Waves of Mergers and Acquisitions

Waves of Mergers and AcquisitionsIntroductionMergers and Acquisitions (MA) rescue al instructions assisted in nursing collective health and harvest pattern of growth and developed countries just taking surface sickness in industries, the concept of amalgamations and acquisitions have played a truly crucial and pivotal role in shaping the business and have been part of foreign business in recent successions.Mergers and acquisitions (MA) have always been an interesting atomic number 18a to study. As we know every(prenominal) our daily sunrise(prenominal)spapers be filled with cases of optical fusions, acquisitions, spin-offs, tender offers, a nonher(prenominal) habituss of corporate restructuring. It have been stated that mergers and acquisitions account consist of 78% of all foreign direct investment, with 97% of that being acquisitions. Van Marrewijk (2006, pg 294)The class 2007 had undoubtedly been landmark of the year for Indian corporate buisness with respect to r ecession taking toll of many Indian business. With loss of time ,the Tata announced the acquisition Corus , a US$ 12.2 billion deal . India industries has not looked back since. The continued growth in the Indian economy and investment and operating climate has resulted in improved health and growth appetite for Indian compines.What are Mergers and Acquisitions?Mergers and acquisitions are arguably the most popular and influential form of discretionary business investment (De Witt Meyer, 1998).In simple terms merger is the combination of the assets and liabilities of two companies, mainly of similar surface, into one business entity.The term acquisition is employ when the assets and liabilities of a smaller company is purchased by a larger one by paying voices, cash or other assets to the target companys personaholders. When there is a merger between two similar sized firms, the shares are exchanged and one firm issues new stock to the other in an agreed ratio. The honour of two firms before and later a merger is the same when you exclude the synergies resulting from it, considering that the valuation of the shares and the exchange ratio has been correctly formulated. Target firms shareholders are normally compens adequate a premium, which means that the exchange rate is skewed.Merger Waves in the 19th, 20th and 21st Centuries, Martin Lipton, York UniversitySeptember 14, 2006Over calculate of MA WavesA merger waver is an intense arrest of merger activity in a particular welkin or industry and last from a short item to a long time partly depending on the performance of the grocery store and the participating companies. In his paper rel sticking(p) on September 14, 2006 Merger Waves in the 19th, 20th and 21st Centuries, Martin Lipton of York University talk intimately merger waves Economists and historians refer to five waves of mergers in the U.S. starting in the 1890s. As I said, I believe a sixth wave started three long time ago. The starting date and duration of each of these waves are not specific, although the ending dates for those that ended in wars or financial disasters, like the 1929 crash or the bursting of the millenary Bubble, are more than(prenominal) definite. Indeed, it could be argued that mergers are an integral part of mart capitalism and we have had a continuous wave of merger activity that has ebbed and flowed since the development of the industrial economy in the latter part of the 19th Century, with interruptions when fundamental forces turned exogenous merger factors negative. The merger activity needs to show a pattern in which the peak year had a greater than 100 percent increase from the early year followed by a decline in acquisition activity of greater than 50 percent from the peak year to qualify as a wave. In or so industries the waves were as long as six years.Lets us see the five merger waves below scratch Period 1893 to 1904 Merger for Monoploy- This was the time of the major horizon tal mergers creating the principal steel, telephone, oil, mining, railroad and other giants of the basic manufacturing and transportation industries in the U.S. The Panics of 1904 and 1907, a U.S. Supreme Court decision in 1904 making the recently enacted antitrust laws applicable to horizontal mergers, and then the First World War are pointed to as the causes of the end of the first wave, which some view as continuing beyond 1904.Second Period 1919 to 1929 Merger for Oligopoly- This period saw further consolidation in the industries that were the subject of the first wave and a very significant increase in vertical integration. The major automobile manufacturers emerged in this period. Ford, for example, was integrated from the finished car back through steel mills, railroads and ore boats to the iron and coal mines. The 1929 Crash and the Great Depression ended this wave.Third Period- 1955 to 1969-73 involved merger- This was the period in which the conglomerate concept took ho ld of American management. Major conglomerates like ITT (Harold Geneen), LTV (Jimmy Ling), Teledyne (Henry Singleton) and Litton (Tex Thornton) were created. Messrs. Geneen, Ling, Singleton and Thornton were viewed as visionaries and heroes of the new concept of business organization. some major established companies accepted the concept and diversified into