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J u l y - O c t o b e r - 2 0 0 7 Need the Dough 

V o l u m e 2 I s s u e I 1 

M A K E W E A L T H W H I L E O T H E R S T H I N K O F I T 

NEED THE DOUGH 

July-October 2007 Volume 2 Issue I1 www.iipmthinktank.com 

SPECIAL ISSUE 

MERGERS & ACQUISITIONS 

INDIA INC. GOING 

GLOBAL 

Rs. 100 

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July-October - 2007 Volume 2 Issue II www.iipmthinktank.com 

PANORAMA 

TRENDS 

8 A“M&A”ZING INDIA 

By Mr. Mohammed Zakriya 

and Prof. Tareque Laskar, 

IIPM Think Tank, Mangalore 

It is not easy to gauge the synergy created 

between the acquirer and the target based on 

the fi nancial performance ... 

12 Mergers and Acquisitions : 

Get the Basics Right 

By Ms. Bhuvna Ravi 

Director, Abhay Capital Services Pvt. Ltd. 

The restrictions on M&A transactions in India 

have been substantially relaxed with the 

liberalisation of the economy ... 

16 A Critical Assessment of the 

Merger and Acquisitions 

Scenario in India 

By Prof. K. P. Ramakrishnan, Visiting faculty, 

IIPM, New Delhi 

Due to the existence of strict government 

regulations, Indian companies were forced to 

move into new areas ... 

20 

A BIG RICH 

INDIAN WEDDING: 

MERGERS REVISITED 

24 Jet Airways – Air Sahara 

“Lite” at the end of the 

Tunnel 

By Prof. Prashant Gupta and Dr. Kapil Pandla, 

Jaipuria Institute of Management, Noida 

If completed, the merger would have 

created the largest Indian airline with 

control over nearly half the market... 

28 The Surging Tsunami - 

Mergers & Acquisitions 

Story… 

By Ms. Sudha Rajagopal, Ex-Banker 

 

 

M & A deals are done to derive a greater 

benefit from the merged entity rather 

than from the individual bits... 

34 M & As Calling: Indian Inc. 

on a Buying Binge 

By Mr. Shashank Tripathi, Research Associate, 

Planman Media 

38 

IN FOCUS 

42 

M&A 

in the 

INDIAN BANKING 

INDUSTRY

RESEARCH 

52 Mergers and Acquisitions in 

Emerging Economies: 

A Study of Impact on Scale 

Economies, Technological 

Change and Structural Shift in 

Profitability 

By Dr. Chandra Shekhar Sharma, Reader, Shri Ram 

College of Commerce, University of Delhi 

The theoretical foundation rests on the assertion 

that in effi cient markets, market value and stock 

registers changes around merger announcements 

to fully capture and refl ect the economic gains 

from the merger… 


G L O B A L 

 

SPECIAL ISSUE 

MERGERS & 

ACQUISITIONS 

46 

64 ‘Strategic Objectives behind 

Corporate Acquisitions & 

the Impact of These Acquisitions 

on Shareholders Wealth’ 

By Mr. Parth Sarathi,Fellow Student, IIPM, New Delhi 

70 

Researchers believe that the fi rm’s ability to 

achieve a sustainable competitive advantage 

depends upon its relative cost and differentiation 

positions... 

PRIVATE 

EQUITY RAIL 

BACKING 

M & A 

TRAIL 

By Mr. Ashwani Batra, 

Senior Analyst, 

Global Strategy & 

Investment Consulting, 

Planman Consulting (India) 

Pvt. Ltd. 

78 

M&A 

DUE DILIGENCE 

MORE THAN 

JUST FINANCIAL 

By Mr. Supriya Mitra Majumdar, Planman Technologies (India) Pvt. Ltd. 

Consolidation 

Corporate 

Activities–Indian Perspective

Editor’s Page 

Dear reader, 


Over the years, in each of the graduating class, interestingly I fi nd more and more students opting for fi nance 

as their specialization. On further probing, I realize that of the students who opt for fi nance, most of them 

want to make a career in lucrative investment banking services. The reasons are quite evident though, as over 

the years as more and more Indian companies are strengthening their global footholds through mergers and 

acquisitions (M&A), the job of an investment banker is getting even more exciting and rewarding. 

In fact the transition had been quite interesting, as in 1991, when the then Finance Minister Dr. Manmohan 

Singh took to economic reforms, India Inc. was up it sleeves as they believed that global corporations would 

threaten their ‘cushioned’ existence through deep pockets and superior technology. But, ten years down, the 

way the India companies, in a generic fashion have gone ahead in terms of buying global companies, as if there 

is no tomorrow. In 2001, a tiny step that India Inc. took in terms of outbound deals worth USD 0.7 billion has 

eventually swollen to a staggering USD 15 billion by 2006. In fact during January-May 2007, the total M&A 

deals were worth USD 47.37 billion, of which the cross border deals were worth USD 28.19 billion. Though 

currently, in relative terms India is still a baby in terms of the total global M&A market (which has been around 

USD 2.7 trillion, for the same period), but then the manner things are proceeding, in no time it is going to be 

a formidable player in the global scene. 

In fact at our business school, we teach that management is all about people and the art of fi nding people 

at the right places and to see to it that they are taken care, for success and failure of any corporation is in 

its people. Interestingly, the same is observed in the case of global mergers and acquisitions too. It is a well 

known fact now that almost 70% of mergers fail because of people/cultural issues, yet intriguingly even today 

M&A deals are restricted to the domains of corporate lawyers, strategists, merchant bankers and fi nancial 

analysts, and for the human resource team, no where to be seen. Globally, it is almost like an implicit practice 

that whenever it comes to any M&A deal focus is invariably on the fi nancial and business issues and a host of 

other strategic issues, except for human issues. How much so ever fi rms try to justify the failed merger through 

strategic of fi nancial reasons or in terms of myriad economic rationalities, the truth is that there are certain 

softer and fi ner human facets involved invariably, which no rationality can justify. To come to the point, the 

familiar problem among the M&A failures is decisive disregard of human factor but the explanation varies 

across the economies dependent upon cultural, political and economic variability. And the irony is that in 

spite of the historical evidence of recorded failures of M&As on several planes, many M&As have taken place 

in the recent decades with blatant disregard for human capital (barring the factual information and legal 

backgrounder). 

So as more and more Indian fi rms buy out global counterparts and as more and more of my students take up 

investment banking as their career in course of the great Indian merger movement, they should remember 

that buying out corporations is nothing else but directing people’s lives and their associated dreams and 

aspirations! If it is people who create world class organizations, nothing could be more strategic than their 

happy existence, and for every other business rationalities, they can follow. In absence of this, every deal would 

remain a failed deal, for people management complements strategy and processes. 

Best 


(As appeared in ”The Sunday Indian”)

The India Economy Review June - 2005 7

PANORAMA 

A“M&A”ZING 

INDIA 

 

 

 

8 Need the Dough July-October - 2007


“We are slowly but surely moving from a regime of “large number of 

small banks” to “small number of large banks.” The new era is going to 

be one of consolidation around identified core competencies. Mergers and 

acquisitions in the sector are going to be the order of the day” 

–Excerpt from speech by Mr. V Leeladhar, Deputy Governor of the Reserve Bank of India, to Kanara 

Chamber of Commerce and Industry, Mangalore (March 11, 2005) 

Mergers and acquisitions activity is heating up 

in India at par with its counterparts across 

the globe as the Indian companies go on a 

buyout rampage as a means to strengthen their global 

footprints. This acquisition spree by Indian companies, 

though as not fervent as Chinese, has still been a 

major contributor to the Mergers and Acquisition activity 

across the continents. The 

fact being significant here is that 

most of the Chinese acquirers are 

Government-owned, while acquisition 

by Indian Companies 

are notably private initiatives. 

And, what might be the reason 

for relatively high Indian interest 

in the buyouts and takeovers 

Simply put, the annual turnover 

of companies in India has been 

rising at a steady pace of about 25-30% in last 5-6 years, 

which adds up to the profitability of the companies and 

enviable reserves. With copious cash reserves under 

their bellies, the ideal expansion strategy for Indian 

corporations (especially for the large ones like Infosys, 

Tata and Reliance) is to expand globally to meet their 

hunger for control, growth and diversification. Before 

we proceed further in this direction, let’s fi rst have a 

quick recap at the evolution and growth of Mergers and 

Acquisitions activities in India over past few years. 

Recap: 

The Indian economy has undergone a major transformation 

and structural change during the past decade 

or so as a result of economic reforms introduced by the 

Government of India (since 1991) in the wake of policy 

of economic liberalization and globalization. In this 

liberalized era, size and “core competence” have become 

the focus of every business enterprise. Naturally, this 

requires companies to grow and expand in businesses 

or processes that they understand well. Thus, leading 

corporate houses have undertaken massive restructuring 

exercises (M and A being one of them) to create a 

formidable presence in their core areas of interest. The 

corporate sector increasingly resorted to Mergers and 

Acquisitions due to significant gains they entail in terms 

of synergy, economies of scale, better fi nancial and marketing 

advantages, diversification and reduced earnings 

volatility, improved inventory 

management, increase in domestic 

market share, and above 

all capturing fast growing 

markets abroad. Since such a 

restructuring exercise should 

promote fair competition for 

the overall benefits of shareholders 

and consumers, regulations 

were thought to be necessary 

to govern this exercise. 

The SEBI, therefore, notified the, ’Takeover Code in 

February 1997, which laid down the rules, which govern 

corporate takeovers in India’. 

Initially, it was necessity that compelled Indian Companies 

to venture into industries abroad, when companies 

like Oil and Natural Gas Corporation embarked 

on the acquisition journey so as to meet their demands 

by securing Oil fields. But, the motives of mergers and 

acquisitions have changed over time ranging from monopoly 

of Technological Expertise, Control over the 

entire Value Chain to mere diversification to increase 

the risk spread in this era of globalization. The second 

wave of M and A activity represented general consensus 

towards M and A being a good means of consolidation. 

The steel giants, communication sector and Sahara-Jet 

deal being the highlight of this wave which is going to 

continue for some more time in the coming months. 

And very soon, what might capture the Markets, as I see, 

would be a third wave impelled by the need to grow and 

diversify which will be impelled largely by the Services 

and Real Estate/Infrastructure sectors. 

Mergers and acquisitions 

activity is heating up 

in India at par with its 

counterparts across the 

globe 

July-October - 2007 Need the Dough 

9

PANORAMA 

The year gone by has seen heavy business activity in 

the mergers and acquisition segment, a few of which has 

already been mentioned above. Consulting fi rms made 

huge money out of this, irrespective of the fact that it 

created value or synergies for its client. Some acquisitions 

saw destruction of shareholder value but most 

of them were successful. 

It is not easy to gauge the 

synergy created between 

the acquirer and the target 

based on the fi nancial performance 

or balance sheet 

values. The synergies created 

are seen only after 

three years of the takeover 

process where the target 

fi rm settles down in the culture of the acquirer. 

And Now: 

The trends in market suggest that outbound investments 

from India will mainly be in oil, pharmaceutical, automotives 

and service sector, while the inflow of investments 

are expected in emerging sectors such as retail, 

telecommunication, infrastructure and real estate as the 

state opens up for the foreign investments. Inbound 

investments in infrastructure, real estate, retail, and 

logistics have started emerging. India’s M&A environment 

is vibrant due to positive regulatory mechanisms, 

globally accepted business processes, and a robust and 

optimistic investment climate. In the recent policy announcement, 

the State has given capital subsidy of 25 

percent on investments for setting up semiconductor 

and nano-technology manufacturing units. This will 

probably further fuel cross-border M&A deals in the 

electronics industry. According to Investment bankers, 

Merger & Acquisition (M & A) deals in India will cross 

$100 billion this year, which is double last year’s level 

and quadruple of 2005. (Source: High Tide of Mergers 

and Acquisitions in India – ARC Advisory group 

- By Sharada Prahladrao). This mark is bound to be 

surpassed by a considerable margin; given the fact that 

the total equity deals struck by Indian companies have 

crossed 50 billion USD in fi rst five months of 2007. In 

the same timeframe last year the equity deals stood at 

13.5 billion USD (as per ICICI bank’s private research 

division in their Global Investment Outlook report). 

If we look at the biggest M and A deal of last year, it 

has to be merger of AT&T and BellSouth (valued at 

around $73 Billion) where as the topmost takeover/ 

merger deal by an Indian company was by the world’s 

biggest steelmaker, Mittal when he achieved success in 

buying all the shares of its top competitor, Arcelor of 

10 Need the Dough July-October - 2007 

It is not easy to gauge 

the synergy created 

between the acquirer and 

the target based on the 

financial performance 

Luxembourg (at $33 Billion). This year Tata Steel kept 

the consolidation wave high in the steel sector with the 

acquisition of Anglo Dutch fi rm- Corus- in a $10 Billion 

deal to form the fifth largest steel-producing entity in 

the world (with Arcelor-Mittal leading the race by far). 

In recent times, there have been speculations flying 

high about the Indian market being 

ripe for another mega Merger deal. 

This has brought out reports of a 

proposed takeover of Capgemini 

(the European outsourcing giant) 

by Indian top software outsourcing 

company Infosys. To bring out the 

disparity in the size and extent of 

each of these companies, we can 

see that even though Capgemini 

has a turnover of $10.35 billion compared to Infy’s $3.1 

billion, the strength that Infy carries is in its Market 

capitalization which lies at $27 billion (while Capgemini 

has capitalization of $10.4 billion). Such a high (almost 

thrice) capitalization, regardless of company turnover 

expanse, is what contributes to the high cash reserves 

in the company and hence the need to expand the operations. 

In spite of these reports being mere speculations, 

it has had a positive impact on the share prices of 

Capgemini, which in turn just signifies how a proposed 

takeover/acquisition can benefit the acquiree through 

value creation. 

In 2001, a tiny step that India Inc. took in terms of outbound 

deals worth USD 0.7 billion has eventually swollen 

to a staggering USD 15 billion by 2006. In fact during 

January-May 2007, the total M&A deals were worth USD 

47.37 billion, of which the cross border deals were worth 

USD 28.19 billion. Though currently, in relative terms 

India is still a baby in terms of the total global M&A 

market (which has been around USD 2.7 trillion, for the 

same period), but then the manner things are proceeding, 

in no time it is going to be a formidable player in the 

global scene. 

 

References: 

- High Tide of Mergers and Acquisitions in India 

– ARC Advisory group - By Sharada Prahladrao 

- India Inc embarks on an merger a acquisition spree 

- The Free Press Journal — December 29, 2004 

- Infosys’ Cap Gemini plan: Is it a saga of identity 

crisis -Krissy- June 30, 2007 (http://www.bpotiger.com/2007/06/infosys_cap_gemini_plan_is_ 

it.html) 

- Contemporary and future issues in Indian banking 

– by V Leeladhar 

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PANORAMA 

MERGERS AND 

ACQUISITIONS : 

GET THE BASICS RIGHT 

Mergers and acquisitions 

are a common 

phenomenon in a 

competitive and free 

economy and as 

India integrates into 

the world economy, 

there will be several 

opportunities for 

M&As... 

 

 

 

Mergers and acquisitions are one of the tactics for continued growth in 

a highly charged global scenario. The consolidation integrates two 

organization to cut costs, reduces competition and consequently 

increases market share. Mergers and acquisitions are manifestations of an 

inorganic growth process. 

Mergers can be classified into three categories: when two entities amalgamate 

and give birth to a new entity; when a relatively small and less profitable 

company merges with a big company; when a relatively big and profitable 

company merges with a smaller company (sometimes even a loss-making 

company for that matter).While mergers can be defined to mean unification 

of two players into a single entity, acquisitions are situations where one player 

buys out the other to combine the bought entity with itself. The usual form 

of consideration for a merger is exchange of shares of the acquiring firm with 

the shares of the target company. In acquisitions, the consideration may take 

the form of cash consideration or loan instruments such as debentures. The 

regulatory regime governing M&A is complex and straddles several areas of law 

and accounting, not to mention business concerns. The restrictions on M&A 

transactions in India have been substantially relaxed with the liberalisation of 

the economy. Thus, the provisions concerning M&A under the Monopolies 

and Restrictive Trade Practice Act, 1969 (MRTP) and the restrictions under 



Foreign Exchange Regulation Act, 1973 (FERA) have been 

substantially removed. 

In 1994, the law relating to acquisition of shares of quoted/listed 

companies was codified and the Securities and 

Exchange Board of India (SEBI) announced the Substantial 

Acquisition of Shares and Take over Code (the ‘code’). The 

code inter alia provides that if any one or more persons 

together acquire 10 per cent or more equity shares of a listed 

company, the acquirer shall make an offer to the remaining 

shareholders of the company to acquire their shares. Indian 

Companies Act, 1956: This has provisions specifically dealing 

with the amalgamation of a company or certain other 

entities with similar status. The most common form of 

merger involves an elaborate but time-bound procedure 

under sections 391 to 394 of the Act. An amalgamation is 

complete only after the court sanctions it and it takes effect 

after the order of the court is filed with the Registrar of 

Companies TOP. 

Latest take over code of SEBI: 

For ensuring smooth takeovers, 

SEBI has designed the framework 

for listed companies from the taken 

over target companies, which is 

defined and detailed: Takeover is 

when “acquirer” takes the control 

by acquiring “substantial quantity of 

shares or voting rights” of the Target Company (where Target 

company: A Target company is a listed company whose 

shares are listed on any stock exchange and whose shares or 

voting rights are acquired/ being acquired or whose control 

is taken over/being taken over by an acquirer.) 

Acquirer: An Acquirer includes persons acting in concert 

(PAC) with the same i.e. any individual/company/any other 

legal entity which intends to acquire or acquires substantial 

quantity of shares or voting rights of target company 

or acquires or agrees to acquire control over the target 

company. 

Control: 

Control is the right to appoint either directly or indirectly or 

by virtue of agreements or in any other manner majority of 

directors on the Board of the target company or to control 

management or policy decisions affecting the target company. 

However, in case there are two or more persons in 

control over the target company then in that case of any one 

of the persons from such control shall neither be deemed 

to be in control of management nor to any change in the 

nature and quantum of control amongst them. 

The restrictions on 

M&A transactions 

in India have been 

substantially relaxed 

with the liberalisation 

of the economy 

been registered with SEBI before making a PA. PA is required 

to be made through the said MB. The acquirer is 

required to make the P.A within 4 working days of entering 

into an agreement to acquire shares or to decide how to 

acquire shares/ voting rights of Target Company or after 

any such change or changes that would result in change in 

control over the target company. 

In case of indirect acquisition or change in control, the 

PA is made by the acquirer within 3 months of consummation 

of such acquisition or change in control or restructuring 

of the parent company or control over the target 

company. The offer price in these cases is determined with 

reference to the date of the public announcement for the 

parent company and the date of the public announcement 

for acquisition of shares of the target company, whichever 

is higher, in accordance with the parameters mentioned in 

the Takeover Regulations Documentation which is a copy 

(hard and soft) of the PA and which 

is required to be submitted to SEBI 

simultaneously with the publication 

of the same in the newspapers. 

A draft letter of offer is required 

to be filed with SEBI within 14 days 

from the date of Public Announcement 

along with a filing fee of 

Rs.50,000/- per letter of offer (payable 

by Banker’s Cheque / Demand 

Draft). A due diligence certificate along with registration 

details as per SEBI circular no. RMB (G-1) series dated 

June 26, 1997 is also required to be filed together with the 

draft letter of offer. 

Letter of offer: 

The MB will incorporate in the letter of offer the comments 

made by SEBI and send it within 45 days from the 

date of PA the letter of offers along with the blank acceptance 

form, to all the shareholders whose names appear 

in the register of the company on the Specified Date. The 

offer remains open for 30 days. The shareholders send 

their Share certificate(s) / related documents to registrar or 

Merchant banker as specified in the PA and letter of offer. 

The pays consider all those shareholders whose shares are 

accepted under the offer, within 30 days from the closure 

of offer. 

The offer once made cannot be withdrawn except in the 

under mentioned circumstances: 

Statutory approval(s) required have been refused; 

The sole acquirer has died a natural death; 

Circumstances wherein the board orders a withdrawal. 

Public announcements: 

The Acquirer appoints a Merchant Banker (MB) who has 

Safeguards incorporated in the takeover: 

The acquirer has to open an escrow account before making 


13

PANORAMA 

the Public Announcement, in the form of cash deposited 

with a scheduled commercial bank or bank guarantee in 

favor of the Merchant Banker or deposit of acceptable securities 

with appropriate margin with the Merchant Banker. 

The Merchant Banker is also required to confirm the firm’s 

financial arrangements. If the acquirer fails to make the payment 

then the MB has a right to forfeit the escrow account 

and distribute the proceeds in the following way. 

• 1/3 of amount to target company 

• 1/3 to regional SEs, for credit to investor protection 

fund etc. 

• 1/3 to be distributed on pro rata basis amongst the shareholders 

who have accepted the offer. 

The Merchant Banker sends back the rejected documents 

which are kept in the custody of the Registrar / 

Merchant Banker to the shareholder through Registered 

Post. Besides forfeiture of escrow account, SEBI can also 

initiate separate action against the acquirer which may 

include prosecution / barring the acquirer from entering 

the capital market for a specified period etc. 

Mandates: 

Reporting is mandatory according to the Regulation 3(4) 

in respect of acquisitions arising 

out of firm allotment in public issues, 

rights issues, inter-se transfer 

amongst group companies, relatives, 

promoters, acquirers and PACs, Indian 

promoters and foreign collaborators 

and transfer of shares from 

state level Financial Institutions to 

co-promoters of company. 

Time frame: 

The report is submitted to SEBI within 21 days from the 

date of acquisition / allotment with a fee of Rs. 10,000/- 

per report. 

Scope of M & A: 

Mergers and acquisitions are a common phenomenon in a 

competitive and free economy and as India integrates into 

the world economy, there will be several opportunities for 

M&A deals both inside and outside India. In the context 

of the liberalised environment, M&As are emerging as a 

major business for the financial community. There are a 

host of factors propelling the Indian corporate sector to 

move towards the M&A arena, including existence of several 

domestic players seeking to consolidate their business 

by acquiring firms in their core areas and shedding their 

non-core businesses. This trend is further supported by 

the presence of several foreign firms, which are looking to 


The recipe for getting 

a successful merger 

starts from deal 

making to merging of 

cultures 

buy their way into the Indian market by acquiring existing 

plants and capacities. 

Post merger effect: 

Despite the rules and regulations; scrupulous efforts, hardwork, 

money and time spent go down the drain as the 

corporate marriages fail. As per the recent survey only 

15% of mergers are successful. During the takeovers the 

executives diligently synergize assets, equipments, technology 

and strategies and neglect the complexity of the variant 

cultures as they overlook the people factor. 

Suggestions: 

The recipe for getting a successful merger starts from 

deal making to merging of cultures. In fact this is proven 

to have attributed to the success of the Roman Empire. 

As Nancy Rothbard, Management Professor at Wharton 

University cites, `Developing a culture that is adaptable 

- both to market conditions and to the firm’s leadership 

- will help a company survive and grow. 

The other growth strategies are: 

• Be upfront and share information about intentions, targets, 

benchmarks and the course of action. Establish 

a rapport by explaining the reason 

for imminent changes and letting the 

others to voice their views, concerns, 

queries and doubts. 

• Patiently diluting away the resistance 

of the members of the acquired 

company with frequent interaction 

and regular dialogue will go a long 

way in rebuilding trust and morale levels. 

• Leaders should let the individual companies retain 

their distinctive identity and learn to live with the differences. 

• They can accommodate variances by organising “firms 

within the firm” rather than pushing for “one firm”. For 

instance, instead of wiping away Ben & Jerry’s (U.S. icecream 

manufacturer) unique essence and strength, Unilever 

took the unconventional route and reaped windfall 

gains from preserving and complementing the former’s 

divergent character. 

Finally, nothing sums it up better than what Chris 

Burand, President of consulting firm Burand & Associates 

said, `The merger of companies is very much like 

the joining together of different families to celebrate the 

holidays. Each family has its own traditions, and those 

traditions must be merged carefully and thoughtfully to 

ensure future harmony”. Then only two good companies 

will transform into one great company with a happily ever 

after culmination.

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PANORAMA 

DERIVATIVES 

A Critical Assessment of the 

Merger and Acquisitions 

Scenario in India 

By Prof. K. P. Ramakrishnan, 

Visiting faculty, 

IIPM, New Delhi 

Mergers and Acquisitions Post Independence: 

Mergers and Acquisitions have played a very important role in bringing about 

transformation of the industrial sector in India post independence. The economic 

and political conditions during several years before and after independence gave 

a stimulus to the genesis of large scale Mergers and Acquisitions. The inflationary 

situation prevailing at that time enabled many Indian businesses to amass 

incomes by charging high prices and hoarding black money. 

This led to a wholesale infiltration of businessmen into the industry during 

those years which gave rise to frantic activities in the stock exchange because 

of the development of a craze to acquire control over industrial units in spite 

of the swollen prices of their shares persisting at that time. The practice of 

cornering shares in the open market and trafficking of managing agency rights 

with a view to acquiring control over the management of established and reputed 

companies had all come into relief prominently at the time. The net ef- 



fect of these practices, namely that of acquiring control over 

ownership of companies and of acquiring control over the 

managing agencies, was that a large number of businesses 

passed into the hands of the prominent industrial houses of 

the country. As it became clear that India would be gaining 

independence, the British managing agency houses gradually 

withdrew their stakes from the Indian corporate affairs and 

liquidated their holdings at rock bottom prices that were 

offered to them by the Indian business houses. Besides the 

transfer of managing agencies, there were a large number of 

cases of transfer of interest in individual industrial units from 

British to Indian hands. Further, at that time, it used to be 

the fashion amongst the Indian business houses, to obtain 

control of insurance companies for the purpose of utilizing 

their funds for acquiring substantial holdings in many such 

above mentioned companies. 

Mergers and Acquisitions after the dependence of the 

country: 

After Independence, in the period between 1951 and 1974, a 

series of governmental regulations were introduced for controlling 

the operations of large industrial organizations in 

the private sector. Such regulations considerably influenced 

the growth strategies as adopted by most companies at that 

time. Some of these prominent regulations were, the Industries 

Development and Regulation Act, 

1951, the Import Control Order, 1957-58, 

the Monopolies and Restrictive Trade 

Practices Act, 1969, and the Foreign Exchange 

Regulation Act, 1973. 

Due to the existence of such strict 

government regulations at that time, 

Indian companies were forced to move 

into new areas where capabilities were 

difficult to develop in the short run. In 

pursuit of this growth strategy, they often changed their organizational 

structures as well as their basic operating characteristics 

in order to meet the requirements of a diversified 

business portfolio. 

