Mergers And Acquisitions

MERGERS & ACQUISITION

MANOJ LUMAJI TIRLOTKAR

DPGD/JA13/0832
Financial Management

Welingkar Institute of Management

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Contents
Chapters

Page No.

Chapter 1. Introduction to Mergers and Acquisition.

2-5

Chapter 2. Purpose of merger and acquisition.

6-8

Chapter 3. Types of Mergers.

9-10

Chapter 4. Advantages of mergers and takeovers.

11-14

Chapter 5. Consideration of Merger and Takeover.

15-19

Chapter 6. Reverse Merger.

20-24

Chapter 7. Procedure of Merger and Acquisition.

25-28

Chapter 8. Why Mergers fail?.

29-29

Chapter 10. Case Studies.

GlaxoSmithlime the successful merger,
Deutsche Dresdner Bank the merger that failed,
StandChart-Grindlays: where StandChart takes over
Grindlays,
Tata-Tetley: the controversial issue of success and failure.

30-38

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Chapte
r
1

Introduction to Mergers
and Acquisition

We have been learning about the companies coming together to from another company
and companies taking over the existing companies to expand their business.
With recession taking toll of many Indian businesses and the feeling of insecurity surging
over our businessmen, it is not surprising when we hear about the immense numbers of corporate
restructurings taking place, especially in the last couple of years. Several companies have been
taken over and several have undergone internal restructuring, whereas certain companies in the
same field of business have found it beneficial to merge together into one company.
In this context, it would be essential for us to understand what corporate restructuring and
mergers and acquisitions are all about.
All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender
offers, & other forms of corporate restructuring. Thus important issues both for business decision
and public policy formulation have been raised. No firm is regarded safe from a takeover
possibility. On the more positive side Mergers & Acquisitions may be critical for the healthy
expansion and growth of the firm. Successful entry into new product and geographical markets
may require Mergers & Acquisitions at some stage in the firm's development. Successful
competition in international markets may depend on capabilities obtained in a timely and
efficient fashion through Mergers & Acquisition's. Many have argued that mergers increase value
and efficiency and move resources to their highest and best uses, thereby increasing shareholder
value.
.
To opt for a merger or not is a complex affair, especially in terms of the technicalities
involved. We have discussed almost all factors that the management may have to look into before
going for merger. Considerable amount of brainstorming would be required by the managements
to reach a conclusion. e.g. a due diligence report would clearly identify the status of the company
in respect of the financial position along with the networth and pending legal matters and details
about various contingent liabilities. Decision has to be taken after having discussed the pros &
cons of the proposed merger & the impact of the same on the business, administrative costs
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benefits, addition to shareholders' value, tax implications including stamp duty and last but not
the least also on the employees of the Transferor or Transferee Company.

Merger:
Merger is defined as combination of two or more companies into a single company where
one survives and the others lose their corporate existence. The survivor acquires all the assets as
well as liabilities of the merged company or companies. Generally, the surviving company is the
buyer, which retains its identity, and the extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and the stock of one company stand transferred to transferee
company in consideration of payment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,

Cash, or

A mix of the above modes.

Acquisition:
Acquisition in general sense is acquiring the ownership in the property. In the context of
business combinations, an acquisition is the purchase by one company of a controlling interest in
the share capital of another existing company.

Methods of Acquisition:
An acquisition may be affected by
(a) agreement with the persons holding majority interest in the company management like
members of the board or major shareholders commanding majority of voting power;
(b) purchase of shares in open market;
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(c) to make takeover offer to the general body of shareholders;
(d) purchase of new shares by private treaty;
(e) Acquisition of share capital through the following forms of considerations viz. means of
cash, issuance of loan capital, or insurance of share capital.
Takeover:
A takeover is acquisition and both the terms are used interchangeably.
Takeover differs from merger in approach to business combinations i.e. the process of
takeover, transaction involved in takeover, determination of share exchange or cash price and the
fulfillment of goals of combination all are different in takeovers than in mergers. For example,
process of takeover is unilateral and the offeror company decides about the maximum price.
Time taken in completion of transaction is less in takeover than in mergers, top management of
the offeree company being more co-operative.
De-merger or corporate splits or division:
De-merger or split or divisions of a company are the synonymous terms signifying a
movement in the company.

What will it take to succeed?

Funds are an obvious requirement for would-be buyers. Raising them may not be a
problem for multinationals able to tap resources at home, but for local companies, finance is
likely to be the single biggest obstacle to an acquisition. Financial institution in some Asian
markets are banned from leading for takeovers, and debt markets are small and illiquid, deterring
investors who fear that they might not be able to sell their holdings at a later date. The credit
squeezes and the depressed state of many Asian equity markets have only made an already
difficult situation worse. Funds apart, a successful Mergers & Acquisition growth strategy must
be supported by three capabilities: deep local networks, the abilities to manage uncertainty, and
the skill to distinguish worthwhile targets. Companies that rush in without them are likely to be
stumble.
Assess target quality:

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To say that a company should be worth the price a buyer pays is to state the obvious. But
assessing companies in Asia can be fraught with problems, and several deals have gone badly
wrong because buyers failed to dig deeply enough. The attraction of knockdown price tag may
tempt companies to skip crucial checks. Concealed high debt levels and deferred contingent
liabilities have resulted in large deals destroying value. But in other cases, where buyers have
undertaken detailed due diligence, they have been able to negotiate prices as low as half of the
initial figure.
Due diligence can be difficult because disclosure practices are poor and companies often
lack the information buyer need. Moreover, most Asian conglomerates still do not present
consolidated financial statements, leaving the possibilities that the sales and the profit figures
might be bloated by transactions between affiliated companies. The financial records that are
available are often unreliable, with different projections made by different departments within
the same company, and different projections made for different audiences. Banks and investors,
naturally, are likely to be shown optimistic forecasts.

