MERGERS & ACQUISITIONS

SUBMITTED BY SIDHARTH BHAMBHANI DIV-A SEMESTER- VI SUBMITTED TO MS. BHARTI WADHWA

ORGANISATION SYMBIOSIS CENTRE FOR MANAGEMENT STUDIES, NOIDA

ASSIGNMENT- 1 TYPES OF MERGERS

1. Horizontal Mergers

Horizontal mergers involve companies that offer the same products or services to the same kinds of customers. Horizontal mergers are types of mergers that involve companies in direct competition with one another. Often horizontal mergers are considered hostile, which means a larger company "takes over" a smaller one in more of an acquisition than a merger. Horizontal mergers offer "economies of scale," meaning that average costs decline as the company does a greater volume of business. Such mergers also increase market share. And they offer opportunities for cost savings by eliminating redundancies: Where the original companies each needed their own purchasing department, advertising budget, benefits program and so on the merged firm only requires one.

2. Vertical Mergers

A vertical merger combines two companies that are involved in producing the same goods or services but at different stages of production. When a company merges with either a supplier or a customer to create an extension of the supply chain, it is known as a vertical merge or integration. An example of a vertical merger may be a steel company merging with a car manufacturer. The steel company was previously a supplier to the car manufacturer but after the merge would be part of the same company. Vertical mergers help prevent business disruptions: The manufacturing operation no longer has to worry about obtaining enough plastic, while the plastics operation gets a steady customer. Cost savings through eliminating redundant functions are also possible. 3. Conglomerate Mergers

Concentric mergers, also called congeneric mergers, occur between companies within an industry that serve the same customers but don't offer them the same products or services. There is no relationship between the type of business one company is in and the type the other is in. The merger is typically part of a desire on the part of one company to grow its financial wealth. By merging with a completely unrelated, the resulting conglomerate gains a revenue stream in many types of industries. Concentric mergers diversify the combined company's offerings and allow the firm to benefit from areas of shared expertise. These mergers can also drive new business. Horizontal Merger Merger of and Satyam Computer Services Ltd.

Satyam Computer Services Ltd is an Indian IT services company based in , . Tech Mahindra which was ranked #5 in India's software services firms and overall #161 in Fortune India 500 list for 2011, is a is a part of Mahindra Group conglomerate with headquartered at , India. Tech Mahindra Limited is a leading global systems integrator and business transformation consulting organization, focused primarily on the telecommunications industry. Satyam unveiled its new brand identity Mahindra Satyam subsequent to its takeover by the Mahindra Group's IT arm on 13 April 2009. On June 24, 2013 Tech Mahindra and Mahindra Satyam merging process completed and the name of the parent company was retained for the merged entity with a new Logo and motto. Merger was delayed due to various disputes both in India and abroad. There were quite many problems in the areas of legal and judicial issues, diverse expertise of the merged entities and also the culture between two companies.

Pre- Merger Scenario at Satyam Computer Services Ltd:

B Ramalinga Raju created Satyam Computer Services Ltd. as a private limited company on 24th June 1987 which became public in 1991 and turned into world‟ s first ISO 9001:2000 company to be certified 2 by BVQI by 2001. Its customers included World Bank, General Electric Company and its affiliates, State Farm Mutual Automotive Insurance Company, Megasoft Inc., Caterpillar Inc.

World Bank announced on December 23, 2008 that Satyam has been barred Satyam from business with World Bank for eight years for providing Bank staff with “improper benefits” and charged with data theft and bribing the staff. Share prices were falling drastically. Ramalinga Raju resigns.

As NDTV informed, over Rs. 70 billion accounting fraud of non-existent cash in the company's books was disclosed. Three more independent directors Vinod Dham, Krishna Palepu and Rammohan Rao resign.Satyam's investment banker DSP Merrill Lynch terminated contract. On Jan 8, 2009 Satyam's bankers Citibank freeze its accounts. On January 22, 2009, Satyam‟ s CFO Srinivas Vadlamani confessed that by inflating the number of employees by 10,000, the company was earning around Rs 20 crore per month from the related but fictitious salary accounts. Pre- Merger Scenario at Tech Mahindra:

Tech Mahindra Limited is an Indian multinational provider of information technology (IT), networking technology solutions and business support services (BPO) to the telecommunications industry.[3] Tech Mahindra is a part of the Mahindra Group conglomerate. It is headquartered at , India.Tech Mahindra is ranked #5 in India's software services firms and overall #111 in Fortune India 500 list for 2012Tech Mahindra has operations in more than 30 countries with 17 sales offices and 13 delivery centres.

