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In this article, Vishakha Bhatnagar, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) with LawSikho and currently working as the Head of Corporate Strategy at Systra MVA Consulting, discusses 8 Biggest Frauds and Mistakes in the M&A History of India.

“83% of all mergers and acquisitions do not create additional shareholder value”. This is hardly the premise that you would like to begin your M&A lessons with. However, this is exactly how my M&A professor at ISB Hyderabad introduced the subject to us 9 years ago in 2009. Eager, as we were to get on with the transactional details, we brushed it aside as trivia and jumped right into the course.

However, today as I evaluate some of the largest M&A deals in the country over the past decade, his words ring true. 90% of the largest M&A deals in the country have failed to be value accretive to shareholders.

Etisalat acquisition of Swan Telecom

In September 2008, as per a news report in Business Standard, UAE based Etisalat inked a deal acquiring  45% stake in Swan Telecom. Swan Telecom at the time had telecom licences in 13 circles. The deal pegged Swan Telecom’s value at 2 billion dollars. Translated in rupee terms at the time it meant an investment of ~3500 crores for Etisalat.

Issues: In November 2013, as per a report in NDTV, the Bombay High Court admitted a petition from Etisalat Mauritius winding up its joint venture with DB realty. On Feb 9th, 2014. Etisalat exited the investment at a complete loss. It wrote off 827 million dollars pertaining to investment in Etisalat DB in 2014.

By 2012, Etisalat had launched legal proceedings against its Indian joint venture partners for fraud and misrepresentation following the cancellation of its 2G licences by supreme court on the premise that Etisalat had invested a year after the award of licences and therefore had no knowledge of impropriety during award. However, beyond guarding the parent against potential legal fallout, Etisalat seems to have gained precious little.

Lessons Learnt – Telecom is a closely controlled industry in India with high regulatory risk. The basis of valuations, in this case, was the telecom licences obtained in 13 circles.  A legal diligence of the not only aspects of geographical coverage and validity of licences but also a forensic assessment of any impropriety in obtaining the licences was called for. However, what seems to have triggered the unfortunate train of events for the buyer was that, Etisalat at the time was looking for an acquisition of a start up in the telecom space with regulatory approvals in place. Swan ticked all boxes and Etisalat picked up stake, which reeks of confirmation bias on part of the buyer. Buyer was sold on the India telecom penetration and market size story and jumped on to the bandwagon.

Daiichi acquisition of Ranbaxy

In June 2008 Daiichi acquired the entire stake of the promoters in Ranbaxy, that stood at 34.82%, besides an additional open offer, some preference shares and warrants. The deal estimated the total enterprise value of Ranbaxy at over 36000 crores. The investment made by Daiichi was 19,800 crores.

Daiichi only just about managed to recover its principal investment at the time of exit in 2014. It sold off an entire stake to Sun Pharma at 22,670 crores.

Issues: Daiichi, once in control by 2010, discovered that the Singh brothers made false representations to them by concealing a document known as SAR – Self Assessment Report. This document was made by a former employee and contained the true extent and impact of impending investigations by the FDA and DOJ against Ranbaxy.  For Daiichi, the deal was non value accretive. They were saddled with a difficult asset mired in controversy with the drug regulator in their largest market, one which they only recently managed to come out of

The supreme court recently rendered a landmark judgement, upholding the award of the arbitration tribunal in Singapore, directing the Singh brothers to pay Daiichi 3500 crores in damages. The enforceability, quantum of compensation and finer points of the judgement is a discussion for another day.

Lessons Learnt: Legal and financial due diligence without confirmation bias on the buyer’s part is central to avoiding the trap that Daiichi found itself in. The acquirer was in love with the target. Deeper legal diligence and view on the FDA and DOJ investigations and potential fallouts from the same needed to be considered by the buyer.

