new project on m&a

7/29/2019 new project on m&a

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EXECUTIVE SUMMARY

We have been learning about the companies coming together to from another

company and companies taking over the existing companies to expand their

business.

With recession taking toll of many Indian businesses and the feeling of

insecurity surging over our businessmen, it is not surprising when we hear

about the immense numbers of corporate restructurings taking place,

especially in the last couple of years. Several companies have been taken

over and several have undergone internal restructuring, whereas certain

companies in the same field of business have found it beneficial to merge

together into one company.

Corporate restructuring refers to a broad array of activities that expands or

contracts a firms operation or substantially modify its financial structure or

bring about a significant change in its organizational structure and internal

functioning. It includes mergers, takeovers, acquisitions, slump sales,

demergers etc.

Mergers, acquisitions and restructuring have become a major force in the

financial and economic environment all over the world. Essentially an

American phenomenon till mid-1970s, they have become a dominant global

business theme since then.

On the Indian scene, too, corporates are seriously looking at mergers,

acquisitions and restructuring which has indeed become the order of the day.

The pace of corporate restructuring has increased since the beginning of the

liberalization era, thanks to greater competitive pressures and a morepermissive environment.

Mergers, acquisitions and restructuring evoke a great deal of public interest

and perhaps represent the most dramatic facet of corporate finance. This

report discusses various facets of mergers


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Objectives:

The present study is an attempt to check the performance of merger and acquisition

deals in India. With the following objectives

*To examine the rationale behind mergers & acquisitions.

*To understand the advantages & disadvantages of mergers & acquisitions in India.

*To examine the need for growth through mergers & acquisitions.

*To examine the growth of M&A in Telecom Sector in India.

.


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SCOPE

Mergers & Acquisition have gained popularity throughout the world in the recent

times. They have become popular due to globalization, liberalization, technological

developments & intensely competitive business environment. Mergers and

acquisition are a big part of the corporate finance world. This process is extensively

used for restructuring the business organization. In India, the concept of mergers and

acquisition was initiated by the government bodies.

The trends of mergers and acquisitions in India have changed over the years. The

immediate effects of the mergers and acquisitions have also been diverse across the

various sectors of the Indian economy. Mergers and Acquisitions (M&A) have been

around for a long time and has experienced waves of popularity during these times

and they are very much an important part of today's business world. They have also

become increasingly international which can be due to the rising global competition.

The popularity of cross-border M&A's makes it important to look at them from an

international perspective


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LIMITATION

Another case study parallel to this report could be examined further to get a more

detailed result. More parameters could be used even in the same report to reach a

different more in-depth conclusion. However the study could not be done on all the

cases of mergers and acquisition for the selected time period, which would have

given a more in-depth look on the results.

Further studies may help to develop some alternate measures of merger-related gains

as financial measures have limitations to capture the full impact of merger on

corporate performance. However, a study providing detailed insights into the reasons

and patterns of post-merger corporate performance across the types of mergers and

industry would be useful.

The recent research shows that management cannot rely solely on mergers &

acquisition as a source of growth and profitability. A case study based research

parallel to this study could be initiated to get nearer to reality show.


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CHAPTER 2

COMPANY PROFILE

GC Cables & Broadband Servics is a "Category A" (all India) ISP licence

holder. It offers its Internet, broadband and cable services under an exclusive

arrangement with the company IndusInd Media and Communications (IMC),

using their existing cable network across India.

IMC commenced operations in 1995 and has built up India's largest cable television

(CATV) network. It currently provides multi-channel transmission services under the

brand name INCableNet and ranks amongst the 12 largest cable TV operators in the

world in terms of subscribers. In addition to Mumbai, IMC's network covers 11 major

cities in northern, southern and western India viz: Delhi,Agra, Hyderabad, Banglaore,

Ahmedabad, Nasik, Belgaum, Indore and Nagpur. IMC is well advanced in its plan

for development of Pay TV platform with Interactive TV/internet capability.

In cognizance with the Company's plans for technological convergence, GC Cables

& Broadband Servics has joined hands with IMC to provide Internet, broadband

and cable services over the existing cable network.

Users across Mumbai will thus have access to high-quality Internet services round the

clock.The Company plans to provide this service in 49 cities across the country

The proceeds of the investment are being used for enhancing the broadband

capabilities and expansion to other cities.

Servicing over 25,000 users covering SOHOs, corporates, cyber cafs and cable

home.


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RESEARCH METHODOLOGY

The success of any research depends upon a well structured methodology. It is vitalfor any researcher to formulate a research friendly methodology that can provide

maximum information at a given time constraint.

This dissertation is about the growing trend of mergers and acquisitions activity in

India's corporate scene. The subject of the dissertation is spurred from the research

done for my own understanding of the topic. My own interest in this domain was

influenced by "economic growth of India "and "mergers and acquisitions". The

findings in the thesis are very much representing an inductive research.

Inductive reasoning/research is known as "bottom up approach". Where result and

hypothesis is based on specific observations to broader theories and generalizations.

This suggests that the findings, hypothesis, observations and conclusion in the

dissertation are based on the collected data. Since it would be impossible to conduct a

survey or questionnaire based research on mergers and acquisitions in India .So, in

order to understand the behaviour of Indian organizations and industries on mergers

and acquisitions with respect to growth and market capitalization it is important to do

a thorough study of already available data on M&A`s in India .The inductive

approach means that the mergers and acquisitions trends and effects on Indian

economy could be approached freely, and allowed to be explore the data fully.

The success of any research depends upon a well structured methodology. It is vital

for any researcher to formulate a research friendly methodology that can provide

maximum information at a given time constraint.

The research based analysis and study of mergers and acquisitions is based on

collection of data, organization of data and integration of the information on mergers

and acquisitions. Data collection is the most pivotal step in the success factor of the

research because it leads to more legitimate and credible results. The research study


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is based on several mergers and acquisitions in number of industries whether they

were both successful and unsuccessful in the last decade or so. In the research

analysis the focus is more on the recent decade's activities of mergers and

acquisitions in India.

The social sciences are methodologically getting very diverse because of the use of

qualitative, quantitative and mixed methods approaches. Quantitative methods

include hypothesis testing, observational studies, re sampling, regression analysis and

high dimensional level analysis and others. Qualitative methods include the

phenomenology, case studies, grounded theories and ethnography and others. After

the analysis of the existing statistics and literature and also the analysis of the leading

economists the the approach is both Quantitative and Qualitative. As it is based onsecondary search, all the selected data is from rigorous analysis of articles from

journals, books, internet and magazines.

As the research is based on both Quantitative and Qualitative .so, the theoretical

evidences and empirical data are mainly from the research papers, articles and by the

highly respective economic research, thesis and journals.


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INTRODUCTION TO MERGERS & ACQUISITIONS:-

In a general sense, mergers and acquisitions are very similar corporate actions - they

combine two previously separate firms into a single legal entity. Significant operational

advantages can be obtained when two firms are combined and, in fact, the goal of most mergers

and acquisitions is to improve company performance and shareholdervalue over the long-term.

The motivation to pursue a merger or acquisition can be considerable; a company that

combines itself with another can experience boosted economies of scale, greater sales revenue

and market share in its market, broadened diversification and increased tax efficiency. However,

the underlying business rationale and financing methodology for mergers and acquisitions

are substantially different.

A merger involves the mutual decision of two companies to combine and become one entity;

it can be seen as a decision made by two "equals". The combined business, through structural

and operational advantages secured by the merger, can cut costs and increase profits, boosting

shareholder values for both groups of shareholders. A typical merger, in other words, involves

two relatively equal companies, which combine to become one legal entity with the goal of

producing a company that is worth more than the sum of its parts. In a merger of two

corporations, the shareholders usually have their shares in the old company exchanged for an

equal number of shares in the merged entity.

