July 28, 2013 Volume 1
FinXpress Volume 1 July 28, 2013
From The Editorial A New Beginning
CONTENTS From The Editorial In Focus: Mergers & Acquisitions - What Brings Synergies? Opinion: Beware of The Food Security Bill Term of The Week Market This Week News Fun Corner
Among all the British poets of the English Romantic Era, Samuel Taylor Coleridge was definitely a class apart. An erstwhile friend and confidant of William Wordsworth, Coleridge was extremely famous for his imagery of the supernatural. It was in his poem, The Rime of the Ancient Mariner where he penned down one of the world’s famous adages, “Water, water everywhere/ And all the boards did shrink/ Water, water everywhere/ Nor any drop to drink.” It felt as if we ran into this above-mentioned clichéd situation when we thought about revamping the FinXpress. We could do so much more with our magazine but few seemed sustainable for a publication published weekly. Yet, we persisted in presenting you, our readers, a new, changed FinXpress. One of our objectives was to become more opinionated so as to integrate all us students to discuss key happenings of our times. Much effort has been spent on the design of the magazine. We looked to keep it simple and innovative by introducing new design templates for the pages. Additionally, we realized that discussion and drawing implications from subject issues are also important from collecting mere facts. Thus we have introduced an “Opinions” section where readers can publish their opinionated articles. These articles could be about public policy seen through the lens of economics and finance, corporate news or any other write-ups along these lines. Our “In Focus” section still remains as our cover article. In future, we plan to cover financial topics, companies and personalities to increase our corporate knowledge. Hopefully they’ll also be beneficial for students preparing for placements and interviews. As always, we look to your continued readership and feedback. We hope you enjoy this edition of FinXpress. Regards! Team FinNiche
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. July 2013
Mergers & Acquisitions What Brings Synergies? —- By Mukul Gupta
A merger or an acquisition is one of the most material and crucial information for an investor from a financial perspective. It can significantly influence the stock price and thereby increase or decrease the valuation of the company. An M&A transaction involves one company acquiring the other in exchange for cash, stock, debt or a combination of the three. It is done for many reasons including industry consolidation,
Did You Know? Vodafone acquired the German company Mannesmann for whooping $200 billion in 1999.
increasing market share, combining talent and technology, entering a new market, booking supply of raw materials, reducing competition etc. M&A transactions involve a plethora of legal, financial, political and accounting procedures which can take days and in some cases years to complete. Once the transaction is complete, the target company is either merged with the acquiring company or operates independently as a subsidiary. The fact that the target company is merged or remains independent depends on the terms of the definitive agreement signed between the parties. Mergers in the manufacturing industry are largely dependent on the occurrence of synergies. Technically, synergies occur when the merged company is bigger and better than the sum of individual buyer and seller. In other words, a merger is synergistic if it leads to increase in combined revenue or decrease in overalls costs. It comes July 2013
from the Greek word “synergia” which means which means joint work and cooperative action. Hence, occurrence of synergies is a very important factor in determining the post merger value of the combined company. If the future cash flow stream of two companies is not positively correlated then combining the two will reduce the variability of cash flow and thus increase the value by having cheaper financing available. When Proctor & Gamble acquired Gillette in 2005, a P&G news release cited that "The increases to the company's growth objectives are driven by the identified synergy opportunities from the P&G/Gillette combination. The company continues to expect cost synergies of approximately $1 to $1.2 billion…and an increase in the annual sales run-rate of about $750 million by 2008". According to P&Gs 2012 annual
report, Gillette sales now account for close to 14% of its total sales. To predict whether a potential merger involves synergies, an analyst studies two parameters. The type of merger and the nature of consideration. A vertical Page 2
merger where the buying company either integrates forward by purchasing the distributors or backwards by acquiring the suppliers, leads to decreased costs. In case of a horizontal merger however, the objective is to bring about an overall increase in revenues as two competitors from the same industry combine as one. The Tata-Jaguar Land Rover deal is a classic example that showcases importance of synergy in horizontal mergers and how it can bring about a drastic turnaround in a firm's operations. Jaguar and Land Rover were ailing brands before they were taken over. Five years hence, it has become one of the most profitable businesses in the Tata conglomerate and is one of the major employers in United Kingdom. Thus, both vertical and horizontal mergers focus on specific synergistic benefits. Another type of merger called
What is Hostile Takeover? An attempt to take over a company without the approval of the company's board of directors i.e. by approaching directly the shareholders to sell their shares.
