Presentation By Mr. M.N.

Chaini - Vice-President Indian Merchants Chamber, Mumbai

M&A : Background & Scenario

In 1990, only six developing and transition countries had made any outward investment. In 2005, the number increased to 25. Between 1987 and 2005, the share of global M&As by MNCs from developing and transition countries rose from 4% to 13% in value terms, and their share in greenfield and expansion projects exceeded 15 percent in 2005.

M&A : Background & Scenario...Contd.

A survey shows that 81% of the companies have considered M&As and 30% have actually done a transaction in the past 3 years. Over 70% say that they expect to do a deal in the next 3 years. All this denotes that we are set for an M&A boom in the years to come. Global M&A volumes of $10bn a day, Indias $18bn for the year 2005 indicates that there is still a long way to go. The trend is clearly on the way up.

M&A in 2006-07 - $ 3.6 Trillion

M&A in 2005-06 - $ 3.55 Trillion (data by Bloomberg) October 2006 M&A deals - $ 262 Billion The Asian M&A market saw 5792 deals worth $ 255.07 billion China alone was the largest market with 1862 deals worth $54.76 billion

Indian Scenario - Major Deals

Corporate India has gone on an acquisition spree, powered by the urge to go global, strong market fundamentals and the drive to dish out costcompetitive products. Acquisitions were not limited to the domestic market, but spread out in the global arena also.
Though India's public sector took the lead in investing abroad, especially looking for oil assets, the private sector is now going full speed ahead, driving overseas investments e.g. Arcelor acquired by Mr. Lakshmi Mittal. Mahindra & Mahindra's takeover of 90 percent stake in Schoneweiss, a family-owned German company. Tata's takeover of Corus & Tetley Tea Co. Hutchison Whampoa of Hong Kong sold their controlling stake in Hutchison - Essar to Vodafone for a whopping $11.1 billion.

Indian Scenario - Major Deals .Contd. Swiss cement major, Holcim, which acquired a 67 per cent stake in Ambuja Cement India Ltd (ACIL).
Videocon Group's acquisition of Thomson's colour picture tube business in China, Poland, Mexico, and Italy for a total of $290 million. The other large overseas deal was by pharmaceuticals Matrix Laboratories, which acquired 100 per cent of the Belgian Pharma Co., Docpharma for $263 million). Birla-Hindalco Indian business conglomerate Aditya Birla group-owned flagship company Hindalco Industries Ltd. Took over Atlanta-based aluminum giant Novelis Inc. for US$ 6.4 billion

Indian firms concluded 70 M&A deals between April and September, spending $14 billion and would have saved as much as Rs.6500 crore ($1.66 billion) because of the over 10% rupee appreciation against the greenback, an Assocham Eco Pulse study said.

Why M & A ?
Quicker way to growth.
Accessing new markets. Taking on the global competition. Improving operating margins and efficiencies, and Acquiring visibility and international brands. Buying cutting-edge technology rather than importing it Developing new product mixes
Objective behind M&A Transaction Responses (in%)

To improve revenues & profitability

Faster growth in scale quicker time to market Acquisition of new technology or competence To eliminate competition & increase market share

33%
28% 22% 11%

Tax shields & investment savings

Any other reason

3%
3%

Determinants of M & A
Ever-growing appetite of strike deals across sectors. entrepreneurs to

Availability of financing options both in Debt as well as in Equity due to low interest-regime of recent years and high stock-market valuations.

Barriers Surmountable? And Legal System.

Liberal approach of Anti-trust authorities / regulators in recent years.

Availability of the unit / business.

Strategy, planning & environment. Corporate Governance.

Corporate Governance
Tata could acquire so many units outside India, against stiff competition; due to good corporate governance & strategic fit. Corporate governance is essential to acquire a company and then make the acquisition successful. In absence of good governance, acquisition may fizzle out.

Interplay of following factors : Strategy Planning Personnel Legal Finance People

Media
Management Philosophy Corporate Governance

M&A as a Business Strategy

Analysis
Only 19% of the respondents state that they do not believe in M&A and 81% look at it as a part of strategy or will look at it opportunistically.

Conclusion
- M&A is definitely a key agenda for India Inc

M&A as a part of Business Strategy

No, We do not believe in inorganic Stragegy 19%

Yes 49% It is Opportunistic 32%

Enhancing Valuation
Analysis
- The key drivers for valuation according to India Inc are Management quality, Industry factors and Financial performance.
-

Conclusion
The perceived quality of a management team a key driver. To enhance valuation along with transparency. Interestingly Press interaction is seen as another way to enhance valuation.

