PROJECT REPORT

ON

MERGERS AND ACQUISITIONS IN TELECOM SECTOR IN

INDIA

SUBMITTED TO

KUMAUN UNIVERSITY,NAINITAL

IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION (2010-12)

UNDER THE GUIDANCE SUBMITTED BY

MR. HITESH PANT JYOTSANA BHATT

ROLL NO: 101636

ENROLLMENTNO:0636349

DEPARTMENT OF MANAGEMENT STUDIES, BHIMTAL

KUMAUN UNIVERSITY, NAINITAL

2012

ACKNOWLEDGEMENT

The writing of this project has been one of the significant academic challenges I have

faced and without the support, patience, and guidance of the people involved, this task

would not have been completed. It is to them I owe my deepest gratitude. It gives me

immense pleasure in presenting this project report on “MERGERS AND

ACQUISITIONS IN TELECOM SECTOR IN INDIA”

This project would not have been possible without the help of librarian of our

college who provided us the necessary books .And I also want to thank the H.O.D

Prof. P.C. KAVIDAYAL of our college for his support and guidance through out the

study.

I acknowledge my thanks to MR. HITESH PANT, my project guide and all faculties,

for their support ,constant advise, constructive criticism, able guidance ,constant

encouragement and the right amount of personal touch ,which enabled the project in

its present state.

I would like to thank My Parents & Brother who directly or indirectly were the

constant source of support which lead to successful completion of this report.

Last but not the least I would thank Almighty for showering his blessings and helping

me at each step.

(Jyotsana Bhatt)

DECLARATION

I hereby declare that project titled “MERGERS AND ACQUISATIONS IN

TELECOM SECTOR IN INDIA” was done during the winter vacation after the

third semester under the guidance of “MR. HITESH PANT”. This project has been

undertaken as a partial fulfillment of the requirement for the award of the degree of

MBA of KU Nainital.

Further I declare that information & findings of this report are based on the data

collected by me. It is my original work. I have neither copied from any report meant

for any other degree / diploma course nor have submitted for award of any degree/

diploma or similar program elsewhere

SIGNATURE OF SIGNATURE OF STUDENT FACULTY GUIDE

…………………………. …………………………. MR. HITESH PANT JYOTSANA BHATT Roll no – 101636 Enrollment no - 0636349

EXECUTIVE SUMMARY

This project deals with the study of Mergers And Acquisitions In Telecom Sector

which comprises of information on various types of merger and acquisition.

This project, in a sense is an outgrowth of my learning experience. In my academic

interaction with teacher, friends and practicing financial executives. I have understood

the merger and acquisition mania to a great extent , the project in a way, represents a

modest attempt to provide information on the subject.

(Jyotsana Bhatt)

CONTENTS

CHAPTER 1

INTRODUCTION…………...………………………………………….06

IMPORTANCE OF MERGERS & ACQUISITIONS.............................10

CHAPTER 2

REVIEW OF LITERATURE…………………………………...………11

CHAPTER 3

OBJECTIVES OF THE STUDY……………………………………….17

CHAPTER 4

CHALLENGES & REGULATION OF M & A………………………..18

CHAPTER 5

RESEARCH METHODOLOGY………………..……………………...23

PROBLEM STATEMENT……………………………………………..24

DATA COLLECTION & ANALYSIS…………………………………25

CHAPTER 6

MERGERS AND ACQUISITIONS THEORITICAL CONCEPTS……26

RISKS ASSOCIATED WITH MERGERS……………………………..39

CHAPTER 7

FINDINGS AND ANALYSIS…….……………………………………41

CHAPTER

CONCLUSIONS………………………………………………………..49

BIBLIOGRAPHY………………………………………………………50

CHAPTER 1

INTRODUCTION OF MERGER & ACQUISITION

Mergers and acquisitions in telecom sector have become familiar in the majority of all

the countries in the world. A large number of domestic telecom industries all over the

world are engaged in merger and acquisition activities.Mergers and acquisitions

encourage telecom industry to gain global reach and better synergy and allow large

telecom industry to acquire the stressed assets of weaker industry.

The word “Telecommunication” is a compound of the Greek prefix “tele” meaning

'far off', and the Latin “communicare”, meaning 'to share'. In its current usage, it

refers to transmission of signals over a distance for the purpose of communication. In

early days, communication between persons took place by means of drums, smoke

signals, flags, etc. Emerging from such humble beginnings, the means now involve

sophisticated high-speed, submarine optical cables laid on ocean floors and artificial

satellites circling the Earth in space. As the demand for signal transmission has

increased, the speed of transmission has also increased. Recently, scientists at

Karlsruhe Institute of Technology in Germany have succeeded in transmitting 26

terabits (equal to about 700 DVDs or about 4 million average paperback books) of

data per second at the distance of 50 kilometers.

The telecommunications industry has impact on every aspect of our lives, from the

simple reality of enabling telephonic communication between people in different

locations to enabling supply-chains to work seamlessly across continents to create

products and fulfill demands. Telecommunication services are now recognized as a

key to the rapid growth and modernization of the economy and an important tool for

socio-economic development for a nation.

Telecommunications in India can be traced back to the 19th century when the British

East India Company introduced telegraph services in India. The past two decades

have been considered as the golden period for the telecommunications industry in

India with exponential growth and development in terms of technology, penetration,

as well as policy. All this has paralleled with the liberalization in this sector and huge

investment by both domestic and foreign investors.

AN OVERVIEW

The modern system of communications in India started with the establishment of

telegraph network. In order to ensure telegraph network‟s exclusivity and establish

government control over electronic communications, various telegraph statutes were

enacted by the Government of India which laid the foundation of the present

regulatory framework governing telecommunications (both wired and wireless). In

early days, India witnessed increasing number of wired telephone connections. Even

when wireless communication was introduced in the form of cellular phones, it was

not immediately accepted by the Indian masses, mainly on account of high price of

cellular phones as well as high tariff structure prevalent at that point in time.

Gradually, with the price of cellular handset as well as mobile (wireless) tariff

reducing there was increasing adoption of wireless communications. Today the Indian

telecom industry is already witnessing the lowest telecom tariff globally.

Like elsewhere, telecommunications in India started as a state monopoly. In the

1980s, telephone services and postal services came under the Department of Posts and

Telegraphs. In 1985, the government separated the Department of Post and created the

Department of Telecommunications (“DoT”). As part of early reforms, the

government set up two new public sector undertakings: Mahanagar Telephone Nigam

Limited (“MTNL”) and Videsh Sanchar Nigam Limited (“VSNL”). MTNL looked

after telecommunications operations in two megacities, Delhi and Mumbai. VSNL

provided international telecom services in India. DoT continued to provide

telecommunications operations in all regions other than Delhi and Mumbai. It is

important to note that under this regime, telecommunication services were not treated

to be a necessity that should be made available to all people but rather a luxury

possible for select few. In the early 1990s the Indian telecom sector, which was

owned and controlled by the Indian government, was liberalized and private sector

participation was permitted through a gradual process2. First, telecom equipment

manufacturing sector was completely deregulated. The government then allowed

private players to provide value added services (“VAS”) such as paging services. In

1994, the government unveiled the National Telecom Policy 1994 (“NTP 1994”).

NTP 1994 recognized that existing government resources would not be sufficient to

achieve telecom growth and hence private investment should be allowed to bridge the

resource gap especially in areas such as basic services. As markets and telecom

technologies started converging and the differences between voice (both fixed and

wireless) and data networks started blurring, the need for developing the modern

telecom network became an immediate necessity. Accordingly, private sector

participation was allowed in basic services.The government anticipated that a major

part of the growth of the country‟s GDP would be reliant on direct and indirect

contributions of the telecom sector and accordingly the need for a comprehensive and

forward looking telecommunications policy was felt. This then paved way for New

telecom Policy 1999 (“NTP 1999”) which largely focused on creating an environment

for attracting continuous investment in the telecom sector and allowed creation of

communication infrastructure by leveraging on technological development. The main

objectives and targets of NTP 1999 were as follows:

Availability of affordable and effective communications for citizens;

Strive to provide a balance between the provision of universal service to all

uncovered areas, including the rural areas and the provision of high-level

services capable of meeting the needs of the country‟s economy;

Create a modern and efficient telecommunications infrastructure taking into

account the convergence of IT, media, telecom and consumer;

Protect the defense and security interests of the country.

NTP 1999 allowed private operators providing cellular and basic services to migrate

from a fixed license fee regime to a revenue sharing regime which made it financially

viable for such operators to function in the market. Most importantly, the government

recognized the necessity to separate the government's policy wing from its operations

wing so as to create a level playing field for private operators. Accordingly the NTP

1999 directed the separation of the policy and licensing functions of DoT from the

service provision functions. The Government corporatized the operations wing of

DoT in October 2000 and named it as Bharat Sanchar Nigam Limited (“BSNL”)

which operates as a public sector undertaking. Thereafter in 2002, the monopoly of

VSNL also came to an end.

Mergers and acquisitions in the telecommunication industry have grown by

substantial proportions in India since the mid 1990s. Economic reforms undertaken in

the 1990s in India opened up the telecom sector which used to be a predominantly

state controlled one. Private investment in the telecom sector in India not only

facilitated the rapid expansion of telecom services in the urban, as well as rural parts

of India, it also provided the opportunity for mergers and acquisitions in this sector.

