Mergers and Acquisitions: 2007

Warburg Pincus acquisition of Bausch & Lomb
Bausch & Lomb is one of the world’s largest eye-care products manufacturer and their offerings include contact lenses, ophthalmic drugs and vision correction instruments; the Company has revenue streams of more than $2 billion and employs more than 12,000 staff. The company is being acquired by the private equity firm, Warburg Pincus for $3.67 billion, which now puts to rest the rival offer of Advance Medical Systems Inc., which had earlier offered $4.2 billion for acquiring Bausch & Lomb.
Cerberus acquires Chrysler
Chrysler has once again become an American company. Daimler of Germany and Chrysler of the US merged nine years ago in a historic $33 billion deal. This partnership ended in 2007 when Daimler Chrysler AG sold 80.1% stake in Chrysler to US based private equity company Cerberus for US$7.4 billion. The German automaker retained a 19.9% stake in the new company, Chrysler LLC. One may remember that the original Daimler-Chrysler deal was hailed as creating a global giant; however, things did not work out the way it was envisaged. Daimler was seriously hit by the rising pension and superannuation costs in the US. Also, it was unable to sort out the quality issues that came up with its focal brand, Mercedes. This is a classic case of how mergers and acquisitions seem rosy at the time of the deal announcement, but gets very challenging when it comes to the stage of integrating the merged companies

Rupert Mudroch takes controlling Interest in Wall Street Journal
2007 saw the takeover of Dow Jones by Rupert Murdoch for $6billion. Dow Jones is the American media giant that controls Wall Street Journal (WSJ), which is considered to be Americas’ most respected and leading business newspaper. The Bancroft family owned Dow Jones for more than 100 years. The media tycoon Rupert Murdoch owns the News Corporation Company, which has to its credit more than 110 newspapers, around the world. Key brands already owned by Murdoch include The Times of London and The Post. Murdoch leaves his footprint in all forms of communication media business including print, television and internet. His business empire stretches virtually to all continents and is truly global. Murdoch is famous for deep pockets and financial strength that help to support his newspaper in the long run. After many months of deliberation, the Bancroft family has finally sold Dow Jones to Murdoch. The initial concerns for the Bancroft family were that Murdoch could negatively influence the editorial independence of the newspaper. This was however overcome as Murdoch agreed to set up independent executive committees that would professionally review some of the critical operational decisions of the company, including the hiring and firing of staff, especially editorial executives.

Royal Bank of Scotland takeover of ABN Amro
The Royal Bank of Scotland (RBS) consortium, comprising itself, Spain’s Santander and Belgian-Dutch bank Fortis, seems to have won the largest ever corporate take over battle in the history of the banking industry, through their US$111.7 billion takeover of Dutch bank, ABN Amro. This corporate takeover battle was being fought between the RBS consortium and the third largest bank in the UK, Barclays. In spite of Barclay’s offer, which was marginally lower than that of the RBS, the management of ABN was in favour of merging their bank with Barclay’s. The main driver here was that Barclays were proposing to integrate the operations of both the banks, post merger, while the intention of the RBS consortium was different; it proposed to break down the operations of ABN which was expected to result in retrenchment of around 19,000 jobs. Nevertheless, at the end of the day, the ABN shareholders were attracted by the higher offer from RBS, resulting in the deal swinging in favor of the RBS consortium!

Vodafone-Hutch Deal

This has been one of the most publicized acquisition deals in 2007 resulting from a 67% divestment by the foreign shareholder, Hutchison Telecom International (HIL), in the Indian wireless telephone ‘Joint Venture (JV)’, Hutchison Essar Limited (Hutch), in which Ruias’ of the Essar group own the remaining 33%. There was stiff competition among almost all major players in the industry, including global telecom majors like Vodafone of UK, Verizon from the US, Maxis Telecommunications of Malaysia, Orascom from Egypt, the Hinduja group, Reliance and Bharti Airtel from India, all of whom were showing keen interest in acquiring the 67% from HIL. Vodafone of UK finally managed to clinch the deal through seamless political diplomacy. The deal was successfully completed at a valuation of $21 billion for 100% shares in Hutch.This deal has been very important for Vodafone, especially as Vodafone had not been performing well of late. 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. All of these markets, including the US, were maturing and were not growing in a big way. The company needed some solid restructuring, and in such a situation it seemed desperate to enter the fastest growing market in the world. In this backdrop, the Hutch deal became very important for Vodafone. Now that the deal is completed, it is expected that Vodafone, with its immense international expertise and technology will bring in significant innovations in the Indian telecom market through which Indian telecom users can gain more. The competition is however expected to be seriously challenging.

