INTERNATIONAL MARKETING

MERGERS & ACQUISITIONS

M&A : Background & ScenarioM&A : Background & Scenario

• In 1990, only six developing and transition countries had made any outward investment.

• In 2005, the number increased to 25.

• Between 1987 and 2005, the share of global M&As by MNCs from developing and transition countries rose from 4% to 13% in value terms, and their share in greenfield and expansion projects exceeded 15 percent in 2005.

• Corporate India has gone on an acquisition spree, powered by the urge to go global, strong market fundamentals and the drive to dish out cost-competitive products. Acquisitions were not limited to the domestic market, but spread out in the global arena also.

• Though India's public sector took the lead in investing abroad, especially looking for oil assets, the private sector is now going full speed ahead, driving overseas investments e.g.

•Arcelor acquired by Mr. Lakshmi Mittal.

•Mahindra & Mahindra's takeover of 90 percent stake in Schoneweiss, a family-owned German company.

•Tata's takeover of Corus & Tetley Tea Co.

•Hutchison Whampoa of Hong Kong sold their controlling stake in Hutchison - Essar to Vodafone for a whopping $11.1 billion.

Indian Scenario - Major DealsIndian Scenario - Major Deals

• A survey shows that 81% of the companies have considered M&As and 30% have actually done a transaction in the past 3 years. Over 70% say that they expect to do a deal in the next 3 years. All this denotes that we are set for an M&A boom in the years to come. Global M&A volumes of $10bn a day, India’s $18bn for the year 2005 indicates that there is still a long way to go. The trend is clearly on the way up.

• M&A in 2006-07 - $ 3.6 Trillion

• M&A in 2005-06 - $ 3.55 Trillion (data by Bloomberg)

• October 2006 M&A deals - $ 262 Billion

• The Asian M&A market saw 5792 deals worth $ 255.07 billion

• China alone was the largest market with 1862 deals worth $54.76 billion

M&A : Background & ScenarioM&A : Background & Scenario…...Contd…...Contd..

• Swiss cement major, Holcim, which acquired a 67 per cent stake in Ambuja Cement India Ltd (ACIL).

• Videocon Group's acquisition of Thomson's colour picture tube business in China, Poland, Mexico, and Italy for a total of $290 million.

• The other large overseas deal was by pharmaceuticals Matrix Laboratories, which acquired 100 per cent of the Belgian Pharma Co., Docpharma for $263 million).

• Birla-Hindalco Indian business conglomerate Aditya Birla group-owned flagship company Hindalco Industries Ltd. Took over Atlanta-based aluminum giant Novelis Inc. for US$ 6.4 billion

Indian Scenario - Major Deals Indian Scenario - Major Deals …….…….ContdContd.-.-

• Indian firms concluded 70 M&A deals between April and September, spending $14 billion and would have saved as much as Rs.6500 crore ($1.66 billion) because of the over 10% rupee appreciation against the greenback, an Assocham Eco Pulse study said.

Why M & A ?Why M & A ?•Quicker way to growth.

•Accessing new markets.

•Taking on the global competition.

• Improving operating margins and efficiencies, and

•Acquiring visibility and international brands.

•Buying cutting-edge technology rather than importing it

•Developing new product mixes

Objective behind M&A Transaction Responses (in%)

To improve revenues & profitability 33%

Faster growth in scale quicker time to market 28%

Acquisition of new technology or competence 22%

To eliminate competition & increase market share 11%

Tax shields & investment savings 3%

Any other reason 3%

Determinants of M & A Determinants of M & A

•Ever-growing appetite of entrepreneurs to strike deals across sectors.

•Availability of financing options – both in Debt as well as in Equity due to low interest-regime of recent years and high stock-market valuations.

•Barriers – Surmountable? And Legal System.

Liberal approach of Anti-trust authorities / regulators in recent years.

Availability of the unit / business.

Strategy, planning & environment.

Corporate Governance.

Corporate GovernanceCorporate Governance

Tata could acquire so many units outside India, against stiff competition; due to good corporate governance & strategic fit.

Corporate governance is essential to acquire a company and then make the acquisition successful. In absence of good governance, acquisition may fizzle out.

Interplay of following factors :

• Strategy

• Planning

• Personnel

• Legal

• Finance

• People

• Media

• Management Philosophy – Corporate Governance

M&A as a Business StrategyM&A as a Business Strategy

Analysis• Only 19% of the respondents

state that they do not believe in M&A and 81% look at it as a part of strategy or will look at it opportunistically.

