Cross Border Mergers & Takeovers: Recent Trends
This is been happening in India for the first time that the people of this country are talking about something very rare to be discussed in India. People often go for several discussions over lot of things but the topic which is now on the tongue of every person is not one of their favourite issues like Cricket, Politics, Movies or Mismanagement by the Government in Country, rather is about the growth, the growth- of Indian Companies, of Indian Economy and of India’s reputation in the Economic world of this globe.
Look what is actually happening, our corporate leaders are grabbing the foreign corporations or going for partnership deeds if not capable of buying them and this is nothing but the magical change in our corporate world because of which we now dare to go for acquisitions of foreign companies or they are themselves eager to combine with us. This is the latest trend developing between Indian Incorporations to grow faster by the way of Takeovers or Merger with other big players. There is not a single company but a list of companies, which are really looking forward to get their goals.
The question that arises here is what are the reasons for this drastic and sudden change? The answer is that there are several factors working behind this change and in this essay we are trying to bring out some of the most important driving factors of the recent trend of the Indian companies becoming global leaders and this time they have chosen the path of Mergers and Takeovers out side the border.
Amalgamations can primarily be of two types, Mergers and Acquisitions. A merger can be defined as an amalgamation of two or more companies into one, wherein the merging entities lose their identities. No fresh investment is made through this process. However, an exchange of shares takes place between the entities involved in such a process. Generally, the company that survives is the buyer that retains its identity and the seller company is extinguished.
On the other hand, an acquisition or takeover is aimed at gaining a controlling interest in the share capital of acquired company. It can be enforced through an agreement with the persons holding a majority interest in the company's management or through purchasing shares in the open market or purchasing new shares by private treaty or by making a take-over offer to the general body of shareholders. In this process only one company loses its identity that is the seller company.
A finer appreciation of this point need be emphasized. A takeover, which is essentially an acquisition, differs from a merger in its approach to business combinations. In the process of takeover, the acquiring company decides the maximum price that is to be offered to the acquired firm and hence takes lesser time in completing a transaction than in mergers, provided the top management of the acquired company is co-operative. In merger transactions, the consideration is paid for in shares whereas in a takeover, the consideration is in the form of cash. In a merger, a new entity may be formed subsuming the merging firms, whereas in an acquisition the acquired firm becomes the subsidiary of the acquirer firm. However, mergers and takeovers can be treated as similar processes, since in both cases at least one set of shareholders looses executive control over a corporation, which they otherwise held.
There have been a series of merger waves, witnessed in many of the market-oriented economies. There have been three major merger waves in the United States during the periods 1887-1905, 1916-1929, and post-world war II. In constant dollar terms, the mergers during 1988 increased almost four to six times more than the value of mergers in the early seventies. The other developed countries such as the UK, Canada, France, Germany and Japan have also witnessed periods of a sharp rise in merger activity, although the US has been the most active mergers market.
The trend in India has been that mergers between large business firms have been negotiated and concluded right through the post-Independence period in India but they have been very rare and exceptional. In 70’s a number of changes were effected in the government’s policies and these changes were heralded, inter alia, through the abolition of the managing agency system, the passage of the MRTP Act 1969, the nationalization of the banking system in 1969 and the announcement of new provisions granting tax relief in the Finance Bill for 1967. All these initiatives were aimed at curtailing the power of the big business houses and dealing with the adverse consequences of the absence of price competition among the established business groups. They therefore affected the process of growth through mergers as well.
As a result of this, mergers and acquisitions were very rare in India during 70’s and 80’s. Only 15 takeovers among MRTP companies were done during 1980-81 to 1984-85 and then in 1985-86 to 1989-90 this figure was 91. The reason for this low rate of mergers and acquisitions was the Government’s view of non-allowance of monopolization and as a result it passed MRTP Act, 1969 whose Chapter III placed a bar on mergers and acquisitions, within and outside India.
But the picture changed in 1991 when the Indian government changed its view and entered into the era of liberalization and dissolved the whole chapter III of the MRTP Act and liberalized the other rules relating to the mergers and acquisitions present in the Companies Act, 1956 and that of RBI. And thus the removal of institutional barriers encouraged a few more Indian companies and foreign firms to redefine their portfolios and reformulate their corporate and business strategies through the merger and takeover process. And it was from hereon that the trend of cross border mergers and takeovers gradually started taking its shape. But in 90’s a few large corporations dominated the merger movement.
