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 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.
Methodology of the study
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 was 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 of a firm is a measure of the proportion of a company’s revenue that is left over after variable costs of production such as raw materials, salary have been paid. A healthy operating margin is necessary for a company to be able to pay for its fixed costs, such as interest on debt. Also known as net profit margin.
(3) Enterprise Value
Enterprise value is a figure that, in theory, that represents the entire cost of a company if someone was to acquire it. Enterprise value is a more precise estimate of takeover cost than market capitalization since it includes a number of important factors such as preferred stock, cash reserves and debts.
ANALYSIS OF DATA
TATA GROUP OF COMPANIES
Tata Group is undoubtedly one of the India’s prime business groups in the country. With around about 96 operating companies it diversifies businesses into 7 different sectors. Revenues equal to 5.3% of India’s GDP. The total revenue of Tata companies, taken together, was around Rs319,000 crore in the year 2009-10, with 57 per cent of this contributed by business outside India. Tata companies employ about 395,000 people globally. The Tata name has been valued in India for 140 years for its devotion to strong values and business ethics. Leading employer in private sector over 300,000 employees. A shareholder base of over 2.9 million and operations across 80 countries.
The group’s major companies are beginning to be counted globally.
Considering three 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.
-Tata Motors, India’s largest automobile company.
With a controlled position in emerging markets, Tata Communications leverages its superior solutions capabilities and domain expertise throughout its worldwide and pan-India network to deliver managed solutions to multi-national enterprises and Indian customers.
Tata Steel Limited acquired the Anglo Dutch steel company, Corus Group Plc for US$ 12.00 billion on January 31, 2007,. The merged body, Tata-Corus, engaged 84,000 people across 45 countries in the globe. It had the ability to make 27 million tons of steel per annum, making it the fifth largest steel producer in the globe as of early 2007.
Prior to the acquisition, the chief market for Tata Steel was India. The Indian market accounted for 69% of the company’s total sales. Approximately half of Corus’ manufacture of steel was sold in Europe .The UK consumed 29% of its production.
Post the acquisition, the European marketplace (including UK) would use 59 percent of the merged entity’s total production.
FINAL DEAL : An auction that started on January 31, 2007, and post 9 rounds of bidding, TATA Steel could finally settle the deal with its last bid 608 pence per share, approximately 34% higher than the initial bid of 455 pence per share by Corus.
Though the possible benefits of the Corus deal were widely respected, some analysts had qualms about the ending and effects on Tata Steel’s performance. They figured 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
COMPANY’S RETURN BEFORE AND AFTER ACQUISITION
Refer APPENDIX 1
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.
TATA Steel (31st Jan 2007)
|Net Profit Margin||20.46||21.36||4.4|
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 $333 million apiece, amid a welter of controversy.
DoCoMo, in accordance with regulations of the Securities and Exchange Board of India, expects to make an open offer to acquire up to 20 per cent of outstanding equity shares of Tata Teleservices Maharashtra (TTML), a Tata telecommunication company, through a joint tender offer along with Tata Sons. TTSL and TTML through the Tata Indicom brand, have increased their combined share of the fast-growing Indian mobile market and their combined subscriber base now stands at over 30 million.
TTSL expects to leverage DoCoMo’s expertise in the development and delivery of value-added services, where DoCoMo is a firmly established market leader.
TATA DOCOMO (13-11-08)
|Net Profit Margin||9.55||10.61||11.10|
Debt equity ratio on post acquisition debt is increasing which shows company debt is increasing after merger. ROCE is constant it has not change much.Net profit margin increases by 11.10 as it income increases in post acquisition as compared to pre acquisition. P/E highly increases in post acquisition from 0 to 12%. ROE is decreasing by 1.53% which shows that it slightly more debt than equity. EPS is increasing drastically by 24.27% which is very profitable for investors. Operating profit margin is increased by 15.43% which shows that company profit margin is very fairly profitable.
