Merger and acquisition Indian contex

 Merger and Acquisition: Indian Context

India has been under wraps of British rule till 1947. Like UK it did not see any major merger and acquisition going on in pre or post independence. After freedom from UK it was under wraps of financial and monetary regulation that was strictest and was full of red taping. In wake of protecting public interest and at same time protecting domestic market no major M&A activity was seen and some giants like coca cola had to even leave the country in 60s.

In 1990s India decided to open its market and that is since then we are seeing certain mergers and takeovers. With time we have seen many Indian companies like Tata, Airtel, Infosys etc going global by acquiring firms. We will talk about certain mergers of significance in coming segments.  Post 1990s Indian M&A activity can be divided into two parts. From 1990 to 1995 when many companies found that in wake of inevitable MNE entrance to market they need to be larger to survive any Hostile takeover or stay alive in market. Post 1995 many MNE acquired local companies to tap ever increasing Indian Market.

The period saw cross border mergers and acquisition as a mean of entering the Indian market. In wake of increasing competition many companies consolidated to buckle and many company vanished over night. Pale agro sold its beverage division to coca cola. USHA leading fan brand vanished in wake of competition. Around 37.7per cent of the total Foreign Direct Investment (FDI) made by multinational corporations (MNCs) during 1991-1998 was financed through cross-border M&As activity, either through Acquisition of substantial equity stakes in existing ventures or through buy-out of real assets through asset-sales.

Manufacturing sector saw most of Merger and acquisitions. Out of 1000 acquisitions in 1990 to 2000 around 60% were of manufacturing sector. We will read with deals in details. Post 2000 we will see certain deals  later.

U.K and Merger Waves

Unlike USA which saw many waves of M&A UK was rather silent. Some mergers took place but it was never a significant wave despite having no serious anti monopoly laws. Most of the firms were held by government and UK was growing using colonization.

First significant but very small wave took place in UK in 1920 when mass production technology was introduction in USA post WWI. Increased productivity reflected in stock price which lead to mergers resulting in concentration of manufacturing industries.

In 1948 monopolies and restrictive policy act was passed and being vague it was of no use. First real merger wave came in 1960s when internationalization was happening and government realized that Firm needs to be larger to survive the impending competition. Based on that government created industrial reorganization committee (IRC) was formed to promote merger and organization. Of large 200 companies around 20 % were involved in M&A activity post IRC. Even though it was not large but still by UK history it was significant. Merger and monopolies acts and commission were created to check any merger and acquisition that is against public interest. Most of the Horizontal mergers were in the purview of MMC. However deals backed by IRC were waived from the check resulting in many mergers that could else have been in purview of MMC.

The office of fair trade was established to look in merger and acquisition taking place around and those that have to be recommended to MMC supervision. Most of these merger and acquisition were horizontal in nature but slowly it moved to conglomerate formation with time.

Another wave was post 1980s when most of merger and acquisition shifted their focus from increasing capacity or size of firms to use the asset and firms as commodity. Since MMC chose to ignore most or mergers that could have been under its purview many horizontal mergers continued. Financial service industry was deregulated, stock market was rising and balance sheet was growing and thus it was good for M&A. Merger and acquisition saw increasing hostility, use of leverage or debt and buy outs as an impression from USA. Even after stock exchange crash of 1987 there was continuous merger and acquisition till 1989.

As most of government owned firms were under deregulation and privatization in 1990 a new wave erupted when british telecom, british rail and british gas were being privatized. This resulted in major corporate restructuring at various levels of industries and thus merger wave occurred. 

Fifth wave Merger 1992-2000

Post 1990 saw best expansion of US economy and many firms were involved in M&A activities. This wave saw splurge in M&A activities and such was the magnitude of deals that 9 out of top ten costliest deals were sealed in this phase. This wave saw many cross border mergers, few hostile takeovers many horizontal merger and Most of these mergers were strategic in nature rather than blind lead. The merger deals were mainly financed by equity and most of these acquisitions were friendly with only 4% being hostile takeover.

The reasons that can be attributed to the wave were rocketing stock market which made raising equity easier and also pressured companies to take majors that will justify their heady stock price. The world was growing global and all of a sudden a large arena of markets like China, India was opening up. Companies realized that they will have to be really big to stay competitive. With time antitrust laws were also restrained. Post 1980 many corporate were well governed and this was the reason behind decreased hostility. Most of the managers were careful analyzer of if, when and how to enter market and thus looking into risk.

Going by numbers some of unthinkable mergers happened in the wave; 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 billion of deals in 1992, the worldwide volume of mergers marched steadily upward to $3.3 trillion worldwide in 2000. The buzzword for the mergers was “Amongst the equal” but soon it was to satisfy ego and were blind number crunching Fad.