All this was a motivation and encouragement for the foreign firms to set up and build their operations in India. In fact, it has been argued that one of the reasons for the increase in mergers during the 1990s was the keenness of international firms to exploit this opportunity, which in some instances is furthered through mergers with existing operators rather than through the establishment of Greenfield projects. The 1990s have been years in which foreign direct investment flows into India have risen from less than half a billion dollars to more than 3 billion dollars a year. Interestingly, one aspect of it has been the role of rising cross-border mergers and acquisitions in explaining the cross-border flows of capital. But it needs to be noted that the presence of foreign firms among merging entities is visible only after 1992-93. This could be because the relaxation of FERA regulations occurred in January 1992, when foreign companies were allowed to open branches, permitted to use their trademarks, carry out any activity of a trading, commercial or industrial nature, borrow money and accept fixed deposits like any other Indian company.
The most important fact emerging here is that in 1990’s either the merger or takeover is done within India by the Indian Companies or the foreign firms are coming here and merging with the Indian companies, but the Indian companies are not moving out of India and entering into mergers and acquisitions with the foreign companies.
Looking up in to the legal or statutory constraints of amalgamations we see that the process of mergers or takeovers in India is governed by the sections 391 to 394 of the Companies Act, 1956 and requires the following approvals:
According to the Indian Companies Act, if the acquisition value exceeds 60 per cent of the Indian company's net worth or 100 per cent of it's free reserves, and then the Indian company is required to take prior approval from its shareholders for making the investment in the target company.
The company must take approval of the High Court of that state in which the registered office of the company is present.
Reserve Bank of India Approval
According to the current RBI regulations, companies cannot bid for an overseas acquisition under the automatic route, if the total funds required for the acquisition exceed 200 per cent of the Indian company's net worth. There are several other aspects, which need to be looked at to determine if the proposed acquisition falls within the 200 per cent limit
SEBI’s Takeover Code for substantial acquisitions of shares listed in Listed Companies
On 4th November 1994, SEBI announced a take-over code for the regulation of substantial acquisition of shares, aimed at ensuring better transparency and minimizing the occurrence of clandestine deals. In accordance with the regulations prescribed in the code, on any acquisition in a company, which makes acquirer’s aggregate shareholding exceed 15%, the acquirer is required to make a public offer. The take-over code covers three types of takeovers-negotiated takeovers, open market takeovers and bail-out takeovers.
With the beginning of 21st century we have witnessed a new era of development and liberalization, as there is a remarkable and consistent growth in Indian economy. All this has lead to a significant growth in the structure of Indian Companies with further eagerness to grow faster to compete with others, whether within India or outside our borders and hence the companies have switched over to some new methods of expansion and restructuring, and takeover or merger is the latest method chosen by our companies to be parallel with foreign companies.
We can say it as a new era of liberalization after early 90s when we have started our economic reforms. To see the real picture we have to look at few remarkable takeovers and mergers by our companies which lead to the beginning of a new era.
These acquisitions have grown tremendously in last five-six years; the research of FICCI has shown that in between 2000 to 2006 there have been 307 acquisitions amounting to more than Rs 90,000 crores. And the reality is that the number of these deals is increasing and similarly there are several mergers also taking place with the foreign companies in various fields. The size of the companies is also increasing with a great velocity and we can say that no one can stop India because now we are also capable of grabbing others and ready to take risks.
Indian companies had spend $20 billion to fund the 147 mergers and acquisitions deals abroad in 2006, according to Dealogic. In comparison, such deals in 2005 accounted for less than $5 billion, with 45 M&A deals.
