In the past few years, merger and acquisition have been a very excellently-known concept. Companies have been aggressively choosing not only domestically but also on a global basis for mergers & acquisitions. The intensified competition in the worldwide industry has motivated businesses to go global for merger and acquisition. An acquisition is when one corporation buys any or all of the stock of another company to gain ownership of that corporation. Having purchased more than 50 percent of the stock and other assets of a target company allows the purchaser to make decisions without the consent of the shareholders of the company about the newly acquired assets.
Companies acquire other companies for various reasons. They may seek economies of scale, diversification, greater market share, increased synergy, cost reductions, or new niche offerings. They are considered as a key for growth in a short span of time in today’s corporate world. Such an acquisition can be implemented in many different types such Horizontal Acquisition, Vertical Acquisition, Congeneric Acquisition, Conglomerate Acquisition, Overseas Acquisition (Outbound Investments) etc.
This is India’s second biggest overseas acquisition after Tata Steel acquiring Corus in the year 2007 for US$ 13 billion. In June 2010, Airtel entered into a deal to buy operations of Zain mobile in 15 African countries for $10.7 billion (about INR 48,000 crores). Airtel acquired 100% shareholding of Zain Africa directly; the holding company based in Netherlands; of the entire African operations of Zain. Bharti incorporated two SPVs one in Singapore and the other in Netherlands to execute this transaction. Both the SPVs availed loans to fund this acquisition to which a corporate guarantee was given by Bharti Airtel.
Post-deal attributes were that Airtel’s combined customer base was increased to 179 million in 18 countries and a total revenue of USD 13 million. Out of the total amount, Airtel paid USD 9 million in cash and assumed debts on the books on Zain to the tune of USD 1.7 billion. Each consumer was valued at USD 252.
Legal, Regulatory and ODI considerations
An Indian company who wishes to acquire a foreign company outside India has to mandatorily comply with the FEMA (ODI Regulations) under which is permitted to invest in a joint venture or a wholly owned subsidiary up to 400% of the Indian Company’s Net worth, in the form of equity, loan or guarantee, as on the date of its last audited balance sheet without seeking any prior RBI approval. In the above case, Bharti Airtel has two SPVs, one in Netherlands and one in Singapore to execute the deal. The SPVs in turn acquired Zain Africa International BV located in Netherlands to acquire African assets of Zain.
The acquisition helps to see the new market, customer base and to obtain the synergy gains. It will not only give the edge to a firm but will also bring maturity in the maturity in the operations of the firm. Thus, acquisitions are considered as the starting step towards the achievement of market leadership.
In the wake of moderating domestic economic growth, Indian companies are becoming increasingly open to the concept of global expansion and make outbound acquisitions. A trend that will become more common in the near future is this evolution of Indian businesses geared towards making overseas acquisitions. Accordingly, the outbound investment trend and outlook remains increasingly promising.