Mergers and Acquisitions

Unit 3

Unit 3

Strategising and Structuring M & A Activity

Structure:
3.1 Introduction
Objectives
3.2 Merger Process
Setting the goals
The Selection criteria and information collection
Evaluation and structuring the offer (term sheet)
Due diligence and documentation
Investment horizon and disposal
Making the decision to sell the business
3.3 Basics Steps in Organising a Merger
3.4 The Five-Stage Model
3.5 Financial Aspects of Mergers
Financial constraints
Surplus cash
Debt capacity
Financing cost
3.6 Merger as a Capital Budgeting Decision
3.7 Summary
3.8 Glossary
3.9 Terminal Questions
3.10 Answers
3.11 Case Study

3.1 Introduction
In the last unit, we studied how corporations typically identify and evaluate
merger opportunities. This is a crucial initiative for the growth of a business,
and the exercise incorporates many strategic thoughts and actions.
In this unit, we take up the other vital aspect of M & A activity the strategic
structuring of a merger or acquisition. The intentions of an acquisition may
be thought out neatly and even documented strongly, but the devil is in the
detail. The success of a merger is probably more because of excellent
implementation than brilliant ideation.

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We, therefore, deal with the actual process of consummating a merger in

this unit.
A takeover generally involves the acquisition of a certain block of equity
capital which enables the acquirer to exercise control over the affairs of the
company. In theory, the acquirer must buy more than 50 per cent of the
paid-up equity of the acquired company to enjoy complete control. In
practice, however, effective control can be exercised with a smaller holding,
usually between 20 and 40 per cent, because the remaining shareholders,
scattered and ill-organised, are not likely to challenge the control of the
acquirer.
After studying this unit, you should be able to:
explain the merger process
describe the key steps of strategic planning of a merger
discuss the five-stage model
explain the financial fallouts of a merger
describe merger as a capital budgeting decision

3.2 Merger Process

The merger process comprises all or most of the following activities:
decision to buy/sell (both buyer and seller)
funding (buyer)
identification of potential and actual target (both)
valuation (both)
preparation of Offer/Memorandum (seller)
due diligence (both)
bidding (both)
negotiation (both)
paperwork (both)
integration (buyer)
post-sale restructuring (seller)
The key steps in a merger process are given below.
3.2.1 Setting the goals
Some common goals of a merger are:
1. acquire domain expertise and technology
2. acquire market share and brand name
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3. acquire technology, products or intellectual property or some such

assets
4. acquire a geographical presence
5. diversify into different businesses for a balanced portfolio and less
concentration in a single industry or market segment
6. reduce competition by acquiring competitors businesses
7. create a dominant position by sheer size, and thereby reduce
overheads and improve profits
8. achieve growth of revenue, profit and assets
9. create synergy between different business domains
10. enhance security of sales and supply
Remember: You should set the goals to align with the company's long-term
and medium-term strategies.
3.2.2 The selection criteria and information collection
After setting the objectives, you search for and identify suitable acquisition
targets. In this step you have to define the selection criteria, to make the
right choice. You can make a checklist of predetermined parameters on
which you evaluate the targets. Some selection criteria generally used are:
1. Size of revenue, profit and assets: Do not waste time chasing targets
that don't fit your bill.
2. Management quality and entrepreneurial flair: You might not want to buy
only technical competence but business expertise as well.
3. Identifiable market and customer base: Validate the business model by
sales to genuine, preferably reputable customers. Beware of a company
that has numerous related party transactions.
4. Maturity of the products, services and technology: If the product or
technology is only at its beta (early development) stage, you need to
assess the investment required to finish the development and the risk of
failure.
5. The sales and marketing channels: You don't want to reinvent the wheel
and build everything from scratch.
3.2.3 Evaluation and structuring the offer (term sheet)
At this stage, you need to crunch the numbers of the target's financial
statements and projections of future business. The objective is to determine
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if the future growth rate can yield the expected return and assess any
potential liabilities by studying the balance sheet.
When you are satisfied with the financial statements and the projections,
you need to work out price of the target acquisition, i.e. do the valuation.
There are a few approaches regularly adopted to determine the valuation of
a business. You can use one of these approaches or a combination. It is
important that you compare your finding with the market capitalisation of
publicly listed companies in a similar sector. Valuation is an art and not a
science, and necessitates application of personal judgement.
After the valuation, you will need to consider the other terms of the offer. All
these will eventually be written into the term sheet. Some other matters that
will be part of the offer include method of paying the consideration, board
representation, percentage shareholding required, management changes
and the administration of major business decisions.
The term sheet forms the basis for negotiation and is the cornerstone of the
legal documents.
3.2.4 Due diligence and documentation
Due diligence process is one common thread that runs throughout much of
the M & A process. Due diligence is the evaluation of the proposed merger
in a detailed and extensive manner. It helps us determine the kind of a fit
that exists between two companies, and whether it is strong enough to
support the merger. This includes the following:

Investment fit: What are the financial resources required, what is the
level of risk of the new organisation, etc.

Strategic fit: What are the management strengths that can be exploited,
to create fresh value? Both the companies in a merger must bring
something unique to the table so that synergy is created.

Marketing fit: How will products and services of the two companies
complement one another? How well do various components of
marketing fit together promotion programmes, brand names, customer
mix, distribution channels, etc.?

Operating fit: How well the different business units and production
facilities are aligned? How operating elements are fitted together
labour force, production capacities, technologies, etc.?

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Management fit: What expertise and talents are brought to the

companies by the merger? How well do these elements fit leadership
styles, adaptability, strategic thinking, etc.?

Financial fit: What is the score regarding financial metrics sales,

return on investment, profitability, cash flow, etc.?

To expose the major risks related to the proposed merger, due diligence has
to be broad and deep. Some of the risk areas that need to be looked into
are:

Market: How large is the market being targeted? Is it growing? What are
the major threats? Can a merger improve it?

Customer: Who are the customers? Does our business complement the
targeted customers? Can we provide new services or products to these
customers?

Competition: Who is the competitor of the target company? What are

the barriers to competition? How will a merger change the competitive
environment?

Legal: What legal issues are seen in the target company and what more
can we expect from the merger? What is the likely financial impact of
these issues?

3.2.5 Investment horizon and disposal

An acquisition that has long-term strategic benefits may be retained as a
strategic investment in the portfolio of an acquiring company which sees
itself as a long-term, corporate investor. Unlike financial investors who look
for short- to medium-term results, corporate investors look for building a
sustainable business with the acquired unit. Financial investors aim at return
in the form of capital gains upon selling the investment, while corporate
investors rely on dividend distribution from the acquisition for return of
investment.
Corporate investors too, at some point of time, dispose of the investment for
cash and move on. It is, therefore, important to have a clear exit strategy at
the time of making the acquisition. Exit can take place by several methods:
listing the acquired company, trade sale to another investor or resale to the
original vendors.

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3.2.6 Making the decision to sell the business

Owners decide to sell the business for a number of reasons like:
1. retirement
2. dispute between partners
3. decreased interest in the business
4. illness or death of any of the principals
5. flattening of sales and earnings
6. investment turning out to be a losing proposition
There is a difference between selling a business and selling an individual
asset because a business is more than an income-earning asset. It is truly a
lifestyle and the decision of parting can be emotional. Before deciding
whether to sell or not, personal factors and economic realities should be
considered so that a proper balanced decision can be achieved. The old
axiom that timing is everything is very true when it comes to selling a
business. Intelligent business owners appreciate that a business should not
be sold merely because there is a short-term downturn in business or due to
some sudden personal frustration.
Self Assessment Questions
1. Growth by M & A is not a privilege of giant multinational corporations.
(True/False)
2. The objective of M & A can be the security of supply and sales.
(True/False)
3. Due diligence is the evaluation of the proposed merger in a detailed
and extensive manner. (True/False)
4. Due diligence is not concerned with the valuation of the target
company. (True/False)
5. Due diligence not only helps to reduce risk but also contributes to
effective management of the acquisition. (True/False)

3.3 Basics Steps in Organising a Merger

Mergers and acquisitions are normally decided after thorough examination
of all facts and aspects. Like capital budgeting decisions, these are difficult
to reverse once they are put through, and so the organisation has to be
meticulous.

