1.0 Introduction: Merger and acquisitions schemes have been regarded as strategic planning measures for enlarging the corporate business activities in order to maximize the profitability of the entities involved in the scheme of amalgamation.
The principal objective of any scheme of merger is to penetrate in to newer markets to take advantage of the expanded market base and also extend the business horizons in various other countries. The other advantages resulting from the mergers and acquisitions are, gaining improvement in the technical and managerial skills so that these skills and techniques can be used to improve the working on the organizations to result in increased financial resources and improved profitability. The important objective of the schemes of mergers and acquisitions thus are to ensure the growth and sustaining the growth achieved. However studies reveal that more than 50 percent of the mergers and acquisition schemes have proved unsuccessful without resulting in any tangible benefits for the companies involved.
. (Business Week) Moreover, according to Mercer Management Consulting (Cited in Smith & Hershman, 1997), in the 1990s, mergers and acquisitions have been proved successful only in respect of about 50 percent of the companies involved. 57 percent of the schemes prove as failure during the 1980s.Despite the lower success rates, mergers and acquisitions are being increasingly used by the US corporations as the most favorite vehicle of growth.
It is important that the top management of the company that intends to acquire another company should make a thorough examination of the issues involved in the pre –acquisition stage and also the prospective benefits that may accrue to the company after the acquisition is effected. There should also be a clear understanding of the objectives for which the acquisition is proposed to be undertaken. In fact the acquirer should make a review of probable synergies that may arise out of the acquisition and its impact on the growth of the combined entity. According to Sirower (1997) in spite of a wide development of research and empirical studies in the area of corporate acquisitions still there is no clear thoughts could be evolved by the managers as to how the acquisition process can improve the profitability of the companies.
This implies that the process of acquisition is so complex that the managers should ensure that a considerable thought process should be evolved before the acquisition activity is undertaken.Despite the problems of getting a clear picture of the outcomes of the merger and acquisition schemes, they have been employed as an important structure for attempting the amalgamation of the activities of different companies in order to achieve the objective of expanding the business opportunities. With the advent of economic globalization the schemes of mergers and acquisitions have been regarded as prominent means for ensuring corporate growth world over.The mergers and acquisition schemes encourage increased competition.
They also help in expand into new countries by breaking the geographical trade barriers. While such schemes ensure free flow of capital from one nation to the other they also help companies pooling their technical and managerial resources across various countries improving their capabilities. Based on the economic reform measures undertaken by the government of India the larger industries in India have also resorted to using the merger and acquisition schemes for the purpose of expanding their operations in their core business activities. The Indian companies have taken these acquisition measures to increase their competitive strength both in the domestic business and in the international business arena (India Business)This literature review attempts to serve the purpose of collecting and analyzing a score of previous research and at the same time details the framework of merger and acquisition schemes that are taking place in the Indian context.
2.0 Corporate Mergers and Acquisitions: Datta, Pinches & Narayanan (1992) have identified two literary frameworks. One of the framework details the scope of merger and acquisition as a strategic measurement approach and the other one as a means of improving the financial sources. It may be noted that both these approaches have tried to associate the merger and acquisitions as the effective sources of improving the shareholders’ wealth.
Under the strategic management approach the mergers and acquisitions have been analysed from the purview of factors which are well with in the control of the management. There are other researches conducted from different angles taking the bases like kinds of mergers and categorizing the mergers on the basis of payment methods. On the other hand the mergers and acquisitions have been dealt with from an economic point of view based on the factors of market control over the mergers. Datta et al (1992) have identified this approach to mergers and acquisitions based on the market control aspects as the source of competition among two companies for acquiring management control of the corporate entities involved.
From the foregoing discussion it evolves that the schemes of mergers and acquisitions can be analysed from two broad perspectives based on the objective on which they have been aimed at. One is the desire to acquire the management control in another firm for expanding the business horizons which is purely based on the market control mechanism and the other perspective is to base on the strategic planning on the part of the acquiring company to enlarge its area of activity purely on strategic terms.Irrespective of the extent of research undertaken on the basis of the two approaches it was not possible to find out the precise reason for the disappointments resulting from certain corporate acquisition schemes.Kitching (1967) has identified the integration of business process in the post-acquisition scenario as the most important factor for gaining the benefits of any scheme of acquisition.
It must also be appreciated that apart from the strategic objectives that result in accumulation of synergies as a result of the schemes of acquisitions there are other factors also responsible for value creation of the firms. These factors will be reflected on the expectations of the capital markets on the post acquisition performance of the companies involved in any scheme of mergers. (Chatterjee, 1992; Seth, 1990) The processes that had been adopted to realize the advantages of the expected synergistic benefits would also contribute to the value growth of the businesses (Datta, 1991; Jemison, 1988).However it appears from the research studies so far undertaken, that it is crucially important that the acquiring and target firms are to be integrated properly in the post-merger management process to ensure the success of such schemes of mergers and acquisitions.
