india going global.indd - The IIPM Think Tank

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
48 Need the Dough July-October - 2007