Reasons For The Growth Of Indian Telecommunication Industry

In recent times mergers and acquisitions in the Indian telecommunication industry

have been driven by a few important factors -

The inclusion of internet (including broadband) and cable services in the

telecom sector.

New technologies like wireless fixed phone services.

Deregulation in the telecom sector.

Important Mergers & Acquisitions In The IndianTelecommunication

Industry

The first merger and acquisition deal in the Indian telecom industry occurred in 1998

between Max Group of Delhi and Hutchison Group of Hong Kong. 41% of stakes of

Orange services in Mumbai was acquired by Hutchison from Max for 560 million US

Dollars. In the years that followed several other mergers and acquisitions took place

in the telecommunications sector in India. Important ones among them include -

Acquisition of Command Cellular Services in Kolkata by Hutchison from

Usha Martin in 2000.

Acquisition of 79.24% stakes of Aircel, Chennai by Sterling group from RPG

group for Rs. 210 Crores in 2003.

Acquisition of 48% stakes in Idea cellular by Aditya Birla group from the Tata

group in 2005.

Acquisition of Hutch services in India by Vodafone in 2006.

Amalgamations

In March 2011, the Vodafone Group announced that it would buy 33 percent stake in

its Indian joint venture for about 5 billion dollars after the Essar Group sold its

holding and exited Vodafone. Healthcare giant Piramal Group too, bought about 5.5

percent in the Indian arm of Vodafone for about 640 million dollars. This brings

Vodafone’s current stake to about 75 percent.

IMPORTANCE OF THE STUDY

The factors inducing mergers and acquisition include technological progress, excess

capacity, emerging opportunities and deregulation of geographic, functional and

product restrictions. It may also bring the performance of telecom sector.

The following are the important aspects for staying in the market:

Competition from global majors.

Competition from new Indian telecom industries.

Disinter mediation and competition resulting into pressure or spread.

Qualitative change in the industries paradigm.

The competencies required from a would be sharper information technology

and knowledge centric.

In order to compete with the new entrants effectively, Indian telecom industries need

to posses matching financial muscle, as a fair competition is possible only among the

equal. If Indian telecom industries are to be made more effective, efficiency and

comparable with their counterparts from abroad, they would need to be more

capitalized, automated and technology oriented, even while strengthening their

internal operations and systems. Further in order to make them comparable with their

competitors from abroad with regard to the size of their capital and asset base, it

would be necessary to structure these industries. Merger and acquisitions are

considered useful to achieve the requisite size in the short run.

CHAPTER 2

REVIEW OF LITERATURE

Review of Previous Study

Market Measures-Based Studies

Gallet (1996) examined the relationship between mergers in the U.S. steel industry

and the market power. The study employed New Empirical Industrial Organization

approach which estimates the degree of market power from a system of demand and

supply equations. The study analyzed yearly observations over the period between

1950 and 1988 and results have revealed that in the period of 1968 to 1971 merges did

not have a significant effect on market power in the steel industry, whereas mergers in

1978 and 1983 did slightly boost market power in the steel industry.

Rau and Vermaelen (1998) investigated the controversial issue of under performance

after mergers and over performance after tender offers through examining the effect

of firm size and low book-to-market value on the post- acquisition performance to

pinpoint reasons behind under performance in mergers and over-performance in

tender offers if any. They also investigated the effect of the payment method

(Cash/Stock) on the post-acquisition performance. The study employed a sample of

3169 mergers and 348 tender offers and concluded that after adjusting for firm size

and book-to-market ratio, acquirers in mergers under perform by a significant 4%

over three years, while acquirers in tender offers earn a significant positive abnormal

return of 9% on average. A fact that destroys the belief that under-performance is due

to un-adjusting for book-to-market ratio. The study has interpreted under-performance

as a result of decision makers’ actions, where they over extrapolate the past

performance of the bidder with low book-to-market ratios "glamour firm" and

overestimate its abilities and hence approve the acquisition. On the other hand, value

bidders companies with poor track record or with high book-to-market ratio tend to be

more prudent and are not motivated by hubris when approving an acquisition. The

study failed to interpret the effect of methods of payment in cases where the long-run

abnormal return is negative in share-financed acquisition and positive in cash

financed acquisition. However, the study did not provide interpretation for the over-

performance of tender offers compared to mergers.

Tse and Soufani (2001) examined the wealth effects on both acquiring and acquired

firms using a sample of 124 transactions over the period 1990 to 1996. The sample is

sub-divided into two merger eras to examine the effect of the prevailing economic

performance on the abnormal returns; the first era is Low Merger Activity from 1990

to 1993 which is a trough period and includes 65 transactions; and the second era is

High Merger Activity Era from 1994 to 1996 which is a booming period, it includes

59 transactions. The basic testing tool used is "event-study" to calculate cumulative

abnormal returns for both eras. The results have indicated that the returns on

successful bids in HMAE are positive while returns in LMAE are negative.

Marginally, returns in the HMAE are better than those in LMAE. This result has

suggested a link between the wealth effect and the economic conditions. Another

important result is that usually gains to target companies (acquired) are mostly

positive while those to bidders (acquirer) are debatable.

Choi and Russell (2004) investigated whether mergers and acquisitions in the

construction sector in U.S. make positive contributions to the performance and

determined the factors that may affect post-mergers and acquisitions performance as:

method of payment, acquisition timing and transaction size. The study analyzed 171

transactions that occurred between 1980 and 2002 using the cumulative abnormal

returns to indicate improvement in performance. The results have revealed that (i) the

number of acquisition transactions increased dramatically during the late 1990s, (ii)

firms experienced insignificant improved performance, in other words, they just

reached break even after mergers, and (iii) no evidence was found that either

acquisition time, method of payment, or target status had an influence on the reported

performance and that related diversifications perform slightly better than unrelated

diversifications. The analysis covered a long time span of about 22 years which

increased the reliability of the results. Unlike the majority of studies that supported

the method of payment as a primary factor influencing mergers and acquisitions, Choi

and Russell (2004) found no evidence to support such results. The study of Andre et

al. (2004) examined long-run performance of mergers and acquisitions in Canada and

investigated the main determinants of post-acquisition abnormal performance to

determine the sources of value creation or value destruction in Canadian M&A. The

study’s sample comprises 267 events of mergers and acquisitions between 1980 and

2000 making up 176 companies to investigate the effects of (i) method of payment,

(ii) book-to-market value of the bidder, and (iii) local and cross-border deals on the

long-run performance. The analysis covered three years after the transaction using

mean calendar-time abnormal returns to measure the magnitude and reliability of

abnormal returns. The results have shown that Canadian acquirers significantly under-

perform over the three-year post-event period. After examining possible explanations

for the long-run performance of M&A, the study found that the method of payment

where stock-financed M&A under-perform relative to cash-financed M&A, glamour

acquirers under perform relative to value acquirers, and finally, crossborder deals

perform poorly in the long- run. The study did not compare post-merger performance

with a benchmark or control group of similar industries to account for industry

effects, and this was the main drawback. Therefore, the negative abnormal returns

could be due to industry conditions.

Yook (2004) tested the impact of acquisition on the acquiring firm’s financial

performance by comparing pre and post-acquisition Economic Value Added relative

to the industry average. The study based on a cross-sectional variation in EVA

performance according to the following transaction characteristics: (i) types of

acquisition, (ii) methods of payment, and (iii) business similarity. The sample

comprises 75 of the largest acquisitions occurring during 1989 to 1994 in the United

States. The results have concluded that acquiring firms experience significantly

deteriorating financial performance after the acquisitions. When calculating industry-

adjusted EVA, the difference is indiscernible, hence, the decline in raw EVA is

grounded by industry effects. Tender offers consistently earn larger EVA than do

mergers. However, there is no difference if EVA is calculated without adjusting the

premium. Hence, larger premiums paid in tender offers can be justified by higher

operating performance. Unfortunately, the study failed to find a relationship between

industry-adjusted EVA and types of acquisition, methods of payment, and business

similarity. However calculating EVA is a difficult process and still has a dispute in

the accounting literature.

Megginson et al. (2004) aim at investigating the relationship between the long-term

postmerger performance and the following factors: (i) the degree of corporate focus,

(ii) method of payment, (iii) the impact of target management attitude, (iv) the impact

of time period of the merger, and (v) the impact of (glamour/value) acquirers. The

sample consists of 204 strategic mergers completed in the period 1977-1996. In

examining the long-term performance, the study carried out three tests; first,

comparing the long-term stock performance; abnormal returns, of merging firms with

a portfolio of firms, second, comparing pre and post-merger operating cash flows to

the same control group, and finally, comparing sample and control pre-merger and

post-merger discounts and premiums in market-to-book values. The results have

indicated that the primary determinant of long-term performance is the degree of

change in corporate focus. On average, 10% decline in the focus results in (a) 9% loss

in relative stockholder wealth, (b) 4% discount in firm value, and (c) 1.2% decline in

operating cash flow by the third post-merger year. Cash-financed mergers

outperformed stock-financed mergers in the operating performance. There is no

significant relationship between managerial resistance and long-term performance.