Thus the central issue concerning the success of corporate mergers and acquisitions lies in the inquiry as to how this process of integration can be achieved to maximize the synergies of the merger.2.1 Further Studies on Corporate Acquisitions There had been numerous studies conducted in the area of corporate mergers and acquisitions to strengthen or contradict the earlier views expressed by scholars, economists and academicians. An insight into some of these studies is worthwhile to pursue the discussion on the review of the available literature on the subject of mergers and acquisitions.
Some of the researches were centering round the integration of the management skills of the acquiring and target firm on different schemes of mergers and acquisitions. Goold & Luchs (1993) stated that, the combined effect of the professional skills of the managers of the both the businesses contemplating to merge with each other will enhance the performance of the new entity after merger depends on the basis assumption that the businesses required that kind of similar managerial skills. However during the 1980s the capacity of the merged firms to create value with the integration of the management skills was viewed with skepticism. According to Goold & Luchs (1993) during the 1980s the situation prevailed in many companies after merger schemes necessitated a rethinking of the takeover activities due to their poor performance despite the roles played by the combined managements in large companies.
The strategic approach adopted in the matter of mergers had also to be viewed with criticism only. During this period the takeover activities in the form of mergers and acquisitions were attempted only with a strategic view of improving the core business activities without any idea of diversification of existing activities. According to Peters & Waterman (1982), there was no tendency among the successful firms to go after diversification into various business activities. In fact the firms tended to focus their attention on specializing in their core business activities with the object of improving their skill and expertise including the managerial skills which are within their reach.
Moreover, Hayes & Abernathy (1980) argue that since most of the American companies were managed by professionals who were accountants or lawyers without any technical knowledge or skill or any in-depth experience in the industry they did not attempt to diversify in various other disciplines. The authors further argue that diversification can be attempted only with respect to investments in shares and securities rather than in the direction of corporate mergers and acquisitions. Mintzberg (1989) also criticized the concept of diversification though corporate merger schemes by stressing the social obligation to understand the business and the peole involved in depth by focused attention rather than widening the scope of management over different areas of activity.From these discussions it may well be understood that though the effect of the corporate schemes of mergers and acquisitions may result in the improved performance of the combined entity there are several factors that need consideration before any scheme of merger or acquisition is proposed to be undertaken.
The first factor revolves around the need for combining the managerial skills in the new entity. This implies that the management of the acquiring firm has to make a careful assessment of the requirement of the managerial skills in the post-merger scenario. Similarly the objective of the merger and acquisition is also important as expansion into diversified business activities through acquisitions without an in-depth knowledge about the new industry may as well result in failures. Perhaps this might be the valid reason for the failure of more than 50 percent of the merger activities resulting in failures during the period 1980 -1990.
The managements in their desire to acquire the market control over other firms would have indulged in ambitious schemes of mergers which proved to result in the failures of the schemes. This further strengthens the argument that the senior management should examine the pre-acquisition status and post-acquisition benefits of the schemes and weigh the scheme before actually entering in to such arrangements. 2.2 What are Mergers and Acquisitions?Mergers, acquisitions and takeovers have been a part of the business world for centuries.
In today’s dynamic economic environment, companies are often faced with decisions concerning these actions – after all, the job of management is to maximize shareholder value. “Through mergers and acquisitions, a company can (at least in theory) develop a competitive advantage and ultimately increase shareholder value.” (Investopedia);Though the terms appear to be synonymous there exist some fundamental differences between the schemes of merger and acquisition.• Merger: Merger implies the complete amalgamation of two already existing corporate entities.
In the true sense of merger both the businesses involved wind up their businesses, liquidate the respective assets and liabilities and create a third entity. Thus merger entails the creation of an altogether new corporate entity.• Acquisition: Acquisition on the other hand implies one business taking control of another one. The term also denotes a ‘takeover’ or a ‘buyout’.
Acquisition may take place in the form acquiring either the shares of another corporation or acquiring the assets thereof. In the case of share purchase the acquiring company purchases the shares of the target firm from the shareholders of that company. In the other form the acquiring firm purchases the complete assets of the target company.In practice it happens that mergers take the form of acquisitions only.
In merger proposals one business is acquired by another business and incorporates the acquired business in to a business model that represents the acquiring firm’s model. Since both the terms are often mingled with each other empirical studies and other statistics always present the figures for a combination of merger and acquisition activities that take place. From this it is possible to understand the merger market in a wider objective. (Judith)For the maximization of their growth by expanding the production and marketing capacities companies often resort to mergers and acquisitions.
