M&a Final Black Book (edited).docx

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A PROJECT REPORT ON

MERGER AND ACQUISITION AND M&A OF FLIPKART AND MYNTRA

SEMESTER VI SUBMITTED In Partial Fulfillment of the Requirements For the Award of Degree of BACHELOR OF MANAGEMENT STUDIES.

BY

JOYAL YONATHAN WAGHCHOURE Roll no: 38

SHRI RAM COLLEGE OF COMMERCE & SCIENCE, BHANDUP WEST.

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CERTIFICATE. This is to certify that Miss JOYAL YONATHAN WAGHCHOURE Roll no. 38 of Third Year B.M.S., Semester VI (2017-2018) has successfully completed the project on ‘MERGER AND ACQUISITION AND M&A OF FLIPKART AND MYNTRA’ under the guidance of Prof. Felix.

Course Coordinator

Principal

Project Guide/Internal Examiner

External Examiner

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ACKNOWLEDGEMENT. To list who all have helped me in this project report is difficult because they are numerous & the depth is so enormous.

I would like to acknowledge the following as being idealistic channel and fresh dimensions in the completion of the project.

First of all I would like to take this opportunity to thank the Mumbai University for having projects as part of B.M.S curriculum.

I am highly indebted to our Principal Dr.Veena for providing necessary facilities required for completion of project.

I would like to express my heartfelt thanks to my guide Mr. Felix

I would like to thank Library Staff who helped me in providing various reference books & magazines related to my product.

Lastly I would like to thank each and every person who helped me directly or indirectly helped me in completion of my project especially my Parents & Peers who supported throughout the project.

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DECLARATION. I JOYAL YONATHAN WAGHCHOURE, the student of T.Y.B.M.S. semester VI (2017-2018) hereby declare that I have completed the project on ‘MERGER AND ACQUISITION AND M&A OF FLIPKART AND MYNTRA’.The information submitted is true and original to the best of my knowledge.

(Signature of the Student)

JOYAL YONATHAN WAGHCOURE ROLL NO. 38. Shri Ram College Of Commerce & Science, Bhandup (West).

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Executive Summary This project is done to study about the merger and acquisition in depth. It covers various topics such as introduction, varieties of mergers and acquisitions individually, needs, pros and cons, scope, benefits, phases, etc. I have also given an overview of a recent merger and acquisition of FLIPKART & MYNTRA. I have also done a primary research in order to understand the customer reviews of each of the online shopping websites the impact of Flipkart - Myntra merger on the customers through a questionnaire.

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TABLE OF CONTENTS SERIAL NO. 1. 2.

HEADINGS INTRODUCTION DIFFERENCE BETWEEN A M&A

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VARIETIES OF MERGER 10 DETAILS OF 11 ACQUISITTION VALUATION MATTERS 12 PREMIUM FOR POTENTIAL SUCCESS WHAT TO LOOK FOR NEED FOR THE STUDY MERGER AND ACQUISITTION PRONE INDUSTTRIES DOING THE DEAL MERGERS AND ACQUISITIONS: THE EVOLVING INDIAN LANDSCAPE M&A INDUSTRY WORLDWIDE: LATEST STATISTICS AND TRENDS M&A: THE INDIA STORY REGULATORY FRAMEWORK GOVERNING M&A TRANSACTIONS WHAT M&A FIRMS DO? M&A EFFECTS WHY MERGERS FAIL? PHASES OF M&A BENEFITS OF M&A STAGES IN A MERGER SYNERGY PROS AND CONS OF M&A WHAT CAN GO WRONG IN M&A? SCOPE OF THE STUDY FLIPKART AND MYNTRA OBJECTIVES OF M&A IMPACT OF FLIPKART AND MYNTRA MERGER AND ACQUISITION CONCLUSION QUESTIONNAIRE

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12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

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INTRODUCTION What is 'Mergers and Acquisitions - M&A' Mergers and acquisitions (M&A) is a general term that refers to the consolidation of companies or assets. M&A can include a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. In all cases, two companies are involved. The term M&A also refers to the department at financial institutions that deals with mergers and acquisitions.

'Mergers and Acquisitions - M&A' Breaking Down Mergers & Acquisitions M&A can include a number of different transactions, detailed below. Merger: In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company. For example, in 2007 a merger deal occurred between Digital Computers and Compaq whereby Compaq absorbed Digital Computers. Acquisition: In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or legal structure. An example of this transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services, where both companies preserved their names and organizational structures. Consolidation: A consolidation creates a new company. Stockholders of both companies must approve the consolidation, and subsequent to the approval, they receive common equity shares in the new firm. For example, in 1998 Citicorp and Travelers Insurance Group announced a consolidation, which resulted in Citigroup. Tender Offer: In a tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price. The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors. Example: when Johnson & Johnson made a tender offer in 2008 to acquire Omrix Biopharmaceuticals for $438 million. While the acquiring company may continue to exist — especially if there are certain dissenting shareholders — most tender offers result in mergers. Acquisition of Assets: In a purchase of assets, one company acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcy proceedings, where other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firm(s) Management Acquisition: In a management acquisition, also known as a management-led buyout (MBO), the executives of a company purchase a controlling stake in a company, making it private. Often, these former executives partner with a financier or former corporate 7

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officers in order to help fund a transaction. Such an M&A transaction is typically financed disproportionately with debt and the majority of shareholders must approve it. For example, in 2013, Dell Corporation announced that it was acquired by its chief executive manager, Michael Dell.1

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What's the Difference Between a Merger and an Acquisition?  

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Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. A merger occurs when two separate entities (usually of comparable size) combine forces to create a new, joint organization in which – theoretically – both are equal partners. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, Daimler-Chrysler, was created. An acquisition refers to the purchase of one entity by another (usually, a smaller firm by a larger one). A new company does not emerge from an acquisition; rather, the acquired company, or target firm, is often consumed and ceases to exist, and its assets become part of the acquiring company. Acquisitions – sometimes called takeovers – generally carry a more negative connotation than mergers, especially if the target firm shows resistance to being bought. For this reason, many acquiring companies refer to an acquisition as a merger even when technically it is not. Legally speaking, a merger requires two companies to consolidate into a new entity with a new ownership and management structure (ostensibly with members of each firm). An acquisition takes place when one company takes over all of the operational management decisions of another. The more common interpretive distinction rests on whether the transaction is friendly (merger) or hostile (acquisition). In practice, friendly mergers of equals do not take place very frequently. It's uncommon that two companies would benefit from combining forces and two different CEO’s agree to give up some authority to realize those benefits. When this does happen, the stocks of both companies are surrendered and new stocks are issued under the name of the new business identity. Since mergers are so uncommon and takeovers are viewed in a derogatory light, the two terms have become increasingly conflated and used in conjunction with one another. Contemporary corporate restructurings are usually referred to as merger and acquisition (M&A) transactions rather than simply a merger or acquisition. The practical differences between the two terms are slowly being eroded by the new definition of M&A deals. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. The public relations backlash for hostile takeovers can be damaging to the acquiring company. The victims of hostile acquisitions are often forced to announce a merger to preserve the reputation of the acquiring entity.2

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Varieties of Mergers From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:      

Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. Con generic mergers - Two businesses that serve the same consumer base in different ways, such as a TV manufacturer and a cable company. Market-extension merger - Two companies that sell the same products in different markets. Product-extension merger - Two companies selling different but related products in the same market. Conglomeration - Two companies that have no common business areas. There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors: o

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Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

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Details of Acquisitions In an acquisition, as in some mergers, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if any). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business. Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to acquire financing buys a publiclylisted shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares. 3

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VALUATION MATTERS Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: Its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. Here are just a few of them:

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Comparative Ratios. The following are two examples of the many comparative metrics on which acquiring companies may base their offers: o

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Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be. Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other companies in the industry.

2. Replacement Cost – In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets – people and ideas – are hard to value and develop.

3. Discounted Cash Flow (DCF) – A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. forecasted free cash flows (net income + depreciation/amortization - capital expenditures - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.4

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The Premium for Potential Success For the most part, acquiring companies nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy; a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy. Let's face it, it would be highly unlikely for rational owners to sell if they would benefit more by not selling. That means buyers will need to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their company's future prospects. For buyers, the premium represents part of the post-merger synergy they expect can be achieved. The following equation offers a good way to think about synergy and how to determine whether a deal makes sense. The equation solves for the minimum required synergy:

In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergers, which we discuss in part five, often prevent the expected benefits from being fully achieved. Alas, the synergy promised by deal makers might just fall short.

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What to Look For It's hard for investors to know when a deal is worthwhile. The burden of proof should fall on the acquiring company. To find mergers that have a chance of success, investors should start by looking for some of these simple criteria: 

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A reasonable purchase price- A premium of, say, 10% above the market price seems within the bounds of level-headedness. A premium of 50%, on the other hand, requires synergy of stellar proportions for the deal to make sense. Stay away from companies that participate in such contests. Cash transactions- Companies that pay in cash tend to be more careful when calculating bids and valuations come closer to target. When stock is used as the currency for acquisition, discipline can go by the wayside. Sensible appetite- An acquiring company should be targeting a company that is smaller and in businesses that the acquiring company knows intimately. Synergy is hard to create from companies in disparate business areas. Sadly, companies have a bad habit of biting off more than they can chew in mergers. Mergers are awfully hard to get right, so investors should look for acquiring companies with a healthy grasp of reality.

