m&a in telecommunication industry

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CHAPTER-1 INTRODUCTION:

Indian Economy- Mergers & AcquisitionsThe Indian economy has undergone a major transformation and structural changeduring the past decade or so as a result of economic reforms introduced by theGovernment of India since 1991 in the wake of policy of economic liberalization andglobalization. In this liberalized era, size and "core competence" have become thefocus of every business enterprise. Naturally, this requires companies to grow andexpand in businesses that they understand well. Thus, leading corporate houses haveundertaken a massive restructuring exercise to create a formidable presence in their core areas of interest. Mergers and acquisitions (M&As) is one of the most effectivemethods of corporate restructuring and has, therefore, become an integral part of thelong-term business strategy of corporate.

The M&A activity has its impact on various diverse groups such as corporate

management, shareholders and investors, investment bankers, regulators, stock markets, customers, government and taxation authorities, and society at large.Therefore, it is not surprising that it has received considerable attention at the handsof researchers world over. A number of studies have been carried out abroadespecially in the developed capital markets of Europe, Australia, Hong Kong, and US.These studies have largely focused on different aspects, viz., (a) the rationale of M&As, (b) allocational and redistribution role of M&As, (c) effect of takeovers onshareholders' wealth, (d) corporate financial performance, etc. Some studies have also

been carried out to predict corporate takeovers using financial ratios. M&As, being anew phenomenon in India, has not received much attention of researchers. In fact, nocomprehensive study has been undertaken to examine various aspects especially after

the Takeover Code came into being in1997. This study has been undertaken to fill thisgap.

Until upto a couple of years back, the news that Indian companies having acquiredAmerican-European entities was very rare. However, this scenario has taken a suddenU turn. Nowadays, news of Indian Companies acquiring foreign businesses are morecommon than other way round.

Buoyant Indian Economy, extra cash with Indian corporates, Government policies andnewly found dynamism in Indian businessmen have all contributed to this newacquisition trend. Indian companies are now aggressively looking at North Americanand European markets to spread their wings and become the global players.

The Indian IT and ITES companies already have a strong presence in foreign markets;however, other sectors are also now growing rapidly. The increasing engagement of the Indian companies in the world markets, and particularly in the US, is not only anindication of the maturity reached by Indian Industry but also the extent of their

participation in the overall globalization process.

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The Top 10 acquisitions made by Indian companies worldwide

Acquirer Target Company Country targeted Deal value ($ ml) Industry

Tata Steel Corus Group plc UK 12,000 Steel

Hindalco Novelis Canada 5,982 Steel

Videocon DaewooElectronics Corp.

Korea 729 Electronics

Dr.ReddysLabs

Betapharm Germany 597 Pharmaceutical

SuzlonEnergy

Hansen Group Belgium 565 Energy

HPCL Kenya PetroleumRefinery Ltd.

Kenya 500 Oil andGas

RanbaxyLabs

Terapia SA Romania 324 Pharmaceutical

Tata Steel Natsteel Singapore 293 Steel

Videocon Thomson SA France 290 Electronics

VSNL Teleglobe Canada 239 Telecom

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Mergers & Acquisitions

Meaning of MergerA merger is a tool used by companies for the purpose of expanding their operationsoften aiming at an increase of their long term profitability. There are 15 different

types of actions that a company can take when deciding to move forward using M&A.Usually mergers occur in a consensual (occurring by mutual consent) setting whereexecutives from the target company help those from the purchaser in a due diligence

process to ensure that the deal is beneficial to both parties. Acquisitions can alsohappen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. In the UnitedStates, business laws vary from state to state whereby some companies have limited

protection against hostile takeovers. One form of protection against a hostile takeover is the shareholder rights plan, otherwise known as the poison pill. 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 thetwo companies to share the risk involved in the deal. A merger can resemble atakeover but result in a new company name (often combining the names of theoriginal 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.

Historically, mergers have often failed to add significantly to the value of theacquiring firm's shares. Corporate mergers may be aimed at reducing marketcompetition, cutting costs (for example, laying off employees, operating at a moretechnologically efficient scale, etc.), reducing taxes, removing management, "empire

building" by the acquiring managers, or other purposes which may or may not beconsistent with public policy or public welfare. Thus they can be heavily regulated.

Classification of Merger

Horizontal mergers: take place where the two merging companies produce similar product in the same industry. Vertical mergers: occur when two firms, each working at different stages in the

production of the same good, combine.

Market Extension Merger and Product Extension Merger:Market Extension Merger:As per definition, market extension merger takes place between twocompanies that deal in the same products but in separate markets. The main

purpose of the market extension merger is to make sure that the mergingcompanies can get access to a bigger market and that ensures a bigger client

base.

Product Extension Merger:According to definition, product extension merger takes place between two

business organizations that deal in products that are related to each other andoperate in the same market. The product extension merger allows the merging

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companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.

