tata merger case study
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
CONTENT LIST
Sr. No. Particulars Page no.
1. Introduction to Merger & Acquisition 07
Merger 09
Acquisition 11
Takeover 12
2. History of merger & acquisition 15
3. Procedure for takeover & acquisition 18
4. Purpose of merger& acquisition 22
5. Types of merger 25
6. Advantage of merger & acquisition 37
7. Distinction between merger & acquisition 41
8. Merger & Acquisition in India 42
9. Merger & Acquisition in across Indian sector 43
10. Merger & Acquisition in banking sector 45
11. Merger & Acquisition in telecommunication sector 47
12. Merger & Acquisition in pharmaceutical sector 51
13. Changes in scenario of Banking sector 55
14. Case study (Acquisition of Jaguar & Land Rover by
Tata Group)
57
15. Conclusion 102
16. Bibliography 103
Merger & Acquisition in India
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
Introduction to Mergers and Acquisition
We have been learning about the companies coming together to
from another company and companies taking over the existing companies to
expand their business.
With recession taking toll of many Indian businesses and the
feeling of insecurity surging over our businessmen, it is not surprising when
we hear about the immense numbers of corporate restructurings taking
place, especially in the last couple of years. Several companies have been
taken over and several have undergone internal restructuring, whereas
certain companies in the same field of business have found it beneficial to
merge together into one company.
In this context, it would be essential for us to understand what
corporate restructuring and mergers and acquisitions are all about. The
phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of
corporate strategy, corporate finance and management dealing with the
buying, selling and combining of different companies that can aid, finance, or
help a growing company in a given industry grow rapidly without having to
create another business entity.
Thus important issues both for business decision and public
policy formulation have been raised. No firm is regarded safe from a
takeover possibility. On the more positive side Mergers & Acquisitions may
be critical for the healthy expansion and growth of the firm. Successful entry
into new product and geographical markets may require Mergers &
Acquisitions at some stage in the firm's development.
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Successful competition in international markets may depend
on capabilities obtained in a timely and efficient fashion through Mergers &
Acquisitions. Many have argued that mergers increase value and efficiency
and move resources to their highest and best uses, thereby increasing
shareholder value. To opt for a merger or not is a complex affair, especially
in terms of the technicalities involved. We have discussed almost all factors
that the management may have to look into before going for merger.
Considerable amount of brainstorming would be required by
the managements to reach a conclusion. e.g. a due diligence report would
clearly identify the status of the company in respect of the financial position
along with the net worth and pending legal matters and details about various
contingent liabilities. Decision has to be taken after having discussed the
pros & cons of the proposed merger & the impact of the same on the
business, administrative costs benefits, addition to shareholders' value, tax
implications including stamp duty and last but not the least also on the
employees of the Transferor or Transferee Company.
Merger
Merger is defined as combination of two or more companies into
a single company where one survives and the others lose their corporate
existence. The survivor acquires all the assets as well as liabilities of the
merged company or companies. Generally, the surviving company is the
buyer, which retains its identity, and the extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of
two or more existing companies. All assets, liabilities and the stock of one
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company stand transferred to Transferee Company in consideration of
payment in the form of:
Equity shares in the transferee company,
Debentures in the transferee company,
Cash, or
A mix of the above modes.
In business or economics a merger is a combination of two
companies into one larger company. Such actions are commonly voluntary
and involve stock swap or cash payment to the target. Stock swap is often
used as it allows the shareholders of the two companies to share the risk
involved in the deal.
A merger can resemble a takeover but result in a new company
name (often combining the names of the original companies) and in new
branding; in some cases, terming the combination a "merger" rather than an
acquisition is done purely for political or marketing reasons.
Merger is a financial tool that is used for enhancing long-term
profitability by expanding their operations. Mergers occur when the merging
companies have their mutual consent as different from acquisitions, which
can take the form of a hostile takeover. The business laws in US vary across
states and hence the companies have limited options to protect themselves
from hostile takeovers. One way a company can protect itself from hostile
takeovers is by planning shareholders rights, which is alternatively known as
“poison pill.
If we trace back to history, it is observed that very few mergers
have actually added to the share value of the acquiring company and
corporate mergers may promote monopolistic practices by reducing costs,
taxes etc.
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Managers are concerned with improving operations of the
company, managing the affairs of the company effectively for all round gains
and growth of the company which will provide them better deals in raising
their status, perks and fringe benefits.
Acquisition
An Acquisition usually refers to a purchase of a smaller firm by a larger one.
Acquisition, also known as a takeover or a buyout, is the buying of one
company by another.
Acquisitions or takeovers occur between the bidding and the
target company. There may be either hostile or friendly takeovers.
Acquisition in general sense is acquiring the ownership in the property. In the
context of business combinations, an acquisition is the purchase by one
company of a controlling interest in the share capital of another existing
company.
Methods of Acquisition:
An acquisition may be affected by
(a)agreement with the persons holding majority interest in the company
management like members of the board or major shareholders
commanding majority of voting power;
(b)purchase of shares in open market;
(c) to make takeover offer to the general body of shareholders;
(d)purchase of new shares by private treaty;
(e)Acquisition of share capital through the following forms of
considerations viz. means of cash, issuance of loan capital, or
insurance of share capital.
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There is different type of acquisition:-
A. Reverse takeover: - Sometimes, however, a smaller firm will acquire
management control of a larger or longer established company and keep its
name for the combined entity. This is known as a reverse takeover.
a. Reverse takeover occurs when the target firm is larger than the bidding
firm. In the course of acquisitions the bidder may purchase the share or the
assets of the target company.
b. In the former case, the companies cooperate in negotiations; in the latter
case, the takeover target is unwilling to be bought or the target's board has
no prior knowledge of the offer.
B. Reverse merger: - A deal that enables a private company to get publicly
listed in a short time period.
a. A reverse merger occurs when a private company that has strong
prospects and is eager to raise financing buys a publicly listed shell
company, usually one with no business and limited assets.
b. Achieving acquisition success has proven to be very difficult, while
various studies have showed that 50% of acquisitions were unsuccessful.
The acquisition process is very complex, with many dimensions influencing
its outcome.
Takeover:
In business, a takeover is the purchase of one company (the
target) by another (the acquirer, or bidder). In the UK, the term refers to the
acquisition of a public company whose shares are listed on a stock
exchange, in contrast to the acquisition of a private company.
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A ‘takeover’ is acquisition and both the terms are used
interchangeably. Takeover differs from merger in approach to business
combinations i.e. the process of takeover, transaction involved in takeover,
determination of share exchange or cash price and the fulfillment of goals of
combination all are different in takeovers than in mergers. For example,
process of takeover is unilateral and the offer or company decides about the
maximum price. Time taken in completion of transaction is less in takeover
than in mergers, top management of the offered company being more co-
operative
There are different types of takeover:-
1. Friendly takeovers
2. Hostile takeovers
3. Reverse takeovers
1. Friendly takeovers
Before a bidder makes an offer for another company, it usually first informs
that company's board of directors. If the board feels that accepting the offer
serves shareholders better than rejecting it, it recommends the offer be
accepted by the shareholders.
In a private company, because the shareholders and the board
are usually the same people or closely connected with one another, private
acquisitions are usually friendly. If the shareholders agree to sell the
company, then the board is usually of the same mind or sufficiently under
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the orders of the shareholders to cooperate with the bidder. This point is not
relevant to the UK concept of takeovers, which always involve the acquisition
of a public company. Hostile takeovers
2. Hostile takeovers
A hostile takeover allows a suitor to bypass a target company's
management unwilling to agree to a merger or takeover. A takeover is
considered "hostile" if the target company's board rejects the offer, but the
bidder continues to pursue it, or the bidder makes the offer without
informing the target company's board beforehand.
A hostile takeover can be conducted in several ways. A tender
offer can be made where the acquiring company makes a public offer at a
fixed price above the current market price. Tender offers in the USA are
regulated with the Williams Act.
An acquiring company can also engage in a proxy fight, whereby
it tries to persuade enough shareholders, usually a simple majority, to
replace the management with a new one which will approve the takeover.
Another method involves quietly purchasing enough stock on
the open market, known as a creeping tender offer, to effect a change in
management. In all of these ways, management resists the acquisition but it
is carried out anyway.
1. Reverse takeovers
A reverse takeover is a type of takeover where a private
company acquires a public company. This is usually done at the instigation of
the larger, private company, the purpose being for the private company to
effectively float itself while avoiding some of the expense and time involved
in a conventional IPO. However, under AIM rules, a reverse take-over
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is an acquisition or acquisitions in a twelve month period which for an AIM
company would:
exceed 100% in any of the class tests; or
result in a fundamental change in its business, board or voting control;
or
in the case of an investing company, depart substantially from the
investing strategy stated in its admission document or, where no
admission document was produced on admission, depart substantially
from the investing strategy stated in its pre-admission announcement
or, depart substantially from the investing strategy
History of Mergers and Acquisitions
Tracing back to history, merger and acquisitions have evolved in
five stages and each of these are discussed here. As seen from past
experience mergers and acquisitions are triggered by economic factors.
The macroeconomic environment, which includes the growth in
GDP, interest rates and monetary policies play a key role in designing the
process of mergers or acquisitions between companies or organizations.
First Wave Mergers
The first wave mergers commenced from 1897 to 1904.
During this phase merger occurred between companies, which enjoyed
monopoly over their lines of production like railroads, electricity etc.
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The first wave mergers that occurred during the aforesaid time
period were mostly horizontal mergers that took place between heavy
manufacturing industries.
End of 1st Wave Merger
Majority of the mergers that were conceived during the 1st phase
ended in failure since they could not achieve the desired efficiency. The
failure was fuelled by the slowdown of the economy in 1903 followed by the
stock market crash of 1904. The legal framework was not supportive either.
The Supreme Court passed the mandate that the anticompetitive mergers
could be halted using the Sherman Act.
Second Wave Mergers
The second wave mergers that took place from 1916 to 1929
focused on the mergers between oligopolies, rather than monopolies as in
the previous phase. The economic boom that followed the post World War I
gave rise to these mergers. Technological developments like the
development of railroads and transportation by motor vehicles provided the
necessary infrastructure for such mergers or acquisitions to take place.
The government policy encouraged firms to work in unison. This
policy was implemented in the 1920s. The 2nd wave mergers that took place
were mainly horizontal or conglomerate in nature. Te industries that went for
merger during this phase were producers of primary metals, food products,
petroleum products, transportation equipments and chemicals. The
investments banks played a pivotal role in facilitating the mergers and
acquisitions.
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End of 2nd Wave Mergers
The 2nd wave mergers ended with the stock market crash in
1929 and the great depression. The tax relief that was provided inspired
mergers in the 1940s.
Third Wave Mergers
The mergers that took place during this period (1965-69) were
mainly conglomerate mergers. Mergers were inspired by high stock prices,
interest rates and strict enforcement of antitrust laws.
The bidder firms in the 3rd wave merger were smaller than the
Target Firm. Mergers were financed from equities; the investment banks no
longer played an important role.
End of the 3rd Wave Merger
The 3rd wave merger ended with the plan of the Attorney
General to split conglomerates in 1968. It was also due to the poor
performance of the conglomerates. Some mergers in the 1970s have set
precedence.
The most prominent ones were the INCO-ESB merger; United
Technologies and OTIS Elevator Merger are the merger between Colt
Industries and Garlock Industries.
Fourth Wave Merger
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The 4th wave merger that started from 1981 and ended by
1989 was characterized by acquisition targets that wren much larger in size
as compared to the 3rd wave merger. Mergers took place between the oil
and gas industries, pharmaceutical industries, banking and airline industries.
Foreign takeovers became common with most of them being hostile
takeovers. The 4th Wave mergers ended with anti takeover laws, Financial
Institutions Reform and the Gulf War.
