this report

1. [2010]
MERGER BETWEEN
KINGFISHER AND
DECCAN AIRLINES
FINANCIAL MANAGEMENT 1
FACULTY GUIDE:
PROF.DEEKSHA SINGH KUMAR
SUBMITTED BY:
VED PRAKASH TIWARI
10BSP0052

2. ACKNOWLEDGEMENT
The success of this final report is the outcome of Guidance and valuable suggestions
provided by all the concerned without whom the report could not fide on the right back.
I would like to express my sincere gratitude to Prof.Deeksha singh kumar and ICFAI,
GURGAON for giving me an opportunity to do this project work.
I express my sense of deep gratitude to faculty of ICFAI, GURGAON for her inclusions
and timely suggestions in the preparation of this final report. Finally, I will be failing in
my duty, if I do not thank my parents, friends and well wishers for their enthusiastic
support and who have directly or indirectly helped in some way or the other in making
this final report a success.
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3. TABLE OF CONTENTS
1. Abstract 4
2. Introduction of industry 5
3. Summary of the study 6
4. Concept of merger and Acquisition 7
5. Reverse merger 8
6. Distinction between mergers and acquisitions 9
7. Kingfisher Airlines- A Review 12
8. Deccan Aviation Limited – A Review 13
9. Kingfisher & Air Deccan Merger – Key Features 14
10. Merger Advantage 15
11. Synergies 16
12. Question on working 17
13. Bibliography 19
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4. ABSTRACT
Project report is a part of the PGPM Program. The objective of a Project report is to
train the student in designing and implementing a research project in respect of a
business problem. A Project report is the culmination of training provided to the student
on practical applicability of the theoretical concepts learned by them.
In this study we look at the options of experiential learning and embedding to the skills
and how the organization get the accreditation from its training course and develop the
employee exactly and smartly using applying different models like 360o feedback,
training by telephone, group training, mind mapping, perceptual awareness etc.
Training is essential to order to understand how to implement the core principle of
coaching and learning. Most of the people attracted up to the profession or precisely the
once who are likely to make good trainers. People with integrity like helping other and
enjoy making different others. Experiential learning and embedding skills is an action
oriented behavioral situation. The purpose of the action situation is to have participants
generate their own data about each of the key concepts to be studied.
To get the best from experiential learning and embedding skills method, the trainer must
be a good observer of behavior. When the groups start to examine its experiences and
reflect upon them, he is in a position to assist with this process. His responsibilities in
focusing learning, and making it clearer for each participant, are extremely important.
INTRODUCTION-About Aviation Industry
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5. India is one of the fastest growing aviation markets in the world. The Airport Authority of
India (AAI) manages a total of 127 airports in the country, which include 13 international
airports, 7 custom airports, 80 domestic airports and 28 civil enclaves. There are over
450 airports and 1091 registered aircrafts in the country. The genesis of civil aviation in
India goes back to December 1912 when the first domestic air route between Karachi
and Delhi became operational. In the early fifties, all airlines operating in the country
were merged into either Indian Airlines or Air India. And, by virtue of the Air
Corporations Act 1953, this monopoly continued for the next forty years.
The Directorate General of Civil Aviation(DGCA) controlled every aspect of aviation,
including granting flying licenses, pilots, certifying aircrafts for flight and issuing all rules
and procedures governing Indian airports and airspace. Finally, the Airports Authority of
India (AAI) was assigned the responsibility of managing all national and international
airports and administering every aspect of air transport operation through the Air Traffic
Control.
Competitive landscape
The air transport services offered are the:
• Scheduled Air Transport Services (Passenger)
• Non- Scheduled Air Transport Services (Passenger)
• Air Transport Services (Cargo
• Non-Scheduled Air Transport Services (Charter Operation)
A STUDY OF MERGERS BETWEEN KINGFISHER AIRLINES AND DECCAN
AIRLINES
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6. Is kingfisher is still the King of Good times?
The Merger/Acquisition Summary
Style: Friendly
Company Status: Public
Intention: Opportunistic
Purpose: Defensive
Predictability of Value: Calculative
Strategic Mode: Development
Management Change: Incremental evolution.
The Deal: Vijay Mallya paid Rs 550 Cr to acquire 26% equity in Deccan. Subsequently,
he paid an additional Rs 418 Cr for a further 20% stake through an open offer.
