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Merger &
Merger & Acquisition
Acquisition

Vodafone
&
Hutchison Telecom
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Presented By
Presented By
Name Roll No.
Hubert D’Sa
Ashwin Shetty
K. Kalyanraman
Anitha Shinde 25

Vodafone
&
Hutchison Telecom
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Merger
Merger
• In business or economics a merger is a combination of two
companies into one larger company.

• Such actions are commonly voluntary and involve stock

swap or cash payment to the target.

Acquisition
Acquisition
• An acquisition, also known as a takeover, is the
buying of one company (the ‘target’) by another.

• An acquisition may be friendly or hostile

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Types of
Types of M
M && AA

• Horizontal merger - Two companies that are in direct

competition and share the same product lines and markets.

• Vertical merger - A customer and company or a supplier

and company. Think of a cone supplier merging with an ice
cream maker.

• Market-extension merger - Market-extension merger - Two

companies that sell the same products in different markets.

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Motive Behind
Motive Behind M
M && AA

• Synergies: This refers to the fact that the combined

company can often reduce its fixed costs by removing
duplicate departments or operations.

• Increased revenue/Increased Market Share: This assumes

that the buyer will be absorbing a major competitor and thus
increase its market power.

• Cross selling: A manufacturer can acquire and sell

complementary products.

• Economies of Scale: For example, managerial economies

such as the increased opportunity of managerial
specialization.

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Motive Behind
Motive Behind M
M && AA
• Taxes: A profitable company can buy a loss maker to use the
target's loss as their advantage by reducing their tax liability.
• Geographical or other diversification: This is designed to
smooth the earnings results of a company, which over the
long term smoothens the stock price of a company, giving
conservative investors more confidence in investing in the
company.
• Resource transfer: Resources are unevenly distributed
across firms and the interaction of target and acquiring firm
resources can create value through either overcoming
information asymmetry or by combining scarce resources

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Need of
Need of Merger
Merger && Acquisitions
Acquisitions
• Gain market share

• Economies of scale

• Enter new markets

• Acquire technology

• Utilization of surplus funds

• Managerial Effectiveness

• Strategic Objective

• Vertical integration

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Structuring an
Structuring an M
M && AA
• Finalize strategy & Due diligence

• Valuation / Negotiations

• Board meeting / Application to High court

• Notices and General body meeting

• Approval by court

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2007- 08
2007- 08 Global
Global TOP
TOP 55 M&A
M&A Deals
Deals

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Vodafone
purchased stake in

Hutch
(Hutchison Telecom International)
for
USD 11.08 billion

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Background –– Vodafone
Background Vodafone (Voice
(Voice Data
Data Fone)
Fone)
Founded : 1983 as Racal Telecom, independent 1991
Group : Vodafone Plc
Headquarters : Berkshire, UK
Key People : Vittorio Colao, CEO & Sir John Bond, Chairman
Industry : Mobile Telecommunications.
Presence : Equity Interest in 25 Countries & Network
Partner in 42
Strength : 2,30,000 (Employees)
Revenue : £ 35,478 Million(14.1% Growth)
Net Income : £ 10,047 Million(10.1% Growth)
EPS : 7.51 Pence Dividend Per Share(11.1% Growth)

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Background –– Hutch
Background Hutch -- Essar
Essar
Operations : 1992

Circles : 16 + license for 6 circles

Revenue : $ 1,282 Million

EBITDA : $ 415 Million

Operating Profit : $ 313 Million

Subscriber Base : 29.2 Million

ARPU : Rs. 340.15

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Growth of
Growth of Hutchison
Hutchison Essar
Essar
• 1992: Hutchison Whampoa and Max Group established
Hutchison Max

• 2000: Acquisition of Delhi operations Entered Calcutta and

Gujarat markets through ESSAR acquisition

• 2001: Won auction for licenses to operate GSM services in

Karnataka, Andhra Pradesh and Chennai.

• 2003: Acquired AirCel Digilink (ADIL - Essar Subsidiary)

which operated in Rajasthan, Uttar Pradesh East and
Haryana telecom circles and renamed it under Hutch
brand

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Growth of
Growth of Hutchison
Hutchison Essar
Essar
• 2004: Launched in three additional telecom circles of India
namely Punjab, Uttar Pradesh and West Bengal.

• 2005: Acquired BPL, another mobile service provider in

India 2007: Vodafone acquired HTIL stake in Hutchison-
Essar

• 2008: Vodafone acquired Dishnet Wireless, a service

provider in Orissa and has successfully launched its
services in the following circle.