Fifth Wave Merger
The 5th Wave Merger (1992-2000) was inspired by globalization,
stock market boom and deregulation. The 5th Wave Merger took place
mainly in the banking and telecommunications industries.
They were mostly equity financed rather than debt financed. The
mergers were driven long term rather than short term profit motives. The 5th
Wave Merger ended with the burst in the stock market bubble. Hence we
may conclude that the evolution of mergers and acquisitions has been long
drawn. Many economic factors have contributed its development.
Procedure for Takeover and Acquisition
Public announcement:
To make a public announcement an acquirer shall follow the following
procedure:
1. Appointment of merchant banker:
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The acquirer shall appoint a merchant banker registered as category – I with
SEBI to advise him on the acquisition and to make a public announcement of
offer on his behalf.
2. Use of media for announcement:
Public announcement shall be made at least in one national English
daily one Hindi daily and one regional language daily newspaper of that
place where the shares of that company are listed and traded.
3. Timings of announcement:
Public announcement should be made within four days of finalization of
negotiations or entering into any agreement or memorandum of
understanding to acquire the shares or the voting rights.
4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBI
Regulations.
Therefore, it is required that it should be prepared showing there in
the following information:
(1) Paid up share capital of the target company, the number of fully paid
up and partially paid up shares.
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(2) Total number and percentage of shares proposed to be acquired from
public subject to minimum as specified in the sub-regulation (1) of
Regulation 21 that is:
a) The public offer of minimum 20% of voting capital of the
company to the shareholders;
b) The public offer by a raider shall not be less than 10% but
more than 51% of shares of voting rights. Additional shares can be had @
2% of voting rights in any year.
(3) The minimum offer price for each fully paid up or partly paid up share.
(4) Mode of payment of consideration;
(5) The identity of the acquirer and in case the acquirer is a company, the
identity of the promoters and, or the persons having control over such
company and the group, if any, to which the company belong;
(6) The existing holding, if any, of the acquirer in the shares of the target
company, including holding of persons acting in concert with him;
(7) Salient features of the agreement, if any, such as the date, the name
of the seller, the price at which the shares are being acquired, the manner
of payment of the consideration and the number and percentage of shares
in respect. Which the acquirer has entered into the agreement to acquire
the shares or the consideration, monetary or otherwise, for the acquisition
of control over the target company, as the case may be;
(8) The highest and the average paid by the acquirer or persons acting in
concert with him for acquisition, if any, of shares of the target company
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made by him during the twelve month period prior to the date of the
public announcement.
(9) Objects and purpose of the acquisition of the shares and the future
plans of the acquirer for the target company, including disclosers whether
the acquirer proposes to dispose of or otherwise encumber any assets of
the target company:
Provided that where the future plans are set out, the public
announcement shall also set out how the acquirers propose to implement
such future plans;
(10) The ‘specified date’ as mentioned in regulation 19.
(11) The date by which individual letters of offer would be posted to each
of the shareholders.
(12) The date of opening and closure of the offer and the manner in which
and the date by which the acceptance or rejection of the offer would be
communicated to the share holders.
(13) The date by which the payment of consideration would be made for
the shares in respect of which the offer has been accepted.
(14) Disclosure to the effect that firm arrangement for financial resources
required to implement the offer is already in place, including the details
regarding the sources of the funds whether domestic i.e. from banks,
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financial institutions, or otherwise or foreign i.e. from Non-resident Indians
or otherwise.
(15) Provision for acceptance of the offer by person who own the shares
but are not the registered holders of such shares.
(16) Statutory approvals required to obtain for the purpose of acquiring
the shares under the Companies Act, 1956, the Monopolies and Restrictive
Trade Practices Act, 1973, and/or any other applicable laws.
Purpose of Mergers and Acquisition
The purpose for an offer or company for acquiring another company
shall be reflected in the corporate objectives. It has to decide the specific
objectives to be achieved through acquisition. The basic purpose of merger
or business combination is to achieve faster growth of the corporate
business. Faster growth may be had through product improvement and
competitive position.
Other possible purposes for acquisition are short listed below: -
(1) Procurement of supplies:
1. to safeguard the source of supplies of raw materials or intermediary
product;
2. to obtain economies of purchase in the form of discount, savings in
transportation costs, overhead costs in buying department, etc.;
3. To share the benefits of suppliers economies by standardizing the
materials.
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(2)Revamping production facilities:
1. to achieve economies of scale by amalgamating production facilities
through more intensive utilization of plant and resources;
2. to standardize product specifications, improvement of quality of
product, expanding
3. market and aiming at consumers satisfaction through strengthening
after sale
4. services;
5. to obtain improved production technology and know-how from the
offered company
6. to reduce cost, improve quality and produce competitive products to
retain and
7. Improve market share.
(3) Market expansion and strategy:
1. to eliminate competition and protect existing market;
2. to obtain a new market outlets in possession of the offered;
3. to obtain new product for diversification or substitution of existing
products and to enhance the product range;
4. strengthening retain outlets and sale the goods to rationalize
distribution;
5. to reduce advertising cost and improve public image of the offered
company;
6. Strategic control of patents and copyrights.
(4) Financial strength:
1. to improve liquidity and have direct access to cash resource;
2. to dispose of surplus and outdated assets for cash out of combined
enterprise;
3. to enhance gearing capacity, borrow on better strength and the
greater assets backing;
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4. to avail tax benefits;
5. To improve EPS (Earning per Share).
(5) General gains:
1. to improve its own image and attract superior managerial talents to
manage its affairs;
2. To offer better satisfaction to consumers or users of the product.
(6) Own developmental plans:
The purpose of acquisition is backed by the offer or company’s own
developmental plans.
A company thinks in terms of acquiring the other company only
when it has arrived at its own development plan to expand its
operation having examined its own internal strength where it might not
have any problem of taxation, accounting, valuation, etc. It has to aim
at suitable combination where it could have opportunities to
supplement its funds by issuance of securities; secure additional
financial facilities eliminate competition and strengthen its market
position.
(7) Strategic purpose:
The Acquirer Company view the merger to achieve strategic
objectives through alternative type of combinations which may be
horizontal, vertical, product expansion, market extensional or other
specified unrelated objectives depending upon the corporate
strategies. Thus, various types of combinations distinct with each other
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in nature are adopted to pursue this objective like vertical or horizontal
combination.
(8) Corporate friendliness:
Although it is rare but it is true that business houses exhibit
degrees of cooperative spirit despite competitiveness in providing
rescues to each other from hostile takeovers and cultivate situations of
collaborations sharing goodwill of each other to achieve performance
heights through business combinations. The combining corporate aim
at circular combinations by pursuing this objective.
Types of merger
Merger or acquisition depends upon the purpose of the offer or
company it wants to achieve. Based on the offer or objectives profile,
combinations could be vertical, horizontal, circular and conglomeratic as
precisely described below with reference to the purpose in view of the offer
or company. Merger types can be broadly classified into the following five
subheads as described below.
1. Horizontal Merger: - refers to the merger of two companies who are
direct competitors of one another. They serve the same market and sell the
same product.
2. Conglomeration: - refers to the merger of companies, which do not
either sell any related products or cater to any related markets. Here, the
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two companies entering the merger process do not possess any common
business ties.
3. Vertical Merger: - is effected either between a company and a customer
or between a company and a supplier.
4. Product-Extension Merger: - is executed among companies, which sell
different products of a related category. They also seek to serve a common
market. This type of merger enables the new company to go in for a pooling
in of their products so as to serve a common market, which was earlier
fragmented among them.
5. Market-Extension Merger: - occurs between two companies that sell
identical products in different markets.
It basically expands the market base of the product.
1. Certified Mergers and Acquisitions
2. Horizontal Mergers
3. Vertical Mergers
4. Market Extension Merger and Product Extension Merger
5. Conglomerate Mergers
1. Certified Mergers and Acquisitions
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There are a number of certified mergers and acquisitions advisory programs
available at the present time. With the help of these programs, a lot of
commercial entities are getting involved in merger and acquisition activities.
These programs are offered by numerous merger and acquisition consultants
and agencies. Some of them are also conducting educational programs and
seminars for the purpose of educating financial professionals about the
nuances of certified mergers and acquisitions and growing the knowledge
base of the merger and acquisition professionals.
One of the most important certified merger and acquisition
advisory programs is the Certified Valuation Manager Program offered by the
American Academy of Financial Management (AAFM). The American
Academy of Financial Management is also hosting a number of Certified
Valuation Manager Training Conferences throughout the year.
The certified mergers and acquisitions agencies help
commercial enterprises or business corporations in acquiring or taking over
other companies and also in significant issues related to mergers and
acquisitions. These agencies also help business entities regarding
management buyouts (MBOs), finding acquisition lookup, sources of equity
and debt financing, as well as valuation of businesses.
In this modern-day world, the power of globalization, market
liberalization and technological advancement has contributed towards the
formation of an increasingly competitive and active commercial world, where
mergers and acquisitions are more and more utilized for achieving
optimization of firm value and competitive benefits.
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With the help of certified merger and acquisition advisory services,
the clients can enjoy instant accessibility to:
A large number of certified business purchasers, which include
multinational or transnational corporations who are seeking to buy
profitable companies
A platform of the merger and acquisition professionals, sources of
funding, transaction makers, intermediaries and tax professionals
Knowledgeable principals
Advices on pricing and valuation
Forward-looking transaction formation, which will lead to value
addition
The certified mergers and acquisition advisory services can be
broadly categorized into the following types:
Business Valuation Services
Funding Services (Acquisition financing, recapitalizations, financial
reconstruction)
Asset Disposal Services
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Acquisition Lookup
Management Buyouts (MBOs)
Certified Equipment and Machinery Estimation
2. Horizontal Mergers
It is a merger of two competing firms which are at the same stage of
industrial process. The acquiring firm belongs to the same industry as
the target company.
The main purpose of such mergers is to obtain economies of scale in
production by eliminating duplication of facilities and the operations
and broadening the product line, reduction in investment in working
capital, elimination in competition concentration in product, reduction
in advertising.
Costs, increase in market segments and exercise better control on
market.
Horizontal mergers are those mergers where the company’s
manufacturing similar kinds of commodities or running similar type of
businesses merge with each other.
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Two companies that are in direct competition and share similar product
lines and markets. In the context of marketing, horizontal merger is
more prevalent in comparison to horizontal merger in the context of
production or manufacturing.
The principal objective behind this type of mergers is to achieve
economies of scale in the production procedure through carrying off
duplication of installations, services and functions, widening the line of
products, decrease in working capital and fixed assets investment,
getting rid of competition, minimizing the advertising expenses,
enhancing the market capability and to get more dominance on the
market.
Never the less, the horizontal mergers do not have the capacity to
ensure the market about the product and steady or uninterrupted raw
material supply.
Horizontal mergers can sometimes result in monopoly and absorption
of economic power in the hands of a small number of commercial
entities.
According to strategic management and microeconomics, the
expression horizontal merger delineates a form of proprietorship and
control. It is a plan, which is utilized by a corporation or commercial
enterprise for marketing a form of commodity or service in a large
number of markets.
Horizontal Integration
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Sometimes, horizontal merger is also called as horizontal integration. It is
totally opposite in nature to vertical merger or vertical integration.
Horizontal Monopoly
A monopoly formed by horizontal merger is known as a horizontal monopoly.
Normally, a monopoly is formed by both vertical and horizontal mergers.
Horizontal merger is that condition where a company is involved
in taking over or acquiring another company in similar form of trade. In this
way, a competitor is done away with and a wider market and higher
economies of scale are accomplished. In the process of horizontal merger,
the downstream purchasers and upstream suppliers are also controlled and
as a result of this, production expenses can be decreased.
Horizontal Expansion
An expression which is intimately connected to horizontal merger is
horizontal expansion. This refers to the expansion or growth of a company in
a sector that is presently functioning. The aim behind a horizontal expansion
is to grow its market share for a specific commodity or service.
