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CHAPTER 1 RESEARCH METHODOLOGY Research problem To analyze the effect of going global through merger and acquisition on investors and traders long term and short term earnings respectively Impact on companies’ financials after acquisition or after being acquired To find out enterprise value of the company by comparing it with the peer group and analyzing the value of the firm To analyze the difference between prospected and actual returns in terms of % daily cumulative abnormal return of pre acquisition and post acquisition Objective of the study To compare the closing price of 5 companies before and after post acquisition To compare the key financial ratios of 5 companies before and after acquisition To do valuation of one or two companies with the method enterprise value and compare the value with peer group and analyze in detail To analyze detailed case study of 5 companies of Tata Group To analyze percentage cumulative abnormal return of one month both before acquisition and after acquisition Research Design Exploratory Research Scope of the study 1
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Page 1: Tata Group Going Global Through m & A

CHAPTER 1 RESEARCH METHODOLOGY

Research problem

To analyze the effect of going global through merger and acquisition on investors and traders long term and short term earnings respectively

Impact on companies’ financials after acquisition or after being acquired

To find out enterprise value of the company by comparing it with the peer group and analyzing the value of the firm

To analyze the difference between prospected and actual returns in terms of % daily cumulative abnormal return of pre acquisition and post acquisition

Objective of the study

To compare the closing price of 5 companies before and after post acquisition

To compare the key financial ratios of 5 companies before and after acquisition

To do valuation of one or two companies with the method enterprise value and compare the value with peer group and analyze in detail

To analyze detailed case study of 5 companies of Tata Group To analyze percentage cumulative abnormal return of one month

both before acquisition and after acquisition

Research Design

Exploratory Research

Scope of the study

To do a relative analysis between BSE Sensex and the share price of the TATA Group of companies

Limited to 5 companies of TATA Limited to daily prices of stocks both before and after one month of

acquisition

Data Sources

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Secondary Data Prowess software Internet sources Business Journals (ICFAI JOURNAL ON M & A)

Method of Analysis Regression Model Valuation (Enterprise value)

Limitations of the study The study is limited to five selected companies of TATA Group only The study is limited to analyze short term performance of the

acquisition

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To find the closing price of the company’s script on BSE and NSE and

then calculate the percentage script return and to find the daily market

return of SENSEX

To find regression model between script return and market return by

entering the excel formula. Once you enter the regression formula one

chart is shown as above feed the data in the model we could find out the

summary that we got, there are three things important for our research.

They are shown here as, R Square, Alpha and beta. The explanation of the

each of the terms and how to read that data is given below:

R-Square

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The R-squared value shows how reliable the dependent variable on

independent variable is. It varies between 0 and 1.

Generally R-square of more than 0.5 is considered to be good.

Y-intercept

The ‘a’ is called the Y-intercept because its value is the point at which the

regression line crosses the Y axis i.e. Vertical Axis. It is also called alpha.

Slope of the line (b):Beta

The ‘b’ is called the slope of the line. It represents how each unit change

of the independent variable X changes the dependent variable Y. It is also

known as Beta of script in comparison of market.

Steps to find out Abnormal Price Effect

The Expected return is calculated as follows:

The Expected Return is calculated by the formula (intercept + Slope of

line X market return)

Y=a+Bx

And from this find out cumulative abnormal return

The Enterprise Valuation is calculated as follows:

1. Total Shareholder’s Equity

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We have calculated the Total Shareholder’s Equity by adding the Market Value of Equity, Preference Shares and the Minority Interest.

2. Net Debt

We have calculated the Net Debt by adding the Long Term Borrowing, Short Term Borrowing and Pension Provisions and then deducting the Excess Cash.

3. Enterprise Value

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We have calculated the Enterprise Value by adding Net Debt and Total Shareholder’s Equity.

The Enterprise Value Multiples is calculated as follows:

1. Sales Multiple

The Sales Multiple is calculated by dividing the EV by Sales of the respective peers.

2. EBITDA Multiple

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The EBITDA Multiple is calculated by dividing the EV by EBITDA of the respective peers.

3. EBIT Multiple

The EBIT Multiple is calculated by dividing the EV by EBIT of the respective peers.

4. PE Multiple

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The PE Multiple is calculated by dividing the Current Market Price by the Earning Per Share of the respective peers.

CHAPTER 2

MERGER AND ACQUISITION: INTRODUCTION

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“The decision to invest in a new asset would mean internal expansion for

the firm. The new asset would generate returns raising the value of the

corporation. Mergers offer an additional means of expansion, which is

external, i.e. the productive operation is not within the corporation itself.

For firms with limited investment opportunities, mergers can provide new

areas for expansion. In addition to this benefit, the combination of two or

more firms can offer several other advantages to each of the corporations

such as operating economies, risk reduction and tax advantage.”

Today mergers, acquisitions and other types of strategic alliances are on

the agenda of most industrial groups intending to have an edge over

competitors. Stress is now being made on the larger and bigger

conglomerates to avail the economies of scale and diversification.

Different companies in India are expanding by merger etc. In fact, there

has emerged a phenomenon called merger wave.

The terms merger, amalgamations, take-over and acquisitions are often

used interchangeably to refer to a situation where two or more firms

come together and combine into one to avail the benefits of such

combinations and re-structuring in the form of merger etc., have been

attempted to face the challenge of increasing competition and to achieve

synergy in business operations.

Mergers and Acquisitions: Definition

One plus one makes three: this equation is the special alchemy of a

merger or an acquisition. The key principle behind buying a company is to

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create shareholder value over and above that of the sum of the two

companies. Two companies together are more valuable than two separate

companies - at least, that's the reasoning behind M&A. This rationale is

particularly alluring to companies when times are tough. Strong

companies will act to buy other companies to create a more competitive,

cost-efficient company.

The companies will come together hoping to gain a greater market share

or to achieve greater efficiency. Because of these potential benefits,

target companies will often agree to be purchased when they know they

cannot survive alone.

Merger vs. Acquisition:

In a merger, the surviving company assumes all the assets and liabilities

of the merged company, which ceases to exist as a separate entity. In an

acquisition, the buyer purchases some or all the assets or the stock of the

selling firm legal requirements, tax considerations, and the ability to

attain shareholder approval determine the type of transaction chosen.

CHAPTER 3

CORPORATE RESTRUCTURING

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Restructuring of business is an integral part of the new economic

paradigm. As controls and restrictions give way to competition and free

trade, restructuring and reorganization become essential. Restructuring

usually involves major organizational change such as shift in corporate

strategies to meet increased competition or changed market conditions.

This activity can take place internally in the form of new investments in

plant and machinery, research and development at product and process

levels. It can also take place externally through mergers and acquisitions

(M&A) by which a firm may acquire other firm or by joint venture with

other firms. This restructuring process has been mergers, acquisitions,

takeovers, collaborations, consolidation, diversification etc. Domestic

firms have taken steps to consolidate their position to face increasing

competitive pressures and MNC’s have taken this opportunity to enter

Indian corporate sector.

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Forms of corporate-restructuring

Expansion

· Amalgamation: This involves fusion of one or more companies where

the companies lose their individual identity and a new company comes

into existence to take over the business of companies being liquidated.

The merger of Brooke Bond India Ltd. and Lipton India Ltd. resulted in

formation of a new company Brooke Bond Lipton India Ltd.

· Absorption: This involves fusion of a small company with a large

company where the smaller company ceases to exist after the merger.

The merger of Tata Oil Mills Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL)

is an example of absorption.

· Tender offer: This involves making a public offer for acquiring the

shares of a target company with a view to acquire management control in

that company. Takeover by Tata Tea of consolidated coffee Ltd. (CCL) is

an example of tender offer where more than 50% of shareholders of CCL

sold their holding to Tata Tea at the offered price which was more than

the investment price.

· Asset acquisition: This involves buying assets of another company.

The assets may be tangible assets like manufacturing units or intangible

like brands. Hindustan lever limited buying brands of Lakme is an

example of asset acquisition.

· Joint venture: This involves two companies coming whose ownership is

changed. DCM group and DAEWOO MOTORS entered into a joint venture

to form DAEWOO Ltd. to manufacturing automobiles in India.

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CONTRACTION

There are generally the following types of contraction:

· Spinoff: This type of demerger involves division of company into wholly

owned subsidiary of parent company by distribution of all its shares of

subsidiary company on Pro-rata basis. By this way, both the companies

i.e. holding as well as subsidiary company exist and carry on business. For

example Kotak, Mahindra finance Ltd. formed a subsidiary called Kotak

Mahindra Capital Corporation, by spinning off its investment banking

division.

· Split-ups: This type of demerger involves the division of parent

company into two or more separate companies where parent company

ceases to exist after the demerger.

· Equity-carve out: This is similar to spin offs, except that same part of

shareholding of this subsidiary company is offered to public through a

public issue and the parent company continues to enjoy control over the

subsidiary company by holding controlling interest in it.

· Divestitures: These are sale of segment of a company for cash or for

securities to an outside party. Divestitures, involve some kind of

contraction. It is based on the principle if “anergy” which says 5-3=3!

· Asset sale: This involves sale of tangible or intangible assets of a

company to generate cash. A partial sell off, also called slump sale,

involves the sale of a business unit or plant of one firm to another. It is

the mirror image of a purchase of a business unit or plant. From the

seller’s perspective, it is a form of contraction:

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From the buyer’s point of view it is a form of expansion. For example,

When Coromandal Fertilizers Limited sold its cement division to India

Cement limited, the size of Coromandal Fertilizers contracted whereas the

size of India Cements Limited expanded.

CORPORATE CONTROLS

· Going private: This involves converting a listed company into a private

company by buying back all the outstanding shares from the markets.

Several companies like Castrol India and Phillips India have done this in

recent years. A well known example from the U.S. is that of Levi Strauss &

company

· Equity buyback: This involves the company buying its own shares back

from the market. This results in reduction in the equity capital of the

company. This strengthens the promoter’s position by increasing his stake

in the equity of the company.

· Anti takeover defenses: With a high value of hostile takeover activity

in recent years, takeover defenses both premature and reactive have

been restored to by the companies.

· Leveraged buyouts: This involves raising of capital from the market or

institutions by the management to acquire a company on the strength of

its assets.

Merger is a marriage between two companies of roughly same size. It is

thus a combination of two or more companies in which one company

survives in its own name and the other ceases to exist as a legal entity.

The survivor company acquire assets and liabilities of merged companies.

Generally the company which survives is the buyers which retiring its

identity and seller company is extinguished.

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· Amalgamation

Amalgamation is an arrangement or reconstruction. It is a legal process

by which two or more companies are to be absorbed or blended with

another. As a result, the amalgamating company loses its existence and

its shareholders become shareholders of new company or the

amalgamated company. In case of amalgamation a new company may

came into existence or an old company may survive while amalgamating

company may lose its existence.

According to Halsbury’s law of England amalgamation is the blending of

two or more existing companies into one undertaking, the shareholder of

each blending companies becoming substantially the shareholders of

company which will carry on blende undertaking. There may be

amalgamation by transfer of one or more undertaking to a new company

or transfer of one or more undertaking to an existing company.

Amalgamation signifies the transfers of all are some part of assets and

liabilities of one or more than one existing company or two or more

companies to a new company.

The Accounting Standard, AS-14, issued by the Institute of Chartered

Accountants of India has defined the term amalgamation by classifying (i)

Amalgamation in the nature of merger, and (ii) Amalgamation in the

nature of purchase

1. Amalgamation in the nature of merger: As per AS-14, an

amalgamation is called in the nature of merger if it satisfies all the

following condition:

· All the assets and liabilities of the transferor company should become,

after amalgamation; the assets and liabilities of the other company.

· Shareholders holding not less than 90% of the face value of the equity

shares of the transferor company (other than the equity shares already

held therein, immediately before the amalgamation, by the transferee

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company or its subsidiaries or their nominees) become equity

shareholders of the transferee company by virtue of the amalgamation.

· The consideration for the amalgamation receivable by those equity

shareholders of the transferor company who agree to become equity

shareholders of the transferee company is discharged by the transferee

company wholly by the issue of equity share in the transferee company,

except that cash may be paid in respect of any fractional shares.

· The business of the transferor company is intended to be carried on,

after the amalgamation, by the transferee company.

· No adjustment is intended to be made in the book values of the assets

and liabilities of the transferor company when they are incorporated in

the financial statements of the transferee company except to ensure

uniformity of accounting policies.

· Amalgamation in the nature of merger is an organic unification of two or

more entities or undertaking or fusion of one with another. It is defined as

an amalgamation which satisfies the above conditions.

2. Amalgamation in the nature of purchase: Amalgamation in the

nature of purchase is where one company’s assets and liabilities are

taken over by another and lump sum is paid by the latter to the former. It

is defined as the one which does not satisfy any one or more of the

conditions satisfied above.

As per Income Tax Act 1961, merger is defined as amalgamation under

sec.2 (1B) with the following three conditions to be satisfied.

1. All the properties of amalgamating company(s) should vest with the

amalgamated company after amalgamation.

2. All the liabilities of the amalgamating company(s) should vest with the

amalgamated company after amalgamation

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3. Shareholders holding not less than 75% in value or voting power in

amalgamating company(s) should become shareholders of amalgamated

companies after amalgamation

Amalgamation does not mean acquisition of a company by purchasing its

property and resulting in its winding up. According to Income tax Act,

exchange of shares with 90%of shareholders of amalgamating company is

required.

ACQUISITION

Acquisition refers to the acquiring of ownership right in the property and

asset without any combination of companies. Thus in acquisition two or

more companies may remain independent, separate legal entity, but

there may be change in control of companies. Acquisition results when

one company purchase the controlling interest in the share capital of

another existing company in any of the following ways:

a) Controlling interest in the other company. By entering into an

agreement with a person or persons holding

b) By subscribing new shares being issued by the other company.

c) By purchasing shares of the other company at a stock exchange, and

d) By making an offer to buy the shares of other company, to the existing

shareholders of that company.

