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PROJECT SUBMITTED IN PARTIAL FULFILMENT OF
THE REQUIREMENT FOR THE DEGREE OF B.COM.
(HONOURS)
BY : VIKAS GARG SUBMITTED TO:
B.COM (HONS.) DR. AJAY NARAIN
III YEAR
ROLL NO: 07/029009
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ACKNOWLEDGEMENT
I am extremely grateful to my mentor,DR. AJAY NARAINof
Commerce Department, DYAL SINGH COLLEGE ,whoprovided valuable comments and suggestions from time to time forthe accomplishment of my project.
His valuable encouragement made it possible for me to complete
the project in its present form.
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DECLARATION
This is to certify that the present project work is based on my understanding
of the subject and has not been copied from some published source or
website. My indebtedness to the other works on the subject has been
acknowledged at relevant places.
This project work has not been submitted in part or full for any other degree
or diploma of any University.
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MERGERS AND ACQUISITIONS
CONCEPT
Corporate Restructuring
Restructuring of business is an integral part of the new economic paradigm.
As controls and restrictions have given 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 (green field investments), R & D at product and process
levels, hiving-off of non-core activities, sell-offs, etc.
It can also take place externally through mergers and acquisitions (M & As)
by which a company may acquire another company or by forming joint
ventures with other companies.
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ACQUISITION
An acquisition may be effected by either of the following:
(a) An agreement with the person holding majority interest in the
company management,
(b) purchase of new shares by private agreement,
(c) purchase of shares in the open market (open offer),
(d) acquisition of share capital of a company by means of cash,
issuance of share capital, and etc.
(e) making a buyout offer to general body of shareholders.
MERGER
Merger has been defined as an arrangement whereby the assets of two or
more companies become vested in, or under the control of one company
(which may or may not be one of the original two companies), which has, as
its shareholders, all or substantially all the shareholders of the two
companies.
It may also include fusion of two or more companies. In merger, one of the
two existing companies merges its identity into another existing company, or
one or more of existing companies may form a new company and merge
their identities into the new company by transferring their businesses and
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undertakings including all other assets and liabilities to the new company
(i.e., merged company)
The situation may be illustrated as under:
There are two companies A and B which decide to merge:
Option IWhere A Company merges into B Company.
Option II
Where B Company merges into A Company. Combined
merged company emerges as A Ltd.
Option III
A Company and B Company both merge to form a new
Company C. Combined merged company as C Ltd.
Examples: Examples of mergers are:
Conglomerates-corporations that are not customers or suppliers to each
other or competitors.
Corporations-union of 2 or more by transferring property to one that
survives, and issuing its shares to stockholders of the corporation that
ceases to exist.
DEMERGER
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Demerger is the converse of a merger or acquisition. It is a corporate
strategy to sell off subsidiaries or divisions of a company. It describes a form
of restructure in which shareholders or unit holders in the parent company
gain direct ownership in a subsidiary (the demerged entity). Underlying
ownership of the companies and/or trusts that formed part of the group does
not change. The company or trust that ceases to own the entity is known as
the demerging entity. If the parent company holds a majority stake in the
demerged entity, the resulting company is referred to as the subsidiary.
Demergers can also result from government intervention, usually by way of
anti-trust/competition law, or through decartelization.
For example: In 2001 British Telecom did a de-merger of its mobile phone
arm, BT Wireless, in an attempt to boost the performance of its stock. British
Telecom took this action because it was struggling under high debt levels
from the wireless venture.
When a company is acquired by another company, the acquiring company
has two options:
http://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Anti-trusthttp://en.wikipedia.org/wiki/Decartelizationhttp://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Anti-trusthttp://en.wikipedia.org/wiki/Decartelization -
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Merge both the companies into one and operate as single
entity
Operate the taken over company as an independent
company, probably with changed management and changed
policies.
The first option is known as merger and the second option is known as
takeover.
MERGERS AND TAKEOVERS
The distinction between a takeover and merger is that, in a takeover, the
direct 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:
(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
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(2) Company should agree to be taken over 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.
TYPES OF TAKEOVER BID
There are two types of takeover bid-
(1) Friendly takeover bid
(2) Hostile takeover bid
FRIENDLY TAKEOVER
Takeover takes place generally through negotiations, i.e., with willingness
and consent of acquirer companys executives or board of directors. Such
takeover is called friendly takeover. This takeover is through negotiating
and if parties do not reach an agreement during negotiations, the proposal of
takeover stands terminated and dropped out. Friendly takeover bid is thus
with the consent of majority or all of the shareholders of target company.
