Waves of Mergers and Acquisitions

Waves of conjugations and AcquisitionsIntroduction spinal fusions and Acquisitions (MA) set out al appearances assisted in nursing in integrated health and crop pattern of evolution and authentic countries just taking out sickness in industries, the concept of mergers and acquisitions puzzle played a truly crucial and pivotal role in shaping the trade and moult off been part of inter internal pargonntage in recent cadences. conjugations and acquisitions (MA) form always been an bear oning bea to study. As we substantiate it off all our daily unfermentedspapers atomic number 18 fil take with cases of mergers, acquisitions, spin-offs, t devastati geniusr offers, other forms of bodied restructuring. It go for been stated that mergers and acquisitions account consist of 78% of all outside(prenominal) direct investment, with 97% of that being acquisitions. Van Marrewijk (2006, pg 294)The year 2007 had undoubtedly been catchment area of the year for Indian corpo rate buisness with respect to recession taking toll of many an(prenominal) Indian business. With passage of time ,the Tata announced the acquisition Corus , a US$ 12.2 trillion deal . India industries has non looked back since. The continued growing in the Indian economy and investment and operating climate has resulted in improved health and growth appetite for Indian compines.What are Mergers and Acquisitions?Mergers and acquisitions are arguably the about popular and influential form of discretionary business investment (De Witt Meyer, 1998).In simple terms merger is the combination of the assets and liabilities of two companies, in the main(prenominal) of similar size, into one business entity.The term acquisition is use when the assets and liabilities of a weeer company is purchased by a pear-shapedr one by paying fates, cash or other assets to the channelise companys theatrical role travelling bagers. When on that point is a merger between two similar sized firms , the roles are change and one firm issues parvenu stock to the other in an concord ratio. The protect of two firms before and after a merger is the said(prenominal) when you exclude the synergies resulting from it, considering that the valuation of the shares and the exchange ratio has been correctly formulated. Target firms shareholders are normally paid a premium, which means that the exchange rate is skewed.Merger Waves in the nineteenth, 20th and 21st Centuries, Martin Lipton, York UniversitySeptember 14, 2006Over office of MA WavesA merger undulate is an intense issue of merger military action in a particular firmament or industry and last from a ill-considered distributor point to a massive time partly depending on the mental process of the market and the participating companies. In his paper released on September 14, 2006 Merger Waves in the 19th, 20th and 21st Centuries, Martin Lipton of York University talk about merger waves Economists and historians refe r to five waves of mergers in the U.S. get-go in the 1890s. As I said, I believe a sixth wave started three years ago. The starting date and duration of each of these waves are not specific, although the ending dates for those that terminate in wars or fiscal disasters, the like the 1929 crash or the bursting of the millennium Bubble, are more(prenominal) than definite. Indeed, it could be argued that mergers are an integral part of market capitalism and we shake had a continuous wave of merger occupation that has ebbed and f started since the evolution of the industrial economy in the latter part of the 19th Century, with interruptions when fundamental forces turned exogenous merger factors negative. The merger operation take to show a pattern in which the peak year had a capitaler than 100 percent increase from the introductory year followed by a decline in acquisition activity of greater than 50 percent from the peak year to qualify as a wave. In whatsoever industrie s the waves were as long as six years.Lets us await the five merger waves belowFirst Period 1893 to 1904 Merger for Monoploy- This was the time of the study horizontal mergers creating the forefront steel, telephone, oil, mining, railroad and other giants of the basic manufacturing and dose industries in the U.S. The Panics of 1904 and 1907, a U.S. Supreme Court decision in 1904 make the recently enacted antitrust laws applicable to horizontal mergers, and then the First ball War are pointed to as the causes of the end of the good turn 1 wave, which whatever view as keep beyond 1904.Second Period 1919 to 1929 Merger for Oligopoly- This period maxim further consolidation in the industries that were the subject of the early wave and a very signifi roll in the hayt increase in vertical integration. The major automobile manufacturers emerged in this period. Ford, for example, was integrated from the finished car back done steel mills, railroads and ore boats to the iron a nd coal mines. The 1929 Crash and the Great Depression finish this wave.Third Period- 1955 to 1969-73 Conglomerate merger- This was the period in which the conglomerate concept took hold of Ameri washbasin commission. Major conglomerates like ITT (Harold Geneen), LTV (Jimmy Ling), Teledyne (Henry Singleton) and Litton (Tex Thornton) were scored. Messrs. Geneen, Ling, Singleton and Thornton were viewed as visionaries and heroes of the new concept of