A Case Study of

Acquisition of
Communications

by
Cellular Limited
Hamendra Kumar Porwal, Ankur Gupta, Anchal Khaneja

ABSTRACT Mergers and acquisitions (M&A) are increasingly being adopted by organizations today to maintain a competitive advantage in the market. The assessment of shareholders' wealth effects is one of the most researched areas in the field of finance. This paper is aimed at studying the impact of mergers on the operating performance of the merged entity by examining pre-merger and post-merger ratios. It also studies the behavior of share prices and returns 20 days before and after the announcement of the acquisition deal of Idea Cellular and Spice Communications. The study highlights that shareholders do not get value addition to their wealth around the announcement date. Keywords: Cumulative Abnormal Returns,Merger and Acquisition,ShareholderWealth Effects.

INTRODUCTION Mergers and acquisitions and corporate restructuring are a big part of the corporate finance world. Every day, investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. A merger is when two companies, more or less on equal footing, decide to join forces. Acquisitions are different in the sense that one company is, in fact, taking over another company. Of course, some companies want to be taken over and some do not. Broadly, there are two ways to grow a business - through organic growth and through inorganic growth. While taking the organic growth path, the company incrementally grows its people, customers, infrastructure resources and thus revenues and profits, an inorganic growth would provide instantaneous growth enabling the company to skip a few steps on the growth ladder. Mergers and acquisition is an inorganic growth strategy. There are several reasons for M&A. M&A has been widely used in developed economies as a growth strategy and is now increasingly getting accepted by Indian businesses as a critical tool of business strategy. It is increasingly becoming the order of the day in businesses especially in rapidly evolving businesses like information technology, telecommunications, business process outsourcing as well as in traditional businesses. Indian businesses are also rapidly using M&A to grow internationally. There are several advantages attached with M&As: Economies of Scale The largest single driving force behind mergers and acquisitions is probably economies of scale. Economies of scale mean that if you have a large company, you can leverage your suppliers. This is a very powerful capability, and exercising it can be a strategic move for a company's operations. Saturated Market Consolidation Another driving force for mergers and acquisitions is the consolidation of saturated markets. If you have a market that is saturated one in which there are many players in the space with a lot of competition you can take over one of your competitors and then automatically increase your market share. Competitive Position Improvement The third driving force has to do with simply improving your competitive position because you end up with a larger asset base and increased notoriety. Synergy Synergy is what organizations are attempting to achieve when they engage in mergers and acquisitions. It is the Cooperative interaction among groups, especially among the acquired subsidiaries or merged parts of a corporation that creates an enhanced combined effect.

A CASE STUDY OF ACQUISITION OF SPICE COMMUNICATIONS BY IDEA CELLULAR LIMITED

When companies decide to engage in a merger their reasons typically fall into one of six categories. The first type of merger is a Horizontal Merger. This is when two companies who are currently in direct competition join together and share their product lines, their markets, and their customer base. A Vertical Merger is when a company, and perhaps one of their suppliers, join together to be able to offer a contiguous, noninterrupted supply of merchandise to their companies. An example might be an ice cream cone manufacturer merging with an ice cream maker so that both products can be acquired from a single entity, thereby presumably making it easier for the customer. A Market Extension Merger is with two companies that sell the same product in different markets. This is an interesting type of merger because companies can be regional. Companies can have different segments of the marketplace in which they have gained a reputation. By acquiring another company that has a foothold in another market, you can automatically increase the markets that you address. A Product Extension Merger is when two companies selling different products in the same market merge. A Conglomeration Merger is where two companies who don't have a lot to do with one another decide to merge. The reason for this would be economies of scale, and getting a larger identity and more assets to be able to leverage for loans and other financial purposes. And finally, a Strategic Merger is the newest type of merger that may involve some or all of the features of the other merger types mentioned above. In today's globalized world, businesses need to invent new ways of competing. M&A have thus become universal tools to attain greater market share, acquire additional brands, create new synergies and capitalize on economies of scale. This study examines the acquisition of Spice Communications Limited by Idea Cellular Limited. It investigates the effect of merger announcement on the wealth of the shareholders of Idea Cellular and Spice Communications. It also examines the post merger corporate performance of the merged entity.

ERGERTYPES

cycle of the organization, and the management styles. The mergers often prove to be traumatic for the employees of acquired firms; the impact can range from anger to depression. The usual impact is high turnover, decrease in the morale, motivation, productivity leading to merger failure. The other issues in the M&A activity are the changes in the HR policies, downsizing, layoffs, survivor syndromes, stress on the workers, information system issues etc. The human resource system issues that become important in M&A activity are human resource planning, compensation selection and turnover, performance appraisal system, employee development and employee relations.

Creating shareholder value through corporate acquisitions means negotiating a deal that includes a favourable price and favourable terms, but it also requires a successful integration program. Poor integration is repeatedly cited as one of the primary reasons that corporate acquisitions fail to meet the purchaser's expectations. Integration Difficulties Integration problems or difficulties that companies often encounter can take many forms. Major amongst them are linking different financial and control systems, building effective working relationships (especially when management styles differ), problems related to differing status of acquired and acquiring companies' executives and melding disparate corporate cultures. InadequateValuation ofTarget Another potential problem is that acquiring companies may pay too much for acquired businesses. Acquiring companies may not thoroughly analyze the target company, failing to develop adequate knowledge of its true market value. Large or Extraordinary Debt Many acquirers, in addition to overpaying for targets, may be forced, due to market conditions, to finance acquisitions with relatively high-cost debt. The use of debt has both positive and negative effects. On the one hand, leverage can be a positive force by allowing the company to take advantage of expansion opportunities; however, excessive leverage can lead to negative outcomes such as postponing or eliminating the investments that are necessary to maintain strategic competitiveness over the long term. Inability to Achieve Synergy Acquiring companies also face the challenge of correctly identifying and valuing any synergies that are expected to be realized from the acquisition. This is a significant problem because, to justify the premium price paid for target companies, managers may overestimate both the benefits and value of synergy. And, to achieve a sustained competitive advantage through an acquisition, acquirers must realize private synergies and core competencies that cannot easily be imitated by competitors.