ONGC – Imperial Energy

ONGC Videsh Limited took control of the Imperial Energy Corporation for 2.9 billion USD in 2009. Imperial Energy Corporation produces approximately 80% of its oil from Maiskoye field and 20% from Snezhnoye field in Tomsk region. New deposits were discovered in 2008. Estimated production output was pegged at 32000 to 80000 barrels per day. It was the most expensive overseas acquisition of OVL at the time.

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Issues: However, as per a report in Business Line in 2014, a parliamentary panel slammed OVL’s acquisition of IEC. It said that the ramped up operations yielding 19200 barrels of oil per day was woefully short of the target. Additionally, the complex tax structure has meant that more that 79% of revenues go as taxes to the Russian state. The parliamentary committee sought justification as to why stake sale had not been initiated to local Russian or other firms. At $121 per barrel the deal had a 10% IRR. Ten years hence oil stands at $61 per barrel and therefore the deal is a goner on multiple fronts

Mistake & Lessons Learnt: Certification of oil reserves was done by DeGolyer & MacNaughton (D&M), an internationally reputed US-based reserves audit firm. However valuation of these reserves obviously had gaps. Valuations of the oil reserves with additional investment requirement could have been done by an independent third party valuer. Additionally, low returns are cited due to the steep Russian tax structure which again should have been covered as part of the due diligence exercise and flagged off. Lastly, the biggest lesson learnt is that any acquisition done at a time where the underlying asset is a commodity whose prices are peaking, will tend to give sub par returns. The acquisition was done at a time when oil prices were at all time highs of $132/ barrel in July 2008, having risen 72% in the trailing twelve months. Macro-economic and regulatory environment emerged as the number 1 challenge in cross border transactions.

Idea Vodafone Merger

The Idea-Vodafone merger in August 2018 with NCLT nod, created the largest mobile company in India with 440 million subscriber and a revenue market share of 35%. The combined entity displaced Bharti Airtel that had retained the top spot for 15 years. Amidst a spate of consolidation in the telecom space there were only 3 players who would slug it out over a billion strong subscriber base of India – Reliance Jio, Idea Voda and Bharti Airtel. Sector experts felt pricing power would return to the sector with the merger. The merger was to yield 15000 crores in synergies

Issues: Cut to Feb 2019, Kumar Mangalam Birla gave an interview to ET wherein he mentioned that 25000 crore issue would give Idea Voda funds for the next 3-4 years. 25000 crores was the CAPEX of Bharti Airtel for the last financial year alone whom the merged entity displaced as the largest telecom service provider in India. The Net Debt/ EBITDA ratio remains double-digit for the merged entity in the long term at 1.3 lakh crores. The cash flow from the operation is slated to remain negative even after realization of all operation synergies within the first 2 years of operation. The RMS loss from physical integration of the assets for realization of synergies resulting from disruption in services has not even been considered.

Mistake: The intention was to create a mammoth entity to counter the Jio threat. What resulted was a mammoth which threatens to sit down under its own weight. In my opinion, this looks to be a case of over-estimation of synergies from the merger while not considering the risks associated with the ever-changing regulatory landscape in telecom.

Tata Motors JLR

On 2nd June 2008, Tata Motors issued a press releasing confirming completion of acquisition of Jaguar Lan Rover for $2.3 billion USD in a cash free debt free transaction. When the initial acquisition pressure wore off the company invested steadily and also reaped benefit in both topline and bottom-line numbers. Between FY09 and FY 17 the company invested ~ 18 billion pounds. For a while strategy seemed to pay off with sales rising 6 times to 3.4 billion pounds and PBT going from negative to 1.6 billion pounds in FY 17. This looked like the M&A success story of the decade.

Issues: However, in Feb 2019, Tata Motors announced impairment of 3.1 billion pounds in a year when it still has to invest 4 billion pounds in new technologies and platforms to compete with Mercedes, BMW etc. Trouble started brewing FY 15 onwards when PAT stopped translating into free cash flows. Significant investments coupled with adverse global events like BREXIT and slump in the China market seriously impacted the car maker in FY 17 and FY 18 when cash flows slowly went from 0 to negative. The asset impairment has reduced the networth of Tata Motors by a third affecting it’s borrowing capacity. It faces numerous other challenges in the form of electrification, trade tariffs etc.

