ADC Business 17AFTERNOON DESPATCH & COURIERWEDNESDAY, MARCH 4, 2009

RIL-RPL mergerholds promiseon all fronts

As said by Alok Agaral,CFO, Reliance, the RIL-

RPL merger “is all about cre-ating a larger or integratedenergy major, it gives us theability to take on projectsmuch larger than done be-fore.”.Other than the size, the

merger gives Reliance a hugeelbow room to scale its opera-tion according to demand andfine-tune its plans of howmuch of each project tomake. As for as country’s needs areconcerned, RIL can fuel India

for 5 to six months making itless dependent on imports.The merger is a move that

will create the world’s com-plex to convert crude oil in pe-troleum products at a singlelocation. The company saidonMonday, that it would offerone share for every 16 sharesheld by investors in ReliancePetroleumLtd (RPL), its refin-ing subsidiary.RIL will issue 69.2 million

new shares to RPL sharehold-ers, increasing the equity cap-ital by 4 per cent to Rs. 1,643crore. RIL’s own 70 per centshare holding in RPL will beextinguished. The companysays the merger will increasethe earning per share in thecombined entity“I cannot think of a better

time for themerger. RIL share-holders will benefit frombringing in an asset that iscomplete now and has mini-mal project risk ( the RPL re-finery) and RPL shareholders ,by being part of the parentcompany, can again form(the) latter’s gas and oil port-folio, and can get all the bene-fits from KG Dt6(Krishna-Godavari) gas fields)which is so closed to produc-tion,” Agarwal told reportersafter announcing the mergerm deal onMonday.The counted synergies in

crude procurement, productplacement, supply chin opti-mization and greater opera-

tional flexibility as bigmergergains , besides efficientutilization of combined

cash flows” and higher valua-tion of for the merged entity..Though a few analysts were

surprised by the timing ofwhat they said was an ex-pected move, most saidmerger made strategic tech-nical and financial strengthfor RIL.. Goldman Sachs ana-lysts said onMonday the dealwill be strategically positivefor RIL as it would give thecompany access to about $1.5 to $ 1.8 billion of RPL’s an-nual cash flow (on full ramp-up for its various plannedprojects)” and “Chevron’sconcomitant exit fromRPL (atRs 60 per share) addsmargin-ally to RIL’s valuation and alsogives RIL’s promoters full con-trol and of the future directionof the company.”US energy firm Chevron

Corp. decided on Friday to sellits 5 per cent stake in RPL for$ 260 million at current ex-change rates’. Anotherfavourable point of themergerworth mentioning is thatthere is no tax or depreciationbenefit from merger that waslargely to boost RIL revenues –a fact that Agarwal confirmedin the press briefing.“The merger is not for tax

saving. Themerged entity willbe tax-neutral and we do notsee any impact. of additionaldepreciation.The rating agencies on their

part reaffirmed their ratingsfor RIL debt after the mergerwas announced.The relative importance of

RIL in all the stock indices willrise after the completion ofmerger with Reliance Petro-leum. This is because all theindices are based upon themarket . capitalization of itsconstituents and post-merger,with RPL shareholders gettingRIL stocks, themarket capital-ization of RIL will rise.. It is atechnical positive for RIL sinceits weightage in the bench-mark indices is likely to goup,” said a Goldman Sachs re-port.Commenting upon the

treasury losses RIL that RIL isrumoured to have incurred inits futures contracts, Agarwalsaid” “We had bought oil at $10 a barrel in 1999 and $ 125in 2008 and still consistentlymaintained higher gross refin-ery margins than industrybenchmarks. We would jothave got there if we do notknow how to manage thevolatility in risks..” �

BY MANIK K. MALAKAR

MUMBAI : Rupert Pennant-Rea a formerDeputy Gov-ernor of the Bank of

England once quipped, “At theBank of England we have the abil-ity to mess things up, and ourrecord shows that we have oftenused it.”That is a sentiment which com-

panies that went in for the merg-ers and acquisitions (M&A) during2005-2008 must be richly sharing.The bull market of that periodmade quite a few companies go infor M&A activity. They may yet beliving to regret their decision.AMTM (mark to market) report

indicates that M&A activity haslost a whooping 53 per cent oftheir value. This information wascompiled by JagannadhamThunuguntla, who is the CEO ofSMC Capitals, one of India’s lead-ing financial services companies.Indian companies in the period