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NEED FOR THE STUDY Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following: 

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Becoming bigger: Many companies use M&A to grow in size and leapfrog their rivals. While it can take years or decades to double the size of a company through organic growth, this can be achieved much more rapidly through mergers or acquisitions. Preempted competition: This is a very powerful motivation for mergers and acquisitions, and is the primary reason why M&A activity occurs in distinct cycles. The urge to snap up a company with an attractive portfolio of assets before a rival does so generally results in a feeding frenzy in hot markets. Some examples of frenetic M&A activity in specific sectors include dot-coms and telecoms in the late 1990s, commodity and energy producers in 2006-07, and biotechnology companies in 2012-14. Domination: Companies also engage in M&A to dominate their sector. However, since a combination of two behemoths would result in a potential monopoly, such a transaction would have to run the gauntlet of intense scrutiny from anti-competition watchdogs and regulatory authorities. Tax benefits: Companies also use M&A for tax purposes, although this may be an implicit rather than an explicit motive. For instance, since the U.S. has the highest corporate tax rate in the world, some of the best-known American companies have resorted to corporate “inversions.” This technique involves a U.S. company buying a smaller foreign competitor and moving the merged entity’s tax home overseas to a lower-tax jurisdiction, in order to substantially reduce its tax bill. Staff reductions: As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also probably include the former CEO, who typically leaves with a compensation package. Economies of scale: Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies—when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. Acquiring new technology: To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. Improved market reach and industry visibility: Companies buy companies to reach new markets and grow revenues and earnings. A merger may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones. 15

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Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers – who have much to gain from a successful M&A deal – will try to create an image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price.5

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Mergers and Acquisitions-Prone Industries  

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Mergers and acquisitions are most common in the health care, technology, financial services, retail and, lately, the utilities sectors. In health care, many small and medium-sized companies find it difficult to compete in the marketplace with the handful of behemoths in the field. A rapidly changing landscape in the health-care industry, with government legislation leading the way, has posed difficulties for small and medium companies that lack the capital to keep up with these changes. Moreover, as health-care costs continue to skyrocket, despite efforts from the government to rein them in, many of these companies find it nearly impossible to compete in the market and resort to being absorbed by larger, better capitalized companies. The technology industry moves so rapidly that, like health care, it takes a massive presence and huge financial backing for companies to remain relevant. When a new idea or product hits the scene, industry giants such as Google, Facebook and Microsoft have the money to perfect it and bring it to market. Many smaller companies, instead of unsuccessfully trying to compete, join forces with the big industry players. These firms often find it more lucrative to be acquired by one of the giants for a huge payday. Throughout the 21st century, particularly during the late 2000s, merger and acquisition activity has been constant in the financial services industry. Many companies that were unable to withstand the downturn brought on by the financial crisis of 2007-2008 were acquired by competitors, in some cases with the government overseeing and assisting in the process. As the industry and the economy as a whole have stabilized in the 2010s, mergers and acquisitions by necessity have decreased. However, the 15 largest companies in the industry have a market capitalization of over $20 billion as of 2015, giving them much leverage to acquire regional banks and trusts. The retail sector is highly cyclical in nature. General economic conditions maintain a high level of influence on how well retail companies perform. When times are good, consumers shop more, and these firms do well. During hard times, however, retail suffers as people count pennies and limits their spending to necessities. In the retail sector, much of the merger and acquisition activity takes place during these downturns. Companies able to maintain good cash flow when the economy dips find themselves in a position to acquire competitors unable to stay afloat amid reduced revenues. Since 2000, M&As have picked up in the utilities sector. After a brief downturn in the immediate wake of the financial crisis of 2008, the pace of acquisitions has risen, especially between 2012 and 2015, driven primarily by a basic focus on operational efficiency and resulting profitability. The fallout from the 2008 financial crisis saw a number of weaker firms, but ones with significant assets, become ripe as takeover targets, especially in Europe. Utilities companies in many of the developed markets became busy supplementing or realigning their portfolios. Low wholesale prices, resulting from dramatic declines in the prices of oil and natural gas, and new regulatory frameworks to deal with, have both been factors as firms seek to align themselves in the most advantageous position. Some companies have undertaken significant divestitures, looking to rid themselves of less-profitable divisions or subsidiaries. Regulatory changes and the simple recognition that renewable energy sources will be an increasing portion of the utilities 17

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business moving forward have been the impetus for several firms to acquire promising wind power companies. The rapid economic growth in emerging market economies, especially the rapid expansion of utility infrastructure and tens of millions of brand-new customers, has kept many utility companies focused on acquisitions in China, India and Brazil.

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Doing the Deal 1. The Opening Offer When the CEO and top managers of a company decide that they want to do a merger or acquisition; they start with a tender offer. The process typically begins with the acquiring company carefully and discreetly buying up shares in the target company, or building a position. Once the acquiring company starts to purchase shares in the open market, it is restricted to buying 5% of the total outstanding shares before it must file with the SEC. In the filing, the company must formally declare how many shares it owns and whether it intends to buy the company or keep the shares purely as an investment. Working with financial advisors and investment bankers, the acquiring company will arrive at an overall price that it's willing to pay for its target in cash, shares or both. The tender offer is then frequently advertised in the business press, stating the offer price and the deadline by which the shareholders in the target company must accept (or reject) it. A letter of intent, or LOI, is used to set forth the terms of a proposed merger or acquisition. It provides a general overview of the proposed deal. The LOI may include the purchase price, whether it is a stock or cash deal and other elements of the proposed deal. After the LOI is submitted, the buyer performs significant due diligence on the seller’s business. A LOI does not have to be legally binding upon the parties unless the terms of the LOI specifically state it is, or it may include both binding and nonbinding provisions. There may be provisions stating the buyer agrees to keep all confidential information it sees during due diligence secret.

2. The Target's Response Once the tender offer has been made, the target company can do one of several things:  

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Accept the Terms of the Offer – If the target firm's top managers and shareholders are happy with the terms of the transaction, they will go ahead with the deal. Attempt to Negotiate – The tender offer price may not be high enough for the target company's shareholders to accept, or the specific terms of the deal may not be attractive. In a merger, there may be much at stake for the management of the target (particularly, their jobs). If they're not satisfied with the terms laid out in the tender offer, the target's management may try to work out more agreeable terms that let them keep their jobs or, even better, send them off with a nice, big compensation package. Not surprisingly, highly sought-after target companies that are the object of several bidders will have greater latitude for negotiation. Furthermore, managers have more negotiating power if they can show that they are crucial to the merger's future success. Execute a Takeover Defense or Find Another Acquirer – There are several strategies to fight off a potential acquirer (see Defensive Maneuvers, below).

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Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two biggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal would require approval from the Federal

Communications Commission (FCC). The FCC would probably regard a merger of the two giants as the creation of a monopoly or, at the very least, a threat to competition in the industry.

3. Closing the Deal finally, once the target company agrees to the tender offer and regulatory requirements are met, the merger deal will be executed by means of some transaction. In a merger in which one company buys another, the acquiring company will pay for the target company's shares with cash, stock or both. A cash-for-stock transaction is fairly straightforward: target company shareholders receive a cash payment for each share purchased. This transaction is treated as a taxable sale of the shares of the target company. If the transaction is made with stock instead of cash, then it's not taxable. There is simply an exchange of share certificates. The desire to steer clear of the tax man explains why so many M&A deals are carried out as stock-for-stock transactions. When a company is purchased with stock, new shares from the acquiring company's stock are issued directly to the target company's shareholders, or the new shares are sent to a broker who manages them for target company shareholders. The shareholders of the target company are only taxed when they sell their new shares. When the deal is closed, investors usually receive a new stock in their portfolios – the acquiring company's expanded stock. Sometimes investors will get new stock identifying a new corporate entity that is created by the M&A deal.6

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MERGERS AND ACQUISITIONS: THE EVOLVING INDIAN LANDSCAPE Merger and acquisition (M&A) is the path businesses take to achieve exponential and not just linear growth and therefore continues to generate interest. The Indian M&A landscape is no different. M&As have become an integral part of the Indian economy and daily headlines. Based on macroeconomic indicators, India is on a growth trajectory; with the M&A trend likely to continue. The catalysts for M&A could be varied, but, almost invariably, inorganic growth is on top of the agenda. This is especially so since even with the government’s efforts to improve ease of doing business in India, the gestation period for Greenfield projects continues to be long, often rife with compliance with multiple regulations. Thus, for any business, inorganic growth through M&A continues to be an attractive option. Some of the other catalysts for M&A could be: • Desire to reduce dependence and hence either backward or forward integration by way of investing in another function of the supply chain • Distressed sales, leading to a business potentially being available ‘cheap’ several other catalysts of M&A activity globally are mirrored by India Inc.: • Regulatory considerations: Considerations such as an anti-trust regime are forcing sale of business to curtail market share. While anti-trust provisions have been an important part of any transaction overseas since fairly long, often impacting not only timelines but also deal mechanics, they are still nascent in India, largely because of the ticket size of the transactions. However, the global merger of Lafarge and Holcim faced a hurdle in India, with the Competition Commission of India finally setting the sale of Lafarge India as a prerequisite to the global deal consummation in India, thereby paving entry for other players into India’s cement market. •Consolidation: Several sectors in India are in consolidation mode—for instance, the renewable energy sector (Tata Power acquired Welspun Energy’s assets in June 2016 in a deal valued at over 9,000 crore INR2 ), the banking sector (Kotak Mahindra acquired ING Vysya Bank in November 2014 in an all-stock deal valued at over 15,000 crore INR3 ), the telecom sector(in January 2016, Reliance Communications announced the acquisition of MTS India from Sistema in an all stock deal4 ) and the insurance sector (HDFC Life and Max Life announced a merger in August 2016, close on the heels of HDFC Ergo’s acquisition of L&T General Insurance in June 20165 ). • Sale of non-core assets, mainly to reduce debt: With rising debt levels, many corporate houses have been forced to put a ‘for sale’ tag on several prized assets. Consequently, some notable transactions have taken place: Reliance Infrastructure’s sale of its cement assets to Birla Corp in a 5,000 crore INR deal announced in February 20166 and Jaypee Group’s sale of cement plants to Ultratech for a deal valued at over 16,000 crore INR (July 2016),7 not long after it sold power plants to the JSW Group in 2015. All these deals were primarily undertaken to reduce debt. 21

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• E-commerce sector: India’s e-commerce sector is a hotbed of activity. With large global players like Amazon and Uber taking on a dominant role with their deep pockets, the sector is now in consolidation mode, which has become an imperative need for survival for many. For example, Tiny Owl got acquired by Roadrunnr8 and Jabong was acquired by the Flipkart owned Myntra9 at significantly lower valuations than they once commanded. Whatever the triggers for any M&A, the benefits are undeniable. Some of them are enumerated below: • Economies of scale • Operational synergies and efficiency • Access to new markets, be it new geographies, new products or new lines of business • Access to foreign capital • Newer technology • Garnering market share Of course, with the increase in M&A activity in India, the tax and regulatory environment is continually evolving, with either several challenges arising or new avenues opening up: • Changes in government regulations: Almost all relevant corporate laws/regulations in India have been revamped in the last few years, be it the Takeover Code, delisting guidelines, Companies Act, Accounting, Competition Law, etc. Tax laws are continually evolving and so are Foreign Exchange Management Act (FEMA) regulations, impacting both inbound and outbound investments. • Shareholder activism: Though activism against M&A activity is yet to pick up as much steam in India as it has globally, with Indian retail investors largely going by sentiments than fundamentals, proxy advisory firms are increasingly looking at transactions with a microscope and are advising shareholders. ‘Crompton Greaves’ deal structure to segregate its consumer products business (to bring in a strategic investor) into a separate entity, while still retaining control with itself, had to eventually be changed to vertically split the businesses. Arguably, shareholder sentiment, fanned by proxy advisory firms against the original deal structure, was a significant trigger. • Tax concerns: Starting from 2007, when the Vodafone controversy erupted, India has witnessed several high-profile tax controversies surrounding M&A transactions, which were on account of withholding tax obligations on indirect transfer of capital assets situated in India. With the advent of the proposed GAAR in 2017, structuring of transactions is set to become more vexed. It is likely that tax indemnity negotiations between parties could get more involved, and, to achieve certainty, more taxpayers could approach tax authorities (such as the Authority for Advance Rulings) for clarity. Tax insurance cover is also likely to be on the rise, though, in the Indian context, it may still be elusive or very expensive.