conglomerate merger does not lead to synergies as two companies from totally unrelated industries combine into one. Such type of mergers are primarily done for tax advantages and to mask poor performance in an industry. For example, if a highly profitable company decides to equate high taxes by investing in a loss making entity of a different sector, it would classify as a conglomerate merger. Companies on the other hand cite diversification as the purpose behind
conglomerate mergers. The nature of consideration also plays a very important role in determining potential synergies. If the acquiring company decides to pay in cash, the target shareholders do not become shareholders of the combined company and there is no dilution. This indicates that the acquirer is reasonably certain of occurrence of synergies and does not wish to share the potential benefits. In
such a case however, the target shareholders would solicit a stock deal. On the other hand, if the acquirer issues new shares to the target shareholders as consideration, it exhibits an apprehensive attitude towards synergies. Shareholders in this case long for payment for their shares in cash. However, sometimes payment of stock is also considered as an indication that the acquirer's stock is overvalued. This works to the detriment of the acquirer as analysts change their recommendation from "buy" to "sell" on overvalued stock. The primary objective of any takeover is to create value for shareholders that exceeds the cost of the acquisition. Thus, synergies are fundamentally the only tangible justification for a takeover.
Beware Of The Food Security Bill —- By Subhankar Halder
The articles by Pratap Bhanu Mehta, a contributing editor for “The Indian Express”, are usually a treat to read. One could disagree with him; yet in all respects she/he would surely appreciate Mr. Mehta’s lucid rationality in analyzing public policy issues. In his article, “A Great Deal of Agreement”, Mr. Mehta argues that political parties in India actually suffer from way too much consensus rather than the feigning worldview that these parties face gridlock due to a dearth of agreement. He claims that all parties are essentially the same – populist, lovers of big government, believers of entitlements and of a welfare state and advocates of affirmative action. In short, their ideologies are very similar with hardly any substantial divergence in their philosophies. Further, he asserts that the only game antagonistic political parties play is in opposing policy. Thus, it’s very much possible for a party to support a political stance once and stymie it the very next instant.
Nevertheless, it is lamentable that the Food Security Bill (now an Ordinance), in all probability, would not be opposed in the Parliament. According to the analysts, the opposing parties would be labeled as anti-poor and would essentially lose their
vote bank. Further, there’s Mr. Mehta’s motif throughout this political situation – political parties love populism, entitlements and the welfare state. Only this time, they would choose not to “thwart”. This is indeed regrettable politics since the Food Security Bill is burdened with problems. This Bill seeks to provide 5 kg of food grains (rice, wheat) per month to nearly 66% of India’s population at super subsidized rates of Rs. 1-3 per kg. Consequently, the government proposes to spend a staggering Rs. 1,25,000 crores every year to supply 62 million tons of food grains. One should make a note that the government has always been doling out food subsidies. According to a research paper by Dr. V P Sharma, professor of IIM Ahmedabad, Rs. 72,283 crores was spent as food subsidy in the 2011-12 year alone. Question arises whether India can afford to spend taxpayer’s money in such a grand scale. FICCI states that such measures are unsustainable from a financial perspective. With a high CAD, a falling rupee and a sluggish growth, heavy subsidies would simply “add pressure on the fiscal situation”. Economists such as Surjit Bhalla, estimate the entire cost of the Food Security Operations to actually amount to nearly 3% of the GDP! One can conclude that such expenditure would surely make a severe dent in the country’s finances. With less money available for investments amid a bearish market, growth would surely take a hit. And how does the government propose to transfer food grains to the poor? The
administration plans to move the food grains through the same old notoriously, corrupt Public Distribution System (PDS). The Planning Commission notes that the Food Corporation of India (FCI), an integral part of the PDS, has its depositories piled up with food surpluses while there’s “widespread incidence of hunger outside!” Additionally, the final food grains that are sold to the poor via the fair price shops are extremely low on quality signifying a substantial black market existence. And now, the government proposes to do the same thing through the same process, only in a much grandiose scale. Without meaningful steps being taken to eradicate the existing corruption present in the PDS, is it justified to pump in vast amounts of taxpayer’s money only to be looted through corrupt practices? Yet, the government will present the ordinance in the House and there will be no opposition.