Tata Steel Corus Deal
Over the last few years Tata Steel has been on an overseas acquisition spree; deals with NatSteel of Singapore and Millennium Steel of Indonesia were successfully completed. But what came through in 2007, in the form of the Corus acquisition, definitely seems to be the best among all that Tata Steel has achieved by way of acquisition. The Corus deal was concluded in 2007 at a value of $12billion, and is roughly four times the current size of Tata Steel, in terms of ‘turnover’. The deal is expected to provide significant synergies to Tata Steel in the future. However the risk in the deal also seems to be fairly high, primarily the financial risk arising out of the excessive debts (loans) incurred by Tatas in financing this deal. The total purchase price of $12 billion required to fund Corus, was financed through $2 billion, infused through equity, another $2 billion through bridge loans, repayable over a year out of Tata Steel internal accruals, a term loan of around $6 billion, repayable over the next ten years and the remaining $2billion through additional equity and loans. Where the proportion of loan financing is so high (70% to 75% in the present case), the risk in the transaction is considerable, due to uncertainties on whether cash flows from invested companies would be in a position to service the debt consistently, over the next ten-year period, subject to good market conditions prevailing that would continue to be conducive for Tata Steel and Corus to generate the envisaged cash flows. Another angle to this issue is the already overstretched position of the Tatas: they are in the midst of a huge capital expansion program with committed investments in Jharkhand, Chattisgarh and Orissa to increase capacity to 30 million tonnes over the coming decade. However, involvement of the Tata name significantly mitigates this risk, as their credit record has been immaculate.

Jet-Sahara Merger
The Jet Sahara deal, which went through a litigation process, was eventually concluded during the current year; Jet Airways and Air Sahara reached a compromise and moved forward. Jet eventually completed the Air Sahara purchase for Rs.1,450 crores, all in cash, through deferred payment. Jet has already re-branded Sahara as ‘JetLite’, and has spun it off as a 100% subsidiary of Jet Airways. Air Sahara’s fleet of aircraft has already been converted to JetLite branding. Jet Airways is now focusing on its international route with Brussels in Belgium as its hub. This strategy gives it the flexibility to retain the full service offering of Jet Airways as it was and at the same time allow JetLite to compete with the onslaught of other Indian low cost carriers without diluting the brand image of Jet Airways

Hindalco’s acquisition of Novelis Inc.
In 2007, Aditya Birla Group’s Hindalco Industries Ltd., India’s largest non-ferrous metal company acquired Novelis Inc., the world’s leading producer of aluminum rolled products in an all cash transaction that was valued at around $6billion. Following the merger, the combined entity of Hindalco-Novelis is expected to be the world leader in aluminum rolling operations, one of the biggest producers of primary aluminum in Asia, and India’s leading copper producer.

Kingfisher-Air Deccan Alliance
As outlined earlier, the Indian domestic airline sector has been moving towards a strong consolidation mode in 2007. The Jet-Sahara merger and Air India-Indian consolidation was followed by Vijay Mallya-owned Kingfisher Airlines taking a close to 50% stake in Air Deccan, promoted by Captain G.R. Gopinath for Rs. 550 crores. This deal is actually not a merger; the intention of this deal is not to merge the operations of the two airlines, but to run them as two distinctive legal entities and separate brands, but the two airlines will now have certain common shareholders like Mr. Mallya; these shareholders would now be in a position to evolve joint strategies for the two airlines that would complement the operations of the two airlines, which till now were competing with each other. We have already seen that Air Deccan has shed its old image and has changed its appearance by adopting the Kingfisher colour schemes and branding. Kingfisher and Air Deccan now have a combined fleet of 71 aircraft and are flying to 70 destinations. They have, between themselves, captured more than 30% of the Indian aviation market share. The commonality in the aircraft types between the two airlines is a major plus and is expected to save costs. Kingfisher offers a full service model (serves hot food on board the aircraft, has luxury lounges in the airports, has in-flight entertainment system like TVs). Air Deccan, on the other hand, targets travelers looking to fly at low costs. Its fares are lower than, or close to, the Second A/C Railway fares and the airline offers very basic service on-board; the target customers of Kingfisher are at the higher end of the spectrum including business executives and holiday leisure travelers. The very philosophy of the two airlines is poles apart. Both Mr. Mallya and Captain Gopinath have rightly decided not to merge the airlines, but to run them independently without diluting either of the brand names.With the credit squeeze partially easing out as a result of the US Federal Reserve (Fed) slashing interest rates by around 75 basis points, the global liquidity position is expected to further improve and more deals could be happening by the 2007 year end!