2.merger And Acquisition.docx

Submitted by: Name:

DEBJIT CHAUDHURI

Registration No:

043-1121-0355-11

Roll No:

301-246

CLASS:

B.COM PART III (HONS.)

College:

SYAMAPRASAD COLLEGE

SUPERVISED BY: SUPERVISOR NAME: College:

Suraj Bhattacharya

SYAMAPRASAD COLLEGE (UNDER CALCUTTA UNIVERSITY)

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STUDENT’S DECLARATION I hereby declare that the project work with the title MERGER AND ACQUISITION submitted by me for the partial fulfillment of the degree of B.Com. Honours in Accounting & Finance under the University of Calcutta is my original work and has not been submitted earlier to any other University for the fulfillment of the requirement for any course of study. I also declare that no chapter of this manuscript in whole or in part has been incorporated in this report form earlier work done by others or by me. However, extracts of any literature which has been used for this report has been duly acknowledged providing details of such literature in the references.

Place: Kolkata

Signature:

Date: 14-2-2014

Name: Debjit Chaudhuri Address:164/42 Lake Gardens, Kolkata- 45 Registration No.: 043-1121-0355-11 Roll No.: 301-246

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SUPERVISOR’S CERTIFICATE This is to verify that Mr. Honours in Accounting & the Calcutta University guidance for her Project ACQUISITION.

Debjit Chaudhuri, a student of B.Com. Finance of Syamaprasad College under has worked under my supervision and work with the title MERGER AND

The project report, which she is submitting is her genuine and original work to the best of my knowledge. Place: Kolkata

Signature:

Date: 14-2-2014

Name: Suraj Bhattacharya Name of the College: Syamaprasad College

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ACKNOWLEDGEMENT I would like to express my gratitude to my teacher as well as our principal for giving me the golden opportunity to do this project on MERGER AND ACQUISITIONS which helped me in learning a lot on the topic. I am really thankful to them. Secondly I would also like to thank my mother and brother for helping me a lot in finding the pictures and finishing this project within the limited time.

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CONTENTs

SL.NO. 1

PARTICULARS Introduction • Meaning And Concept • Objectives of M&A • Business Valuation • Research Methodology • Literature Survey

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Conceptual Framework

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International Scenario

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Presentation, Analysis & Findings

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Conclusion • Limitation • M&A Failure • Ending Thoughts

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Bibliography

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1. INTRODUCTION Mergers and acquisitions (abbreviated M&A) is an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.

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MEANING AND CONCEPT The phrase M&A (abbreviated MERGERS AND AMALGAMATIONS) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. A merger is a transaction that results in the transfer of ownership and control of a corporation. A transaction where two firms agree to integrate their operations so that they together may create stronger competitive advantage is termed as merger. The term ‘merger’ refers to a combination of two or more companies into a single company and this combination may be either through consolidation or absorption. A consolidation is a combination of two or more companies into a third entirely new company formed for the purpose. The new company absorbs the assets, and possibly liabilities, of both original companies which cease to exist. When two firms merge, stocks of both are surrendered and new stocks in the name of new company are issued. Generally, mergers take place between two companies of more or less the same size. In case of absorption one company absorbs another company i.e. it purchases either the assets or shares of that company. The merger by absorption is always friendly in nature i.e. both the companies agree to the terms of absorption.

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OBJECTIVES OF M&A Every merger has its own unique reasons why the combining of two companies is a good business decision . The underlying principle behind merger and acquisition is simple. The joining or merging of the two companies creates additional value which we called synergy value. Synergy value takes three forms: 1. Revenue: By combining the two companies, we will realize higher revenues then if the two companies operate separately. 2. Expenses: By combining the two companies, we will realize lower expenses then if the two companies operate separately . 3. Cost of capital : By combining the two companies, we will realize the lower cost of capital The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance:

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Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.

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Economy of scope: This refers to the efficiencies primarily associated with demandside changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products.

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Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.

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Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.

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Synergy: For example, managerial economies such as the increased opportunity of managerial specialization. Another example is purchasing economies due to increased order size and associated bulk-buying discounts.