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The steps in an exercise of organising an acquisition are as follows:

Step 1: Pre-acquisition review: The preeminent reason for acquisition is
growth, and in this step the company management reviews the companys
growth plans, alternatives to achieving the growth, and the pros and cons of
each alternative.
Pre-acquisition review includes answers to the following questions:
Is our company undervalued? What should we do to protect our
valuation?
Why are we unable to grow or sustain market share? Will acquisition
help?
Are we a desirable target for acquiring corporations? Are we interested
in being acquired?
The fundamental question that needs to be answered is: Is the
merger/acquisition going to improve our valuation? And is there a positive
value addition?
Step 2: Searching and screening of target acquisitions: The second
step is to search for potential takeover candidates from the standpoint of
strategic compatibility with the acquiring company.
Compatibility and fit should be assessed across a range of criteria size,
kind of business, capital structure, core competencies, etc.
The search and screening process must be performed by the management
of the acquiring company without taking help of any outside agency except
for technical inputs like market intelligence, financial valuation, etc.
Step 3: Valuation of the target company: The third step is a thorough
analysis of the target company and its valuation. It is important to confirm
that the target company is truly a good fit with the acquiring company. This
requires a detailed review of operational, strategic, financial, and other
aspects of the target company. This detailed review is called due diligence.
Due diligence is the process of identifying and confirming or negating the
business reasons for the proposed capital transaction. Various factors like
customer needs, shareholder value and strategic alignment are at the core
of the analysis.
The direction and content of the due diligence exercise depends on what the
company expects to gain from the transaction. The acquiring companys
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interest can be in some or all of the following resources: employees,

customers, processes, products and services, technology and tangible
assets.
Due diligence is initiated after the selection of a target company. The main
purpose is to identify synergies that can be realised through the merger.
After this is done, the merged entity is valued as the sum total of values of
the acquiring company, the acquired company and the synergies, less the
cost of acquisition. The following example will make the calculations clear:
Value of acquiring company

= ` 500 lakh

Value of target company

= ` 250 lakh

Value of synergies as per phase I due diligence = ` 150 lakh

M & A costs

= ` 60 lakh

Total value of combined company

= Value of the acquiring

company + Value of the
target company + Value
of the synergies M & A
costs
= 500 + 250 + 150 60
= ` 840 lakh

Step 4: Negotiation: In this step, the deal is negotiated between the

companies. Based on various key questions, a negotiation plan is
developed:
Is there resistance from the target entity to the acquisition? How should
it be overcome?
How important is it for the two companies to get merged? Who has the
greater need?
What will be the acquiring company's bidding strategy?
How much should the acquiring company offer in the first round of
bidding?
The most common approach for both the companies is to write out an
informal agreement or a memorandum of understanding on how to proceed.
A negotiated merger is the preferred approach because the process will be
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smooth when both the parties are interested in the merger. This also goes a
long way in making the merger successful.
Step 5: Post-merger integration: On successful conclusion of
negotiations, the two companies announce an agreement to merge, which
leads to the fifth and final phase called integration. This is the most difficult
phase in the M & A process.
Every company has its own distinctive operating style, organisation
structure, culture and strategy. It is the responsibility of the managements of
the two companies to merge these distinctions and get the two companies
stakeholders working in harmony and unison. This requires extensive
planning and step-by-step implementation in the combined organisation.
Only when post-merger integration is successful, the synergies that are the
key objective of the combination can be realised.
Self Assessment Questions
6. The __________ phase is the most difficult phase in the M & A
process.
7. Compatibility and fit should be assessed across a range of criteria
size, kind of business, ___________, core competencies, etc.
8. Due diligence is initiated after the selection of a ___________.

