Page 36 - Banking Finance December 2020

ARTICLE

However, on an average, across the most commonly c) The management of the acquiring firm must learn to
studied variables, acquiring firms' financial performance be resilient, patient and be able to adopt to the change
does not positively change as a function of their owing to ever-changing business dynamics in the
acquisition activity. Therefore, an additional motive for industry.
merger and acquisition that may not add shareholder d) The important being the human amalgamation. The
value includes:
added workforce from the merged / acquired entity
9) Diversification: While this may hedge a company must be provided with conducive atmosphere to adapt
against a downturn in an individual industry it fails to with the new work culture. Many a time while all
deliver value, since it is possible for individual financial and other business factors are well rehearsed
shareholders to achieve the same hedge by diversifying and managed, HR issues are hanged loosely. This may
their portfolios at a much lower cost than those lead to conflict within work force and demoralization
associated with a merger. among employees capable enough to ruin all other
10) Manager's hubris: Managerial hubris is the unrealistic expected benefits from the consolidation.
belief held by managers inbidding firms that they can
manage the assets of a target firm more efficiently than Some of the top Merger & Acquisition
the target firm's current management. Managerial
hubris is one reason why a manager may choose to deals in India
invest in a merger that on average generates no profits. TATA STEEL-CORUS: Tata Steel is one of the biggest ever
Manager's overconfidence about expected synergies Indian's steel company and the Corus is Europe's second
from merger might results in overpayment for the target largest steel company. In 2007, Tata Steel's takeover
company. European steel major Corus for the price of $12.02 billion,
11) Empire-building: Empire-Building refers to the making the Indian company, the world's fifth-largest steel
tendency of countries and nations to acquire resources, producer. Tata Sponge iron, which was a low-cost steel
land, and economic influence outside of their borders producer in the fast developing region of the world and
in order to expand their size, power, and wealth. Corus, which was a high-value product manufacturer in the
Managers have larger companies to manage and hence region of the world demanding value products. The
more power. acquisition was intended to give Tata steel access to the
European markets and to achieve potential synergies in the
12) Manager's compensation: In the past, certain
executive management teams had their payout based areas of manufacturing, procurement, R&D, logistics, and
back office operations.
on the total amount of profit of the company, instead
of the profit per share, which would give the team a
perverse incentive to buy companies in order to increase VODAFONE-HUTCHISON ESSAR: Vodafone India Ltd. is the
second largest mobile network operator in India by
the total profit while decreasing the profit per share
(which hurts the owners of the company, the subscriber base, after Airtel. Hutchison Essar Ltd (HEL) was
one of the leading mobile operators in India. In the year
shareholders).
2007, the world's largest telecom company in terms of
revenue, Vodafone made a major foray into the Indian
Four important considerations should be taken into
telecom market by acquiring a 52 percent stake in Hutchison
account:
Essat Ltd, a deal with the Hong Kong based Hutchison
a) The company must be willing to take the risk and
Telecommunication International Ltd. Vodafone main motive
vigilantly make investments to benefit fully from the
in going in for the deal was its strategy of expanding into
merger as the competitors and the industry take heed
quickly. emerging and high growth markets like India. Vodafone's
purchase of 52% stake in Hutch Essar for about $10 billion.
b) To reduce and diversify risk, multiple bets must be Essar group still holds 32% in the Joint venture.
made, in order to narrow down to the one that will
prove fruitful. HINDALCO-NOVELIS: The Hindalco Novelis merger marks

36 | 2020 | DECEMBER | BANKING FINANCE