Acquisitions and Mergers Gathering Momentum in India

V K Vijayakumar, Destination Kerala magazine

Mergers and acquisitions happen frequently in developed economies and are regarded as a sign of well-developed financial markets. It is a reflection of financial and business maturity. The fact that mergers have gathered pace and momentum in India in recent times is an indication of India Inc.’s growing maturity.

The most compelling argument in favour of mergers is synergy. The logic of synergy is 2 plus 2 is more than 4. The merging entities reinforce each other’s strengths and build on that. Merger allows one entity to exploit the strengths of the other, thereby benefiting the merged entity and all the stakeholders.

“Merger allows one entity to exploit the strengths of the other, thereby benefiting the merged entity and all the stakeholders,” says V K Vijayakumar

Let us take the example of the latest Shriram-IDFC merger proposal. The two listed companies of the Shriram Group – Shriram Transport Finance and Shriram City Union- are proposed to be merged with IDFC Bank and the unlisted Shriram companies – Shriram Life and General Insurance – will be merged with IDFC. IDFC Bank has good presence in Maharashtra, Karnataka and Madhya Pradesh with 75 branches. Shriram City Union, the small and micro credit arm of Shriram Group, has a network of 75 branches. Shriram Transport Finance (STF), a leading player in commercial vehicle financing, has a national presence with around 1000 branches. The merger will allow IDFC Bank to leverage on the huge branch network of STF to market their wide range of savings-investment products. The cost of funds for the merged entity will be lower thanks to lower cost CASA of IDFC. Post-merger, both Shriram Capital, the holding company of the Shriram Group and the listed IDFC will emerge as the holding companies of the new entity.

The ultimate impact of the merger on minority shareholders will depend on the outcome of the merger. If the merger turns out to be successful and wealth generating, minority shareholders, like others, will benefit. There are numerous instances of mergers generating phenomenal wealth thereby benefiting small shareholders, too. HDFC Bank’s acquisition of Centurion Bank of Punjab and the merger of ING Vysya with Kotak Mahindra Bank are very successful M&As, which created substantial wealth for investors of both acquiring and target companies. The reverse is true in the case of Ranbaxy-Sun Pharma merger. Benefits to the shareholders of the merging entities will depend on the swap ratio/price. Arriving at a fair price is very complex. An apparently unfair price at the time of the merger may prove to be ‘more than fair’ later when the merger produces results. Tata Motors’ acquisition of JLR is an example. Tata Steel’s acquisition of Corus proved to be very expensive later, when steel prices crashed.

India Inc. is likely to witness more mergers and acquisitions, going forward. The recently announced merger of HPCL with ONGC is an attempt to build a state-run integrated oil major that can compete with private and foreign players. Many mergers are in the offing in the public sector banking space as well. We are likely to move from a market situation characterized by ‘a large number of small banks’ to a market form characterized by ‘a small number of large banks.’ This will produce a few winners while many will find the going tough. Investors should try to identify the potential winners. India’s leading private sector banks have been consistently increasing their market share in recent times. Also, they have been successfully increasing the share of fee-based income in their total income. These are potential winners.

(V K Vijayakumar is Chief Investment strategist, Geojit Financial Services Ltd.)