Intellectual Property: The Dominant Force In Future Commercial Transactions Comprising Mergers and Acquisitions

Authors : Puneet Yadav & Prashant R Dahat

There is a well-established statutory, administrative and judicial framework to safeguard intellectual property rights in India, whether they relate to patents, trademarks, copyright or industrial designs. Well-known international trademarks have been protected in India even when they were not registered in India. The Indian Trademarks Law has been extended through court decisions to service marks in addition to trade marks for goods. Computer software companies have successfully curtailed piracy through court orders. Computer databases have been protected. The courts, under the doctrine of breach of confidentiality, accorded an extensive protection of trade secrets. Right to privacy, which is not protected even in some developed countries, has been recognized in India.

There has been a noticeable pick-up in cross-border mergers and acquisitions in recent months that could signal the beginning of a sustained rise in international takeovers. In last year alone, there were six major Mergers and Acquisitions transactions in which a company in one country acquired the assets and operations of a company in a different country.

Acquisitions and Mergers, although always an important means of corporate growth since the seventies, it became much more prominent during the early 1990s in the Indian corporate sector. While liberalization has spawned a merger wave among large firms, the removal of barriers such as those created by the MRTP Act does not appear to be the proximate cause for mergers. However the policies of economic liberalisation
adopted during those years triggered a sharp increase in mergers between domestically owned companies and between domestically owned companies and companies under foreign ownership.
The structural adjustment programme and the new industrial policy adopted by the Government of India would allow business houses to undertake without restriction any program of expansion either by entering into a new market or through expansion in an existing market. In that context, it also appears that Indian business houses are increasingly resorting to mergers and acquisitions as a means to growth.
CONCEPTS
Mergers or amalgamation, result in the combination of two or more companies into one, wherein the merging entities lose their identities. No fresh investment is made through this process. However, an exchange of shares takes place between the entities involved in such a process. Generally, the company that survives is the buyer which retains its identity and the seller company is extinguished (Ramaiya, 1977). A merger can also be defined as an amalgamation if all assets and liabilities of one company are transferred to the transferee company in consideration of payment in the form of equity shares of the transferee company or debentures or cash or a mix of the above modes of payment. An acquisition, on the other hand, is aimed at gaining a controlling interest in the share capital of acquired company. It can be enforced through an agreement with the persons holding a majority interest in the company’s management or through purchasing shares in the open market or purchasing new shares by private treaty or by making a take-over offer to the general body of shareholders.
A takeover, which is essentially an acquisition, differs from a merger in its approach to business combinations. In the process of takeover, the acquiring company decides the maximum price that is to be offered to the acquired firm and hence takes lesser time in completing a transaction than in mergers, provided the top management of the acquired company is co-operative. In merger transactions, the consideration is paid for in shares whereas in a takeover, the consideration is in the form of cash. However, mergers and takeovers can be treated as similar processes, since in both cases at least one set of shareholders looses executive control over a corporation which they otherwise held. Based on the objective profile of an offer, business combinations such as mergers, acquisitions or takeovers could be categorised as vertical, horizontal, circular or conglomerate mergers (Peter, 1975).
VERTICAL COMBINATION
A vertical combination is one in which a company takes over or seeks a merger with another company in order to ensure backward integration or assimilation of the sources of supply or forward integration towards market outlets. The acquirer company gains a strong position due to the imperfect market of its intermediary products and also through control over product specifications. However, these gains must be weighed
against the adverse effects of the merger. For instance, firms which have monopoly power in one stage may increase barriers to entry through vertical integration and this would help to discriminate between different purchasers by monopolisation of raw material supplies or distributive outlets (Comanor, 1967).
HORIZONTAL COMBINATION
A horizontal combination is a merger of two competing firms belonging to the same industry which are at the same stage of the industrial process. These mergers are carried out to obtain economies of scale in production by eliminating duplication of facilities and operations and broadening the product line, reducing investment in working capital, eliminating competition through product concentration, reducing advertising costs, increasing market segments and exercising better control over the market. It is also an indirect route to achieving technical economies of large scale.
CIRCULAR COMBINATION
In a circular combination, companies producing distinct products in the same industry, seek amalgamation to share common distribution and research facilities in order to obtain economies by eliminating costs of duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification (Ansoff and Weston, 1962).
CONGLOMERATE COMBINATION