OST MERGER ISSUES

RE MERGER ISSUES While deciding on entering a merger or an acquisition, the bidder firm faces the following financial issues:

It needs to evaluate the portfolio of the target company It has to evaluate the fixed assets of the target firm. It then needs to calculate the value of the deal.

The pre acquisition period involves an assessment of the cultural and organizational differences, which will include the organizational cultures, role of leaders in the organization, life
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A CASE STUDY OF ACQUISITION OF SPICE COMMUNICATIONS BY IDEA CELLULAR LIMITED

The Indian telecom industry is the most dynamic in the world with an evolving regulatory environment. It is the second fastest growing telecom market in the world after China. Indian telecom operators are driven towards specialization and consolidation to achieve economies of scale and improve margins. The industry is changing at a rapid pace with constantly changing policies, new players, alliances and partnerships being announced on daily basis. Mergers and acquisitions (M&A) are increasingly being adopted by organizations today to maintain a competitive advantage in the market. So it becomes very important to study the gains and costs relating to a merger strategy in the real world. In the Indian telecom industry there have been quite a few merger and acquisition cases. But in our belief, no research has been taken up yet. This was the main motivation behind the study undertaken on acquisition and we studied various acquisition deals before settling on Idea and Spice which was one of the major deals happening in India. It included two domestic players and one Telecom Company of Malaysia to make it a perfect piece to study. This study examines the acquisition of Spice Communications Limited by Idea Cellular Limited. It investigates the effect of merger announcement on the wealth of the shareholders of Idea Cellular and Spice Communications. It also examines the post merger corporate performance of the merged entity.

OTIVATION BEHINDTHE STUDY

H1 (null hypothesis): There is no significant difference in the mean abnormal returns of the pre and post merger announcement period for the bidding firm. H2 (null hypothesis): There is no significant difference in the mean abnormal returns of the pre and post merger announcement period for the target firm. H3 There is zero or negative combined excess return for the merging entities.

HEORY AND METHODOLGY Operating Performance Study

This kind of research, along with their explanations, could partially not be correct, as many other factors influence stock prices and their conclusions do not provide clear and conclusive results argumentation. In this context, the use of post-merger accounting data and, in particular, financial ratios from financial statements that have been examined for their credibility is a better and safer path to test directly for changes in operating performance that result from mergers than stock price studies. Although, there is not a commonly accepted concrete set of financial ratios as a successful operating performance measure, profitability ratios are widely used for the purpose. Accordingly, our study also uses primarily profitability ratios for measuring operating performance of Idea Cellular Limited after merger. We have used the following six ratios in order to measure the profitability: 1. Return on Assets (ROA)

COPE The scope of this paper is to examine the value addition to the shareholders' wealth by the means of an event study of the abnormal stock returns of the merging entities.

The paper also analyses the corporate performance of the merged entity by using the following set of ratios: Current Ratio, Return on Assets, Return on Equity, Return on Capital Employed, Profit Margin and Earning Per Share.

ROA measure company's earnings in relation to all of the resources it has employed. It tells us what earnings were generated from the invested capital (assets). Net income is taken as Profit afterTax (source: Capitaline Database) ROA= Net income/Total Assets 2. Return on Capital Employed (ROCE)

IMS AND OBJECTIVES The objectives of the present study are: To examine the effect of mergers on the wealth of the shareholders.

To analyze the immediate impact of mergers on the share prices of the merging companies. To examine the post merger corporate performance of the merged entity.

ROCE is a significant measure of return that a company is realizing from its capital calculated by the profit before interest and tax divided by the capital employed. Profit before Interest and Tax (PBIT) and Capital Employed (AssetsLiabilities) are taken from Capitaline Database. It is calculated as ROCE= PBIT/Capital Employed 3. Earnings Per Share (EPS)

YPOTHESES To attain the above objectives the following hypotheses will be tested:

EPS is per share earnings of a company for a given period. It is calculated as Net Income divided by the number of equity shares. EPS values are directly taken from audited results of the company EPS= Net Income/The number of equity shares

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A CASE STUDY OF ACQUISITION OF SPICE COMMUNICATIONS BY IDEA CELLULAR LIMITED

4. Profit Margins 1. 2. 3. 4. Identifying of the events of interest and defining the event window size. Selection of the sample set of firms to include in the analysis. Prediction of a normal return during the event window in the absence of the event. Calculation of the abnormal return within the event window, where the abnormal return is defined as the difference between the actual and predicted returns. Testing whether the abnormal return is statistically different from zero.

It gauges a company's operating success over a given period of time. Net income again is taken as Profit after tax. Profit Margins= Net Income/Sales 5. Current Ratio

It measures the ability of a company to pay its debts in the short-term and to meet unexpected cash needs. Current Ratio= Current assets/Current liabilities 6. Return on Equity (ROE)

5.