Time period has no effect on the long-term post-merger performance. No evidence

was found to support that glamour outperform value acquirers.

Yuce and Ng (2005) investigated the effect of merger announcements of Canadian

firms on the abnormal returns. The sample consists of all Canadian mergers that

occurred between 1994 and 2000 making up 1361 acquirer companies and 242 target

companies representing industrial product companies, oil and gas companies,

consumer product sectors and the rest of the sample is scattered over 38 industries.

Abnormal returns have been used for both the acquiring and target companies in an

effort to support or reject the results of American studies that report negative

abnormal return for acquiring firms and positive abnormal return for target firms. The

results have indicated negative results in contrast to U.S. studies (for example; Andre

et al., 2004). Yuce and Ng (2005) argued that both the target and the acquiring

company shareholders earn significant positive abnormal returns, but it is lower than

what had reported in previous study of Megginson et al. (2004) on Canadian

companies. This means that abnormal returns appear to be decreasing through time.

The results of Yuce and Ng (2005) suggest that (i) there are significant and positive

cumulative abnormal returns to acquirers buying private firms with stock rather than

public ones, (ii) no significant difference is found between public and private targets

when paid in cash, (iii) there is higher risk for acquiring private firms than public

ones, (iv) firms tend to pay less in stocks for private firms, and (v) differences in

Canadian industry, capital markets, and regulations may justify the difference in the

Canadian experience. It can be argued that the study did not test the effect of industry

type on the acquisition price. Additionally, the study examined the performance for a

period of 40 days which is a very short period to examine the performance; therefore

the results have lack of generalization. Accordingly, an investigation over a long-run

is needed to determine whether the positive abnormal returns in the shortrun would

reverse in the long-run or continue as positive.

Kling (2006) carried out a study to judge the successfulness of the mergers wave in

Germany and to analyze the effect of mergers on the macro level taking into

consideration variables that might drive mergers such as: economics of scale, macro

economic conditions, success of former mergers and market structure. The study

choose a sample of 35 leading German companies that experienced mergers over the

period from the early 1870s to the beginning of the First World War in 1914 covering

a period of 44 years. The results reveal that the first German wave of merger started

around 1898 accompanied by the introduction of the new exchange law in 1896. The

vector regression model used was unable to find out that mergers were not successful

through the whole period albeit periods of successful mergers, hence, this issue has

been identified using rolling regressions. From 1898 to 1904, mergers affected total

stock returns positively in all industries except for banks. Despite this fact, managers

imitated the merger wave in the industrial companies without assessing the

successfulness of this activity on the banking sector. The study has cons and pros;

where the period covered in the study was long enough to conclude considerable

results. Moreover, categorizing the sample according to industry type provides

insights on the effects of mergers across sectors rather than generalizing results with

no evidence. On the other hand, the study is based on the macro level which in turn

might affect results of analyzing mergers on a micro level of corporate performance.

Table 1: Summary of Market Measures-Based Studies

Study Objective(s) Measures

Used

Results

Gallet(1996)

Rau & Vermaelen(1998)

Tse & Soufani(2001)

Choi & Russell(2004)

Andre et al.(2004)

Yook(2004)

Megginson et al.(2004)

Yuce & Ng(2005)

Kling(2006)

Examine the relationship between mergers in the U.S. steel industry and the market power.

Identify the reason(s) behind under performance in mergers & over-performance in tender offers as well as examining the effect of the payment method on post acquisition performance.Test the effect of M&A on the abnormal returns for both the acquired and the acquiring firms.

Examine the effect of M&A in the construction sector in the U.S. on firms' performance & investigating factors that may affect post M&A performance.

Explore the effect of Canadian mergers on long-term performance and identifying the factor(s)behind value creation or value destruction.

Test the effect of acquisition on the acquiring firms' financial performance.

Examine the impact of the followings & long term performance: (i) degree of corporate focus, (ii) method of payment, (iii) target management attitude, (v) time period of the merger,(iv) (glamour/value) acquirers.

Investigate the effect of mergersannouncements of Canadian firmson the abnormal returns.

Investigate the successfulness ofthe mergers wave in Germany.

Market

Power

Book-to-MarketValues

CumulativeAbnormal

Returns

CumulativeAbnormal

Returns

Mean Calendar-Time AbnormalReturn

Economic ValueAdded

Abnormal Return,Market-to-BookValues

Abnormal

Return

Total-

Stock

Return

Results have suggested that mergers slightly boost market power in steel industry.

Results have indicated that firms in mergers & tender offers under-perform their benchmarks by statistically significant 4% in the three years following the acquisitions.

Results have indicated that the returns on successful bids in high merger activity era are +ve while returns in low merger activity era are -ve. Shows link b/w the wealth effect & the economic conditions.Results have reported that firms experience insignificant improved performance. No evidence was found that either acquisition time, method of payment, or target status has an impact on the reported performance. Results have shown that Canadian acquirers significantly under-perform over the three-year postevent period.

Results have reported that firms experience significantly deteriorating operating performance after the acquisitions.

Results have indicated the following: (i) the primary determinant of long-term performance is the degree of change in corporate focus, (ii) on average, 10% decline in the focus results in 9% loss in relative stockholder wealth, 4% discount in firm value, & 1.2% decline in operating cash flow by the third postmerger year,

Results have indicated that both the target and the acquiring company shareholders earn significant +ve abnormal returns.

From 1898 to 1904 mergers affected stock returns positively in all industries except for banks.

CHAPTER 3(RESEARCH METHODOLOGY)

OBJECTIVES OF STUDY

The main purpose of the study is to identify and to know how merger and acquisition

takes place in telecom sectors and is significance in growth of telecom sectors

domestic as well as for the international telecom industries concern. Objectives of the

study are briefly stated below:

To critically analyze the impact mergers and acquisitions on the operating

performance of the firm in India.

To identify how through mergers and acquisitions in the telecom sector, the

industries look for strategic benefits in the telecom sector and also how they

enhance their customer base.

To know how Mergers and acquisitions help in ensuring efficiency,

profitability and synergy. And also help to form & grow shareholder value.

CHAPTER 4

CHALLENGES & REGULATION OF M & A

Challenges and opportunities in Indian telecom sector

The telecom sector has been one of the fastest growing sectors in the Indian economy

in the past 4 years. This has been witnessed due to strong competition that has brought

down tariffs as well as simplification of policy environment that has promoted healthy

competition among various players.. The mobile sector alone has been growing

rapidly and has emerged as the fastest growing market in the whole worlds. Currently

of a size nearing 70 million (GSM and CDMA), this sector is expected to reach a size

of nearly 200 million subscribers by financial year 2008.

The government has eased the rules regarding inter circle and intra circle mergers.

This has led to a slew of mergers and acquisitions in the recent past. Also as the sector

is moving closer to maturity, further consolidation is a reality and this will lead to the

survival of more profitable players in this segment. In order to further promote the use

of Internet in the country the government is takingproactive steps to develop this

sector with the help of the various players in this segment.For this purpose, the use of

broadband technology is being mooted and this will go a long way in improving the

productivity of the Indian economy as well as turn out to be the next big opportunity

for telecom companies after the mobile communications segment.

Non-voice services and VAS are the gold mines. The big takeoff is expected with the

rollout of 3G services in early 2007, once the spectrum issues are sorted out. Internet

users base fast reaching near the English speaking population base. Local language

and content required for further growth. Infrastructure equipment cost is down to a

fraction of what prevailed just a few years ago.Operators can plan better expansion

plan now. Increased viability for the operators to expand to semi-urban and rural

markets, hence, accelerate growth further

It’s not without reason that India is tipped to be the world’s third-larges economy by

2050! No wonder if it happens much earlier Investors can look to capture the gains of

the Indian telecom boom and diversify their operations outside developed economies

that are marked by saturated telecom markets and lower GDP growth rates. At a time

when global telecom majors are struggling to cope with their losses and the rollout of

3G networks, which has been a non-starter for close to a year now; India, with its

telecom success story, represents an attractive and lucrative destination for

investment.

Regulatory Framework

The Telecom Regulatory Authority of India (TRAI) was set up in March 1997 as a

regulator for Telecom sector. The TRAI’s functions are recommendatory, regulatory

and tariff setting in telecom sector.

Telecom Disputes Settlement and Appellate Tribunal (TDSAT) came into existence in

May, 2000. TDSAT has been empowered to adjudicate any dispute –

• between a licensor and a licensee

• between two or more service providers

• between a service provider and a group of consumers

• hear and dispose of appeal against any direction, decision or order of TRAI

Tariffs for telecommunication services have evolved from a regime where tariffs were

determined by Telecom Regulatory Authority of India to a regime where tariffs are

largely under forbearance. TRAI intervenes by regulating the tariffs for only those

services, the markets of which are not competitive.

Universal Service Obligation Fund (USOF) exclusively for meeting the Universal

Service Obligation was established in April, 2002. The Universal Service Levy is

presently 5 per cent of the Adjusted Gross Revenue (AGR) of all telecom service

providers except the pure value added service providers like Internet, Voice Mail, E-

Mail service providers etc. Indian Telegraph Act has been amended in October’2006

to provide support for all telegraph services including mobile and broadband to bridge

the digital divide.

