Symbiont- A Newsletter on Mergers and Acquisitions

8/8/2019 Symbiont- A Newsletter on Mergers and Acquisitions

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Cadbury and Kraft. A surprising taleof how two rich and successful con-glomerates can shape up, what can betermed as one of the most talked

about and surprising acquisition pri-marily because of two reasons:

1. Either of the parties are marketleaders in the confectionary andsweets market.

2. Its a hostile takeover by themanagement of Kraft, who nec-essarily ventured into purchas-ing the brands of Cadbury over a period of 6 years.

Mergers and acquisitions: These twowords represent how companies buy,sell and recombine businesses.They're also the reason why today'scorporate landscape is a maze of con-glomerations. Insurance companiesown breakfast cereal makers, shop-

ping mall outlets are part of militarymanufacturing groups, and moviestudios own airlines, all because of mergers and acquisitions.

Not all M&As are peaceful, however.Sometimes, a company can take over another one against its will --a hostile takeover . How can they dothat?

There is much evidence to suggestthat most acquisitions and mergersresult in a net benefit to the economy.There are more winners than losers.Economists would say that it is a

positive-sum game. Yet those whoinitiate such activity, the "predators,"are commonly viewed as greedy,immoral and uncaring.

A number of groups benefit as a re-sult of merger activity. The oldshareholders benefit because theyreceive a premium for their stock.

New shareholders benefit becausethey are buying stock in a companythat is in the process of becomingmore efficient and competitive.Those shareholders who do not ten-der their stock also benefit because

the market value of their shares risesas a result of the tender offer.

The general public benefits becausethe more efficient company that re-sults from the merger is able to re-duce its prices and/or provide higher quality products and services. Em-

ployees benefit because a healthycompany will be less likely to go outof business. It seems like the onlygroup that does not benefit from anacquisition or merger is the com-

pany's present management, whichstands to lose their jobs as a result of the merger. Management uses a vari-ety of defensive tactics to thwart atakeover. They sometimes run toSEBI or the state legislature scream-ing that the predator has violatedsome antitrust law or some antitake-over law.

The hostile takeover when a suitor

SYMBIONT28th July 2010 VOLUME II, ISSUE 9

Financing M&A 4

Essar Steelacquires Servo

Steel

5

RCom-GTLMerger

7

HCL Infosystems buys NTS

8

Essar to buy NavaBharat Power

9

RNRL merges withR-Power

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Case Study 12

Quiz 13

The unending scuffle in M&A:The so called unethical Hostile Takeovers

By Akash Sablok

FACT-O-METER

India saw a snapped up value of its M&Adeals for Jan-June2010 at a staggering $38 billion. A seven

fold increase over the previous half.

Telecom sector wasthe largest contributor in the total share withdeals valued at billiondollar plus numbering

seven which is arecord first.

(Click on thearticle title)

INSIDE THIS ISSUE


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75% in a company through an openoffer. That restricts complete take-overs by preventing companies fromoutright owning 100% of a companyand deters hostile suitors who dontwant to have to deal with a 25% mi-nority shareholding that opposesthem.

But a committee appointed by theSecurities and Exchange Board of India has made a series of propos-als that are expected to shake up theIndian market for mergers and ac-quisitions, in part by setting thestage for hostiles. It includes pro-

posed revisions to the current ruleson the size of open offers.

Another noteworthy recommendationis to abolish payment of the non-compete fee, which is paid by the ac-quirers to the target companys pro-moters in lieu of a commitment for not entering the same business. Such

payments can be as high as 25% of the deal value.

Going by the utilitarianism of the business world, business ethics gets acommandment where it is proven thatthe hostile takeover necessarily defersand deters the will of the acquirecompanys management. This resultsin loss of right to finances and deci-sions held by the top management andthe board of directors.

The unethical nature of acquisitionmight result in resistance from theshareholders due to the following rea-sons:

1. Change in management mightresult in change in rules andcorporate policies which governthe distribution of profits andinterim dividends, hamperingthe interest of shareholders.

