CHAPTER- 1
INTRODUCTION
1.1
Introduction
Mergers and Acquisitions have become a major component in the economic
and financial environment all over the world. Indian firms have been gradually
exposed more to both national and international competition and competitiveness.
Hence, in recent times firms have started blending their operations around their core
corporate activities through corporate integration.
Mergers and Acquisitions have been a popular element of corporate strategy
and have become a common phenomenon. Corporate enterprises have used Mergers
and Acquisitions for refocusing in the lines of core global competitiveness,
competence, market share and combinations. A clustering of Merger and Acquisition
activities have played a magnificent improvement in the transformation of the
industrial sector in India. There has been an excess of Mergers and Acquisitions
happening in every sector of Indian industry.
The corporate enterprises which need to be fast growing, adaptable to
technology, strive for efficient performance and maintain a dominant market position
is not possible currently without Mergers and Acquisitions in the present context and
it is impossible to be competitive in the global economy. Mergers and Acquisitions
count among the most spectacular and most obvious strategic demonstrations on the
economic scales of companies.
In the review of literature, attention has been paid to Merger and Acquisition
activities. Various studies have been conducted in order to determine the trends and
key motive factors resulting in Mergers and Acquisitions. The key motives for the
acquirers are value matters and the waves of increasing Mergers and Acquisitions
transactions. It is even more relevant to examine whether value is created or not after
Mergers and Acquisitions. Few studies have observed that the Merger and Acquisition
activities have created value to the bidders firm in the short run as well as in the long
run.
1
It is widely accepted and proved that Mergers and Acquisitions are important for a
firm to set up strategies in order to meet the various challenges. The strategies a firm
chooses to follow should be in line with an overall aim of value creation. A decision
to enlarge organisational capabilities through Merger and Acquisition activities has to
converse to the underlying strategy of the firms. The effect of Mergers and
Acquisitions, in this study, tried to evaluate through calculation of Firm Value. Firm
Value according to this study can be defined as “Firm Value is written as the total of
following three components. Those are Capital investment assets in place, Present
value of Economic Value Added of assts in place and Expected present value of
Economic Value Added from the future investment. In this model, instead of Net
Present Value results, the calculation considers Economic Value Added into the
equation to evaluate Firm Value interms of assets. However Firm Value can be
calculated by using Economic Value Added (EVA) model. But few studies have
pointed out that sometimes a Firms Value is eventually destroyed when the firms
engage in Merger and Acquisition activities. The basis for this conclusion is drawn
from the fact that the major Mergers and Acquisitions transactions are the ones
resulting in huge losses. Apart from the ‘huge loss deals’ the residual firms essentially
gain results from Merger and Acquisition activities.
The uses of both Financial Performance indicators and Economic Value Added
model are calculated individually. It requires in-depth analysis in case of each Merger
and Acquisition. This analysis can be applied to any other cases of Mergers and
Acquisitions and also it can work as a model to assess the firm value and value
addition calculation to the proposed companies
Mergers and Acquisitions are inevitable to get economies of scale of operation in the
globalise economy. Size of the firm determines the capability of winning competition.
In the long run sustainability of the firm depends on multiple market mix and product
mix strategies which requires Mergers and Acquisitions. The firm value of selected
firms increase in post acquisition period but there is no commissive increase in value
addition. Immediately after the acquisition for 3 – 5 years there may be some decline
in the earning per share and price earning ratio but after the gestation period it will
benefit the companies. Diversification in both product and market is able the
companies to overcome the economic upheavals and business cycle problems.
2
1.2
Problem Statement
The findings from the review of literature are the main inspiration for this thesis and
the aspiration of the thesis is to combine the reviews and relate them to Indian firms in
an analysis of value creation. In other words, to study the Impact of Mergers and
Acquisitions in terms of financial health, synergies, firm value and value addition in
post acquisition.
In this study the analysis is done in relation to both profitability and leverage
figures, which involves focus upon both long term and short term value creation.
The aim of the study is to investigate value creation in Merger and Acquisition
activities based on the key motive factors of the activity. The study is mainly
stimulated by observation and aims to examine through the Mergers and Acquisitions
impact on the value of the firm. Especially, focussing on bidding firms located in
India.
The expressions and the research approach in this study are lined up with existing
research in the field. Hence, no separate definitions are obtained here except for a
clearing up of Mergers and Acquisitions activity. The sample size consists of both the
Mergers and Acquisitions are referred to as a deal.
1.3
•
Objectives of the Study
To examine the financial health in terms of profitability, leverage and capital
market position of selected Mergers and Acquisitions in India.
•
To evaluate the synergies in terms of financial, managerial and operational
performance of selected Mergers and Acquisitions in India.
•
To examine the impact of Mergers and Acquisitions on value of the firm.
•
To determine the value addition or short fall of selected Mergers and Acquisitions
in India.
•
To compute and make a comparative analysis of financial health, synergies, firm
value and value addition in the pre and post period of selected Mergers and
Acquisitions in India.
3
1.4
Hypotheses of the study
Based on the research gap areas from the literature survey this research has identified
the following hypotheses for the study.
Null hypothesis
• There is no significant difference between the financial health of selected firms in
pre and post Mergers and Acquisitions.
• There is no significant difference between the synergies of selected firms in pre
and post Mergers and Acquisitions.
• There is no significant difference between the firm value of selected firms in pre
and post Mergers and Acquisitions.
• There is no significant difference between value addition of selected firms in pre
and post Mergers and Acquisitions.
1.5
Research Methodology
1.5.1
Type of Research
Descriptive Research: Descriptive research means attempts to observe and
describe a phenomenon about the universe or population being studied. This study is
mainly dependent on secondary source of data. It describes the problem that already
exists. Therefore this type of study comes under descriptive research.
1.5.2
Sample Technique
This study has been carried out at the micro level study for the researcher. The
companies included in the analysis were selected based on the top ten Mergers and
Acquisitions during the year 2010. A particular deal was excluded in some cases
where no sufficient information was available for the deal based on the sample period.
So, convenient sampling was made.