Enterprise value: Rs 2,115 Cr when Mallya acquired 26%
Market Share of Air Deccan: 18%
Fleet with Air Deccan: 43
Combined market share: 29%
Share bought at 2007 was RS.155/share
CMP=Rs48/share (2009)
Mergers and acquisitions
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7. The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of
corporate strategy, corporate finance and management dealing with the buying, selling
and combining of different companies that can aid, finance, or help a growing company
in a given industry grow rapidly without having to create another business entity.
Acquisition
An acquisition, also known as a takeover or a buyout, is the buying of one company
(the ‘target’) by another. Merger is when two companies combine together to form a
new company alltogether. An acquisition may be private or public, depending on
whether the acquiree or merging company is or isn't listed in public markets. An
acquisition may be friendly or hostile. Whether a purchase is perceived as a friendly or
hostile depends on how it is communicated to and received by the target company's
board of directors, employees and shareholders. It is quite normal though for M&A deal
communications to take place in a so called 'confidentiality bubble' whereby information
flows are restricted due to confidentiality agreements (Harwood, 2005). In the case of a
friendly transaction, the companies cooperate in negotiations; in the case of a hostile
deal, the takeover target is unwilling to be bought or the target's board has no prior
knowledge of the offer. Hostile acquisitions can, and often do, turn friendly at the end,
as the acquiror secures the endorsement of the transaction from the board of the
acquiree company. This usually requires an improvement in the terms of the offer.
Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes,
however, a smaller firm will acquire management control of a larger or longer
established company and keep its name for the combined entity. This is known as a
reverse takeover. Another type of acquisition is reverse merger, a deal that enables a
private company to get publicly listed in a short time period.
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8. A reverse merger occurs when a private company that has strong prospects and is
eager to raise financing buys a publicly listed shell company, usually one with no
business and limited assets. Achieving acquisition success has proven to be very
difficult, while various studies have shown that 50% of acquisitions were
unsuccessful.The acquisition process is very complex, with many dimensions
influencing its outcome. There is also a variety of structures used in securing control
over the assets of a company, which have different tax and regulatory implications
• The buyer buys the shares, and therefore control, of the target company being
purchased. Ownership control of the company in turn conveys effective control
over the assets of the company, but since the company is acquired intact as a
going concern, this form of transaction carries with it all of the liabilities accrued
by that business over its past and all of the risks that company faces in its
commercial environment.
• The buyer buys the assets of the target company. The cash the target receives
from the sell-off is paid back to its shareholders by dividend or through
liquidation. This type of transaction leaves the target company as an empty shell,
if the buyer buys out the entire assets. A buyer often structures the transaction as
an asset purchase to "cherry-pick" the assets that it wants and leave out the
assets and liabilities that it does not. This can be particularly important where
foreseeable liabilities may include future, unquantified damage awards such as
those that could arise from litigation over defective products, employee benefits
or terminations, or environmental damage. A disadvantage of this structure is the
tax that many jurisdictions, particularly outside the United States, impose on
transfers of the individual assets, whereas stock transactions can frequently be
structured as like-kind exchanges or other arrangements that are tax-free or tax-
neutral, both to the buyer and to the seller's shareholders.
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a
situation where one company splits into two, generating a second company separately
listed on a stock exchange.
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9. Distinction between mergers and acquisitions
Although often used synonymously, the terms merger and acquisition mean slightly
different things.
[This paragraph does not make a clear distinction between the legal concept of a
merger (with the resulting corporate mechanics - statutory merger or statutory
consolidation, which have nothing to do with the resulting power grab as between the
management of the target and the acquirer) and the business point of view of a
"merger", which can be achieved independently of the corporate mechanics through
various means such as "triangular merger", statutory merger, acquisition, etc.]
When one company takes over another and clearly establishes itself as the new owner,
the purchase is called an acquisition. From a legal point of view, the target company
ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be
traded.
In the pure sense of the term, a merger happens when two firms agree to go forward as
a single new company rather than remain separately owned and operated. This kind of
action is more precisely referred to as a "merger of equals". The firms are often of about
the same size. Both companies' stocks are surrendered and new company stock is
issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline
Beecham, both firms ceased to exist when they merged, and a new company,
GlaxoSmithKline, was created.
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10. In practice, however, actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired firm
to proclaim that the action is a merger of equals, even if it is technically an acquisition.