According to Aparna Menon “Mergers can be defined to mean unification of two players into a single entity; Acquisitions are situations where one player buys out the other to combine the bought entity with itself.” Merger schemes are found popular in a variety of fields of operations and more particularly in information technology, telecommunications and business process outsourcing. Such schemes are also popular in traditional businesses with a view to expand the customer base and derive the other economic advantages of the merger and acquisition schemes. The most common and important objective of mergers and acquisitions is to combine and share the resources of two or more companies.
(Aparna Menon)2.3 Reasons for Mergers and Acquisitions:;The advantages of latest technology, pooling of the managerial resources and opportunities for an expanded market base are the important economic objectives that the managements of the amalgamated firms expect out of any corporate mergers.There are some vital reasons why the mergers and acquisitions are being practiced. Some of them are:To take advantage of new and associated product lines by expanding into those areas.
To explore new geographically expanded markets and distribution channelsTo garner the benefits resulting from the economies of scale by expanding the production baseTo acquire and gain knowledge in the latest technological development with a view to either supplement the existing technology or replace them.The strategic goals of mergers and acquisitions to meet the market challenges include:Consolidating the existing vendors and customers to gain an added market shareIntegrating the available resources to mobilize new market areas and acquire enabling technologiesMerging the operating forces with competitors to take advantage of economies of scaleEntering a new business venture by acquiring new product line with the necessary elements to promote overall growthIntegrating vertically to add a new line to existing business andAcquiring the required infrastructural facilities that will support the market environment and the connected supply chain (E-Coach)2.2 Economic Advantages of Mergers and Acquisitions:;The economic advantages mostly reflect the objectives with which the mergers and acquisitions take place. Some of the most common objectives and advantages resulting from the schemes of mergers and acquisitions are outlined below:Accelerating the growth of the company is the foremost objective of entering into any scheme of arrangements of mergers.
Especially where the chances of internal growth is subject to major constraints the external options of mergers and acquisitions help to bring the necessary momentum to organizational growth.Enhancing the profitability of the company is the next objective of the schemes of mergers. This is made possible by combining the resources and thereby taking advantage of the cost economies and an improvement in the efficiency of the utilization of resources. The resultant profitability may arise due to economies of scale, operating economies and synergies emerging out of the scheme of acquisitions.
“Synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R;D and market coverage capacity due to the complementarity of resources and skills and a widened horizon of opportunities.” (India Business)The mergers may result in diversification of the risks of the company. This happens more so in the case of mergers where companies with unconnected activities are acquired. The withstanding capabilities of the companies against any economic downturn are greatly enhanced by combining the managerial and other resources of companies.
Financial synergies in the form of reduction of financial constraints, enhancing the debt capacity and reduction in the financial costs can be expected out of a successful scheme of mergers and acquisitions.There will be a great improvement in the market potential of the company which will have the effect of limiting the competition. A merger will undoubtedly increase the market share of the firm and thereby result in the increase of profitability of the firm due to additional sources of distribution channels and wider market exposure. The company can acquire greater bargaining power in terms of its negotiations with the labour, suppliers and other external stakeholders.
2.3 Agreed Mergers and Hostile Mergers:;Corporate mergers usually occur when two corporation combine their activities. In some cases there is an agreement between the companies that want to merge with each other. In this case this scheme is called as an ‘agreed merger’.
In a situation where one company wants to acquire control on another company without the other’s agreement, the scheme is known as ‘hostile takeover.’A hostile’ bid occurs when a proposed acquirer launches a bid which was not solicited by the target firm. This implies that the merger scheme was not in agreement with the target firm. In those cases where there are more competing rival bidders one of them might turn to be hostile, while one is successful in completing the scheme of merger.
Hostility may also result from the complaints of those external stakeholders who feel that they are likely to be aggrieved by the proposed scheme of merger. There are three fundamental aspects of hostility:Merger control has the character of being used as a strategic instrument of bid defense.This has been witnessed in a number of merger schemes in the UK. For instance “an antitrust defense was notably employed by Abbey National against Lloyds TSB, whose hostile bid lapsed after the UK Competition Commission found that the merger was against the public interest on competition grounds.
” (NERA)While in the case of an agreed merger both the entities involved may push forward the process, in the case of hostile merger one of the parties involved may delay the process to gain time with the hope that some other bidder with a better offer may emerge. Here a term ‘White Knight’ is being used to denote another company with which the target company would like to merge rather than the original bidder.There is likely to be an impact of the hostile merger on the set of data and information to be provided to the regulators for completion of the process. For example, in a hostile takeover bid at lease one of the affected parties would have a natural tendency to resort to posing different arguments based on economic and competition policies that have the effect of challenging the merger scheme.