2. Change in governance mightaffect the confidence of theshareholders in the functioningof the company which is very

pertinent to the success and themarket value of the companysshares.

3. Distribution and sharing of as-sets and the payoffs of liabili-ties affects the balance sheet of either company.

Traditionally no company was al-lowed to place more than three peo-

ple of the same company and partyin the Board of Directors, but thenew policies under SEBI register an

accumulation of shareholding in the board that can be underwritten bythe company itself, hence, an inter-nal preference and interest cannot beruled out under such circumstances.

To address the issue of underminingthe ethical behaviour of the acquir-ing company, SEBI was entitled tointerfere in regards to acknowledge-ment and deference of any red taped

and sought unethical takeovers,which is where the rule of 75:35:25was allowed.

The Takeover Regulation AdvisoryCommittee was formed by the Secu-rities and Exchange Board of Indiain September 2009 to look at anoverall change in the takeover norms.

So whether the process is ethical or not; two things are clear:

1. Hostile takeover is informedand decided- Ethical

2. The acquire company is forcedto sell its stake Unethical

It is again a 360 degree question.

T R I V I A

T ho mso n F i na nc ia l

Sec u r i t ies da ta s ho w

t ha t 1 4 pe rce n t o f t he

me rge rs i n 200 7, wo r t h $ 48 7 b i l l io n, i n vo

l ved

hos t i le ta k eo ve rs.

S i nce t hese f ig u res a re

f o u r t i mes t he i r las t

pea k i n 1988, t he y re-

f lec t a no t he r reco rd f o r

200 7.

World

Microsoft Yahoo

HP Compaq

Vodafone Mannesmann

India

Kraft-Cadbury

Mitsui-Sesa Goa

ICI Plc Asian Paints

Examples

"If you want to know what a man is really like, make notice how he actswhen he loses money." - Proverb

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does not have to sell the assets securitised to a spe-cial purpose vehicle and therefore is able to retainoperational control. The acquiring firms float sub-sidiaries for this purpose. The whole business se-curitisation is particularly attractive for a businesswhich has significant value attached to assetswhich it is unable to reflect on its balance sheet,such as brands or other intellectual property rights.

A whole business securitisation enables such anacquisition to realise the value of those assets in away which would not be possible using more tradi-tional financing methods.

BOOTSTRAPPING FINANCEBootstrapping Finance is a form of buyout where a

buyer finances an acquisition in part with the tar-get corporation's excess cash or liquid assets.

It is a way of buying a company over a period of time. Buyer buys some shares of target firm, andthen uses those shares to borrow more money to

buy more shares, each time promising to givethose shares to the lender if they fail to make re-

payments on their loan. In this way over a periodof time the acquisition takes place.

STOCKSWAPA stock swap, also known as a share swap, is a

business takeover or acquisition in which the ac-quiring company uses its own stock to pay for theacquired company. Each shareholder of the newlyacquired company receives a certain number of shares of the acquiring company's stock for eachshare of stock share holders previously held in the

acquired company. This financing method is veryconvenient as the debt requirement is nil, but di-lutes the management control.

Todays CFOs are using the newer methods to fi-nance the acquisitions to ensure a lower cost of capital and to avoid the legal requirements and taxliabilities. They are combining the traditional andemerging methods to get maximum benefit out of the acquisition right from the beginning.

Once a decision has been taken by a company to pursue acquisition as part of its business strategy,

and an appropriate target has been identified; it isobviously crucial that the acquisition can befunded. Without being able to raise the necessaryfunding, the acquisition strategy cannot be imple-mented. In the books of finance there are a number of strategies prevailing to finance the M & A deals.

Strategies like Equity and debt funding permuta-tions, Private equity and VC investment perspec-tives, Mezzanine debt finance etc. are well provenand widely used in various combinations to finance

the funding needs of acquisitions.SECURITIZATIONSecuritization of the assets of the target firm is oneof the innovative approaches used by the acquirersin recent time. Securitisation is an innovativemeans for certain companies to raise finance in acost-effective manner.