The amount of net income (Profit after Tax) returned as a percentage of shareholders equity (Shareholders capital, Outstanding Employee Stock Options, Reserves and Surplus). Return on Equity= Net income/Shareholders' Wealth

Estimation Period,Event Date and EventWindow The event of this study is the M&A announcement (t=0) of Idea Cellular with Spice Communications. It is the date on which the information about a merger bid first appeared in the financial dailies. In this case, Idea cellular first announced its plan to acquire Spice Communications on 25th June, 2008. Hence 25th June, 2008 is taken as t=0 in this study. The significance of an event can be identified by examining its impact on the firm's stock price. To accomplish this, a period of days is defined over which the impact of the event will be measured. This period is known as the event window. The event window covers 41 days (-20 to +20 days). The estimation window is the control period preceding the event period. In this study, the estimation window for the event ends 20 days before the event and extends back to 250 days (210 days for Spice) prior to it. Estimation periods generally end before the event of interest so that the returns during the event window will not influence the model parameters. Estimation Period Event Window

FFICIENT MARKET HYPOTHESIS (EMH) EMH forms the base of using event study method which is employed in this study. Hence, it is very important to understand the basic concepts of EMH.

EMH asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made. There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". Weak EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. Semi-strong EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. Strong EMH additionally claims that prices instantly reflect even hidden or "insider" information. There is evidence for and against the weak and semi-strong EMH, while there is powerful evidence against strong EMH. Studies of the semi-strong form of the EMH can be regarded as tests of the speed of adjustment of prices to new information. The leading research tool in this area is the event study method.

T0 Sample Set

T1

T2

This paper is a case study based research and therefore the sample includes the acquisition of Spice Communications Limited by Idea cellular Limited. Abnormal/Excess Shareholder Return (AR) It measures the stock market's initial reaction to a merger bid and division of any gains from any new information which becomes available to the market. Daily share price changes were tracked to compute daily excess returns (ARit) for the security i as on a particular day (t) by employing market model denoted by equation (1): XRit = Rit E (Rit)...........(1)

The core assumption of the event-study methodology is that if information communicated to the market contains any useful and surprising content an abnormal return will occur. In a capital market with semi-strong efficiency one can assesses the impact of the event in question on the market value of the company by calculating the abnormal return - the difference between the actual postevent return and the return expected in the absence of the event. An event study can be roughly categorized into the following five steps:
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A CASE STUDY OF ACQUISITION OF SPICE COMMUNICATIONS BY IDEA CELLULAR LIMITED

Where, t = day measured relative to an event, XRit = excess return on security i for day t, Rit = return on security i during t, E (Rit) = expected rate of return on security i that it would ordinarily earn for a given level of market performance for day t. This is measured using the market model denoted by the equation (2): E(Rit) =
i

returns of Idea Cellular and Spice Communications were extracted from Capitaline database for the estimation period as well as event window. The data used for calculating various ratios was extracted from the Capitaline database and the company websites.

ITERATURE REVIEW The assessment of shareholders' wealth effects (value creation or destruction) of Mergers and Acquisitions is one of the most researched areas in the field of finance.

+ iRmt ...........(2)

The study deduced the market performance by taking the BSE SENSEX Index as the market benchmark. Values of and were estimated by regressing Rit (dependent variable) on Rmt (independent variable) for the 250 day period. Cumulative Abnormal/Excess Returns (CAR) CAR in the days surrounding the merger (equation 3) were needed to examine whether shareholders of merging firms gained from the merger. CAR = ARit (3) for i=-20 to +20 Excess Returns of the Combined Firm Excess returns of the combined firm (equation 4) were calculated for assessing the market expectations from the merger of the two companies. It is a weighted sum of bidder and target firms' excess return. AR(bt,t) = [AR(b,t) * MVb + AR(t,t) * MVt] / [MVb + MVt]. (4) Where, MV b and MV t are market values (i.e. market capitalization) of the bidder and target respectively as at the day before the announcement date (t=-1). AR(b,t) is the excess returns of bidder firm as on day t and AR(t,t) is the excess return of the target firm as on day t.

Anita Shukla & Mouni Geoffrey Gekara (2010) - Effects of Multinational Mergers and Acquisition on Shareholders' Wealth & Corporate Performance. This research aimed at studying the impact on the operating performance of the acquiring firm by examining the pre merger & post merger financial ratio. It analyzed Tata Steel's merger with Corus Steel, the largest ever foreign merger by an Indian company. It compared the pre & post financial ratios & behavior of share prices. The results failed to support the hypothesis that bidder's gains are captured at the beginning of merger program. It observed that negative excess returns prevail in the market between the announcement & the outcome date. It exhibited negative average returns in almost every interval surrounding the announcement period. Barbara Dozier (2010) - Mergers & Acquisition as A Means of Creating Shareholders Wealth- A Case of Lloyds TSB & HBOS. The study investigated the profitability for shareholders by examining the daily excess returns that accrue to the shareholders around the date of announcement of the merger deal. Three levels of analysis were carried out: excess return for the shareholders, announcement effect and finally excess return for the combined entity. The study showed huge positive excess returns for the shareholders of both firms around the announcement date. However, the study also stated that these excess returns cannot be solely attributed to the merger announcement. External economic conditions also play a role in this. M Jayadev and Rudra Sensarma (2009) - Mergers in Indian Banking: An Analysis. This paper analyzed some critical issues of consolidation in Indian banking with particular emphasis on the views of two important stake-holders viz. shareholders and managers. It reviewed the trends in consolidation in global and Indian banking. To ascertain the shareholders' views, the paper conducted an event study analysis of bank stock returns which revealed that in the case of forced mergers, neither the bidder nor the target banks' shareholders have benefited. But in the case of voluntary mergers, the bidder banks' shareholders have gained more than those of the target banks. In spite of absence of any gains to shareholders of bidder banks, a survey of bank managers strongly favored mergers and identified the critical issues in a successful merger as the valuation of loan portfolio, integration of IT platforms, and issues of human resource management. B. Rajesh Kumar and K.M. Suhas (2010) - An Analytical Study onValue Creation in Indian Bank Mergers. This study, based on Indian banking mergers, examined the impact of mergers on
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T D