During the decade of the 1990s: 

The Merger and Acquisition scenario at this time changed a 

lot especially after the initiation of the liberalization process 

in the year 1991. The plethora of Government regulations in 

respect of the industrial growth and the growth in Merger 

and Acquisition segment were reduced considerably during 

that time. Besides, several other measures were also initiated 

by the Government which included delicensing, derservation, 

MRTP Act relaxation, liberalisation of policy towards foreign 

capital and technology, etc. all of which led to a phenomenal 

structural transformation of Indian industry. Such transformation 

provided a much needed thrust to the corporates to 

seek to grow and expand through an inorganic process of 

growth enveloping the implementation of appropriate Merger 

and Acquisition strategy at its helm. 

If the growth, presence and size registered by some of the 

principal corporate groups in India, at the time were to be 

analyzed, it would be seen that most of the industrial houses/ 

groups had employed the merger and acquisition process in a 

strategic manner for growing and expanding their businesses. 

In fact business houses like that of R.P. Goenka (RPG), Vijay 

Mallya (UB), and Manu Chabria (MC) had all employed with 

the merger and acquisition strategy largely to grow aggressively. 

The Piramal group had also nearly grown by the merger 

and acquisition route. The Murugappa group in the South of 

India had also grown by adopting a similar strategy. Other 

companies down in the South which had grown similarly by 

adopting the M & A route included the Ranbaxy group, Sun 

Pharmaceuticals Limited, HLL, etc. Post-liberalisation several 

studies were made by various academicians to evaluate the 

M&A market in India. Some of these were by Beena (1998), 

Roy (1999), Kumar (2000), etc. 

Some of the factors behind the Merger and Acquisition 

Process as identified by these studies were the following: 

External Factors: 

Though, there had been a number of M & As undertaken in 

Due to the 

existence of strict 

government 

regulations, Indian 

companies were 

forced to move 

into new areas... 

the period after independence, the ‘Anti-Monopoly’ bias in 

the Government regulatory environment prevailing in the 

1960s and in the 1970s seriously impeded the merger and 

acquisition process. This did not however mean that M & A’s 

were uncommon during those regulatory regimes. 

Based on a study of trends in the merger activity from 

1974-75 to 1994-95, Beena (1998) found that there had been 

an acceleration in merger activity in the liberalized regime 

of the 1990s. The study also argued that a number of factors 

had triggered off the merger and acquisition wave during 

the 1990s consequent upon relaxation and removal of many 

legal restrictions as noted above, wherefrom most Indian 

companies had substituted their green field growth plans 

with M & A strategies. This was because of the fact that the 

benefit in adopting the takeover route was premised to be 

more lucrative as to make this strategy preferable to adopting 

the organic growth route. 


17

PANORAMA 

Competitive impact: 

This factor also became an important motive in M&As because 

of its impact on competition. Sometimes one of the 

motives behind a hostile takeover was to reduce competition 

and increase the competitive strength of the acquiring firm. 

Thus with the acquisition of TOMCO by HLL, the latter’s 

market share increased substantially. In the pharma sector, 

Ranbaxy acquired three companies over the period from 

1996-1997 to become a market leader by relegating Glaxo 

India and Cipla to the second and third spots respectively 

by securing and increasing its market share from 3.9 per cent 

to 5.3 per cent. 

Pre-emptive Motive: 

Frequently M&As can also be used as a pre-emptive strategy 

if it was felt that a potential competitor was planning to make 

a quick and easy entry into a market by adopting the merger 

and acquisition route, which may be pre-empted by another 

company acquiring that particular firm and depriving the 

former from securing the advantage. The Indian corporate 

sector abounds with examples of such a style as exemplified 

by the acquisition of Premier Tyre Company by Apollo 

Tyres, etc. 

Internal Factors: 

In a study conducted in 1991 to establish that efficiency gains 

and reduction in expenditure were an important motive for 

undertaking M&A, the merger wave of the early 1990s was 

analyzed and it was found to be a mere means for undertaking 

internal restructuring rather than being an instrument to further 

product / market / asset share. Such internal restructuring 

also formed an important motive for the spate of mergers 

that happened during the 1990s, all of which seemed to have 

aimed at increasing size, deriving marketing and financial 

benefits and securing economies of scale. 

Growth: 

The Murugappa group in the south was a classic example 

of growth achieved by an industrial house by successfully 

adopting the M&A strategy. The group’s penchant for acquisitions 

was that in the past capacities could not be expanded 

because of the MRTP constraints and hence the group had 


to take the route of buying up a company through the BIFR 

route. However in less than a few years of liberalization, it 

had acquired over a dozen companies including EID Parry, 

Coromondal Fertilizers, etc. 

Portfolio Strategy: 

Does M&A contribute to a company’s product portfolio strategy; 

that is to say that, does it provide a strategic leverage to 

a company for expanding its product portfolio as envisaged 

If the acquisition by Hindustan Lever Limited (HLL) of Tata 

Oil Mills Co. Ltd. were to be analyzed, it would clearly be 

observed that this merger had enabled HLL to consolidate its 

market power in the soaps and detergents product segments. 

Besides the merger also helped HLL to fill a perceived gap 

in this area and improve the geographical distribution of its 

production facilities in this segment in India. 

Achievement of Economies of Scale and Synergy: 

According to various exponents, M&As can improve the 

profitability of a company by securing a reduction in overheads, 

effective utilization of facilities, improving its ability 

to raise funds at a lower cost and deployment of surplus 

cash for expanding business with higher returns - a fact that 

stands testified by the example of economies of scale and 

DERIVATIVES 

The acquirers 

usually targeted 

those companies for 

takeovers which were 

undervalued and 

whose replacement 

costs were high 

synergy achieved by the Brooke Bond and Lipton merger, 

both being two Lever Group companies whose businesses 

overlapped and merged in the year 

1993 to benefit from operational 

economies and synergies secured 

in this process. The HLL, like its 

parent Unilever had identified 

food business as its major segment 

and undertook acquisitions 

like its parent Unilever. Brooke 

Bond Lipton India (BBLIL) also 

adopted a similar strategy by taking 

over three key players in the ice-cream market segment, 

namely, Kwality, Milk foods, and Dollops, which together 

with its own brand i.e. Hostile corporate raids can be classified 

as those attempted takeovers which had been undertaken 

without the promoters’ consent and by support through the 

media market route. The acquirers usually targeted those 

companies for takeovers which were undervalued and whose 

replacement costs were high. In other words, there seemed to 

exist a difference between the market value of the assets and 

their replacement costs. However, at times it happened that 

the market capitalization of many companies were less than 

the book values of their assets, in which situation a company 

desiring to add to capacity in producing a particular product, 

could acquire the additional capacity more cheaply by buying 

a company that produced the product rather than produce 

the same by building up the infrastructure for such purpose


from the scratch. 

Most of the Indian business houses like, that of the Tatas, 

the Birlas, the Thapars, the Singhanias and the Seths had 

control in their companies with stakes ranging from fifteen 

percent to forty percent. Therefore, looking at promoter holdings 

and current market prices, most of these companies were 

still, quite susceptible to hostile takeovers. 

Many companies are also playing safe by shoring up their 

holdings by buy backs of their shares to thwart hostile corporate 

raids for example what HLL did recently. In this 

context, companies like, Kesoram Industries, Finolex Cables, 

Indian Rayon, etc. had all announced buyback programmes 

worth as much as Rs. 400 crores in the year 2003-04. All 

these anticipated a loss of corporate control, a fact which 

was evident from the case of G.E. Shipping which went for 

a second buyback in less than a year as the promoters were 

initially holding a meager eighteen percent equity after the 

first buyback. 

Impact of Mergers and Acquisitions: 

Various studies have been carried out for determining the 

impact of M&As on the profitability of the merged companies 

wherein analysis had been made of the pre merger and post 

merger profit margin in respect of a sample of 20 acquiring 

firms where there was a decline in profitability in about 10 

of these companies after merger. 

Overall, acquirers were found to be high growth firms 

which had improved their performance over the years prior 

to the merger and had higher liquidity. The target firms, on 

the other hand, were firms that had higher than industry 

profitability which had deteriorated over the period just prior 

to merger. If pre merger profitability (an index of efficiency 

of a company) of acquirer and target companies were to be 

compared, the acquiring companies had been found to have 

higher pre merger profitability in 20 of the 25 merger cases 

studied. This revealed that, in general, the acquiring firms 

were found to be more efficient than the corresponding targets 

in terms of their profitability. 

Integration Aspects in India: 

Post merger acquisition or integration of the firms was also 

a crucial task that required to be accomplished for securing 

effective performance. The organizational cultures of the two 

companies may have been different and sometimes there may 

have been differences in their policies, procedures and styles 

as well. Functional facilities and activities would therefore 

require be aligning and coordinating for such purpose. The 

most common perception generated by M&As is that there 

is a loss of self-determination and post-the M&A phase it is 

characterized by a change in strategic stance (and therefore, in 

the operating systems) of the acquired company. For instance, 

a merger or acquisition to achieve a backward integration 

would make it a logical necessity for the target company to 

lose its market-orientation and become more of a feeder unit 

as would require to plan and produce to suit the priorities of 

the acquiring company. 

Changed conditions always have the potential for generating 

a sense of powerlessness among the employees, and often 

kill their initiative and entrepreneurial spirit which becomes a 

core issue that needs to be addressed in the acquired company. 

Another common offshoot of this phenomenon is the problem 

of a sense of alienation among the employees. With people 

facing an overhauling of their identity post merger, relationships 

which they had built with their organization, its culture 

and people - all undergo a cataclysmic metamorphosis. 

At the most obvious level, in the post-M&A period there 

are changes in the company’s name, marketing strategies, 

and control systems. Besides these, employees also have to 

contend with many other changes, all of which make their 

daily experience of working in the new company strange and 

alien. For instance, colleagues of many years either leave or 

are transferred to other parts of the organisation, or former 

powerful bosses suddenly lose their power and status in the 

company all of which affect the emotional quotient of the 

employees. 

In the HLL-Tomco merger, about 50 top Tomco executives 

posted out from the company headquarters left the company, 

within a year. Since the executives who left were also the ones 

with whom the employees had identified themselves closely, 

their departure signified both the psychological as well as an 

emotional loss for the existing employees. This dilemma was 

well expressed by a senior Tomco manager who has fought 

Levers in the market for as much as twenty years, so much 

so that he could not mentally accept the situation of working 

for the Lever company at this stage of his career, which only 

goes to expose one small aspect of the cultural problem that 

companies have to contend with when they merge. 

However, in the case of HLL the management of HLL 

were aware of these issues, and referring to the merger, the 

Chairman of the company when asked as to whether the 

merger would create cultural mismatches answered that the 

culture factor is indeed an issue that they have to take into 

consideration for which they have already outlined a strategy 

and put it in place. The first task of course is to communicate 

the plan clearly and if some insecurity creeps in then counseling 

would be needed to be undertaken in order to remove 

the scope for misunderstanding arising in such a process. 

The important thing to note is that success or failure of any 

new entity would depend largely upon the people affected by 

the merger process who are important and who run the new 

company. If there is any unhappiness, insecurity or uncertainty, 

obviously, the merged company cannot expect to get 

the best out of them and this will require a very high degree 

of attention. 

 


19

GLOBAL PERSPECTIVE 

A BIG RICH 

INDIAN WEDDING: 

MERGERS REVISITED 



As much as we wish and 

hope the marriage to be 

a merger activity, it has 

more characteristics of an 

acquisition than a merger 

 

 

 

Mergers and Acquisitions are rich affairs, just 

like our own Indian weddings. However, the 

similarity between the Indian weddings and 

mergers is not just limited to lavishness and frequently 

cited extravagance. Weddings in India can be directly 

compared to the corporate mergers in many other aspects 

as well. The emphasis here is on marriages in India because 

in the western world the procedure is not as tedious 

as it is in our country. To substantiate further, in both 

the above cases, be it an Indian wedding or any other 

marriage around the globe (including the cross-country/ 

cross-cultural/cross-continental mergers) there are a lot 

who’s who of the family and relatives (Like the study of 

financial statements, Cost-benefit analyses for an M & 

A, and the valuation of the target firm) begin. Needless 

to mention, the whole cumbersome activity of matching 

horoscopes carried out by the Pundits (Consulting 

firms) is also an indispensable ritual. Once the marriage 

proposal is accepted by the head of the family (Management 

acting on behalf of shareholders) and is declared, 

a whole lot of activities are undertaken to welcome the 

new member into the family (Say, profitability analyses 

in terms of sharing of technology, downsizing of labor 

and management, etc). Such is the fervor that even the 

In order to find the suitable match, parents (Investment 

bankers/advisors) use their personal contacts or social 

networking means and sometimes even carry out classified ads 

of stake holders involved before and after the marriage. 

That is, why the process is tedious and why does it take 

months of negotiations, speculations and evaluations 

before the event actually occurs. Of course, there are 

many significant differences between the two. However, 

it would not be incorrect to classify an arranged marriage 

as a special case of an M&A transaction. 

When a marriage takes place in an Indian household, 

there is so much of hype surrounding the marriage (and 

if it is a celebrity wedding, then media goes gaga just as it 

does when it gets a whiff of a potentially large-scale M & 

A activity). Months (and at times, even years) before the 

‘D’ day, preparations begin. Much before the marriage 

is announced, background checking and consulting the 

house gets a makeover. 

In order to understand this peculiar resemblance further, 

let’s take a detailed look at a traditional Indian “arranged 

marriage” vis-à-vis a corporate merger: 

Parties in question: 

As much as we wish and hope the marriage to be a merger 

activity, it has more characteristics of an acquisition than 

a merger. Blame it all on the social setup that exists in 

India. The acquirer and the target, here are the bride 

and the groom respectively or vice versa. The roles that 

the two play depends on the social system (in matriarchal 

system, bride is the acquirer; while in patriarchal 

system, bridegroom is the acquirer). Supposing it to be 


21

PANORAMA 

a patriarchal system, which is followed by a large chunk 

of Indian mass, the bride shifts to the groom’s house 

with all her worldly assets and liabilities after the marriage. 

The price paid by the groom is the cost/expense 

borne on the marriage itself (a significant part of which 

is shared by the bride’s family, in most cases). The cost 

incurred by the groom (price paid) has not much of a 

bearing on the actual value of the bride (the acquired 

firm). “The groom’s family can spend pretty much anything 

they like; based on their own status (the Fortune 

500s of society like to spend a lot on theme marriages, 

celebrity dance performances and such other social pastimes). 

The groom’s side does offer some presents to the 

bride and her family, a case which happens to be more 

when he or she attains a ‘marriageable age’ or completes 

his/her education. In fact, merger transactions between 

start-ups (children) are considered to be retrogressive 

and illegal. The parents (top management) look out for 

befitting opportunities in the marriage market to ensure 

a harmonized synergy after the marriage. The parents’ 

(top management’s) motivation for their ward’s marriage 

might not be on the same plane as their ward’s motivation. 

While the top management thinks more practically 

and looks for tangible benefits and synergies, the 

ward’s motivation might be limited to being romantic 

and based on external appearances (Target firm’s size 

and turnovers). 

“The boy’s parents (often, the boy himself, as well) 

It is possible to have ‘reverse goodwill’, if the bride brings in a 

lot of tangible assets on her parents’ money, over and 

above herself 

of a cash-and-kind deal.” 

Benefits sought: 

Have you ever heard of a startup firm or a relatively 

young venture being a part of an M & A activity The 

obvious answer is ‘no’. Thus, the fi rms have to reach 

maturity stage before they generally seek merger or an 

acquisition. This being analogous to the fact that parents 

of a boy or a girl start seeking for a suitable “match” only 

may not be interested in the girl’s own qualities, but in 

her family’s wealth. This is similar to trying to acquiring 

a firm for its ‘crown jewels’.” 

Acquisition activity: 

Now, let us relate the marriage process on whole with the 

entire acquisition activity. To begin with, there are two 

‘eligible’ parties, the groom and the bride (the acquirer 

and the acquiree/target). They both would have shown 

their willingness to undertake the acquisition activity. 

Now, the parents on either side are like the investment 

bankers appointed as advisors. Their objective is to provide 

a turnkey solution to their respective wards, with 

the wards’ agreement not carrying much significance in 

many cases (not unlike the corporate world). 

In order to find the suitable match, parents (Investment 

bankers/advisors) use their personal contacts or 

social networking means and sometimes even carry out 

classified ads (publicize on the media). This “alternatives 

searching” part of the activity is a long and expansive 

function and is done through extensive data-accumulation 

of probable matches (of acquirers/acquirees) in the 

market. This information, suitably biased by the parents’ 

advisors according to their own liking, is presented to 

the ward. Third-party agents like classified ads, matchmakers 

and match-making websites are a good means of 

alternative search for those parents who haven’t spent 

much time on the networking front and need some consultation 

support in the search process. 

The probable matches are then rigorously studied and 

screened by the client-ward on behest of the advisor-par- 



ent. There might be differences in the benefits sought by 

the client-ward (which generally is short-term benefits) 

and those suggested by the advisors and the ward might 

feel it is not being given the service quality that it deserves. 

The ward and the parents may not agree on what 

‘synergies’ to focus on. 

“When the candidates on the two sides agree to explore 

matters a bit further with a shortlist of counterparties, 

the process of due diligence begins with due 

earnestness. “ 

Now, some more evaluation of the acquirer and target 

are done to ensure there is no friction amongst the parties 

after the merger. The information being sought are; 

the boy’s salary, people in the boy’s house, the character 

of the girl (hardly anybody bothers about the boy’s 

character), the quality of management in the boy’s house 

(his parents), and whether the boy lives in a joint family 

(which may be categorized under ‘environmental issues’). 

In the final stages, just before the marriage, situation 

gets grimmer and a series of negotiations unfold with 

the advisors on both sides playing hardball as they try 

to promote their own benefits and struggle to make the 

transaction as propitious for themselves as possible. This 

is just like the final negotiations in an M & A transaction. 

The difference is that all these vehement discussions are 

verbal, and unlike an M & A these deliberations are not 

taken down frantically by a big team of lawyers. 

“When a deal has been successfully thrashed out, the 

two sides issue a joint statement publicizing the engagement, 

often giving indicative timelines for the completion 

of the deal (marriage).” 

Just like in a corporate merger, timing of the announcement 

is important for other candidates in the 

market who might also have set their sights on one of 

the two sides just engaged. 

Dramatization of events: 

Large corporate houses seeking M and A activity create 

a high drama environment in the corporate world, 

especially when there are deviations from the above mentioned 

stream of events. Such high-voltage drama is not 

uncommon amongst the Indian arranged marriages too. 

If one party is less desperate or needy for the match than 

the other, the party might pressurize the other by starting 

dialogue with other parties in market, so as to get an 

improved offer from the latter. “At times, the acquiree 

(girl) may not like her parent-advisors’ choice of suitor 

and look out for a ‘white knight’ more acceptable to her. 

Or, sometimes, even other candidates, jealous of a particular 

match-up, may spread canards about the candidates 

or their top managements to sow the seeds of doubt on 

either side.” 

Post-merger challenges: 

As in the marriages, the actual confrontation of interests and 

the murkier hidden-truth comes out only in the post-merger 

integration phase. Mergers are not always seen to solve 

problems but they also have the ability to create a new set 

of problems and opportunities. Mergers need to be treated 

as other long-term relationships with an emphasis on the 

communication patterns that evolve in healthy or destructive 

manners. The paradox in a marriage and a merger is that 

seemingly insignificant patterns in conversations between 

individuals are crucial in the longevity and health of the 

relationship. Both sides may discover hidden liabilities in 

the counterparty, renege on the verbal conditions agreed 

to during the negotiation, experiencing of managerial ego 

clashes, strive to take a profitable position in the ‘market 

for marital control’, etc. “In the worst case, the husband’s 

family carries out ‘asset stripping’ - the practice of using up 

or selling the wife’s belongings and not letting her carry on 

operations (her job) or even murdering her for dowry.” 

Accountability: 

“In the corporate world, accounting for M and A can be 

done using one of two methods: the purchase method or the 

pooling of interests method. Now, most married people will 

agree that, on a philosophical level, if not at a financial one, 

there is no real ‘pooling’ of interests post-marriage. Thus, 

the purchase method of accounting wins by default.” 

This in turn, might not be an ideal way of accounting and 

has its own flaws when the purchase method for marriage 

is actually applied. In general, the additional expenses that 

the acquirer incurs (in terms of lucrative incentive-filled 

payments) or the premium it pays over and above the actual 

value of the identifiable tangible & intangible assets of the 

acquiree is classified as goodwill on the acquirer’s balance 

sheet. So there is no goodwill. Rather, it is possible to have 

‘reverse goodwill’, if the bride brings in a lot of tangible 

assets from her parents’ money, over and above herself. 

References: 

● 

● 

● 

‘M & A: The Odd Couple – By George Skaria, 

Business Today (http://www.india-today.com/btoday/07111998/ma.html) 

Arranged marriages as social M&A activity – November 

18th, 2006 - Posted by tavaishnav (http:// 

tavaishnav.wordpress.com/2006/11/18/arrangedmarriages-as-social-ma-activity/) 

Merger as Marriage: Communication Issues in 

Post-Merger Integration - Kevin J. Dooley, Arizona 

State University, Brenda J. Zimmerman, McGill 

University 


23

TRENDS 

Jet Airways – 

Air Sahara 

merger 

“Lite” at 

the end of 

the Tunnel 

 

 

 

 

24 Need the Dough July-October 2007


The Mumbai-based Jet Airways board met in 

December 2005 and approved the acquisition 

of the 100% Delhi-based Air Sahara, which 

is wholly owned by the Sahara Group. Specific terms 

were not disclosed, but the airline said that it would 

be an all-cash deal worth around $500 million and it 

didn’t include the assumption of Air Sahara’s debts. 

The takeover - the biggest in India’s aviation history 

– would create the country’s largest airline. Jet Airways, 

which was founded by a London-based former travel 

agent Naresh Goyal, controls about 35% of the Indian 

domestic airline market. According to analysts the deal 

would help the company consolidate its position in 

India’s flourishing aviation market. 

Air Sahara, owned by the reclusive businessman 

Subrata Roy, controls about 12% of India’s market. 

Air Sahara and Jet Airways are India’s largest privately 

owned carriers with a combined domestic market share 

close to 50%. Jet Airways is even larger than the stateowned 

Indian Airlines, which is its closest competitor 

with around 25% market share. Both Jet Airways and 

Air Sahara have extensive domestic networks and limited 

international operations, and they were the only 

survivors from the Indian government’s fi rst attempt 

at liberalisation in the early 1990s, when more than a 

dozen new carriers launched services. 

Mr. Goyal said there were no plans to convert Air Sahara 

into a low cost carrier. Air Sahara would continue 

to operate separately in the near term, but eventually 

Jet Airways would absorb the smaller airline’s aircraft, 

airport facilities and technical operations, after which 

the Air Sahara name will disappear. A joint integration 

team was thus formed under the vigilance of senior 

executives from both the airlines. 

Delhi-based Air Sahara has been in the market for 

some time as it needed cash to expand and its promoters 

were not willing to make the necessary investments, 

while Jet Airways is fi nancially comfortable following 

a successful public offering. Kingfisher was considered 

a front-runner in the bidding for Air Sahara, but its 

flamboyant Chairman, Vijay Mallya, said while withdrawing 

his offer shortly before the Jet Airways deal 

was confi rmed, that the asking price was far too high. 

Many industry observers see the Jet Airways move as 

one intended primarily to keep Kingfisher and other 

new players from becoming stronger competitors. 

The fleets of Air Sahara and Jet Airways are not 

radically different, as both operate Classic and Next 

Generation Boeing 737 narrow bodies on the majority 

of their routes. Jet Airways has more than 50 aircraft, 

some 40 of which are 737s, which it acquired through a 

mix of lease and purchase. It also possesses eight ATR 

72s and three Airbus A340-300s, in addition to fi rm 

orders with Airbus and Boeing for 10 A330-200s, 10 

777-300ERs and 10 more 737-800s. Delhi-based Air 

Sahara operates nearly 30 leased aircraft, around 20 of 

which are 737s. It also has seven Bombardier CRJ200 

regional jets and a recently added 767-300ER which it 

leased for the new London - Heathrow services. 

The deal could also mean more international routes 

for airlines, as Jet Airways and Air Sahara were the only 

two private Indian carriers who were permitted to fly 

overseas. Jet runs 271 scheduled fl ights daily within 

India. It recently won the government’s permission 

to fly to London, Singapore and Kuala Lumpur. Air 

Sahara operates 134 fl ights daily in India. It has recently 

begun flying to US, London and Singapore as well. 

According to aviation analyst Alok Dayal, the takeover 

would not affect the passenger fares much in an 

The fleets of Air Sahara and Jet Airways 

are not radically different, as both operate 

Classic and Next Generation Boeing 737... 

industry which has seen explosive growth due to the 

entrance of low cost carriers. “Both Jet and Air Sahara 

are full-cost airlines and do not offer low fares 

as compared to low cost carriers. So I think the low 

cost carriers will continue to give competition to these 

airlines”, he said. 

Hiccups: 

That the proposed merger between Jet Airways and 

Air Sahara would not go ahead, is news which came as 

a heavy blow to the Indian aviation industry. 

Airline officials have said that the merger worth 

USD500m has fallen through due to a combination 

of procedural delays and disagreements between the 

two airlines. The deadline for the merger was 21st June 

2006. With the approach of the deadline for regulatory 

approval, Air Sahara was willing to extend the deadline 

by 15 days, but Jet Airways did not agree to an extension 

unless the purchase price was reduced by 10-20%. 

Later, Air Sahara rejected this proposal. 

Questions from the Indian government regarding 

airport-landing slots, is another reason which had 

jeopardized this planned merger between Jet Airways 

and Air Sahara. According to the media, India’s civil 

aviation authorities are questioning all of Air Sahara’s 

landing slots being transferred to Jet Airways. The authorities 

reportedly fear that the merged airline could 

have too much control over airport parking bays. A 

July-October 2007 Need the Dough 

25

TRENDS 

report stated that the government takes the view that 

airport facilities have been leased to Air Sahara and 

would not automatically transfer to Jet Airways, the 

report said. Jet Airways has apparently included the 

slots in its valuation of Air Sahara. 

The merger was approved by the Ministry 

of Company Affairs but not by the Civil 

Aviation Regulation Board as reported by 

media that time. The technical cause for 

missing the deadline was a government delay 

in approving the appointment of Jet Airways 

chairman Naresh Goyal to the board of Air 

Sahara after the acquisition. 

