Friday, September 21, 2007

Recent Acquisitions by CISCO Systems’’ Case Study

Anupam Dubey
Keerthi Shankar
Mainak Bhattacharya
Vinod Ramteke
K.V.S.S. Narayana Rao

Corporate history
• Founded in 1984 by Len Bosack and Sandy Lerner.
• While Cisco was not the first company to develop and sell a router (a device that forwards computer traffic between two or more networks), it was one of the first to sell commercially successful multi-protocol routers, to allow previously incompatible computers to communicate using different network protocols
• As the Internet Protocol (IP) has become a standard, the importance of multi-protocol routing as a function has declined.
• Today, Cisco's largest routers are marketed to route primarily IP packets and MPLS frames.
• Company went public in 1990, and was listed on the Nasdaq
• Acquired Cerent Corp., a start-up company located in Petaluma, California, for about $7 billion in 1999.
In late March 2000, at the height of the dot-com boom, Cisco was the most valuable company in the world, with a market capitalization of more than $500 billion. In 2007, with a market cap of about $165 billion, it is still one of the most valuable companies.
Using acquisitions, internal development, and partnering with other companies, Cisco has made inroads into many network equipment markets outside routing, including Ethernet switching, remote access, branch office routers, ATM networking, security, IP telephony, and others. In 2003, Cisco acquired Linksys, a popular manufacturer of computer networking hardware and positioned it as a leading brand for the home and end user networking market (SOHO).

Acquisitions by CISCO


Since it made its first acquisition in 1993, CISCO has acquired a total of 110 companies--an average of about one every six weeks for 13 years. Cisco's business, built largely through acquisition, is booming. The company's routers and switches--the two networking devices that keep the Internet humming by allowing computers to talk to one another--have captured more than 70 percent of the expanding $23 billion markets, according to Dell'Oro Group. Sixteen years after it went public, Cisco's market capitalization, at some $120 billion, is bigger than those of Dell, Xerox, and Apple combined.
Some of the Recent Acquisitions have been:
• May 22, BroadWare Technologies, provides software that enables web-based monitoring, management, recording and storage of audio and video that can be accessed anywhere by authorized users.
• March 28, SpansLogic, develops processors that improve packet processing speeds across the network.
• March 15, WebEx, makes applications that enable online group meetings and secure instant messaging.
• March 13, NeoPath, a provider of high-performance and highly scalable file storage management solutions.
• March 5, Utah Networks, acquired selected technology assets of Utah Networks, the operator of the social networking site
• February 21, Reactivity, XML gateway provider enabling customers to deploy, secures, and accelerates XML and web services.
• February 8, Five Across, software developer of 'social networking' technologies that allows businesses to create 'MySpace-like' communities on their websites.
• January 4, Ironport, a developer of security software that scans e-mail for viruses and spam.
• December 15, Tivella, a provider of digital signage software and systems.
• November 13, Greenfield Networks, developer of semiconductors designed to improve Ethernet packet processing for the so-called metro Ethernet market.
• October 25, Orative, developer of solutions that extend Cisco's Unified Communications system to mobile devices.
• October 10, Ashley Laurent (selected assets), provider of software for the embedded service provider gateway market; Cisco will use to improve Linksys' DSL gateway offerings.
• August 21, Arroyo Video Solutions, software designed to help cable operators and phone companies deliver a more flexible video-on-demand service.
• August 10, Nuova Systems, technologies for the data center. $50M funding commitment for an 80% ownership; will become a majority-owned subsidiary of Cisco.
• July 6, Meetinghouse, provides 802.1X-based security software that allows enterprise customers to restrict access to networked resources through both wired and wireless media.
• June 9, Audium, technologies that allow interactive voice response (IVR) systems to work together to power voice applications in an enterprise, carrier or service bureau environment.
• June 9, Metreos, software enabling rapid development and automated management of applications that converge voice with enterprise applications and data.
• March 7, SyPixx Networks, provides network-centric video surveillance software and hardware.
• November 29, Cybertrust (selected assets); a security intelligence information service, known as Intellishield Alert Manager.
• November 18, Scientific-Atlanta a digital cable television equipment manufacturer.
• September 30, Nemo Systems, a fabless semiconductor company that develops memory chips for network systems.
• July 26, Sheer Networks, intelligent network and service management products
• July 22, KISS Technology (by Linksys), technology provider for networked entertainment devices
• June 27, Netsift, high-speed packet processing solutions
• June 14, M.I. Secure Corporation, security and VPN solutions
• May 26, FineGround Networks, network appliances that accelerate, secure, and monitor application delivery
• May 23, Vihana, Semiconductor solutions
• April 27, Sipura Technology (by Linksys), Voice over IP specialist
• April 14, Topspin Communications, Server Fabric Switches
• January 12, Airespace, Wireless LAN solutions
• 1993 Crescendo Communications, $95 million: an entry into switches
• 1999 Monterey Networks, $517 million: a fiber-optics deal that fizzled
• 2003 Linksys, $550 million: a move into home networking
• 2005 Airespace, $450 million: a beachhead in wireless technology
• 2006 Scientific Atlanta, $7 billion: an attempt to pave the way for digital TV over the Internet

Acquisition Process:

Most of the Acquisitions in Cisco are handled by its business development group, a 40-person team in Cisco’s San Jose office complex.
The Cisco acquisition process was not always so seamless. For almost 10 years after it was founded in 1984, the company wasn't in the business of acquisitions at all. The market was growing rapidly, and Cisco went public in 1990. But three years later, when a faster and cheaper piece of hardware, the switch, seemed to threaten its business of routers, Cisco had to change its business model.

Acquisition No. 1: Crescendo Communications, a small switch maker that Cisco purchased in 1993 for $95million. The switching unit now generates almost $10 billion in annual revenues.
Cisco has used acquisition to expand into new markets and technologies. In 1995, Cisco acquired its way into firewalls and cache engines. In 1998, Internet telephony. In 2003, with the acquisition of Linksys, a home-networking company, Cisco made its first big move away from corporate customers into the consumer market. This year, by acquiring Scientific Atlanta, a set-top-box manufacturer, Cisco expanded its product line into the living room, as well, moving into video
In 2003, Cisco acquired Linksys, A small company based in Irvine, California. Linksys makes broadband routers for homes and small businesses--enabling fast, secure Internet access for multiple computers. Since Cisco has always targeted business customers, there was some skepticism within the company about entering the consumer market. But ultimately the logic of the deal won out: Linksys not only would give Cisco a foothold in the fast-growing home-networking market, but it would also help pump up infrastructure demand for routers and switches.

