Description
Case study
STRATEGIES FOLLOWED BY BUSINESSES TO AFFECT GOVERNMENT DECISIONS
COMPETITION is a marvellous thing. In virtually all fields, from sports to business, it forces people to strive, innovate and attain new heights of excellence. It is particularly important in business, since excellence here also means a better deal for consumers and a persistent rise in productivity which alone can banish poverty, and raise living standards. This is a major reason to welcome foreign companies into India. Their entry yields other gains, like an inflow of hard currency. But the real advantage of foreign investment lies in furthering the competitive process in pushing all economic actors to new peaks of performance using the best technology and organisational methods in the world. Those who say foreign companies and brands will crush Indian ones are wrong. We have cases galore of Indian companies beating foreign companies. Videocon and BPL have hammered Philips in TV, Nirma has beaten Surf, Rasna has knocked out Tang. In general the entry of foreign companies and brands has meant more competition, not a foreign monopoly. However, some new forms of foreign investment threaten to reduce competition. Coca Cola wants to enter India by buying out the brands of Parle (like Thums Up.Limca and Citra). Gillette is negotiating for the purchase of a 49 per cent stake in the house of Malhotra, the market leader in razor blades with brands like Topaz. Given the ongoing quarrels and likely split in the Malhotra family, such a deal could leave Gillette with a controlling stake. In both these cases the foreign company will end up with a market share exceeding twothirds. Should such acquisitions be prohibited on anti-monopoly grounds? When Pepsi entered India, it increased competition. Rivals like Parle increased their bottle size from 200 cc to 250 cc with no increase in price, implying a big price cut per cc. The imminent entry of 7-Up forced Parle to come up with a rival brand, Citra, which ultimately triumphed in the marketplace, Consumers benefited in terms of price and range of choice. Precisely the opposite is now proposed. Coca Cola is negotiating to buy out Parle’s brands. Coke maintains the fig leaf that it will market Parle’s brands in addition to its own, and thus increase competition. In practice Parle’s brands will die out, and the market will see a straight Coke-Pepsi fight. Will this be a duopolistic situation militating against consumer interest? The answer is not entirely clear. Coke and Pepsi dominate most countries but it would be absurd to say that they have a cozy arrangement not to compete. On the contrary, their global battle is more fierce than in industries having a dozen competitors. Nevertheless, a three-way battle between Coke, Pepsi and Parle will serve the consumer interest better. It will present the consumer with a greater range of brands, and improve the chances of Indian brands becoming strong enough to go multinational. So there is a case for banning the Coke-Parle deal on anti-monopoly grounds. The same logic applies to the Gillette-Malhotra deal. Some people will say that mergers and acquisitions are part of any market economy, and that the logic of economic liberlisation means the government should not interfere. This is not true. All capitalist countries allow acquisitions but also use anti-monopoly laws to thwart monopolistic mergers.
Modern economic theory and practice is much more relaxed about monopolies than was the case two decades ago, since in a fast-changing, globalising world, most monopolies turn out to be temporary and hence illusory. In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously separate firms into a single legal entity. Significant operational advantages can be obtained when two firms are combined and, in fact, the goal of most mergers and acquisitions is to improve company performance and shareholder value over the long-term. The motivation to pursue a merger or acquisition can be considerable; a company that combines itself with another can experience boosted economies of scale, greater sales revenue and market share in its market, broadened diversification and increased tax efficiency. However, the underlying business rationale and financing methodology for mergers and takeovers are substantially different. A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. For example, back in 1998, American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals as the chairmen in both organizations became joint-leaders in the new organization. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presense in North America. A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired. Target companies can employ a number of tactics to defend themselves against an
unwanted hostile takeovers, such as including covenants in their bond issues that force early debt repayment at premium prices if the firm is taken over.