ESTINGTHE STATISTICAL SIGNIFICANCE The Paired t-test

A paired t-test is used to compare two population means. Here it is used to determine whether there is a significant difference between the average values of event-window abnormal returns. This averaged difference is calculated based on the paired differences between the two values of each event-window day. ATA The historical share prices of BSE SENSEX Index were taken from Yahoo Finance for the estimation period of 250 days. The stock

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both the stock market wealth creation and operating performance. The study also analyzed the performance of the merged banks in relation to a control group based on financial ratios. The results of cumulative abnormal returns analysis signify that merger announcements are value-creating activities for the acquirer banks. At the same time, merger announcements erode shareholder wealth for the target banks. The framework of pre-merger and post-merger comparison of the operating performance of the acquirer banks was based on three models whereby the cash flow was deflated by market value of assets, book value of assets, and income. The result did not provide evidence to support the view that corporate performance improves after mergers. Guntur Anjana Raju and Dipa Ratnakar Gauncar - Is M&A a Wealth Creation Vehicle for Business Houses in India? Case of the Tata Group of Companies. The study examined the impact of M&A on corporate performance and shareholders wealth of acquiring companies of Tata Group of companies in different industries from 1996 and 2008. The article analyzed with whether Tata as a Business House created wealth through M&A. It was concluded that the majority of the acquiring companies were not able to add value to the shareholders' wealth in Post M&A announcement period. The market reacted to the news of the M&A in a negative manner expecting that the M&A would not improve the performance of the company. Casper Flught (2009) - Shareholders' wealth effects of M&A, An Empirical Investigation of Short Term Performance in the European market. The paper focused on European M&A profitability from a quantitative perspective by examining the abnormal stock returns to shareholders in the period surrounding the announcement date using the event study methodology in a short term window to see whether the findings of the 80s and 90s merger waves were still applicable to the European data from the 2000s. Analysis found evidence that target shareholders receive positive and significant abnormal return. The paper also examined whether the market expectations about M&A profitability depend on different attributes of the deal. Means of Payment - all cash payments likely to have a large impact on the share price of the target & the bidder. Domestic vs. cross border M&A face cultural, legal and transaction barriers. No difference could be found between focus oriented vs. diversification M&A for target as well as bidding firms. Finally, it was demonstrated that the premium paid statistically depends on the location of the target. Ruud A.I Van Frederickslust examined in his paper (Shareholder Wealth effects of M&A) the wealth creation and redistribution theories of M&A using a Dutch sample in the period 1954 till 1997. The research found that 60% of the merger partners had positive total return. Also research pointed out that the method of payment had a large influence on performance. Payment in shares had a significant negative relation while payment in cash a positive influence on the total return. It also showed that takeover targets had a better positive share price performance than the takeover bidders. The study analyzed the various merger motives and found out that synergy was the most convincing.

Olaf Rieck (2007) in his paper investigated M&A in the telecom industry and analyzed the conditions under which such M&A can be considered successful. The study applied the event study method to examine the shareholders' value effects of M&A. The findings showed that there was an overall positive shareholders wealth effect associated to M&A announcement. This was especially true for communication operators engaging in cross border M&A. They experience positive abnormal returns and outperform firms that expand domestically. In addition, it found that mergers (that are both non conglomerate and cross border) add value to the acquiring telecommunication operator, whereas no significant stock reactions are found when acquirers engage in conglomerate domestic mergers.

DEA CELLULAR'S ACQUISITION OF SPICE COMMUNICATIONS About the Companies

IDEA Cellular: A leading GSM mobile services operator, Idea Cellular has licenses to operate in all 22 service areas of India with commercial operations in 11 service areas. With a customer base of over 26 million, Idea Cellular runs operations in Delhi, Himachal Pradesh, Rajasthan, Haryana, Uttar Pradesh (East), Uttar Pradesh (West) & Uttaranchal, Madhya Pradesh & Chattisgarh, Gujarat, Maharashtra & Goa, Andhra Pradesh, and Kerala, holds spectrum for Mumbai, Bihar, Orissa, Tamilnadu (including Chennai), and Karnataka, and licenses for the remaining 6 service areas. Idea is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India. Idea Cellular is a part of the US $ 28 billion Aditya Birla Group, Indias first truly Multinational Corporation. The group has a market cap in excess of US $ 31.5 billion, operates in 20 countries, and is anchored by 100,000 employees belonging to 25 nationalities. Spice Communications Limited: Spice was incorporated as Modicom Network Private Limited on 28 March 1995 as a private limited company. Spice subsequently became a deemed public company under Section 43(1A) of the Companies Act, 1956 of India with effect from 1 April 1999 and its name was changed to Modicom Network Limited. Spice assumed its present name via a fresh Certificate of Incorporation dated 3 December 1999. As of 30 April 2008, Spice had 4.4 million subscribers representing a 1.7% market share in India, and was the second and fifth largest mobile telecommunication service provider within the Punjab and Karnataka circles, respectively. Spice was listed on the Bombay Stock Exchange Limited on 19th July 2007 and on the National Stock Exchange of India Limited on 16 June 2008.