If completed, the merger would have created 

the largest Indian airline with control over nearly 

half the market. Jet Airways and Air Sahara continued 

to battle at the press, over possession of 

The Company plans to increase its revenue 

from international operations to 50% of 

the total earnings within the next 3 years 

an INR 5billion ($108.5 million) escrow account tied 

to Jet’s aborted acquisition of its much smaller rival. 

The merger, which was announced in January 2006, 

fell apart after Jet seemingly walked away rather than 

extending the deadline to June 21 in order to complete 

the deal. While Jet offered little explanation for the 

decision, Air Sahara claimed that Jet dropped the deal 

after Sahara rejected a request to lower the $500 million 

purchase price by 10%-20%. 

Final Move: 

Nine months after lapsing its proposal to take over 

Air Sahara, Jet Airways had revived its bid. After the 

deal failed to get regulatory approvals, Jet said the 

earlier it had decided not to pursue the acquisition for 

commercial reasons and in the interest of its shareholders. 

Sahara had argued that the deal should have been 

completed, and asked for compensation. 

A three-member arbitration panel was set up to resolve 

the dispute between the two airlines over the 

disputed merger. The two airlines, after two days of 

closed-door talks in Mumbai, submitted the re-worded 

sale purchase agreement to the three-member arbitrators’ 

panel. The delay in hammering out the consent 

order was on account of some differences between the 

two sides on payment procedures. 

Air Sahara had fi nally landed on Jet Airways runway, 

ending nearly 10 months of dispute between the 

two airlines. Naresh Goyal, Chairman, Jet Airways 

announced that it had agreed to buy out Air Sahara 

in an all-cash deal for Rs 1,450 crore, which is about 

40 per cent less than the Rs 2,300 crore that Jet had 

agreed to pay for the acquisition in 

January 2006. 

Mode of payment: 

While Rs 500 crore had already 

been paid to Sahara after the fi rst 

agreement was inked between the 

two in January 2006, next installment 

of Rs. 400 crore paid on or 

before April 20, 2007. The remaining 

Rs 550 crore will be paid in 

four equal annual and interest-free 

installments during the next four 

years ending 2010-11 commencing 

on or before March 30, 2008. 

Mr Goyal said at the current interest 

rate, the Net Present Value of the 

lump sum price was in the vicinity 

of Rs 1,200 crore. He, however, did 

not touch upon the liabilities of Air 

Sahara including about Rs 200 crore 

credit outstanding. Sources said Jet 

would have to bear these liabilities, 

which would enhance its acquisition cost. 

The buyout will make the merged entity the largest 

domestic private carrier, with a market share of about 

42 per cent and a fleet of 88 aircrafts, including the 

27 operated by Air Sahara. Incidentally, all the Sahara 

aircrafts are on lease. The buyout will also help Jet in 

its plans to go international. 

The company plans to increase its revenue from 

international operations to 50 per cent of the total 

earnings within the next three years. The company has 

applied for rights to expand its international network to 

connect India to key destinations across the world, including 

the US, Canada, the UK, South Africa, Kenya, 

China and South East Asia. 

Impact: 

Briefi ng newspersons in New Delhi, the Air Sahara 

President, Mr Alok Sharma, said that the deal had been 

closed on an as-is-where-is basis. “The deal will see Jet 

Airways get Air Sahara in its current position. All the 

Government approvals for the deal are in. The deal is 

beneficial to all parties. Not only will Jet Airways get 

to operate on our routes, it will also get the existing 

fleet and the 10 brand new Boeing 737 aircraft being 

delivered to us. Besides, Jet will also get a larger market 



share and more loyal customers”, Mr. Sharma said. The 

deal allows the Air Sahara brand to continue for some 

more time after which it would revert to the owners 

of Sahara group. Assets of Air Sahara including four 

helicopters and the personal Boeing Business Jet of 

the Sahara Group Chairman would be carved out and 

sold back to Sahara. 

The completion of the deal will not affect the existing 

3,700 Air Sahara staff. “If required, Sahara will 

absorb all employees at the same terms and conditions”, 

Mr Sharma added. While Jet Airways is likely to absorb 

the pilots, cabin crew and engineers with Air Sahara, 

the rest of the staff are likely to be absorbed by the Sahara 

group, sources indicated. On the other hand when 

asked whether Jet will rename Sahara, and whether 

the airline would retrench any Air Sahara employees, 

Mr Goyal said he would answer all the questions later. 

Reacting to the development, the Jet Airways stock 

increased by 3.24 per cent to close at Rs 628.65 on the 

BSE on April 12, 2007. 

Post Merger Scenario: 

Jet Airways, which recently took over the beleaguered 

Air Sahara for Rs 1,450 crore, has rebranded the lowcost 

carrier `JetLite’. According to Jet, the combined 

entity would have a market share of 33 per cent of the 

domestic market and a combined FY08 net revenue of 

$2.5 billion. However, Jet and Air Sahara will operate 

as independent companies and Jet Airways would raise 

$400 million to fund overseas expansion. 

Jet Airways is also planning to acquire 20 widebodied 

aircraft for $2.1 billion. It would comprise 10 

state-of-the-art Boeing 777-300 (extended range) and 

ten A330-200 Airbus aircrafts. 

While the airline has redesigned everything, offering 

new products in the fi rst, premier and economy 

classes, the airlines also holds options of adding more 

aircrafts of each type and have recently signed a deal 

for purchase of 10 Boeing 787 Dreamliner with delivery 

commencing in 2011, which will cost the company 

$1.6 billion. In all, Jet Airways will invest $3.7 billion 

in new aircrafts for its aggressive growth strategy for 

both domestic and international market. All facilities 

offered will be premium and hence a premium will 

have to be paid by the passengers but the prices will 

be competitive, a senior Jet Airways official said. 

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TRENDS 

THE SURGING TSUNAMI - 


STORY… 



The restructuring exercise is carried out to gain 

optimum utilization of resources and re-focus on the 

objectives and changed business dynamics 

 

 

Breaking News: 

● Havells India acquires SLI Sylvania, Germany – deal 

size US $ 300 mn 

● Suprajit Engg buys out CTP Gills Cable of UK – deal 

cost US $ 5 mn 

● Batliboi Ltd acquires Quickmill Inc in Canada – worth 

INR 22 crores and buys AESA of France – deal size 

INR 9 crores 

● Tata Steel outbid their South American rival for Corus 

– deal size US $ 12.1 bn 

● Karuturi Networks acquires Sher Agencies , a Dutch 

outfit – cost US $ 69 mn 

● Suzlon successfully bids to buyout REpower in the 

wind energy segment – deal size $ 1.35 bn 

● Wipro acquires the healthcare providers of S.E. Asia 

to gain geographies and enhance their health and 

personal care product range. 

● Wipro Technologies acquires Infocrossing of US in 

a all cash deal of US $ 600 mn 

● JSW Steels India buys Steel Saw Pipes, USA, Jindal 

United Steel Corp., US & Jindal Enterprises LLC 

USA totaling a whopping US $ 940 mn / INR 3845 

crores 

A typical though small sampler of headlines making 

it to the daily newspapers in the first half of the year 

2007 --- 

Headlines such as these have become an everyday 

feature and inevitable too. To comprehend the reasons 

pertaining to such frequency in the world of mergers 

and acquisition , if we peel off the layer of hectic activity 

and biddings, dealings going on, the causes and the 

underlying matter attracting such deals and sustaining 

this rapidly ballooning phenomenon can be seen to be 

fundamentals emerging from the economic structure. 

The present multi-hued conglomerations, mega deals 

are all seen to be happening on the strength and structure 

of the developing thriving economy and in turn is 

also facilitated by the liberalization policies and growing 

economy. Quite a case of success breeding success, if 

one could say so. 

Growth Theme: 

The dominant theme for India Inc`s M & A outreaches 

is simply this: Growth. Catch up with the biggies out 

there as quickly as possible. 

● Growth – Evolve, Empower 

Being in a phase of economic transition, introspecting, 

exploring the unfolding opportunities, investing for a 

bigger and better profitable tomorrow helps in evolution 

and empowerment of the business 

● Growth – Uniqueness, Innovation 

The present day business dynamics ensure growth only 

and if only there is enough preparedness, innovation, 

thinking processes devoted to creating uniqueness of 

products and services 

● Growth – Value addition, Differentiation 

The businesses of today have to compete in open environs 

to be able to gain and retain interest and attract 

brand loyalty and trust in preference to other products in 

the range which can only be secured with differentiation 

and value addition. 

● Growth – Vision, Mission 

The growth on the basis of planned out investments 

leads to a higher plane of vision, the scale of operations 

perceptibly richer and varied with the mission also rolling 

on to newer domains, intact and fully compatible with 

commercial interests. 

This Growth to happen in a defined period of time 

and space, to realize all these dramatically resultant significant 

energies need the added impetus given by M & A 

activities, (inevitably incremental fund flows too!) as the 

internal accrual method of gaining strength is definitely 

a slower, slightly restrictive process though very much in 

the realm of possibilities. Just as a specialist sportsperson 

needs general fitness and agility before training in the 

special features of the game, so do the economy, industry 

and firm need to be basically fit before attempting to gain 

speed and competitiveness in a specialist zone. 

A cursory glance at the basic sectoral array of the firms 

confirm the view that the proactive expansion growth 

plans are happening across the board – from engineering, 

Information Technology, by Mr. ITES Jangoo to healthcare, Dalal power 

and infrastructure to even Sr. VP-Enterprise, horticulture firms Cisco Systems – with no (India & SAARC) 

sector lagging behind. 

Deal sizes range from a hefty US $ 1 billion and more, 

as in the case of Tatas to as tiny as US $ 2/3 millions 

and gauging which the size gradation ranges from neo 

corporates, niche players in their selected segments to 


29

TRENDS 

established giants of the industries like Tatas. 

Of course not all of the deals are outbound and cross 

border acquisitions, but there are also domestic buyouts 

and consolidation, a good example of it is seen in the 

banking space wherein small private sector banks like 

Nedungadi Bank and Lord Krishna Bank have been 

merged with more powerful Banks in order to remain 

competitive and to confirm adherence, compliance to 

the regulators` benchmark rates. 

The Hidden Picture: 

Lost in this story abounding in outbound, cross border 

deals is that firms are also hiving off, de-merging in an 

attempt to focus better or effect change in control by 

offering certain units to other foreign firms and willingly 

merging within themselves to form a well, slimmer, fitter 

and powerful units. Biocon divesting its Industrial 

Enzyme unit to a Norwegian firm – Novozymesa is a 

case of strategic fit wherein it can be more focused on 

its Bio-pharmaceuticals space, maintaining faster growth 

momentum while leaving behind food industry application 

areas. Similarly IBR Infrastructure Developers- 

IBRID merged all subsidiaries and SPVs with themselves 

to form a single holding Co. The objectives achieved are 

integrated approach, greater control of activities in the 

construction projects apart from globally valid true core 

transparency and ethical practice of accounting in the 

books. The restructuring exercise is carried out to gain 

optimum utilization of resources and re-focus on the 

objectives and changed business dynamics. 

Why the deal 

To have instant growth, to gather and retain growth 

momentum, to gain competence and jump on to the outsourcing 

bandwagon and explore/exploit better revenue 

yielding opportunities. Here the vital point to be noted 

is the time frame with which one has to be sync. 

Augmenting export earnings, partially de-risking geopolitical 

competition, gaining access to newer markets 

thus overriding cyclical downtrends in established exposure 

domains is a strategic move in M & A situations. To 

take on domestic competition, to retain competitive edge 

with economies of scale, wider product range and simultaneously 

to maintain global level quality and standards 

in business practices, the bottom line in all these activities 

is to be able to realize economies of scale, enhance 

product range and market share, to improve margins 

and add to instant growth while complying with global 

standards, all form compelling forces. 

Ways & Means: 

Consolidation of businesses by large industrial houses, 

multinationals operating in India, increasing competition 

amongst domestic companies and against imports 

has all combined to spur mergers and acquisitions activities 

in India. In response to the growing business, 

 

The bottom line in all these 

activities is to be able to realize 

economies of scale, enhance 

product range and market share... 

 

regulators have issued guidelines to facilitate smooth 

transactions. 

Mergers and acquisitions take the form of 

● Modes of cross border acquisitions 

● Categories of cross border acquisitions 

● Open offers 

- Acquisition of shares 

- Acquisition of undertaking/assets 

● Substantial sale of equity 

● Corporate partnering 

Strategic investments 

● Earn out acquisitions 

● Public to private– Leveraged buy outs 

● Sale of distressed assets by financial intermediaries 



– Distress sale 

● Schemes of arrangement by companies, etc. – Supporting 

management buy outs 

There is also a rising trend in buyback of issued equity 

by companies. Disinvestment is also an acquisition by 

the new owners of the business hitherto owned by the 

government. This trend is as significant at the State level 

(if not more) as compared to the Central government. 

Private Equity or PE players are actively promoting 

all forms in this trend. Along with dedicated foreign 

funds with Asia / India / Emerging Markets specific 

nature, funds scout around for profitable and promising 

ventures and organizations wherein they can participate 

and fund the action deals. 

Composition and Constituents: 

M & A activity which started as stray instances in the 

80s started to trickle in the 90s and becoming a surging 

phenomenon in this decade, thereby taking tsunami 

– like proportions in 2007. The figures tell the entire 

story: considered in no. of deals, in terms of deal size, 

in the sector of economy covered, competition faced, 

et all. The absolute numbers were to the tune of globally 

transacted 24806 deals amounting to US$ 2059 bn 

worldwide while India’s share in that was roughly to the 

tune of 394 transactions amounting to around US $ 10 

bn in the year 2005 which saw a steep rise of 52% over 

the previous year and thereby promising to outbeat the 

previous year by a good measure in 2006. 

While the activity was seen mainly in the domestic 

markets, with firms acquiring a certain critical mass, 

the focus then shifted overseas. Then again in 2005 

the majority of action was seen in the IT and ITES 

sectors, the following year saw transactions in general 

engineering industry and infrastructure segments. The 

average size of the deal also rose significantly – US $ 

794 mn for the top 20 transactions – much higher than 

the previous years` average of US $ 538 mn. 

The chart showing the value of deals done by India 

Inc., referenced in terms of US $ million against FY 

2001 to FY 2006 

The stats give a very healthy picture of M & A activity 

area. The different categories of this phenomena, namely, 

domestic, international, whether in-bound or outbound, 

or be it integration upward / backward or attracting 

diverse interests and work areas, to expand geographies, 

to increase numbers, gain strength and competitiveness, 

to strategise – whatever may be the compelling driving 

force, this form of inorganic growth has been resorted to. 

The only damper to this great show of numbers is that 

when viewed in the global context, that is as a percentage 

of the amount of funds flowing into other emerging 

economies, like our great neighbor the awakening dragon 

China or Mexico - the other nation joining the band of 

fast developing nations, India’s share is quite small and 

apparently remains lagging behind. 

Support Structures: 

The steady growth in all sectors of the Indian economy, 

the policies and regulators placing a level field of operations 

enabling good competition and freeing the processes 

of handicaps have gone a long way in fulfilling this 

dream run for India Inc’s member units. 

The political will of the country along with its governance 

institutions have enabled the economic growth 

activities of the country, maintaining low inflation volatility 

and on the other hand containing the risk to price 

stability. The authorities’ guidance has been effective 

in chanelising the corporates into productive economic 

ventures. There has been a surge in the interests of gaining 

practical work experience and of good management 

skills and efficient financial organizing which have paid 

rich dividends in terms of contribution to growth 

The gross domestic product has been growing at an 

appreciable 6% and more in the last few years, last year 

registering a 9 % and 2007 estimated to clock the same 

rate atleast. With inputs from technology, better farming 

practices and good overall monsoon, the agriculture 

sector also has been supporting the economic growth 

story. 

The IT sector progressed as an island of growth in the 

early years of 2000 which had a cascading effect on other 

sectors and rub off on engineering goods industry, infrastructure 

sectors, telecom, power and services all picking 

up strength and growing to boost economic growth. 

Growing domestic consumption induced demand increasing 

in the economy, industrial performances have 

matched the demand and created a local plough back of 

capital in building utilities and assets. 

The capital formation, investment by firms in plant 

and machinery, capital goods and capex programs and 

abundant capital flows thru FDI and FII has been substantial 

facilitating growth and M & A transaction deals. 


31

TRENDS 

The FII funds inflow for the 1st half year of 2007 has 

been in the region of US $ 85 bn which is a significant 

indicator of the trend. Thus real industrialization and 

economic progress has been happening and encouraging, 

facilitating M & A deals. A T Kearney have graded 

India a high 2nd in their FDI Confidence Index indicating 

the safety of funds invested in India and ability of 

the firms to meet their debt obligations in time. Other 

support systems are the rich FX reserves accumulated, 

buoyant capital markets, stable equity markets with rich 

fund flows, lower cost advantage in industrial manufacture 

esp. in steel, cars and pharma, Etc. 

Progressive, Pro-growth financial sector regulators and 

frontier growth in the financial services delivery modes 

have been great supporters of transactions in this area. 

While LIC the only insurance player in the Indian 

context had always participated, the entry of many other 

private insurance players have added additional funds, 

 

M & A deals are done to derive a 

greater benefit from the merged 

entity rather than from the 

individual bits 

 

direction and depth to the capital markets’ productive 

funds flow pattern. 

The maturation in the financial sector, freer flow of 

funds, better ability for integration of accounts, elevated 

corporate governance concepts, and the opening of most 

sectors to foreign competition enabled in good measure 

in creating the atmosphere needed for the sudden spurt 

seen in this growth pattern. 

Ready availability of a big talent pool of Management 

professionals which is well trained and experienced in 

present day trends and global cues facilitate the mergers 

in all phases of the process. 

Enablers: 

The emergence of the business economic intelligence 

and corporate competitive intelligence on the macro 

structure has played a pivotal role in enabling environment 

for M & A deals. The valuations of target firms 

are estimated and then negotiations conducted to find 

a perfect ‘fit’ in terms of costs. Financial Institutions 

/ Agencies / Finance professionals / Business Bureaus 

doing the valuations step up to do the number crunching 

exercises. 

Advisors are the next tier of professionals to step in 

who undertake due diligence studies, cover the legal and 

tax-oriented aspects of the deal and are designated as 

overall in charge of negotiations in seeing the deal thru. 

The advisor is generally from the financial background 

efficient at putting together a package of finances agreeable 

to both parties, look into legality aspects of operative 

clauses with reference to both countries legislation 

and taxation aspects (implying a global perspective and 

knowledge) applicable to all concerned. The impact on 

books of accounts pre as well as post merger are considered 

for the acquirer and target firms. This ensures 

the viability of the deal post merger, assuring that the 

resultant energies and benefits are greater than the sum 

of its parts and that the deal is truly a benefit. 

There are Integrated Service Providers – doing the 

numbers, arranging finances, negotiating, conducting 

due diligence, etc., creating a customized, end-to-end 

solution. The Management Services personnel, experts, 

specialists educated in the burgeoning B-schools in India 

and abroad help in providing Advisory-cum-Boutique 

Services in this direction. 

Expected Issues / Fallouts: 

M & A deals are done to derive a greater benefit from the 

merged entity rather than from the individual bits. So it 

should be undertaken only when this criteria is fulfilled 

or sound the alert and drop the plan, timing and environments 

being very crucial to the deal. No deal needs 

to be gone thru just because it has been initiated. 

Integration – management setups, human resources, 

cultural practices, work ethos of the organisations need 

to be blended, top-down to gain acceptance at all levels. 

The objectives of the merger operation need to be clearly 

delineated to gain empathy to remove misconceptions 

and to promote commitment and vigor to the program. 

Job trims, redundancies, remuneration patterns post 

merger are sensitive issues to be discussed in detail and 

to be applied impartially. This is the difficult part in 

absorption post merger. 

Bringing out a unified set of Books of Accounts is 

another exercise which has to be done, in line with the 

statutes and provisions which although is challenging 

and requires skill and knowledge, can be got done with a 

clinical efficiency, an easier task than fusing the cultural 

and human aspects of the two or more entities involved 

in the merger plan. 

Corporate governance and adherence to principles of 

transparency, unbiased and impartial conduct with the 

management cadres and being candid and fair in dealings 

is essential in bonding in the new environs and creating 

enthusiasm and drive among staff members to get 

the brand new organization going full speed ahead. 

Way to go India Inc., it’s very cool, yah! 


TRENDS 

M & As Calling: 

Indian Inc. on a Buying Binge 


No decision is good or bad 

in the world of business; it’s 

the outcome which makes it 

good or bad...


The golden bird of the world is gaining its glitter 

once again and recent times bear a true testimony 

for her accomplishments. India’s economy crossing 

the $1 trillion GDP benchmark, rupee value getting 

stronger against the USD, mounting inflation taking a 

back seat, Sensex making through the 15k mark and innumerable 

other instances that delineate and disseminate 

the successful saga of her corporate world going hammer 

and tons and doing exceptionally well, seem to be the 

most obvious reasons which have made her a prominent 

economy on the global map today. 

There is no company in the fortune 500 list, which 

does not want to do business either with India or inside 

India. Ranging from IT titans like Microsoft, IBM, Intel, 

Dell, to world’s largest retail chain Walmart, Japanese car 

manufacturer Hyundai and Toyota to French major Renault. 

From biggest telecom company Vodafone to global 

financial institutions like Bank of America, Citigroup, 

ABN Amro and HSBC, all of them have announced their 

future plans for the country along with the humongous 

investments that they intend to make. 

And why would any company not contemplate of commencing 

its operations or for that matter not want to do 

business with India, especially when they get one of the 

most educated and well versed workers, with sound knowledge 

of the global market, at comparatively and relatively 

lower price. (According to estimates by the year 2010, 

India will have the highest number of English speakers). 

Be it world leaders in car manufacturing like the General 

Motors or domestic corporate giants like Reliance, Bharti, 

Tata et al, they have all been capitalizing on the human resource 

available in India for quite a longtime now. And all 

the financial accomplishments of these enterprises could 

also be attributed to these reasons, which have eventually 

helped the country becoming only the 12th nation to cross 

the trillion dollar GDP figure. 

Going Hammer and Tongs: 

Not only this, in the last couple of years the corporate 

India has made valuable attempts for expanding 

their operations in the overseas market as well and 

the recent figures of both inbound as well as outbound 

Mergers and Acquisitions(M&As) exemplify 

this fact pretty well. In the past 15-18 months, Indian 

conglomerates left no stone unturned in acquiring, 

merging or tying-up with their foreign comrades 

and doing business that could and most certainly 

would contribute to India’s economic growth. Taking 

full advantage of their company’s strong revenue 

base, Indian corporate leaders executed the plans 

to acquire and merge with the European giants 

(though at times with comprehensive risks, as in 

case of Tata-Corus or Hindalco-Novelis deals) in order 

to have an access to markets abroad. 

According to the Grand Thorton report, the total 

number of deals that took place in the year 2006 was 782 

as compared to 467 in 2005, out of which 480 were M&A 

deals and the rest 302, the private equity ones. Altogether 

there were 480 M&A deals with a total value of about 

$20.3 billion in 2006 with an average deal size of $42 

million. Going by the sectoral examples, IT happened to 

be the leading one, which garnered $2.9 billion worth of 

deals. The major deals in that segment included EDS’s 

acquisition of majority stake in Mphasis BFL, RR Donnelley’s 

acquisition of Office Tiger, i-Flex’s acquisition of 

Mantas Inc etc. 

Additionally, there were 8 deals of over $500 million 

(excluding Tata-Corus), of which Dr. Reddy’s Laboratories 

acquisition of Betapharm, Suzlon Energy’s of Hansen 

and Citigroup’s increasing stake in HDFC were both the 

biggest as well as the most talked about ones. The report 

further divulges that IT leads the M&A volume proportion 

with its 20 percent share of total number of M&A deals, 

while Pharma, Healthcare & Biotech contributed to the 

second highest share at 10.4 percent. 

The cross border deals significantly increased to 266 

with a consequent appreciation in the worth thereby reaching 

a whopping $15.3 billion last year as against 192 deals 

with a total worth of $9.5 billion in 2005. Where at one 

hand there has been a phenomenal growth rate in outbound 

deal value as well as volume, inbound deals have 

remained almost the same as compared to the year 2005. 

The largest outbound acquisitions have been in Europe, 

which accounts for 42 percent of the deal value, followed 

by North America with 24 percent. United States and 

United Kingdom are the two countries that garnered the 

maximum outbound deal share, at 29 percent of the total 

deal value. 

Sectorwise Break up- M&A Deals by Value Mar-Apr 2007 

Source: Grant Thornton 


35

TRENDS 

During the last financial year the total number of M&A 

deals that took place in India was worth $47 billion, out 

of which $20 billion were spent on outbound deals (nearly 

five-times of what happened in the year 2005). Furthermore, 

if the forecast by McKinsey & Company is taken into 

account, India will see overseas-M&A activity of about 

$30-36 billion this year, out of which deals worth some $10 

billion have already been completed. During the period of 

last 15 months, the Private Equity investments in Indian 

companies have also witnessed a significant growth. From 

a monthly rate of 12 deals valued at $200 million in January 

2006, PE investments deals’ figures have reached to 

45 deals and valued to about $1 billion for the month that 

ended March 2007. The total deal value has increased from 

merely $2 billion in 2005 to $7.8 billion in 2006 and to $3.5 

billion for the Jan-April 2007 period. But if all the M&A 

activities are observed from the global perspective, our 

motherland is far behind that of the rival sister countries. 

India’s contribution to the global M&A-spend of nearly 

inbound cross border deals has been 17 with a total value 

of $1.98 billion. While the numbers of outbound cross 

border deals were 32 with a value of $3.41 billion. 

In the month of April 2007, Indian companies announced 

scores of M&A deals. The largest being the Essar 

Steel-Algoma deal, where Ruias owned Essar Steel 

declared that it would acquire Canadian Algoma Steel for 

1.8 billion Canadian dollars (approx $1.58 billion) which 

is to be paid in cash. Algoma Steel had steel shipments of 

2.4 million tons in 2006 thereby generating a revenue of 

1.9 billion Canadian dollars. 

M&A deals like Tata Power’s stake in PT Kaltim Prima 

Coal and PT Arutmin Indonesia, Vedanta Resources’ buying 

out majority stake in Sesa Goa, Matsushita’s majority 

stake in Anchor Electricals, Ranbaxy Laboratories’ 14.9 

percent share in the Hyderabad-based Jupiter Bioscience, 

Cadila Healthcare’s 100 percent acquisition in Tokyoheadquartered 

Nippon Universal Pharmaceutical for an 

undisclosed sum, Jubilant Organosys’ share in US-based 

Certainly there is a huge scope ahead 

for the Indian majors, but one should 

never forget that everything comes at a 

particular cost, and it’s the risk associated 

$4 trillion has been merely 

over 1 percent, which is 

anything but sufficient. 