With the introduction of the Unified Access Licensing Regime, operators can offer

telecom access services to consumers in a technology neutral manner, subject to

fulfilling certain conditions. Introduction of this regime has also broken the

legal/regulatory impasse between the cellular and basic service providers. Issuance of

Intra-Circle Merger and Acquisition Guidelines provide investors an opportunity to

take stakes in existing telecom operations.

Government Initiatives

The Government has taken the following main initiatives for the growth of the

Telecom Sector:

• All telecom services have been opened up for free competition for unprecedented

growth

• 217 (Information Technology Agreement) ITA-I items are at zero Customs Duty.

Specified capital goods and all inputs required to manufacture ITA-I, items are at zero

Customs Duty

• Availability of low cost mobile handsets

• In April 2004, license fee for Unified Access Service Providers (UAS) was reduced

by 2 per cent

• License fee for infrastructure Provider-II reduced from 15 per cent to 6 per cent of

the Adjusted Gross Revenue and spectrum charges between 2 to 4 per cent in June

2004

• Entry fee for NLD licenses was reduced to Rs. 2.5 Crore from Rs. 100 Crore. Entry

fee for ILD reduced to Rs. 2.5 Crore from Rs. 25 Crore

• Lease line charges have been reduced to make the bandwidth available at

competitive prices to facilitate growth in IT enabled services

• One India plan i.e. single tariff of Re. 1/-per minute to anywhere in India was

introduced from 1st March 2006 by the Public Sector Undertakings. This tariff was

emulated by most of the private service providers also. This scheme has led to death

of distance in telecommunication and is going to be instrumental in promoting

National Integration further

• The robust telecom network has also facilitated the expansion of BPO industry that

is having 500,000 employees now and adding 400 employees per day.

• Annual license fee for National Long Distance (NLD), International Long Distance

(ILD), Infrastructure Provider-II, VSAT commercial and Internet Service Provider

(ISP) with internet telephony (restricted) licenses was reduced to 6 per cent of

Adjusted Gross Revenue (AGR) with effort from Jan 2006.

• The Government’s policy is neutral on use of technology by telecom service

providers subject to availability of scarce resources such as spectrum etc.

• Licence Fees 6-10 per cent of Adjusted Gross Revenue (AGR)

Foreign Direct Investment Policy

Foreign Direct Investment (FDI) was permitted in the telecom sector beginning with

the telecom manufacturing segment in 1991 - when India embarked on economic

liberalisation. FDI is defined as investment made by non-residents in the equity

capital of a company. For the telecom sector, FDI includes investment made by Non-

Resident Indians (NRIs), Overseas Corporate Bodies (OCBs), foreign entities,

Foreign Institutional Investors (FIIs), American Depository Receipts (ADRs)/Global

Depository Receipts (GDRs) etc.

Present FDI Policy for the Telecom sector

• In Basic, Cellular Mobile, National Long Distance, International Long Distance,

Value Added Services and Global Mobile Personal Communications by Satellite, FDI

is limited to 49 per cent (under automatic route) subject to grant of licence from the

Department of Telecommunications and adherence by the companies (who are

investing and the companies in which investment is being made) to the licence

conditions for foreign equity cap and lock-in period for transfer and addition of equity

and other license provisions.

• Foreign Direct Investment up to 74 per cent permitted, subject to licensing and

security requirements for the following:

- Internet Service (with gateways)

- Infrastructure Providers (Category II)

- Radio Paging Service

• FDI up to 100 per cent permitted in respect to the following telecom services:

- ISPs not providing gateways (Both for satellite and submarine cables)

- Infrastructure Providers providing dark fibre (IP Category I)

- Electronic Mail

- Voice Mail

The above is subject to the following conditions:

- FDI up to 100 per cent is allowed subject to the condition that such companies

would divest 26 per cent of their equity in favour of Indian public within 5 years, if

these companies are listed in other parts of the world.

- The above services would be subject to licensing and security requirements,

wherever required.

- Proposals for FDI beyond 49 per cent shall be considered by Foreign Investment

Promotion Board (FIPB) on a case-to-case basis.

• In the manufacturing sector 100 per cent FDI is permitted under the automatic route.

• In Basic, Cellular Mobile, paging and Value Added service, and Global Mobile

Personal Communications by Satellite, FDI is permitted up to 49 per cent (under

automatic route) subject to grant of license from Department of Telecommunications

• Foreign direct investment up to 74 per cent permitted, subject to licensing and

security requirements for the Internet Service (with gateways), Infrastructure

Providers (category-II), Radio Paging Service

• FDI up to 100 per cent permitted in respect of

- ISPs not providing gateways (both for satellite and submarine cables),

- Infrastructure Providers providing dark fibre (IP Category I);

- Electronic Mail; and

- Voice Mail

• FDI up to 49 per cent is also permitted in an investment company, set up for making

investment in the telecom companies licensed to operate telecom services. Investment

by these investment companies in a telecom service company is treated as part of

domestic equity and is not set of against the foreign equity cap.

• Manufacturing - 100 per cent FDI is permitted under automatic route.

• FDI is subject to the following conditions

• FDI up to 100 per cent is allowed subject to the conditions that such companies

would divest 26 per cent of their equity in favour of Indian public in 5 years, if these

companies are listed in other parts of the world.

• The above services would be subject to licensing and security requirements,

Wherever required.

• Proposals for FDI beyond 49 per cent shall be considered by FIPB on case to case

basis

CHAPTER 5

RESEARCH METHODOLOGY

Research refers to a search for knowledge. Research is a scientific search and

systematic search for pertinent information on a specific topic. In fact, research is an

art of scientific investigation. The Advanced Learner’s Dictionary of Current English

lays down that “A Research is a careful investigation or inquiry, especially through

search for new facts in any branch of knowledge. It is a systematized effort to gain

more knowledge”.

Significance Of Research

“All progress is born of inquiry.” Research inculcates scientific and inductive thinking

and it promotes the development of logical habits of thinking and organization.

Research is equally important for social scientists in studying social relationships and

in seeking answers to various social problems.

TYPES OF RESEARCH:

1) Descriptive Vs. Analytical:Descriptive research comprises surveys and fact-finding enquiries of different types.

The main objective of descriptive research is describing the state of affairs as it

prevails at the time of study. The most distinguishing feature of this method is that the

researcher has no control over the variables here.

2) Applied Vs. Fundamental:

Research can also be applied or fundamental research. An attempt to find a solution to

an immediate problem encountered by a firm, an industry, a business organisation, or

the society is known as applied research. Researchers engaged in such researches

aim at drawing certain conclusions confronting a concrete social or business

problem. On the other hand, fundamental research means gathering knowledge for

knowledge’s sake is termed “pure” or “basic” research.

3) Quantitative Vs. Qualitative:

Quantitative research relates to aspects that can be quantified or can be

expressed in terms of quantity. It involves the measurement of quantity or amount.

Statistical method is adopted for this research such as correlation, regressions, time

series analysis, etc. Whereas, qualitative research is concerned with qualitative

phenomenon, or more specifically, the aspects relating to or involving quality or kind.

Similar projective methods.

4) Conceptual Vs. Empirical:

A research related to some abstract idea or theory is known as conceptual

research. Generally philosophers and thinkers use it for developing new concepts or

for reinterpreting the existing ones. Empirical research relies on observation or

experience with hardly any regard for theory and system. Such research is data based.

PROBLEM STATEMENT

Since 1991, the process of liberalization, privatization and globalization initiated by

the government of India has influenced the functioning and governance of Indian

companies which has forced Indian companies to refocus their strategies. As a sequel

to this, Mergers and acquisitions are becoming a normal phenomenon. M & A are not

new in Indian economy. In the past also companies have used mergers and

acquisitions strategies to grow. Having spread their wings haphazardly during the

days of controlled regime. Indian corporate houses are now refocusing on the lines of

core competence, market share and global competitiveness. This process of refocusing

has been hastened by the arrival of foreign competitors. Thus, leading corporate

houses have undertaken restructuring exercise. M & A is one of the most effective

methods of restructuring and has, therefore, become an integral part of the long-term

business strategy of corporate enterprises.

DATA COLLECTION AND ANALYSIS

Data collection is the most essential aspect of any research because the whole result of

research depends on the data & information. How much primary & secondary data

must be collected, and which is the source; these are many related aspects must be

decided well in advance.

In any research there are two distinct types of data:

Primary data:The primary data was collected through personal observation

like questionnaire, interviews etc.

Secondary data: It means to collect data which is already available or have

been used by someone.

CHAPTER 6

MERGERS AND ACQUISITIONS THEORITICAL CONCEPTS

MERGERS

A merger occurs when two or more companies combines and the resulting firm

maintains the identity of one of the firms. One or more companies may merger with

an existing company or they may merge to form a new company.

Usually the assets and liabilities of the smaller firms are merged into those of larger

firms. Merger may take two forms-

1. Merger through absorption

2. Merger through consolidation.

Absorption

Absorption is a combination of two or more companies into an existing company. All

companies except one loose their identify in a merger through absorption.