Extracted from the website of Idea Cellular

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Acquisition Background Idea Cellular acquired the 40.8% stake of the promoter group (Modi group) in Spice Communications for a price of Rs77.30 per share in the FY08. Apart from this, it also made a payment of Rs544cr to the promoter group of Spice as non-compete fee. As per Indian securities laws, Idea made an open offer along with Telecom Malaysia International (TMI) and its affiliates and associates for a further 20% stake in Spice Communications (Telekom Malaysia, which initially had a 39.3% stake in Spice Communications, got a proportional stake in the combined entity). The Boards of Idea and Spice approved the merger of Spice into Idea and the swap ratio has been determined at 49 shares of Idea for every 100 shares of Spice. Idea made a preferential allotment to TMI of 46.473cr equity shares at a price of Rs156.96 per share, which represents 14.99% of Idea's equity capital post allotment. Primary Benefits Idea gains entry in the contiguous wireless markets of Punjab and Karnataka, which account for 11% of India's total wireless subscribers. Spice, a pioneering operator, delivers a strong running start in Punjab and Karnataka 4.4 million subscribers as at 30 April 2008, equivalent to a 15.1% market share in the two service areas wireless operator in Punjab with a 22.3% market share. Ideas operations in the 900 MHz GSM spectrum band will increase from the current 7 service areas to 9 service areas, driving scale economies and operational synergies resulting in lower operating and capital expenditure.
2

Current State

Idea to consolidate its position with its all-India subscriber market share increasing from 9.5% to 11.1%. Importantly, Idea would be No.1 in 3 service areas, in the top 3 in 5 more service areas, and with a rapidly improving share in all its other operating service areas.

Additional Solicitor General Amarjit Singh Chandhiok said in his legal opinion dated February 15 that Idea violated laws by holding more than 10% stake in two mobile companies operating in the same regions. Idea holds overlapping mobile permits in six telecom circles after its acquisition of Spice Communications in October 2008. If Chandhiok's view is accepted, the Aditya Birla Group Company will also lose the Rs 843-crore refund that it has been demanding from the government for surrendering the overlapping mobile permits. In a letter to the telecom department, Chandhiok said Idea Cellular and Spice Communications also violated the April 2008 merger guidelines, which prohibited new entrants from selling stakes within three years of obtaining licenses. Spice had obtained four of its six mobile permits in 2008 ahead of the deal with Idea. Idea-Spice must also pay penalties for failing to roll out services in the six circles where it has two mobile permits, the letter adds, citing laws that mandate mobile companies to launch commercial services within 12 months of obtaining licenses. The telecom department had sought the law ministry's opinion on the Idea-Spice deal last year and had asked if the overlapping mobile permits could be cancelled. The additional solicitor general said Idea Cellular be imposed a fine of Rs 50 crore each in the six circles where it holds two licenses. He has also recommended a total of six show-cause notices to Idea and Spice each as both companies were in violation of the law.

A
Particulars

NALYSIS AND OBSEVATIONS Operating Performance Study Table 1 Pre and Post Merger Financial Performance of Idea Cellular Ltd.
Operating Performance Analysis Post Merger
2009-10 2008-09 2007-08 21597.45 0.05 0.09 0.08 3.07 0.08 0.90 15547 0.04 0.09 0.06 3.01 0.09 1.33

Step 1: Idea acquires Sprice promoters' 40.8% stake @ Rs 77.30 per share

Exit of Modi Group from Spice Communications

Pre Merger
2006-07 2005-06 0 0.03 0.12 0.07 0.74 0.07 0.48 27078.32 24515.49 0.09 0.06 0.16 0.13 0.21 0.11 3.96 2.19 0.16 0.12 0.57 1.15

Step 2: Idea to make 20% open offer to Spice shareholders @ Rs 77.30 per share

Idea gets 60.8% stake in Spicealong with TMI

Market Capitalization ROA ROCE ROE EPS Profit Margin Current Ratio

Step 3: Idea to make preferential issue of 46.473cr equity shares to TMI @ Rs 156.96 per share

TMI gets 14.99% in Idea's equity capital post the issue

Step 4: TMI to get shares in Idea through share swap in the ratio of 49:100 (49 shares of Idea for every 100 shares held in Spice)