A takeover, oracquisition, on the other hand, is characterized the purchase of a smaller company

by a much larger one. This combination of "unequal" can produce the same benefits as a merger,

but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile

takeover of a smaller firm, which essentially amounts to buying the company in the face of

resistance from the smaller company's management. Unlike in a merger, in an acquisition, the

acquiring firm usually offers a cash price per share to the target firm's shareholders or the

acquiring firm's share's to the shareholders of the target firm according to a specified conversion
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ratio. Either way, the purchasing company essentially finances the purchase of the target

company, buying it outright for its shareholders.

In this context, it would be essential for us to understand what corporate restructuring and

mergers and acquisitions are all about.

MERGER:-

Mergers involve the mutual decision of two companies to combine & become one entity.

The combined business can cut cost of operation & increase profit which will boost shareholders

value for both groups of shareholders. In Merger of two corporations, shareholders usually have

their shares in the old organization & are exchanged for an equal numbers of shares in the

merged entity.

According to the Oxford Dictionary merger means combining of two companies into one.

Merger is a fusion between two or more enterprises, whereby the identity of one or more is lost

and the result is a single enterprise. In merger the assets and liabilities of the companies get

vested in another company, the company that is merged losing its identity and its shareholders

becoming shareholders of the other company. All assets, liabilities and the stock of one company

are transferred to Transferee Company in consideration of payment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,

Cash, or

A mix of the above modes.

In the pure sense, a merger happens when two firms, often of about the same size, agree to go

forward as a single new company rather than remain separately owned and operated. This kind of

action is more precisely referred to as a "merger of equals." For example, both Daimler-Benz and

Chrysler ceased to exist when the two firms merged, and a new company, Daimler Chrysler, was

created.


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ACQUISITION:-

Acquisition in general sense is acquiring the ownership in the property. In the context of

business combinations, an acquisition is the purchase by one company of a controlling interest in

the share capital of another existing company.

On the other hand, Acquisition means the purchase of a smaller company by much larger one. A

larger company can initiate an Acquisition of smaller firm which essentially amounts to buy the

company in the face of resistance from smaller companys management. Unlike Mergers in an

Acquisition the acquiring firm usually offers a cash price per share to target firms shareholders.

Acquisition means an attempt by one firm to gain majority interest in the another firm called

target firm &dispose-off its assets or to take the target firm private by small group of investors.

A company can buy another company with cash, stock or a combination of the two. Another

possibility, which is common in smaller deals, is for one company to acquire all the assets of

another company.

An acquisition may be affected by;

(a)agreement with the persons holding majority interest in the company management like

members of the board or major shareholders commanding majority of voting power;

(b)purchase of shares in open market;

(c) to make takeover offer to the general body of shareholders;

(d)purchase of new shares by private treaty;

(e)Acquisition of share capital through the following forms of considerations viz. means of

cash, issuance of loan capital, or insurance of share capital.

There are broadly two kinds of strategies that can be employed in corporate acquisitions. These

include:


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I. Friendly Takeover:-

The acquiring firm makes a financial proposal to the target firms management and

board. This proposal might involve the mergerof the two firms, the consolidation of two

firms, or the creation of parent/subsidiary relationship.

II. Hostile Takeover:-

A hostile takeover may not follow a preliminary attempt at a friendly takeover. For

example, it is not uncommon for an acquiring firm to embrace the target firms

management in what is colloquially called a bear hug.


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HISTORY OF

MERGERS AND ACQUISITIONS


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HISTORY:-

Merger and acquisition activity in the United States has typically run in cycles, withpeaks coinciding with periods of strong business growth. U.S. merger activity has been marked

by five prominent waves: one around the turn of the twentieth century, the second peaking in

1929, the third in the latter half of the 1960s, the fourth in the first half of the 1980s, and the fifth

in the latter half of the 1990s.

This last peak, in the final years of the twentieth century, brought very high levels of merger

activity. Bolstered by a strong stock market, businesses merged at an unprecedented rate. The

total dollar volume of mergers increased throughout the 1990s, setting new records each year

from 1994 to 1999. Many of the acquisitions involved huge companies and enormous dollar

amounts. Disney acquired ABC Capital Cities for $19 billion, Traveler's acquired Citicorp for

$72.6 billion, Nation Bank acquired Bank of America for $61.6 billion and Daimler-Benz

acquired Chrysler for $39.5 billion.
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DISTINCTION BETWEEN MERGERS AND ACQUISITIONS


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DISTINCTION BETWEEN MERGERS AND ACQUISITIONS:-

Although they are often uttered in the same breath and used as though they were

synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the

purchase is called an acquisition. From a legal point of view, the target company ceases to exist,

the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size,

agree to go forward as a single new company rather than remain separately owned and operated.

This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks

are surrendered and new company stock is issued in its place. For example, both Daimler-Benz

and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler,

was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company

will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that

the action is a merger of equals, even if it's technically an acquisition. Being bought out often

carries negative connotations, therefore, by describing the deal as a merger, deal makers and top

managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the

best interest of both of their companies. But when the deal is unfriendly - that is, when the target

company does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the

purchase is friendly or hostile and how it is announced. In other words, the real difference lies in
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how the purchase is communicated to and received by the target company's board of directors,

employees and shareholders.

TYPES OF MERGERS

TYPES OF MERGERS:-

There are three main types of mergers which are Horizontal merger, Vertical merger &

Conglomerate merger. These types are explained as follows;

1. Horizontal Merger:-

This type of merger involves two firms that operate & compete in a similar kind of a

business. Horizontal merger is based on the assumptions that it will provide economies of

scale from the larger combined unit. The economies of scale are obtained by the elimination

of duplication of facilities, broadening the product line, reduction in the advertising cost.

Horizontal mergers also have potentials to create monopoly power on the part of the

combined firm enabling it to engage in anti-competitive practices.

Examples: -

Mumbai - Glaxo India Limited and Smith Kline Beecham Pharmaceuticals (India)

Limited have legally merged to form GlaxoSmithKlinePharmaceuticals Limited
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in India (GSK). A merger would let them pool their research & development funds

and would give the merged company a bigger sales and marketing force.

Merger of Centurion Bank & Bank of Punjab.

Merger between Holicim & Gujarat Ambuja Cement ltd

2. Vertical Merger:-

A vertical Merger involves merger between firms that are in different stages of

production or value chain. A company involved in vertical merger usually seeks to merge

with another company or would like to takeover another company mainly to expand its

operations by backward or forward integration. The acquiring company through merger of

another units attempt to reduce inventory of raw materials and finished goods. The basic

purpose of vertical merger is to eliminate cost of searching raw materials. Vertical merger

takes place when both firm plan to integrate the production process and capitalize on the

demand for the product. A company decides to get merged with another company when it is

not in a position to get strong position in a market because of imperfect market of

intermediary product, scarcity of resources.

Example: - Among the Indian corporate that have emerged as big international players is the

Videocon group. The group became the third largest colour picture tube manufacturer in the

world when it announced the purchase of the colour picture tube business of France-based

Thomson SA, which includes units in Mexico, Poland and China, for about Rs 1260 crore.

3. Conglomerate merger:-

Conglomerate mergers means mergers between firms engaged in unrelated types of

business activity. The basic purpose of such combination is utilization of financial resources.

Such type of merger enhances the overall stability of the acquirer company and creates

balance in the companys total portfolio of diverse products and production processes and

thereby reduces the risk of instability in the firms cash flows.

Conglomerate mergers can be distinguished into three types:

I. Product extension mergers These are mergers between firms in related


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business activities and may also be called concentric mergers. These mergers

broaden the product lines of the firms.

II. Geographic market extension mergers: These involve a merger between two

firms operating in two different geographic areas.

III. Pure conglomerates mergers: These involve mergers between two firms with

unrelated business activities. They do not come under product extension or

market extension.

REASONS FOR MERGERS & ACQUISITIONS


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REASONS FOR MERGERS & ACQUISITIONS:-

There are many reasons or factors that motivate companies to go for mergers and

acquisitions such as growth, synergy, diversification etc.