3.4 The Five-Stage Model

To examine the issues that may contribute to the failure of acquisition and
value destruction, a five-stage model of mergers and acquisitions was
developed by the author Sudi Sudarsanam. This model advocates a view of
M & A as a process rather than a transaction. The process is considered as
a multi-stage one and a holistic view of the process is required to appreciate
the links between different stages and develop effective value-creating M &
A strategies.
The five stages comprise:
corporate strategy evolution
organising for acquisition
deal structuring and negotiations
post-acquisition integration
post-acquisition audit and organisational learning
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Stage 1: Corporate strategy evolution

The goal of M & A is to achieve corporate and business strategic objectives.
Corporate strategy aims to achieve ways to optimise the portfolio of
businesses that a firm has and how that portfolio can be modified in the
interest of the shareholders. Business strategy aims to enhance the firms
competitive positioning on a sustainable basis in its chosen markets. Both
the objectives can be met by M & A but is only one of several alternatives
including, for instance, strategic alliances, outsourcing, organic growth, etc.
Generally, acquisitions are made by companies due to one or more of the
following strategic intents:
to gain market power
to achieve economies of scale
to internalise vertically linked operations to save cost on dealing with
markets
to acquire complementary resources.
The acquirer looks for capabilities that can be leveraged to enhance the
competitive advantage of both the firms post-merger. Achievement of the
objectives depends both on the conceptual and empirical validity of the
strategy.
M & A generally seeks to create value through:
enhancement of revenue while maintaining the existing cost base
reduction in cost while maintaining the existing revenue levels
generation of new resources and capabilities, thus leading to revenue
growth or cost reduction or both.
Stage 2: Organising for acquisition
It is important to understand the decision process of acquisition because it
has a bearing not only on the quality of the decision and its value creation
logic but also on the ultimate success of the post-merger integration.
There are two primary perspectives here:

The rational perspective: This view is based on hard economic,

strategic and financial evaluation of the acquisition proposal and the
potential value creation. The acquisition is basically a matter of

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measurement of expected costs and benefits. The acquisition decision is

assumed to be a unified view which requires commitment from all
managers within the firm.

The process perspective: This is based on soft human dimension. In

this view the process of decision-making is more politically complex and
has to be carefully managed so that the required clarity and commitment
of managers is achieved, which is taken for granted in the rationalist
approach.

The authors contention is that the M & A five-stage process model ensures
that the risk involved in value damage are potentially structural in their
foundation, and managing this risk effectively should be crucial while the
acquisition is being considered.
Stage 3: Deal structuring and negotiation
The result of the processes described in Stages 1 and 2 is the specific
target selection. Once the selection has been made by the firm, the merger
transaction has to be negotiated or a takeover bid to be made. The dealmaking takes place in this stage.
The deal structuring and negotiation process is complex and involves many
interconnected steps including:
valuing the target company
choosing experts like investment bankers, lawyers and accountants as
advisors to the deal
obtaining and evaluating maximum intelligence possible about the target
company
performing due diligence
negotiating the senior management positions of the both firms in the
post-merger context
developing the appropriate bid and defence strategies and tactics within
the regulatory and other parameters.
Stage 4: Post-acquisition integration
The objective of this important stage is to make the merged organisation
operational so that the strategic value expectations can be delivered which
drove the merger in the first place.

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Integration of two organisations is not just about making changes in the

organisational structure and instituting a new hierarchy of authority. It
involves integration of processes, systems, strategies, reporting systems,
etc. Above all, it also involves integrating people and changing
organisational culture of the merging firms, possibly to develop a new hybrid
culture.
Integration of organisations may require change in the mindset and
behaviour of the people. It is, therefore, necessary to address cultural issues
during the integration process. Since it involves redistributing the power
between the merging firms, it is also a politically sensitive stage. Conflicts of
interest and loyalty will certainly come into play.
This stage of the acquisition process is, therefore, a major factor which
determines the success of the acquisition. The extent of integration depends
upon the degree of strategic interdependence required between the two
firms as a precondition for value creation and capability transfer. The value
creation logic behind the acquisition dictates the extent to which the
capabilities of the two firms need to be merged into a single organisation.
The diagram below illustrates the dimensions of need for interdependence
vis--vis need for autonomy. The taxonomy results in four types of postacquisition integration (Figure 3.1).

