S.N
Topics
Page No.
o 1 2 3 4 5 6 7
Chapter 1 Executive Summary Chapter 2 Introduction Chapter 3 Objectives of the Study Chapter 4 Literature Review Chapter 5 Research Methodology Chapter 6 Data Analysis Chapter 7 Findings and Conclusion
8
Findings Conclusion Chapter 8 Recommendations
INDEX
CHAPTER 1 EXECUTIVE SUMMARY
Executive Summary
The primary objective of an organization towards M &A's is to create a niche of core competencies and improve transform the organizational culture to a better and improved form. It helps in design and develops systems in accordance to the changing face of business across all industrial sectors. The JSW steel merger with JSW Ispat is the latest in India in 2013. This deal also has background of the merger including various regulatory interventions of authorities like Securities and Exchange Board of India (SEBI). In this case, an attempt has been made to analyze the probable impact of strategic tools and features of the JSW Steel on pre and post merger financial performance. In daily news we come across frequently with the headlines of merger, acquisitions, takeover, joint venture, demerger and so on. Since last two decades as especially after, the liberalization and consequent globalization and privatization have resulted into tough competition not only in Indian business but globally as well. The present study is mainly based on secondary data. In order to evaluate financial performance, Ratio analysis have been used as tool of analysis.
CHAPTER 2 INTRODUCTION
Introduction
The main objective of any company is profitable growth of enterprise to maximize the wealth of its shareholders. Further, to achieve profitable growth of business it is necessary for any company to limit competition, to gain economies of large scale and increase in income with proportionally less investment, to access foreign market, to achieve diversification and utilize underutilized market opportunities. In order to achieve goals, business needs to remain competitive and work towards its long term sustainability. A profitable growth of business can achieved successfully if as a strategic tool merger is adopted. The most remarkable examples of growth and often the largest increases in stock prices are a result of mergers and acquisitions. Business environment of business is changing so rapidly, the present corporate scenario has totally changed; during this changing scenario it is very difficult for every business organization to achieve its objectives like as maximize its profit and improve growth and development of the entity. Association along with the changing scenario of the business is a primary activity of every concern to achieve its goal. Growth potentiality drives every business organization for internal and external changes. With internal changes an organization go for new product development or the external changes are the main requirement to maintain and improve the position of the business it can be possible through mergers, acquisitions, amalgamations and takeovers. These are the basic growth and improvement strategies which eliminate the weak points of businesses and make them competitive. This study concerned with merger activity of managing the business environmental changes and lot of research works which provides a huge quantum suggestion for this subject matter. But now a days it is very popular growth oriented strategy especially in developing countries like as India. JSW Steel has completed the merger of JSW Ispat Steel with itself and the merger has become effective from June 1.With the completion of merger, JSW Steel has become the second largest steel producer in the country after state-owned Steel Authority of India (SAIL) with 14.3 million tones capacity. The company led by Sajjan Jindal, had announced merger of JSW Ispat into itself in September 2012. With reference to the earlier announcement the JSW Steel has now informed BSE that The Scheme has become effective from June 1, 2013, upon filing of the certified copy of the order of the High Court of Bombay with the Registrar of Companies, Maharashtra, Bombay. The Bombay High Court had approved the composite scheme of amalgamation and arrangement amongst the two companies and their shareholders and creditors on May 3, 2013. Shareholders and creditors of the two companies had approved the merger on January 30. JSW Steel, belonging to the JSW group, is part of the OP Jindal Group, one of the lowest cost steel producers in the world. It has a total installed capacity of 11 million tons per annum (MTPA). The company is engaged in manufacture of flat and long products viz. HR coils, CR coils, galvanized/galvalume products, color coated products, auto grade/white goods grade CRCA Steel, bars and rods. JSW Steel has one of the largest galvanizing and color coating production capacity in the country. The company has also tied up with JFE Steel Corp, Japan for manufacturing high grade automotive steel. JSW Steel has acquired a majority stake in Ispat Industries resulting in a combined capacity of 14.3 MTPA. The company has also acquired mining assets in Chile, the US and Mozambique.