4
1.5.3
Sample and Sample size
The study focuses on the top ten Mergers and Acquisitions that took place in
India, during the year 2010. Due to the accessibility of reliable data, the transactions
were selected based on the high value deals. A list of companies involved in Mergers
and Acquisitions during the year 2010 were compiled from the capital line and
prowess database. Mergers and Acquisitions cases, where at least 3 years of data were
not available for pre merger period, were removed from the study sample. The study
selected ten companies mentioned below:
Table: 1.1
Selected ten M&A in the year 2010
Sl
No
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Bidding firms
Target firms
Bharthi Airtel Ltd
Zain Africa BV
Hinduja Global
U K based CRM-
Solutions Ltd
Careline Service
Hindustan Zinc Ltd
Lanco Infratech
Ltd
Anglo American
Plc zinc
Griffen coal
Parkway Holdings
Ltd
Ltd
Jindal Steel &
Shadeed Iron &
Power Ltd
Steel Ltd
Mahindra and
South Korean
Mahindra Ltd
based Ssang Yong
Ltd
GTL Infrastructure
Ltd
Nature of
Type of
value
transaction
industry
$1070cr Acquisition
Fortis Health Care
Tata Chemicals
Deal
UK- British Salt
Aircel Towers
Reliance Power
Reliance Natural
Ltd
Gas
£0.45cr Acquisition
communication
Financial
services
$134cr Acquisition
Metals
$84.5cr Acquisition
Infrastructure
$68.53cr Acquisition
Healthcare
$46.4cr Acquisition
Iron & steel
$46.3cr Acquisition
Automobiles
$1300cr Acquisition
Chemicals
$180cr Acquisition
Infrastructure
$1100 cr Acquisition
(Source: www.imaa.org & Ernst and Young advisors, India)
5
Tele
Oil & Gas
Brief Profile of Selected Acquirers of Indian firms
1. Bharti Airtel Ltd
Bharti Airtel popularly named as Airtel. Bharti Airtel is an Indian multinational
telecomm service provider head quartered in New Delhi. It has operations in 20
countries across the globe. The company ranked the 5th position in global mobile
services company in terms of number of subscribers.
Head Quarter:
New Delhi, India
CEO:
Christian de Faria
Founder:
Sunil Bharti Mittal
Founded:
July 7,1995
In June 2010, India’s largest mobile service provider Bharti Airtel completed
the acquisition deal of African operations in the same sector known as Zain. The
strategic reason behind this acquisition was to expand the market internationally.
Bharti Airtel has operations in 18 countries through the strategic deal. Bharti Airtel
had acquired Zain Africa B V for a value of $10.7 billon. The deal had a payment of
$7.9 billion in cash, and $1.7 billion bill of consolidated debt liabilities under the
negotiations between the Bharti and Zain. The government has a benefit of Rs123
billion from the 3G spectrum in an auction.
Key motive behind Mergers and Acquisitions activity
•
To improve quality of customers
•
Market expansion
•
Long term economies of scale
•
Entering into international market
This acquisition deal is India’s second largest cross border Mergers and Acquisitions
deals after Tata Steel’s $13 billion acquisition of Corus in 2007. It resulted with
Bharti Airtel becoming the world’s 5th the largest mobile phone service provider for
subscribers, opportunity to the company access to South Africa, permit to tap the
market with high potential. According to the standard and poor credit analysis the deal
6
provided meaningful opportunities in South Africa which has relatively between
product penetrations and to improve Zain’s relatively lower Earnings Before Interest,
Tax, Depreciations and amortisations. To fund the deal Bharti Airtel took a loan of
$8.3 billion through loans sanctioned by Standard Chartered, SBI, Bank of America,
Merrill Lynch, HSBC, Bank of Tokyo, V-FJ Ltd, Barclays and DBS Group Holdings.
The deal seems as being expensive and in the light of the present environment in the
Indian Telecom sector. The bottom-line anticipated to decline at 5.1% Cumulative
Annual Growth Rate (CAGR) in the financial year 2010-2012. Bharti Airtel
documented 17.4% growth in total revenue in the first quarter of 2011. It mainly
focused on account of growth at 16% in the mobile business and additional revenue of
Rs.958 crore contributed by Zain Africa BV. Bharti Airtel shares increased 1.52% to
Rs.310.95. According to the International Financial Reporting Standards, Bharti
Airtel’s consolidated profit after tax rose 115.1% (Rs.610 crores), 13.3% rise in total
revenue of Rs.21939 crore in December 2013 to 2012. Bharti Airtel had 287 million
customers across the globe at the year end of December 2013. Bharti Airtel was
undervalued before merger; it is a chance to get a strong credit line for future aspects.
Table: 1.2
Sl
No
Name
Competition of Bharti Airtel Ltd
Last
Price
Market
Cap
(in Cr)
Sales
Net
Turnover Profit
Total
Assets
1. Bharti Airtel
337.00
134712.38 49918.50
6600.20 61126.00
2. Idea Cellular
135.20
47915.69
26179.47
1689.31 33337.60
3. Reliance Comm
143.05
29525.90
11176.00
730.00
63469.00
4. Tata Comm
392.95
11199.08
4376.40
542.43
8087.80
5. Tata Teleservices
12.35
2414.34
2731.18
-560.08
4176.16
6. MTNL
34.60
2179.80
3391.74
7825.13 8754.27
7. Tulip Telecom
4.25
61.63
945.03
-735.00
3667.36
8. Goldstone infra
11.10
40.05
80.32
2.12
110.79
9. Nu tek India
1.20
18.54
139.23
-28.04
605.15
(Source: www.economictimes.com)
7
2. Hinduja Global Solutions Ltd
Hinduja Global Solutions Ltd is a world leader in Business Process Management.