new industries and areas. The conglomerate stocks crashed in 1969-70 and the diversified companies never achieved the benefits ideal to be derived from diversification.Fourth Period 1974-80 to 1989 The Megamerger- Generally referred to as the merger wave, or takeover wave, of the 1980s and frequently said to be the period from 1984 to 1989. However, its antecedents reach back to 1974 when the first major-company hostile dictation was made by Morgan Stanley on behalf of Inco (the same Inco that has been involved in the four-way takeover struggle that has now ended with its takeover by Vale) seeking to take over ESB. This suc cessful hostile bid opened the door for the major investment confides to make hostile takeover bids on behalf of raiders. In addition to hostile bids, this period was noted for junk truss financing and steadily increasing volume and size of LBOs. In Europe in the latter half of the 1980s companies sought to prepare for the Common commercialise through cross-border horizontal mergers. In the U.S. this was the period that saw corporate raiders like Boone Pickens run rampant with two-tier, front-end-loaded, boot-strap, bust-up, junk-bond, hostile tender offers until the playing field was leveled by the embitter pill in the mid-1980s. However, even after the poison pill, merger activity increase through the latter part of the 1980s, pausing for scarcely a few months after the October 1987 stock grocery crash. It ended in 1989-90 with the $25 billion RJR Nabisco LBO and the collapse of the junk bond market, along with the collapse of the savings and bestow banks and the serious lo an portfolio and capital problems of the commercial banks.Fifth Period 1993 to 2000 Strategic Restructuring This was the era of the mega-deal. It ended with the bursting of the Millennium Bubble and the great scandals, like Enron, which gave rise to the revolution in corporate arrangement that is continuing today. During the fifth wave companies of unprecedented size and global sweep were created on the assumption that size matters, a belief bolstered by market leading premium stock-market valuations. High stock prices simultaneously emboldened companies and pressured them to do deals to maintain heady trading multiples. A global view of disceptation, in which companies a lot find that they must be big to compete, and a comparatively restrained antitrust environment led to once-unthinkable combinations, such as the mergers of Citibank and Travelers, Chrysler and Daimler Benz, Exxon and Mobil, Boeing and McDonnell Douglas, AOL and Time Warner, and Vodafone and Mannesmann. From a depleted $342 billion of deals in 1992, the worldwide volume of mergers marched steadily upward to $3.3 trillion worldwide in 2000. Nine of the ten largest deals in history all took send off in the three-year period 1998-2000, with the tenth in 2006. Most of the 1990s deals were strategic negotiated deals and a major part were stock deals. The buzzwords for opening of merger discussions were, would you be raise in discussing a merger of equals. While few if any deals are true mergers of equals, the sobriquet goes a long way to soothe the egos of the management of the acquired company. The year 2000 started with the announcement of the record-setting $165 billion merger of Time Warner and AOL. However, after a five-year burst of telecommunications, media and technology (TMT) mergers, there was a dramatic long-windedd receive in the TMT sector, as comfortably as in all mergers. It started with the collapse of the Internet stocks at the end of the first quarter followed by the earnings and financing problems of the telecoms. While merger activity in 2000 exceeded 1999 by a small amount by the end of the year, the bubble had burst. The NASDAQ was down more than 50% from its high, many TMT stocks were down more than 50% (some as much as 98%), the junk bond market was almost nonexistent, banks tightened their lending standards and merger announcements were not well received in the equity markets. So ended the fifth wave, with merger activity in 2001 half of what it was in 2000. To my surprise (and I think to the surprise of most) the sixth wave started just three years later. The sixth period of merger wave is what Lipton believes started in 2003.Sixth Period From a low of $1.2 trillion in 2002 the step of merger activity has increased to what appears will be a total of $3.4 trillion by the end of 2006. Among the principal factors are globalization, abetment by the governments of some countries (for example, France, Italy and Russia) to create strong natio nal or global champions, the rise in commodity prices, the availability of low-interest financing, hedge fund and other shareholder activism and the tremendous growth of private equity funds with a concomitant increase in management-led buyouts.CROSS BORDER MERGERS ACQUISITIONS GLOBAL SENARIOGlobalisation is a key feature of the new competitive landscape within which the mergers and acquisitions frenzy is taking place. . Globalization has spurred an unprecedented surge in cross-border merger and acquisition activity. (Child J.et al, 2001).Cross border MAs have bring forth a fundamental characteristic of the global business landscape. Cross-border MAs are one mode of admission for foreign direct investors to host economies. The ownership