The finances and the supply chain operations of this grand agenda are fraught with such problems. But now, one should spare some moments deliberating about the public policy of
entitlements in general. It’s true that all countries, including America, are welfare states and food security schemes surely sound noble. But are welfare states and entitlements good in execution? Aren’t we making the poor more dependent on the government by providing numerous schemes like cash transfers and food security? Aren’t such schemes a way to keep the parties’ vote bank intact? Why should someone trust the government again and again when they have shown to be incompetent to execute any scheme of importance?
The solution to the problem of hunger is to rely on the market rather than the government. Let FDI be allowed freely to come to India so as to integrate the food distribution supply chain efficiently. Encourage companies to come up with CSR activities to uplift the rural poor. Importantly, ease the requirements for businesses to start in rural areas. Lesser regulation would mean lesser corruption on the part of government officials. Let there be freedom and liberty for a person to start a legitimate business in the food sector rather than absurd regulations and high-handedness of the PDS.
Term of The Week - FCCBs —- By Anshuman Singh
regulations have been laid down by the RBI for ECCB’s in their master circular on ECB’s FCCB’s (Foreign Currency Convertible (External Commercial Borrowings). Bonds) are a type of convertible bond that are issued in a currency different from the issuing It clearly defines the eligibility criterion for both company’s currency. A FCCB holder has the borrowers and lenders, and also stipulates option of redeeming their investment or End Use conditions which lay down what the converting the bonds into equity at/before company raising these funds can use them maturity at a market-linked pre-determined for. Definition
price. How they work Now that we have taken a look at the definition, let us attempt to demystify the jargon a bit. This financial instrument is basically a convertible bond, which means it’s a hybrid of a debt and an equity instrument. Let us say company X wishes to raise funds for itself through the FCCB route. It can issue such a bond with a certain maturity period to a lender in another country, and in return has to make an interest payment to the lender, like any regular debt instrument. The payment has to be made in the currency of the lender.
Why companies opt for them FCCB’s are a cheaper form of raising capital for companies as they can access international markets which demand lower interest rates, and partly because the borrowing rate is lower than pure debt due to the inherent option of conversion to equity. A large number of FCCB’s raised by Indian companies are unsecured i.e. do not need any collateral which helps in making it a cheaper form of financing. What’s in it for investors
Investors receive the safety of guaranteed Now on the date of maturity, the lenders or payments on the bond and can take the investors have two options – they can advantage of any large appreciation in the redeem their investment or they can opt for share price. conversion to equity. This conversion is done The tax liability is also lower than pure debt at a market linked initially agreed price. So if instruments due to lower coupon rate. our company X had agreed the conversion price to be Rs 400 with Mr. Y, an investor The FCCB landscape in India who had invested Rs 2000 total, he would be A large number of FCCB’s were raised by eligible to get 2000/400 = 5 shares at Indian companies in the period of 2006 – maturity. Mr Y would stand to gain by 2008 as rates were much cheaper than what converting to equity if the share price at this they were getting in domestic markets and point in time had gone up, as he would in companies believed that their stock prices effect, be getting the shares at a discount. If would continue trending up and investors on the other hand the share price had gone would chose the equity conversion route. down, Mr Y can go for full redemption of the However a series of global and domestic macroeconomic factors have contributed to invested amount. plummeting share prices of a lot of these Regulatory framework in India companies , and therefore they have to re pay The Indian Government treats the money the debt. Along with this the rupee has raised through this route as FDI. Stringent depreciated , which makes repayment in the foreign currency more expensive. July 2013
