Introduction
Mergers and Takeovers are the important ways of non-organic restructuring a corporate entity, which can only be achieved by an efficient process. Such restructuring is done for achieving a greater growth and this is done by utilizing the strengths and potential of other entities. Moreover the shareholders of a Company cannot always finance the Company’s growth and therefore mergers and takeovers/acquisitions become the other good option. After the advent of the Globalization in the early nineties, improved market access, the adoption of the policy of liberalization by countries such as India and the enforcement of some much desired statutes e.g. the Competition Act of India in 2002, Sarbanes Oxley Act in USA etc global mergers and takeovers have become a common visible feature. Across the world low interest rates, pressure of competition and the advent of ever bigger private equity funds have spurred a huge number of mergers and takeovers. According to Thomson Financial, the year 2006 only witnessed a worldwide Merger and Acquisitions activity of $3,760 billion compared to $3,400 billion in 2000.United States Corporations did 1878 cross-border transactions in 2006, valuing at $186 billion. The Year 2006 thus set a record for M&A activities which reached historic highs. Merger & Acquisition activities will continue to increase in Asia Pacific region (India having the fastest growing market after Japan) because of the improved market access, followed by the desire to create combined business and coordinated strategies. In the year 2006, India had a mere 0.7% share with only 876 deals taking place totaling $27.7 billion in value but now India is now among the eighth largest market for M&A market. USA and UK countries are the number one and two in M&A activities. The article divulges in detail with the recent trends of global mergers and takeovers of the corporate world in the current scenario.
Since the terms Merger, Acquisition and Takeover have become very common today therefore it becomes pivotal to define them. Merger or amalgamation in simple terms means nothing but a consolidation of two or more enterprises by way of purchase of business, acquisition of shares, absorption of one entity into another etc. Though the term ‘take over’ has not been defined legally but in commercial parlance, the term may be defined as the process whereby the majority of the voting capital of a company is bought through private arrangements, public offer or otherwise. An acquisition on the other hand connotes the purchase of shares of a target company. When such a purchase is done with an intention to take over management or control of the target company, such an acquisition becomes a take over.
Periods of Merger Activities
Five periods of high merger activity have taken place in the history of mergers and acquisitions:
The first wave occurred in the early part of the 20th century, when companies undertook M&As with the explicit objective of dominating their industries and creating monopolies. The second wave coincided with the rising market of 1920s, when firms again embarked on M&As as a way of extending their reach into new markets and expanding their market share.
The third wave occurred in 1960s and 1970s, when firms focused on acquiring firms in other lines of business, with the intent of diversifying and forming conglomerates.
The fourth wave occurred in the mid 1980s, when firms were acquired primarily for restructuring assets. This wave ended as deals became pricier and it became more difficult to find willing lenders. The era of reforms under Mr. Rajiv Gandhi saw the emergence of large scale corporate ambition and the last fifth wave occurred towards the end of 1990s when firms focused on the acquired firms with the aim of restructuring. It saw the commencement of the selling of the non-core businesses too.
Cross border mergers imply the merging of two companies incorporated in different countries:
1. Merger of Foreign Company with an Indian Company-Section 2(7) of the Companies Act, 1956 includes foreign company within the definition of a body corporate and as such, a foreign company can merge with an Indian Company.
2. Merger of Indian Company with a Foreign Company-Section 394(4) (b) of the Companies Act, 1956 expressly excludes a foreign company from the expression ‘transferee company’. Thus, an Indian Company cannot merge with a foreign company although the vice-versa is permissible.