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Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.

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Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below).

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Resource transfer: Resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

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Vertical integration: Vertical integration occurs when an upstream and downstream firm merges (or one acquires the other). There are several reasons for this to occur. One reason is to internalize an externality problem. A common example of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. Following a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.

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Hiring: Some companies use acquisitions as an alternative to the normal hiring process. This is especially common when the target is a small private company or is in the startup phase. In this case, the acquiring company simply hires the staff of the target private company, thereby acquiring its talent (if that is its main asset and appeal). The target private company simply dissolves and little legal issues are involved.

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Absorption of similar businesses under single management: Similar portfolio invested by two different mutual funds namely united money market fund and united growth and income fund, caused the management to absorb united money market fund into united growth and income fund.

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Business valuation The five most common ways to value a business are Asset valuation   

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Historical earnings valuation, Future maintainable earnings valuation, Relative valuation (comparable company & comparable transactions), Discounted cash flow (DCF) valuation

Professionals who value businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. The information in the balance sheet or income statement is obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an Audit. Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being evaluated for interest's sake. There are other, more detailed ways of expressing the value of a business. While these reports generally get more detailed and expensive as the size of a company increases, this is not always the case as there are many complicated industries which require more attention to detail, regardless of size. As synergy plays a large role in the valuation of acquisitions it is paramount to get the value of synergies right; synergies are different from the "sales price" valuation of the firm, as they will accrue to the buyer. The analysis should, hence be done from the acquiring firm's point of view. Synergy creating investments are started by the choice of the acquirer and therefore they are not obligatory, making them real options in essence.

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Research Methodology The methodology adopted in conducting the proposed study are as follows.Nature of data – Mainly secondary data such as published reports of various departments and companies, internet information, a few books and business journals have been used. Reports of various other scholars published on this topic were of immense help for collecting the various data. Application of statistical data – Various trends have been depicted with the help of various statistical data like bar charts, pie charts, tabular representation of data etc. to give a better representation of the matter.

Literature and Survey A brief summary of relevant research on this topic: KAMAL GHOSH RAY- Strategy, Valuation and Integrationbrief idea on merger and amalgamation. Merger and amalgamation-A.P.DASH Research for classification of merger, details, valuation methods. Merger and amalgamation-EDWIN L. MILLER-legal procedure for merger and amalgamation. WILLIAM J. CARNEY- Data about the Yearly Mergers And Acquisition. Ministry of Petroleum and Natural gas (Govt. of India) “Annual Reports April 2012”.

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2. Conceptual Framework Different economic rationality hypotheses exist, but the central theme is that the merger and acquisition strategy aims at creating value for the shareholders. This value creation is sometimes labeled synergy. Generally, synergy exists when the total effect is greater than the sum of the effects taken independently. Or put differently, synergy exists when two plus two adds up to five. This general definition has also been translated to the diversification literature whereby synergy indicates that a corporate portfolio of businesses is worth more than its businesses would be worth as stand-alone entities (Campbell and Luchs, 1992). The same authors also argued that synergy can cover other situations, for instance synergy can be created in horizontal mergers (i.e. mergers between competitors within the same industry). For the purpose of this study, however, we focus on synergies due to diversification strategies. In many articles synergy is considered as one of the main rationales for merger and acquisition. Only few attempts have been made to link the type of synergy to the amount of economic value created. Most research starts from a classification of related versus unrelated merger, but the problem with this scheme is that it lumps together the different economic benefits and treats them as synonymous.

The major theories that indicate the sources of synergy that would be discussed in this study include: 1. The Efficiency Hypothesis; 2. The Market Power View, and 3. The Financial Synergy Hypothesis.

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3. INTERNATIONAL SCENARIO Most histories of M&A begin in the late 19th Century United States. However, mergers coincide historically with the existence of companies. In 1708, for example, the East India Company merged with an erstwhile competitor to restore its monopoly over Indian trade. In 1784, the Italian Monte dei Paschi and Monte Pio banks were united as the Monti Reuniti. In 1821, the Hudson's Bay Company merged with the rival North West Company.