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Chapte
r
2

Purpose of
Mergers and
Acquisition

The purpose for an offeror company for acquiring another company shall be reflected in
the corporate objectives. It has to decide the specific objectives to be achieved through
acquisition. The basic purpose of merger or business combination is to achieve faster growth of
the corporate business. Faster growth may be had through product improvement and competitive
position.
Other possible purposes for acquisition are short listed below: (1)Procurement of supplies:
1. to safeguard the source of supplies of raw materials or intermediary product;
2. to obtain economies of purchase in the form of discount, savings in transportation costs,
overhead costs in buying department, etc.;
3. to share the benefits of suppliers economies by standardizing the materials.
(2)Revamping production facilities:
1.
2.
3.
4.
5.
6.

to achieve economies of scale by amalgamating production facilities through

more intensive utilization of plant and resources;
to standardize product specifications, improvement of quality of product,
expanding
market and aiming at consumers satisfaction through strengthening after sale
services;
to obtain improved production technology and know-how from the offeree
company
to reduce cost, improve quality and produce competitive products to retain and
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7.

improve market share.

(3) Market expansion and strategy:

1. to eliminate competition and protect existing market;
2. to obtain a new market outlets in possession of the offeree;
3. to obtain new product for diversification or substitution of existing products and to
enhance the product range;
4. strengthening retain outlets and sale the goods to rationalize distribution;
5. to reduce advertising cost and improve public image of the offeree company;
6. strategic control of patents and copyrights.
(4) Financial strength:
1.
2.
3.

to improve liquidity and have direct access to cash resource;

to dispose of surplus and outdated assets for cash out of combined enterprise;
to enhance gearing capacity, borrow on better strength and the greater assets
backing;
4.
to avail tax benefits;
5.
to improve EPS (Earning Per Share).
(5) General gains:
1. to improve its own image and attract superior managerial talents to manage its affairs;
2. to offer better satisfaction to consumers or users of the product.
(6) Own developmental plans:
The purpose of acquisition is backed by the offeror companys own developmental plans.
A company thinks in terms of acquiring the other company only when it has arrived at its
own development plan to expand its operation having examined its own internal strength
where it might not have any problem of taxation, accounting, valuation, etc. but might
feel resource constraints with limitations of funds and lack of skill managerial
personnels. It has to aim at suitable combination where it could have opportunities to

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supplement its funds by issuance of securities, secure additional financial facilities,
eliminate competition and strengthen its market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through
alternative type of combinations which may be horizontal, vertical, product expansion,
market extensional or other specified unrelated objectives depending upon the corporate
strategies. Thus, various types of combinations distinct with each other in nature are
adopted to pursue this objective like vertical or horizontal combination.
(8) Corporate friendliness:
Although it is rare but it is true that business houses exhibit degrees of cooperative spirit
despite competitiveness in providing rescues to each other from hostile takeovers and
cultivate situations of collaborations sharing goodwill of each other to achieve
performance heights through business combinations. The combining corporates aim at
circular combinations by pursuing this objective.
(9) Desired level of integration:
Mergers and acquisition are pursued to obtain the desired level of integration between the
two combining business houses. Such integration could be operational or financial. This
gives birth to conglomerate combinations. The purpose and the requirements of the
offeror company go a long way in selecting a suitable partner for merger or acquisition in
business combinations.

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Chapte
r
3

Types of mergers

Merger or acquisition depends upon the purpose of the offeror company it wants to
achieve. Based on the offerors objectives profile, combinations could be vertical, horizontal,
circular and conglomeratic as precisely described below with reference to the purpose in view of
the offeror company.
(A) Vertical combination:
A company would like to takeover another company or seek its merger with that company to
expand espousing backward integration to assimilate the resources of supply and forward
integration towards market outlets. The acquiring company through merger of another unit
attempts on reduction of inventories of raw material and finished goods, implements its
production plans as per the objectives and economizes on working capital investments. In
other words, in vertical combinations, the merging undertaking would be either a supplier or
a buyer using its product as intermediary material for final production.
The following main benefits accrue from the vertical combination to the acquirer company
i.e.
(1) it gains a strong position because of imperfect market of the intermediary products,
scarcity of resources and purchased products;
(2) has control over products specifications.
(B) Horizontal combination :
It is a merger of two competing firms which are at the same stage of industrial process. The
acquiring firm belongs to the same industry as the target company. The mail purpose of such
mergers is to obtain economies of scale in production by eliminating duplication of facilities
and the operations and broadening the product line, reduction in investment in working
capital, elimination in competition concentration in product, reduction in advertising costs,
increase in market segments and exercise better control on market.

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(C) Circular combination:
Companies producing distinct products seek amalgamation to share common distribution and
research facilities to obtain economies by elimination of cost on duplication and promoting
market enlargement. The acquiring company obtains benefits in the form of economies of
resource sharing and diversification.
(D) Conglomerate combination:
It is amalgamation of two companies engaged in unrelated industries like DCM and Modi
Industries. The basic purpose of such amalgamations remains utilization of financial
resources and enlarges debt capacity through re-organizing their financial structure so as to
service the shareholders by increased leveraging and EPS, lowering average cost of capital
and thereby raising present worth of the outstanding shares. Merger enhances the overall
stability of the acquirer company and creates balance in the companys total portfolio of
diverse products and production processes.

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Chapte
r
4

Advantages of
mergers and
takeovers

Mergers and takeovers are permanent form of combinations which vest in management
complete control and provide centralized administration which are not available in combinations
of holding company and its partly owned subsidiary. Shareholders in the selling company gain
from the merger and takeovers as the premium offered to induce acceptance of the merger or
takeover offers much more price than the book value of shares. Shareholders in the buying
company gain in the long run with the growth of the company not only due to synergy but also
due to boots trapping earnings.

Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholders, managers ad
promoters of the combing companies. The factors, which motivate the shareholders and
managers to lend support to these combinations and the resultant consequences they have to bear,
are briefly noted below based on the research work by various scholars globally.
(1) From the standpoint of shareholders
Investment made by shareholders in the companies subject to merger should enhance in
value. The sale of shares from one companys shareholders to another and holding investment in
shares should give rise to greater values i.e. the opportunity gains in alternative investments.
Shareholders may gain from merger in different ways viz. from the gains and achievements of
the company i.e. through
(a) realization of monopoly profits;
(b) economies of scales;
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(c)
(d)
(e)

diversification of product line;

acquisition of human assets and other resources not available otherwise;
better investment opportunity in combinations.

One or more features would generally be available in each merger where shareholders
may have attraction and favour merger.