Recent Trends
Mergers and Takeovers are a normal feature of a vibrant economy and in 2006 it reached historic records. The mega deals-totaling more than $10 billion are back and as the economy of India is becoming more free, liberalized and dynamic the M&A scenes are going to get hot. A certain trend has been observed in Mergers and Takeovers activity during the current years. It is as follows:
1. Horizontal Mergers and Takeovers
Well, the mergers can be vertical, conglomerate and horizontal but most of the Mergers and Takeovers taking place currently are horizontal i.e. between firms and Companies manufacturing the same goods or services. The Tata Steel of India acquired the Anglo-Dutch Steel company Corus, Tata Tea Group acquired Tetley Tea of UK in 2000, Vodafone Telecom Company of United Kingdom acquired the assets of Hutchinson Essar(One of the biggest telecommunication companies of India), Hindalco of Kumar Mangalam Birla acquired Novelis (Aluminium Company of Canada), Tata Tea acquired Eight O’clock Coffee (Coffee producing company of USA), Tata Motors acquired the truck assets of Korea’s Daewoo Motors Company, Dr Reddy’s Lab acquired the Betapherm of Germany (which is also a pharmaceutical company), Ranbaxy Pharmaceuticals too acquired Romania’s Terapia (A pharmaceutical company), Essal Packaging which used to manufacture toothpaste tubes took over Propack, Suzlon Energy purchased Hansen Transmissions of Belgium, Tata chemicals acquired the UK based Brunner Mond in Dec 2005, VSNL’s purchased Teleglobe etc. What is pertinent here is that the businesses of the most of the entities which have been acquired are similar to that of the companies which have acquired them. Thus, today a company wants to merge with or have a control over that company which deals in the same business. This tendency is on the rise. Horizontal mergers also remain the most challenged and the disputed one.
2. Merger between Topmost Companies
The mergers and takeovers which have taken place in the last few years have been almost among the topmost companies i.e. between No.1 and No.2 companies or between No.1 and No 3 or between No.2 with No.4. Previously the trend was that mergers used to take place between lower ranked companies e.g. No. 8 and No.10 companies or between No.12 with No.16 but the same condition is not the general rule now. The Laxmi Niwas Mittal’s Steel Company acquired Arcelor Steel (The biggest steel producer Company) and thus L.N. Mittal became the owner of biggest Steel Company. Similarly, the Vodafone Telecom Company, which is the biggest telecom company of UK acquired Hutchinson Essar (The fourth largest telecom company of India), Bharat Forge acquired Germany’s largest forging company CDP etc. Thus the recent M&A’s took place among the topmost and high ranked companies. Thus in merger and acquisitions the topmost Companies are being looked out for the deals.
3. India’s expansion of Activity
In all the major recent mergers and takeovers one of the bidders have always been an Indian company. As Indian companies have the potential, worth and resources to buy the global companies therefore the mergers and takeovers activity of India will certainly expand. While the primary focus of the Indian foreign acquisitions will likely be in the energy sector, growth potential for Indian Mergers and Acquisitions activity also exist in the following sectors:
a) Mining
b) Information Technology as exemplified by the recent transactions involving Celestica with HCL Technologies and Aditya Birla Group’s indirect acquisition of Minacs worldwide.
c) Automotive, with Indian auto manufacturers such as Bharat Forge, Tata Motors and Mahindra and Mahindra looking to gain a foreign foothold.
The big involvement of the Indian companies in the global Mergers and Acquisitions is because they have benefitted a lot from the policies of Liberalization and delicensing. They have got the sufficient experience and they now want to compete at an international level. The previous successful mergers and takeovers of the other companies provided a sort of impetus and encouragement to the companies to work at a global level.
4. Acquisition at higher prices
Most of the takeovers of the alien companies by the Indian companies have been at very higher prices. The recent acquisition of Novelis (Aluminium Company of Canada) by Hindalco of India was done at about $6 billion. Analysts say that the Kumar Mangalam Birla paid too high a fee for the company which was in losses. The price Hindalco paid translates to a market capitalization/profit before tax (PBT) multiple of 36. This is really high.
Similarly the UK based Telecom Company Vodafone purchased 67% stake in Hutchinson Essar for $11.08 billion. In this deal the Company had edged out Hutch’s 33% partner Essar Group, Reliance Communications and Hinduja Group of UK. The market capitalization/profit before tax (PBT) multiple in this case came out to be 18. This deal was also considered to be an expensive one. Sony also overpaid by about $1 billion in acquiring Columbia pictures.