Examples of Horizontal Mergers:-
Following are the important examples of horizontal mergers:
The formation of Brook Bond Lipton India Ltd. through the merger of
Lipton India and Brook Bond
The merger of Bank of Mathura with ICICI (Industrial Credit and
Investment Corporation of India) Bank
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The merger of BSES (Bombay Suburban Electric Supply) Ltd. with
Orissa Power Supply Company
The merger of ACC (erstwhile Associated Cement Companies Ltd.) with
Damodar Cement
3. Vertical merger
A customer and company or a supplier and company. Think of a
cone supplier merging with an ice cream maker.
Vertical mergers refer to a situation where a product
manufacturer merges with the supplier of inputs or raw materials. In can also
be a merger between a product manufacturer and the product's distributor.
A company would like to take over another company or seek its
merger with that company to expand espousing backward integration to
assimilate the resources of supply and forward integration towards market
outlets.
The acquiring company through merger of another unit
attempts on reduction of inventories of raw material and finished goods,
implements its production plans as per the objectives and economizes on
working capital investments. In other words, in vertical combinations, the
merging undertaking would be either a supplier or a buyer using its product
as intermediary material for final production.
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The following main benefits accrue from the vertical combination to the
acquirer company i.e.
(1)it gains a strong position because of imperfect market of the
intermediary products, scarcity of resources and purchased products;
(2)Has control over products specifications.
Vertical mergers may violate the competitive spirit of markets.
It can be used to block competitors from accessing the raw material source
or the distribution channel. Hence, it is also known as "vertical foreclosure".
It may create a sort of bottleneck problem. As per research, vertical
integration can affect the pricing incentive of a downstream producer. It may
also affect a competitor’s incentive for selecting input suppliers.
There are multiple reasons, which promote the vertical integration
by firms. Some of them are discussed below.
The prime reason being the reduction of uncertainty regarding the
availability of quality inputs as also the uncertainty regarding the
demand for its products.
Firms may also enter vertical mergers to avail the plus points of
economies of integration.
Vertical merger may make the firms cost-efficient by streamlining its
distribution and production costs. It is also meant for the reduction of
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transactions costs like marketing expenses and sales taxes. It ensures
that a firm's resources are used optimally.
4. Market-extension merger
Two companies that sell the same products in different markets.
As per definition, market extension merger takes place between
two companies that deal in the same products but in separate markets. The
main purpose of the market extension merger is to make sure that the
merging companies can get access to a bigger market and that ensures a
bigger client base.
Example of Market Extension Merger
A very good example of market extension merger is the
acquisition of Eagle Bancshares Inc by the RBC Century. Eagle Bancshares is
headquartered at Atlanta, Georgia and has 283 workers. It has almost
90,000 accounts and looks after assets worth US $1.1 billion.
Eagle Bancshares also holds the Tucker Federal Bank, which is
one of the ten biggest banks in the metropolitan Atlanta region as far as
deposit market share is concerned. One of the major benefits of this
acquisition is that this acquisition enables the RBC to go ahead with its
growth operations in the North American market.
With the help of this acquisition RBC has got a chance to deal in the
financial market of Atlanta, which is among the leading upcoming financial
markets in the USA. This move would allow RBC to diversify its base of
operations.
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5. Product-extension merger
Two companies selling different but related products in the same market.
According to definition, product extension merger takes place
between two business organizations that deal in products that are related to
each other and operate in the same market. The product extension merger
allows the merging companies to group together their products and get
access to a bigger set of consumers. This ensures that they earn higher
profits.
Example of Product Extension Merger
The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of
product extension merger. Broadcom deals in the manufacturing Bluetooth
personal area network hardware systems and chips for IEEE 802.11b wireless
LAN.
Mobilink Telecom Inc. deals in the manufacturing of product designs meant
for handsets that are equipped with the Global System for Mobile
Communications technology.
It is also in the process of being certified to produce wireless
networking chips that have high speed and General Packet Radio Service
technology. It is expected that the products of Mobilink Telecom Inc. would
be complementing the wireless products of Broadcom.
6. Conglomeration
Two companies that have no common business areas.
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As per definition, a conglomerate merger is a type of merger whereby the
two companies that merge with each other are involved in different sorts of
businesses. The importance of the conglomerate mergers lies in the fact that
they help the merging companies to be better than before.
Types of Conglomerate Mergers
There are two main types of conglomerate mergers:-
1. pure conglomerate merger
2. Mixed conglomerate merger.
1. pure conglomerate merger
The pure conglomerate merger is one where the merging
companies are doing businesses that are totally unrelated to each other.
2. Mixed conglomerate merger
The mixed conglomerate mergers are ones where the
companies that are merging with each other are doing so with the main
purpose of gaining access to a wider market and client base or for
expanding the range of products and services that are being provided by
them There are also some other subdivisions of conglomerate mergers
like the financial conglomerates, the concentric companies, and the
managerial conglomerates.
Reasons of Conglomerate Mergers
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There are several reasons as to why a company may go for a
conglomerate merger. Among the more common reasons are adding to the
share of the market that is owned by the company and indulging in cross
selling. The companies also look to add to their overall synergy and
productivity by adopting the method of conglomerate mergers.
Benefits of Conglomerate Mergers
There are several advantages of the conglomerate mergers.
One of the major benefits is that conglomerate mergers assist the companies
to diversify. As a result of conglomerate mergers the merging companies can
also bring down the levels of their exposure to risks.
Advantages of mergers and acquisition
Mergers and takeovers are permanent form of combinations which vest in
management complete control and provide centralized administration which
are not available in combinations of holding company and its partly owned
subsidiary.
Shareholders in the selling company gain from the merger and
takeovers as the premium offered to induce acceptance of the merger or
takeover offers much more price than the book value of shares. Shareholders
in the buying company gain in the long run with the growth of the company
not only due to synergy but also due to “boots trapping earnings”.
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Motivations for mergers and acquisitions
Mergers and acquisitions are caused with the support of
shareholders, manager’s ad promoters of the combing companies. The
factors, which motivate the shareholders and managers to lend support to
these combinations and the resultant consequences they have to bear,
are briefly noted below based on the research work by various scholars
globally.
(1) From the standpoint of shareholders:-
Investment made by shareholders in the companies subject to
merger should enhance in value.
The sale of shares from one company’s shareholders to another
and holding investment in shares should give rise to greater values i.e.
the opportunity gains in alternative investments. Shareholders may gain
from merger in different ways viz. from the gains and achievements of the
company i.e. through
(a) realization of monopoly profits;
(b) economies of scales;
(c) diversification of product line;
(d) acquisition of human assets and other resources not available
otherwise;
(e) Better investment opportunity in combinations.
One or more features would generally be available in each
merger where shareholders may have attraction and favors merger.
(2) From the standpoint of managers
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Managers are concerned with improving operations of the
company, managing the affairs of the company effectively for all round
gains and growth of the company which will provide them better deals in
raising their status, perks and fringe benefits.
Mergers where all these things are the guaranteed outcome get
support from the managers. At the same time, where managers have fear
of displacement at the hands of new management in amalgamated
company and also resultant depreciation from the merger then support
from them becomes difficult.
(3) Promoter’s gains
Mergers do offer to company promoters the advantage of increasing the
size of their company and the financial structure and strength. They can
convert a closely held and private limited company into a public company
without contributing much wealth and without losing control.
(4) Benefits to general public
Impact of mergers on general public could be viewed as aspect of
benefits and costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or
consumer or the worker in the companies under merger plan.
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(a) Consumers
The economic gains realized from mergers are passed on to
consumers in the form of lower prices and better quality of the product which
directly raise their standard of living and quality of life.
The balance of benefits in favors of consumers will depend
upon the fact whether or not the mergers increase or decrease competitive
economic and productive activity which directly affects the degree of welfare
of the consumers through changes in price level, quality of products, after
sales service, etc.
(b) Workers community
The merger or acquisition of a company by a conglomerate or
other acquiring company may have the effect on both the sides of increasing
the welfare in the form of purchasing power and other miseries of life. Two
sides of the impact as discussed by the researchers and academicians are:
1. Mergers with cash payment to shareholders provide opportunities for
them to invest this money in other companies which will generate
further employment and growth to uplift of the economy in general.
2. Any restrictions placed on such mergers will decrease the growth and
investment activity with corresponding decrease in employment. Both
workers and communities will suffer on lessening job opportunities,
preventing the distribution of benefits resulting from diversification of
production activity.
(c) General public
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Mergers result into centralized concentration of power.
Economic power is to be understood as the ability to control prices and
industries output as monopolists. Such monopolists affect social and political
environment to tilt everything in their favors to maintain their power ad
expand their business empire. These advances result into economic
exploitation. But in a free economy a monopolist does not stay for a longer
period as other companies enter into the field to reap the benefits of higher
prices set in by the monopolist. This enforces competition in the market as
consumers are free to substitute the alternative products.
Therefore, it is difficult to generalize that mergers affect the
welfare of general public adversely or favorably. Every merger of two or
more companies has to be viewed from different angles in the business
practices which protects the interest of the shareholders in the merging
company and also serves the national purpose to add to the welfare of the
employees, consumers and does not create hindrance in administration of
the Government polices.
Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they
were synonymous, the terms merger and acquisition mean slightly different
things:-
When one company takes over another and clearly established itself as
the new owner, the purchase is called an acquisition.
When merger happens when two firms, often of about the same size,
agree to go forward as a single new company rather than remain
separately owned and operated. This kind of action is more precisely
referred to as a "merger of equals".
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Both companies' stocks are surrendered and new company stock is
issued in its place. A purchase deal will also be called a merger when
both CEOs agree that joining together is in the best interest of both of
their companies.
But when the deal is unfriendly - that is, when the target company
does not want to be purchased - it is always regarded as an
acquisition. This is challengeable.
An acquisition can be either friendly or hostile. An example of a recent
friendly takeover was when Microsoft bought Fast Search and Transfer
(OSE Stock Exchange, Ticker FAST).CEO of the acquired company
(FAST) revealed that they had been working with Microsoft for more
than 6 months to get the deal which was announced in January, 2008.
Mergers and Acquisitions in India
The process of mergers and acquisitions has gained substantial importance
in today's corporate world. This process is extensively used for restructuring
the business organizations.
In India, the concept of mergers and acquisitions was initiated
by the government bodies. Some well known financial organizations also
took the necessary initiatives to restructure the corporate sector of India by
adopting the mergers and acquisitions policies.
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The Indian economic reform since 1991 has opened up a whole
lot of challenges both in the domestic and international spheres. The
increased competition in the global market has prompted the Indian
companies to go for mergers and acquisitions as an important strategic
choice.
The trends of mergers and acquisitions in India have changed
over the years. The immediate effects of the mergers and acquisitions have
also been diverse across the various sectors of the Indian economy.
India has emerged as one of the top countries with respect to
merger and acquisition deals. In 2007, the first two months alone accounted
for merger and acquisition deals worth $40 billion in India.
Mergers and Acquisitions across Indian Sectors
Among the different Indian sectors that have resorted to
mergers and acquisitions in recent times, telecom, finance, FMCG,
construction materials, automobile industry and steel industry are worth
mentioning.
With the increasing number of Indian companies opting for
mergers and acquisitions, India is now one of the leading nations in the world
in terms of mergers and acquisitions.
The merger and acquisition business deals in India amounted to
$40 billion during the initial 2 months in the year 2007. The total estimated
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value of mergers and acquisitions in India for 2007 was greater than $100
billion. It is twice the amount of mergers and acquisitions in 2006.
Mergers and Acquisitions in India: The Latest Trends
Till recent past, the incidence of Indian entrepreneurs acquiring
foreign enterprises was not so common. The situation has undergone a sea
change in the last couple of years. Acquisition of foreign companies by the
Indian businesses has been the latest trend in the Indian corporate sector.