In traditional securitization process the acquiringcompany floats a special purpose vehicle (SPV) as

an orphan company and sells the assets of the targetfirm to that company. The SPVs mobilize moneyfrom market through the bond issue route or debt.By this way, acquiring firms ensure the lowest in-crease of their fixed assets in the balance sheet after the acquisition (to avoid legal and tax proceedings)while retaining the full management control andsatisfying acquisition needs.

In contrast to a traditional securitisation, in whole business securitization the borrowing company

Financing M&A - A Different Perspective By Surajit Mandal

"If past history was all there was to the game, the richest peoplewould be librarians." - Warren Buffet
http://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Takeover


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Essar Steel is going ahead for itsmaiden acquisition in UK with Servos-teel, the largest independent steel proc-essor in the UK. The acquisition wasmade through Essar Steel InternationalBV. Essar Steel International BV is asubsidiary of Essar Steel HoldingsLimited. The company, however, didnot disclose the buyout amount.

Servosteel has a steel processing capacity of 500,000 tonnes per annum. Itis capable of processing the entire flat

product range - hot rolled coils, coldrolled coils, hot rolled pickled, galva-nised and colour coated products.

Servosteel, a Dudley-based steel ser-vice center in the West Midlands, of-fers a one-stop service for SCS(smooth clean surface) technology,

pickling, slitting and decoiling andvarious individual custom tailored ser-vices.

Essar Steel, global producer of steel, isa fully integrated flat carbon steelmanufacturer, with presence in Can-ada, the US, and Indonesia besides In-dia. It has integrated facilities for pro-duction of extra wide plates, hot roll-

ing, cold rolling, galvanising and col-our coating, pipes with a full distribu-tion business with service centre andsteel hyper marts.

Essar Steel has a global steel produc-tion capacity of 8.6 million tonnes per annum (MTPA). It operates seven ser-vice centres in India, Indonesia andCanada with aggregate capacity of over 3 million tonnes.

Essar Steel is part of the Essar Group,a leading player in the sectors of steel,oil and gas, power, communications,shipping, ports and logistics, construc-tioaqn and minerals and has opera-tions in more than 20 countries acrossfive continents.

Essar Steel Middle East, through its

subsidiary, had announced its plans toset up a 2,50,000-tonne processingand service centre in Dubai's Jebel AliFree Zone in January this year, toserve Essar's expanding regional cli-ent base in sectors such as automotive,ship building and engineering.

The steel giant is believed to have sentfeelers to Kandil for raw materials.

Essar Steel acquires Servo Steel in UK

In line with Essar Steel's distribution strategy

DATE June 28th

, 2010ACQUIRER Essar SteelACQUIREE ServoSteelDEAL VALUE UndisclosedDEAL NATURE AcquisitionPURPOSE To strengthen the companys

distribution network

By Praveen and Nirmoy

"Diversification is a protection against ignorance. It makes little sense for those who knowwhat they're doing." - Warren Buffet

According toEssar Steels

spokesperson,This is an oper-ating plant with a

loyal customer base; so we donthave to go out and

search for newcustomers.

TRIVIA

Essar Steel has aglobal steel produc-tion capacity of 8.6

million tonnes per annum (MTPA).It operates sevenservice centres in

India, Indonesia andCanada with aggre-

gate capacity of over 3 million tonnes.

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"Doing more and more with less and less is one form of being generous. In fact, the easiest way to become rich is by being generous." - Robert Kiyosaki

Kotak Mahindra Bank Ltd has enteredinto an agreement with SumitomoMitsui Banking Corporation, Japan(SMBC), for a preferential issue toSMBC of 16.4 mn shares of Kotak,which amounts to approximately 4.5%stake on a post-issue basis for Rs.1,366 cr. The proposed investment isat a price of Rs. 833 per share. The

preferential issue is subject to share-holder and other necessary regulatoryapprovals.

