Botched up

Regulators, companies and investment bankers have to share the blame for the crumbling of M&A deals
By Mohan Sule
Besides injecting life into the primary market, a bull market triggers mergers and acquisitions. After a demand slump, companies dust off plans to expand to capture the buoyant economic mood. Most primary market offerings are to raise funds for organic growth. Friendly and hostile takeovers cut short the incubation period of a grassroots venture. For investors, both routes offer exciting opportunities for wealth creation. A reasonably valued public offering gives ample scope for appreciation on listing as well as a few years later. The inorganic route provides an exit window for the shareholders of a weak prey or an entry into a strong company. The market is happy that cash is being utilized by the predator-company to grow its share, helping improve the return ratios. Yet there is a downside, too. There could be a sudden change in the business environment and delays in execution. A target that seemed apt could prove to be a cumbersome burden due to difficulties in enmeshing different work cultures. Depletion of reserves would mean insufficient spare change to exploit new trends. In addition to all these obstacles, some new problems have cropped up going by a few recent cases. Take the unraveling of the Rs 700-crore Bharti Airtel-Loop deal. Bharti would have consolidated its leadership position in the telecom space, with the Mumbai-based services provider’s three-crore subscriber base. Users of the struggling Loop would have got better services. Despite the obvious advantages, the agreement failed to get regulatory approval. The hitch? Loss of revenue to the Department of Telecommunications as Loop subscribers would be ported to Airtel numbers without paying the mandatory Rs 19 fee.

During the wait, Loop’s subscribers dwindled to 1.2 lakh. Bharti’s stock ended the day of the announcement with a loss of nearly 3%. Loop’s licence is set to expire end November and DoT might not get the Rs 800 crore that the services provider owes it. This is not the first time that Bharti’s shareholders have seen a botched up acquisition. India’s largest telecom company by subscribers gave up the idea of taking over MTN in September 2009 as the South African government wanted India to permit dual listing. This would have allowed sharing of revenue and profit by the two. The cash-cum-stock deal gave Bharti a 49% stake in MTN in return for the latter getting a 36% economic interest in the Indian carrier. However, the Reserve Bank of India refused to concede as the arrangement implied capital account convertibility. So the US$24-billion alliance that would have created the world’s fourth largest telcom services provider covering 24 countries with 200 million subscribers crumbled after eight months of complex negotiations. Trading in the MTN stock had to be suspended for the day by the Johannesburg Stock Exchange after slumping more than 5% on hearing the news. These two cases do not show regulators in a positive light. Many times, the market throws up new situations. Regulators have to act speedily and find a via media till the guidelines are amended to reflect reality.

DoT and the RBI could have shown some flexibility. Bharti could have been told to deposit the portability charges with the regulator till the resolution of the issue and the RBI could have asked Bharti to invest the profit share of MTN in India for the time being. Apart from the regulators, the eagerness of companies to grab opportunities to expand market share without reading the fine print is disturbing. Apollo Tyres’s $2.5-billion (Rs14400-crore) deal to acquire Cooper Tire was called off after the US tyre maker sought judicial intervention to expeditiously close the merger. The Indian company termed Cooper’s decision as “inexplicable” and “a diversionary smokescreen, an unfortunate acknowledgement” of the inability to meet the obligations necessary to complete the transaction. These instances of ambition and impatience overtaking prudence demostrate sloppy due-diligence by investment bankers. The Sahara-Jet Airways acrimony over the deal price after the merger took effect and the bitter experience of Daiichi Sankyo following the takeover of Ranbaxy illustrate that inorganic growth is much as a risk factor as a wealth multiplier. The shareholders of Apollo were saved from a bigger disaster had the Cooper acquisition gone through. Ranbaxy shareholders were bought out at a hefty premium by the Japanese drug maker. Those that remained found a new parent in Sun Pharma. Not everyone is so fortunate. May be the regulator should insist that acquirers contribute a certain percentage of the deal amount to an escrow account with a three-year lock-in to compensate for the loss in market value due to costly missteps.