There are several reasons for M&A. M&A has been widely used in developed economies as a growth strategy and is now increasingly getting accepted by Indian businesses as a critical tool of business strategy. It is increasingly becoming the order of the day in businesses especially in rapidlyevolving businesses like information technology, telecommunications, business process outsourcing as well as in traditional businesses. Indian businesses are also rapidly using M&A to grow internationally. Results of the International Business Owners Survey recently carried out by Grant Thornton through 6,900 interviews conducted in 26 countries in Europe, Africa, Asia-Pacific and the Americas, say that 34% of businesses will use M&A as a method to maintain or improve profitability. Businesses are acquired to gain strengths, expand customer base, cut competition or enter into a new market or product segment (European media groups such as Bertelsmann, Pearson, etc. have driven their growth by expanding into the United States through M&A). When HLL acquired Lakme, it got an entry into the cosmetics market through an established brand. Similarly, when Glaxo and SmithKline Beecham merged, they not only gained market share, but eliminated competition between each other.
IBMDaksh is a case in point for acquiring a competence (detailed case study later in this section). Tata Tea’s acquisition of Tetley was made to leverage Tetley’s international marketing strengths (Tetley has a strong market network in 35 countries across the world while Tata Tea’s strengths lie in tea production). Ashok Leyland Information Technology (ALIT) was acquired by Hinduja Finance, a group company, so that it could set off the accumulated losses in ALIT’s books against its profits. In order to maximise value creation it is important to focus on one’s core competencies. It is therefore equally important to plan for selling a business as it is to acquire a business. Grant Thornton’s International Business Owners’ msurvey results show that 56% of businesses will eliminate non-core services activities to maintain or improve profitability. Hence, a key reason for divesting a business could be to focus on core activities (HLL is trying to prune non-core brands to concentrate on power brands through sale of brands like Dalda, Glucovita, etc.). The other reasons could be declining profitability or as an exit opportunity for promoters.
Typically financial investors or venture capitalists look for exit opportunities through a trade sale to a strategic investor at some stage. With the venture capital industry maturinginternationally and in India, currently many such firms are looking at such exit options. According to a survey by Grant Thornton Corporate Finance, over the next six months, almost 65% of mid-market venture capitalists believe they are likely to realise a higher number of disposals than they were able to achieve during the past six months. A business could be demerged to form two different businesses for tax purposes or to correct market under-valuation by creating greater focus in each business. (Ramco Systems demerged by Ramco Industries).
By H.V. HARISH AND C.G. SRIVIDYA: Rationale and Valuation techniques for MERGERS AND ACQUISITIONS
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