When the funding winter of 2016 struck India, everyone expected it to send Venture Capitalists and other market players who dare dream of globalization scampering to the warmth of their chipped tile fireplace. While this did indeed happen, it only lasted for a year. The snow cleared sooner than anticipated and mergers and acquisitions have been the flavour of the year. In addition to this, a much greater force has been acting upon the economy. One that is very well capable of spelling trouble for the economy in the long-term. This year saw Walmart Inc, Berkshire Hathaway and ArcelorMittal on a buying spree, taking the total transaction value of private equity-led buyouts and corporate acquisitions over $100 billion. New unicorns such as Udaan and Freshworks were born while Flipkart took centre-stage with its controversy-riddled breakup coupled with a $16 billion acquisition by Walmart. Meanwhile, food delivery unicorns Zomato and Swiggy have taken the acquisition route to strengthen their fleet. Another high-profile deal has been the merger of Idea and Vodafone, one that was completed in August 2018 after a plethora of regulatory approvals. However, the merged entity posted a net loss of Rs. 4974 crore for the July-September quarter and key performance indicators have been dismal. Nonetheless, the merged entity has set FY 2023 as its deadline for completing merger synergies.
With all this activity going on, the fall of the rupee has had its own ramifications on the economy. Believed to have been triggered by a rise in the Fed rates, the rupees’ fall has had widespread consequences on the economy. Notwithstanding the uptick in foreign portfolio investor (FPI) inflows into the economy of late, the rupee is anticipated to maintain a low profile. This unfavourable trend could be attributed to a cut in oil production by OPEC and non-OPEC players by as much as 1.2 million barrels per day.
While the rupee has certainly shown signs of improvement from an all-time low of Rs. 74.6 and is following a somewhat sluggish uptrend, M&As have been slow to show the same vigour. Although the above trends spawn from very different economic ingredients, we believe that a tenacious approach should be followed; one that would help industries operate seamlessly as well as stabilize the domestic currency. With this background, we present few papers in this issue of TJEF. We hope that the readers of the journal benefit from the views and insights of the papers published.
Dollar Value appreciation has not been a recent phenomenon. However, the recent appreciation in the value of the dollar has been a piece of breaking news because of several reasons.
The huge jump in the value of the dollar was not expected.
People expected that the Government or the Central Bank would do something to help the Rupee’s condition.
Mechanisms implemented have not been fully successful to bring back the rupee to its previous level.
The fiscal or monetary policies implemented so far has worked well with the inflation targeting in India. However, more or less, the actions to check the fall of the rupees has not been very effective. People sending remittances to the home country, India, in US Dollars must be happy with such appreciation as the converted value would be high. However, it becomes a headache for people who travel outside India where they require US Dollars, as ultimately, they would have to burn more cash to get the same value of dollars.
Economists have been studying various phenomena to identify and implement models that could justify the fall or rise of the value of one currency with respect to the another. There have several economic models that have proposed so far. The models include the Purchasing Power Parity Theorywhich is based on the purchasing powers of the two countries, Interest Rate Parity Theory which is based on the interest rates of the two countries involved, International Fischer Effect which is based on nominal interest rates or inflation rates of the two countries, and Balance of Payments Theorywhich is based on the surplus or deficit of the account, i.e., in order to reach equilibrium, it must be balanced. There are few other theories which include Real Interest Differential Model, Asset Market Model, Monetary Model, and Economic Data model.
The focus of this paper is to discuss models that can provide quantitative methods to estimate future exchange rates. Accordingly, some of the models listed above have been discussed in the subsequent sections.
In this essay, we are mainly going to emphasize how the appreciation of the US Dollar i.e., USD against other currencies would impact different sectors of an economy in the context of India. The growth trajectory of the Indian Economy post the Liberalization, Privatization, and Globalization (LPG) reforms has been stupendous. The CAGR of close to 7% for almost 25 years is extraordinary for any economy and India has been able to sustain this growth for such a long period. This growth was coincidental with the growth of the world economy.