The basic nature of the operations is business process outsourcing service providers
head quartered in Bangalore. It has business in 10 countries around the globe and it
has more than 50 operating centres in India. Earlier Ashok Leyland Information
Technology merged with Hinduja Finance Corporation to form Hinduja Global
Solutions. From the year 2003 the operations are rigorously commenced in the
company. Hinduja Global Solutions has so many acquisitions; the major acquisitions
are Customer Contract Centre Inc in Philippines in the year 2006, AFFINA LLC –
Database Management and Contract Centre marketing research company in 2010. In
the same year it had another acquisition of 100% stake in UK- based Careline
Services- contact Centre Management Service Providers.
Head Quarter:
Bangalore, India
CEO:
Ramakrishnan P Hinduja
Founder:
Hinduja
Founded:
2000
Hinduja Global Solutions engaged in information technology enabled services.
The Hinduja Global Solutions has 60 delivery services in India, UK, US, Canada,
France, Italy, Netherland and Philiphines. It was awarded “Best Mid-Sized Contract
Centre” won for Preston centre in the year 2013. It handles over 50000 customer
interactions through different channels in 14 languages. This acquisition helps the
strategic drive of Hinduja Global Solutions for growth and enhances the future scope
of company services.
Key motive behind Mergers and Acquisitions activity
•
Entry to new markets.
•
Optimising opportunities to growth
•
Multi – geographic contracts
•
Expansion and strengthening markets
8
Careline Services is a UK based contact centre management outsourcing business.
The name was changed after this acquisition as a step to demonstrate ONE Hinduja
Global Solutions across the world wide. The Careline termed as Hinduja Global
Solutions-UK has reached the expectations of the growing provider in the European
market place. The UK and European operations preformed as peer expectations of
management and in the present year they added three new clients in the telecom,
consumer, automotive and public verticals. The performance focussed on selective
opportunities to increase better profitability in India. Hinduja Global Solutions has
reported a turn over of $412 million in financial year 2014.
Table: 1.3
Sl
No
Competition of Hinduja Global Solutions Ltd
Market
Last
Sales
Net
Name
Cap
Price
Turnover
Profit
(in Cr)
Total
Assets
1. TCS
2419.35 473884.85
64672.93 18474.92 44141.57
2. Infosys
3212.90 184496.34
44341.00 10194.00 42092.00
3. Wipro
555.95 137167.05
39133.30
7387.40 28275.50
4. HCL Tech
1461.50 102301.55
12517.82
3704.72 10852.88
5. Tech Mahindra
2114.90
49570.81
16295.13
2685.47
5287.30
6. Oracle Fin Serv
3217.15
27072.61
3159.47
1148.36
7292.35
7. MphasiS
425.00
8932.17
1328.97
223.08
3901.16
8. Mindtree
861.55
7204.77
3031.60
451.20
1643.60
9. Hexaware Tech
152.20
4570.94
1019.95
333.97
888.63
1085.00
4340.00
1184.12
248.57
1007.47
11. Cyient
352.65
3954.35
1224.49
254.92
1167.03
12. NIIT Tech
449.85
2732.77
1308.48
208.40
954.72
13. Polaris Tech
210.15
2094.58
2005.25
83.97
1175.60
14. Zensar Tech
427.95
1980.47
921.80
187.22
646.94
15. Tata Elxsi
608.80
1895.69
772.10
75.11
223.23
16. Rolta
111.65
1801.24
1142.89
459.39
4729.40
17. Financial Tech
261.70
1205.88
334.71
228.55
3275.11
571.25
1178.18
866.35
134.56
907.48
10. Persistent
18.
Hinduja Global
Solutions
(Source: www.economictimes.com)
9
3. Hindustan Zinc Ltd
Hindustan Zinc Ltd is an Indian leading Zinc producer with 80% domestic share
and operates several coal fixed power plants. The sterlite owns 64.9% of Hindustan
Zinc Ltd share capital.
Head Quarter:
Udaipur, India
CEO:
Akilesh Joshi
Founder:
Anil Agarwal
Founded:
1966
Hindustan Zinc Ltd acquired Anglo American Zinc one of the top 5 global Zinc
manufacturers. The total consolidation of $1340 million included the holdings in
100% owned Skorpion Mine in Namibia for $698 million, 100% shares owned
Lisheen mine in Ireland of $308 million and 74% owned in Black Mountain mining of
$332 million.
The whole transaction of Anglo American Zinc Acquisition was funded through
the firm’s existing cash reserves as on 31 March 2010. The Vedanta had cash and
cash equivalent of $7.2 billion.
Hindustan Zinc Ltd became the largest producer of Zinc by overtaking Tech and
Xstrata Resources in Zinc manufacturing after the acquisition of Anglo American
Zinc Plc. It paid $1.3 billion for acquisition which planned to be financed through
Hindustan Zinc Ltd. The Hindustan Zinc Ltd had cash and fixed deposits around
Rs.11900 crore which was used to fund the acquisition.
Key motive behind Mergers and Acquisitions activity
•
To in increase the class of infrastructure
•
For organic growth potentials
•
Operational and strategic fitness
•
Increasing production capacity
•
For long term development through high profitability
10
The results of this acquisition lends to an increase in the Hindustan Zinc Ltd
production capacity to 4 lakhs tonnes in Zinc and a yearly increase of 0.6%
production in lead in the following years.
All cash deals helped Hindustan Zinc Ltd to utilise better its scarce infrastructure.
It increased Hindustan Zinc Ltd Zink and Lead manufacturing by 53% and an
additional add on 76% of Hindustan Zinc Ltd reserves expansion of presence in
Europe and Africa.
Hindustan Zinc Ltd expected to increase output of 36% in upcoming years but in
recent announcements the company has a decline in output by 23.1%. Due to this
decline in the production has lead to an increase in the operating costs. The cost of
production increased by 23.5% in quarter to quarter it is a highly negative
consequence to the company. The higher other income makes to inline profit after tax
due to increase in the operating costs.
The company has a present market capitalisation of Rs.69041.40 crore. In the
current year the company has maintained more than 90% dividend rate. The
Hindustan Zinc Ltd total revenue inline was due to the lower output offset by customs
and increase in products premium.