MERGER

Merger refers to a situation when two or more existing firms combine

together and form a new entity. Either a new company may be

incorporated for this purpose or one existing company (generally a bigger

one) survives and another existing company (which is smaller) is merged

into it. Laws in India use the term amalgamation for merger.

· Merger through absorption

· Merger through consolidation

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Absorption: Absorption is a combination of two or more companies into an

existing company. All companies except one lose their identity in a

merger through absorption. An example of this type of merger is the

absorption of Tata Fertilisers Ltd.(TFL) TCL, an acquiring company (a

buyer), survived after merger while TFL, an acquired company ( a seller),

ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

Consolidation: A consolidation is a combination of two or more companies

into a new company .In this type of merger, all companies are legally

dissolved and a new entity is created. In a consolidation, the acquired

company transfers its assets, liabilities and shares to the acquiring

company for cash or exchange of shares. An example of consolidation is

the merger of Hindustan Computers Ltd., Hindustan Instruments Ltd., and

Indian Reprographics Ltd., to an entirely new company called HCL Ltd.

TAKEOVER

Acquisition can be undertaken through merger or takeover route.

Takeover is a general term used to define acquisitions only and both

terms are used interchangeably. A takeover may be defined as series of

transacting whereby a person, individual, group of individuals or a

company acquires control over the assets of a company, either directly by

becoming owner of those assets or indirectly by obtaining control of

management of the company.

Takeover is acquisition, by one company of controlling interest of the

other, usually by buying all or majority of shares. Takeover may be of

different types depending upon the purpose of acquiring a company.

1. A takeover may be straight takeover which is accomplished by the

management of the taking over company by acquiring shares of another

company with the intention of operating taken over as an independent

legal entity.

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2. The second type of takeover is where ownership of company is

captured to merge both companies into one and operate as single legal

entity.

3. A third type of takeover is takeover of a sick company for its revival.

This is accomplished by an order of Board for Industrial and Financial

Reconstruction (BIFR) under the provision of Sick Industrial companies

Act, 1985. In India, Board for Industrial and Financial Reconstruction

(BIFR) has also been active for arranging mergers of financially sick

companies with other companies under the package of rehabilitation.

These merger schemes are framed in consultation with the lead bank, the

target firm and the acquiring firm. These mergers are motivated and the

lead bank takes the initiated and decides terms and conditions of merger.

The recent takeover of Modi Cements Ltd., by Gujarat Ambuja Cement

Ltd. was an arranged takeover after the financial reconstruction Modi

Cement Ltd. The fourth kind is the bail-out takeover, which is substantial

acquisition of shares in a financially weak company not being a sick

industrial company in pursuance to a scheme of rehabilitation approved

by public financial institution which is responsible for ensuring compliance

with provision of substantial acquisition of shares and takeover

Regulations, 1997 issued by SEBI which regulate the bailout takeover.

Takeover Bid

This is a technique for affecting either a takeover or an amalgamation. It

may be defined as an offer to acquire shares of a company, whose shares

are not closely held, addressed to the general body of shareholders with a

view to obtaining at least sufficient shares to give the offer or, voting

control of the company. Takeover Bid is thus adopted by company for

taking over the control and management affairs of listed company by

acquiring its controlling interest.

While a takeover bid is used for affecting a takeover, it is frequently

against the wishes of the management of Offeree Company. It may take

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the form of an offer to purchase shares for cash or for share for share

exchange or a combination of these two firms.

Where a takeover bid is used for effecting merger or amalgamation it is

generally by consent of management of both companies. It always takes

place in the form of share for share exchange offer, so that accepting

shareholders of Offeree Company become shareholders of Offeror

Company.

Types of Takeover Bids

There are three types of takeover bid

1. Negotiated bid

2. Tender offer

3. Hostile takeover bid

Negotiated bid : It is also called friendly merger. In this case, the

management /owners of both the firms sit together and negotiate for the

takeover. The acquiring firm negotiates directly with the management of

the target company. So the two firms reach an agreement, the proposal

for merger may be placed before the shareholders of the two companies.

However, if the parties do not reach at an agreement, the merger

proposal stands terminated and dropped out. The merger of ITC Classic

Ltd. with ICICI Ltd. and merger of Tata oil mills Ltd. With Hindustan Lever

Ltd. were negotiated mergers.

However, if the management of the target firm is not agreeable to the

merger proposal, then the acquiring firm may go for other procedures i.e.

tender offer or hostile takeover.

Tender offer: A tender offer is a bid to acquire controlling interest in a

target company by the acquiring firm by purchasing shares of the target

firm at a fixed price. The acquiring firm approaches the shareholders of

the target firm directly firm to sell their shareholding to the acquiring firm

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at a fixed price. This offered price is generally, kept at a level higher than

the current market price in order to induce the shareholders to disinvest

their holding in favor of the acquiring firm. The acquiring firm may also

stipulate in the tender offer as to how many shares it is willing to buy or

may purchase all the shares that are offered for sale.

In case of tender offer, the acquiring firm does not need the prior approval

of the management of the target firm. The offer is kept open for a specific

period within which the shares must be tendered for sale by the

shareholders of the target firm.

Consolidated Coffee Ltd. was takeover by Tata Tea Ltd.by making a

tender offer to the shareholders of the former at a price which was higher

than the prevailing market price.

In India, in recent times, particularly after the announcement of new

takeover code by SEBI, several companies have made tender offers to

acquire the target firm. A popular case is the tender offer made by Sterlite

Ltd. and then counter offer by Alean to acquire the control of Indian

Aluminium Ltd.

Hostile Takeover Bid: The acquiring firm, without the knowledge and

consent of the management of the target firm, may unilaterally pursue

the efforts to gain a controlling interest in the target firm, by purchasing

shares of the later firm at the stock exchanges.

Such case of merger/acquisition is popularity known as ‘raid’. The caparo

group of the U.K. made a hostile takeover bid to takeover DCM Ltd. and

Escorts Ltd. Similarly, some other NRI’s have also made hostile bid to

takeover some other Indian companies.

The new takeover code, as announced by SEBI deals with the hostile bids.

Takeover and merger

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“The distinction between a takeover and merger is that in a takeover the

direct or indirect control over the assets of the acquired company passes

to the acquirer in a merger the shareholding in the combined enterprises

will be spread between the shareholders of the two companies”.

In both cases of takeover and merger the interests of the shareholders of

the company are as follows:

1. Company should takeover or merge with another company only if in

doing so, it improves its profit earning potential measured by earning per

share and

2. The company should agree to be taken if, and only if, shareholders are

likely to be better off with the consideration offered, whether cash or

securities of the company than by retaining their shares in the original

company.

TYPES OF MERGERS

There are four types of mergers as follows

1. Horizontal merger:

It is a merger of two or more companies that compete in the same

industry. It is a merger with a direct competitor and hence expands as the

firm’s operations in the same industry. Horizontal mergers are designed

to produce substantial economies of scale and result in decrease in the

number of competitors in the industry. The merger of Tata Oil Mills Ltd.

with the Hindustan lever Ltd. was a horizontal merger.

In case of horizontal merger, the top management of the company being

meted is generally replaced, by the management of the transferee

company. One potential repercussion of the horizontal merger is that it

may result in monopolies and restrict the trade. Weinberg and Blank7

define horizontal merger as follows:

“A takeover or merger is horizontal if it involves the joining together of

two companies which are producing essentially the same products or

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services or products or services which compete directly with each other

(for example sugar and artificial sweetness). In recent years, the great

majority of takeover and mergers have been horizontal. As horizontal

takeovers and mergers involve a reduction in the number of competing

firms in an industry, they tend to create the greatest concern from an

anti-monopoly point of view, on the other hand horizontal mergers and

takeovers are likely to give the greatest scope for economies of scale and

elimination of duplicate facilities.”

2. Vertical merger:

It is a merger which takes place upon the combination of two companies

which are operating in the same industry but at different stages of

production or distribution system. If a company takes over its

supplier/producers of raw material, then it may result in backward

integration of its activities. On the other hand, Forward integration may

result if a company decides to take over the retailer or Customer

Company.

Vertical merger may result in many operating and financial economies.

The transferee firm will get a stronger position in the market as its

production/distribution chain will be more integrated than that of the

competitors. Vertical merger provides a way for total integration to those

firms which are striving for owning of all phases of the production

schedule together with the marketing network (i.e., from the acquisition

of raw material to the relating of final products). “A takeover of merger is

vertical where one of two companies is an actual or potential

supplier of goods or services to the other, so that the two companies are

both engaged in the manufacture or provision of the same goods or

services but at the different stages in the supply route (for example where

a motor car manufacturer takes over a manufacturer of sheet metal or a

car distributing firm). Here the object is usually to ensure a source of

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supply or an outlet for products or services, but the effect of the merger

may be to improve efficiency through improving the flow of production

and reducing stock holding and handling costs, where, however there is a

degree of concentration in the markets of either of the companies, anti-

monopoly problems may arise.”

3. Co-generic Merger:

In these, mergers the acquirer and target companies are related through

basic technologies, production processes or markets. The acquired

company represents an extension of product line, market participants or

technologies of the acquiring companies. These mergers represent an

outward movement by the acquiring company from its current set of

business to adjoining business. The acquiring company derive benefits by

exploitation of strategic resources and from entry into a related market

having higher return than it enjoyed earlier. The potential benefit from

these mergers is high because these transactions offer opportunities to

diversify around a common case of strategic resources.

Western and Mansinghka9 classified cogeneric mergers into product

extension and market extension types. When a new product line allied to

or complimentary to an existing product line is added to existing product

line through merger, it defined as product extension merger, Similarly

market extension merger help to add a new market either through same

line of business or adding an allied field . Both these types bear some

common elements of horizontal, vertical and conglomerate merger. For

example, merger between Hindustan Sanitary ware industries Ltd. and

associated Glass Ltd. is a Product extension merger and merger between

GMM Company Ltd. and Xpro Ltd. contains elements of both product

extension and market extension merger.

4. Conglomerate merger:

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These mergers involve firms engaged in unrelated type of business

activities i.e. the business of two companies are not related to each other

horizontally (in the sense of producing the same or competing products),

nor vertically (in the sense of standing towards each other n the

relationship of buyer and supplier or potential buyer and supplier). In a

pure conglomerate, there are no important common factors between the

companies in production, marketing, research and development and

technology. In practice, however, there is some degree of overlap in one

or more of this common factor.

Conglomerate mergers are unification of different kinds of businesses

under one flagship company. The purpose of merger remains utilization of

financial resources enlarged debt capacity and also synergy of managerial

functions. However these transactions are not explicitly aimed at sharing

these resources, technologies, synergies or product market strategies.

Rather, the focus of such conglomerate mergers is on how the acquiring

firm can improve its overall stability and use resources in a better way to

generate additional revenue. It does not have direct impact on acquisition

of monopoly power and is thus favored throughout the world as a means

of diversification.

CHAPTER 4

MERGER PROCEDURE

A merger is a complicated transaction, involving fairly complex legal

considerations. While evaluating a merger proposal, one should bear in

mind the following legal provisions.

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Sections 391 to 394 of the companies act, 1956 contain the provisions for

amalgamations. The procedure for amalgamation normally involves the

following steps:

1. Examination of object Clauses: The memorandum of association of

both the companies should be examined to check if the power to

amalgamate is available.

Further, the object clause of the amalgamated company (transferee

Company) should permit it to carry on the business of the amalgamating

company (transferor company) .If such clauses do not exists, necessary

approvals of the shareholders, boards of directors and Company Law

Board are required.

2. Intimation to stock Exchanges: The stock exchanges where the

amalgamated and amalgamating companies are listed should be informed

about the amalgamation proposal. From time to time, copies of all

notices, resolutions, and orders should be mailed to the concerned stock

exchanges.

3. Approval of the draft amalgamation proposal by the Respective

Boards: The draft amalgamation proposal should be approved by the

respective boards of directors. The board of each company should pass a

resolution authorizing its directors/executives to pursue the matter

further.

4. Application to the National Company Law Tribunal (NCLT): Once

the draft of amalgamation proposal is approved by the respective boards,

each company should make an application to the NCLT so that it can

convene the meetings of shareholders and creditors for passing the

amalgamation proposal.

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5. Dispatch of notice to shareholders and creditors: In order to

convene the meeting of shareholders and creditors, a notice and an

explanatory statement of the meeting, as approved by the NCLT, should

be dispatched by each company to its shareholders and creditors so that

they get 21 days advance intimation. The notice of the meetings should

also be published in two newspapers. An affidavit confirming that the

notice has been dispatched to the shareholders/creditors and that the

same has been published in newspapers should be filed with the NCLT.

6. Holding of Meetings of shareholders and creditors: A meeting of

shareholders should be held by each company for passing the scheme of

amalgamation. At least 75 percent (in value) of shareholders in each

class, who vote either in person or by proxy, must approve the scheme of

amalgamation. Likewise, in a separate meeting, the creditors of the

company must approve of the amalgamation scheme.

7. Petition to the NCLT for confirmation and passing of NCLT

orders: Once the amalgamation scheme is passed by the shareholders

and creditors, the companies involved in the amalgamation should

present a petition to the NCLT for confirming the scheme of

amalgamation. The NCLT will fix a date of hearing. A notice about the

same has to be published in two newspapers. After hearing the parties

the parties concerned ascertaining that the amalgamation scheme is fair

and reasonable, the NCLT will pass an order sanctioning the same.

However, the NCLT is empowered to modify the scheme and pass orders

accordingly.

8. Filing the order with the Registrar: Certified true copies of the

NCLT order must be filed with the Registrar of Companies within the time

limit specified by the NCLT.

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9. Transfer of Assets and Liabilities: After the final orders have been

passed by the NCLT, all the assets and liabilities of the amalgamating

company will, with effect from the appointed date, have to be transferred

to the amalgamated company.

10. Issue of shares and debentures: The amalgamated company,

after fulfilling the provisions of the law, should issue shares and

debentures of the amalgamated company. The new shares and

debentures so issued will then be listed on the stock exchange.

