Mergers & Acquisitions: Some Key Issues

By

Prof. Ajit Kumar Bansal

Asst. Professor
Faculty of Management Studies
Graphic Era University
Dehradun

Abstract

The process of mergers and acquisitions has gained substantial importance in today's
corporate world. This process is extensively used for restructuring the business
organizations. In India, the concept of mergers and acquisitions was initiated by the
government bodies. Some well known financial organizations also took the necessary
initiatives to restructure the corporate sector of India by adopting the mergers and
acquisitions policies. The Indian economic reform since 1991 has opened up a whole
lot of challenges both in the domestic and international spheres. The increased
competition in the global market has prompted the Indian companies to go for
mergers and acquisitions as an important strategic choice. The trends of mergers
and acquisitions in India have changed over the years. The immediate effects of the
mergers and acquisitions have also been diverse across the various sectors of the
Indian economy.

Mergers and Acquisitions Across Indian Sectors This article is focused on basic key
issues relating to financial reengineering and consolidation exercise performed by
organizations to face the cut throat competition and to survive in market place.
Along with this the laws controlling M & A exercise are also described.

Mergers

Merger is a financial tool that is used for enhancing long-term profitability by

expanding their operations. Mergers occur when the merging companies have their
mutual consent as different from acquisitions, which can take the form of a hostile
takeover.

The business laws in US vary across states and hence the companies have limited
options to protect themselves from hostile takeovers. One way a company can
protect itself from hostile takeovers is by planning shareholders rights, which is
alternatively known as - poison pill. If we trace back to history, it is observed that
very few mergers have actually added to the share value of the acquiring company.
Corporate mergers may promote monopolistic practices by reducing costs, taxes etc.

Such activities may go against public welfare. Hence mergers are regulated d
supervised by the government, for instance, in US any merger required\s the prior
approval of the Federal Trade Commission and the Department of Justice. In US
regulation son mergers began with the Sherman Act in 1890. Mergers may be
horizontal, vertical, conglomerate or congeneric, depending or the nature of the
merging companies.

Acquisitions

Acquisitions or takeovers occur between the bidding and the target company. There
may be either hostile or friendly takeovers. Reverse takeover occurs when the target
firm is larger than the bidding firm. In the course of acquisitions the bidder may
purchase the share or the assets of the target company.

Mergers and Acquisitions Laws

Business firms opt for mergers and acquisitions mostly for consolidating a
fragmented market and also for increasing their operational efficiency, which give
them a competitive edge. Nations across the globe have promulgated Mergers and
Acquisitions Laws to monitor the functioning of the business units therein. An
estimate made in 2007 put the number of global competition laws at 106. They
possess merger control provisions.

While most mergers and acquisitions increase the operational efficiency of business
firms some can also lead to a building up of monopoly power. The anti-competitive
effects are achieved either through coordinated effects or unilateral effects.
Sometimes mergers and acquisitions tend to create a collusive market structure.

However, free and fair competition is seen to maximize the consumers' interests
both in terms of quantity and price.

Mergers and Acquisitions Laws: the Global Perspective

As per global experience around 85% of acquisitions and mergers are devoid of any
competitive concerns. They get approval within a period of 30 to 60 days. The
remaining percentage of firms usually has a substantially long gestation period for
getting the legal approval. These cases are relatively complex and need a close
examination of the various aspects by the regulatory bodies. As per the guidelines
from "The International Competition Network" simple merger and acquisitions cases
should receive approval within a period of 6 weeks. The comparable time frame for
complex cases is 6 months.

It may be noted that the 'Competition Network' mentioned above is actually an

association of international competition authorities.

Mergers and Acquisitions Laws: the Indian Perspective

Indian competition law grants a maximum time period of 210 days for the
determination of the combination, which comprises acquisitions, mergers,
amalgamations and the like. One needs to take note of the fact that this stated time
frame is clearly distinct from the minimum compulsory wait period for applicants.

As per the law, the compulsory period of waiting for applicants can either be 210
days starting from the day of notice filing or receipt of the Commission's order,
whichever occurs earlier. The threshold limits for firms entering business
combinations are substantially high under the Indian law. The threshold limits are set
either in terms of the asset value or in terms the firm's turnover. Indian threshold
limits are greater than those for the EU. They are twice as high when compared with
UK.

