In the current globalised economy, mergers and acquisitions are being progressively more used the world over, for increasing competitiveness of companies through gaining better market share, expansion of the portfolio to reduce business risk, to capitalize on the economies of scale and for entering new geographies, etc. This research study was intended to analyze the consequence of going global market through merger and acquisition and traders long and short term earnings. Thereby study the impact of mergers on the financials by examining some pre- merger and post-merger financial ratios, with the sample of firms chosen as three major mergers/acquisitions of TATA Group. The results put forward that there are small variations in terms of post merger financial performance of the joint firm is not considerably different from the aggregate performance of the acquirer and target companies before the merger.
Merger and acquisitions have emerged as chief forces in the contemporary financial and economic environment. They have been a source of corporate growth and in India, it has changed radically after the liberalization of Indian economy. Mergers and acquisitions came up as one of the most efficient methods of such corporate restructuring, and became an essential part of the long-term trade strategy of corporates in India.
The sole three chief objectives at the back of any M&A transaction were found to be:
- Improving Profitability
- Rapid growth in scale and closer time to market
- Acquirement of new technology
Many in corporate India would be jealous of the Tata Group’s strategy around mergers and acquisition. In the past 8 years, the Tata Group had made 35 overseas acquisitions, including coal and iron ore mines, adding up Rs 78,000 crore, mostly in the past 3 years.
To examine the consequence of going global through mergers and acquisitions and the trader’s long term and short term earnings respectively. This would aid in studying the impact on companies financials past the merger or acquisition. To also determine the enterprise value of the corporation by comparing it with the peer group and studying the value of the firm
Objective of the study
To analyze the a thorough detailed case study of 3 companies of Tata Group who merged or acquired in the past years.
To evaluate the closing price of 3 companies previous to and post acquisition
To weigh up the key financial ratios of 3 companies pre and post acquisition
To do valuation of two companies through enterprise value and contrast the value with peer group and examine in detail
Review of literature
The subsequent studies are the few existing work reviewed which were conducted by researchers in the sight of analyzing the financial performance during and post merger activity across different time periods.
Effect of mergers on corporate performance in India, writer Mrs. Vardhana Pawaskar (2001), considered the impact of mergers on corporate performance. A case study, assessed the financial performance of a cloth unit by using ratio analysis. It compared the before and after merger performance of the corporations between 1992 and 2000 to identify their financial character. The study found that the financial fitness was never in the strong zone during the whole study period and ratio analysis highlighted that decision-making incompetence accounted for a good number of the problems.
Forecasting the viability and operational efficiency by Mr Mulla through use of ratio analysis, suggested matching up efficiency and success of all facets of management and put the company on a lucrative footing. The study of a sample of firms, restructured through mergers, showed that the merging firms were at the inferior end in terms of liquidity of the industry. The merged firms gave better performance than industry in terms of profitability.
Mergers and operating performance by Mr. Mantravadi: An Indian perspective, attempted to examine the impact of mergers on the performance post industrial reforms, by investigating some pre- and post-merger financial ratios, with chosen sample firms, and all mergers linking public and private limited companies The study results suggested that there are minor variations in terms of impact on financial performance of subsequent mergers across different intervals of time in India. It also indicated that for mergers between the same groups of companies in India, there has been deterioration in performance and ROI.
Mergers & acquisitions in the banking sector presents the Indian scenario, author Mr. Selvam (2007) has analyzed the impacts of stock price changes to mergers and acquisitions behavior taken place in banking industry with particular reference to private and public sector banks. Found that share prices are market sensitive. From the financial analysis it was noted that greater part of the banks went for branch extension and this has affected profitability to some extent and it resulted in harmful competition among the players.
To add up the review of literature, many offerings have offered diverse perspectives of merger in different industries globally and explained the valuation techniques followed by merging companies, and shareholders possessions effect due to merger. From the review of several papers evaluating the pre and post merger performance of merged companies, it is incidental that majority of the studies powerfully support the concept of improved post merger performance due to merger and it is valuable to the acquirer companies.
There are several mergers within the TATA Group during the study period from
01.04.2006 to 31.03.2009. For the purpose of corporate analysis, it was decided to select three of the highest deals which merged/ acquired under the TATA Group during the study period. Hence, the sample size of this study is confined to 3. Besides, while selecting the sample, following points were taken into account.
- Acquirer and target companies ought to belong to the same industry.