Joint Venture Companies in India A joint venture is a strategic alliance where two or more parties, usually businesses, form a partnership to share markets, intellectual property, assets, knowledge, and of course, profits. Joint Venture companies are one of the most preferred form of corporate entities for Doing Business in India. There are no separate laws for joint ventures in India. Foreign companies are free to open branch offices in India, however joint venture company attracts less tax than branch office. Benefits A successful joint venture can offer: access to new markets and distribution networks increased capacity sharing of risks and costs with a partner access to greater resources, that is, Specialized staff, technology and finance Entering in to a Joint Venture Agreement: Selection of a good local partner is the key to the success of any joint venture. Once a partner's selection is complete generally a Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement. Drafting a Joint Venture Agreement: When you decide to create a joint venture, you should set out the terms and conditions in a written agreement. This will help prevention of any misunderstandings once the joint venture is up and running. A written agreement should cover structure, objectives, financial contributions, intellectual property, management and control, disputes, profits sharing etc. Setting up a Joint Venture in India: India is witnessing a revolution in the context of liberalization as well as in globalization of the Indian economy and transacting business through Joint ventures set up with foreign partners across various industry sectors. To start a new joint venture in India a joint venture company has to be formed. In case one of the partners of the joint venture company is a non resident, approval of Reserve bank of India {RBI} will be required for acquiring shares of the company. The Joint Venture agreement must be conditional upon obtaining all necessary approvals/ consents/ licenses /permissions of appropriate agencies of Government of India like RBI/SIA etc within specified period.
In an open economy where imports are allowed, even if an industry has only one producer he has no monopoly since consumers can switch to imports. The theory of contestable markets shows that the mere possibility of a rival entering the field can force companies with an apparently monopolistic position to nevertheless! charge competitive prices. The loss of $ 8 billion suffered recently by IBM shows that even what looks like the most secure monopoly can be illusory in an era of fast-changing technology. Indian laws on dominance have failed to recognise this, and need changing. It is ridiculous to think that a market share of 25 to 33 per cent amounts to dominance. In the US, courts have held that monopoly power can reasonably be assumed if a company’s market share exceeds 66 per cent. Even this monopoly power can be transient, as IBM’s case has shown. India bans consumer goods imports, and even if these are allowed soon, they will bear high duties. So India is not an open economy with fully contestable markets. In such circumstances it is appropriate to worry about industries where any one company gets a market share exceeding 66 per cent. If a company achieves such dominance through excellence in competitive conditions – as in the case of Bajaj Scooters – that is fine. If Coca Cola achieves dominance by beating its rivals in the Indian market, that too is acceptable. But we should not allow such dominance through mergers which reduce competition.
*********************************
doc_180694413.doc
Case study
STRATEGIES FOLLOWED BY BUSINESSES TO AFFECT GOVERNMENT DECISIONS
COMPETITION is a marvellous thing. In virtually all fields, from sports to business, it forces people to strive, innovate and attain new heights of excellence. It is particularly important in business, since excellence here also means a better deal for consumers and a persistent rise in productivity which alone can banish poverty, and raise living standards. This is a major reason to welcome foreign companies into India. Their entry yields other gains, like an inflow of hard currency. But the real advantage of foreign investment lies in furthering the competitive process in pushing all economic actors to new peaks of performance using the best technology and organisational methods in the world. Those who say foreign companies and brands will crush Indian ones are wrong. We have cases galore of Indian companies beating foreign companies. Videocon and BPL have hammered Philips in TV, Nirma has beaten Surf, Rasna has knocked out Tang. In general the entry of foreign companies and brands has meant more competition, not a foreign monopoly. However, some new forms of foreign investment threaten to reduce competition. Coca Cola wants to enter India by buying out the brands of Parle (like Thums Up.Limca and Citra). Gillette is negotiating for the purchase of a 49 per cent stake in the house of Malhotra, the market leader in razor blades with brands like Topaz. Given the ongoing quarrels and likely split in the Malhotra family, such a deal could leave Gillette with a controlling stake. In both these cases the foreign company will end up with a market share exceeding twothirds. Should such acquisitions be prohibited on anti-monopoly grounds? When Pepsi entered India, it increased competition. Rivals like Parle increased their bottle size from 200 cc to 250 cc with no increase in price, implying a big price cut per cc. The imminent entry of 7-Up forced Parle to come up with a rival brand, Citra, which ultimately triumphed in the marketplace, Consumers benefited in terms of price and range of choice. Precisely the opposite is now proposed. Coca Cola is negotiating to buy out Parle’s brands. Coke maintains the fig leaf that it will market Parle’s brands in addition to its own, and thus increase competition. In practice Parle’s brands will die out, and the market will see a straight Coke-Pepsi fight. Will this be a duopolistic situation militating against consumer interest? The answer is not entirely clear. Coke and Pepsi dominate most countries but it would be absurd to say that they have a cozy arrangement not to compete. On the contrary, their global battle is more fierce than in industries having a dozen competitors. Nevertheless, a three-way battle between Coke, Pepsi and Parle will serve the consumer interest better. It will present the consumer with a greater range of brands, and improve the chances of Indian brands becoming strong enough to go multinational. So there is a case for banning the Coke-Parle deal on anti-monopoly grounds. The same logic applies to the Gillette-Malhotra deal. Some people will say that mergers and acquisitions are part of any market economy, and that the logic of economic liberlisation means the government should not interfere. This is not true. All capitalist countries allow acquisitions but also use anti-monopoly laws to thwart monopolistic mergers.