The Indian law also provides for the modern day phenomenon of merger and
acquisitions, which are cross border in nature. As per the law domestic nexus is a
pre-requisite for notification on this type of combinations.

It can be noted that Competition Act, 2002 has undergone a recent amendment. This
has replaced the the voluntary notification regime with a mandatory regime. Of the
total number of 106 countries, which possess competition laws only 9 are thought to
be credited with a voluntary notification regime. Voluntary notification regimes are
generally associated with business uncertainties. Post-combination, if firms are seen
to be involved in anti-competitive practices de-merger shows the way out.

More on Indian Mergers and Acquisitions Laws

Indian Income Tax Act has provision for tax concessions for mergers/demergers
between two Indian companies. These mergers/demergers need to satisfy the
conditions pertaining to section 2(19AA) and section 2(1B) of the Indian Income Tax
Act as per the applicable situation.

In case of an Indian merger when transfer of shares occurs for a company they are
entitled to a specific exemption from the capital gains tax under the "Indian I-T tax
Act". These companies can either be of Indian origin or foreign ones.

A different set of rules is however applicable for the 'foreign company mergers'. It is
a situation where an Indian company owns the new company formed out of the
merger of two foreign companies. It can be noted that for foreign company mergers
the share allotment in the merged foreign company in place of shares surrendered
by the amalgamating foreign company would be termed as a transfer, which would
be taxable under the Indian tax law.

Also as per conditions set under section 5(1), the 'Indian I-T Act' states that, global
income accruing to an Indian company would also be included under the head of
'scope of income' for the Indian company.

Benefits of Mergers and Acquisitions

Merger refers to the process of combination of two companies, whereby a new

company is formed. An acquisition refers to the process whereby a company simply
purchases another company. In this case there is no new company being formed.
Benefits of mergers and acquisitions are quite a handful.

Mergers and acquisitions generally succeed in generating cost efficiency through the
implementation of economies of scale. It may also lead to tax gains and can even
lead to a revenue enhancement through market share gain.

The principal benefits from mergers and acquisitions can be listed as increased value
generation, increase in cost efficiency and increase in market share.
Mergers and acquisitions often lead to an increased value generation for the
company. It is expected that the shareholder value of a firm after mergers or
acquisitions would be greater than the sum of the shareholder values of the parent
companies.

An increase in cost efficiency is effected through the procedure of mergers and

acquisitions. This is because mergers and acquisitions lead to economies of scale.
This in turn promotes cost efficiency. As the parent firms amalgamate to form a
bigger new firm the scale of operations of the new firm increases. As output
production rises there are chances that the cost per unit of production will come
down.

An increase in market share is one of the plausible benefits of mergers and

acquisitions. In case a financially strong company acquires a relatively distressed
one, the resultant organization can experience a substantial increase in market
share. The new firm is usually more cost-efficient and competitive as compared to its
financially weak parent organization. It can be noted that mergers and acquisitions
prove to be useful in the following situations:

Firstly, when a business firm wishes to make its presence felt in a new market.
Secondly, when a business organization wants to avail some administrative benefits.
Thirdly, when a business firm is in the process of introduction of new products. New
products are developed by the R&D wing of a company.

Employee Benefits under Mergers and Acquisitions in US

The 'Employee Retirement Income Security Act' was enacted in 1974. It is also
known as ERISA. Since then programs for employee benefit have been a major
component of the balance and income statements of US business organizations.

Current law promulgations have attached supreme importance to the presence of

post retirement pension schemes and welfare benefit schemes as a part of corporate
obligation. As a result employee benefit programs are affecting the viability of
mergers and acquisitions in the USA.

Expenses accruing due to employee benefit programs may not be fully reflected in a
company's balance sheet. Some employee benefit obligations may arise out of a
change in the corporate structure of a firm. Retirement income schemes and benefit
plans may vary from company to company. Companies going for mergers and
acquisitions strive to iron out the internal differences to maintain a specified level of
employee satisfaction.

Recent Mergers and Acquisitions

Mergers and Acquisitions have been very common incidents since the turn of the
20th century. These are used as tools for business expansion and restructuring.
Through mergers the acquiring company gets an expanded client base and the
acquired company gets additional lifeline in the form of capital invested by the
purchasing company. Recent mergers and acquisitions authenticate such a view.

The Long Success International (Holdings) Ltd merged with City Faith Investments
Ltd on the 8th of April 2008. The value of the merger was US $3.2 million. The
agency in this instance was Bermuda Monetary Authority, Hong Kong Stock
Exchange and other regulatory authority that was unspecified.

