the research has also examined factors beyond financial analysis which shows
that there is a lot of synergy in the form of geographical spread, increased
customer space, growth in size and scale, access to new markets, cutting costs
in operational terms and reduction in areas where overlap was witnessed.

To conclude mergers and acquisitions do not create immediate shareholder

wealth and margins for the acquiring firm in the immediate short However, from
a longer perspective a consolidated company would be able to better cope up
with competition, increased pressure to cut costs and grow in the changing
business environment.

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