Another paradigm of acquisition at the higher price is that of the Corus by the Tata Group. The Tata Group had acquired the Corus Company for an excessive amount of $10.4 billion. The enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) value for Tata Steel is 4.6. Laxmi Niwas Mittal too paid 5.8 EBITDA for Arcelor.
5. Size of the company acquired
If we examine the long-run value to book, we find that low value-to-book firms buy high value-to-book firms. In fact, the long-run value to book component of M/B for targets is three to five times higher than that for acquirers. Thus big companies are acquiring the bigger companies by paying the excessive amount and taking big risks e.g. Mittal’s Steel Company purchased world’s largest steel producer Arcelor Steel Company, Tata Steel which used to be at no. 56 in the pecking order picked up Corus, ranked no. 9. Corus used to make four times more steel than Tata Steel. It has become a trend now to swallow a bigger fish rather than looking for smaller entities by utilizing all the energy, potential and talent. The availability of finance easily is one of the important factors which has made the Companies to acquire even bigger companies.
6. Mega Deals
The current global Merger and Acquisition activities have been a big deal. Now the M&A activities are not done with a small some of lucre. Rather it involves a very big amount of money. The major M&A activities ran into billions of dollars. The Tata Steel Company acquired the Corus Company for $ 10.4 billions. Similarly, Hindalco paid an excessive amount of $6 billion for purchasing the assets of Novelis, Videocon Industries made a bid of $731 million for Daewoo Electronics, Dr. Reddy’s acquisition of Betapherm in Germany stood for a heavy $572 million. Ranbaxy too paid Terapia an amount of $324 million. Suzlon Energy paid Hansen Transmissions of Belgium $565 million. The number of deals taking place is increasing, as is their value. In 2005, the total number of outbound deals was 136, which generated a total deal value of $4.3 billion. The deal which was largely restricted to the IT and telecom sectors in 2004 has now spread to all sectors.
7. Finance Availability
The Companies like Tata and Vodafone today are acquiring much larger companies. The deal is exorbitant in most of the cases and the acquisition price runs into billions of dollars. Generally the acquirer company does not have that much assets and money and thus it resorts to the help of banks and other financial methods for the purpose of finance. Today, after considering the credibility and paying capacity of a company banks lend a part of money needed easily for the transaction. Besides banks the finance is also arranged through junk bonds, equity, senior term loans, cash reserves, external borrowings etc. Moreover, high economic growth has left Indian companies with surplus funds. India Inc is already exploring exchanges like the Alternative Investment Market of London Stock Exchange, TSZ of Toronto etc to take advantage of liberal listing norms which is a quicker listing process and better valuations from wider range of international investors. Indian companies can raise at least ₤2-3 billion from AIM alone.
In the Corus acquisition by Tata Group, Tatas are paying only a third of the acquisition price. It is being routed through a special purpose vehicle called Tata Steel, UK. Tatas have indicated that the group holding company Tata Sons will pump in $4.1 billion (one third) as equity into the SPV. The balance $8 billion will be raised by junk bonds and loans by banks.
Similarly in the acquisition of Novelis, the Hindalco is borrowing $2.85 billion (a part of the money will be raised as debt from the group companies and another part would be mobilized through its own cash reserves. Therefore the companies have the plethora of options open today for the purpose of getting finance. This has also proved to be a boon for the companies for the purpose of making big acquisitions.
Conclusion
With the effects of Globalization at its peak and the boom in the economy the Mergers and Acquisitions activities will witness a further upsurge. The deals of the first quarter of the year 2007 are already 24% more than the value of the deals of the year 2006. Decline in the stock markets have also spurred deal activities because of the lowering of the price of the takeover targets. Some mergers of prominent banks and companies are on the way and most probably they will take place in the current year only. The Mergers and Takeovers activities help the companies to work and compete globally. It also provides an opportunity to understand the global business aura. The trends discussed above have been described with the Indian perspective and I hope that the future deals shall set up more new trends.