Novartis AG acquired 25% stake in Alcon Inc. This acquisition was worth 73,666
million common shares of the company. They bought this stake from Nestle SA for
$10.547 billion by paying $143.18 for every share. It was a privately negotiated
transaction that needed to have a regulatory approval. Simultaneously, Novartis AG
also received an offer of 52% interest that was equivalent of 153.225 million
common shares of Alcon Inc.

Kinetic Concepts acquired each and every remaining common stock of LifeCell Corp
for $51 for each share. Their total offer was $1.743 billion. The deal was done in
accordance to regulatory approvals and the conventional closing conditions.

Kapstone Paper & Packaging Corp acquired the kraft paper mill as well as other
assets of MeadWestVaco.Corp. They paid them $485 million. The deal was conducted
as per the regulatory approvals, receipt of financing and conventional closing
conditions. This deal included a lumber mill in Summerville, hundred percent interest
in Cogen South LLC. The Chip mills in Kinards, Elgin, Andrews and Hampton in South
Carolina are also parts of this deal.

Petrofalcon Corp acquired the remaining shares of Anadarko Venezuela Co from

Anadarko Petroleum Corp. The deal was worth 428.46 million Venezuelan bolivar or
US $200 million. The deal was completed as per the regulatory approvals.

Discover Financial Services, LLC acquired Diners Club International Ltd from
Citigroup Inc. The deal was worth US $165 million. The deal was subjected to
regulatory approvals and normal closing conditions. Cobham PLC took over MMI
Research Ltd. The deal was worth ?16.6 million or $33.099 million. In this deal ?12.2
was paid in cash, ?1.4 million in loan notes and almost ?3 million in payments
related to profits.
WNS (Holdings) Ltd from India, took over the total share capital of Chang Ltd. The
deal was worth ?9.6 million. Of this amount ?8 million was to be paid in cash and the
rest was to be paid in payments related to profits.

AptarGroup Inc acquired the Advanced Barrier System wing of the CCL Industries
Inc. The deal was worth almost 9.4 million Canadian dollars. The entire amount was
paid on cash. Varian Inc from USA took over 23% stakes of Oxford Diffraction Ltd.
The deal was worth ? 4.6 million pounds. ? 3.5 million was paid in cash, and the rest
was to be paid from the profits made by the company.

Spice PLC took over Melton Power Services Limited. The deal was worth? 4.5
million. ?2.5 million was paid in cash and the rest was to be paid from the profits
made by the company. Spice PLC also got Utility Technology Ltd., GIS Direct Ltd,
and Line Design Solutions Ltd as part of the deal.

Atlas Iron Ltd. Took over a 19.9% stake in the Warwick Resources Ltd. This was
equivalent of 15.124 million new common stock of the Warwick Resources Ltd. They
paid A$ 3.781 million in a transaction that was privately negotiated. The transaction
was executed as per the approval from the shareholders. The selling price of the
shares was A$ 0.23 and it was based on the value of each share that stood at A$
0.25 on 4th of April 2008.
Republic Gold Ltd of Australia took over the remaining stocks of Vista Gold (Antigua)
from Vista Gold Corp. The deal was worth $3 million. Republic Gold also got the
Amayapampa project in Bolivia as a part of the deal. Manpower Software PLC took
over Key IT Systems Ltd. The deal was worth ?0.83 million. ?0.375 million was paid
in cash and the rest is supposed to be paid from profits.

Spice PLC took over Utility Technology Ltd. The deal was worth ?0.2 million – ?0.1
million was to be paid in cash and the rest was to be paid from the profits. As part of
this deal Spice PLC also acquired Melton Power Services Ltd, GIS Direct Ltd and Line
Design Solutions Ltd.

Spice PLC took over Line Design Solutions Ltd and GIS Direct Ltd. The total deal was
worth ?0.1 million and the entire amount was paid in cash. Spice PLC also acquired
Utility Technology Ltd and Melton Power Services Ltd as part of the deal.

Thomas Cook Group PLC acquired Elegant Resorts Ltd from Barbara Catchpole and
Geoff Moss. Australian Social Infrastructure Fund merged with API Fund. The deal
was subjected to regulatory approvals and shareholder. Greenbier Cos Inc took over
Roller Bearing Industries Inc., from AB SKF. Fijian Holdings Ltd has taken over
50.2% interest in RB Patel Group Ltd.

