OBJECTIVES This unit will enable you to:

• know the meaning of alliances, mergers and acquisitions and consolidation;

• study the objectives of merger/consolidation;

• know the advantages and disadvantages of alliances and mergers;

• study the progress and prospects of mergers and alliances in respect of the Indian banking industry.

Before proceeding further, let us understand clearly the meaning of the terms like alliance, merger, consolidation, take-over, acquisition, etc.

9.1 ALLIANCES

A strategic alliance is a formal and 'mutually agreed to' commercial collaboration between companies. The partners pool, exchange, or integrate specific business resources for mutual gain, yet they remain separate businesses. It is a synergistic arrangement whereby two or more organisations agree to cooperate in the operation of a business activity, where each involved company brings different strengths and capabilities to the arrangement. Alliances can be either equity or non-equity based and typically start with one cooperative agreement that evolves into a portfolio of arrangements built overtime.

[email protected], [email protected], 09994452442 9.1.1 Why Alliances?

Alliance contagious is an excellent vehicle to obtain market growth amid the rapidly changing market conditions. Alliances can also help construct broader business systems by linking a company's internal core competencies with the best of breed capabilities of its allies.

But not all alliances succeed. Almost one in two fails. 'Problematic alliances can be the result of many factors, including industry dynamics, (for example, regulatory changes), new

technologies, new entrants or economic cycles'.

The ability to weather external forces as well as maximise internal alliance potential is heavily driven by establishing a solid alliance foundation that includes experience, mutual trust, strong relationships and sound business rational. Alliances that are managed well can create tremendous value. Strategic alliances and collaborative approach, as an alternative to mergers and acquisitions, could be attempted to reduce transaction costs through outsourcing, leverage synergies in operations and thus avoid problems related to cultural integration. If merger/consolidation is difficult to achieve, this alternative could be tried. Further, rapid expansion in foreign markets without sufficient knowledge of local economic conditions could increase vulnerability of individual banks and hence, a strategic alliance with a local player could be a better solution.

One of the example of alliance is the coming together of three mid-size public sector banks - Indian Bank, Corporation Bank and Oriental Bank of Commerce - which have entered into a 'strategic alliance' in October 2006. The alliance, intended to help the banks leverage their combined balance sheet strength and share the benefits of economies of scale, is reflective of the dynamics at play in the Indian banking space today. The present moves are: presupposing the sharing of IT platform initially for ATMs, formation of a joint appraisal cell in Mumbai to undertake appraisal of large projects for funding, participating in each other's training

programmes and building up a common data centre.

9.1.2 Strategic Alliances - Benefits

Strategic alliances bring enterprises the following benefits:

(a) Increase in capital for research and product development and yet lower risk (Innovation)

(b) Decrease in product lead times and life cycles (time pressures)

(c) Ability to bring together complementary skills and assets that neither company could easily develop on its own

(d) Access to knowledge and expertise beyond company borders (technology transfer) (e) Rapidly achieve scale, critical mass and momentum (economies of scale - bigger is better)

(f) Expansion of channel and international market presence (foreign market entry) (g) Building credibility in the industry and brand awareness

(h) Providing added value to customers (value-addition)

(i) Establishing technological standards for the industry that will benefit the firm.

Strategic alliances come in all shapes and sizes, and include a wide range of cooperation, from contractual to equity forms.

9.2 MERGER

Merger, also known as amalgamation, is defined as the combination of two or more companies into a single company, where one survives with its name (or a combined new

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name) and the others lose their corporate existence. According to the Oxford Dictionary, 'merger' means 'combining of two commercial companies into one' and 'amalgamation' means 'merging of two or more business concerns into one'. All the assets and liabilities (both on and off balance sheet items) of the merging company gets transferred to the surviving company. An example of this type of amalgamation in the Indian banking sector is the merger of Global Trust Bank Ltd. with Oriental Bank of Commerce.

9.2.1 Objectives

Mergers are well recognised commercial practices for growth and diversification of

manufacturing, business and service activities. Following characteristics motivate mergers:

(a) diversify the areas of activities; achieve optimum size of business;

(b) remove certain key factors and other bottlenecks of input supplies;

(c) improve profitability;

(d) serve the customer better;

(e) achieve economies of scale and size, internal and external;

(f) acquire assets at lower than the market price;

(g) bring separate enterprises under single control;

(h) grow without any gestation period and nurse a sick unit and get tax advantages by acquiring a running concern.

9.2.2 Types of Merger

There are four types of Mergers, viz., horizontal mergers, vertical mergers, concentric mergers and conglomerate mergers. Horizontal Mergers normally involve the merger of two or more companies which are producing similar products or rendering the same type of services, i.e. products oj services which compete directly with each other. This type of merger normally results in reduction in the number of players in that particular industry and may reduce or eliminate competition. Vertical Mergers involve the merger of two companies, where one of them is an actual or potential supplier of goods or services to the other. The object of this kind of merger could be to ensure a source of supply or an outlet for products and the effect may improve efficiency.

In Concentric or Congeneric Mergers, the two companies may be related through the basic technologies, production process or markets. The merged company provides an extention of product line, market participations or technology to the surviving company. Such mergers provide greater opportunities to diversify into a relative market having higher return than it enjoyed earlier. Conglomerate mergers neither constitute the bringing together of competitors nor have a vertical connection. It involves a

predominant element of diversification of activities. Thus, in this kind of merger, one company derives most of its revenue from a particular industry, acquiring companies operating in other industries - with a view to obtain greater stability of earnings through diversification or to obtain benefits of economies of scale, etc.

9.2.3 Advantages

(a) Brings in synergy in operations and economies of scale in inputs, production and delivery, which

results in cost savings for the acquirer.

(b) Due to increased size, the growth in the top line (sales volume) and bottom line (profit) are significant.

(c) Creates opportunities to penetrate markets - strategic benefits.

(d) Helps build a strong marketing front-end for increased customer comfort and to leverage expertise

in markets.

[email protected], [email protected], 09994452442 (e) Enables to achieve world-class standards in their line of business.

(f) Facilitates product innovation as their resources are more so complementary.

9.2.4 Disadvantages

(a) Merger of two companies may result in dilution of competition in the market, adversely affecting consumers' interests.

(b) May result in abuse of market power.

(c) Higher concentration arising out of consolidation could have larger potential for systemic risk.

9.3 CONSOLIDATION

Consolidation is defined as the combining of two existing companies into a new company, in which both the existing companies get extinguished and a new company is made or created.

The existing companies lose their identities and a new entity is created with a different or the same name. The assets and liabilities of both the companies get merged into the new

company. In the Indian corporate history, we can cite the example of the Birla Group of companies, 'Indian Rayon and Industries Ltd.' and 'Indo Gulf Industries Ltd.' consolidating to give birth to the, now existing new company named 'Aditya Birla Nuvo Ltd.'