Table: 1.4
Sl
No
Name
Competition of Hindustan Zinc Ltd
Market
Last
Sales
Net
Cap
Price
Turnover Profit
(in Cr)
Total
Assets
1. Hindustan Zinc
167.80
70900.85
2. Hind Copper
112.70
10427.21
1488.88
286.42
1645.02
78.40
820.59
1059.07
62.80
716.70
125.40
145.01
983.56
14.44
292.27
5. Nissan Copper
3.00
18.86
4.64
-198.38
369.41
6. Cubex Tubings
8.15
11.67
43.73
0.15
58.88
7. Bilpower
3.15
6.62
3.85
-34.62
122.87
3. Tinplate
4. Precision Wires
(Source: www.economictimes.com)
11
13636.04 6904.62 37417.61
4. Lanco Infratech Ltd
Lanco Infratech is a conglomerate Indian business involved in real estate,
constructions and power. Lanco Infratech grouped company was listed among the
fastest growing companies in the world. Lanco Infratech has operations in Singapore,
China, Indonesia, Italy and Netherlands.
Lanco Infratech had to increase power generation capacity in India and bring coal
from Griffen mines to India. Lanco Infratech has connected the league of mine
developers and operators by producing more than 2 billion tonnes of coal resources.
Lanco Infratech made a strategic move into the western Australian industrial coal
market acquisition through its Australian subsidiary with an aim to increase the
capacity.
Head Quarter
Gurgaon, India
CEO
G Venkatesh Babu
Founder
Lagadapathi Rajagopal
Founded
1986
Lanco Infratech acquired Australian- Griffen Coal for A$ 730 million. This deal is
the second biggest investment by an Indian enterprise in Australia, after the deal of
Adani Enterprises acquiring Linc of an Australian firm for $2.7 billion.
Key motive behind Mergers and Acquisitions activity
•
Increase in production
•
Increase in the capacity
•
Opportunity to utilise available resources
Lanco Infratech was funded through ICICI providing a loan of A$480 million and
the remaining amount through three instalments. The acquisition helped Lanco
Infratech to increase production of 40-50 million tonnes of coal for future projects by
access of 4 million tonnes of thermal coal. Hence it resulted in increase of production
of another 15 million tonnes.
12
Presently, Lanco Infratech has achieved coal production touching 5 million tonnes
per annum with this Lanco Infratech has reached the break even point. Lanco
infratech is reported a net loss of A$43 million at the end of 31- March-2012 for the
expansion of Griffen coal by investing A$132 million.
Table: 1.5
Sl
No
Competition of Lanco Infratech Ltd
Name
1. Larsen
Last
Price
Market
Cap
(in Cr)
1753.40 162599.41
Sales
Net
Total
Turnover
Profit
Assets
56598.92
5493.13
43016.01
2. BHEL
260.90
63857.88
39108.83
3460.78
31859.30
3. Adani Ports
269.85
55860.34
4345.78
2016.17
14503.28
4. Siemens
985.70
35102.74
11352.66
193.95
4030.30
1138.60`
24127.89
7721.99
179.31
3297.67
6. Jaiprakash Asso
72.10
15999.59
13116.11
413.89
33549.04
7. GMR Infra
31.05
12086.01
786.29
1165.90
10953.76
8. Thermax
960.30
11442.58
4302.16
252.97
2214.30
9. Engineers Ind
319.00
10748.28
1823.59
479.76
2237.55
10. IRB Infra
250.80
8335.69
2212.24
288.21
2706.63
11. ILAndF S Trans
210.55
5194.69
3404.58
266.03
5863.23
12. NBCC
392.70
4712.40
4066.96
247.14
950.70
33.15
4604.31
3318.69
299.16
13662.62
1450.00
3872.94
1152.24
88.58
692.08
86.50
3701.23
40.13
-25.75
2993.40
776.10
3232.03
2911.51
4.68
3294.35
12.70
3057.91
2236.40
-959.99
7780.63
5. ABB
13. Jaypee Infra
14. Va Tech Wabag
15. Essar Ports
16. BEML
17. Lanco infratech
(Source: www.economictimes.com)
13
5. Fortis Healthcare Ltd
Fortis Healthcare Ltd is a well equipped chain of super speciality hospitals with its
head quarter situated in New Delhi. Fortis Healthcare had major acquisition of EHCL,
EHSSIL, EHSSHL and EHRCL in the year 2005, 99.99% of International Hospital
Ltd, Noida in March 2006 and in the same year acquired 100% in Oscar Bio-Tech Pvt
Ltd. Fortis Healthcare is the largest hospital in terms of number of beds.
Head Quarter
New Delhi, India
CEO
Malvinder Mohan Singh
Founder
Parvinder Singh
Founded
2001
Fortis Healthcare acquired 23.9% stake in Singapore based – Parkway Holdings
Ltd from Texas Pacific Group. The acquisition of 23.9% stakes in Parkway holdings
raised the net profit of Fortis Healthcare to 41.34% in quarter four of 2012.
The Parkway Holdings Ltd acquisition has given an opportunity of international
expansion to Fortis Healthcare. This is the company’s third major deal from the last 5
years after Wockhardt Hospitals and Escorts Heart Institute.
Key motive behind Mergers and Acquisitions activity
•
Entry to International Market
•
Market Expansion
•
Increasing the capacity
The transaction increased Fortis Healthcare network to 62 and became the biggest
hospital network in Asia which had more than 10000 beds. The deal had each price of
Parkway Shares at Singapore $3.56 higher than the closing price of S$3.12 by paying
premium at 14% after completion of the transaction. The Fortis Healthcare share price
rose more than 5% in 52 weeks of high at Rs.179.20.
14
Parkway is one of Asia’s top healthcare service providers. Fortis Healthcare has a
further construction of Fortis international Institute of Bio- Medical Sciences, which
has been built in Gurgoan. It is also under the progress and it became third Greenfield
hospital having multi super –speciality. With this the company had aggressive growth.
Presently, Fortis Healthcare has a capacity of 6000 beds through 40 hospitals reported
in the year 2012.
