Smart M & A will create value for owners of capital

Mergers and acquisitions can help achieve strategic objectives if done at right value, a top official of J P Morgan India said.

Speaking on 'Going for Growth: emerging global trends in finance,' at 'The India Finance Forum 2005' organised by CII on Thursday, Vedika Bhandarkar, managing director and head "� investment banking, J P Morgan India Pvt Ltd, said that smart M & A would create value for owners of capital.

She said that companies maximise value by pursuing all projects where return on capital employed was higher than the cost of capital. M & A should be carried out if it can provide industrial logic and the ability to integrate.

"Failures have happened in cross border M & As in the past, due to lack of ability to integrate, she added.

Stating that M & A built scale by adding businesses but, did not accelerate growth, she said that value framework should be used to determine acquisition price in an M & A deal.

She suggested that companies should first determine the market value of target and expected synergies. Then they should negotiate the price, which should be less than the market value of target plus synergy, for creating value for acquirer.

M&A deals should follow quantitative principles of value creation and qualitative adjustments, she said, adding that companies should do away with value-destroying deals, just to keep getting larger.

She pointed out that stock deal gave more flexibility as both bidder and target stock may be over/under valued. Unlike in the past, more use of stock deal transactions have been witnessed in M & A during 2004-05, she added.

Stating that companies turn to M&A to add business, and to add shareholder value, she said that there would be three options to create shareholder value. These include operating strategy, M & A strategy and financial strategy. "If you don't have the operating model right, M & A will not make sense," she added.

A Gopalakrishnan, senior partner, Venkatachalam Iyer & Co said that speed was the essence for success of mergers. He sought various legislative reforms, like approval for online registration of mergers, single window concept to approve mergers, common stamp duty, among others.

He stressed that adoption of international best practices and a coordinated approach were necessary while bringing amendments to the code of merger in the Companies Act.

A Viswanathan, Convenor, Panel on Economic Affairs and Taxation, CII Tamil Nadu, highlighted the major trends in the corporate world in India with which the finance leadership in the country has been closely involved.