advantage,location advantage and incorporation advantage, factors such as the search for market power, efficiency gains through synergies, size, diversification, and financial motivations affect the decision of firms to undertake cross-border MA s. Organizations which aspire to expand across geographies are bread and butter their cross-border acquisitions through a mix of local and foreign financing. According to World Bank statistics, new capital raised through corporate securities offerings and loans from international bank syndicates totalled US $400 billion in 2006, a threefold increase from 2003. Multi-national companies based in developing countries made more than 700 cross-border MA purchases in 2006, up from just 11 such deals in 1987. These developments have put some of these companies on par with large companies from developed countries. As many developing-country governments have eased their policies toward capital outflows their companies have expanded their operations abroad. 15000 multinational corporations have their presence in developing countries. Cross border MA activity was one of the old reasons for increasing FDI outflows from developing countries. The total cross-border MA activity from the develop ing countries was abide byd at $80 billion in 2007, up from $75 billion in 2006. The activity was across sectors with service sector contributed about 60% of the total activity.MA ACTIVITY IN INDIAIndian MA activity totaled US$19.8 billion in FY08 as compared to US$33.1 billion in FY07. The decline in MA activity was in line with the global activity. The average size of deals in FY08 was US$23.4 million far lower than that of US$70.5 million in FY 07. Cross-border MA totaled US$8.2 billion in FY08 after declining of 56.3% from the preliminary year, where the total cross-border MA was US$18.7 billion. The sector which witnessed highest decline (97.6%) in MA activity was the telecommunication sector due to the base cause of acquisition of Hutchison by Vodafone in FY07. Followed by telecommunications sector was the healthcare sector declining 72.3% in FY08 again due to the base effect of US$1 billion acquisition of ground substance Laboratories in FY07. Financials sector was the th ird sector to experience decline in the MA activity.Trends Patterns of Indian acquisitions abroadMA activity has seen phenomenal rise in India in the past few years and some patterns are discernible in this mass of financial transactions.India has passed several milestones and come a long way from overseas investments of about $0.7 billion in 2000-01 to $2.7 billion in 2005-06 and finally to $11 billion in 2006-07.Save a slight lull in cross-border deals in 2000-2002,MA has only been rising in India. The number of overseas acquisitions was 38 in 2003 and rose to 177 in 2006. The first six months of 2007 saw a whopping 123 transactions. The value of outflows has increased from $649 million in 2003 to $32.9 billion in 2007. The value of overseas acquisitions by Indian firms far exceeded the value of foreign firms acquisitions in India for the first time in 2006. The African nations have especially opened up their economies to FDI flows from India hoping that the funds transfer knowl edge transfer and skill development will offend their nearly stagnant economies a much needed boost.The Indian services sector was the first entrant to the area of overseas MA and later the primary(a) manufacturing sectors ventured into it. However, eventually the manufacturing sector surpassed the services sector both in terms of number of transactions and value of transactions with overseas acquisitions in the services sector rising 2-3 times as compared to 5-22 times increase in the manufacturing sector in the period 2001-2007Literature reviewAccording to Jankowitz (1991) have given more emphasises on the importance of the belles-lettres review by stressing that knowledge does not exist in a vacuum and your work only help in relation to others. He describes the literature review as providing a theoretical framework and condition for the project.An attempt has been made in the present paper to recognise the motives and implications of the Merger-wave in the second half of the nineties. The analysis has been conducted in a comparative perspective by classifying the Acquiring firms into two categories in terms of ownership, namely, Indian possess and foreign owned. The paper is divided into seven sectionsiii) Policy-shift regarding MAs during the 1990siv) Impact of MAs on the performance of Acquiring firms,v) Source of financing and some plausible issues for corporate governanceSection I Theories on Motives and Implications of MAsAccording to Cantwell and Santangelo 2002 the theories on MAs have been spreaded over the vast terrains of industrial organisation, financial, economic and international business studies. Thus researcher has been pointed out that the trends of MAs can be theoretically traced back to particular motives for MAs emphasized by industrial organization theories that is market power and defensive reactions, the financial economic literature that is managerial ego and international business research which is access to markets or technol ogies.We have classify these theories into four categories, namely, i) Mergers as efficiency enhancing measures Mergers