13. Consolidation at Group Level
Group company mergers are generally initiated with a view to affect consolidation to derive critical mass to cut costs in order to achieve focus and eliminate competition. Such mergers within group are also aimed at restructuring their diverse units to create a more viable unit, to revive sickness, improve borrowed capital. There are few other micro economic reasons to decide on mergers with group consideration as their sole consideration:
- To achieve economies of scale
- To reduce cost of administration and management expenses in companies within same group.
- To bifurcate business by floating separate products this is referred to as demerger.
Example of restructuring and consolidation within the group companies is the case of Nirma Ltd. merging with it, its group companies, Nirma detergents, Nirma soaps and detergents, Shina soaps and detergents and Nirma chemicals. The objective was to make Nirma a strong and resilient corporate entity capable of facing global competition by restructuring management, sizable reduction in management costs and increased professionalism.
Merger of Videocon groups Videocon Narmada Electronics with its flagship company Videocon International led to operating efficiencies by controlling costs under one head.
14. Following Parent’s Footsteps
Some of mergers in India belonging to Multinational giants take place as a result of direct fall out of mergers of their parent companies taking place in their home countries.
Some instances of such mergers are listed below:
- As per the dictates of their parent companies, their two Indian counter parts, visa. The General Electric Company of India Ltd. and The English Electric Company of India Ltd. were merged from Ist April 1992 and changed their name to GEC. Alsthen India Ltd.( just like the GEC, Alsthen N.V. Ltd. formed by merger of two largest industrial groups The General Electric company plc. U.K. and Alcatel Alsthen, France)
- Consequent of the merger of Grand plc. and Guiness plc. In London in Dec. 1997, their Indian offspring’s IDL Ltd. and united Distilleries India Ltd. both liquor companies followed this in India.
- Novartis India (51% of Novartis AG) was formed in India by the merger of Hindustan ciba Giegy and Sandoz India Ltd. in 1996 following the merger of their global parents.
15. Increase Promoter’s Stake
Another motive for merger could be to increase the stake of promoters. Thus, ‘A’ company which is family owned could be merged with ‘B’ company which is a listed company with family stake in it. By the process of merger, the family stake could be consolidated without going through the complications of SEBI guidelines of 4th august 1994. So, mergers could be motivated by the need to enhance promoter’s holdings in post- merger company.
For instance, Nanda family’s holding in escorts Ltd. was 20% before merger. Its merger with Escorts Tractors Ltd. increased their holding by another 20%. Similarly, merger of Reliance Polythylene and Reliance Polypropylene into Reliance Industries swap ratio of 100: 30 and 100:25 respectively resulted in an increase in Ambani’s stake from 23% to 37%. The higher stakes helps to ward off takeover bids.
16. Defensive Maneuver
Merger can be used as shields for protection from raiders. A merger or acquisition can be used by a company as defensive maneuver to resist takeover by another company. If a firm feels that it could be acquired by another firm, it may consider getting involved in a merger game. In doing so, it is able to expand its size, making its acquisition very expensive. Also, by increasing market capitalization of the merged company’s threat of takeover can be tackled. For instance, merger of Jindal Ferro Alloys with Jindal Strips helped Jindal Ferro Alloys improve its share price from Rs. 65 to Rs. 170 and market capitalization of Rs. 160 crores to Rs. 550 crores with the help of swap ratio of forty five Jindal strips for every hundred Jindal Ferro alloy shares.
17. Acquire Global Competitive Strength
With competitive forces resulting from globalization and deregulation, many industries have forced most corporate to consolidate. European and Asian market have become more receptive to merger and acquisitions. On the one hand, European countries face competitive pressures from creation of single Euro currency, on the other hand, Asian crisis has forced most Asian nations to look to the west for technological and capital support. Hence, merger are planned to acquire global competitive strength.
After the pitched battle against Multi National Company (MNC) in domestic arena, Indian companies have also felt the need of becoming global. The globalized business environment thus demands that Indian industries also restructured. Its size and capacities are small as compared to MNC’s. Industries have to increase its capacity, induct new technology and development markets. Globalization has thus resulted in major implications for industrial competitiveness by lowering the cost of labour and opening markets to a great number of producing firms. To meet the opportunities thrown open by fast growing world, generic market and to acquire global competitive strength. Cross border mergers and acquisitions are being resorted to such mergers provide opportunities for taking up larger projects. Also the merged company is able to compete more effectively with increased size.
The recent acquisition of Tetley, the world’s largest Tea brands by Tata tea, the world’s largest integrated tea company has been driven by the fact that Tetley fits perfectly into Tata tea’s globalization drive and could be a perfect launch vehicle to achieve greater synergies in global arena. The acquisition has brought with it, greater market penetration, helped improve operating efficiencies and resulted in instant expansion of product lines of Tata tea —Tetley combines.
The process of globalization and increasing integration of Indian economy with the international market will have its impact sooner or later.
Ansoff suggested a number of reasons that are attributed to the occurrence of mergers and acquisitions. For example, it is suggested that mergers and acquisition are intended to:
- Limit competition
- Utilize under-utilization market power
- Overcome the problem of slow growth and profitability in one’s own industry
- Achieve diversification
- Gain economies of scale and increase income with proportionately less investment
- Establish a transnational bridgehead without excessive start-up costs to gain access to a foreign market
- Utilize under-utilized resources-human and physical and managerial skills
- Displace existing management
- Circumvent government regulations
- Reap speculative gains attendant upon new security issue or change in P/E ratio
- Create an image of aggressiveness and strategic opportunism empire building and to amass vast economic powers of the economy.
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Mergers and Acquisitions are conditions almost always used together in the corporate world to make reference to two or more organizations becoming a member of to type one business. A merger happens when two organizations, often of about the same size, accept to progress and are available as a single new organization rather than stay independently managed. This kind of action is more particularly generally known as a “merger of is equal to.” On the other hand, when one organization takes over another organization and clearly determines itself as the new proprietor, the purchase is known as an acquisition. Acquisition represents two imbalanced organizations becoming one and the financing can include a money and debt mixture, all money, shares, or other value of the organization.