Fortis Healthcare had further announced in September 2011 it acquired Fortis
Healthcare International Ltd of 100% acquisition for a purchase consideration of $665
million. From this integration there were multiple synergies of talent, growth, cost
efficiencies and medical verticals. From this activity the consolidated entity has
strength of more than 4000 doctors.
Fortis Healthcare has operation networks in India, New Zealand, Australia
Vietnam, Hong Kong, Mauritius, Singapore, Srilanka, Dubai and Canada with over
12000 beds, 75 hospitals, 191 day care specialty, 210 diagnostic centres and over 600
care centres in March 2014.
Table: 1.6
Sl No
Competition of Fortis Healthcare Ltd
Name
Market
Last
Cap
Price
(in Cr)
1031.50 14350.76
Sales
Net
Total
Turnover
Profit
Assets
1.
Apollo Hospital
2.
Fortis Health Care
124.00
5738.57
368.90
23.99 4203.04
3.
Poly Medicure
477.30
1051.65
252.24
24.03
4.
Opto Circuits
38.95
943.83
261.11
42.16 2254.94
5.
Indraprastha
46.00
421.70
677.58
35.44
222.86
6.
Kovai Medical
250.50
274.10
334.14
23.72
264.42
7.
Lotus Eye Care
10.15
21.11
28.69
0.04
51.44
(Source; www.economictimes.com)
15
3861.63 330.72 3625.31
148.66
6. Jindal Steel and Power Ltd
Jindal Steel and Power Ltd is a steel and energy producer with head quarter
situated in New Delhi, India. Jindal Steel and Power Ltd have an approximate
turnover of $3.56 billion. Jindal Steel and Power Ltd is a diversified product portfolio
in India. Jindal Steel and Power Ltd is a diversified part of Jindal Group. The
manufacturing plants are situated in Chattisgrah, Odisha and Jharkhand.
Jindal Steel and Power Ltd have undergone backward integration and forward
integration to be comparatively economical and efficient steel and power producers.
Jindal Steel and Power Ltd also expanded the identity too internationally by entering
Africa, Oman, Australia, and Indonesia. Jindal Steel and Power Ltd is a leading
producer of steel, power, oil, gas, mining and infrastructure in India.
Head Quarter:
New Delhi, India
CEO:
Ravi Uppal
Founder:
Om Prakash Jindal
Founded:
1952
Jindal Steel and Power Ltd acquired Shadeed Iron and Steel Co.LLC, has a
agreement for 100% shares purchase and the total value of the deal was reported to be
$464 million. Jindal Steel and Power Ltd was funded through tie up with international
banks for $400 million and the balance of the deal amount was financed through
internal finance.
Key motive behind Mergers and Acquisitions activity
•
Strategic Expansion
•
Economies of scale
•
Expanding geographical reach
The acquisition has key motives as a step of strategic expansion by increasing the
production capacity. Jindal Steel and Power Ltd have strong demand in North African
countries, estimated supply short fall of more than 15 million tonnes. Shadeed Iron
16
and Steel Company have a manufacturing capacity of 15 million tonnes per annum. It
helps to meet the demand of Jindal Steel and Power Ltd by this. The firm claims to be
the largest steel plant. It is the first and largest Steel Melting Shop (SMS).
Jindal Steel and Power Ltd has more than 10% growth compared to the export
sales and in retail volume growth has comparatively increased to 78% growth from
second quarter to third quarter of 2014. Jindal Steel and Power Ltd announced 15%
growth in flat product sales in 2014 with earnings before depreciation, interest, tax
and amortisations margin of 20% at 6 years Compound Annual Growth Rate
(CAGR).
Table; 1.7
Sl
No
Competition of Jindal Steel & Power Ltd
Name
Last
Price
Market
Cap
(in Cr)
Sales
Net
Total
Turnover
Profit
Assets
1. Jindal Steel
330.15
30204.96
14544.02
1291..95
31849.01
2. Gallantt Ispat
463.40
1356.21
473.81
14.98
370.98
3. Sarda Energy
297.70
1067.25
1270.51
75.38
1440.49
4. Tata Sponge
685.60
1055.82
782.22
101.17
722.62
5. Monnwt Ispat
137.30
903.79
2309.77
66.63
8186.35
6. Adhunik Metalic
53.25
657.64
1671.86
2.82
2438.22
7. Gowawari Power
168.95
553.42
1540.92
55.94
1229.59
8. MSP Steel
30.50
2688.71
1192.76
21.00
1576.33
9. Jai Balaji Ind
28.00
206.59
1968.10
-318.95
2763.01
(Source: www.economictimes.com)
17
7. Mahindra & Mahindra Ltd
Mahindra & Mahindra Ltd is the largest vehicle producer in India. Mahindra and
Mahindra is an Indian multinational company. The automobile manufacturer’s head
quarter is situated in Mumbai. Mahindra and Mahindra have operations in Australia,
Asia, Middle East, Africa, Europe, South Africa and North America. Mahindra and
Mahindra have tractors to airplanes, and, the Mahindra group automobiles to
Information Technology Consulting Services.
Mahindra and Mahindra manufactures important products and services for
Defence, Energy and Farm Equipments. Mahindra and Mahindra has a diversified
business through their 18 industries like, farm equipments, automotive products &
services, agri business, consulting services, aerospace components, information
technology, industrial equipments, hospitality, retail, real estate, logistics and motor
cycle racing. Mahindra and Mahindra has growth of $16.5 billion and more than
180000 employees over 100 countries around the world.
Head Quarter:
Mumbai, India
CEO:
Anand Mahindra
Founder:
Jagadeesh Chandra Mahindra
Founded:
October 02 1945
Mahindra and Mahindra Ltd acquired 70% of majority stake in the South Korean
based Automobile – Ssang Yong Motor Company (SYMC). Mahindra and Mahindra
emerged as the preferred acquirer for Ssang Yong Motor Company in August 2010.
The deal value of 70% acquisition of SsangYong was $463 million. SsangYong’s
premium of Recreational Vehicles (RV) and Sports Utility Vehicles (SUV) in Korea
has operations from the past five decades.