Key Drivers for enhancing valuation of a company

Management Team 27% Regular interaction with analysts and press 15%

Governance Track record 8%

Industry outlook 19% Financial Performance 16% Transparency in operations 15%

Competition Policies in EU and India- Is it transparent and Non discriminatory? Lessons for India & EU to work together
Indian economy today is a competitive and de-regulated open economic system. Various restraints to competition existed in the pre-reform era such as :
Investment restraints (licensing). Control over acquisition of economic power through Monopolies & Restrictive Trade Practices Act (MRTP). Public sector reservation for infrastructure and other industries creating monopolies in various areas. Product reservation for the small-scale sector. Government procurement policies favoring public and small-scale sectors. Trade restrictions and high tariffs. Restrictions on foreign direct investment. Contd.

 All these restraints (protective measures as well as controls) have been or are being relaxed now.
One key issue in the current phase of transition of India is of ensuring and managing competition and to derive the most out of liberalization. The task is all the more difficult because the nation is not starting with a clean slate as various institutional structures continue to be in place.

Although, decontrol, deregulation & privatization initiatives are being taken, global economic environment is also undergoing a major change and hence the economic system is becoming more complex.

New Needs for Competition Policy

The Indian corporate sector adopted a variety of strategies in the post-reform period to cope with the increasing competitive pressures due to internal and external liberalization.

With the maturing of the Indian oligopolies, the competition policy needs of the country are also undergoing changes.

Changing Indian corporate sector

Some salient aspects of the changes in the Indian corporate sector :
The Indian corporate restructuring itself. sector is vigorously

Restructuring is mainly geared towards consolidation in few chosen areas to correct the inefficiencies created by over-diversification in the pre-reform era. MNCs have actively participated in the merger and acquisition process to get market entry or to strengthen their presence. Acquisitions have been used by MNCs to quickly get access to various complementary assets. MNCs are better placed vis-a-vis domestic firms in the acquisition game because of their deep pockets and relatively cheaper access to capital.

Changing Indian corporate sector

The intentions to invest in India by MNCs are significantly influenced by differences in the cost of capital and huge Indian market. The reliance of the Indian corporate sector on foreign technology purchase has increased. More and more technology flows are now tied with equity. Purchase of technology (especially foreign) is taking precedence over R&D. In house technology generation has taken a backseat. Besides, a large variety of inter-firm alliances are taking place. Firms are making efforts to improve manufacturing capability. This is being done through building alliances as well as through initiatives within the firm. Quality upgradation seems to be an important priority. These efforts at improving manufacturing capability may still prove to be inadequate to meet the competitive challenges.

Changing Indian corporate sector

These inadequacies may also adversely affect Indias chances of seeking FDI, the need for which has been emphasized.
Product differentiation strategy seems to be dominating over strategies of building distribution and marketing related assets. Such a strategy helps Indian firms to stand up to transnational with their strong and internationally recognized brands. Export based growth strategies are being adopted by some of the corporate sector but such strategies are not widespread. Export orientation increased appreciably. Overall, exposure to the international market is still inadequate to put the Indian firms on higher growth and learning trajectories.

Objective of our competition policy

Creating an active competitive environment, and in aiding the process of creating globally competitive firms with enhanced investment & technological

capabilities.

Progress made in Indian competitive Policy

India has had a legislation to address competition issues since 1969, when the Monopoly and Restrictive Trade Practices Act, was enacted.

This Act primarily dealt with Monopolistic Restrictive and Unfair Trade Practices. A Statutory Commission, the Monopoly and Restrictive Trade Practices Commission, was set up under this act, with an adjudicatory role. With the changing economic environment , need was felt to have a new law tuned to the needs of modern times, and towards this end, a new Competition Act was enacted in 2002. This Act deals with anti-competitive agreements (including cartels), abuse of dominant position, regulation of combination (including mergers and acquisitions) and advocacy. Contd

Progress made in Indian competitive Policy

The Act also envisages Competition Commission. establishment of the

However, the Commission set up under the Act is not yet fully operational for the present.
While some issues relating to its functioning are being addressed, it is carrying out only advocacy functions, as of now and thus competition issues continue to be adjudicated by MRTPC.

India Going Global

India is at a stage of development where cross-border activities are growing rapidly and are likely to grow more in the near future. The level of cross-border activity between India and EU is also significantly increasing. The EU is the leading investor in India and also a major destination for Indian investors. The EU invested 1.1 billion euros in India in 2004. But it's the reverse flow which is more interesting. In 2005-06, the EU was the main destination for Indian investment. One in every four dollars invested abroad by an Indian company went to the EU. Many of the major Indian IT companies such as Infosys, TCS and Wipro have operations in Europe. There have also been several high-profile acquisitions of European companies by Indian corporates, the famous being of course Tata's headline-grabbing Corus deal.

Need for Convergence and Cooperation in Competition Policies

India is reviewing its competition policy apart from trying to influence international agreements on competition policy related issues. Cooperation can be closer and effective, if laws and procedures of the countries involved are similar. Convergence and cooperation are needed in competition policy on issues relating to :

Cartelisation.
Other horizontal restraints. Mergers and acquisitions. Price fixing. Voluntary export restraints and orderly marketing arrangements. National treatment for foreign direct investors and services.

