OIL AND NATURAL GAS CORPORATION

MERGER AND ACQUISITION

In reference to Cross Border Merger and Acquisition
MAHIMA SINGH B.A.LLB HONS. (4TH YEAR) UNIVERSITY OF PETROLEUM AND ENERGY STUDIES

2013

Oil and Natural Gas Corporation Scope Minar , Nirman Vihar ,New Delhi

INDEX

1. Introduction 2. Merger 3. Acquisition 4. Cross Border Merger and Acquisition 5. Types of cross border M&As 6. M&As as an entry of mode for direct investment 7. Modes of foreign direct investment 8. The driving forces behind cross-border M&As 9. Difference between merger and acquisition 10. List of merger and acquisition in India 11. Conclusion 12. Bibliography

Acknowledgement
I would like to thank the Corporate Law Department, ONGC, for providing me with the opportunity to work as a trainee for the Summer Internship Programme. I am extremely thankful to Ms. Awantika Mam for her patience and encouragement and Mrs. Sandhya Yadav for helping me learning and knowing the working mechanism of ONGC and for giving me the opportunity to attend the conciliation proceedings. I would like to pay my sincere gratitude to Ms. Mallika Anand for her kind gestures throughout my training period. I would like to thank form the bottom of my heart, all the members of the Corporate Law Department, ONGC, for the knowledge, cooperation and guidance throughout, which in my opinion will go a long way in helping me in legal field.

Thanking you all!! Mahima Singh BA.LLB.Hons. 4th year University of Petroleum and Energy Studies, Dehradun

INTRODUCTION The growth strategies followed by companies can be broadly classified into organic and inorganic growth strategies. Organic strategies refer to internal growth strategies that focus on growth by the process of asset replication, exploitation of technology, better customer relationship, innovation of new technology and products to fill gaps in the market place. It is a gradual growth process spread over a few years. Apple Inc. is probably an excellent example of Organic Growth. Growth at Apple is driven by trend-setting product innovation. Macintosh, iMac, iPod and the latest technological breakthrough pioneered by Apple is the I Phone. Steve Jobs, Founder, Apple Inc. commented thatOur belief was that if we kept putting great products in front of customers, they would continue to open their wallets. Inorganic growth strategies refer to external growth by takeovers, mergers and acquisitions. It is fast and allows immediate utilization of acquired assets. Getting involved with another company in this way makes good business sense as it can give a new source of fresh ideas and access to new markets. Most business enterprises are constantly faced with the challenge of prospering and growing their businesses. Growth is generally measured in terms of increased revenue, profits or assets. Most business enterprises are constantly faced with the challenge of prospering and growing their businesses. Growth is generally measured in terms of increased revenue, profits or assets. Businesses can choose to build their in-house competencies, invest to create competitive advantages, differentiate and innovate in the product or service line (Organic Growth) or leverage upon the market, products and revenues of other companies (In-organic Growth). The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. There are 15 different types of actions that a company can take when deciding to move forward using M&A. Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. In the United States, business laws vary from state to state whereby some companies have limited

protection against hostile takeovers. One form of protection against a hostile takeover is the shareholder rights plan, otherwise known as the "poison pill". Historically, mergers have often failed to add significantly to the value of the acquiring firm's shares. Corporate mergers may be aimed at reducing market competition, cutting costs (for example, laying off employees, operating at a more technologically efficient scale, etc.), reducing taxes, removing management, "empire building" by the acquiring managers, or other purposes which may or may not be consistent with public policy or public welfare. Thus they can be heavily regulated, for example, in the U.S. requiring approval by both the Federal Trade Commission and the Department of Justice MERGERS The term merger is not defined under the Companies Act, 1956 (the Companies Act), the Income Tax Act, 1961 (the ITA) or any other Indian law. Simply put, a merger is a combination of two or more distinct entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but to achieve several other benefits such as, economies of scale, acquisition of cutting edge technologies, obtaining access into sectors / markets with established players etc. Generally, in a merger, the merging entities would cease to be in existence and would merge into a single surviving entity. Merger refers to a circumstance in which the assets and liabilities of a company (merging company) are vested in another company (the merged company). The merging entity loses its identity and its shareholders become shareholders of the merged company Mergers may be of several types, depending on the requirements of the merging entities:

a. Horizontal Mergers: Also referred to as a horizontal integration, this kind of merger takes place between entities engaged in competing businesses which are at the same stage of the industrial process.1 A horizontal merger takes a company a step closer towards monopoly by eliminating a competitor and establishing a stronger presence in the market. The other benefits of this form of merger are the advantages of economies of scale and economies of scope. b. Vertical Mergers: Vertical mergers refer to the combination of two entities at different stages of the industrial or production process. For example, the merger of a company engaged in the construction business with a company engaged in production of brick or steel would lead to vertical integration. Companies stand to gain on account of lower transaction costs and synchronization of demand and supply. Moreover, vertical integration helps a company move towards greater independence
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Corporate Mergers Amalgamations and Takeovers, J.C Verma, 4th edn., 2002, p.59

and self-sufficiency. The downside of a vertical merger involves large investments in technology in order to compete effectively. c. Co-generic Mergers: These are mergers between entities engaged in the same general industry and somewhat interrelated, but having no common customer-supplier relationship. A company uses this type of merger in order to use the resulting ability to use the same sales and distribution channels to reach the customers of both businesses.2 d. Conglomerate Mergers: A conglomerate merger is a merger between two entities in unrelated industries. The principal reason for a conglomerate merger is utilization of financial resources, enlargement of debt capacity, and increase in the value of outstanding shares by increased leverage and earnings per share, and by lowering the average cost of capital. A merger with a diverse business also helps the company to foray into varied businesses without having to incur large start-up costs normally associated with a new business. e. Cash Merger: In a typical merger, the merged entity combines the assets of the two companies and grants the shareholders of each original company shares in the new company based on the relative valuations of the two original companies. However, in the case of a cash merger, also known as a cash-out merger, the shareholders of one entity receives cash in place of shares in the merged entity. This is a common practice in cases where the shareholders of one of the merging entities do not want to be a part of the merged entity. f. Triangular Merger: A triangular merger is often resorted to for regulatory and tax reasons. As the name suggests, it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer. Based on which entity is the survivor after such merger, a triangular merger may be forward (when the target merges into the subsidiary and the subsidiary survives), or reverse (when the subsidiary merges into the target and the target survives).

Financial Management and Policy-Text and Cases, V.K Bhalla, 5th revised edn., p.1016

ACQUISITION An acquisition or takeover is the purchase by one company of controlling interest in the share capital, or all or substantially all of the assets and/or liabilities, of another company. A company that attempts to acquire or merge with another company is called an acquiring company. A target company is a company that is being solicited by the acquiring company. The assets of the dissolved company would be owned by the acquiring company. The shareholders of the dissolved company are paid either cash or given shares in acquiring company. A takeover may be friendly or hostile, depending on the offeror companys approach, and may be affected through agreements between the offeror and the majority shareholders, purchase of shares from the open market, or by making an offer for acquisition of the offerees shares to the entire body of shareholders. a. Friendly takeover: Also commonly referred to as negotiated takeover, a friendly takeover involves an acquisition of the target company through negotiations between the existing promoters and prospective investors. This kind of takeover is resorted to further some common objectives of both the parties. b. Hostile Takeover: A hostile takeover can happen by way of any of the following actions: if the board rejects the offer, but the bidder continues to pursue it or the bidder makes the offer without informing the board beforehand. c. Leveraged Buyouts: These are a form of takeovers where the acquisition is funded by borrowed money. Often the assets of the target company are used as collateral for the loan. This is a common structure when acquirers wish to make large acquisitions without having to commit too much capital, and hope to make the acquired business service the debt so raised. d. Bailout Takeovers: Another form of takeover is a bail out takeover in which a profit making compan y acquires a sick company. This kind of takeover is usually pursuant to a scheme of reconstruction/rehabilitation with the approval of lender banks/financial institutions. One of the primary motives for a profit making company to acquire a sick/loss making company would be to set off of the losses of the sick company against the profits of the acquirer, thereby reducing the tax payable by the acquirer. This would be true in the case of a merger between such companies as well.