As per the merger scheme, shareholders of JSW Ispat would get one JSW Steel share for every 72 shares they hold. JSW Steel had acquired 41% stake in debt-ridden Ispat Industries from the Mittal brothers -- brothers of the steel czar L N Mittal-- for about Rs 2,157 crore in December, 2010. Subsequently, Ispat was renamed as JSW Ispat. Later, JSW increased its stake to 46.75% in JSW Ispat and was the single-largest shareholder of the company. In this case, an attempt has been made to analyze the probable impact of strategic tools and features of the JSW Steel on pre and post merger financial performance. In order to evaluate financial performance, Ratio analysis has been used as tool of analysis.
CHAPTER 3 OBJECTIVES OF THE STUDY
OBJECTIVES OF THE STUDY • To study the various aspects of merger and acquisition.
• To analyse the case study based on merger of JSW Steel Ltd and JSW Ispat Ltd. • To study the pre and post performance of acquiring and acquired company.
CHAPTER 4 LITERATURE REVIEW
Literature Review Merger and acquisition for long have been an important phenomenon in the US and UK economics. In India also, they have now become a matter of everyday occurrence. They are
the subject of counting interest to different persons such as the business executives who are looking for potential merger partners, investment bankers who manage the mergers, lawyers who advice the parties, regulatory authorities concern with the operations of security market and growing corporate concentration in the economy and academic researchers who want to understand these phenomenon better. Gallet C.A (1996), “Merger and Market Power in the US Steel industry” He examine the relationship between mergers in the U.S. steel industry and the market power. The study employed New Empirical Industrial Organization (NEIO) approach which estimates the degree of market power from a system of demand and supply equations. The study analyzed yearly observations over the period between 1950 and 1988 and results have revealed that in the period of1968 to 1971 merges did not have a significant effect on market power in the steel industry; whereas mergers in 1978 and 1983 did slightly boost market power in the steel industry. Anup Agraval Jeffrey F. Jaffe (1999), “The Post-merger Performance Puzzle” they examines the literature on long-run abnormal returns following mergers. The paper also examines explanations for any findings of underperformance following mergers. We conclude that the evidence does not support the conjecture that underperformance is specifically due to a slow adjustment to merger news. We convincingly reject the EPS myopia hypothesis, i.e. the hypothesis that the market initially overvalues acquirers if the acquisition increases EPS, ultimately leading to long-run under-performance. Saple V. (2000), “Diversification, Mergers and their Effect on Firm Performance: A Study of the Indian Corporate Sector” he finds that the target firms were better than industry averages while the acquiring firm shad lower than industry average profitability. Overall, acquirers were high growth firms which had improved the performance over the years prior to the merger and had a higher liquidity. Beena P.L (2000), ‘An analysis of merger in the private corporate sector in India’ she attempts to analyze the significance of merger and their characteristics. The paper establishes that acceleration of the merger movement in the early 1990s was accompanied by the dominance of merger between firms belonging to the same business group of houses with similar product line. Vardhana Pawaskar (2001), “Effect of Mergers on Corporate Performance in India” he studied the impact of mergers on corporate performance. It compared the pre- and postmerger operating performance of the corporations involved in merger between 1992 and 1995 to identify their financial characteristics. The study identified the profile of the profits. The regression analysis explained that there was no increase in the post- merger profits. The study of a sample of firms, restructured through mergers, showed that the merging firms were at the lower end in terms of growth, tax and liquidity of the industry. The merged firms performed better than industry in terms of profitability. Paul (2003) “The merger of Bank of Madura with ICICI Bank”. The researcher evaluated the valuation of the swap ratio, the announcement of the swap ratio, share price fluctuations of the banks before the merger decision announcement and the impact of the merger decision on the share prices. He also attempted the suitability of the merger between the 57 year old Bank of Madura with its traditional focus on mass banking strategies based on social objectives, and ICICI Bank, a six year old ‘new age’ organization, which had been emphasizing