can lead to increased efficiencies. Such efficiencies and cost savings can flow from economies of scale and scope possible in the larger post-Merger operations, greater control over key inputs, production rationalisation, combining marketing, advertisement and distribution, or from cutting down overlapping Research and Development (Ansoff and Weston 1962. International MAs may be regarded as a new cross-border dodging that aims at increasing corporate global competitiveness by pursuing related diversification and by integrating affiliates into a global network (Cantwell Santangelo 2002). Schemalensee (1987) argued that the cost-reducing effect of a particular proposed Merger might probably outweigh its collusion-enhancing effects. Sanjaya Lall rightly questions whether the positive economic effects that cross-border Acquisitions can have outweigh the concerns th ey arouse (Lall, 2002). ii)Mergers as enhancing concentration and monopoly The immediate effect of a Merger is to increase the degree of concentration as it bowdlerises the number of firms. Another effect of Mergers on 8competition is on the times of barriers to entry. Artificial barriers can be raised or strengthened, if the Merger results in a strengthening of product differentiation through legal rights in designs, patents and knowhow. Williamson (1968) argued that a small efficiency gain would generally be offset by a large increase in market power, which creates a situation that sets prices higher up the competitive levels. Further, the motives behind transnational or cross-border Acquisitions differ from those, which drive purely domestic Acquisitions. An Acquiring firm might decide to go in for international Merger in order to take advantage of cheap raw materials and labour, to capture profits from exchange rates, or to invest its surplus cash (Weston et al. 1996). The en try and subsequent activities of Multinational firms affect the structure of markets for goods and services in host countries in several different ways. Numerous studies for individual developing countries as well as developed economies doom a positive association between TNC activities and the concentration of producers in host country industries (UNCTAD 1997 137). Some qualifications and exceptions have to a fault been pointed out about this trend. Greenfield investment in new production facilities adds to the number of firms busy in the production of a good or service and it might reduce or at least, leave unchanged the concentration of producers in an industry. In contrast, FDI-entry through a Merger or Acquisition would increase the concentration of producers if a Merger or Take-over results in increased sales for the newly created foreign affiliates or leave it unchanged, if its size is the same as that of the incumbent firm acquired(UNCTAD 1997 141).The essential impact of an Acquisition on competition depends upon the marketing strategies of TNCs, as well as on industry and country-specific circumstances (Dunning 1993). The risk that CB MAs may reduce competition tends to be greater in those industries in which shrinking demand and 9 excess capacity are important motivations for MAs and in countries in which competition insurance policy does not exist or where its implementation is weak (Zhan Ozawa 2001 61). In sum, MAs as concentration enhancing and building oligopolistic market power is a rather familiar view in studies on Mergers internationally. iii) Mergers as driven by macro-economic changes MAs areundertaken to compensate for instabilities such as wide fluctuations in demand and product mix, excess capacities related to slow sales growth and declining profit margins and technological shocks (Post 1994 Weston et al. 1996). Firms may pursue MAs for the sole reason of growing in size as size more than favorableness or relative efficiency is c onsidered to be the effective barrier against Takeovers (Singh 1975 1992). It is also argued that the development of an active market for corporate control may encourage managers to pudding stone build, not only to increase their monopoly power but also to progressively shield themselves from Takeover by becoming larger (Singh 2003). What is referred to herein is the defensive evasive action of firms in a developing country like India. While there are firm-specific motives for undertaking CB MAs, there are also economic forces that have acted to encourage the CB MAs, such as the economic integration of the European Union (EU) and NAFTA represented by the creation of a common market (Caves1991UNCTAD 1997). Macro-economic changes become the context or provide opportunities for MAs. Mergers may also be resorted to as defensive measures in response to major policy-shifts. iv) Mergers as driven by financial motives Firms adopt MAs as a route to growth whenever alternative investment op portunities for financing corporate expansion in specific environments are less good-natured. Availability of capital to pay Acquisitions and innovations in financial markets such as junk-bonds can also be among the reasons 10 for cross-border Mergers (Sudersanam 1995). The valuation differences of the share prices or economic disturbances lead to Acquisitions of firms that are low-valued from the stall of outsiders (Gort 1969).Lower interest rates also lead to more Acquisitions, as