TMI gets around 18. 20% in Idea Cellular post the share swap

From the year 2007-08 to 2008-09 (year in which merger took place), Market Capitalization has decreased from 27,078.32 crores to 15,547 crores which can be due to fall in share prices (Table 1). ROA has gone down from 9% to 4% and ROCE has fallen from 16% to 9%. ROE has decreased from 21% to 6%. Profit Margins have decreased from 11% to 9%. Although there is growth in sales but expenses have also increased more than the sales proportionately. Current ratio has increased from 0.57 to 1.33 which could be due to preferential allotment of shares toTMI.
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Table 2 Share Price Study Day t Idea Cellular Limited Abnormal Return (%) -20 -19 -18 -17 -16 -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -0.14 0.54 0.16 -0.19 0.76 1.77 -0.78 -1.06 -0.77 -0.94 -4.06 10.78 0.87 -1.08 0.19 0.04 1.58 -0.55 -0.58 -2.43 2.39 -2.74 0.45 -2.57 -3.53 3.57 -3.84 -0.65 -0.27 -2.02 -1.06 -0.98 -0.05 -1.72 -4.22 1.51 -1.98 1.51 2.93 2.71 0.20 Cumulative Abnormal Return (%) -0.14 0.40 0.56 0.37 1.13 2.90 2.12 1.06 0.29 -0.65 -4.72 6.06 6.93 5.85 6.04 6.08 7.65 7.11 6.53 4.10 6.49 3.75 4.20 1.62 -1.91 1.66 -2.18 -2.83 -3.10 -5.12 -6.18 -7.16 -7.22 -8.94 -13.16 -11.65 -13.62 -12.11 -9.18 -6.47 -6.26 Spice Communications Limited Abnormal Return (%) 8.17 1.42 9.54 -0.02 -1.75 -6.05 0.69 -1.86 5.00 5.12 2.31 5.21 2.19 2.90 -4.49 2.80 2.70 0.06 -1.44 -8.49 32.56 -1.11 3.06 2.27 3.10 -3.80 3.65 -1.93 0.13 1.42 -3.10 0.82 2.55 0.60 3.88 0.75 -3.18 -2.91 -3.11 -0.67 -4.14 Cumulative Abnormal Return % 8.17 9.59 19.13 19.11 17.37 11.31 12.00 10.14 15.15 20.27 22.58 27.79 29.98 32.88 28.39 31.18 33.89 33.95 32.51 24.02 56.58 55.48 58.54 60.80 63.90 60.10 63.75 61.82 61.95 63.37 60.27 61.09 63.63 64.23 68.12 68.87 65.69 62.78 59.68 59.01 54.86

The above table displays the Abnormal returns (ARs) and Cumulative Abnormal Returns (CARs) of Idea Cellular and Spice Communications for the event window (-20 to +20), i.e. from 20 days before the announcement date to 20 days after the announcement. The Table 2 shows that the shareholders earned an excess return of 2.39% on the announcement day which reflects that the shareholders expected benefits from the merger. The return on the announcement date is not highest in the pre announcement period signifying that there might be a possible leakage of the information. A few days before announcement CNBC brought out news that Modi was exiting Spice and Idea would pick up his share. The CAR of idea shows a gradual decrease and becomes -6.26% at the end of the event window. This can be attributed to the global financial recession that
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took place during the same period which led to negative investor sentiments and hence a falling market. The mean CAR in the 41 day window is -0.97% but is +5.01% in 5 day window (-21to +21) signifying the immediate effect of announcement (Table 4). For Spice Communications, the announcement day return was 32.56% (Table 2) which was the highest in the event window. This signifies the immediate advantage of the announcement for Spice's shareholders. The CAR of Spice increased and was 42.29% (Table 6) at the end of period. The largest firm gets premium from the bidder for acquiring it. And therefore, shareholders of the target firm earn higher returns than those of the bidding firm.

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A CASE STUDY OF ACQUISITION OF SPICE COMMUNICATIONS BY IDEA CELLULAR LIMITED

Table 3 Mean and Median AR% Based on Market Model Method for Different Time Window Periods- Idea Cellular Limited (-)20 TO +20 Days MEAN MEDIAN -0.15 -0.27 (-)10 TO +10 Days -0.26 -0.58 (-)5 TO +5 Days -0.40 -0.55 (-)2 TO +2 Days -0.58 -0.58

Table 4 Mean and Median CAR% Based on Market Model Method for Different Time Window Periods- Idea Cellular Limited (-)20 TO +20 Days MEAN MEDIAN -0.97 0.37 (-)10 TO +10 Days 2.29 4.10 (-)5 TO +5 Days 4.30 4.20 (-)2 TO +2 Days 5.01 4.20

Table 5 Mean and Median AR% Based on Market Model Method for Different Time Window Periods- Spice Communications Limited (-)20 TO +20 Days MEAN MEDIAN 1.34 0.72 (-)10 TO +10 Days 1.90 2.19 (-)5 TO +5 Days 2.88 2.27 (-)2 TO +2 Days 4.92 -1.11

Table 6 Mean and Median CAR% Based on Market Model Method for Different Time Window Periods- Spice Communications Limited (-)20 TO +20 Days MEAN MEDIAN Testing Hypothesis: Idea cellular 42.29 54.86 (-)10 TO +10 Days 45.89 55.48 (-)5 TO +5 Days 46.45 55.48 (-)2 TO +2 Days 45.43 55.48

Table 7 Paired t-test for Pre and Post-Merger AR and CAR (Idea) Mean 0.205117118 -0.637724732 2.983827822 -5.291095791 Number 20 20 20 20 SD 2.81085255 2.271501506 3.415277505 5.412829849

Paired Samples Part 1: Pre-Merger AR Post-Merger AR Part 2: Pre-Merger CAR Post-Merger CAR

On comparing the means of pre and post periods in both ARs and CARs, we observe that both show a decrease. The standard deviation of AR decreases in the post period whereas standard

deviation of CAR increases. This represents a state of uncertainty in the minds of the shareholders of Idea regarding the success of the merger deal (Table 7).
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A CASE STUDY OF ACQUISITION OF SPICE COMMUNICATIONS BY IDEA CELLULAR LIMITED