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HOSTILE TAKEOVER
When a company does not propose to acquire another company but silently
and unilaterally pursues efforts to gain controlling interest in it against the
wishes of the management, it is called an attempt at hostile takeover.
There are various ways in which the acquirer company may pursue the
matter to acquire controlling interest in another company. These acts are
called takeover raids or hostile takeover bids.
Hostile takeovers are small but significant part of global M & A market.
They are frequently used in developed markets of US and UK to unlock
value for shareholders.
They have beneficial impact on the economy. They keep the company
management on guard and compel them to perform at higher levels of
efficiency. They encourage optimum utilization of resources.
For minority shareholders, hostile takeovers are again beneficial since they
ensure that management works for improving shareholder value.
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TYPES OF MERGERS
A merger refers to the process whereby at least two companies
combine to form one single company. Business firms make use of mergers
and acquisitions for consolidation of markets as well as for gaining a
competitive edge in the industry. Merger types can be broadly classified into
the following five subheads as described below:-
They are Horizontal Merger, Conglomeration, Vertical Merger, Product-
Extension Merger and Market-Extension Merger.
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.
Conglomeration refers to the merger of companies, which do not
either sell any related products or cater to any related markets. Here,
the two companies entering the merger process do not
possess any common business ties.
Vertical Merger is effected either between a company and a customer
or between a company and a supplier.
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
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in for a pooling in of their products so as to serve a common market,
which was earlier fragmented among them.
Market-Extension Merger occurs between two companies that sell
identical products in different markets. It basically expands the market
base of the product.
Benefits of Mergers and Acquisitions
Merger refers to the process of combination of two companies, whereby a
new company is formed. An acquisition refers to the process whereby a
company simply purchases another company. In this case there is no new
company being formed. Benefits of mergers and acquisitions are quite a
handful.
Mergers and acquisitions generally succeed in generating cost efficiency
through the implementation of economies of scale. It may also lead to tax
gains and can even lead to a revenue enhancement through market share
gain.
BIRDS EYE VIEWOF THE BENEFITS ACCRUING
FROM MERGERS AND ACQUISITIONS:
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The principal benefits from mergers and acquisitions can be listed as
increased value generation, increase in cost efficiency and increase in market
share. Mergers and acquisitions often lead to an increased value generation
for the company. It is expected that the shareholder value of a firm after
mergers or acquisitions would be greater than the sum of the shareholder
values of the parent companies.
An increase in cost efficiency is affected through the procedure of mergers
and acquisitions. This is because mergers and acquisitions lead to economies
of scale. This in turn promotes cost efficiency. As the parent firms
amalgamate to form a bigger new firm the scale of operations of the new
firm increases. As output production rises there are chances that the cost per
unit of production will come down.
An increase in market share is one of the plausible benefits of mergers and
acquisitions. In case a financially strong company acquires a relatively
distressed one, the resultant organization can experience a substantial
increase in market share. The new firm is usually more cost-efficient and
competitive as compared to its financially weak parent organization.
It can be noted that mergers and acquisitions prove to be useful in the
following situations:
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Firstly, when a business firm wishes to make its presence felt in a
new market.
Secondly, when a business organization wants to avail some
administrative benefits.
Thirdly, when a business firm is in the process of introduction of new
products. New products are developed by the R&D wing of a
company.
MERGERS AND ACQUISITIONS IN INDIA
India is the land of marriages and we are experiencing the rush of the
corporate marriages.
The process of mergers and acquisitions has gained substantial importance in
todays 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. 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
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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.
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.
MERGERS AND ACQUISITIONS IN INDIA: THE
LATEST TRENDS
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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.
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MERGERS &ACQUISITIONS
Amalgamations
Merger De-merger
Acquisitions
Takeovers
Friendlytakeover
Hostiletakeover
Conglomeration
Vertical merger
Horizontalmerger
Product-extension
Market-extension
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INDIAN MERGERS AND ACQUISITIONS: THE CHANGING FACE
OF INDIAN BUSINESS
Until upto a couple of years back, the news that Indian companies
having acquired American-European entities was very rare. However, this
scenario has taken a sudden U turn. Nowadays, news ofIndian Companies
acquiring foreign businesses is more common than other way round.
Buoyant Indian Economy, extra cash with Indian corporates, Government
policies and newly found dynamism in Indian businessmen have all
contributed to this new acquisition trend. Indian companies are now
aggressively looking at North American and 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 an indication of the maturity reached by
Indian Industry but also the extent of their participation in the overall
globalization process.
