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Chapter 1 Introduction CHAPTER 1 INTRODUCTION 1.1 Background of the study Merger and Acquisitions have been increasingly becoming a perfect economic strategy to pace up with the fast-growing economy worldwide. In this space where industrialists and CEOs of concerned companies are interested in profits and expansions, those employed in their companies suffer loss, particularly regarding their own rights to employment. This chapter provides insights as to how increasing competition, strategies for expansion and profit making has led the corporate world to favour Merger and Acquisitions as the most preferable way. 1.2 Increasing competition amongst industries and globalization Every organization today must reinvent itself in order to survive. For this, it might introduce new products in the market, enter into new markets or bring about certain other changes that would ensure its presence in it. No matter, companies keep on trying to gain monopoly of their product in the market. At the same time, it also caters to the profits and loss incurred due to many new entries.3 For instance, the booming rise of Patanjali Ayurveda products endorsed by Baba Ramdev has shaken the Indian markets. Patanjali has a huge range of products ranging from toothpaste, beauty care, body care, sanitation, cereals, to many other household items. Along with that, its criteria of promoting ‗Indian-ness‘ through his products has brought his sales to striking heights. It has been introducing more and more products into the market providing a hard time for others to survive. Patanjali has brought to light the herbal and nature based products. Companies like Emami, Hindustan Unilever Limited, Dabur and Himalaya have been re-inventing their products with a promise of ―herbal age‖4 coming up. Where companies like 3 Muhammad Faizan Malik et. al, ―Mergers and Acquisitions: A Conceptual Review”, International Journal of Accounting and Financial Reporting4 (2014): 520-533. 4AvishekRakshit, ―The Patanjali effect‖, Business Standard, February 8, 2016. 1 Hindustan Unilever Limited (13.2% to 3.2%) and ITC (11-12 % to 7%) are incurring losses, Patanjali is rising high with its 2,000-crore market5. In such cases, the bigger companies try hard to deal with the changed scenario like HUL, Dabur and Himalaya are doing. While, many small industries which are not able to cope up with the increasing competition often end up losing itself to losses. In such cases, the only remedy left for them is to merge with other bigger companies to handle the losses6. Globalization has been a driving force in increasing the competitive environment. Where local traders and companies were self-sufficient with their own range of buyers, now they have expanded to international markets to sell their products. From another point of view, where local traders had a monopoly on the local buyers, now they have to face international companies preying on their valued customers. Globalization entails bringing international market within the local. Bang and Merkeset7 have identified five major factors driving globalization. These are: Low trade restrictions, Low shipment costs, economical benefits of information, communication and technology with rising globalisation and revolution in ICT. Low trade barriers is associated with International Monitory Fund‘s (IMF) reduction of import barriers, welcoming foreign technology and investments which has led countries to enter new international markets. India and China benefited much from this. Lower transportation and communication cost has further increased the flow of goods from one country to the other. The connectivity is further enhanced by increase in Information and Communication Technology (ICT) that enables services, support surveillance etc. to be employed for better management of trade worldwide. With globalization, there have been changes within the size of the market. Bang and Merkeset8 quote a study by Harvard University (HU), according to which, major trade in the world came from Northern parts of America, Western parts of European nations, Japan, African and Latin American countries and East of Asia. In toto, around 2.5 billion people across these countries were accounted as those involved in 5Ibid. 6Muhammad Faizan Malik et. al, 520. 7Erik Knut Bang, and Tore Markeset, ―Identifying the Drivers of Economic Globalization and the Effects on Companies‘ Competitive Situation‖, Advances in Production Management Systems (2011). 