Its activities spread across a broad spectrum, including Business Support Systems (BSS), Operations Support Systems (OSS), Network Design & Engineering, Next Generation Networks, Mobility Solutions, Security consulting and Testing.

After the Satyam Episode of 2008-09, Tech Mahindra bid for Satyam Computer Services, and emerged as a top bidder with an offer of Rs 58.90 a share for a 31 per cent stake in the company, beating a strong rival Larsen & Toubro.

Tech Mahindra Acquired Satyam, Renamed it As Mahindra Satyam:

On Feb 19, 2009 when the share price was Rs. 46.25, in order to increase authorized share capital to Rs. 2.8 billion from Rs. 1.6 billion, company Law Board decided to identify investors to get hold of 51% stake in company through open, transparent and competitive process from those organizations that are having net assets in excess of $150 million. Investors need to provide proof of funds worth Rs. 15 billion. The companies interested in acquiring Satyam include L&T, Cognizant, Wilbur Ross and Tech Mahindra. The bidding process took place on Mar 11, 2009 under the observation of Former chief justice of Supreme Court S.P. Bharucha. Satyam intimates SEBI was informed about bidding process. Apr 2, 2009 when the share price was Rs. 39.90 Satyam modifies bidding process; goes for open auction and on Apr 13, 2009 when share price Rs. 48.85 Venturbay Consultants, a subsidiary of Tech Mahindra, turned out as the highest bidder for Rs.58per share. Thus Tech Mahindra wins bid to acquire 51% stake in Satyam.

In the board of the new company, Tech Mahindra CEO and MD Vineet Nayyar was appointed as the Vice Chairman , its international operations Head CP Gurnani as CEO and Subramaniyam Durgashankar as CFO. Deloitte Haskins & Sells was chosen as the company‟ s statutory auditors. The board of Tech Mahindra and Mahindra Satyam approved the merger on March 21, 2012. Reasons for Merger:

 To create new strategies and deep competencies and a balanced mix of revenues from Telecom, Manufacturing, Technology, Banking, Insurance etc.  To leverage expertise in mobility, system integration , deliver of large amount of information to diverse clients around the globe.  To create economies of scale, sourcing benefits, and standardization of business processes.

Investment Bankers:

Ernst and Young acted as merger advisors. Morgan Stanley and JPMorgan were bankers to the merger process. AZB Partners acted as legal advisors. Enam Securities pvt ltd and Barclays Bank acted as advisors to Tech Mahindra.

Challenges:

Each and every organization has a unique characteristics, policies which form work culture of that particular organisation. Whenever employees settle in the culture, they feel a sense of belongingness to the company. Many a times it does happen that when culture undergoes some kind of changes, due to some reason or other, it might lead to demoralizing sometimes even devastating situations. During a merger or acquisition also culture can change and employees from the acquired company might face too much problem and can resist in accepting the new culture. It might lead to demotivation, frustration, lower productivity etc., which can affect a company to a great extent. Only 25,429 employees were associated with Tech Mahindra. As compared to Tech Mahindra, Satyam was a larger in size with more number of employees. After the acquisition total staff strength became 85,167. To handle such a huge workforce was a great challenge. At the same time Mahindra and Mahindra group had to gain the customers‟ faith on Mahindra Satyam and make it run profitably again.

Status after the merger:

On January 3rd, 2014 the share price of Tech Mahindra was Rs.1836.05. On the basis of this it can be assumed the company is moving forward at a very rapid rate. Tech Mahindra and Satyam together expected to post revenue of about $2.7 billion in fiscal 2013. The vision of Tech Mahindra is to be among the top three firms in India in the business segments it is focusing on. Its aspires to reach revenue target of $5 billion by 2015. To attain this vision the company is initiating to reappoint its former employees in the mid-to-senior management levels who know the organization in and out. The merger was successful. Vertical Merger Merger of Reliance Gateway with FLAG Telecom Ltd.

