A Journal of Radix International Educational and Research Consortium RIJEB RADIX INTERNATIONAL JOURNAL OF ECONOMICS & BUSINESS MANAGEMENT MERGER AND ACQUISITION IN INDIA: A CONSOLIDATED STUDY DR. PROBHAT KUMAR PAL Assistant professor in Commerce Rishi Bankim Chandra College Naihati, West Bengal, India DR. SK. SIRAJUDDIN Assistant professor in Commerce Saldiah College Bankura, West Bengal, India DR. PANKAJ KUMAR PAUL Assistant Teacher Badla High School Badla, West Bengal, India ABSTRACT The Indian economy is progressing rapidly in every sector be it, IT, telecom, energy, financial services, hospitality etc. Indian economy is the second fastest growing economy in the world after China. In this situation investors are eagerly willing to invest in India where rate of return on capital employed and hence shareholders return is high. As a result merger and acquisition has increased dramatically. Through mergers and acquisitions, a company gets the competitive advantage and ultimately increases the return to the shareholders. The present study categorically analyses the economic scenario, business political background, legal provisions of different corporate, economic, foreign exchange and taxation laws 1 P a g e www.rierc.org
regarding merger and acquisition in the Indian context. The study attempts to show the cost benefit analysis of recent mergers and acquisitions in India from the shareholders return and wealth creation point of view. After a trend analysis the study finds out the rationale behind merger and acquisition in present Indian context. Finally the study comes to a conclusion that despite negative aspects, M&A will continue to be an important tool to increase the growth of rate of return and wealth to the shareholders. Key Words: Merger, Acquisition, Growth, Wealth, Competitive Advantage INTRODUCTION The Indian economy is progressing rapidly in every sector be it, IT, telecom, energy, financial services and hospitality etc. Indian economy is the second fastest growing economy in the world after China. In this situation investors are eagerly willing to invest in India where rate of return on capital employed and hence shareholders return is high. As a result merger and acquisition has increased dramatically. Besides, the presence of foreign investors and the reform process taken by the Indian Govt. since 1991 have induced the Indian enterprises to take the path of growth or expansion. Through mergers and acquisitions, a company gets the competitive advantage and ultimately increases the rate of return to the shareholders. A firm can achieve growth internally or externally. Internal growth can be achieved by expanding its existing activities, by up scaling capacities or by establishing new firm with fresh investments in existing product markets. In case of internal growth a firm can face certain problems i.e. market size may be limited, existing product market may not have growth potential, Govt. restriction may be on capacity enhancement, firm may not have 2 P a g e www.rierc.org
specialized knowledge to enter into new product/market and it takes longer period to establish own units and yield positive return. Alternative way to achieve growth or expansion is external arrangements like mergers and acquisitions. External alternative of corporate growth have certain advantages. In case of diversified mergers firm can use resources and infrastructure that are already there in place. While in case of congeneric mergers it can avoid duplication of various activities thus can achieve operating and financial efficiency. In addition, economic circumstances of industries may also favor mergers and acquisitions. Merger takes place when a new company is created by dissolving the existing companies. The assets and liabilities of the existing companies are transferred to the new company. Acquisition may be called as a takeover or buyout. Acquisition is the purchase by one company of controlling interest in the share capital, or all or substantially all the assets and/or liabilities of another company. LEGAL PROVISION FOR MERGER, AMALGAMATION AND TAKEOVER I) Section 390 to 395 of companies act 1956 deal with arrangements, amalgamations, mergers and the procedure to be followed for getting the arrangement, compromise or the scheme of amalgamation approved. II) Sec. 5 of the companies act,2002deals with combination which defines combination by reference to assets and turnover a) exclusively in India and b) in India and outside India. Sec.6 of the companies act.2002 states that, no person or enterprise shall enter into a combination which causes or likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. 3 P a g e www.rierc.org
III) Foreign exchange management act, 1999, SEBI takeover code 1994, Indian income tax act 1961 along with regulation by the proper authority to be followed during merger and acquisition. BENEFITS OF MERGER AND ACQUISITION Mergers and acquisitions improve the performance of the company due to economies of scale, operating synergy and financial synergy. a) Economies of Scale An economy of scale is the reduction of cost due to large number of units produced. Fixed cost per unit reduces due to large number of units produced with the same production capacity. Due to merger size of the firm increases and more raw materials are purchased at better terms than earlier which reduce the variable cost per unit also. As a result total cost of production per unit decreases. b) Operating Synergy Mergers and acquisitions avoid the duplication of cost like duplicating advertisement expenses, duplicating sales and distribution expenses etc. c) Financial Synergy Mergers increase the debt capacity of the firm, especially in case of diversified mergers, where cash flows of the two companies are not positively correlated. This decreases 4 P a g e www.rierc.org
lender s risk and as a result cost of capital decreases. Financial synergy can also be obtained by reducing interest or taking benefits of tax shield and depreciation. ASPECTS OF MERGERS AND ACQUISITIONS Mergers and acquisitions are accelerating in India ue to technological changes, reduction of cost, increased competition, favorable economic and financial environment, efficiency of operation, economies of scale, operating synergy, financial synergy, value creation through specialization, under capacity utilization etc. Unfortunately many mergers and acquisitions never fully achieve their objectives. Eight aspects should be considered to make the mergers and acquisitions successful. 1) Early communication to the stake holders; 2) Well defined mergers and acquisitions strategy; 3) Proper evaluation of different alternatives; 4) Establishing a price; 5) Strategic due diligence; 6) Post merger financial, organizational and cultural integration; 7) Post merger communication; 8) Performance evaluation EARLY COMMUNICATION TO THE STAKEHOLDERS Good communication is essential to successful mergers and acquisitions. Early communication is needed to get the interested person into confidence. Communication is required even before a formal merger and an acquisition is underway. If the employees feel that management is keeping information from them, they begin to feel anxious. As a result, 5 P a g e www.rierc.org