Congeneric mergers: occur where two merging firms are in the same generalindustry, but they have no mutual buyer/customer or supplier relationship, such as a

merger between a bank and a leasing company.

Conglomerate mergers: take place when the two firms operate in differentindustries.

A unique type of merger called a reverse merger is used as a way of going publicwithout the expense and time required by an IPO.

The contract vehicle for achieving a merger is a "merger sub"

Accretive mergers: are those in which an acquiring company's earnings per share(EPS) increase. An alternative way of calculating this is if a company with a high

price to earnings ratio (P/E) acquires one with a low P/E.

Dilutive mergers: are the opposite of above, whereby a company's EPS decreases.The company will be one with a low P/E acquiring one with a high P/E.

The completion of a merger does not ensure the success of the resulting organization;indeed, many mergers (in some industries, the majority) result in a net loss of valuedue to problems. Correcting problems caused by incompatibilitywhether of technology, equipment, or corporate culture diverts resources away from newinvestment, and these problems may be exacerbated by inadequate research or byconcealment of losses or liabilities by one of the partners. Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely thenew management may cut too many operations or personnel, losing expertise anddisrupting employee culture. These problems are similar to those encountered intakeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate .

Meaning of AcquisitionAn acquisition, also known as a takeover, is the buying of one company (the target)

by another. An acquisition may be friendly or hostile. In the former case, thecompanies cooperate in negotiations; in the latter case, the takeover target is unwillingto be bought or the target's board has no prior knowledge of the offer. Acquisitionusually refers to a purchase of a smaller firm by a larger one. Sometimes, however, asmaller firm will acquire management control of a larger or longer establishedcompany and keep its name for the combined entity. This is known as a reversetakeover.

Types of Acquisition A company is said to have "Acquired" a company, when onecompany buys another company. Acquisitions can be either:

Hostile

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Friendly

In case of hostile acquisitions, the company, which is to be bought has no informationabout the acquisition. The company, which would be sold is taken by surprise.

In case of friendly acquisition, the two companies cooperate with each other and settlematters related to acquisitions.

There are times when a much smaller company manages to take control of themanagement of a bigger company but at the same time retains its name for thecombination of both the companies. This process is known as "reverse takeover".

Kinds of acquisitions: There may be two types of acquisitions depending on theoption adopted by the buying company. In one case, the buying company may buy allthe shares of the smaller company. The other option is buying the assets of the smaller companies.

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CORPORATE RESTRUCTURING

Restructuring of business is an integral part of the new economic paradigm. As

controls and restrictions give way to competition and free trade, restructuring and

reorganization become essential. Restructuring usually involves major organizational

change such as shift in corporate strategies to meet increased competition or changed

market conditions. This activity can take place internally in the form of new

investments in plant and machinery, research and development at product and process

levels. It can also take place externally through mergers and acquisitions (M&A) by

which a firm may acquire other firm or by joint venture with other firms. This

restructuring process has been mergers, acquisitions, takeovers, collaborations,

consolidation, diversification etc. Domestic firms have taken steps to consolidate their

position to face increasing competitive pressures and MNCs have taken this

opportunity to enter Indian corporate sector.

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Forms of corporate-restructuring

1. Expansion

Amalgamation : This involves fusion of one or more companies where the

companies lose their individual identity and a new company comes into

existence to take over the business of companies being liquidated. The merger

of Brooke Bond India Ltd. and Lipton India Ltd. resulted in formation of a

new company Brooke Bond Lipton India Ltd.

Absorption: This involves fusion of a small company with a large company

where the smaller company ceases to exist after the merger. The merger of

Tata Oil Mills Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL) is an example

of absorption.

Tender offer: This involves making a public offer for acquiring the shares of

a target company with a view to acquire management control in that company.

Takeover by Tata Tea of consolidated coffee Ltd. (CCL) is an example of

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tender offer where more than 50% of shareholders of CCL sold their holding

to Tata Tea at the offered price which was more than the investment price.

Asset acquisition: This involves buying assets of another company. The

assets may be tangible assets like manufacturing units or intangible like

brands. Hindustan lever limited buying brands of Lakme is an example of

asset acquisition.

Joint venture: This involves two companies coming whose ownership is

changed. DCM group and DAEWOO MOTORS entered into a joint venture to

form DAEWOO Ltd. to manufacturing automobiles in India.

2. CO NTRACTION

There are generally the following types of contraction:

Spinoff: This type of demerger involves division of company into wholly

owned subsidiary of parent company by distribution of all its shares of

subsidiary company on Pro-rata basis. By this way, both the companies i.e.

holding as well as subsidiary company exist and carry on business. For example Kotak, Mahindra finance Ltd. formed a subsidiary called Kotak

Mahindra Capital Corporation, by spinning off its investment banking

division.