Here are the top 10 acquisitions made by Indian companies worldwide:
http://trak.in/tags/business/2007/08/16/indian-mergers-acquisitions-changing-indian-business/http://trak.in/tags/business/2007/08/16/indian-mergers-acquisitions-changing-indian-business/http://trak.in/Tags/Business/2007/05/30/india%E2%80%99s-new-found-confidence-global-acquisitions/http://trak.in/Tags/Business/2007/05/30/india%E2%80%99s-new-found-confidence-global-acquisitions/http://trak.in/Tags/Business/2007/07/02/the-indian-mergers-and-acquisitions-are-growing-exponentially/http://trak.in/Tags/Business/2007/07/02/the-indian-mergers-and-acquisitions-are-growing-exponentially/http://trak.in/Tags/Business/2007/04/30/the-indian-economy-can-it-be-stopped-somehow/http://trak.in/Tags/Business/2007/04/28/indian-it-companies-flush-with-cash/http://trak.in/Tags/Business/2007/06/20/vijay-mallya-kingfisher-airlines-enters-overseas-market-biggest-airbus-order/http://trak.in/Tags/Business/2007/05/30/india%E2%80%99s-new-found-confidence-global-acquisitions/http://trak.in/tags/business/2007/08/16/indian-mergers-acquisitions-changing-indian-business/http://trak.in/tags/business/2007/08/16/indian-mergers-acquisitions-changing-indian-business/http://trak.in/Tags/Business/2007/05/30/india%E2%80%99s-new-found-confidence-global-acquisitions/http://trak.in/Tags/Business/2007/05/30/india%E2%80%99s-new-found-confidence-global-acquisitions/http://trak.in/Tags/Business/2007/07/02/the-indian-mergers-and-acquisitions-are-growing-exponentially/http://trak.in/Tags/Business/2007/07/02/the-indian-mergers-and-acquisitions-are-growing-exponentially/http://trak.in/Tags/Business/2007/04/30/the-indian-economy-can-it-be-stopped-somehow/http://trak.in/Tags/Business/2007/04/28/indian-it-companies-flush-with-cash/http://trak.in/Tags/Business/2007/06/20/vijay-mallya-kingfisher-airlines-enters-overseas-market-biggest-airbus-order/http://trak.in/Tags/Business/2007/05/30/india%E2%80%99s-new-found-confidence-global-acquisitions/ -
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GRAPHICAL REPRESENTATION OF INDIAN
OUTBOUND DEALS SINCE 2000:-
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The above graph shows that the mergers and acquisitions in the Indian
Corporate World are rising every year by an enormous amount.
MERGERS AND ACQUISITIONS IN INDIA IN 2007
India Inc's appetite for mergers and acquisitions has seen deal value nearly
double in just two months of 2007 to about 37 billion dollars from 20 billion
dollar in the entire 2006.
There were total 102 M&A deals worth 36.80 billion dollars in January and
February 2007 as against 480 deals for 20.30 billion dollar in 2006,
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according to data complied by research and advisory firm GranThornton
India.
The deals in 2007 are much larger as is evident from the fact that only 102
transactions were worth over 36 billion dollars.
There were 41 domestic deals with a total value of 0.62 billion dollar.
Besides, there were 21 in-bound cross-border deals worth 15.18 billion
dollar and 40 out-bound deals with a total value of 21 billion dollars.
THE SIGNIFICANT MERGERS AND ACQUISITIONS IN THE
INDIAN CORPORATE WORLD IN 2007 INCLUDE:
MAHINDRA & MAHINDRA
One of the first overseas acquisitions by India Inc. in 2007 which received
little or no notice was Mahindra & Mahindra Ltd's takeover of 90 per cent
stake in Schoneweiss & Co. GmbH, a family-owned German forgings
company with over 140 years of experience in the sector.
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Among the top five axle beam manufacturers in the world, the company
specialises in suspension, power train and engine parts, and its top customers
include the DaimlerChrysler Group, MAN, Scania and Volkswagen.
Schoneweiss has three manufacturing plants in Hagen and Gevelsberg,
Germany, with a total manpower of 550 people.
M&M was convinced that the acquisition would create a strong European
base and would consolidate its position towards becoming a globally
significant player in the forgings business.
TATA-CORUS DEAL
INDIAN conglomerate Tatas 6bn acquisition of Corus Group Plc that
made it the worlds sixth-largest steelmaker has been ranked among the 10
best business deals of 2007. Tata Steels acquisition of Corus for 6bn
($11.3bn) was the biggest overseas acquisition by an Indian company.
