MERGERS AND ACQUISITIONS

Merger and acquisitions in simple terms means where one company takes over another or where two companies join together to form one single company. The process of mergers and acquisitions has gained substantial importance in today’s world. The process is extensively used for restructuring business process. It has become popular because of enhanced competition, breaking of trade barriers, free flow of capital across countries, buoyancy in economy, liquidity in corporate sector, dynamic attitude of entrepreneurs and most of all Globalization of business.

India’s growth story has been no different. Since NEP 1991 the economic reform has put a whole lot of challenges both in domestic as well as in international arena. The Indian Corporate has been handed over a platter to showcase to the entire world its ability to withstand competition. Our beloved country has arrived in global arena- A Country not to be trifled with, but to be looked up to with respect and admiration.

Mergers and Acquisition have more positives than negatives and hence it is one of the hottest topics among the top CEOs of India. Before we move on to the advantages of amalgamation we must know the motives behind the same: They are

Economies of Scale: The average costs of product decreases since fixed cost are shared over a large number of goods thereby lowering the cost to the company and increasing profits.

Increased Revenue:  Company absorbs one of its major competitors and thus is able to command a price in the market.

Corporate Synergy:  Better use of complimentary resources may take form of revenue enhancement and cost savings.

Tax Planing: A Profitable company may buy a sick company to set off its income.

Resource transfer: Resources are unevenly distributed across firms and interaction of target and acquiring firm resources can create value by combining scarce resources.

These are few and motives differ from company to company and from industry to industry.

Advantages of Merger and Acquisitions:

 Access to new markets: When a company acquires another company it opens up an entirely new market. A domestic company acquiring a foreign company gives exposure to international markets. An international brand is created for the company. Eg: Tata- Chorus.

Taking on Global Competition: Any company to survive in the industry needs to grow. Growth must be reasonable enough not only to compete against other companies but also strive better than them. One way by which company may look to perform better is by acquiring another company equivalent to its size or even bigger. Eg: Tata Motors- Jaguar Land rover.

Financial Aspects: Mergers also help in increased market share, improve profitability, EPS, financial leveraging, access to cheaper international finance, market capitalization and so on.

Other advantages of mergers and acquisitions are

• Buying cutting edge technology rather than buying it.
• Improving operating margins and efficiencies.
• Developing new product mixes.
• Maintaining growth momentum
• Product innovation through R&D.
• Goodwill and brand building

However corporate require huge cash balances to buy the company which is one of the major constraints. However with effective long term planning the same can be overcome. The benefits of acquisitions will not be realized immediately as most of the shareholders would want. It is a process which is long term in nature. Benefits of such takeovers would take 5years to yield actual benefits.  But at the same time we must not forget the current situation of the economy and the industry growth aspects.

 Indian companies are buying international companies rapidly and thus expanding their business beyond the national boundaries.

Major Takeovers

Some of the major takeover by Indian Companies is

Tata Steel acquired chorus to become one of the largest steel company in the world and also the biggest takeover by an Indian Company for a whopping $12.1 Billion.

Tata Motors acquires Jaguar Land rover for $2.3 billion.

Vodafone takes over Hutch Essar for $10 Billion for a 52% stake in the company.

NTT Docomo Tata tele service deal for $2.7 billion. The second biggest deal after Vodafone- Hutch.

ONGC Acquisition of Russia based imperial energy for $2.8 billion. This marked a turnaround of India s hunt for natural reserves to compete with China.

Suzlon Energy acquies Repower. Hindalco acquires Novellis for $6billion. Reliance industries takes over Reliance Petroleum limited for $1.6 billion.

Also more recently Reliance power took over RNRL.

These are some of the big takeovers in India. But at the same time India have missed lot of opportunities in this field.  SBI should have merged with its subsidiaries such as SBH, SBT and others. This would have given SBI a wide access to markets and at the same time to capital.  It would have helped the bank to consolidate and grow at a rapid rate and thus be the leading bank not only in India, but also in the world. During recession in 2008 & 2009, at a point of time Citibank shares were trading at $1/ Share.   Home Minister P Chidambaram then asked the SBI Chairman to buy the shares of Citibank as it would have a global market. However SBI could not take over Citibank because it was a small bank and also due to lack of strong capital base. Merger of Main bank and its subsidiaries would have helped the bank to overcome the obstacles. Also the Bharti- MTN deal didn’t go ahead due to certain constraints. It would have put India on the world map. But alas an opportunity goes begging.

India is a young country with high aspirations. India is already an economic powerhouse. It is one of the very few countries to raise a positive GDP growth during the economic slowdown. With huge profits and surplus cash in the hands of corporate’s, day is not far when India will acquire some of the biggest companies in the world and make its presence felt in all the countries.