Split-ups: This type of demerger involves the division of parent company into

two or more separate companies where parent company ceases to exist after

the demerger.

Equity-carve out: This is similar to spin offs, except that same part of

shareholding of this subsidiary company is offered to public through a public

issue and the parent company continues to enjoy control over the subsidiary

company by holding controlling interest in it.

Divestitures: These are sale of segment of a company for cash or for

securities to an outside party. Divestitures, involve some kind of contraction. Itis based on the principle if anergy which says 5-3=3!

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Asset sale: This involves sale of tangible or intangible assets of a company to

generate cash. A partial sell off, also called slump sale, involves the sale of a

business unit or plant of one firm to another. It is the mirror image of a

purchase of a business unit or plant. From the sellers perspective, it is a form

of contraction:

From the buyers point of view it is a form of expansion. For example, When

Coromandal Fertilizers Limited sold its cement division to India Cement

limited, the size of Coromandal Fertilizers contracted whereas the size of India

Cements Limited expanded.

3. CORPORATE CONTROLS

Going private: This involves converting a listed company into a private

company by buying back all the outstanding shares from the markets. Several

companies like Castrol India and Phillips India have done this in recent years .

A well known example from the U.S. is that of Levi Strauss & company

Equity buyback: This involves the company buying its own shares back from

the market. This results in reduction in the equity capital of the company. This

strengthens the promoters position by increasing his stake in the equity of the

company.

Anti takeover defenses: With a high value of hostile takeover activity in

recent years, takeover defenses both premature and reactive have been

restored to by the companies.

Leveraged buyouts: This involves raising of capital from the market or

institutions by the management to acquire a company on the strength of its

assets.

Merger is a marriage between two companies of roughly same size. It is thus a

combination of two or more companies in which one company survives in its

own name and the other ceases to exist as a legal entity. The survivor

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company acquire assets and liabilities of merged companies. Generally the

company which survives is the buyers which retiring its identity and seller

company is extinguished.

Amalgamation

Amalgamation is an arrangement or reconstruction. It is a legal process by which two

or more companies are to be absorbed or blended with another. As a result, the

amalgamating company loses its existence and its shareholders become shareholders

of new company or the amalgamated company. In case of amalgamation a new

company may came into existence or an old company may survive while

amalgamating company may lose its existence.

According to Halsburys law of England amalgamation is the blending of two or more

existing companies into one undertaking, the shareholder of each blending companies

becoming substantially the shareholders of company which will carry on blende

undertaking. There may be amalgamation by transfer of one or more undertaking to a

new company or transfer of one or more undertaking to an existing company.

Amalgamation signifies the transfers of all are some part of assets and liabilities of

one or more than one existing company or two or more companies to a new company.

The Accounting Standard, AS-14, issued by the Institute of Chartered Accountants of

India has defined the term amalgamation by classifying (i) Amalgamation in the

nature of merger, and (ii) Amalgamation in the nature of purchase

1. Amalgamation in the nature of merger: As per AS-14, an amalgamation is called

in the nature of merger if it satisfies all the following condition:

All the assets and liabilities of the transferor company should become, after

amalgamation; the assets and liabilities of the other company.

Shareholders holding not less than 90% of the face value of the equity shares of the

transferor company (other than the equity shares already held therein, immediately

before the amalgamation, by the transferee company or its subsidiaries or their

nominees) become equity shareholders of the transferee company by virtue of the

amalgamation.

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The consideration for the amalgamation receivable by those equity shareholders of

the transferor company who agree to become equity shareholders of the transferee

company is discharged by the transferee company wholly by the issue of equity share

in the transferee company, except that cash may be paid in respect of any fractional

shares.

The business of the transferor company is intended to be carried on, after the

amalgamation, by the transferee company.

No adjustment is intended to be made in the book values of the assets and liabilities

of the transferor company when they are incorporated in the financial statements of

the transferee company except to ensure uniformity of accounting policies.

Amalgamation in the nature of merger is an organic unification of two or more

entities or undertaking or fusion of one with another. It is defined as an amalgamation

which satisfies the above conditions.

2. Amalgamation in the nature of purchase: Amalgamation in the nature of

purchase is where one companys assets and liabilities are taken over by another and

lump sum is paid by the latter to the former. It is defined as the one which does not

satisfy any one or more of the conditions satisfied above.

As per Income Tax Act 1961, merger is defined as amalgamation under sec.2 (1B)

with the following three conditions to be satisfied.

1. All the properties of amalgamating company(s) should vest with the amalgamated

company after amalgamation.

2. All the liabilities of the amalgamating company(s) should vest with the

amalgamated company after amalgamation

3. Shareholders holding not less than 75% in value or voting power in amalgamating

company(s) should become shareholders of amalgamated companies after

amalgamation

Amalgamation does not mean acquisition of a company by purchasing its property

and resulting in its winding up. According to Income tax Act, exchange of shares with

90%of shareholders of amalgamating company is required.