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• Funding restrictions: Indian companies have several restrictions imposed on them for

funding acquisitions, especially in case of share acquisitions, making leveraged buyouts in India difficult. Local bank funding for acquisition of shares is currently still permitted only in restricted circumstances. However, with the advent of newer instruments like masala bonds and listed non-convertible debentures (NCD’s), fund raising is set to become easier. Further, the external commercial borrowings (ECB) policy is also under liberalization. Given the emergence of clarity on pass-through taxation of REIT’s, InvIT’s and alternative investment funds, it is likely that more companies will use them as a means to raise funds, either to lower their existing debt levels or for acquisitions (unlike overseas listing of unlisted Indian companies which never really took off, though the FDI policy was amended to allow it). India continues to be an investment destination, with few corporate houses having the muscle to do outbound acquisitions the scale of Tata Tea’s acquisition of Tetley, Tata Steel’s of Corus, Lupin’s acquisition of Gavis or Motherson Sumi’s multiple acquisitions. The newest addition to the list of Motherson Sumi’s acquisitions is Finnish truck wire maker PKC Group. With the opening up of the economy and the government’s thrust on various initiatives, such as Make in India and Digital India, inbound M&A activity is only going to be on the uptick. In the following chapters, we will delve into various aspects of M&A, especially from an Indian tax and business perspective, which is ever evolving. Aspects like easier delisting norms via an acquisition, dual listing, full capital account convertibility, opening up funding avenues and a stable taxation system will go a long way in making India’s M&A activity the stuff of global headlines.7

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M&A industry worldwide: Latest statistics and trends 

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The era of volatility has made it inevitable for a business to grow only through organic means. The global M&A highlights sourced from Dealogic10 suggest that after three consecutive year-on-year increases, global M&A dropped to 3.84 trillion USD in 2016 from 4.66 trillion USD in 2015 (an annual record high), namely a decline of 18% year-on-year. Although cross-border M&A was down by 3% globally year-on year, China’s outbound volume hit a record high (225.4 billion USD) as did US inbound M&A (486.3 billion USD). October 2016 was the biggest month on record for global M&A, with 600.8 billion USD. As per the EMIS (a Euro money Institutional Investor company) Report on Asia Markets,11 in the first nine months of 2016, activity surged in India, with a total of 712 deals and an increase of 135 deals year-on-year. The report also suggests that, in Asian markets, the increase in the volume of deals was the highest in the IT and Internet sector; however, the increase in value of deals was the highest in the finance and insurance sector. Interestingly, the withdrawn M&A volume of 606.4 billion USD was the highest total on record in the first half of 2016 and the second highest full year since 2009. Causes for the withdrawal of M&A deals include difficulty in justifying valuations, negotiation and contracting difficulties between parties, etc.

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Macroeconomic Trends     

The world economy is divided between mature and emerging markets. The recent trend of an increase in buyers from emerging markets investing in mature markets can have a dynamic effect on the deals space. Due to the monetary easing policies of developed countries, banks and corporate have more funds which are deployed towards M&A activities. With the US Central Bank increasing rates in 2016, there is bound to be an impact on corporate’ ability to undertake inorganic expansion. Capital markets are always a key influencer in M&A activities. The action taken by Federal Bank of USA is likely to affect worldwide capital markets, which would have to embrace lot of volatility before things stabilize. The insecurity is intensified due to events such as Brexit, the ramifications of which cannot be gauged yet.

Commodity prices have been under pressure, and the sector is expected to undergo a phase of consolidation. Further, uncertainty regarding the policies of Donald Trump, the new president of the worlds’ largest economy, has been sending confusing signals to emerging markets.   

Cross-border activity by India Inc. on the rise Cross-border activities are fuelled by several factors such as strong domestic cash flows, availability of cheap finance, dynamic global demand, requirements of new markets and upgraded technologies. In order to fulfill any or all of these company objectives, the processes of M&A are quintessential. Third quarter deals in India totalled 12.2 billion USD, the highest quarterly value in more than two years. Considering India Inc.’s cross-border activities in the nine months of 2016, the top two big-ticket deals in the arena of domestic, inbound and outbound activities are as follows:

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The Indian scenario and macroeconomics impacting India As per the Credit Suisse Emerging Consumer Survey 2016, 12 India is at the top of the Emerging Consumer Scorecard, indicating a robust level of income expectations by the consumer and making India stand out in the emerging world. Considering World Bank’s Doing Business 2016 ranking, India has improved its global ranking, which clearly indicates the positive impact of various initiatives that the government has undertaken. The report specifically emphasizes the improvement in the indicator of ‘starting a business’, which reflects the simplified process for initiating various start-ups and their rapid growth. The regulatory reform of the Reserve Bank of India (RBI) allowing lenders (banks) to boost support for a debt Issued by a company to 50% from the erstwhile 20% has helped to enhance the credit rating of securities and spur the bond market. This regulatory reform would increase investor interest worldwide, and the increase in credit enhancement would inflate opportunities for the company to expand further. In addition, the opening up of the banking sector through the issuance of new banking licenses, payment bank licenses, etc., has provided a much-needed impetus to the financial sector and the overall economy. Consolidation of banks, as suggested by the former RBI Governor, RaghuramRajan, in the Report of the Committee on Financial Sector Reforms,13 is a clear measure to integrate banks with the global economy and aid them in achieving fuller capital account convertibility. The recent merger of State Bank of India (SBI) and its associate banks would increase SBI’s asset base by five times more than that of the second-largest Indian bank, ICICI Bank, post-merger. In July 2015, a Press Information Bureau release by the Ministry of Commerce and Industry, Government of India, 14 stated that there has been a 48% growth in FDI equity inflows after the launch of the Make in India campaign. This reaffirms the confidence of global investors in a resurgent India. In addition, it ensures that such initiatives lead to a positive growth environment. In line with the above initiatives, the government has liberalized the FDI policy to increase the cap of FDI investments in various sectors. For example, the FDI cap in the insurance and pension sectors has been raised to 49%, and 100% FDI has been allowed both in railway infrastructure (excluding operations) and the defense sector. This has attracted large investments in the insurance and defense sector over the last 6–8 months. Non-debt finance in the form of FDI pursuant to these liberalizations is an unseen advantage to the country. The government recently took a bold demonetization initiative that affected not just common people but also the economy to a great extent. It was an unflinching measure to merge the unorganized and organized sectors. Due to demonetization, banks have been flooded with funds. This surplus of funds with banks could lead to enhanced lending in high-growth sectors. Subsequently, increased lending may lead to reduced interest rates, bringing in multiple benefits such as lower cost of production to companies, higher profits and diversified growth. The manifold consequences of demonetization could take growth in the Indian economy to new heights. This favorable impact on India due to reforms in policy regimes could have a domino effect, leading to enhanced availability of resources for the country’s future missions, including that of smart cities. In the World Economic Forum’s Global Competitiveness Index, which ranks countries based on parameters such as 26

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institutions, macroeconomic environment, education, market size and infrastructure, India has jumped 16 notches to rank 39 among 138 countries. Considering all the above initiatives, reforms, market trends, etc., it would be a conceivable dream for India to fulfill its funding requirement of around 1 trillion USD for infrastructure growth in sectors such as highways, ports and airways during the 12th Five-Year Plan (2012–17). Let us look at the Indian M&A story in the next chapter and understand the typical modes of M&A transactions along with their regulatory framework.

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MERGERS AND ACUISITIONS: THE INDIA STORY 

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Recent trends in Indian M&A the Indian M&A landscape has witnessed several big-ticket deals in the past few years. At a time when Indian business houses are constantly looking at inorganic growth through acquisitions of other businesses, the M&A arena appears stronger than ever before now. Recently, a lot of consolidation in the form of mergers, share acquisitions and business acquisitions has been observed in telecom, cement, banking, power and insurance. Modes for M&A transactions in India

Acquisitions 

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Acquisitions can either be in the form of share purchase, whereby controlling interest in the target is acquired, or it could be in the form of acquisition of a business undertaking. While share acquisition is an effective solution, where the acquirer seeks to acquire entire control over the target, it becomes inevitable for asset acquisition in cases where the acquirer wants to assume control of an identified business undertaking. A share sale is usually for cash consideration to the shareholders of the target. In September 2016, Tata Power Renewable Energy Private Limited acquired shares of Welspun Renewable Energy Private Limited for around 1.4 billion USD (9,249 crore INR), thereby increasing its green energy portfolio by 1.14 GW.15 An acquisition of a business undertaking could be effected in various manners such as demerger of a business from the target, slump sale or slump exchange. In case of a typical demerger, the shareholders of the target are issued shares of the acquirer. In case of a slump sale/exchange, cash is paid or securities are issued to the target itself and not to its shareholders. The year 2016 has seen a number of such transactions, some of which are listed below:

• In May 2016, JSW Energy Limited (JSW), a listed company engaged in power generation, acquired 1 GW power plant from the heavily debt-laden Jindal Steel and Power Limited (JSPL) for 0.98 billion USD (6,500 crore INR) by way of slump sale by JSPL into its wholly owned subsidiary and share acquisition by a special purpose vehicle (SPV) of JSW. • July 2016 saw a major consolidation in the cement sector by way of ‘slump exchange’ when the cement capacity of 21.20 million tones per annum owned by Jaiprakash Associates