2005-2008 took part inM&A activ-ity worth $ 45 billion dollars (oflisted Indian companies and a dealsize of more than $100 million).This value is now down to $ 20.96billion This represents a loss in

value of a staggering $ 24.04 bil-lion. Obviously not a smallamount!“Companies usually ventured

into theM&A route either for busi-ness compatibility, R&D, access toraw materials, access to cus-tomers, new product line, andother factors,” said Thunuguntla,when asked about the rationalebehind the M&A activity.The bull run of the period start-

ing from 2004 was also a factor inboosting M&A activity since In-dian businesses had large profitsand accumulated reserves.“The vaunted ‘Indian Growth

Story’ campaign was yet anotherfactor that led to some of India’sbusiness houses venture into bigticket M&As,” continuedThunuguntla. The additionalglobal attention that these dealsbring to the companies and theirpromoters was another catalyst.M&A activity was both domestic

as well as foreign. On current valu-ations, domestic MTM transac-tions have lost 42 to 43 per centwhile overseas ventures lost 60 percent. The cumulative loss averagesout to 53 per cent.A lack of hard-nosed valuations

in the M&A was a distinct feature.“An interesting point is that mostof these over-excited M&A weredone by seasoned, matured busi-

ness houses rather than the young,first-generation entrepreneurs,”reports Thunuguntla. This under-lines the point that even seasonedbusinessmen get influenced with

‘false promises’ of bull market.Continuing with this evaluation

ofM&A valuations, it is to be notedthat M&A activity of 2005 has per-formed (relatively) better than thatof 2006-2008. “This probably be-cause by the time of 2005, the in-fluence of bull markets is not infull swing and the acquirers werenot paying hyper-valuations,” ex-plains Thunuguntla.“However, in the euphoric

mindset, the Indian corporateshad bitten the cross-border M&Abug and they are now paying aheavy price,” he said. Cash-richconservative groups have now ex-hausted all their profits, their over-seas acquisitions have failed to

deliver expected results and theyare starving for cash now.In the later years, however, the

feeling of euphoria came intoplay and acquirers were not both-ered about how much they arepaying. “Most of the transactionsof 2006, 2007 were out of adrena-line-rush than out of rationality,”he said.The only sector in the M&A

space that has proved to be an ex-ception to the rule has been thetelecom sector. Thunuguntla ex-plains, “It was an inbound acquisi-tion whereVodafone has acquireda five per cent stake in Bharti-Air-tel. The sector in which it’s presentand the elegance of managementhas ensured there are verymodestlosses in the stock in comparisonto collapse of rest of the market.This has enabled Vodafone’s fiveper cent acquisition of Bharti turn-ing out to be a profit-making deal,in comparison to other disastrousM&As.”But coming back to tends, how-

ever, the rest of the M&A scenedoes not offer comfort. “Globally,95 per cent of the M&As fail,” isThunuguntla’s stark statement. Inlight of this statistic IndianM&A isthe trend rather than exception.Jagannadham Thunuguntla

sounds a very cautious note.“Shareholders should always care-fully assess and watch any big-ticketM&A transaction, especially,when the target company is twotimes bigger than the acquiringcompany,” he said.The severe not continues. Ag-

gressive M&A activity on the partof Indian companies waswrong asthey spent all of their hard earnedprofits. “Globally, in developedcountries, M&As are very preva-lent because the markets in thosecountries are extremely saturatedand matured. In such economies,the scope of organic growth is verylimited. Hence, the only way thecompanies can exhibit growth isthroughM&As in the form of inor-ganic growth,” statedThunuguntla.Needless to add, M&A is no

longer the flavour of the month.M&A activity is now on the slow-down. “Companies that have beenbitten once are twice shy now,” hesaid.There is opportunity in every

adversity, notes Thunuguntla. Forthe cash rich corporate this is theopportunistic time to do somesmart M&As. “As rightly put byWarren Buffet, we should be fear-ful when others are greedy. And,we should be greedy when othersare fearful,” Thunuguntla con-cluded. �

M&A are cooling down

Jagannadham Thunuguntla,CEO, SMC Capitals