Consolidation

A consolidation is a combination if two or more combines into a new company. In

this form of merger all companies are legally dissolved and a new entity is created. In

consolidation the acquired company transfers its assets, liabilities and share of the

acquiring company for cash or exchange of assets.

ACQUISITIONS

A fundamental characteristic of merger is that the acquiring company takes over the

ownership of other companies and combines their operations with its own operations.

An acquisition may be defined as “an act of acquiring effective control by one

company over the assets or management of another company without any

combination of companies”.

TAKEOVER

A takeover may also be defined as obtaining control over management of a company

by another company.

DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were

synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new

owner, the purchase is called an acquisition. From a legal point of view, the target

company ceases to exist, the buyer "swallows" the business and the buyer's stock

continues to be traded.

In practice, however, actual mergers of equals don't happen very often. Usually, one

company will buy another and, as part of the deal's terms, simply allow the acquired

firm to proclaim that the action is a merger of equals, even if it's technically an

acquisition. Being bought out often carries negative connotations, therefore, by

describing the deal as a merger, deal makers and top managers try to make the

takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining

together is in the best interest of both of their companies. But when the deal is

unfriendly - that is, when the target company does not want to be purchased - it is

always regarded as an acquisition.

1.2 TYPES OF MERGERS

Mergers can be a distinguished into the following four types:-

1. Horizontal Merger

2. Vertical Merger

3. Conglomerate Merger

4. Concentric Merger

Horizontal Merger

Horizontal merger is a combination of two or more corporate firms dealing in same

lines of business activity. Horizontal merger is a co centric merger, which involves

combination of two or more business units related to technology, production

process, marketing research, development and management

Vertical Merger

Vertical merger is the joining of two or more firms in different stages of production

or distribution that are usually separate. The vertical Mergers chief gains are

identified as the lower buying cost of material.

Conglomerate Merger

Conglomerate merger is the combination of two or more unrelated business units in

respect of technology, production process or market and management.

Concentric Merger

Concentric merger are based on specific management functions where as the

conglomerate mergers are based on general management functions. If the activities of

the segments brought together are so related that there is carry over on specific

management functions. Such as marketing research, Marketing, financing,

manufacturing and personnel.

1.3ADVANTAGES OF MERGERS AND ACQUISITIONS

1) Accelerating a company's growth, particularly when its internal growth is

constrained due to paucity of resources.

2) Resources can be acquired from outside through mergers and acquisitions.

3) For entering in new products/markets, the company may lack technical skills

and may require special marketing skills and a wide distribution network to

access different segments of markets.

4) The company can acquire existing company or companies with requisite

infrastructure and skills and grow quickly.

5) Enhancing profitability because a combination of two or more companies may

result in more than average profitability due to cost reduction and efficient

utilization of resources. This may happen because of:-

1. GROWTH OR DIVERSIFICATION : -

Companies that desire rapid growth in size or market share or diversification in the

range of their products may find that a merger can be used to fulfill the objective

instead of going through the tome consuming process of internal growth or

diversification. The firm may achieve the same objective in a short period of time by

merging with an existing firm. In addition such a strategy is often less costly than the

alternative of developing the necessary production capability and capacity. If a firm

that wants to expand operations in existing or new product area can find a suitable

going concern. It may avoid many of risks associated with a design; manufacture the

sale of addition or new products..

SYNERGY : -

Implies a situation where the combined firm is more valuable than the sum of the

individual combining firms. It refers to benefits other than those related to economies

of scale. Operating economies are one form of synergy benefits. But apart from

operating economies, synergy may also arise from enhanced managerial capabilities,

creativity, innovativeness, R&D and market coverage capacity due to the

complementarity of resources and skills and a widened horizon of opportunities

Merger may result in financial synergy and benefits for the firm in many ways:-

i. By eliminating financial constraints

ii. By enhancing debt capacity. This is because a merger of two companies

can bring stability of cash flows which in turn reduces the risk of

insolvency and enhances the capacity of the new entity to service a larger

amount of debt

iii. By lowering the financial costs. This is because due to financial stability,

the merged firm is able to borrow at a lower rate of interest.

Other Motives For Mergers

Merger may be motivated by other factors that should not be classified under

synergism. These are the opportunities for acquiring firm to obtain assets at bargain

price and the desire of shareholders of the acquired firm to increase the liquidity of

their holdings.

1. Purchase Of Assets At Bargain Prices

Mergers may be explained by opportunity to acquire assets, particularly land mineral

rights, plant and equipment, at lower cost than would be incurred if they were

purchased or constructed at the current market prices. If the market price of many

socks have been considerably below the replacement cost of the assets they represent,

expanding firm considering construction plants, developing mines or buying

equipments often have found that the desired assets could be obtained where by

heaper by acquiring a firm that already owned and operated that asset. Risk could be

reduced because the assets were already in place and an organization of people knew

how to operate them and market their products.

2.Increased Managerial Skills or Technology

Occasionally a firm will have good potential that is finds it unable to develop fully

because of deficiencies in certain areas of management or an absence of needed

product or production technology. If the firm cannot hire the management or the

technology it needs, it might combine with a compatible firm that has needed

managerial, personnel or technical expertise. Of course, any merger, regardless of

specific motive for it, should contribute to the maximization of owner’s wealth.

2. Acquiring New Technology

To stay competitive, companies need to stay on top of technological

developments and their business applications. By buying a smaller company with

unique technologies, a large company can maintain or develop a competitive

edge.

i. Economy Of Scale : This refers to the fact that the combined company can

often reduce its fixed costs by removing duplicate departments or operations,

lowering the costs of the company relative to the same revenue stream, thus

increasing profit margins.

ii. Operating Economies: Arise because, a combination of two or more firms

may result in cost reduction due to operating economies. In other words, a

combined firm may avoid or reduce over-lapping functions and consolidate its

management functions such as manufacturing, marketing, R&D and thus

reduce operating costs

iii. Increased Revenue Or Market Share: This assumes that the buyer will be

absorbing a major competitor and thus increase its market power (by

capturing increased market share) to set prices.

iv. Cross-Selling : For example, a bank buying a stock broker could then sell its

banking products to the stock broker's customers, while the broker can sign up

the bank's customers for brokerage accounts. Or, a manufacturer can acquire

and sell complementary products.

1.4 Procedure For Evaluating the decision or Merger & Acquisitions

The three important steps involved in the analysis of mergers and acquisitions are:-

1. Planning: Acquisition will require the analysis of industry-specific and firm-

specific information. The acquiring firm should review its objective of

acquisition in the context of its strengths and weaknesses and corporate goals.

It will need industry data on market growth, nature of competition, ease of

entry, capital and labour intensity, etc.

2. Search And Screening: Search focuses on how and where to look for suitable

candidates for acquisition. Screening process short-lists a few candidates from

many available and obtains detailed information about each of them.

3. Financial Evaluation: A merger is needed to determine the earnings and cash

flows, areas of risk, the maximum price payable to the target company and the

best way to finance the merger. In a competitive market situation, the current

market value is the correct and fair value of the share of the target firm. The

target firm will not accept any offer below the current market value of its share

3. MERGERS AND ACQUISITION IN INDIA

1.The Reliance – BP deal

The much talked about Reliance – BP deal finally came through in July 2011 after a 5 month wait. Reliance Industries signed a 7.2 billion dollar deal with UK energy giant BP, with 30 percent stake in 21 oil and gas blocks operated in India. Although the Indian government’s approval on two oil blocks still remains pending, this still makes it one of the biggest FDI deals to come through in India Inc in 2011-12-31.

2.Essar Exits Vodafone

In March 2011, the Vodafone Group announced that it would buy 33 percent stake in its Indian joint venture for about 5 billion dollars after the Essar Group sold its holding and exited Vodafone. Healthcare giant Piramal Group too, bought about 5.5 percent in the Indian arm of Vodafone for about 640 million dollars. This brings Vodafone’s current stake to about 75 percent.

3.The Fortis Healthcare Merger

In September 2011, India’s second largest hospital chain, Fortis Healthcare (India) Ltd, announced that it will merge with Fortis Healthcare International Pte Ltd., the promoters’ privately held company. This will make Fortis Asia’s top healthcare provider with the approximate total revenue pegged at Rs. 4,800 crore. Fortis India will buy the entire stake of the Singapore based Fortis International. This company is currently held by the Delhi-based Singh brothers (Malvinder Singh and Shivinder Singh).

4.iGate Acquires Majority Stake In Patni Computers

In May 2011, IT firm iGate completed its acquisition of its midsized rival Patni Computers for an estimated 1.2 billion dollars. For iGate, the main aim of this acquisition was to increase its revenue, vertical capability and customer base. iGate now holds an approximate stake of 82.5 percent in Patni computers, now called iGate Patni.

5.GVK Power Acquires Hancock Coal

In one of the biggest overseas acquisitions initiated by India in September 2011, Hyderabad-based GVK Power bought out Australia’s Hancock Coal for about 1.26 billion dollars. The acquisition includes a majority of the coal resources, railway line and port infrastructure of Hancock Coal, along with the option for long term coal supply contracts.

6.Essar Energy’s Stanlow Refinery Deal With Royal Dutch Shell

The Ruias’ flagship company for its oil business, Essar Energy completed its 350 million dollar acquisition of the UK based Stanlow Refinery of Shell in August 2011. In addition to a direct access to the UK market, Essar is planning to make optimum utilization of this deal with its ’100 day plan’ to improve operations at the UK unit.