Honeywell International Inc has acquired Norcross Safety Products LLC from Odyssey
Investment Partners LLC. The deal was worth $1.2 billion. It was subjected to
various kinds of regular closing conventions and regulatory approvals.

References:

http://dssresearch.com
http://www.burke.com.
http://www.research-int.com
http://www.economywatch.com/mergers-acquisitions/international/recent.html
www.wikepedia.com

Prof. Ajit Kumar Bansal

Asst. Professor
Faculty of Management Studies
Graphic Era University
Dehradun

Source: E-mail June 17, 2010

 M&A Activity U.S. and U.S. Cross-Border Transactions
Top 10 Deals for Year 2008

Value ($mm)(1) Announce Date Seller Unit Sold Buyer

$66,809.44 1/26/2009 Wyeth Pfizer, Inc.
$50,613.03
6/11/2008 Anheuser-Busch Cos., Inc. InBev SA
$46,391.47
$44,291.31
9/14/2008 Merrill Lynch & Co., Inc. Bank of America Corp.
$38,406.36
$31,804.41 7/21/2008 Genentech, Inc. Roche Holding AG
$27,000.00 3/9/2009 Schering-Plough Corp. Merck & Co., Inc.
$27,000.00
$27,000.00 Verizon Communications, Inc. / Vodafone
6/5/2008 Alltel Corp.
Group PLC
$27,000.00
Verizon Communications, Inc. / Vodafone
6/5/2008 Alltel Corp.
Group PLC
Verizon Communications, Inc. / Vodafone
6/5/2008 Alltel Corp.
Group PLC
Verizon Communications, Inc. / Vodafone
6/5/2008 Alltel Corp.
Group PLC

4/28/2008 William Wrigley Jr. Co. Mars, Inc.

M&A Activity Europe

Top 10 Deals of 2008 as of 4/25/2009
 Announce Date Seller Unit Sold Buyer
6/11/2008 Anheuser-Busch Cos., Inc. InBev SA
7/21/2008 Genentech, Inc. Roche Holding AG
2/1/2008 Rio Tinto PLC Aluminum Corp. of China Ltd.
12/1/2008 Sacyr Vallehermoso SA Itinere Infraestructuras SA Citigroup, Inc.
3/31/2008 V&S Vin & Sprit AB Pernod Ricard SA
7/11/2008 Citigroup, Inc. Citibank Privatkunden AG & Co. KGaA Groupe CM-CIC
7/7/2008 APP Pharmaceuticals, Inc. Fresenius SE
12/3/2008 Constellation Energy Group, Inc. Constellation Energy Nuclear Group LLC Électricité de France SA
3/14/2008 SSAB Svenskt Stål AB IPSCO Tubulars, Inc. Lanebrook Ltd.
Value ($mm) (1)
6/3/2008 RAG-Stiftung Evonik Industries AG CVC Capi
$50,613.03
$44,291.31
$14,135.25
$9,933.14
$8,374.06
$7,795.66
$4,667.31
$4,500.00
$4,025.00
$3,710.52

&A Activity Asia

Top 10 Deals of 2007
Value ($mm) Announce Date Seller Unit Sold Buy
(1)
Solectron
6/4/2007 Flextronics International L
Corp.
$3,622.09
2/11/2007 Novelis, Inc. Hindalco Industries Ltd.
KKR & Co.
9/20/2007 FL Selenia SpA Petroliam Nasional Bhd.
$3,388.41 LLC
United Test
6/26/2007 & Assembly Global A&T Electronics Ltd
$1,408.65 Center Ltd.
Chembulk
10/14/2007 PT Berlian Laju Tanker Tb
Tankers LLC
$1,169.65
MMI
4/5/2007 Precision Capital Pte Ltd.
Holdings Ltd.
$850.00 CII Carbon
6/1/2007 Rain Calcining Ltd.
LLC
CDC Group
$664.48 5/26/2007 Globeleq Ltd. /Latin American & Caribbean Ops/ Globeleq Ltd. /Latin Amer
PLC
General
8/27/2007 GE Capital Auto Lease Services Solution PCL Bank of Ayudhya Public C
$595.00 Electric Co.

Infocrossing,
8/6/2007
$568.00 Inc.

$502.04

$416.16