Acquisition results when one company purchase the controlling interest in the share capital of another existing company in any of the following ways; a) Controlling interest in the other company by entering into agreement with a person of persons holding. b) By subscribing new shares being issued by the other company. c) By purchasing shares of the other company at a stock exchange, and d) By making an offer to buy the shares of other company, to the existing shareholders of that company. CROSS BORDER MERGER AND ACQUISITION Cross Border mergers involve the merger of an entity incorporated in India with another entity incorporated outside India. Section 394 of the Companies Act provides that a foreign body corporate or a branch of a foreign body corporate may merge with an Indian company under a scheme of merger or amalgamation sanctioned by the court as per the provisions set out therein. The Companies Act precludes an Indian company from merging with a body corporate outside India. It is significant to note that at the time of sanctioning the merger of a foreign transferor body corporate with an Indian transferee company, the relevant high court will consider the validity of the merger as per the laws of the country in which the foreign body corporate has been incorporated, prior to approval of the scheme of merger. Cross-border mergers and acquisitions (M&As) have rapidly increased in recent years, accelerating the globalization of industry and reshaping industrial structure at the international level. In the 1990s, there has been a marked tendency in foreign direct investment towards mergers and acquisitions rather then Greenfield investment. The value of cross-border M&As grew more than six-fold in the period 1991-98, with an increasing tendency towards very largescale unions. Although non-OECD countries have increased their share of cross-border mergers and acquisitions, they primarily involve OECD countries and firms. M&As are taking place in a range of industries including mature manufacturing sectors, high technology fields and service sectors and reflect a need to restructure and strengthen global competitiveness in core businesses. The driving forces underlying the trend to cross-border M&A s are complex and vary by sector. Prolonged economic growth in countries such as the United States increases the capital available for industrial purchases abroad and attracts more inward investment, while the globalization of financial markets is also a factor. In some mature industrial sectors, international competition and market pressures due to excess capacity and falling demand are driving restructuring. Technological change, particularly in information technology, facilitates the international expansion of firms, which are also seeking to capture new market opportunities in fast-changing technologies and to pool research and development costs.