7.Aditya Birla Group To Acquire Columbian Chemicals

In June 2011, the Aditya Birla Group announced its completion of acquiring US based Columbian Chemicals, a 100 year old carbon black maker company for an estimated 875 million dollars. This will make the Aditya Birla Group one of the largest carbon black maker companies in the world, doubling its production capacity instantly.

8.Mahindra & Mahindra Acquires Ssangyong

In March 2011, Mahindra acquired a 70 percent stake in ailing South Korean auto maker Ssangyong Motor Company Limited (SYMC) at a total of 463 million dollars. This acquisition will see the Korean company’s flagship SUV models, the Rexton II and the Korando C foray into the Indian market.

9.The Vedanta – Cairn acquisition

December 2011 finally saw the completion of the much talked about Vedanta – Cairn deal that was in the pipeline for more than 16 months. Touted to be the biggest deal for Indian energy sector, Vedanta acquired Cairn India for a neat 8.6 billion dollars. Although the Home Ministry cleared the deal, it has highlighted areas of concern with 64 legal proceedings against Vedanta.

10.Adani Enterprises Takes Over Abbot Point Coal

In June 2011, Adani acquired the Australian Abbot Point Port for 1.9 billion dollars. With this deal, the revenues from port operations are expected to almost triple from 110 million Australian dollars to 305 million Australian dollars in 2011. According to Adani, this was amongst the largest port deals ever made.

4.MERGERS IN INDIAN TELECOM SECTOR

The number of mergers and acquisitions in Telecom Sector has been increasing

significantly.Telecommunications industry is one of the most profitable and rapidly

developing industries inthe world and it is regarded as an indispensable component of

the worldwide utility and services sector.Telecommunication industry deals with

various forms of communication mediums, for example mobile phones, fixed line

phones, as well as Internet and broadband services.

Currently, a slew of mergers and acquisitions in Telecom Sector are going on

throughout the world. The aim behind such mergers is to attain competitive benefits in

the telecommunications industry.The mergers and acquisitions in Telecom Sector are

regarded as horizontal mergers simplybecause of the reason that the entities going for

merger or acquisition are operating in the same industry that is telecommunications

industry. In the majority of the developed and developing countries around the world,

mergers andacquisitions in the telecommunications sector have become a necessity.

This kind of mergersalso assits in creation of jobs.

Both transnational and domestic telecommunications services providers are keen to

try merger and acquisition options because this will help them in many ways. They

can cut down on their expenses, achieve greater market share and accomplish market

control.

Mergers & acquisitions in the telecommunications sector have been showing a

prosperoustrend in the recent past and the economists are advocating that they will

continue to do so. The majority of telecommunication services providers have

understood that in order to grow globally,strategic alliances and mergers and

acquisitions are the principal devices.

Private sector investment and FDI (Foreign Direct Investment) have also boosted the

growth of  mergers and acquisitions in the telecommunications sector.Over the last

few years, a phenomenal growth has been witnessed in the number of mergers

andacquisitions taking place in the telecommunications industry. The reasons behind

thisdevelopment include the following:

• Deregulation

• Introduction of sophisticated technologies (Wireless land phone services)

• Innovative products and services (Internet, broadband and cable services)

Economic reforms have spurred the growth in the mergers and acquisitions industry

of the telecommunications sector to a satisfactory level.

Mergers and acquisitions in Telecom Sector can also have some negative effects,

which includemonopolization of the telecommunication products and services,

unemployment and others.However, the governments of various countries take

appropriate steps to curb these problems.

In countries like India, mergers and acquisitions have increased to a considerable

level from themid 1990s. In the United States, the mergers and acquisitions in the

telecommunications sector are going on in a full-fledged manner.

The mergers and acquisitions in the telecommunications sector are governed or

supervised by theregulatory authority of the telecommunication industry of a

particular country, for instance theTelecom Regulatory Authority of India or TRAI.

The regulatory authorities always keep a tab onthe telecommunications industry so

that no monopoly is formed.

FOLLOWING ARE THE IMPORTANT MERGERS AND ACQUISITIONS

THAT TOOK   PLACE IN THE TELECOMMUNICATIONS SECTOR

• The takeover of Mobilink Telecom by Broadcom. This can also be described as a

suitableexample of product extension merger 

• AT&T Inc. taking over BellSouth

• The acquisition of eScription Inc. by Nuance Communications Inc.

• The taking over of Hutchison Essar by the Vodafone Group. Now it has

becomeVodafone Essar Limited

• China Communications Services Corporation Ltd. taking over China

InternationalTelecommunication Construction Corporation

• The acquisition of Ameritech Corporation by SBC (Southwestern Bell

Corporation)Communications

• The merger of GTE (General Telephone and Electronics) with Bell Atlantic

• The acquisition of US West by Qwest Communications

• The merger of MCI Communications Corporation with WorldCom

BENEFITS PROVIDED BY THE MERGERS AND ACQUISITIONS IN

THETELECOMMUNICATIONS-SECTOR

 Following are the benefits provided by the mergers and acquisitions in the

telecommunicationsindustry:

• Building of infrastructure in a more convenient way

• Licensing options for mergers and acquisitions are often found to be easier 

• Mergers and acquisitions offer extensive networking advantages

• Brand value

• Bigger client base

• Wide array of products and services

REASONS FOR THE GROWTH OF INDIAN TELECOMMUNICATION

INDUSTRY

In recent times mergers and acquisitions in the Indian telecommunication industry

have beendriven by a few important factors

•The inclusion of internet (including broadband) and cable services in the telecom

sector.

• New technologies like wireless fixed phone services.

•Deregulation in the telecom sector.

Rules Related To Mergers & Acquisitions In The Indian Telecommunication

Industry

Certain regulatory and statutory norms pertaining to mergers and acquisitions in the

Indiantelecommunications sector are laid down by the Indian government and its

authorized agencies.These include -

• Mergers and acquisitions require approval from the Department Of

Telecommunications(DOT)

• Mergers are allowed in the same service area.

• Mergers or acquisitions in a service area should not lead to less than 3 operators in

thatarea.

• Mergers and acquisitions should not lead to monopoly

Major M&A deals in Indian telecom sector

Company/Service Name

Stake sold

Buyer Seller Year Dealsize(US$)

Indicative Enterprise value (US$)

Per sub value (US$)

Orange, Mumbai 41% Hutchison Group, HongKong

Max Group, Delhi

1998 560 Mn 1.36 Bln NA

Hutch, India 8.3% Max India Kotak Mahindra, India

2006 225 Mn - NA

Hutch Essar, India 5.1% Hutchison Group, HongKong

Hinduja 2006 450 Mn 9 Bln NA

Hutch Essar 3.1% Essar Group Max India

2005 146 Mln - 570

Command Cellular,Kolkata

100% Hutchison & IndianGroup,

Usha Martin & Others

2000 - 138 Mln

Idea Cellular 48.14%

Aditya Birla Group

Tata Group

2005 NA 2 Bln 400

Modi Telestra,Calcutta

100% Bharti Group, India

B.K.Modi and Telestra

2000 NA 160 Mln

Bharti 9.3% Private Investors

Warburg Pincus

NA 873 Mn NA 1000

Bharti Airtel 10% Vodaphone Bharti Group

2005 1.5 bln 16 Bln 1000

Aircel, Chennai 79.24%

Sterling Group, Chennai

RPG Group

2003 210 Cr

Aircel, TN, Chennaiand NE

74% Maxis, Malaysia

Sterling Group

2006 750 Mn 1.07 Bln 496

Spice, (Punjab andBangalore)

49% Telekom Malaysia, Malaysia

NA 2006 178 Mn 363 Mln -

Reliance CDMA - Qualcomm, San Diego,US

Reliance Infocomm

2002 - 10 Bln -

BPL Mobile and BPLCellular

- Promoters 2005 1.15 Bln NA -

RISKS ASSOCIATED WITH MERGER

Here Is My Analysis Of The 10 Risks With Examples :

1. Regulation and Compliance :  The regulatory authority in India has delayed

the 3G auction and sets up new guidelines every now and then. It has also

given 3G license for BSNL without giving it to other providers. Airtel and

Vodafone which has launched iPhone 3G phone were left in the dark with 3G

phones without any 3G service.

2. Entry Of 4-5 Players  : Licenses were granted to 6 new players. Unitech,

Sistema, etc.. Sitema has started its operations under the name of MTS by

providing 1 million minutes free. New players and offers like these would

seriously dent the expansion plans of established players. All the players

should think out of the box and come up with IDEAS. Next thing would be

consolidation in the industry which is already happening in the telecom tower

business.

3. Capital For Expansion : This is the biggest criteria for smaller players. While

there are no smaller players, as the new players are backed up by some heavy-

weights, expansion is still tough. This is where sharing infrastructure comes

into picture. Indus Towers is one such example. BSNL has recently announced

about leasing its towers. Initiatives like these will help both the older and

newer players to penetrate into new markets.