There are different factors that played their parts in facilitating the
mergers and acquisitions in India. Favorable government policies, buoyancy
in economy, additional liquidity in the corporate sector, and dynamic
attitudes of the Indian entrepreneurs are the key factors behind the
changing trends of mergers and acquisitions in India.
The Indian IT and ITES sectors have already proved their
potential in the global market. The other Indian sectors are also following the
same trend. The increased participation of the Indian companies in the
global corporate sector has further facilitated the merger and acquisition
activities in India.
Major Mergers and Acquisitions in India
Recently the Indian companies have undertaken some important
acquisitions. Some of those are as follows:
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Hindalco acquired Canada based Novelis. The deal involved transaction
of $5,982 million.
Tata Steel acquired Corus Group plc. The acquisition deal amounted to
$12,000 million.
Dr. Reddy's Labs acquired Betapharm through a deal worth of $597
million.
Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million.
Suzlon Energy acquired Hansen Group through a deal of $565 million.
The acquisition of Daewoo Electronics Corp. by Videocon involved
transaction of $729 million.
HPCL acquired Kenya Petroleum Refinery Ltd. The deal amounted to
$500 million.
VSNL acquired Teleglobe through a deal of $239 million.
When it comes to mergers and acquisitions deals in
India, the total number was 287 from the month of January to May in
2007. It has involved monetary transaction of US $47.37 billion. Out of
these 287 merger and acquisition deals, there have been 102 cross
country deals with a total valuation of US $28.19 billion.
Mergers and Acquisitions in Banking Sector
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Mergers and acquisitions in banking sector have become
familiar in the majority of all the countries in the world.
A large number of international and domestic banks all over the
world are engaged in merger and acquisition activities. One of the principal
objectives behind the mergers and acquisitions 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 significant growth
in their operations and minimize their expenses to a considerable extent.
Another important advantage behind this kind of merger is that
in this process, competition is reduced because merger eliminates
competitors from the banking industry. Mergers and acquisitions in banking
sector are forms of horizontal merger because the merging entities are
involved in the same kind of business or commercial activities. Sometimes,
non-banking financial institutions are also merged with other banks if they
provide similar type of services.
In the context of mergers and acquisitions in the banking sector,
it can be reckoned that size does matter 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 inorganic growth.
Both government banks and private sector banks are adopting policies for
mergers and acquisitions. In many countries, global or multinational banks
are extending their operations through mergers and acquisitions with the
regional banks in those countries.
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These mergers and acquisitions are named as cross-border
mergers and acquisitions in the banking sector or international mergers and
acquisitions in the banking sector. By doing this, global banking corporations
are able to place themselves into a dominant 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 and synergy. They also help to form and grow shareholder value.
In some cases, financially distressed banks are also subject to
takeovers or mergers in the banking sector and this kind of merger may
result in monopoly and job cuts. 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
banking sector. Nevertheless, there are many challenges that are still to be
overcome through appropriate measures. Mergers and acquisitions in
banking sector are controlled or regulated by the apex financial authority of
a particular country. For example, the mergers and acquisitions in the
banking sector of India are overseen by the Reserve Bank of India (RBI).
Mergers and Acquisitions in Telecom Sector
The number of mergers and acquisitions in Telecom Sector has been
increasing significantly.
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Telecommunications industry is one of the most profitable and
rapidly developing industries in the world and it is regarded as an
indispensable component of the worldwide utility and services sector.
Telecommunication industry deals with various forms of communication
mediums, for example mobile phones, fixed line phones, as well as Internet
and broadband services. Currently, a slew of mergers and acquisitions in
Telecom Sector are going on throughout the world.
The aim behind such mergers is to attain competitive benefits in
the telecommunications industry. The mergers and acquisitions in Telecom
Sector are regarded as horizontal mergers simply because of the reason that
the entities going for merger or acquisition are operating in the same
industry that is telecommunications industry.
In the majority of the developed and developing countries
around the world, mergers and acquisitions in the telecommunications sector
have become a necessity. This kind of mergers also assists in creation of
jobs. Both transnational and domestic telecommunications services providers
are keen to try merger and acquisition options because this will help them in
many ways.
They can cut down on their expenses, achieve greater market
share and accomplish market control. Mergers and acquisitions in the
telecommunications sector have been showing a prosperous trend in the
recent past and the economists are advocating that they will continue to do
so.
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The majority of telecommunication services providers have
understood that in order to grow globally, strategic alliances and mergers
and acquisitions are the principal devices.
Private sector investment and FDI (Foreign Direct Investment)
have also boosted the growth of mergers and acquisitions in the
telecommunications sector. Over the last few years, a phenomenal growth
has been witnessed in the number of mergers and acquisitions taking place
in the telecommunications industry.
The reasons behind this development include the following:
Deregulation
Introduction of sophisticated technologies (Wireless land phone
services)
Innovative products and services (Internet, broadband and cable
services)
Economic reforms have spurred the growth in the mergers and
acquisitions industry of the telecommunications sector to a satisfactory
level. Mergers and acquisitions in Telecom Sector can also have some
negative effects, which include monopolization of the telecommunication
products and services, unemployment and others.
However, the governments of various countries take appropriate
steps to curb these problems. In countries like India, mergers and
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acquisitions have increased to a considerable level from the mid 1990s. In
the United States, the mergers and acquisitions in the
telecommunications sector are going on in a full-fledged manner.
The mergers and acquisitions in the telecommunications sector
are governed or supervised by the regulatory authority of the
telecommunication industry of a particular country, for instance the
Telecom Regulatory Authority of India or TRAI. The regulatory authorities
always keep a tab on the telecommunications industry so that no
monopoly is formed.
Significant Mergers and Acquisitions in Telecom Sector
Following are the important mergers and acquisitions that took place in the
telecommunications sector:
The takeover of Mobilink Telecom by Broadcom. This can also be
described as a suitable example of product extension merger
AT&T Inc. taking over BellSouth
The acquisition of Scription Inc. by Nuance Communications Inc.
The taking over of Hutchison Essar by the Vodafone Group. Now it
has become Vodafone Essar Limited
China Communications Services Corporation Ltd. taking over China
International Telecommunication Construction Corporation
The acquisition of Ameritech Corporation by SBC (Southwestern Bell
Corporation) Communications
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The merger of GTE (General Telephone and Electronics) with Bell
Atlantic
The acquisition of US West by Qwest Communications
The merger of MCI Communications Corporation with WorldCom
Following are the benefits provided by the mergers and acquisitions
in the telecommunications industry:
Building of infrastructure in a more convenient way
Licensing options for mergers and acquisitions are often found to be
easier
Mergers and acquisitions offer extensive networking advantages
Brand value
Bigger client base
Wide array of products and services
Mergers and Acquisitions in Pharmaceutical Sector
There are several causes of mergers and acquisitions in the
global pharmaceutical industry. Among them are the absence of proper
research and development facilities, gradual expiry of patents and
competition within specific pharmaceutical genres. The high profile product
recalls have also played a major role in the continuing mergers and
acquisitions in the industry.
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Mergers and Acquisitions in Indian Pharmaceutical Sector
In the Indian pharmaceutical market there are a number of
companies that have entered into merger and acquisition agreements in the
context of the global market scenario. These companies would be selling off
the non-core business divisions like Over-the-Counter. This is expected to
further the consolidation in the mid-tier as far as the pharmaceutical industry
in Europe is concerned.
The sheer number of companies acquiring parts of other
companies has shown that the Indian pharmaceutical industry is ready to be
a dominant force in this scenario. In the recent times Nicholas Piramal has
taken the ownership of 17% of Biosyntech that is a major pharmaceutical
packing organization in Canada.
Torrent has got the ownership of Heumann Pharma, a general
drug making company and, formerly, a subsidiary of Pfizer. Matrix has
acquired Docpharma, a major pharmaceutical company of Belgium.
Sun Pharmaceutical Industries is set to make acquisitions in
pharmaceutical companies in the US and has set aside $450 million to
execute these plans. In Bengaluru, Strides Arcolab has aimed at acquiring 70
percent in a pharmaceutical facility in Italy that is worth $10 million.
Opportunities for Pharmaceutical Companies
There are a number of opportunities for the major pharmaceutical products
and services providers in the Indian pharmaceutical sector as the price
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controls have been relaxed and there have been significant changes in the
medicinal requirements of the Indians.
The manufacturing base in India is also strong enough to
support the major international pharmaceutical companies from the
performance perspective.
This may be said as the Indian pharmaceutical market is varied
as well as economical. It is expected that in the coming years the Indian
pharmaceutical companies would be executing more mergers and
acquisitions. It is expected that the regulated pharmaceutical markets in the
United States and Europe would be the main areas of operation.
In the recent years the Indian pharmaceutical companies have
been venturing into mergers and acquisitions so that they can gain access to
the big names of the international pharmaceutical scenario.
Patterns of Mergers and Acquisitions in Pharmaceutical Sector
One of the major features of the mergers and acquisitions in the
pharmaceutical sector of the Asia-Pacific region has been the integration of
the local pharmaceutical companies. This has happened especially in India
and China. Acquisition has made it convenient for a number of companies to
do business in various pharmaceutical markets. Previously the
pharmaceutical markets of Europe were closed to the companies of other
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countries due to the difference in language. There were also other problems
for companies like the trade barriers for instance.
Figures of Mergers and Acquisitions in Pharmaceutical Sector
As per the figures of mergers and acquisitions in pharmaceutical
sector, from the year 2004, there have been more mergers and acquisitions
in the pharmaceutical sector in the Asia-Pacific region compared to North
America. The combined financial value of the mergers and acquisitions in
Asia-Pacific region has been greater than North America. One of the major
merger and acquisition deals in the Asia-Pacific region in the recent years
has been the merger of Fujisawa and Yamanouchi in Japan.
This deal was worth $7.9 billion. In the same period the Asia-
Pacific region has experienced the highest percentage of growth in the
mergers and acquisitions in pharmaceutical sector. In the same period the
rate of growth in the Asia-Pacific region has been 37%. In Western Europe
the rate of growth has been 11% and in North America it has been 20%. The
pharmaceutical market in Eastern Europe has not experienced any increase
in the rate of mergers and acquisitions.
Mergers and Acquisitions in Global Pharmaceutical Sector
Since the year 2004 there has been an increase in the mergers and
acquisitions in the global pharmaceutical sector. This was reflective of the
increase in the mergers and acquisitions in other industries at the same
period. There was 20% increase in the number of deals, which stood at
1,808. There were eight deals with the value of more than $1 billion. This
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was three more than 2003. The total financial value of the deals was $112
billion and this was an increase of 53%. However, these figures do not
include the acquisition of Aventis by Sanofi-Synthelabo that was worth $60
billion. This is the biggest acquisition in the pharmaceutical industry after the
merger of Pharmacia and Pfizer in 2002.
Recent Mergers and Acquisitions
Mergers and Acquisitions have been very common incidents since the turn of
the 20th century. These are used as tools for business expansion and
restructuring.
Through mergers the acquiring company gets an expanded client base and
the acquired company gets additional lifeline in the form of capital invested
by the purchasing company.
Change in scenario of Banking Sector
1. The first mega merger in the Indian banking sector that of the HDFC Bank
with Times Bank, has created an entity which is the largest private sector
bank in the country.
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2. The merger of the city bank with Travelers Group and the merger of Bank
of America with Nation Bank have triggered the mergers and acquisition
market in the banking sector worldwide.
3. Europe and Japan are also on their way to restructure their financial
sector thought merger and acquisitions. Merger will help banks with
added money power, extended geographical reach with diversified branch
Network, improved product mix, and economies of scale of operations.
Merger will also help banks to reduced them borrowing cost and to spread
total risk associated with the individual banks over the combined entity.
Revenues of the combine entity are likely to shoot up due to more
effective allocation of bank funds.
