Introduction

Business combinations which may take forms of merger, acquisitions, amalgamation and
takeovers are important features of corporate structural changes. They have played an important
role in the financial and economic growth of a firm.

Merger is a combination of two or more companies into one company. One or more companies
may merge with an existing company or they may merge to form a new company

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.

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 & Acquisitions. Many have argued that mergers increase value and efficiency
and move resources to their highest and best uses, thereby increasing shareholder value.

With the liberalization of the Indian economy in 1991, restrictions on Mergers and Acquisitions
have been lowered. The numbers of Mergers and Acquisitions have increased many times in the
last decade compared to the slack period of 1970-80s when legal hurdles trimmed the M&A
growth.
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.

Merger or amalgamation may take two forms:

 Merger through absorption

 Merger through consolidation

Absorption:
In absorption, one company acquires another company. All companies except one lose their
identity in merger through absorption.

Consolidation:

In a consolidation, two or more companies combine to form a new company. In this form of
merger, all companies are legally dissolved and a new entity is created. In consolidation, the
acquired company transfers its asset, liabilities and shares to the acquiring company for cash or
exchange of shares.

Acquisition:

A fundamental characteristic of merger (either through absorption or consolidation) is that the

acquiring company (existing or new) takes over the ownership of other companies and combines
their operations with its own operations. In an acquisition two or more companies may remain
independent, separate legal entity, but there may be change in control of companies.

Takeover:

A takeover may also define as obtaining of control over management of a company by another.
Under the Monopolies and Restrictive Trade Practices Act, takeover means acquisition of not
less than 25% of the voting power in a company. If a company wants to invest in more than 10%
of the subscribe capital of another company, it has to be approved in the shareholders general
meeting and also by the central government. The investment in shares of other companies in
excess of 10% of the subscribed capital can result into their takeover.

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: -

Procurement of supplies:

Revamping production facilities:

Market expansion and strategy:

Financial strength:

Strategic purpose:

Desired level of integration:

Reasons for Merger

The reason of merger can be broadly explain as follows:

1. Accelerated Growth:
2. Enhanced Profitability:
3. Utilization of surplus funds:
4. Managerial Effectiveness:
5. Diversification of Risk:
6. Lower Financing Costs:
Types of Mergers

Merger or acquisition depends upon the purpose of the offer or company it wants to
achieve. Based on the offers’ objectives profile, combinations could be vertical, horizontal,
circular and conglomeratic as precisely described below with reference to the purpose in view of
the offer or company.

Vertical combination

A company would like to take over 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

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.

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.
 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 company’s total portfolio of diverse products and
production processes

Procedures for Merger and Acquisition

The following is the procedures for merger or acquisition is fairly long dawn. Normally it
involves the following steps:

 Permission for merger

Two or more firm can amalgamate only when amalgamation is permitted under their
memorandum of association. Also, the acquiring firm should have the permission in its object
clause to carry on the business of the acquired company. In the absence of these provisions in the
memorandum of association, it is necessary to seek the permission of the shareholders, board of
directors and the Company Law Board before affecting the merger.

 Information to the stock exchange

The acquiring and the acquired companies should inform the stock exchange where they
are listed about the merger.

 Approval of board of directors

The boards of the directors of the individual firm should approve the draft proposal for
amalgamation and authorize the managements of companies to further pursue the proposal.
 Application in the High Court

An application for approving the draft amalgamation proposal duly approved by the
board of directors of the individual firm should be made to the High Court. The High Court
would convene a meeting of the shareholders and creditors to approve the amalgamation
proposal. The notice of meeting should be sent to them at least 21 days in advance.

 Shareholders and Creditors meetings

The individual firm should hold separate meetings of their shareholders and creditors for
approving the amalgamation scheme. At least 75% of shareholders and creditors in separate
meeting, voting in person or by proxy, must accord their approval to the scheme.

 Sanction by the High Court

After the approval of shareholders and creditors on the petitions of the companies, the
High Court will pass order sanctioning the amalgamation scheme after it is satisfied that the
scheme is fair and reasonable. If it deems so, it can modify the scheme. The date of the court’s
hearing will be published in two newspapers and also the Regional Director of the Law Board
will be intimated.