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Limited (a part of the Jaypee Group)

ii. Mergers 

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Simply put, a merger is a combination of one company into another, whereby the transferor company loses its existence upon merger with the transferee company. Various types of mergers include horizontal mergers (merger of companies involved in the same industry and in direct competition), vertical merger (merger of two companies operating in the same industry but at different level within the industry’s supply chain) or a conglomerate merger (where completely unrelated companies come together to achieve synergy benefits). In a typical merger, the shareholders of the transferor company are allotted shares as consideration for their holding in the transferee company. As recent as August 2016, an amalgamation of Aditya Birla Nuvo Limited (ABNL) with Grasim Industries Limited (Grasim), both being listed on stock exchanges, was announced in a bid to unlock shareholders’ value and create a 9 billion USD (60,300 crore INR) consolidated enterprise. The entire arrangement would be undertaken in two steps as under:

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iii. Joint venture (JV) 

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A JV is a form of business arrangement whereby two or more companies having different capabilities or particular expertise come together to undertake a business venture. The rights and obligations, profit-sharing ratio, cost allocation and other commercial considerations of each JV are typically governed by the JV agreement mutually agreed upon between the joint ventures. A recent deal between Reliance Communications Limited (RCom), a listed company, and Aircel Limited (Aircel), both engaged in the telecom sector, marked an alliance which would result in a combined asset base of 9.7 billion USD (65,000 crore INR). In this deal, the wireless telecom business of RCom will be transferred to Aircel and its subsidiary. The combined entity would be owned by RCom and the existing shareholders of Aircel.9

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Regulatory framework governing M&A transactions 1. Company law An acquisition of shares is permissible with prior approval of the audit committee and board of directors. Share sale between related parties may also require prior shareholders’ approval. Previously, mergers or demergers were largely governed by sections 391-394 of the Companies Act, 1956. Recently, with effect from 15 December 2016, sections 230-240 of the Companies Act, 2013, were notified(except Section 234 of Companies Act, 2013), pursuant to which all the Schemes of Arrangement now require approval of the National Company Law Tribunal (NCLT) as against the High Court earlier. Procedurally, any scheme is first approved by the audit committee, the board of directors, stock exchanges (if shares are listed) and then by the shareholders/creditors of the company with a requisite majority (i.e. majority in number and 3/4th in value of shareholders/creditors voting in person, by proxy or by postal ballot). NCLT will give its final approval to the scheme after considering the observations of the Regional Director, Registrar of Companies, Official Liquidator, income tax authorities, other regulatory authorities (RBI, stock exchanges, SEBI, Competition Commission of India [CCI], etc.) and any other objections filed by any other stakeholder interested in or affected by the scheme. 2.

Income-tax Act, 1961 In case of a slump sale/sale of shares of an unlisted company, capital gains tax is chargeable at the rate of 20% or 30% on the resultant capital gains depending upon the period for which the undertaking/shares are held. In case of a sale of shares of a listed company, the capital gains arising on transfer of such shares on the stock exchanges would be exempt from capital gains tax or would be chargeable at the rate of 15% depending on the period for which such listed shares are held. A classical amalgamation and demerger—i.e. amalgamation/demerger involving issuance of shares to shareholders to at least 3/4th in value of shares of the transferor company— is a tax-neutral transaction under ITA subject to the satisfaction of other specified conditions. This means that the amalgamation or demerger would not be subject to capital gains tax in the hands of the transferor company or Transferee Company as well as their shareholders. ITA also provides for continuity of business losses in the transferee entity subject to fulfillment of certain conditions. 2. Securities laws Any acquisition of shares of more than 25% of a listed company by an acquirer would trigger an open offer to the public shareholders. Any merger or demerger involving a listed company would require prior approval of the stock exchanges and SEBI before approaching NCLT. Further, under the Takeover Code, a merger or demerger of a listed company usually does not trigger an open offer to the public shareholders.

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Foreign exchange regulations Sale of equity shares involving residents and nonresidents is permissible subject to RBI pricing guidelines and permissible sectoral caps. A typical merger/demerger involving any issuance of shares to non-resident shareholders of the transferor company does not require prior RBI/government approval provided that the transferee company does not exceed the foreign exchange sectoral caps and the merger/demerger is approved by the India Indian courts. Issuance of any instrument other than equity shares/compulsorily convertible preference shares/ compulsorily convertible debentures to the non-resident would require prior RBI approval as they are considered as debt.

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Competition regulations Any acquisition requires prior approval of CCI if such acquisition exceeds certain financial thresholds and is not within a common group. While evaluating an acquisition, CCI would mainly scrutinize if the acquisition would lead to a dominant market position, resulting in an adverse effect on competition in the concerned sector.

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Stamp duty The Indian Stamp Act, 1899, provides for stamp duty on transfer/issue of shares at the rate of 0.25%. In case the shares are in dematerialized form, there would be no stamp duty on transfer of shares. Conveyance of business under a business transfer agreement in the case of a slump sale is charged to stamp duty at the same rate as in the case of conveyance of assets. Typically, a scheme of merger/demerger is charged to stamp duty at a concessional rate as compared to conveyance of assets. The exact rate levied depends upon the specific entry under the respective state laws.

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What Merger and Acquisition Firms Do? The merger or acquisition deal process can be intimidating and this is where the merger and acquisition firms step in, to facilitate the process by taking on the responsibility for a fee. These firms guide their clients (companies) through these transformative, multifaceted corporate decisions. The various types of merger and acquisition firms are discussed below. The role of each type of firm is to successful seal a deal for its clients, but each does differ in its approach and duties. 

Investment Banks

Investment banks perform a variety of specialized roles. They carry out transactions involving huge amounts, in areas such as underwriting. They act as a financial advisor (and/or broker) for institutional clients, sometimes playing the role of an intermediary. They also facilitate corporate reorganizations including mergers and acquisitions. The finance division of investment banks manages the merger and acquisition work, right from the negotiation stage until the deal's closure. The work related to the legal and accounting issues is outsourced to affiliate companies or empanelled experts. The role of an investment bank in the procedure typically involves vital market intelligence in addition to preparing a list of prospective targets. Then once the client is sure of the targeted deal, an assessment of the current valuation is done to know the price expectations. All the documentation, management meetings, negotiation terms and closing documents are handled by the representatives of the investment bank. In cases where the investment bank is handling the selling side, an auction process is conducted with several rounds of bids to determine the buyer.. 

Law Firms

Corporate law firms are popular among companies looking to expand externally through a merger or acquisition, especially companies with international borders. Such deals are more complex as they involve different laws governed by different jurisdictions thus requiring very specialized legal handling. The international law firms are best suited for this job with their expertise on multi-jurisdiction matters. 

Audit & Accounting Firms

These companies also handle merger and acquisitions deals with obvious specialization in auditing, accounting and taxation. These companies are experts in evaluating assets, conducting audits and advising on taxation aspects. In cases where cross border merger or acquisition is involved, the understanding of the taxation part becomes critical and such companies fit well in such situations. In addition to audit and account expects these companies have other experts on the panel to manage any aspect of the deal well.

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Consulting & Advisory Firms

The leading management consulting and advisory firms guide clients through all stages of a merger or acquisition process – cross industry or cross-border deals. These firms have a team of experts who work towards the success of the deal right from the initial phase to successful closure of the deal. The bigger companies in this business have global footprint which helps in identifying targets based on suitability in all aspects. The firms work on the acquisition strategy followed by screening to due diligence and advising on price valuations making sure that the clients are not overpaying and so on. 11

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M&A Effects – Capital Structure and Financial Position  

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M&A activity obviously has longer-term ramifications for the acquiring company or the dominant entity than it does for the target company in an acquisition or the firm that is subsumed in a merger. For the target company, an M&A transaction gives its shareholders the opportunity to cash out at a significant premium, especially if the transaction is an all-cash deal. If the acquirer pays partly in cash and partly in its own stock, the target company’s shareholders would hold a stake in the acquirer, and thus have a vested interest in its long-term success. For the acquirer, the impact of an M&A transaction depends on the deal size relative to the company’s size. The larger the potential target, the bigger the risk to the acquirer. A company may be able to withstand the failure of a small-sized acquisition, but the failure of a huge purchase may severely jeopardize its long-term success. Once an M&A transaction has closed, the impact upon the acquirer would typically be significant (again depending on the deal size). The acquirer’s capital structure will change, depending on how the M&A deal was designed. An all-cash deal will substantially deplete the acquirer’s cash holdings. But as many companies seldom have the cash hoard available to make full payment for a target firm in cash, all-cash deals are often financed through debt. While this additional debt increases a company’s indebtedness, the higher debt load may be justified by the additional cash flows contributed by the target firm. Many M&A transactions are also financed through the acquirer’s stock. For an acquirer to use its stock as currency for an acquisition its shares must often be premium-priced to begin with, else making purchases would be needlessly dilutive. As well, management of the target company also has to be convinced that accepting the acquirer’s stock rather than hard cash is a good idea.

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M&A Effects – Market Reaction and Future Growth 

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Market reaction to news of an M&A transaction may be favorable or unfavorable, depending on the perception of market participants about the merits of the deal. In most cases, the target company’s shares will rise to a level close to that of the acquirer’s offer, assuming of course that the offer represents a significant premium to the target’s previous stock price. In fact, the target’s shares may trade above the offer price if the perception is either that the acquirer has lowballed the offer for the target and may be forced to raise it, or that the target company is coveted enough to attract a rival bid. There are any numbers of reasons why an acquirer’s shares may decline when it announces an M&A deal. Perhaps market participants think that the price tag for the purchase is too steep. Or the deal is perceived as not being accretive to EPS (earnings per share). Or perhaps investors believe that the acquirer is taking on too much debt to finance the acquisition. An acquirer’s future growth prospects and profitability should ideally be enhanced by the acquisitions it makes. Since a series of acquisitions can mask deterioration in a company’s core business, analysts and investors often focus on the “organic” growth rate of revenue and operating margins – which excludes the impact of M&A – for such a company. In cases where the acquirer has made a hostile bid for a target company, the latter’s management may recommend that its shareholders reject the deal. One of the most common reasons cited for such rejection is that the target’s management believes the acquirer’s offer substantially undervalues it. But such rejection of an unsolicited offer can sometimes backfire, as demonstrated by the famous Yahoo-Microsoft case.12

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M&A Effects – The Workforce 

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Historically, mergers tend to result in job losses, as operations and departments become redundant. The most consistently threatened jobs are the target company's CEO and other senior management, who often are offered a severance package. But it can also signal risk for all the target company's employees, especially since those who had hired them are likely no longer making critical labor decisions. By and large, the target company's employees do not have to fear for their current accumulated benefits. The Employee Retirement Income Security Act protects retirement pensions and other benefits. In some circumstances, the employees of the newly created entity receive new stock options (such as an employee stock ownership plan) or other benefits as a reward and incentive.