However, the Indian economy has undergone some exceptional phases of macroeconomic developments and growth pattern post the Global Financial Crisis. When the world economy was growing at a very tepid pace, the Indian economy was an exception, growing at nearly 8% compounded annual growth and then Demonetization struck the Indian Economy and Goods and Services Tax (GST) was rolled out without proper planning of its implementation. The growth trajectory took a hit for some time and it’s only recently that India’s growth seems to be picking up once again (the last quarter’s GDP growth has reached close to 8.5 %).
Indian Rupee (INR) has depreciated against US Dollar (USD) the most (about 8.3 percent) in comparison with other major currencies such as Euro (EUR), Great Britain Pound (GBP), Japanese Yen (JPY) and Chinese Yuan (CNY) in the last five years. The USD appreciation is due to various factors such as an increase in India’s trade deficit, fears of a trade war, surging oil prices and instability in Eurozone among many others (Anoyn, 2018). The changes in the exchange rates will affect the firms from different industries in three ways.
First, transaction exposure, which is created by the transactions of the firm involving cash flows resulting from activities such as imports, exports, payment/receipt of interest royalty etc. If there is a change in the exchange rate consequent upon the transaction, the revenue and profit margins will be disturbed. For instance, an Indian company exports goods invoiced in USD receivable after three months without knowing the exchange rate of USD/INR. If USD appreciates against INR for three months, the exporter’s INR revenue will decrease. Second, the changes in exchange rates may result in gains or losses in the consolidation of financial statements of foreign subsidiaries. This exposure is known as translation exposure. Third, the changes in the exchange rates might affect the firms’ competitive position in the market and the long-term cash flows. This is known as economic exposure (Eun & Resnick, 2012). The nature of the industries will have decided if they are going to be benefitted or affected by the exchange rate changes.
Steel is the most crucial material in industrial development and infrastructure construction, and is, therefore, of strategic importance for national transformation. Large economies around the world have achieved their economic development, prosperity, and growth strongly supported by a robust, sustainable and reliable domestic steel industry. In 2014, the Indian steel industry reeled due to scarcity of raw materials, supply-demand imbalance due to excessive capacity and moderate domestic demand, and surging imports from nations like China, South Korea, Japan, etc. in the absence of adequate tariff and non-tariff barriers against the dumping of steel and Free Trade Agreements (FTA’s) providing a very low duty protection.
A merger is a concoction of two companies to form a single entity where both assets and liabilities are merged together.
In an acquisition, one company “takes over” another company where assets and liabilities of the acquired company
become part of the “acquirer” company.
There are 4 different types of
Horizontal: Horizontal M&A happens between
companies engaged in the same business activity and competing with each other. e.g., HP-Compaq, Arcelor-Mittal, etc.
Vertical: VerticalM&A happen between companies
engaged in different segments of a product value chain so as to integrate the
entire value chain. e.g., Reliance Industries Limited (RIL)-Reliance
Petroleum Industries (RPL).
Concentric: It happens when two companies
operate in complementary industries and their products are used by the
same/similar customers. e.g., Sony- Columbia Pictures.
Conglomerate: Conglomerates arise when companies
that are in diversified industries with no visible synergy merge with one another. The
business of the target company is entirely different from the acquiring/merging
company. E.g., ITC Bhadrachalan-ITC.
History of Merger Waves:
In the past century, M&A activities have manifested a clustered
pattern which is delineated as a wave and they betide in a burst interspersed
with relative inactivity. There were six radical
M&A waves. Premiere four transpired between 1897 and 1904, 1916 and 1929, 1965 and 1969, and 1984 and 1989.