1. Growth: One of the most common reason for mergers is growth. There are two

broadways a firm can grow. The first is through internal growth. This can be slow and

ineffective if a firm is seeking to take advantage of a window of opportunity in which

it has a short-term advantage over competitors. The faster alternative is to merge and

acquire the necessary resources to achieve competitive goals. Even though bidding

firms will pay a premium to acquire resources through mergers, this total cost is not

necessarily more expensive than internal growth, in which the firm has to incur all of

the costs that the normal trial and error process may impose. While there are

exceptions, in the vast majority of cases growth through mergers and acquisitions is

significantly faster than through internal means. Mergers can give the acquiring

company an opportunity to grow market share without having to really earn it by

doing the work themselves - instead, they buy a competitor's business for a price.

Usually, these are called horizontal mergers. For example, a beer company may

choose to buy out a smaller competing brewery, enabling the smaller company to

make more beer and sell more to its brand-loyal customers.

Example- RPG group had a turnover of only Rs. 80 crores in 1979, which has

increased to about Rs.5600 crores in1996. This phenomenal growth was due to the

acquisitions of several companies by the RPG group. Some of the companies

acquired are Asian Cables, Calcutta Electricity Supply and Company, etc.

2. Synergy: Another commonly cited reason for mergers is the pursuit of synergistic

benefits. The most commonly used word in Mergers & Acquisitions is synergy,
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which is the idea of combining business activities, for increasing performance and

reducing the costs. Essentially, a business will

attempt to merge with another business that has complementary strengths and

weaknesses. This is the new financial math that shows that 1 + 1 = 3. That is, as the

equation shows, the combination of two firms will yield a more valuable entity than

the value of the sum of the two firms if they were operating independently.

Value(A + B) > Value (A) + Value (B)

Although many merger partners cite synergy as the motive for their transaction,

synergistic gains are often hard to realize. There are two types of synergy one is

derived from cost economies and other one is derived from revenue enhancement.

Cost economies are the easier to achieve because they often involve eliminating

duplicate cost factors such as redundant personnel and overhead. When such

synergies are realized, the merged company generally has lower per-unit costs.

Revenue enhancing synergy is more difficult to predict and to achieve. An example

would be a situation where one companys capability, such as research process, is

combined with another companys capability, such as marketing skills, to

significantly increase the combined revenues.

3. Diversification : Other reasons for mergers and acquisitions include diversification.

A company that merges todiversify may acquire another company engaged in

unrelated industry in order to reduce the impact of a particular industry's

performance on its profitability. The track record of

diversifying mergers is generally poor with a few notable exceptions. A few firms,

such as General Electric, seem to be able to grow and enhance shareholders wealth

while diversifying. However, this is the exception rather than a norm. Diversification

may be successful, but it needs more skill and infrastructure than some firms have.

4. Economies of scale: Yes, size matters. Whether it's purchasing stationery or a new
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corporate it system, a bigger company placing the orders can save more on costs.

Mergers also translate into improved purchasing power to buy equipment or office

supplies - when placing larger orders, companies have a greater ability to negotiate

prices with their suppliers. This refers to the fact that the combined company can

often reduce duplicate departments or operations, lowering the costs of the company

relative to theoretically the same revenue stream, thus increasing profit.

5. Increase Market Share & Revenue: This reason assumes that the company will be

absorbing a major competitor and increasing its power (by capturing increased market

share) to set prices. Companies buy companies to reach new markets and grow

revenues and earnings. A merge may expand two companies' marketing and

distribution, giving them new sales opportunities. A merger can also improve a

company's standing in the investment community: bigger firms often have an easier

time raising capital than smaller ones.

Example-Premier and Apollo Tyres,

6. Increase Supply-Chain Pricing Power: By buying out one of its suppliers or one of

the distributors, a business can eliminate a level of costs. If a company buys out one

of its suppliers, it is able to save on themargins that the supplier was

previously adding to its costs; this is known as avertical merger. If a

company buys out a distributor; it may be able to sale its products at a lower cost.

7. Eliminate Competition: Many mergers and acquisitions deals allow the acquirer to

eliminate future competition and gain a larger market share in its product'smarket. The downside of this is that a large premium is usually required to convince

the target company's shareholders to accept the offer. It is not uncommon for the

acquiring company's shareholders to sell their shares and push the price lower in

response to the company paying too much for the target company.
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8. Acquiring new technology: To stay competitive, companies need to stay on top of

technological developments and their business applications. By buying a smaller

company with unique technologies, a large company can maintain or develop a

competitive edge and vice versa.

9. Procurement of production facilities: Procurement of production facilities may be

the reason for acquiring company to go for mergers and acquisition. It is a kind of

backward integration. Acquiring Firms will take the decision of merging with another

firm who supplies raw material to acquiring firm in order to safeguard the sources of

supplies of raw material or intermediary product. It will help acquiring firm to bring

economies in purchasing of raw material. It will also help to cut down the

transportation cost.

Example- Videocon takes over Thomson picture tube in China to procure supply of

picture tube required for producing television sets.

10. Market expansion strategy: Many firms go for mergers and acquisitionsas a part

of market expansion strategy. Mergers and acquisitions will help the company to

eliminate competition and to protect existing market. It will also help the firm to

obtain new market for promoting their existing or obsolete products.

For example, Lenovo takes over IBM in India to increase market for Lenovo products

like desktops, laptops in India.

11. Financial synergy: Financial synergy may be the reason for mergers and

acquisitions. Following are the financial synergy available in case of mergers andacquisitions;

I. Better credit worthiness- This helps companies to purchase good on credit,

obtain bank loan and raise capital in the market easily.


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II. Reduces cost of capital- The investors consider big firms as safe and hence they

expect lower rate of return for the capital supplied by them. So the cost of capital

reduces after merger.

III. Increase debt capacity- After the merger the earnings and cash flows become

more stable than before. This increase the capacity of the firm to borrow more

funds.

IV. Rising of capital- After the merger due to increase in the size of the company,

better credit worthiness and reputation the company can easily raise the capital at

any time.

12.Own development plans: The purpose of mergers & acquisition is backed by the

acquiring companys own developmental plans. A company thinks in terms of

acquiring the other company only when it has arrived at its owndevelopment plan to

expand its operation having examined its own internal strength where it might not

have any problem of taxation, accounting, valuation, etc. but might feel resource

constraints with limitations of funds and lack of skill managerial personnel. It has to

aim at suitable combination where it could have opportunities to supplement its funds

by issuance of securities; secure additional financial facilities eliminate competition

and strengthen its market position.

13.Corporate friendliness: Although it is rare but it is true that business houses exhibit

degrees of cooperative spirit despite competitiveness in providing rescues to each

other from hostile takeovers and cultivate situations of collaborations sharing

goodwill of each other to achieve performance heights through business

combinations. The combining corporate aims at circular combinations by pursuing

this objective


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14.General gains:

I. To improve its own image and attract superior managerial talents to manage its

affairs.

II. To offer better satisfaction to consumers or users of the product.

15.Taxes: A profitable company can buy a loss maker to use the target's loss as their

advantage by reducing their tax liability. In the United States and many other

countries, rules are in place to limit the ability of profitable companies to "shop" for

loss making companies, limiting the tax motive of an acquiring company.

Ahmadabad Cotton Mills Merged with Arvind Mills ( Rs =3.34 crores)

Sidhaper Mills merged with Reliance Industries Ltd.(Rs. 3.34 crores)


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ADVANTAGES & DISADVANTAGES OF MERGERS & ACQUISITIONS:

1) ADVANTAGES-

Mergers and acquisitions is the permanent combination of the business which vest

management in complete control of the business of merged firm. Shareholders in the selling

company gain from the mergers and acquisitions as the premium offered to induce

acceptance of the merger or acquisitions. It offers much more price than the book value of

shares. Shareholders in the buying company gain premium in the long run with the growth of

the company.