productivity starts to fall as staff waste time in discussing rumors and losing their morale. Some staff starts to leave the company before having insured about their job and company s future prospect. Employees face the following type of confrontation before them: a) loss of job and influence; b) uncertainty about employee s plan; c) enhancement of workload due to leaving of people voluntarily or involuntarily; d) Psychological effect on individuals lives. Effective communication is needed to address these type of problems faced by the employees a) top management should take into consideration the technical and financial aspects of the deal on employees and customers also; b) trained managers are required to deal with the human related issues. A manager should have good leadership attitude; c) lack of flow of information from the top management to the supervisory level creates communication vacuum. Supervisor will not know enough information to satisfy the day to day needs of their staff. This dissatisfaction will undermine the positive aspects of the merger. WELL DEFINED MERGERS AND ACQUISITIONS STRATEGY Mergers and acquisitions strategy should be well defined and clear. There should be clear explanation regarding value creation transactions and value destroying transactions. 6 P a g e www.rierc.org
EVALUATION OF DIFFERENT ALTERNATIVES The following questions should be addressed before mergers and acquisitions: a) Will the deal bring long term value addition to the shareholders? b) Will the integration process be successful? c) Will management resources be leveraged or sustained? d) Are the two entities culturally compatible? ESTABLISHING A PRICE Price for any acquisition should be considered from long term view point. Its true economic value can be determined on the basis of projections that extend over many decades. For instance, for sale or purchase of financial institution four major elements should be considered: a) Shareholders equity b) The value of its current book of business as projected over the long term c) The value of its market franchise d) The distribution network and its administrative system e) The synergistic value of the company will bring to its acquirer. Strategic due diligence It provides a more comprehensive look at every aspects of the target company. This deeper and more sophisticated investigation and analysis of the target company helps a potential acquirer to test the strategic reasons of purchasing. The sales force and product pricing are 7 P a g e www.rierc.org
not the only components of a target company that require careful due diligence. It is necessary to consider assets, liabilities (both current and potential), reserve, expense structure, true economic value rather than accounting profit, the quality of management and the synergistic possibilities. Post merger integration Integration is the key to a successful merger or acquisition. Financial, organizational and cultural integration help to build a powerful organization. In some cases, significant changes in the financial structures of the participating companies can serve to increase the value of the merged company. Organizational changes are likely to be necessary. Administrative differences can be sorted out more easily than cultural differences that exist between company cultures. In many organizations, cultures are part and parcel of every employee s psyche. In the long run bridging this cultural gap can be a key to successful merger and acquisition. Integration also involves the resolution of differences to marketing, administration, finance, customer service, information technology and other areas. Post merger communication Successful merger management absolutely requires successful management of the people involved. Get people in both the merging company and the company being absorbed together as early as possible. Discuss the issue of potential benefits behind the merger openly and frankly. If company A s strength is sales and they are absorbing company B in part because of B s distribution capabilities, make sure A s distribution people know to listen to B s distribution people and B s sales force understands the opportunity to learn 8 P a g e www.rierc.org
from A. make sure he evaluation of the people of both the company will be made equally so that not a single efficient person may be lost. Progressive corporation have realized that a merger is in name only without the positive support of the newly acquired human resources. Manager should treat truly the people as an asset. A merger and acquisition gives us an opportunity to do well by our people by being honest with them, giving them all information as early as we can. Performance evaluation Establishing appropriate standards of performance measurement is important of mergers and acquisitions. The criteria for measuring success should be determined before the deal completed. The company should then measure performance against those criteria. Based on those standards, which may be strategic, financial and operational, management should lay out specific performance requirements for each of those indicators. For example, if a goal of the merger is to increase size in order to attain economies of scale, the focus would be on average and marginal cost per unit. In measuring the success of a transaction, a company must consider the impact on three major constituent groups: shareholders, customers and employees. For the first group, the standard can be expressed in terms of share price or shareholders value. For the second group standard can be expressed in terms of retention, satisfaction and probability of relationship. In assessing the third group- employees, it is necessary to consider retention of key talent, morale, productivity and so forth. The ultimate success measurement is whether the value of the company has increased as a result of mergers and acquisitions. 9 P a g e www.rierc.org
CONCLUSION The rationale behind mergers and acquisitions is that the two companies are profitable than individual companies and that the shareholders value is also over and above that of the sum of the value of the two companies. Despite negative aspects, mergers and acquisitions continues to be an important tool behind the growth of rate of return to the shareholders, retention and satisfaction fo the customers and maintenance of high morale and productivity. Lastly, the path of growth through mergers and acquisitions would be a matter of reflection instead of celebration until and unless the above aspects are truly followed. REFERENCES Harrision, Kim. Good Communication is essential for successful mergers and acquisitions www.cuttingedgepr.com Panirath, Attorney Navpreet. Mergers and acquisitions in India- a general analysis ICAI-ARF Group. Procedure for merger and amalgamation Reh, F John. Managing merger successfully management.about.com. Desai, Nishith (2010). Associates Merger and acquisition in India www.nishithdesai.com. Feb, 1, 2010. Thambi, Mahesh Kumar. Impact of mergers and amalgamation on the performance of Indian companies ecopapers.repec. Perrin, Tillinghast- Towers. Aspects of merger and acquisition www.towersperrin.com. 10 P a g e www.rierc.org