Need for Convergence and Cooperation in Competition Policies

Participation in such arrangements provides an opportunity for learning and exchange of information that may be critical for competition agencies in developing economies. The economies in transition may also want to participate in order to influence the directions which cooperation arrangements take. We are also of the view that more active steps need to be taken to enable developing countries in dealing with international cartels, and to ensure effective cooperation by the developed countries in this task. The developed countries need to recognize the pronouncements of competition authorities against international cartels based in their own jurisdiction, and help the prosecution of members of such cartels.
Contd.

Need for Convergence and Cooperation in Competition Policies

In addition there should be more focus on abuse of international dominance by transnational companies, whether in terms of market behavior or intellectual property. We may have to incorporate provisions preventing multinationals from refusing to deal with countries as a whole if the countrys competition authority has moved against the company. There is a need of special dispensation for the informal sector in these countries. Economies of developing countries have a large contribution from the informal sector, in contrast to the developed country economy.

Any competition law would have to take into cognizance of special needs of such sector, and the need of Governments to support this sector.
Contd.

Need for Convergence and Cooperation in Competition Policies

Hence, special preferences and incentives provided for the informal sector for these economies, need to be recognized and accepted in the competition law. Need of advocacy and capacity building on competition issues is strong felt need in developing countries. However, the focus of capacity building need not be limited to the competition authorities, but should have a wider scope to include sub-national authorities, economists, universities, jurists, etc. so that a large pool of competition experts are available in the country. Similarly advocacy efforts should focus on making competition a way of life in these countries and not something to be imposed by the State. Contd..

Need for Convergence and Cooperation in Competition Policies

Now we all know or feel that the World is flat and Knowledge is borderless. As such, the economic changes will be rapid. Complexity and disparity are likely to be major factors worrying the world leaders and global institutes. It is therefore very appropriate and timely that such issues are being debated in this Conference. I would like to wish the Conference to be a success, with the deliberations being made today guiding the competition law and policy internationally in a positive manner for the next many years.

Success Factors
Analysis
The main factors for succeeding in M&A are Strategic Fit, Personnel & Proper Planning.

Conclusion
For success in M&A it is critical that there be a good strategic fit and personnel or HR is a key factor apart from planning. India Inc is not looking at M&A to become conglomerate and core competence is a key driver for growth through M&A

Most important factors that contribute to the success of a M&A Transaction.

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M & As Future economic outlook for India

Indian Companies Set to go global : Study
Foreign Direct Investment by Indian Companies is all set to increase by 15 per cent per annum over the next five years. India's share of global outward investment (FDI, mergers and acquisitions) has trebled over four years and outbound activity in 2006 alone increased by 26 per cent, 'Global Outbound FDI Potential of Indian Companies 2007' a new study from Oxford Intelligence points out. The report forecasts continued growth averaging 15 per cent over the next five years adding that this year will see growth of 19 per cent on activity on 2006. North America, in particular, is expected to emerge as a 'hot spot' for Indian outward investment, with levels of activity trebling over the next five years, it says.

M&As Future economic outlook for India

"Although discussion about India today tends to focus on the growing tide of foreign companies looking to establish operations in the country through direct investment, joint ventures or through outsourcing, today's Indian companies have a global vision and are becoming an increasingly important source of outbound investment," Michel Lemagnen, Director, Oxford Intelligence research.

The removal in 2005 of key restrictions on Indian companies' ability to expand internationally triggered a sharp increase in overseas expansion. The country's top companies are now in an extremely healthy position in terms of cash, profitability and financing capacity and their potential for international investment, through both M&As and FDI, for the next few years is extremely favourable".

M&A in Future
Analysis
Over 70% expect to do a transaction in the next 3-4 years with several of them planning to do multiple transactions.

Conclusion
We can expect greater activity in M&A in the years to come.

Plans to acquire or merge in the next 3 to 4 years.

Out of the 73% of the respondents who have said Yes 15% of the respondents say that their company plans to make at least 1 acquisition in the next 3 to 4 years. 30% of them say more than 2 acquisitions About 28% of the respondents believe that their company plans to make numerous acquisitions in the next 3 to 4 years

27%

73%

Cross Border M&A in future

Proper India Inc is transforming A resounding 94% expect to do a cross itself into MNC and the chosen border acquisition out of those who path is M&A. expect to do a deal in the next 3 years.

Analysis

Conclusion

Plans for Cross Border Acquisitions in the next 3 to 4 years

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% None One Two Three or more 6% 25% 25% 44%

Conclusion
Mergers & Acquisitions are a significant form of business strategy today for Corporates. The two main objectives behind any M&A Transaction, for corporates today is :
to improve Revenues and Profitability Faster growth in scale and quicker access to market Competition in Globalised Market

The most important factors according to corporate India that contribute to the success of an M&A Transaction are :
Timing Intrinsic Fit Personnel Advisors on legal, policy and financial strategies