The Impact of Foreign Exchange Foreign currency exchange rates can have a major impact on the flow of cross-border mergers and acquisitions (M&A) deals – that is, when the target company and the acquiring company are in different countries. Studies show that companies in countries whose currencies have appreciated substantially are more likely to target acquisitions in countries whose currencies have not appreciated as much. Since the acquiring company has a stronger currency relative to the country of the acquisition, the transaction is more affordable on a relative basis. Foreign currency traders may even take advantage of major international M&As for profitable trade setups. A large cross-border M&A often requires a large currency transaction. This transaction can have an impact on the relative exchange rates between the two countries for large deals.

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Why Mergers Fail It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. Different systems and processes, dilution of a company's brand, overestimation of synergies and lack of understanding of the target firm's business can all occur, destroying shareholder value and decreasing the company's stock price after the transaction.

Flawed Intentions 

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For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit. A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later. On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world.

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The Obstacles to Making it Work 

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Even if the rationale for a merger or acquisition is sound, executives face major stumbling blocks after the deal is consummated. Potential operational difficulties may seem trivial to managers caught up in the thrill of the big deal; but in many cases, integrating the operations of two companies proves to be a much more difficult task in practice than it seemed in theory. The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity. Cultural clashes between the two entities often mean that employees do not execute post-integration plans well. And since the merger of two workforces often creates redundant functions, which in turn often result in layoffs, scared employees will act to protect their own jobs, as opposed to helping their employers realize synergies. And sometimes, the expected advantages of acquiring a rival don't prove worth the price paid. Say pharma company A is unduly bullish about pharma company B’s prospects – and wants to forestall a possible bid for B from a rival – so it offers a very substantial premium for B. Once it has acquired company B, the best-case scenario that A had anticipated doesn't materialize: A key drug being developed by B may turns out to have unexpectedly severe side-effects, significantly curtailing its market potential. Company A’s management (and shareholders) may then be left to rue the fact that it paid much more for B than what it was worth. More insight into the failure of mergers is found in a highly acclaimed study from McKinsey, a global consultancy. The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders.13

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PHASES OF MERGER AND ACQUISITION PHASE I - STRATEGIC PLANNING Stage 1 Develop or Update Corporate Strategy To identify the Company’s strengths, weaknesses and needs a. Company Description b. Management & Organization Structure c. Market & Competitors d. Products & Services e. Marketing & Sales Plan f. Financial Information g. Joint Ventures h. Strategic Alliances Stage 2Preliminary Due Diligence a. Financial b. Risk Profile c. Intangible Assets d. Significant Issues Stage 3 Preparation of Confidential Information Memorandum a. Value Drivers b. Project Synergies c. EBIDTA Adjustments

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PHASE II – TARGET/BUYER IDENTIFICATION & SCREENING Stage 4 Buyer Rationale a. Identify Candidates b. Initial Screening Stage Stage 5 Evaluations of Candidates a. Management & Organization Information b. Financial Information (Capabilities) c. Purpose of Merger or Acquisition Merger & Acquisition

PHASE III – TRANSACTION STRUCTURING Stage 6Letter of Intent Stage 7Evaluations of Deal Points

a. Continuity of Management b. Real Estate Issues c. Non-Business Related Assets d. Consideration Method e. Cash Compensation f. Stock Consideration g. Tax Issues h. Contingent Payments i. Legal Structure j. Financing the Transaction Stage 8 Due Diligences a. Legal Due Diligence b. Seller Due Diligence c. Financial Analysis 41

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d. Projecting Results of the Structure Stage 9 Definitive Purchase Agreements a. Representations and Warranties b. Indemnification Provisions Stage 10 Closing the Deal

PHASE IV – SUCCESSFUL INTEGRATION a. Human Resources b. Tangible Resources c. Intangible Assets d. Business Processes e. Post Closing Audit14

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BENEFITS OF MERGERS AND ACQUISITIONS A merger occurs when two firms join together to form one. The new firm will have an increased market share, which helps the firm gain economies of scale and become more profitable. The merger will also reduce competition and could lead to higher prices for consumers. The main benefit of mergers to the public are: 1. Economies of scale. This occurs when a larger firm with increased output can reduce average costs. Lower average costs enable lower prices for consumers.

Different economies of scale include:    

Technical economies; if the firm has significant fixed costs then the new larger firm would have lower average costs, Bulk buying – A bigger firm can get a discount for buying large quantities of raw materials Financial – better rate of interest for large company Organizational – one head office rather than two is more efficient

A merger can enable a firm to increase in size and gain from many of these factors. Note a vertical merger would have less potential economies of scale than a horizontal merger e.g. a vertical merger could not benefit from technical economies of scale. However, in a vertical merger, there could still be financial and risk-bearing economies.

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Some industries will have more economies of scale than others. For example, car manufacture has high fixed costs and so gives more economies of scale than two clothing retailers. More on economies of scale 2. International competition. Mergers can help firms deal with the threat of multinationals and compete on an international scale. This is increasingly important in an era of global markets. 3. Mergers may allow greater investment in R&D This is because the new firm will have more profit which can be used to finance risky investment. This can lead to a better quality of goods for consumers. This is important for industries such as pharmaceuticals which require a lot of investment. It is estimated 90% of research by drug companies never comes to the market. There is a high chance of failure. A merger, creating a bigger firm, gives more scope to tolerate failure, encouraging more innovation. 4. Greater efficiency. Redundancies can be merited if they can be employed more efficiently. It may lead to temporary job losses, but overall productivity should rise. 5. Protect an industry from closing. Mergers may be beneficial in a declining industry where firms are struggling to stay afloat. For example, the UK government allowed a merger between Lloyds TSB and HBOS when the banking industry was in crisis. 6. Diversification. In a conglomerate merger, two firms in different industries merge. Here the benefit could be sharing knowledge which might be applicable to the different industry. For example, AOL and Time-Warner merger hoped to gain benefit from both the new internet industry and an old media firm.15

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Evaluation of mergers The desirability of a merger will depend upon several factors such as:   

Is there scope for economies of scale? Are there high fixed costs in the industry? Will there be an increase in monopoly power and a significant reduction in competition? Is the market still contestable? (is there freedom of entry and exit)

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STAGES IN A MERGER There are three major steps in a merger transaction: planning, resolution, and implementation. 1. Planning which is the most complex part of the merger process entails the analysis, the

action plan, and the negotiations between the parties involved. The planning stage may last any length of time, but once it is complete, the merger process is well on the way. More in detail, the planning stage also includes:    

signing of the letter of intent which starts off the negotiations; the appointing of advisors who play the role of consultants, examining the strengths, weaknesses, opportunities, and threats of the merger; detailing the timetable (deadline), conditions (share exchange ratio), and type oftransaction (merger by integration or through the formation of a new company); Expert report on the consistency of the share exchange ratio, for all of the companies involved.

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2. The resolution is simply management's approval first, then by the shareholders involved

in the merger plan. The resolution stage also includes:    

the Board of Directors calling an extraordinary shareholders’ meeting whose item on the agenda is the merger proposal; the extraordinary shareholders’ meeting being called to pass a resolution on the item on the agenda; any opposition to the merger by creditors and bondholders within 60 days of the resolution; Green light from the Italian Antitrust Authority, which evaluates the impact of the merger and imposes any obligations as a prerequisite for approving the merger.

3. Implementation is the final stage of the merger process, including enrolment of the

merger deed in the Company Register. Normally medium-sized/big mergers require one year from the start-up of negotiations to the closing of the transaction. This is because, in addition to the time needed technically, there are problems relating to the share exchange ratio between the merging companies which is rarely accepted by the parties without drawn-out negotiations. During the merger process, share prices will adjust to the share exchange ratio. On the effective date of the merger, financial intermediaries will enter the new shares with the new quantities in the dossiers. The shareholders may trade without constraint the new shares and benefit from all rights (dividends, voting rights).

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SYNERGY What is 'Synergy' Synergy is the concept that the value and performance of two companies combined will be greater than the sum of the separate individual parts. Synergy is a term that is most commonly used in the context of mergers and acquisitions. Synergy, or the potential financial benefit achieved through the combining of companies, is often a driving force behind a merger. Shareholders will benefit if a company's post-merger share price increases due to the synergistic effect of the deal. The expected synergy achieved through the merger can be attributed to various factors, such as increased revenues, combined talent and technology, or cost reduction.

BREAKING DOWN 'Synergy' Mergers and acquisitions are made with the goal of improving the company's financial performance for the shareholders. Two businesses can merge to form one company that is capable of producing more revenue than either could have been able to independently, or to create one company that is able to eliminate or streamline redundant processes, resulting in significant cost reduction. Because of this principle, the potential synergy is examined during the merger and acquisition process. If two companies can merge to create greater efficiency or scale, the result is what is sometimes referred to as a synergy merge.

TYPES OF SYNERGY 1) Operations Synergy This is obtained through integrating functional activities. It can be created through economies of scale / or scope. 2) Technology Synergy To create synergies through this, firms seek to link activities associated with research and development processes. The sharing of R&D programs, the transfer of technologies across units, products and programs, and the development of new core business through access to private innovative capabilities are examples of activities of firms trying to create synergies 3) Marketing – Based Synergy Synergy is created when the firm successfully links various marketing-related activities including those related to sharing of brand names as well as distribution channels and advertising and promotion campaign.

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4) Management Synergy These synergies are typically gained when competitively relevant skills that were possessed by managers in the formerly independent companies or business units can be transferred successfully between units within the newly formed firm. 5) Private Synergy This can be created when the acquiring firm has knowledge about the complementary nature of its resources with those of the target firm that is not known to others. 18

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PROS AND CONS OF MERGERS AND ACQUISITIONS The advantage and disadvantages of merger and acquisition are depending of the new companies short term and long term strategies and efforts. That is because of the factors likes' market environment, Variations in business culture, acquirement costs and changes to financial power surrounding the business captured. So following are the some advantages and disadvantages of merger and acquisition (M&A) are: PROS: Following are the some advantages  

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The most common reason for firms to enter into merger and acquisition is to merge their power and control over the markets. Another advantage is Synergy that is the magic power that allow for increased value efficiencies of the new entity and it takes the shape of returns enrichment and cost savings. Economies of scale is formed by sharing the resources and services (Richard et al, 2007). Union of 2 firm's leads in overall cost reduction and utilize alternative tax benefits.