(2) From the standpoint of managers

Managers are concerned with improving operations of the company, managing the affairs
of the company effectively for all round gains and growth of the company which will provide
them better deals in raising their status, perks and fringe benefits. Mergers where all these things
are the guaranteed outcome get support from the managers. At the same time, where managers
have fear of displacement at the hands of new management in amalgamated company and also
resultant depreciation from the merger then support from them becomes difficult.
(3) Promoters gains
Mergers do offer to company promoters the advantage of increasing the size of their
company and the financial structure and strength. They can convert a closely held and private
limited company into a public company without contributing much wealth and without losing
control.
(4) Benefits to general public
Impact of mergers on general public could be viewed as aspect of benefits and costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or consumer or the
worker in the companies under merger plan.

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(a) Consumers
The economic gains realized from mergers are passed on to consumers in the form
of lower prices and better quality of the product which directly raise their standard
of living and quality of life. The balance of benefits in favour of consumers will
depend upon the fact whether or not the mergers increase or decrease competitive
economic and productive activity which directly affects the degree of welfare of
the consumers through changes in price level, quality of products, after sales
service, etc.
(b) Workers community
The merger or acquisition of a company by a conglomerate or other acquiring
company may have the effect on both the sides of increasing the welfare in the
form of purchasing power and other miseries of life. Two sides of the impact as
discussed by the researchers and academicians are: firstly, mergers with cash
payment to shareholders provide opportunities for them to invest this money in
other companies which will generate further employment and growth to uplift of
the economy in general. Secondly, any restrictions placed on such mergers will
decrease the growth and investment activity with corresponding decrease in
employment. Both workers and communities will suffer on lessening job
opportunities, preventing the distribution of benefits resulting from diversification
of production activity.
(c) General public
Mergers result into centralized concentration of power. Economic power is to be
understood as the ability to control prices and industries output as monopolists.
Such monopolists affect social and political environment to tilt everything in their
favour to maintain their power ad expand their business empire. These advances
result into economic exploitation. But in a free economy a monopolist does not
stay for a longer period as other companies enter into the field to reap the benefits
of higher prices set in by the monopolist. This enforces competition in the market
as consumers are free to substitute the alternative products. Therefore, it is
difficult to generalize that mergers affect the welfare of general public adversely

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or favorably. Every merger of two or more companies has to be viewed from
different angles in the business practices which protects the interest of the
shareholders in the merging company and also serves the national purpose to add
to the welfare of the employees, consumers and does not create hindrance in
administration of the Government polices.

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Chapte
r
5

Consideration of
Merger and
Takeover

Mergers and takeovers are two different approaches to business combinations. Mergers
are pursued under the Companies Act, 1956 vide sections 391/394 thereof or may be envisaged
under the provisions of Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial
Companies Act, 1985 whereas, takeovers fall solely under the regulatory framework of the SEBI
Regulations, 1997.

Minority shareholders rights

SEBI regulations do not provide insight in the event of minority shareholders not
agreeing to the takeover offer. However section 395 of the Companies Act, 1956 provides for the
acquisition of shares of the shareholders. According to section 395 of the Companies Act, if the
offerer has acquired at least 90% in value of those shares may give notice to the non-accepting
shareholders of the intention of buying their shares. The 90% acceptance level shall not include
the share held by the offerer or its associates. The procedure laid down in this section is briefly
noted below.
1. In order to buy the shares of non-accepting shareholders the offerer must have reached
the 90% acceptance level within 4 months of the date of the offer, and notice must have
been served on those shareholders within 2 months of reaching the 90% level.
2. The notice to the non-accepting shareholders must be in a prescribed manner. A copy of a
notice and a statutory declaration by the offerer (or, if the offerer is a company, by a
director) in the prescribed form confirming that the conditions for giving the notice have
been satisfied must be sent to the target.

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3. Once the notice has been given, the offerer is entitled and bound to acquire the
outstanding shares on the terms of the offer.
4. If the terms of the offer give the shareholders a choice of consideration, the notice must
give particulars of options available and inform the shareholders that he has six weeks
from the date of the notice to indicate his choice of consideration in writing.
5. At the end of the six weeks from the date of the notice to the non-accepting shareholders
the offerer must immediately send a copy of notice to the target and pay or transfer to the
target the consideration for all the shares to which the notice relates. Stock transfer forms
executed on behalf of the non-accepting shareholders by a person appointed by the
offerer must also be sent. Once the company has received stock transfer forms it must
register the offerer as the holder of the shares.
6. The consideration money, which is received by the target, should be held on trust for the
person entitled to shares in respect of which the sum was received.
7. Alternatively, if the offerer does not wish to buy the non-accepting shareholders shares,
it must still within one month of company reaching the 90% acceptance level give such
shareholders notice in the prescribed manner of the rights that are exercisable by them to
require the offerer to acquire their shares. The notice must state that the offer is still open
for acceptance and specify a date after which the right may not be exercised, which may
not be less than 3 months from the end of the time within which the offer can be
accepted. If the offerer fails to send such notice it (and its officers who are in default) are
liable to a fine unless it or they took all reasonable steps to secure compliance.
8. If the shareholder exercises his rights to require the offerer to purchase his shares the
offerer is entitled and bound to do so on the terms of the offer or on such other terms as
may be agreed. If a choice of consideration was originally offered, the shareholder may
indicate his choice when requiring the offerer to acquire his shares. The notice given to
shareholder will specify the choice of consideration and which consideration should
apply in default of an election.
9. On application made by an happy shareholder within six weeks from the date on which
the original notice was given, the court may make an order preventing the offerer from

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acquiring the shares or an order specifying terms of acquisition differing from those of
the offer or make an order setting out the terms on which the shares must be acquired.
In certain circumstances, where the takeover offer has not been accepted by the required
90% in value of the share to which offer relates the court may, on application of the offerer, make
an order authorizing it to give notice under the Companies Act, 1985, section 429. It will do this
if it is satisfied that:
a. the offerer has after reasonable enquiry been unable to trace one or more shareholders to
whom the offer relates;
b. the shares which the offerer has acquired or contracted to acquire by virtue of acceptance
of the offerer, together with the shares held by untraceable shareholders, amount to not
less than 90% in value of the shares subject to the offer; and
c. the consideration offered is fair and reasonable.
The court will not make such an order unless it considers that it is just and equitable to do
so, having regard, in particular, to the number of shareholder who has been traced who did accept
the offer.