Table 8 Paired Samples for Pre and Post Merger AR and CAR(Idea) Degree of Freedom 19 19 SD 4.4783448 2.688770566 8.966635975 3.581185589 Degree of Freedom 19 19 Std. Error Mean 95% Confidence Interval of the Difference Lower Pair 1: Pre Merger AR and Post Merger AR Pair 2: Pre Merger AR and Post Merger CAR 0.84 8.27 3.49293 8.01924 0.78104 1.79315 -0.7919 4.5218 Upper 2.4775 12.0280 1.0791 4.6147 Probability 0.294 0.000 0.248 0.00 Probability Paired Differences Paired Samples Mean SD t value

Critical value of t at 5% level of significance and df 19 = 2.093 On comparing the calculated value of t with the critical value at 5% level of significance (Table 8), we find |t calculated|(1.0791) < t critical for AR (2.093) This implies that the difference in the means of pre and post period AR is statistically insignificant. On the other hand, for CAR |t calculated| (4.6147)> t critical (2.093) This implies that the difference is significant. The significance that has been observed in CARs and was not observed in the ARs may be due to the fact that a small sample had been taken and that CARs may not give accurate answers when compared to ARs. Hence we do not reject our Null Hypothesis. This means that the difference in the pre and post announcement day return cannot be attributed to the merger announcement alone. H1 (null hypothesis): There is no significant difference in the mean abnormal returns of the pre and post merger announcement period for the bidding firm. Spice Communications On comparing the means of pre and post periods in AR we find that it decreases whereas the mean CAR increases in the post period (Table 9). The standard deviation is lowest during the post period in both ARs and CARs at 2.69 and 3.58 respectively. This implies stability in the post merger period.

Table 9 Paired t-test for Pre and Post-Merger AR and CAR (Spice) Paired Samples Part 1: Pre-Merger AR Post-Merger AR Part 2: Pre-Merger CAR Post-Merger CAR Mean 1.201262623 -0.086064862 21.97125932 61.89628186 Number 20 20 20 20

Table 10 Paired Samples for Pre and Post Merger AR and CAR(Spice) Paired Differences Paired Samples Mean SD Std. Error Mean 95% Confidence Interval of the Difference Lower Pair 1: Pre Merger AR and Post Merger AR Pair 2: Pre Merger AR and Post Merger CAR 1.29 -39.93 4.8400 8.34529 1.0822 1.86606 -0.9778 -43.830 Upper 3.55252 -36.019 1.18948 -21.395 t value

Critical value of t at 5% level of significance and df 19 = 2.093

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On comparing the calculated value of t with the critical value at 5% level of significance (Table 10), we find |t calculated| (1.18948)< t critical for AR (2.093) This implies that the difference in the means of pre and post period AR is statistically insignificant. On the other hand, for CAR |t calculated| (21.395)> t critical (2.093) This implies that the difference is significant. The significance that has been observed in CARs and was not cannot be attributed to the merger announcement alone. H2 (Null Hypothesis): There is no significant difference in the mean abnormal returns of the pre and post merger announcement period for the target firm. The table depicts the combined ARs for 20 days after the announcement date. The combined returns gradually fall and reach to -11.37% (Table 11). This signifies that there was no additional wealth creation for the shareholders of the firm. This confirms the common hypothesis that a merger is either a zero sum game or a loss game for the combined firm. H3 There is zero or negative combined excess return for the merging entities.

Table 11 Combined Returns Dat t Daily Excess Return Idea Spice Combined Excess Return Based on Market Value As on (t = - 1) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -2.74 0.45 -2.57 -3.53 3.57 -3.84 -0.65 -0.27 -2.02 -1.06 -0.98 -0.05 -1.72 -4.22 1.51 -1.98 1.51 2.93 2.71 0.20 -1.11 3.06 2.27 3.10 -3.80 3.65 -1.93 0.13 1.42 -3.10 0.82 2.55 0.60 3.88 0.75 -3.18 -2.91 -3.11 -0.67 -4.14 -2.54 0.78 -1.96 -2.70 2.64 -2.90 -0.81 -0.22 -1.59 -1.31 -0.76 0.27 -1.43 -3.20 1.41 -2.13 0.96 2.17 2.28 -0.34 Cumulative Gain/Loss -2.54 -1.76 -3.73 -6.43 -3.79 -6.69 -7.49 -7.71 -9.30 -10.62 -11.38 -11.10 -12.53 -15.74 -14.32 -16.45 -15.49 -13.31 -11.03 -11.37

observed in the ARs may be due to the fact that a small sample had been taken and that CARs may not give accurate answers when compared to ARs. Hence we do not reject our Null Hypothesis. This means that the difference in the pre and post announcement day return
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ONCLUSIONS The study analyzed Idea Cellular's acquisition of Spice Communications. It examined the effect of the merger on the wealth of shareholders of both the companies by
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A CASE STUDY OF ACQUISITION OF SPICE COMMUNICATIONS BY IDEA CELLULAR LIMITED

comparing pre and post merger financial ratios and the behavior of share prices. The results failed to support the fact that value is created for the shareholders of the merging entities. Focusing on the period around the announcement date, it is observed that negative excess returns prevail in the market. Also the difference in the returns cannot be attributed to merger announcement alone. There are external factors also in play that affect an organization. Another limitation of the study lies in market orientated nature of the analysis. The model we used relies heavily on market values, and there may be a possibility of shareholders overvaluing the shares. Some researchers are of the view that shorter event windows (5-day or 3-day) are more reliable and longer windows have some serious limitations. One disadvantage of using longer windows is that other, unrelated events may be confounded with the event of interest. If other relevant events occurred during the event window, it is hard to isolate the impact of one particular event. The study doesn't look at other factors that can affect shareholders' returns such as means of payment (equity, cash), international diversification, merger motives and the nature of markets. The long term effects of a merger in terms of financial performance can be analyzed only in due course of time. Finally, the study cannot be generalized as it could not be justified on the basis of a single case study.