business formation. numerous major established companies accepted the concept and diversified into new industries and areas. The conglomerate stocks crashed in 1969-70 and the diversified companies never get tod the benefits thought to be derived from diversification. after part Period 1974-80 to 1989 The Megamerger- Generally referred to as the merger wave, or take everyplace wave, of the mid-eighties and frequently said to be the period from 1984 to 1989. However, its antecedents reach back to 1974 when the first major-company h ostile bid was do by Morgan Stanley on behalf of Inco (the same Inco that has been snarly in the four-way takeover struggle that has now ended with its takeover by Vale) seeking to take over ESB. This successful hostile bid assailable the door for the major investment banks to make hostile takeover bids on behalf of raiders. In addition to hostile bids, this period was noted for junk stay put pay and steadily change magnitude volume and size of LBOs. In europium in the latter half of the 1980s companies sought to prepare for the unwashed Market by means of cross-border horizontal mergers. In the U.S. this was the period that saw corporate raiders like Boone Pickens run rampant with two-tier, front-end-loaded, boot-strap, bust-up, junk-bond, hostile tender offers until the playing theatre of operations was leveled by the toxicant pill in the mid-1980s. However, even after the poison pill, merger activity increase finished with(predicate) the latter part of the 1980s, pau sing for ba hope a hardly a(prenominal) months after the October 1987 stock market crash. It ended in 1989-90 with the $25 zillion RJR Nabisco LBO and the split up of the junk bond market, along with the collapse of the savings and loan banks and the serious loan portfolio and capital problems of the commercial banks. twenty percent Period 1993 to 2000 Strategic Restructuring This was the era of the mega-deal. It ended with the bursting of the Millennium Bubble and the great scandals, like Enron, which gave rise to the revolution in corporate governance that is continuing today. During the fifth wave companies of unprecedented size and international sweep were created on the assumption that size matters, a belief bolstered by market leaders premium stock-market valuations. High stock prices simultaneously emboldened companies and pressured them to do deals to bear heady trading multiples. A planetary view of competition, in which companies lots find that they must be big t o compete, and a copulati alone placid antitrust environment led to once-unthinkable combinations, much(prenominal) as the mergers of Citibank and Travelers, Chrysler and Daimler Benz, Exxon and Mobil, Boeing and McDonnell Douglas, AOL and Time Warner, and Vodafone and Mannesmann. From a modest $342 million of deals in 1992, the groundwide volume of mergers marched steadily up(a) to $3.3 trillion worldwide in 2000. Nine of the ten astronomicalst deals in narration all took place in the three-year period 1998-2000, with the tenth in 2006. about of the 1990s deals were strategic negotiated deals and a major part were stock deals. The buzzwords for spring of merger discussions were, would you be interested in discussing a merger of equals. piece few if any deals are true mergers of equals, the sobriquet goes a long way to soothe the egos of the management of the acquired company. The year 2000 started with the announcement of the record-setting $165 billion merger of Time W arner and AOL. However, after a five-year burst of telecoms, media and technology (TMT) mergers, in that respect was a dramatic slowdown in the TMT sphere of influence, as wholesome as in all mergers. It started with the collapse of the Internet stocks at the end of the first quarter followed by the earnings and financing problems of the telecoms. While merger activity in 2000 exceeded 1999 by a small metre by the end of the year, the bubble had burst. The NASDAQ was down more than 50% from its proud, many TMT stocks were down more than 50% (some as much as 98%), the junk bond market was almost nonexistent, banks tightened their lending standards and merger announcements were not wholesome reliable in the virtue markets. So ended the fifth wave, with merger activity in 2001 half of what it was in 2000. To my amazement (and I think to the surprise of most) the sixth wave started just three years later. The sixth period of merger wave is what Lipton believes started in 2003. Sixth Period From a low of $1.2 trillion in 2002 the pace of merger activity has increased to what appears lead be a amount of $3.4 trillion by the end of 2006. Among the principal factors are globalization, encouragement by the governments of some countries (for example, France, Italy and Russia) to create strong national or global champions, the rise in commodity prices, the availability of low-interest financing, ring fund and other shareholder activism and the tremendous growth of private equity funds with a concomitant increase in management-led buyouts.CROSS put off MERGERS ACQUISITIONS GLOBAL SENARIOGlobalisation is a severalize feature of the new competitory landscape at heart which the mergers and acquisitions frenzy is taking place. . Globalization has spurred an unprecedented scend in cross-border merger and acquisition activity. (Child J.et al, 2001).Cross border MAs turn in nonplus a