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How beneficial are mergers for shareholders
April, 18th 2014

If there's a quick way to expand a company's scale of operations, widen its product portfolio, expand into new geographies and add to its technological capabilities, it's through mergers and acquisitions (M&As). However, while companies are able to gain and expand their balance sheets, shareholders might not always be able to make money from such deals.

If the past is an indication, M&As might not always turn out as anticipated. Experts say shareholders must always watch for the price and strategic intention. They reckon in the coming years, mergers, domestic and foreign, will increase; so should the scrutiny of such deals.

Says Mehraboon Irani, head (private client group), Nirmal Bang: "Not all mergers are profitable and not all will be profitable. But some will add a lot of value. Broadly, it depends on the price and the strategic intention of the company merging."

Experts say some mergers have fared exceedingly well. Before the Ranbaxy deal, Sun Pharma made 16 acquisitions; the company has built a record of successful acquisitions and, through the years, managed to increase shareholder value. The market capitalisation of the company has zoomed from Rs 6,027 crore to Rs 1.18 lakh crore in the past 10 years, as it pursued both organic and inorganic routes for growth.

Daiichi Sankyo's acquisition of Ranbaxy was looked at with circumspection. Analysts told investors they should exit the stock through the open offer. However, this isn't true of Sun Pharma's acquisition of Ranbaxy. Sun has acquired a Rs 6,000-crore enterprise for Rs 19,200 crore in an all-stock deal; both are big players in the generics space. As their businesses are complementary, Sun Pharma can derive huge synergies in product portfolio, research and development and raw material sourcing. After the acquisition, the Sun Pharma stock has surged seven per cent to Rs 628 at present.

Experts say in 2008, Sintex had a one-year forward valuation discount of about 25 times to its earnings. But after the company acquired entities abroad at higher valuations, its valuation multiple fell - the stock is trading at a price/earnings ratio of just four.

In 2008, the Tatas made strategic acquisitions such as Corus and JLR, within a span of a year. While one turned out to be an exceptional acquisition, the other is struggling. Rikesh Parikh, vice-president, market strategy, Motilal Oswal, says, "Everybody was expecting Corus to do well for Tata Steel and JLR to be a drag on Tata Motors. But it has turned out the other way round."

The Hindalco-Novelis merger is yet to yield desired results. The Hindalco stock has seen compounded gains of only 7.4 per cent per annum since the acquisition in May 2007, similar to the BSE Sensex's gains of 7.2 per cent during the same period.

Experts say one should always keep track of the factors that influence an acquisition and analyse how it will strategically fit a company's broader expansion plans. A case in point is Tech Mahindra's acquisition of the erstwhile Satyam. Being largely telecom-focused software company, Tech Mahindra had to expand into enterprise solution software. Though the acquisition wasn't yielding the desired results initially, the Mahindras were slowly able to integrate operations. Tech Mahindra has since gained 192 per cent since June 2013. Tech Mahindra paid Rs 2,900 crore for the Satyam acquisition.

Analysts say Mahindra & Mahindra has a reputation of deriving the best synergies. The Mahindras acquired Punjab Tractors, Gujarat Tractors and Ssangyong, gradually emerging as the prominent tractor manufacturer in the world. The group is now filling gaps in its automobile portfolio, having acquired Kinetic Motors in the two-wheeler segment and Ssangyong in the upper-end sports utility vehicle space.

The price a company pays for the acquisition is crucial. And, the return on investment is among the most crucial aspects of a merger. Says Parikh: "Any merger has to be at the right price. Sometimes, when companies run after acquisitions and acquire it at aggressive pricing, it tends to hurt the company in the long run and shareholder value is lost."

Motherson Sumi has been successful in making strategic acquisitions and integrating these. The company has gained substantially, from a string of good acquisitions in the past few years. Revenues surged from Rs 2,801 crore (consolidated) in FY09 to Rs 25,312 crore in FY13 due to a string of strategic acquisitions. Currently, it is valued at Rs 22,730 crore, against Rs 2,387 crore in March 2009, a rise of 56 per cent per annum compounded, as against the Sensex's 18 per cent.

Last, the sector plays a crucial role. Experts say in the pharmaceuticals and fast-moving consumer goods segments, the price for acquisitions could be higher, as one pays for the brand or technology.

Says Irani: "It always makes sense to buy or merge a company when the economic conditions are not that optimistic and the new management can institute a shift in the company's operations."

An M&A might deliver higher growth for a company, especially if it is being pursued with a clear vision and is cost-competitive. A lot of Indian companies have proven to be quite adept at acquisitions. But in case the price is steep and sector is faring well, acquisitions might see shareholder returns decline.

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