The Great Merger Movement: 1895-1905 The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicles used were so-called trusts. In 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 it was around 10–11% of GDP. Companies such as DuPont, US Steel, and General Electric that merged during the Great Merger Movement were able to keep their dominance in their respective sectors through 1929, and in some cases today, due to growing technological advances of their products, patents, and brand recognition by their customers. There were also other companies that held the greatest market share in 1905 but at the same time did not have the competitive advantages of the companies like DuPont and General Electric. These companies such as International Paper and American Chicle saw their market share decrease significantly by 1929 as smaller competitors joined forces with each other and provided much more competition. The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large 15

volume production. In addition, many of these mergers were capitalintensive. Due to high fixed costs, when demand fell, these newlymerged companies had an incentive to maintain output and reduce prices. However more often than not mergers were "quick mergers". These "quick mergers" involved mergers of companies with unrelated technology and different management. As a result, the efficiency gains associated with mergers were not present. The new and bigger company would actually face higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains; they were in fact done because that was the trend at the time. Companies which had specific fine products, like fine writing paper, earned their profits on high margin rather than volume and took no part in Great Merger Movement.

MERGER WAVES The economic history has been divided into Merger Waves based on the merger activities in the business world as:

Period

Name

Facet

1897–1904 1916–1929 1965–1969 1981–1989

First Wave Second Wave Third Wave Fourth Wave

1992–2000 2003–2008

Fifth Wave Sixth Wave

Horizontal mergers Vertical mergers Diversified conglomerate mergers Congeneric mergers; Hostile takeovers; Corporate Raiding Cross-border mergers Shareholder Activism, Private Equity, LBO

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4. PRESENTATION, ANALYSIS & FINDINGS

Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion making the Indian company the world’s sixth largest steel producer. This acquisition process has started long back in the year 2005. However, Corus itself was involved in a considerable number of Merger & Acquisition deals and joint ventures.

Commenting, Mr Ratan Tata, Chairman of Tata Steel and Corus, said: "The completion of this acquisition of Corus by Tata Steel is a major step forward in the Company’s global strategy and represents an exciting future for both businesse”

The case of Tata Steel acquiring Corus throws up several interesting questions on emerging multinationals and traditional multinationals in the steel industry and particularly the complexities of the acquisition in the above context. What has been surprising in the above case is that how could a small steel maker, Tata Steel from a developing country like India buy up a large steel company, Corus PLC from the United Kingdom. Prior to the acquisition, Corus was four times bigger than Tata Steel. However, the operating profit for Tata Steel was $840 million whereas in case of Corus it was $860 million in the year 2006. It is also interesting to find out why a large global steel maker, Corus decided to sell itself off to a small steel maker from a developing country.

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Brief History of TATA Steel: TATA Steel was established by Parsi Businessman Jamshed Tata in 1907. Tata Steel holds a very vital place in the Indian business, because it has introduced some of the most unique concepts. From Tata Steel, Tata has started investing in various other businesses like oil mills, airlines, tata motors, consultancy services, etc in the short span of 30 years. In the year 1945 Tata entered into Tea business by the name of Tata Tea. Tata also entered into exports as Tata Exports which is the most successful and the largest export house in India. The company has been run by family members for five generations. The current chairman of Tata group is Cyrus Mistry who succeded Ratan Tata. The Tata group has made a number of recent acquisitions. On February 2007, Tata steel won its bid to acquire Corus, the AngloDutch steel company. The Corus acquisitions by Tata Steel made it a “giant among giants in Indian Inc”. The acquisition of Corus by Tata Steel is anticipated to make Tata Steel the world’s second largest steel maker.

Brief History of Corus Group Plc : Corus Group Inc was formed on 6th October 1999 through the merger of two companies British Koninklijke Hoogovens, following the privatisation of many steel works companies by UK government. The company consists of four divisions which include strip products, long products, aluminium and distribution and building systems. With headquarters in London, Corus operates as an international company satisfying the demand of many steel customers worldwide. Its core business comprises of manufacturing, allocation of steel and aluminium products and services. In terms of performance the company is regarded as the largest steel producer in UK with Pound 10142 millions of annual revenue for 2005 and a workforce of 50,000 employees.