fundamental characteristic of the global business landscape. Cross-border M As are one mode of entry for overseas direct investors to host economies. The ownership value,location advantage and internalization advantage, factors such as the search for market power, efficiency gains through synergies, size, diversification, and pecuniary motivations affect the decision of firms to undertake cross-border MAs. Organizations which aspire to expand across geographies are funding their cross-border acquisitions through a mix of local and foreign financing. According to World Bank statistics, new capital raised through corporate securities offerings and loans from international bank syndicates totalled US $400 billion in 2006, a threefold increase from 2003. Multi-national companies based in developing countries made more than 700 cross-border MA purchases in 2006, up from just 11 such deals in 1987. These developments spend a penny put some of these companies on par with large companies from develop countries. As many developing- soil governments accept ea sed their policies toward capital outflows their companies have expanded their operations abroad. 15000 multinational corporations have their presence in developing countries. Cross border MA activity was one of the primary reasons for increasing FDI outflows from developing countries. The total cross-border MA activity from the developing countries was valued at $80 billion in 2007, up from $75 billion in 2006. The activity was across arenas with service celestial sphere contributed about 60% of the total activity.MA ACTIVITY IN INDIAIndian MA activity come US$19.8 billion in FY08 as compared to US$33.1 billion in FY07. The decline in MA activity was in line with the global activity. The average size of deals in FY08 was US$23.4 million far frown than that of US$70.5 million in FY 07. Cross-border MA totaled US$8.2 billion in FY08 after declining of 56.3% from the previous year, where the total cross-border MA was US$18.7 billion. The sector which witnessed highest decline (97. 6%) in MA activity was the telecommunication sector receivable to the base violence of acquisition of Hutchison by Vodafone in FY07. Followed by telecommunications sector was the healthcare sector declining 72.3% in FY08 again due to the base violence of US$1 billion acquisition of Matrix Laboratories in FY07. Financials sector was the third sector to experience decline in the MA activity.Trends Patterns of Indian acquisitions abroadMA activity has seen phenomenal rise in India in the past few years and some patterns are discernible in this mass of financial legal proceeding.India has passed several milestones and come a long way from overseas investments of about $0.7 billion in 2000-01 to $2.7 billion in 2005-06 and lastly to $11 billion in 2006-07.Save a slight shut up in cross-border deals in 2000-2002,MA has only been upgrade in India. The number of overseas acquisitions was 38 in 2003 and rose to 177 in 2006. The first six months of 2007 saw a whopping 123 transactions. The value of outflows has increased from $649 million in 2003 to $32.9 billion in 2007. The value of overseas acquisitions by Indian firms far exceeded the value of foreign firms acquisitions in India for the first time in 2006. The African nations have especially opened up their economies to FDI flows from India hoping that the funds canalise knowledge transfer and skill development will give their nearly stagnant economies a much needed boost.The Indian go sector was the first fledgling to the area of overseas MA and later the primary manufacturing sectors ventured into it. However, eventually the manufacturing sector surpassed the services sector both in terms of number of transactions and value of transactions with overseas acquisitions in the services sector rising 2-3 times as compared to 5-22 times increase in the manufacturing sector in the period 2001-2007Literature reviewAccording to Jankowitz (1991) have given more emphasises on the importance of the literature revie w by stressing that knowledge does not exist in a vacuum and your work only champion in relation to others. He describes the literature review as providing a theoretical framework and condition for the project.An attempt has been made in the perplex paper to understand the motives and implications of the Merger-wave in the second half of the nineties. The analysis has been conducted in a comparative perspective by classifying the Acquiring firms into two categories in terms of ownership, namely, Indian owned and foreign owned. The paper is divided into sevener sectionsiii) Policy-shift regarding MAs during the 1990siv) Impact of MAs on the performance of Acquiring firms,v) Source of financing and some plausible issues for corporate governanceSection I Theories on Motives and Implications of MAsAccording to Cantwell and Santangelo 2002 the theories on MAs have been spreaded over the vast terrains of industrial organisation, financial, scotch and international business studies. Th us researcher has been pointed out that the trends of MAs can be theoretically traced back to particular motives for MAs emphasized by industrial organization theories that is market power and defensive reactions, the financial economic literature that is managerial ego and international business research which is access to markets or technologies.We