A conglomerate combination is the amalgamation of two companies engaged in unrelated industries. It enhances the overall stability of the acquirer company and improves the balance in the company’s total portfolio of diverse products and production processes. Through this process, the acquired firm gets access to the existing productive resources of the conglomerate which result in technical efficiency and furthermore it can have access to the greater financial strength of the present acquirer which provides a financial basis for further expansion by acquiring potential competitors. These processes also lead to changes in the structure and behaviour of acquired industries since it opens up new possibilities (Mueller, 1969).
MERGERS, GROWTH AND DIVERSIFICATION
Mergers, we have mentioned, are an important means to corporate growth. A firm or a group can be expanded in several ways. One way of growth, is through the extension of existing activities by upscaling capacities or establishing a new firm with fresh investment in existing product markets. However, a firm normally faces two major constraints when it seeks to grow within a single market. When the size of the market is small and the rate of expansion is too low, the growth of a set of firms in the same market might affect adversely the growth of other firms. Thus, it could lead to price wars or takeover bids. This, and other constraints such as control by the government over the expansion of firms in particular lines, encourage firms to grow by diversifying into other markets. Through diversification, firms can increase their sales by either creating new markets for the same product or entering new markets by diversifying into new product lines.
When the present market does not provide much additional opportunity for growth, diversification as a strategy is vital for a firm if it wants to augment its demand base. In practice, diversification is an important way in which firms grow. A firm is said to diversify if it produces new products including intermediate products that are sufficiently different from the existing product lines (Penrose, 1959). Besides, it also diversifies to take account of the changing opportunity costs of its own resources, which might occur when existing markets become relatively less profitable than opportunities for new investments elsewhere. With a growing and reasonably stable industry, a shift can take place in the manufacturing processes, the product profiles and the demand patterns arising out of technological innovations.
To reduce this vulnerability, a firm with excellent apparent growth and stability prospects which becomes vulnerable to sudden changes because its product line has a narrow technological and market base, may need to increase its flexibility by broadening this base to new markets and particularly to new areas of technology. For these reasons, during the 1970s, for example, large firms in India and elsewhere had diversified into new fields, related or unrelated to the existing business (Kumar, 1985, p.105). Growth and diversification can be achieved both internally and externally. Mergers, tender offers and joint ventures are all strategies through which a firm can grow externally. A firm would grow by external expansion when it becomes difficult for a firm to use its resources efficiently for further growth. Mergers do not require any cash outlay and therefore can be considered as the only way of diversifying activities for a firm whose financial position is not strong and whose managerial and technical services are highly specific to existing products (Penrose, 1959).
MERGERS, TAKEOVER AND INDIA
India is one of the nations who have been developing herself in various way, Takeover and Merger are also the way for the development of nation. From 1970 it is become easier due to the rules and regulation constructed by the Government of India. In second five years plan Indian Government were given priority to Industrial development. But when the concept of LPG that is Liberalization, Privatization and Globalization has been occurred Industrial Development become challenge and competition between rival companies arisen. There are many takeovers during last 30-40 years, Tata was the first Indian company who takeovers a foreign company.
The Tata group, which was among ten companies expressing interest in the takeover of Daewoo’s commercial vehicle subsidiary, was given priority in sales negotiations. Tata succeed in their effort, it has become first takeover by an Indian automobile company abroad. The ‘preferred bidder’ status entails Tata Motors to enter into a Memorandum of Understanding (MoU) to be negotiated with Daewoo, followed by
a detailed due diligence process. “We had submitted both technical and financial bids. The final financial bid will have to be submitted after the MoU is signed and the final due diligence is completed,” according to Tata Motors director (finance) Praveen Kadle.
CONCLUSION
Now at present The Tata Group is celebrating its acquisition of the Anglo-Dutch steel firm Corus, and the catapulting of Tata Steel into world steel’s big-five status (by revenue). It should. The $12 billion deal is a marker in the ground. Not that it is the biggest deal ever from an emerging market.
Recent deals, even attempts, have been bigger. For example, Brazilian firm Companhia Vale do Rio Doce successfully acquired most of Canadian nickel company Inco Limited for $19 billion last year, and Chinese petro giant CNOOC tried, but failed, to pull off an $18 billion acquisition of Unocal in the U.S. But Tata-Corus is the largest out of India, and is done by a private sector entity of its own volition, away from the shadow of state influence. For these reasons, it bears noticing.
The same euphoria surrounded Shenzhen-based TCL Multimedia when it acquired the French company Thomson’s TV assets to become the biggest TV manufacturer in the world (by volume, even if not by revenue) in 2004, just twelve years after TCL entered the TV business in mainland China.