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ACQUISITION

Acquisition refers to the acquiring of ownership right in the property and asset

without any combination of companies. Thus in acquisition two or more companies

may remain independent, separate legal entity, but there may be change in control of

companies. Acquisition results when one company purchase the controlling interest in

the share capital of another existing company in any of the following ways:

a) Controlling interest in the other company. By entering into an agreement with a

person or persons holding

b) By subscribing new shares being issued by the other company.

c) By purchasing shares of the other company at a stock exchange, and

d) By making an offer to buy the shares of other company, to the existing

shareholders of that company.

MERGER

Merger refers to a situation when two or more existing firms combine together and

form a new entity. Either a new company may be incorporated for this purpose or one

existing company (generally a bigger one) survives and another existing company

(which is smaller) is merged into it. Laws in India use the term amalgamation for

merger.

Merger through absorption

Merger through consolidation

Absorption: Absorption is a combination of two or more companies into an existing

company. All companies except one lose their identity in a merger through

absorption. An example of this type of merger is the absorption of Tata Fertilisers Ltd.

(TFL) TCL, an acquiring company (a buyer), survived after merger while TFL, an

acquired company ( a seller), ceased to exist. TFL transferred its assets, liabilities and

shares to TCL.

Consolidation: A consolidation is a combination of two or more companies into a new

company .In this type of merger, all companies are legally dissolved and a new entity

is created. In a consolidation, the acquired company transfers its assets, liabilities and

shares to the acquiring company for cash or exchange of shares. An example of

consolidation is the merger of Hindustan Computers Ltd., Hindustan Instruments Ltd.,

and Indian Reprographics Ltd., to an entirely new company called HCL Ltd.

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TAKEOVER

Acquisition can be undertaken through merger or takeover route. Takeover is a

general term used to define acquisitions only and both terms are used interchangeably.

A takeover may be defined as series of transacting whereby a person, individual,

group of individuals or a company acquires control over the assets of a company,

either directly by becoming owner of those assets or indirectly by obtaining control of

management of the company.

Takeover is acquisition, by one company of controlling interest of the other, usually

by buying all or majority of shares. Takeover may be of different types depending

upon the purpose of acquiring a company.

1. A takeover may be straight takeover which is accomplished by the management of

the taking over company by acquiring shares of another company with the intention of

operating taken over as an independent legal entity.

2. The second type of takeover is where ownership of company is captured to merge

both companies into one and operate as single legal entity.

3. A third type of takeover is takeover of a sick company for its revival. This is

accomplished by an order of Board for Industrial and Financial Reconstruction

(BIFR) under the provision of Sick Industrial companies Act, 1985. In India, Board

for Industrial and Financial Reconstruction (BIFR) has also been active for arranging

mergers of financially sick companies with other companies under the package of

rehabilitation. These merger schemes are framed in consultation with the lead bank,

the target firm and the acquiring firm. These mergers are motivated and the lead bank

takes the initiated and decides terms and conditions of merger. The recent takeover of

Modi Cements Ltd., by Gujarat Ambuja Cement Ltd. was an arranged takeover after

the financial reconstruction Modi Cement Ltd. The fourth kind is the bail-out

takeover, which is substantial acquisition of shares in a financially weak company not

being a sick industrial company in pursuance to a scheme of rehabilitation approved

by public financial institution which is responsible for ensuring compliance with

provision of substantial acquisition of shares and takeover Regulations, 1997 issued

by SEBI which regulate the bailout takeover.

Takeover Bid

This is a technique for affecting either a takeover or an amalgamation. It may bedefined as an offer to acquire shares of a company, whose shares are not closely held,

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addressed to the general body of shareholders with a view to obtaining at least

sufficient shares to give the offer or, voting control of the company. Takeover Bid is

thus adopted by company for taking over the control and management affairs of listed

company by acquiring its controlling interest.

While a takeover bid is used for affecting a takeover, it is frequently against the

wishes of the management of Offeree Company. It may take the form of an offer to

purchase shares for cash or for share for share exchange or a combination of these two

firms.

Where a takeover bid is used for effecting merger or amalgamation it is generally by

consent of management of both companies. It always takes place in the form of share

for share exchange offer, so that accepting shareholders of Offeree Company become

shareholders of Offeror Company.

Types of Takeover Bids

There are three types of takeover bid

1. Negotiated bid

2. Tender offer

3. Hostile takeover bid

Negotiated bid : It is also called friendly merger. In this case, the management

/owners of both the firms sit together and negotiate for the takeover. The acquiring

firm negotiates directly with the management of the target company. So the two firms

reach an agreement, the proposal for merger may be placed before the shareholders of

the two companies. However, if the parties do not reach at an agreement, the merger

proposal stands terminated and dropped out. The merger of ITC Classic Ltd. with

ICICI Ltd. and merger of Tata oil mills Ltd. With Hindustan Lever Ltd. were

negotiated mergers.