have classify these theories into four categories, namely, i) Mergers as efficiency enhancing measures Mergers can lead to increased efficiencies. Such efficiencies and cost savings can flow from economies of scale and celestial orbit possible in the larger post-Merger operations, greater control over key inputs, ware rationalisation, combining marketing, advertisement and distribution, or from cutting down overlap Research and Development (Ansoff and Weston 1962. International MAs may be regarded as a new cross-border strategy that aims at increasing corporate global competitiveness by pursuing related diversification and by integr ating affiliates into a global network (Cantwell Santangelo 2002). Schemalensee (1987) argued that the cost-reducing effect of a particular proposed Merger readiness probably outweigh its collusion-enhancing effects. Sanjaya Lall rightly questions whether the positive economic effects that cross-border Acquisitions can have outweigh the concerns they arouse (Lall, 2002). ii)Mergers as enhancing concentration and monopoly The immediate effect of a Merger is to increase the degree of concentration as it sinks the number of firms. Another effect of Mergers on 8competition is on the generation of barriers to entry. Artificial barriers can be raised or strengthened, if the Merger results in a modify of product several(predicate)iation through legal rights in designs, patents and knowhow. Williamson (1968) argued that a small efficiency gain would generally be offset by a large increase in market power, which creates a situation that sets prices supra the competitive levels. Further, the motives behind transnational or cross-border Acquisitions differ from those, which drive stringently domestic Acquisitions. An Acquiring firm might decide to go in for international Merger in order to take advantage of catchpenny(prenominal) raw materials and labour, to capture net incomes from exchange rates, or to invest its superfluous cash (Weston et al. 1996). The entry and subsequent activities of Multinational firms affect the structure of markets for goods and services in host countries in several different ways. Numerous studies for person developing countries as well as developed economies indicate a positive association between TNC activities and the concentration of producers in host country industries (UNCTAD 1997 137). Some qualifications and exceptions have also been pointed out about this trend. Greenfield investment in new production facilities adds to the number of firms engaged in the production of a good or service and it might reduce or at least, leav e unchanged the concentration of producers in an industry. In contrast, FDI-entry through a Merger or Acquisition would increase the concentration of producers if a Merger or Take-over results in increased sales for the newly created foreign affiliates or leave it unchanged, if its size is the same as that of the incumbent firm acquired(UNCTAD 1997 141).The essential impact of an Acquisition on competition depends upon the marketing strategies of TNCs, as well as on industry and country-specific circumstances (Dunning 1993). The risk that CB MAs may reduce competition tends to be greater in those industries in which shrinking carry and 9 excess capacity are important motivations for MAs and in countries in which competition policy does not exist or where its implementation is flimsy (Zhan Ozawa 2001 61). In sum, MAs as concentration enhancing and building oligopolistic market power is a rather familiar view in studies on Mergers internationally. iii) Mergers as dictated by mac ro-economic changes MAs areundertaken to compensate for instabilities such as wide fluctuations in select and product mix, excess capacities related to slow sales growth and declining profit margins and technological shocks (Post 1994 Weston et al. 1996). Firms may pursue MAs for the sole reason of growing in size as size more than profitability or relative efficiency is considered to be the effective barrier against Takeovers (Singh 1975 1992). It is also argued that the development of an busy market for corporate control may encourage managers to empire build, not only to increase their monopoly power but also to progressively carapace themselves from Takeover by becoming larger (Singh 2003). What is referred to herein is the defensive tactic of firms in a developing country like India. While there are firm-specific motives for undertaking CB MAs, there are also economic forces that have acted to encourage the CB MAs, such as the economic integration of the European wedlock ( EU) and NAFTA represented by the creation of a common market (Caves1991UNCTAD 1997). Macro-economic changes fashion the context or provide opportunities for MAs. Mergers may also be resorted to as defensive measures in response to major policy-shifts. iv) Mergers as driven by financial motives Firms adopt MAs as a route to growth whenever substitute investment opportunities for financing corporate expansion in specific environments are little attractive. Availability of capital to finance Acquisitions and innovations in financial markets such as junk-bonds can also be among the reasons 10 for cross-border Mergers (Sudersanam 1995). The valuation differences of the share prices or economic disturbances lead to Acquisitions of firms that are low-valued from the viewpoint of