If the growth in the individual 

sectors is taken 

into account, investments 

in real estate, financial 

services, media & entertainment, 

to name a few, 

have seen quite a high 

growth. For example, investment 

in real estate has 

increased from negligible 

values in 2005 to about $1.1 billion in 2006 and crossed the 

figure of $680 million in just the Jan-April 2007. Similarly, 

investment in Media & Entertainment has gone up from 

a figure of $142 million in 2005 to $640 million in Jan- 

April 2007 quarter, an average q-o-q increase of 175%. 

In the financial services itself the figures have increased 

from barely $185 million to as much as $773 million, an 

average q-o-q increase of 159% for the same quarterly 

period. Altogether, there were 111 M&A deals with a total 

value of about $6.12 billion in March and April 2007, out 

of which the total number of domestic deals have been 

62, with a value of around $0.73 billion. The number of 

contract research and manufacturing services(CRAMS) 

company Hollister-Stier Laboratories LLC for $122.5 

million, Wockhardt’s stake in French pharmaceutical 

group Negma Laboratories for Rs10.9 billion ($265 million) 

and Siemens acquisitions of 77 percent in Chennaibased 

iMetrex Technologies, have been the ones to hit 

the headlines. 

In fact during the first four months of 2007, there were 

213 M&A deals with a total value of about $ 42.92 billion. 

Of these, the number of domestic deals has been 103 

with a value of $ 1.35 billion. The number of inbound 

cross border deals has been 38 with a value of $ 17.16 

billion and the number of outbound cross border deals 

was 72 with a value of $24.41 billion, whereas the sectors 

garnering the maximum investment during the period 

of March and April has been Steel with 25 percent and 

Energy with 18 percent. 

Need to be circumspect not cynical: 

Certainly there is a huge scope ahead for the Indian majors, 

but one should never forget that everything comes at 

a particular cost, and in this case, it’s the risk associated. 

Takeovers are said to be extremely risky and whenever an 

individual company has bid for the acquisition, especially 

for the one bigger than its own size, it has made an adverse 



effect on the company’s market cap, as the share prices 

have always tumbled down with the news. 

But why does this at all happen Does one think that 

by investing upon an idea to take over a foreign major 

or a domestic one, especially which has not been doing 

good for the past some time, companies are gambling with 

the investors’ as well as their own funds Perhaps Yes! 

Perhaps Not! Share holders of a company are the people 

who have accepted to take the risk associated with the 

company on their own choice. When during good times 

they never miss an opportunity to earn on whatever they 

have invested, why should they not be prepared for the 

loss They must at least bear with the company till the 

volatile period passes by, or shouldn’t they 

Well, that is something that cannot be not be answered, 

at least for the time being, but something that can be 

answered is that upto what extent taking risks by these 

enterprises is justified. It is clear that more risk is involved 

in the M&A cases where debt-equity ratio of the company 

being acquired or taken over is high, (as has been in the 

case of Novelis). Also, instances in which the deal is considered 

overpriced, apprehensions go up, be it in analyst’s 

mind or shareholders’ (as has been in the case of Corus, 

where the deal bagged was considered to be the winning 

curse for the Tatas). 

Actually there are very few, who are able to understand 

that these acquisitions are done keeping in mind the long 

term benefits. Most of them who land up commenting 

unnecessarily, do so because either they overlook those 

benefits, partially because they are oblivious and rest because 

of their inability to understand the benefits that lie 

beneath those deals. In case of Birlas’ bid for Novelis, a 

Canadian debt laden Aluminum producer, that accounts 

for almost 19% of the world’s Aluminium market; the deal 

was condemned by a consortium of invest bankers and 

business tycoons. Following the foot steps of Tatas’, when 

Hindalco’s chairman Kumar Mangalam Birla announced 

of the $6 billion acquisition, which they believe would 

double the turnover of Aditya Birla group to over $20 

billion, they faced terrible opposition by the investors as 

a result of which their share prices declined miserably. 

In fact, Novelis was a much risky game than Corus, as 

on a net worth of $322 million, company had a debt of 

nearly $2.33 billion with a debt equity ratio of 7.23:1. Even 

analyst reports said Birlas are taking too high a risk to enter 

into fortune 500 list and this sort of buyout would reduce 

Hindalco’s earnings per share by 25 percent. But there 

was something in this acquisition that only the authorities 

at the Aditya Birla group could see, something that was 

worth taking the risk! The authorities revealed, “Novelis 

brings with it technology, which Hindalco would take 10 

years to develop on its own. Moreover it would cost nearly 

$12 billion for Hindalco to build assets that would match 

Novelis’ 29 plants in 4 continents with current production 

of 3.3 million tons”. 

Some similar apprehensions were raised when the deal 

of Corus, when an equity value of $12.1 billion was at the 

verge of being materialized. After several rounds of revised 

bids Tata Steel finally managed to defeat its Brazilian competitor 

and what commenced as an amicable bid for the 

world’s ninth largest ‘Corus’, culminated into a corporate 

war with Brazilian giant CSN. Projections divulged that 

the Tata-Corus entity together would produce some 23.5 

million tons of steel and would become the fifth largest 

steel producer of the world, post merger. But instead of 

the move to acquire Corus being appreciated, it was considered 

over priced and reservations were raised on the 

company’s future, until recently, when Tatas steel posted 

a net PAT of around $ 950 million. 

Before condemning any act we fi rst need to analyze as 

well realize the vision with which it was taken. No decision 

is good or bad in the world of business, it’s the outcome 

of the decisions taken which makes it good or bad. If a so 

called bad decision creates maximum shareholders wealth, 

it would be considered a good one. Quite evident is the 

fact that when ever two companies, one doing fi nancially 

well and the other not, have formed an alliance, people, 

market and all the experts have resisted to their coming 

together, as compared to the merger of two well performing 

enterprises. Just take the instance of Exxon and Mobil 

coming together to form ExxonMobil, world’s biggest oil 

company with a massive revenue base of over $365 billion 

(figures as per the 2006 Company’s Annual Report) or for 

that matter the merger of United States’ second biggest oil 

corporation ConocoPhilips, created through the combination 

of Conoco Inc. and the Phillips Petroleum Company 

in 2002. In both these cases, there were apprehensions 

(though in the minds of few), but people were not so cynical 

about these strategic combination. 

Eventually it’s your call: 

Also one must not forget, that all these M&A decisions, 

taken on the advice of world class consortium of Investment 

Bankers, who charge nearly one percent of the 

billions of dollar worth deals, can not simply be called 

imprudent, just because they lack the short-term gain and 

involve a comprehensive amount of risk. Although we 

have witnessed more failures than success in M&A deals 

in the recent past, that does not at all not mean that most 

M&As would simply not work. Hence the debate is on! 

Should people simply sit back and enjoy the token return 

on their investment by not taking any risk or should they 

look forward to earning big bucks by supporting the company 

in time of need. 

 


37

IN FOCUS 


G L O B A L 

 

 

India Inc.’s global ambitions are on a new high with year-to-date 

overseas acquisitions worth more than $28 billion compared with 

just $4 billion in the corresponding period of the calendar year in 

2006 and more than twice achieved in the whole of last year. Transactions 

include the acquisition of the U.K.’s largest steel maker Corus 

Group Plc by India’s Tata Steel Ltd; the acquisition of Hutchison Essar 

Ltd India’s second largest GSM mobile service provider by the U.K.’s 

Vodafone Group Plc; India’s largest non-ferrous metals company Hindalco 

Industries Ltd’s acquisition of Atlanta-based Novelis Inc. and 

Suzlon Energy Ltd’s acquisition of German wind turbine company 

REpower Systems AG. 

If that was not enough, we have the bidding war round the corner 

for Jaguar and Land Rover, the U.K. based iconic marques owned by 

Ford Motor Company, the U.S. based world’s third largest automaker, 

for an estimated price upward of $2 billion, which features Tata Motors 

Ltd, India’s biggest automobile company, and Mahindra & Mahindra 



Ltd, tractor & utility vehicle manufacturer, among others. 

These deals are symbolic of the evolving Indian businesses 

making a mark in the global market place. 

Investment Scenario: 

SIX MONTHS (JAN-JUNE) OF CY 2007 

• No. of Merger & Acquisition Deals : 339 

• Total value of deals $44 billion 

• Number of domestic deals have been 167 

• Value of domestic deals $1.6 billion. 

• The number of inbound cross border deals: 51 

• Value of inbound deals $14.5 billion 

• The number of outbound cross border deals: 121 

• The value of outbound deals : $28 billion 

• Private Equity investments : $6.8 billion 

Deals - January to December 2006: 

• Total deal value $28 billion, a growth of 54% compared 

to $18 billion in 2005 

Mergers & Acquisitions - $20 billion through 480 deals, 

growth of 24% 

• Cross border deals - $15 billion through 266 deals 

• Inbound deals - $5.4 billion through 76 deals 

• Outbound deals - $10 billion through 190 deals 

• Private Equity investments $8 billion, compared to just 

$2 billion the previous year 

• Foreign Direct Investment - $12.5 billion (April – January 

2006-07) 

Volume to Value Game: Go Global 

On the other hand, the increase in deal values, with the 

average deal size for M&A deals increasing to $130 million 

in H1 2007 from $48 million for the same period 

last year points to the fact that the year 2007 is on track 

to be a year of ‘mega deals’. The deals so far have already 

captured more than $40 billion, twice as much as last 

year and four times more when compared 

to the corresponding period. 

While last year the focus was on the 

volume of deals, 2007 will be more 

value driven and is expected to touch 

the $100 billion mark. 

The key to these mega deals is not to 

provide short-term increase in earnings 

per share or for that matter, a great yield of shareholder 

value because there is too much risk involved. There is risk 

of the price being paid, as the valuations of the acquired 

companies could be far in excess of those of the acquiring 

companies. And the biggest risk in M&A deal is not the deal 

itself, it is the post merger integration and there is still a lot 

of lack of experience in Indian companies. As ambitious 

as they are, they are not quite global as yet. 

Inorganic paths are 

the way to get the 

scale and the longterm 

benefits 

Having said that, if Indian companies want to go global 

and do want to hit the kind of scale you see, not just from 

the top companies in India, but globally fortune 100 companies, 

you have to buy that growth. 

Tata Steel could not have gone from six million tonne 

capacity to 25 million tonne without acquisitions. Inorganic 

paths are the way to get that scale and the long-term 

benefits, even mid-term benefits will be there provided you 

can get the cost rationalization, the synergies, and the full 

through effect on the bottomline and therefore a positive 

effect on EPS. 

The Risk Effect: 

The immediate reaction to such deal announcements is the 

‘Stock Prices’ of the acquiring companies drop as investors 

perceive a high degree of risk in the acquisitions and 

a premium price being paid by Indian companies a bit too 

high. Investors tend to be cautious, as I said the biggest risk 

in merger & acquisitions (M&A) deals were not the deals 

themselves, but the post-merger integration. 

Notwithstanding the negative short-term reaction, there 

are obvious long-term benefits of achieving global scale 

– new markets and new customers; high-end intellectual 

property of either process technology or product technology 

patterns of some kind and skill-sets. Such acquisitions also 

add incremental value to the acquirer’s brand, the ability to 

serve the customer close to a point of need and of course, 

getting economies of scale. This in the present day can 

be achieved through inorganic means and that attracts a 

premium. 

Premium Justified: 

The premiums paid are, in some way, a bet on the execution 

capabilities of the acquiring company to get those cost 

synergies. The one company I would bet on being able to 

get the integration cost down is Tata Group. It is a company 

that has been brilliant in execution pretty 

much so far. They have paid a premium 

price, probably very close to the top end 

of their desired price for Corus Group 

Plc, but Tatas have the recognition that 

the world is getting smaller and if they 

want to be globally competitive, they 

have got to keep up with the likes of 

Arcelor-Mittal, the world’s largest steel maker formed as 

a result of the merger of Arcelor S.A. with Mittal Steel 

Company, N.V. in 2006. 

At the high end of any price, and that goes pretty much 

across the board whether it is the deals by Aditya Birla 

Group, Tata Group or Vodafone and Suzlon Energy, all 

those deals are critically dependent on the post-merger integration 

strategies. 


39

IN FOCUS 

If they can successfully do that, then they have got cost 

rationalization, but there is no one in the market who would 

say today that they have paid a cheap price. If Indian companies 

want to buy companies which are cheap, then they 

are looking at companies that are not hugely profitable or 

not profitable at all. So the result of that is, they are not 

buying either a very healthy company or by buying a less 

profitable company, they take the earnings per share dilution 

upfront. 

One World: 

The other aspect is the growing prominence of the cross 

border deals which highlight the growing intimacy between 

two economies or regions. The acquisition of Hutchison 

Essar Ltd by the U.K.’s Vodafone Group Plc reinforces the 

reciprocity between Indian and the U.K. companies seeking 

to unlock the potential in emerging economies on one hand 

and harnessing the size and scale of global operations on the 

other as shown by the acquisition of the U.K.’s largest steel 

maker Corus Group Plc by India’s Tata Steel Ltd. 

Indo-Europe Trade: 

• Indo-Europe trade by 2010 to touch $100 billion from 

$20 billion currently 

• Indo-French trade to touch $10billion by 2010 from $3.5 

billion currently 

• India among top 10 investors in U.K. in 2006-07 

• No. of Indian companies in London : 500 

• Listed companies : 30 

• New Projects financed : 69 

• New jobs created : 5,130 

• The largest proportion of outbound acquisitions (Indian 

companies acquiring companies overseas) have been in 

Europe - 57% of deal value this year 

Indo-U.S. Trade: 

• Trade volume of $30 billion in 2006-07 

• U.S. accounts for 16.8% of Indian exports and 6.3% of 

its imports 

• India-U.S. bilateral trade expected to double by 2009 

• North America accounted for 34% of the outbound 

acquisitions this year 

• 46 outbound investment deals from India to the U.S. 

amounted to the total value of more than $2 billion 

during the financial year 2006-07 

• 48% of the deals were in the Information Technology 

(IT) and IT-enabled Services (ITeS) Pharma & Healthcare 

accounted for 9% and Gems & Jewellery registered 

7% deals 

• Indo-U.S. Nuclear deal expected to open a lucrative 

market for nuclear energy equipment makers 

Trade between India and Europe is expected to multiply 

five times to $100 billion by 2010 from current level 

of $20 billion, according to industry estimates. Propelling 

this growth is increasing merger and acquisition activity 

between companies in the two regions. Acquisitions by 

Indian companies in Europe accounted for 57% of the 

total acquisitions made overseas so far this year amounting 

to about $16 billion, up from just $4 billion in whole 

of last year. 

The investments by India Inc. in Britain during the fiscal 

year 2006-07 has created 5,130 jobs, second to the U.S., according 

to the U.K.’s Department of Trade and Industry. 

In terms of the number of new projects, India has been 

ranked third with 69 new projects, after 540 new projects 

of the U.S. and 95 new projects of France. 

Further, an India-strategy for a global company in the 

overall business plans takes precedence in its inorganic 

growth as well. A point highlighted in the recent acquisition 

by French IT services company, Groupe Steria of U.K.- 

based Xansa Plc., which has more than 5,000 employees in 

India out of its total headcount of 8,000. 

The deal follows the footsteps of the acquisition by 

Capgemini SA, Europe’s biggest computer-services company 

of Rosemont, Illinois-based Kanbay International Inc., 

provider of IT services for banks and financial institutions 

for $1.25 billion in the last week of October 2006. The 

combined entity today has about 17,000 employees in India, 

representing 22% of Capgemini’s total workforce. 

Sectors to Watch 

Information Technology: 

It is difficult to ignore a market that offers the best of the 

three key location-based advantages: a skilled workforce, 

lower costs and growing domestic market. 

India’s information technology (IT) and IT services industry 

became the most consolidating industry with 97 mergers 

and acquisitions (M&A) deals worth almost $3 billion last 

year. This year so far the sector has already witnessed 75 

M&A deals, a growth of 22% when compared to the corresponding 

period last year worth more than a billion dollars 

in just half a year matching the deal making last year. 

Going ahead, we are expecting to see continued growth 

in the IT services sector. Software and related services exports 

are expected to touch $21 billion in 2007, a growth 

of 21.6%. Business process outsourcing is also expected to 

increase by 34% to reach at $12.6 billion in 2007. 

Automotive Sector: 

The Indian automotive sector, characteristically driven 

by traditional and conservative business conglomerates is 

under-going a fundamental shift as companies set out to 

unlock the benefits of global scale of operations exhibited 

by the increasing merger & acquisition (M&A) deals in the 



sector worth more than $515 million from 17 deals so far 

this year, i.e. almost equal to the value and volume of deals 

done by the sector in the whole of last year. 

The Indian auto component industry is likely to almost 

double to $18.7 billion by 2009 and reach about $40 billion 

by 2014. India is expected to move ahead of the U.K. and 

Canada as a car-producing country by 2008. Its car production 

capacity is expected to surpass 2 million units by 2008 

from the current capacity of more than 1.4 million units. 

It has already surpassed Korea to become the third largest 

car market in Asia-Pacific after China and Japan. 

Pharmaceutical Sector: 

The global ambition of Indian companies, underpinned by 

unprecedented overseas acquisitions, is now playing out in 

the pharmaceutical industry. The increase in worldwide 

M&A activity in the pharma-sector is attributed to the expected 

market growth as drugs worth $65 billion in sales 

go “off patent” next year. 

The pharma sector accounted for second most M&A 

deals worth $2.5 billion in 2006 compared with just $364 

million the previous year. In the current year the sector 

has already seen M&A deals worth more than $1 billion 

from 34 deals. 

Indian companies are strongly positioned to grab the 

new opportunities in the generic drug market as they have 

the benefit of low-cost manufacturing, world-class production 

skills and availability of quality manpower. Domestic 

production costs in India are almost 50% less compared 

to developed countries. 

The progressive trend in this sector is expected to continue, 

due to increased integration with global trade which 

began with the signing of the General Agreement on Tariffs 

and Trade (GATT) in January 2005. India started to recognise 

global patents and the growing significance of the 

country in terms of contract research and clinical trials. 

Indian drug-makers are expected to acquire a 33% share 

of the global generic drug market in the next two years 

against the current 4% market share, according to industry 

estimates. 

Retail sector: 

The Indian retail market worth $250 billion is expected to 

grow at a compounded rate of 30%, in the next five years. 

It is fast becoming an area of growing interest among global 

retail companies. Wal-Mart Stores Inc., the world’s largest 

retailer, recently announced a joint venture with Bharti 

Enterprises, the parent company of Bharti Airtel Ltd, the 

largest mobile telecom service provider in the country. 

The agreement is expected to catalyze the growth of 

“organised retail” in India, which will require investments 

of about $60 billion by 2010, according to estimates from 

Department of Industrial Promotion and Policy, Ministry of 

Commerce & Industry, Government of India. The segment 

growing at the rate of 25%-30% a year is expected to see its 

share in the total Indian retail market grow to 15%-20% in 

the next decade from the current 2%. 

While global companies like Wal-Mart are lining up to 

grab a share of the pie, domestic companies such as Pantaloon 

Retail (India) Ltd (currently Future Group), country’s 

leading retail company with more than 100 stores in 30 

cities and Shoppers’ Stop, the largest retail stores chain in 

India have taken the lead in showcasing modern retail to 

the Indian consumer. 

They are followed by India’s largest industrial conglomerate 

Tata Group with its subsidiary Trent Ltd that operates 

Westside, one of India’s leading chains of retail stores for 

garments; Reliance Industries Ltd., India’s most valuable 

firm with a market value of Rs. 3,872.01 billion and diversified 

Aditya Birla Group have made their retail forays 

respectively. While the early movers will have an advantage, 

the opportunities in the market are big enough to accommodate 

others who follow. 

Real-Estate: 

With a housing requirement of 80 million units over the 

next 15 years and 200 million square feet in office space required 

over the next five years by the country’s Information 

Technology and Business Process Outsourcing industries 

alone, India’s real estate market is expected to be worth $50 

billion in 2010 from $14 billion this year. 

General Electric Company (GE), the world’s second largest 

company by market value, is boosting its commitment 

to India’s real estate market by allocating $2 billion for 

real estate projects such as townships, special economic 

zones (SEZs), information technology (IT) parks, retail 

and residential developments. 

Amid apprehensions and caution from some stock market 

analysts, demand for shares for the $2.4 billion Initial 

Public Offering (IPO) by DLF Ltd, India’s largest real estate 

company, exceeded supply by two times. 

Also, the new guidelines for Real Estate Mutual Funds 

(REMFs) issued by the Indian stock market regulator Securities 

and Exchange Board of India (SEBI) have opened 

new vista of investment opportunities for mutual funds in 

Indian real estate. 

Such an initiative by the regulator and industry growth 

trends have found many takers as overseas funds of about 

$7 billion have been announced so far for investment in 

Indian real estate. Foreign Direct Investments (FDIs) are 

estimated to reach 16 billion by 2012 from just $600 million 

last year. The sector has also seen its share of inorganic 

activity with M&A deals worth more than $500 so far this 

year compared to just negligible deal activity last year. 


41

IN FOCUS 

M&A 

in the 

INDIAN BANKING 

INDUSTRY 

According to Indian Bank’s Association Banking 

Industry Vision 2010, mergers and acquisitions 

would gather momentum as managements strive 

to meet the expectations of stakeholders 



 

 

 

Consolidation is a dominant feature of the banking 

sector in most countries today. A major 

Process of Mergers and Acquisitions (M&A) has 

helped in consolidation of the banking industry. Most 

large banks in the world have been acquiring repeatedly 

smaller and larger banks in their countries and elsewhere 

and the process of integration has been generally smooth 

and successful. This has given a further impetus to this 

the consolidation activity in banks through M&A. While 

a merger involves a marriage of two or more banks, an 

acquisition involves one bank taking over ownership of 

the other. It is generally accepted that mergers and acquisitions 

promote synergies and economies of scale. The 

basic idea is that the combined entity will create more 

value than the individual banks operating independently 

not only for the stakeholders, but also for customers and 

the industry in general. 

In Asia, Malaysia has reduced the number of banks 

from 55 to 10, Taiwan is working towards bringing down 

the number of state banks from to 6 from 12 this year 

and the Singapore Government has guided the system 

down to three players with DBS being supported to 

become a regional leader. Similar initiatives are being 

taken in Indonesia, South Korea and Japan. 

Only 22 of the Indian banks figure among the top 

1,000 banks in the world. In Asia, State Bank of India 

(SBI), the largest in India, is the only entity that has made 

it to the top-25 list. In comparison, China’s fourth-largest 

bank is 2.5 times that of SBI. The market capitalization 

of the entire Indian banking sector is about $40-45 billion, 

which would make the entire Indian banking sector 

rank after the 30 largest banks in the world. 

The present capital structure of public sector banks 

will make them vulnerable to takeovers unless M&As 

take place on a significant scale. It is necessary for Indian 

banks to complete these M&A activities by 2008-09, to 

ensure that they have the strength and size to take on 

competition from foreign banks, once sector opens up 

almost completely to foreign banks. 

Foreign banks are eagerly waiting for the regulator 

to open up the sector in April 2009, when RBI is set to 

review bank ownership norms. Meanwhile, these banks 

are gradually buying minor stakes upto permitted levels 

in local banks and also setting up non-bank finance 

companies (NBFCs), which can perform most banking 

functions except for opening and maintaining savings 

bank accounts. 

Just as in any other sector, consolidation in the banking 

industry, in India and elsewhere, provides for value 

maximization as well as non-value maximization and is 

also of great relevance for the long term growth prospects 

of the national economy. 

The major gains perceived from bank consolidation 

are the ability to withstand the pressures of emerging 

global competition, to strengthen the performance of 

the banks, to effectively absorb the new technologies 

and demand for sophisticated products and services, to 

enable funding for major development products in the 

realm of infrastructure, telecommunication, etc. which 

require huge financial outlays and to streamline human 

resources functions and skills in tune with the emerging 

competitive environment. 

Also, Basel II norms on capital adequacy, capitalization 

and risk management, which will require banks to 

have minimum CAR of 12.5% as against the present 

9%, will encourage the banks to move towards consolidation. 

Profit maximization is no longer the only objective 

No. of M&As 

35 

30 

25 

20 

15 

10 

5 

M&A Activity before Nationalisation of Indian Bank: 

0 1961 1962 1963 1964 1965 1966 1967 1968 1969 

Source : Banknet India 

for banks, wealth maximization (that is increasing the 

wealth of shareholders) and protecting the interest of 

shareholders by ensuring financial stability is the new 

goal. Consolidation will enable banks to have a much 

stronger balance sheet thereby increasing value to shareholders. 


43

IN FOCUS 

Mergers and amalgamations are not new to the Indian 

banking system. However, it is pertinent to note that a 

majority of such mergers undertaken by public sector 

banks were backed more by because of political reasons 

than by commercial ones. 

The HDFC Bank-Times Bank merger, which became 

effective 26 February 2000, was the first market-led 

M&A Activity after Nationalisation of Indian Bank: 

25 

20 

15 

10 

5 

No. of M&As 

0 

1970-79 1980-89 1990-99 2000-07 

Source : Banknet India 

merger on the Indian banking scene in recent times. 

The merger had quite a few firsts to it. For one, two new 

age private banks, both barely five years old, were joining 

hands. Two, the merging banks had reasonably similar 

profiles and the deal was settled through a share swap. 

The Trend of Acquisitions in Cooperative Banks in 

India is growing and one major reason for the same is 

the RBI restrictive policy on issuing branch licenses for 

co-operative banks. 

An important observation which may be induced from 

various past mergers is that a merger between big and 

small banks has led to greater gains as compared to a 

merger between equals. It is also observed from past 

experiences that if the merger follows business aided by 

appropriated technology and diversified product range, 

it could lead to greater gains for the banking industry 

as a whole. Similarly, consolidation increases the market 

power and does not cause any damage to the availability 

of services to small customers. 

Banks in India are gradually going for- 1) Consolidation 

of players through mergers and acquisitions, 2) 

Globalization of operations, 3) Development of new 

technology and 4) Universalisation of banking. 

Mergers and acquisitions invite litigation and at the 

same time involve substantial time and money for the 

parties involved. ”Strategic Business Alliance” although 

a new concept, promises a good alternative. A good 

example of this is the strategic alliance entered into by 

Corporation Bank, Oriental Bank of Commerce and 

Indian Bank in 2006 for sharing of information, IT 

infrastructure, Training, ATMs, Treasury, Loans etc. 

Consolidation would and is taking place not only in the 

structure of banks, but also in the area of services. For 

instance, some banks would like to shed their non-core 

business portfolios to others. This could see the emergence 

of niche players in different functional areas and 

business segments such as housing loans, cards, mutual 

funds, insurance, sharing of their infrastructure including 

ATM Network, etc. 

