CORPORATE SECURITIES LAW

CLASS PRESENTATION 1
TOPIC- FUNDAMENTALS OF MERGERS
MANVESH VATS

A merger is a corporate strategy of combining different companies into a single company in

order to enhance the financial and operational strengths of both organizations.  
Example:
A merger usually involves combining two companies into a single larger company. The
combination of the two companies involves a transfer of ownership, either through
a stock swap or a cash payment between the two companies. In practice, both companies
surrender their stock and issue new stock as a new company. 
There are several types of mergers. For example, horizontal mergers may happen between two
companies in the same industry, such as banks or steel companies. Vertical mergers occur
between two companies in the same industry value chain, such as a supplier or distributor or
manufacturer. Mergers between two companies in related, but not the same industry are
called concentric mergers. These mergers can use the same technologies or skilled workforce to
work in both industry segments, such as banking and leasing. Finally, conglomerate mergers
occur between two diversified companies that may share management to improve economies
of scale for both companies.
A merger sometimes involves new branding or identity of the merged companies. Otherwise, a
merger may lead to a combination of the names of the two companies, capitalizing on the
brand identity of both companies.

Why it matters ?
Mergers may result in a stronger company with combined assets, competencies, and markets.
At the same time, mergers may result in a dilution of the financial strengths of one of the
companies, particularly if the new company results in the issuance of more stock across the
same asset base of the two merged companies. Finally, mergers often fail because of the clash
of corporate cultures between the two companies, a reluctance to restructure redundant
management and operations, incompatibilities of the technologies used by the companies, and
disruptions in the workforce.
Because mergers are difficult to implement, most ultimately take the form of an acquisition,
that is, the purchase of a weaker company by a stronger company.

Objects, Reasons & Advantages of Mergers

1. Synergistic operational advantages –
Coming together to produce a new / enhanced effect compared to separate effects.
2. Economies of scale (scale effect) –
Reductions in the average cost of production, & hence in the unit costs, when output is
increased,
Enable to offer products at more competitive prices & to capture a larger market share.
3. Reduction in expenses -
Production, administrative, selling, legal & professional.
4. Benefits of integration –
Reducing competition; saving costs by reducing overheads;
Capturing a larger market share;
Pooling technical / financial resources; cooperating on R&D; etc.
5. Optimum use of capacities & factors of production.
6. Diversification:
Co. can go for diversification of production (GE, Honeywell, Wipro)
7. Tax advantages –
Carry forward & set off of losses of a loss-making amalgamating Co. against profits of a profit-
making amalgamated Co., e.g. Sec. 72A, Income-Tax Act, 1961.
8. Overcome Financial constraints – Going for Expansion –
A Co. - has the capacity to expand but cannot do so due to financial constraints may opt for
merging into another Co. which can provide funds for expansion.
10. Loss of objectives of Co’s set up as independent entities / Survival
11. Competitive advantage:
Factors that give a Co. an advantage over its rivals
12. Eliminating / weakening competition
13. Revival of a weak / sick Co.
14. Sustaining growth

The Structure of Mergers

Mergers may be structured in multiple different ways, based on the relationship between the
two companies involved in the deal.
 Horizontal merger: Two companies that are in direct competition and share the same
product lines and markets.
 Vertical merger: A customer and company or a supplier and company. Think of a cone
supplier merging with an ice cream maker.
 Congeneric mergers: Two businesses that serve the same consumer base in different
ways, such as a TV manufacturer and a cable company.
 Market-extension merger: Two companies that sell the same products in different
markets.
 Product-extension merger: Two companies selling different but related products in the
same market.
 Conglomeration: Two companies that have no common business areas.

Mergers may also be distinguished by following two financing methods--each with its own
ramifications for investors.
 Purchase Mergers: As the name suggests, this kind of merger occurs when one company
purchases another company. The purchase is made with cash or through the issue of
some kind of debt instrument. The sale is taxable, which attracts the acquiring
companies, who enjoy the tax benefits. Acquired assets can be written-up to the actual
purchase price, and the difference between the book value and the purchase price of
the assets can depreciate annually, reducing taxes payable by the acquiring company.
  Consolidation Mergers: With this merger, a brand new company is formed, and both
companies are bought and combined under the new entity. The tax terms are the same
as those of a purchase merger.

Regulatory Framework
Applicable Indian Laws
 Companies Act, 1956 – [Sec 391-394]
 Listing Agreement
 Accounting Standard – 14
 SEBI Takeover Code (in case of acquisition by/of a listed company)
 Company Court Rules
 FEMA (in case of merger of companies having foreign capital)
 Competition Act, 2002
 Income Tax Act, 1961
 Indian Stamp Act

Tricky issues- how decided

Stamp duty on mergers:
Two school of thoughts prevailing:
1. Transfer of property in a scheme happens by way of vesting, pursuant to a court order,
and therefore, cannot be regarded as an therefore, cannot be regarded as an instrument.
2. Scheme is a voluntary act by Parties and the court merely puts its stamp of approval on
court merely puts its stamp of approval on what the parties desire (followed by
Maharashtra, Gujarat, Karnataka and Rajasthan)

Example-
RIL- RPL MERGER Reliance Industries Limited is an Indian Conglomerate holding
organisation headquartered in Mumbai, India. Reliance is the most beneficial organisation in
India. It is the second biggest traded company in India. Reliance Petroleum Limited(Douma,
George, and Kabir 2006) was set by Reliance Industries Limited, one of the India‟s baddest
private sector company situated in Ahmedabad (Saha 2009). Right now, Reliance
Industries(Mantravadi and Reddy 2008) assuming control Reliance Petroleum Limited at the cost
of 8500 crores or $1.6 billion.

Case-Hindustan Lever Employees’ Union v. Hindustan Lever Ltd., AIR 1995 SC 470

Principles laid down by the Supreme Court in Hindustan Lever Employees’ Union v. Hindustan
Lever Ltd., AIR 1995 SC 470
 Valuation is an art, not an exact science
 A combination of the yield method, asset value method and market value method was
used was used
 Courts not to generally question valuation done by independent professional expert and
approved by the shareholders
 Valuation of experts not to be set aside in the absence of fraud or malafides on the part of
experts