Mergers and Takeovers are the important ways of non-organic restructuring a corporate entity, which can only be achieved by an efficient process. Such restructuring is done for achieving a greater growth and this is done by utilizing the strengths and potential of other entities. Moreover the shareholders of a Company cannot always finance the Company’s growth and therefore mergers and takeovers/acquisitions become the other good option. After the advent of the Globalization in the early nineties, improved market access, the adoption of the policy of liberalization by countries such as India and the enforcement of some much desired statutes e.g. the Competition Act of India in 2002, Sarbanes Oxley Act in USA etc global mergers and takeovers have become a common visible feature. Across the world low interest rates, pressure of competition and the advent of ever bigger private equity funds have spurred a huge number of mergers and takeovers. According to Thomson Financial, the year 2006 only witnessed a worldwide Merger and Acquisitions activity of $3,760 billion compared to $3,400 billion in 2000.United States Corporations did 1878 cross-border transactions in 2006, valuing at $186 billion. The Year 2006 thus set a record for M&A activities which reached historic highs. Merger & Acquisition activities will continue to increase in Asia Pacific region (India having the fastest growing market after Japan) because of the improved market access, followed by the desire to create combined business and coordinated strategies. In the year 2006, India had a mere 0.7% share with only 876 deals taking place totaling $27.7 billion in value but now India is now among the eighth largest market for M&A market. USA and UK countries are the number one and two in M&A activities. The article divulges in detail with the recent trends of global mergers and takeovers of the corporate world in the current scenario.
Since the terms Merger, Acquisition and Takeover have become very common today therefore it becomes pivotal to define them. Merger or amalgamation in simple terms means nothing but a consolidation of two or more enterprises by way of purchase of business, acquisition of shares, absorption of one entity into another etc. Though the term ‘take over’ has not been defined legally but in commercial parlance, the term may be defined as the process whereby the majority of the voting capital of a company is bought through private arrangements, public offer or otherwise. An acquisition on the other hand connotes the purchase of shares of a target company. When such a purchase is done with an intention to take over management or control of the target company, such an acquisition becomes a take over.
Periods of Merger Activities
Five periods of high merger activity have taken place in the history of mergers and acquisitions:
The first wave occurred in the early part of the 20th century, when companies undertook M&As with the explicit objective of dominating their industries and creating monopolies. The second wave coincided with the rising market of 1920s, when firms again embarked on M&As as a way of extending their reach into new markets and expanding their market share.
The third wave occurred in 1960s and 1970s, when firms focused on acquiring firms in other lines of business, with the intent of diversifying and forming conglomerates.
The fourth wave occurred in the mid 1980s, when firms were acquired primarily for restructuring assets. This wave ended as deals became pricier and it became more difficult to find willing lenders. The era of reforms under Mr. Rajiv Gandhi saw the emergence of large scale corporate ambition and the last fifth wave occurred towards the end of 1990s when firms focused on the acquired firms with the aim of restructuring. It saw the commencement of the selling of the non-core businesses too.
Cross border mergers imply the merging of two companies incorporated in different countries:
1. Merger of Foreign Company with an Indian Company-Section 2(7) of the Companies Act, 1956 includes foreign company within the definition of a body corporate and as such, a foreign company can merge with an Indian Company.
2. Merger of Indian Company with a Foreign Company-Section 394(4) (b) of the Companies Act, 1956 expressly excludes a foreign company from the expression ‘transferee company’. Thus, an Indian Company cannot merge with a foreign company although the vice-versa is permissible.