The affected party would also try to defend their case with the backing of market information and connected theories.3.0 Mergers and Acquisitions in the Indian Context:;Until recently the Indian companies acquiring any foreign companies was viewed as a rarity. However, this scenario has taken a sudden U turn.
The present day economic scenario in India witnesses the acquisition of more foreign businesses by the Indian Companies. This is mainly due to the buoyancy of the Indian Economy, the surplus cash situation of the Indian corporate, liberal Government policies and increased dynamism among Indian businessmen.There has been an increasing trend among the Indian companies to acquire North-American and European firms so that there can be a beneficial expansion of their businesses into these large markets. It may be noted that the Information Technology (IT) and Information Technology Enabled Services (ITES) companies are having strong presence globally.
The other sectors of the economy are spreading their wings breaking the geographical barriers and in order to sustain their growth the companies are increasingly looking for more options of mergers and acquisitions world wide. The increase in the acquisition activities of the Indian companies in the world markets, especially the acquisition of US corporations indicates the maturity of the Indian Industry and also the increase in their participation in the overall economic globalization.This is evident from the following table which shows the top 10 acquisitions made by the Indian companies in the recent past.;Table: The Top 10 Global Acquisitions by the Indian Companies;AcquirerTarget CompanyCountry targetedDeal value ($ ml)IndustryTata SteelCorus Group plcUK12,000SteelHindalcoNovelisCanada5,982SteelVideoconDaewoo Electronics Corp.
Korea729ElectronicsDr. Reddy’s LabsBetapharmGermany597PharmaceuticalSuzlon EnergyHansen GroupBelgium565EnergyHPCLKenya Petroleum Refinery Ltd.Kenya500Oil and GasRanbaxy LabsTerapia SARomania324PharmaceuticalTata SteelNatsteelSingapore293SteelVideoconThomson SAFrance290ElectronicsVSNLTeleglobeCanada239TelecomSource: http://trak.in/Tags/Business/2007/08/16/indian-mergers-acquisitions-changing-indian-business/;It is interesting to note that the total value of the Indian acquisition deals in the above transactions alone amounts to $ 21,500 million which represents almost double the amount involved in the acquisition of the Indian companies by their US Counterparts.
The graphical representation of the growth in the Indian activities in global acquisition deals is presented below:;Source: http://trak.in/Tags/Business/2007/08/16/indian-mergers-acquisitions-changing-indian-business/;Some of the other highlights of the mergers and acquisition deals in the Indian context are:There had been a quantum jump in the value of merger and acquisition deals involving Indian companies from US $ 0.7 billion in the year 2000-01 to US $ 4.3 billion and has well crossed the US $ 15 billion mark in the year 2006.
The US $ 15 billion represent 60 percent of the total merger and acquisition activity that took place in India during the year 2006.Almost 99 percent of the total value of the acquisition deals was settled through cash payments.During the period January to May 2007 there were 287 merger deals with a total value of US$ 47.37 billion.
Out of the 287 deals, 102 deals have been cross border deals having a value of US$ 28.19 billion. The cross border deals represent 59.5 per cent of the total merger activities in India.
During the months of March and April 2007 alone there were 111 deals of mergers and acquisitions in India involving US $ 6.12 billion out of which the cross border deals account for US $ 3.41 billion making the number to 32.In the month of May 2007, 74 deals with a value of US $ 4.
37 billion were signed and out of these the outbound deals represent 30 involving a total amount of US $ 3.79 billion.The Indian merger and acquisition scenario witnesses increased activities in various sectors like metals, medicine and pharmaceutical, engineering industries, automotive industries, soft drinks and other beverages, information and communication technology and financial service industries. More activities are witnessed in information technology and pharmaceutical sectors.
(IBEF)4.0 Takeover of Corus Group Plc by Tata Steel:;As a part of the literature review this section of the paper deals with the take over of Corus Steel plc by the India based Tata Steel.4.1 Corus Steel – an Overview:;Corus, the Anglo-Dutch steel producer was producing about 20 million tones of steel at the time Corus was formed out of a merger of British Steel and Dutch Group Hoogovens in the year 1999 and employs 47,300 people worldwide.
Corus at the time of acquisition was the eight largest producer of steel in the World. Tata Steel a subsidiary of Tata Group India’s biggest private company was considering a bid for the former. “Corus produces about 20m tonnes of steel and is the world’s eighth-biggest producer. It has long been rumoured as a take-over target and has been searching for six months for a merger partner.
” (New Economist)4.2 Tata Steel – an Overview: A brief overview of Tata Steel as provided by the Hoovers is produced below: “Tata Steel is India’s largest private sector steel company. The company’s steel making and finishing facilities, located in Jamshedpur in eastern India, produces more than 5 million tons of both flat and long products each year. Tata Steel’s products include hot and cold rolled coils and sheets, galvanized sheets, tubes, wire rods, rings and bearings.