Conclusion- M&A is definitely a key agenda for India Inc

Yes49%

It is Opportunistic

32%

No, We do not believe in inorganic Stragegy

19%

M&A as a part of Business StrategyM&A as a part of Business Strategy

Enhancing ValuationEnhancing Valuation

Analysis- The key drivers for valuation

according to India Inc are Management quality, Industry factors and Financial performance.

Conclusion- The perceived quality of a

management team a key driver. To enhance valuation along with transparency. Interestingly Press interaction is seen as another way to enhance valuation.

Key Drivers for enhancing valuation of a company

Financial Performance

16%

Governance Track record

8%

Management Team27%

Regular interaction with analysts and

press15%

Industry outlook19%

Transparency in operations

15%

• Investment restraints (licensing).

• Control over acquisition of economic power through Monopolies & Restrictive Trade Practices Act (MRTP).

• Public sector reservation for infrastructure and other industries creating monopolies in various areas.

• Product reservation for the small-scale sector.

• Government procurement policies favoring public and small-scale sectors.

• Trade restrictions and high tariffs.

• Restrictions on foreign direct investment.Contd….

Competition Policies in EU and India- Is it Competition Policies in EU and India- Is it transparent and Non discriminatory? transparent and Non discriminatory?

Lessons for India & EU to work togetherLessons for India & EU to work together

• Indian economy today is a competitive and de-regulated open economic system.

• Various restraints to competition existed in the pre-reform era such as :

• All these restraints (protective measures as well as controls) have been or are being relaxed now.

• One key issue in the current phase of transition of India is of ensuring and managing competition and to derive the most out of liberalization.

• The task is all the more difficult because the nation is not starting with a clean slate as various institutional structures continue to be in place.

• Although, decontrol, deregulation & privatization initiatives are being taken, global economic environment is also undergoing a major change and hence the economic system is becoming more complex.

• The Indian corporate sector adopted a variety of strategies in the post-reform period to cope with the increasing competitive pressures due to internal and external liberalization.

• With the maturing of the Indian oligopolies, the competition policy needs of the country are also undergoing changes.

New Needs for Competition PolicyNew Needs for Competition Policy

Some salient aspects of the changes in the Indian corporate sector :

Changing Indian corporate sectorChanging Indian corporate sector

• The Indian corporate sector is vigorously restructuring itself.

• Restructuring is mainly geared towards consolidation in few chosen areas to correct the inefficiencies created by over-diversification in the pre-reform era.

• MNCs have actively participated in the merger and acquisition process to get market entry or to strengthen their presence.

• Acquisitions have been used by MNCs to quickly get access to various complementary assets.

• MNCs are better placed vis-a-vis domestic firms in the acquisition game because of their deep pockets and relatively cheaper access to capital.

• The intentions to invest in India by MNCs are significantly influenced by differences in the cost of capital and huge Indian market.

• The reliance of the Indian corporate sector on foreign technology purchase has increased.

• More and more technology flows are now tied with equity.• Purchase of technology (especially foreign) is taking

precedence over R&D.• In house technology generation has taken a backseat.

Besides, a large variety of inter-firm alliances are taking place.

• Firms are making efforts to improve manufacturing capability. This is being done through building alliances as well as through initiatives within the firm.

• Quality upgradation seems to be an important priority.• These efforts at improving manufacturing capability may

still prove to be inadequate to meet the competitive challenges.

Changing Indian corporate sectorChanging Indian corporate sector

• These inadequacies may also adversely affect India’s chances of seeking FDI, the need for which has been emphasized.

• Product differentiation strategy seems to be dominating over strategies of building distribution and marketing related assets.

• Such a strategy helps Indian firms to stand up to transnational with their strong and internationally recognized brands.

• Export based growth strategies are being adopted by some of the corporate sector but such strategies are not widespread.

• Export orientation increased appreciably.

• Overall, exposure to the international market is still inadequate to put the Indian firms on higher growth and learning trajectories.

Changing Indian corporate sectorChanging Indian corporate sector

Creating an active competitive

environment, and in aiding the

process of creating globally

competitive firms with enhanced

investment & technological

capabilities.

Objective of our competition policyObjective of our competition policy

• India has had a legislation to address competition issues since 1969, when the Monopoly and Restrictive Trade Practices Act, was enacted.

• This Act primarily dealt with Monopolistic Restrictive and Unfair Trade Practices. A Statutory Commission, the Monopoly and Restrictive Trade Practices Commission, was set up under this act, with an adjudicatory role.

• With the changing economic environment , need was felt to have a new law tuned to the needs of modern times, and towards this end, a new Competition Act was enacted in 2002.