Enterprises increasingly seek to exploit intangible assets technology, human resources, brand names through geographical diversification and acquisition of complementary assets in other countries. Government policies such as investment liberalization, privatization and regulatory reform are also increasing the number of and access to industrial targets for acquisition. Cross-border mergers and acquisitions can yield dividends in terms of company performance and profits as well as benefits for home and host countries when successful industrial restructuring leads to greater efficiency without undue market concentration. Benefits from such M&As are increasingly intangible and found in economy-wide spillover effects. They can help revitalize ailing firms and local economies and create jobs through the restructuring process, acquisition of technology and productivity growth. Yet countries have differed widely in their openness to M&As involving foreign firms. And in some cases, poorly functioning factor and product markets may impede the realization of the favorable impacts of M&As in terms of economic growth and job creation. Government policies in areas such as investment, competition, labour and technology need to promote sufficient flexibility to enable firms to engage in necessary restructuring at the international level. TYPES OF CROSS-BORDER M&As Inward and Outward cross-border M&A s Cross-border M&A s can be either inward or outward. Inward cross-border M&As incur an inward capital movement through the sale of domestic firms to foreign investors (M&A sales), while outward cross-border M&As incur an outward capital movement through the purchase of all or parts of foreign firms (M&A purchases). However, inward and outward cross-border M&A s are closely related, since M&A transactions involve both sales and purchases. Trends in crossborder M&A differ among developed and developing countries. Developed countries are playing a major role in inward cross-border M&As, accounting for 73% (US$1 447 billion) of the total (US$1 977 billion) during the period 1991-98. Developing countries accounted for 27% (US$530 billion) of inward cross-border M&As during the Period 1991-98.As for inward cross-border M&As, developed countries are playing a dominant role in outward cross border M&As. Unsurprisingly, developing countries are relatively less important in outward cross-border M&As compared with inward cross-border M&As, accounting for only 11% (US$209 billion) of world outward cross-border M&As during the period 1991-98 (Tables 5 and 6). The share of developing countries in outward cross-border M&As has tended to increase throughout the 1990s, from 6% in 1991 to 12% in 1997. However, as in inward cross-border M&As, the value of outward cross-border M&As in developing countries in 1998 decreased to less than half of the level for 1997: from US$41 billion in 1997 to US$18 billion in 1998. In particular, outward cross-border M&As in those Asian countries which experienced the financial crisis were worth
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less than one-third of their 1997 value. As a result, the share of developing countries in global outward M&A s fell to 3% in 1998. Top five countries for inward cross-border M&As - United States, United Kingdom, Germany, France, Canada Top five countries for outward cross-border M&As - United States, United Kingdom, Germany, France, Canada M&As AS AN ENTRY MODE FOR DIRECT INVESTMENT When undertaking direct investment in a foreign country, a firm can choose between different modes of entry. Broadly speaking, the alternative options can be divided into mergers and acquisitions or Greenfield investment (Caves, 1982). That is, a firm may either acquire an existing local firm (M&A mode) or establish a new plant (Greenfield mode) in the host country. Furthermore, in the case of M&A mode, a firm can either acquire more than 50% of the shares of the acquired firm (majority M&A) or engage in an acquisition of a minority share-holding (minority M&A).Although entry modes for direct investment depend on a variety of firm and industry characteristics, there has been a marked tendency towards more mergers and acquisitions in particular, more majority M&As and less Greenfield investments. MODES OF FOREIGN DIRECT INVESTMENT Modes of inward FDI Analysis of the modes of entry for FDI across countries shows quite different patterns between Developed and developing countries. Cross-border M&As, in particular majority M&As, play a dominant role in FDI inflows for developed countries, but other modes of FDI inflows such as Greenfield investment are more important for developing countries. That is, as an entry mode into markets, cross-border majority M&A s are preferred to minority M&As and Greenfield investment in developed countries, while in developing countries, Greenfield investment and cross-border minority M&As are preferred to cross-border majority M&As. In developed countries, majority M&As tend to be the prevailing mode for inward cross-border M&A s. Modes of outward FDI As in inward cross-border M&As, majority M&As tend to be the prevailing mode for outward cross-border M&As in developed countries Unlike the case of inward cross-border M&As, the value of outward cross-border M&As in relation to FDI outflows is quite similar between developed and developing countries. It imply that outward cross-border M&As play an Important role in FDI outflows for both developed and developing countries. That is, as an entry mode into markets, outward cross-border M&As are preferred to Greenfield investment for both developed and developing countries. However, cross-border majority M&As are preferred by companies based in developed countries, while cross-border minority M&As are preferred by developing countries.
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Oil and gas Market trends and a need for restructuring are driving the increasing number of large-scale deals between companies in the oil and gas industry. Being of fundamental strategic importance to producer countries, the oil industry has gone through various stages of ownership and organizational structures. The 1970s saw the age of nationalism, where natural resources were nationalized, foreign concessions taken over and consortia halted, and the OPEC cartel regulated supply. In the 1980s followed an age of hostile take-overs and rescuing white knights in fact, the still-standing record for deals in the oil industry dates back to 1984 when Texaco took over Getty Oil, Gulf was overtaken by Chevron, and Mobil acquired Superior Oil. A privatization trend throughout the 1990s has brought private capital and foreign investors back into the arena and led to several mega-mergers (although it should be noted that the public sector often still plays a large role in the oil sector). Today, as oil prices remain low, managers are hard pressed to improve financial performance. The oil industry accounted for the largest mergers of all in 1998. The deal between British Petroleum and Amoco of the United States amounted to US$55 billion Recent years have seen the formation of several joint ventures as well as the mega-mergers by BP-Amoco, Total-Fina, and Nisseki-Mitsubishi. These deals were taking place as oil prices reached their lowest level in ten years in 1998. Other than (but related to) cost pressures, the oil and gas industry has seen some new features with strong implications for industry structure and the way of doing business. Among the most important factors are technological advancements which have increased competitive pressures in several ways. On the one hand, improved extraction techniques keep up supply, which in turn puts pressure on prices. On the other hand, technology has made gas cheaper as a substitute for oil, and gas better meets environmental concerns. Cross-border mergers between companies with different regional outreach will result in the spreading of political and financial risk. More capital will increase the ability to bid for large deals without having to look for partnerships for each occasion. Increased size increases the ability to take risks in exploration and production. In addition, mergers may give access to newer and cheaper oil fields generally outside Europe and North America.