The Tata Group owns 20% of the company but has talked about raising that in order to ward off potential hostile takeovers. In 2006 UK steel giant Corus Group agreed to Tata’s $9 billion takeover bid. After a bidding war with Brazilian steelmaker CSN ensued, Tata acquired Corus for $11.3 billion in 2007.
” (Hoovers at http://www.hoovers.com/tata-steel/–ID__138408–/freeuk-co-factsheet.xhtml) The Tata Steel bid was the biggest ever takeover bid by an Indian Company for the takeover of a foreign company.
As commented by the head of corporate finance KPMG the professional services firm “A transaction of this size would be a transformational deal from an Indian perspective,” (New Economist)4.3 Tata – Corus: The Merger: With the Tata-Corus deal it had become evident that the Indian companies could enter the arena of mergers and acquisitions as any other companies in the industrially advanced countries. The strength for entering into such deals had been acquired by these companies on the basis of the reputation they enjoy in the world market. The size of the Tata take over suggests that there can be much larger acquisitions by the Indian companies in the future.
Though the size of Tata Steel is only one fourth of the Corus they did not hesitate to bid for Corus. This tendency is bound to continue in the future.Unlike the Arcelor-Mittal deal the Tata-Corus merger was not a hostile one although there were counter offers from CSN of Brazil. It was decided by the management of Corus that Tata would be the best strategic fit for any takeover deals.
This decision was taken by the company after considering several alternative proposals from various companies from all over the world. Another important feature of Tata-Corus is that the deal was well received by the government and politicians in the host country. But in the case of Arcelor deal, there was wide opposition from the political circles.4.
4 Key Factors for Negotiation: The key factor that weighed with the consideration for the negotiation of the merger scheme was in the area of comparative assets strength of Corus, specifically the mining assets held by Corus. The other factors under consideration were the competitiveness of the cost elements and the existing liabilities and the analysis of the cash flows into the company.After the sale by Corus of its minority holding in certain mines in the later part of the year 2002 the company did not have significant mining interest or assets to augment its production.· At the time of the merger the company was importing 25 million tones of iron ore fromCountries like Brazil, South Africa, Australia, Canada and Venezuela.
· Whereas Tata steel was in possession of mining assets extending their rights to rich iron, dolomite, chromium and manganese mining. Tata Steel had also ownership of many related assets in India and in foreign countries. At the time of acquisition of Corus Tata was producing over 9 million tonnes of iron ore.· Corus had the problem of high cost of production in spite of the continuous upward swing of the world steel prices due to high labour cost in the UK, than in countries like India, China,· It was a fact to consider that Tata Steel was the lowest cost producer in the world at the time of merger with Corus.
4.5 The Bid: The fight for takeover of Corus was won by Tata Steel with a final bid of £6.7 billion to acquire the Anglo-Dutch steel firm Corus. Though initially Tatas were seemed to be losing the deal at the end they came with an unexpected bid to oust Brazil’s Companhia Siderurgica Nacional (CSN) out of the acquisition deal.
The initial bid was 415 pence a share (totaling to £4.3 billion). But the bid went up to the final offer from Tata’s of 608 pence a share as the counter offer for the bid from CSN. Because of the intervention of CSN in the acquisition deal Tatas had to end up paying out more than what they originally intended to settle with the shareholders of Corus.
There was an increase in the commitment from Tata’s side to the extent of £ 2.4 billion on the total acquisition deal. Because of the intention of the CSN to take over Corus and their counter offers to Tata’s bids the acquisition process had to take the auction route. In the final bid CSN came out with a figure of 603 pence per share which Tatas counted with 608 pence performance share.
CSN was unable to counter the final bid of Tatas at 608 pence per share.In a way Corus was happy to have Tatas as their partner and the auction brought the search of Corus for a strategic partner which was on for almost two years. The management of Corus was also happy that their shareholders could get a ‘best deal’ at the end. The shareholders of Corus intended to recommend the proposal unanimously.
;4.6 Impact of the Merger:;According to the Managing Director of Tata Steel there will be a saving of $ 400 million to the company after three years as a result of the merger with Corus. During the year of merger the company will be benefited to the extent of $130 million savings this year till March 2008. After three years the merger will result in a saving of $400 million yearly.
The other advantages expected from the merger scheme are:The company after merger can use the breakthrough technology developed by Corus for the reduction of the cost of production for steel.The company was also expected to meet the increased global demand growth for steel from the combined production capacity of the Tata Corus facilities.5.0 A Hostile Merger Deal:;As a case study for the hostile merger deal this paper takes the classic merger deal of Mittal Steel with Arcelor which was regarded and much talked about the hostile merger deal.