 Filing of the Court order

After the Court order its certified true copies will be filed with the Registrar of
Companies.

 Transfer of asset and liabilities

The asset and liabilities of the acquired firm will be transferred to the acquiring firm in
accordance with the approved scheme, with effect from the specified date.

 Payment by cash or securities

As per the proposal, the acquiring firm will exchange shares and debentures and pay
cash for the shares and debentures of the acquired firm. These securities will be listed on the
stock exchange.
Benefits of Mergers

1. Limit competition
2. Utilize under-utilized market power
3. Overcome the problem of slow growth and profitability in one’s own industry
4. Achieve diversification
5. Gain economies of scale and increase income with proportionately less investment
6. Establish a transnational bridgehead without excessive start-up costs to gain access to a
foreign market.
7. Utilize under-utilized resources- human and physical and managerial skills.
8. Displace existing management.
9. Circum government regulations.
10. Reap speculative gains attendant upon new security issue or change in P/E ratio.
11. Create an image of aggressiveness and strategic opportunism, empire building and to amass
vast economic power of the company.

Valuations of Merger

Any understanding on M&A is incomplete without a discussion on valuation. During the course
of a merger procedure, normally a Chartered Accountant or a category-I Merchant Banker is
appointed to work out the value of shares of companies involved in the merger. Based on the
values so computed the exchange ratio is worked out. It is the value at which a buyer and seller
would make a deal. There are certain basic factors, which determine the value of a company's
share. As these are very subjective factors, valuations generally vary from case to case depending
on assumptions and future projections. The following steps are involved in the valuation of a
merger which can be broadly discussed as follows:

 Identify growth and profitability assumptions and scenarios

 Project cash flows
 Estimate the cost of capital
 Compute NPV (Net Present Value) for each scenario
 Decide if the acquisition is attractive on the basis of NPV
  Decide if the acquisition should be financed through cash or exchange of shares
 Evaluate the impact of the merger on EPS (Earning Per Share) and PE (Price-earnings
ratio)

Cash Flow approach

In a merger or acquisition the acquiring firm is buying the business of the target firm rather than
a specific asset. Thus merger is a special type of capital budgeting decision. This should include
the effect of operating efficiencies and synergy. The acquiring firm should appraise merger as a
capital budgeting decision. The acquiring firm incurs a cost (in buying the business of the target
firm) in the expectation of a stream of benefits (in the form of cash flows) in the future.

Cash Flow = EBIT (1-T) + Depreciation – Changes in Working Capital – Changes in Capital
Expenditure

Earnings Per Share (EPS) and P/E (Price Earning) ratio

In practice, investor attaches a lot of importance to the earning per share (EPS) and the price
earning (P/E) ratio. The EPS and P/E ratio is the market price per share

Exchange Ratio

The current market value of the acquiring and the acquired firms may be taken as
the basis for exchange of shares.

Exchange Ratio = Share price of the acquired firm/Share price of the acquiring firm.

M&A adding value to banking sector

Technology drive has benefited the customers in terms of faster improve convenient banking
services and Varity of financial products to suit their requirement. Atms, Phone Banking, Net
banking, Any time and Any where banking are the services which bank have started offering
following the changing trend in sectors. In plastic money segment customer have also got a new
option of debits cards against the earlier popular credit card. Earlier customers had to conduct
their banking transaction within the restricted time frame of banking hours. Now banking hours
are extended. Atms ,Phone banking and Net banking had enable the customer to transact as per
their convince customer can now without money at any time and from any branch across country
as certain their account transaction, order statements of their account and give instruction using
the tally banking or on online banking services. Bank traditionally involve working capital
financing have started offering consumer loans and housing loans. Some of the banks have
started offering travel loans, as well as many banks have started capitalizing on recent capital
market boom by providing IPO finance to the investors.