- Availability of information on the merger and industry.
Period of the study
The present study covers a period of one year from April 1, 2006 to March 31, 2009. But in order to evaluate the financial performance of sample companies on a comparative basis, 15-20 days before merger and after merger were considered.
Sources of data
The present study fundamentally depends on secondary data. The required data on financial performance prior and post merger were composed and they were obtained from Prowess software, Internet sources, Business Journals (ICFAI JOURNAL ON M & A)
The data were also collected from books, and newspapers.
In order to study the financial performance of acquirer and target companies, ratios Debt-Equity Ratio, ROCE (%),net profit margin, P/E, EPS, OPM(%) and valuation.
(1) Analysis of financial performance
The pre-merger average performance of the companies were compared with the post- merger performance of the joint firm. The present study attempts to calculate and study the pre and post merger performance of acquirer and target companies by using financial ratios in order to determine whether mergers resulted in shareholders wealth or not.
Accordingly, the following null hypothesis has been tested:
H0: The post merger financial performance of the combined firm is not significantly different from the aggregate performance of the acquirer and target companies prior to the merger.
Debt-Equity Ratio: A gauge of a company’s financial leverage obtained by dividing the total liabilities by stockholders’ equity. It shows what proportion of equity and debt the company is presently using to finance their assets.
Return On Capital Employed (ROCE): ROCE compares earnings with the invested capital in the company. It is like Return on Assets (ROA), but also considers sources of financing
Net profit margin: The profit margin says how much profit a company makes for every 1 Rupee it generates in revenue or sales. Profit margins vary with industry to industry, but all else being equal, the greater a company’s profit margin compared to its competitors, the better.
P/E: It is a gauge of the price paid for a share relative to the annual net income or the net profit earned by the firm per share.
EPS: The portion of a company’s profit which is allocated to each outstanding share of common stock. Earnings per share acts as an indicator of a company’s profitability.
OPM: Operating margin is a measurement of the proportion of a company’s revenue that is left over after variable costs of production such as wages, and raw materials have been paid. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Also known as operating profit margin and net profit margin.
Enterprise value is a figure that, in theory, represents the entire cost of a company if someone were to acquire it. Enterprise value is a more accurate estimate of takeover cost than market capitalization because it takes includes a number of important factors such as preferred stock, debt, and cash reserves that are excluded from the latter metric.
ANALYSIS OF DATA
TATA GROUP OF COMPANIES
One of the India’s largest business groups in the country. It has about 96 operating companies. Diverse business in 7 sectors. Revenues equivalent to 5.3% of India’s GDP. Group revenue FY 2008: Rs 251,543 Cr. / $ 62.5 b. Group profit FY 2008: Rs 21,578 Cr. / $ 5.4 b .Its 27 publicly listed companies have a combined market capitalization which is the 2nd highest among all business houses in India. Largest employer in private sector over 300,000 employees. A shareholder base of over 2.9 million. Operations in over 80 countries. Products and services exported to 85 countries
Tata is a rapidly growing business group based in India with significant international operations. Revenues in 2007-08 are estimated at $62.5 billion (around Rs251, 543 crore), of which 61 per cent is from business outside India. The group employs around 350,000 people worldwide. The Tata name has been respected in India for 140 years for its adherence to strong values and business ethics.
The business operations of the Tata group currently encompass seven business sectors: communications and information technology, engineering, materials, services, energy, consumer products and chemicals.
The group’s major companies are beginning to be counted globally.
Considering two of the largest mergers of TATA Group:
Tata Steel became the sixth largest steel maker in the world after it acquired Corus.
Tata Communications is a leading global provider of a new world of communications. With a leadership position in emerging markets, Tata Communications leverages its advanced solutions capabilities and domain expertise across its global and pan-India network to deliver managed solutions to multi-national enterprises, service providers and Indian consumers.
About the acquisition
Date: – 30th March 2007
Acquirer: – Tata Steel Limited
Target company: – Corus Plc.
Stake: – 100 %
Deal amount: – US$ 12201 m
Sector: – Steel sector
On January 31, 2007, India based Tata Steel Limited (Tata Steel) acquired the Anglo Dutch steel company, Corus Group Plc (Corus) for US$ 12.20 billion. The merged entity, Tata-Corus, employed 84,000 people across 45 countries in the world. It had the capacity to produce 27 million tons of steel per annum, making it the fifth largest steel producer in the world as of early 2007.