parameters like profitability in the interests of shareholders. It was concluded that synergies generated by the merger would include increased financial capability, branch network, customer base, rural reach, and better technology. However, managing human resources and rural branches may be a challenge given the differing work cultures in the two organizations. Joy deep Biswas (2004) “Recent trend of merger in the Indian private corporate sector”. They research about Corporate restructuring in the form M&A has become a natural and perhaps a desirable phenomenon in the current economic environment. In the tune with the worldwide trend, M&A have become an important conduit for FDI inflows in India in recent years. In this paper it is argued that the Greenfield FDI and cross-border M&A are not alternatives in developing countries like India. Vanitha. S (2007) “Mergers and Acquisition in Manufacturing Industry” she analyzed the financial performance of the merged companies, share price reaction to the announcement of merger and acquisition and the impact of financial variables on the share price of merged companies. The author found that the merged company reacted positively to the merger announcement and also, few financial variables only influenced the share price of the merged companies. Kumar (2009), "Post-Merger Corporate Performance: an Indian Perspective" examined the post-merger operating performance of a sample of 30 acquiring companies involved in merger activities during the period 1999-2002 in India. The study attempts to identify synergies, if any, resulting from mergers. The study uses accounting data to examine merger related gains to the acquiring firms. It was found that the post-merger profitability, assets , turnover and solvency of the acquiring companies, on average, show no improvement when compared with pre- merger values.
Different definitions are : 1. Merger: A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two “equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. ‘the statutory combination of two or more corporations in which one of the corporations survives and the other corporations cease to exist. Merger is a broad term and it denotes the combination of two or more companies in such a way that only one survives while the other is dissolved.
2. Acquisition: A takeover or acquisition is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's
management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm’s shareholders or the acquiring firm's shares to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. ‘The act of one corporation acquiring a controlling interest in another corporation’. According to Machiraju (2003:2), ‘the traditional acquisition is the negotiated acquisition in which a willing buyer and willing seller negotiate the terms under which an acquisition or merger occurs
3. Amalgamation : Amalgamation defines as, ‘the blending of two or more companies into one, the shareholders of each blending company becoming substantially the shareholders of other company which holds blended companies’. The Institute of Chartered Accountants of India (ICAI) uses amalgamations as a broad term to describe two types of combinations. According to accounting standard 14 of ICAI amalgamations fall into two broad categories. In the first category are those amalgamations where there is a genuine pooling not merely of the assets and liabilities of the amalgamating companies but also of the shareholders’ interests and of the businesses of these companies. Such amalgamations are amalgamations which are in the nature of ‘merger’ and the accounting treatment of such amalgamations should ensure that the resultant figures of assets, liabilities, capital and reserves more or less represent the sum of the relevant figures of the amalgamating companies. In the second category are those amalgamations which are in effect a mode by which one company acquires another company and, as a consequence, the shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company, or the business of the company which is acquired is not intended to be continued. Such amalgamations are amalgamations in the nature of ‘purchase’.