Fig. 3.1: Need for strategic interdependence

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Preservation: There is a great need for autonomy so that the

capabilities of the acquired firm are nurtured by the acquirer with
judicious and limited intervention such as financial control while allowing
the acquired firm to develop and exploit its capabilities to the full.

Holding company: This refers to involving no interaction between

portfolio companies, with passive investment by parent more in the
nature of a financial portfolio motivated by risk reduction and reduction in
capital costs

Symbiosis: This refers to two firms initially co-existing but gradually

becoming
independent.
Symbiosis-based
acquisitions
need
simultaneous protection and permeability of the boundary between the
two firms.

Absorption: This means full consolidation of

organisation and culture of both the firms over time.

the

operations,

Stage 5: Post-acquisition audit and organisational learning

Companies trying to grow through acquisitions need to develop acquisitionmaking as a core competence and excel in it. Companies possessing the
right growth strategy through acquisition and the necessary organisational
capabilities to manage their acquisitions efficiently and effectively can
sustain their competitive advantage far longer and create sustained value
for their shareholders.
For acquisition-making to become a firms core competence, possessing
robust organisational learning capabilities is a must. Developing such
learning capabilities is thus integral to the M & A core competence of
building effort by multiple or serial acquirers. It is, or should be, part of their
competitive strategy.
Self Assessment Questions
9. The five-stage model considers M & A as a ________________.
10. The goal of integration is to create an organisation which is able to
achieve the ______________ of the acquisition.
11. ____________ developed the five-stage model.
12. Business strategy aims to enhance the firms ___________ in its
chosen markets on a sustainable basis.

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13. Achievement of the objectives depends on both the conceptual and

____________ validity of the strategy.

3.5 Financial Aspects of Mergers

There are some key financial aspects of the M & A decision. A merger may
have to deal with the following aspects:
tackling financial constraints
deploying surplus cash
enhancing debt capacity
managing cost of capital
3.5.1 Financial constraints
If a firm has difficulty in putting through its acquisition because of cash
shortage, it may have to do a stock deal (exchange of shares) or borrow the
funds (leveraged buyout).
3.5.2 Surplus cash
Excess cash can be a trigger for merger activity. A firm which has surplus
cash and does not have opportunities to invest this cash may either
distribute it among its shareholders or use it for acquisitions. The
shareholders may prefer increase in the market value of their shares
through successful growth fuelled by acquisitions instead of getting cash
dividends and paying higher income tax.
3.5.3 Debt capacity
A merger of two companies with fluctuating but negatively correlated cash
flows can bring stability of cash flows of the combined company. The
stability of cash flows increases the capacity of the new entity to service a
larger amount of debt. The increased borrowing allows interest tax shield
and reduced cost of capital.
3.5.4 Financing cost
Although the cost of capital is reduced by enhanced debt capacity of the
merged firm, but this advantage has to be seen in relation to the increase in
shareholders risk on account of the increased gearing. Another aspect of

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financing costs is issue costs. A merged firm is able to realise economies of

scale in floatation and transaction costs related to an issue of capital.
Self Assessment Questions
14. The stability of cash flows ____________ the capacity of the new entity
to service a larger amount of debt.
15. A merged firm is able to realise ______________ in floatation and
transaction costs related to an issue of capital