Important elements of merger procedure are:

Scheme of merger

The scheme of any arrangement or proposal for a merger is the heart of

the process and has to be drafted with care. There is no specific form

prescribed for the scheme. It is designed to suit the terms and conditions

relevant to the proposal but it should generally contain the following

information as per the requirements of sec. 394 of the companies Act,

1956:

1. Particulars about transferor and transferee companies

2. Appointed date of merger

3. Terms of transfer of assets and liabilities from transferor to transferee

4. Effective date when scheme will came into effect

5. Treatment of specified properties or rights of Transferor Company

6. Terms and conditions of carrying business by Transferor Company

between appointed date and effective date

7. Share capital of Transferor Company and Transferee Company

specifying authorized, issued, subscribed and paid up capital.

8. Proposed share exchange ratio, any condition attached thereto and the

fractional share certificate to be issued.

9. Issue of shares by Transferee Company

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10. Transferor company’s staff, workmen, employees and status of

provident fund, Gratuity fund, superannuation fund or any other special

funds created for the purpose of employees.

11. Miscellaneous provisions covering Income Tax dues, contingent and

other accounting entries requiring special treatment.

12. Commitment of transferor and Transferee Company towards making

an application U/S 394 and other applicable provisions of companies Act,

1956 to their respective High court.

13. Enhancement of borrowing limits of transferee company when scheme

coming into effect.

14. Transferor and transferee companies consent to make changes in the

scheme as ordered by the court or other authorities under law and

exercising the powers on behalf of the companies by their respective

boards.

15. Description of power of delegates of Transferee Company to give

effect to the scheme. Qualifications attached to the scheme which

requires approval of different agencies.

16. Effect of non receipt of approvals/sanctions etc.

17. Treatment of expenses connected with the scheme.

CHAPTER 5

PROCESS OF MERGER AND ACQUISITION

Step I: Finding the Right Candidate

Few items to consider as initial filtering criteria:

The maximum and minimum revenue range

Geographic location

Years in business

Market share

Reputation (either good or poor)

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Distribution channels

Technology provided

Corporate culture

Specific business strengths, such as R&D, sales/marketing, or

production

Low-cost as opposed to high-price provider

Services or products provider

Industry

Publicly traded or privately held

Reputation of the management team

Services of an investment banker at this initial qualification

stage:

These companies take a percentage of the transaction total (usually five

to fifteen percent) for assisting with the initial search and with the

consummation of the final deal.

Using a broker usually speeds up the filtering stage of the acquisition

process, but it is not cost-free.

Their fees must be paid at some point and are embedded into the

purchase price.

Additional considerations to be noted:

The M&A process can become quite complicated unless the transaction

value is small and the number of parties involved are few:

The Buyer has a team of experts, as does the seller.

Should either party be involved in publicly traded company, the

complexity increases again?

Should either party be involved in litigation of any kind, the complexity

increases yet again?

Step II: Initiate Discussions

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The seller and buyer will have a number of internal meetings early in their

respective processes that help define the various objectives of the

purchase/sale.

Notice that none of these meetings involve anyone outside of the

immediate company since this is the planning stage for both buyer and

seller respectively.

The next meetings often involve a business broker who will assist in either

marketing the firm if you are the seller or finding viable acquisition

targets for the buyer.

Once the target companies are determined, initial meetings will be set up

to investigate the willingness of the parties to either buy or sell.

After these initial meetings, a letter of intent (or letter of understanding or

expression of interest) is often prepared stating both parties’ desires to

proceed to the next step.

This letter is critically important because it represents a written

understanding between the parties involved.

A letter of intent can be effectively used as a communication tool

that ensures that both parties are working in the same direction

and with the same overall intentions.

The seller and buyer both have a vested interest in finding deal stoppers

at an early stage.

Step III: The Due Diligence Stage

Due diligence is usually the most time-consuming, nerve wracking, and

expensive stage of the M&A process. The intent of this stage is to help the

buyer understand the inner workings of the seller’s company. The better

the understanding, the more realistic are the expectations and price.

It requires that the buyer be given a high degree of access to the selling

company’s customers, financial records, legal records, and operations,

sales, and marketing functions. The due diligence teams are typically

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looking for items that either validate the offered price or items that

diminish the company’s value and its purchase price.

What happens when both parties are direct competitors in the same

industry space and there is a possibility of the deal falling through?

What happens when both parties operate in the same industry space?

The seller does not want to reveal unnecessary information to the buyer,

should the deal not consummate in a final purchase.

This fear of disclosure is particularly acute when the buyer is the seller’s

direct competitor, and for very good reason.

Every company would love to know the detailed financial, marketing, and

sales aspects of its competitor, and due diligence requires that this

information be disclosed.

Should the transaction fall apart, the seller is placed at a decided

disadvantage compared to the buyer, who disclosed little or no

confidential information about its own internal processes during due

diligence. Once again, the letter of intent comes into play.

Sellers should make their secrecy boundaries clearly known in the letter

of intent.The buyer can either accept or reject those boundaries at this

earlier stage instead of being caught by surprise later.

Non disclosure agreements (NDA’s) are also executed early in the

process specifically with the intent of protecting the secrecy needs of the

parties involved.

Alternate approach

As an alternative approach to immediate full disclosure to the buyer by

the seller, an interim stage can be defined.

Here, the buyer gains access to certain information with the intention of

deciding on a purchase price and set of acceptance conditions.

This approach provides both the seller and buyer with some level of

protection. Due diligence, by its very nature, pushes the threshold of

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confidential information disclosure and should be treated with the respect

it deserves.

Step III – (A): A sample due diligence checklist

A legal structure review, including tax liabilities, employee disagreements,

any other pending litigation

A review of ownership and capitalization structure

A general breakdown of the customer base, with a more detailed analysis

required to make an effective assessment

A review of intellectual property rights, including trademarks, patents,

and other areas of unique and intrinsic value. This is particularly true for

technology companies.

Outstanding loans that are guaranteed by the company and/or its owners

Technology evaluation that includes development tools, cycles, processes

and personnel. Key value areas should be highlighted and evaluated in

light of acquisition goals.

Financial statement review for the prior three to five years, including the

minutes of board meetings and so on

Annual reports and required stock exchange filings for any publicly traded

company. This action can also be taken during the prequalification

screening stages.

Due diligence process – in conclusion

Due diligence is a complicated process which should be given major

emphasis.

It is that stage where the buyer determines whether the target company

is worth pursuing.

Sellers also get a chance to learn more about the internal workings at the

buyer’s company, which also enables them to determine for themselves if

a cultural fit between the two exists.

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A willing seller is critical during due diligence. The integrity of all parties

must be intact or the seller could fight the buyer’s information requests at

every step, making it a tough and stressful process for all concerned.

Further, due diligence works both ways, especially if the buyer expects

the seller to take stock.

Due diligence is an integral and critical part of the M&A process.

The way it is handled tells a lot about the buyer and seller while providing

the foundation upon which a final purchase price is based.

The more the buyer and seller know about each other, the more

accurately they can assess the likelihood of a successful future business

relationship. Plan for this process takes time. Spend the required time in

the due diligence stage and thoroughly understand what you are

committing to with the sale or purchase.

Arranging finance:

Financing depends on the financial condition of the acquired company as

well as the acquiring company.

The buying and/or selling company must be creditworthy or the deal will

simply not go through.

Buyers have usually lined up financing when the letter of intent is signed –

sellers can ask about the buyer’s ability to fund the purchase before

signing the LOI.

Sellers may seriously consider stalling the M&A stage until the buyer has

shown itself to be creditworthy.

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Negotiating & signing agreements:

The lawyers begin negotiating the specific terms and condition of the

deal. The role of the business manager is to make sure the overall

business intentions are met. The end result should be a legally binding

agreement that also makes business sense.

CHAPTER 6

VALUATION METHODOLOGIES FOR AN M&A

TRANSACTION

Valuation is not an exact science; more an art. Valuation is

essentially bringing together the economic concept of value.

Decision to accept the valuation lies with the management of both

the acquirer and the target. Courts do not disturb the Exchange

Ratio unless it is objected and found grossly unfair.

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Structure of value

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Selection of Method:

Discounted Cash Flow

Approach:

This methodology is used to determine present value of a business

on a ‘going concern’ assumption.

A DCF technique primarily depends on the projection of future cash

flows and selection of an appropriate discounting factor.

Enterprise Value is derived based on summation of:

Projected cash flows over a specified projected period

(‘Primary period’); and

Cash flows to perpetuity that a company will generate after

the primary period.

Equity value is equal to Enterprise value less Net Debt.

Computation of Cost of Capital

Cost of Capital:

Cost of capital is

A function of the investment and the investor

Forward looking and represents investors’ expectations

The principal factors which influence the risk-free rate, equity risk

premium and level of the beta

Forecasting performance

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Forecast period has the following characteristics:

The forecasting process should be able to give insightful information

about the overall business risk.

The length of the forecast period is very critical and should include

the period of accelerated growth or risk.

The steady state period has the following characteristics:

Constant or steady rate of growth in line with mature industry

Capital expenditure and in depreciation are substantially balance

Rate of return remains substantially constant

Terminal value growth rate:

Assumed perpetuity growth rate for the Company being valued i.e.

the growth rate at which the Company would continue to grow to

perpetuity.

The perpetuity/terminal growth rate is assumed based on the status

of industry and evolution of business.

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DCF valuation – A sample:

Market Multiples

Comparable companies

In arriving at the selected range of multiples applied to the

company‘s earnings we consider the overall dynamics of the sector.

We also include an analysis of the level of sales multiples against

absolute sales and also EBITDA multiples against EBIT margins.

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In arriving at the level of multiple to apply, we have to consider

companies that are broadly in the same size.

Based on the specific characteristics of the company we consider

multiples in the range that are appropriate in the circumstances.

In assessing the level of multiple applied to the company, we also

consider takeover premia paid in the market and the level of

transactions in the sector.

Based on the specific characteristics of the company we calculate

multiples in the range to be appropriated in the circumstances.

Other Methods

Net Assets Method:

Assets at historical cost or replacement cost on valuation date considered:

Intangible assets

Revaluation of fixed assets

Deferred tax asset/ liabilities

Some adjustments that may be called for:

Contingent liabilities

Investments and Surplus assets

Inventory and Debtors

Closing the deal

Financial model of the merger A detailed analysis of the effect of the

merger on shareholder value requires building financial models of the

acquirer, the target, and the merged firm.

The financial models should produce income statements, balance sheets,

and cash flow statements for the forecast period for a given set of

operating and financing assumptions.

The financial model permits performing the following analyses:

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Free cash flow valuation:

Valuation of the stand-alone acquirer, the target and the merged firm

The Target is valued under the operating assumptions assumed by the

acquirer decision.

Break-even synergies:

A first calculation of the value of the synergies net of transaction

expenses necessary to maintain the share price of the acquirer at its pre-

merger level

Accretion – dilution analysis

Calculation of EPS for the Acquirer with and without the acquisition

An estimate of the synergies required to breakeven

Stress testing and scenario analysis

Accretion-dilution and valuation computations should be tested for

robustness, via sensitivity and scenario analysis.

Finalizing the terms of the merger

Form of payment whether in cash, stock of or a combination both.

The type of transaction adopted for the tax purposes (whether a merger,

a purchase of assets or a purchase of stock):

The tax consequences of the transaction for buyer and seller, and

whether there are transferable net operating losses.

The fees and expenses to be paid by the parties

Financing the merger

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How the cash component of the price and the transaction expenses will

be financed, whether from available cash in the target and/ or the

acquirer or with additional borrowing?

What pre-merger debt and other claims such as preferred stock and

warrants are assumed or exchanged and what claims are to be retired, at

what cast and how will retirements be financed.

This is summarized in a statement of sources and uses of funds.

Synergy

Synergy is the magic force that allows for enhanced cost efficiencies of

the new business. Synergy takes the form of revenue enhancement and

cost savings. By merging, the companies hope to benefit from the

following:

Staff reductions - As every employee knows, mergers tend to mean job

losses. Consider all the money saved from reducing the number of staff

members from accounting, marketing and other departments. Job cuts

will also include the former CEO, who typically leaves with a

compensation package.

Economies of scale - Yes, size matters. Whether it's purchasing stationery

or a new corporate IT system, a bigger company placing the orders can

save more on costs. Mergers also translate into improved purchasing

power to buy equipment or office supplies - when placing larger orders,

companies have a greater ability to negotiate prices with their suppliers.

Acquiring new technology - To stay competitive, companies need to stay

on top of technological developments and their business applications. By

buying a smaller company with unique technologies, a large company can

maintain or develop a competitive edge.

Improved market reach and industry visibility - Companies buy companies

to reach new markets and grow revenues and earnings. A merge may

expand two companies' marketing and distribution, giving them new sales

opportunities. A merger can also improve a company's standing in the

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investment community: bigger firms often have an easier time raising

capital than smaller ones.

That said, achieving synergy is easier said than done - it is not

automatically realized once two companies merge. Sure, there ought to

be economies of scale when two businesses are combined, but sometimes

a merger does just the opposite. In many cases, one and one add up to

less than two.

Sadly, synergy opportunities may exist only in the minds of the corporate

leaders and the deal makers. Where there is no value to be created, the

CEO and investment bankers - who have much to gain from a successful

M&A deal - will try to create an image of enhanced value. The market,

however, eventually sees through this and penalizes the company by

assigning it a discounted share price. We'll talk more about why M&A may

fail in a later section of this tutorial.

Conclusion

The financial analysis of the merger is an iterative process that assists the

buyer in carrying out due diligence, testing the consistency of the merger

assumptions, formulating the terms of the offer, and reaching a decision.

Negotiating an acquisition is a process of give and take as the parties get

comfortable with each other and learn about their intentions.

A flexible financial model will assist the acquirer during the negotiation

process by showing the financial and value implications of alternative deal

terms.

Reaching a final agreement may require the addition of earn outs, collars,

escrows, and other contingencies to the terms of the merger in order to

close the valuation gap separating buyer and seller.

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CHAPTER 7

WHY DO COMPANIES THINK OF GOING GLOBAL?