However, if the management of the target firm is not agreeable to the merger

proposal, then the acquiring firm may go for other procedures i.e. tender offer or

hostile takeover.

Tender offer: A tender offer is a bid to acquire controlling interest in a target

company by the acquiring firm by purchasing shares of the target firm at a fixed price.The acquiring firm approaches the shareholders of the target firm directly firm to sell

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their shareholding to the acquiring firm at a fixed price. This offered price is

generally, kept at a level higher than the current market price in order to induce the

shareholders to disinvest their holding in favor of the acquiring firm. The acquiring

firm may also stipulate in the tender offer as to how many shares it is willing to buy or

may purchase all the shares that are offered for sale.

In case of tender offer, the acquiring firm does not need the prior approval of the

management of the target firm. The offer is kept open for a specific period within

which the shares must be tendered for sale by the shareholders of the target firm.

Consolidated Coffee Ltd. was takeover by Tata Tea Ltd.by making a tender offer to

the shareholders of the former at a price which was higher than the prevailing market

price.

In India, in recent times, particularly after the announcement of new takeover code by

SEBI, several companies have made tender offers to acquire the target firm. A

popular case is the tender offer made by Sterlite Ltd. and then counter offer by Alean

to acquire the control of Indian Aluminium Ltd.

Hostile Takeover Bid: The acquiring firm, without the knowledge and consent of the

management of the target firm, may unilaterally pursue the efforts to gain a

controlling interest in the target firm, by purchasing shares of the later firm at the

stock exchanges.

Such case of merger/acquisition is popularity known as raid. The caparo group of

the U.K. made a hostile takeover bid to takeover DCM Ltd. and Escorts Ltd.

Similarly, some other NRIs have also made hostile bid to takeover some other Indian

companies.

The new takeover code, as announced by SEBI deals with the hostile bids.

Takeover and merger

The distinction between a takeover and merger is that in a takeover the direct or

indirect control over the assets of the acquired company passes to the acquirer in a

merger the shareholding in the combined enterprises will be spread between the

shareholders of the two companies.

In both cases of takeover and merger the interests of the shareholders of the company

are as follows:

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1. Company should takeover or merge with another company only if in doing so, it

improves its profit earning potential measured by earning per share and

2. The company should agree to be taken if, and only if, shareholders are likely to be

better off with the consideration offered, whether cash or securities of the company

than by retaining their shares in the original company.

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MERGER PROCEDURE

A merger is a complicated transaction, involving fairly complex legal considerations.

While evaluating a merger proposal, one should bear in mind the following legal

provisions.

Sections 391 to 394 of the companies act, 1956 contain the provisions for

amalgamations. The procedure for amalgamation normally involves the following

steps:

1. Examination of object Clauses: The memorandum of association of both the

companies should be examined to check if the power to amalgamate is available.

Further, the object clause of the amalgamated company (transferee Company) should

permit it to carry on the business of the amalgamating company (transferor

company) .If such clauses do not exists, necessary approvals of the shareholders,

boards of directors and Company Law Board are required.

2. Intimation to stock Exchanges: The stock exchanges where the amalgamated and

amalgamating companies are listed should be informed about the amalgamation

proposal. From time to time, copies of all notices, resolutions, and orders should be

mailed to the concerned stock exchanges.

3. Approval of the draft amalgamation proposal by the Respective Boards: The

draft amalgamation proposal should be approved by the respective boards of directors.

The board of each company should pass a resolution authorizing its

directors/executives to pursue the matter further.

4. Application to the National Company Law Tribunal (NCLT): Once the draft of

amalgamation proposal is approved by the respective boards, each company should

make an application to the NCLT so that it can convene the meetings of shareholders

and creditors for passing the amalgamation proposal.

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5. Dispatch of notice to shareholders and creditors: In order to convene the

meeting of shareholders and creditors, a notice and an explanatory statement of the

meeting, as approved by the NCLT, should be dispatched by each company to its

shareholders and creditors so that they get 21 days advance intimation. The notice of

the meetings should also be published in two newspapers. An affidavit confirming

that the notice has been dispatched to the shareholders/creditors and that the same has

been published in newspapers should be filed with the NCLT.

6. Holding of Meetings of shareholders and creditors: A meeting of shareholders

should be held by each company for passing the scheme of amalgamation. At least 75

percent (in value) of shareholders in each class, who vote either in person or by proxy,

must approve the scheme of amalgamation. Likewise, in a separate meeting, the

creditors of the company must approve of the amalgamation scheme.

