Merging to save money, increase market

The Glaxo-SKB merger,which is being financed through a 75.7-billion stock swap, is only the latest of an endless series of corporate combinations and takeovers. Under the merger-of-equals8217;, the merger will create the world8217;s number one drug maker, to be called Glaxo SmithKline PLC with annual sales of the new company at 24.9 billion, and over 107,000 employees. Although Time Warner and AOL are not directly present in India, media is abuzz with rumours of similar mergers involving internet and media companies.

These two mega mergers have already expedited the negotiations for the acquisition of Warner-Lambert Co by Pfizer Inc, which is expected to be announced soon. And the proposed merger of Monsanto Co and Pharmacia and Upjohn Inc are also speeding up the rapid transformation in the competitive world of pharma business. All these companies are active in India and these mergers will transform the Indian industry in a big way.

Analysts say companies are seeking partners due to the need to finance the enormous fundsrequired to turn a revolution in human biology into a steady flow of new medicines. And new medicines are the key to success in the highly fragmented pharmaceutical market as Indian companies are learning slowly.

Saving money is, therefore, the millennium mantra. Any merger or acquisition can result in cost cutting and more market share. A large number of employees in the management cadre of merging companies are likely to lose their jobs as the merger would lead to overlapping in areas like marketing 8212; one of the few disadvantages of the mega mergers. This is one area where Indian companies, which are now increasingly looking at listing on Nasdaq and New York Stock Exchange of the US, will have to tread cautiously.

As the entire corporate world is merging and acquiring to tap the hidden potentials, its implications on India will be far reaching and beneficial to consumers as long as it does not create monopolies. In India, an eventual merger between Gujarat Ambuja and ACC will create India8217;s biggestcement firm while a merger between National Thermal Power Corporation and National Hydro-electric Power Corp will make one of the world8217;s biggest power companies. The power minister has already made the announcement that a merger between the two is imminent.

Similarly, by the end of this year, if all things go right, Reliance will acquire public sector petrochemical major Indian Petrochemical Corporation Ltd IPCL and it would emerge as India8217;s largest petrochemical company and one of the biggest in the world. Says Anil Ambani, managing director of Reliance Industries: 8220;We have already given our bid to the government8230; now the ball is in the government8217;s court.8221; IOC-Soros is the other bidder for IPCL. The disinvestment process in public sector firms, if and when accelerated, would give further push to the Mamp;A process.

Mergers and acquisitions will become the order of the day. In the years to come we will some very surprising Mamp;As which would change the entire structure of that industry and benefit themerged entity. In this, public sector unit8217;s merger can create some of the biggest companies in the world but vested interests are not letting it happen. Take, for example, a merger between Air India and Indian Airlines which has the potential to create one of the world8217;s biggest airline but bureaucrats and politicians will not let it happen 8212; lest they lose their free tickets!

Among the financial companies, after the mega deal between HDFC Bank and Times Bank, rumours are already going around about the possibility of a merger between term-lending institution ICICI with ICICI Bank. Though both companies are denying this, a merger between the two makes sense as it would create a financial powerhouse which can compete with some of the best banks in the world. The stock market is being bombarded with rumours of a host of other mergers involving private banks almost every day.

General Motors of the US is close to signing a deal with the creditors of beleaguered Daewoo to take over the latter8217;s automobilebusiness worldwide. General Motors already has a presence in India through its 100 per cent subsidiary with its plant site situated in Gujarat. As a result of the merger, General Motors will get the state-of-the-art automobile plant near New Delhi. Corporate analysts also expect more mergers and takeovers in the cement, infotech and pharma sectors in India.

Among the many advantages of a Mamp;A, the market capitalisation of the merged entity would thwart the possibility of any hostile takeover attempt by a corporate raider. 8220;It would require tonnes of money to mount a takeover attempt on companies like Time or AOL or even here at home like the ACC-GACL combine8230; the management can rest in peace,8221; says a corporate analyst in Mumbai. Global giants like Lafarge of France 8212; which acquired Tisco8217;s cement division are already on the prowl in India.

But mergers in India have to face many hurdles like rigid labour laws, high stamp duty and angry shareholders who want a better deal than what has been arrived bythe valuers. The Glaxo-Burroughs mergers is still locked in court cases as a case has been filed by Burroughs Wellcome employees who are demanding higher salaries.

Similarly, the merger of Ciba and Sandoz, which resulted in Novartis, was held up for several years in this country, because Sandoz shareholders argued that they hadn8217;t got a good deal and the court had to intervene and raise the swap ratio. Besides, due to high duty of stamp duty in Maharashtra where the maximum companies are based, companies are finding it difficult to merge or acquire companies. Hence, the merchant banker has to find loopholes in the guidelines to finally merge two companies.

Many Indian companies especially those run by business families 8212; are watching the global Mamp;A process eagerly. With the globalisation of business, it8217;s time for Indian companies to look at the Mamp;A process seriously to cut costs and corner new markets.