4. Attracting & Managing Talent And Intellectual Capital : This is a tough

one. With fierce competition comes the talent poaching. Companies should

have some talent retention measures in place. Airtel has restructured its

business into 9 verticals to retain talent. Not every company can do the same

but, that is one option.

5. Management Of Strategic Partnerships : Providing free SMS’s or call rates

at 40 paise per minute are no longer the differentiators. It is the value Added

services which matter. There were bunch of partnerships which happened in

the last 2 months. AskLaila-Airtel partnership for local search,

AmarChitraKatha – Vodafone, IDEA and Bharat Matrimony have tied up for

VAS. BSNL has recently tied up with Hungama portal for music and game

downloads.Strategic partnerships like these should be nurtured and

maintained.

6. Inappropriate Processes & Systems To Support Exponential Business

Growth Experienced Over Past 4-5 Years : This is where investing in IT

and the right tools is crucial. These are the operations that should be

outsourcing so that the telecom companies can focus on their core areas.

Indian telecom companies should outsource aggressively and focus on

expanding their network and services.

7. Forecasting Returns From Technology & Infrastructure Investments

8. Privacy & Security Risks

9. Contain & Reduce Costs

10. Manage Consolidation And Mergers & Acquisition : This would tie back to

point #2 of entry of new players and a possible consolidation in the telecom

business and the tower business.

Few of the risks given for India are different from global risks. For example, E&Y

report has Losing ownership of the client as the number one risk. It does not feature

as a risk for Indian telecom. Reason is – India is still in the growth phase and losing a

customer is not yet on the minds of the service providers.

CHAPTER 7

FINDINGS AND ANALYSIS

MERGER /ACQUISITION OF HUTCHISON ESSAR BY VODAFONE

The acquisition of Hutchison Essar by Vodafone at an enterprise value of $19.3

billion which comes to around $794 per share was one of the biggest cross border

deals in the booming Indian telecom market at that time. Vodafone won the 67%

block on sale by Hutch-Essar leaving behind Reliance Communication and a

consortium led by Hindujas as well. It paid around 10.9 billion dollars for the

acquisition.

Profile of Co-parties

Owners: Vodafone: 67% Essar: 33%

Vodafone Profile: Vodafone Group plc is a global telecommunications company

headquartered in Newbury, United Kingdom. It is the world's largest mobile

telecommunications company measured by revenues and the world's second-largest

measured by subscribers, with around 332 million proportionate subscribers as at 30

September 2010. It operates networks in over 30 countries and has partner networks

in over 40 additional countries. It owns 45% of Verizon Wireless, the largest mobile

telecommunications company in the United States measured by subscribers.

Its primary listing is on the London Stock Exchange and it is a constituent of the

FTSE 100 Index. It had a market capitalisation of approximately £92 billion as of

November 2010, making it the third largest company on the London Stock Exchange.

It has a secondary listing on NASDAQ.

Essar Profile: The Essar Group is a multinational conglomerate corporation in the

sectors of Steel, Energy, Power, Communications, Shipping Ports & Logistics as well

as Construction headquartered at Mumbai, India. The Group's annual revenues were

over USD 15 billion in financial year 2008-2009.

Essar began as a construction company in 1969 and diversified into manufacturing,

services and retail. Essar is managed by Shashi Ruia, Chairman – Essar Group and

Ravi Ruia, Vice Chairman Essar Group.

Hutch Profile: Hutchison Whampoa Limited of Hong Kong is a Fortune 500

company and one of the largest companies listed on the Hong Kong Stock Exchange.

HWL is an international corporation with a diverse array of holdings which includes

the world's biggest port and telecommunication operations in 14 countries and run

under the 3 brand. Its business also includes retail, property development and

infrastructure. It belongs to the Cheung Kong Group

Vodafone-Essar: - Hutchison International, a non-resident seller and parent company

based in Hong Kong sold its stake in the foreign investment company CGP

Investments Holdings Ltd., registered in the Cayman Islands (which, in turn, held

shares of Hutchison-Essar - Indian operating company, through another Mauritius

entity) to Vodafone, a Dutch nonresident buyer. Vodafone Essar is owned by

Vodafone 52%, Essar Group 33%, and other Indian nationals, 15%. On February 11,

2007, Vodafone agreed to acquire the controlling interest of 67% held by Li Ka Shing

Holdings in Hutch-Essar for US$11.1 billion, pipping Reliance Communications,

Hinduja Group, and Essar Group, which is the owner of the remaining 33%. The

whole company was valued at USD 18.8 billion. The transaction closed on May 8,

2007. The total is Vodafone Essar subscription is 106,347,368 subscribers i.e.,

23.94% of the total 444,295,711 subscribers.

Individual Investors: Individual large stake holders Analjit Singh and Asim Ghosh

sold their stakes to Vodafone in December 2009. Asim Ghosh, the former managing

director of Vodafone Essar, had 4.68 per cent stake in the company held through

investment firm AG Mercantile, and sold a part of it for about Rs 3.3 billion. Analjit

Singh, who had a share of 7.58 per cent through three companies, sold a part of his

stake for over Rs 5 billion. After the sale, the stakes held by Ghosh and Singh in

Vodafone Essar will come down to 2.39 per cent and 3.87 per cent respectively.

Vodafone Hutch Deal –Time Line

The time line for the Vodafone and Hutch deal is as follow:

2007/05/29 - Court sends notice to Vodafone and Hutch

2007/05/05 - Vodafone-Hutch deal gets Finance Minister's nod

2007/04/04 - Vodafone-Hutch deal: Decision likely at next FIPB meeting

2007/03/19 - FIPB to take up Vodafone proposal on Tuesday

2007/03/16 - Hutchison offers $415 m to Essar as `sign-on bonus'

2007/03/16 - Vodafone's Hutch deal in order: Kamal Nath

2007/03/15 - Essar, Vodafone reach agreement on jointly managing Hutch

2007/02/18 - What Vodafone will collect from the Hutch call

2007/02/15 - `Roses for Essar, telephony for masses'

2007/02/15 - Vodafone pledges $2-b investments

2007/02/12 - Hutch: Vodafone top bidder with $19-b offer

2007/02/11 - Hindujas to partner Qatar Telecom, Altimo for Hutch

2007/02/10 - Hutch bidding goes to the wire

2007/01/11 - Vodafone offer in a few weeks

2007/01/09 - Vodafone starts due diligence of Hutch

2007/01/06 - Hutchison, Essar differ over right of refusal

2007/01/03 - Essar gets fund pledge worth $24 b for Hutch-Essar buy

2006/12/29 - Reliance Comm in race for Hutch-Essar

2006/12/23 - Vodafone joins race for Hutchison Essar stake

2006/12/21 - Vodafone may join race for Hutch

Taxation Issue In Vodafone – Hutch Deal: The Indian Revenue authorities issued

show cause notice to Vodafone arguing that they had failed to discharge withholding

tax obligation with respect to tax on gains made by Hutch on sale of shares to

Vodafone. Vodafone filed a writ petition in the Mumbai High Court challenging the

jurisdiction of the Revenue department. The revenue department issued show-cause to

Vodafone asking for an explanation as to why Vodafone Essar (which was formerly

Hutchison Essar) should not be treated as an agent (representative assessee) of

Hutchison International and asked Vodafone Essar to pay $ 1.7 billion as capital gains

tax.

Indian Income Tax Department View: The whole controversy in the case of

Vodafone is about the taxability of transfer of share capital of the Indian entity.

Generally, the transfer of shares of a non-resident company to another non-resident is

not subject to tax in India. But the revenue department is of the view that this transfer

represents transfer of beneficial interest of the shares of the Indian company and,

hence, it will be subject to tax. The revenue authorities are of the view that as the

valuation for the transfer includes the valuation of the Indian entity also and as

Vodafone has also approached the Foreign Investment Promotion Board (FIPB) for its

approval for the deal, Vodafone has a business connection in India and, therefore, the

transaction is subject to capital gains tax in India.

Vodafone View: On the contrary, Vodafone’s argument is that there is no sale of

shares of the Indian company and what it had acquired is a company incorporated in

Cayman Islands which, in turn, holds the Indian entity. Hence, the transaction is not

subject to tax in India.

Vodafone argued that the deal was not taxable in India as the funds were paid outside

India for the purchase of shares in an offshore company that the tax liability should be

borne by Hutch; that Vodafone was not liable to withhold tax as the withholding rule

in India applied only to Indian residence that the recent amendment to the IT act of

imposing a retrospective interest penalty for withholding lapses was unconstitutional.

Now the taxman’s argument was focused on proving that even though the Vodafone-

Hutch deal was offshore, it was taxable as the underlying asset was in India and so it

pointed out that the capital asset; that is the Hutch-Essar or now Vodafone-Essar joint

venture is situated here and was central to the valuation of the offshore shares; that

through the sale of offshore shares, Hutch had sold Vodafone valuable rights - in that

the Indian asset including tag along rights, management rights and the right to do

business in India and that the offshore transaction had resulted in Vodafone having

operational control over that Indian asset. The Department also argued that the

withholding tax liability always existed and the amendment was just a

clarification.

Key questions before the High Court:

Whether the show cause notice issued by the Revenue authorities was without

Jurisdiction as Vodafone could not be said to be liable under section 201 of the

Income tax Act 1961 for not withholding tax?