Synergies Claimed

To understand how remarkable Cisco’s success has been, it is only necessary to examine competitors such as Nortel, Ericsson, and Lucent that also were aggressive acquirers – all using their high stock market capitalizations to fund their acquisitiveness. By 2003, all of these firms with the exception of Cisco were recovering from near bankruptcy, and had written-off billions of dollars spent on acquisition. Moreover, start-up competitors such as Ciena, Juniper Networks, and Extreme Networks were experiencing great difficulties. Within this market maelstrom, Cisco stands out as the only networking equipment firm with solid finances and a continuing acquisition program

After experiencing some failures in acquiring companies, Cisco devised a three step process of acquisition.

1) Analyzing the benefits of acquiring, understanding how the two organizations will fit together – how the employees from the organization can match with Cisco culture and then the integration process. For example Cisco believes in an organizational culture which is risk taking and adventurous. If this is lacking in the working style of the target company, Cisco is not convinced about the acquisition.

2) No forced acquisitions are done - The Company insists on no layoffs and job security is guaranteed to all the employees of the acquired company. Once the acquisition team is convinced, an integration strategy is rolled out. A top level integration team visits the target company and gives clear cut information regarding Cisco and the future roles of the employees of the acquired firm.

3) After the acquisition, employees of the acquired firm are given 30 days orientation training to fit into the new organizational environment. The planned process of communication and integration has resulted in high rate of success in acquisitions for Cisco.

Cisco’s competitors such as Lucent and Nortel were certainly scanning their environment, but were nearly always late in entering new fields.
The decision to eschew the traditional R&D laboratory approach favored by its established competitors meant that Cisco had to develop another mechanism for providing future products. Cisco’s management learned that one of the best places to find the products of the future was in the start-up ecosystem from which it had emerged only a decade earlier. With this understanding, Cisco evolved a portfolio of tactics, formal and informal, to tap the knowledge that is constantly emerging in its ecosystem. Cisco created the Business Development Group (BDG) to be involved in the ecosystem.There were also informal practices that evolved inside Cisco. Because of the multiplex linkages and the embeddness in the ecosystem, Cisco
has early information about emerging technologies and significant new startups.
The emphasis on gathering environmental knowledge is formalized at the Business Unit
(BU). Each BU is charged with tracking and assessing new technologies that could affect its market. In the annual business plan each BU must identify emerging technologies and suggest a preliminary make-or-buy recommendation. This compels BU personnel to scan the environment for competitors and opportunities.
At the corporate staff level, the BDG has responsibility for ecosystem involvement, including venture capital investing, strategic alliances, and acquisitions. It operates as the central repository for information about the ecosystem. Through relationships with venture capitalists, Wall Street analysts, industry insiders, and its own venture investments, the BD team keeps track of private firms and emerging markets. The BDG’s investments in startups are important because 25 percent of all acquisitions have been portfolio firms; however Cisco invests in many firms it does not purchase. For example, in 1993 Cisco made a $2.7 million early round investment in Cascade Communications, but in 1997 Ascend Communications, a Cisco competitor purchased Cascade.

Recent Acquisitions (2007)- Utilization of Synergies.

Reactivity, Inc.
February 21, 2007 - Reactivity is a leading XML (extensible Markup Language) gateway provider for organizations ranging from commercial enterprises to the Global 500. The acquisition demonstrates Cisco's commitment to the expanding Application Networking Services (ANS) Advanced Technology segment, which is an important part of Cisco's Service-Oriented delivered from the network platform. Reactivity complements and extends the capability of Cisco's ANS portfolio for these emerging application architectures.

Market Opportunity: Application Networking Service

BroadWare Technologies, Inc.
May 21, 2007 - BroadWare Technologies is a leading provider of IP-based video surveillance software. BroadWare's software enables web-based monitoring, management, recording and storage of audio and video that can be accessed anywhere by authorized users. With this acquisition, Cisco will be able to help customers easily gain access to live and recorded surveillance video for faster investigation response and event resolution. The BroadWare acquisition complements Cisco's existing video surveillance product offering, which provides a smooth migration path from analog surveillance video to a digital network solution.

Market Opportunity: Physical Security

SpansLogic, Inc.
March 28, 2007 - SpansLogic is a leading provider of processors that dramatically improve packet processing speeds across the network. SpansLogic offers a breakthrough approach for resolving packet processing bottlenecks at extremely high speeds. The SpansLogic acquisition will provide Cisco with valuable technology, IP, and a core team to productize innovations that support Cisco’s SONA architecture.
Market Opportunity: Silicon

WebEx Communications, Inc.
March 15, 2007 - WebEx is a market leader in on-demand collaboration applications, and its network-based solution for delivering business-to-business collaboration extends Cisco's vision for Unified Communications, particularly within the Small to Medium Business (SMB) segment. WebEx's service portfolio includes technologies and services that allow companies to engage in real-time and asynchronous data conferences over the Internet as well as share web-based documents and workspaces that help improve productivity, performance and efficiency of workers in any size organization. WebEx's subscription-based services strategy has been key to its success, and Cisco plans to preserve this business model going forward.

Market Opportunity: Unified Communications

NeoPath Networks
March 13, 2007 - NeoPath Networks is the leading provider of high-performance and highly scalable file storage management solutions. Cisco and NeoPath share a common vision of providing unique and flexible file storage management services to enterprise customers. In line with its Service-Oriented Network Architecture (SONA) strategy and vision, Cisco plans to integrate the NeoPath technology in future products with the goal of providing additional value added file services. This will benefit both current file based solutions, such as Wide Area Application Services (WAAS), and business partners’ file based solutions.

Market Opportunity: Storage

FiveAcross, Inc.
February 8, 2007 - Five Across is a leading vendor in the social networking marketplace. The Five Across platform, Connect Community Builder, empowers companies to easily augment their websites with full-featured communities and user-generated content such as audio/video/photo sharing, blogs, podcasts, and profiles. These user-interaction functions help companies improve the interaction with their customers and overall customer experience on their websites. Social networking functions are of unique interest to media companies, sports leagues, affinity groups and any organization wishing to increase its interaction with its online constituency.

Market Opportunity: Consumer

IronPort Systems, Inc.
January 4, 2007 - IronPort is a leading provider of messaging security appliances, focusing on enterprise spam and spy ware protection. Securing email, messaging and other sorts of content is of primary concern to enterprises and other organizations. As email and messaging are leading applications for use over the Internet, the acquisition of IronPort's industry-leading messaging and Web security solutions is a natural extension to Cisco's security portfolio. The security products and technology from IronPort add a rich and complementary suite of messaging solutions to Cisco's industry-leading threat mitigation, confidential communications, policy control, and management solutions.