SMBC is the core financial institutionof Sumitomo Mitsui Financial Group(SMFG), the second largest bankinggroup in terms of market cap in Japanwith approximately USD 1.37 trillionof total assets and USD 3.02 billion of net profit as of March 31, 2010.

SMBC is engaged in the business of providing financial services by itself,and through its affiliates and groupcompanies, spanning commercial, re-tail and wholesale banking, securities

businesses, asset management, projectfinance, consumer finance and creditcard services.

It was established in April 2001 throu-

gh the merger of two leading Japa-nese banks, Sakura Bank of the Mit-sui group and Sumitomo Bank of theSumitomo group, both of which havehad a long business tradition globallyas well as domestically for nearly100 years each. SMBC, as a coremember of SMFG, works together with other member firms in the

Group to offer customers highly so- phisticated, comprehensive financialservices. SMBC also owns SMBCCapital India Pvt Ltd, which is a100% owned subsidiary in India fo-cused on providing advisory servicesto clients in the infrastructure andother similar sectors.

The intent of this cooperation be-tween the two groups is to explore

opportunities arising from cross bor-der business, investment and tradeflows, with a substantial focus on theIndia-Japan corridor. The coopera-tion would cover various businessesof mutual interest including assetmanagement, alternate assets, invest-ment banking, and wholesale bank-ing such as infrastructure finance etc.

To explore opportunities in cross border business, investment andtrade flows, with a focus on the Indo-Japanese corridor

Sumitomo Mitsui to hold 4.5% stake inKotak Mahindra Bank

By Sudhakar and Prathibha

DATE

June 29th, 2010

ACQUIRER

Sumitomo Mitsui

ACQUIREE

Kotak MahindraBank

DEAL VALUE

Rs.1366 crores

DEAL NATURE

Acquisition

PURPOSE

To look into assetmanagement, in-

vestment banking,and wholesale

banking

Mr.Uday Kotak, MD of Kotak Mahindra Bank said, The Indian financial servicesindustry continues its high growth trajec-tory. We see this as a significant opportunity

for two financial conglomerates to leveragetheir strengths to serve the Indo-Japan cor-ridor across a range of financial services".

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Reliance Infratel, the telex-infrastructurearm of the Anil Ambani led Reliancecommunication has agreed to merge withthe ManojTirodkar led GTL Infrastruc-ture for a cash and stock deal.Valuationof RComs tower arm is estimated as Rs31250 Cr. @ Rs 62.5 L per tower.RComs debt of 18000Cr (out of totaldebt of 33000Cr) will be transferred tothe books of GTL, and about 2 million

share holders of RCom will get freelisted shares of GTL.

The transformational deal will be imple-mented through a demerger of RelianceInfratels tower assets into GTL Infra.The related assets (Other than towers)will however remain withRCom. Reliance infratel is transferringtheir entire portfolio of 50000 towers tothe GTL. The post merger entity will

become the Worlds largest telecom in-frastructure company, which operates

neutrally.

For reliance communication the debt burden will reduce considerably and fi-nancial position will improve in their

book. Moreover share holders of RCOMwill get a bonus in the form of GTLlisted shares. For GTL the deal is signifi-cant as the independence and neutrality

of the merged entity is expected toact as a catalyst to attract addi-tional tenancies from 2G, 3G andBWA players and it may catapultGILs number of tenants per tower from current 1.2 to over 2.5, after considering the additional tenancyof over 75,000 to the existing num-

ber of 1,25,000 tenants. A higher tenancy is necessary to improve

operating efficiency and reduce thetime necessary to retrieve invest-ments. Hence, the success of thenew entity largely depends uponthe managements ability to im-

prove tenancy ratio.