The year 2000 started with $165 billion deal of time Warner and AOL but soon it was all over. The boom in TMT(telecommunication media and technology) sector which all started in 1995 was all of a sudden halted and it impacted over all merger. Merger in TMT sector dropped from $346 billion in 2000 to $85 billion in 2001. The collapse of internet stocks, financial problem of telecom all signaled that bubble has burst. Stocks of TMT sector nose dived by 50%, junk bond were non existents, bank tightened lending standard

 The wave started on caution note but within no time stock market bubble made it mad rush, it became a fad and it has huge repercussion on investors and overall society lost $134 billion in the post wave crash. Moeller and Stulz found that out of 12000 mergers valuing $1 million or more, the merger before 2008 were mostly profitable. However, post 2008 investors acquiring lost $281 billion. Post 2008 around 80 deals lost $1 billion or more to investors.

One may wonder when it all started right; why all of a sudden it went wrong. Strong stocks made valuation lofty and P/E ratio were tempting. Most of the executives proclaimed higher valuation as their expertise rather than irregular and irrational wave of overvaluation. No doubt when it call crashed ripples were felt for long.

4th Wave 1981-1989

Whenever there is competition looming it takes drastic majors to propel you ahead.  Around the year 1974; when Morgan Stanley was facing challenges from its competitor in investment banking segment. Underwriting, which had constituted 95% of its business until 1965, had become less profitable as other investment banks challenged the traditional rela­tionships of the underwriting business by making competitive bids when securities were being underwritten. This attempt by Morgan Stanley to launch itself ahead saw the advent of first ever hostile takeover in 1974 when the nickel producing giant INCO acquired battery producing ESB by giving an offer for 3 hours using “Take it or leave it over “. Post 1981, merger waves saw many hostile takeovers.  This despite the fact that INCO ESB takeover was utter failure and it saw INCO breaking ESB in four parts in year 1981.

The waver merger also saw a new concept of debt financing to raise capital for merger and acquisition. While earlier most of mergers were financed by equity, mergers were financed by debt component also and we saw few billion dollar deals as well. This period saw popularization of concepts like Junk Bonds and saw increase in no. of LBOs. In over all sense this wave saw merger which were congeneric in nature and were hostile takeover popularly known as corporate raiding. Thus many investment banking firm took actively part in on behalf of these raiders as it was earning them more commission than friendly takeover.

One of the major characteristic of this wave was conflict between state government and central government. Most of the besieged companies took shelter in state government for anti takeover laws. Federal government felt that anti take over law was infringement in interstate commerce however state government thought it is right as per constitutional rights to them. Another characteristics were few international takeovers

One of the major reasons of the merger wave was inefficient management of many firms. Ineffective corporate governance and poor managerial incentives saw managerial inefficiency creeping in 1970s and 80s. Inefficiency in stock market to react in identifying inefficient firms and do away with it finally lead to new corporate control by efficient firm. Mostly once the firms where acquired their management will be renovated and profits will be withdrawn from it.

In Europe in the latter half of the 1980s companies sought to prepare for the Common Market through cross-border horizontal mergers. In the U.S. this was the period that saw corporate raiders like Boone Pickens run rampant with two-tier, front-end-loaded, boot-strap, bust-up, junk-bond, hostile tender offers until the playing field was leveled by the poison pill in the mid-1980s. However, even after the poison pill, merger activity increased through the latter part of the 1980s, pausing for only a few months after the October 1987 stock market crash. It ended in 1989-90 with the $25 billion RJR Nabisco LBO and the collapse of the junk bond market, along with the collapse of the savings and loan banks and the serious loan portfolio and capital problems of the commercial banks.


I will talk about Hostile take over, methodology and its remedy in coming sections. 

2nd and 3rd Wave : Redefining corporates

2nd Phase 1916 to 1919

When the whole world was reeling under pain of 1^st world war U.S was seeing a change that gave birth to new structure in USA industrial arena. This was largely different from 1^st wave which was toward monopoly formation to an oligopolistic structure. This wave was due to booming stock market which made raising cash easier. At the same time being boomed by success against large monopolies like standard oil has lead to promote oligopoly. Thus Clayton act was passed which made anti-trust law stricter and anti monopoly which promoted oligopoly.  This wave was result of splurge in investment post WWI, rising stock prices and capital investment kept the investors upbeat.

This phase saw emergence of many automobile giant. Ford motors were formed by vertical merger from the finished car back through steel mills, railroads and ore boats to the iron and coal mines.  The wave ended suddenly with 1929 great depression when stock market crashed. It continued for long 13 years.  

3^rd Phase 1965 to 1969

It took nearly 36 years for companies to come to came back to the terms of merger and 3^rd wave was primarily the formation of big and large conglomerate. Most of these were diversified conglomerate merger. The amount of firms merged in 1968 was nearly twice the peak no. of firms merged earlier. From 1959 to 1966 nearly 1000 firms were absorbed every year. However in 1967 to 1968 there was sudden splurge in no. of merger when around 2400 mining and manufacturing firms merged and vanished. Many large firm were either acquired or acquiring firm. However, merger has taken signified tide since 1950’s.  

This wave synchronized with region of economic prosperity of USA and many firms got enough resources to acquire another firms. Major conglomerates like IT&T (Harold Geneen), LTV (Jimmy Ling), Teledyne (Henry Singleton) and Litton (Tex Thornton) were created. Messrs. Geneen, Ling, Singleton and Thornton were viewed as visionaries and heroes of the new concept of business organization.