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THE DRIVING FORCES BEHIND CROSS-BORDER M&As Firms engage in cross-border M&A activity for several reasons: among them, to strengthen their market position, expand their businesses, seek useful resources such as complementary intangible assets or realize efficiency gains by restructuring their businesses on a global basis (UNCTAD, 1998). The growth in cross-border M&As is part of an overall surge in M&As at both national and international levels due to their inherent advantages over other forms of investment. Through M&As, investors can exploit synergetic effects between their own assets and those of already-established firms. M&As enable firms to quickly realize new market opportunities and establish an immediate critical mass in a particular market. They can also serve to eliminate actual or potential competitors which, at the international level, are becoming more important as barriers to trade and investment fall. Virtually all developed countries and many developing countries have competition laws which prohibit anti-competitive mergers; horizontal mergers, particularly those occurring in highly concentrated markets, are generally subject to fairly close scrutiny by competition authorities to verify efficiency effects, although this may not always be 100% effective (Organization for Economic Co-operation and Development, 1996a). Mergers and acquisitions are not a new phenomenon, although their motives and characteristics may change over time. They have tended to occur in waves throughout this century, with periodic increases in M&A activity when stock market prices were high (Mueller, 1989). Economic recessions or booms can affect the level of global M&A activity and its regional focus. Industry characteristics such as growth prospects, market structure and competition are a strong influence on cross-border mergers. Slow growth, over-capacity and increased competition in global markets typically drive industrial restructuring and often make M&As preferable to Greenfield investments. Increased competitive pressures can push companies to seek equal partners where costly overlaps can be reduced and synergies exploited. Technological change works both as a pull and push factor for cross-border M&As: by promoting international expansion through falling communication and transport costs; by creating new businesses and markets; by rapidly changing market conditions; or by increasing the costs of research and development. Technical competence and market know-how, flexibility and ability to innovate increasingly are becoming corporate strategic assets, while at the same time the speed of technological development is pressing on. Companies are being forced to look for partners from whom intangible assets such as these can be obtained and absorbed. In addition, government policies such as liberalization, privatization and regulatory reform influence cross-border unions by opening up opportunities and increasing the availability of favorable M&A targets. These driving forces behind cross-border M&As can be loosely grouped into factors at the macroeconomic, industry and firm-level, as well as technological and government-related factors.

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DIFFERENCE BETWEEN MERGER AND ACQUISITION Merger and acquisition is often known to be a single terminology defined as a process of combining two or more companies together. The fact remains that the so-called single terminologies are different terms used under different situations. Though there is a thin line difference between the two but the impact of the kind of completely different in both the cases. Merger is considered to be a process when two or more companies come together to expand their business operations. In such a case the deal gets finalized on friendly terms and both the companies share equal profits in the newly created entity. When one company takes over the other and rules all its business operations, it is known as acquisitions. In this process of restructuring, one company overpowers the other company and the decision is mainly taken during downturns in economy or during declining profit margins. Among the two, the one that is financially stronger and bigger in all ways establishes it power. The combined operations then run under the name of the powerful entity who also takes over the existing stocks of the other company. Another difference is, in an acquisition usually two companies of different sizes come together to combat the challenges of downturn and in a merger two companies of same size combine to increase their strength and financial gains along with breaking the trade barriers. A deal in case of an acquisition is often done in an unfriendly manner, it is more or less a forceful or a helpless association where the powerful company either swallows the operation or a company in loss is forced to sell its entity. In case of a merger there is a friendly association where both the partners hold the same percentage of ownership and equal profit share