4. ICICI Bank has initiated merger talks with Centurion Bank but due to
difference arising over swap ration the merger didn’t materialized. Now
UTI Bank is egeing Centurion Bank.
The proposed merger of UTI Bank and Centurion Bank will make them
third largest private banks in terms of size and market Capitalization
State Bank of India has also planned to merge seven of its associates or
part of its long-term policies to regroup and consolidate its position. Some
of the Indian Financial Sector players are already on their way for mergers
to strengthen their existing base.
5. In India mergers especially of the PSBS may be subject to technology and
trade union related problem. The strong trade union may prove to be big
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obstacle for the PSBS mergers. Technology of the merging banks to
should complement each other NPA management. Management of
efficiency, cost reduction, tough competition from the market players and
strengthen of the capital base of the banks are some of the problem
which can be faced by the merge entities. Mergers for private sector
banks will be much smoother and easier as again that of PSBS.
CASE STUDY
Acquisition of Jaguar & Land Rover by Tata Motors
INTRODUCTION
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We have been learning about the companies coming together to form another
company and companies taking over the existing companies to expand their
business.
With recession taking toll of many Indian businesses and the feeling of insecurity
surging over our businessmen, it is not surprising when we hear about the immense
numbers of corporate restructurings taking place, especially in the last couple of
years. Several companies have been taken over and several have undergone
internal restructuring, whereas certain companies in the same field of business
have found it beneficial to merge together into one company.
In this context, it would be essential for us to understand what corporate
restructuring and mergers and acquisitions are all about.
All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs,
tender offers, & other forms of corporate restructuring. Thus important issues both
for business decision and public policy formulation have been raised. No firm is
regarded safe from a takeover possibility. On the more positive side Mergers &
Acquisitions may be critical for the healthy expansion and growth of the firm.
Successful entry into new product and geographical markets may require Mergers &
Acquisitions at some stage in the firm's development.
The objectives of our caselet can be described as:
1. To understand the pros and cons of Mergers and Acquisitions.
2. To understand the legal formalities undertaken in the acquisition
process.
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WHAT IS LAW?
Law denotes rules and principles either enforced by an authority or self
imposed by the members of a society to control and regulate people’s
behavior with a view to securing justice, peaceful living and social security.
Mercantile law is that branch of law which comprises law concerning trade,
industry and commerce.
INDIAN CONTRACT ACT, 1872
A contract is an exchange of promises between two or more parties to do or
refrain from doing an act which is enforceable in a court of law. Section 2(h) defines
a contract as an agreement enforceable by law.
Contract= Agreement + Enforceability at law
Section2 (e) defines every promise and every set of promise forming consideration
for each other as an agreement.
Agreement= Offer+ Acceptance
And,
Agreement=Social agreement + Legal agreement
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Essential Elements of
Merger & Acquisition
Offer and Acceptance
Legal Relationship
Lawful Consideration
Competency Capacity
Free ConsentLegality of object
Certainty of object
Possibility of performance
Legal Formalities
Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
MERGER
Merger is defined as combination of two or more companies into a single company
where one survives and the others lose their corporate existence. The survivor
acquires all the assets as well as liabilities of the merged company or companies.
Generally, the surviving company is the buyer, which retains its identity, and the
extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more
existing companies. All assets, liabilities and the stock of one company stand
transferred to Transferee Company in consideration of payment in the form of:
Equity shares in the transferee company,
Debentures in the transferee company,
Cash, or
A mix of the above modes.
ACQUISITON
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
Acquisition in general sense is acquiring the ownership in the property. In the
context of business combinations, an acquisition is the purchase by one company of
a controlling interest in the share capital of another existing company.
Methods of Acquisition:
An acquisition may be affected by:
(f) agreement with the persons holding majority interest in the company
management like members of the board or major shareholders commanding
majority of voting power;
(g) purchase of shares in open market;
(h) to make takeover offer to the general body of shareholders;
(i) purchase of new shares by private treaty;
Acquisition of share capital through the following forms of considerations viz. means
of cash, issuance of loan capital, or insurance of share capital
ACQUISITION PROCESS
The acquisition process can be divided into a planning stage and an implementation
stage. The planning stage consists of the development of the business and the
acquisition plans. The implementation stage consists of the search, screening,
contacting the target, negotiation, integration. Process of acquisition can be in the
following steps:
1. Developing the business plan
A merger or acquisition decision is a strategic choice. The acquisition strategy
should fit the company’s strategic goals of increasing the cash flows and reduce
risk.
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
Business plan communicates a mission or a vision for the firm and a strategy for
achieving that mission.
Business plan consists of the following activities:
Determining where to compete i.e. the industry or the market in which the
firm desires to compete.
Determining how to compete. An external analysis can be made to determine
how the firm can most effectively compete in its chosen market.
Self assessment of the firm by conducting an internal analysis of the firm’s
strengths and weaknesses relative to the competition.
Defining the mission statement by summarizing where and how the firm has
chosen to compete
Setting objectives by developing competitive measures of performance.
Selecting the most likely strategy to achieve the objectives within a
reasonable time period subject to the constraints in the self assessment.
The strategic planning process identifies the company’s competitive position and
sets objectives to exploit its relative strengths while minimizing the effects of its
weaknesses.
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
2. The Search Process
The search for the potential acquisition takes place in two stages:-
It involves establishing a primary screening process. The primary criteria
based on which the search process is based include factors like the industry,
size of the transaction and the geographic location. The size of the
transaction is best defined in terms of the maximum purchase price of a firm
is willing to pay.
This involves developing the search strategy. It uses computerized database
and directory services to identify the prospective candidates.
The screening process the screening process starts with the reduction of the initial
list of potential candidates identified by using the primary criteria such as the size
and the type of industry.
First contact it involves meeting the acquisition candidate and putting forward the
proposal of acquisition. It depends on the size of the company and whether it is
publicly or privately held.
3. Preliminary legal documents
Confidentiality agreement
Letter of intent
4. Negotiation
Process consists of many activities conducted simultaneously by various members
of the acquisition team. The actual purchase consideration is determined during this
phase.
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
Defining the purchase price: The purchase consideration can be defined in
The total consideration
Total purchase price
The net purchase price
5. Structuring the deal
It involves meeting the needs of both parties by dealing with issues of risk and
reward by legal, tax and accounting structures.
Due diligence required by law
According to Cadbury report, the due diligence report is required for
acquisitions because the full board of directors of the purchasing company
should review significant acquisitions.
In India, a merchant banker has to conduct due diligence to ensure the
acquirer’s financial position and chance of implementation of terms of
merger condition by the parties by giving a due diligence certificate to the
SEBI.
In a merger, both the parties will conduct due diligence. Due diligence can
be conducted from different perspectives.
Financial – historical records, review of management and systems.
Legal- various contractual acts in the country
Commercial –market conditions
Tax- existing tax levels, liabilities and arrangements.
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
Management –mgmt quality, organizational structure
6. Closing the Deal
Closing is the final legal procedure where the company changes hands. It consists of
all necessary shareholder, regulatory and third party. All the necessary approvals
are attained at this stage.
Conditions for closing
Certain pre conditions set in the definitive agreement have to meet before the close
of the contract. The pre conditions include the assumption that the seller would
abide by the representations and warranties and will live up to the obligations.
Documents required completing the transaction of a merger or an
acquisition is:-
Loan agreements, trademarks and trade names
Supplier and customer contracts
Distributor and sales representative agreements
Insurance policies and claim pending
Articles of incorporation, bylaws and corporate seals.
Employee incentive programs
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
TATA GETS JAGUAR AND ROVER UNDER ITS PAW!
ABSTRACT
Creating history, India’s top corporate Tata’s on Wednesday acquired luxury auto
brands—Jaguar and Land Rover—from Ford Motors for $ 2.3 billion, stamping their
authority as a takeover tycoon.
Beating compatriot Mahindra and Mahindra for the prestigious brands on 2nd June
2008 announced the deal they signed with Ford, which on its part would chip in
$600 million towards JLR’S pension plan.
“We are very pleased at the prospect of Jaguar and Land Rover being a significant
part of our automotive business”, Group Chairman Ratan Tata said after making the
deal public.
Tata Motors' acquisition of two iconic British brands - Jaguar and Land Rover - was
finally completed. Well, it is true that their immediate previous owners were
American, but the flavor of the two companies continues to be very Brit. Tata has
acquired the two companies for about half the price that Ford paid their original
owners when the latter acquired them in 1989. Though that sounds like a good deal,
it is not going to be all rosy for Tata Motors after the acquisition. The real work
starts now for this global Indian, trying to pull together the two brands and making
them more profitable while still being weighed down by their historical issues.
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
Jaguar and Land Rover are both special, super premium brands that have a huge
fan following. The ownership of the two brands has changed hands, but the brands
themselves will remain untarnished. And Tata Motors itself has just become more
global. Calls to separate the passenger car business from the rest of the company
will only get shriller now.
Tata Motors is now officially the proud parent of the Jaguar, and its sister Land
Rover. The deal is a fulfillment of Mr. Tata’s personal vision and is intended to
catapult Tata Motors, the owner of the cute li’l Nano, into the global big league of
auto majors. It will also reinforce the global perception of India Inc as a leader in
international business, and not just in IT.
Yet, the final lap of Group Tata’s long-drawn-out bid to acquire Jaguar-Land Rover
(JLR) from Ford for $2.3 billion in cash was a bit of an anti-climax. Compared with
the Corus deal, this was almost hush-hush. In open-for-business Britain, the
headlines are already calling the Tata’s the ‘Corus owners’, and not the ‘Indian auto
company’.
The key challenge for the new owner of Jaguar and Land Rover will be to grow and
maintain sales of the two brands in a global downturn and credit crunch.
Tata Motors will have to commit significant managerial and financial resources to
engineer a turnaround. It will have to significantly step up its R&D budget as well as
increase operating expenditure and capital expenditure to meet JLR’s requirements.
Auto analysts tracking the development say the acquisition was just the first step;
the real challenge lies in running JLR. The acquisition cost of $2.3 billion is financed
by a bridge loan, which will be raised through a syndicate of banks. The bridge
money will be replaced by a combination of long-term debt and equity at an
appropriate time. The company will raise funds to finance its equity contribution by
selling a portion of its stake in some of its subsidiaries in the next few months.
Largest cross-border auto takeover
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
SOURCES indicate that initially two joint ventures with Hitachi for axles and
transmission—HVAL and HVTL—and auto component maker TACO are some of the
subsidiary companies Tata Motors is looking to divest.
Citigroup and JPMorgan are the lead advisors to the deal, which is the largest cross-
border auto acquisition by an Indian company. The deal is expected to close by the
end of June 2008, subject to regulatory approvals and the achievement of financial
closure. The transaction is significant for a number of reasons. Coming as it does
amidst a global freeze in credit markets; it shows that top-notch Indian companies
have the ability to raise large amounts of money at reasonably low rates of interest.
Besides the two US banks, the bridge loan is being underwritten by a consortium of
eight banks — State Bank of India, Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, ING,
Mizuho and Standard Chartered. The loan has been structured in the form of step-
up financing: for the first six months, the interest charge would be Libor (London
Inter-Bank Offered Rate) plus 70 basis points and for the next six months, it would
be 140 basis points over the benchmark rate. The six-month Libor is currently at
2.63%. The bridge loan is being raised by a special purpose vehicle — Tata Motors
UK, which will own these two brands, banking sources said. Tata Motors UK is 100%
owned by Tata Motors.
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
THE COMPANY PROFILE :
TATA
Tata Motors Limited is India’s largest automobile company, with revenues of
Rs. 35651.48 crores (USD 8.8 billion) in 2007-08. It is the leader in
commercial vehicles in each segment, and among the top three in passenger
vehicles with winning products in the compact, midsize car and utility vehicle
segments. The company is the world’s fourth largest truck manufacturer,
and the world’s second largest bus manufacturer.