Market Opportunity: Security

Steps Subsequent to the announcements of the Deals
(1) Hands-on directors. Cisco has made over 70 acquisitions to date and its executive owner has been actively involved in every one.
(2) Setting goals. A crucial part of Cisco’s merger activity is exploring how its vision and that of an acquired company can complement each other.
(3) Combining cultures. Cisco uses a mentoring system where a Cisco veteran supports an acquired manager. This is a painless way of transferring Cisco’s values to the acquired company, as the acquired manager will trickle them down to his own staff. Cisco also holds regular employee orientation sessions where questions can be asked and answered.
(4) Maximum involvement. Cisco involves leaders of all the relevant business units to promote ownership of the merger strategy.
(5) Communication. One of Cisco’s integration principles is “communication early, often, and honestly”. This avoids the atmosphere of rumor and suspicion that can build up around a fundamental business change like a merger. Cisco’s communication strategy is to share the new post-merger business vision with employees as soon as possible with particular emphasis on timescales, future benefits and ongoing progress.
(6) Clarity. Cisco lets employees know their roles and titles as soon as a merger is announced.
(7) Customer focus. Cisco rolls out information to customers at the earliest practical stage and makes customer satisfaction a key measure of successful integration.
(8) Flexibility. Cisco is also keen to allow acquired companies to retain their unique identities when appropriate.
Steps Prior to Deal Announcement
When the agreement is imminent, typically 6-8 weeks prior to the announcement, integration preparations commence. Two dedicated BDG units, Merger and Acquisition and Acquisition Integration, which in total employ approximately 60 persons, facilitate this. Their purpose is to oversee the process. They are responsible for ensuring that Cisco employees interact directly and frequently with the target firm employees to create a shared understanding and trust. The integration manager (from the BD group) forms a team including public relations, sales, HR, and marketing personnel from both the BU and the target company.
There is also a gradual evolution in responsibility for the acquisition. Initially, the BD manager and executive sponsor share equal responsibility, but as the integration process advances the BD manager transfers responsibility to the executive sponsor.
The Announcement and Closing Period
With the announcement, employees at both firms and the public are informed about the acquisition. The announcement does not mean that the acquisition is completed. The finalization of the acquisition will take 90 days or longer. However, for the employees of the acquired firm, they must be informed about its meaning to them immediately. Therefore, though senior managers have known about the acquisition, now the other employees are informed about the implications for them. Immediately after the announcement, HR conducts communication meetings at the acquired firm until all employees have information on key issues.
The announcement is a critical moment, because it is at this time that employees experience the maximum uncertainty. The prior discussions, the clear plan, and the professionalism of the acquisition team dampen the apprehension that plagues most acquisitions. This is reinforced by the fact that the leaders of the acquired firm already know their positions and responsibilities within Cisco, and thus are able to reassure their employees. Prior planning avoids a prolonged period of uncertainty and chaos that could retard progress and devalue the acquisition.

First 90 Days after Closing
After the deal closes, the business integration team takes over the majority of post-announcement integration responsibilities. The plans that the BD team developed are executed. The HR systems are converted, integration of the acquired company’s network and conversion of voice and data systems is undertaken, and the sales, service, and marketing strategies and manufacturing plans are put into effect. F
90 to 180 Days
The BD integration team continues to operate until all plan parameters are met, including, in most cases, shipment of the acquired company’s products under the Cisco name through the Cisco sales channels By the end of 180 days, the team reevaluates and refines 6, 12, and 24-month initiatives. Also, the planned and actual results are measured and the reasons for discrepancies are investigated.

Structuring of the Deals

As the table below indicates, the acquisitions are concentrated in a few locales. Forty-four percent of all acquired firms were located in Northern California. Moreover, the percentage of Northern California acquisitions was highest in the early years when Cisco was learning how to acquire (69 percent from 1993 to 1996 and only 37 percent during 1999 and 2000). Interestingly, after the stock market bubble collapse from 2001 to 2003, of Cisco’s ten acquisitions 50 percent were in Silicon Valley and the remaining five were in Texas (2), Massachusetts (2), and Southern California (1). The second largest concentration (14%) was in the Boston area, which has the second largest concentration of venture capital-financed, high technology startups in the U.S. and an entrepreneurial environment. The final significant concentration was Israel, which has a start-up culture resembling that of Silicon Valley

Table to be inserted

Valuation Details:

Cisco Systems, Inc. and many high-tech companies used pooling of interest method to account for acquisitions of both big well-established and small low-revenue start-up companies. By taking advantage of pooling, Cisco avoided recognizing goodwill and subsequent amortization, which, they believe, would have otherwise depressed its earnings and penalized its market value for years to come.
Cisco has used its own stock to make acquisitions valued at more than $30 billion.
The high prices which Cisco pays for other companies “validate” the prices of its previous takeovers and its own sky-high price (currently no less than 190 times earnings).

The majority of Cisco's acquisitions are funded with its stock. However, there are times that cash or a combination of stock and cash is used. The way in which the purchase is funded depends on the objectives of Cisco and the target company and is impacted by such issues as the tax treatment of the transaction and liquidity. The exact way in which acquisitions are funded is part of the negotiating process.

When Cisco uses its stock to fund an acquisition, there's some dilution of stock ownership, which results in lower earnings per share and cash flow per share. Cisco is richly valued and on many occasions the company it acquires actually trades at lower multiples than Cisco. Also, a number of Cisco's acquisitions have made significant contributions to its explosive growth

Subsequent Performance:

Since its inception Cisco has faced two sets of rivals: start-up firms such as 3Com, Wellfleet, Synoptics etc. and established telecommunications equipment makers such as Lucent, Nortel, and Alcatel. Of the four major data communications rivals established in the 1980s, 3Com, Wellfleet, Ascend, and Synoptics, only 3Com remains independent, but its market capitalization in December 2003 was less than $3 billion versus $160 billion for Cisco. Nortel's value had declined to approximately $20 billion. These are powerful general indicators of success, and since acquisition was a central component of Cisco’s total corporate strategy, they indirectly confirm the strategy's success.
In the aftermath of the crash of the stock market bubble, these other firms have discontinued their acquisitive strategy, while Cisco continues to acquire firms, though at a much slower rate. The continuation of the strategy is an indication that it was not driven so much by high stock valuations as by corporate strategy.
Given Cisco's approximately 60 percent profit margins, market share growth in rapidly growing markets results in enormous returns and can justify high acquisition prices.
The amount invested and market share in each market category is shown in Figure below (Data till 2001)

fig to be inserted

Advice to the Buyer and Seller

Cisco transformed what the literature “environmental scanning” into a process of active engagement in the ecosystem. This implies that management must manage not only the internal organization, but also its interaction with external organizations. Cisco now depends upon the ecosystem to create innovations and propel the technology forward. In other words, entrepreneurial activity is expected to benefit Cisco because it has developed methodologies for harnessing it. The entire firm is mobilized to collect information from the ecosystem through an involvement in it. This is critical for a data communications equipment firm that has no central R&D laboratory – the ecosystem is the substitute.
The reliance upon acquisition as a methodology for entering markets means that successful integration is a critical component for overall corporate success. The importance Cisco places on dialogue in facilitating the acquisition and integration process is noteworthy. Cisco values unmediated access to the firm’s decision-makers so it rarely uses intermediaries such as investment bankers and consultants.