Though the merger did not happen in the Indian Context, I have chosen to discuss the case of Arcdelor-Mittal as it offers a wide scope for a detailed study of the hostile merger deals in cross border schemes.With the advent of globalization the large companies have broken their geographical barriers and this has resulted in the cross border mergers and acquisitions of bigger companies. Especially in Europe the purchases by way of takeovers of companies had been at $ 418 billion whereas it was only $ 211 billion for the American companies in the first quarter of the year 2006. This includes the fierce battle of the hostile takeover by Netherlands based Mittal Steel of Luxembourg based Arcelor.
This hostile bid for takeover was put forth by Mittal Steel to Arcelor for taking over the latter at a consideration of US $ 22.4 billion and this bid was made on the 27th January 2006. This takeover once completed would result in an aggregate sale of seventy billion US dollars and ten percent of the world steel production. This also means that the combined production of the new company would be three times more than that of the closest competitor Nippon Steel Corporation of Japan.
After the merger the new entity would provide employment for 320,000 people. The operations of the new company would spread over four continents of the world. The company would also expand its market to the United States where there is a high potential for growth. This would also entail the new company commendable bargaining power and economies of scale.
5.1 A Background:;A brief background of the Buyer (Mittal Steel) and the Target (Arcelor S.A.) is presented below:;5.
1.1 Mittal Steel N.V:;Head Quartered in Rotterdam/London225,000 employeesSteelmaking facilities in 16 countriesCustomers in 120 countriesShipped 49.2m tons in 2005Revenues of $28.
1bn in 2005 (Breaking News Article 2006)While production of steel of various kinds is the main activity, the Mittal Steel is presently operating in countries like United States, Mexico, Trinidad, Canada, Germany and France. Specialisation of Mittal Steel is integrated mini-mill process and has a wide range of flat and long steel products. Mittal Steel produces broad range of coated, cold rolled and hot rolled products and high quality wireless rods. The group acquired LNM Holdings in the year 2004 and merged subsequently with another steel major International Steel Group.
After the merger the name was changed from Ispat International NV to Mittal Steel Company NV. The Group made further mergers with Mittal Steel USA ISG Inc. and Ispat Inland Inc. in the first quarter of 2006.
;5.1.2 Arcelor S.A:;Head Quartered in Luxembourg;94,000 employeesShipped 46m tons in 2005Revenues of 32.
6bn euros in 2005Formed in 2002 by merger of European firms Arbed, Aceralia and Usinor(Breaking News Article 2006)The company Arcelor was formed in the year 2002 by the merger of Arbed of Luxembourg, Aceralia of Spain and Usinor of France. Arcelor has its plants, joint ventures and subsidiaries in over 60 countries. Arcelor is the second largest steel producer in the world, and the company also has its presence in automotive, construction, household appliances and packaging as well as general industry.5.
2 Rationale behind the Merger – As Seen by Mittal Steel:;The purpose of the proposed merger as described by Mittal Steel is:Financial policy for sustainable shareholder value creationEfficient capital structure and return of excess cash to shareholders30% dividend payout ratio over the cycleUnparalleled financial flexibility to pursue internal and external growth opportunitiesCommitment to investment grade credit ratingMaintain high returns on capitalProposed strategic achievements expected of the merger:Creating the undisputed leading global steel companyGrowth and value creation opportunities maximised through unique global platformEfforts towards steel industry integration and consolidationSignificant synergy potentialFinancial strength and strategic flexibility reinforcedLeadership in R;D/product developmentSignificant free float and liquidityRe-rating potentialPositive for all stakeholders (Mittal Steel Investor Presentation 2006)The advantages out of the proposed merger for the shareholders of Arcelor as outlined by Mittal Steel in their web site are:The Arcelor shareholders will receive a significant premium with a principal offer of 13 new Mittal Steel shares and € 150.60 for every 12 Arcelor shares tendered and a subsidiary cash offer of € 40.40 or a subsidiary offer in shares of 11 new Mittal shares for every 7 Arcelro shares tendered.There was the combination of cash and shares put together.
There will be a good opportunity to realize significant synergies out of the proposed merger.The merger will result in better sustainability to the shareholders.Mittal steel will strive to make a dividend payment of 30% of it annual earnings on an average over a business cycle.;;;5.
3 The Scheme:;Originally the initial offer made by Mittal Steel consisted of a $22.7 billion offer to Arcelor’s shareholders. The consideration was to be met by Seventy-five percent of Mittal Shares and the balance Twenty-five percent in cash. Under the original offer, Arcelor shareholders would have received 4 Mittal Steel shares and 35 euros for every 5 Arcelor shares they held.