Being bought out often carries negative connotations, therefore, by describing the deal
euphemistically as a merger, deal makers and top managers try to make the takeover
more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz
in 1999 which was widely referred to in the time.
A purchase deal will also be called a merger when both CEOs agree that joining
together is in the best interest of both of their companies. But when the deal is
unfriendly - that is, when the target company does not want to be purchased - it is
always regarded as an acquisition.
Mergers and it’s types and it’s form
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11. Merger
(and it’s forms)
Absorption Consolidation
Types of merger
Merger
Horizontal Vertical Conglomerate
Merger Merger Merger
Acquisition
Acquisition
Friendly Takeover Hostile Takeover
Kingfisher Airlines- A Review
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12. Kingfisher Airlines is a private airline based in Bangalore, India. Currently, it holds the
status of India's largest domestic airline, providing world-class facilities to its customers.
Owned by Vijay Mallya of United Beverages Group, Kingfisher Airlines started its
operations on May 9, 2005, with a fleet of 4 brand new Airbus - A320, a flight from
Mumbai to Delhi to start with. The airline currently operates on domestic as well as
international routes, covering a number of major cities, both in and outside India. In a
short span of time, Kingfisher Airlines has carved a niche for itself in the civil aviation
industry.
History
Kingfisher Airlines proved to be a stiff competition for other domestic airlines of India,
with its brand new aircraft, stylish red interiors, stylishly dressed cabin crew and ground
staff. The airline introduced in-flight entertainment (IFE) systems, for the first time to
Indian consumers. The IFE systems were provided on every seat, even on the domestic
flights. The airline offers attractive services to its on board passengers. Years following
its inception proved to be beneficial for the airline, in terms of its booming business, with
a good track record of customer satisfaction. However, it faced a worsening economic
scenario in 2008.
Kingfisher was engaged earlier in the following businesses:
Scheduled Air Transport
Services
Scheduled Air Transport
Ground handling services Training academy
Services
Commercial Airline
Business
Merger Motive
Vijay Mallaya had a vision. His successful Kingfisher Airlines had completed a merger
agreement with low cost carrier airlines Deccan Aviation on May, 2007. With this deal
he planned to become the dominant low cost carrier in the country.
Deccan Aviation Limited – A Review
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13. Deccan Aviation, promoted by Capt. G.R. Gopinath, Capt. K.J. Samuel and Capt.
Vishnu Singh Rawal, was initially incorporated as a private limited company on June 15,
1995 in Karnataka with the main object of pursuing chartered aviation services both for
commercial and non commercial purposes in India and to provide all aviation related
services. It was converted into a public limited company in 2005. The company’s vision
was “To empower every Indian to Fly” and its mission “To demystify air travel in India by
providing reliable low cost and safe travel to the common man by constantly driving
down the air fares as an ongoing mission”. As is evident from their mission statement,
the strategy was to garner market penetration through cost reduction.
Deccan was engaged earlier in the following businesses:
Scheduled Air Transport Services Non -Scheduled Air Transport Services
Scheduled Air Transport Services Scheduled Air Transport Services
Commercial Airline Business Charter Services Operations
Market Share Data
Market share Data of Oct 2005
Airline Percentage
Indian Airlines 28%
Jet Airways 35%
Air Sahara 12%
Air Deccan 11%
King Fisher 6%
Spice Jet 5%
Others 3%
Total 100%
Market Data of combined entity was 25% at 2007
Market data of Kingfisher on July 2009 is 22%
Kingfisher & Air Deccan Merger – Key Features
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14. On 1st June 2007, the Board of Air Deccan approved the allotment of equity
share of 26% to UB group & its nominees. The shares were allotted at Rs.155
per share approximately a 10% premium for the current market price (CMP). The
UB group made the money in two phases: Rs.150 Crore as initial investment &
Rs396 Crore at the on or before the end of June.
Once the investment process is complete, the UB group will become the single
largest share holder in the Deccan Aviation ltd.
UB group will make an open offer to acquire minimum 20% to all shareholders of
Deccan aviation at a price of Rs.155.
The Kingfisher-Air Deccan group will be the largest domestic airline with a fleet of
71 aircraft including 41 Airbus aircraft and 30 ATR aircraft. This combined airline
powerhouse will cover all segments of air travel from low fares to premium fares
and offer the maximum number of 537 daily flights covering the single largest
network in India connecting 69 cities whilst taking advantage of unparallel
synergy benefits arising from a common fleet of aircraft.