Alternative modes of acquisition

The terms used in business combinations carry generally synonymous connotations and
can be used interchangeably. All the different terms carry one single meaning of merger but
each term cannot be given equal treatment in the discussion because law has created a dividing
line between take-over and acquisitions by way of merger, amalgamation or reconstruction.
Particularly the takeover Regulations for substantial acquisition of shares and takeovers known
as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 vide section 3
excludes any attempt of merger done by way of any one or more of the following modes:
(a) by allotment in pursuant of an application made by the shareholders for right issue
and under a public issue;
(b) preferential allotment made in pursuance of a resolution passed under section 81(1A)
of the Companies Act, 1956;

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(c) allotment to the underwriters pursuant to underwriters agreements;

(d) inter-se-transfer of shares amongst group, companies, relatives, Indian promoters and
Foreign collaborators who are shareholders/promoters;
(e) acquisition of shares in the ordinary course of business, by registered stock brokers,
public financial institutions and banks on own account or as pledges;
(f) acquisition of shares by way of transmission on succession or inheritance;
(g) acquisition of shares by government companies and statutory corporations;
(h) transfer of shares from state level financial institutions to co-promoters in pursuance
to agreements between them;
(i) acquisition of shares in pursuance to rehabilitation schemes under Sick Industrial
Companies (Special Provisions) Act, 1985 or schemes of arrangements, mergers,
amalgamation, De-merger, etc. under the Companies Act, 1956 or any other law or
regulation, Indian or Foreign;
(j) acquisition of shares of company whose shares are not listed on any stock exchange.
However, this exemption in not available if the said acquisition results into control of
a listed company;
(k) such other cases as may be exempted from the applicability of Chapter III of SEBI
regulations by SEBI.
The basic logic behind substantial disclosure of takeover of a company through
acquisition of shares is that the common investors and shareholders should be made aware of the
larger financial stake in the company of the person who is acquiring such companys shares. The
main objective of these Regulations is to provide greater transparency in the acquisition of shares
and the takeovers of companies through a system of disclosure of information.

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Escrow account
To ensure that the acquirer shall pay the shareholders the agreed amount in redemption of
his promise to acquire their shares, it is a mandatory requirement to open escrow account and
deposit therein the required amount, which will serve as security for performance of obligation.
The Escrow amount shall be calculated as per the manner laid down in regulation 28(2).
Accordingly:
For offers which are subject to a minimum level of acceptance, and the acquirer does
want to acquire a minimum of 20%, then 50% of the consideration payable under the public offer
in cash shall be deposited in the Escrow account.

Payment of consideration
Consideration may be payable in cash or by exchange of securities. Where it is payable in
cash the acquirer is required to pay the amount of consideration within 21 days from the date of
closure of the offer. For this purpose he is required to open special account with the bankers to an
issue (registered with SEBI) and deposit therein 90% of the amount lying in the Escrow Account,
if any. He should make the entire amount due and payable to shareholders as consideration. He
can transfer the funds from Escrow account for such payment. Where the consideration is
payable in exchange of securities, the acquirer shall ensure that securities are actually issued and
dispatched to shareholders in terms of regulation 29 of SEBI Takeover Regulations.

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Chapte
r
6

Reverse Merger

Generally, a company with the track record should have a less profit earning or loss
making but viable company amalgamated with it to have benefits of economies of scale of
production and marketing network, etc. As a consequence of this merger the profit earning
company survives and the loss making company extinguishes its existence. But in many cases,
the sick companys survival becomes more important for many strategic reasons and to conserve
community interest. The law provides encouragement through tax relief for the companies that
are profitable but get merged with the loss making companies. Infact this type of merger is not a
normal or a routine merger. It is, therefore, called as a Reverse Merger.
The allurement for such mergers is the tax savings under the Income-tax Act, 1961.
Section 72A of the Act ensures the tax relief which becomes attractive for amalgamations of sick
company with a healthy and profitable company to take the advantage of carry forward losses.
Taking advantage of the provisions of section 72A through merger or amalgamation is known as
reverse merger, which gives survival to the sick unit by merging it with the healthy unit. The
healthy unit extincts loosing its name and the surviving sick company retains its name.
Companies to take advantage of the section follow this route but after a year or so change their
names to the one of the healthy company as were done amongst others by Kirloskar Pneumatics
Ltd. The company merged with Kirloskar Tractors Ltd, a sick unit and initially lost its name but
after one year it changed its name as was prior to merger.

Reverse Merger under Tax Laws

Section 72A of the Income-tax Act, 1961 is meant to facilitate rejuvenation of sick
industrial undertaking by merging with healthier industrial companies having incentive in the
form of tax savings designed with the sole intention to benefit the general public through
continued productive activity, increased employment avenues and generation of revenue.

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(1) Background
Under the existing provisions of the Income-tax Act, so much of the business loss of a
year as cannot be set off by him against the profits of the following year from any business
carried on by him. If the loss cannot be so wholly set off, the amount not so set off can be carried
forward to the next following year and so on, up to a maximum of eight assessment years
immediately succeeding the assessment year for which the loss was first computed. The benefit
of carry forward and set off of business loss is, however, not available unless the business in
which the loss was originally sustained is continued to be carried on by the assessee. Further,
only the assessee who incurred the loss by his predecessor. Similarly, if a business carried on one
assessee is taken over by another, the unabsorbed depreciation allowance due to the predecessor
in business and set off against his profits in subsequent years. In view of these provisions, the
accumulated business loss and unabsorbed depreciation allowance of a company which merges
with another company under a scheme of amalgamation cannot be carried forward and set off by
the latter company against its profits.
The very purpose of section 72A is to revive the business of an undertaking, which is
financially non-viable and to bring it back to health. Sickness among industrial undertakings is a
matter of grave national concern. Experience has shown that taking over of such units by
Government is not always the most satisfactory or the most economical solution. The more
effective course suggested was to facilitate the amalgamation of sick industrial units with sound
ones by providing incentives and removing impediments in the way of such amalgamation. To
save the Government from social costs in terms of loss of production and employment and to
relieve the Government of the uneconomical burden of taking over and running sick industrial
units is one of the motivating factors in introducing section 72A. To achieve this objective so as
to facilitate the merger of sick industrial units with sound one, the general rule of carry forward
and set off of accumulated losses and unabsorbed depreciation allowance of amalgamating
company by the amalgamated company was statutorily related. By a deeming fiction, the
accumulated loss or the unabsorbed depreciation of the amalgamating is treated to be the loss or,
as the case may be, allowance for depreciation of the amalgamated company for the previous
year in which amalgamation was effected.
There are three statutory conditions which are to be fulfilled under section 72A(1) for the
benefits prescribed therein to be available to the amalgamated company, namely