outsiders (Gort 1969).Lower interest rates also lead to more Acquisitions, as Acquiring firms rely heavily on borrowed funds (Melicher et al 1983). It is also argued that the under-valuation of the dollar vis-a -vis pound and yen in the early eighties had resulted in some very substantial Acquisitions of assets in the United States by British and Japanese firms (Dunning 1993). The currency devaluations in the risis-affected countries as well as falling piazza prices reduced the foreign-currency costs of acquiring fixed assets in those countries and it has provided a specious opportunity for TNCs to enter their local markets (Zhan Ozawa, 2001). Our own earlier study (Beena 2001) all the way pointed out how financial motives had a crucial role in MAs during the first half of the decade of liberalisation. The study argued that among the motives for Mergers, in many cases, could have been the appetite to improve the financial position of the firm through a viable capital structure and the desire of firms to exploit the opportunity provided by the initial post-liberalization buoyancy in the Indian stock market. It should not be strike if in latest phase of contemporary finance capitalism , financial motives are also the major determinants of MAs in our country. Paul Sweezy (19941999 249) had spoken of the enormous growth of a financial superstructure atop the real productive base of the world economy over the last three decades. However, the linkages between a huge financial superstructure of the global capitalist economy and the financial motives of MAs in India is not so apparent and would need further exploration. Our classification of the four categories of theorisations on MAs throw light on one or the other aspect of the phenomenon. severally of them is true in its own right. However, it is context-specific studies that could substantiate the validity of each of these arguments. motif of cross-border acquisitionThere are four main reasons for Indian firms to have engaged in crossborder acquisitions, (see Acceenture, 2006). These include the need to enter new markets to prevail the current level of growth, to get closer to global guests to easily achieve mar ket share and customer base via mergers compared to starting up new firms in foreign countries. Further, crossborder acquisitions help Indian firms to gain easier access to targets resources. Since 1995 over 60 percent of Indian MAs took place in Europe and marriage America in the 2000-2006 period US firms followed by UK firms were the major target of 9 Indian acquirers. These developed markets were attractive due to their large customer base,advanced legal system, knowledge foundation, and sophisticated technologies. More importantly, acquisitions often prove to be the only way for Indian companies to be able to begin competing in these markets, due to the high level of existing competition in developed countries. However, to a lesser degree, Indian firms have also acquired firms in less developed countries. These deals are profitable because of high demand for foreign investment in some of these economies. These deals have also provided the Indian firms with access to resourcesMa ny Indian firms participate in crossborder MAs to expand their overall technical capabilities and to update their existing knowledge base. In most cases, the knowledge and technical expertness earned abroad can help the acquirers in improving their productivity in the domestic Indian market as well. Furthermore, crossboarder MAs can create excess value for Indian acquirers, relative to their competitors, by allowing them to save on labour and production costs. Some Indian firms, especially in the pharmaceutical sector, strive to increase their market share by enhancing the size of their product range or in general, to diversify the portfolio of products or services. This is possible through two avenues buying the technology, or acquiring firms who already own that technology. Indian firms seem to have used both methodsTrends of MAs Indian ExperienceMA activity has seen phenomenal rise in India in the past few years and some patterns are discernible in this mass of financial transa ctions There are four sectors in India which have experient the most detectable MA trend after deregulation, starting in 1991 (see Srinivasan, 2001).Consumer goods sector in which firms want to quickly achieve market share and banking and financial industry where size is an important factor due to high capital requirements set by the Reserve Bank of India (RBI) experienced many mergers. Sectors that are overloaded with many small players underwent consolidation. There were two sectors within which the need for high technology increased dramatically, such as telecommunication and pharmaceutical also underwent major merger activityThe motivations underlying domestic takeovers in India are similar to the ones that promoted crossborder MAs in recent years. Liberalizations and deregulations have been the main driver of domestic as well as crossborder takeovers. Political, financial, and cultural reforms have fueled both crossborder and domestic MAs in India.Why India leads China in cro ss-border MA?Although FDI flows to China are relatively higher than those to India, Indian firms have performed much disclose than their Chinese counterparts in terms of overseas MA. A McKinsey analysis shows