Indian corporations are going global. The recent acquisition of Corus

by Tata has signalled that some of them are looking beyond the

national market and seeing their future as multi-nationals,

competing for space in the global economy with the present

occupants. International power relations are influenced by the

global reach of national capital. Hence the global ambitions of

Indian corporations make geo-political sense and also economic

sense. The Tata-Corus deal is the biggest one so far. But a lot has

been happening since the finance minister loosened controls on

overseas investments by Indian companies in 2003. The volume of

overseas acquisitions by Indian companies has grown from around

$2 billion in 2004 to $4.5 billion in 2005 and it reached over $10

billion in 2006. Videocon, Bharat Forge, Ranbaxy and other pharma

companies, the IT majors and, of course, ONGC are some of the

others who have been active.

This push by Indian companies is part of a broader outward

expansion by companies from the rapidly developing economies

(RDEs). A study by the Boston Consulting Group (BCG) has identified

100 globalising companies in 12 RDEs, of which 44 are in China, 21

in India, 12 in Brazil, 7 in Russia, 6 in Mexico, 5 in ASEAN, 4 in

Turkey and 1 in Egypt. There are of course several older global

players operating out of South Korea, Taiwan, Singapore and Hong

Kong, which are now considered part of the developed world.

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Going global involves more than just acquiring foreign companies.

The BCG study looks at it more broadly in terms of a company’s

presence abroad in the form of subsidiaries, manufacturing and

servicing facilities, its interest in M&A activity, access to

international capital markets, the breadth and depth of its technical

competence and the value proposition it presents.

After all, the greatest comparative advantage of the RDEs is their

cost advantage in labour and even in fixed costs at home. Two-

thirds of the BCG 100 come from China and India, where the size of

the domestic market reinforces this cost advantage.

What then is the advantage which accrues to these companies if

they invest abroad, often in high-cost mature economies?

One reason, perhaps the most important one, is ambition. When Mr

Dhoot of Videocon was asked this question after the preliminary

moves to acquire Daewoo Electronics, he replied that he wanted to

grow five-fold in size in five years and he could not do that even if

his company expanded at twice the GDP growth rate within India.

The Tata-Corus deal has some of this raw ambition. But it is more

than that. It reflects a rather special value proposition the Tata

management can provide. The Tatas have operated a steel plant

under difficult conditions, coped with competition and developed

plant management, supply management, maintenance and

marketing skills, which constitute a viable business-model for

developed country commodity producers teetering on the edge of

commercial decline. In some ways Mittal’s empire rests on the same

strength as he has brought in management talent from India even

though he himself is based in Europe.

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Other companies have used acquisitions to reach new markets and

get the technical and marketing muscle required for this. Thus

Bharat Forge, which now is the second-largest forging company in

the world, points out that each acquisition brought in something

new to its capabilities—access to the US pick-up truck market, the

European engine assembly market or the aluminum castings

market. The same is true for several pharma acquisitions. These are

commercial beachheads allowing these companies to conquer new

markets.

A different way of going global is organic growth of a company, by

setting up sales and service facilities, manufacturing plants, and

R&D centres abroad. This becomes necessary at a certain scale

because of the long supply chains, particularly from Asia to Europe

and the US. Indian IT majors and many of the consumer product

companies on the BCG 100 list have followed this route. Some

Chinese companies have built deep relationships with retailers like

Home Depot and Wal-Mart, which give them access to the price-

conscious consumer segment, where they can compete effectively

with present players.

In the long run, survival in a global market depends on building a

strong brand equity or a cost or technical advantage that allows a

company to capture, say, 25 per cent or more of a global market.

There are some Chinese and Brazilian companies that can claim this

but none as yet from India.

ONGC, China’s national oil company and its main steel company are

different. Their overseas forays are an effort at securing supply

sources. Both China and India are late-comers to this game and

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both have large and growing demands for imports of oil and other

minerals. This part of the globalisation process is more a geo-

political than an economic game. Overseas expansion necessarily

involves some financial packaging. Most of these financial services

are today provided by investment bankers abroad. Why not make it

easier for Indian investment bankers to provide these services?

They have the talent but are hemmed in by controls on what they

can do abroad.

One question that arises is whether a capital-scarce country should

be a capital exporter. First, any large country that engages in

foreign trade has to invest abroad for securing markets and raw

material supplies. Second, acquisitions like the Tata-Corus deal do

not involve much export of capital since they are often financed by

foreign borrowing. They are, in effect, an export of management

capacity.

India’s greatest comparative strength is in project and plant

management under difficult conditions, in intermediate engineering

and IT services and in skill-intensive manufacture. Leveraging this

to our advantage requires a liberal view of overseas expansion by

Indian companies.

CHAPTER 8

TATA GROUP OF COMPANIES

• One of the India’s largest business groups in the country

• It has about 96 operating companies

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• Diverse business in 7 sectors

• Revenues equivalent to 5.3% of India’s GDP

• Group revenue FY 2008: Rs 251,543 Cr. / $ 62.5 b

• Group profit FY 2008: Rs 21,578 Cr. / $ 5.4 b

• Its 27 publicly listed companies have a combined market

capitalization which is the 2nd highest among all business houses in

India

• Largest employer in private sector over 300,000 employees

• A shareholder base of over 2.9 million

• Operations in over 80 countries

• Products and services exported to 85 countries

Tata is a rapidly growing business group based in India with

significant international operations. Revenues in 2007-08 are

estimated at $62.5 billion (around Rs251, 543 crore), of which 61

per cent is from business outside India. The group employs around

350,000 people worldwide. The Tata name has been respected in

India for 140 years for its adherence to strong values and business

ethics.

The business operations of the Tata group currently encompass

seven business sectors: communications and information

technology, engineering, materials, services, energy, consumer

products and chemicals.

The group's 27 publicly listed enterprises have a combined market

capitalization of some $60 billion, among the highest among Indian

business houses, and a shareholder base of 3.2 million. The major

companies in the group include Tata Steel, Tata Motors, Tata

Consultancy Services (TCS), Tata Power, Tata Chemicals, Tata Tea,

Indian Hotels and Tata Communications.

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The group’s major companies are beginning to be counted globally.

Tata Steel became the sixth largest steel maker in the world after it

acquired Corus. Tata Motors is among the top five commercial

vehicle manufacturers in the world and has recently acquired Jaguar

and Land Rover. TCS is a leading global software company, with

delivery centres in the US, UK, Hungary, Brazil, Uruguay and China,

besides India. Tata Tea is the second largest branded tea company

in the world, through its UK-based subsidiary Tetley. Tata Chemicals

is the world’s second largest manufacturer of soda ash. Tata

Communications is one of the world’s largest wholesale voice

carriers.

In tandem with the increasing international footprint of its

companies, the group is also gaining international recognition.

Brand Finance, a UK-based consultancy firm, recently valued the

Tata brand at $11.4 billion and ranked it 57th amongst the Top 100

brands in the world.

Business-week ranked the group sixth amongst the ‘World’s Most

Innovative Companies’ and the Reputation Institute, USA, recently

rated it as the ‘World’s Sixth Most Reputed Firm.’

Founded by Jamsetji Tata in 1868, the Tata group’s early years were

inspired by the spirit of nationalism. The group pioneered several

industries of national importance in India: steel, power, hospitality

and airlines. In more recent times, the Tata group’s pioneering spirit

has been showcased by companies like Tata Consultancy Services,

India’s first software company, which pioneered the international

delivery model, and Tata Motors, which made India’s first

indigenously developed car, the Indica, in 1998 and recently

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unveiled the world’s lowest-cost car, the Tata Nano, for commercial

launch by end of the financial year 2008-09.

The Tata group has always believed in returning wealth to the

society it serves. Two-thirds of the equity of Tata Sons, the Tata

group’s promoter company, is held by philanthropic trusts which

have created national institutions in science and technology,

medical research, social studies and the performing arts. The trusts

also provide aid and assistance to NGOs in the areas of education,

healthcare and livelihoods. Tata companies also extend social

welfare activities to communities around their industrial units. The

combined development-related expenditure of the Trusts and the

companies amounts to around 4 per cent of the group’s net profits.

Going forward, the group is focusing on new technologies and

innovation to drive its business in India and internationally. The

Nano car is one example, as is the Eka supercomputer (developed

by another Tata company), which in 2008 is ranked the world’s

fourth fastest. The group aims to build a series of world class, world

scale businesses in select sectors. Anchored in India and wedded to

its traditional values and strong ethics, the group is building a

multinational business which will achieve growth through excellence

and innovation, while balancing the interests of its shareholders, its

employees and wider society.

Tata Group’s Top M&A Deals

Acquirer Target Sector Stake (%)

Price (US$ million)

Date

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Tata Chemicals Limited

General Chemicals Industrial Products Inc.

Plastic and Chemicals

100 1005 27-03-2008

TATA Motors

Jaguar Land Rover

Automobile 100% 2,300.00 27-03-08

TATA Steel ltd

Corus steel

Steel 100% 12201 30-03-07

TATA Power

PT-Kaltim Prima Coal

Coal & mines

30% 1100 30-03-07

NTT- Docomo

Tata- Teleservices ltd.

Tele-Communications

26% 2700 13-11-08

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CASE-STUDIES

CHAPTER 9

9.1 TATA COMMUNICATION-NTT DOCOMO

About the acquisition

Date: - 13th November 2008

Acquirer: - Ntt-Docomo

Target company: - Tata Teleservices Ltd.

Stake: - 26 %

Deal amount: - US$ 2700 m

Sector: - Tele-communication

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TATA COMMUNICATIONS

Tata Communications is a leading global provider of a new world of

communications. With a leadership position in emerging markets, Tata

Communications leverages its advanced solutions capabilities and domain

expertise across its global and pan-India network to deliver managed

solutions to multi-national enterprises, service providers and Indian

consumers.

The Tata Global Network includes one of the most advanced and largest

submarine cable networks, a Tier-1 IP network, with connectivity to more

than 200 countries across 400 Pops, and nearly 1 million square feet of

data centre and collocation space worldwide.

Tata Communications' depth and breadth of reach in emerging markets

includes leadership in Indian enterprise data services, leadership in global

international voice, and strategic investments in operators in South Africa

(Neo-tel), Sri Lanka (Tata Communications Lanka Limited), Nepal (United

Telecom Limited), and subject to approval by the Chinese government,

China (China Enterprise Communications)

Tata Communications Limited is listed on the Bombay Stock Exchange

and the National Stock Exchange of India and its ADRs are listed on the

New York Stock Exchange. (NYSE: TCL)

NTT-DOCOMO

NTT DOCOMO is Japan's premier provider of leading-edge mobile voice,

data and multimedia services. With more than 55 million customers in

Japan, the company is one of the world's largest mobile communications

operators.

DOCOMO also is an influential force in the continuing advancement of

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mobile technologies and standards. In 1999, Docomo launched i-mode the

world's most popular platform for mobile Internet services including e-

mail, browsing, downloading and more.

In 2001, DOCOMO introduced FOMA, the world's first 3G commercial

mobile service based on W-CDMA, which has transformed the mobile

landscape in Japan while bringing the DOCOMO brand global recognition.

The role of mobile phones as "lifestyle tools" was cemented when

DOCOMO launched Osaifu-Keitai™, a mobile wallet platform enabling

quick, contact-less transactions for cash, credit, ID, and more. More than

36 million phones equipped for Osaifu-Keitai services are now in use.

Building on a solid foundation of research and development, and guided

by its customer-first philosophy, the company leverages the power of

mobile communications to enable customers to enrich their lives.

DOCOMO is expanding its global reach through offices and subsidiaries in

Asia, Europe and North America, as well as strategic alliances with mobile

and multimedia service providers in markets worldwide.

Detailed case study

Tata Sons Limited, the promoter of Tata Teleservices Limited, announced

today that its transaction with NTT DOCOMO, under which the Japanese

telecom company was to acquire 26 per cent of the common shares of

Tata Teleservices Limited—in accordance with the capital-alliance

agreement announced by the parties in November 2008—has been

completed.

Tata Sons further stated that DOCOMO has also completed its payment

obligations under the Tender Offer and is preparing to acquire

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approximately 12 per cent of the common shares of Tata Teleservices

(Maharashtra) Limited (TTML) through an open offer*, with the Tender

Offer having closed on 12 March 2009.

With this development, DOCOMO has become a 26-per cent shareholder

in Tata Teleservices Limited and three DOCOMO Directors will be named

to join the TTSL Board. The partners will now work to increase the

enterprise value of both TTSL and TTML, while creating synergies through

their joint activities including Business & Technology Cooperation

Committee.

Tokyo-based DOCOMO, the world’s leading mobile operator, has played a

major role in the evolution of mobile telecommunications through its

development of cutting-edge mobile technologies and services. The

company is a strong market leader used by more than 50 per cent of

Japan’s mobile phone users. DOCOMO, the world’s leading mobile

operator, will work closely with TTSL’s management and provide know-

how to help the company develop its mobile business. TTSL expects to

leverage DOCOMO’s expertise in the development and delivery of value-

added services, where DOCOMO is a firmly established market leader. The

Japanese telecom giant which, with 53 million customers and 51.5% of the

Japanese market, is one of the world's largest players in the

telecommunications industry, bought a 26% stake in Tata Teleservices Ltd

(TTSL) for $2.7 billion. NTT DoCoMo followed up this deal with an open

offer for 20% in Tata Teleservices (Maharashtra) Ltd -- TTML -- the listed

subsidiary of TTSL. At Rs24.70 (50 cents) a share, this means another

$191 million. The offer will open in January.

The Road ahead

Great deal it may be, but it has its risks. One reason is that telecom deals

have been controversial in recent times. This goes back to late last year

when the government sold pan-India licenses for $333 million apiece,

amid a welter of controversy. New players, with no experience in the

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business, got these licenses on a first-come-first-served basis. In India

also, many of our companies already are or will soon face major problems

in their access to credit due to the lack of liquidity in the domestic market

and also their inability to effectively raise equity due to the depression in

the stock market and the erosion of investor confidence.