SsangYong has a healthy domestic network with more than 130 dealers’ exports
in 90 countries through more than 1200 dealers. The total deal value is $ 463 million,
out of this $378 million was invested in stock and the remaining $85 million through
18
investment in corporate bonds. With this Mahindra and Mahindra completed 70% of
acquisition in SsangYong.
Key motive behind Mergers and Acquisitions activity
•
As a business strategy –to penetrate international market
•
To be a global passenger vehicle industry
•
To Protect brand identity and to ensure quality
•
For global procurement and new car development
Recently Mahindra and Mahindra launched new car models. It increased their
dealership in South Africa. There has been a sudden increase in sales from 2012. The
turnover of Mahindra and Mahindra and Ssang Yong Motor Company has increased
by 118% in the segment of Light Commercial Vehicles (LCV) and passenger cars.
Mahindra and Mahindra plans to invest another $900 million in the next 4 years
for the development of six engines and three new platforms with an integration of
South Korean based Ssang Yong Motors. Mahindra and Mahindra reported a growth
of 6.3% in 2012 in terms of sales and 23% of growth in domestic cars.
Table: 1.8
Sl
No
Competition of Mahindra & Mahindra Ltd
Name
Last
Price
Market
Cap
(in Cr)
Sales
Net
Total
Turnover
Profit
Assets
1. Maruti Suzuki
2627.35
79367.00
43700.63
2783.05
19968.10
2. M&M
1232.65
75917.97
40508.50
3758.35
17885.99
10.20
188.47
722.89
-71.20
40.11
3. Hind Motors
(Source: www.economictimes.com)
19
8. Tata Chemicals Ltd
Tata Chemicals Ltd is a global entity with their core focus on life like living, farm
and industry essentials. Tata Chemicals Ltd is a market leader in India for the branded
segment – Iodised Salt. Tata Chemicals Ltd is the second largest producer of soda the
world. Tata Chemicals Ltd, provide key ingredients to few of the largest producers of
detergents, glass and industrial products. The company has manufacturing facilities in
Africa, Asia, Europe and North America. Tata Chemicals Ltd has world class
Research and Development facilities in the area of Bio – Technology and Nano
Technology.
Head Quarter:
Mumbai, Maharastra,India
CEO:
Ramakrishnan Mukundam
Founder:
Dorabji Tata
Founded:
1939
In the year 2008, Tata Chemicals Ltd acquired 100% stake of the US based
General Chemicals Industry Product Inc., for $1.05 billion to became the second
largest producer of Soda Ash in the world. The plant has a capacity of 3.85 billion
tonnes of Urea and 2.2 billion tonnes of Ammonia per day.
Tata Chemicals Ltd is a wholly owned UK arm Brunner Mond acquired Cheshire
Salt Holding Ltd., a parent company of British Salt. British Salt profitability increased
through the Gas storage business resulting in promising business models and raised
the potential cash flows for the company.
Key motive behind Mergers and Acquisitions activity
•
Entry to the food segment in the UK
•
Increase in potential cash flows
•
Technology upgradation
•
To secure long term brine suppliers
•
Improve overall financial performance
20
This acquisition helped improve overall financial performance of Tata
Chemicals Ltd. The deal value of the acquisition was £93 million. Through this
acquisition the production capacity from British Salt added another atleast 720 lakhs
tonnes per year. The overall deal value was facilitated through debt on non – resource
basis.
British Salt is a leading vacuum salt producer which has its own brine wells in the UK
with a residual life of 50 years. It has a capacity to manufacture 8 lakhs tonnes of pure
white salt every year. Tata Chemicals Ltd, reported 8% growth in profit after tax of
Rs.55 billion and 16% growth in sales of Rs111.02 billion in 2011.
Table: 1.9
Sl
No
Competition of Tata Chemicals Ltd
Name
Last
Price
Market
Cap
(in Cr)
Sales
Net
Total
Turnover
Profit
Assets
1. Pidilite Ind
328.05
16817.23
3878.24
468.61
1732.44
2. UPL
344.00
14743.99
4968.27
415.73
5395.80
3. Tata Chemicals
342.65
8729,22
8725.26
436.07
7764.38
4. Guj Flourochem
498.00
5470.53
1140.94
74.43
3285.89
5. BASF
880.00
3809.14
4429.89
127.87
1502.00
2040.00
3691.99
904.03
83.84
613.27
7. Linde India
365.90
3120.55
1428.46
77.33
2344.34
8. Aarti Ind
223.00
1975.59
2632.77
148.69
1478.40
9. Vinati organics
352.00
1737.91
696.13
86.15
442.07
10. Guj Alkali
201.75
1481.59
1896.06
185.02
2023.70
6. Solar Ind
(Source: www.economictimes.com)
21
9. GTL Infrastructure Ltd
GTL Infrastructure is a multinational Indian enterprise. GTL Infrastructure is a
global group enterprise in the core business of shared telecom infrastructure in India.
GTL Infrastructure has a portfolio of over 30,000 towers in India. GTL Infrastructure
builds, operates, owns and maintains the network infrastructures and provide
infrastructure facilities to cellular telecom operators.
Head Quarter:
Mumbai, India
CEO:
Manoj G Tirodkar
Founder:
Manoj G Tirodkar
Founded:
2004
GTL Infrastructure is listed in BSE and NSE at the market capitalization of
Rs.1397 crore. With this, the company was first listed in Asia Pacific to get the listed
shared telecom infrastructure. GTL Infrastructure completed acquisition of 17,500
tower and 21,000 tenancies of Aircel Towers at an enterprise value of Rs.8026 crore.
GTL Infrastructure acquired Aircel Cellular Tower Business for Rs.8400 crore
through a cash deal. From this transaction Aircel rolled out an additional 20,000
towers and expected a revenue base of Rs.1,800 crores with an EBDITA of more than
Rs.1,200 crores in the financial year 2011.
Key motive behind Mergers and Acquisitions activity
•
Increase in scale of operations
•
Providing better services
•
Increase in profitability
•
Economies of scale
GTL Infrastructure already had 15,000 towers and integrated with Aircel’s
17,500 towers. So the firm consolidated 32,500 towers for its operations.