CONS: Following are the some difficulties encountered with a merger

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Loss of experienced workers aside from workers in leadership positions. This kind of loss inevitably involves loss of business understand and on the other hand that will be worrying to exchange or will exclusively get replaced at nice value. As a result of M&A, employees of the small merging firm may require exhaustive reskilling. Company will face major difficulties thanks to frictions and internal competition that may occur among the staff of the united companies. There is conjointly risk of getting surplus employees in some departments. Merging two firms that are doing similar activities may mean duplication and over capability within the company that may need retrenchments. Increase in costs might result if the right management of modification and also the implementation of the merger and acquisition dealing are delayed. The uncertainty with respect to the approval of the merger by proper assurances. In many events, the return of the share of the company that caused buyouts of other company was less than the return of the sector as a whole giving a competitive advantage, that is feasible as a result of raised buying power and longer production runs. Decrease of risk using innovative techniques of managing financial risk. To become competitive, firms have to be compelled to be peak of technological developments and their dealing applications. By M&A of a small business with unique technologies, a large company will retain or grow a competitive edge. The biggest advantage is tax benefits. Financial advantages might instigate mergers and corporations will fully build use of tax- shields, increase monetary leverage 19

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What can go wrong in M&A deals Synergy, sharpening business focus, growth and elimination of competition are some of the driving forces for any entity to undertake an acquisition. In the case of a merger, the two merging companies will bring in synergies, leading to an increase of wealth of the original shareholders of the companies. However, to the dismay of the shareholders and other stakeholders such as employees and banks, the flaw in the logic and the assumptions used in arriving at this logic look fallible and becomes conspicuous only in hindsight. In this chapter, we deal with the key themes of arriving at conclusions for increased shareholder value and trends to watch out for while evaluating these themes.

1. Backward/forward integration: Many M&A transactions are based on the premise that it makes perfect logic to inorganically acquire key customers or key suppliers of the target enterprise as it gives the opportunity to add margins to the company with little incremental effort. More often than not, one can see front-end companies acquiring their back-end suppliers with the logic that the margin that the back-end company is making can be easily added and increased as well as cut down when it becomes a captive unit. What can go wrong? The managements of back-end businesses operating in the B2B domain are not only focused on maintaining high-end quality but very tight cost controls as well. They would try and squeeze out all costs wherever possible as industrial buyers have high availability of information and are often able to cut cost year on year. The auto industry is one such example where suppliers cut down the price per unit on a continuous basis. However, when the back-end supplier is acquired by a front-end company where the management is more focused on sales and marketing rather than cost controls, there is a likelihood of inefficiencies creeping in over a period of time. Even if there is no new inefficiency creeping in, the pace of innovation and continuous focus on cost controls does go down, leading to less than optimal realization of planned synergies. 2. Eliminate competition/increase market share: Many transactions are undertaken to increase market share and/or eliminate competition. These types of transactions, in our experience, do give the envisaged results, at least in short period of time. Increase in market share is often accompanied by reduction in overheads such as employee numbers, better bargaining with suppliers and more control over the customers and distribution channel. What can go wrong? This clearly is one of the safer bets as the acquirer knows the intricacies of the business being acquired. After the acquisition, the managements are often left with multiple products in their portfolio, with many of them competing against one another. Many managements faced with such a situation try and issue a death warrant for the weaker product rather than managing both the products, leaving a void for the competition to come and capture some market share which has been paid for. However, there are multiple examples where companies have managed to run both the brands successfully, a popular

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one being Coca Cola, where Coke still runs Coke and Thumps Up as successful brands in India. It is clearly easy to cull a product or a brand and move ahead but managing brands and products which may end up competing with each other is a rather difficult thing to do. However, in industrial brands, many companies have been successful in following the strategy of pulling the plug on one of the products. 3. Entering into new areas/adjacent businesses: Much management faced with one or more of the following situations embark on a journey to enter new business areas. • Too much free cash flow being generated in the main business • Low growth rates in their main lines of business An example of this would be tobacco companies that have over the last 30 years convinced themselves to venture into unrelated areas based on the above two reasons. What can go wrong? This is clearly one of the most risky strategies. If history is any indicator of the trend, the results have been far less than satisfactory for many companies. However, when you have a sufficient amount of money being generated and a stable business, undertaking such kind of activities do provide excitement to the management in an otherwise mundane business ecosystem. Almost everything can go wrong in such businesses. To start, the manager of the acquired business will always be compared with the manager of the stable business, and more often than not his results will not match up. 20

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SCOPE OF THE STUDY I will be presenting an overview of FLIPKART-MYNTRA MERGER AND ACQUISITION

E-commerce ecosystem of India The rapid growth of e-commerce in India is supported by an increasingly sophisticated ecosystem that speeds consumer products makers’ goods to online shoppers. The sector is classified into four major types, based on the parties involved in the transactions – Businessto-business (B2B), business-to-customer (B2C), and customer-to business (C2B) and customer-to-customer (C2C). The emergence of well-designed user-friendly online trading, payment and delivery services. E-Commerce (B2C, C2C) revenues have been growing at a whopping ~50% year on year with USD 10billion in 2011. Technopak estimates that e-tailing in India will grow from the current USD 0.6 billion to USD 76 billion by 2021, i.e., more than hundredfold. The key reason for this disruptive growth lies in the fact that the market enabling conditions and ecosystem creation for e-tailing will outpace the same for corporatized brick & mortar retail. This growth will offer many advantages to the Indian economy, besides bringing in immense benefits to consumers. The growing need of consumer in various zones, travelling, jobs, entertainment and changing trends in fashion, has attracted customers to get comfortable ordering online. The companies have played a vital role in building a critical mass of Indian users – and they will continue to evolve. Key competitors of market Jabong, Flipkart, Yebhi and makemytrip has made a tremendous growth in case of turnovers21

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Philosophy behind the acquisition of Flipkart and Myntra

As India’s community of online shoppers grows, so will the traditional and online players that make smart and strategic moves to enjoy the major share by optimizing operations for profit. The main idea behind any merger and acquisition is to gain competitive advantage in global market and accelerate company’s growth particularly when its growth is constrained due to paucity of resources. For entering in new product/markets, the company may lack technical skills and may require special marketing skills and a wide distribution network to access different segments of market. The joining or merging of the two companies creates additional value which we call "synergy" value. Synergy value can take three forms   

Revenues: By combining the two companies, we will realize higher revenues then if the two companies operate separately Expenses: By combining the two companies, we will realize lower expenses then if the two companies operate separately. Cost of Capital: By combining the two companies, we will experience a lower overall cost of capital. The model below represents the process and map of merger and acquisition Many mergers are driven by the need to cut costs. However, the best mergers seem to have strategic reasons for the business combinations. These include

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Positioning-Taking advantage of future opportunities that can be exploited when the two companies are combined. For example, a telecommunications company might improve its position for the future if it were to own a broad band service company. Companies need to position themselves to take advantage of emerging trends in the marketplace. Gap Filling-One company may have a major weakness (such as poor distribution) whereas the other company has some significant strength. By combining the two companies, each company fills-in strategic gaps that are essential for long-term survival. 54

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Bargain Purchase-It may be cheaper to acquire another company then to invest internally. For example, suppose a company is considering expansion of fabrication facilities. Another company has very similar facilities that are idle. It may be cheaper to just acquire the company with the unused facilities then to go out and build new facilities on your own. Diversification-It may be necessary to smooth-out earnings and achieve more consistent long-term growth and profitability. This is particularly true for companies in very mature industries where future growth is unlikely. It should be noted that traditional financial management does not always support diversification through mergers and acquisitions. It is widely held that investors are in the best position to diversify, not the management of companies since managing a steel company is not the same as running a software company. Short Term Growth-Management may be under pressure to turnaround sluggish growth and profitability. Consequently, a merger and acquisition is made to boost poor performance. Undervalued Target-The Target Company may be undervalued and thus, it represents a good investment. Some mergers are executed for "financial" reasons and not strategic reasons [Evans, 2000].Marking the above explanation Flipkart which started with online bookstore similar to Amazon and now sells products across categories, including fashion and electronics. It now also sells white goods and furniture. It hit the billion-dollar milestone in annual gross merchandise value last month. Subsequently Fashion, which delivers over 35% in operating margin, is among the most contested categories in ecommerce and has seen the emergence of players like Jabong, Fashionara and Limeroad and even web-only brands like Yepme and Zovi. The number is growing every month and on track to grow between 100-150 per cent over next 3-4 years. The overall Lifestyle category in India is $45 billion, growing at 16% CAGR. The industry will cross $100 billion in 2015 with somewhere between 5- 10% of this being online. Flipkart moved to market place model in Feb. 2013 where third party merchants sell goods to shoppers through flipkart site. It allows e-commerce companies to scale up faster & save storage & other inventory related cost as the products are held by merchants. For Flipkart, setting up a huge fashion vertical means boosting margins, because fashion has the highest margins-35 to 40 per cent-among all products sold online. Myntra has big plans with its private brands like Anouk, Dress berry and Roadster, which promise margins as high 60 per cent. Myntra will continue to operate as a separate brand, and its founder MukeshBansal will occupy a seat on Flipkart's board, heading all fashion at the new entity. Flipkart will bring in its capabilities in customer service and technology. Both companies will also net customers that have shopped on both portals-about 80 per cent of the country's online shoppers have shopped

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on either Myntra or Flipkart. However, the companies will not integrate the back end. The two teams will also function separately. To begin with Flipkart will invest $100 million in fashion business. On the other hand Myntra’s goal is to generate 20,000 crore in gross sales by 2020 for which the site needs more than $150-200 million fresh funds. Flipkart and Myntra deal will create the first Indian e-tailing powerhouse, and provide a big fillip to India's still nascent but very promising e-commerce industry. Myntra sells products from over 650 brands like Nike, HRX by HrithikRoshan, Biba and Steve Madden and clocked revenue of about Rs 1,000 crore in the previous financial year. As part of the acquisition, Myntra co-founder MukeshBansal will join Flipkart's board and will also oversee Flipkart's fashion business. Flipkart and Myntra will remain as two separate entities, but people holding stock options in Myntra will now hold the same in Flipkart. The current deal appears to be win-win for both companies, and could be the making of a giant company, better positioned to address India's growing demand for online retail-one that could put up strong competition against rivals Flipkart, which also operates under the marketplace model allowing retailers to offer products on its platform, has since its inception raised over $500 million. Common investors such as early-stage investor Accel Partners and investment fund Tiger Global are expected to remain invested in Myntra, as also recent investor Premji Invest, which participated in the 300 crore funding round in the fashion portal in February. 22

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FACT FILE OF FLIPKART-MYNTRA DEAL It’s a 100% acquisition. The current investors in Myntra remain so and there’s no exit taking place. 