7. Petition to the NCLT for confirmation and passing of NCLT orders: Once the

amalgamation scheme is passed by the shareholders and creditors, the companies

involved in the amalgamation should present a petition to the NCLT for confirming

the scheme of amalgamation. The NCLT will fix a date of hearing. A notice about the

same has to be published in two newspapers. After hearing the parties the parties

concerned ascertaining that the amalgamation scheme is fair and reasonable, the

NCLT will pass an order sanctioning the same. However, the NCLT is empowered to

modify the scheme and pass orders accordingly.

8. Filing the order with the Registrar: Certified true copies of the NCLT order must

be filed with the Registrar of Companies within the time limit specified by the NCLT.

9. Transfer of Assets and Liabilities: After the final orders have been passed by the

NCLT, all the assets and liabilities of the amalgamating company will, with effect

from the appointed date, have to be transferred to the amalgamated company.

10. Issue of shares and debentures: The amalgamated company, after fulfilling the

provisions of the law, should issue shares and debentures of the amalgamated

company. The new shares and debentures so issued will then be listed on the stock exchange.

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Important elements of merger procedure are:

Scheme of merger

The scheme of any arrangement or proposal for a merger is the heart of the process

and has to be drafted with care. There is no specific form prescribed for the scheme. It

is designed to suit the terms and conditions relevant to the proposal but it should

generally contain the following information as per the requirements of sec. 394 of the

companies Act, 1956:

1. Particulars about transferor and transferee companies

2. Appointed date of merger

3. Terms of transfer of assets and liabilities from transferor to transferee

4. Effective date when scheme will came into effect

5. Treatment of specified properties or rights of Transferor Company

6. Terms and conditions of carrying business by Transferor Company between

appointed date and effective date

7. Share capital of Transferor Company and Transferee Company specifying

authorized, issued, subscribed and paid up capital.

8. Proposed share exchange ratio, any condition attached thereto and the fractional

share certificate to be issued.

9. Issue of shares by Transferee Company

10. Transferor companys staff, workmen, employees and status of provident fund,

Gratuity fund, superannuation fund or any other special funds created for the purpose

of employees.

11. Miscellaneous provisions covering Income Tax dues, contingent and other

accounting entries requiring special treatment.

12. Commitment of transferor and Transferee Company towards making an

application U/S 394 and other applicable provisions of companies Act, 1956 to their

respective High court.

13. Enhancement of borrowing limits of transferee company when scheme coming

into effect.

14. Transferor and transferee companies consent to make changes in the scheme as

ordered by the court or other authorities under law and exercising the powers on

behalf of the companies by their respective boards.

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15. Description of power of delegates of Transferee Company to give effect to the

scheme. Qualifications attached to the scheme which requires approval of different

agencies.

16. Effect of non receipt of approvals/sanctions etc.

17. Treatment of expenses connected with the scheme.

PROCESS OF MERGER AND ACQUISITION

Step I: Finding the Right Candidate

Few items to consider as initial filtering criteria:

The maximum and minimum revenue range

Geographic location

Years in business

Market share

Reputation (either good or poor)

Distribution channels

Technology provided

Corporate culture

Specific business strengths, such as R&D, sales/marketing, or production

Low-cost as opposed to high-price provider

Services or products provider

Industry

Publicly traded or privately held

Reputation of the management team

Services of an investment banker at this initial qualification stage:

These companies take a percentage of the transaction total (usually five to fifteen

percent) for assisting with the initial search and with the consummation of the final

deal.

Using a broker usually speeds up the filtering stage of the acquisition process, but it is

not cost-free.

Their fees must be paid at some point and are embedded into the purchase price.

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Additional considerations to be noted:

The M&A process can become quite complicated unless the transaction value is small

and the number of parties involved are few:

The Buyer has a team of experts, as does the seller.

Should either party be involved in publicly traded company, the complexity increases

again?

Should either party be involved in litigation of any kind, the complexity increases yet

again?

Step II: Initiate Discussions

The seller and buyer will have a number of internal meetings early in their respective

processes that help define the various objectives of the purchase/sale.

Notice that none of these meetings involve anyone outside of the immediate company

since this is the planning stage for both buyer and seller respectively.

The next meetings often involve a business broker who will assist in either marketing

the firm if you are the seller or finding viable acquisition targets for the buyer.

Once the target companies are determined, initial meetings will be set up to

investigate the willingness of the parties to either buy or sell.

After these initial meetings, a letter of intent (or letter of understanding or expression

of interest) is often prepared stating both parties desires to proceed to the next step.

This letter is critically important because it represents a written understanding

between the parties involved.

A letter of intent can be effectively used as a communication tool that ensures

that both parties are working in the same direction and with the same overall

intentions.

The seller and buyer both have a vested interest in finding deal stoppers at an early

stage.

Step III: The Due Diligence Stage

Due diligence is usually the most time-consuming, nerve wracking, and expensive

stage of the M&A process. The intent of this stage is to help the buyer understand the

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inner workings of the sellers company. The better the understanding, the more

realistic are the expectations and price.