Open offer

Besides, DoCoMo, in accordance with regulations of the Securities and

Exchange Board of India, expects to make an open offer to acquire up to

20 per cent of outstanding equity shares of Tata Teleservices Maharashtra

(TTML), a Tata telecommunication company, through a joint tender offer

along with Tata Sons. TTSL and TTML through the Tata Indicom brand,

have increased their combined share of the fast-growing Indian mobile

market and their combined subscriber base now stands at over 30 million.

Market leader

NTT DoCoMo is a market leader in Japan and is used by over 50 per cent

of Japan’s mobile phone users.

It serves over 53 million customers, including 46 million people

subscribing to FOMATM (in Japan), launched as the world’s first 3G mobile

service based on W-CDMA in 2001.

It offers a variety of leading-edge mobile multimedia services, including i-

mode™, the world’s most popular mobile e-mail/Internet service, used by

48 million people.

With the addition of credit-card and other e-wallet functions, DoCoMo

mobile phones have become versatile tools for daily life. It is listed on the

Tokyo, London and New York stock exchanges. TTSL expects to leverage

DoCoMo’s expertise in the development and delivery of value-added

services, where DoCoMo is a firmly established market leader.

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IMPACT ON SHAREHOLDER’S WEALTH

57

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Tata Docomo

14.57

19.80

-

5.00

10.00

15.00

20.00

25.00

Open Price

Tata Docomo

14.33

19.73

-

5.00

10.00

15.00

20.00

25.00

Closing Price

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Tata Docomo

26.15

25.23

24.50

25.00

25.50

26.00

26.50

Turnover

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Tata Docomo

15.14

20.02

-

5.00

10.00

15.00

20.00

25.00

High Price

Tata Docomo

13.88

19.46

-

5.00

10.00

15.00

20.00

25.00

Low Price

INTERPRETATION

The calculation of five days moving average for the previous as well as

later month from the date of merger is shown. It takes into account the

open, high, low, close, daily turnover as well as calculation of abnormal

return. This takes into account the daily volatilities of the share prices.

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Here, the daily average prices have risen due to positive feedback

of the merger but the turnover has decreased at the same time.

This shows that there are certain shareholders who expect the

share prices to rise much more as compared to actual rise that has

taken place and so they have reduced trading activities and turned

themselves into investors. Such investors value the deal much more

and so they expect the share prices to rise sharply within a period

of year or so.

COMPANY’S RETURN BEFORE AND AFTER ACQUISITION

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Post Acquisition

Date Ex. Return Abnormal Return Cumm. Ab. Return

11/14/2008 -1.59% 0.00% 0.00%11/17/2008 -1.01% 0.00% 0.01%11/18/2008 -3.82% 0.01% 0.02%11/19/2008 -1.83% 0.00% 0.02%11/20/2008 -3.69% 0.01% 0.03%11/21/2008 5.51% -0.02% 0.01%11/24/2008 -0.13% 0.00% 0.01%11/25/2008 -2.34% 0.01% 0.02%11/26/2008 3.82% -0.01% 0.01%11/28/2008 0.73% 0.00% 0.00%12/1/2008 -2.79% 0.01% 0.01%12/2/2008 -1.14% 0.00% 0.01%12/3/2008 0.10% 0.00% 0.01%12/4/2008 5.53% -0.02% -0.01%12/5/2008 -2.87% 0.01% 0.00%12/8/2008 2.21% -0.01% -0.01%12/10/2008 5.39% -0.02% -0.03%12/11/2008 -0.10% 0.00% -0.03%12/12/2008 0.47% 0.00% -0.03%12/15/2008 1.47% -0.01% -0.04%

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-0.60%

-0.50%

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

10/15

/08

10/17

/08

10/19

/08

10/21

/08

10/23

/08

10/25

/08

10/27

/08

10/29

/08

10/31

/08

11/2/

08

11/4/

08

11/6/

08

11/8/

08

11/10

/08

11/12

/08

Cumm. Ab. Return

-0.04%

-0.03%

-0.02%

-0.01%

0.00%

0.01%

0.02%

0.03%

0.04%

11/14

/08

11/16

/08

11/18

/08

11/20

/08

11/22

/08

11/24

/08

11/26

/08

11/28

/08

11/30

/08

12/2/

08

12/4/

08

12/6/

08

12/8/

08

12/10

/08

12/12

/08

12/14

/08

INTERPRETATION

The return of the target company Tata Communication has been very

poor since the past 15 to 20 days before the acquisition but it almost got

to break-even soon after the acquisition date. This sustained for the next

8 to 10 days but again got back into negative returns zone due to poor

customer support to the newly entered Docomo brand in highly

competitive communications market in India.

RATIO ANALYSIS

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TATA DOCOMO (13-11-08)

Pre- acquisition Post- acquisition

Change (%)

Debt-Equity Ratio 0.11 0.14 27.27%ROCE (%) 7.33 7.44 1.50%net profit margin 9.55 10.61 11.10%P/E 0 12 0ROE(%) 11.14 10.97 -1.53%EPS 0.89 1.11 24.72%OPM(%) 16.2 18.7 15.43%

INTERPRETATIONDebt equity ratio on post acquisition debt is increasing which shows

company debt is increasing after merger.ROCE is constant it has not

change much.Net profit margin increases by 11.10 as it income increases

in post acquisition as compared to pre acquisition. P/E highly increases in

post acquisition from 0 to 12%. ROE is decreasing by 1.53% which shows

that it slightly more debt than equity. EPS is increasing drastically by

24.27% which is very profitable for investors. Operating profit margin is

increased by 15.43% which shows that company profit margin is very

fairly profitable.

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9.2 TATA MOTOR - JLR

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About the acquisition

Date: - 27th March 2008

Acquirer: - Tata Motors Ltd

Target company: - Jaguar Land Rover

Stake: - 100 %

Deal amount: - US$ 2300m

Sector: - Automotive

TATA MOTORS

Tata Motors Limited is India's largest automobile company, with

consolidated revenues of Rs.70,938.85 crores (USD 14 billion) in

2008-09

It is the leader in commercial vehicles segment, and among the top

three in passenger vehicles

It is the world's fourth largest truck manufacturer, and the world's

second largest bus manufacturer

The company's 24,000 employees are guided by the vision to be

"best in the manner in which we operate, best in the products we

deliver, and best in our value system and ethics"

Over 4 million Tata vehicles ply on Indian roads, since the first rolled

out in 1954

It has manufacturing base in India spread across Jamshedpur

(Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh),

Pantnagar (Uttarakhand) and Dharwad (Karnataka)

The company's dealership, sales, services and spare parts network

comprises over 3500 touch points

Tata Motors also distributes and markets Fiat branded cars in India

Tata Motors, the first company from India's engineering sector to be

listed in the New York Stock Exchange (September 2004), has also

emerged as an international automobile company

It has operations in the UK, South Korea, Thailand and Spain

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In 2004, it acquired the Daewoo Commercial Vehicles Company,

South Korea's second largest truck maker

In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a

reputed Spanish bus and coach manufacturer, and subsequently the

remaining stake in 2009. Hispano's presence is being expanded in

other markets

In 2006, Tata Motors formed a joint venture with the Brazil-based

Marcopolo, a global leader in body-building for buses and coaches

to manufacture fully-built buses and coaches for India and select

international markets

Tata Motors is also expanding its international footprint, established

through exports since 1961

The company's commercial and passenger vehicles are already

being marketed in several countries in Europe, Africa, the Middle

East, South East Asia, South Asia and South America

In January 2008, Tata Motors unveiled its People's Car, the Tata

Nano, which India and the world have been looking forward to

JAGUAR LAND ROVER

Jaguar Cars Ltd, founded in 1922, is one of the world’s premier

manufacturers of luxury saloons and sports cars

Since 1948 Land Rover has been manufacturing authentic 4*4s that

defines ‘breadth of capability’ in their segments

The Jaguar Land Rover business employs some 16000 people,

predominately in the UK, including some 3500 engineers at two

product development centres in Whitley, Coventry and Gaydon,

Warwickshire

The business is a major wealth generator for the UK Jaguars

exported to 63 countries, with sales to customers conducted

principally through franchised dealers and importers

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That Jaguar and Land Rover are two of the most well-known

automotive names in the world, and that Ford had acquired them

for a collective cost of about $5 billion almost a decade earlier, Tata

Motors seems to have got them at a steal at $2 billion

Terms

Under the terms of the deal Ford will contribute about $600 m to JLR

pension plan. Ford will continue to supply JLR for differing periods with

engines, stamping and other car components, in addition to a variety of

technologies. In addition Ford Motor Credit Company will provide

financing for JLR and customers during a transitional period upto 12

months.

Detailed Case Study

Acquisition of British Icons

On June 02, 2008, India-based Tata Motors completed the acquisition of

the Jaguar and Land Rover (JLR) units from the US-based auto

manufacturer Ford Motor Company (Ford) for US$ 2.3 billion, on a cash

free-debt free basis.

JLR was a part of Ford's Premier Automotive Group (PAG) and were

considered to be British icons. Jaguar was involved in the manufacture of

high-end luxury cars, while Land Rover manufactured high-end SUVs.

Tata Motors had several major international acquisitions to its credit. It

had acquired Tetley, South Korea-based Daewoo's commercial vehicle

unit, and Anglo-Dutch Steel maker Corus.

Tata Motors long-term strategy included consolidating its position in the

domestic Indian market and expanding its international footprint by

leveraging on in-house capabilities and products and also through

acquisitions and strategic collaborations.

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Analysts were of the view that the acquisition of JLR, which had a global

presence and a repertoire of well established brands, would help Tata

Motors become one of the major players in the global automobile

industry.

Ford Motors Company (Ford) is a leading automaker and the third largest

multinational corporation in the automobile industry. The company

acquired Jaguar from British Leyland Limited in 1989 for US$ 2.5b.

After Ford acquired Jaguar, adverse economic conditions worldwide in the

1990s led to tough market conditions and a decrease in the demand for

luxury cars. The sales of Jaguar in many markets declined, but in some

markets like Japan, Germany, and Italy, it still recorded high sales.

In March 1999, Ford established the PAG with Aston Martin, Jaguar, and

Lincoln. During the year, Volvo was acquired for US$ 6.45 billion, and it

also became a part of the PAG In September 2006, after Allan Mulally

(Mulally) assumed charge as the President and CEO of Ford, he decided to

dismantle the PAG. In March 2007, Ford sold the Aston Martin sports car

unit for US$ 931 million.

In June 2007, Ford announced that it was considering selling JLR.

Tata Motors also entered into long term agreements with FMC for supply

of engines, stampings and other components to JLR. Other areas of

transition support from Ford include IT, accounting and access to test

facilities. The two companies will continue to cooperate in areas such as

design and development through sharing of platforms and joint

development of hybrid technologies and power train engineering.

The Ford Motor Credit Company, the credit providing arm of FMC, will

continue to provide financing for Jaguar Land Rover dealers and

customers for a transition period lasting for a period of 12 months. Tata

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Motors is in an advanced stage of negotiations with leading auto finance

providers to support the Jaguar Land Rover business in the UK, Europe

and the US, and is expected to select financial services partners shortly.

Financing the deal

On March 26 2008, Tata Motors entered into an agreement with Ford for

the purchase of JLR. Tata Motors agreed to pay US$ 2.3 billion in cash for

a 100% acquisition of the business of JLR. As part of the acquisition, Tata

Motors did not inherit any of the debt liabilties of JLR the acquisition was

totally debt free.

Tata Motors raised $3 billion (about Rs. 12000 crore) through bridge loans

for 15 months from a clutch of banks, including JP Morgan, Citigroup, and

SBI

The Company chartered out plans to raised Rs,7200 crore through three

simultaneous but unlinked rights issue, the proceeds of which will be used

to part-finance the JLR deal of Rs.9228.75 crore. The precise terms of the

issue (the ratio at which these securities will be offered, offer price and

the conversion price) will be decided when the issue are ready to be made

The rights issue will raise the equity capital of Tata Motors by 30-35

percent by March 2009. The company also plans to raise $500-600 million

through an issue of securities in the foreign markets. The company will

share the date of listing at a later date.

The acquisition of JLR was done through the company’s wholly owned

subsidiary TML Holdings (UK).

The Challenges

Morgan Stanley reported that JLR's acquisition appeared negative for Tata

Motors, as it had increased the earnings volatility, given the difficult

economic conditions in the key markets of JLR including the US and

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Europe. Moreover, Tata Motors had to incur a huge capital expenditure as

it planned to invest another US$ 1 billion in JLR. This was in addition to the

US$ 2.3 billion it had spent on the acquisition. Tata Motors had also

incurred huge capital expenditure on the development and launch of the

small car Nano and on a joint venture with Fiat to manufacture some of

the company's vehicles in India and Thailand. This, coupled with the

downturn in the global automobile industry, was expected to impact the

profitability of the company in the near future

The Road Ahead

Tata Motors had formed an integration committee with senior executives

from the JLR and Tata Motors, to set milestones and long-term goals for

the acquired entities. One of the major problems for Tata Motors could be

the slowing down of the European and US automobile markets. It was

expected that the company would address this issue by concentrating on

countries like Russia, China, India, and the Middle East.

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IMPACT ON SHAREHOLDER’S WEALTH

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Tata Jaguar

674.16

625.13

600.00

620.00

640.00

660.00

680.00

Open Price

Tata Jaguar

666.86

624.43

600.00

620.00

640.00

660.00

680.00

Closing Price

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Tata Jaguar

111.36

67.89

-

50.00

100.00

150.00

Turnover

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Tata Jaguar

683.08

635.22

600.00

620.00

640.00

660.00

680.00

700.00

High Price

Tata Jaguar

655.57

616.35

580.00

600.00

620.00

640.00

660.00

Low Price

INTERPRETATION

The calculation of five days moving average for the previous as well as

later month from the date of merger is shown. It takes into account the

open, high, low, close, daily turnover as well as calculation of abnormal

return. This takes into account the daily volatilities of the share prices.