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(i)

The amalgamating company was, immediately before such amalgamation, financially

non-viable by reason of its liabilities, losses and other relevant factors;
(ii) The amalgamation is in the public interest;
(iii) Such other conditions as the Central Government may by notification in the Official
Gazette, specify, to ensure that the benefit under this section is restricted to
amalgamation, which would facilitate the rehabilitation or revival of the business of
amalgamating company.

(2) Reverse merger

As it can be now understood, a reverse merger is a method adopted to avoid the stringent
provisions of Section 72A but still be able to claim all the losses of the sick unit. For doing so, in
case of a reverse merger, instead of a healthy unit taking over a sick unit, the sick unit takes over/
amalgamates with the healthy unit.
High Court discussed 3 tests for reverse merger:
a. assets of transferor company being greater than transferee company;
b. equity capital to be issued by the transferee company pursuant to the acquisition
exceeding its original issued capital, and
c. the change of control in the transferee company clearly indicated that the present
arrangement was an arrangement, which was a typical illustration of takeover by
reverse bid.
Court held that prime facie the scheme of merging a prosperous unit with a sick unit
could not be said to be offending the provisions of section 72A of the Income Tax Act, 1961
since the object underlying this provision was to facilitate the merger of sick industrial unit with
a sound one.

(3) Salient features of reverse merger under section 72A

1. Amalgamation should be between companies and none of them should be a firm of
partners or sole-proprietor. In other words, partnership firm or sole-proprietary
concerns cannot get the benefit of tax relief under section 72A merger.

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Mergers And Acquisitions

2. The companies entering into amalgamation should be engaged in either industrial
activity or shipping business. In other words, the tax relief under section 72A would not
be made available to companies engaged in trading activities or services.
3. After amalgamation the sick or financially unviable company shall survive and
other income generating company shall extinct. In other words essential condition to be
fulfilled is that the acquiring company will be able to revive or rehabilitate having
consumed the healthy company.
4. One of the merger partner should be financially unviable and have accumulated losses
to qualify for the merger and the other merger partner should be profit earning so that
tax relief to the maximum extent could be had. In other words the company which is
financially unviable should be technically sound and feasible, commercially and
economically viable but financially weak because of financial stringency or lack of
financial recourses or its liabilities have exceeded its assets and is on the brink of
insolvency. The second requisite qualification associated with financial unavailability
is the accumulation of losses for past few years.
5. Amalgamation should be in the public interest i.e. it should not be against public
policy, should not defeat basic tenets of law, and must safeguard the interest of
employees, consumers, creditors, customers and shareholders apart from promoters of
company through the revival of the company.
6. The merger must result into following benefit to the amalgamated company i.e. (a)
carry forward of accumulated business loses of the amalgamated company; (b) carry
forward of unabsorbed depreciation of the amalgamating company and (c) accumulated
loss would be allowed to be carried forward set of for eight subsequent years.
7. Accumulated loss should arise from Profits and Gains from business or profession
and not be loss under the head Capital Gains or Speculation.
8. For qualifying carry forward loss, the provisions of section 72 should have not been
contravened.

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Mergers And Acquisitions

9. Similarly for carry forward of unabsorbed depreciation the conditions of section 32
should not have been violated.
10. Specified authority has to be satisfied of the eligibility of the company for the relief
under section 72 of the Income Tax Act. It is only on the recommendations of the
specified authority that Central Government may allow the relief.
11. The company should make an application to a specified authority for requisite
recommendation of the case to the Central Government for granting or allowing the
relief.
12. Procedure for merger or amalgamation to be followed in such cases is same as in any
other cases. Specified Authority makes recommendation after taking into consideration
the courts direction on scheme of amalgamation.

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Mergers And Acquisitions

Chapte
r
7

Procedure for
Takeover
and Acquisition

Public announcement:
To make a public announcement an acquirer shall follow the following procedure:
1. Appointment of merchant banker:
The acquirer shall appoint a merchant banker registered as category I with SEBI to
advise him on the acquisition and to make a public announcement of offer on his behalf.
2. Use of media for announcement:
Public announcement shall be made at least in one national English daily one Hindi daily
and one regional language daily newspaper of that place where the shares of that company are
listed and traded.
3. Timings of announcement:
Public announcement should be made within four days of finalization of negotiations or
entering into any agreement or memorandum of understanding to acquire the shares or the voting
rights.

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Mergers And Acquisitions

4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBI Regulations.
Therefore, it is required that it should be prepared showing therein the following information:
(1)
paid up share capital of the target company, the number of fully paid up and
partially paid up shares.
(2)

Total number and percentage of shares proposed to be acquired from public

subject to minimum as specified in the sub-regulation (1) of Regulation 21
that is:
a) The public offer of minimum 20% of voting capital of the company to the
shareholders;
b) The public offer by a raider shall not be less than 10% but more than 51%
of shares of voting rights. Additional shares can be had @ 2% of voting
rights in any year.