Myntra continues to function as an independent entity and so does the fashion division of Flipkart. 

Only MukeshBansal from Myntra joins the Flipkart board. He’ll head the fashion business for Flipkart.

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All the Myntra employees get the universal stock options.

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$100 million to be invested in Flipkart fashion business in coming years.

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Together, Flipkart and Myntra will have over 50% share in the online fashion market in India (Myntra’s current share is ~30%). There are no immediate plans of integrating the duo but the possibilities will be explored in near future.

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There are enough funds with Flipkart to sustain for long; hence there are no immediate plans for next round of funding.

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Flipkart is definitely eyeing for an IPO but not the priority as of now.

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Flipkart plans to go Alibaba way rather than the Amazon way due to more similarities in between Indian and Chinese consumers.

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There’s no threat to Myntra’s online fashion dominance by Amazon.

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Flipkart aims to grow its fashion/apparel business to an extent that it accounts to 30% of their revenue shares.

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Key stakeholders in Myntra have become millionaires with this deal.

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OBJECTIVES OF MERGER AND ACQUISITION 

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Shareholder Gains By shareholders gains I refer to the increase in the market value of the firm due to the merger. Since the increase in the value of the firm directly benefits its owners (shareholders) it is said that shareholders gain. A firm may increase its market value by increasing its profits. Increasing profits, in turn, is possible by decreasing costs, operating more efficiently, implementing optimal incentives to managers or enhancing market power Efficiency gains Technical efficiencies are those that could be obtained by other means than merging, in particular, by internal growth, joint ventures, specialization agreements, licensing, etc. According to the authors, technical efficiencies correspond to changes within the joint production capabilities of the merging parties. In the short term, they can be achieved by a reallocation of output across the merging units or scale economies if capital is mobile. In the longer run, they can be achieved by undertaking investment on a larger scale. Economies of scale A firm is said to have economies of scale when its average cost decreases as total output increases. More strictly, economies of scale arrive when the higher the production, the lower the marginal cost. In the short run, when physical capital is held fixed economies of scale make production less expensive. In the long run, they may result from the coordinationof the merging firms’ investments in physical capital. Economies of scope Economies of scope are economies of scale generalized to multi-product firms or to firms related by a chain of supply. They are reached if the average cost of producing two products separately falls when the products are produced jointly. Economies of vertical integration Economies of vertical integration are revealed when the sum of the cost of separately owned stages of production falls when a single firm performs the two stages of production. These cost savings can be localized in the technical relationship between the two stages of production or in the market transactions costs (distribution costs). For instance, acquisitions of technical support, promotion, training, equipment and financing are often seen as factors generating efficiency gains from vertical integration. Diffusion of know-how If the merging firms have different technological capabilities, human capital, organizational cultures, patents, or simply know-how and it turns out that they are complementary to each other; then, by putting them together, they will most probably achieve a technological progress. R&D An acquiring firm may see a high R&D target as a faster mean of investment on R&D than internally expending on it. Indeed, often merging firms claim that by integrating their R&Ds they will faster introduce new or better quality products and innovate in cost reducing processes.

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Cost savings Cost savings is a very general concept that may be attained in many distinct ways. What is important for the analysis of merger motives is to identify the type of cost saving, i.e., if it consists on a reduction of average or marginal costs of production, fixed costs or financial 11 - costs. Fixed costs are those that do not vary with production but that are necessary to produce. They include for instance administrative support, public relationships, maintenance of property plant and equipment, salaries, advertising, etc.

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Rationalization Rationalization consists on a more optimal reallocation of production across the different lines of production of the merging firms. That is, shifting production from a plant with higher marginal costs to another with lower marginal costs, without necessarily increasing the joint technological capabilities, is a mean to save costs. Purchasing power Cost savings may arrive when firms at the downstream level of production merge to increase their bargaining power towards their providers of inputs (firms at the upstream level of production). That is, by increasing its size, a downstream firm may also increase its buyer power and obtain quantity discounts or just better prices from their upstream suppliers. This practice would clearly imply a cost saving for the new merged entity. Creating internal capital markets This hypothesis states that if external capital markets (stocks, securities or banks) are not sufficiently efficient to create value, then by building up an M-form larger firm that creates an internal capital market, value will be generated. Taxes Mergers before the 1980s were strongly motivated by tax advantages. The reason is that at the time when an acquisition premium was paid above the values at which a company’s depreciable assets were recorded in tax accounts, the acquired assets could benefit of higher depreciation charges, protecting the acquirer from tax liabilities. Interest rates Often small firms cannot borrow at competitive interest rates due to liquidity constraints or to asymmetric information in the external capital market. Since a large - 13 - corporation has better access to the outside capital market that a small one, the merger is said to be motivated by the possibility of borrowing more cheaply than separate units. Diversification The common feature between them is that they occur in conglomerate mergers and acquisitions. Here, the idea is that managers assemble a portfolio composed of selected portfolios based on their overall risk-return performance rather than portfolios with securities that have individual high risk-return performance.6 This is a financial strategy that may reduce the risk of bankruptcy too. Sometimes diversification may be chosen with the purpose of higher managerial rents.

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IMPACT OF FLIPKART-MYNTRA MERGER AND ACQUISITION FS analyzed and comprehended the major factors that forced Myntra and Flipkart to merge their ventures – [A] Flipkart and Myntra Merge – Business Expansion and Market Consolidation Flipkart has already acquired a large consumer base in e-commerce of Books, Electronics Goods etc. So instead of struggling with its rudimentary vertical of Fashion and Lifestyle Products, the acquisition of well trusted player of same domain, Myntra, was upright choice for Flipkart. More than 150k product catalogue of Myntra helped Flipkart in enhancing its business vertical of Apparel. Flipkart co-founder and CEO SachinBansal stated about this acquisition that they, at Flipkart, believed that they wanted to be leaders in every segment and fashion was a category of the future, this acquisition would help us become leaders in this category. MukeshBansal, Founder of Myntra, stated that they wanted to exploit their mutual synergies (like the technology at Flipkart and market leadership of Myntra) in order to accelerate their growth. Flipkart also ensured the sector consolidation of e-commerce by acquisition of Myntra. It’s like becoming one single known name when online shopping comes into mind. So the best strategy for market consolidation of e-commerce is by incorporating all possible verticals into one single business model.

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[B] Consumer Base – Loyalty, Sharing and Acquisition Before the Deal though e-commerce had made a remarkable presence in startup eco-system , loyalty of consumers was still in doubt. The availability of large number of players of same domain, cash burn tactics for attracting customers, discount oriented mindset of public etc were some of the reasons that were creating large turbulence in penetration and loyalty. Also, since the acquisition cost of consumers was high for e-commerce players and switching cost was non-existing so they both needed a large pool of loyal customers. Through the deal Myntra and Flipkart were able to combine their loyal consumer base into a common pool. Myntra claimed to have 8million registers and loyal user base while Flipkart has 18 million. So the deal developed a large loyal market volume for both of the players. Addressing the consumer behavior and acquisition, SachinBansal stated that Cost synergies were not their priority for this deal, it was about scaling the two businesses in much faster to expand market share in fashion. [C] Market Competition – Biggies, FDI and Future Market competition that both of the players, Myntra and Flipkart were facing was huge. All the marketing capturing strategies could easily be replicated by biggies like Snapdeal, Amazon, and E-bay – strong enough in terms of funds, technology and manpower. Also, the regulation of FDI was a big concern for both of the player. As the government was planning to allow 100% FDI in retail, players like Amazon, Ebay, and Walmart could have introduced their own products and shifted to an inventory based model. Earlier model of Flipkart was also inventory based before they faced capital issues and shifted to market based model. The combined market share of both the players was already 50% which was expected to increase up to 70% after this apparel concentrated acquisition. So the deal was a win-win situation for both to stand against the market competition in long run. [E] Loss Reduction by Combining the Services – Technology, Consumers, Logistics So far, none of the e-commerce player had reported to achieve profitability in their business model. High cash burn, forward and reverse logistics cost in poor infrastructure, technical backend cost etc were the factors contributing to this continuous loss of money for these Ecommerce firms. In 2013, Flipkart lost Rs 281 Crore (US$47 million) on revenues of Rs 1,180 Crore (US$197 million) while Myntra lost Rs 134 Crore (US$22 million) on revenues of Rs 212 Crore (US$35 million). Combined services of the players, shared logistics, technical backend, consumers would help them in reducing this loss over revenue. So the deal was a win-win situation for Myntra and Flipkart.

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[F] Investors Long Term Vision – IPO Fashion is the business which is most profitable amongst the all products which are being currently sold in online market places. And all other verticals introduced by Flipkart were nowhere near the margins which fashion vertical was generating. According to Indian stock exchange, a company that is losing money can’t come in picture for Initial Public Offering. So Myntra as well as Flipkart were not able to go for IPO listing due to their money loss and also have threat of running out of cash in near future. IPO being the ultimate goal of VCs and the investors of both the companies Myntra and Flipkart are same, Tiger Global, Accel Partners etc, the combined entity would be able to run longer with their available funds and reduce their loss and become profitable in coming future. So the deal would help investors to offer IPO sooner than running separately and make return on their investments earlier. [G] Rise of private label players – High profit margins One major advantage to the retailers in India, and which works in favor of private labels, comes from the fact that Indian consumers are less brand conscious and more quality and freshness conscious. Retailers have increased their profits by offering private label products since there are huge margins to be achieved from private label products, which are 30-40% higher margins than branded products. Retailers are not any more offering low quality products for a lesser price, but they are creating new level of differentiation, better pricing for a good quality product and new merchandising and promotion strategies. Flipkart which was earlier into branded product selling saw a better option through Myntra’s private labeling strategy. Myntra’s association with numerous private label players was another added advantage.25

25

http://www.fuckedupstartups.com/fs-analyser/myntra-merger-with-flipkart-a-successful-exit-or-strategicacquisition/

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DATA ANALYSIS AND INTERPRETATION 1 AGE

INTERPRETATION:OUT OF THE TOTAL AGE COUNT, 5.3% OF THE CUSTOMERS BELONG TO AGE 18, 10.5% BELONGS TO 19, 42.1% BELONGS TO AGE 20, 10.5% BELONGS TO AGE 21, 15.8% BELONGS TO AGE 23, 5.3% BELONGS TO AGE 29, 5.3% BELONGS TO AGE 43 AND 5.3% BELONGS TO AGE 60.