Under the final merger scheme proposed by Mittal Steel which was accepted by Arcelro S.A.contained the following offer:Every 12 Arcelor shares would fetch a price equal to 13 Mittal Steel shares and 150.6 euros in cash.
or 12.55 euros in cash and 1.084 Mittal Steel shares per Arcelor shareA cash offer at a price equal to 40.4 euros per Arcelor shareAn exchange offer at an exchange ratio of 11 Mittal Steel shares per 7 Arcelor sharesA mixed offer for Arcelor convertible bonds (OCEANEs) at a price equal to 13 Mittal Steel shares and 188.
42 euros per 12 Arcelor OCEANEsThe purchase consideration under the proposed scheme of merger would be subjected to a pro-ration and allocation procedure. This procedure will ensure that the consideration would be constituted by sixty-nine percent of Mittal Steel shares and thirty-one percent in cash5.4 Merger Benefits to Arcelor Shareholders:;The offer made by Mittal Steel for the proposed take over of Arcelor S.A was irresistible for the shareholders of Arcelor due to the following advantages accruing to them:· First of all, the share premium Proposed by Mittal Steel to Arcelor shareholder was very high and significant; just before the announcement of the offer the price of Arcelor’s share was €22.
22. This price was the all-time high price of Arcelor share. . The offer from Mittal consisted of 13 new Mittal Steel share plus €150.
60 for very 12 Arcelor shares held which is equivalent to 1.0833 new Mittal Steel shares plus €12.55 per every Arcelor share. The Mittal Steel’s share price stood at €40.
40, on the day when the improved offer was made. The premium for the Arcelor shares on the basis of this price worked out to 82 percent.Changes in the Prices of Arcelor SharesSource: Datastream· By realizing the cash component €12.55 per share immediately, Arcelor shareholders stand to receive fifty-six percent of their share prices before the announcement of the offer at the time they surrender their shares.
· The participation in the future success and value creation was the clear benefit that was available to the Arcelor shareholders.· Under the accepted terms of the takeover Arcelor shareholders are entitle to make their preferences for a higher cash or higher share element in the consideration mix. However this preference is subject to the condition of an overall proration of the consideration consisting 31.1 percent cash and 68.
9 percent shares.· The synergy value of the merger is expected to be in the order of $1.6 bn (€1.3 bn)· The synergies out of the merger are expected to be realized within a shorter period due to the savings in purchasing costs for the new company and optimization of the flow of steel on a global basis.
· The synergies will also provide an increase in the earnings and improved cash flow to the shareholders.The shareholders of the new company would stand to gain more in the form of higher dividends resulting from higher profitability. This is again a product of the synergy benefits, higher growth prospects and greater stability of earnings that should result from the merger of both companies.5.
5 Benefits accruing to Shareholders of Mittal Steel out of the Merger with Arcelor:;In fact, the Mittal Steel and its shareholders stand to gain a lot out of the merger, although the immediate cash and share compensation payable to Arcelor shareholders may appear very significant. The compensation part of the merger is only a short term benefit and the long term benefit will be realized more by the Mittal Steel shareholders. (However since the merged company is known Arcelor-Mittal the identity of the individual shareholders of Mittal Steel and Arcelor S.A will be lost in the process) The shareholders of Mittal Steel would stand to gain greater advantages of the merger since:· The merger of Mittal Steel and Arcelor is a step change in the consolidation of the steel industry.
The combined company will be the undisputed industry leader and a true global player with a well balanced portfolio of geographies and products and a high level of raw material self-sufficiency. In terms of production, the combined company will be three times larger than its nearest competitor. This company will be better able to respond to changes in the industry, manage cyclicality and take advantage of growth opportunities. (Mittal Steel)· The global steel industry will be totally transformed after the merger and will enjoy more stability in its operations.
;;The graph shows the reaction of the market with respect to the share prices of Mittal Steel through the period from January 2006 when the company announced its hostile bid till the time the new company Arcelor-Mittal came into existence. It may be observed for the graphical representation that the shares suffered a set back in the prices immediately before the acceptance of the proposal by Arcelor. During the time when Arcelor was resisting the efforts of Mittal Steel – during May June 2006 – by associating with Severstal the share prices are showing a downward trend.6.