Recent Trends
Mergers and Takeovers are a normal feature of a vibrant economy and in 2006 it reached historic records. The mega deals-totaling more than $10 billion are back and as the economy of India is becoming more free, liberalized and dynamic the M&A scenes are going to get hot. A certain trend has been observed in Mergers and Takeovers activity during the current years. It is as follows:
1. Horizontal Mergers and Takeovers
Well, the mergers can be vertical, conglomerate and horizontal but most of the Mergers and Takeovers taking place currently are horizontal i.e. between firms and Companies manufacturing the same goods or services. The Tata Steel of India acquired the Anglo-Dutch Steel company Corus, Tata Tea Group acquired Tetley Tea of UK in 2000, Vodafone Telecom Company of United Kingdom acquired the assets of Hutchinson Essar(One of the biggest telecommunication companies of India), Hindalco of Kumar Mangalam Birla acquired Novelis (Aluminium Company of Canada), Tata Tea acquired Eight O’clock Coffee (Coffee producing company of USA), Tata Motors acquired the truck assets of Korea’s Daewoo Motors Company, Dr Reddy’s Lab acquired the Betapherm of Germany (which is also a pharmaceutical company), Ranbaxy Pharmaceuticals too acquired Romania’s Terapia (A pharmaceutical company), Essal Packaging which used to manufacture toothpaste tubes took over Propack, Suzlon Energy purchased Hansen Transmissions of Belgium, Tata chemicals acquired the UK based Brunner Mond in Dec 2005, VSNL’s purchased Teleglobe etc. What is pertinent here is that the businesses of the most of the entities which have been acquired are similar to that of the companies which have acquired them. Thus, today a company wants to merge with or have a control over that company which deals in the same business. This tendency is on the rise. Horizontal mergers also remain the most challenged and the disputed one.
2. Merger between Topmost Companies
The mergers and takeovers which have taken place in the last few years have been almost among the topmost companies i.e. between No.1 and No.2 companies or between No.1 and No 3 or between No.2 with No.4. Previously the trend was that mergers used to take place between lower ranked companies e.g. No. 8 and No.10 companies or between No.12 with No.16 but the same condition is not the general rule now. The Laxmi Niwas Mittal’s Steel Company acquired Arcelor Steel (The biggest steel producer Company) and thus L.N. Mittal became the owner of biggest Steel Company. Similarly, the Vodafone Telecom Company, which is the biggest telecom company of UK acquired Hutchinson Essar (The fourth largest telecom company of India), Bharat Forge acquired Germany’s largest forging company CDP etc. Thus the recent M&A’s took place among the topmost and high ranked companies. Thus in merger and acquisitions the topmost Companies are being looked out for the deals.
3. India’s expansion of Activity
In all the major recent mergers and takeovers one of the bidders have always been an Indian company. As Indian companies have the potential, worth and resources to buy the global companies therefore the mergers and takeovers activity of India will certainly expand. While the primary focus of the Indian foreign acquisitions will likely be in the energy sector, growth potential for Indian Mergers and Acquisitions activity also exist in the following sectors:
a) Mining
b) Information Technology as exemplified by the recent transactions involving Celestica with HCL Technologies and Aditya Birla Group’s indirect acquisition of Minacs worldwide.
c) Automotive, with Indian auto manufacturers such as Bharat Forge, Tata Motors and Mahindra and Mahindra looking to gain a foreign foothold.
The big involvement of the Indian companies in the global Mergers and Acquisitions is because they have benefitted a lot from the policies of Liberalization and delicensing. They have got the sufficient experience and they now want to compete at an international level. The previous successful mergers and takeovers of the other companies provided a sort of impetus and encouragement to the companies to work at a global level.
4. Acquisition at higher prices
Most of the takeovers of the alien companies by the Indian companies have been at very higher prices. The recent acquisition of Novelis (Aluminium Company of Canada) by Hindalco of India was done at about $6 billion. Analysts say that the Kumar Mangalam Birla paid too high a fee for the company which was in losses. The price Hindalco paid translates to a market capitalization/profit before tax (PBT) multiple of 36. This is really high.
Similarly the UK based Telecom Company Vodafone purchased 67% stake in Hutchinson Essar for $11.08 billion. In this deal the Company had edged out Hutch’s 33% partner Essar Group, Reliance Communications and Hinduja Group of UK. The market capitalization/profit before tax (PBT) multiple in this case came out to be 18. This deal was also considered to be an expensive one. Sony also overpaid by about $1 billion in acquiring Columbia pictures.