• This Act deals with anti-competitive agreements (including cartels), abuse of dominant position, regulation of combination (including mergers and acquisitions) and advocacy.

Contd…

Progress made in Progress made in Indian competitive PolicyIndian competitive Policy

• The Act also envisages establishment of the Competition Commission.

• However, the Commission set up under the Act is not yet fully operational for the present.

• While some issues relating to its functioning are being addressed, it is carrying out only advocacy functions, as of now and thus competition issues continue to be adjudicated by MRTPC.

Progress made in Progress made in Indian competitive PolicyIndian competitive Policy

• India is at a stage of development where cross-border activities are growing rapidly and are likely to grow more in the near future.

• The level of cross-border activity between India and EU is also significantly increasing.

• The EU is the leading investor in India and also a major destination for Indian investors.

• The EU invested 1.1 billion euros in India in 2004. But it's the reverse flow which is more interesting.

• In 2005-06, the EU was the main destination for Indian investment. One in every four dollars invested abroad by an Indian company went to the EU.

• Many of the major Indian IT companies such as Infosys, TCS and Wipro have operations in Europe. There have also been several high-profile acquisitions of European companies by Indian corporates, the famous being of course Tata's headline-grabbing Corus deal.

India Going Global India Going Global

• India is reviewing its competition policy apart from trying to influence international agreements on competition policy related issues.

• Cooperation can be closer and effective, if laws and procedures of the countries involved are similar.

• Convergence and cooperation are needed in competition policy on issues relating to :

Need for Convergence and Need for Convergence and Cooperation in Competition PoliciesCooperation in Competition Policies

• Cartelisation.

• Other horizontal restraints.

• Mergers and acquisitions.

• Price fixing.

• Voluntary export restraints and orderly marketing arrangements.

• National treatment for foreign direct investors and services.

• Participation in such arrangements provides an opportunity for learning and exchange of information that may be critical for competition agencies in developing economies.

• The economies in transition may also want to participate in order to influence the directions which cooperation arrangements take.

• We are also of the view that more active steps need to be taken to enable developing countries in dealing with international cartels, and to ensure effective cooperation by the developed countries in this task.

• The developed countries need to recognize the pronouncements of competition authorities against international cartels based in their own jurisdiction, and help the prosecution of members of such cartels.

Contd….

Need for Convergence and Cooperation in Competition PoliciesNeed for Convergence and Cooperation in Competition Policies

• In addition there should be more focus on abuse of international dominance by transnational companies, whether in terms of market behavior or intellectual property.

• We may have to incorporate provisions preventing multinationals from refusing to deal with countries as a whole if the country’s competition authority has moved against the company.

• There is a need of special dispensation for the informal sector in these countries.

• Economies of developing countries have a large contribution from the informal sector, in contrast to the developed country economy.

• Any competition law would have to take into cognizance of special needs of such sector, and the need of Governments to support this sector.

Contd….

Need for Convergence and Cooperation in Competition PoliciesNeed for Convergence and Cooperation in Competition Policies

• Hence, special preferences and incentives provided for the informal sector for these economies, need to be recognized and accepted in the competition law.

• Need of advocacy and capacity building on competition issues is strong felt need in developing countries.

• However, the focus of capacity building need not be limited to the competition authorities, but should have a wider scope to include sub-national authorities, economists, universities, jurists, etc. so that a large pool of competition experts are available in the country.

• Similarly advocacy efforts should focus on making competition a way of life in these countries and not something to be imposed by the State.

Contd..

Need for Convergence and Cooperation in Competition PoliciesNeed for Convergence and Cooperation in Competition Policies

Success FactorsSuccess Factors

Analysis• The main factors for

succeeding in M&A are Strategic Fit, Personnel & Proper Planning.

Conclusion• For success in M&A it is critical that

there be a good strategic fit and personnel or HR is a key factor apart from planning. India Inc is not looking at M&A to become conglomerate and core competence is a key driver for growth through M&A

20%

16%

20%22%

10%

6% 6%

0%

5%

10%

15%

20%

25%

Most important factors that contribute to the success of a M&A Transaction.

ConclusionConclusion

Mergers & Acquisitions are a significant form of business strategy today for Corporates.

The two main objectives behind any M&A Transaction, for corporates today is :• to improve Revenues and Profitability• Faster growth in scale and quicker access to

market• Competition in Globalised Market

The most important factors according to corporate India that contribute to the success of an M&A Transaction are : Timing Intrinsic Fit Personnel Advisors on legal, policy and financial

strategies