COMPANY’S RETURN BEFORE AND AFTER ACQUISITION
The return of the target company Tata Communication has been very poor since the past 15 to 20 days before the acquisition but it almost got to break-even soon after the acquisition date. This sustained for the next 8 to 10 days but again got back into negative returns zone due to poor customer support to the newly entered Docomo brand in highly competitive communications market in India.
TATA MOTOR – JLR
About the acquisition
Date: – 27th March 2008
Acquirer: – Tata Motors Ltd
Target company: – Jaguar Land Rover
Stake: – 100 %
Deal amount: – US$ 2300m
Sector: – Automotive
Detailed Case Study
In June 2008, India-based Tata Motors Ltd. announced that it had accomplished the purchase of the two iconic British brands – Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.33 billion. Tata Motors stood to grow on numerous fronts from the deal. One, the acquirement would help the corporation acquire a international footprint and enter the high-end premier section of the global automobile market. Following the acquisition, Tata Motors would possess the world’s cheapest car – the US$ 2,500 Nano, and extravagance marquees like the Jaguar and Land Rover. Though there was initial uncertainty over an Indian corporation owning the luxury brands, possession was not considered a key concern at all.
According to business analysts, some of the issues that could danger Tata Motors were financial slowdown in European and American markets, funding risks, currency risks etc.
Morgan Stanley reported that JLR’s acquirement appeared unhelpful for Tata Motors, as it had amplified the earnings unpredictability, given the tricky economic environment in the key markets of JLR counting the US and Europe. Furthermore, Tata Motors had to incur a huge principal outflow as it planned to invest an additional US$ 1 billion in JLR. This was in addition to the US$ 2.3 billion it had spent on the acquirement. Tata Motors had also incurred enormous capital expenditure on the growth and launch of the small car Nano and on a joint project with Fiat to assemble some of the company’s vehicles in India and Thailand. This, together with the slump in the global automobile industry, was projected to impact the success of the company in the near future
In fewer than three years after its acquirement, Jaguar Land Rover has metamorphosed from a burden around Tata Motors’ neck into its top jewel. In the June 2010 quarter, JLR division accounted for just about 70% of the company’s net turnover and over 60% of its revenues on the consolidated base. This was more than what the market has anticipated and the supply is up by almost 150% in the past two trading sessions.
JLR benefited from an advance in its pricing control and a positive exchange rate in the US dollar and the euro. The two worked in tandem and resulted in a quick 60% jump in JLR returns per unit to approximately £38,000 in June 2010 quarter compared to the £23,800 a year ago. With the unprocessed material costs remaining benign, it lead to a quick advance in the division’s in use margin and its reported net revenue of £221 million (`1,613.3 crore) in the first quarter as in opposition to a net loss of £64 million (`467 crore) a year ago.
TATA MOTORS (27- 03 2008)
|Net Profit Margin||6.88||11.47||40.02|
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.
COMPANY’S RETURN BEFORE AND AFTER ACQUISITION
As we can see from the line chart that 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 happened.
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 check what is the force of mergers on the financials of acquiring company by probing some pre- merger and post-merger financial, in requisites of impact on in use performance. The outcome from the study of pre- and post-merger operating performance ratios for the acquiring firms in the trial showed that there was a differential force of mergers, for different production sectors in India. Type of production does seem to make a difference to the post-merger in use performance of acquiring firms.
Growth through mergers and acquirement is one of the best ways for any domestic corporation to step outside the coast of India in an global market place and acquit itself as a international player
Corporations can turn into conglomerate in convincingly less time by capitalizing on its strengths of competence and efficacy by acquiring comparatively poor performing companies as TATA did in nearly all its cluster of companies
Recent examples of corporations which took up similar outline of growth are Renuka Sugars, Arcelor Mittal, Reliance, Essar Group, Aditya Birla Group, etc.
One can study any of the above mentioned corporations and bring to a close that the key underlying decision of these companies escalating rapidly and competently is their well-timed decision of merging and acquiring suitable companies
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