Structure and ownership pattern would undergo 

changes. There would be greater presence of international 

players in the Indian financial system. Similarly, some 

of the Indian banks would become global players. 

According to Indian Bank’s Association Banking 

Industry Vision 2010, mergers and acquisitions would 

gather momentum as managements strive to meet the 

expectations of stakeholders. This could see the emergence 

of 4-5 world class Indian Banks. As banks seek 

niche areas, we could see emergence of some national 

banks of global scale and a number of regional players. 

Global banks are jostling to gain a foothold in the 

Indian market as the $1 trillion economy is continuing 

to grow at a brisk pace offering enormous opportunities. 

All of them want to party in the world’s fastest growing 

banking market. According to PricewaterhouseCoopers, 

India could emerge as the third largest domestic banking 

market in the world by 2040 and, in the long run, could 

grow faster than China. 

Mergers and acquisitions in the banking sector are 

going to be the order of the day. India is slowly but 

surely moving from a regime of `large number of small 

banks’ to `small number of large banks’. The new era 

in banking in India is going to be one of consolidation 

around identified core competencies. 

 

Reference: 

Banknet’s Handbook on M&A in Indian Banking System- 

Second Edition July 2007. Banknet’s Handbook 

on M&A is a comprehensive guide to bank mergers & 

acquisitions in India. It covers Indian banking structure, 

Bank mergers in India since 1961, Essentials of M&A, 

Indian legal framework, Procedure, Guidelines for bank 

mergers, RBI’s review process, Accounting, Taxation & 

Valuation, Case studies and much more. 

** Banknet Group, promoted and managed by senior 

bankers is focused on disseminating banking and financial 

information through online, offline, print and 

mass media. BanknetIndia.com is ranked among the Top 

25 banking sites and Top 20 banking technology sites 

and resources online in the world. Banknet Conferences 

are one of the largest organizers of highly focused and 

topical banking conferences, seminars in India. Banknet 

Publications are based on extensive industry research, 

surveys and interactions with practicing industry 

professionals. 


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ASIA | EUROPE | AMERICA

IN FOCUS 

Corporate Consolidation 

Activities–Indian Perspective 

 

 

 

 

 

 



Baffled Consider this – `Have cash, will buy` - the 

breezy motto of India Inc. Deal mania has gripped 

India Inc. Every week seems to bring news of some 

headline-grabbing deal or the other. In June 2007, total 

value of overseas deals by Indian Companies exceed inbound 

deals with an average deal size of $107 mn. The 

malaise that had gripped Deal Street till is now a distant 

memory. The economy is on steroids and capital is furiously 

coursing through its veins - it could be a corporate M&A, 

PEs, IPOs. Business assets are being bought and sold like 

never before. And, to add a happy twist, wannabe Indian 

MNCs are picking up targets in the US, Europe and Asia. 

`M&A is now a core art of India Inc`s growth strategy` – is 

the conclusion of survey-based report of AT Kearney and 

the Wharton School of University of Pennsylvania. Using 

financial data from 10,000 corporates over a span of three 

years, they showed that 72% of India Inc`s value growers, 

those who have grown both in terms of revenue and shareholders 

value, have employed an M&A led strategy. Grant 

Thornton India in a separate survey-based report concluded 

that “81% of respondents look M&A as a part of strategy 

or will look at it opportunistically.” 

Why has there been a spurt in deals in the recent years 

The red-hot economy is the obvious starting point. India is 

likely to end the year with GDP growth in excess of 9 per 

cent. It will be the third consecutive year of fast growth, a 

rarity in our economic history. Confidence 

is sky-high. But the mere urge to buy and 

merge is not enough. You need money 

for the job. Companies and private equity 

investors are sitting on large piles of cash. 

“Companies focused on restructuring between 

1997 and 2003. They cleaned up 

their balance sheets. Now, companies are 

cash-rich and business confidence is skyhigh. 

Add to this the easy availability of funding options and 

you have what seems like a winning formula. This explains 

the frenzied activity we have witnessed in recent months,” 

says Praveen Kadle, Tata Motors’ executive director and 

CFO. Truly said, in this era of LPG (Liberalisation, Globalisation 

and Privatization) M&A has become a buzzword 

in the Indian corporate world today. In mathematics 1 + 

1 is always equal to 2 but in corporate world it has always 

been an endeavor to make 1+1 =3. This is exactly what we 

define as synergy effect. It is the very reason why M&A has 

become so popular today. 

The uphauling of the industrial policies in India’s agenda 

for economic reforms has resulted in a radical change of 

environment for the private corporate sector, boosting in 

the process, a market for corporate control characterized by 

M&A and similar corporate consolidation activities. M&A 

are undertaken by corporates to achieve certain strategic 

The real thing 

happened in 

1991 and old 

corporate 

empires felt 

the heat of 

competition... 

and financial objectives. They involve the bringing together 

of two organizations with often disparate corporate personalities, 

cultures and value system. Success of mergers 

may therefore depend on how well the organizations are 

integrated. There are a variety of stakeholders in the merging 

entities that have an interest in the success or mergers. 

Shareholders and managers are two critical players of this 

corporate strategy but others who have an interest in the 

success of mergers include employees, consumers, local 

communities and the economy at large. M&A may also 

adversely affect competition, an anti-thesis to the movement 

of LPG. Though this branch of law is in its infancy 

in India, but many countries have an effective mechanism 

to regulate corporate consolidations that have anti-competitive 

implications. 

Burst and Wave Pattern: 

One of the striking aspects of mergers and acquisitions as a 

phenomenon is that they occur in `Bursts` interspersed with 

relative inactivity. This pattern is called the `wave pattern`. 

This pattern of M&A has been observed in US for over last 

100 years, in the UK from the early 1960s; and continental 

Europe very recently. 

In Indian context, this is the fourth wave of corporate 

deal-making. The first wave lapped our shores in the 1980s. 

The first corporate raiders landed - the likes of Swaraj Paul, 

Manu Chhabria and R.P. Goenka. The first 

mega public issues, too, hit the markets. This 

was the era of the first tentative reforms 

under Rajiv Gandhi and the birth of largescale 

corporate ambition. Companies were 

hemmed in by all sorts of licensing restrictions, 

and buying a company was one obvious 

way to grow. The real thing happened 

in 1991 and old corporate empires felt the 

heat of competition. Conglomerates that had built sprawling 

and unfocused business portfolios were forced to sell 

non-core businesses that could not withstand competitive 

pressures. The Tata, for example, sold their soaps business 

to Hindustan Lever. That was the second wave of M&As, 

largely built on the theme of corporate restructuring. The 

third wave splashed its way through the corporate landscape 

after Y2K. There was a round of consolidation in key sectors 

like cement and telecommunications. Companies like Bharti 

Tele-Ventures and Hutch bought smaller competitors and 

built national networks. A new type of deal also made its 

presence felt - Venture Capital. Money poured into start-ups, 

especially in technology and IT services. There were large 

IPOs in this round too. So how is this fourth wave different 

from the three previous ones It is the first time that India 

has seen so many deals with a global flavour. It could be 

foreign private equity coming into Indian companies, like 


47

IN FOCUS 

Newbridge’s investment in Shriram Holdings, Swiss cement 

major Holcim’s investment in ACC. Or, most significantly, 

a global acquisition by an Indian company, like Hindalco 

Industries Limited`s (Aditya Birla Group) acquisition of 

Novelis for nearly US$ 6 billion, Tata Steel’s purchase of 

Corus and NatSteel, or Videocon’s acquisition of the colour 

picture tubes business of Thomson, which gave it five 

manufacturing and research facilities abroad. 

Propellants of M&A and Industry clustering: 

Economic scientists suggest that merger waves occur when 

a rise in general economic activity creates disequilibrium 

in product markets. Some investors hold a more positive 

expectation of future demand than others and value target 

firms higher. M&A result from attempts to take advantage 

of such valuation differences. Once some leading firms 

make merger moves, the competitors follow suit and pursue. 

Another viewpoint is mergers waves occur due to changes 

in Political, Economic, Social and Technical dimensions. 

Such changes confer first mover advantages to the firms 

that can anticipate these changes or read the implications 

HIGH M&A INDUSTRIES 

• Pharmaceuticals, Healthcare 

• Manufacturing & Engineering 

• IT & ITES 

• Steel, Cement 

• Banking & Financials (investment banks, commercial 

banks, insurance companies) 

• FMCG 

• Power & Oil & Gas 

• Construction 

• Automotive 

• Jewelry 

Source: Grant Thornton (India) Survey 

of these changes correctly. 

One the natural forces of change in an industry is the 

product life cycle of that industry e.g. automobiles, chemicals, 

IT and ITES, pharmaceuticals etc. As these products 

become standardized or commoditized, there is fierce price 

competition with the industry characterized by excess capacity; 

firms have to merge to `takeout` the excess capacity. 

Excess capacity may exist in several forms: in production 

capacity, in R&D, in marketing and distribution channels 

or in managerial expertise. 

Analyzing the size, growth and presence of some leading 

corporate groups and presence of some leading corporate 

groups in India, it has been observed that these groups 

employed M&A strategically to grow and expand. Corporate 

groups like RP Goenka (RPG), Vijay Mallya (UB), 

Reliance Industries, Murugappa group, Bangur group, Hindustan 

Unilever, Ranbaxy, Infosys, Wipro, Sun Pharma, Dr. 

Reddy`s Laboratories and Manu Chabria Group employed 

M&A strategy aggressively to grow. The Ajay Piramal group 

was almost entirely built up by M&A. 

Legislative impetus to M&A: 

The terms `merger`, `amalgamation`, `acquisition`, `buyout` 

and `takeover` are all part of the M&A parlance. In 

a merger, the corporations come together to combine and 

share their resources to achieve common objectives. The 

shareholders of the combining firms often remain as joint 

owners of the combined entity. In commercial context, 

merger and amalgamations are used in the same parlance. 

An acquisition resembles more of an arm’s length deal, with 

one firm purchasing the assets or shares of another, and with 

the acquired firm’s shareholders ceasing to be owners of that 

firm. In a merger a new entity may be formed subsuming 

the merging firms, whereas in an acquisition the acquired 

firm becomes the subsidiary or a unit (separate profit centre) 

of the acquirer. A buyout is acquisition of a company or one 

of its component businesses and generally implies that the 

acquirer is a group of investors including specialist private 

equity firms and managers of the business being bought. 

In common parlance, a takeover is generally understood to 

imply the acquisition of shares carrying voting rights in a 

company in a direct or indirect manner with a view to gaining 

control over the management of the company. It also 

implies that the acquirer is much larger than the acquired. 

Where the acquired firm is larger than the acquirer, the 

acquisition is referred to as a `reverse takeover`. 

Mergers and Amalgamations: 

The terms mergers and amalgamations have not been defined 

in the Companies Act, 1956. Amalgamation has been 

defined in Section 2(1B) of the Income Tax Act 1961, as 

merger of one or more companies to form one company, 

the company or companies merging are referred to as the 

amalgamating company or the companies and the company 

with which they merge to or which is formed as a result of 

the merger is known as the amalgamated company. The 

amalgamated company also referred to as the acquiring 

company or merged company acquires the assets and liabilities 

of the amalgamating company, also referred to as the 

acquired company, merging company or Target Company. 

The shareholders of the amalgamating company get shares 

of the amalgamated company in exchange for their shares 

in the amalgamating company. 

Sections 391 and 394 of the Companies Act 1956 constitute 

a legislative tool that facilitates merger and amalgamation 

of companies, both public and private, whether listed 



or unlisted. Section 391 is a complete code and once a 

Scheme of Amalgamation is sanctioned by the High Court 

, it encompasses the approval under other provisions of the 

Act – for example reduction of Share Capital. Two or more 

companies can amalgamate only when the amalgamation 

is permitted under their Memorandum of Association. In 

case either of the companies is listed, compliance of listing 

agreement is obligatory. Further, the individual companies 

should hold separate meetings of their shareholders and 

creditors for approving the amalgamation scheme. Atleast, 

75 percent of shareholders and creditors in separate meeting, 

voting in person or by proxy, must accord their approval 

to the scheme. Where the shareholders and creditors have 

given their no objections to such merger, the meetings 

of shareholders and creditors may be exempted provided 

their number is around 50. Both the concerned companies 

shall normally file two separate petitions, one each by 

the transferor and transferee before the High Court where 

the registered office of the company is situated. However, 

Delhi High Court in the case of Mohan Exports (India) 

Ltd v. Tarun Overseas Pvt. Ltd [1999] 95 Comp Cas 53 

has held that a joint petition may also be 

made by both parties. The High Court, 

after it is satisfied that the scheme is fair 

and reasonable, may pass an order, sanctioning 

the amalgamation scheme. After 

the Court order, its certified true copies 

will be filed with the Registrar of Companies. 

The assets and liabilities of the 

acquired company will be transferred to 

the acquiring company in accordance with 

the scheme approved by the High Court. 

Takeover or gaining control: 

Takeover or gaining control over a company, as opposed 

to pure investment, is the most common leitmotif for substantial 

acquisition of shares. Acquisition of voting shares 

in a closely held company being a domestic concern is 

regulated under Section 372A of the Companies Act 1956. 

Takeover or gaining control of a listed company generally 

takes place through a process of friendly negotiations or 

in a hostile manner in which, the existing management 

resists the change in control. It is for this reason that substantial 

acquisition of shares in and change in control a 

listed company take place within the orderly framework 

of regulations and that such a framework should be one 

which comports with principles of fairness, transparency 

and equity, and above all with the need to protect the rights 

of the shareholders. 

The first attempts at regulating takeovers were made in a 

limited way by incorporating a clause, viz. Clause 40, in the 

Listing Agreement which provided for making a public offer 

Two or more 

companies can 

amalgamate 

only when the 

amalgamation is 

permitted under 

their MoA 

to the shareholders of a company by any person who sought 

to acquire 25% or more of the voting rights of the company. 

This allowed for the passive participation of shareholders 

of the company that is being taken over, in the takeover 

process. One of several other deficiencies in the clause was 

being a part of the listing agreement, it could be made 

binding only on listed companies and could not be effectively 

enforced against an acquirer unless the acquirer itself 

was a listed company. At the recommendation of Bhawati 

Committee, SEBI (Substantial Acquisition of Shares and 

Takeover) Regulations 1997 [SEBI Takeover Regulations] 

was enacted as the regulatory framework where affected 

company is a listed company. The guiding principles of 

the regulations may be summarized as under:- 

i. The process of substantial acquisition of shares and takeovers 

is complex. Equality of treatment and opportunity 

to all shareholders. 

ii. Protection of interests of shareholders. 

iii. Fair and truthful disclosure of all material information 

by the acquirer in all public announcements and offer 

documents. 

iv. No information to be furnished by 

the acquirer and other parties to an offer 

exclusively to any one group of shareholders. 

v. Availability of sufficient time to shareholders 

for making informed decisions. 

vi. An offer is to be announced only after 

most careful and responsible consideration. 

vii. The acquirer and all other intermediaries 

professionally involved in the offer, to exercise 

highest standards of care and accuracy in preparing offer 

documents. 

viii. Recognition by all persons connected with the process 

of substantial acquisition of shares that there are bound 

to be limitations on their freedom of action and on the 

manner in which the pursuit of their interests can be 

carried out during the offer period. 

ix. All parties to an offer to refrain from creating a false 

market in securities of the target company. 

x. No action to be taken by the target company to frustrate 

an offer without the approval of the shareholders. 

Takeover as per SEBI (Substantial and Takeover) Regulations 

1997 [SEBI Takeover Regulations] means when an 

Acquirer takes over the `shares` or `control` of the Target 

Company- a listed company. Based on `Bright Line tests`, 

other persons having commonality of objectives and a community 

of interests along with the Acquirer in the proposed 

acquisition of voting shares beyond the threshold limit, are 

considered as Persons Acting in Concert (PAC) and their 

shareholding is thus grouped together with the Acquirer. 


49

IN FOCUS 

Control includes right to appoint majority of directors or 

to control the management or policy decisions, directly or 

indirectly of Target Company. Control may also be exercised 

by virtue of shareholding or management rights or 

shareholders agreements or voting agreements or in any 

other manner. 

Any Acquirer may acquire voting shares upto 5% in any 

financial year of a listed Target Company. The Acquirer may 

consolidate his holding upto 15% shares or voting rights in 

the listed target company. SEBI Takeover Regulations is 

triggered when Acquirer acquires or purposes to acquire any 

further voting shares, he shall have to acquire a minimum 

20% shares by making an open offer to other shareholders of 

that target company - Public Announcement of his intention 

to such acquisition. The price for acquisition is arrived at by 

way of price discovery mechanism. Further, irrespective 

of whether or not there has been any acquisition of shares 

or voting rights in a company, no acquirer shall acquire 

control over the target company, unless such person makes 

a Public Announcement to acquire shares and acquires such 

shares in accordance with SEBI Takeover Regulations. To 

regulate such acquisitions, the Takeover Code prescribes 

event-based initial and continual disclosures by Promoters, 

PAC and othe shareholders holding specified voting shares 

in a listed company. Further, very often acquisition of shares 

or voting rights may become necessary in commercial and 

business interests and certain cases of transfer of shares 

among two set of persons may not result in a takeover and 

the interest of shareholders may not be jeopardized. In such 

cases, Merit-based exemption from the requirement of making 

mandatory public offer may be granted by SEBI at the 

recommendation of Takeover Panel. Furthermore, where 

a shareholder passively crosses the threshold limit he has 

been exempted from making the public offer; nonetheless, 

he has to disclosure his holdings. 

M&A and the Competition Policy: 

Developing countries do need a competition policy in the 

wake of the international merger movement as well as because 

of privatization, deregulation and liberalization, which 

have occurred in their domestic economies and consequential 

impact on their domestic M&A. While examining this 

issue, a distinction was found between developing countries 

and developed countries. In order to give effect to the stated 

desire in the Singapore WTO Ministerial Declaration of 

December 1996, “to ensure that the development dimension 

is fully taken into account”, it would not be enough to simply 

suggest that all that developing countries need is a longer 

time frame to be able to implement the US or UK type of 

competition policy. The special and different circumstances 

of the developing countries and their development needs 

require a creative application and understanding of the competition 

policy formulations. Accordingly, they should be 

given a free hand in formulating their competition policy. 

In India, the MRTP Act 1969 (now repealed) and the 

Consumer Protection Act 1986 (CPA) deal with the anticompetitive 

practices. However, the MRTP Act was limited 

in its scope and hence it failed to fulfi ll the need of a 

competition law in an age of growing LPG. A High-Level 

Committee on Competition Policy and Law was set up in 

October 1999 under the Chairmanship of SVS Raghavan 

to examine the then existing MRTP Act for shifting the 

focus of the law from curbing monopolies to promoting 

competition and to suggest a modern competition law in line 

with international developments to suit Indian conditions. 

The Committee submitted its report in May 2000 which 

has been enacted in October 2003. The Committee felt 

that the Competition law should cover both types of M&A 

– horizontal and vertical, if it is established that they prejudice 

competition. The agreements that contribute to the 

improvement of production and distribution and promote 

technical and economic progress, while allowing consumers 

a fair share of the benefits, should be dealt with leniently. 

On the contrary, certain anti-competitive practices such as 

blatant price, quantity bid and territory sharing agreements 

and cartels should be presumed to be illegal. 

The Competition Act, 2002 failed to curb prevailing anticompetitive 

practices in India, after having been notified as 

law in October 2003. Litigation over the appointments of 

Chairperson and Members of the Competition Commission 

before the High Court of Madras and the Supreme Court of 

India (Brahm Dutt vs. Union of India and others in the Writ 

Petition No. 490 of 2003) respectively, kept the development 

of Indian competition law in limbo. The Government 

was unable to notify substantive provisions of the law. An 

Amendment Bill has been moved by the Government and 

is expected to be passed soon. To capture the intent and 

spirit of Competition Commission the observations of Prof. 

Alan Fels, former Chairman of the Australian Competition 

and Consumer Commission (ACCC) during his recent visit 

to New Delhi are noteworthy “competition advocacy and 

public awareness campaigns on competition issues are better 

achieved through orders of a Commission”. 

Cross border M&A in India: 

Grant Thornton Survey Report 2006 on M&A in India 

concludes that over 70% of acquisitions have been done by 

India Inc. by cross border acquisitions. Liberalized economic 

and trade policies coupled with easy financing from 

PEs, outbound deals have surpassed the inbound deals over 

the last decades. Acquisitions of new skills and access to 

wider global market have catapulted India Inc. 

The Companies Act 1956 also provides for cross border 

M&A where a foreign body corporate, including a foreign 



company, could merge with an Indian company. Either a 

foreign company or a branch of a foreign company in India 

can merge with an Indian company by following the procedure 

provided for in section 391 to 394 of the Companies 

Act 1956 with the sanction of the High Court. Conversely, 

as the land stands today, when an Indian company merges 

with a foreign company, because the High Courts (of India) 

cannot go beyond the horizon of land, it appears due to 

lack of jurisdiction, such merger cannot be approved by the 

Indian High Courts. This inadequacy in Indian law have 

been judicially noticed by Andhra Pradesh High Court in 

the matter of Moschip Semi Conductor Technology Ltd 

[2004] 120 Comp Cas 108 (AP). Irani Committee Report 

has recommended for removal of this operational hurdle. 

Such mergers would reap in economic wealth to our domestic 

browses by listing of Indian Depository Receipts. 

Indian Shareholders of the foreign company would also 

enjoy the benefits of the foreign company. Our FDI may 

also see a trajectory growth. 

As cross border M&A involve movement of domestic 

currency overseas, recently liberalized Foreign Exchange 

Management (Transfer or Issue of any Foreign Security) 

Regulations, 2000 and Foreign Exchange Management 

(Transfer or Issue of Security by a Person Resident Outside 

India) Regulations, 2000 are also required to be complied 

with. 

Conclusion: 

The scale and the pace at which M&A activities are coming 

up in Indian Inc. are remarkable. The recent booms in 

M&A suggest that the organizations are spending a significant 

amount of time and money either searching for firms 

to acquire or worrying about whether some other firm will 

acquire them. Also, mergers are regarded as one of the fast 

track growth strategy or a measure of external growth in 

contrast to internal growths. The recent booms in M&A 

would increase at a much faster rate in near future because 

the world markets are becoming more integrated besides 

global push for open trade policies and easy and cheaper 

availability of funds especially Private Equity – Venture and 

Hedge funds. Because M&A have a universal impact, practically 

everyone from society, shareholders, employees, and 

directors to financial institutions, it should be so designed 

to create value or economic wealth for all the stakeholders 

of the corporate. Our laws also need to be aligned to this 

global economic integration phenomenon.

RESEARCH 

MERGERS AND ACQUISITIONS IN EMERGING 

ECONOMIES: 

A STUDY OF IMPACT ON SCALE ECONOMIES, 

TECHNOLOGICAL CHANGE AND STRUCTURAL 

SHIFT IN PROFITABILITY 



 

 

 

Introduction: 

Corporate entities are viewed as vehicles of value maximization 

for investors. Yet, they are also means of achieving 

diverse goals of different stakeholders. Viewed from this 

perspective, the objectives of mergers and acquisitions 

have been examined and studied as tools of achieving a 

number of different yet related objectives. Baumol (1967) 

and Mueller (1969) found merger and acquisition activity 

as a means of empire building. Shleifer and Vishny (1989) 

observed it to be a means of management entrenchment. 

Likewise mergers have been resorted to for enhancing 

monopoly power (Mueller, 1993); to improve the performance 

of an entity/target perceived to be underperforming 

(Roll, 1986). However, from the stand point 

of a world view that resources are limited and only the 

fittest can survive, the appropriate paradigm explaining 

merger and acquisition activity will be Efficiency Theory 

of Firms. The theory states that only efficient firms will 

survive and inefficient firms will be taken over (Manne, 

1965; Mead, 1968; Jensen, 1988).The issue has assumed 

great significance in emerging economies in view of rising 

trend in them towards M & A. 

Theoretical and empirical research on motivations 

for mergers and acquisitions has identified a number of 

factors such as reduction in costs (Coase, 1937), elimination 

of hold up problems (Williamson, 1979), mitigation 

of uncertainties in market transactions (Klein, 

Crawford and Alchian, 1979), risk aversion (Blair and 

Kaserman, 1978) and meeting the challenges posed 

by price inflexibility (Carlton, 1979) and competition 

(Perry, 1989). These factors collectively constitute the 

effort to overcome internal management hurdles and to 

improve the efficiency. Studies on managerial performance 

have revealed that often poor performance is the 

consequence of managers deviating their focus from 

long term value maximization and profitability (Rappaport,2002 

). Deflection of the focus leads to decline 

in the operating efficiency leading to poor performance 

and non realization of the potential. Poor performance 

in the presence of good resources and potential attracts 

buyers/investors who believe that operating efficiency 

and value can be increased if methods and techniques 

of utilization of resources are improved. The acquiring 

firms are propelled to buy the target with the objective of 

transforming the operational landscape and practices to 

bring about improved efficiency, by Mr. Jangoo input-output Dalalratios and 

hence value. Another most Sr. VP-Enterprise, commonly cited Cisco managerial Systems (India & SAARC) 

motivation for undertaking M&A is unlocking synergies 

(Walter and Barney, 1990). Unlocking synergies means 

creation of economic gains when assets are used more 

effectively by the combined entity than by the target 

and acquirer separately (Shelton, 1988). This occurs pri- 


53

RESEARCH 

marily due to efficient utilization and rearrangement of 

resources (Jarrell, Brickley and Netter, 1988). The logic 

is to achieve higher efficiency gains by combining two 

entities that will contribute and complement each other’s 

performance. Buyers will recognize specific complementarities 

between their firm and the target. Although both 

firms are performing well but the two are believed to 

do even better when the two are combined, whatever 

maybe the motivation the mergers must result in efficiency 

and economies. Empirical research investigating 

the efficiency of M&A has failed to provide unequivocal 

results. In one of the most comprehensive and classical 

study (Ravenscraft and Scherer, 1987a, 1987b), employing 

comprehensive and narrowly disaggregated accounting 

data it examined the mergers in the US in the sixties. It 

concluded that these mergers were essentially failures, 

more recent studies (Scherer, 1999, 2002) provide mixed 

evidence. These studies show that some mergers yield 

significant efficiencies while others fail because either 

they bid too much or because of corporate 

culture mismatches, incentive 

failures or clumsy implementation. 

Likewise, Mueller and Burkhard 

(1999) found little evidence of efficiency 

gains. They attributed the 

inefficiency due to the lack of integration 

of organizations; similar 

results were reported by Bhuyan 

(2002). Likewise in a study one of 

hundred and sixteen mergers by 

Copeland, Kotler and Murrin (1990) 

it was that only 23% were successful 

while 61% registered negative results. Porter (1987) and 

Young (1981) also arrived at similar results. However, 

Lichtenberg and Siegel (1992) reported significantly improved 

labour productivity after the implementation of 

acquisition programs. 