Another paradigm of acquisition at the higher price is that of the Corus by the Tata Group. The Tata Group had acquired the Corus Company for an excessive amount of $10.4 billion. The enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) value for Tata Steel is 4.6. Laxmi Niwas Mittal too paid 5.8 EBITDA for Arcelor.
5. Size of the company acquired
If we examine the long-run value to book, we find that low value-to-book firms buy high value-to-book firms. In fact, the long-run value to book component of M/B for targets is three to five times higher than that for acquirers. Thus big companies are acquiring the bigger companies by paying the excessive amount and taking big risks e.g. Mittal’s Steel Company purchased world’s largest steel producer Arcelor Steel Company, Tata Steel which used to be at no. 56 in the pecking order picked up Corus, ranked no. 9. Corus used to make four times more steel than Tata Steel. It has become a trend now to swallow a bigger fish rather than looking for smaller entities by utilizing all the energy, potential and talent. The availability of finance easily is one of the important factors which has made the Companies to acquire even bigger companies.
6. Mega Deals
The current global Merger and Acquisition activities have been a big deal. Now the M&A activities are not done with a small some of lucre. Rather it involves a very big amount of money. The major M&A activities ran into billions of dollars. The Tata Steel Company acquired the Corus Company for $ 10.4 billions. Similarly, Hindalco paid an excessive amount of $6 billion for purchasing the assets of Novelis, Videocon Industries made a bid of $731 million for Daewoo Electronics, Dr. Reddy’s acquisition of Betapherm in Germany stood for a heavy $572 million. Ranbaxy too paid Terapia an amount of $324 million. Suzlon Energy paid Hansen Transmissions of Belgium $565 million. The number of deals taking place is increasing, as is their value. In 2005, the total number of outbound deals was 136, which generated a total deal value of $4.3 billion. The deal which was largely restricted to the IT and telecom sectors in 2004 has now spread to all sectors.
7. Finance Availability
The Companies like Tata and Vodafone today are acquiring much larger companies. The deal is exorbitant in most of the cases and the acquisition price runs into billions of dollars. Generally the acquirer company does not have that much assets and money and thus it resorts to the help of banks and other financial methods for the purpose of finance. Today, after considering the credibility and paying capacity of a company banks lend a part of money needed easily for the transaction. Besides banks the finance is also arranged through junk bonds, equity, senior term loans, cash reserves, external borrowings etc. Moreover, high economic growth has left Indian companies with surplus funds. India Inc is already exploring exchanges like the Alternative Investment Market of London Stock Exchange, TSZ of Toronto etc to take advantage of liberal listing norms which is a quicker listing process and better valuations from wider range of international investors. Indian companies can raise at least ₤2-3 billion from AIM alone.
In the Corus acquisition by Tata Group, Tatas are paying only a third of the acquisition price. It is being routed through a special purpose vehicle called Tata Steel, UK. Tatas have indicated that the group holding company Tata Sons will pump in $4.1 billion (one third) as equity into the SPV. The balance $8 billion will be raised by junk bonds and loans by banks.
Similarly in the acquisition of Novelis, the Hindalco is borrowing $2.85 billion (a part of the money will be raised as debt from the group companies and another part would be mobilized through its own cash reserves. Therefore the companies have the plethora of options open today for the purpose of getting finance. This has also proved to be a boon for the companies for the purpose of making big acquisitions.
Conclusion
With the effects of Globalization at its peak and the boom in the economy the Mergers and Acquisitions activities will witness a further upsurge. The deals of the first quarter of the year 2007 are already 24% more than the value of the deals of the year 2006. Decline in the stock markets have also spurred deal activities because of the lowering of the price of the takeover targets. Some mergers of prominent banks and companies are on the way and most probably they will take place in the current year only. The Mergers and Takeovers activities help the companies to work and compete globally. It also provides an opportunity to understand the global business aura. The trends discussed above have been described with the Indian perspective and I hope that the future deals shall set up more new trends.
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