For the near future, Kingfisher will continue to serve the corporate and business
travel segment while Air Deccan will focus on serving the low fare segment but
with improved financial prospects for both carriers.
Kingfisher Airlines and Air Deccan will, henceforth, work very closely together to
exploit the significant synergies that exist in the areas of operations and
maintenance, ground handling, vastly increased connectivity, feeder services,
distribution penetration etc.
Kingfisher & Air Deccan- Merger Advantage
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15. • The fresh equity capital will allow the Deccan to pay the loans & to fund various
infrastructure projects.
• Reduction of cost by sharing infrastructure
• The merger ensures that Kingfisher does not need to invest more in
infrastructure or in spare planes, thereby reducing costs and increasing
profitability.
• The combined share of the two carriers will increase the Market share.
• As per the existing laws Kingfisher Airlines would not be able to operate on
international routes until 2010. However Air Deccan would be eligible from
the second half of next year as its five-year ceiling is coming to an end.
Kingfisher & Air Deccan- Synergies
Operational Synergies
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16. • Kingfisher and Air Deccan have exactly the same fleet of aircraft, the same
equipment in terms of engine, in terms of brakes and in terms of avionics. This
provides a huge opportunity on saving in engineering and maintenance cost.
• The airlines will achieve perfect synergies in the backend (operations and
maintenance, ground handling, vastly increased connectivity, feeder services,
distribution penetration) while preserving the front-end and that will enable both
Deccan and Kingfisher to be profitable.
• Apart from ground handling synergies, there is a whole host of items where
duplication is completely unnecessary and can now be avoided.
Infrastructure Synergy
• Kingfisher and Air Deccan will now be able to access ground infrastructure at 65
airports, of which more than 28 are common to both the set ups.
• The new entity will have over 71 aircraft.
Route Synergy
• On the most lucrative of routes, New Delhi-Mumbai, that on its own accounts for
more than half of India's 33 million passenger traffic, the two carriers will now
account for a total of 155 flights.
• According to Dr.Mallya kingfisher is considering swapping or switching in
coordination with each other to rationalize the fleet structure.
Investment synergy
• Both airlines have orders for about 90 aircraft currently placed with European
aircraft major, Airbus Industries.
• Kingfisher has placed orders for new aircrafts at higher prices as compared to Air
Deccan. The alliance with Air Deccan may provide it the opportunity to
renegotiate its rates with the manufactures thereby saving substantially.
Are these Airlines Mergers working?
The answer is probably NO.
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17. For two simple reasons:
First Reason is Subjectivity: The business investor can’t resist such a glamorous
business.
The second Reason is objectivity: pricing pressure exerted by other low cast
carriers (LCC)
Subjectivity: The business investor can’t resist such a glamorous business.
Glamour of the airlines: No industry other than film-making industry is as glamorous
as the airlines. Airline tycoons from the last century, like J. R. D. Tata and Howard
Hughes, and Sir Richard Branson and Dr. Vijaya Mallya today, have been idolized.
Airlines have an aura of glamour around them, and high net worth individuals can
always toy with the idea of owning an airline. All the above factors seem to have
resulted in a "me too" rush to launch domestic airlines in India.
Objectivity: Pricing Pressure
Declining yields: LCCs and other entrants together now command a market share of
around 46%. Legacy carriers are being forced to match LCC fares, during a time of
escalating costs. Increasing growth prospects have attracted & are likely to attract more
players, which will lead to more competition. All this has resulted in lower returns for all
operators.
Understanding the Competitive Landscape of Airline Industry
The fundamental characteristics of competition in the airline market:
1. It’s a capital intensive industry,
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18. 2. With few scale efficiencies,
3. Delivering a highly perishable product,
4. Within a partly regulated infrastructure,
5. Driven by powerful unions,
6. Price elastic demand and
7. Free market entry.
Bibliography
1. "The Indian Express, June 01, 2007.
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19. 2. "International Business Times, May 31, 2007.
3. "The Hindu Business Line, June 21, 2007.
4. "www.indiaaviation.aero, June 18, 2007
5. "www.expressindia.com, June 01, 2007.
6. "www.livemint.com, June 04, 2007
7. "Khaleej Times, June 11, 2007.
8. "The Hindu Business Line, June 01, 2007
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