McGuckin Nguyen (1995) found significant positive 

relationship between labour productivity growth and 

change of ownership. They also concluded that buyer 

firms acquire poorly performing plants because they are 

good assets with substantial positive potential which can 

be utilized for enhancing values of the combined firm. 

Mixed results relating to impact on efficiency notwithstanding, 

a sharp rise in the M&A activity in both 

developed and emerging markets has lead to a plethora 

of research by academics as well as practitioners to find 

whether this activity is leading to justifiable economic 

gains by creating value for the owners or not. Research 

studies have mostly focused on finding the quantum of 

value generation or value destruction and how the gains 

and losses of M&A transactions are shared between the 


In efficient markets, 

market value and stock 

registers changes 

around merger 

announcements to fully 

capture and reflect the 

economic gains from 

the merger 

targets and the acquirers. As stated above if the M&A 

activity have the capability to improve the efficiency 

through internal management change and unlocking 

of synergy, the activity must demonstrate evidence of 

significant value creation. Besides, an investigation in 

this issue is important for it may have significant policy 

implications for regulators. Needless to say, objective 

assessment of the results of these transactions is necessary 

to assess whether society’s resources are being put 

to efficient use or not. 

Event Studies: 

Majority research in the area of financial study of M&A 

has largely sought to address the issue of value creation 

and destruction for shareholders by employing the event 

study methodology initiated by Fama, Fisher, Jensen 

and Roll (1969). The event study methodology asserts, 

if combined stock prices rise in the few days surrounding 

merger announcements, it must be because rational stock 

market investors anticipate future 

earning gains. The theoretical foundation 

rests on the assertion that 

in efficient markets, market value 

and stock registers changes around 

merger announcements to fully capture 

and reflect the economic gains 

from the merger. Empirical studies 

also have more or less unanimously 

proven the theoretical assertion. 

Event studies have found increase 

in shareholder value of target firms 

as a manifest of significant positive 

cumulative abnormal return around merger announcement. 

Be that as it may the methodology is fraught with 

serious flaws. First, the findings showing positive shareholder 

value for target firms around merger announcement 

do not really mean much. Partly because this is 

exactly what one would expect to happen, for target 

shareholders they must receive a premium if they have 

to handover their stake to the acquiring firm. Moeller 

Schlingmann and Stulz (2004) report that between 1980 

and 2001 acquiring firms paid a mean premium of 68% 

for large firms and 62% for small firms. The offered 

premiums may in fact be overpayments (Roll, 1986). 

Secondly, event study conclusions rest strictly on the validity 

of the assumption that markets are efficient. There 

is plenty of evidence to show that stock market value may 

temporarily deviate from the fundamental levels (Healy, 

Palepu and Ruback, 1992). Mitchell, Pulvino, and Stafford 

(2004) also indicate that announcement period of 

normal return is due to merger, arbitrage and short-sell-


ing, rather than information. The study contradicts the 

premise that stock prices solely reflect value changes. It 

clearly questions the event study’s ability to distinguish 

the real economic gains from market inefficiency. Finally, 

value can be said to have been created if one can establish 

unequivocal evidence of creation of efficiency and its 

causes. Since event study approach cannot perform this 

task, there is need to examine how input output relations 

transform as a result of M&A activity. More so in case 

of emerging economies which are undergoing a process 

of fast transformation and which often are characterized 

by absence of efficient markets. 

The Present Study: 

Accordingly, the present study aims at examining the economic 

gains of M&A activities by investigating whether 

mergers result in economies of scale and technological 

change. Understanding these issues is critically important 

both to understand the economic rationale behind the 

corporate decision maker’s action and to gauge whether 

M&A activity really leads to improvement in internal 

management and creation of synergy. It is obvious that if 

operating efficiency improves it must lead to emergence 

of economies. Since M&A represent structural changes 

in the firm and invariably a change in the scale of operations, 

the impact of mergers from the point of view 

of change in the scale needs to be properly scrutinized. 

Secondly, technological performance is strictly related 

to commercial and economic success (Franko, 1989) and 

represents one of the most important long term effects 

of acquisition. Unfortunately such long term effects of 

M&A tend to be underestimated (King et al, 2004). 

The present study attempts to examine the issue of 

efficiency by providing a detailed study of cost and technological 

structure of merged firms on one hand and 

structural shift in the profitability of the operations on 

the other, based on a large panel data extending over one 

decade. The study will serve three major purposes: 

1. Fill the void in the literature by (a) examining structural 

shift in the profitability of merging firms and (2) 

by examining the economies of scale as manifestation of 

efficiency by studying the underlying characteristics of 

production process represented in the cost structure. 

2. The study evaluates whether there is any technological 

change post M&A. Such a change is likely to act as a 

powerful proxy for the existence of synergy. 

3. The study employs panel data across three emerging 

economies namely India, Brazil and Malaysia and makes 

an attempt to study the influence of changing global 

environment brought about by progressive movement 

towards integration of distant economies of the world. 

Method: 

To investigate whether the time of merger or acquisition 

in the life history of a firm represents the point of 

structural shift the present study uses structural shift 

model. Following the parametric approach of studying 

the characteristics of production process from structured 

production functions which represent of the underlying 

technical relations between input and output the present 

study employs cost function to investigate whether scale 

of economies and technological change occur as a result 

of M & A ; latter being the indicator of improvement 

in internal management .The cost function is also used 

to examine other relevant properties of the production 

process. 

Structural Shift Model: 

If M&A is successful one expects, as stated above, improvement 

in performance. Following DU- Pont analysis, 

efficiency and leverage manifest in return on equity 

(ROE). A successful merger must therefore demonstrate 

a structural shift in profitability from the point of view 

of owners, after the merger. Whether structural break 

has taken place at the point of merger can be statistically 

measured by regressing time variable (causal variable) 

on ROE (dependent variable) time series. It is well 

established in econometric literature that to arrive at 

reliable results from a time series, it is necessary to study 

whether it is stationary. If a time series is stationary, its 

mean, variance and auto covariance (at various lags) remain 

the same no matter at what time we measure them 

(Cuthbertson, Hall and Taylor, 1995). Such a time series 

will have mean reversion process. The series will tend 

to revert to its mean and fluctuations around this mean 


55

RESEARCH 

will have broadly constant amplitude. A stationary time 

series is time reverting, with constant mean and standard 

deviation of the random variable over time and covariance 

between two periods depends only on the distance 

or gap between the two time periods and not the actual 

time at which the covariance is calculated. 

The distinction between stationary and non-stationary 

time series has crucial bearing on when the trend is 

deterministic or stochastic . The 

classical suggestion that time series should be detrended 

works well for the deterministic series rendering its trend 

stationary. If the series is stochastic it is recommended 

that it should be differenced before being regressed on 

others. This process however may lead to substantial loss 

of long run information. 

Stationarity is popularly checked using Dickey-Fuller 

unit root test or Augmented Dickey-Fuller test (1979) or 

Phillips-Perron test (1988). One of the problems with 

unit root tests is that they cannot distinguish between 

the existence of a stochastic trend and a structural trend 

in a time series. That is, these tests ignore a shift in the 

intercept or trend midway in the time series. Presence 

of a structural break or shift implies that the data consist 

of two more data sets with trend levels of different 

intercepts caused by an exogenous variable such as shift 

in policy paradigm or a complete break from previous 

structural environment as happens in case of M&A activity. 

Presence of such structural shift leads to a bias 

in Augmented Dickey Fuller and Phillip-Perron tests. 

These tests conclude that time series is non-stationary. 

This is possible even if the series is stationary within 

each of the sub-periods before and after the structural 

shift. A composite time series with a (or a finite number) 

structural shift shall display different characteristics from 

one with a stochastic trend. If the shift point is imposed 

on the data, as Perron does in his classic 1989 paper with 

the Great Depression as his reference point, it is easy 

to econometrically distinguish between the models of 

stochastic trends and models with structural shifts. However, 

if the shift points are random/ endogenous to the 

data and are imposed, the analysis is considerably more 

complex and the results are not so ‘robust’ (Christiano, 

1992 and Zivot and Andrews, 1992). 

The structural shifts occur due to technological change 

and innovations. The regression models incorporate 

these by using dummy variables. The dummy variable 

is given value zero in respect of observations before the 

structural change and one after the shift. Dummy variable 

can also be assigned by giving value of one only at 

the point of shift and zero otherwise. In the former case 

it is called “step” modeling of dummy variable and in the 

latter “pulse” modeling. The year of merger represents 

the time of structural shift in the life of the company. In 

the present study we have attempted to examine three 

models of structural shift. (Each one of these is an extension 

of Random Walk with Drift model.) 

Model 1: The Jump Model 

This model captures structural shift by permitting a 

one time shift in the trend. It allows for capturing the 

jump in the intercept and trend function. Its generalized 

form shall be 

(1) 

DUMt = 1 for time period after the merger and zero 

otherwise. 

Model 2: Growth Shift Model 

This model of structural change assumes a change 

in the slope of time-trend function without imposing 

any sudden change in the level at the point of structural 

shift. The model implicitly attempts to join two segments 

of trend function at the point of the shift. The 

specification is: 

……….(2) 

where = (t – s) if t > s and zero otherwise ;and s = 

point of shift. 

Model 3: Shift in Intercept and Growth Model 

This model attempts to capture the change in the intercept 

as well as the slope of the trend function. It allows for 

a sudden change in the intercept that is a structural shift accompanied 

by a different growth path. The specification is: 

The estimation procedure involves three steps: 

First, the regression equations specified in the models 

given above are estimated and their residuals t is computed. 

Secondly, residual εt are regressed on 1 period 

lagged residual εt-1. We estimate the following equation: 

(4) 

The equation assumes absence of serial correlation 

among the residuals of equation (4). In case these residuals 

are infected with serial correlation augmented 

regression of the following type is used: 

(5) 

To test the presence of serial correlation we have employed 

Lagrange Multiplier (LM) test. 

In the third and last step we calculate the value of 

t- statistic for null hypothesis HO : a1 = 1 . For the 

purpose of statistical inference Perron has provided critical 

values at different levels of significance in respect of 

(3) 



capital and labour on the other is relatively small indicating 

some degree of complementarity. Table-6 provides 

the estimates of own and cross price elasticities. 

Table 7 summarises the estimates of own and cross 

price elasticities of conditional input demands. All price 

Table 5 

Test of Restrictions Using Pindyck’s Coefficient 

Degrees of 

Freedom 

Total 

Sample 

elasticities are negative, with all input demands except for 

profit being highly price elastic. The cross price elasticities 

contain much of the same information contained 

in the elasticities of substitution and indicate substitutability 

among all inputs. Increases in cost of materials 

induce increased profit but very slight response in labour 

and capital utilization. Profit use also responds relatively 

highly for increases in wages and capital costs. Increases 

in capital costs cause a modest increase in labour use. 

Overall, Tables 5 and 6 provide additional assurance that 

our representation of the technology is reasonable and 

methodology adopted in this study is appropriate. 

Economies of scale and technological innovations: 

Finally, let us examine the results relating to economies 

of scale as well as technological change as a result of M 

& A. Table 8 presents the results relating to returns to 

scale measuring responsiveness of cost due to change in 

output after merger holding input prices constant. These 

estimates of scale elasticities are measured as per equation 

(12). In respect of the total sample it can be seen that the 

coefficient of scale elasticity is 1.29. The coefficient is 

India Brazil Malaysia Chi Sq 

at.001 

Homotheticity 4 2.15 4.12 3.11 9.23 18.47 

Homogeneity 5 3.11 6.35 6.44 11.23 20.52 

Cobb-Douglous 12 12.054 22.36 9.25 25.36 36.12 

Table 6 

Allen Elasticitiess 

Materials Labour Capital Profit 

Materials -0.36244 

(-3.09333) 

Labour 0.03251 -1.0354 

(-4.01214) (-6.98) 

Capital 0.05761 1.1423 -2.3959 

(-4.00946) (-15.32) (-4.702) 

Profit 1.0258 1.24.331 1.0549 -9.475 

(-4.823) (-11.104) (-7.25) (-14.24) 

Figures in parentheses are t values 

greater than 1. It implies that an equi-proportional rise 

in all the inputs is leading to more than proportional 

increase in output. Thus the sample data of the present 

study shows that M & A activity results in economies of 

scale. Table 8 also shows that coefficient of scale elasticity 

is greater than 

1 in respect of individual 

countries also. 

Thus the merged firms 

tend to operate on declining 

portion of the 

average cost function 

when costs are plotted 

against output. One 

can examine how scale 

economies change over a period of time. In the context of 

M & A, we are interested in knowing whether the output 

level at which minimum average cost can be achieved 

increases overtime. That is to say, we need to examine 

whether M & A activity leads to rise in the range of output 

over which average cost can be reduced further due 

to economies of scale. To investigate the occurrence of 

economies of scale over time, we can define economies 

Table 7 

Direct Elasticities 

Materials Labour Capital Profit 

Materials -0.2185 0.02746 0.0025 1.15725 

(-3.15) -3.26 -3.21 -5.68 

Lobour 0.0658 -0.45879 0.1958 0.3154 

(4.25) (-9.254) -5.26 -7.36 

Capital 4.69 0.3154 -0.5891 0.1654 

(12.825) (6.25) (8.256) (5.25) 

Profit 1.1153 0.5421 0.2014 -1.123 

(8.25) (7.256) (7.23) (14.25) 

Figures in parantheses are t values 

or diseconomies of scale in terms of cost elasticity. If 

cost elasticity is greater than 1, it implies existence of 

scale economies. If it is less than 1 it implies existence 

of diseconomies of scale. 

The first derivative of cost elasticity (defined as reciprocal 

of scale elasticity) with respect to time T (βC/βT) is 

given by βQt in equation 8. A βQt less than zero indicate 

that the percentage increase in cost due to 1% increase 

in output falls over time. This suggests an increase in 

the degree of scale economies over time. In other words 

a βQt less than zero will indicate that the output level 

at which the long run cost is at minimum has increased 

over time. That is the size of the firm at which all the 


61

RESEARCH 

economies of scale are exhausted has registered an increase. 

From Table 4, one can observe that in respect 

of all the firms taken together the 

coefficient of βQt is negative. It means that on an 

average, scale economies have increased over time in case 

of merged firms. That is the size of minimum efficient 

firm has increased. The finding shows that when firms 

merge, they are able to increase the range of output over 

which they can reduce their long run average cost. That is 

they can enjoy positive scale economies over an expanded 

output range. βQt is negative in case of Indian and 

Malaysian firms but is positive for Brazil. It means that 

in case of Brazilian mergers scale economies is declining 

over time and the range of output over which minimum 

long run average cost can be achieved is falling. 

Let us now examine the rate of technical change. The 

coefficients of the rates of technological change are also 

presented in Table 8. The estimates are arrived at in 

accordance with equation (18). In respect of the total 

sample the rate of technical change is .00176. That is 

there is a decrease in total cost at a rate of 0.17% per 

annum. Similarly positive rates of technological change 

are observed in case of individual countries also. The 

estimates clearly show that M & A result in technical 

change across countries. To gain further insight into 

the nature of technological change, input bias in it can 

be measured according to equation (19). The coefficients 

of input bias are presented in Table 8. It can be observed 

that the coefficients are negative in case of labour and 

capital of total sample which means there are factor saving 

technological advancements in respect of labour and 


capital. The positive coefficient in respect of materials 

indicates that the technological advancement is material 

using. In case of Indian firms the technological advancement 

is labour and materials saving but capital using and 

in case of Brazil it is labour saving but materials and 

capital using. In Malaysia technological advancement 

is factor saving on account of labour, capital as well as 

materials. 

Lastly, we examine whether technological change increases 

scale economies or decreases these as per equation 

(20). It can be seen from Table 8 that the coefficient 

of technological scale bias is positive in case of overall 

sample as well as India and Malaysia. It is negative in 

case of Brazil. This implies that the technological change 

is increasing the economies of scale, that is the increase 

in output level at which long run average cost will be 

minimum, is expanding due to technological innovations. 

This finding indicates that merged firms are likely 

to introduce technological innovations. 

In conclusion, it can be stated that M & A activity leads 

to structural shift in the profitability after merger as well 

as economies of scale and technological innovations. The 

economies are factor saving and increase the range of 

output over which the economies can be availed. Technological 

innovations also contribute to these economies. 

The study thus supports the hypotheses that mergers 

lead to both improvement in internal management and 

unlock synergy. 

 

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Coefficient 

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63


different s , where is defined as 

where S = point of shift 

T = total no. of observations 

If the estimated statistic is greater than critical value, 

one can conclude that there is structural shift in the data. 

To make the analysis complete, we analysed the pre and 

post merger time series using the data of the target firms 

as well as the acquiring firm. Thus two sets of time series 

were constructed; one used target firm’s data of the premerger 

period and the other used acquiring firm’s data 

of the pre-merger period 

The Cost Function: 

To examine the underlying characteristics of production 

process 

we employ a twice differentiable four input production 

function of the following type 

Q = f (L, K, M, P) (6) 

Where Q is output and L, K, M, P represent inputs 

of labor, capital, materials and profit, respectively. We 

follow the “intermediation approach” in which materials 

combined with labor; capital and profit are assumed to 

be utilized to produce final output. 

We assume profit and / or value maximizing firms 

pursue cost minimizing behavior. Therefore cost function 

can be uniquely represented by a dual cost function 

of the following form: 

C = f(Q,Zi,t) , for i = L,K,M and P (7) 

where, C is the total cost (including interest costs), Zi 

= input prices for i = L,K,M and P, and t represents time 

also it acts as a dummy for technological change. 

It is now well established in economic literature that as 

part of cost function time variable indicates technology. 

The time coefficient in the cost function has another 

interpretation also–a significant time -coefficient shows 

presence of technological change keeping all other variables 

constant. The time variable, being the residual one, 

captures the influence of other variables not incorporated 

explicitly in the cost function, including the impact of 

technology. For the purposes of specifying the explicit 

form of the cost function stated in equation (2) we use the 

standard translog specification. The reason for employing 

a translog function is that it provides a flexible functional 

form where it does not restrict the second-order properties 

of the cost structure examined. The translog form 

used for estimation is the following second-order Taylor 

series expansion of the cost function defined in eq. (2) 

(8) 

Employing Shephard’s Lemma one can arrive at the 

cost share of inputs. Accordingly dlnC/dlnzi represents 

the cost share of each input i. Hence, based on the cost 

function given in (3) we have the following share equations, 

one for each input i: 

Imposing the usual restrictions to reflect homogeneity 

of degree one in input prices namely, 

These restrictions imply dropping the share equation 

of one of the inputs, using the associated input price 

as a numeraire. The input price of profit was used as a 

numeraire in the estimation. 

Above specifications lay down the statistical characterization 

of the production technology. However, before 

proceeding one must answer the questions whether the 

functional form adopted in the present investigation for 

representing technology is appropriate or not; secondly 

how to identify generalized/global characteristics of the 

underlying technology. Answers to these questions are 

necessary to avoid inappropriate inference due to the 

econometric misrepresentation of the technology. To this 

end, the present study makes an attempt to test whether 

the production process as captured by the above stated 

flexible functional form exhibits presence of homotheticity, 

homogenity and constant returns to scale. Also 

an attempt is made to compare it with a more restrictive 

Cobb-Douglas specification to find whether trans-log 

functional form is consistent with it or not. Estimates 

of elasticity of substitution among the stated cost inputs 

are also reported. Analysis of these aspects is likely 

to establish the preliminary confidence on data as well 

as the estimation procedure. With a view to evaluating 

the generalized characteristics of the technology as incorporated 

in the above stated cost functions standard 

comparison of restricted cost models is made with the 

unrestricted trans-log version. 

Presence of homotheticity in technology implies satisfying 

the following restriction : 

βQQ = βQt = 0; (10) 

Likewise a homogeneous production function (homogeneous 

with respect to output) must satisfy the following 

condition in addition to (5) above 

βiQ = 0. (11) 

Further a technology that exhibits constant returns 

to scale requires an additional restriction (in addition 

to (5) and (6)) that 

(9) 


57

RESEARCH 

βQ = 0. (12) 

Finally, a Cobb-Douglas specification implies, in addition 

to (5), (6) and (7), the following restriction: 

βij = βiQ = 0. (13) 

Pindyck (1976) states that we can test restrictions using 

a simple chi-square test The appropriate test statistic 

is : 

-2 log C = n (log Ω* r - log Ω* u) (14) 

where, IΩ*rI and IΩ*uI are the determinants of the 

estimated error covariance 

matrices for the restricted and unrestricted models respectively. 

This statistic is distributed as chi-square with 

degrees of freedom equal to the number of parameter 

restrictions being tested. 

To characterize the nature of the production process 

further as represented by the cost functions, the study 

also estimates the Allen elasticities of substitution and 

elasticities of conditional input demands. From the cost 

and share equations, the measures of the Allen elasticities 

of substitutions are defined as: 

σij = βij/Si*Sj - 1/Si + 1 , for i = j, (15a) 

Where Si = cost share of input i 

σij = βij/Si*Sj + 1 for i ≠ j (15 b) 

The related own- and cross-partial elasticities of conditional 

input demand are given by: 

εij = βij/Si + Si - 1 , for i = j, and (16 a) 

εij = βij/Si + Sj , for i ≠ j. (16 b) 

Estimation of Economies of Scale: 

Economies of scale are said to exist if an increase in 

output, holding input prices constant, leads to a less than 

proportional increase in total costs, causing a decline 

in average costs. When two firms merge the size of the 

firm rises proportionally. If internal management of the 

combined firms improves and\or the synergies unlock, 

these will manifest in scale of economies in the same 

way as defined here. From the translog cost function 

stated in equation (3) above, returns to scale measuring 

cost responses resulting from changes in output, post 

merger holding input prices constant, can be derived 

as follows: 

firm result in a more than proportional increase in output. 

Evidence of scale economies, other things constant, 

could be a rationale for M & A activity. 

Investigation of synergy and technological Change 

It is well known fact in economics that a change in 

output holding the quantity and cost of inputs constant 

can occur if there is a change in technology. This concept 

has been employed in the present study in the context of 

evaluation of M&A. unlocking of synergies and improvement 

in internal management practices will be manifest 

in the significant technology coefficient of the cost function 

specified in the equation (3) above. Specifically, from 

the cost side, holding input prices constant, technological 

change permits the firm to produce the same level of 

output at lower expenditure. Given the cost function in 

(3), the rate of technological change can be measured 

by: 

Where 

= rate of technological change 

(18) 

Technological change can be biased with respect to inputs 

as well as with respect to the scale characteristics of 

the production technology. With regard to input biases, 

a technological change is Hicks-neutral, if the slope of 

the production isoquants is independent of technological 

change. A cost-neutral technological change, an analogous 

(but not equivalent) concept, refers to a technical 

change that does not affect relative cost shares of inputs. 

From the share equation in (4), a measure of input bias 

in technological change is: 

(19) 

A η = 0 imply a neutral technical change. η> 0 and 

η < 0 imply ith factor-using and ith factor-saving technological 

advancements respectively. 

Technological change could also be biased with respect 

to the scale property of the production technology. 

Technological change may be scale-biased or non-neutral 

in the sense that it might alter the range of outputs over 

which a given scale economies can be attained, thus resulting 

in a change in the cost-minimizing efficient firm 

size. Define the cost elasticity to be C=1/S, S=elasticity 

of scale. Technological scale bias is given by: 

(17) 

An estimate of S > 1 implies scale economies, indicating 

that an equiproportional increase in all inputs of a 

(20) 

A TSB > 0, implies that technological change increases 

scale economies and, conversely, 



If TSB< 0, scale economies are decreasing as a result of 

technological progress. A scale increasing technological 

progress (TSB > 0) implies that the minimum efficient 

size (MES) at which the average cost is the lowest is 

increasing due to technological innovations. 

Thus, the above analysis can provide insight into the 

future industry trends of M&A activities in the sense that 

a scale-increasing technological change, ceteris paribus, 

could induce further mergers in the industry over time. 

In contrast, a scale-decreasing technical change could 

lead to industry fragmentation or demerger activity. 

DATA 

The data were collected from the financial statements 

of the companies. These data were obtained from the 

Thomson Analytics Database as well as Prowess Database. 

Apart from this, data were also obtained from the 

annual reports of the companies which were procured 

personally. Only those companies were selected which 

had indulged in M&A activity in the year 2000 in Brazil, 

Malaysia and India. Care was taken for selecting those 

companies which had a continuous data series available 

from 1990 to 2006. Different series were constructed on 

production, number of employees, fixed assets, materials 

and net profits after tax. These respectively represented 

output, labour, capital, materials and profits as the primary 

inputs. Profit represented entrepreneurship. The 

prices of these inputs were calculated as under: 

Price of labour was calculated by dividing wages and 

salaries and welfare expenditures by number of employees. 

Total materials were divided by the number of units 

produced to obtain the price of 

material per unit. Price of entrepreneurial 

factor input was calculated 

by arriving at ROE. 

In all there were 79 firms. Of 

these 34 were firms from Brazil, 

27 from Malaysia and the rest from 

India. The data were converted 

into US $ if not already available. 

This exercise had to be carried out 

in case of Indian companies whose 

data were not available in US $. 

Following the methodology of 

Thomson Analytics Database, the 

nominal effective exchange rate 

as reported in The Economic Survey 

of India for the particular year 

was used to convert local currency 

figures into US $. Similar exercise 

was carried out in case of Brazilian 

and Malaysian companies. In 

their case nominal effective exchange rates calculated by 

World Bank were used. The pooled cross-sectional time 

series data consists of 1343 data points. 

RESULTS AND ANALYSIS 

Structural Shift Model: 

The results of the exercise undertaken in respect of 

structural shift model are summarized in Tables 1, 2 

and 3. Table 1 shows that there is no serial correlation 

in any of the three structural shift models in respect of 

time series constructed with the data of target as well 

as acquiring firms. Therefore augmented equation for 

regressing the residuals was not used. Secondly, Table 

2 lists the t-statistic of the slope coefficient of equation 

4 fitted in respect of the residuals of various models. 

These t- statistics show that the coefficients are significant. 

Thus, the results clearly establish that there is a 

structural shift in the ROE after the merger whether 

we use data of target firm or that of acquiring company. 

Hence, M & A activity brings about an improvement in 

internal management as well as release of synergy. When 

this exercise is carried out in respect of the companies 

of individual countries the results are not different. It 

means M & A activity leads to a significant shift in the 

profitability of firms in emerging economies. 