0 Role of Mergers and Acquisitions in the Development of Indian Businesses:;The merger and acquisition trends clearly show that India is in the lookout for new proposals for prospective candidates for potential takeovers. “These transactions have been effected by some broad strategic drivers…?Expanding global reach and network – establishing a footprint in newer markets, geographies and sourcing human resource capabilities?Enhancing existing product portfolio/service offerings?Customer acquisition?Strategic tie ups – access to ‘state of the art’ technology and production processes?De-risking the business model by acquiring plant capacities in various locations to beat the business cycle” (Rohit Kapur)India has been recognized as a vibrant player in the area of cross border corporate mergers and acquisitions. There are other acquisitions by Tata group companies and many other corporations in various other sectors like pharmaceuticals and banking have made several deals and schemes in the area of mergers and acquisitions in the global context.Other acquisition deals include the take over of Tyco Global Network by Videsh Sanchar Nigam Ltd (VSNL) and the takeover of NatSteel a Singapore based company by Tata Steel Ltd.
There were other deals that were being discussed including the one by Tata Tea.The largest acquisition in the pharmaceutical industry was undertaken by Dr. Reddy’s Laboratories Limited by taking over the fourth largest generic pharmaceutical company in Germany, betapharm Arzneimittel GmbH (betapharm) from the 3i Group PLC (3i) for US$570 million (€480 million).“The acquisition was hailed as the biggest overseas acquisition made by an Indian pharmaceutical company.
The synergies from the acquisition were expected to benefit both DRL and betapharm. The acquisition gave DRL access to the German generic drugs market, the second-largest generic drugs market in the world, as well as help DRL leverage the strong marketing and distribution channels of betapharm in Germany. betapharm was expected to benefit from the addition of more products to its portfolio and utilize DRL’s low cost manufacturing and product development infrastructure”. (ICFAI) The confidence in the Indian businesses is created by the capabilities of the outsourcing phenomenon by the major companies in the IT Industry.
This has helped Indian companies in a number of direct and indirect ways. It has enabled the Indian executives to get more exposed to the business culture and best management practices of the Western countries. The Indian companies have created a name for their quality and reliability in the outsourcing jobs in the course of time. This in turn has resulted in an exponential increase of profits to the Indian outsourcing companies.
The companies become cash rich with a lot of cash at their disposal and with this financial structure they are in a position to borrow larger sums of money.The visible development of the Indian business is witnessed by the spurt in the overseas investments by Indian businesses. The investment in the companies abroad rose from $0.7 billion in 2000-01, to $2.
7 billion in 2005-06. With the merger of Tata and Corus the investments would reach $11 billion in 2006-07.There are six reasons identified for the wide spread interest of the Indian businesses in the cross border mergers and acquisitions:“Accessing new markets, maintaining growth momentum, acquiring visibility and international brands, buying cutting-edge technology rather than importing it, developing new product mixes, improving operating margins and efficiencies, and taking on the global competition” (Majumder) are the reasons identified for the indulgence in the merger and acquisition activity.6.
1 Mergers and Acquisition – Domestic Deals in the Indian Context: Apart from the cross border mergers and acquisitions such activities undertaken domestically also has contributed much to the development of Indian business. The major contribution to the merger schemes was from the finance sector in the year 2005. The major acquisition deal was in the finance sector. The company AAA enterprises belonging to Reliance group took over the asset management company the ‘Reliance Capital’ by acquiring 52.
03 per cent stake for a total value of Rs 25.6 billion ($587.8 million). Another notable deal was the merger of the large government-owned financial institution, Industrial Development Bank of India (IDBI), with its subsidiary, IDBI Bank, in a deal worth Rs 7.
6 billion ($174.6 million). (Kai Taraporevala & James Winterbotham)There was another deal which went through between the large government-owned financial institution, Industrial Development Bank of India (IDBI) and IDBI Bank its own subsidiary company and the deal was worth Rs 7.6 billion ($174.
6 million). This deal initiative from the IDBI was promoted with a view to convert itself into a universal banking institution, proposing to undertake activities of project financing as well as retail banking. 7.0 Conclusion: The major purpose of adopting to the route of mergers and acquisitions is to gather the combined strength of both the companies involved in the arrangement so that the companies become more valuable in the eyes of shareholders and also the combined entity is more profitable than individual companies.
It is also possible that the shareholders can get a better value for their shares which are above the combined value of both the companies. Although the merger and acquisition activities often are criticized by the economists they carry definite advantages that contribute to the growth of the companies. There are various reasons that support these activities the most important of those being the constraint on the internal resources. With merger and acquisition activities there will be no drain on the working capital of the companies and the stocks of both companies can be used interchangeably.
There is the added advantage of tax saving and more than anything else there will be the benefit of consolidation of the industry resulting in the maximization of the market power. With more liberalization in the foreign direct investment policies the companies have a tendency to talk and think more about mergers, acquisitions and other forms of strategic alliances in furtherance of their organizational objectives.To state in simple and plain terms mergers can be regarded as an important tool in the hands of the companies for purposes of expanding their businesses and thereby achieve a higher profitability. Achievement of these objectives depends on the kind of companies that get merged.
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