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2. GENDER

INTERPRETATION:OUT OF THE TOTAL CUSTOMERS 44.1% ARE FEMALES AND THE REST 55.9% OF CUSTOMERS ARE MALES.

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3. HOW OFTEN DO YOU USE INTERNET?

INTERPRETATION:OUT OF THE TOTAL CUSTOMERS, 10.5% OF THE CUSTOMERS BELONG TO 1-2 HOURS A DAY CATEGORY. 26.3% OF THE CUSTOMERS BELONG TO 2-4 HOURS A DAY CATEGORY, 31.6% OF THE CUSTOMERS BELONG TO 4-6 HOURS A DAY CATEGORY AND 31.6% OF THE CUSTOMERS BELONG TO 6+ OURS A DAY CATEGORY.

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4. OCCUPATION

INTERPRETATION:OUT OF THE TOTAL CUSTOMERS, 5.3% OF THE CUSTOMERS BELONG TO SALARIED PROFESSIONALS, CA AND SALARIED SENIOR/JUNIOUR EXECUTIVE, NO CUSTOMER BELONGS TO BUSINESS AND UNSKILLED CATEGORIES, 73.7% OF CUSTOMERS BELONG TO STUDENT CATEGORY AND 15.8% OF STUDENTS BELONG TO OTHERS.

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5. HOW FREQUENTLY DO YOU SHOP ONLINE?

INTERPRETATION:OUT OF THE TOTAL CUSTOMERS, 21.1% OF CUSTOMERS BELONGS TO NOT LIKELY AND MOST LIKELY CATEGORY AND 57.9% OF THE CUSTOMERS BELONGS TO VERY LIKELY CATEGORY. I NEVER SHOP ONLINE CATEGORY INCLUDES NO CUSTOMERS.

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6. WHAT DO YOU USE INTERNET FOR?

INTERPRETATION:OUT OF THE TOTAL CUSTOMERS, 44.4% OF CUSTOMERS USES INTERNET FOR EMAILS, 83.3% OF CUSTOMERS USES INTERNET FOR SOCIAL NETWORKING SITES, 61.1% OF CUSTOMERS USES INTERNET FOR LISTENING TO MUSIC AND WATCHING VIDEOS, 50% OF CUSTOMERS USES INTERNET TO BUY THINGS ONLINE AND 5.6% OF CUSTOMERS USES INTERNET FOR TEH UPDATES AND VLOGS.

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7. HAVE YOU EVER BOUGHT ANYTHING ONLINE?

INTERPRETATION:OUT OF THE TOTAL RESPONSES, ALL THE CUSTOMERS HAVE BOUGHT ANYTHING ONLINE.

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8. WHERE HAVE YOU ORDERED FROM?

INTERPRETATION:OUT OF THE TOTAL CUSTOMERS 52.6% OF THE CUSTOMERS ORDER FROM FLIPKART, 68.4% OF CUSTOMERS ORDER FROM MYNTRA, 42.1% OF CUSTOMERS ORDER FROM JABONG, 21.1% OF CUSTOMERS ORDER FROM SHEIN, 26.3% OF CUSTOMERS ORDER FROM KOOVS, 78.9% OF CUSTOMERS ORDER FROM AMAZON AND 5.3% O F CUSTOMERS ORDER FROM OTHER SITES.

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9. WHAT METHODS OF PAYMENTS WOULD YOU LIKE TO PREFER ONLINE?

INTERPRETATION:OUT OF THE TOTAL CUSTOMERS 10.5% OF CUSTOMES USES CREDIT CARD, 42.1% OF CUSTOMERS USES DEBIT CARD, 15.8% OF CUSTOMERS USES PAYTM, 89.5% OF CUSTOMERS PREFERS CASH ON DELIVERY AND NO ONE USES PAYPAL.

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10. WHAT ITEMS WOULD YOU BUY ONLINE?

INTERPRETATIONS:OUT OF THE TOTAL CUSTOMERS, 10.5% OF THE CUSTOMERS BUY MUSIC/VIDEOS, 89.5% OF THE CUSTOMERS BUYS CLOTHES/ACCESSORIES, 21.1% OF THE CUSTOMERS BUYS SPORTS EQUIPEMENTS AND 26.3% OF CUSTOMERS BUYS GAMES ONLINE.

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11. HAVE YOU HEARD ABOUT FLIPKART-MYNTRA MERGER?

INTERPRETATIONS:OUT OF THE TOTAL CUSTOMERS, 26.3% OF THE CUSTOMERS DIDN’T KNOW ABOUT THE MERGER, 63.2% OF THE CUSTOMERS KNOW ABOUT THE MERGER AND 10.5% OF THE CUSTOMERS ARE IN THE MAYBE CATEGORY.

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12. HOW DO YOU PREFER BUYING ONLINE?

INTERPRETATIONS:OUT OF THE TOTAL CUSTOMERS 84.2% OF THE CUSTOMERS PREFERS ONE TIME OR LUMP SUM PAYMENT OPTION AND 15.8% OF THE CUSTOMERS PREFERS TO BUY IN INSTALLMENTS.

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13. DO THE MERGER OF FLIPKART-MYNTRA AFFECT IN THE PRICING OF THE PRODUCTS?

INTERPRETATION:OUT OF THE TOTAL CUSTOMERS, 47.4% OF THE CUSTOMERS ARE UNSURE ABOUT THE PRICING. 36.8% OF THE CUSTOMERS SAYS YES AND 15.8% OF THE CUSTOMERS SAYS NO.

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14. WILL YOU CONTNUE BUYING FROM FLIPKART AND MYNTRA?

INTERPREATATION:OUT OF THE TOTAL CUSTOMERS, 63.2% OF THE CUSTOMERS WILL CONTINUE BUYING, 31.6% OF CUSTOMERS WILL NOT CONTINUE TO BUY.

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15. HAVE YOU NOTICED ANY CHANGES AFTER THE MERGER?

INTERPRETATION:OUT OF THE TOTAL CUSTOMERS 21.1% OF THE CUSTOMERS NOTICED SOME CHANGES 57.9% OF THE CUSTOMERS DIDN’T NOTICED ANY CHANGES AND 21.1% ARE UNSURE.

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CONCLUSION Many companies find that the best way to get ahead is to expand 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. 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 many 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. 

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A merger can happen when two companies decide to combine into one entity or when one company buys another. An acquisition always involves the purchase of one company by another. The functions of synergy allow for the enhanced cost efficiency of a new entity made from two smaller ones. Synergy is the logic behind mergers and acquisitions. Acquiring companies use various methods to value their targets. Some of these methods are based on comparative ratios —such as the P/E and P/S ratios— or replacement cost or discounted cash flow analysis. An M&A deal can be executed by means of a cash transaction, stock-forstock transaction or a combination of both. A transaction struck with stock is not taxable. Break up or de-merger strategies can provide companies with opportunities to raise additional equity funds unlock hidden shareholder value and sharpen management focus. De-mergers can occur by means of divestitures, carve-outs spin offs or tracking stocks.

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Mergers can fail for many reasons, including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations.26

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http://www.investopedia.com/university/mergers/mergers6.asp

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QUESTIONNAIRE MERGER AND ACQUISITION OF FLIPKART –MYNTRA 1. NAME 2. AGE 3. GENDER  MALE  FEMALE 4. HOW OFTEN DO YOU USE INTERNET?  1-2 HOURS A DAY  2-4 HOURS A DAY  4-6 HOURS A DAY  6+ HOURS A DAY 5. PLEASE TICK YOUR OCCUPATION  SALARIED PROFESSIONAL  SALARIED SENIOR/JUNIOR EXECUTIVE  BUSINESS  STUDENT  UNSKILLED  OTHERS 6. HOW FREQUENTLY DO YOU SHOP ONLINE?  MOST LIKELY  VERY LIKELY  NOT LIKELY  I NEVER SHOP ONLINE 7. WHAT DO YOU USE INTERNET FOR?  EMAIL  SO LISTENING TO MUSIC/WATCHING VIDEOS  SOCIAL NETWORKING  BUYING THINGS  GAMING

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8. HAVE YOU EVER BOUGHT ANYTHING ONLINE?  YES  NO 9. WHERE HAVE YOU ORDERED FROM?  FLIPKART  MYNTRA  JABONG  SHEIN  OTHERS 10. WHAT METHODS OF PAYMENTS DO YOU PREFER ONLINE?  CREDIT CARD  DEBIT CARD  PAYPAL  PAYTM  CASH ON DELIVERY 11. WHAT ITEMS WOULD YOU BUY ONLINE?  MUSIC/VIDEOS  CLOTHES/ACCESSORIES  SPORTS EQUIPMENTS  GAMES 12. HAVE YOU HEARD ABOUT FLIPKART-MYNTRA MERGER?  YES  NO 13. WHAT DO YOU THINK ABOUT THE MERGER? 14. HOW DO YOU PREFER BUYING ONLINE?  INSTALLMENTS  ONE TIME OR LUMP SUM PAYMENT 15. DO THE MERGER OF FLIPKART-MYNTRA AFFECT IN THE PRICING OF THE PRODUCTS?  YES  NO  MAYBE

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16. WILL YOU CONTINUE BUYING FROM FLIPKART AND MYNTRA?  YES  NO  MAYBE 17. HAVE YOU NOTICED ANY CHANGES AFTER THE MERGER?  YES  NO  MAYBE 18. WHAT FEEDBACK WOULD YOU LIKE TO GIVE ABOUT THE MERGER OF FLIPKARTMYNTRA?

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BIBLIOGRAPHY           

http://www.edupristine.com/blog/mergers-acquisitions http://www.investopedia.com/terms/m/mergersandacquisitions.asp http://www.investopedia.com/university/mergers/mergers6.asp https://www.slideshare.net/sujithkumarsugathan7/mergers-and-acquisitions-14375592 http://whatis.techtarget.com/definition/mergers-and-acquisitions-MA http://study.com/academy/lesson/what-are-mergers-and-acquisitions-definition-examplesquiz.html https://www.shopify.com/encyclopedia/mergers-and-acquisitions-m-a https://www.pdfcoke.com/doc/260386472/flipkart-myntra-case-study-assignment-2-pdf https://www.ripublication.com/ijmibs-spl/ijbmisv4n1spl_10.pdf https://www.slideshare.net/piyushparashar50/flipkart-weds-myntra https://yourstory.com/2014/05/flipkart-myntra-acquisition/

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