Acquiring firms rely heavily on borrowed funds (Melicher et al 1983). It is also argued that the under-valuation of the one dollar bill vis-a-vis pound and yen in the early eighties had resulted in some very substantial Acquisitions of assets in the United States by British and Nipponese firms (Dunning 1993). The currency devaluations in the risis-affected countries as well as falling property prices reduced the foreign-currency costs of acquiring fixed assets in those countries and it has provided a golden chance for TNCs to enter their local markets (Zhan Ozawa, 2001). Our own earlier study (Beena 2001) clearly pointed out how financial motives had a crucial role in MAs during the first half of the cristal of liberalisation. The study argued that among the motives for Mergers, in many cases, could have been the bank to improve the financial position of the firm through a viable capital structure and the desire of firms to exploit the opportunity provided by the initial post-liberalization buoyancy in the Indian stock market. It should not be surprising if in latest phase of contemporary finance capitalism, financial motives are also the major determinants of MAs in our country. Paul Sweezy (19941999 249) had spoken of the enormous growth of a financial superstructure a give the real plentiful base of the world economy over the last three decades. However, the linkages between a huge financial superstructure of the global capitalist economy and the financial motives of M As in India is not so apparent and would need further exploration. Our classification of the four categories of theorisations on MAs throw light on one or the other aspect of the phenomenon. apiece of them is true in its own right. However, it is context-specific studies that could substantiate the validity of each of these arguments.Motivation of cross-border acquisitionThere are four main reasons for Indian firms to have engaged in crossborder acquisitions, (see Acceenture, 2006). These include the need to enter new markets to maintain the current level of growth, to get closer to global customers to easily achieve market share and customer base via mergers compared to starting up new firms in foreign countries. Further, crossborder acquisitions help Indian firms to gain easier access to targets resources. Since 1995 over 60 percent of Indian MAs took place in Europe and North America in the 2000-2006 period US firms followed by UK firms were the major target of 9 Indian acquirer s. These developed markets were attractive due to their large customer base,advanced legal system, knowledge foundation, and sophisticated technologies. More importantly, acquisitions often prove to be the only way for Indian companies to be able to begin competing in these markets, due to the high level of existing competition in developed countries. However, to a lesser degree, Indian firms have also acquired firms in less developed countries. These deals are profitable because of high demand for foreign investment in some of these economies. These deals have also provided the Indian firms with access to resourcesMany Indian firms participate in crossborder MAs to expand their overall technical capabilities and to update their existing knowledge base. In most cases, the knowledge and technical expertise gain abroad can help the acquirers in improving their productivity in the domestic Indian market as well. Furthermore, crossboarder MAs can create excess value for Indian acquirers , relative to their competitors, by allowing them to save on labour and production costs. Some Indian firms, especially in the pharmaceutical sector, strive to increase their market share by enhancing the size of their product range or in general, to diversify the portfolio of products or services. This is possible through two avenues buying the technology, or acquiring firms who already own that technology. Indian firms seem to have used both methodsTrends of MAs Indian ExperienceMA activity has seen phenomenal rise in India in the past few years and some patterns are discernible in this mass of financial transactions There are four sectors in India which have experienced the most detectable MA trend after deregulation, starting in 1991 (see Srinivasan, 2001).Consumer goods sector in which firms want to quickly achieve market share and banking and financial industry where size is an important factor due to higher capital requirements set by the Reserve Bank of India (RBI) experienc ed many mergers. Sectors that are overloaded with many small players underwent consolidation. There were two sectors within which the need for high technology increased dramatically, such as telecommunication and pharmaceutical also underwent major merger activityThe motivations underlying domestic takeovers in India are similar to the ones that promoted crossborder MAs in recent years. Liberalizations and deregulations have been the main driver of domestic as well as crossborder takeovers. Political, financial, and cultural reforms have fueled both crossborder and domestic MAs in India.Why India leads China in cross-border MA?Although FDI flows to China are relatively higher than those to India, Indian firms have performed much better than their Chinese counterparts in terms of overseas MA. A McKinsey analysis shows that Indian companies generate