india going global.indd - The IIPM Think Tank

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
18 Need the Dough July-October - 2007
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