that Indian companies generate twice as much taxation from foreign sales as Chinese companies do Other aspects like foreign asset-ownership and number of workers employed abroad also indicate a similar trend. In the year 2007, India registered a 126% jump in amount spent on international MA deals as opposed to a mere 82% of China. Now let us see some of the specific characteristics of Indian crossborder of MAsThere are a host of reasons wherefore Indian firms have outperformed their Chinese rivals in corporate deal-making abroad. Indian MAs have several distinct characteristics compared to those done by firms in the west or from China1) Language skills and know-how English is the official business diction in India and is built into the Indian education system. Chinese, on the other hand,have always been set(p) and insisted on the use of their own language. Aversion to English language led to the isolation of the Chinese industry from the international corporate world. Now China, having clear this, is making concerted efforts to switch to English as the official language of communication.Chinese undervalue the role of soft skills in managing employees, business partners, stakeholders etc. Delegation of work,transparency, objective outlook, employee growth etc are aspects that are not hitherto developed in the Chinese work environment. This deters foreign employees from working in Chinese firms. Western employees are used to working with a high amount of latitude and things like close supervision, no clarity regarding management policies/expectations, corporate governance issues, favouritism and high level of political perturbation in the routine functioning of an organisation are deeply resented by Hesperian professionals. This impedes post-merg er integration of a Chinese and western firm.China lacks the salmagundi of leaders with international cultural understanding and flexibility to adapt to different markets and work environments. Leaders that can lead all employees without giving a sense of alienation to any specific group and successfully trace cross-border organisations are visibly lacking in China. Even though the economics of the deal make perfect sense, the inability to integrate the operations and most importantly employees of the two companies, spells doom for the new entity.Inhibitions about western cultures and practices have a profound effect in that Chinese leaders are now increasingly wary of undertaking overseas assignments. They find it problematical to blend and work with completely different thought processes and working culture. The waiver of face resulting from the failure to integrate prompts Chinese employees to shun overseas assignments. To get over this, these days Chinese companies do orga nise mandatory international knowledge and orientation programmes to prepare its workforce for cross-border experiences.Since Chinese companies are still immensely state-controlled, finance skills of Chinese managers are at a nascent percentage point yet. Indian firms however and especially the private ones have very well developed finance skills competing with some of the best in the world.Handling variety show and differences in race, religion, ideas, personalities etc is much easier for Indians as compared to Chinese due to the relatively solid Chinese society. Although both nations are huge (China being much bigger), India is considered as one of the societies with the highest intra-country diversity and hence Indians are much more used to handling differences/conflicts.2) Corporate structure Many Indian firms have corporate structures similar to those prevalent in North America. These are companies with central leaders provided by owners but managed by professional manager s. In contrast, most of the large Chinese companies are still state-owned and hence riddled with bureaucracy, political objectives. elderly management of these firms is always composed of members or people close to members of the communist Party and strategy of the firm always is in line with the policy of the Chinese government. The lower management is ineffective, weak and resentful. Hence Indian firms responses to changes in the global industry are much quicker and strategic than those of Chinese firms.Chinas IT industry tried hard to give tough competition to the thriving Indian IT industry but the fragmented nature of Chinas IT sector, along with short(p) product management and weak process controls failed Chinas attempt. Consolidation is the key to exploring better opportunities for the Chinese IT industry since its top 10 IT-service companies command only 20% of the market share as opposed to 45% market share of Indias top 10.3) Focus on exports Majority of Chinese compa nies still concentrate on only exports for achieving short-term growth. MA is thought of as a strategy that is best suited for long-term growth. In the period 1995-2007, only 17 out of the top 100 Chinese companies signed cross-border deals as opposed to 31 out of the top 100 Indian companies with 18 of them successfully closing more than 3 deals each.4) Political opposition Chinese companies frequently face fierce political backlash in western countries due to a general muted feeling of distrust regarding Chinas global plans and its eagerness to take possession of international natural resource reserves. CNOOCs (Chinese state-contro