2005 - Oil India Limited

OIL beyond territorial barriers
of the known field, shallower or deeper prospects within
the known limit of the field, scopes for re-development for
enhancing recovery of the existing field, and / or
discovery of new field within the lease area based on a
fresh evaluation of the prospects. These relatively high
risk components do not form part of the standard
valuation of the assets as only proved and probable
reserves are normally taken into account in these
exercises.
MERGERS AND ACQUISITIONS: MECHANISM
In the international arena, mergers and acquisitions
normally take place through direct negotiations between
buyer and seller, or
through the process
of international
bidding. In cases
where the bidding
process is chosen
by the seller, bids
are invited from the
prospective buyers
by the financial
advisors appointed
by the seller. It is
only in very special
cases that the
advisors are
6
Appointment of
Financial Advisor
Appointment of
Teams for Technical,
Financial,
Commercial and
Legal Due Diligence
appointed by the buyers to look for specific acquisition
targets.
In the E & P business, where acquisition of assets is very
common, there are a few agencies, who provides scouting
services based on analysis of various companies. Also,
mergers of large international companies often result in
disposal of assets to rationalize portfolio as a part of M & A
deals and such information is usually available with the
scouting agencies.
Once a company is aggressively engaged in M & A
activities in the market, it is quite common to be listed by
the financial advisors of the sellers as potential buyers,
and information do flow in easily. Until such a reputation
is established, it is necessary for the acquirers to be
Conduct of Due
Diligence of
Company / Assets
to be acquired
Valuation of Asset /
Company
Approvals
Submission of Bid
Figure 2 : Important Steps is an M&A Deal
proactive and be in communication with advisors who
are in the business of providing advisory services to the
sellers.
After an acquisition target is identified, several important
steps are to be taken either simultaneously or in quick
succession as outlined below in figure 2.
SYNERGY FROM MERGERS AND ACQUISITIONS
Generally speaking, potential sources of synergy in
mergers and acquisitions are in competitive advantage in
the existing business, expansion into new business, and in
financial benefits to the merged entity.
Negotiation of
Buyer-Seller
Agreement
Signing of Buyer-
Seller Agreement
Transaction
Hand-over /
Take-over
Competitive
advantages in existing
business are achieved
through horizontal
mergers. It helps in
achieving economies
of scale, restricting
competition and in
indulging in anticompetitive
practices.
Vertical mergers on
the other hand, make
supplies more difficult
for the competitors.
When there is
shortage in the market, profitability improves. When the
market has over supply, merger could help in
re-structuring, whereby the economically less viable
assets / projects could be disposed of or kept in abeyance.
Entry to a new business or market through mergers is very
common. It is because entry to a new business or market
through merger is relatively quick. It also has lower risk than
direct entry. Sometimes, M & A is also the cheaper route.
The basic idea of M & A is to exploit the distinctive
capabilities of the acquired company and to get
possession of its strategic assets. Vertical integration
through mergers and acquisitions has a greater chance of
success if the original core competencies of the merged
companies are complementary.