The Tata-Corus (the Anglo-Dutch steelmaker), which hit the headlines on
the last day of January, illustrated that Indian companies who used to do
small deals are now prepared to use their cash mountains for larger
acquisitions.
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Tata won the battle to take over Anglo-Dutch steelmaker Corus in January
after offering 608p per share, ahead of rivals Brazilian firm CSN. This deal
apparently offered the promise of access to high-end European markets
combined with low-cost Indian manufacturing. It is incredible and makes
Indians hold their heads high in pride.
BIRLAS HINDALCO BUYS ALUMINIUM GIANT NOVELIS
Indian business conglomerate Aditya Birla group-owned flagship company
Hindalco Industries Ltd. agreed to take over Atlanta-based aluminum giant
Novelis Inc. which was seen as the second largest foreign acquisition by an
Indian company.
On 10 February 2007, Hindalco entered into an agreement with Novelis to
acquire the company in an all-cash transaction which values Novelis at
approximately US$ 6.0 billion, including debt.
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Hutchison Essar, Vodafone contended that the price was worth paying as the
deal would help it get a massive footprint in one of the most competitive
telecommunication markets in the world. Vodafone planned to bring world
class branding to India after the 'Hutch' brand was replaced by the Vodafone
brand name and wanted to build up its numbers in the Indian market mostly
by expanding into the rural areas.
MERGERS AND ACQUISITIONS IN INDIA IN 2008
2008 has not kept pace with the momentum gained last year. This year has
not been good for India overall. The total number of Merger & Acquisition
deals has seen huge negative growth. During the first six months of 2008,
total M&A deals stand at 265 with value at $18.54 billion as against 335
deals amounting to $ 43.97 billion in the corresponding period in 2007.
Indian firms have announced deals worth $6.8 billion so far in 2008, down
39 percent from the same period last year. However, the month of August
has seen a record high in the value of mergers and acquisitions (M&A) deals
announced in the country. According to reports, the total value of M&A and
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Even as Malvinder Singh would continue as CEO and MD of the entity,
which would retain its Ranbaxy brand, the family would net in about
Rs 10,000 crore (Rs 100 billion) by selling their stake.
Singh would also assume the position of chairman of the board upon the
deal's closure that is expected by March 2009.
Post acquisition, Ranbaxy would become a debt-free firm with a cash
surplus of around Rs 2,800 crore (Rs 28 billion).
Daiichi Sankyo has operations in 21 countries and by entering into
agreement with Ranbaxy; it will have presence in 60 countries globally.
There would be 10 members in the board and Ranbaxy would appoint four
members, including Malvinder Singh, while the rest of the members would
be from Daiichi Sankyo.
The deal puts Ranbaxy on a new and much stronger platform to harness its
capabilities in drug development, manufacturing and global reach.
According to Malvinder Singh, with this, they will see significant growth in
their business in Japan as the generic drugs market in the country is also
opening up.
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Idea-Spice deal 4th largest M&A in India
The buyout of Spice Telecom by Idea Cellular is the fourth largest merger
and acquisition deal involving an Indian entity and may be a pre-cursor to
more such transactions in the telecom space.
The country's fifth-largest mobile operator in terms of subscribers, Idea
Cellular acquired B K Modi-owned Spice group's 40.8 per cent stake in
Spice Communications.
The deal consists of 4 transactions:
Idea will acquire the Modis 40.8% stake in Spice (for Rs 2,720
crore).
Idea will launch the mandatory 20% open offer for the Spice
shareholders, jointly with Telekom Malaysia International (TMI).
Idea will merge Spice with itself and offer a 14.99% stake to TMI
through a preferential allotment.
The Idea-TM combine will launch the open offer at Rs 77.30 jointly
with TMI, which now holds 39.2%in Spice
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Idea will earn Rs 7,294 crore ($1.7 billion, assuming an exchange rate of Rs
43) by selling the 20% stake to TMI (making it one of the largest infusions
of FDI into India.)
Spice shareholders will get 49 Idea shares (after the TMI preferential
allotment) for every 100 shares they hold and the deal is supposed to be over
by end of 2008.
The deal gives Idea an entry into the Punjab and Karnataka markets, and
Spices 4.4 million customers, while Spice founders, Modi plans to expand
into entertainment, handset business.