Here, the daily average prices have fallen in terms of all prices and

even the turnover has decreased. This shows that the investors are

not happy with the valuation of merger and so the overall sentiment

among the investors is very poor. There are certain shareholders

who expect the share prices to fall even much more as compared to

actual fall that has taken place and so they have reduced trading

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activities and tried to sell and come out of the situation as soon as

possible.

COMPANY’S RETURN BEFORE AND AFTER ACQUISITION

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-0.25%

-0.20%

-0.15%

-0.10%

-0.05%

0.00%

2/25

/08

2/27

/08

2/29

/08

3/2/

08

3/4/

08

3/6/

08

3/8/

08

3/10

/08

3/12

/08

3/14

/08

3/16

/08

3/18

/08

3/20

/08

3/22

/08

3/24

/08

3/26

/08

3/28

/08

Cumm. Ab. Return

-0.07%

-0.06%

-0.05%

-0.04%

-0.03%

-0.02%

-0.01%

0.00%

0.01%

0.02%

0.03%

3/31

/08

4/2/

08

4/4/

08

4/6/

08

4/8/

08

4/10

/08

4/12

/08

4/14

/08

4/16

/08

4/18

/08

4/20

/08

4/22

/08

4/24

/08

4/26

/08

4/28

/08

INTERPRETATIONAs we can see from the line chart that the cumulative return before

merger was negative and the entire trend is moving in the negative

direction due to poor returns of tata motors.

A soon as the acquisition took place, the highly profit generating Jaguar as

well as Land Rover added to the profit and earnings of the tata motors.

The brand value of JLR added to the highly reputable Tata Group and the

company’s balance sheet. This can be clearly seen in the line chart above.

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RATIO ANALYSIS

TATA MOTORS (27- 03 2008) Pre-acquisition

Post- acquisition

Change (%)

Debt-Equity Ratio 0.56 0.97 42.27ROCE (%) 30.52 6.88 -343.60net profit margin 6.88 11.47 40.02P/E 15.45 9.59 -61.11ROE(%) 30.98 5.34 -480.15EPS 47.1 18.81 -150.40OPM(%) 11.16 7.89 -41.44

INTERPRETATION

Debt equity ratio is increasing by 42.27% as Tata took loan of banks to

acquire JLR.ROCE increases vey high by 343.60% as compared to pre

acquisition as it gauges that company that generate its earnings from the

total pool of capital which indicates profitability.Net profit margin

increases as it income increases in post acquisition as compared to pre

acquisition. P/E highly decreases in post acquisition by 60.1% which in

investor point of view they will be profitable to invest to get high earning.

ROE is highly increasing by 480.15% which shows that it has more equity

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than debt. EPS is increasing drastically by 480.15% which is very

profitable for investors. Operating profit margin is reduced by 41.44%

which shows that company profit margin is very less.

9.3 TATA POWER–PT KALTIM PRIMA COAL

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About the acquisition

Date: - 30th March 2007

Acquirer: - Tata Power

Target company: - PT kaltim prima coal

Stake: - 30 %

Deal amount: - US$ 1100m

Sector: - Power sector

TATA POWER

As India’s largest private power utility, we at Tata Power have set the

momentum of growth. In our quest to deliver sustainable energy, we are

spreading our footprint nationwide, creating new benchmarks in

operational efficiencies, investing in global resources and redefining

paradigms.

Our strength lies in fulfilling our commitments and our ability to manage

well in the changing environment. We take pride in building lasting and

trustful relationship with our customers along with a legacy of caring for

our communities in and around our areas of operations. As we strive to

lead the reform process for sustainable power, we are excited to redefine

the contours of Indian ‘Power’ Sector.

PT KALTIM PRIMA COAL (KPC)

GM External Affairs and Sustainable Development (ESD), Harry ‘Sony’

Miarsono said that the award has become real evidence that KPC

consistently and transparently reports social, economic, and environment

activities. Moreover, KPC has followed standard determined by Global

Report Initiative (GRI).

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KPC Received SGS CSR Award

The success of PT Kaltim Prima Coal in developing CSR programs regains

much attention from society. At this moment, SGS Indonesia, an

international company for audit and certification services, specifically

awarded the SGS Corporate Social Responsibility (CSR) Award.

KPC Received ISRA Award

Endang Ruchijat, KPC Chief Executive Officer, proudly announced that KPC

had received the Second Best “Indonesia Sustainability Reporting Award”

(ISRA) 2008. This was awarded to KPC Sustainable Development Report

2007 and presented in person by Mr Ahmadi Hadibroto the Chairman of

Indonesian Accountant Association (IAI) in Niko Hotel Jakarta.

Indonesia's world class producer of high coal thermal from one of the

world's largest open pit mining operations

Kaltim Prima Coal receives awards for it's achievements in helath, safety,

environment, and community development

Detailed case study

Tata Power Company kicked off the implementation of its ultra mega

power projects by exploring coal mines buyouts overseas for Mundra.

Confirming the move, the Tata Power Managing Director, Mr. Prasad R.

Menon, said on Thursday that Tata Power plans to import around 12

million tonnes of coal annually starting 2012 for its upcoming coal-fired

project in Gujarat and the company is also scouting for coal mines abroad.

The Centre has awarded Tata Power a contract to build a 4,000-MW

project at Mundra.

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Mr. Menon said Tata Power was looking at mine acquisitions and coal

supplies from Australia, Indonesia and South Africa.

The company is also considering overseas suppliers for boilers and

turbines for the Gujarat power project. "We are looking at (equipment

supply) possibilities in South-East Asia, East Asia and possibly in West

Europe...We need both (competitive) price and (timely) delivery," he said.

Tata Power is yet to finalize the funding pattern for the project, which is

estimated to cost around Rs 18,000 Cr.

"We are yet to decide whether it will be 70:30 (debt-to-equity ratio) or

75:25," Mr Menon said. The company will finalize the funding pattern for

the project in the next six months, he said. India has a total hydro power

potential of 1,50,000 MW, with most of it in Jammu and Kashmir, Himachal

Pradesh, Uttaranchal, Sikkim and Arunachal Pradesh.

Tata Power Company said it has signed a $1.1-billion (Rs 4,950 crore) deal

to buy 30 per cent stakes in two Indonesian coal companies, and in a

related coal trading company, all promoted by PT Bumi Resources Tbk

(Bumi), Indonesia.

PL Kaltim Prima Coal and PT Arutmin Indonesia are two of Indonesia's

largest coal mines which together produced 53.5 million tonnes in 2006,

of which 95 per cent was exported.

Tata Power has also signed an offtake agreement with Kaltim Prima,

which entitles it to purchase 10 million tonnes of coal per annum.

The Indian power company is sewing up long-term contracts for coal for

its ambitious five-year, 7000 MW expansion plan.

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"The acquisition specifically addresses fuel requirements of the Mundra

Ultra Mega Power Project, the Trombay project and the coastal power

project in Maharashtra. It is complementary and supports the assumptions

made in the bid for Mundra UMPP," said Mr Prasad Menon, Managing

Director, Tata Power.

"This move not only secures our fuel requirements in the light of the

aggressive growth plans charted out by the company, but also opens up

opportunities for Tata Power to own and operate a range of world-class,

competitive and profitable electricity and energy businesses in India and

overseas," he said.

The transaction cost of $1.1 billion is prior to working capital and other

adjustments. The seller PT Bumi Resources could get as much as $200

million more from these adjustments, getting $1.3 billion from the deal.

Financing the deal

Tata Power will make this acquisition through an offshore special purpose

vehicle, said a statement from the company. Funding will be done through

a combination of debt in the SPV, internal accruals and borrowings from

Tata Power.

The funding details cannot currently be specifically described since the

company is finalizing a funding package that would include other projects,

including the Mundra UMPP, said Mr S. Ramakrishnan, Executive Director,

Tata Power.

The company will require 21 mt of imported coal for all these planned

projects. The Indonesian deal will take care of 50 per cent of Tata Power's

requirements, which would be capped there. "From a risk point of view,

we don't want to get more than 50 per cent of our requirements from one

country," said Mr Ramakrishnan.

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The rest is to be secured through a combination of purchasing equity

stakes in coal mines and entering offtake contracts. "We are looking at

opportunities in Australia and South Africa too," he said.

The transaction is expected to be completed by June 30 2007.

Benefits

The financial impact of the acquisition on Tata Power will be positive over

a five-year time frame; however it would be under marginal pressure for

one or two years, said Mr Ramakrishnan. But, on a consolidated basis, the

deal will be positive from day one, the acquiree companies being profit-

making ones, he said.

Currently, Bumi has 100 per cent stake in PT Arutmin and 95 per cent

stake in Kaltim Prima, he said. Regulations require that Indonesian

promoters own at least 51 per cent stake in these companies.

Bumi had been looking for a buyer for one-third interest in these mines

ever since its attempts to sell the stakes to an investment bank proved

unsuccessful.

But Tata Power believed that it was a good deal, whose valuation was

done on the basis of discounted cash flows and entitlement to earnings.

Tata Power also produces hydro-electric power but is betting on coal-

based thermal power as its mainstay for expansion. It runs current

capacities of close to 2,400 MW.

The company had reported revenues of Rs 4,562 crore and net profit of Rs

610 crore for the year ended March 31, 2006. Its revenues for the quarter

ended December 31, 2006 had been Rs 1,200 crore and net profit, Rs 280

crore.

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IMPACT ON SHAREHOLDER’S WEALTH

87

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88

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Tata Power

510.79

538.56

490.00

500.00510.00

520.00

530.00540.00

550.00

Open Price

Tata Power

510.56

538.56

490.00

500.00

510.00520.00

530.00

540.00

550.00

Closing Price

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Tata Power

35.02

53.08

-

20.00

40.00

60.00

Turnover

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91

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Tata Power

518.60

545.39

500.00

510.00

520.00

530.00

540.00

550.00

High Price

Tata Power

503.58

526.06

490.00

500.00

510.00

520.00

530.00

Low Price

INTERPRETATION

The calculation of five days moving average for the previous as well as

later month from the date of merger is shown. It takes into account the

open, high, low, close, daily turnover as well as calculation of abnormal

return. This takes into account the daily volatilities of the share prices.

Here, the daily average prices have risen in terms of all prices and

even the turnover has increased by more than 50 % from Rs. 35m

to Rs. 53m. This shows that the investors are quite happy with the

merger and they value the deal highly.

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The daily traders are taking the benefit of increased turnover to

book their intraday profit. The daily High-Low difference has

remained almost constant but the individual highs and lows have

increased by around 4-6%. This shows that investors are quite

supportive to the decision of merger and hence its company’s

management.

COMPANY’S RETURN BEFORE AND AFTER ACQUISITION

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94

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-0.70%

-0.60%

-0.50%

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

0.10%

3/2/

07

3/4/

07

3/6/

07

3/8/

07

3/10

/07

3/12

/07

3/14

/07

3/16

/07

3/18

/07

3/20

/07

3/22

/07

3/24

/07

3/26

/07

3/28

/07

3/30

/07

Cumm. Ab. Return

-0.30%

-0.20%

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

4/2/

07

4/4/

07

4/6/

07

4/8/

07

4/10

/07

4/12

/07

4/14

/07

4/16

/07

4/18

/07

4/20

/07

4/22

/07

4/24

/07

4/26

/07

4/28

/07

4/30

/07

INTERPRETATION

As we can see from the line chart that the cumulative return before

acquisition was negative and the entire trend is moving in the negative

direction due to poor returns of Tata Power.

As soon as the acquisition took place, the highly profit generating state

owned Indonesian firm Kaltim Prima Coal Ltd., it added to the profit and

earnings of the Tata Power. The Co. took the benefit by capitalizing on the

high demand and its simultaneously high capacity in power generation.

The target company also being profit making, the effect got translated in

improved earnings.

RATIO ANALYSIS

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TATA Power (30- 03 2007) Pre- acquisition Post- acquisition Change(%)Debt-Equity Ratio 0.53 0.47 -11.32ROCE (%) 8.99 10.99 22.25net profit margin 10.18 14.65 43.91P/E 19.54 30.69 57.06ROE(%) 8.7 12.31 41.49EPS 29.66 38.19 28.76OPM(%) 22.1 24.15 9.28

INTERPRETATIONDebt equity ratio is decreasing by 11.32 which show that company has

more liabilit.ROCE increases by 22.25% as compared to pre acquisition as

it gauges that company that generate its earnings from the total pool of

capital which indicates profitability.Net profit margin increases as it

income increases in post acquisition as compared to pre acquisition. P/E

highly decreases in post acquisition by 57.06% which in investor point of

view will be profitable to invest to get high earning. ROE is highly

increasing by 41.49% which shows that it has more equity than debt. EPS

is increasing by 28.76% which is very fair for investors. Operating profit

margin increasing by 9.28% which shows that company profit margin is

very has increase.

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9.4 TATA STEEL-CORUS

About the acquisition

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Date: - 30th March 2007

Acquirer: - Tata Steel Limited

Target company: - Corus Plc.

Stake: - 100 %

Deal amount: - US$ 12201 m

Sector: - Steel sector

TATA-STEEL

• Founded in 1907,by Jamsetji Nusserwanji Tata

• Tata Steel is lited on BSE and NSE and employs about 82700

• (2007) people

• It started with a production capacity of 1,00,000 tones has

transformed into a global giant

• Its revenue in 2005-2006 was US$ 5.0 b

• It has a main steel plant located at Jamshedpur

• The Company also has three greenfield steel projects in the states

of Jharkhand, Chattisgarh and Orissa

CORUS STEEL

• Corus is Europe's second largest steel producer formed on 6th

October 1999

• Company has four divisions: Strip product, Long product, Aluminum

and Distribution and Building system

• Total debt of Corus was GBP 1.6 billion

• It has revenues of $ 18.06 billion and profit of $ 626 million

Detailed case study

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On January 31, 2007, India based Tata Steel Limited (Tata Steel) acquired

the Anglo Dutch steel company, Corus Group Plc (Corus) for US$ 12.20

billion. The merged entity, Tata-Corus, employed 84,000 people across 45

countries in the world. It had the capacity to produce 27 million tons of

steel per annum, making it the fifth largest steel producer in the world as

of early 2007.