Modern economic theory and practice is much more relaxed about monopolies than was the case two decades ago, since in a fast-changing, globalising world, most monopolies turn out to be temporary and hence illusory. In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously separate firms into a single legal entity. Significant operational advantages can be obtained when two firms are combined and, in fact, the goal of most mergers and acquisitions is to improve company performance and shareholder value over the long-term. The motivation to pursue a merger or acquisition can be considerable; a company that combines itself with another can experience boosted economies of scale, greater sales revenue and market share in its market, broadened diversification and increased tax efficiency. However, the underlying business rationale and financing methodology for mergers and takeovers are substantially different. A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. For example, back in 1998, American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals as the chairmen in both organizations became joint-leaders in the new organization. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presense in North America. A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired. Target companies can employ a number of tactics to defend themselves against an
unwanted hostile takeovers, such as including covenants in their bond issues that force early debt repayment at premium prices if the firm is taken over.
Joint Venture Companies in India A joint venture is a strategic alliance where two or more parties, usually businesses, form a partnership to share markets, intellectual property, assets, knowledge, and of course, profits. Joint Venture companies are one of the most preferred form of corporate entities for Doing Business in India. There are no separate laws for joint ventures in India. Foreign companies are free to open branch offices in India, however joint venture company attracts less tax than branch office. Benefits A successful joint venture can offer: access to new markets and distribution networks increased capacity sharing of risks and costs with a partner access to greater resources, that is, Specialized staff, technology and finance Entering in to a Joint Venture Agreement: Selection of a good local partner is the key to the success of any joint venture. Once a partner's selection is complete generally a Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement. Drafting a Joint Venture Agreement: When you decide to create a joint venture, you should set out the terms and conditions in a written agreement. This will help prevention of any misunderstandings once the joint venture is up and running. A written agreement should cover structure, objectives, financial contributions, intellectual property, management and control, disputes, profits sharing etc. Setting up a Joint Venture in India: India is witnessing a revolution in the context of liberalization as well as in globalization of the Indian economy and transacting business through Joint ventures set up with foreign partners across various industry sectors. To start a new joint venture in India a joint venture company has to be formed. In case one of the partners of the joint venture company is a non resident, approval of Reserve bank of India {RBI} will be required for acquiring shares of the company. The Joint Venture agreement must be conditional upon obtaining all necessary approvals/ consents/ licenses /permissions of appropriate agencies of Government of India like RBI/SIA etc within specified period.
In an open economy where imports are allowed, even if an industry has only one producer he has no monopoly since consumers can switch to imports. The theory of contestable markets shows that the mere possibility of a rival entering the field can force companies with an apparently monopolistic position to nevertheless! charge competitive prices. The loss of $ 8 billion suffered recently by IBM shows that even what looks like the most secure monopoly can be illusory in an era of fast-changing technology. Indian laws on dominance have failed to recognise this, and need changing. It is ridiculous to think that a market share of 25 to 33 per cent amounts to dominance. In the US, courts have held that monopoly power can reasonably be assumed if a company’s market share exceeds 66 per cent. Even this monopoly power can be transient, as IBM’s case has shown. India bans consumer goods imports, and even if these are allowed soon, they will bear high duties. So India is not an open economy with fully contestable markets. In such circumstances it is appropriate to worry about industries where any one company gets a market share exceeding 66 per cent. If a company achieves such dominance through excellence in competitive conditions – as in the case of Bajaj Scooters – that is fine. If Coca Cola achieves dominance by beating its rivals in the Indian market, that too is acceptable. But we should not allow such dominance through mergers which reduce competition.
*********************************
doc_180694413.doc