Incidentally, telecom operatorswhich are already tenants via thisdeal and have been brought on

board are RCOM, Aircel, EtisalatDB Telecom, MTS, Uninor Tele-com, Videocon Mobile, Tata Tele-services, Vodafone and S Tel.

If one takes into account the futuredemand for telecom infrastructureacross the country from 14 playersin 2G, and winners in the recentauction for 3G.

RCOM-GTL tower merger creates a globaltele-infrastructure giant.This is one of the major measures that ADAG is undertaking toclear debt and to lighten the burden of upswing tower cost

By Surajit and Chinnu

"Finding your entrepreneurial spirit and making it strong is more important than theidea or business you are developing." - Robert Kiyosaki

Date June 28, 2010Acquirer GTL InfrastructureAcquiree Reliance CommunicationDeal Value Rs 31250 Cr.Deal Nature Merger Purpose To strengthen the Asset built up position

TRIVIA

GTL has beenrecognized as a

4Ps power brand and also as the top

10 in the S&P ESG India Index.

FACT

The combined tower operations of

Reliance Communi-cations and GTL

Infrastructure would be the largest tele-coms infrastructure

firm in the worldnot controlled by acarrier.

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"If past history was all there was to the game, the richest peoplewould be librarians." - Warren Buffet

HCL Infosystems has acquired a 60 per cent stake in Dubai-based IT servicesand solutions company, NTS Group, for an estimated $6.5 million.

With the addition of NTS, HCL Info-systems will now expand its global foot-

print in the Middle East and Africanmarkets with the direct operations to

address Systems Integration and ser-vices needs in these regions, the company said in a statement.

NTS provides solutions ranging from IThardware to software services and con-sulting. Specific areas covered by NTSinclude computer hardware, enterprisesoftware solutions, infrastructure andnetworking solutions, e-security solu-tions and web development services.

NTS Group has over 100 technologyand support employees in the UnitedArab Emirates.

HCL will be augmenting existing NTSDubai business with its system integra-tion, product, services and solutions

portfolio to create larger business, itsaid.Meanwhile, HCL Infosystems hasannounced the launch of HCL O'zone, a

The deal aims at creating greater business opportunities throughdeeper customer service to the NTS Group

HCL Infosystems buys 60% stake inNTS Group

By Tom and Seetha

DATE

July 8th, 2010

ACQUIRER

HCLInfosystems

ACQUIREE

NTS Group

DEAL VALUE

$ 6.5 million

DEAL NATURE

Acquisition

PURPOSE

To createsystems, product,

services andsolutions portfolio

cloud-based computing solution ser-vice for its customers.

The new offering straddles infra-structure-as-a-service (IaaS) andsoftware-as-a-service (SaaS), andHCL said it would deliver the bene-fits such as reduced capital ex-

penses, increased data security, re-

duced power and cooling, greencomputing and disaster recovery.The solution will also provide 24x7technical support to manage scal-ability and performance.

The acquisition is part of our strat-egy to go global. Although we havea small presence in the Middle Eastand African markets cur-rently, NTS will become our beach-

head in addressing these markets ona larger scale, saidHCL Infosystems executive vice -

president George Paul.

About NTS Group NTS is a six-year old privately-heldorganisation that provides IT hard-ware and software services to a hostof business houses across Gulf.

With the addition of NTS, HCL Infosys-tems will now expand its global footprint inthe Middle East and African markets withthe direct operations to address Systems

Integration and services needs in these regions, said Mr George Paul, ExecutiveVice-President, HCL Infosystems

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Essar Power Ltd, a subsidiary of LondonStock Exchange (LSE)-listed Essar En-ergy Holdings Ltd, has entered into bind-ing agreements to purchase 100% stakein Navabharat Power Pvt. Ltd, which is

building a 2,250MW coal-fired power plant in Dhenkanal district, Orissa.

The purchase is part of Essar Powerscommitment to foreign investors to raise

its power generation capacity to11,470MW by 2014. However Essar Power has not disclosed the amount itwill pay for NavaBharat, only statingthat it would initially acquire 76% stakeand the rest after completing certain pro-

ject milestones.