Tata Steel is acquiring from a position of strength amidst a boom in the world steel market. In that case, as in Tata-Corus, the rationale was to supplement the customer facing front-end in the developed markets, with a lower-cost back-end in an emerging market. That is, TCL was trying to buy sales and marketing structure and a set of brands.
Much like Tata is with Corus. But that story had a sorry ending. TCL chairman Li Dongsheng was awarded a French accolade, Officer de La Legion D’Honneur, the highest honor France had yet bestowed upon a Chinese entrepreneur, but his shareholders don’t have much to show for the deal. TCL had to write off much of its investment. The CNOOC-Unocal deal, in the different setting of the oil industry, also had a sorry ending. So, it is perhaps worth reflecting why Tata-Corus might be different. I believe it will be. Here’s why.
First, CNOOC’s bid collapsed amid Washington intrigue. The Chinese proved to be babes-in-the-wood in navigating the Byzantine corridors of Washington’s power, and underestimated a relentless backlash that unwound the deal. While politics and steel are not alien to each other, there is nothing in Tata-Corus like the level of political concern in the CNOOC-Unocal situation.
Second, TCL acquired Thomson’s assets from a position of weakness. Margins at TCL were under pressure from cut-throat competition in mainland China. Even though TCL was one of the largest Chinese TV manufacturers (even prior to the acquisition of Thomson’s assets), commodity TVs and other consumer electronics items were not producing good returns.
In contrast, Tata Steel is one of the most profitable, if not the most profitable, steel companies in the world, and is acquiring from a position of strength amid a boom in the world steel market. This will buy it valuable experimenting time and learning space. Third, there was much difficulty in integrating Chinese and French management. Some of this surely stemmed from language considerations. To an extent, the Indians’
greater command of the world’s lingua franca will lubricate the inevitably-difficult integration process.
Fourth, the Tatas have built up some experience in the past few years with cross border acquisitions. Some of this lies within Tata Steel itself, as in its acquisition in Singapore. And the rest lies in the broader ambit of the Tata group through its acquisitions of Daewoo’s truck assets in South Korea, Tetley Tea in the U.K. and ritzy
hotel properties on the U.S. East Coast. TCL had some experience taking over factories in Vietnam and environs, and also a failed bid for a much smaller German company, but nothing to prepare it for the Thomson assets’ integration.
Fifth, there is learning in the ambience. That is, India Inc. has built up, and is building up, its own cross-border acquisition capability. This arises not just from entrepreneurs who have been doing this for years like the Birlas and Asian Paints but also from more recent moves by India’s pharmaceuticals, software, and auto component
sectors, among others.
Cross-border experiences with integrating diverse management teams, communicating across borders and time zones, and integrating compensation practices, are not as new to the Tata group as they might well have been to the hapless TCL management team. Finally, my feeling is that the Indians are still underestimated in the West, at least relative to the Chinese.
India’s largest mobile operator, Bharti Airtel has overtaken Hutchison Essar with regard to its average revenue per user (ARPU). As per the latest data by the Cellular Operators Association of India, Bharti had
an ARPU of Rs 343.17 per month for the quarter ended December 2006, ahead of Hutchison Essar’s Rs 340.15 per month. Hutch’s ARPU fell by over 9% in the quarter ended December 2006, while Bharti witnessed only a 1.5% fall in its average revenues during the same period.
The average industry ARPU has fallen to Rs 316 for the quarter ended December 2006 from Rs 356 in March 2006 – a fall of Rs 40 per subscriber and a decline of 11%. On the other hand, private operators have recorded a 10% increase in the revenues during the quarter ended December 2006.
When the entire nation is engrossed in the unfolding Hutch drama, another landmark deal is in the works. Two of the world’s most admired business leaders — Ratan Tata of the Tata Group and Richard Branson of the Virgin Empire— are coming together for an alliance in India’s telecom landscape.
A source familiar with the development said the Virgin Group is in talks with Tata Teleservices to introduce Virgin Mobile brand in India. Globally, Virgin Mobile’s business strategy is to act as a MVNO (Mobile Virtual Network Operator) which buys bulk space from an existing wireless company and resell it under the Virgin brand. However, this model is not yet allowed in India.(For instance: Virgin Mobile has a tie-up with Bell in Canada, while it has an alliance with Sprint in the US).
Instead, Virgin is planning to become an exclusive franchisee of Tata Tele-services which is permitted in India. For this, a new entity largely owned by Tata Tele-services will be formed. The products and services will be bundled under Virgin name, supported by the services provided by Tata Teleservices. The source added that a discussion so far has been good and if all goes well with the regulatory approvals in place, Virgin Mobile would be launched in April this year. When contacted, a Tata group spokesperson declined to comment.
There would be two brands — Tata Indicom and Virgin. Tata Indicom positioned as a mass market brand, while Virgin would be positioned as a youth brand pitted against brands like Hutch. This is been done as Tata Indicom does not appeal to everyone in terms of popularity and appeal. Tata Indicom has already established itself in the mass market category while Richard Branson’s touch could bring in more subscribers.

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