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With the help of collection of primary source of data by way of conducting several surveys, group discussions and other discussion forums and panels, following information is revealed --

Liabilities of Corus Steel : Liabilities (in GBP million) Long term debt obligations Finance Lease obligations Interest commitments Operating lease obligations Purchase obligations Other long term liabilities Total

Total 1,101 159 331 462 350 30 2,433

< 1 yr 24 82 75 331 512

1-3 yrs 567 36 149 102 13 867

3-5yrs 534 26 94 76 6 736

Tata Corus - Projected Capacity : Corus Group (in UK and The Netherlands)

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Tata Steel - Jamshedpur

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Tata Steel - Jharkhand

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Tata Steel - Orissa

6

Tata Steel - Chattisgarh

5

NatSteel - Singapore

2

Millennium Steel - Thailand

1.7

Aggregate projected capacity

55.7

Global Steel Ranking : Company Capacity (in million to tonnes ) Arcelor - Mittal

110.0

Nippon Steel

32.0

Posco

30.5

JEF Steel

30.0

Tata Steel - Corus

27.7

Bao Steel China

23.0

US Steel

19.0

Nucor

18.5

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>5 yrs 73 6 209 30 318

The following is the date wise process of the Merger :

11/27/06

Corus postpones shareholder meeting from December 4 to December 20 to give Companhia Siderúrgica Nacional (CSN) time to prepare a formal bid.

11/28/06

Corus reports a 63 per cent increase in quarterly profits.

1/27/07

Tata Steel and CSN agreed to terms for an auction that will begin January 30 at 4:30 p.m. London time and end by 2:30 a.m. with an announcement of the winner by 3:00 a.m. There will be up to nine rounds Of bidding.

1/30/07

The British press bills the bid for Corus as a clash between Tata Steel and CSN as a battle to “decide the fate of more than two centuries of British industrial history”

2/1/07

After three months of bids and counter-bids, Tata Steel wins a fiercely contested 8-hour closed-door auction against Brazil’s CSN for Corus. Tata Steel acquires 21.1 percent of the equity share capital for 608 pence per share ($11.7), besting the CSN bid of 603 pence, paving the way to acquire Corus.

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4/2/07

The courts officially approved Tata Steel’s acquisition of Corus in a deal valued at GBP 6.2 billion ($12 billion dollars).

4/11/07

Tata Steel’s board of directors meet on 4/17 to consider proposals for raising equity funds to finance the Corus acquisition. Tata Steel shares trade at Rs. 495.55 on the Bombay Stock Exchange.

4/28/07

Tata Steel announces it will raise $4.1 billion equity capital as partial payment for Corus using a rights issue and a convertible preference share issue along with other financial methods.

5/4/07

Tata Steel will borrow $7.3 billion in loans as part of its long-term financing arrangements in the takeover of Corus. It took advantage of high liquidity in the leveraged loan market and went with a long-term arrangement with Citigroup, Standard Chartered and ABN Amro.

5/17/07

Tata Steel announced plans that would potentially make it the second largest steel maker in the world within five years. Manufacturing capacity is planned to increase from about 25 million tons a year to 40 million by 2012, and then to 50 million by 2015.