Whether the provisions relating withholding tax obligation under section 195 of

the Acts have extra territorial application and a non resident without presence in

India has an obligation to comply with it?

Whether the transaction per se resulted in income chargeable to tax in India?

Vodafone’s Petition and Arguments: Vodafone’s argument is that there is no sale of

shares of the Indian company and what it had acquired is a company incorporated in

Cayman Islands which in turn holds the Indian entity. Hence, the transaction is not

subject to tax in India.

The Petitions And Arguments Of Vodafone Are As Under:

It was not in default (under section 201) for not withholding tax as the law applied to

situations where tax had been withheld and not deposited. Hence, to impose an

obligation where no withholding had been made was unconstitutional. Giving a

contextual interpretation, “person” liable to withhold tax could not include a non

resident having no presence (in India), since such an interpretation would amount to

treating unequal’s as equal by imposing onerous compliance obligations as applicable

to residents or nonresidents having a presence in India. The transfer was with respect

to ownership of shares in a foreign company and no capital asset in India. Further,

change in controlling interest in Indian companies was only incidental to change in

foreign shareholding.

Vodafone also challenged the constitutional validity of retrospective amendments to

sections 191 and 201 of the Act, motivated to impose an obligation on payer to

withhold tax.

The transfer of the shares of CGP which was a capital asset situated outside India

could not result in any income chargeable to tax in India. A share in a company

represents a bundle of rights and its transfer results in a transfer of all the underlying

rights. However, what were transferred were only a share and not the individual

rights.

When there is no look-through provisions under the Income Tax Act, 1961 ("the

Act"), such a provision cannot be read into the statute and the corporate veil cannot be

lifted unless a tax fraud is perpetrated. The Supreme Court ("SC") in the case of Azadi

Bachao Andolan (2003) 263 ITR 706 has held that there was no tax consequence in

India when the shares of one of the intermediate holding company in Mauritius were

transferred. Similarly, there should not be a tax consequence, even when an upstream

holding company transfers its shares.

ANALYSIS

Analysis Of The Issue

HC ruling in Vodafone Case: The HC held that the series of transactions in question

has a ‘significant nexus' with India. Since the essence of it was change in controlling

interest in HEL, it constituted a source of income in India. It held that the price paid

by Vodafone factored in, as part of the consideration, diverse rights and entitlements

being transferred as part of the composite transaction. Many of these entitlements

were not relatable to the transfer of the CGP share. It held that intrinsic to the

transaction were transfer of other rights and entitlements. Such rights and entitlements

constitute ‘capital assets' as per the provisions of the Act.

The apportionment of consideration paid by Vodafone for a bundle of entitlements

stated above lies within the jurisdiction of the Indian Revenue. The Indian Revenue

Authorities sought to apportion income resulting to HTIL between what has accrued

or arisen or what is deemed to have accrue or arise as a result of a nexus with India

and that which lies outside. Subsequent to the HC ruling, the Revenue has raised a tax

demand of Rs. 112,180 million on Vodafone for failure to withhold taxes. Meanwhile,

the appeal filed by Vodafone before the Supreme Court was heard in November 2010.

Analysis Of Decision

This is a landmark ruling which throws light on principles of taxation of cross-border

transfers. The High Court's observation on the ‘principle of proportionality' that a

portion of the income would be chargeable to tax is asignificant one. The Court has

also observed that the other rights and entitlements, passed on as a part of the deal are

separate assets and can be regarded as ‘capital assets', within the meaning of the Act.

These observations seem to indicate that transactions involving a simpler transfer of

shares of a company outside India, which has companies in its fold in India, would

not be chargeable to tax in India. However, if certain other rights and entitlements in

India are transferred along with the transfer of shares, there would be an incidence of

tax in India.

This decision could certainly embolden the Revenue authorities to investigate

offshore transactions, which have a connection with India or cases where limited

interest exists in India and the demand raised by the Revenue authorities is a clear

indication of things to come.

The Dutch government, on behalf of Vodafone, has approached the Indian

government for settling a three-year-old dispute involving a tax claim of over Rs

11,000 crore. Netherlands has written to India asking it to consider an alternate

dispute resolution that will run parallel to the ongoing court process through what is

termed as a Mutual Agreement Procedure (MAP).

India would examine the request and take a decision in accordance with the

provisions of the India-Netherlands double tax avoidance agreement (DTAA). MAP

is an alternate process of dispute resolution, and is an option available to a taxpayer in

addition to and concurrent with the appellate process. However, under MAP, once the

proceedings are initiated, it is possible to obtain a stay on the tax demand provided

one gives a bank guarantee

This opens up the possibility of a settlement on the lines of what Vodafone clinched

in the UK earlier this year, when it agreed to pay £1.25 billion in taxes to settle a

decade-long dispute dating back to 2000 regarding its Luxembourg subsidiary.

Supreme Court Of India Decision

The Supreme Court today ruled in favour of Vodafone in the $2 billion tax case

saying capital gains tax is not applicable to the telecom major. The apex court also

said the Rs 2,500 crore which Vodafone has already paid should be returned to

Vodafone with interest. The decision will be a big boost for cross-border mergers and

acquisitions here. The Income tax department’s contention, if upheld, would have

rendered standard transaction structures too risky forcing foreign companies to weigh

potentially new litigation and insurance costs. Nearly five years after the Indian

taxman issued the first notice to Vodafone international on September 2007 for failure

to withhold tax on payments made to Hutchison Telecom, Chief Justice of India SH

Kapadia and Justice KS Radhakrishnan pronounced their judgement. The SC has

ruled that the transaction is not taxable in India, and it has made the following

observations/ comments while pronouncing its ruling:

Presently, there are no look-through provisions in the Indian domestic tax law

to tax the transaction.

There is no extinguishment of property rights in India through the transfer of

shares between two foreign entities of shares in another foreign entity.

Similarly, provisions which treat a person as an agent/representative of a

foreign entity for the purpose of levy and recovery of tax due from such a

foreign entity is not applicable in the absence of a nexus.

There is no conflict between the earlier decisions of the SC in Azadi Bachao

Andolan, and Mc Dowell. The SC in the case of Azadi (263 ITR 706), had

held that an act which is otherwise valid in law cannot be held as sham, merely

on the basis of some underlying motive supposedly resulting in some tax

advantage. The SC in the case of Mc Dowells (154 ITR 148), held that

sanction cannot be accorded to a “colourable” device.

The duration of the holding structure, timing of exit and continuity of

business, are important factors while evaluating as to whether the transaction

as a whole is a sham. Considering the factual matrix in the present scenario,

the SC held that the transaction is not a sham.

Withholding tax provisions in the Indian domestic tax law cannot apply to off

shore transactions

The Tax Authority has also been directed to refund the entire amount (US$ 0.5

billion) deposited by Vodafone as part payment towards the demand in early

2011 along with interest

Tax policy certainty crucial for national economic interest.

The decision of the SC is expected to be a milestone development in the taxation of

international transactions and on the judicial approach to tax avoidance. This case is,

perhaps, the first in the world where the issue of taxation on indirect transfer of shares

is being litigated before a country’s highest judicial forum. The principles emanating

from this ruling could therefore, have ramifications beyond India. It could also be of

relevance in shaping India’s tax policy on international taxation and tax avoidance in

the future.

CHAPTER 8

CONCLUSIONS

M&As have become very popular over the years especially during the last two

decades owing to rapid changes that have taken place in the business

environment. Business firms now have to face increased competition not

only from firms within the country but also from international business

giants thanks to globalization, liberalization, technological changes, etc. Generally the

objective of M&As is wealth maximization of shareholders by seeking gains in

terms of synergy, economies of sca le , be t te r f inanci a l and market ing

advantages , d ivers i f ica t ion and red uced earnings volatility, improved

inventory management, increase in domestic market share and also to capture fast

growing international markets abroad. But astonishingly, though the number and

value of M&As are growing rapidly, the results of the studies on the impact

of mergers on the performance from the acquirers' shareholders perspective have

been highly disappointing.

In this paper an attempt has been made to draw the results of only some of

the earlier studies while analyzing the causes of failure of majority of the

mergers. Making the mergers work successfully i s not tha t easy as here we

are not only jus t put t ing the two organiza t ions together but a l so

integrating people of two organizations with different cultures, attitudes and mind

sets.Meticulous pre-merger planning including conducting proper due diligence,

effective communication during the integration, committed and competent

leadership, speed with which the in tegra t ion p lan i s in tegra ted a l l th is

pave for the success of M&As. Whi le making the merger deals, it is

necessary not only to make analysis of the financial aspects of the acquiring

firm but also the cultural and people issues of both the concerns for proper

post-acquisition integration

BIBLOGRAPHY

BOOKS

Chandra, Prasanna, Financial Management,(7e), Tata MC-Graw Hill.

Pandey, I.M, Financial Management, 2006, Vikas Publication, New Delhi.

Bhalla, V. K., Financial Management & Policy, 1999, Anmol Publication, New Delhi.

Kisore R.M, Advanced Financial Management, Taxmann’s Publication.

WEBSITES

http://www.hindubusinessline.com

http://www.economictimes.com

http://www.sebi.gov.in

www.wikipedia.com