Reliance Infocomm Ltd.,.India's largest mobile service provider, is a part of the Reliance group founded by Shri Dhirubhai H. Ambani (1932-2002). Reliance Infocomm has established a pan-India, high-capacity, integrated (wireless and wireline) and convergent (voice, data and video) digital network, to offer services spanning the entire Infocomm value chain - infrastructure, services for enterprises and individuals, applications and consulting. The Reliance Group is India's largest business house with total revenues in the financial year ended March 2003 of Rs 800 billion (US$ 16.8 billion), cash profit of over Rs 98 billion (US$ 2.1 billion), net profit of over Rs 47 billion (US$ 990 million), market capitalisation Rs 974 billion (US$21.7 billion) and exports of Rs 119 billion (US$ 2.5 billion).

FLAG Telecom has an established customer base of more than 180 leading operators, including all of the top ten international carriers. FLAG owns and manages an extensive optical-fiber network spanning four continents and connecting key business markets in Asia, Europe, the Middle East and the USA. FLAG also owns and operates a low latency global MPLS based IP network, which connects most of the world's principal international Internet exchanges. FLAG offers a focused range of global products, including global bandwidth, IP, Internet, Ethernet and co-location services.

Pre-Merger:

RELIANCE Infocom had announced its plan to acquire FLAG Telecom, an international provider of wholesale telecom network transport and communications, for an aggregate amount of $207 million (around Rs 1,000 crore) on 15th October, 2003.

The Agreement and Plan of Amalgamation for the acquisition was signed between Reliance Gateway Net Pvt Ltd, a fully owned subsidiary, and FLAG Telecom Group.

An announcement by FLAG said that this works out to $95.61 per share, a premium of more than 50 per cent over closing price of the company which is listed on the London Stock Exchange and Nasdaq.

This is the first international acquisition by Reliance and the largest such international acquisition in the services sector by an Indian company, according to Mr Anil Ambani, Vice-Chairman and Managing Director, . The agreement is for the acquisition of 100 per cent of the fully diluted equity of the company.

The acquisition is subject to regulatory approvals and FLAG shareholders' approval.

Reasons for Merger:

Reliance believes that the acquisition price is "very attractive and offers great value for FLAG shareholders". FLAG has 50,000 km of undersea optic fibre cable which will complement Reliance Infocomm's vast 3G digital network in the country. FLAG would be a very compatible horse in the Reliance stable. FLAG is understood to have 10 gbps of international bandwidth coming into the country.

Reliance believes that its acquisition price of US$207 million is very attractive and offers great value to Flag's shareholders.

Investment Bankers:

Advisors to Reliance on this transaction are Davis Polk & Wardwell, legal advisors and Deutsche Bank, financial advisors. Advisors to FLAG Telecom are Akin Gump Strauss Hauer & Feld LLP, legal counsel and Houlihan Lokey Howard & Zukin (Europe) Limited, financial advisors.

Challenges:

VSNL had had the exclusive rights to market FLAG's capacity in India under an agreement through which it bought some bandwidth for 25 years.

FLAG's submarine cable's landing station is at the VSNL gateway in Mumbai and is owned by VSNL, now a Tata group company.

The agreement an important first step towards concluding the acquisition of Flag, is subject to certain conditions, including the receipt of regulatory approvals and the approval of Flag's shareholders. A meeting of Flag's shareholders was expected to be held in December 2003 to approve the amalgamation. Post-Merger:

This acquisition, when consummated, will be the first international acquisition by Reliance and the largest such international acquisition in the services sector by an Indian company. Flag's global fiber optic network will complement Reliance's next generation digital network in India and enable Reliance to serve its customers worldwide more effectively by offering end to end solutions.

Flag is in the business of providing bandwidth through its undersea cable network. It owns and operates a global telecom network comprising of over 50,000 kms of undersea fiber optic cable that spans four continents and connects the key regions of Asia, Europe, Middle East and the USA. Through its network, Flag offers a variety of telecom products and services to its customers consisting of major telecom carriers, Internet service providers, and other bandwidth intensive users such as broadcasters.

Reliance Infocomm Ltd. is a part of the Reliance group founded by Shri Dhirubhai H. Ambani (1932-2002) and is India's largest business house with total revenues of Rs 80,000 crore (US$ 16.8 billion), cash profit of over Rs 9,800 crore (US$ 2.1 billion), net profit of over Rs 4,700 crore (US$ 990 million) and exports of Rs 11,900 crore (US$ 2.5 billion).