Mergers in the Banking Sector

ICICI Bank

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest
private bank. ICICI Bank has total assets of about Rs.20.05bn (end-Mar 2005), a network of over
550 branches and offices, and about 1900 atms. The industrial Credit and Investment
Corporation of India Limited now known as ICICI Ltd. Was founded b the World Bank, the
Government of India and representatives of private industry on January 5, 1955. The objective
was to encourage and assist industrial development and investment in India. Over the years,
ICICI has evolved into a diversified financial institution. ICICI’s principal business activities
include:

 Project Finance
 Infrastructure Finance
 Corporate Finance
 Securitization
 Leasing
 Deferred Credit
 Consultancy services
 Custodial services
ICICI Bank is a focused banking company coping with the changing times of the banking
industry. So it can be a lucrative target for other player in the same line of operations. However,
when merged with ICICI Limited the attraction is reduced manifold considering the magnitude
of operations of the ICICI limited.

Of course, one would still need a bank to open letters of credit, offer guarantees, handle
documentation, and maintain current account facilities etc. So banks will not superfluous. But
nobody needs so many of them anymore.

Secondly, besides credit, a customer may also want from a bank efficient cash management,
advisory services and market research on his product. Thus the importance of fee based is
increasing in comparison with the fund-based income.

The pre--merger status of ICICI Bank is as follows: it had liabilities of Rs.12,073 crore, equity
market capitalization of Rs.2,466 crore and equity volatility of 0.748. Working through options
reasoning, we find that this share price and volatility are consistent with assets worth Rs.13,249
crore with volatility 0.15. Thus, ICICI bank had assets which are 9.7% ahead of liabilities, which
is roughly consistent with the spirit of the Basle Accord, and has leverage of 5.37 times.

 In 2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a Chettiar bank,
and had acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank (established 1904)
in the 1960s.

 In 2002 The Boards of Directors of ICICI and ICICI Bank approve the merger of ICICI,
ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI
Bank. After receiving all necessary regulatory approvals, ICICI integrates the group's
financing and banking operations, both wholesale and retail, into a single.
Changes after the merger

While, BOM had an attractive business per employee figure of Rs.202 lakh, a better
technological edge and had a vast base in southern India when compared to Federal bank. While
all these factors sound good, a cultural integration would be a tough task ahead for ICICI Bank.

ICICI Bank has announced a merger with 57-year-old Bank of Madure, with 263
branches, out of which 82 of them are in rural areas, with most of them in southern India. As on
the day of announcement of merger) 09-12-00), Kotak mahindra group was holding about 12
percent stake in BOM, the Chairman BOM, Mr.K.M. Thaiagarajan, along with his associates
was holding about 26 percent stake, Spic groups has about 4.7 percent, while LIC and UTI were
having marginal holdings. The merger will give ICICI Bank a hold on South India market, which
has high rate of economic development.

The board of Director at ICICI has contemplated the following synergies emerging from the
merger:

Financial Capability: The amalgamation will enable them to have a stronger financial and
operational structure, which is supposed to be capable of greater resourger/deposit mobilization.
And ICICI will emerge a one of the largest private sector banks in the country.

Branch network: The ICICI’s branch network would not only 264, but also increases
geographic coverage as well as convenience to its customers.

Customer base: The emerged largest customer base will enable the ICICI bank to offer banking
financial services and products and also facilitate cross-selling of products and services of the
ICICI groups.

Tech edge: The merger will enable ICICI to provide atms, Phone and the Internet banking and
finical services and products and also facilitate cross-selling of products and services of the
ICICI group.
Focus on Priority Sector: The enhanced branch network will enable the Bank to focus on
micro-finance activities through self-help groups, in its priority sector initiatives through its
acquired 87 rural and 88 semi-urban branches.

IDBI – UNITED WESTERN MERGER BANK

The merger that was announced on , 2006 between Deutsche Bank and Dresdner Bank,
Germany’s largest and the third largest bank respectively was considered as Germany’s 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 Bank’s 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, had
negotiations for a merger between Deutsche and Dresdner Bank failed on April 5, 2000.

The main issue of the failure was Dresdner Bank’s investment arm, Kleinwort Benson, which the
executive committee of the bank did not want to relinquish under any circumstances.
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 Bank’s investment arm.

Deutsche Bank’s asset management had only integrated with London’s investment group
Morgan Grenfell and the American Banker’s trust. This division alone contributed over 60% of
Deutsche Bank’s 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 Germany’s 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.