Cost Function Model: 

The cost function in equation (8) and three of the associated 

four cost share equations are estimated simultaneously 

using Zellner’s Iterative Seemingly Unrelated 

Regression Estimates (SURE) technique. The estimates 

Table 1 

Test Statistics of Legrange-Multiplier for the Test of Ho: No serial correlation 

Jump Model Growth Shift 

Model 


Intercept and 

Growth Model 

Estimated Value 

1.98 .38 2.13 

Acquirer Series 

P-value .23 .81 .17 

Estimated Value (nR2) 

2.01 1.64 1.33 

Target Series 

P-Value .19 .41 .84 

Table 2 

Perron’s Test of Structural Shift in the ROE of Merged firms 

Estimated-t 

(Acquirer Series) 

Estimated t 

(Target Series) 

Perron’s critical 

value 

Jump Model 1.15 3.05 -3.48 

Growth and Shift Model 0.15 0.987 -3.48 

Intercept and Growth Model 1.14 0.847 -3.48 

59

RESEARCH 

Tabel 3 

Test of Structural Shift in the ROE of Merged firms in 

Emerging Economies 

Series Country Jump Growth and 

Shift Model 

Acquirer 

Series 

Target 

Series 

therefore are asymptotically equivalent to maximum likelihood 

estimators. 

The regression coefficient of equation 8, their standard 

errors and t-statistics are presented in Table-4. All coefficients 

except one are statistically significant at the one 

percent level of significance. This is true for both the 

Results of Translog Cost Function of Merged Firms 

Coefficient Standard 

Error 

Coefficients 

for India† 


Intercept and 

Growth Model 

India 1. 501 0.05 0.48 

Brazil 0.89 0.12 0.11 

Malaysia 0.95 0.125 0.23 

India 0.15 0.087 0.37 

Brazil 0.853 0.22 .12 

Malaysia 1.03 0.31 .23 

Coefficients 

for Brazil† 

total sample as well as individual countries. 

The results relating to the test of homotheticity 

expressed in restriction stated in equation 

(10) are presented in Table 5. The test 

of restrictions imposed on cost function as 

well as share functions support the hypothesis 

of homotheticity. The cost function of 

the sample firms therefore is separable between 

output and input prices. This shows 

that cost, output and input price relationships 

can possibly be characterized globally. The 

strong acceptance of homotheticity implies 

strong support of homogeneity also. It can 

be observed from Table 4 that the direct test 

of homogeneity also accepts the homogeneity 

hypothesis. It is obvious that Cobb-Douglas 

specification as well as global constant returns to scale 

is also strongly supported. 

This implies that the assumptions underlying the restrictive 

cost functions and hence production structures 

offer a valid representation of technology of the merged 

sample companies. The production technology over the 

sample period is consistent with homothetic 

production process. The 

Coefficients 

for Malaysia† 

Intercept 1.6949 0.573617 2.3123 1.8956 0.0198 

ln Z (L) 0.4422 0.008483 0.5823 0.4184 0.0089 

ln Z (K) 0.1023 0.000360 0.8790 0.0271 0.0022 

ln Z (M) -0.4558 -0.000177 0.6631 -0.0074 0.0069 

ln Z (LL) 0.7191 0.009455 0.0388 0.0033 0.0257 

ln Z (LK) 0.0761 0.001223 0.6819 0.0040 0.0195 

ln Z (LM) 0.1524 0.002126 0.0004 0.0134 0.0306* 

ln Z (LQ) 0.0044 0.000120 0.0008 0.0094 0.0016 

ln Z (LT) -0.0061 0.000933 -0.0340 -0.0036 -0.0066 

ln Z (KK) -0.0031 -0.000554 0.0183 0.0020* 0.0169 

ln Z (KM) 0.0015 1.489630 0.00061* 0.0064 -0.0085 

ln Z (KQ) 0.0586 -0.000647 0.0807 -0.0020 0.0163 

ln Z (KT) -0.0110 0.000672 0.0015 -0.0138 -0.0010 

ln Z (MM) -0.0865 -0.000154 -0.0042 -0.0216 0.0036 

ln Z (MQ) 0.0023 0.000059 0.0015 -0.0173 0.0013 

ln Z (MT) 0.0456 0.000817 -0.0003 0.0137 -0.0053 

ln(Q) 0.7053 0.002343 0.6336 0.9018 0.8001 

ln(QQ) 0.0799 0.007583 0.0070 0.0136 0.0208 

ln(QT) -0.0759 0.000630 -0.0019 0.0103 -0.0139 

ln(TT) 0.0443 0.000306 0.0005 -0.0049 0.0010 

ln(T) 0.0014 0.000317 0.0020 -0.0068 0.0191 

† All coeficients are significant except for those marked with * 

finding provides justification for the 

use of both a flexible functional form 

(adopted in the present study ) such 

as translog cost functions as well as 

restrictive production functions to 

capture the underlying production 

process. 

To understand the nature of production 

process of the merged firms 

more elaborately, estimates of the 

Allen elasticities of substitution were 

computed in respect of the firms in 

the sample. The results are presented 

in Table-6. The estimates show that 

all inputs are substitutes. Profit is 

a strong substitute for each of the 

other factors. There is a strong substitutability 

between materials and 

profits perhaps because if material 

cost goes down profits are likely to 

increase. The results also show presence 

of strong substitutability between 

physical inputs namely labour 

and capital. It is explained probably 

by the tendency of merged firms 

to economise on labour costs. The 

degree of substitution between materials 

and profits on one hand and

RESEARCH 

‘Strategic Objectives behind 

Corporate Acquisitions & 

the Impact of These Acquisitions 

on Shareholders Wealth’ 

Researchers believe that the firm’s ability to achieve a sustainable competitive 

advantage depends upon its relative cost and differentiation positions... 



The Main Idea behind any merger or an acquisition 

is: “One plus one makes three”, this equation 

is the special alchemy of a merger or an 

acquisition. The key principle behind buying a company 

is to create shareholder value over and above that of the 

sum of the two companies. Two companies together are 

more valuable than two separate companies - at least, 

that’s the reasoning behind M&A. 

This rationale is particularly alluring to companies 

when times are tough. Strong companies will act to buy 

other companies to create a more competitive, cost-efficient 

company. The companies will come together hoping 

to gain a greater market share or to achieve greater 

efficiency. Because of these potential benefits, target 

companies will often agree to be purchased when they 

know they cannot survive alone. 

World Wide Scenario: 

USA has seen 20 years long wave 

of mergers, leveraged buyouts 

and takeovers that changed USA, 

Inc. Biggest merger of the world, 

the $190 billion America Onlinemedia 

giant Time Warner (stock 

fi nanced deal) became second biggest in one month’s 

time. Previous biggest merger was MCI-world. Europe 

and Japan also have seen many mergers. 

The value of mergers in the global technology sector 

alone surged a 52 percent to $ 1.2 trillion in 1999 as 

companies scrambled to adapt their businesses to meet 

the growing demands of the internet economy. The total 

number of merger and acquisition transactions in the 

IT, media and communications sector rose globally, 

according to a report by New-York based investment 

bank Broadview International. 

Indian Scenario: 

In India we have witnessed a storm of mergers and acquisitions 

in recent years. The Finance Act, 1999 clarified 

many issues relating to Business Reorganizations 

thereby facilitating and making business restructuring 

tax neutral. 

Compelled by the present economic scenario and 

market trends, corporate restructuring through mergers, 

amalgamations, takeovers and acquisitions have 

emerged as the best form of survival and growth for 

the companies all over the world. 

In the last few years, India has followed the worldwide 

trends in consolidation amongst companies 

through mergers and acquisitions. Companies are being 

taken over, units are being hived off,joint ventures 

tantamount to acquisitions are being made and so on. 

The global M&A was 

at a boom with an 

average of $ 12.5 

Billion worth of M&A 

per day 

It may be reasonably stated that the quantum of mergers 

and acquisitions in the last few years must be more 

than the corresponding quantum in the four and a half 

decades post independence. 

As per Finance Minister this has been done to accelerate 

internal liberalization and to release productive 

energies and creativity of Indian businesses. The year 

1999-00 has notched-up deals of over Rs. 21000 cr. 

which is over 1% of India’s GDP. This level of activity 

was never seen in the Indian corporate sector. 

InfoTech, banking, media, pharma, cement, power 

are sectors which are more active in mergers and acquisitions. 

Examples: ACC Gujarat- Ambuja Cement, Lafarge 

TISCO, Satyam Infoway-Indiaworld, Rajpal E capital- 

Zee tele-Subir Bhatia-HLL- lakme, 

HLL Tomco, Sandoz-Ciba,HLL- 

Lipton,IndiaCements-Rassi, 

Sun-TDPL,Sun-MJ, Wockhardt 

demerger, only distribution network- 

parents’ acquisitions- PAL 

– Peugot, Piramal Sarabhai, Piramal- 

Crossland, HDFC-Times 

Bank and many more. Among 

hostile takeover bids we saw Sterlite’s bid for Indal, 

Bajoria for Bombay Dyeing and Ballarpur Industries, 

Dalmia for Gesco and many more. 

Present Scenario as Per 2006: 

The average Indian M&A deal size was close to US 

$ 42 mn. The global M&A is also at a boom with an 

average of $ 12.5 Billion worth of M&A per day. Recently 

in one day $ 75 Billion worth of transactions took 

place including the largest private equity deal which 

was Blackstone’s $ 36 Billion offer for Equity Office 

Properties. 

The year 2006 has seen significant growth in acquisitions, 

as well as investments by India Inc. Key 

highlights of the year include: 

- The total number of deals at 782 compared to about 

467 in 2005. Of these there were 480 M&A deals and 

302 private equity ones. 

- The total value of deals at $ 28.2 billion compared 

to about $ 18.3 billion in 2005, recorded a growth of 

54%. 

- The average deal size (value per deal) being close to 

$ 36 million (including M&A and PE). 

- There have been more than 40 deals with deal value 

of over $ 100 million. 

- 480 M&A deals with a total value of about $ 20.3 

billion in 2006 where the average deal size is of $ 42 

million. 


65

RESEARCH 

Sectoral Spread of M&A Deals: 

IT & ITES was the clear leader as far as sectoral values 

were concerned. This sector garnered US $ 2.9 

bn worth of deals. The major deals included EDS’s 

acquisition of majority stake in Mphasis BFL, RR Donnelley’s 

acquisition of Office Tiger, i-Flex’s acquisition 

of Mantas Inc etc. 

There were 8 deals having value greater than US $ 

500 mn. We haven’t included Tata-Corus deal in this 

edition. The clear leader in value with large deals were 

Dr. Reddy’s acquisition 

of Betapharm, Suzlon 

Energy’s acquisition of 

Hansen and Citigroup’s 

increasing stake in 

HDFC. 

The other sectors 

which have significantly 

contributed to the M&A value are telecom pharma & 

healthcare and energy. 

IT & ITeS leads the M&A volume proportion with 

20% share of total number of M&A deals. Pharma, 

Healthcare and Biotech have the second highest share 

at 10.4%. Other significant contributors to the deal volume 

are media & entertainment, banking & fi nancial 

services, FMCG, food & beverages. The key sectors 

contributing to M&A in 2006 are shown in the Table 

2. Traditionally it is thought that some large sectors 

like Commodities, IT, Pharma etc participate aggressively 

in M&A, but we are seeing every sector including 

retail, pharma stores, textiles, apparel, real estate, 

media, food, banking. 

Literature Review: 

A) Strategic objectives behind mergers and determinants 

for shareholder’s wealth 

By M. Mark Walker 

He investigated 454 acquisitions dated as per the 

Wall Street Journal to study the strategic objectives 

and stock price performance of acquiring fi rms. The 

results support both the asymmetric information 

hypothesis (acquiring-fi rm shareholders earn higher 

returns following cash offers) and also the strategic 


With deal worth of US 

$ 2.9 bn, IT & ITES was 

the clear leader as 

far as sectoral values 

were concerned 

alignment hypothesis (acquiring-fi rm shareholders 

earn higher returns following takeovers that either 

expand the fi rm’s operations geographically or increase 

its market share). 

B) Does Corporate Performance Improve After Mergers 

By Paul M. Healy, Krishna Palepu, Richard S.Ruback 

They examined the post-acquisition operating performance 

of merged fi rms using a sample of the 50 

largest mergers between U.S. public 

industrial fi rms which happened during 

the period of 1979 to 1983. The 

results indicate that merged fi rms 

have significant improvement in asset 

productivity relative to their industries 

after the merger, leading to 

higher post-merger operating cash 

flow returns. Sample fi rms maintain their capital expenditure 

and R & D rates relative to their industries 

after the merger, indicating that merged fi rms do not 

reduce their long-term investments. There is a strong 

positive relation between post-merger increases in 

operating cash flows and abnormal stock returns at 

merger announcements, indicating that expectations 

of economic improvements underlie the equity revaluations 

of the merging fi rms. 

C) Can firms learn to acquire Do markets notice 

By Maurizio Zollo* and Dima Leshchinskii 

Using fi nancial, accounting and questionnaire response 

data they investigated the post acquisition 

performance of 47 US bank holding companies that 

executed 579 mergers and acquisitions in the 1964- 

1996 period. 

The objectives of the study were to identify the 

factors that explain the variance in the distribution 

of post-acquisition performance, and to test whether 

the fi nancial markets efficiently predict performance 

outcomes by incorporating public information about 

the acquiring fi rm into the stock price following the 

acquisition announcement. 

They fi nd that prior acquisition experience does not 

improve post-acquisition performance, but the degree 

to which acquirers articulate and codify their experience 

in ad-hoc tools does. Financial markets do not 

seem to be sensitive to any of these predictors of performance 

in their short-term reactions, but long-term 

adjustments are significantly impacted by acquirers’ 

integration strategies and codified implementation 

knowledge, in line with the variations of accounting 

returns.


D) Multinational Enterprises and M&As in India: Patterns 

and Implications 

By Nagesh Kumar 

The paper makes an exploratory attempt to map out 

the recent M&A activity in the Indian corporate sector 

associated with foreign MNEs and their Indian affi liates. 

That is attempted with the help of an exclusive 

database built-up by us that cover 

most of the deals associated with 

MNEs in India for the period 

April 1993 – mid-February 2000. 

This database helps to examine 

the industrial composition of the 

deals as well as their motives. 

The research will include the 

study of the strategic objectives behind the takeovers, 

mergers, acquisitions from the Indian perspective and 

will also evaluate the stock price performance of the 

acquiring fi rm around the date of the announcement 

of the corporate takeovers. 

The research investigates the role that corporate 

strategies plays in explaining changes in acquiring-fi rm 

shareholder wealth at the takeover announcement date 

and conclude on the various aspects like: 

• The primary strategic objective behind the mergers, 

acquisitions or takeovers for acquiring-fi rm shareholders. 

• The mode of payment in the mergers and acquisition 

deals 

Relative cost and 

differentiation 

positions - mantras to 

achieve a competitive 

advantage 

Strategic objectives behind the corporate takeovers 

mergers and acquisitions: 

Researchers believe that the fi rm’s ability to achieve 

a sustainable competitive advantage depends upon its 

relative cost and differentiation positions. The relative 

cost and differentiation positions are determined 

largely by the fi rm’s horizontal and vertical boundaries. 

Horizontal boundaries focus on the varieties and 

quantity of goods or services the fi rm produces. Vertical 

boundaries defi ne the type of activities the fi rm 

products rather than it buys. 

The research has investigated the PRIMARY strategic 

objectives of each merger, acquisition by using the 

newspaper articles, any stock exchange announcements. 

The strategic objectives are considered according to 

the acquiring fi rm’s perspective. 

1 Capacity Expansion: Companies who wish to grow 

and increase their market share are indirectly looking 

for opportunities to increase their capacity. Example: 

2 Vertical Integration: When companies acquires its 

suppliers (backward) or buy out its immediate customers 

(forward) into its own business in order to 

have a good hold in its existing businesses. 

3 Geographic Expansions: when a company wants 

to establish its reach in some new geographic location, 

or in the new market segment then it targets 

a company who is well established in the desired 

area. 

4 Growth: when a company 

doing well in the business wishes 

to expand its business and invest 

more, it goes for growth strategy. 

5 Consolidation: When a 

group company acquires its subsidiary 

into itself. This strategy 

results into umbrella positioning in the market and 

produces synergy effect. 

6 Diversification: when a company wishes to start a 

new business other than the existing one, it goes 

for kind of strategy. 

7 Gaining Financial Strength: when a company acquires 

a cash rich company in order to utilize its 

cash position to expand, diversify, or increase capacity. 

8 Horizontal Integration: when a company acquires 

its competitors in the existing businesses. 

9 Broadening the Product Line: When the acquiring 

fi rm seeks economies of scope by expanding its 

product line. 

10 Increase In Market Share: this strategy is some what 

like the horizontal integration where in the acquiring 

fi rm buys its competitors. 

52 deals from 2001-2006: 

The primary strategic objectives behind the 

acquisitions from 2001-2006 

Strategic Objectives 

Frequency 

Capacity expansion 3 

Vertical integration 9 

Geographic expansion 2 

Growth 4 

Consolidation 18 

Diversification 4 

Gaining financial strength 1 

Horizontal integration 3 

Broadening product line 6 

Increase in market share 2 

TOTAL 52 


67

RESEARCH 

Mode of payment of the deals 

As in the acquiring firm, the acquired firm can decide 

upon an agreed swap ratio or can agree upon some 

amount of cash consideration. Example: The offer 

made to Ambuja cement eastern by Gujarat Ambuja 

cement was: Offer of four GACL equity shares of Rs 

2 each for every five ACEL equity shares of face value 

Rs 10 each. 

Mode of Payment 

The preferred mode of payment in the acquisitions 

from 2001-2006 

Conclusions: 

• Consolidation is the primary strategic objective 

behind the corporate acquisitions, followed by the 

vertical integration, diversification. 

• In total there are about 10 primary strategic objectives 

discussed in the research paper. 

• The majority of the deals were settled on the basis 

of Stock considerations. 

• In case the acquisition is of the merger type then 

the preferred mode of payment through stock (swap 

ratios) and in case the acquisition is of the type takeovers 

then the preferred mode of payment is cash. 

• There are no significant changes seen in the abnormal 

returns around the date of the announcement 

of the corporate announcements. 

Limitations: 

• The time period considered in the research paper is 

from 2001-2006 only. 

• The acquiring companies considered in the data 

sample are actively trading on the stock exchanges 

in India. 

• The study revolves around the Indian economic 

changes 

• Cross- Border deals during 2001-2006 have been 

included. 

• The market adjusted approach in the only basis for 

the calculations for the abnormal returns. 

• A 5 trading day window was chosen for calculating 

returns. 

• In all the banking sector acquisitions or in the financial 

institutions takeovers, mergers have been 

excluded. 

• Only the primary strategic objectives have been considered 

and an assumption that these objectives are 

mutually exclusive has been made. 

 

Bibliography: 

1) www.envestindia.com 

2) http://www.investopedia.com/university/mergers/ 

3) The Bombay Stock Exchange (www.bseindia.com) 

4) Christopher B. Kummer “Country-Specific Factors 

that Indian Companies are attracted by to Pursue 

Cross-border Mergers & Acquisitions (M&A)” 

5) The Economic Times 

6) The Hindu Business Line 

7) The Business Standard 

8) The Securities and Exchange Board of India (SEBI, 

www.sebi.gov.in) 

9) The Reserve Bank of India (RBI, www.rbi.org.in ) 


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O UTREACH • OUTPERFORM • OUTSHINE

RESEARCH 

PRIVATE 

EQUITY RAIL 

BACKING 

M & A 

TRAIL 

By Mr. Ashwani Batra, 

Senior Analyst, 

Global Strategy & Investment 

Consulting, Planman 

Consulting (India) Pvt. Ltd. 



An abundance of private equity dollars, a favorable 

financing market, and strategic players 

wanting to expand geographic, demographic, 

and product reach are all contributing to a steady pace 

of M&A activity. As we consider the landscape for 

corporate transactions in mid-2007, the fundamentals 

are in line for a healthy merger and acquisition environment 

across all sectors. And although no blockbuster 

deals are percolating at present, the confluence of positive 

economic and market factors should prove fruitful 

for both buyers and sellers. 

Global M&A activity reached record highs as the volume 

of global deals in 2006 increased to over US$3.8 

trillion, representing a 37.9 per cent increase from 2005. 

This surpassed the previous record of $3.4 trillion set 

in 2000, with announced deals in the fourth quarter of 

2006 alone totaling approximately $1.3 trillion. 

Private equity transactions were some of the primary 

drivers of M&A activity: in 2006 they totaled $757.6 

billion worldwide, or approximately 20 per cent of total 

M&A activity. In 2006, 2,354 private equity transactions 

were announced, which represented a 172 per 

cent increase from 2005. 

One of the most notable features of LBO activity 

was the surge in deal size. Topping the charts was The 

Blackstone Group’s $39 billion acquisition of Equity 

Office Properties Trust, which was the largest LBO in 

history at the time. Blackstone increased its original $36 

billion price to top a competing offer by a rival strategic 

buyer that emerged after Blackstone had entered into 

a definitive merger agreement with the target company. 

Other major private equity transactions in 2006 

included LBOs of HCA ($33 billion), Kinder Morgan 

($27.5 billion), Harrah’s Entertainment ($27.4 billion) 

and Clear Channel ($26.7 billion). 

In deals with US targets, private equity involvement 

climbed to record levels as more than $414.6 billion 

fi nancial sponsor transactions occurred in 2006 on the 

buyers’ and sellers’ sides, which represented just over 

a quarter of all US M&A activity. Private equity deals 

accounted for half of the top 10 M&A deals in the US 

and one quarter of the overall values. 

Europe accounted for 36 per cent of global private 

equity transactions by target region. The largest European 

LBO was the acquisition of VNU by AlpInvest, 

Blackstone, the Carlyle Group, Hellman & riedman, 

Kohlberg Kravis Roberts & Co (KKR) and Thomas H 

Lee Partners for $11 billion. Other leading European 

private equity transactions included LBOs of AWG 

($10 billion), Phillips Semiconductor ($9.5 billion), 

Kion ($5.7 billion) and PagesJaunes $4.2 billion). 

Mergers and acquisitions involving private equity 

funds in the Asia-Pacific region totaled $37.7 billion in 

2006, which represented a 7 per cent increase on 2005. 

North Asia deals amounted to $10.4 billion, led by 

Goldman Sachs’ $2.6 billion investment in Industrial & 

Commercial Bank of China, CVC Asia Pacific’s $2 billion 

bid for Australian radiology company DCA Group 

and the $1.5 billion offer for Taiwan’s China Network 

Systems by MBK Partners. India deals jumped to $3.1 

billion from $764 million in 2005, with the largest 

purchase being the acquisition of Electronics Software 

Systems by KKR. In the biggest Asia-Pacific private 

equity transaction of the year, announced in Decem- 

Worldwide Mergers & Acquisitions 

Overall M&A 

WW PE M&A 

Value Value % of 

($mil)| Deals ($mil)| Deals Total 

1995 925.2 19,688 28.0 584 3.0 

1996 1,116.7 23,853 33.8 612 3.0 

1997 1,640.0 25,898 52.5 758 3.2 

1998 2,493.1 29,376 59.0 942 2.4 

1999 3,265.4 32,183 107.4 1,327 3.3 

2000 3,400.0 38,716 97.3 1,795 2.9 

2001 1,687.0 30,174 63.9 1,315 3.8 

2002 1,208.6 26,482 106.4 1,196 8.8 

2003 1,360.9 28,830 128.8 1,561 9.5 

2004 1,865.3 31,543 237.7 2094 12.7 

2005 2,699.5 33,636 321.5 2700 11.9 

2006 3,600.7 37,839 750.0 3293 20.8 

2007* 2,179.3 14433 447.4 1238 20.5 


71

RESEARCH 

WORLDWIDE MERGERS & ACQUISITIONS 

YTD 2007 YTD 2006 Full Year 2006 

Macro Industry 

Value 

Deals 

Value 

Deals 

% Change 

Value 

Deals 

($bn) 

($bn) 

(YoY) 

($bn) 

Financials (Private Equity) 44.7 97 22.0 94 103.3 46.8 235 

Financials 474.1 1,686 166.1 1,532 185.5 568.7 4,360 

Private Equity % of Total 9.4 13.2 8.2 

Energy and Power (Private Equity) 53.4 53 5.0 48 974.6 53.9 152 

Energy and Power 304.1 1,060 171.5 996 77.3 527.1 2,738 


Industrials (Private Equity) 39.0 209 48.3 206 -19.3 88.8 577 

Industrials 259.9 1,850 109.7 1,862 136.9 257.1 4,860 


Materials (Private Equity) 16.8 99 7.4 107 126.9 31.5 299 

Materials 183.5 1,806 148.6 1,474 23.5 380.3 4,181 


Real Estate (Private Equity) 24.5 40 17.4 38 40.8 95.2 101 

Real Estate 172.7 792 75.0 715 130.2 360.4 2,159 


Consumer Staples (Private Equity) 36.2 102 3.6 84 905.0 12.7 227 

Consumer Staples 152.3 905 36.7 953 315.2 121.8 2,370 


Healthcare (Private Equity) 45.0 83 12.2 76 268.8 77.1 208 

Healthcare 146.0 706 76.3 770 91.4 270.2 2,114 


Media and Entertainment (Private Equity) 42.5 127 28.5 125 49.0 162.0 332 

Media and Entertainment 140.0 1,153 94.3 1,125 48.5 358.9 3,110 


High Technology (Private Equity) 65.3 155 15.6 164 318.5 58.2 393 

High Technology 136.8 1,988 55.0 1,966 148.7 201.9 5,148 


Telecommunications (Private Equity) 40.1 35 3.5 29 1,056.1 9.1 72 

Telecommunications 107.7 394 200.8 440 -46.4 300.7 1,054 


Consumer Products (Private Equity) 21.4 149 7.5 166 185.8 41.8 459 

Consumer Products 53.8 1,401 32.7 1,435 64.5 105.6 3,861 


Retail (Private Equity) 18.5 88 37.3 81 -50.4 72.8 236 

Retail 48.3 681 64.7 615 -25.4 147.1 1,842 


Worldwide Industry Total (Private Equity) 447.4 1,238 208.2 1,218 114.8 750.0 3,293 

Worldwide Industry Total 2,179.3 14,433 1,231.6 13,900 77.0 3,600.7 37,839 




ber 2006, Qantas Airways in Australia agreed to an 

$8.7 billion buyout by Texas Pacific Group (TPG) and 

Macquarie Bank. 