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• Anand, J. and H. Singh. 1997. "Asset Redeployment, Acquisitions and Corporate Strategy in Declining Industries." Strategic Management Journal 18: 99-118.
• Autler, Gerald. 2000. Global Networks in High Technology: The Silicon Valley-Israel Connection Master's Thesis, Department of City and Regional Planning, University of California, Berkeley.
• Avnimelech, Gil and Morris Teubal 2002. “Venture Capital-Start-Up Co-evolution and the Emergence of Israel’s New High Tech Cluster.” Paper presented at 2002 DRUID Summer Conference on Industrial Dynamics of the New and Old Economy – Who Is Embracing Whom?” (June 6-8).
• Bahrami, Homa and Stuart Evans. 2000. “Flexible Re-Cycling and High-Technology Entrepreneurship.” In M. Kenney (ed.) Understanding Silicon Valley: The Anatomy of an Innovative Region (Stanford: Stanford University Press): 165-189.
• Bain, J. S. 1959. Industrial Organization (New York: John Wiley & Company).
• Bunnell, David. 2000. Making the Cisco Connection (New York: John Wiley & Sons, Inc.).
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• Business Week. 2002. "Cisco: Behind the Hype." (January 21).

Case Study : Merger of ARCELLOR and MITTAL



ArcelorMittal is the largest steel company in the world. The company was founded in 2006 when Arcelor and Mittal Steel company merged. The company is headquartered in Luxemberg City, in southern Luxemberg, the former seat of Arcelor.

Arcelor Mittal produces as much as 110 million tons of steel a year, about 10 percent of world output. The company also controls the biggest bulk handling port in Mexico, from where it imports iron ore and exports semi-finished steel products.
Laxmi Mittal (owner of Mittal Steel) is the president and chairman. Mittal's familyl holds a 43.6% stake in this company. Counting all shareholders, 50.6% will be former Arcelor shareholders and 49.4% will be former Mittal shareholders.

In addition to Lakshmi Mittal as president and chairman, the Board of Directors of the company consists of eighteen non-executive members with six nominated by Mittal, three chosen independently, six nominated by Arcelor, three chosen by existing Arcelor shareholders and three employee representatives.


Mittal Steel Announcement Offer for Arcelor Merger proposal to create first 100 million ton plus steel producer US$40 billion merger marks step change in steel sector consolidation

Mittal Steel N.V. (“Mittal Steel”) on 27 January, launched an offer to the shareholders of Arcelor SA (“Arcelor”) which would create the world’s first 100 million ton plus steel producer. The offer valued each Arcelor share at €28.21 which represented a 27% premium over the closing price and all time high on Euronext Paris of Arcelor shares on 26 January 2006, a 31% premium over the volume weighted average price in the preceding month, and a 55% premium over the volume weighted average share price in the preceding 12 months.

This offer valued Arcelor at an equity value of €18.6 billion on a fully diluted basis.

The new company was expected to have:

– Unprecedented scale, scope and synergies
– Pro-forma* 2005 annual revenues of approximately US$69bn and EBITDA of
US$12.6bn (*IBES estimates)
– Pro-forma market capitalisation of approximately US$40 billion
– Leading positions in NAFTA, EU, Central Europe, Africa and South America
– Expected synergies of US$1 billion from purchasing, marketing and manufacturing efficiencies
– Exceptional raw material resources with a high degree of iron-ore self
– Reduced volatility through geographic and product diversification
– Security of long-term contracts through high value-added products
– Low cost profile and high growth prospects from developing markets
– Leading position across a range of key product segments
– Ability to supply customers on a global basis
– A dividend policy representing c. 25% of earnings over the cycle

Under the terms of the offer, Arcelor shareholders were expected to receive 4 Mittal Steel shares and €35.25 cash for every 5 Arcelor shares (equivalent to 0.8 Mittal Steel shares plus €7.05 cash for each Arcelor share). In addition, they were to have the right to receive a cash or stock mix in any proportion they elect, provided that 25% of the aggregate consideration paid to Arcelor shareholders was paid in cash and 75% in stock. The maximum amount of cash to be paid by Mittal Steel was to be approximately €4.7bn and the maximum number of Mittal Steel shares to be issued were approximately 526.6 million, assuming the conversion of the outstanding Arcelor Convertible Bonds (2017 OCEANEs).

Mittal Steel also announced that it had entered into an agreement with ThyssenKrupp AG (“ThyssenKrupp”) to resell to ThyssenKrupp all the common shares of Dofasco Inc (“Dofasco”) that Arcelor purchases in its pending tender offer for Dofasco or later, at a price equal to the Euro equivalent of C$ 68.00 per share, adjusted based on changes in net financial debt and net working capital from the date of acquisition of Dofasco by Arcelor and the date of resale to ThyssenKrupp.


The offer valued each Arcelor share at €28.21 which represented a 27% premium over the closing price of Arcelor shares on Euronext Paris as of 26 January 2006, a 31% premium over the volume weighted average price in the preceding month, and a 55% premium over the volume weighted average share price in the preceding 12 months. Mittal Steel offerd to acquire all of the outstanding Arcelor shares through three offers:

- a primary mixed cash and exchange offer for Arcelor shares consisting of 4 new
Mittal Steel shares and €35.25 in cash for every 5 Arcelor shares;

- a secondary cash offer consisting of €28.21 per each Arcelor share;
- a secondary exchange offer consisting of 16 new Mittal Steel shares for every 15
Arcelor shares.

Arcelor shareholders could tender their shares in either the primary offer or either or both of the secondary offers, but the two secondary offers will, in the aggregate, comprise 75% in Mittal Steel shares and 25% in cash.

Mittal Steel also offered to acquire Arcelor Convertible Bonds (OCEANEs 2017)
based on the following exchange ratio: 4 new Mittal Steel shares and €40 in cash for every five Arcelor Convertible Bonds.The offer was conditioned on the tendering of more than 50% of Arcelor’s share capital and voting rights on a fully diluted basis, the extraordinary shareholders’ meeting of Mittal Steel having approved the issuance of new Mittal Steel shares to Arcelor shareholders (the Mittal family having undertaken to vote in favour of the issuance of such new Mittal Steel shares) and the absence of events or actions that would alter
Arcelor’s substance.

The draft offer document was filed with the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”). In order to coordinate the process in the various jurisdictions in which Arcelor securities are listed, the offer was also filed with the competent authorities in other countries, including in Spain and Belgium. A draft share offering prospectus was filed with the Dutch AFM and with the French AMF. A registration statement was filed with the US SEC.

In addition, this transaction was reviewed by antitrust authorities in the EU, the US and possibly other jurisdictions around the world.