Mergers and acquisitions are caused with the support of shareholders, managers and

promoters of the combing companies. The advantages, which motivate the shareholders and

managers to give their support to these combinations and the resulting consequences they

have to bear, are briefly noted below.

From shareholders point of view: - Shareholders are the owners of the company

so they must get be benefited from the mergers and acquisitions. Mergers and

acquisitions can affect fortune of shareholders. Shareholders expect that

investment made by them in the combining companies should enhance when

firms are merging. The sale of shares from one companys shareholders to another

and holding investment in shares should give rise to greater values. Following are

the advantages that would be generally available in each merger and acquisition

from the point of view of shareholders;

1. Face value of the share is increased.

2.

Shareholders will get more returns on the investments made by them in thecombining companies.

3. Sale of shares from one companys shareholder to another is possible.

4. Shareholders get better investment opportunities in mergers and

acquisitions.


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From managers point of view: - Managers are concerned with improving

operations of the company, managing the affairs of the company effectively for

all round gains and growth of the company which will provide them better deals

in raising their status, perks and fringe benefits. Mergers where all these things

are the guaranteed outcome get support from the managers.

From Promoters point of view: -

1. Mergers offer companys promoters advantages of increase in the size of

their company, financial structure and financial strength.

2. Mergers can convert closely held and private limited company into public

limited company without contributing much wealth and losing control ofpromoters over the company.

From Consumers point of view: - Consumers are the king of the market so they

must get some benefits from mergers and acquisitions. Benefits in favour of the

consumer will depend upon the fact whether or not mergers increase or decrease

competitive economic and productive activity which directly affects the degree of

welfare of the consumers through changes in the price level, quality of the

products and after sales service etc.

Following are the benefits that consumers may derive from mergers and

acquisitions transactions;

1. Low price & better quality goods: - The economic gains realized from

mergers and acquisitions are passed on to consumers in the form of low

priced and better quality goods.

2. Improve standard of living of the consumers: - Low priced and better

quality products directly improves standard of living of the consumers.

2) DISADVANTAGES-

Merger or acquisition of two companies in the same field or in diverse field may involve

reduction in the number of competing firms in an industry and tend to dilute competition in the

market. They generally contribute directly to the concentration of economic power and are likely


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to lead the merger entities to a dominant position of market power. It may result in lesser

substitutes in the market, which would affect consumers welfare. Yet another disadvantage may

surface, if a large undertaking after merger because of resulting dominance becomes complacent

and suffers from deterioration over the years in its performance. Following are some

disadvantages of mergers and acquisitions;

Creates monopoly- when two firms merged together they get dominating position in the

market which may lead to create monopoly in the market.

Leads to unemployment-Raiders shouldnt have the right to buy up firms they have no

idea how to runthe employees who have spent their lives building up the firm should

be making the decisions.

Raiders become filthy rich without producing anything, at the expense of hardworking

people who do produce something.

M&A damages the morale and productivity of firms.

Corporate debt levels have risen to dangerous levels.

Managers pressured to forego long-term investment in favour of short-term profit.

Shareholders may be payed lesser dividend if the firm is not making profits. There may

be a possibility that shareholders would be paid less returns on investment if the company

is not earning enough profit.

Corporate raiders use their control to strip assets from the target, make a quick profit,

destroying the company in the process, throwing people out of work.

PROCEDURE OF MERGERPROCEDURE OF MERGER:

1. Search for merger partner- The first step in mergers is to search for merger partner.

The top management may use their own contact in the same line of economic activity or

in the other diversified field which could be identified as a better merger partners. Such

identification should be based on the detail information of the merger partners collected

from public and private sources.


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2. Agreement between the two companies- The beginning of actual merger procedure

starts with agreement between the merging companies, but mere agreement does not

provide legal cover to the transaction unless it is sanctioned by the Court under section

391 of Companies Act 1956.

3. Scheme of mergerThe scheme of merger should be prepared by the companies which

have taken decision of merging. There is no specific form prescribed for scheme of

merger but scheme should contain following information;

Particulars about the merging companies.

Main terms of transfer of assets and liabilities from transferor to transferee.

Conditions of conducting business.

Particulars about share capital of merging companies specifying authorized

capital issued capital and paid up capital.

Description of proposed profit sharing ratio and any condition attached to it.

Conditions about payment of dividend.

Status of employees of the merging companies and also status of provident fund,

gratuity fund or any funds created for the benefits of existing employees.

Treatment of debit balance of merging companies.

Miscellaneous provisions covering income tax dues, contingencies and other

accounting entries.

4. Approval of Board Of Directors for the scheme- The scheme for merger must be

approved by the respective Board Of Directors of transferor and transferee companies.

5. Approval of scheme by financial institutions- The Board of Directors should in fact

approve the scheme after it has been approved by the financial institutes, debentureholders, banks which have granted loans to the companies. Approval of Reserve Bank of

India is also needed.


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6. Application to the Court- The next step is to make an application under section 39(1) of

Indian Companies Act 1956 to the High Court for getting permission for merging

between companies.

7. Approval of scheme by the Court- On the receipt of the application for merger theCourt will decide whether to approve the scheme of merger or not. Once the Court has

approved the application then firms can merged.

8. Transfer of assets and liabilities- The High Court has the power to give order for

transfer of any property from Transferor Company to Transferee Company. By the virtue

of such order assets and liabilities of the Transferor Company shall automatically stand

transferred to Transferee Company.

9. Allotment of shares to shareholders of transferor company- By the virtue of

sanctioned scheme of merger, the shareholders of Transferor Company are entitled to get

shares in Transferee Company in the exchange of ratio provided under the said scheme.

10.Intimation to stock exchanges- After merger is effected; the company which takes over

assets and liabilities of the Transferor Company should apply to the Stock Exchanges

where its securities are listed, for listing the new shares allotted to the shareholders of the

company.

11.Public announcement- Public announcement of merger is mandatory as required under

SEBI regulations. The Transferee Company shall appoint merchant bank to make a

public announcement of merger on the behalf of Transferee Company. Public

announcement shall be made at least in one national English daily one Hindi daily and

one regional language daily newspaper of that place where the shares of that company are

listed and traded. Public announcement should be made within four days from

finalization of negotiations or entering into any agreement of merger. Public

announcement should contain following information;

Paid up share capital of the transferee company, the number of fully paid up and

partially paid up shares.

The minimum offer price for each fully paid up or partly paid up share.


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Mode of payment of consideration.

Salient features of the agreement, if any, such as the date, the name of the seller, the

price at which the shares are being acquired, the manner of payment of the

consideration and the number and percentage of shares in respect of

which the acquirer has entered into the agreement to acquire the shares or the

consideration, monetary or otherwise, for the acquisition of control over the

transferee company, as the case may be;

Objects and purpose of the mergers and acquisitions and the future plans of the

transferor company for the transferee company. Provided that where the future plans

are set out, the public announcement shall also set out how the transferor proposes to

implement such future plans.

The date by which individual letter of offer would be posted to each of the

shareholder.

The date of opening and closure of the offer and the manner in which and the date by

which the acceptance or rejection of the offer would be communicated to the share

holders.

The date by which the payment of consideration would be made for the shares in

respect of which the offer has been accepted.

Approvals of banks or financial institutions required, if any;

Such other information as is essential for the shareholders to make them informed

about the offer.


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PARTICIPANTS TO MERGERS AND ACQUISITIONS


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PARTICIPANTS IN MERGERS AND ACQUISITIONS:-

Mergers and Acquisitions process requires highly skilled and qualified group of advisers.

Each advisor specializes in a specific aspect of the merger and acquisition process. The role

played by such advisers or professional experts are as follows;

1. Investment bankers: Investment banking is one of the most important department in the

process of mergers and acquisitions. It is fee based adviser department which works with

the company that wish to acquire other company or with industries that wish to purchase

a smaller industry. The main role of investment banks is to provide finance for mergers

and acquisitions transactions.