It requires that the buyer be given a high degree of access to the selling companys

customers, financial records, legal records, and operations, sales, and marketing

functions. The due diligence teams are typically looking for items that either validate

the offered price or items that diminish the companys value and its purchase price.

What happens when both parties are direct competitors in the same industry space and

there is a possibility of the deal falling through?

What happens when both parties operate in the same industry space?

The seller does not want to reveal unnecessary information to the buyer, should the

deal not consummate in a final purchase.

This fear of disclosure is particularly acute when the buyer is the sellers direct

competitor, and for very good reason.

Every company would love to know the detailed financial, marketing, and sales

aspects of its competitor, and due diligence requires that this information be disclosed.

Should the transaction fall apart, the seller is placed at a decided disadvantage

compared to the buyer, who disclosed little or no confidential information about its

own internal processes during due diligence. Once again, the letter of intent comes

into play.

Sellers should make their secrecy boundaries clearly known in the letter of intent.The

buyer can either accept or reject those boundaries at this earlier stage instead of being

caught by surprise later.

Non disclosure agreements (NDAs) are also executed early in the process

specifically with the intent of protecting the secrecy needs of the parties involved.

Alternate approach

As an alternative approach to immediate full disclosure to the buyer by the seller, an

interim stage can be defined.

Here, the buyer gains access to certain information with the intention of deciding on a

purchase price and set of acceptance conditions.

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This approach provides both the seller and buyer with some level of protection. Due

diligence, by its very nature, pushes the threshold of confidential information

disclosure and should be treated with the respect it deserves.

Step III (A): A sample due diligence checklist

A legal structure review, including tax liabilities, employee disagreements, any other

pending litigation

A review of ownership and capitalization structure

A general breakdown of the customer base, with a more detailed analysis required to

make an effective assessment

A review of intellectual property rights, including trademarks, patents, and other areas

of unique and intrinsic value. This is particularly true for technology companies.

Outstanding loans that are guaranteed by the company and/or its owners

Technology evaluation that includes development tools, cycles, processes and

personnel. Key value areas should be highlighted and evaluated in light of acquisition

goals.

Financial statement review for the prior three to five years, including the minutes of

board meetings and so on

Annual reports and required stock exchange filings for any publicly traded company.

This action can also be taken during the prequalification screening stages.

Due diligence process in conclusion

Due diligence is a complicated process which should be given major emphasis.

It is that stage where the buyer determines whether the target company is worth

pursuing.

Sellers also get a chance to learn more about the internal workings at the buyers

company, which also enables them to determine for themselves if a cultural fit

between the two exists.

A willing seller is critical during due diligence. The integrity of all parties must be

intact or the seller could fight the buyers information requests at every step, making

it a tough and stressful process for all concerned.

Further, due diligence works both ways, especially if the buyer expects the seller to

take stock.Due diligence is an integral and critical part of the M&A process.

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The way it is handled tells a lot about the buyer and seller while providing the

foundation upon which a final purchase price is based.

The more the buyer and seller know about each other, the more accurately they can

assess the likelihood of a successful future business relationship. Plan for this process

takes time. Spend the required time in the due diligence stage and thoroughly

understand what you are committing to with the sale or purchase.

Arranging finance:

Financing depends on the financial condition of the acquired company as well as the

acquiring company.

The buying and/or selling company must be creditworthy or the deal will simply not

go through.

Buyers have usually lined up financing when the letter of intent is signed sellers can

ask about the buyers ability to fund the purchase before signing the LOI.

Sellers may seriously consider stalling the M&A stage until the buyer has shown itself

to be creditworthy.

Negotiating & signing agreements:

The lawyers begin negotiating the specific terms and condition of the deal. The role of

the business manager is to make sure the overall business intentions are met. The endresult should be a legally binding agreement that also makes business sense.

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MERGER AND ACQUISITION IN TELECOMMUNICATION INDUSTRY:

The telecommunication industry witnessed the first round of merger wave

through the Birla-Tata-AT&T consortium.

Tatas acquisition of VSNL Ltd., the largest ISP subscriber, provided the

company NLD licence, 32 earth stations, 12 international gateways and link to

five submarine cables, and importantly, it got assured traffic from the state

owned BSNL and MTNL for two years. VSNL later acquired Tyco Global Network for $130 million in all cash deal which would give it a control over

the 60,000km cable network spanning over three continents.

Reliance Infocomm bought Flag Telecom to get access to the undersea cable

network, to enable them to connect key regions like Asia, Europe and the US.

The acquisition of Hutchisons stake in Essar by Vodafone was the largest

ever consolidation in telecom space, with an enterprise value of $19 billion.

Mergers and Acquisitions In Telecommunication Industry

Acquirer Target Sector Stake (%) Value Date

NTT-DoCoMo

Tata-Teleservicesltd.