1.1 Step change in steel sector consolidation

The combination of Mittal Steel and Arcelor represents a step change in the consolidation of the steel sector. The combined group was expected to have approximately 320,000 employees worldwide, annual sales of more than US$69 billion and annual crude steel production of approximately 115 million metric tons, which represents a global market share of approximately 10 per cent by volume. This transaction was expected to create a steel company with unprecedented scale, a strong global presence and a broad based product offering. This unique platform was expected to provide the combined company with unrivalled financial strength and strategic flexibility to pursue growth and value creation opportunities. Despite a trend towards increasing consolidation over the past few years, the global steel industry remained relatively fragmented compared to end-market customers and raw materials suppliers. Recent consolidation has led to increased focus amongst producers on adjusting production to market conditions. The combination of the top two steel companies in the world was expected to represent a further step towards achieving a sustainable operating environment for the steel industry.

1.2 Expanding geographic footprint with leading positions in a number of regions

The geographic overlap between Mittal Steel and Arcelor was limited. This combination was expected to create a truly global steel company with leading
positions in the five main regions (South America, NAFTA, European Union, Central Europe and Africa). Geographic diversification was expected to reduce volatility for the enlarged group while presenting numerous strategic opportunities. Through its diverse asset base in both emerging and developed markets, the company was expected to be ideally placed to take advantage of multiple market opportunities.
Mittal Steel’s North American activities were to be complemented by Arcelor’s strong position in Western Europe. These developed markets had expertise in producing highly value-added products and provided opportunities for new product development. Mittal Steel had leading positions in emerging markets in Eastern andCentral Europe, Asia and Africa. These regions offered low cost production, high growth prospects and in many cases, access to significant raw material reserves.

1.3 Strengthening the range of products and solutions for global customers

The enlarged group was expected to have leading positions in a number of product segments and have the ability to supply customers across a range of geographic regions and in end-markets such as automotive, domestic appliances, packaging, construction and oil and gas. The company was also expected to have a strong value-added contract business which will allow for reduced pricing volatility.
In the automotive sector, the new group was expected to be the leader in both the
European Union and NAFTA regions and will also have leading positions in South America, Eastern Europe, Africa and Asia. In appliance and packaging, the group was expected to be the leader in the NAFTA region and one of the leaders in the European Union. In construction, the group will have a leading position in most of the markets it serves and a growing presence in the oil and gas sector. The expertise of both groups in the various applications and end markets could be combined to develop new market opportunities.

1.4 Maximising opportunities with a global distribution and trading network

Mittal Steel and Arcelor together was expected to have the ability to optimise
production and distribution on a global basis. The international production base of the group was expected to facilitate global sourcing of materials and products that can be directed to the markets where they are ultimately required. The combined company’s access to a broad range of customers enabled the group to capitalise on market opportunities and expand into new areas. The combined company was expected to eliminate cross-border trade flows and thus generate substantial savings.

1.5 Increasing efficiency of the combined asset base through investment and operational excellence

Mittal Steel aimed to maximise the value and opportunities within the combined portfolio of assets. Major initiatives included:
(i) Leveraging Mittal Steel’s R&D capabilities for processing and product innovation
(ii) Improving productivity through global benchmarking and continuous improvement programmes across the network of operating units
(iii) Maximising industrial potential between units, for example through product specialization by unit
By organising and optimising product flow and investments throughout the production system, the company was expected to have the ability to realize
more potential and value from its asset base.

1.6 Controlling input costs by maximising the synergies from integration of
mining and steel making

Integration of mining activities with steel production was a key element of the group’s strategy. The combined company was expected to be one of the five largest producers of iron ore worldwide and also have direct ownership of DRI plants, coal mines, coke production and certain infrastructure assets. The group was expected to have the opportunity to expand its mining operations in order to reduce the dependency on third-party supplies of iron ore and coal. By 2010, the combined group aimed to be about 50 per cent self -sufficient in iron ore.

1.7 Targeting operational synergies of US$1 billion

Target annual cost synergies were expected to reach US$1 billion before tax by the end of 2009. The integration and restructuring costs to realize this level of synergies were expected to be minimal. The industrial plan for the combined entity identified several synergies, primarily from purchasing, marketing opportunities and manufacturing process optimization.

1.8 Maximising financial opportunities

Based on the closing Mittal Steel share price on the New York Stock Exchange of US$32.30 (equivalent to €26.45 per share at an exchange rate of US$1.2214 per €1) on 26 January 2006, the pro forma equity market capitalisation of the enlarged group was expected to be approximately US$40 billion and the free float was to be significantly increased to approximately 43% (assuming 100% acceptance of the Offer). The Group was expected to benefit from a lower cost of capital, improved access to the capital markets, enhanced profile with investors and a high level of liquidity for trading of the company’s shares. Finally, the financial resources of the enlarged company were expected to provide the flexibility for the Group to pursue both internal and external growth opportunities. Mittal Steel was committed to maintaining an investment grade rating.


Operations in high-growth economies with
low-cost, profitable assets and local
operating expertise in numerous emerging

Leadership position in high-end segments
in North America, with strong R&D

Access to raw materials and upstream

Access to very low cost slab potential in
Ukraine to serve West Europe


Leadership position in high-end segments in
Western Europe, with strong R&D capabilities

Low-cost slab manufacturing in Brazil that
can be expanded for export to Europe and
North America

Increased free float and liquidity

Successful distribution business in Europe


Mittal Steel offered to acquire all outstanding Arcelor ordinary shares and Arcelor Convertible Bonds (2017 OCEANEs), as follows:

– 4 new Mittal Steel shares and €35.25 in cash for every 5 Arcelor ordinary
– 4 new Mittal Steel shares and €40 in cash for every 5 Arcelor Convertible

Holders of Arcelor shares in lieu of this mix of Mittal Steel stock and cash, could make the following elections with respect to the consideration to be received:

– Elect to receive 16 new Mittal Steel shares for every 15 Arcelor shares; or
– Elect to receive €28.21 in cash for each Arcelor share.

Holders were required to make the same election for all Arcelor shares tendered, and either of these elections may be made for all or some of the Arcelor shares to be tendered. However, these elections were subject to aproration and allocation procedure to ensure that 75% of the tendered Arcelor shares were exchanged for new Mittal Steel shares and 25% were exchanged for cash.

If certain actions were taken by Arcelor including distributions or share buybacks
the consideration set forth above were to be adjusted accordingly.The offer was made for all issued and outstanding Arcelor shares, as well as for all Arcelor shares that are held in treasury stock and all Arcelor shares that were or were expected to become issuable prior to the expiration of the Offer due to the conversion of Arcelor Convertible Bonds or the exercise of Arcelor stock subscription rights.