2. Lawyers: The legal framework surrounding a typical transaction has become so

complicated that no one individual can have sufficient expertise to address all the issues.

In large and complicated transactions, legal teams consists of more than one dozen

lawyers each of them represents specialized aspects of law. Lawyers are expected to

perform all legal proceedings.

3. Accountants: Services provided by accountants include advice on the optimal tax

structure, financial structuring and performing financial due diligence. A transaction can

be structured in many different ways, with each having different tax implications for the

parties involved. Tax accountants are vital in determining the appropriate tax structure.

Accountants also perform the role of auditors by reviewing the transferor companys

financial statements and operations through a series of interviews with senior and middle

level managers.


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4. Valuation experts: They may be appointed either by the bidder or the Transferor

Company to determine the value of the transferor company. They build models that

incorporate various assumptions such as costs or revenue growth rate.

5. Institutional investors: They include public and private pension funds, insurance

companies, banks, mutual funds. Collection of institutions can influence firms action.

They invest their money in the company.

SUCCESS & FAILURE OF MERGERS & ACQUISITIONS


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SUCCESS & FAILURE OF MERGERS & ACQUISITIONS:-

1. Factors responsible for successful mergers and acquisitions

The success of merger depends upon many critical factors but the main factor is that Transferor

Company should buy Transferee Company at right time, at right place and at right cost. Just

because of company is for sale and another company can afford buying that company is not good

reason to do a deal. The success of mergers and acquisitions depend on how realistic deal makers

are and how well they can integrate two companies while maintaining day-to-day operations.

There are several key ingredients that need to come together for merger and acquisitions to be

successful;

I. Strategy- Strategy is the basis for any merger and acquisition. Company should be able to

express in one sentence the motive behind merger and acquisition. If the transferor

company is not able to express the motive for doing a deal for merger then the deal should

not be done. There are many strategic reasons to buy a company some of them are listed as

follows;

Acquire Innovative technical skills.

Obtain new markets and customer.

Enhance product line.

II. Motive- Buying company i.e. transferor company does not know reasons why another

company is being sold. It should ask reasons for selling the company. Transferor Company

should also try to know what selling company knows about the business that they are not


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telling potential buyers. After knowing all reasons for selling a company buying company

would be in a position to decide whether to go for a deal or not. If they are going for deal

then buying company should decideappropriate price for the deal. Buying company should

also examine its own motive for wanting to acquire the company, whether it is good asset

for the company that would enhance the market of buying company.

III. Price- A low price does not always equate to a good deal, but higher the price; it is fewer

cushions for unexpected problems. Buying company is often forced to pay more price than

they want to pay for the deal. In a competitive situation the buying company needs to

decide how much it is willing to pay and not exceed that level, even if it means losing the

company. However, in any merger and acquisition there is a pricing range, based on

different assumptions of the future performance of the merger and acquisition. The buying

company has to decide the price to offer for the deal, or how risk will be divided between

shareholders of merging company. .

IV. POST MERGER MANAGEMENT- For a merger to succeed much work a remains after

the deal has been signed. The strategy and business model of the old firms may no longer

be appropriate when a new firm is formed. Each firm is unique and presents its own set of

problems and solutions. It takes a systematic effort to combine two or more companies

after they have come under a single ownership.

V. DUE DILIGENCE- Due diligence means, A large part of what makes a deal successful

after completing it, is what is being done before completing it. Before the closing of the

deal, the buyer should engage in a thorough due diligence review of the sellers business.

The purpose of the review is to detect any financial and the business risk that the buyer

might inherit from the seller. The due diligence team can identify ways in which assets,

process and other resources can be combined in order to realize cost saving and other

expected synergies. The planning team can also try to understand the necessary sequencing

of events and resulting pace at which the expected synergies may be realized.


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Factors responsible for failure of mergers and acquisitions

As there are many factors responsible for success of mergers similarly there are many factors

responsible for failure of the merger. The main factor is buying wrong company at wrong time,

at wrong place and by paying wrong price. If the process through which merger is executed is

faulty then it will affect merger adversely. Historical trends show that roughly two thirds of big

mergers will disappoint on their own terms, which means they will lose value on the stock

market. Some of reasons for failure of mergers and acquisitions are listed below;

I. Payment of high price- The merger fails when the maximum price is paid to buy

another company. In such situation shareholders of Transferee Company will receive

more cash but the shareholders of Transferor Company will pay more cash. As a result

of this deal for merger will fail.

II. Culture clash- Lack of proper communication, differing expectations and conflicting

management styles due to differences in corporate culture contribute to failure in

implementing plan and therefore, failure of mergers and acquisitions.

III. Overstated synergies: - An acquisition can create opportunities of synergy by

increasing revenues, reducing costs, reducing net working capital and improving the

investment intensity. Over estimation of such synergies may lead to a failure of this

merger. Inability to prepare plans leads to failure of mergers and acquisitions.

IV. Failure to integrate operations- Once firms are merged management must be prepared

to adapt plans in favour of changed circumstances. Inability to prepare plans leads to

failure of mergers and acquisitions.

V. Inadequate due diligence- The process of the due diligence helps in detecting any

financial and business risks that the buyer might inherit from the seller. Inadequate due

diligence results in the failure of the mergers and acquisitions.


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TELECOM SECTOR IN INDIA

India's mobile telecom sector is one of the fastest growing sectors. Unlike in the 1990s when the

mobile phone was an elitist product, mobile operators now tap a mass market with mass

marketing techniques. "Unified licensing" rules allow basic and mobile operators into each

other's territory, and have ushered in perhaps the final phase of industry consolidation.

It seems that only companies with deep pockets can effectively compete as primary operators

mobile markets. Economies of scale, scope, and end-to-end presence in long-distance as well as

local telecom, are desirable.

There are, besides, new challenges. Operators are having to find new growth drivers for the wire

line business. There are problems of getting broadband to take off, of technology choice, of when

to introduce new technologies, and of developing a viable business model in an era of

convergence.

This report analyses the changing features, opportunities and challenges facing the basic and

mobile telecom services business. It covers the regulatory environment, markets, new services

and revenue sources, tariff structures, economics of the industry, investment and technology

issues, and the current and emerging competitive environment.

Growth of mobile technology

India has become one of the fastest growing mobile markets in the world. The mobile services

were commercially launched in August 1995 in India. In the initial 5-6 years the average

monthly subscribers additions were around 0.05 to 0.1 million only and the total mobile

subscribers base in December 2002 stood at 10.5 millions. However, after the number of
http://en.wikipedia.org/wiki/Mobile_phonehttp://en.wikipedia.org/wiki/Mobile_phone


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proactive initiatives taken by regulator and licensor, the monthly mobile subscriber additions

increased to around 2 million per month in the year 2003-04 and 2004-05.

Although mobile telephones followed the New Telecom Policy 1994, growth was tardy in the

early years because of the high price of hand sets as well as the high tariff structure of mobile

telephones. The New Telecom Policy in 1999, the industry heralded several pro consumer

initiatives. Mobile subscriber additions started picking up. The number of mobile phones added

throughout the country in 2003 was 16 million, followed by 22 millions in 2004, 32 million in

2005 and 65 million in 2006. The only countries with more mobile phones than India with

156.31 million mobile phones are China408 million and USA170 million.

India has opted for the use of both the GSM (global system for mobile communications) and

CDMA (code-division multiple access) technologies in the mobile sector.

The mobile tariffs in India have also become lowest in the world. A new mobile connection can

be activated with a monthly commitment of US$ 5 only. In 2005 alone 32 million handsets were

sold in India. The data reveals the real potential for growth of the Indian mobile market.