Private Equity growth supports M&A market, why 

Increased public profi le of private equity and continuation 

of club deals 

In light of the total amount of capital invested by 

private equity fi rms and record-breaking LBO sizes 

in 2006, the industry has fi rmly established itself as 

a major player in the global M&A market and private 

equity fi rms are among the most sought-after suitors for 

companies seeking to engage in a business combination 

transaction. According to Buyouts, 54 companies were 

successfully delisted from public exchanges in 2006, 

up from 38 in 2005 and 32 in 2004. 

This greater public profi le has resulted in some resistance 

to financial sponsor investments in certain 

jurisdictions. For example, notable opposition has been 

voiced by public investors, regulators and industry players 

in Germany, Korea and Australia. In response to the 

increasing number of private equity transactions, the 

UK’s Financial Services Authority undertook a study of 

the risks posed by such transactions and the potential 

need for increased regulation. The study concluded that 

private equity transactions posed no systemic risk and 

that private equity made a significant contribution to 

improving company competitiveness. 

invest in even larger transactions involving household 

name companies and to sustain high levels of private 

equity activity. 

These types of high-profi le deals, together with sustained 

high levels of fi nancial sponsor activity, will 

contribute to increased public awareness of financial 

sponsors and the influence of private equity capital. 

It remains to be seen whether LBOs will constitute a 

similarly significant percentage of global M&A activity 

in 2007 as in 2006. Private equity firms will need to 

continue investing the large amounts of equity capital 

rose over the past several years and, ultimately, will 

begin to pursue various exit strategies from their portfolio 

investments, including initial public offerings, 

sales to strategic buyers or sales to other private equity 

firms. As a result, it is anticipated that private equity 

transactions will be important drivers of overall M&A 

activity and continue to have a significant impact on 

the global economy. 

Globalization is causing many boards to consider over- 

seas strategies: 

China, in particular, is seen as a huge potential source 

of revenue, especially for technology companies. Many 

companies now feel they need an emerging markets play 

and are keen to acquire the best businesses, regardless 

of where they are located. Synergies continue to be a 

driving force for deals. 

Diverse target industries: 

In the past year private equity transactions involved 

target companies in a wide range of industries. Traditionally, 

private equity firms have concentrated heavily 

in the manufacturing, distribution and services industries, 

each of which have historically generated target 

companies with steady cash flows. However, fi nancial 

sponsors are branching out into a variety of other industries, 

as their expertise, investment scope and available 

capital expand. 

Abundance of equity capital and debt financing: 

Private equity funds continued to set record fundraising 

levels in 2006. Private equity funds raised $406 billion 

last year, with 612 new funds launched, which exceeded 

the previous record of $311 billion set in 2005. 

Lenders have been provided more flexible debt structures 

to fi nancial sponsors to fi nance LBOs. The robust 

debt markets and abundance of equity capital were 

significant factors in the LBO surge in 2006, and it 

is likely that a continuation of favorable debt markets 

this year, combined with private equity’s significant 

cache of equity capital, will allow fi nancial sponsors to 

Particularly in the rapidly evolving TMT sector, 

where the markets for traditional providers and newer, 

Web-based technologies are converging, the idea that 

the best of both worlds can combine to create more 

productive and efficient entities is being more readily 

recognized. 

Buyout Boom Not Just for Biggest Firms: 

Buyout Boom Not Just for Biggest Firms: 

Private equity’s ongoing zeal for the middle market 

has many boards contemplating what they need to do 

to spark interest in their company. To no one’s sur- 


73

RESEARCH 

prise, the recent $20 billion and $40 billion LBO deals 

grabbed most of the M&A headlines in the fi rst quarter 

of 2007. But today’s capital markets offer abundant 

transactional opportunities for companies of all sizes, 

from private, middle-market fi rms to publicly traded 

large caps. 

And lower return requirements among an expanding 

pool of private capital means few industries are left 

out of the action any longer. Private equity fi rms and 

hedge funds have raised billions in new equity capital 

over the last few years, and they haven’t hesitated to 

put that money to work. 

Private Equity-The next biggest thing in the M&A mar- 

ket, how 

Private Equity M&A: The Force behind the Seller’s 

Market. 

There are several reasons for the recent boom in 

private equity M&A activity. First, today’s market is 

over-flowing with private equity capital looking for 

investments. Many private equity funds took advantage 

of the strong market in 2005 and cashed out their 

investment portfolios, distributing loads of cash to 

their investors, many of which were pension funds. 

The pension funds used the profits realized in 2005 

and reinvested them last year in private equity investments, 

which are expected to continue generating rates 

of return well above what is available in the public 

markets. 

Furthermore, extraordinarily low spreads in the debt 

markets and the aggressive expansion of hedge funds 

into debt fi nancing offer plenty of cheap fi nancing. 

Also, the compliance costs and potential liabilities 

associated with Sarbanes- Oxley have driven many investors 

and managements from the public markets. 

Finally, private equity fi rms with six or seven year 

horizons that were created in the heyday of private 

equity investment in 1999 and 2000 are about to expire, 

leading their managers to dispose of numerous assets, 

which are increasingly being purchased by other private 

equity fi rms (in so called “secondary transactions”). 

All of these factors have led to a dramatic increase 

in the amount of capital in the private equity market 

and a substantial increase in the percentage of total 

M&A volume involving private equity buyers and sellers, 

which has swung the pendulum in the seller’s favor 

in today’s M&A market, where hungry buyers are on 

a buying spree. 

Private equity players are participating in larger and 

larger transactions, where traditionally private equity 

players had stayed mainly in the middle market. Seven 

of the ten largest buyouts of all time took place last 

year. In recent years, private equity players have been 

pooling their money to pay for large targets in socalled 

“club deals.” Furthermore, some fi nancial buyers 

are beginning to amalgamate such large portfolios of 

assets that they can take advantage of synergies that 

were once only available to strategic highly-capitalized 

buyers, in effect themselves becoming strategic buyers. 

These trends have resulted in the entry of private equity 

funds into larger transactions, which means that sellers 

throughout the entire spectrum of transaction values 

are increasing their leverage ovessssr buyers. With so 

much excess cash on hand, private equity funds are 

competing in a race to deploy their funds. There is 

an oversupply of money chasing a limited number of 

quality targets, causing private equity buyers who want 

to compete to offer sellers top prices and very seller 

friendly deal terms. 

With so much excess cash on 

hand, private equity funds are 

competing in a race to deploy 

their funds 

No Financing Contingency: 

Most leveraged buyouts in the United States traditionally 

have provided that one of the conditions to 

a buyer’s obligation to consummate the transaction is 

that the buyer has obtained the requisite fi nancing, 

as those transactions by defi nition involve significant 

leverage and sponsors do not maintain significant cash 

on hand from operations. However, recent private equity 

M&A transactions have been consummated with 

no fi nancing contingency, including the following 

major transactions: the $21.3 billion leveraged buyout 

of hospital operator HCA by a consortium of private 

equity funds including Bain Capital Partners, Kohlberg 



Kravis Roberts & Co. and Merrill Lynch Global Private 

Equity; the $8.3 billion acquisition of ARAMARK by 

Joseph Neubauer and investment funds managed by 

GS Capital Partners, CCMP Capital Advisors and J.P. 

Morgan Partners, Thomas H. Lee Partners and Warburg 

Pincus LLC; and Apollo Management, L.P.’s $9 

billion acquisition of Realogy Corporation. 

Reverse Break-Up Fees: 

Although break-up fees, imposing penalties on the seller 

in the event that the transaction is not consummated, 

are common in takeover deals involving two public 

companies, private equity buyers have traditionally 

resisted them. Recently, sellers have been demanding 

“reverse break-up fees,” to shift deal-completion risk to 

private equity buyers. For instance, under the terms of 

the $27 billion buyout of Clear Channel Communications, 

Inc., announced in November 2006, the private 

equity group buyer consortium, led by Bain Capital 

Partners, LLC and Thomas H. Lee Partners, L.P., will 

be required to pay a break-up fee in the amount of 

$500 million to Clear Channel if they cannot obtain 

fi n a n c i n g. 

Assumption of Industry Risk in MAC Conditions: 

It is becoming more common for private equity buyers 

to assume the risk of downturns in the seller’s industry 

as an exception to the “material adverse change” closing 

condition. Private equity buyers have historically 

objected to assuming industry risk on the basis that 

they do not become industry participants until they 

close the acquisition. However, in almost 80% of private 

equity deals announced in 2005 and early 2006, 

the buyer assumed industry risk in material adverse 

change closing conditions. 

Limited Indemnification: 

Sellers taking advantage of their market power and 

desiring to make a clean exit are insisting on limited 

indemnification provisions to minimize the magnitude 

of their exposure and the length of time during which 

the buyer can bring an indemnification claim. Indemnification 

basket amounts are increasing and liability caps 

are decreasing. Buyers are agreeing to shorter survival 

periods: where once buyers could expect survival periods 

of up to three years, many recent transactions have 

had survival periods of just one year or less. 

Private equity funds are also expected to continue 

to expand from investing in traditional industrial companies 

into other industries. The flow of capital to the 

private equity markets has been and will continue to 

be a powerful driving force behind the seller’s market. 

As greater competition and pricing pressure continue 

to mount, buyers who intend to remain competitive in 

the seller’s market will have to increase their purchase 

prices, limit their closing conditions and accept limited 

post-closing recourse. 

India – The offloading destination for Private Equi- 

ties: 

With India emerging as an economic powerhouse and 

domestic companies showing great appetite for mergers 

Industry experts say that the 

full potential of private equity 

investment in India has not 

been unleashed yet 

and acquisitions both domestically and globally, India 

has become very much a part of their top priority list. 

India was ranked at twelfth position in the total M&A 

deal value and volume in CY06, whereas it has managed 

to climb to seventh position in the first three months 

of CY07. And private equity fi rms are eyeing this new 

found desire of India INC’s empire building plans to 

capitalize on. 

This development comes at a time when there is a 

growing need felt in India for an alternative avenue of 

fund raising for small and medium enterprises (SMEs). 

Many feel that private equity can act as an alternative 

source of raising fi nance and fi ll this gap to a great 

extent. With private equity investment, these firms will 

not only be able to get the much needed resources for 

their future expansion and growth but would also be 

able to leverage the expertise of these private equity to 

both drive operational performance and access global 

markets. With the participation of private equity, the 


75

RESEARCH 

system of corporate governance, fi nancial reporting 

etc will dramatically reach global standards. 

Even industry experts say the full potential of private 

equity investment in India has not been unleashed yet. 

There are certain hurdles, which are coming in the way 

of private equity investment in India. The most important 

one is the FDI cap prevailing in certain sectors 

such as telecom, aviation, banking, insurance, NBFCs 

etc which is limiting their scope of investment in India. 

Even if they make any investment in these sectors their 

exit becomes difficult due to these sectoral caps. 

The new guidelines issued by the government on 

overseas issue of preferential shares, though rightly intended 

to restrict the flow of money into the Indian real 

estate sector, have hit the overall private equity industry 

itself. The new guidelines have also put certain restrictions 

on the deal structuring capability of private equity 

players intending to invest across the sectors, admits a 

domestic private equity player who did not wish to be 

named. Another major issue confronting private equity 

investors is limited number of good companies available 

for investment because of lack of proper fi nancial 

information and other materials. This has resulted in 

large funds chasing few of them making it difficult to 

gain entry. This in turn is pushing up their valuations 

higher which often tend to affect their future returns. 

Then there are many mid-sized enterprises, which are 

largely family controlled and where the entrepreneurs 

are not willing to dilute control over the management. 

But most PE fi rms want a say in the management and 

functioning of the company. 

In spite of these challenges, the Indian PE market 

is booming and the industry is bullish on its growth 

prospects. Certain sectors which are looking good 

are pharma/biotech, real estate/construction, infrastructure, 

manufacturing, retail, IT and IT-related 

services. 

Recently, General Atlantic, Goldman Sachs and Saif 

Partners picked up stake of 5% each in the National 

Stock Exchange. Another private equity fund Chrys 

Capital has invested $24 mn in Mankind Pharma. In 

2006, the Carlyle group invested $20 mn in Claris Life 

sciences. Industry sources say private equity fi rms are 

active in Indian real estate and infrastructure sectors. 

They invest in Special Purpose Vehicles (SPVs) set up 

by these companies and pick up stake in established 

real estate companies. In 2006, private equity investment 

rose by over 230% to $7.46 billion compared to 

$2.26 bn invested in 2005. The first quarter of 2007 

has already witnessed an investment of $2.5 billion 

from private equity fi rms up from $1.27 billion during 

the same period, according to data released by Venture 

Intelligence. 

Overall, there is a broader consensus among private 

equity players that India is a suitable destination offering 

great opportunities for the growth of private 

equity investment. It is only a matter of time, say experts, 

when the huge potential in this industry will 

be realized. 

Forecast M&A Activity by World Region: 

The analysis shows that, in the fi rst five months of 

2007, there was a significant discrepancy between the 

key trend indicators of deal values and volumes. The 

last time the market witnessed this kind of disconnect 

where the average deal size rose, but the number of 

deals fell - occurred at the height of the dot com boom 

in 2000. A sign that the market is starting to cool came 

in H2 2006 when the total number of deals fell for the 

fi rst time since H1 2003 (dropping 8 percent compared 

to H1 2006). 

The analysis shows that the appetite for M&A transactions 

appears to be slowing, despite conservative 

balance sheets. Twelve month forward PE valuations 

The analysis says that Europe 

continues to exhibit the 

strongest M&A picture out of 

all the major global regions 

rose marginally to 17.1x compared to 16.8x in both 

June and December 2006 which implies a restriction on 

the available bid premium in the marketplace. Balance 

sheet capacity remains conservative but has tightened 

marginally from 0.85 times to 0.91 times. 

Of the major global regions, Europe remains the 

most positive in terms of potential M&A activity, due 

to rising PE momentum, while AsPac once again looks 

the weakest. The U.S. remains static in terms of valuation, 

suggesting the potential for a slow down. 

In terms of sector regions, the best M&A prospects 

appear to reside in Utilities Europe, Basic Materials 

North America, Oil and Gas North America, Industrials 

Europe and Consumer Services Europe with the 

weakest prospects being Consumer Services AsPac and 

Consumer Goods AsPac. 

Europe: 

The analysis shows that Europe continues to exhibit 

the strongest M&A picture out of all the major global 

regions. Twelve month forward PEs stood at 16.2x 

at the end of the first five months of 2007, some 7.3 



percent above the 15.1x at the end of 2006. Net debt 

to EBITDA ratios for the region weakened slightly, 

from 0.8 times to 0.88 times. 

By sector, Utilities are eliciting the most significant 

“activity” signals, with forward PEs up 12.7 percent to 

19.8x. Net debt to EBITDA ratios in European Utilities 

remain typically among the highest of any sector 

and have deteriorated slightly from 1.44 x to 1.52 x. 

Industrials has also shown a strong tendency with PE’s 

up 10.9 percent to 17.7x, with net debt to EBITDA 

weakening slightly from 1.59 x to 1.65 x. Consumer 

Services and Telecoms were also strong (PE up 9.6 

percent and 8.4 percent respectively). Oil and Gas was 

the weakest performer though balance sheets remain 

very strong with net cash, though this position has 

deteriorated during the past six months. 

The European market remains largely buoyant. The 

key difference between now and then, however, is the 

dramatic influence of private equity, which continues 

to hunt-down stable cash flow, attractive growth prospects 

and profitable companies. Private equity players 

are accounting for a greater volume of deals being done, 

but more importantly average private equity deal size 

is increasing, with the likes of Carlyle and Blackstone 

highly prominent in Europe. Of course the efficient 

debt market is supporting market buoyancy. Liquidity 

remains good, enabling highly-leveraged deals to be 

undertaken. 

U.S.A. 

The U.S. traded sideways in terms of valuation with 

an almost unchanged forward PE of 17.9x, slightly up 

from 17.7x six months ago. Similar to Europe, balance 

sheets remain robust though have deteriorated with 

net debt to EBITDA ratios of 0.82 times to 0.96 times. 

Within the region, the most positive sector is Oil and 

Gas with forward PEs rising 13.6 percent from 11.7x 

to 13.3x. Balance sheets remain strong at 0.41 times 

indicating that this represents the comparatively hot 

sector going forward. Telecom is close behind with 

forward PEs rising 11.2 percent from 15.7x to 17.5x, 

though net debt EBITDA ratios have deteriorated 

to 1.41 times. According to Dealogic data this is the 

fourth consecutive drop in deal volumes. Most other 

sectors within the U.S. remain relatively stable, though 

Healthcare has experienced negative developments in 

forward PEs from six months ago (down 4.1 percent 

to 17.7x). 

Liquidity in the market is still good so the ability to 

get deals fi nanced remains high, fuelling M&A activity 

in North America. A lot hinges on the recovery for 

North American Auto Original Equipment Manufacturers 

and the impact it could have on the significant 

parts suppliers throughout the continent. Consolidation 

in the auto parts industries is expected to pick up pace. 

Furthermore, competitive global pressure on North 

American manufacturers has put significant pressure 

on CEOs to reach for increased economies of scale and 

penetrate new markets, which should support M&A 

activity in the medium term. 

North of the border, there may be a more robust 

picture. A large part of Canada’s ever-popular income 

trust sector was halted last year by proposed changes to 

the Canadian Income Tax Act causing many of these 

mid-size public companies to evaluate their strategic 

options and participate in significant M&A activity. 

There are 250 income trusts in Canada with a market 

capitalization of approximately US$200 billion. Energy 

and resource companies are still expected to remain 

strong as world commodity markets experience strong 

growth from growing global demand. 

Asia Pacific: 

Asia Pacific: 

Asia Pacific has continued to experience a valuation 

decline, down a further 4.9 percent to 17.0x, compared 

to 17.9x as at the end of December 2006 and 18.9x as at 

the end of June 2006 continuing to suggest an “easing” 

of potential M&A activity. Contrary to North America 

and Europe, its balance sheet has strengthened with 

net debt EBITDA falling from 1.0 times to 0.97 times. 

Furthermore foreign direct investment in Asia is expected 

to remain strong, particularly China. 

The biggest “fallers” contributing to valuation 

weakness and therefore falling appetite for deals in 

the region are Consumer Services and Oil and Gas. 

Consumer Services forward valuation declined 8.7 percent 

from 22.5x to 20.6x, with Oil and Gas forward 

PE down by 7.1 percent from 12.4x to 11.5x. Only 

telecoms remained “warm” with forward PE’s up 9.4 

percent to 17.5x with net debt EBITDA remaining 

modest and 0.34 times. s 

Global fi ndings show the number of deals falling for 

the first half year period since H2 2002, and forward 

valuations have now been static for four consecutive 

half-yearly periods. However, fundamentals still look 

sound in the Asia region. Overall, interest rates remain 

low and show no signs of any significant increase - the 

debt markets are highly competitive although with recent 

signs of tightening. Currencies remain robust and 

the booming regional resources sector with demand 

driven commodity pricing is not expected to slowdown 

any time soon. Any fall off in the “price paid” by the 

market for earnings streams could signify an easing in 

the appetite for assets at perceived inflated levels”. 


77

RESEARCH 

M&A 

DUE DILIGENCE 

MORE THAN 

JUST FINANCIAL 

By Mr. Supriya Mitra Majumdar, Consultant - Legal cum Compliance, 

Planman Technologies (India) Pvt. Ltd. 



The Current Scenario: 

Between 2005 and 2006, on a year-on-year basis, global 

M&A volume had gone up by 37%. People who deal with 

corporate strategies and M&A dealmakers, think that since 

the global interest rates are still at relatively low levels and 

hedge funds have taken an active role in the recent past 

in M&A activities, there is a possibility that global fund 

managers shall continue to allocate more fund for M&A 

deals at least in near future. 

The objective of this article is to focus on the issues of 

M&A that require attention of professional managers having 

specialization in finance, law, strategies etc., since these 

are crucial by nature. It is the fact of life today that the 

banks fund M&A mainly for financial reasons realizing 

the need for faster growth in volume of business through 

inorganic route. Companies make strategic growth plan 

through internal operations and acquisition. When mature 

resources are needed right away, acquisitions perhaps make 

business sense. 

Initial Issues: 

Internally it should be addressed that when normally M&A 

drives fail to generate greater value then why at all a company 

should think for it By and large the reason of failure 

is poor post-merger integration as a result of which proper 

plan for such integration and accountability aspects are to 

be drawn up in detail at the strategic plan making stage. 

Before placing the matter to the Board, the CEO and his 

team should check whether the added resources of the target 

company carry any sense to the acquirer Should the 

acquisition be made to broaden the product line to reach 

a critical market Is it to address a new customer point 

Could the brand value of the target be a wealth creator in 

the hands of the acquirer 

These need to be hammered out to find a logical answer. 

Specific issues to be examined like what would be increased 

capacity of the acquirer and what would the comparison 

look like if compared with its rivals 

What was or is the niche market of the target company 

and how did the target make value out of its overall business 

and is it still possible to create further value What are the 

operational hurdles of the target and how the acquirer is 

going to address such hurdles How the scale of economy 

shall show advantageous to the acquirer Lastly, what would 

be the incremental cost (interest for borrowing for M&A) 

vis-à-vis the incremental volume and the incremental return 

on capital 

Some Related Issues: 

The recent M&A deals by Indian business groups abroad 

and by non-resident Indians in Europe and US, is perhaps 

a positive response to “satisfactory underperformance” as 

told by late Sumantra Ghosal. These issues are currently 

being deliberated upon at the management schools. While 

making analysis relating to M&A strategies some time, it 

is not uncommon that the companies forget that may be 

a joint venture or a strategic alliance is more flexible than 

an acquisition proposal. M&A is an answer for long-term 

need or when operations are to be integrated perfectly at 

many levels. The question of affordability should also be addressed. 

In the absence of cash available, private placement, 

leveraged buyout could be the source of fund. Funding by 

diluting stake of promoter is also not un-common beside 

reverse merger. The deal maker and the management of the 

acquirer should settle these issues upfront, because the funding 

model always creates an impact on the future financial 

performance of the target and the acquirer. At the legal front 

collateral agreements are important between the acquirer 

and the investment banker, consultants, lawyers, auditors 

in order to avoid confusion and unnecessary disclosure 

of confidential matters. The management of the acquirer 

should develop its team for due diligence and post-merger 

integration, to avoid any conflict in the process. 

In the absence of cash available, 

private placement, leveraged buyout 

could be the source of fund 

Some Observations: 

There are unfortunate instances of due diligence which 

echoed the desire of the acquirer in the report and obviously 

the M&A failed to be a tool for growth of the combining 

entity. Due diligence have the following as source 

of information: 

1. Public information, public document etc. 

2. Research based on feed-back from the customers, suppliers, 

distributors, alliance partners, former employees, 

competitors, business journalists, analysts and industry 

experts. 

3. The target company, through its management accounts, 

interviews with management team. 

4. And lastly, own understanding of the acquirer from database 

on customer satisfaction and employee turnover 

rates etc, and its causes. Theoretically the due diligence 

team should meet regularly during the due diligence period 

to exchange their views and findings and the leader 

of the team should have courage not to echo the thought 

of the owner of the acquirer and should carry sufficient 

amount of courage to arrive at a logical and bankable 

findings of due diligence report. The due diligence team 

should have ability to adjust objectives and the scope of 


79

RESEARCH 

the due diligence if it is necessary, 

and should carry necessary mandate 

from the acquirer for such purpose. 

Unfortunately it is commonly seen 

that the due diligence team during 

due diligence process take due 

diligence to a routine, time bound, 

and target oriented exercise. On the 

other hand the directors of the acquirer 

always want to know whether 

the due diligence has been properly 

performed, whether the buyer understands 

the transaction, whether the 

target company is a strategic fit and whether there is a 

sound post deal implementation plan. There is increased 

board scrutiny on the subject which reflects an awakening 

on the implications of risk arising out of due diligence 

relating to M&A. The Board of the acquirer wants to 

know the measures to be adopted to mitigate the risks 

arising out of the Merger and Acquisition proposal. 

Watson Wyatt’s Worldwide Mergers & Acquisitions Survey 

– Asia Pacific shows a difference in approach between 

the East and the West on M&A issues. However sector-wise 

combination is a continuing trend, mainly to achieve bigger 

volume of business and competitive 

size beside synergistic resemblance and 

cost reduction. However, lack of proper 

documentation from the end of the target 

company and reluctance on the part 

of the target in some cases pose difficulty 

in gathering information. This difficulty 

was further compounded by a lack of 

efficient data collection process in the 

acquiring organization and the lack of 

time in which to gather information. 

The survey also states that experienced 

acquirers dedicate longer time in making 

due diligence in a comprehensive and 

realistic manner covering the pertinent 

issues involved. A rigorous approach to 

commercial due diligence helps acquirers to negotiate better, 

reduce risk and perhaps avoid disaster. 


Information gathered through due diligence Scale 0-40 

Hard assets 35 

Market share, distribution 31 

Financial aspects and HR function 30 

Management capabilities and willingness to co-operate 26 

Technological and business competencies 26 

Major shareholders 25 

HR Policy matters 20 

Workforce potential 19 

Organizational culture and dynamics of change 18 

Watson Wyatt’s M & A survey discloses the following: 

From the above it is apparent that due diligence study makers 

give more importance to hard assets and market share 

but focus less on workforce potential and organizational 

culture. Due diligence makers assume some time that the 

knowledge pool or the competency level of the acquirer 

is greater and better than the target company. Therefore, 

the intellectual capital and managerial capability are the 

two important casualties in normal due diligence process. 

Learning ability, sharing ability, adoptability of new 

knowledge and courage for further invention are the key 

areas through which the level of intellectual capabilities 

of any organization could be assessed. The due diligence 

team through a knowledge audit may try to ascertain the 

level of intellectual capital of the target company or may 

even reconcile the findings of the knowledge audit with the 

acquirer to ascertain its real intellectual strength. These are 

issues examined by the due diligence and post deal integration 

teams. The nature of queries and their response on 

the degree of importance is quite signifacant and may be a 

Nature of queries Critical Important Unimportant 

Retention of key talent 76 21 3 

Employee communication 76 18 6 

Retention of key managers 74 26 0 

Integration of corporate culture 49 49 2 

Managing resistance 30 57 13 

Labour relation 28 54 18 

Alignment of compensation 27 61 12 

Retraining workforce 26 58 16 

Recruitment of new staff 18 61 21 

Redeployment of workers 10 59 31 

Downsizing 10 68 22 

tool of learning for the management in the process of due 

diligence and integration period. 

The cultural assessment in the pre M&A period and the 

alignment of cultures between the target company and the 

acquirer is an important element in the post M&A integration 

stage. There are instances where poor post-deal integrations 

have dampened the acquisition. Experts agree that 

mergers generally create value beyond the combined value 

of both the targets and the acquirers. Experts also say that 

success of M&A depends on adequate pre-deal due diligence 

and post deal integration, with the help of findings of due 

diligence report of M&A.

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