The completion of the offer was to be subject to the following conditions:

(i) the number of Arcelor shares tendered to the offer represents on the closing date of the offer more than 50% of the total share capital and voting rights in Arcelor, on a fully diluted basis;

(ii) the extraordinary general meeting of shareholders of Mittal Steel approved the acquisition of Arcelor as contemplated by the offer and the issuance of the new Mittal Steel shares; the Mittal family which held 97% of the voting rights in Mittal Steel had undertaken to vote in favor of such resolutions; and

(iii) during the offer period, no exceptional events occur and Arcelor does not take any actions that (in either case) would in Mittal Steel’s view alter Arcelor’s substance, including but not limited to share repurchases, acquisitions or disposals of material assets and any distribution of dividends or assets, whether such distribution is paid out of current earnings, retained earnings or reserves.


Arcelor later implemented a white knight defence through a transaction structure contemplating the issuance of shares to a friendly strategic partner (SeverStal of Russia), which was also a technique allowed in certain jurisdictions in Europe (but not in the U.K.) and used in the U.S. Just as Arcelor took actions to protect Dofasco with the S3, Arcelor believed that an opportunity to acquire SeverStal was consistent with Arcelor’s corporate interest and should, if possible, be presented as a viable alternative to Mittal Steel’s original offer, which Arcelor believed was an inadequate offer. While Arcelor had a previous mandate from its shareholders to issue the Arcelor shares proposed to be issued to Mr. Mordashov (SeverStal’s controlling shareholder), the Arcelor Board felt it was important to give the shareholders an opportunity to express their opinion on the transaction, in particular given the outstanding takeover offer from Mittal Steel. The Arcelor Board called an extraordinary meeting of shareholders on June 30, 2006, to vote on the SeverStal transaction. Unless more than 50% of the then outstanding Arcelor shares opposed the transaction, the merger with SeverStal would proceed. While the 50% unwind mechanism was criticised by the market, including institutional investors, the SeverStal transaction caused Mittal Steel to increase the price of its offer and to deliver better overall corporate governance and other terms. And in the end, the proposed SeverStal merger was unwound as over 50% of Arcelor’s shareholders voted to unwind it.


Jan 27, 2006: Mittal Steel unveils €18.6b cash and share offer for Arcelor

Jan 29: Arcelor directors reject Mittal’s offer as “150 per cent hostile”, saying the companies “do not share same vision, business model and values”

Jan 31: Jean-Claude Juncker, prime minister of Luxembourg, which holds 5.6 per cent of Arcelor, vows to use “all necessary means” to fend off Mittal’s unsolicited offer

Feb 16: Arcelor raises 2005 dividend by 85 per cent.

Apr 4: Arcelor says it will distribute €5bn to shareholders. Raises 2005 dividend to €1.85

Apr 28: Arcelor chairman says supervisory board would think again if Mittal made a cash

May 9: Mittal says it is willing to revise terms if Arcelor board recommends its bid

May 12: Arcelor says it will implement €5bn share buy-back

May 17: Mittal launches offer after regulators approve terms of the deal

May 18: Mittal raises offer by 34 per cent to €25.8bn with a 57 per cent increase in cash component. New deal would relinquish Mittal family control of group.

May 25: Arcelor agrees to join forces with Russian steelmaker, Severstal

May 30: Leading Arcelor shareholders speak out against proposed Severstal merger

May 31: More than a third of Arcelor investors sign a letter demanding the right to vote on a deal

June 7: Arcelor agrees to meet representatives from Mittal

June 11: Arcelor formally rejects Mittal’s €25.8bn bid and reiterates plans to press ahead with Severstal merger, but leaves the door open for an increased offer from Mittal and gives shareholders the chance to vote

June 18: Arcelor cancels shareholder vote on Severstal

June 20: Spanish investor forces Severstal rethink after calling for management changes at Arcelor

June 21: Severstal changes terms of its proposed merger with Arcelor to counter shareholder fears

June 25: Arcelor recommends upgraded €26.9bn Mittal offer after intensive talks

Finally deal was finalised when Arcelor accepted €33.5bn offer from Mittal.


The proposed transaction presented by the member
Joseph Kinsch Chairman, Arcelor ,Lakshmi N. Mittal Chairman & CEO, Mittal Steel, Gonzalo Urquijo SEVP-CFO, Arcelor, Aditya Mittal President & CFO, Mittal Steel
were as follows……..


• 13 Mittal Steel shares plus €150.6 cash for 12 Arcelor shares4.
– Ability to elect to receive more cash or shares, subject to 31% cash and 69% stock paid in aggregate
– Very significant premium to Arcelor’s pre bid all time share price high
– 10.1% further improvement in the offer based on latest MT share price
– 7.0% further improvement in the offer based on 19 May revised offer

• Values Arcelor shares at €40.4 as at 23 June close


• Minimum acceptance >50.0%
• No change in Arcelor or Mittal Steel substance during offer

• Expect to file revised offer shortly
• Closing of the tender offer expected to be extended by a few days beyond
5 July

Key contract terms:

• Other offers

Arcelor agreed to accept no other offer for Arcelor shares unless it was a
superior offer for the entire share capital of Arcelor

– No break-up fee required in contract
– If shares are issued under the Strategic Alliance Agreement, corporate governance rules and certain other conditions terminate

• Standstill

Mittal family agreed to a standstill at 45% of share capital. Exceptions in
certain circumstances - consent of a majority of the independent directors or in
case of passive crossing of such thresholds

• Lock up

Mittal family agreed to a 5-year lock-up, subject to certain exceptions,
including the right to dispose of up to 5% of the share capital after the 2nd year.

High standards of corporate governance:

• Shareholder voting rights
– All shares with identical voting and economic rights: One share - one vote regardless of holding period

• Composition of initial Board of Directors

– Mr Kinsch to be Chairman, Mr Mittal to be President
– Upon Mr Kinsch’s retirement, Mr Mittal becomes Chairman
– The Board of Directors will be composed of 18 members, all non executive (majority independent)
• 6 members from Arcelor
• 6 members from Mittal Steel
• 3 current representatives of existing Arcelor major shareholders
• 3 employee representatives

– After expiry of three year period, shareholders to elect Board of Directors

• Board Committees

– an Audit Committee composed solely of independent directors
– an Appointments and Remuneration Committee composed of 4 members, including
the Chairman, President and 2 independent directors

• Composition of Management Board

– The Management Board will be comprised of 7 executive members
• 4 current Arcelor executives, CEO to be proposed by the Chairman
• 3 Mittal Steel executives


Purchase price allocation

The Company was in the process of allocating the purchase price for its acquisition of
Arcelor. It should be noted that all of the purchase price allocation adjustments made and
reflected in the Company’s December 31, 2006, financials (Income statement and Balance sheet) were still preliminary and could materially change as a result of the finalization of the purchase price allocation process . It was expected that this allocation would be finalized in Q2 2007.

The Company recorded the following significant preliminary purchase price adjustments:


Inventory was increased by $1.1 billion as of the acquisition date (August 1, 2006). The
pro forma income statement excludes the effects of this adjustment.

