Another type of Corporate actions or restructuring that is commonly seen in the market is merger and acquisition or simply abbreviated as M&A. Mittal Steel buying Arcelor or Tata taking over Corus are examples that fall under M&A category. Basically, any transaction that results in one company taking over another company completely or one company joining hands to setup a combined business are typical M&A transactions. The former case falls under acquisition category and the latter constitutes a merger.
Why will two companies go for M&A transaction? Well, there can be multiple reasons for that. But in the simplest terms, let me explain in terms of mathematics:
In simple terms
A + B = AB
However, in case of mergers and acquisitions,
A + B = AB + Synergy
This is the word, Synergy, that proves to be beneficial for both A & B, and that’s what is the driving factor for companies to either merge with each other completely or join hands. The synergy is supposed to be a positive term; if it is negative, then the M&A deal is worthless. But how exactly can we quantify this term synergy?
Let’s take an example: Assume that Air India operates from India to London. So, it can cater to the needs of travelers traveling from India to London only. However, if someone from India wishes to travel to New York, he may not be able to fly Air India, because it is limited only till London. He can do so, but he will then have to arrange tickets on any other airline from London to New York on his own. This will not only cost him money, but it may also require some legal formalities like transit visa at London airport. Ultimately, it’s a loss to the airline. Now suppose that Air India joins hands with British Airways, which operates from London to New York. This will help eliminate many problems and will be beneficial to both airlines as well as passenger.
From the point of view of passenger, he will have the following advantages:
• he will not have to worry about getting a transit visa at London
• no worry about collecting the luggage and again check-in at the London airport for travel between London and New York
• he will pay less for a collective booking, instead of 2 separate bookings
• he may get advantage of collective airmile points as the 2 airlines are now offering joint services
From the point of view of Air India & British Airways:
• Both airlines will be able to get additional income from the passengers of 2 countries
• Both airlines can work efficiently with less no. of staff
• Both will get access to new markets on sharing basis. For e.g. British Airways can now look forward to providing travel arrangements for British passengers on Air India flights from London to Singapore, via Mumbai & Air India can now serve Indian passengers from Mumbai to Sweden, via a BA flight from London.
The above, and several other points, constitute the so-called synergy from an M&A transaction.
Another example, say Bank of Baroda operates in South & west India, while Dena bank has good presence in north and east India. Both these banks can join hands and offer shared services to the customer at low costs, for e.g. sharing each others ATM and branches. GTB bank was supposed to have this kind of arrangement with ICICI and UTI bank, before it went burst.
In case of Arcelor Mittal, the synergy was supposed to come from the 2 different product ranges. Mittal steel is in the business of low-grade steel, while Arcelor is in the business with high grade steel production. The two join hands and jointly sell products of two varieties. Major benefit can come in the form of cross-selling new products to existing customers. For e.g., an existing client of low grade steel can now be offered high grade steel, with the relations that have been built by one company helps in cross selling products of the newly acquired company.
In case of Tata-Corus, the synergy is supposed to come from Tata getting access to the European markets.
Recent acquisitions in Indian aviation industry, Jet buying Sahara and Kingfisher buying Deccan are some other examples. Both airlines are expected to benefit from catering to a much wider customer base and reduce costs under the same name and work efficiently with less no. of staff. Another major benefit is in terms of reduction of poaching, pilots of one airline will have less job-switching options after consolidation in the aviation sector, and hence operations will be smooth. The airlines have to pay less license fee under the same name & hence will improve saving.
Continue to Part II of this article
No comments:
Post a Comment