Next generation networks

In the Next Generation Networks, multiple access networks can connect customers to a core

network based on IP (internet protocol) technology. These access networks include fibre optics

orcoaxial cable networks connected to fixed locations or customers connected through wi-fi as

well as to 3G networks connected to mobile users. As a result, in the future, it would be

impossible to identify whether the next generation network is a fixed or mobile network and the

broadband wireless access would be used both for fixed and mobile services. It would then be

futile to differentiate between fixed and mobile networksboth fixed and mobile users will

access services through a single core network.

Indian telecom networks are not so intensive as developed countrys telecom networks and

India's teledensity is low only in rural areas. 670,000 route kilometers ofoptical fibres has been

laid in India by the major operators, even in remote areas and the process continues. A rural

network based on the extensive optical fibre network, using Internet Protocol and offering a

variety of services and the availability of open platforms for service development, viz. the Next
http://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/USAhttp://en.wikipedia.org/wiki/Global_System_for_Mobile_Communicationshttp://en.wikipedia.org/wiki/Code_division_multiple_accesshttp://en.wikipedia.org/wiki/Mobile_phonehttp://en.wikipedia.org/wiki/Telecommunications_networkhttp://en.wikipedia.org/wiki/Internet_Protocolhttp://en.wikipedia.org/wiki/Fibre_opticshttp://en.wikipedia.org/wiki/Coaxial_cablehttp://en.wikipedia.org/wiki/Wi-fihttp://en.wikipedia.org/wiki/3Ghttp://en.wikipedia.org/wiki/Mobile_phonehttp://en.wikipedia.org/wiki/Broadbandhttp://en.wikipedia.org/wiki/Wirelesshttp://en.wikipedia.org/wiki/Core_networkhttp://en.wikipedia.org/wiki/Optical_fibreshttp://en.wikipedia.org/wiki/Internet_Protocolhttp://en.wikipedia.org/wiki/Next_Generation_Networkhttp://en.wikipedia.org/wiki/Next_Generation_Networkhttp://en.wikipedia.org/wiki/Internet_Protocolhttp://en.wikipedia.org/wiki/Optical_fibreshttp://en.wikipedia.org/wiki/Core_networkhttp://en.wikipedia.org/wiki/Wirelesshttp://en.wikipedia.org/wiki/Broadbandhttp://en.wikipedia.org/wiki/Mobile_phonehttp://en.wikipedia.org/wiki/3Ghttp://en.wikipedia.org/wiki/Wi-fihttp://en.wikipedia.org/wiki/Coaxial_cablehttp://en.wikipedia.org/wiki/Fibre_opticshttp://en.wikipedia.org/wiki/Internet_Protocolhttp://en.wikipedia.org/wiki/Telecommunications_networkhttp://en.wikipedia.org/wiki/Mobile_phonehttp://en.wikipedia.org/wiki/Code_division_multiple_accesshttp://en.wikipedia.org/wiki/Global_System_for_Mobile_Communicationshttp://en.wikipedia.org/wiki/USAhttp://en.wikipedia.org/wiki/China


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Generation Network, appears to be an attractive proposition. Fibre network can be easily

converted to Next Generation network and then used for delivering multiple services at cheap

cost.

Cellular Service Providers

As on Apr 2007 India has 167 million mobile phone subscribers. Out of this 125 million are

GSM users and 41 million CDMA users.

BSNL, Bharti Airtel, Hutch, Idea, Aircel, Spice and MTL are the main GSM providers in India.

Reliance Communications and Tata Indicom are the main CDMA providers in India.

Bharti Airtel

Airtel is providing cellular services in Delhi, Mumbai, Kolkata, Chennai, Andhra Pradesh,Gujarat, Haryana, Himachal Pradesh, Jammu and Kashmir, Karnataka, Kerala, Madhya Pradesh,

Maharashtra, Goa, Orissa, Punjab, Rajasthan, Tamil Nadu, UP and West Bengal. Airtel is the

No.1 cellular service provider in India using GSM technology. Airtel has 23% market share in

India with a total subscriber base of 38 million.

Reliance Communications

Reliance has both CDMA and GSM networks and total subscriber base of 29 million or 17%

market share. It has GSM network in Assam, Bihar, Himachal Pradesh, Kolkata, North East,

Madhya Pradesh, Orissa and West Bengal. Reliance has CDMA networks in other states andcities.

Bharat Sanchar Nigam Limited (BSNL)

BSNL is a state owned telecom company which has GSM presence in almost every cities and

towns. BSNL has 27 million subscribers with a market share of 16%.

Hutch

Hutch is another emerging GSM provider in India with coverage in Kerala, Mumbai, Delhi,Kolkata, Chennai, Gujarat, Andhra Pradesh, Karnataka and Punjab with a total subscriber base of

27 million.

Tata Indicom
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Tata Indicom is a main CDMA provider in India with 16 million subscribers all over India. Tata

Indicom has presence in almost every states and cities in India

The leading cellular service providers have the following number of subscribers:

Service Provider No. of CDMA Subscribers No. of GSM Subscribers

Reliance 2.75 crores 38.76 lakhs

Tata 1.07 crores

Airtel 3.37 crores

MTNL 24.98 lakhs

BSNL 2.44 crores

Hutch 2.44 crores

Idea 1.3 crores

Spice 25.56 lakhs

BPL 10.62 lakhs

Aircel 48 lakhs

Bharti Airtel has the largest customer base with 31% market share, followed by Hutch and BSNL

with each holding 22% market share.

The 2007 budget has brought further relief to the customers with the reduction in the tariffs, both

local and long distance, and with slashing down the roaming rentals. This is likely to lead to even

more people going for cellular services and more and more use of the value added services.

However, landline telephony is likely to remain popular, too, in the foreseeable future. MTNL,


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the largest landline service provider, has recently taken some bold initiatives to retain its market

share and, if possible, expand it.

Revenue and growth

The total revenue in the telecom service sector was Rs. 86,720 crore in 2005-06 as against Rs.

71, 674 crore in 2004-2005, registering a growth of 21%. The total investment in the telecom

services sector reached Rs. 200,660 crore in 2005-06, up from Rs. 178,831 crore in the previous

fiscal.

Telecommunication is the lifeline of the rapidly growing Information Technology industry.

Internet subscriber base has risen to 6.94 million in 2005- 2006. Out of this 1.35 million were

broadband connections. More than a billion people use the internet globally.

The value added services (VAS) market within the mobile industry in India has the potential to

grow from $500 million in 2006 to a whopping $10 billion by 2009 (Music, games to drive

mobile VAS growth).

Merger or Acquisition in TELECOM Sector in India

VodafoneHutch

Indian Telecom Industry:

One of the fastest growing sectors in the country, telecommunications has been zooming

up the growth curve at a feverish pace in the past few years. The year 2007 saw India achieve the

distinction of having the world's lowest call rates (2-3 US cents), the fastest growth in the

number of subscribers (15.31 million in 4 months), the fastest sale of a million mobile phones (1

week), the world's cheapest mobile handset (US$ 17.2) and the world's most affordable colour

phone (US$ 27.42).
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Trends

Indian telecommunication firms added 5.19 million new subscribers in April 2007, taking

the total user base above 212.02 million.

Wireless service providers continued to dominate user growth by adding 5.15 million

subscribers in April, while 40,000 new fixed-line users signed up.

At 500 minutes a month, India has the highest monthly 'minutes of usage' (MOU) per

subscriber in the Asia-Pacific region.

India is emerging as a forerunner in using the cell phone as a tool to access the Internet,

with one in every 11 people logging on to the web across the world through mobiles

turning out to be an Indian.

The country's telecom sector will see investments up to US$ 25 billion over the next fiveyears, projects global consultancy firm Ernst & Young.

India is expected to register handset production of over 51 million units in 2007 to record

the highest growth in the Asia-Pacific region, according to technology research firm

Gartner.

India produced nearly 31 million mobile phones in 2006 worth about US$ 5 billion. The

production of handsets is set to increase by 68 per cent in units and 65 per cent in value

terms in 2007. By 2011, production volumes are expected to reach nearly 95 million units

at a compound annual growth rate (CAGR) of 25 per cent.