8Ibid 2 trade. However, by the year 2000 when India, Soviet Union and China became participants, the number of people involved in trade rose to around 6 billion. ―The World Economic Forum9‖ (WEF) in 1985 consisted of North American and Latin American countries, European, Japan and African countries and East Asian Countries, and the total population from this geography participating in international trade was about 2.5 billion people. By 2000 the erstwhile, USSR, and Asian powers like India and China had become major economic power and its population had expanded to 6 billion people‖. This increase in size means survival becomes more difficult, for the pie has to be shared between more and more people now. This generated another effect which Bang and Merkeset call, ―The pressure effect‖. They observe that globalization has not only led to decreasing in cost of products and services but has also made companies uncertain about their future. The fact that the sellers were able to understand their consumers is no longer appropriate. With increasing availability of choices and diversity of consumers it becomes difficult for the companies to understand their costumers well and that is another major source of pressure for them. Now, when globalization have flung open the barriers of trade between countries, pressure on survival has become manifolds. This has paved way for finding strategies that could help deliver the industries out of this trauma. 1.3 Strategies employed because of stiff competition Tanwar10 discusses three basic strategies given by Harvard Professor Michael Porter. The very first one is the ―Cost leadership strategy‖. In this strategy, the value of the product is kept low. The focus is on a wider distribution with the help of a wide range of promotions. This strategy is successful only if there is an access to raw materials, labour or other inputs in a cost-effective mode. In the case of Indian market, Reliance Jio has been using this strategy to grab consumers towards its own cellular brand. Providing unlimited calls and high-speed internet at a very cheap price has given a blow to Vodafone and Airtel who are now 9 www3.weforum.org/docs/WEF_First40Years_Book_2010.pdf. 10RitikaTanwar, ―Porter‘s Generic Competitive Strategies‖, IOSR Journal of Business and Management (2013), 15: 11-17. 3 bent upon reducing their prices in order to compete with the growing customer share of Reliance Jio. Another strategy given by Porter is ―Differentiation strategy‖11. This strategy focuses upon manufacturing a product or services that is unique in the industry and thus provides an edge over other products in the market. This can be in the form of a unique design, a superior quality, higher technology and so on. As Tanwar notices, the buyer could be the cost bearer of the higher than normal price of the product. Apple is a prominent example of this strategy. Apple brought iPhone with a range that was thought as far more than double the price expected of a mobile phone. It was found beyond the reach of the common man and only affordable to the rich. However, as years passed by and customers began noticing the unprecedented technology of iPhone, it began to create a niche for itself. No matter a mobile which usually costs anything around 10,000-15,000 at its best, costs 60,000 for an iPhone but still has customers growing. Slowly, companies like Samsung which used to sell phones at affordable rates began competing with iPhone by raising the standard of their product along with its price. In the present scenario, brands like Gionee, Vivo, Redmi, One plus along with Samsung and Motorola are bent upon competing the mobile giant iPhone by replicating its metallic body, sleek looks, high resolution camera, similar features and so on. ―Focus Strategy‖12 is another one that Porter discusses in his work. It concentrates on select markets to sell its products. Markets that are low in competition and where the company can have a monopoly. It is also termed as ―niche strategy‖13. Further, cost strategy has two variants as recognized by Tanwar14, ―cost focus‖ and ―differentiation focus‖. In cost focus, the firm enjoys ―cost advantage‖ whereas in differentiation focus it can work upon the required needs of the population thereby staying unique. Tanwar discussed PepsiCo as an example for this particular strategy. While the three strategies appear profitable, Tanwar finds them unsuitable in the long run. She provides many reasons for failure of the three strategies. For cost leadership strategy, she finds flaws such as ―risk of imitation‖, ignoring consumer needs for 11Ibid 12Ibid 13Ibid 14Ibid 4 minimalizing cost of product etc. For differentiation strategy, she found if the price difference is too much then even loyal customers may switch over to other brands to save money and if imitation occurs then the company would straightway go in losses. While regrading focus strategy she finds that higher cost may turn consumers to companies providing broad range of products and if major markets found the focus market producer they might overthrow them easily. In such a case, another important strategy that comes in picture is Mergers and Acquisitions. According to USFSP,15 merger and acquisition is adopted because of the uncertain nature of the market. It is a way of ―buying growth‖ because another fully furnished entity is being joined with another one. Thus, assumed to have prominent gains. It is used for gaining a competitive edge over the market and increase in returns.
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