The first merger wave betided after the protracted depression
of 1873–1883, culminated between 1898 and 1902, and concluded in 1904.F
Source: Merill Lynch Business Brokerage and Valuation, Mergerstat Review,1989
During the second merger wave(1916-1929), multifarious
industries were consolidated. George Stigler, the late Nobel prize-winning
economist, contrasted the first and second merger wave as “merging for
monopoly” versus “merging for oligopoly.” Throughout the duration of this
period, the American economy perpetuated to metamorphose and transmogrify, predominately
because of the post–World War I economic boom, which proffered copious
investment capital for fervently interluding securities markets.
The third merger wave (1965-1969) attributed a historically extortionate magnitude of merger activity. These years were often known as the conglomerate merger period as it was recurrent for proportionately smaller firms to target larger companies for acquisition. In contrast, during the two earlier waves, a majority of the target firms were significantly miniscule than the acquiring firms.
Source: Merill Lynch Business Brokerage and Valuation, Mergerstat Review,1989
generis trait of the fourth wave
(1984-1989) lies in the conspicuous role of hostile
mergers. The downward trend that characterized M&As in the 1970s through 1980 back-pedalled keenly
Although the rapidity of mergers decelerated again in 1982 as the economy grew frail,
a brawny merger wave had taken hold by 1984.
Commencing in 1992(Fifth wave, 1992-2000), the number of M&As once again began to ameliorate. The prodigious deals, some similar in quantum to those that transpired in the fourth merger wave, emerged to eventuate afresh. During the 1990s, the U.S. economy entered into its longest post-war augmentation and companies reacted to the proliferated assemblage demand by pursuing M&As.
The Sixth Merger Wave (2003-2008) took
place on the heels of the recovery period of the dotcom bubble. Globalization, private equity,
and shareholder activism were the pivotal proclivity that defines the sixth
Global M&A deals and Rationale behind deals
Recently one of the strategic drivers of M&A deals has been acquiring technology assets. 20% of deals cite the acquisition of technological assets as the cardinal impetus behind deals, up from 6% in the spring of 2016.
of customer bases in existing markets, and also an inclusion to product
offerings or diversification of services, rank as the next two strategic
consequential drivers that corporate respondents cite as a raison d’etre behind
Digital strategy, a new response option for what is driving deals, ranked number four in importance, with 12% citing it as the most important driver.
Acquisition of talent has more than doubled in importance from the spring of 2016, increasing from 4% to 9%.
The prime influencers behind the deals in 2017 are:
One of the key influences on global M&A activity
in 2017 was a significant 62% plummet in Chinese investment in Europe and the US (the 2 biggest M&A
markets), as compared to the record-breaking levels reached in 2016.
Private equity played its part in shaping the M&A landscape in 2017 showing the
highest buyout value since 2007 and also the highest exit value on record.
Brexit has continued to have an impact on M&As both in the UK and overseas. The depressed value of the Sterling has promoted an uptick in inbound M&As in the UK, resulting in the highest level on record in 2017.
Global M&A have had a positive start in the first quarter of 2018 with deal value ameliorating to $1.2trillion in value. U.S. tax reforms and faster economic growth in European countries unbridled many companies’ deal making instinct.
Swelling cash coffers and hefty debt and equity
succoured to boost the confidence of chief executives and convince them that
now was a good time to pursue transformative mergers.F
According to Thomson Reuters data, though the number of deals globally plummeted by 10% to 10,338 y-o-y in the first quarter of 2018, the value of the deals burgeoned by 67% on y-o-y basis.
Brobdingnagian deals that consummated
in the 1st quarter of 2018 were those of U.S. health
insurer Cigna Corp’s $67 billion deal to acquire U.S. pharmacy chain Express
Scripts Holding Co, and German utility E.ON SE‘s $38.5 billion deal to
acquire RWE AG‘s renewable energy business Innogy SE. In the first quarter of 2018,
M&A volumes ameliorated by 67% in the US, 11% in Asia and almost doubled in
The two largest proposed deals this year are the $65billion deal of Disney to acquire Fox and the $85.4billion deal of AT&T to buy Time Warner.