The retail market for mobile phones -- handsets, accessories and airtime -- is over US$

15.6 billion and growing at the rate of 15-20 per cent.

Massive infrastructure needs in India might provide a potential private equity role. A

recent study by telecom regulator Telecom Regulatory Authority of India (TRAI) has

estimated that the country will need about 350,000 telecom towers by 2010, as against

125,000 in 2007.

With a CAGR of 46 per cent, India has emerged as the fastest growing market in the data

centre-structured cabling market in the Asia Pacific region, according to Access Markets

International (AMI) Partners, a US-based consultancy agency. The data centre structured

cabling market is expected to grow from US$ 19 million in 2005 to US$ 125 million in


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2010. The overall structure cabling market is expected to grow from US$ 127 million in

2005 to US$ 345 million by 2010 at a CAGR of 22 per cent. .

In May 2007, Indian GSM mobile phone service providers signed up 5.1 million

customers, taking total users to 130.6 million, the Cellular Operators' Association of India

said.

The combined revenue of all operators from their mobile businesses would more than

double to US$ 33.1 billion by 2010, from about US$ 12.8 billion in 2006.

The total revenue of all telecom operators is also set to nearly double to US$ 43.6 billion

in four years, from US$ 22.5 billion in 2006. The revenue share of mobile business would

rise to 76 per cent in the same period, from 57 per cent currently. India, which is adding

over six million mobile subscribers every month, has surpassed Russia to become the

third largest mobile market in the world after China and the US. The total mobile

subscriber base in the country is likely to reach 425 million by March 2010 with Bharti

Airtel (GSM) and Reliance (CDMA and GSM) emerging as the top two mobile operators

in terms of number of subscribers.

The mobile industry should continue its strong growth. The countrys telecom regulator,

the TRAI, says that the rate of market expansion would increase with further regulatory andstructural reform. The adoption of Unified Licensing, a change in the Access Deficit Charge

regime, increased sharing of infrastructure and coverage of new areas by operators will

contribute to ongoing growth.


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A very large market with significant growth potential

Source: I nforma, Analyst consensus.

The Indian telecom industry has lots of scope as only 13% of the mobile market is penetrated

and it still has a vast potential which is untapped. When this untapped mobile market is

compared with the growing population the scope further widens as India is the 2nd most populous

country in the world.

0

200

400

600

800

1000

1200

1400

1318

1116

494

300189

143127

(m)

Population (Dec-06)

0

20

40

60

80

100

120108 107

78 77

54

41

13

(%)

Mobile Penetration (% as of Dec-06)

India is the worlds 2n

most

o ulated countr

.. where the mobile penetration

remains low

Penetration expected to exceed 40% by FY2012 and exceed 50% in the longer term


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1.1 Indian Mobile Market

India is divided into 23 license

territories or CIRCLES for the purpose of

mobile service.

Circles are categorized as follows

Metros ( 4 largest cities )

A circles (state with highest earning

power)

B Circles

C Circles (state with least earning )

Each Circle typically has 5-6 Operators.

Private GSM Operators on 900MHz.

1 Government Owned GSM Operator (BSNL/MTNL)

1 active private GSM operator on 1800MHz

Circle by- Circle Breakdown

Key Facts


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1-2 CDMA operators on 800MHz.

2. History of Hutch

Hutchison Telecom is a global provider of telecommunications services. It has significant

presence in nine countries and territories, and are market leaders in many of them. Hutch

currently offer mobile and fixed-line telecommunication services in Hong Kong, and operate or

are rolling out mobile telecommunication services in Macau, India, Israel, Thailand, Sri Lanka,

Ghana, Indonesia and Vietnam. Hutch was the first provider of 3G mobile services in Hong

Kong and Israel and operates brands including Hutch, 3and Orange.

Overall, the offer encompasses voice services (including a range of enhanced calling

features), broadband data and multimedia services, mobile and fixed-line Internet and intranet

services, IDD and international roaming services, bandwidth services and data centre services.

Together with its regional partners, Hutchison Telecom is a key player in the multi-

market telecommunications industry, with a growing customer base of about 30 million as of 31

December 2006

2.1 Strategies of Hutch


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The guiding strategy of Hutch is to focus on mobile telecommunications services markets

which offer the best growth potential. Hutch enters these markets either through greenfield

developments or by acquisition, and brings our strengths in network and product development,

branding and customer service to create market leaders.

Hutch believes that a combination of strong economic growth and favorable demographic

profiles in these markets will result in sustained growth in demand for our services. Many of its

markets are still significantly under-penetrated, and offer tremendous scope for future growth.

For example, in India the combination of vast population and a very low penetration rate creates

an enormous growth opportunity for accessible and affordable mobile services.

Elsewhere - most notably in Hong Kong and Israel - the penetration of mobile services

has reached higher levels. As an early developer and market leader in 3G technology, Hutch is

ideally positioned to benefit from these trends. The companies that comprise Hutchison Telecom

enjoy a leading position in many of the markets in which Hutch operate.

In all its markets, Hutch will leverage its experienced management team and our track-

record of successfully developing and operating mobile telecommunications businesses to

continue to grow and diversify our turnover and profits. In addition, Hutch will continue to

selectively acquire or invest in new businesses, in new markets as well as in countries where

Hutch is already present.

2.2 The Evolution of Hutch Essar

1992 : Hutchison entered India in partnership with Max


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1994: C. Sivasankaran sells 51% stake in Delhis sterling cellular to Essar Group

1995: Hutchison max mobile goes live in Mumbai; Essar Cellphone Starts Service in

Delhi

1996:Swisscom sells 49% stake in Essar cell phone to Hutchison

1998: Max Analjit Singh sells 41% stake in Hutchison Hong Kong

2000: Hutchison acquires 49% stake in sterling cellular buys Kolkatas Usha Martin

Telecom

2001: Hutchison Buys 49% stake in Gujarats Fascel gets license for Karnataka &

Chennai

2003: Aircell Digling becomes part of hutch

2004: Essar picks France Telecom 9.9% Stake in BPCL Communication

2005: Hutchison Essar signed an agreement to acquire BPL for Rs.4400 crores and Essar

Spacetel, paving the way for nationwide coverage in India. Essar Telecommunication

holdings buys Max Telecom ventures 3.16% stake in Hutchison Essar for Rs 657crore.

Orascom Telecom became a shareholder in Hutchison Telecom

2006: Hutchison Essar received licences to operate in six new licence areas, positioning it

for pan-India coverage.Kotak sells 8.3% stake to Analjit Singh for Rs 1019crore.

Hinduja sells 5.11% stake to Hutch for $450 million. Hutchison wants to exit.

2. 3 Why is Hutch ready to sell?

Hutch is ready to sell its stake in Hutch Essar, India due to the following reasons:

To help recoup its investment in 3G in mature markets - Hong Kong and Israel


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Tussle between Essar and Hutchison:There were also differences between Hutchison and

Essar over the merger of BPL Mobile with Hutch. The Essar Group acquired BPL Mobile

and merged it with Hutch Essar to raise its stake in the latter to 33 per cent. Some

differences over valuations and sorting out regulatory hurdles in the key Mumbai telecom

circle are believed to have contributed to the dispute.

Enterprise Value is 22-24 times is EBIDTA in as compared to its investment initially.

3. Potential Suitors for the Bid

Suitor # 01: VodafoneArun Sarin, CEO

Background: Largest mobile company - 29 billion

Financial Health: Huge revenues - 29.35 billion in 2006, Net Loss

of over 21.8 billion - under fire from shareholders

Presence: Across 26 countries. Partner networks 34 countries,

Subscriber base of 190 million

Why is Hutch-Essar important: Limited presence in Asia: 3.3% in

China, Other markets like the UK, Germany and Australia saturated.

Suitor # 02: Reliance CommunicationAnil Ambani, Chairman

Background: Hutchison Essar fit well , commitments from large

banks, teaming with Carlyle Group.