Before the acquisition, the major market for Tata Steel was India. The

Indian market accounted for sixty nine percent of the company's total

sales. Almost half of Corus' production of steel was sold in Europe

(excluding UK). The UK consumed twenty nine percent of its production.

After the acquisition, the European market (including UK) would consume

59 percent of the merged entity's total production.

Commenting on the acquisition, Ratan Tata, Chairman, Tata & Sons, said,

"Together, we are a well balanced company, strategically well placed to

compete at the leading edge of a rapidly changing global steel industry"

Financing the deal

Tata Steel outbid the Brazilian steelmaker Companhia Siderurgica

Nacional's (CSN) final offer of 603 pence per share by offering 608 pence

per share to acquire Corus.

Tata Steel had first offered to pay 455 pence per share of Corus, to close

the deal at US$ 7.6 billion on October 17, 2006. CSN then offered 475

pence per share of Corus on November 17, 2006.

Finally, an auction was initiated on January 31, 2007, and after nine

rounds of bidding, TATA Steel could finally clinch the deal with its final bid

608 pence per share, almost 34% higher than the first bid of 455 pence

per share of Corus.

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Expert’s opinion

Many analysts and industry experts felt that the acquisition deal was

rather expensive for Tata Steel and this move would overvalue the steel

industry world over.

Commenting on the deal, Sajjan Jindal, Managing Director, Jindal South

West Steel said, "The price paid is expensive...all steel companies may

get re-rated now but it's a good deal for the industry." Despite the worries

of the deal being expensive for Tata Steel, industry experts were

optimistic that the deal would enhance India's position in the global steel

industry with the world's largest and fifth largest steel producers having

roots in the country. Stressing on the synergies that could arise from this

acquisition, Phanish Puram, Professor of Strategic and International

Management, London Business School said, "The Tata-Corus deal is

different because it links low-cost Indian production and raw materials

and growth markets to high-margin markets and high technology in the

West.

The cost advantage of operating from India can be leveraged in Western

markets, and differentiation based on better technology from Corus can

work in the Asian markets."

Tata Steel Vs CSN: The Bidding War

There was a heavy speculation surrounding Tata Steel's proposed

takeover of Corus ever since Ratan Tata had met Leng in Dubai, in July

2006. On October 17, 2006, Tata Steel made an offer of 455 pence a

share in cash valuing the acquisition deal at US$ 7.6 billion. Corus

responded positively to the offer on October 20, 2006.

Agreeing to the takeover, Leng said, "This combination with Tata, for

Corus shareholders and employees alike, represents the right partner at

the right time at the right price and on the right terms." In the first week

of November 2006, there were reports in media that Tata was joining

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hands with Corus to acquire the Brazilian steel giant CSN which itself was

keen on acquiring Corus. On November 17, 2006, CSN formally entered

the foray for acquiring Corus with a bid of 475 pence per share. In the

light of CSN's offer, Corus announced that it would defer its extraordinary

meeting of shareholders to December 20, 2006 from December 04, 2006,

in order to allow counter offers from Tata Steel and CSN...

Synergies

There were many likely synergies between Tata Steel, the lowest-cost

producer of steel in the world, and Corus, a large player with a significant

presence in value-added steel segment and a strong distribution network

in Europe. Among the benefits to Tata Steel was the fact that it would be

able to supply semi-finished steel to Corus for finishing at its plants, which

were located closer to the high-value markets...

The Pitfalls

Though the potential benefits of the Corus deal were widely appreciated,

some analysts had doubts about the outcome and effects on Tata Steel's

performance. They pointed out that Corus' EBITDA (earnings before

interest, tax, depreciation and amortization) at 8 percent was much lower

than that of Tata Steel which was at 30 percent in the financial year 2006-

07

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IMPACT ON SHAREHOLDER’S WEALTH

102

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103

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Tata Corus

472.40

451.52

440.00

450.00

460.00

470.00

480.00

Open Price

Tata Corus

471.65

447.10

430.00

440.00

450.00

460.00

470.00

480.00

Closing Price

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Tata Corus

323.90

581.65

-

200.00

400.00

600.00

800.00

Turnover

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106

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Tata Corus

478.51

455.38

440.00

450.00

460.00

470.00

480.00

490.00

High Price

Tata Corus

466.31

442.49

430.00

440.00

450.00

460.00

470.00

Low Price

INTERPRETATION

The calculation of five days moving average for the previous as well as

later month from the date of merger is shown. It takes into account the

open, high, low, close, daily turnover as well as calculation of abnormal

return. This takes into account the daily volatilities of the share prices.

Here, all the daily average prices have fallen except the turnover

which has increased by approximately 80% from Rs. 323.9m to Rs.

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581.65m. This is somewhat shocking as the trading activity has

risen inspite of severe fall in stock prices.

This is indicative of two completely different types of investor

groups involved in the market. One with the positive view about the

acquisition and the others who think the acquisition is overvalued.

Investors with positive sentiments, view this deal to be lucrative in

the long run. So they grab the opportunity to buy the shares at a

low price and those investors on the other hand readily sell their

accumulated shares to save themselves from further fall in prices.

COMPANY’S RETURN BEFORE AND AFTER ACQUISITION

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109

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-0.60%

-0.50%

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

1/2/

07

1/4/

07

1/6/

07

1/8/

07

1/10

/07

1/12

/07

1/14

/07

1/16

/07

1/18

/07

1/20

/07

1/22

/07

1/24

/07

1/26

/07

1/28

/07

1/30

/07

Cumm. Ab. Return

-0.60%

-0.50%

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

2/1/

07

2/3/

07

2/5/

07

2/7/

07

2/9/

07

2/11

/07

2/13

/07

2/15

/07

2/17

/07

2/19

/07

2/21

/07

2/23

/07

2/25

/07

2/27

/07

3/1/

07

INTERPRETATION

As we can see from the line chart that the %cumulative abnormal return

before acquisition was sharply decreasing since past month with not even

a single glimpse of positive return on any single day.

But as soon as the acquisition took place, the earnings showed a

marginal rise and again got back to the level where it was just

before the acquisition. This happened due to very large debt

generated due to overpaying by acquiring the Corus at a very high

price of 608 pence per share as compared to previously valued 455

pence per share.

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RATIO ANALYSIS

TATA Steel (31st jan 2007) Pre-acquisition Post- acquisition Change ( %)Debt-Equity Ratio 0.31 0.67 116.ROCE (%) 50.13 23.27 -53.6net profit margin 20.46 21.36 4.4P/E 8.72 11.35 30.2ROE(%) 41.7 25.97 -37.7EPS 61.51 61.06 -0.7OPM(%) 39.79 36.11 -9.2

INTERPRETATIONDebt equity ratio on post acquisition increase because Corus debt was

high it was GBP1.6b to buy Corus and so its debt is almost 116% more

than in pre acquisition. ROCE shows that post acquisition is very less as

compared to pre acquisition it has negative percentage because company

has short term returns after one year it will improve in the long run. Net

profit margin has very less change as profit is not much affected. P/E

increases in post acquisition by 30.2% which show high future cash flow.

ROE is decreasing by 37.7 which show that it has more debt than equity.

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EPS has a very minor change. Operating profit margin is reduced by 9.1%

which shows that it has low profit.

9.5 TATA CHEMICALS – GENERAL CHEMICALS

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About the acquisition

Date: - 27th March 2008

Acquirer: - Tata Chemicals Limited

Target company: - General Chemicals Industrial Products Inc.

Stake: - 100 %

Deal amount: - US$ 1005 m

Sector: - Plastic and Chemicals

TATA CHEMICALS

Tata Chemical Ltd (TCL) Group is world’s third largest soda ash producer

with a combined capacity of 2.9 million tonne and a market leader in soda

ash and salt in India. TCL is rapidly adding capacity by organic and

inorganic means. It is showing robust growth with strong volume growth

in soda ash, cement, salt, and phosphatic fertiliser.

GENERAL CHEMICALS INDUSTRIAL PRODUCTS INC.

General Chemical is one of the world's leading and most experienced

producers of soda ash. They supply an essential raw material used to

make a range of familiar everyday products, such as glass, soap,

powdered detergent, paper, textiles, and even food.

They have produced soda ash for more than 100 years and are currently

one of the Top 5 global producers. The breadth of practical experience

and ever increasing production efficiency in mining and processing

ensures high-quality soda ash. Their expertise in shipping and storage

enables them to get soda ash when and where customers need it.

Detailed case study

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After global acquisitions that made it the fifth largest steelmaker and the

second largest branded tea bag owner worldwide, the Tata group was

poised to become the second largest soda ash manufacturer in the world.

Tata Chemicals had signed an agreement to acquire 100 per cent stake in

US-based General Chemical Industrial Products Inc. for $ 1.005 billion

(approx. Rs 4,000 crore).

GCIL is a privately held debt-free company with revenues of $ 400 million

and a healthy bottomline.

Tata Chemicals was also looking to buy Harbinger Capital Partners, a

private equity firm that owns a majority stake in GCIL.

GCIL had a capacity of 2.5 million tonnes of soda ash, while Tata

Chemicals was already at number three position globally (at 3 million

tonnes) after its acquisition of the UK-based Brunner Mond in 2005. GCIL

has access to the world’s largest and most economically recoverable

trona ore deposits (which is converted into soda ash) in Wyoming in the

US, said Mr Khusrokhan.

After the buy, over 50 percent of Tata Chemicals’ capacity would be

through the natural route, providing both sustainability as well as a

natural hedge against the commodity cycle, he said.

As a thumb rule, natural soda ash is more economical and delivers higher

margins, said Mr R Mukundan, Executive Vice-President, Chemicals.

On picking up a US asset in the backdrop of a slowdown in that country,

Mr Mukundan said that soda ash is in the growth phase with worldwide

demand for various applications and that margins are picking up.

Forty per cent of TCL’s revenues are from international sales.

The acquisition would be funded through a mixture of equity and debt.

The company’s stock lost over 7 per cent on the BSE, to close at Rs 305

from previous close of Rs 328.

Tata Chemicals now has manufacturing locations in four continents and

access to consumers around the world, including new markets it was not

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earlier in, viz. North America, Latin America and certain markets in the Far

East.

Benefits

The acquisition was timely from an Indian viewpoint as the company was

picking up US assets at a time when the rupee was strong.

According to analysts, this would clearly pitch Tata Chemicals into the

number two position worldwide.

More than 50 per cent of Tata Chemicals’ capacity would be through the

natural route which would lead to sustainability in terms of margins.

A 100 per cent equity stake in General Chemical Industrial Products

(GCIP), a US-based soda ash maker, will endow Tata Chemicals with

substantial global scale and manufacturing cost advantages in its soda

ash business. The acquisition is timely; As demand and price trends for

soda ash were at a new high globally, the acquisition helped the company

to quickly capitalize on those trends, without the gestation period that

would have been involved in putting up Greenfield capacities.

The scaling up of capacities came at a time when the global soda ash

cycle was displaying considerable strength, with construction activity in

Asia spurring strong demand, production failing to keep pace and China

curtailing exports of the chemical in order to meet domestic

requirements.

Financing the deal

Lazard and Standard Chartered Bank were financial advisers to TCL on the

transaction.

The acquisition has been funded through a mixture of term financing

(ECB) of $500 million and bridge financing (in the US) of $350 million,

raising a total of $850 million at competitive rates.

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The loan was arranged by seven banks. They include ABN AMRO, Nova

Scotia, Calyon, HSBC, Mizuho Financial Group, Rabobank and Standard

Chartered.

IMPACT ON SHAREHOLDER’S WEALTH

116

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Tata Chem

316.71

318.62

315.00

316.00

317.00

318.00

319.00

Open Price

Tata Chem

313.01

322.46

305.00

310.00

315.00

320.00

325.00

Closing Price

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Tata Chem

83.94

48.93

-

20.00

40.00

60.00

80.00

100.00

Turnover

118

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119

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Tata Chem

322.42

326.65

320.00

322.00

324.00

326.00

328.00

High Price

Tata Chem

304.58

313.60

300.00

305.00

310.00

315.00

Low Price

INTERPRETATION

The calculation of five days moving average for the previous as well as

later month from the date of merger is shown. It takes into account the

open, high, low, close, daily turnover as well as calculation of abnormal

return. This takes into account the daily volatilities of the share prices.

Here, the daily average prices have risen due to positive feedback

of the merger but the turnover has decreased at the same time. This

shows that there are certain shareholders who expect the share prices to

rise much more as compared to actual rise that has taken place and so

they have reduced trading activities and turned themselves into

investors. Such investors value the deal much more and so they expect

the share prices to rise sharply within a period of year or so.

COMPANY’S RETURN BEFORE AND AFTER ACQUISITION

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121

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-0.35%

-0.30%

-0.25%

-0.20%

-0.15%

-0.10%

-0.05%

0.00%

2/26

/08

2/28

/08

3/1/

08

3/3/

08

3/5/

08

3/7/

08

3/9/

08

3/11

/08

3/13

/08

3/15

/08

3/17

/08

3/19

/08

3/21

/08

3/23

/08

3/25

/08

3/27

/08

Cumm. Ab. Return

-0.25%

-0.20%

-0.15%

-0.10%

-0.05%

0.00%

0.05%

3/28

/08

3/30

/08

4/1/

08

4/3/

08

4/5/

08

4/7/

08

4/9/

08

4/11

/08

4/13

/08

4/15

/08

4/17

/08

4/19

/08

4/21

/08

4/23

/08

4/25

/08

4/27

/08

INTERPRETATION

As we can see from the line chart the earnings of Tata Chemicals has

fallen sharply since one month by about 0.30% to 0.35%.

The effect of poor result continued even after the acquisition of General

Chemicals and went down by 0.2% more in next 30 days. As a result of

poor earnings, even the share prices of Tata Chemicals fell from Rs. 328

per share to Rs. 305 per share.