MERGER OF HDFC BANK AND CENTURION BANK OF PUNJAB
On May 23, 2008, the amalgamation of Centurion Bank of Punjab with
HDFC Bank was formally approved by Reserve Bank of India to complete
the statutory and regulatory approval process. As per the scheme of
amalgamation, shareholders of CBoP received 1 share of HDFC Bank for
every 29 shares of CBoP. The name of the bank would remain as HDFC
BANK.
The shareholders of erstwhile CBoP have been allotted 6, 98, 83,956 equity
shares of Rs.10/- each pursuant to the share swap ratio. The merger has been
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accounted for as per the pooling of interest method of accounting in
accordance with the scheme of amalgamation. The merger will allow HDFC
Bank to extend its reach in the country before a central bank review next
year that may allow foreign banks such as Citigroup and Standard Chartered
to buy Indian lenders.
The amalgamation added significant value to HDFC Bank in terms of
increased branch network, geographic reach, and customer base, and a
bigger pool of skilled manpower.
INDIAS NEW-FOUND CONFIDENCE: GLOBAL ACQUISITIONS!
Most of the Americans may have never heard of these Indian companies:
Reliance Gatewaynet, VSNL, Scandent and GHCL - but these are growing
number of Indian companies who have recently acquired US firms. The
news of Indian company acquiring a US firm may have been a surprising to
most just a few years back, but not now - It is become a common place in
todays world.
And these US acquisitions are a very small part of the bigger picture. Indian
companies have been on a buying spree in Continental Europe in the quest to
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become players in the global market. Very recently, Tata Steel bought the
English-Dutch steel makerCorus for a staggering deal of $12 billion. These
are the signs that global commercial and industrial leadership is beginning to
pass from the West to emerging economies like India.
FROM WHERE HAS THIS CONFIDENCE COME IN INDIAN
BUSINESSES?
The outsourcing phenomenon, especially in IT Industry has helped Indian
companies in lot of direct and indirect ways. First and foremost, it has
ensured that Indian managers and executives are now far more exposed to to
Western business culture and practices. Over a period of time, the Indian
offshore companies have created an image of reliable low cost, yet high
quality products and services. Outsourcing/Off shoring companies have
increased their profits exponentially. There is a lot more cash available with
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Indian companies than ever before. Their capacity to borrow large amount of
cash has also gone high.
WHAT DOES ALL THIS RESULT INTO - ACQUISITIONS
Indian companies are now eyeing Global markets instead of domestic to
move up the growth ladder. If you are a large company, you need to have a
presence in US and Europe. Managers and Executives of Indian companies
are taking much higher Risks than ever before.
Also, the regulatory changes have made the whole process of acquisition
much easier than ever before. Some restrictions like the amount of Foreign
exchange entering India have been relaxed. The result is that Indian
companies are flush with foreign exchange !
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CHANGING ASPECT OF MERGERS AND ACQUISITIONS
With the non-availability of finance and the changing economic scenario,
2008 has seen drop in M&A activity of Indian companies, both domestically
and overseas. While lower valuations may attract further activity among
listed companies, the outlook is likely to remain subdued.
Indian M&A (mergers and acquisitions) has seen two distinct changes since
January 2008. First, following the precedent of the Ranbaxy deal, it is now
possible to contemplate Indian promoters giving up their flagship businesses,
and second, hostile takeovers are back on the agenda. When the Singh
family sold Ranbaxy Laboratories to Daiichi Sankyo it took everyone by
surprise. This deal may well have opened the door for other such
transactions in the future. Indian promoters, who were considered to be
sentimentally attached to their businesses, are now analyzing their business
portfolio and may be willing to cash out at right values.
Hostile takeovers, taboo in the Indian corporate world, are suddenly being
talked about. Emami is in the process of acquiring control of Zandu through
a hostile takeover. Ranbaxy Laboratories had also taken a significant stake in
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Orchid Chemicals and forged a strategic tie-up with the company. Of late
there has been news of Videocon acquiring a stake in Archies and
Temptation Foods acquiring in Kohinoor through market purchases. The
success of one hostile takeover will pave the way for more.
BIBLIOGRAPHY:
www.trak.in
www.economywatch.com
www.livemint.com
www.walesonline.com
www.domain-b.com
www.financialexpress.com
www.thehindubusinessline.com
www.investopedia.com
http://www.trak.in/http://www.economywatch.com/http://www.livemint.com/http://www.walesonline.com/http://www.domain-b.com/http://www.financialexpress.com/http://www.thehindubusinessline.com/http://www.trak.in/http://www.economywatch.com/http://www.livemint.com/http://www.walesonline.com/http://www.domain-b.com/http://www.financialexpress.com/http://www.thehindubusinessline.com/ -
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