Financial Health: Third Quarter 2006-07 revenues of Rs. 3.525

crore, PAT702 cr.

Presence: CDMA -21 circles, 25 million subscriber base. GSM3.5

million subscriber in 8 circles.

Why is Hutch-Essar important: Undisputed leader in India 50

million subscribers. Save $ 5 billion on capex and opex5 years

Suitor # 03: RuiaRavi Ruia, Vice Chairman


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Background: Flagship business is steel, refinery, just started

operationsearly entrant into cellular telephony, decade experience.

33% stake in HEL.

Financial Health: Steel and refining expected to generate Rs 45000-

50000 cr

Presence: 16 circles vis HEL.

Why is Hutch-Essar important: Headstart with 33% holding, secure

best valuation

Suitor # 04: MaxisJamaludin Ibrahim, CEO

Background: Malaysia's largest operator 7 million subscribers, $

13.5 billion 100% Hutch-Essar buyout said to have dropped out of

the race.

Financial Health: 2004-05, revenues stood (Rs. 8,060 cr) PAT (Rs.

2,164 cr)

Presence: Malaysia, Indonesia and in India via Aircel74% stake

Why is Hutch-Essar important: Indian operation7 circles, subscriber

base 4.2 million.

Suitor # 05: HindujaAshok Hinduja, Executive Chairman

Background: Held 5.11% stake in Hutch-Essar, sold in mid 2005-06

for $ 450 million

Financial Health: Revenues of $ 11 bn, raising cash is no problem

Presence: No global presence, 5.11% stake was a courtesy the

Hindujas presence in Gujrat circle.

Why is Hutch-Essar important: Looking at (finally) expanding in

India, biggest opportunity in Indian Telecom

Suitor # 06: Verizon WirelessIvan Seidenberg, Chairman and CEO


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Background: USs Second Largest cellular operator, CDMA

technology, 57 million customers, 44% JV with Vodafone .

Financial Health: Revenues of $ 32.3 billion, Operating income of $

7.38 billion.

Presence: Restricted to US.

Why is Hutch-Essar important: Any presence outside a saturated US

market is welcome

4. Vodafone Details

The beginnings of Vodafone can be traced to a small UK company called Racal

Electronics that was founded in 1985. The chronological history of Vodafone can be inferred as

under:

-It is the largest mobile operator in the world with barely any presence in India. Vodafones

presence was via a minority stake in Indias Bharti Airtel.

- If Vodafone needs to maintain its competitive edge it was very clear that they needed to have

a clear and identifiable India strategy.

- Buying Hutch Essar gives Vodafone instant access to about 23 million mobile users in India.

- Building such a big user base would have taken Vodafone a long time to build.

- As one analyst said that Vodafone paid a high price for the strategic value of Hutch Essar and

that is the key to understanding Vodafones India strategy.

Vodafone can now bring its expertise and services from other countries to India. Over the past

couple of years Vodafone has sold its stake in Europe and Japan and refocused its energy in

countries where mobile and telecom services are on a huge growth curve. These countries


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include Turkey, Egypt, South Africa and that trend clearly shows that Arun Sarin, a seasoned

telecom expert knows where the future revenue streams for his company is located.In order for

Vodafone to scale it needs to resolve and come up with solutions for the infrastructure

bottlenecks in India. Bharti Airtel and Vodafone are reportedly going to share their network

infrastructure. This sharing of network will help Airtel and Vodafone penetrate into the rural

areas, where Bharti Airtel is spending about a couple of billion dollars this year.


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Why India?

CY2006 CY 2010

Mobile Voice, Mobile Data, Fixed Voice, Fixed Data

India being the second largest growing economy and also the telecom markets are growing at a

faster pace. The sustained economic and telecom market are the major drives for Vodafone to

enter the Indian Emerging Market.

0

1

2

3

4

5

6

7

87.3

6.9

4.3

3.4

2.82

1.1

2006-2015 real GDP growth (%)

2006-2015 real GDP growth

50

7

3

65

11

20

$22.5 Bn

$43.6 Bn19% CAGR

3

4


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4. 2 If India, then why eyeing ONLY Hutch?

PLATFORM FOR FUTURE GROWTH

Vodafone eyed Hutch for the following reasons:

The 2nd Largest customer base i.e. following BSNL (PSU)

Customers

000s

32,466 29,980 25,55123,308

12,442 10249 4,513

Market share

(%)

22.8 21.1 18.0 16.4 8.8 7.2 3.2

No of

Circles/total

23/23 23/23 23/23 22/23 13/23 20/23 2/23

Technology GSM CDMA/GSM GSM GSM GSM CDMA GSM


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It decent market share, though not in the top three. But acquiring the top three market

share leaders was just not possible.

No. of circles covered by Hutch also made a lot of difference as the penetration level in

the mobile market is an important criteria for any telecom company in todays

competitive scenario. This means there was not immediate necessity to spend on the

infrastructure requirements.

The technology under Hutch purview was GSM, which was a perfect fit for Vodafone.

The other reason for Hutch being targeted by Vodafone is as under:

Subscribers 22. 27 million 16.39% of mobile market;

biggest private GSM operator

after Bharti

New Subscribers 1 million every month Just behind market leader

Bharti

ARPUs* Rs. 374 Just behind market leader

Bharti

Circles 16 11.65 % over national GSM

average

Revenues Rs. 5,800 cr Present in all top circles

* ARPUsAverage revenues per user

5. Hutch Vodafone Synergy

Hutch-Essar has a strong presence in India so Vodafone would have a strong base. These

are the following ways Vodafone will capitalize on the Hutch-Essar position:


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5.1 Distribution:

- They have very big advantage in terms of distribution as they have 1800 branded shops all

over India & still the previous owners of HTIL was aggressively expanding the distribution

network. The model of hutch consists of 1000 exclusive dealers for contract & 300,000 retail

outlets for prepaid.

- Now Vodafone will capitalized more on these aggressive strategy by investing more on the

existing model develop by hutch. Accelerate distribution rollout in line with network roll out

plans Proven retail experience in over 7000 retail stores globally Vodafone is a world class

brand & the brand name will help Vodafone.

5.2 Network:

Overall coverage of Indian population below 40% today

- Network performance comparable to major competitors in Hutch Essar 16 circles-Hutch

Essar network fully EDGE enabled

- BPL 3 circles: continued aggressive roll out of network

- Spacetel 6 circles: secure spectrum, build network and launch service

- Complete nationwide fibre backbone27,000 km today

5.3 Infrastructure:

Infrastructure sharing MOU with Bharti to enable industry leading cost structure for sites.

MOU outlines a process for achieving a more extensive level of site sharing

- sharing of tower, shelters, civil works, back-up diesel generators, power supply and air

conditioners

- separate electronics, spectrum and backhaul transmission

-benefits expected to commence during 2007

MOU covers both new and existing sites

Around 1/3 of current Hutch Essar sites shared with other Indian mobile operators

Longer term anticipated to result in approximately 2/3 of total sites shared


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Significant capex and opex savings achievable for Hutch Essar

US$1bn opex and capex savings over first 5 years

opex saving improves EBITDA margin by c.1.5%

5.4 Targeted sharing of active infrastructure:

- Current regulatory consultation on broader infrastructure sharing to support rural areas and

teledensity target

- MOU with Bharti envisages the scope to include active infrastructure sharing

- potential to extend agreement to sharing of radio access network and access transmission

- Potential significant additional savings on capex and opex

5.5 Brand:

The Hutch brand is across 16 circles:

- Strong consumer focus

- Recognized major business brand

6. Operational Plan for Hutch Essar

Vodafone will execute an operational plan to build on the strengths of Hutch Essar in

order to capture the Indian telecom growth opportunity.

6.1 Key strategic objectives

In the context of penetration that is expected to exceed 40% by FY2012, Vodafone is

targeting a 20-25% market share within the

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