• 2008: Vodafone launched the Apple iPhone 3G to be used

on its 17 circle 2G network.

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Reasons for
Reasons for Hutchison’s
Hutchison’s Exit
Exit
- Urban markets in the country had become saturated.
- Future expansion would have had to be only in the rural
areas, which would lead to falling average revenue per user
(ARPU) and consequently lower returns on its investments
• HTIL also wanted to use the money earned through this deal
to fund its businesses in Europe
• The sale of its interests in India will enable Hutchison
Telecom to become one of Asia’s best capitalized companies
• Relations between Hutchison Telecom and the Essar group
of India will be key to the sale of Hutch's 67% stake in Hutch-
Essar

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Why && How

Why How the
the deal
deal came
came through…
through…
• None of its recent global acquisitions, including those of the
German business of Mannesmann, telecom businesses in
Japan and Belgium, were performing up to the mark

• Markets, including the US, were maturing and were not

growing in a big way

• Stiff competition among almost all major players in the

industry, including global telecom majors like BT,O2 of UK,
Verizon from the US, Maxis Telecommunications of
Malaysia, Orascom from Egypt, the Hinduja group, Reliance
and Bharti Airtel from India

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Fourth largest deal of the year 2007 (to date) at $13.3

Deal size and bn ($11.1 bn plus $2 bn debt). Hutchison Essar valued at
stake $18.8 bn.

Vodafone acquisition is subject to a number of

Regulatory approvals including from the Department of
Approvals Telecommunications and the Government (FIPB).

Foreign Application for an approval from the FIPB still not been
Investment approved due to issues relating to the total direct
Promotion Board and indirect foreign holding in Hutchison Essar.

Press Note 5 of 2005 provides that direct and indirect

Foreign Direct foreign shareholding in a telecom company cannot
Investment Policy exceed 74%.

The Department of Telecommunication has given its

Department
nod All licensing conditions to be met by Vodafone.
of Telecom

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Principal Benefits
Principal Benefits for
for Vodafone
Vodafone
• Accelerates Vodafone’s move to a controlling position in a leading
operator in the attractive and fast growing Indian mobile market

• India is the world’s 2nd most populated country with over 1.1
billion inhabitants

• India is the fastest growing major mobile market in the world, with
around 6.5 million monthly net adds in the last quarter

• India benefits from strong economic fundamentals with expected

real GDP growth in high single digits

• Increases Vodafone’s presence in higher growth emerging

markets

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Principal Benefits
Principal Benefits for
for Vodafone
Vodafone …
… Cont
Cont
• Potential for Hutch Essar to bring Vodafone’s innovative
products and services to the Indian market, including
Vodafone’s focus on total communication solutions for
customers

• Vodafone and Hutch Essar both expected to benefit from

increased purchasing power and the sharing of best
practices

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"The announcement is a clear evidence of how we are executing

our strategy of developing our presence in the emerging
markets. Hutch Essar is an impressive, well-run company that
will fit well into the Vodafone Group
-Arun Sarin, CEO, Vodafone Ltd., in February 2007

"We exit the Indian market as one of the best capitalized telecom
companies in the region which will enable us to react swiftly to
new opportunities and to accelerate growth in our existing
markets.
-Canning Fok, Chairman, HTIL, in May 2007

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Foreign Exchange
Foreign Exchange and
and Management
Management Act
Act (FEMA)
(FEMA)
• HTIL financed the loan to minority shareholders Asim Ghosh
& Analjith Singh for 15 % stake in Hutch-Essar

• The loan is a violation of External Commercial Borrowings

(ECB) norms issued under FEMA. This is because the multi-
layered transaction (for Ghosh and Singh's stake) has been
funded by a local finance company, backed by a stand-by
letter of credit issued by a Hong Kong entity at the instance
of HTIL

• Since both the shareholders are fronting for HTIL, the 15 %

minority shareholding is interpreted as foreign stake.

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Taxation
Taxation
• Finance Bill 2008 also proposes to ensure that capital gains tax should
be levied on acquisitions in India.

• Buyer will be responsible for paying the tax after purchasing any capital
asset - a share or debenture of a company in India.

• The buyer will have to deduct TDS and failure to do so would leave him
liable to pay the tax. The tax will have to be paid with a retrospective
effect from June 2002.

• Department sent a notice to Vodafone, asking for about $1.7 billion as

capital gains tax in the sale of 52% stake in Hutchison Essar to Vodafone

• It argues that the company should have deducted tax at source while
making payment to HTIL

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