The company’s 23,000 employees are guided by the vision to be “best in the
manner in which we operate best in the products we deliver and best in our
value system and ethics.”
Established in 1945, Tata Motors’ presence indeed cuts across the length
and breadth of India. Over 4 million Tata vehicles ply on Indian roads, since
the first rolled out in 1954. The company’s manufacturing base in India is
spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
Pradesh) and Pantnagar (Uttarakhand). Following a strategic alliance with
Fiat in 2005, it has set up an industrial joint venture with Fiat Group
Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars
and Fiat powertrains. The company is establishing two new plants at
Dharwad (Karnataka) and Sanand (Gujarat). The company’s dealership,
sales, services and spare parts network comprises over 3500 touch points;
Tata Motors also distributes and markets Fiat branded cars in India.
Tata Motors, the first company from India’s engineering sector to be listed in
the New York Stock Exchange (September 2004), has also emerged as an
international automobile company. Through subsidiaries and associate
companies, Tata Motors has operations in the UK, South Korea, Thailand and
Spain. Among them is Jaguar Land Rover, a business comprising the two
iconic British brands that was acquired in 2008. In 2004, it acquired the
Daewoo Commercial Vehicles Company, South Korea’s second largest truck
maker. The rechristened Tata Daewoo Commercial Vehicles Company has
launched several new products in the Korean market, while also exporting
these products to several international markets. Today two-thirds of heavy
commercial vehicle exports out of South Korea are from Tata Daewoo. In
2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a reputed
Spanish bus and coach manufacturer, with an option to acquire the
remaining stake as well. Hispano’s presence is being expanded in other
markets. In 2006, it formed a joint venture with the Brazil-based Marcopolo,
a global leader in body-building for buses and coaches to manufacture fully-
built buses and coaches for India and select international markets. In 2006,
Tata Motors entered into joint venture with Thonburi Automotive Assembly
Plant Company of Thailand to manufacture and market the company’s
pickup vehicles in Thailand. The new plant of Tata Motors (Thailand) has
begun production of the Xenon pickup truck, with the Xenon having
been launched in Thailand at the Bangkok Motor Show 2008.
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
Tata Motors is also expanding its international footprint, established through
exports since 1961. The company’s commercial and passenger vehicles are
already being marketed in several countries in Europe, Africa, the Middle
East, South East Asia, South Asia and South America. It has franchisee/joint
venture assembly operations in Kenya, Bangladesh, Ukraine, Russia and
Senegal.
The foundation of the company’s growth over the last 50 years is a deep
understanding of economic stimuli and customer needs, and the ability to
translate them into customer-desired offerings through leading edge R&D.
With over 2,500 engineers and scientists, the company’s Engineering
Research Centre, established in 1966, and has enabled pioneering
technologies and products. The company today has R&D centers in Pune,
Jamshedpur, Lucknow, in India, and in South Korea, Spain, and the UK. It was
Tata Motors, which developed the first indigenously developed Light
Commercial Vehicle, India’s first Sports Utility Vehicle and, in 1998, the Tata
Indica, India’s first fully indigenous passenger car. Within two years of
launch, Tata Indica became India’s largest selling car in its segment. In 2005,
Tata Motors created a new segment by launching the Tata Ace, India’s first
indigenously developed mini-truck
In January 2008, Tata Motors unveiled its People’s Car, the Tata Nano, which
India and the world have been looking forward to. A development, which
signifies a first for the global automobile industry, the Nano brings the
comfort and safety of a car within the reach of thousands of families. When
launched in India later in 2008, the car will be available in both standard and
deluxe versions. The standard version has been priced at Rs.100,000
(excluding VAT and transportation cost).
Designed with a family in mind, it has a roomy passenger compartment with
generous leg space and head room. It can comfortably seat four persons. Its
mono-volume design will set a new benchmark among small cars. Its safety
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Project: Merger & Acquisition Process in India Roll No.64 MFM Semester V TIMSR
performance exceeds regulatory requirements in India. Its tailpipe emission
performance too exceeds regulatory requirements. In terms of overall
pollutants, it has a lower pollution level than two-wheelers being
manufactured in India today. The lean design strategy has helped minimize
weight, which helps maximize performance per unit of energy consumed and
delivers high fuel efficiency. The high fuel efficiency also ensures that the car
has low carbon dioxide emissions, thereby providing the twin benefits of an
affordable transportation solution with a low carbon footprint.
The years to come will see the introduction of several other innovative
vehicles, all rooted in emerging customer needs. Besides product
development, R&D is also focusing on environment-friendly technologies in
emissions and alternative fuels.
Through its subsidiaries, the company is engaged in engineering and
automotive solutions, construction equipment manufacturing, automotive
vehicle components manufacturing and supply chain activities, machine
tools and factory automation solutions, high-precision tooling and plastic and
electronic components for automotive and computer applications, and
automotive retailing and service operations.
True to the tradition of the Tata Group, Tata Motors is committed in letter
and spirit to Corporate Social Responsibility. It is a signatory to the United
Nations Global Compact, and is engaged in community and social initiatives
on labor and environment standards in compliance with the principles of the
Global Compact. In accordance with this, it plays an active role in community
development, serving rural communities adjacent to its manufacturing
locations.
With the foundation of its rich heritage, Tata Motors today is etching a
refulgent future.
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Tata Code of Conduct
This comprehensive document serves as the ethical road map for Tata
employees and companies, and provides the guidelines by which the group
conducts its businesses.
Clause: 1
National interest
The Tata group is committed to benefit the economic development of the
countries in which it operates. No Tata company shall undertake any project
or activity to the detriment of the wider interests of the communities in
which it operates.
A Tata company’s management practices and business conduct shall benefit
the country, localities and communities in which it operates, to the extent
possible and affordable, and shall be in accordance with the laws of the land.
A Tata company, in the course of its business activities, shall respect the
culture, customs and traditions of each country and region in which it
operates. It shall conform to trade procedures, including licensing,
documentation and other necessary formalities, as applicable.
Clause: 2
Financial reporting and records
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A Tata company shall prepare and maintain its accounts fairly and accurately
and in accordance with the accounting and financial reporting standards
which represent the generally accepted guidelines, principles, standards,
laws and regulations of the country in which the company conducts its
business affairs.
Internal accounting and audit procedures shall reflect, fairly and accurately,
all of the company’s business transactions and disposition of assets, and
shall have internal controls to provide assurance to the company’s board and
shareholders that the transactions are accurate and legitimate. All required
information shall be accessible to company auditors and other authorized
parties and government agencies. There shall be no willful omissions of any
company transactions from the books and records, no advance-income
recognition and no hidden bank account and funds.
Any willful, material misrepresentation of and / or misinformation on the
financial accounts and reports shall be regarded as a violation of the Code,
apart from inviting appropriate civil or criminal action under the relevant
laws. No employee shall make, authorize, abet or collude in an improper
payment, unlawful commission or bribing.
Clause: 3
Competition
A Tata company shall fully support the development and operation of
competitive open markets and shall promote the liberalization of trade and
investment in each country and market in which it operates. Specifically, no
Tata company or employee shall engage in restrictive trade practices, abuse
of market dominance or similar unfair trade activities.
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A Tata company or employee shall market the company’s products and
services on their own merits and shall not make unfair and misleading
statements about competitors’ products and services. Any collection of
competitive information shall be made only in the normal course of business
and shall be obtained only through legally permitted sources and means.
Clause: 4
Equal opportunities employer
A Tata company shall provide equal opportunities to all its employees and all
qualified applicants for employment without regard to their race, caste,
religion, color, ancestry, marital status, gender, sexual orientation, age,
nationality, ethnic origin or disability.
Human resource policies shall promote diversity and equality in the
workplace, as well as compliance with all local labour laws, while
encouraging the adoption of international best practices.
Employees of a Tata company shall be treated with dignity and in
accordance with the Tata policy of maintaining a work environment free of
all forms of harassment, whether physical, verbal or psychological. Employee
policies and practices shall be administered in a manner consistent with
applicable laws and other provisions of this Code, respect for the right to
privacy and the right to be heard, and that in all matters equal opportunity is
provided to those eligible and decisions are based on merit.
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Clause: 5
Gifts and donations
A Tata company and its employees shall neither receive nor offer or make,
directly or indirectly, any illegal payments, remuneration, gifts, donations or
comparable benefits that are intended, or perceived, to obtain uncompetitive
favors for the conduct of its business. The company shall cooperate with
governmental authorities in efforts to eliminate all forms of bribery, fraud
and corruption.
However, a Tata company and its employees may, with full disclosure,
accept and offer nominal gifts, provided such gifts are customarily given and
are of a commemorative nature. Each company shall have a policy to clarify
its rules and regulations on gifts and entertainment, to be used for the
guidance of its employees.
Clause: 6
Government agencies
A Tata company and its employees shall not, unless mandated under
applicable laws, offer or give any company funds or property as donation to
any government agency or its representative, directly or through
intermediaries, in order to obtain any favorable performance of official
duties. A Tata company shall comply with government procurement
regulations and shall be transparent in all its dealings with government
agencies.
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Clause: 7
Political Non-alignment
A Tata company shall be committed to and support the constitution and
governance systems of the country in which it operates.
A Tata company shall not support any specific political party or candidate for
political office. The company’s conduct shall preclude any activity that could
be interpreted as mutual dependence / favour with any political body or
person, and shall not offer or give any company funds or property as
donations to any political party, candidate or campaign.
Clause: 8
Health, safety and environment
A Tata company shall strive to provide a safe, healthy, clean and ergonomic
working environment for its people. It shall prevent the wasteful use of
natural resources and be committed to improving the environment,
particularly with regard to the emission of greenhouse gases, and shall
Endeavour to offset the effect of climate change in all spheres of its
activities.
A Tata company, in the process of production and sale of its products and
services, shall strive for economic, social and environmental sustainability.
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Clause: 9
Quality of products and services
A Tata company shall be committed to supply goods and services of world
class quality standards, backed by after-sales services consistent with the
requirements of its customers, while striving for their total satisfaction. The
quality standards of the company’s goods and services shall meet applicable
national and international standards.
A Tata company shall display adequate health and safety labels, caveats and
other necessary information on its product packaging.
Clause: 10
Corporate citizenship
A Tata company shall be committed to good corporate citizenship, not only
in the compliance of all relevant laws and regulations but also by actively
assisting in the improvement of quality of life of the people in the
communities in which it operates. The company shall encourage volunteering
by its employees and collaboration with community groups.
Tata companies are also encouraged to develop systematic processes and
conduct management reviews, as stated in the Tata ‘corporate sustainability
protocol’, from time to time so as to set strategic direction for social
development activity.
The company shall not treat these activities as optional, but should strive to
incorporate them as an integral part of its business plan.
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Clause:11
Cooperation of Tata companies
A Tata company shall cooperate with other Tata companies including
applicable joint ventures, by sharing knowledge and physical, human and
management resources, and by making efforts to resolve disputes amicably,
as long as this does not adversely affect its business interests and
shareholder value.
In the procurement of products and services, a Tata company shall give
preference to other Tata companies, as long as they can provide these on
competitive terms relative to third parties.
Clause: 12
Public representation of the company and the group
The Tata group honors the information requirements of the public and its
stakeholders. In all its public appearances, with respect to disclosing
company and business information to public constituencies such as the
media, the financial community, employees, shareholders, agents,
franchisees, dealers, distributors and importers, a Tata company or the Tata
group shall be represented only by specifically authorized directors and
employees. It shall be the sole responsibility of these authorized
representatives to disclose information about the company or the group.
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Clause: 13
Third party representation
Parties which have business dealings with the Tata group but are not
members of the group, such as consultants, agents, sales representatives,
distributors, channel partners, contractors and suppliers, shall not be
authorized to represent a Tata company without the written permission of
the Tata company, and / or if their business conduct and ethics are known to
be inconsistent with the Code.