22
The transaction enabled GTL Infrastructure to achieve high deal tower
portfolio in average revenue per user and helped provide attractive services through
2G, 3G and broadband wireless operations.
GTL Infrastructure has raised money through debt and equity. In the total deal
value of Rs.3400 crore was raised through fresh equity and the remaining amount of
the deal was raised through Rs.5000 crores which was funded by SBI Caps.
Most of the telecom companies are selling or transferring their tower
operations of another firm to reduce the costs to meet the market demand and
anticipating recovering the capital expenditure within 3 to 12 years.
Table: 1.10
Sl
Competition of GTL Infrastructure Ltd
Name
No
1. Bharti Infratel
Last
Price
Market
Cap
(in Cr)
Sales
Net
Total
Turnover
Profit
Assets
266.70
50407.37
4999.30
1089.90
17672.40
5150.00
4553.38
1706.99
86.16
780.97
18.40
2280.45
2018.78
147.48
985.03
148.80
1217.56
531.16
50.93
242.63
31.70
912.96
708.72
-344.26
1778.23
3.65
844.64
578.73
-551.24
6524.24
26.15
411.33
2265.11
-469.78
4442.90
6.35
65.09
87.79
-44.47
470.64
9. MIC Electronics
20.60
41.46
87.79
-9.18
470
10. Shayam Telecom
33.90
38.21
348.50
-1.35
59.59
2.
Honeywell
Autom
3. HFCL
4. Astra Microwave
5. ITI
6. GTL Infra
7. GTL
8. NELCO
(Source:www.economictimes.com)
23
10. Reliance Power Ltd
Reliance Power is a part of Dhirubhai Ambani Group. It has a core business of
construction, development and operations of power projects in national and
international markets. It generates power from naphtha, coal, natural gas and diesel.
The firm has products and services which includes retail, agricultural and industrial
consumers.
Reliance Power operations has two segments which are associated business
activities and power generation. The company and its subsidiaries target to utilise a
variety of fuel resources for developing a better portfolio of power projects. The head
quarter is situated in Mumbai.
Head Quarter:
Mumbai, India
CEO:
J P Chalasani
Founder:
Anil Dhirubhai Ambani
Founded
2007
Reliance Power merged with Reliance Natural Resources and the deal value waas
at $11 billion. This activity was considered as the biggest transaction in the year 2010.
This activity made an easy path for Reliance Power to get the resources for its power
project.
The Reliance Power and Reliance Natural Resources merger was swap fixed at
1:4. Hence, the four shares of Reliance Natural Resources Ltd were converted as one
share of Reliance Power. The payment has made on the fixed swap basis.
Key motive behind Mergers and Acquisitions activity
•
Accelerating power plants plan
•
Accelerating backward integration
•
Increasing the capacity of the plant
•
Becoming the largest coal reserves
24
The merger has market capitalisation of Reliance power to shrink over Rs.52000
crore. Reliance Power has retained all employees and the assets of Reliance Natural
Resources Ltd. Reliance Power had a turnover of Rs.298 crore after the merger. The
combined firm networth exceeded Rs.1000 crore by having 6,00,000 shareholders.
Reliance Power Ltd has 4 billion tonnes of coal reserves in India and across the
country. The merger accelerated plans to set up 10000 MW gas power plants and get
pure thermal power for its power projects. Reliance Power has advantage of a
diversified portfolio of 37000MW for its power projects.
Table: 1.11
Sl
Competition of Reliance Power Ltd
Market
Sales
Net
Total
Turnover
Profit
Assets
157.70 130030.97
72018.93
10974.74
140.35
73425.36
15230.29
4497.42
108.10
30323.42
91.69
27.20
30112.22
5537.04
978.79
95033.34
5. Tata Power
106.80
28885.40
8627.04
954.08
18702.97
6. Reliance Infra
796.00
20934.00
11356.93
1587.94
45258.o2
7. Adani Power
65.60
18811.09
11010.04
595.26
29343.83
8. Newyyeli Lignite
99.60
16709.99
5967.23
1501.88
15462.02
9. JSW Energy
84.60
13874.86
5802.61
602.48
11610.54
10. SJVN
24.50
1013473
1873.58
1114.63
10286.28
11. CESC
713.85
5510.00
5510.00
652
8611.66
No
Name
1. NPTC
2.
Power Grid
Corpo
3. Reliance Power
4. NHPC
Last
Price
Cap
(in Cr)
(Source: www.economictimes.com)
25
56.48 133641.17
1.5.4
Sources of data
The research study is based on secondary data taken from the financial reports of
selected firms. The data relating to companies, history, growth and developments of
the industrial sectors have been collected from books, magazines, published papers,
articles, reports and from several news papers, other industry oriented reports,
research organisations and various internet sites.
1.5.5
Period of the Study
The present study examines the value creation of merged firms from 3 years pre
merger to 3 years post merger.
1.5.6
Tools of Analysis
a)
Financial Tools:
I.
Ratio Analysis
Ratio analysis is extensively accepted and the most widely used financial
tool. “Ratio is a mathematical relationship between one value to another value”. An
accounting ratio shows the mathematical relationship between two numbers. Ratio is
used for evaluating the performance of the business concern and the operations of a
company from scientific facts. Accounting and financial ratios are used for evaluating
the earning capacity, financial soundness, credit worthiness and operating efficiency
of business entities.
II.
Economic Value Added (EVA)
Economic Value Added defined as “the incremental difference in rate of
return over a firm’s overall cost of capital”. Economic Value Added result as positive
or negative. In case of Economic Value Added, negative means the firm is destroying
the value of funds invested. Economic Value Added is a yardstick for an investment
measuring the value of surplus or deficit. In other words, the Economic Value Added
is calculated as a sum of excess return made on investment and invested capital.
Economic Value Added is calculated by using the following formula:
26
Economic Value Added = (Return on invested capital) – (Cost of Capital) (Capital
invested)
b)
Statistical Tools:
I.