The biggest contributor to 2006’s deals was the Tata - Corus deal which was valued at about $9.8 billion. This was followed by ONGC's $1.4 billion takeover of Campos Basin Oils Fields and 50 percent stake in Omimex de Colombia ranked second and third biggest deals. United Breweries $0.75 billion offer for UK-based distiller Whyte & Mackay and the takeover of Daewoo Electronics by Videocon for $0.72 billion formed the top five deals. Among other publicized deals, Tata Motors bought South Korean company Daewoo's truck plant in that country. Reliance Infocom took over Flag International, a major telecom network, for US$211 million. The deal gives Reliance access to 50,000 kilometers of fiber optic network worldwide. Software giant Wipro Ltd has acquired US-based consulting company Nerve Wire for $18.7 million even as it’s contemporary, Infosys Technologies, snapped up Australian software firm Expert Information Services Pty Ltd for $23 million. Meanwhile Sundram Fasteners Ltd, an auto ancillary manufacturer based in south India, has acquired Dana Splicer Europe, the British arm of a global multinational corporation (MNC) that supplies leading automotive giants like Volvo and Scania. Pharma major Ranbaxy has purchased RPG Aventis, the French generic wing of multinational Aventis. Cadilla Healthcare has bought the formulations business of another French company, Alpharma. Mahindra Group has picked up a majority stake in California-based technology consulting and services firm Bristlecone. And Hindalco, a flagship company of the $6 billion Aditya Birla Group, has acquired two copper mines in Australia for $68 million.
In the last five years, industry leaders like Wipro, TCS, Ranbaxy, Bharat Forge, Mahindra & Mahindra and Genpact, have acquired companies abroad at a regular intervals in a bid to get market access, technological know-how or acquire new skills. And now it’s not only the mid-rung companies with strong domestic market share, solid cash flows, and good management that have joined the outward-bound group, but even those without a hefty bank balance are looking out. “Today everybody is looking at international markets. Even the smaller companies are asking themselves the question, ‘Why am I defining my market as only India,’” says Abhijit Bhaumik, director, Opus Advisory, a boutique advisory firm. And this is not the limit because we are going to see a new era, an era of Indian companies being global with new goals to defeat others anyhow. And this is the reason why cross border mergers and takeovers are started to be called as recent trend.
There are several tie ups also taking place where Indian and foreign companies are coming up with joint ventures like Ranbaxy and other pharma companies are doing, but the recent and most remarkable deal is between Mahindra and Mahindra of India coming together with Renault, a big player in world of automobiles.
This is the real picture of changing face of Indian corporate world because the conditions are really favourable for fulfilling their goals of expansion and restructuring.
With all these changes the views about Indian economy are also getting changed because we not only have consistent high GDP growth but we have also got approval as a big player in world economy. Foreign investors are now eager to enter in Indian market with lot of funds because they are sure about the growth and this is been shown by our high speed of growth in the share market. Due to the confidence in India the whole globe is looking towards us and they are now turning out in large numbers which makes our foreign currency stocks big and strong as never, this enables us for looking at new goals and hence our public sector companies are also going for mergers and acquisitions as private ones.
Along with these new achievements we come across some challenges as to run the acquired companies properly, which is not an easy task, because these mergers and acquisitions may affect the working of these companies adversely. There are financial problems also because we are acquiring companies bigger in the size and capital, every one is not quite capable as TATA to get funds from market that much easily because for that one has to prove its capability in handling these kinds of business deals.
There is one another problem in west, they never want any Indian or Asian company to grab their market and hence they generally oppose such deals, as evident from Arcellor-Mittal deal. Hence we also have to acquire their faith and support along with acquisition of their companies.
The conclusion of the essay is that we had several adverse situations in the past in emerging as a global leader in economic sector because we hadn’t gone for liberalization and afterwards when we opened our doors for outer world they entered slowly due to hesitation about our policies and growth in our market because we were progressing at very low rate. Our companies were also bound by several obligations while entering outer world but when the situations got favourable then they choose to grow and expand beyond the borders. Though it had started with a low pace but now we have got the right pace and environment to grow ourselves according to the desires and hence our corporate world has chosen the magical formula of merger and acquisition which enables them to mark their global presence with comparatively easy way, as in this manner they get a readymade manufacturing unit, prior market and distribution network, which are very difficult when anyone goes for establishment of a new unit.
Hence now our companies are becoming global by way of cross border mergers and acquisition which has developed into a recent trend, where we have gone for tie-ups and acquisitions to grow ourselves according to the need of a true global economy.