Essar, a late entrant in the power sector,will have to pay a premium to build its

portfolio in time to fulfill its commit-

ment to overseas investors. The acquisi-tion of NavaBharat will enable Essar

power to take advantage of Indias Plan-ning Commissions target of additional

power generation of around 78,577MWto provide electricity to all non-electrified villages, and to all ruralhouseholds through the Rajiv GandhiGrameenVidyutikaranYojana.

The acquisition will save the company about two years it wouldhave otherwise spent looking for coal mines, buying land, signing

power purchase agreements withstate governments and getting en-vironmental clearances. The

Navabharat power plant has se-cured coal mines from Rampiacoal block with an estimated an-

nual output of 112 million tonnesand from Coal India Ltd that willgive it 4.7 million tonnes, annu-ally. It had been planning an in-vestment of $2 billion (Rs9, 380crore) to build the plant. Essar Power will develop the plant intwo phases of 1,050MW and1,200MW, and expects to tie upfunds for the first phase by Decem-

ber 2010, a company statement

said. The group needs to raisenearly Rs10, 025 crore to completethe two phases.

In April, the Essar Group raised$2.5 billion by selling shares of Essar Energy, the groups holdingcompany for the energy business,and listed on LSE.

Essar to buy NavaBharat Power Ltd.Will enable Essar power to take advantage of Indias PlanningCommissions target of additional power generation

By Anjali and Rachna

"If you lend someone $20, and never see that person again; it was probably worth it." - Unknown

DATE Only entered into a binding agreement

ACQUIRER Essar Power

ACQUIREE NavBharat Power Ltd.

DEAL VALUE Amount not disclosed

DEAL NATURE Acquisition

PURPOSE To accelerate growth and feed new expansion plans to increase power generation capacity

FACT

NavabharatPower, is a jointventure betweenMalaxmi Energy

Ventures and Nava BharatVentures. The

project includesthe allocation of

112 MMT of coalfrom the Rampia block and addi-

tionally, 4.7 MMTcoal linkage with

Coal India.

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"In the business world, the rear-view mirror is always clearer thanthe windshield." - Warren Buffet

In a mega Rs 50,000-crore deal, AnilAmbani group announced merger of RNRL with another group firm ReliancePower, which would now become a di-rect beneficiary of the gas deal signedwith Mukesh Ambani-led Reliance In-dustries.

As part of the all-stock deal, ReliancePower will give one of its shares for every four held in RNRL.RNRL shareholders, including the pro-moters, would get Reliance Power shares worth about Rs 7,150 crore, as

per the current market prices. Out of these, promoters would get shares worthover Rs 3,600 crore. The combined en-tity would have a net worth of over Rs16,000 crore, including RNRL's networth of around Rs 1,900.Announcing the deal, the two compa-nies said in a joint statement "ReliancePower's plans for setting up upto 10,000MW gas-based power plants (would) beaccelerated" and Reliance Power would"derive substantial benefit from RNRL'sGas Supply Master Agreement .

RNRL shareholders will benefit fromthe proposed amalgamation, by partici

This is the deal that caused the Ambani brothers to scout for anout of court settlement

RNRL merges with second fiddleReliance Power

By Chippy and Surya

DATE

July 4th, 2010

ACQUIRER

Reliance NaturalResources Ltd.

ACQUIREE

Reliance Power

DEAL VALUE

Rs 50,000 crores

DEAL NATURE

Merger

PURPOSE

To derive benefitfrom RNRL's Gas

Supply Master Agreement with

RIL

pating in future growth prospects of Reliance Power's diversified gen-eration portfolio of 37,000 MW andits substantial coal reserves in Indiaand abroad.

On the other hand, Reliance Power would reap benefits from RNRL'scoal bed methane blocks, and fuelsupplies through the latter's coalsupply logistics and shipping busi-ness, it said, adding that combinedentity would have over sixty lakhshareholders, the largest for any en-tity in the world.