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LIST OF MERGER AND ACQUISITION IN INDIA 1. Tata Steel's mega takeover of European steel major Corus for $12.2 billion. The biggest ever for an Indian company. This is the first big thing which marked the arrival of India Inc on the global stage. The next big thing everyone is talking about is Tata Nano. 2. Vodafone's purchase of 52% stake in Hutch Essar for about $10 billion. Essar group still holds 32% in the Joint venture. 3. Hindalco of Aditya Birla group's acquisition of Novellis for $6 billion. 4. Ranbaxy's sale to Japan's Daiichi for $4.5 billion. Sing brothers sold the company to Daiichi and since then there is no real good news coming out of Ranbaxy. 5. ONGC acquisition of Russia based Imperial Energy for $2.8 billion. This marked the turnaround of India's hunt for natural reserves to compete with China. 6. NTT Do Como-Tata Tele services deal for $2.7 billion. The second biggest telecom deal after the Vodafone. Reliance MTN deal if went through would have been a good addition to the list. 7. HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion. 8. Tata Motors acquisition of luxury car maker Jaguar Land Rover for $2.3 billion. This could probably the most ambitious deal after the Ranbaxy one. It certainly landed Tata Motors into lot of trouble. 9. Wind Energy Premier Suzlon Energy's acquisition of Repower for $1.7 billion. 10. Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8500 crore or $1.6 billion. 11. LINN Energy combine with its affiliate Linn Co to purchase Berry Petroleum in an all-stock deal valued at $4.3 billion.

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CONCLUSION Cross-border M&As are increasing in both frequency and size. The current wave of M&As, while involving a wider range of countries, is mostly taking place in the OECD area. Crossborder unions are occurring in all sectors, with some of the larger mergers seen in mature industrial sectors where adjustment to over-capacity and reduced growth prospects is urgently needed. Cross-border M&As are appearing in many high-technology sectors in order to pool resources and abilities to remain competitive and innovative. They are particularly characteristic of service sectors which, as a result of regulatory reform, privatization and liberalization of trade and investment regimes, are now able to restructure more freely at both the national and international levels. Unlike previous decades, these mergers are motivated by the desire to consolidate capacities to serve global markets and fully benefit from scale economies. The concentration of resources on core competencies and the full utilization of intangible assets are key to the competitive strategies of multinational firms. These are aims that may be better achieved through cross border M&As than through other types of foreign investment.

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BIBLIOGRAPHY 1. Deloitte Oil and Gas Mergers and Acquisitions Report Mid Year 2012 2. Rocky Mountain Mineral Law Foundation, Strategic Risk Management for Natural Resources Companies and Their Advisors, May 1-2, 2008, Paper 8, MANAGING RISK IN OIL AND GAS ACQUISITIONS 3. Arvind Maharajan, Overseas Acquisition of Oil and Gas Assets by India 4. Navigating Joint Venture in the Oil and Gas Industry, Ernst & Young 5. National Oil Company Q1 2012, Ernst & Young 6. Deloitte Mergers and Acquisitions Global Oil & Gas Sector: Consolidation and New Avenues over the Landscape 7. Mergers and Acquisition in India: A strategic Impact analysis for the corporate enterprises in the post liberalization period 8. Motives for Cross Border Merger and Acquisition Some Evidence from Danish Firm 9. www.ongvidesh.com/Assets.aspx

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