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After effect of Merger : On July 23, 2007, Tata Steel stock reached a 52-week high close of 721.00 on the Bombay Stock Exchange’s (BSE) 30-stock Sensex after hitting a low of 399.00 on March 8, 2007. Tata Steel was one of the market leaders for the BSE Sensex up 27% in 2007. Standard & Poor’s Ratings Services cut its credit rating to BB from BBB and removed them from the negative watch list on which they were placed after the financing structure for the acquisition of Corus was announced. The rating was changed to a positive outlook. According to one Standard & Poor’s analyst, “the rating remains constrained by the weak business profile of Corus, which is characterized by lack of integration or upstream linkages and relatively high cost of operations in the UK, resulting in lower-than average profitability.” However, S&P maintains that the strategic significance and size of Corus, along with its importance to Tata Steel’s future plans, give strong economic impetus to support the acquisition (Forbes.com, 2007, July 11). Unfortunately, the current global economic downturn has wiped all previous gains. By February 2009, Tata Steel’s stock price had declined to Rs. 168.05, after a 52-week low of Rs.145.35 and a 52week high of Rs. 925.00. Clearly, Tata Steel gambled on a strategy based on anticipation of global consolidation of the steel industry. Along with Arcelor-Mittal, it may still be poised to emerge as one the few global steel producers. Tata Steel’s strategy will pay off if consolidation in the European steel leads to a more stable pricing structure if not now, by 2011. Second, if potential customers like Toyota want to buy steel in different countriesn in Europe as well as in India, this would give global steel producers (like Tata Steel) a competitive advantage (Financial Times, 2007, February 1, 12). Clearly, the global steel industry and Tata Steel in particular will be closely watched in the years ahead, as some experts continue to maintain that the steel industry is a forecaster of overall global economic well-being.

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5. CONCLUSIONS LIMITATION OF THE STUDY

The present study has seen limitations that need to be taken into account when considering the study and its contributions. In this research report there are certain things which are needed to be explored and should be investigating at a big approach.

There were also some time constraints which limited my research work. With more time, the Case Study could have been more elaborate and accurate.

In addition to winding up the limitation of the project, it was very interesting to investigate about the topic and do the various market analysis.

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M&A failure Despite the goal of performance improvement, results from mergers and acquisitions (M&A) are often disappointing compared with results predicted or expected. Numerous empirical studies show high failure rates of M&A deals. Studies are mostly focused on individual determinants. A book by Thomas Straub (2007) "Reasons for frequent failure in Mergers and Acquisitions" develops a comprehensive research framework that bridges different perspectives and promotes an understanding of factors underlying M&A performance in business research and scholarship. The study should help managers in the decision making process. The first important step towards this objective is the development of a common frame of reference that spans conflicting theoretical assumptions from different perspectives. On this basis, a comprehensive framework is proposed with which to understand the origins of M&A performance better and address the problem of fragmentation by integrating the most important competing perspectives in respect of studies on M&A Furthermore according to the existing literature relevant determinants of firm performance are derived from each dimension of the model. For the dimension strategic management, the six strategic variables: market similarity, market complementarities, production operation similarity, production operation complementarities, market power, and purchasing power were identified having an important impact on M&A performance. For the dimension organizational behavior, the variables acquisition experience, relative size, and cultural differences were found to be important. Finally, relevant determinants of M&A performance from the financial field were acquisition premium, bidding process, and due diligence. Three different ways in order to best measure post M&A performance are recognized: Synergy realization, absolute performance and finally relative performance.

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ENDING THOUGHTS One size doesn't fit all. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power.

By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies.

M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.

To conclude mergers and acquisitions donot create immediate shareholders wealth and margins for the acquiring firm in the immediate short term. However from a longer perspective a consolidated company would be able to better cope up with the competition, increased pressure to cut cost and grow in the changing business environment.

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6. BIBLIOGRAPHY

             

en.wikipedia.org/wiki/Mergers_and_acquisitions www.investopedia.com/terms/m/merger.asp http://indiamergers.co.in/ http://en.wikipedia.org/wiki/Tata_Corus_acquisition http://tata-corus.blogspot.in/ http://www.britannica.com/EBchecked/topic/376016/merger Tata Steel ratings cut to ‘BB’ with positive outlook after Corus buy. AFX News Limited, [email protected] at Forbes.com. Tata Steel Makes It to Fortune 500 List, Indiaserver.com www.domain-b.com www.Businessweek.com/print/globalbiz/content/Jan www.forbes.com/2006/10/22/tata-corus-mna-bizcx_cx_rd_1022corus_print.html on www.iht.com/bin/print.php?id-4414416 www.tatasteel.com

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