Motives Of Mergers And Acquisitions There are various motives for acquisitions and mergers. These extend from economies of scale to managerial motives. Here an attempt is made to evaluate some of these reasons. 1. Differential Efficiency: This theory stresses on differential efficiencies of different management of different companies. Manne (1965) highlights the existence of a positive correlation between corporate managerial efficiency and the market price of shares of that company. If a company is poorly managed the market price of the shares of that company falls as compared to the market price of the shares of other companies in the same industry. This difference in share price of companies, indicates the potential capital gain that can accrue if the management of the company passed into the hands of a more efficient management. The company in question becomes an attractive takeover target for those who believe that they can manage the company more efficiently. 2. Inefficient Management: This theory is related to the differential efficiency theory. Takeover is seen as an effort by the shareholders of the acquired company to discipline the management of the company. Managers often have problem in abandoning their old strategies, even when these strategies do not contribute to the growth of the company. When the need to restructure is overlooked by the
management, the capital markets through the market for corporate control come to rescue. The shareholders of the target company through the takeover market pass on the control to the more efficient management. 3. Operating Synergy: can be achieved trough horizontal, vertical and conglomerate mergers. This theory assumes that economies of scale exist in the industry and prior to a merger, the firms are operating at levels of activity that fall short of achieving the potentials for economies of scale. There are four kinds of synergies: cost, revenue and market power and intangibles. Cost synergies are again broken down into fixed cost and variable cost synergies. Fixed cost synergies like sharing central services such as accounting and finance, the office, executive and higher management, legal, sales promotion and advertisement etc can substantially reduce overhead costs. Variable cost reduction is associated with increased purchasing power and productivity. 4. Pure Diversification: Unlike the stakeholders of a company who reduce their diversifiable risk by holding a portfolio of well-diversified scrip’s, manager’s income from employment constitutes a major portion of their total income. Hence risk attached with a manager’s income is to a large extent a function of firm’s performance. Managers invest heavily in organization capital during their tenure with the firm. A major part of this capital may be firm specific, increasing the employment risk of the managers. 5. Agency Problems: On one hand literature on mergers and acquisitions points out that corporate takeovers are used as disciplining mechanism by the shareholders of the acquired firm, on the other hand authors also consider takeovers as manifestation of the agency problem. Ignoring the welfare of its shareholders, the management of acquiring company makes value-eroding acquisitions to increase the size of their company and thereby increasing their compensation.. Bids are made when valuation of the target firm by the acquiring firm exceeds the market price of the firm. 6. Market Power: Acquisitions, especially horizontal mergers may also be undertaken to destroy competition and establish a critical mass. This might increase the bargaining power of the company with its suppliers and customers. Economies of scale may also be generated in the process. Example of this could be VIP’s takeover of Universal Luggage and its thereafter putting an end to Universal’s massive price discounting, which was eating their profits. The HP and Compaq merger also created the largest personal computers company in India. Internationally, as well this move was supposed to put IBM under immense pressure. 7. Market Expansion: Organic route of growth takes time. Organizations need place, people, regulatory approval and other resources to expand into newer product categories or geographical territories. Acquisition of another organization with complementary products or geographic spread provides all these resources in a much shorter time, enabling faster growth. 8. Tax Benefits: If a healthy company acquires a sick one, it can avail of income tax benefits under section 72-A of Income Tax Act. This stipulates that subject to the merger fulfilling certain conditions, the healthy company’s profit can be set off
against the accumulated losses of the sick unit. The money saved must be used for the revival of the sick unit. Reasons for mergers as enumerated above are all economic in nature and the most commonly quoted ones across various industries. Mergers and acquisitions are a very old phenomenon and have occurred due to these different reasons for over a century now.
CHAPTER 5 RESEARCH METHODOLOGY
Research methodology Secondary Data The secondary data was collected from Companies internal sources, journals, news papers and Company’s Websites etc.
Period of the Study: The present study is mainly intended to examine the financial performance of merged companies 2 years before merger and 2 years after merger. The financial statement of JSW Steel and JSW Ispat companies are taken from 2011-2012 to 2014-2015 financial years. The 2014-2015 financial statement are taken on expected basis because 2014-2015 statements are not available .
Research tool : The ratio analysis is being used as tool to analyze the pre and post merger performance of JSW Steel and JSW Ispat. Ratio Analysis are among the well known and most widely used tools of financial analysis. Ratio can be defined as “The indicated quotient of two mathematical expression”.
1)Current ratio Current Ratio = Current assets / Current liabilities 2) net profit ratio net profit ratio = net profit /net sales *100
STATISTICAL TOOLS USED Statistical tools used in the project study are-: 1. Tables 2. Bar Diagrams Secondary Data Collection sources Secondary data were collected from the following sources-: (A) Books related to the topic (B) Company documents (C) Magazines (D) Websites
LIMITATION OF THE STUDY 1. This study is mainly based on secondary data derived from the annual report of company.The reliability and the finding are contingent upon the data published in annual report. 2. The study is limited to five years before merger and five years after merger only. 3. Accounting ratios have its own limitation, which also applied to the study.