Referring to the Gas Supplies Mas-ters Agreement signed by RNRLwith RIL, it said Reliance woulddrive "substantial benefit" from it.Besides, gas prospects fromRNRL's coal bed methane blocks asalso its 10% share in an oil and gas

block in Mizoram.

RNRL was born out of demerger of DhirubhaiAmbani's Reliance em-

pire. The purpose of creation of RNRL was for sourcing, supply andtransportation of fuels, primarilynatural gas.

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However, the merger was necessary as the governments gas utilization policy had madeit clear that a gas trading company would not be favoured while allocating gas, and the en-tity receiving the gas should have power gen-eration capacities, which R- Power has, said Mr. Anil Ambani, CEO, ADAG Group


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C R O S S W O R D

T H E W O R D P O W E R

Across

3. This Indian IT firm has acquired 60 per centstake in Dubai-based IT services firm NTSGroup for $6.5 million to expand globallyand tap the Middle East and African mar-kets. (3)

4. A spin-off is a transaction in which a parentcreates a new legal subsidiary and distributesshares in the subsidiary to its current share-holders as a stock dividend. (7)

5. This is a case of selling a small portion of the company as an Initial Public Offering.(8)

7. This software giant has agreed to acquire privately held Scalent, a maker of data cen-ter software, founded in 2003, for an undis-closed amount. (4)

8. Indian Firm Fortis agreed to pay $ 2.3 bil-lion to acquire this Singapore based Health-care Firm with an offer of SG$3.8 per share

against Khazanah's SG$ 3.7. (7)

Down

1. The Ruias-owned Essar Steel has acquiredthis UK-based steel firm, the largest inde-

pendent steel processor in the country. (10)2. International Business Machine Corp has

agreed to buy this privately held securitysoftware company continuing an acquisitionspree to expand its line of corporate security

products (11th security-related acquisitionsince 2006). (6)

3. This Global Bank has agreed to acquire theIndian retail and commercial banking busi-ness of Royal Bank of Scotland for a pre-mium of $95 million over the net asset valueof the business. (4)

6. This shipping-to-telecom conglomerateagreed to acquire Navabharat Power Pvt Ltdwhich is setting up a 2,250-mega watt (Mw)coal-fuelled power plant at Dhenkanal inOrissa. (5)

By Ashim, Anish and Shweta

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CASE STUDYIndian Banking sells its trump card, now a hot seat for

major Mergers & Acquisitions

By Puneet Singh

Mergers and acquisitions in banking are now synonymous to major trading and banking nations due tothe strategic intent behind it. A large number of international and domestic banks all over the world areengaged in merger and acquisition activities. One of the principal objectives behind the mergers andacquisitions in the banking sector is to reap the benefits of economies of scale.

With the help of mergers and acquisitions in the banking sector, the banks can achieve significantgrowth in their operations and minimize their expenses to a considerable extent. Another important ad-vantage behind this kind of merger is that in this process, competition is reduced because merger elimi-nates competitors from the banking industry.

Mergers and acquisitions in banking sector are forms of horizontal merger because the merging entitiesare involved in the same kind of business or commercial activities. Sometimes, non-banking financialinstitutions are also merged with other banks if they provide similar type of services.

Through mergers and acquisitions in the banking sector, the banks look for strategic benefits in the banking sector. They also try to enhance their customer base.

In the context of mergers and acquisitions in the banking sector, it can be reckoned that size does mat-ter and growth in size can be achieved through mergers and acquisitions quite easily. Growth achieved

by taking assistance of the mergers and acquisitions in the banking sector may be described as inor-

ganic growth. Both government banks and private sector banks are adopting policies for mergers andacquisitions.