(3)

The minimum offer price for each fully paid up or partly paid up share;

(4)

Mode of payment of consideration;

(5)

The identity of the acquirer and in case the acquirer is a company, the identity
of the promoters and, or the persons having control over such company and
the group, if any, to which the company belong;

(6)

The existing holding, if any, of the acquirer in the shares of the target
company, including holding of persons acting in concert with him;

(7)

Salient features of the agreement, if any, such as the date, the name of the
seller, the price at which the shares are being acquired, the manner of
payment of the consideration and the number and percentage of shares in
respect of which the acquirer has entered into the agreement to acquirer the
shares or the consideration, monetary or otherwise, for the acquisition of
control over the target company, as the case may be;

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Mergers And Acquisitions

(8)

The highest and the average paid by the acquirer or persons acting in concert
with him for acquisition, if any, of shares of the target company made by him
during the twelve month period prior to the date of the public announcement;

(9)

Objects and purpose of the acquisition of the shares and the future plans of
the acquirer for the target company, including disclosers whether the acquirer
proposes to dispose of or otherwise encumber any assets of the target
company:
Provided that where the future plans are set out, the public announcement
shall also set out how the acquirers propose to implement such future plans;

(10)

The specified date as mentioned in regulation 19;

(11)

The date by which individual letters of offer would be posted to each of the
shareholders;

(12)

The date of opening and closure of the offer and the manner in which and the
date by which the acceptance or rejection of the offer would be
communicated to the share holders;

(13)

The date by which the payment of consideration would be made for the
shares in respect of which the offer has been accepted;

(14)

Disclosure to the effect that firm arrangement for financial resources required
to implement the offer is already in place, including the details regarding the
sources of the funds whether domestic i.e. from banks, financial institutions,
or otherwise or foreign i.e. from Non-resident Indians or otherwise;

(15)

Provision for acceptance of the offer by person who own the shares but are
not the registered holders of such shares;

(16)

Statutory approvals required to obtained for the purpose of acquiring the

shares under the Companies Act, 1956, the Monopolies and Restrictive Trade
Practices Act, 1973, and/or any other applicable laws;

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Mergers And Acquisitions

(17)

Approvals of banks or financial institutions required, if any;

(18)

Whether the offer is subject to a minimum level of acceptances from the

shareholders; and

(19)

Such other information as is essential fort the shareholders to make an

informed design in regard to the offer.

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Mergers And Acquisitions

Chapte
r
8

Why Mergers fail?

Why Mergers Fail?

Revenue deserves more attention in mergers; indeed, a failure to focus on this important factor
may explain why so many mergers dont pay off. Too many companies lose their revenue
momentum as they concentrate on cost synergies or fail to focus on post merger growth in a
systematic manner. Yet in the end, halted growth hurts the market performance of a company far
more than does a failure to nail costs.

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Mergers And Acquisitions

Chapte
r
9

Case Studies

CASE STUDY 1
GlaxoSmithKline Pharmaceuticals Limited, India
(Merger Success).
Mumbai -- Glaxo India Limited and SmithKline Beecham Pharmaceuticals (India)
Limited have legally merged to form GlaxoSmithKline Pharmaceuticals Limited in India (GSK).
It may be recalled here that the global merger of the two companies came into effect in
December 2000.
Commenting on the prospects of GSK in India, Vice Chairman and Managing Director,
GlaxoSmithKline
Pharmaceuticals Limited, India, Mr. V Thyagarajan said, The two
companies that have merged to become GlaxoSmithKline in India have a great heritage a fact
that gets reflected in their products with strong brand equity. He added, The two companies
have a long history of commitment to India and enjoy a very good reputation with doctors,
patients, regulatory authorities and trade bodies. At GSK it would be our endeavor to leverage
these strengths to further consolidate our market leadership.

GlaxoSmithKline, India
The merger in India brings together two strong companies to create a formidable presence
in the domestic market with a market share of about 7 per cent.

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Mergers And Acquisitions

With this merger, GlaxoSmithKline has increased its reach significantly in India. With a
field force of over 2,000 employees and more than 5,000 stockiest, the companys products are
available across the country. The enhanced basket of products of GlaxoSmithKline, India will
help serve patients better by strengthening the hands of doctors by offering superior treatment
and healthcare solutions.

GlaxoSmithKline, Worldwide
GlaxoSmithKline plc is the worlds leading research-based pharmaceutical and
healthcare company. With an R&D budget of over 2.3 billion (Rs.16, 130 crores),
GlaxoSmithKline has a powerful research and development capability, encompassing the
application of genetics, genomics, combinatorial chemistry and other leading edge technologies.
A truly global organization with a wide geographic spread, GlaxoSmithKline has its
corporate headquarters in the West London, UK. The company has over 100,000 employees and
supplies its products to 140 markets around the world. It has one of the largest sales and
marketing operations in the global pharmaceutical industry.

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Mergers And Acquisitions

CASE STUDY 2
Deutsche Dresdner Bank (Merger Failure)
The merger that was announced on march 7, 2000 between Deutsche Bank and Dresdner
Bank, Germanys largest and the third largest bank respectively was considered as Germanys
response to increasingly tough competition markets.
The merger was to create the most powerful banking group in the world with the balance
sheet total of nearly 2.5 trillion marks and a stock market value around 150 billion marks. This
would put the merged bank for ahead of the second largest banking group, U.S. based citigroup,
with a balance sheet total amounting to 1.2 trillion marks and also in front of the planned
Japanese book mergers of Sumitomo and Sukura Bank with 1.7 trillion marks as the balance
sheet total.
The new banking group intended to spin off its retail banking which was not making
much profit in both the banks and costly, extensive network of bank branches associated with it.
The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Banks
green corporate color in its logo. The future core business lines of the new merged Bank included
investment Banking, asset management, where the new banking group was hoped to outside the
traditionally dominant Swiss Bank, Security and loan banking and finally financially corporate
clients ranging from major industrial corporation to the mid-scale companies.
With this kind of merger, the new bank would have reached the no.1 position of the US
and create new dimensions of aggressiveness in the international mergers.
But barely 2 months after announcing their agreement to form the largest bank in the world,
negotiations for a merger between Deutsche and Dresdner Bank failed on April 5, 2000.
The main issue of the failure was Dresdner Banks investment arm, Kleinwort Benson,
which the executive committee of the bank did not want to relinquish under any circumstances.

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Mergers And Acquisitions

In the preliminary negotiations it had been agreed that Kleinwort Benson would be
integrated into the merged bank. But from the outset these considerations encountered resistance
from the asset management division, which was Deutsche Banks investment arm.
Deutsche Banks asset management had only integrated with Londons investment group
Morgan Grenfell and the American Bankers trust. This division alone contributed over 60% of
Deutsche Banks profit. The top people at the asset management were not ready to undertake a
new process of integration with Kleinwort Benson. So there was only one option left with the
Dresdner Bank i.e. to sell Kleinwort Benson completely. However Walter, the chairman of the
Dresdner Bank was not prepared for this. This led to the withdrawal of the Dresdner Bank from
the merger negotiations.
In economic and political circles, the planned merger was celebrated as Germanys
advance into the premier league of the international financial markets. But the failure of the
merger led to the disaster of Germany as the financial center.