Mistakes/Lessons learnt: The strategic focus of the group was to look at mature markets and developed economies. In hindsight, this has not paid off more obviously in case of Tata Steel Corus transaction and more recently the JLR acquisition seems to have gone awry. The learning, in this case, was that solving for Macroeconomic environment remains the number 1 challenge in cross border transactions.

Tata Steel Corus

Tata Steel acquired Corus in 2007 paying out $12 billion dollars. This was a 4 million tonne per annum Indian company acquiring 18 million tonnes per annum mammoth. The company was looking at getting a firm foothold in mature market and value added steels.

Issues: A lot has been written about the colossal failure of the deal. Tata Steel over last 10 years has reduced the production capacity of Corus from 18 MTPA to 10 MTPA. This culminated in 2018 with Tata Steel hiving off 50% to Thyssen Krupp resulting in a  reduction in it’s debt burden by 19,100 crores. Tata Steel used the cash box to shop for distressed assets in India – Bhushan Steel

Mistakes and Lessons: Much like the OVL IEC acquisition the Tata – Corus transaction came at a time that commodity prices had peaked. The basis for valuation was production capacity and much like OVL despite an auction and reservations on valuations, Tata Steel ended up paying 30% more than the negotiated price – prestige at play. Finally, this was a leveraged buy out with no clear debt paring plan present with the buyer. There was no way that a 4 MTPA operation could help offset losses from an 18 MTPA operation. Tata Steel has revised its strategy to be India centric, however, it again faces similar challenges of high Debt/ EBITDA ratios of 4 which it hopes the business will sustain with more profitable EBITDA/ ton – the question is can it?

Suzlon Senvion

Suzlon purchased Senvion in 2007 for 1.4 billion Euros. Tulsi Tanti, the promoter, wanted a foothold in mature markets and optimized product offerings.

Issues: Company defaulted on its bondholder repayments of $209 million in October 2012. Debt restructuring and r-financing exercises were taken up in the next 2 years. Suzlon looked at selling non-core assets, taking Senvion public as well as raising money through the public route. Nothing worked. By the end of 2014, Suzlon was sitting on a debt of 17,323 crores on a consolidated basis. The unsustainable debt situation could prove hazardous for the India assets. Suzlon then opted for the next best option and sold Senvion to Centerbridge Partners for 7200 crores.

Mistakes and Lesson: The macroeconomic factors of any cross-border transaction did have a part to play with the bust of 2008. However, this was again an example of a high leverage transaction with no clear debt paring plan.

Blackstone – PE fund’s first wave of Investments in India :

  • NCC
  • Monnet Ispat
  • Gokaldas Exports

Blackstone was a rather late entrant to the India party. It started looking at Asia only in 2005 when most of its peers like General Atlantic Partners, Warburg Pincus, Actis had been in India for 5 to 7 years. It started with striking PIPE deals at high valuations – case in point being NCC and Gokaldas Exports rather than sticking to pure private equity deals.

Issues: Many of these PIPE deals were disasters. I have limited the discussion to 3 companies. Blackstone exited Gokaldas Exports at a 75% haircut. However, so strong was the management belief in the deal that Mathew Cyriac, a former co-head of Blackstone private equity picked up a 40% stake. Another problem point was NCC. Blackstone invested $115 million in the deal and ended up exiting after recovering the investment in rupee terms. The last of course is Monnet Ispat which has filed for bankruptcy

Lessons Learnt and applied: These early stage investments were PIPE (private investments in public equity) where Blackstone was a financial investor. 2011 saw a significant change in investment strategy. Blackstone turned strategic investor. It started acquiring majority stake only in areas where it had deep knowledge like finance, healthcare, IT and industrials. This has started yielding returns with the firm managing 6 fold returns on it’s investments like S.H.Kelkar. By FY 18, the Indian portfolio has yielded an IRR of 30% on investments made post-2011.


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