3.6 Merger as a Capital Budgeting Decision

In a merger or acquisition, the acquiring firm is buying the business of the
target firm and not a specific asset. Thus, merger is a special type of capital
budgeting and should reflect the effect of operating efficiencies and synergy.
In appraising the merger as a capital budgeting decision, it is crucial to
appraise the value of the combined entity including the synergy, and not
compute independently the present value of the target company minus the
cost of acquiring it. Remember that after merger neither of the units is
relevant, but only the merged entity is. Projecting cash flows of the merged
company and evaluating its net present value will therefore provide the
proper answer.
This concept for evaluating acquisition decisions is illustrated with a
framework and an example below.
The framework:
Step 1: Determine CF (X), the equity-related post-tax cash flows of the
acquiring firm, X, without the merger, over the relevant planning horizon
period.
Step 2: Determine PV (X), the present value of CF (X) by applying a
suitable discount rate.
Step 3: Determine CF (X), the equity-related post cash flows of the
combined firm X which consists of the acquiring firm X and the acquired
firm Y, over the planning horizon. These cash flows must reflect the postmerger benefits.
Step 4: Determine PV (X), the present value of CF (X).
Step 5: Determine the ownership position (OP) of the shareholders of firm X
in the combined firm X, with the help of the following formula:
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OP = Nx/[Nx + ER (Ny)]
where
Nx = number of outstanding equity shares of acquiring firm X before the
merger.
Ny= number of outstanding equity shares of acquired firm Y before the
merger.
ER = exchange ratio representing the number of shares of firm X
exchanged for every share of firm Y.
Step 6: Calculate NPV of the merger proposal from the point of view of X
as:
NPV (X) = OP [PV (X)] PV (X)
where
NPV (X) = NPV of the merger proposal from the point of view of
shareholders of X
OP = ownership position of the shareholder of firm X
PV (X) = PV of the cash flows of the combined firm X
PV (X) = PV of the cash flows of firm X, before the merger
Illustration 1:
Consider a firm X Ltd.
Step 1: Estimated equity-related post-tax cash flow CF (X)t of X limited is as
follows:
Year

CF (X) t

200

220

236

248

260

After 5 years, CF (X)t will grow at a compound rate of 5% per annum.

Step 2: Determination of PV of cash flows using the discount rate of 15%
PV (X) = 200/1.15 + 220/(1.15)2 + 236/(1.15)3 + 248/(1.15)4 +260/(1.15)5 +
260(1.05)/[(0.15 0.05) (1.15)5] = 2123.79
The last item in the above equation represents the PV of the perpetual
stream of cash flows beyond the fifth year.
Step 3: Estimated equity-related cash flow of the combined firm X is as
follows:
Year

CF (X)t

320

360

410

430

450

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After 5 years, cash flow of the combined firm is expected to grow at the
compounded rate of 6% per year.
Step 4: Determination of PV of expected cash flows of the combined firm
PV(X) = 320/1.15 + 360/(1.15)2 + 410/(1.15)3 + 430/(1.15)4 + 450/(1.15)5 +
450(1.06)/[(0.15 0.06) (1.15)5] = 3660.6

Step 5: Determination of ownership position of the shareholders of X

The number of outstanding shares of firm X and firm Y before merger are
100 each. The proposed exchange ratio (ER) is 0.6. The ownership position
of the shareholders of firm X in the combined firm X will be:
OP = 100/[100 + 0.6(100)] = 0.625
Step 6: Calculation of NPV of the merger proposal from the point of view of
shareholders X
NPV (X) = (0.625) 3660.6 2123.79 = 164.085
Self Assessment Questions
16. Companies trying to grow through acquisitions need to develop
acquisition-making as a __________ and excel in it.
17. The merger will be advantageous to the acquiring firm if the present
value of the target merger is greater than the_____________.

3.7 Summary

Mergers and acquisitions have become an integral part of the strategic

growth initiative developed in an effort to restructure a business
organisation.

The main motive behind a merger is to add value to an existing

company by making changes in the organisational, financial and
operational structures. The main principle is to enhance shareholder
value, and the key to achieving this is distinct value addition through the
merger.

In tough times, strong companies act to buy other companies and create
a more competitive and cost-efficient company.