Before the acquisition, the major market for Tata Steel was India. The Indian market accounted for sixty nine percent of the company’s total sales. Almost half of Corus’ production of steel was sold in Europe (excluding UK). The UK consumed twenty nine percent of its production.
After the acquisition, the European market (including UK) would consume 59 percent of the merged entity’s total production.
DEAL : An auction was initiated on January 31, 2007, and after nine rounds of bidding, TATA Steel could finally clinch the deal with its final bid 608 pence per share, almost 34% higher than the first bid of 455 pence per share of Corus.
There were many likely synergies between Tata Steel, the lowest-cost producer of steel in the world, and Corus, a large player with a significant presence in value-added steel segment and a strong distribution network in Europe. Among the benefits to Tata Steel was the fact that it would be able to supply semi-finished steel to Corus for finishing at its plants, which were located closer to the high-value markets…
Though the potential benefits of the Corus deal were widely appreciated, some analysts had doubts about the outcome and effects on Tata Steel’s performance. They pointed out that Corus’ EBITDA (earnings before interest, tax, depreciation and amortization) at 8 percent was much lower than that of Tata Steel which was at 30 percent in the financial year 2006-07
As we can see from the line chart that the %cumulative abnormal return before acquisition was sharply decreasing since past month with not even a single glimpse of positive return on any single day.
But as soon as the acquisition took place, the earnings showed a marginal rise and again got back to the level where it was just before the acquisition. This happened due to very large debt generated due to overpaying by acquiring the Corus at a very high price of 608 pence per share as compared to previously valued 455 pence per share.
Debt equity ratio on post acquisition increase because Corus debt was high it was GBP1.6b to buy Corus and so its debt is almost 116% more than in pre acquisition. ROCE shows that post acquisition is very less as compared to pre acquisition it has negative percentage because company has short term returns after one year it will improve in the long run. Net profit margin has very less change as profit is not much affected. P/E increases in post acquisition by 30.2% which show high future cash flow. ROE is decreasing by 37.7 which show that it has more debt than equity. EPS has a very minor change. Operating profit margin is reduced by 9.1% which shows that it has low profit.
TATA COMMUNICATION-NTT DOCOMO
About the acquisition
Date: – 13th November 2008
Acquirer: – Ntt-Docomo
Target company: – Tata Teleservices Ltd.
Stake: – 26 %
Deal amount: – US$ 2700 m
Sector: – Tele-communication
Tata Teleservices has sold a stake of 26% to Japan’s NTT DoCoMo. The deal value is $2.7 bn. Tata Tele has 30 million CDMA subscribers and is rolling out its GSM services. Some say the deal is over-valued and some say its not easy to put value on the fastest growing mobile market in the world. India is the fastest growing market second only to China. It adds 10mn subscribers every month. The current subscriber base stands at 300+million and is expected to be 700 million in 2012. That is almost double to today’s numbers.
The Road ahead
Great deal it may be, but it has its risks. One reason is that telecom deals have been controversial in recent times. This goes back to late last year when the government sold pan-India licenses for $333 million apiece, amid a welter of controversy.
DoCoMo, in accordance with regulations of the Securities and Exchange Board of India, expects to make an open offer to acquire up to 20 per cent of outstanding equity shares of Tata Teleservices Maharashtra (TTML), a Tata telecommunication company, through a joint tender offer along with Tata Sons. TTSL and TTML through the Tata Indicom brand, have increased their combined share of the fast-growing Indian mobile market and their combined subscriber base now stands at over 30 million.
TTSL expects to leverage DoCoMo’s expertise in the development and delivery of value-added services, where DoCoMo is a firmly established market leader.
Debt equity ratio on post acquisition debt is increasing which shows company debt is increasing after merger. ROCE is constant it has not change much.Net profit margin increases by 11.10 as it income increases in post acquisition as compared to pre acquisition. P/E highly increases in post acquisition from 0 to 12%. ROE is decreasing by 1.53% which shows that it slightly more debt than equity. EPS is increasing drastically by 24.27% which is very profitable for investors. Operating profit margin is increased by 15.43% which shows that company profit margin is very fairly profitable.
The return of the target company Tata Communication has been very poor since the past 15 to 20 days before the acquisition but it almost got to break-even soon after the acquisition date. This sustained for the next 8 to 10 days but again got back into negative returns zone due to poor customer support to the newly entered Docomo brand in highly competitive communications market in India.