With another anti-trust arsenal Celler-Kefauver act with Clayton and Sherman act third merger wave faced stricter anti-trust music. Johnson was stricter however in 1969 next president Nixon was relaxed.  However many of these conglomerate stock crashed and companies can’t take benefit from the diversification. However these stock crashes continued and this put a broke on the merger wave for the time being.  Many companies found that it is difficult to manage conglomerates which are spread over large market and large countries so many companies chose to divest or they failed miserably as there was no synergy in companies merged. 

1897-1904 The First Merger Wave

1890 saw a significant change in operations of industries in U.S. A. The introduction of Sherman act lead to proclaiming price fixing illegal. It managed to curb the price fixing however law was unclear on merger of companies via stock trading and shares. Thus the companies who were finding troubles cause of Sherman act decided to merge. This was also supplemented by crash of stock market in 1893 and financial uncertainty which lead to many companies to question their capacity to survive. Most of these firms were small and were managing to operate profitably by price fixing which meant to control supply and demand. However it meant to be anticompetitive and thus government wanted to control it.

However, lack of comprehensive implementation and will power by government lead to various mergers that transformed many industries Monopolistic.  Most of the mergers were horizontal in nature. Collated data suggests that in this period 78.3 % of mergers were horizontal in nature compared to 13% vertical merger. Rest 9% was vertical and horizontal merger.  Around 2900 companies were part of this wave.  1899 saw peek of all mergers when around 1200 companies entered the fray.  The wave finally ended in 1904 with certain mergers showing signs of failure, financial mishandling and Mr. Roosevelt antitrust campaigns and strengthening of Sherman law.

This wave saw maximum consolidation in industries like primary metals, food products, petroleum products, chemicals, transportation equipments, fabricated metal products, bituminous coal and machinery.  These mergers resulted in nearly monopolistic market structure. The out of these merger resulted in one of major Giants like U.S. Steel which grabbed market share of 75% on inception was result of around 785 steel operations. Some of today’s giants like DuPont, American tobacco, general electric’s, Eastman Kodak, standard oil and Navistar international. J.P Morgan played a key role in the wave by founding U.S Steel and overseeing the mergers that created general electric.

These giants were helped by scales, new technological invention and in some cases by doing away with operating units. For example Standard oil garnered revenue by operating three units only and it do away with unnecessarily plants and thus had better operational efficiency. Companies and manager focused on production process so to enhance their ability to engage in ever expanding mass production.

However the monopolies created spurred a backlash and justice department charged many monopolies with violation of Sherman anti -trust act. The act was itself actually a response of anti rail road protest when some of hostile takeover actually turned violent judiciary system was highly corrupt. The then president Roosevelt (Known as trust Buster) and this successor focused on enforcing the act.  The major success came when in 1904 when northern securities merger was deemed illegal by court. With time standard oil was also divided into entities like standard oil of New Jersey (Exxon now), standard oil of New York (Mobil now), standard oil of California (chevron now) and other entities which became major players in the industry. However more than the court room preceding the wave ceded cause of failure of many companies to acquire efficiency, irregularities in attaining finance ,stock market crash of 1904, weak banking system etc. 

Merger and Acquisition Vol. 1

Nothing is sweeter than sharing. Nothing is more fruitful than converging and nothing rules the world more than cooperation. Our Indian culture had taught us the story of fighting cats and monkey and we are the perfect example of being divided and ruled. However any coordination without meeting of mind and soul is useless. And sometime being separate can be better than living together. The concept of Merger acquisition and corporate restructuring derives it life from the basic culture of being together or being separate.

It was year 1838 when of the first few merger of World’s history took place. It can easily be first ever merger but I don’t have convincing data to support that. The first merger of Rail Road industry in 1838 was between Wilmington &Susquehanna and Baltimore & port deposit which lead to the formation of Philadelphia, Wilmington and Baltimore.   This merger even though small in nature; led to beginning of an era and concept which lead to many mergers and establishment of monopoly in many established industries.

The world’s history of merger and acquisition has been divided into six phases or six waves. During these periods we saw immense surge in the M& A deals. You can attribute these waves to many factors or many time combinations of economic, technological and regulatory shocks.  The economic shocks, like recession and economic slowdown tends to make certain companies redundant. Sometime over competitiveness in industry and price wars make certain companies less financially viable. However, more often these shocks lead to horizontal merger than vertical merger.  The merger wave in 1897 was result of Panic and mild recession post 1896. Such economic shocks challenges ability to run business on own and this merger and acquisition are sought to ease operational constraint and increase profitability.

The regulation shocks or easement is also a factor calling for merger as waves. Many a time many probable merger and acquisition are in abeyance cause of regulatory pressure and is simulated once these regulations are quashed with time.  Earlier US Banks were not allowed to cross state lines or enter other industries. One it was eased out we saw many banks spending their fins. Citi Bank had been one of the largest banks across globe by around more than 150 M&A deals since inception.

The technological shocks which makes many products outdated in sudden turn has been one of the causes of M & A. recent time has seen landline being redundant and spurge in popularity of smart phones. Some similar shift or shocks which make cost of production cheaper may make many companies redundant and thus we see a surge in M&A.