Tangible fixed assets

The Company is being assisted by an independent appraisal firm in valuing the tangible
fixed assets acquired and assessing the remaining useful lives of these assets. Based on
the preliminary estimates, the Company increased the value of the tangible fixed assets
acquired by $12.3 billion. The Company also assessed the remaining useful lives of
these assets and concluded that the assets acquired have a longer average remaining
useful life than previously estimated by Arcelor. The Company therefore estimates, on a
preliminary basis, the annual additional depreciation charge to be insignificant.


As a result of the preliminary purchase price allocation, the Company currently estimates
goodwill related to the acquisition of Arcelor at $6.6 billion. This amount is still preliminary and could materially change as a result of the finalization of the purchase price allocation process.


Pro forma results twelve months ended December 31, 2006 versus twelve months
ended December 31, 2005 1

Arcelor Mittal pro forma net income for the twelve months ended December 31, 2006,
was $8.0 billion, or $5.76 per share, as compared with pro forma net income of $8.3
billion, or $5.97 per share for the twelve months ended December 31, 2005.
Pro forma sales and operating income for the twelve months ended December 31, 2006,
were $88.6 billion and $11.8 billion, respectively, as compared with $80.2 billion and
$11.6 billion, respectively, for the twelve months ended December 31, 2005.
Total steel shipments for the twelve months ended December 31, 2006, were 110.5
million metric tonnes as compared with 102.9 million metric tonnes for the twelve months ended December 31, 2005. Pro forma depreciation for the twelve months ended December 31, 2006, increased to $3.4 billion as compared with $3.3 billion for the twelve months ended December 31, 2005.Pro forma net financing costs for the twelve months ended December 31, 2006, remained flat as compared with $1.3 billion for the twelve months ended December 31, 2005. Pro forma net financing costs for the twelve months ended December 31, 2006, include a charge of $367 million OCEANES1 and a gain of $450 million resulting from a Canadian dollar swap. Pro forma income tax expense for the twelve months ended December 31, 2006, increased to $1.7 billion as compared with $1.4 billion for the twelve months ended December 31, 2005. The effective tax rate for the twelve months ended December 31, 2006, was 14.9% as compared with 12.6% for the twelve months ended December 31, 2005. Pro forma minority interest for the twelve months ended December 31, 2006, remained flat at $1.5 billion as compared with the twelve months ended December 31, 2005.

Pro forma results three months ended December 31, 2006 versus three months ended September 30, 20061

Arcelor Mittal pro forma net income for the three months ended December 31, 2006, was
$2.4 billion, or $1.72 per share, as compared with pro forma net income of $2.2 billion, or $1.58 per share for the three months ended September 30, 2006. Pro forma sales and operating income for the three months ended December 31, 2006, were $23.2 billion and $3.2 billion, respectively, as compared with $22.1 billion and $3.4 billion, respectively, for the three months ended September 30, 2006. Total steel shipments for the three months ended December 31, 2006, were 26.7 million metric tonnes as compared with 26.9 million metric tonnes for the three months ended September 30, 2006. Pro forma depreciation for the three months ended December 31, 2006, decreased to $875 million as compared with $910 million for the three months ended September 30, 2006. Pro forma net financing costs for the three months ended December 31, 2006, was $4million income as compared with $352 million expense for the three months ended September 30, 2006, primarily due to a gain resulting from a Canadian dollar swap in the three months ended December 31, 2006. Pro forma income tax expense for the three months ended December 31, 2006, decreased to $642 million as compared with $669 million for the three months ended September 30, 2006. The effective tax rate for the three months ended December 31, 2006, was 18.6% as compared with 20.5% for three months ended September 30, 2006. Pro forma minority interest for the three months ended December 31, 2006, increased marginally to $443 million as compared with $420 million for the three months ended September 30, 2006.

Liquidity and Capital Resources1

The liquidity position of the Company remains stable. As of December 31, 2006, the
Company’s cash and cash equivalents including restricted cash and short term
investments were $6.1 billion. The net debt, which includes long-term debt plus shortterm debt less cash and cash equivalents, restricted cash and short-term investments,
was reduced by $2.3 billion to $20.4 billion as compared to September 30, 2006.
In addition, the Company, including its operating subsidiaries, had available borrowing
capacity of $9.0 billion at December 31, 2006, as compared to $5.9 billion at September
30, 2006. On November 30, 2006, Arcelor Mittal entered into a credit facility, which is comprised of a _12 billion term loan and a _5 billion revolving credit facility (the “_17 billion facility”). The proceeds of the term loan were used to refinance Mittal Steel’s _3 billion refinancing facility, _5 billion acquisition facility and _2.8 billion bridge facility, along with Arcelor’s 4 billion term loan facility and a _3 billion revolving credit facility. The _5 billion revolving credit facility has remained unutilized and is fully available to Arcelor Mittal, the proceeds of which may be used for general corporate purposes. The _17 billion facility is unsecured and provides for loans bearing interest at LIBOR or EURIBOR (based on the borrowing currency) plus a margin based on a ratings grid.
Arcelor Mittal’s _3 billion refinancing facility, _5 billion credit facility and _2.8 billion bridge facility were repaid and subsequently cancelled on December 14, 2006. Arcelor’s _4 billion term loan was repaid and subsequently cancelled on December 14, 2006 and its
_3 billion facility was cancelled on December 5, 2006.
On September 27, 2006, Mittal Steel announced that its board of directors agreed upon a
new dividend and cash distribution policy. The new policy will be proposed to Mittal
Steel’s shareholders at the next general meeting. The new policy provides a mechanism
that will allow Mittal Steel to honor its commitment of returning 30% of net income to
shareholders every year through an annual base dividend, supplemented by additional
share buy-backs. Mittal Steel’s board of directors proposed an annual base dividend of
$1.30 (approximately 1 Euro at the current exchange rate). This base dividend has been
designed to guarantee a minimum payout per year and would rise in order to reflect the
underlying growth of Mittal Steel. Payment of this dividend will be on a quarterly basis.
In addition to this dividend, Arcelor Mittal’s board of directors proposed a share buy-back program tailored to match the 30% distribution pay-out commitment. As a consequence, the sum of the annual base dividend and the share buy-back program each year will represent 30% of annual net income. Based on the pro forma annual net earnings announced for the twelve months ended December 31, 2006, the group will implement a $590 million share buy-back and cash dividend of approximately $1.8 billion. This new distribution policy will be implemented as of January 1, 2007 for the 2006 results, subject to shareholder approval. On February 2, 2007, Arcelor Mittal declared an interim dividend of $0.325 per share.The cash dividend will be payable on March 15, 2007 to Euronext Amsterdam, Euronext Brussels, Euronext Paris, Luxembourg Stock Exchange and Spanish Exchanges shareholders (“European Shareholders”) of record on February 27, 2007, and to NYSE shareholders of record on March 2, 2007.