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Mergers And Acquisitions

CASE STUDY 3
Standard Chartered Grindlays (Acquisition Success)
It has been a hectic year at London-based Standard Chartered Bank, going by its
acquisition spree across the Asia-Pacific region. At the helm of affairs, globally, is Rana Talwar,
group CEO. The quintessential general, he knew what he was up against when he propounded his
'emerging stronger' strategy - of growth through consolidation of emerging markets - for the turn
of the Millennium: loads of scepticism. The central issue: Stan Charts August 2000 acquisition
of ANZ Grindlays Bank, for $1.3 billion.
Everyone knows that acquisition is the easy part, merging operations is not. And recent
history has shown that banking mergers and acquisitions (MERGERS & ACQUISITIONs), in
particular, are not as simple to execute as unifying balance sheets. Can Stan Charts proposed
merger with ANZ Grindlays be any different?
The '1' refers to the new entity, which will be India's No 1 foreign bank once the
integration is completed. This should take around 18 months; till then, ANZ Grindlays will exist
separately as Standard Chartered Grindlays (SCG). The '2' and '3' are Citibank and Hong Kong
and Shanghai Banking Corp (HSBC), India's second and third largest foreign banks, respectively.
That makes the new entity the world's biggest 'emerging markets' bank. By way of
strengths, it will have treasury operations that will probably go unchallenged as the country's
most sophisticated. Best of all, it will be a dynamic bank. Thanks to pre-merger initiatives taken
by both banks, it could per- haps boast of the country's fastest growing retail-banking business.
StanChart is rated highly on other parameters too. It is currently targeting global costsavings of $108 million in 2001, having reported a profit-before-tax of $650 million in the first
half of 2000, up 31 per cent from the same period last year. Net revenue increased 6 per cent to
$2 billion for the same period. Consumer banking, a typically low-profit business which
accounted for less than 40 per cent of its global operating profits till four years ago, now brings
in 55 per cent of profits. So the company's global report card looks fairly good.

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Mergers And Acquisitions

StanChart knows it mustn't let its energy dissipate. It has been growing at a claimed annual
rate of 25 per cent in the last two years, well over the industry average of below 10 per cent. But
maintaining this pace won't prove easy, with Citibank and HSBC just waiting to snip at it. The
ANZ Grindlays acquisition had happened just before that, though the process started in early
1999, at Stan Charts headquarters in London. At first, it was just talk of a strategic tie-up with
ANZ Grindlays, which had the same colonial British antecedents.
But this plan was abandoned when it became evident that all decision-making would
vacillate between Melbourne and London, where the two are headquartered. By December, ANZ
had expressed a willingness to sell out, and StanChart initiated the due-diligence proceedings. It
wasn't until March that a few senior Indian bank executives were let into the secret. Now, it's
time to get going. A new vehicle, navigators in place, engines revving and map charted, the road
ahead is challenging and full of promise. To steer clear of trouble is the only caution advised by
industry analysts, as the two banks integrate their businesses. Sceptics don't see how StanChart
can really be greater than the sum of its parts.
The aggression, though, is not as raw as it sounds. Behind it all is a strategy that everyone
at StanChart seems to be in synchrony with. And behind that strategy is Talwar, very much the
originator of the oft-repeated phrase uttered by every executive - "getting the right footprint".
The other key words that tend to find their way into every discussion are 'focus' and 'growth'.

StanChart India's net non-performing loans, as a percentage of net total advances, is

reported at just 2 per cent for 1999-2000. In terms of capital adequacy too, the banks are doing
fine. StanChart has a capital base of 9.5 per cent of its risk-weighted assets, while SCG has 10.9
per cent. So, with or without a safety net provided by the global group, the Indian operations
are
on
firm
ground.

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Mergers And Acquisitions

CASE STUDY 4
TATA TETLEY (Controversial Issue over Success And
Failure).
The Tata group was infusing a fresh 30 million pounds into Tata tea that had been used to
buy an 85.7% stake in the UK-based Tetley last year. Already high on a heady brew of a fresh
buy and caffeine, most missed what Krishna Kumar's statement meant.
Tata Teas much hyped acquisition of Tetley, one of the worlds biggest tea brands, isnt
proceeding according to the plan. 15 months ago, the Kolkata based Rs 913 crore Tata Teas
buyout of the privately held The Tetley Group for Rs 1843 crore had stunned corporate watchers
and investment bankers alike. It was a coup! An Indian company had used a leveraged buyout to
snag one of the Britains biggest ever brands. It was by far, the biggest ever leveraged buyout by
an Indian company.
Tata Tea didnt pay cash upfront. Instead, it invested 70 million pounds as equity capital
to set up Tata Tea. It borrowed 235 million to buy the Tetley stake. The plan was that Tetleys
cash flows would be insulated from the debt burden.
When Tata Tea took the big gamble to buy Tetley, its intent was very clear. The company
had established a firm foothold in the domestic market and had a controlling position in growing
tea. Going global looked like the obvious thing to do. With Tetley, the second largest brand after
Lipton in its bag, Tata Tea looked ready to set the Thames on fire.
Right from the start, Tetley was never a easy buy. In 1996, Allied Domecq, the liquor and
retail conglomerate, had put Tetley on the block. Even then Tata Tea, nestle, Unilever and Sara
lee had put in bids, all under 200 million pounds. Allied wanted to cash on the table. Tata Tea
didnt have enough of its own. The others bids also did not go through. Eventually, Tetley group
together with a consortium of financial investors like Prudential and Schroders, bought the entire
equity stake for 190 million pounds in all cash deal. Two years later, Tetley went for an IPO,
hoping to raise 350-400 million pounds. But the IPO never took place. Soon afterwards, the
investors began looking for exit options. Tetley was once again on the block.