RATIO ANALYSIS

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TATA chemicals (27- 03 2008) Pre- acquisition

Post- acquisition

Change(%)

Debt-Equity Ratio 0.55 0.81 47.27ROCE (%) 19.26 5.58 -71.03net profit margin 30.52 6.88 -77.46P/E 10.73 7.98 -25.63ROE(%) 19.48 14.15 -27.36EPS 19.29 17.69 -8.29OPM(%) 20.18 6.31 -68.73

INTERPRETATIONDebt equity ratio is increasing by 47.27% as Tata Chemicals debt is low as

compare to equity.ROCE decreases vey high by 71.03% as compared to

pre acquisition as it gauges that company cannot generate its earnings

from the total pool of capital which indicates less profitability.Net profit

margin decreases highly by 77.46% which shows decrease in income in

post acquisition as compared to pre acquisition. P/E highly decreases in

post acquisition by 25.63% which in investor point of view is not profitable

to invest. ROE is highly decreasing by 71.03% which shows that the

company has incurred a huge loss and should improve its OPM to improve

performance. EPS is decreasing by 8.29% there would be a selling spree

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in point of view investors. Operating profit margin is drastically reduced

by 68.73% which shows that company profit margin is very less.

CHAPTER 10

VALUATION AND INTERPRETATION

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In our project we have done Enterprise Value Model

What is Enterprise Value?

Enterprise value is a figure that, in theory, represents the entire cost of a

company if someone were to acquire it. Enterprise value is a more

accurate estimate of takeover cost than market capitalization because it

takes includes a number of important factors such as preferred stock,

debt, and cash reserves that are excluded from the latter metric.

How is Enterprise Value Calculated?

Enterprise value is calculated by adding a corporation’s market

capitalization, preferred stock, and outstanding debt together and then

subtracting out the cash and cash equivalents found on the balance

sheet. (In other words, enterprise value is what it would cost you to buy

every single share of a company’s common stock, preferred stock, and

outstanding debt. The reason the cash is subtracted is simple: once you

have acquired complete ownership of the company, the cash becomes

yours). Let’s examine each of these components individually, as well as

the reasons they are included in the calculation of enterprise value:

Market Capitalization: Frequently called “market cap”, market

capitalization is calculated by taking the number of outstanding shares of

common stock multiplied by the current price-per-share. If, for example,

Billy Bob’s Tire Company had 1 million shares of stock outstanding and

the current stock price was $50 per share, the company’s market

capitalization would be $50 million (1 million shares x $50 per share =

$50 million market cap).

Preferred Stock: Although it is technically equity, preferred stock can

actually act as either equity or debt, depending upon the nature of the

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individual issue. A preferred issue that must be redeemed at a certain

date at a certain price is, for all intents and purposes, debt. In other

cases, preferred stock may have the right to receive a fixed dividend plus

share in a portion of the profits (this type is known as “participating”).

Regardless, the existence represents a claim on the business that must

be factored into enterprise value.

Debt: Once you’ve acquired a business, you’ve also acquired its debt. If

you purchased all of the outstanding shares of a chain of ice cream stores

for $10 million (the market capitalization), yet the business had $5 million

in debt, you would actually have expended $15 million; $10 million may

have come out of your pocket today, but you are now responsible for

repaying the $5 million debt out of the cash flow of the business – cash

flow that otherwise could have gone to other things.

Cash and Cash Equivalents: Once you’ve purchased a business, you own

the cash that is sitting in the bank. After acquiring complete ownership,

you can simply take this cash and put it in your pocket, replacing some of

the money you expended to buy the business. In effect, it serves to

reduce your acquisition price; for that reason, it is subtracted from the

other components when calculating enterprise value.

Why Is Enterprise Value Important?

Some investors, particularly those that follow a value philosophy, will look

for companies that are generating a lot of cash flow in relation to

enterprise value. Businesses that tend to fall into this category are more

likely to require little additional reinvestment; instead, the owners can

take the profit out of the business and spend it or put it into other

investments.

EV Multiples of Tata Corus

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EV MULTIPLES FOR CORUS GROUP INC

Source: ProwessDeal Value USD(m)

EnterpriseValue USD(m)

Currency: INR in Crores 100% 11939.0 11939.2696TCPeer 11939 Means equity value and EV are 11939

as on 31st March 2007

Company Name EV/Sales EV/EBITDA EV/EBIT PE

Tata Steel Ltd. 1.52 4.21 4.74 6.75 Bhushan Steel Ltd. 1.04 4.98 6.50 8.15 J S W Steel Ltd. 1.01 3.17 3.98 5.83 Jindal Steel & Power Ltd. 2.33 6.64 8.39 11.24 Steel Authority Of India Ltd. 0.73 2.72 3.06 8.78 J S L Ltd. 0.75 4.41 5.77 5.76

Average 1.17 4.38 5.54 7.95 Maximum 2.33 6.64 8.39 11.24 Minimum 0.73 2.72 3.06 5.76

Multiple at which the deal has been done 0.68x 7.02x 10.19x 68.23x

Tata Steel and Corus Group deal happened at high multiples compared to

its peers. We can observe that the average multiples of the peer group

company stands half compared to the deal multiples.

Sales Multiple:

The average sales multiple of its peers is 1.17x compared to the deal of

0.68x of Corus Group’s sales. This can be possible due to high sales value,

reducing the multiple to 0.68x. The lowest multiple (Steel Authority of

India) is at 0.73x.

EBITDA Multiple:

EBITDA multiple of its peers averages at 4.38x compared to the deal

multiple of 7.02x of Corus Group’s sales. Even the highest multiple (Jindal

Steel & Power) is at 4.38x. This is almost half of the deal multiple. It can

be observed that Tata played very aggressively.

EBIT Multiple:

EBIT multiple of its peers averaged at 5.54x compared to the deal of

10.19x of Corus Group’s sales. Even the highest multiple (Jindal Steel &

Power) is at 8.39x.

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PE Multiple:

The PE multiple of the deal is very high on the account that the margins

of Corus are very low compared to Tata Steel and other peers. The

average PE multiples is 7.95x compared to 68.23x at which the deal

haapened.

EV Multiples of Tata NTT Docomo

EV MULTIPLES FOR Tata Teleservices (Maharashtra) Ltd.

Source: ProwessDeal Value USD(m)

EnterpriseValue USD(m)

Currency: INR in Crores 26% 2653.0 10204.6476DTPeer 10203.84615 Means equity value and EV are approx 10204

as on 31st March 2008

Company Name EV/Sales EV/EBITDA EV/EBIT PE

Tata Teleservices (Maharashtra) Ltd. 4.96 18.33 175.05 (38.49) Bharti Airtel Ltd. 6.64 16.43 24.36 25.11 Idea Cellular Ltd. 5.50 15.37 23.73 25.95 Mahanagar Telephone Nigam Ltd. 1.14 4.20 7.83 14.95 Reliance Communications Ltd. 9.24 26.74 41.02 40.57 Tata Communications Ltd. 4.34 19.02 30.73 46.33

Average 5.37 16.35 25.53 30.58 Maximum 9.24 26.74 41.02 46.33 Minimum 1.14 4.20 7.83 14.95

Multiple at which the deal has been done 26.98 99.81 952.96 N/A

The deal of Tata Teleservices and NTT Docomo happened at very high

multiples. We can observe that the average multiples of the peer group

company stands very low compared to the deal multiples.

Sales Multiple:

The average sales multiple of its peers is 5.37x compared to the deal of

26.98x (as on 31st March, 2008) of Tata Teleservices’s sales. Even the

highest multiple (Reliance Communication) is at 9.24x. Thus we can

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conclude that Tata Teleservices got very good price for its stake dilution

for NTT Docmo.

EBITDA Multiple:

Again the average EBITDA multiple of its peers is very less, 16.35x

compared to the deal of 99.81x (as on 31st March, 2008) of Tata

Teleservices’s sales. Even the highest multiple (Reliance Communication)

is at 26.74x. This is a huge difference. NTT Docomo paid 6 times more

what it should have paid to Tata.

EBIT Multiple:

EBIT multiple of its peers is 25.5x compared to the deal of 952.96x (as on

31st March, 2008) of Tata Teleservices’s sales. Even the highest multiple

(Reliance Communication) is at 41.02x.

PE Multiple:

The PE multiple for Tata Teleservices is negative as its net income is

negative

Note: The multiples are high on account that Sales and the profitability of

Tata Teleservices is low, inturn giving very high multiples. Its sales stands

at Rs. 1,815.5 Cr. compared to the average sales of Rs. 11,490.6 Cr. of its

peers.

FINDINGS

FINDINGS FROM IMPACT ON SHAREHOLDERS’ WEALTH

The impact on shareholder’s wealth differs from company to

company. But the overall impact on shareholder’s wealth has

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increased and thereby created a positive image of the Tata Group

as a whole.

The average daily share prices of Tata Communications increased

whereas that of Tata Motors decreased but the average daily

turnover decreased in 3 out of 5 group companies.

Except Tata Motors and Tata Steel, the average daily share prices of

all the three remaining companies have risen. In-spite of decreased

average daily share prices in Tata Corus, the volume of trading

increased substantially thereby indicating the trust on the TATA

group as a whole.

Tata Motors 100% acquisition of JLR and Tata Steel’s 100%

acquisition of Corus led to very high cash outflow which was

interpreted by shareholders to be overvalued and they felt that the

payback period for such a large investment would be atleast 4 to 5

years. So they preferred to sell the stock in the short run and invest

their money in other less risky or risk free portfolios (like 5 year

govt T-bills, 5-year bonds with fixed return,etc. or even less risky

scripts.)

The one month pre and post acquisition percentage cumulative

abnormal return of Tata Communications, Tata Corus reduce to a

very high extent because the actual market return was much low as

compared to expected return.

The one month pre and post acquisition percentage cumulative

abnormal return of Tata Motors, Tata Power and Tata

Chemicals increases soon after the acquisition. This was due to

more expected returns than its market return.

FINDINGS FROM RATIO ANALYSIS

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TATA Power’s ratios increases with a moderate value which shows

good sign for the company after the acquisition but price earning and

debt equity decreases which is not a good sign for the company.

Tata steel’s profitability ratios have decreased in post-acquisition as

compared to pre-acquisition due to overvalue of the deal and so

company liabilities increased.

Tata motors’ ratios are very profitable from investors’ point of view as

they will be more profitable to get high earning. Its net profit margin

also increased which is good for the company

Tata chemicals’ operating profit margin reduced by 70% which shows

poor operating performance of the company after acquisition and debt-

equity increased by 47% which is not a welcome move for the

company. Profitability ratio has decreased which shows poor

performance of the company after acquisition

Tata power overall ratio increased which shows a very good

performance of the company.

FINDINGS FROM VALUATION OF ENTERPRISE VALUE MULTIPLE

Tata Corus

Tata Steel and Corus Group deal happened at high multiples compared

to its peers. We can observe that the average multiples of the peer

group company stands half compared to the deal multiples. Even the

highest multiple (Jindal Steel & Power) is at 4.38x. This is almost half of

the deal multiple It can be observed that Tata played very aggressively

as it paid high enterprise value as compared to our analysis. A reason

for Corus to be sold is chance to Bail out of Debt and Financial stress.

TATA Steel Paid 7.02 Times EBITDA of Corus Enterprise Value. The PE

multiple of the deal is very high on the account that the margins of

Corus are very low compared to Tata Steel and other peers the only

company who has high P/E is Jindal steel.

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Tata NTT Docomo

The deal of Tata Teleservices and NTT Docomo happened at very high

multiples. We can observe that the average multiples of the peer

group company stands very low compared to the deal multiples. The

average sales multiple of its peers is 5.37x compared to the deal of

26.98x (as on 31st March, 2008) of Tata Teleservices’s sales.

Even the highest multiple (Reliance Communication) is at 9.24x. Thus

we can conclude that Tata Teleservices got very good price for its

stake dilution for NTT Docomo. The PE multiple for Tata Teleservices is

negative as its net income is negative. EBITDA multiple of its peers is

very less, 16.35x compared to the deal of 99.81x (as on 31st March,

2008) of Tata Teleservices’s sales. Even the highest multiple (Reliance

Communication) is at 26.74x. This is a huge difference. NTT Docomo

paid 6 times more what it should have paid to Tata. The multiples are

high on account that Sales and the profitability of Tata Teleservices is

low, in turn giving very high multiples. Its sales stands at Rs. 1,815.5

Cr. compared to the average sales of Rs. 11,490.6 Cr. of its peers.

CONCLUSION

Except Tata Steel- Corus deal, all the other 4 acquisitions are well

accepted by not only well accepted by the owners of the company

(the shareholders) but even made the entire Tata group come into

the eyes of fortune 500 list. In-fact it ranked at 56 th position at a

global level in 2009

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Expansion through mergers and acquisition is one of the best ways

for any domestic company to step outside the shores of India in an

international market place and acquit itself as a global player

Company can turn into conglomerate in reasonably less time by

capitalizing on its strengths of efficiency and effectiveness by

acquiring relatively poor performing companies as TATA did in

almost all its group of companies

Recent examples of companies which adopted similar pattern of

expansion are Renuka Sugars, Arcelor Mittal, Reliance, Essar Group,

Aditya Birla Group, etc.

One can study any of the above mentioned company and conclude

that the key underlying decision of these companies expanding

quickly and efficiently is their timely decision of merging and

acquiring appropriate companies

BIBLIOGRAPHY

ELECTRONIC

http://www.expressindia.com/latest-news/The-10-largest-MA-deals-

so-far-in-2009/465486

http://business.mapsofindia.com/finance/mergers-acquisitions/

process.html

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http://www.bseindia.com

http://www.nseindia.com

http://www.anagram.co.in/anagram/content/ana_home.jsp

http://www.mergermarket.com

http://www.economictimes.indiatimes.com

http://www.hindustantimes.com/business-news

BOOKS

Mergers and Acquisition, ICFAI UNIVERSITY

J. Fred Weston, Mulherin & Mitchell Takeovers, Restructuring, and

Corporate Governance, Ed. Fourth , Pearson Education

Mergers and Acquisitions Broc Romanek and Cynthia M. Krus

JOURNALS & MAGAZINES:

Journal on Mergers and Acquisition, ICFAI UNIVERSITY

Business Standard

Business India

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