Tele-Communications

26% $2.7 billion 13-11-08

Vodafone HutchisonEssar

Tele-Communications

67% $11.1 billion -02-2007

Bharti Zain Tele-Communications

100% $10.7 billion -03-2010

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NTT- DoCoMo-Tata- Teleservices ltd.Japanese Telecom giant NTT DoCoMo acquired 26 per cent stake in TataTeleservices. With a subscriber base of 25 million in 20 circles, the company paid Rs20107 per subscriber to acquire the stake.

Vodafone-Hutchison EssarVodafone bought the controlling stake of 67% held by LI Ka Shing Holdings inHutch Essar

Bharti-ZainBharti entered into a legally binding definitive agreement with Zain Group (Zain) toacquire the sale of 100% of Zain Africa BV, its African business excluding itsoperations in Morocco and Sudan, based on an enterprise valuation of USD 10.7

billion. Under the agreement, Bharti will acquire Zains African mobile servicesoperations in 15 countries with a total customer base of over 42 million.

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CHAPTER-2 REVIEW OF LITERATURE

2.1 LITERATURE REVIEW

1. Jarrod McDonald, Max Coulthard, and Paul de Lange(2005) analysis say thatthe Mergers and acquisitions (M&As) continue to be a dominant growth

strategy for companies worldwide. This is in part due to pressure from key

stakeholders vigilant in their pursuit of increased shareholder value. It is

therefore timely to identify key planning steps that will assist CEOs and

company boards to achieve M&A success.

This study used semi-structured interviews to: identify the link between

corporate strategic planning and M&A strategy; examine the due diligence

process in screening a merger or acquisition; and evaluate previous experience

in successful M&As.

The study found that there was a clear alignment between corporate and M&A

strategic objectives but that each organisation had a different emphasis on

individual criterion. Due diligence was also critical to success; its particular

value was removing managerial ego and justifying the business case. Finally,

there was mixed evidence on the value of experience, with improved results

from using a flexible framework of assessment. 1

1 Jarrod McDonald, Max Coulthard, and Paul de Lange,Planning for a successful

merger or acquisition, Global Business and Technology, Volume 1, Number 2,

Year:2005

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2. Rhodes (2002) analysis say that the merger and acquisition will immediately

impact the company with changes in ownership, in ideology, and eventually in

practice. In order to have a more successful expansion, the company should

provide some marketing strategy for the company. The company should

provide a strategy that could generate revenues and profits from three sources

and these are sales at company-owned stores, royalties from possible franchise

stores and franchisee fee from the new store openings and sales of soft drinks.

Expansion of the business is an important and interesting approach that needs

to emphasize, it is important for the company to meet the demand with an

adequate supply of goods and services. This can be accomplished by effective

distribution channels and effective marketing. By cutting back on the costs

involved in making and marketing, the company, less expensive and can be

more profitable soft drinks can be produced. 2

2 Rhodes, K. Making Mergers a Growth Strategy , Root Strategic Assets, Spring , Year:2002.

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CHAPTER 3 : RESEARCH METHODOLOGY

3.1 OBJECTIVE OF THE STUDY:

To analyze the effect of going global through merger and acquisition

on investors earnings respectivelyImpact on companies financial position after acquisition or after being

acquired

To compare the closing price of 3 companies before and after post

acquisition

To compare the key financial ratios of 3 companies before and after

acquisition

To analyze percentage cumulative abnormal return of one month both before acquisition and after acquisition

To achieve synergy in business operations.

3.2 RESEARCH DESIGN:

Type of research:

Exploratory Research

Exploratory studies help in understanding and assessing the critical issues of problems. However, the study results are used for subsequent research to

attain conclusive results for a particular problem situation. Exploratory studies

are conducted for three main reasons, to analyze a problem situation, to

evaluate alternatives and to discover new ideas.

3.3 SOURCES OF DATA COLLECTION:

The study that is conducted being exploratory one the research source of data

used is of two types:

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Primary Data

Secondary Data

Primary data: Interaction by personally talking with some of expert.

Secondary data: is collected from various sources like internet, books,

newspapers & magazines.

Books:-Mergers and Acquisitions text and cases by B Rajesh

Kumar, Corporate Restructuring by Prasad G. Godbole.Cases:-of the NTT DoCoMo- Tata Teleservices, Vodafone-

Hutchison Essar, Bharti-Zain.

Journals:- Journal of Global Business and Technology(2005),

Root Strategic Assets, Spring(2002).

3.4 SCOPE OF THE STUDY:

To know about effective organizational growth.To know how company increases its revenue/ market share/ market

power.

To know companies innovation/ Discoveries in products and

Technology.

To know how company responses to economic scenarios and increased

speed to market.

3.5 LIMITATIONS OF THE STUDY:

The study is limited to three selected companies of Telecommunication

Industry only.

The study is limited to analyze short term performance of the merger &

acquisition.

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m&a in telecommunication industry

Documents