TATA MOTOR – JLR
About the acquisition
Date: – 27th March 2008
Acquirer: – Tata Motors Ltd
Target company: – Jaguar Land Rover
Stake: – 100 %
Deal amount: – US$ 2300m
Sector: – Automotive
Detailed Case Study
In June 2008, India-based Tata Motors Ltd. announced that it had completed the acquisition of the two iconic British brands – Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3 billion. Tata Motors stood to gain on several fronts from the deal. One, the acquisition would help the company acquire a global footprint and enter the high-end premier segment of the global automobile market. After the acquisition, Tata Motors would own the world’s cheapest car – the US$ 2,500 Nano, and luxury marquees like the Jaguar and Land Rover. Though there was initial skepticism over an Indian company owning the luxury brands, ownership was not considered a major issue at all.
According to industry analysts, some of the issues that could trouble Tata Motors were economic slowdown in European and American markets, funding risks, currency risks etc.
Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors, as it had increased the earnings volatility, given the difficult economic conditions in the key markets of JLR including the US and Europe. Moreover, Tata Motors had to incur a huge capital expenditure as it planned to invest another US$ 1 billion in JLR. This was in addition to the US$ 2.3 billion it had spent on the acquisition. Tata Motors had also incurred huge capital expenditure on the development and launch of the small car Nano and on a joint venture with Fiat to manufacture some of the company’s vehicles in India and Thailand. This, coupled with the downturn in the global automobile industry, was expected to impact the profitability of the company in the near future
In less than three years after its acquisition, Jaguar Land Rover has metamorphosed from a millstone around Tata Motors’ neck into its crowning jewel. In the June 2010 quarter, JLR division accounted for nearly 70% of the company’s net profit and over 60% of its revenues on the consolidated basis. This was more than what the market has expected and the stock is up by nearly 150% in the past two trading sessions.
JLR benefited from an improvement in its pricing power and a favourable exchange rate in the US dollar and the euro. The two worked in tandem and resulted in a sharp 60% jump in JLR revenue per unit to around £38,000 in June 2010 quarter compared to the £23,800 a year ago. With the raw material costs remaining benign, it led to a sharp improvement in the division’s operating margin and its reported net profit of £221 million (`1,613.3 crore) in the first quarter as against a net loss of £64 million (`467 crore) a year ago.
Debt equity ratio is increasing by 42.27% as Tata took loan of banks to acquire JLR.ROCE increases vey high by 343.60% as compared to pre acquisition as it gauges that company that generate its earnings from the total pool of capital which indicates profitability.Net profit margin increases as it income increases in post acquisition as compared to pre acquisition. P/E highly decreases in post acquisition by 60.1% which in investor point of view they will be profitable to invest to get high earning. ROE is highly increasing by 480.15% which shows that it has more equity than debt. EPS is increasing drastically by 480.15% which is very profitable for investors. Operating profit margin is reduced by 41.44% which shows that company profit margin is very less.
The cumulative return before merger was negative and the entire trend is moving in the negative direction due to poor returns of tata motors.
A soon as the acquisition took place, the highly profit generating Jaguar as well as Land Rover added to the profit and earnings of the tata motors. The brand value of JLR added to the highly reputable Tata Group and the company’s balance sheet. This can be clearly seen in the line chart above.
VALUATION AND INTERPRETATION
EV Multiples of Tata Corus
Tata Steel and Corus Group deal happened at high multiples compared to its peers. We can observe that the average multiples of the peer group company stands half compared to the deal multiples.
The average sales multiple of its peers is 1.17x compared to the deal of 0.68x of Corus Group’s sales. This can be possible due to high sales value, reducing the multiple to 0.68x. The lowest multiple (Steel Authority of India) is at 0.73x.
EBITDA multiple of its peers averages at 4.38x compared to the deal multiple of 7.02x of Corus Group’s sales. Even the highest multiple (Jindal Steel & Power) is at 4.38x. This is almost half of the deal multiple. It can be observed that Tata played very aggressively.
EBIT multiple of its peers averaged at 5.54x compared to the deal of 10.19x of Corus Group’s sales. Even the highest multiple (Jindal Steel & Power) is at 8.39x.
The PE multiple of the deal is very high on the account that the margins of Corus are very low compared to Tata Steel and other peers. The average PE multiples is 7.95x compared to 68.23x at which the deal haapened.