In many countries, global or multinational banks are extending their operations through mergers andacquisitions with the regional banks in those countries. These mergers and acquisitions are named ascross-border mergers and acquisitions in the banking sector or international mergers and acquisitions inthe banking sector. By doing this, global banking corporations are able to place themselves into a domi-nant position in the banking sector, achieve economies of scale, as well as garner market share.

Mergers and acquisitions in the banking sector have the capacity to ensure efficiency, profitability andsynergy. They also help to form and grow shareholder value.

In the context of India, the major classification of banking Mergers and Acquisitions can be framed as:Acquisition of smaller cooperative banks which helps in consolidation.Acquisition of banks which help in resource and capacity expansion at the least cost.

There is lot of action on mergers and acquisitions in the co-operative banking sector in Maharashtra.There are 636 UCBs in the state, with total deposits of around Rs 60,000 crore. One out of every fiveUCB is not financially sound.

Mumbai-based Abhyudaya Co-operative Bank, is set to acquire one more co-operative bank SantJanabai Urban Co-operative Bank in Parbhani district of Marathwada. This will be the third acquisi-tion for the bank which recently took over Citizens Co -operative Bank.


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While Saraswat Bank acquired Maratha Mandir, Cosmos Bank took over four urban cooperative banks.These included Secunderabad-based Premier Urban Co-operative Bank and Annapurna Mahila Co-operative Bank, Baroda-based Unnati Co-operative Bank and Co-operative Bank of Ahmedabad. Cos-mos is on a consolidation phase now, and will look at further acquisitions much later.

In some cases, financially distressed banks are also subject to takeovers or mergers in the banking sec-tor and this kind of merger may result in monopoly and job cuts. The best and the most recent exampleof the same issue is the takeover of Bank of Rajasthan by ICICI Bank. The swap ratio was 1:4 andthere was a major hue and cry over the change in management from public sector type dealing to pri-vate hands.

Deregulation in the financial market, market liberalization, economic reforms, and a number of other factors have played an important function behind the growth of mergers and acquisitions in the bankingsector. Nevertheless, there are many challenges that are still to be overcome through appropriate meas-ures.

Mergers and acquisitions in banking sector are controlled or regulated by the apex financial authorityof India, the Reserve Bank of India (RBI).

As far as the history goes, the deals have just gone bigger and better by the day. But let me end thiscase study with one question, does consolidation ensure a possible future cartel?

Q U I Z

C A T E C H I Z E T H E Q U E S T I O N M A R K S 1. Which major bank is merging with SBI?

2. Piramal has recently sold its diagnostic unit for Rs.600 crores to whichcompany?

3. DE Shaw has inked a deal with which major Indian conglomerate?4. Which paints company holds a 25% stake in Punjab National Banks

insurance business?5. Marvel Entertainment was acquired by which huge entertainment and

adventure company?6. Arava Power has seen investment from which electronics giant for $15

million?7. United Spirits was about to acquire which major beverages firm?8. Wockhardt has recently sold 10 hospitals to which pharma giant?9. SPSS is now under which famous IT firm?10. How many offers were made by BhartiAirtel to MTN? 11. The NCR bred, DT Cinemas, was in talks with which entertainment

company for a possible acquisition?12. Under what name does Reliance operate its US acquired chain of multi-

plexes?13. Piramal acquired the intellectual rights of which company?14. Reliance is eyeing its third gas deal with which US company?

15. IBM has acquired which company for its marketing solutions?


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QUIZANSWERS

1. State Bank of Indore2. SRL3. RIL4. Berger Paints5. Disney

6. Siemens7. Diageo8. Fortis9. IBM10. 3111. PVR Cinemas12. Reliance Media Works13. BSV Anesthetics14. Atlas Marcellus Shale15. Red Pill

CROSSWORDANSWERS


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INSPIRED BY Prof. Anirban Ghatak Christ University Institute of Management, Kengeri

Sincere acknowledgment of the efforts of all the contributors for

their knowledge filled articles, crossword and quiz

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Symbiont- A Newsletter on Mergers and Acquisitions