M&A Consolidation Game in
ended the year 2017 on an optimistic note with 1,022 deals clocking a disclosed value of US$46.8
billion. While the deal volume attained a record acme (as compared to 895 deals in 2016) since 2010, the deal value was lower by 12% from US$53.2 billion in 2017. Deals aimed at market proliferation and
entry into new untapped markets, digital disruption and sector convergence,
were the cardinal drivers of deal-making during the year.
in deal count can be largely attributed to the powerful deal activity in the
domestic arena throughout the year, showcasing the preference of the local
market for businesses, driven by a stable economy and optimistic deal market
fundamentals. The year 2017 fared well on the value front as well as with the
yearly performance, which was in line with the median average of the previous
few years. Keeping in mind 2016s outstanding activity in value terms, the
decline in deal value during 2017 can be primarily attributed to a fewer number
of big-ticket deals (US$500
million and above). The year 2017 recorded 13 big-ticket deals as compared to 21 in 2016. Also, other factors such as the
uncertainty resulting from GST
implementation and the lagged effects of demonetization, heightened intensity of diligence in multiple
areas and delays in approval
processes also had an unfavourable impact on deal timelines.
Domestic deals continued to predominate the Indian
M&A landscape, as home grown companies preferred inorganic route to achieve
growth. In terms of volume, 2017 saw 682deals accounting for around 67%
of the gross deal volume. The
domestic deal value stood at US$37.9 billion, constituting for more than 3/4th of the total
disclosed value, a first time phenomenon ever in the Indian M&A deal
market. Interestingly, 127 deals
(totalling US$10 billion) out of the
total domestic deals were restructuring in nature, constituting around 19% of the domestic deal volume and 27% of the deal value. The local
M&A market saw US$3
billion plus deals during the year, totalling US$5.3 billion.
The years 2016 and 2017
have been the most promising years for M&As and looking into 2018, we can
conclude that this year has been as promising as the previous two years. Recent global political turmoil,
regulatory and policy changes by different nations are responsible for certain
disruptions of macroeconomic parameters, which have been the pivotal impetus
behind the deals.
Value creation: Laying the foundation for
mergers and acquisitions. PwC Report, 2018.
of 2017 and outlook for 2018, EY, 2018
Kashiramka and N V Muralidhar
Rao, Shareholders Wealth Effects
of Mergers and Acquisitions on Acquiring Firms in the Indian IT and ITeS Sector
XU1, Yong-jin LIANG, Shun-lin SONG, What Drives Mergers &
Acquisitions Waves of Listed Companies of The Chinext Market? IPO
Over-Financing or Stock Overvaluation, 2018
R. King, Svante Schriber, Addressing Competitive Responses to Acquisitions,
Mergers and Acquisitions are transactions in which the ownership of a company is either consolidated with or transferred to other entities. In acquisitions, a new company is not formed. Instead, the assets of the company are transferred to the acquirer and the smaller company is absorbed in it. In mergers, two companies combine with each other on mutually agreed terms and become partners in the new joint venture. Mergers and Acquisitions are a crucial corporate strategy adopted by organizations for their growth and sustenance. Multiple reasons can be attributed to M&As being the pivot of the businesses. The whys and wherefores range from pre-emptive motives like expanding the market power, ensuring efficiency gains to corporate governance motives such as correction of the internal inefficiencies and rectifying capital market imperfections. Especially, M&As are projected to be the culmination point in the life-cycle of start-ups. The entrepreneurial ventures are presumed to start with the seed capital and end in M&As.
The following statistic shows the value of Mergers and Acquisitions (M&A) worldwide from 2003 to 2017 and a prediction for the year 2018. The value of global Mergers and Acquisitions deals in 2007 amounted to 3.66 trillion U.S. dollars and it was predicted to go up to 4.4 trillion U.S. dollars by the end of 2018.