This study will add to the literature of M&As. Although there have been M&As in the Indian telecom sector, to our belief, no such study has been taken up in this sector yet. This paper will help the readers gain an insight into the problems and gains associated with an acquisition. The case that we have picked up involves players that are domestic and hence it helps to understand the Indian scenario better.

K L

EY CONTRIBUTIONS OFTHE STUDY

IMITATIONS OFTHE STUDY

There were few limitation in the study carried out in this dissertation. The first and the foremost limitation of this study is that we didn't take in to account the external economic conditions to analyze the shareholders' wealth. The excess returns may be due to some external factors affecting the stock price of target or bidding firm and in these conditions it could be erroneous to conclude that shareholders wealth is maximized by acquisition or merger.

Similar studies can be carried out on a larger set of merger deals. Future research might investigate whether the shareholders' returns vary with the mode of payment. Also the research can cover a wider set of ratios to measure corporate performance.

UGGESTIONS FOR FURTHER RESEARCH

REFERENCES 1 Ashquith Paul (1983), The Gains to Bidding Firms from Merger, Journal of Financial Economics, Vol. 11, pp. 121-139. 2 Beena P .L. (2000), An Analysis of Mergers in the Private Corporate Sector in India, Centre for Development Studies, Thiruvananthapuram, Working Paper No. 301, March 2000, available at: http://www.cds.edu/admin/homeFiles/CV1_bpl.pdf 3 BhallaPriya (2010), Mergers and Acquisitions in India with Special Reference to the Financial Sector: Recent Trends and Patterns, The IUP Journal of Business Strategy, Vol. VII, No. 3, pp. 37-59. 4 ChatterjeeSayan (1986), Types of Synergy and Economic Value: The Impact of Acquisitions on Merging and Rival Firms, Strategic Management Journal, Vol. 7, No. 2. (Mar. - Apr., 1986), pp. 119-139. 5 Dozier Barbra (2010), Mergers and Acquisitions as a Means of Creating Shareholders Wealth. A Case of Llyods TSB and Hbos, available at: http://barbradozier.wordpress.com/2010/01/04/mergers-and-acquisition-as-a means-of-creating-shareholders-wealth-a-case-of-lloyds-tsb-and-hbos/. 6 Raju Guntur Anjana and Gauncar Dipa Ratnakar, Is M&A a Wealth Creation Vehicle for Business Houses in India? Case of the Tata Group of Companies, available at: www.icaindia.info 7 Flugt Casper (2009), Shareholder Wealth Effects of Mergers and Acquisitions: An Empirical Investigation of Short-term Performance in the European Market, Aarhus School of Business, University of Aarhus, Denmark, May 2009, available at: http://pure.au.dk/portal-asb-student/files/8464/217003.pdf 8 Frederikslust Ruud. A. I. Van, Wal Vincent Van Der and WestdijkHuib (2005), Shareholder Wealth Effects of Mergers and Acquisitions, available at: http://www.efmaefm.org/efma2005/papers/262-van-frederikslust_paper.pdf 9 Jayadev M and Sensarma Rudra (2009), Mergers in Indian Banking: An Analysis, available at: https://uhra.herts.ac.uk/dspace/bitstream/2299/3465/1/902962.pdf 10 Kumar Rajesh B and Panneerselvam S (2009), Mergers, Acquisitions and Wealth Creation: A Comparative Study in the Indian Context, IIMB Management Review, Sept. 2009, pp. 222-244. 11 Kumar Rajesh B. and Suhas K.M. (2010), An Analytical Study on Value Creation in Indian Bank Mergers, Afro-Asian J. Finance and Accounting, Vol. 2, No. 2, 2010, pp. 107-134. 12 Mann BikramJit Singh and KohliReena (2009), Impact of Mode of Payment and Insider Ownership on Target and Acquirers Announcement Returns in India, Vikalpa, Vol. 34, No. 4, Oct-Dec 2009, pp. 51-66. 13 Pautler Paul A (2001), Evidence on Mergers and Acquisitions, September 25, 2001, available at: http://www.ftc.gov/be/workpapers/wp243.pdf 14 PawaskarVardhana (2001), Effects of Mergers on Corporate Performance in India, Vikalpa, Vol. 26, No. 1, January-March 2001, pp. 19-32. 15 Rieck Olaf and Doan CanhThang (2007), Shareholder Wealth Effects of Mergers and Acquisitions in the Telecoms Industry, NanyangTechnological University, Singapore, available at:http://www.itseurope.org/ITS%20CONF/istanbul2007/downloads/paper/01.08.2007_Rieck%20Canh.pdf 16 Selvam M, Vanitha S, Gayathri J, Bennet E and Nageswari P (2010), The Determinants of Shareholders Wealth of Acquiring Firms in India, Journal of Modern Accounting and Auditing, Vol. 6, No.1 (Serial No. 56), pp. 46-54. 17 Shukla Anita and GekaraMouni Geoffrey (2010), Effects of Multinational Mergers and Acquisitions on Shareholders Wealth and Corporate Performance, The IUP Journal of Accounting Research and Audit Practices, Vol. IX, Nos. 1&2, pp. 44-62. 18 Soongswang A (2006), Takeover Effects During the Pre-Bid Period on Thai Bidding Firms, International Research Journal of Finance and Economics, Issue 5, pp. 194-208.

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