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Companies plan mergers and acquisitions to gain greater market share,

achieve greater operational efficiency and enhance the market value of
the company.

3.8 Glossary
Due diligence: A detailed and extensive evaluation of the proposed merger
Absorption: Full consolidation of the operations, organisation and culture of
both the firms over time.

3.9 Terminal Questions

1.
2.
3.
4.
5.

Explain the process of merger.

What are the basic steps in strategic planning of mergers?
Write a note on the five-stage model.
Explain the financial fallouts of a merger.
Merger should be a capital budgeting decision. Explain.

3.10 Answers
Self
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.

Assessment Questions
True.
True.
True.
False.
True.
Post-merger integration.
Capital structure.
Target company.
Process.
Strategic objectives
Sudi Sudarsanam
Competitive positioning.
Empirical.
increases
economies of scale
Core competence.
Cost of acquisition.

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Terminal Questions
1. The merger process includes some basics steps like setting of
objectives, due diligence, deal structuring, etc. For more details, refer
section 3.2.
2. The basics steps of strategic planning are pre-acquisition planning,
searching for target companies to acquire, etc. For more details, refer
section 3.3.
3. To examine the issues that may contribute to the failure of acquisition
and value destruction, a five-stage model of mergers and acquisitions
was developed by the author Sudi Sudarsanam. For more details,
refer section 3.4.
4. There are some key financial aspects of the M & A decision. For more
details, refer section 3.5.
5. The merger is a special type of capital budgeting decision and should
include the effect of operating efficiencies and synergy. It should
therefore be an evaluation of the merged business rather than the
acquired business. For more details, refer section 3.6.

3.11 Case Study

Indian Oil-BRPL merger plan awaits cabinet nod
Indian Oil is expecting the Union Cabinet committee to approve the merger
proposal of Bongaigaon Refinery and Petrochemicals Ltd (BRPL) with itself
next month. "We are expecting the Cabinet note for the same to be
circulated in June. Hopefully the approval will be available in July," a senior
company official told Business Line. The boards of both the companies
approved the merger in November 2006. The swap ratio was pegged at
4:37 (four equity shares of ` 10 each of IOC for every 37 shares of ` 10 each
of BRPL). IOC holds 74 per cent stake in BRPL.
This was the second merger proposal forwarded by IOC after IBP. The latter
was merged with the parent on May 2.
Located at Bongaigaon in Assam, BRPL refines roughly 2.35 million tonnes
of crude. The company registered a net profit of ` 239 crore on a gross
turnover of ` 6,426 crore in 2006-07. Shares of BRPL ended at ` 47.30 on
the BSE on Monday.
Sikkim Manipal University

Page No.: 57

Mergers and Acquisitions

Unit 3

Refining capacity
While efforts to enhance the refining capacity (of BRPL) were unsuccessful
so far due to non-availability of adequate crude oil in the north-eastern
region, BRPL has recently lined up a ` 2,000-crore investment plan to
increase profitability by upgrading product quality and replacing the existing
production of black oil and naphtha with high-value products.
The company has also stopped operating its polyester staple fibre plant.
The plant was run on naphtha and had turned unviable.
(Source: www.thehindubusinessline.com, circa Jun06)

Question
Make an analysis of the deal between Indian Oil-BRPL.
Hint answer: The deal is likely to be beneficial for both the companies. IOC
is holding 74% stake in BRPL. BRPL has refining capacity of 2.35 million
tonnes of crude and has a net profit of ` 239 crore.
References:
Godbole Prasad G., 2010, Mergers, Acquisitions and Corporate
Restructuring, Vikas Publishing House, New Delhi
Chandra Prasanna, 2007, Financial management, Tata McGraw Hill
Publication, New Delhi
Maheshwari S. N., 2002.Management Accounting, Sultan Chand &
Sons, New Delhi
EReferences:
themanagementor.com
www.som.cranfield.ac.uk

Sikkim Manipal University

Page No.: 58