EV Multiples of Tata NTT Docomo
The deal of Tata Teleservices and NTT Docomo happened at very high multiples. We can observe that the average multiples of the peer group company stands very low compared to the deal multiples.
The average sales multiple of its peers is 5.37x compared to the deal of 26.98x (as on 31st March, 2008) of Tata Teleservices’s sales. Even the highest multiple (Reliance Communication) is at 9.24x. Thus we can conclude that Tata Teleservices got very good price for its stake dilution for NTT Docmo.
Again the average EBITDA multiple of its peers is very less, 16.35x compared to the deal of 99.81x (as on 31st March, 2008) of Tata Teleservices’s sales. Even the highest multiple (Reliance Communication) is at 26.74x. This is a huge difference. NTT Docomo paid 6 times more what it should have paid to Tata.
EBIT multiple of its peers is 25.5x compared to the deal of 952.96x (as on 31st March, 2008) of Tata Teleservices’s sales. Even the highest multiple (Reliance Communication) is at 41.02x.
The PE multiple for Tata Teleservices is negative as its net income is negative
Note: The multiples are high on account that Sales and the profitability of Tata Teleservices is low, inturn giving very high multiples. Its sales stands at Rs. 1,815.5 Cr. compared to the average sales of Rs. 11,490.6 Cr. of its peers.
FINDINGS FROM VALUATION OF ENTERPRISE VALUE MULTIPLE
Tata Steel and Corus Group deal happened at high multiples compared to its peers. We can observe that the average multiples of the peer group company stands half compared to the deal multiples. Even the highest multiple (Jindal Steel & Power) is at 4.38x. This is almost half of the deal multiple It can be observed that Tata played very aggressively as it paid high enterprise value as compared to our analysis. A reason for Corus to be sold is chance to Bail out of Debt and Financial stress. TATA Steel Paid 7.02 Times EBITDA of Corus Enterprise Value. The PE multiple of the deal is very high on the account that the margins of Corus are very low compared to Tata Steel and other peers the only company who has high P/E is Jindal steel.
Tata NTT Docomo
The deal of Tata Teleservices and NTT Docomo happened at very high multiples. We can observe that the average multiples of the peer group company stands very low compared to the deal multiples. The average sales multiple of its peers is 5.37x compared to the deal of 26.98x (as on 31st March, 2008) of Tata Teleservices’s sales.
Even the highest multiple (Reliance Communication) is at 9.24x. Thus we can conclude that Tata Teleservices got very good price for its stake dilution for NTT Docomo. The PE multiple for Tata Teleservices is negative as its net income is negative. EBITDA multiple of its peers is very less, 16.35x compared to the deal of 99.81x (as on 31st March, 2008) of Tata Teleservices’s sales. Even the highest multiple (Reliance Communication) is at 26.74x. This is a huge difference. NTT Docomo paid 6 times more what it should have paid to Tata. The multiples are high on account that Sales and the profitability of Tata Teleservices is low, in turn giving very high multiples. Its sales stands at Rs. 1,815.5 Cr. compared to the average sales of Rs. 11,490.6 Cr. of its peers.
Except Tata Steel- Corus deal, all the other 2 acquisitions was well accepted by not only well accepted by the owners of the company (the shareholders) but even made the entire Tata group come into the eyes of fortune 500 list. In-fact it ranked at 56th position at a global level in 2009
This study was undertaken to test what is the impact of mergers on the financials of acquiring corporate by examining some pre- merger and post-merger financial, in terms of impact on operating performance. The results from the analysis of pre- and post-merger operating performance ratios for the acquiring firms in the sample showed that there was a differential impact of mergers, for different industry sectors in India. Type of industry does seem to make a difference to the post-merger operating performance of acquiring firms.
Expansion through mergers and acquisition is one of the best ways for any domestic company to step outside the shores of India in an international market place and acquit itself as a global player
Company can turn into conglomerate in reasonably less time by capitalizing on its strengths of efficiency and effectiveness by acquiring relatively poor performing companies as TATA did in almost all its group of companies
Recent examples of companies which adopted similar pattern of expansion are Renuka Sugars, Arcelor Mittal, Reliance, Essar Group, Aditya Birla Group, etc.
One can study any of the above mentioned company and conclude that the key underlying decision of these companies expanding quickly and efficiently is their timely decision of merging and acquiring appropriate companies
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