On December 15, 2006 Arcelor Mittal redeemed Arcelor's 3%[1] 2017 bonds convertible
and/or exchangeable into new and/or existing Arcelor shares. On December 26, 2006, Fitch Ratings affirmed the Company’s Issuer Default and senior unsecured ratings at “BBB” and Short-term rating at “F2” and removed the ratings from Rating Watch Negative.


2. C8DFE/712/2006JanuaryMittalannoucesofferforArcelor1.pdf

4. selectionurls= =0~wassite=1~method=Boolean%20search~searchterm=merger

Acquisition of Air Sahara by Jet Airways Case Study

Barkha Mittal, Ravi Malhotra, Shriharsh Sarkar, Soham Basu(PGDIM-13, NITIE), K.V.S.S. Narayana Rao

Aviation Industry – “A Glance”

Revolutionized by liberalization, the aviation sector in India has been marked by fast-paced change in the past few years. India is now the second largest aviation industry of the world .The Indian fleet, which comprised of 170 aircraft in May 2005, is now almost twice that, with 312 units. By 2010, India's fleet strength will stand at 500-550. In the same period, the domestic market size will cross 60 million and international traffic 20 million. Aircraft manufacturer Airbus pegs India's demand at 1100 aircraft, worth US$ 105 billion, over the next 20 years. According to Civil Aviation Minister Praful Patel, the country will need 1,500 to 2,000 passenger planes in 10 years, up from 260 now.
India continues to show steady year on year growth, with a 7 per cent increase in the number of flights into and out of India (an additional 835 flights and more than 200,000 seats a month). The number of flights has virtually doubled from 6,800 in May 2001 to 13,200 in May 2007. In fact, India is in third place in the Top 10 list of countries with the highest number of additional flights in May this year, behind only China and the US.
Presently, the number of air travelers is about 0.8 per cent of the population. Given the rapid shift in demographics due to a consistently high-performing economy, a figure of even 10 per cent of the population as air travelers, would necessitate about 5,000 aircrafts in the country.
The years 04-05, 05-06 and 06-07 have been years of record growth in air traffic in India. During the period April-September 2006, international and domestic passengers recorded growth of 15.8 per cent and 44.6 per cent, respectively, leading to an overall growth of 35.5 per cent. During the same period, international and domestic cargo recorded growth of 13.8 per cent and 8.7 per cent, respectively, resulting in an overall growth of 12.0 per cent.

About Jet Airways:

Jet Airways Limited was incorporated as an "air taxi" operator on 1 April 1992. It started commercial airline operations on 5 May 1993 with a fleet of 4 Boeing 737-300 aircraft. In January 1994 a change in the law enabled Jet Airways to apply for scheduled airline status, which was granted on 4 January 1995. It began international operations to Sri Lanka in March 2004.

Key Metrics

• Global Sales of Rupees 5387 crores
• Largest private domestic player with a market share of 25%.
• Operates around 330 flights in over 60 destinations, both national and international.

About Air Sahara
The airline was established on 20 September 1991 and began operations on 3 December 1993 with two Boeing 737-200 aircraft as Sahara Airlines. The carrier has a fleet size of 28 and it serves 34 destinations both inside and outside the country. Initially services were primarily concentrated in the northern sectors of India, keeping Delhi as its base, and then operations were extended to cover all the country. Sahara Airlines was re-branded as Air Sahara on 2 October 2000, although Sahara Airlines remains the carrier's registered name. On 22 March 2004 it became an international carrier with the start of flights from Chennai to Colombo.It is part of the major Sahara India Pariwar business conglomerate. The uncertainty over the airline's fate has caused its share of the domestic Indian air transport market go down from approximately 11% in January 2006 to a reported 8.5% in April.

Key Metrics
• Global Sales of Rupees 1290 crores.
• Second largest Private player in the aviation industry with a market share of around 6%.
• It flies 115 flights on a network of 20 destinations, operating a dozen Boeing 737 airliners and seven regional jets.

Acquisition of Air Sahara by Jet Airways:

Details of Announcement:

Date of Announcement – January 20, 2006
Place of Announcement- New Delhi
Speaker – Jet Airways CEO- Mr. Naresh Goyal.

Jet Airways had valued Air Sahara at about 500 million dollars (Rs2300crores) initially. However, subsequent negotiations between Jet Airways owner, Mr. Naresh Goyal and the Air Sahara team settled the deal at 450 million dollars (Rs2100crores). The initial valuation of Air-Sahara seemed to be very high, given that the carrier was sitting on Rs96 lakhs of loss in the just concluded financial year. This feeling among the industry analysts were reflected when the Jet Airways share experienced a sharp decline with the announcement of the deal.

Synergies claimed:

The private sector Jet-Sahara combine will end the dominating role of the public sector with the new corporate commanding as much as 32 percent of the domestic market space.
Jet Airways access to the entire leased fleet of about 27 aircraft of Air Sahara as well as to the infrastructure and logistics of the smaller airline including parking bay of 22 flights.
Jet Airways will also benefit from a pan-India presence as Sahara is operating in many areas where Jet is not present.
Even in the international arena, Air Sahara becomes complementary to the larger airline. While Jet has a presence in long-haul routes to the US and Europe, Air Sahara is operating to neighboring countries like Sri Lanka, Nepal and Thailand.
Jet Airways gets access to Sahara's parking slots in London's Heathrow airports as well as in Delhi and Mumbai.
The huge shortage of airline pilots, it can now draw upon the bank of Air Sahara's pilots. Other maintenance facilities of the smaller carrier will also be available within the country.

Steps/Events subsequent to announcement of the deal

After the initial announcement, there were a lot of regulatory issues. Jet airways chairman, Mr. Goyal also echoed what the market felt for a long time – the fact that he was paying too high a price for Air Sahara. Air Sahara meanwhile used 500 crores of the money deposited in an escrow account. Jet airways filed a lawsuit against Air sahara related to the above issue. After several litigations and counter litigations, a lot of mud slinging in public, Jet Airways acquired Air Sahara, for a total cash consideration of Rs. 1460crores (US $ 365 million). The amount was paid to Air Sahara in an all cash deal. The Company has accounted for this acquisition under the purchase method. Accordingly, the financial results for the post acquisition period have been included in the consolidated financial statements of the Company.

Structure and Financing of the deal:

The acquisition was an all cash transaction and Jet Airways would be funding the acquisition through $450 million of promoter’s equity. For Jet Airways, Mr Naresh Goyal retains a majority of the equity, with a small portion of other shareholders.
Closure of the deal:

Closure Date- On April 21, 2007
Place- New Delhi India.

Subsequent performance:

To be added


• Prowess- The Indian Corporate Reports Database.

Friday, September 14, 2007


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