twice as much revenue from foreign sales as Chinese companies do Other aspects like foreign asset-ownership and number of workers employe d abroad also indicate a similar trend. In the year 2007, India registered a 126% jump in amount spent on international MA deals as opposed to a mere 82% of China. Now let us see some of the specific characteristics of Indian crossborder of MAsThere are a host of reasons why Indian firms have outperformed their Chinese rivals in corporate deal-making abroad. Indian MAs have several distinct characteristics compared to those done by firms in the west or from China1) actors line skills and know-how English is the official business language in India and is built into the Indian education system. Chinese, on the other hand,have always been rigid and insisted on the use of their own language. Aversion to English language led to the isolation of the Chinese industry from the international corporate world. Now China, having realised this, is making concerted efforts to switch to English as the official language of communication.Chinese undervalue the role of soft skills in managing empl oyees, business partners, stakeholders etc. Delegation of work,transparency, objective outlook, employee growth etc are aspects that are not yet developed in the Chinese work environment. This deters foreign employees from working in Chinese firms. Western employees are used to working with a high amount of latitude and things like close supervision, no clarity regarding management policies/expectations, corporate governance issues, favouritism and high level of political enlistment in the routine functioning of an organisation are deeply resented by western professionals. This impedes post-merger integration of a Chinese and western firm.China lacks the kind of leaders with international cultural understanding and flexibility to adapt to different markets and work environments. Leaders that can lead all employees without giving a sense of craziness to any specific group and successfully steer cross-border organisations are visibly lacking in China. Even though the economics of th e deal make better sense, the inability to integrate the operations and most importantly employees of the two companies, spells doom for the new entity.Inhibitions about western cultures and practices have a profound effect in that Chinese leaders are now increasingly wary of undertaking overseas assignments. They find it difficult to blend and work with completely different thought processes and working culture. The loss of face resulting from the failure to integrate prompts Chinese employees to shun overseas assignments. To overcome this, these days Chinese companies do organise mandatory international training and orientation programmes to prepare its workforce for cross-border experiences.Since Chinese companies are still vastly state-controlled, finance skills of Chinese managers are at a nascent fix up yet. Indian firms however and especially the private ones have very well developed finance skills competing with some of the best in the world.Handling diversity and differe nces in race, religion, ideas, personalities etc is much easier for Indians as compared to Chinese due to the relatively homogeneous Chinese society. Although both nations are huge (China being much bigger), India is considered as one of the societies with the highest intra-country diversity and consequently Indians are much more used to handling differences/conflicts.2) Corporate structure Many Indian firms have corporate structures similar to those prevalent in North America. These are companies with central leadership provided by owners but managed by professional managers. In contrast, most of the large Chinese companies are still state-owned and hence riddled with bureaucracy, political objectives. Senior management of these firms is always composed of members or people close to members of the Communist Party and strategy of the firm always is in line with the policy of the Chinese government. The lower management is ineffective, weak and resentful. Hence Indian firms respons es to changes in the global industry are much quicker and strategic than those of Chinese firms.Chinas IT industry tried hard to give tough competition to the booming Indian IT industry but the fragmented nature of Chinas IT sector, along with execrable product management and weak process controls failed Chinas attempt. Consolidation is the key to exploring better opportunities for the Chinese IT industry since its top 10 IT-service companies command only 20% of the market share as opposed to 45% market share of Indias top 10.3) Focus on exports Majority of Chinese companies still focus on only exports for achieving short-term growth. MA is thought of as a strategy that is best suited for long-term growth. In the period 1995-2007, only 17 out of the top 100 Chinese companies signed cross-border deals as opposed to 31 out of the top 100 Indian companies with 18 of them successfully closing more than 3 deals each.4) Political opposition Chinese companies frequently face fierce poli tical backlash in western countries due to a general muted public opinion of distrust regarding Chinas global plans and its eagerness to take possession of international natural resource reserves. CNOOCs (Chinese state-contro