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Mergers And Acquisitions

It was until Feb 2000 that the due diligence was completed. By this time, the Tata's were
ready with their offer. They would pay 271 million pounds to buy the entire Tetley equity and the
funds would go towards first paying off Tetleys 106 million debt. The balance would go the
owners.
The offer price did not include rights to Tetley coffee business, which was sold to the USbased Rowland Coffee Roasters and Mother Parkers Tea and Coffee in Feb 2000 for 55 million
pounds.
For Tetley new owners, too, the problems were only just beginning. The deal hinged on
Tetleys ability, over and above covering its own debts, to service the loans Tata Tea had taken
for the acquisition. Thats where reality bites.
Consider the facts. When Tata Tea acquired Tetley through Tata Tea, it sunk in 70 million
pounds as equity and borrowed 235 million pounds fro ma consortium to finance the deal.
Implicit in the LBO was that Tetleys future cash flows would fund the SPVs interest and
principal repayment requirements. At an average interest rate of 11.5%, Tetley needed to
generate 22 million pounds in interest alone on a loan o 190 million pounds. Add to this the
interest on the high cost vendor loan notes of 30 million poundsit worked out to be 4.5 million
and the charges on the working capital portion, amounting to 2 million pounds per annum. All
this works out to about 28 million pounds in interest alone per year.
At the same time, it also has to pay back the principal of 110 million pounds over a nice
period through half yearly installments. This works out to 12 million pounds per year. If you
were to assume that depreciation and restructuring charges were pegged at last years levels, the
bill tots up to 48 million pounds a year. In FY 1999, the Tetleys cash flows were 29 million
pounds.
Some of the problems could have been obviated if Tetleys cash flows had increased by
40 % in FY 2001 over the previous year. That way, the company would have covered both its
own commitments as well as of the Tata's. But the situation worsened. Major UK retailers
clamped down on grocery prices last year. That substantially reduced Tetleys pricing flexibility.

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Mergers And Acquisitions

Besides, the UK tea markets have been under pressure for some time now. According to
the UK governments national food survey, there has been a substantial fall in the consumption
of mainstream teas- tea-bag black teas drunk with milk and sugar. Also the tea drinking
population in UK has come down from 77.1% to 68.3% in 1999. On the other hand, natural
juices and coffee have consistently increased their market share.
So, when it was confronted by Tetleys sliding performance, what options did Tata Tea
have? On its own, it could not do much. The last year has been one of the worst years for the
Indian tea industry and Tata Tea has also been affected. The drop in tea prices and a proliferation
of smaller brands in the organized segment have taken toll on Tata Teas performance. In FY
2001, Tata Teas net profit fell by 19.59% from Rs 124.63 crore to Rs 100.21 crore. Income from
operations declined by 8.72%.
But letting Tetley sink under the weight of the interest burden would have been an
unthinkable option, given the prestige attached to the deal.
Thus from the above case we infer that Tata had to shell out a lot of money to cover all
the debts of Tetley which was found not worthy enough by the general public.
But Tata still calls it to be a success whereas in reality it is a failure.

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Mergers And Acquisitions

NOTES
In
du
str
y

Table 5: Acquisitions in the New Series Industries.

Acquirer/Bidder
Target
Date

Adver WPP Group plc

tising McCann-Erickson
Agenc Worldwide
y
WPP Group plc
Bates Worldwidde
Trave Carlson Wagonlit
l
Kuoni,
Agenc Switzerland
y
Kuoni Travel
Busin Jardine Flemming
ess
Coopers and
Servic Laybrand
es
Ernst and Young
Watson Wyatt
Publi Macmillan UK
shing
McGraw Hill
Polygram
International
Holding Bv
Softw Baring India
are
Investments,
Mauritius
Baring Private
Equity Partners
(India)
Martek Holdings
Incorporation
IBM
IBM

Motive

Equus
McKann Erikson India

June 1996
March 1998

Entry in Indian market

Buyout joint venture partner

Hindustan Thompson
Associates
Bates Carion
Ind Travels
Sita Travels

June 1998

Buyout joint venture partner

Jan 2000
August 1999
Jan 2000

Buyout joint venture partner

Entry in Indian market
Entry in Indian market

SOTC
Karvy Consultants
SB Billimoria

May 1997
April 1996
June 1996

Increase stake
Entry in Indian market
Entry in Indian market

SR Batliboi
Wyatt India
Macmillan India

Jan 1997
March 1998
May 1997

Buyout joint venture partner

Buyout joint venture partner
Increase stake

Tata McGraw Hill

Polygram India

April 1996
June 1999

Buyout joint venture partner

Buyout joint venture partner

BFL Software

June 1998

Entry in Indian market

Synergy Log-In Systems

April 1999

Entry in Indian market

Mascon Global Ltd.

July 1999

Entry in Indian market

IBM Global Services

Tata IBM

Sept 1999
Sept 1999

Buyout joint venture partner

Buyout joint venture partner

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Mergers And Acquisitions

NOTES
Table 1: Share of M and As in FDI
Year
1997
1998
1999
(Jan-Mar)
Total

Inflows in India.
FDI Inflows
M and A Funds
($ million)
($ million)
3200
2900

1300
1000

Share of M and A
Funds in Inflows
(Percent)
40.6
34.5

1400
7100

500
2800

35.7
39.4

Source: Economic Times December 23,1998 and June 21,1999

Table 2: MNE Related M and As in India.

Year
Mergers
Acquisitions
1993-94
4
9
1994-95
7
1995-96
12
1996-97
2
46
1997-98
4
61
1998-99
2
30
1999-2000
(up to Jan 2000)
5
74
Total
17
239

Total
13
7
12
48
65
32
79
256

Source: Kumar based on RIS-ICDRC Database

Table 3: Consideration involved in Select

MNE Related Acquisition.
Total
Percent
Consideration
Share
(Rs. Million)
All deals (87)
87449
100.00
Top 10 deals
50371
66.75
Top 20 deals
6999
80.04
Bottom 20 deals
773
00.79
Source: Kumar based on RIS-ICDRC Database

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Mergers And Acquisitions

Table 4: Average size of Acquisition
Deals
Types of
Acquirer
Existing MNE
affiliates
Foreign
corporations
Foreign parents
of existing
affiliates
All cases

Number

Amount
(Rs. Million)

Average per deal

(Rs. Million)

19

13,661

718

36

37,360

1,038

32
87

36,420
87,440

1,138
1,005

Source: Kumar based on RIS-ICDRC Database.

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Mergers And Acquisitions

NOTES

- 43