Third parties and their employees are expected to abide by the Code in their
interaction with, and on behalf of, a Tata company. Tata companies are
encouraged to sign a non-disclosure agreement with third parties to support
confidentiality of information.
Clause: 14
Use of the Tata brand
The use of the Tata name and trademark shall be governed by manuals,
codes and agreements to be issued by Tata Sons. The use of the Tata brand
is defined in and regulated by the Tata Brand Equity and Business Promotion
Agreement. No third party or joint venture shall use the Tata brand to further
its interests without specific authorization.
Clause:15
Group policies
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A Tata company shall recommend to its board of directors the adoption of
policies and guidelines periodically formulated by Tata Sons.
Clause: 16
Shareholders
A Tata company shall be committed to enhancing shareholder value and
complying with all regulations and laws that govern shareholder rights. The
board of directors of a Tata company shall duly and fairly inform its
shareholders about all relevant aspects of the company’s business, and
disclose such information in accordance with relevant regulations and
agreements.
Clause:17
Ethical conduct
Every employee of a Tata company, including full-time directors and the
chief executive, shall exhibit culturally appropriate deportment in the
countries they operate in, and deal on behalf of the company with
professionalism, honesty and integrity, while conforming to high moral and
ethical standards. Such conduct shall be fair and transparent and be
perceived to be so by third parties.
Every employee of a Tata company shall preserve the human rights of every
individual and the community, and shall strive to honor commitments.
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Every employee shall be responsible for the implementation of and
compliance with the Code in his / her environment. Failure to adhere to the
Code could attract severe consequences, including termination of
employment.
Clause: 18
Regulatory compliance
Employees of a Tata company, in their business conduct, shall comply with
all applicable laws and regulations, in letter and spirit, in all the territories in
which they operate. If the ethical and professional standards of applicable
laws and regulations are below that of the Code, then the standards of the
Code shall prevail.
Clause: 19
Concurrent employment
Consistent with applicable laws, an employee of a Tata company shall not,
without the requisite, officially written approval of the company, accept
employment or a position of responsibility (such as a consultant or a
director) with any other company, nor provide freelance services to anyone,
with or without remuneration. In the case of a full-time director or the chief
executive, such approval must be obtained from the board of directors of the
company.
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Clause: 20
Conflict of interest
An employee or director of a Tata company shall always act in the interest of
the company, and ensure that any business or personal association which he
/ she may have does not involve a conflict of interest with the operations of
the company and his / her role therein.
Independent directors of a Tata company shall comply with applicable laws
and regulations of all the relevant regulatory and other authorities. As good
governance practice they shall safeguard the confidentiality of all
information received by them by virtue of their position, but they need not
be bound by all other conflicts that are applicable to employees or executive
directors, as indicated below.
An employee, including the executive director (other than independent
director) of a Tata company, shall not accept a position of responsibility in
any other non-Tata company or not-for-profit organization without specific
sanction.
The above shall not apply to (whether for remuneration or otherwise):
a) Nominations to the boards of Tata companies, joint ventures or associate
companies.
b) Memberships / positions of responsibility in educational / professional
bodies, wherein such association will benefit the employee / Tata Company.
c) Nominations / memberships in government committees / bodies or
organizations.
d) Exceptional circumstances, as determined by the competent authority.
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Competent authority, in the case of all employees, shall be the chief
executive, who in turn shall report such exceptional cases to the board of
directors on a quarterly basis. In case of the chief executive and executive
directors, the Group Corporate Centre shall be the competent authority.
An employee or a director of a Tata company shall not engage in any
business, relationship or activity which might conflict with the interest of his /
her company or the Tata group. A conflict of interest, actual or potential,
may arise where, directly or indirectly…
a) An employee of a Tata company engages in a business, relationship or
activity with anyone who is party to a transaction with his / her company.
b) An employee is in a position to derive an improper benefit, personally or
to any of his / her relatives, by making or influencing decisions relating to
any transaction.
c) An independent judgment of the company’s or groups best interest cannot
be exercised.
The main areas of such actual or potential conflicts of interest shall include
the following:
a) An employee or a full-time director of a Tata company conducting
business on behalf of his / her company or being in a position to influence a
decision with regard to his / her company’s business with a supplier or
customer where his / her relative is a principal officer or representative,
resulting in a benefit to him / her or his / her relative.
b) Award of benefits such as increase in salary or other remuneration,
posting, promotion or recruitment of a relative of an employee of a Tata
company, where such an individual is in a position to influence decisions with
regard to such benefits.
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c) The interest of the company or the group can be compromised or
defeated.
Notwithstanding such or any other instance of conflict of interest that exist
due to historical reasons, adequate and full disclosure by interested
employees shall be made to the company’s management. It is also
incumbent upon every employee to make a full disclosure of any interest
which the employee or the employee’s immediate family, including parents,
spouse and children, may have in a family business or a company or firm
that is a competitor, supplier, customer or distributor of or has other
business dealings with his / her company.
Upon a decision being taken in the matter, the employee concerned shall be
required to take necessary action, as advised, to resolve / avoid the conflict.
If an employee fails to make the required disclosure and the management of
its own accord becomes aware of an instance of conflict of interest that
ought to have been disclosed by the employee, the management shall take a
serious view of the matter and consider suitable disciplinary action against
the employee.
Clause: 21
Securities transactions and confidential information
An employee of a Tata company and his / her immediate family shall not
derive any benefit or counsel, or assist others to derive any benefit, from
access to and possession of information about the company or group or its
clients or suppliers that is not in the public domain and, thus, constitutes
unpublished, price-sensitive insider information.
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An employee of a Tata company shall not use or proliferate information that
is not available to the investing public, and which therefore constitutes
insider information, for making or giving advice on investment decisions
about the securities of the respective Tata company, group, client or supplier
on which such insider information has been obtained.
Such insider information might include (without limitation) the following:
Acquisition and divestiture of businesses or business units.
Financial information such as profits, earnings and dividends.
Announcement of new product introductions or developments.
Asset revaluations.
Investment decisions / plans.
Restructuring plans.
Major supply and delivery agreements.
Raising of finances.
An employee of a Tata company shall also respect and observe the
confidentiality of information pertaining to other companies, their patents,
intellectual property rights, trademarks and inventions; and strictly observe a
practice of non-disclosure.
Clause: 22
Protecting company assets
The assets of a Tata company shall not be misused; they shall be employed
primarily and judiciously for the purpose of conducting the business for
which they are duly authorized. These include tangible assets such as
equipment and machinery, systems, facilities, materials and resources, as
well as intangible assets such as information technology and systems,
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proprietary information, intellectual property, and relationships with
customers and suppliers.
Clause: 23
Citizenship
The involvement of a Tata employee in civic or public affairs shall be with
express approval from the chief executive of his / her company, subject to
this involvement having no adverse impact on the business affairs of the
company or the Tata group.
Clause: 24
Integrity of data furnished
Every employee of a Tata company shall ensure, at all times, the integrity of
data or information furnished by him/her to the company. He/she shall be
entirely responsible in ensuring that the confidentiality of all data is retained
and in no circumstance transferred to any outside person/party in the course
of normal operations without express guidelines from or, the approval of the
management.
Clause: 25
Reporting concerns
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Every employee of a Tata company shall promptly report to the
management, and / or third-party ethics helpline, when she / he becomes
aware of any actual or possible violation of the Code or an event of
misconduct, act of misdemeanor or act not in the company’s interest. Such
reporting shall be made available to suppliers and partners, too.
Any Tata employee can choose to make a protected disclosure under the
whistleblower policy of the company, providing for reporting to the
chairperson of the audit committee or the board of directors or specified
authority. Such a protected disclosure shall be forwarded, when there is
reasonable evidence to conclude that a violation is possible or has taken
place, with a covering letter, which shall bear the identity of the
whistleblower.
The company shall ensure protection to the whistleblower and any attempts
to intimidate him / her would be treated as a violation of the Code.
The TATA - Values and purpose
Purpose
At the Tata group our purpose is to improve the quality of life of the
communities we serve. We do this through leadership in sectors of economic
significance, to which the group brings a unique set of capabilities. This
requires us to grow aggressively in focused areas of business.
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Our heritage of returning to society what we earn evokes trust among
consumers, employees, shareholders and the community. This heritage is
being continuously enriched by the formalization of the high standards of
behavior expected from our employees and companies.
The Tata name is a unique asset representing leadership with trust.
Leveraging this asset to enhance group synergy and becoming globally
competitive is our chosen route to sustained growth and long-term success.
Core values
The Tata group has always been a values-driven organization. These values
continue to direct the group's growth and businesses. The five core Tata
values underpinning the way we do business are:
Integrity: We must conduct our business fairly, with honesty and
transparency. Everything we do must stand the test of public scrutiny.
Understanding: We must be caring, show respect, compassion and
humanity for our colleagues and customers around the world, and
always work for the benefit of the communities we serve.
Excellence: We must constantly strive to achieve the highest possible
standards in our day-to-day work and in the quality of the goods and
services we provide.
Unity: We must work cohesively with our colleagues across the group
and with our customers and partners around the world, building strong
relationships based on tolerance, understanding and mutual
cooperation.
Responsibility: We must continue to be responsible, sensitive to the
countries, communities and environments in which we work, always
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ensuring that what comes from the people goes back to the people
many times over.
Company Profile:
The Ford Motor Company (NYSE: F) is an American multinational corporation
and the world's fourth largest automaker based on worldwide vehicle sales,
following Toyota, General Motors, and Volkswagen. Based in Dearborn,
Michigan, a suburb of Detroit, the automaker was founded by Henry Ford and
incorporated on June 16, 1903. In addition to the Ford, Lincoln, and Mercury
brands, Ford also owns Volvo Cars of Sweden, and a small stake in Mazda of
Japan and Aston Martin of England. Ford's former UK subsidiaries Jaguar and
Land Rover were sold to Tata Motors of India in March 2008.
In 2007, Ford fell from the second-ranked automaker to the third-ranked
automaker in US sales for the first time in 56 years, behind General Motors
and Toyota. Based on 2007 global sales, Ford fell to the fourth-ranked spot
behind Volkswagen. Ford is the seventh-ranked overall American-based
company in the 2007 Fortune 500 list, based on global revenues in 2007 of
$172.5 billion. In 2007, Ford produced 6.553 million automobiles and
employed about 245,000 employees at around 100 plants and facilities
worldwide. Also in 2007, Ford received more initial quality survey awards
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from J. D. Power and Associates than any other automaker. Five of Ford's
vehicles ranked at the top of their categories and fourteen vehicles ranked in
the top three.
Ford introduced methods for large-scale manufacturing of cars and large-
scale management of an industrial workforce using elaborately engineered
manufacturing sequences typified by moving assembly lines. Henry Ford's
methods came to be known around the world as Fordism by 1914.
Corporate governance:
Members of the board as of early 2007 are: Chief Sir John Bond, Richard
Manoogian, Stephen Butler, Ellen Marram, Kimberly Casiano, Alan Mulally
(President and CEO), Edsel Ford II, Homer Neal, William Clay Ford Jr., Jorma
Ollila, Irvine Hockaday Jr., John L. Thornton and William Clay Ford (Director
Emeritus).[7]
The main corporate officers are: Lewis Booth (Executive Vice President,
Chairman (PAG) and Ford of Europe), Mark Fields (Executive Vice President,
President of The Americas), Donat Leclair (Executive Vice President and
CFO), Mark A. Schulz (Executive Vice President, President of International
Operations) and Michael E. Bannister (Group Vice President; Chairman & CEO
Ford Motor Credit). Paul Mascarenas (Vice President of Engineering, the
Americas Product Development).
Our Progress
We get it. We need a new way of doing business. You'll be glad to know Ford
has been making great progress … we're sure you will agree.