The merger was successful. Conglomerate Merger Merger of P&G and Gillette

On January 28, 2005, Cincinnati-based P&G announced its investment deal to acquire Boston-based Gillette for $57 bn to become the world's largest consumer goods company. The annual sales of the combined entity would be $60.7 bn. After its purchase of Gillette, P&G would have 21 billion-dollar brands with a market capitalization of $200bn.

Pre-Merger:

According to the deal, P&G will be paying 0.975 for each share of Gillette, valuing the acquisition at a 20% premium to shareholders of Gillette. The shareholders of P&G were apprehensive of the company's share prices being diluted. To avoid such problems, P&G had promised to buy back its shares, worth $18-$22 bn, over the following 12-18 months. P&G planned to pay Gillette 40% in cash and the rest 60% in stock. The extra 20% premium paid by P&G for Gillette's stock was going to make it 20% more difficult for the deal to pay dividends to stock holders. By acquiring Gillette, P&G will be adding the world's best shaving products to its portfolio. This is what P&G's CEO A G Lafley thinks is necessary to overtake their close competitors, particularly in developing countries.

According to The Wall Street Journal, Gillette chairman and chief executive officer James Kilts will earn more than $153 million if the deal goes through, including gains on his stock options and stock rights, an estimated $23.9 million payment from P&G, and a change-in control payment of $12.6 million. The transaction, which is subject to certain conditions including approval by Gillette's and P&G's shareholders and regulatory clearance, was expected to close in the fall of 2005.

Post-Merger:

Both the firms' CEOs termed the deal as a friendly move, and added that it would benefit both the firms equally. According to analysts, the merging companies had many similarities a corporate history that is more than a century old, billion-dollar brands, and pioneering consumer product marketing initiatives. The merger was also said to have been based on a different model where innovation was the focus rather than scale. It was called a unique case of acquisition by an innovative company to expand its product line by acquiring another innovative company. Analysts described the merger as a "perfect marriage". Challenges:

Future Gillette retirees might suffer as they faced diminished medical benefits. In addition, 6,000 layoffs were expected to be among Gillette workers in Boston, where the company had its world headquarters. As a result of the merger, another concern was the impact on the city of Boston regarding the number of empty floors in the 52-story Prudential Building, adding to the city’s existing merger-driven glut of sublease office space. The board of directors had also been challenged on the valuation they had placed on the merger.

Some analysts felt that regulatory concerns raised by the merger could relate to product overlaps between both companies, in order to determine whether the combined firm would have the power to set prices. There were concerns that strong overlaps in toothbrushes and toothpaste could result in regulators seeking some divestitures, although P&G would like to keep as many Gillette brands as it can.

Reasons for Merger:

The P&G-Gillette merger is one of the biggest mergers in the history of the consumer goods industry. The merger gives P&G access to new products, markets and change the dynamics of the consumer goods industry.

The Gillette Company was a market leader in several global product categories including blades and razors, oral care and batteries. Total sales for Gillette during its pre-acquisition year ended December 31, 2004, were $10.5 billion.

Gillette and P&G have similar cultures and complementary core strengths in branding, innovation, scale and go-to-market capabilities, making it a terrific fit.

Investment Bankers:

In connection with the merger, the Procter & Gamble board of directors considered the opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Procter & Gamble’s financial advisor.

Goldman, Sachs & Co. and UBS Securities LLC have rendered their respective opinions to the Gillette board of directors. Post-Merger:

On October 1, 2005, P&G completed the acquisition of The Gillette Company. Pursuant to the acquisition agreement, which provided for the exchange of 0.975 shares of The Procter & Gamble Company common stock, on a tax-free basis, for each share of The Gillette Company, P&G issued 962 million shares of The Procter & Gamble Company common stock. The value of these shares was determined using the average Company stock prices beginning two days before and ending two days after January 28, 2005, the date the acquisition was announced. P&G also issued 79 million stock options in exchange for Gillette’s outstanding stock options. Under the purchase method of accounting, the total consideration was approximately $53.4 billion including common stock, the fair value of vested stock options and acquisition costs. This acquisition ultimately resulted in a new Grooming reportable segment. The Gillette oral care, batteries and personal care businesses were subsumed within the Health Care, Fabric Care and Home Care, and Beauty reportable segments, respectively.

The merger was successful.