Market This Week In the week July 22 - 26, the SENSEX slumped 2% and close at the 19748.19 mark. The Nifty also fell by more than 2.3% to close at 5886.2. Hindustan Unilever slumped after its June-quarter sales missed forecast, while banks such as HDFC Bank fell on caution ahead of the RBI’s policy review next week. Maruti Suzuki failed to hold on to earlier gains and fell 2.7% after analysts raised concerns about the carmaker’s cautious outlook on car sales. Reliance Infrastructure (RLIN.NS) fell 1.6% while Ranbaxy Laboratories ended 1.9% own as brokers expected both stocks to be removed from the Nifty at a review next month. Property developer DLF fell 1.5% after Citigroup downgraded the stock to “sell” from “neutral”, citing high leverage and mounting interest costs. BSE SENSEX
SENSEX Simple Moving Averages Thirty Days
Two Hundred Days
Nifty Simple Moving Averages Thirty Days Fifty Days Hundred Days Two Hundred Days
5856.87 5899 5857.41 5850.43
Top 5 Stocks of the Week Stock Jet Air India Biocon Ambuja Cements TTK Prestige Bata India
Last Trade Price
Commodities Commodity Gold Silver Crude Oil
Unit 10 grams 1 Kg 1 bbl
Rs / Unit 27631 41080 6197
% Change 0.82 0.71 0.22
Lending / Deposit Rates Base Rate Savings Deposit Rate Term Deposit Rate
9.70% - 10.25% 4.00% 7.50% - 9.00%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio Statutory Liquidity Ratio
10.25% 7.25% 6.25% 4% 23%
Exchange Rates INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling
58.9133 78.218 59.67 90.6794
NEWS Blackstone to acquire majority stake in Igarashi Motors Global private equity major Blackstone will buy majority stake in domestic auto component maker Igarashi Motors India in a multilayered deal. The Chennai-based Igarashi Motors board has approved the transaction. Under the deal, Blackstone along with another entity plans to acquire over 97 per cent stake in the company.
At Rs 50,000 cr, Lakshmi Mittal's ArcelorMittal in India's biggest FDI pullout In the biggest foreign investment pullout, world's largest steel maker ArcelorMittal scrapped its USD 12 billion (Rs 50,000 crore) steel plant in Odisha over inordinate delays, problems in acquiring land and securing iron ore linkages.
Tata Consultancy Services net profit jumps 15.5% to Rs 3,831 cr in first quarter The country's largest software exporter Tata Consultancy Services (TCS) reported consolidated net profit of Rs 3,831 crore for the June quarter, up 15.5 per cent from Rs 3,318 crore in the same period last year.
Bajaj Auto quarterly net profit up 3 percent at Rs 737.68 cr Bajaj Auto reported 2.68 per cent increase in standalone net profit for
the first quarter ended June 30, 2013 at Rs 737.68 crore, while its sales volume dipped in a difficult market. The company had posted standalone net profit of Rs 718.39 crore in the same period of previous fiscal.
Reliance Industries logs 19 percent profit growth in quarter on strong margins Mukesh Ambani-led Reliance Industries (RIL) posted a 19 per cent jump in its first-quarter net profit at Rs 5,352 crore on back of stronger margins in its core oil refining and petrochemical businesses.
Rupee bounces back by 32 paise to Rs. 59.35 vs USD after 2-days of losses The rupee snapped two days of losses and appreciated by 32 paise today to close at 59.35 against the dollar as the US currency weakened overseas and traders wound up positions at the end of the week. The rupee was also helped by fresh dollar sales by exporters and some banks and around Rs 250 crore capital inflows in stocks.
FIIs pull out Rs 18,500 crore from Indian capital market in July The weakness in the Indian currency was instrumental in overseas investors exiting the debt markets as the rising cost of hedging a volatile rupee hurts the yield differential FIIs work with.
Fun Corner FinQuiz
Last Weekâ€™s Answers
1. What is the usual service offered by Bank of Baroda in Tirupati? 2. Name the person who introduced "Double Entry" bookkeeping concept. 3. "Don't dream it, Drive it" is the punch line for which company? 4. Who is the CFO of Google? 5. What is the practice of calculating forward rates using spot rates called?
1. Mercedes 2. Market Capilisation 3. Citibank 4. Dundee Mutual Fund 5. Security Paper Mill, MP
Last Weekâ€™s Winner Vamsi Prakash Batchu
**Rush in your entries to : email@example.com
Feel free to write to us at : firstname.lastname@example.org
The right entries will get their name featured in the next
We are on the web !
issue of FinXpress. So hit the quiz fast & get yourself
visible among 1000 odd in the campus.
Volume 1 Publisher : Mukul Gupta
OUR TITLE SPONSOR