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Ford Motor Company, Honda Motors and Toyota Motors quality ratings are in
a dead heat.
Our cars, trucks and SUVs deliver fuel economy that's competitive with that
of all other automakers.
EVENTS OF THE TATA-FORD DEAL
1. FORD STARTS FACING PROBLEM WITH PENSION COSTS AND
FALLING SALES IN NORTH AMERICA.
Ford has been forced to sell two company’s based at Solihill and Castle
Bromwich in the West Midlands and Halewood on Merseyside in order to
concentrate on it’s loss-making core US car business, which it hopes to turn
around in the next two years. The largest loss of a $127 billion, overseen by
Allan Mullay, who took over as a Chief Executive Officer in the same year,
decided to sell its iconic Aston Martin Brand to a U.K based investment
consortium in a deal worth $955.2 million in 2007. Ford mission became to
integrate the Ford brand globally, and create a strong Ford motor company
that delivers profitable growth to all.
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2. FORD INDICATES THAT IT MIGHT LOOK FOR BUYERS FOR JAGUAR
AND LAND ROVER MARQUES
After the losses drained out cash and resources out of the Ford Company,
Ford Motor gave a lucid indication for buyers of its two other brands- Jaguar
and Land Rover, as luxury car sales went down across the globe. Jaguar sales
dropped 33% in the US and Europe in the first two months of the year while
Land Rover sales fell 13% in the US and 7.7% in Europe during the period.
Ford bought Jaguar for $2.5 billion in 1989 and Land Rover for $2.7 billion in
2000. But it has been struggling and wants to focus on its main brands. It
has now sold the marques for less than what it paid then.
3. TATA CONFIRMS THE NEWS TO PARTICIPATE IN THE BID
The head of India's Tata conglomerate confirmed Friday that his group was
interested in bidding for luxury UK car brands Jaguar and Land Rover, in an
interview with an Indian news channel. Tata Motors, India's biggest car
company, has appointed advisors to evaluate a bid and signed a
confidentiality agreement with Ford to access financial details of the two
brands which have a combined British workforce of 19,000, the Business
Standard daily quoted unnamed sources as saying last month. The move
would be in keeping with Tata group's growing appetite for overseas
acquisitions.
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4. MAHINDRA-MAHINDRA FAILED TO MAKE IN TO BID
Mahindra & Mahindra has pulled out of the race to acquire iconic British
brands Jaguar and Land Rover, which have been put on the block by Ford,
citing complexities in the way the deal was structured. The development
strengthened the case for Tata Motors, which is now pitted against private
equity firm One Equity Partners that has roped in former Ford boss Jacques
Nasser as an advisor. Sources close to the negotiations said M&M — though
a serious contender in the beginning — decided against pursuing the deal as
there were concerns related to Intellectual Property Rights (IPR) associated
with the two brands. "The whole deal was considered to be very complex,
prompting the company not to pursue it," a source said. M&M thought that it
would have to go back to Ford on many crucial issues related to use of
technology even after bagging the two brands. Crucial IPRs related to the
brands are locked in with the US auto major, making it difficult for the
eventual winner to "derive full benefits unhindered and Ford's continuing
involvement was a crucial concern".
5. FORD ANNOUNCES TATA AS “PREFERRED BUYER”.
On 1 January 2008, Ford made a formal announcement which declared Tata
as the preferred bidder. Tata Motors also received endorsements from the
Transport and General Worker's Union (TGWU)-Amicus combine as well as
from Ford. According to the rules of the auction process, this announcement
would not automatically disqualify any other potential suitor. However, Ford
(as well as representatives of Unite) would now be able to enter into more
focused and detailed discussions with Tata to iron out issues ranging from
labour concerns (job security and pensions), technology (IT systems and
engine production) and intellectual property as well as the final sale price.
Ford would also open its books for a more comprehensive diligence by Tata.
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On 18 March 2008, Reuters reported that American bankers Citigroup and JP
Morgan shall be due underwriting a loan of USD 3 billion in order to finance
the deal.
6. EUROPEAN COMMISION CLEARS ACQUISITION OF JAGUAR AND
LAND ROVER BY INDIAN COMPANY, TATA MOTORS.
On 26th April 2008, The European Commission (EC), the executive panel of
the 27-member European Union, cleared the acquisition of the Jaguar and
Land Rover business (JLR) of US-based Ford Motor Company by India's Tata
Motors Ltd the EC announced in Brussels. That it has granted clearance
under the EU Merger Regulation Procedure.
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THE DEAL
The definitive agreement was agreed by Tata Motor’s Ltd., on 26 th March
2008 to acquire luxury British marquees, Jaguar and Land Rover.
The all-cash deal, which was agreed in March, includes all necessary
intellectual property rights, manufacturing plants, two advanced design
centers in the UK and a worldwide network of sales companies. Included in
the deal were the rights to three other British brands, Jaguar's own Daimler,
as well as two dormant brands Lanchester and Rover. On 2 June 2008 the
sale to Tata was completed by both parties
TRANSITION SUPPORT
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Other areas of transition support from Ford include IT, accounting and access
to test facilities. The companies will also cooperate in areas such as design
and development through sharing of platforms and joint development of
hybrid technologies and power train engineering, Tata Motors said.
TIMELINE OF THE HISTORIC DEAL
2005 Ford starts facing problems with pension and health
care costs and falling sales in North America.
Starts reporting losses from the second quarter
2006 Alan Mullaly takes over as chief executive and
oversees a $12.7 billion loss, the largest in the
company's history Ford decides to sell its Aston
Martin brand
May, 2007 Ford closes the Aston Martin sale for $848 million
June, 2007 Ford indicates that it might look at buyers for Jaguar
and Land Rover marquees
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July, 2007
Ford receives preliminary bids for the brands. Reports
say that TPG Inc., Cerberus Capital Management Lp.
Ripplewood Holdings, One Equity Partners Llc are in
the fray, along with Tata Motors
Ltd and Mahindra & Mahindra
August,
2007
Ratan Tata, chairman of Tata Motors Ltd, confirms
that his company was bidding for the premium car
Makers
November,
2007
Investment bankers say that Apollo Alternative Assets
is teaming up with Mahindra & Mahindra
Reports say that Ford has shortlisted three bidders—
Tata, Mahindra and One Equity—for further
negotiations with its trade unions Unite, the trade
union representing Land Rover and Jaguar workers,
says it supports Tata Motors' bid
December, The three bidders submit their bid
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2007
January ,
2008
Ford names Tata as "preferred buyer"
March, 2008
Tata, Ford sign deal
June, 2008 Deal finally completed by both the parties.
STUDENT’S ANALYSIS
OFFER AND ACCEPTANCE
Offer and acceptance: there must be two parties to an agreement, i.e.,
one party making the offer and the other party accepting it. The terms of
the offer must be definite and the acceptance of the offer must be
absolute and unconditional. The acceptance must also be according to the
mode prescribed and must be communicated to the offeror.
The deal was offered by Tata and finally accepted on 2nd June 2008 by
William Clay Ford (Chairman of Ford) and Allan Mulally (CEO of Ford)
OFFER BY TATA à ACCEPTANCE BY FORD
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LEGAL RELATIONSHIP
Intention to create legal relationship: When the two parties enter into an
agreement, their intention must be to create a legal relationship between
them. If there is no such intention on the part of the parties, there is no
contract between them.
Both the parties have the intention to create legal Relationship between
them and were agreed to legalize the deal in written
LAWFUL CONSIDERATION
1. Lawful consideration: An agreement to be enforceable by law must be
supported by consideration. ‘Consideration’ means an advantage or
benefit moving from one party to another. It is the essence of a
bargain. In simple words, it means ‘something in return’. The
agreement is legally enforceable only when both the parties give
something and get something in return. Consideration need not
necessarily be in cash or kind. It may be an act, abstinence, or promise
to do or not to do something. It may be past, present or future. But it
must be real and lawful.
Consideration is lawful in the deal. Mr. Ratan Tata (Chairman of Tata) gets
the Ford Company as his consideration.
CAPACITY OR COMPETENCY OF PARTIES
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Capacity of parties- competency: The parties to the agreement must be
capable of entering into a valid contract. Every person is competent to
contract if he (a) is the age of majority, (b) is of sound mind, and (c) is not
disqualified from contracting by any law to which he is subject.
There are three conditions that are required for a party to become
competent to contract were fulfilled:-
-Both the parties attains the age of majority at the time of contract.
-Both the parties are of sound mind
-Both Tata and Ford were not disqualified by any law from signing any
contract.
FREE CONSENT
Free and genuine consent: It is essential to the creation of every contract
that there must be free and genuine consent of the parties to the
agreement. The consent of the parties is said to be free when they are of
the same mind on all the material terms of the contract. The parties are
said to be of the same mind when they agree about the subject matter of
the contract in the same sense and at the same time. There is absence of
free consent if the agreement is induced by coercion, undue influence,
fraud, misinterpretation, etc.
In this case the consent of both the parties are free i.e. It is not caused by-
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• Coercion
• Undue Influence
• Fraud
• Misrepresentation
• Mistake
Thus the contract is genuine.
LEGALITY OF OBJECT
Lawful object: The object of the agreement must be lawful. In other words, it
means that the object must not be (a) illegal, (b) immoral, or (c) opposed to
public policy. If an agreement suffers from any legal flaw, it would not be
enforceable by law.
In Tata Ford deal nothing was illegal, immoral or opposed to public policy
hence legality of object criteria also got fulfilled.
POSSIBILITY OF PERFORMANCE
Certainty and possibility of performance: The agreement must be certain
and not vague or indefinite. If it is vague and it is not possible to ascertain
its meaning, it cannot be enforced. The term of the agreement must also
be such as are capable of performance. Agreement to do an act
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impossible in itself cannot be enforced.
In this deal both the parties were perform their respective promises so the
deal is successful.
LEGAL FORMALITIES
Legal formalities: A contract may be made by words spoken or written. As
regards the legal effects, there is no difference between a contract by
writing and a contract made by word of mouth. It is in the interest of the
parties that the contract should be in the writing. There are some other
formalities also which have to be complied with in order to make an
agreement legally enforceable. In some cases, the document in which the
contract is incorporated is to be stamped. In some other cases, a contract,
besides being a written one, has to be registered. Thus, where there is a
statutory requirement that a contract should be made in writing or should
be made in the presence of witnesses or registered, the required
statutory formalities must be compiled with.
In this deal all the legal formalities like registration etc. are fulfilled hence
the deal is successful.
Thus, all the elements which are essential for an agreement to become a
contract are present.
Conclusions
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The following conclusions have been drawn from the study:
1. Post- liberalization, most Indian business houses are undergoing major
structural changes, the level of restructuring activity is increasing
rapidly and the consolidations through M&A have reached every
corporate boardroom.
2. Most of the mergers that took place in India during the last decade
seemed to have followed the consequence of mergers in India
corroborate the conclusions of research work in U.S. with most of the
M&A are taking place in India to improve the size to withstand
international competition which they have been exposed to in the Post-
liberalization regime.
3. The M&A activity is undertaken with the objective of financial
restructuring and to avail of the benefits of financial restructuring.
Nowadays, before financial restructuring, it has become a pre-requisite
that companies need to merge or acquire. Moreover, financial
restructuring becomes easier because of M&A. the small companies
cannot approach international markets without becoming big i.e.
without merging or acquiring.
4. Market capitalalisation of a company sometimes is found to be going
up or down without any corresponding change in the EVA and MVA
since the stock may be strong because of the general bullish scenario
in the market, s is observed in most of the cases in our study.
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BIBLIOGRAPHY
Books: - Merger, Acquisition and corporate restructuring in India (Rachna
Jawa)
Financial services 3rd edition (M.Y.khan)
Website: www.google.com
www.wikipedia.com
www.icicidirect.com
www.mergersindia.com
www.mergerdigest.com
www.deustchbank.com
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