Mean: Mean is used to refer to the measure of the central
tendency. Mean is a total sum of data divided by the number of observation. Mean is a
well known and established statistical measure. It is useful to compare the many sets
of data. Mean is always calculated based on all the observations. The results of the
mean is least affected by variations in sampling.
II.
Standard Deviation: Standard Deviation was introduced by Karl
Pearson in the year 1823. It is a widely used measure of dispersion. Standard
Deviation is denoted by a small sigma sign.
III.
Co – efficient of Variation: Co-efficient of Variation is a statistic
measure used to compare the variability from the sets of data. It is expressed in terms
of percentage. When Co-efficient of Variation is less it indicates consistency or less
variation, whereas when Co-efficient of Variation is more it’s indicates high variation
or less consistency.
IV.
Paired T-test: To investigate the impact of Mergers and
Acquisitions activities ratios have been calculated for three years before and after the
transactions. Paired samples T- test has been conducted to assess the difference in pre
Mergers and Acquisitions financial performance and post Mergers and Acquisitions
financial performance. The paired sample t-test compares the mean of two variables
from the same group. It determines whether the difference between the means of two
variables is significantly different from zero. In this study, the two variables are mean
ratio of the acquired firm before and after the Mergers and Acquisitions period. The
paired samples T- test thus determines whether there is a significant change in the
variables ‘before and after’ mergers and acquisition. A positive t-value indicates a
higher mean value for post Mergers and Acquisitions period.
V.
Skewness: Generally skewness means ‘lack of symmetry’. It
observes higher value or lower value from the total variable. The extreme values have
27
longer tails. Positive skewness is a higher variation towards the variable which has
higher value. Negative skewness is a higher variation towards the variable which has
lower value.
VI.
Kurtosis: means to identify the distribution, shape and the nature
of hump in other words, it is concerned with peakedness or flatness of the distribution
frequency curve. Prof. Karl Pearson named it ‘convexity of the curve’ or ‘Kurtosis’.
Kurtosis is classified based on the shape namely; Lepto-Kurtic (negative Kurtosis),
Meso- kurtic(Normal Kurtosis), Platy-kurtic(positive Kurtosis).
1.6
Significance of the study
This study aims to increase knowledge regarding financial ratios. This study fills a
gap between the conceptual study and the practical performance. Therefore, the study
has examined the research gaps by evaluating and applying various statistical and
financial tools and techniques and the knowledge about the statistical test. More than
this the study contributes to the society as well as to the companies.
•
Contribution to the society
This study finds the real situation of the financial position of selected firms to
the society by making an analysis in pre and post Mergers and Acquisitions.
This study helps to take effective decisions by the stakeholders of selected firms.
Promoters will be able to take adequate decision by evaluating better strategies.
•
Contribution to the industry/ company
This study provides the information regarding to financial health during the
period of Mergers and Acquisitions. It helps to maintain the better position.
This study helps to know about the impact of Mergers and Acquisitions on value
of the firm.
28
1.7
Scope of the study
This study has considered the top ten Mergers and Acquisitions and its trends
on Indian firms. However, the value evaluation of Merger and Acquisition activities is
confined to the select Indian acquiring firms, wherein Merger and Acquisition
activities occurred in the year 2010. The remarkable increase in Mergers and
Acquisitions and the value matters leads to making a comparative study of pre and
post Mergers and Acquisitions by considering 3 years of the pre and post acquisition
period.
1.8
Limitations of the study
The major limitations of the study are as below
•
This study is purely based on secondary data announced from the annual reports of
companies. The consistency and the findings are dependent upon the published
annual reports. The short comings of the use of secondary data are inevitable.
•
There is no common view from the experts groups on the different approaches for
evaluation of profitability and liquidity of the firm.
•
This study is limited to 3 years of pre and post Mergers and Acquisitions period,
for data analysis. The information relating to the year in which Mergers and
Acquisitions has taken place (2010) the information taken place that year is
ignored.
•
Financial ratios have their own limitations, which is also applied to the study.
•
The study is carried out on the basis of 10 limited numbers of companies only. Any
generality for universal application can not be applicable here.
•
The financial analysis only considers the facts which are expressed in terms of
money.
•
The study focuses on the bidding firms from India. Therefore, the target firms may
be inbound or outbound acquisitions of India.
29
1.9
Outline of chapter scheme
Chapter- 1 is an Introduction. In this chapter a general introduction of the study,
Problem statement, Objectives of the study, hypothesis, methodology- type of
research, sample techniques, sample size, a brief profile of selected acquirers of
Indian Firms consisting of information about history, nature of business, acquisitions,
mode of payment, key motive factor behind the acquisition, post-period performance,
competition levels, comparison of the competition level based on market
capitalisation, turnover, net profits and total assets, Sources of data, period of the
study, tools of analysis, significance of the study, scope of the study and limitations of
the study are discussed.
Chapter – 2 deals with review of literature. Various research articles, journals and
books are referred. This chapter focuses on Mergers and Acquisitions and includes a
brief about Mergers and Acquisitions, worldwide Mergers and Acquisitions, trends of
Mergers and Acquisitions in India, key motives for Mergers and Acquisitions, impact
of Mergers and Acquisitions- positive impact and negative impact of Mergers and
Acquisitions are discussed.
Chapter – 3 deals with data analysis & interpretation. In this chapter analysis of
profitability, liquidity and leverage positions of selected firms have been explained.
This chapter is classified into 2 main heads: a) examination of the financial health of
the selected firms in pre & post Mergers and Acquisitions period by comparing the
ratios under 2 categories, which are 1) profitability, leverage and market capital
ratio,2)financial synergy, managerial synergy and operating synergy standards. b)
Examination of the impact of value of the firm, value added/ shortfall and net present
value of the investment. All the ratios under the above two categories are tested with
the help of Paired ‘t’ Test. The analysis tools - meaning and the framework of analysis
are also discussed.
Chapter – 4 deals with findings, suggestions and conclusion. It also consolidates the
summary of findings, suggestions are presented, the conclusions are drawn and
implications are stated.
30