Merger and

Acquisition

COURSE INSTRUCTOR
MR. RUPENDRA SINGH
 Basic Concepts
There are primarily two ways of growth of business organization,
i.e. organic and inorganic growth.
Organic growth is through internal strategies, which may relate
to business or financial restructuring within the organization
that results in enhanced customer base, higher sales, increased
revenue, without resulting in change of corporate entity.
Inorganic growth provides an organization with an avenue for
attaining accelerated growth enabling it to skip few steps on the
growth ladder.
Restructuring through mergers, amalgamations etc., constitute one
of the most important methods for securing inorganic growth.
• The business environment is rapidly changing with respect to
technology, competition, products, people, geographical area,
markets, customers.
• It is not enough if companies keep pace with these changes
but are expected to beat competition and innovate in order to
continuously maximize shareholder value.
• Inorganic growth strategies like
• mergers,
• acquisitions,
• takeovers and
• spinoffs
• Help companies to enter new markets, expand customer base,
cut competition, consolidate and grow in size quickly, employ
new technology with respect to products, people and processes.
Thus, the inorganic growth strategies are regarded as fast track
corporate restructuring strategies
Corporate Restructuring Defined

Restructuring as per Oxford

dictionary means “to give a
new structure to, rebuild or
rearrange”.
As per Collins English dictionary, meaning of corporate
restructuring is a change in the business strategy of an
organization resulting in diversification, closing parts of the
business, etc, to increase its long-term profitability.

Corporate restructuring is the process of significantly

changing a company's business model, management
team or financial structure to address challenges and
increase shareholder value. Corporate restructuring is
an inorganic growth strategy.
Corporate Restructuring is concerned with
arranging
The business activities of the corporate as a whole so as to achieve
certain predetermined objectives at corporate level.

Such objectives include the following:

— orderly redirection of the firm's activities;

— deploying surplus cash from one business to finance profitable

growth in another;

— exploiting inter-dependence among present or prospective

businesses within the corporate portfolio;

— risk reduction; and

— development of core competencies.

• The scope of Corporate Restructuring encompasses enhancing
economy (cost reduction) and improving efficiency
(profitability).
•

• When a company wants to grow or survive in a competitive

environment, it needs to restructure itself and focus on its
competitive advantage.
•

• The survival and growth of companies in this environment

depends on their ability to pool all their resources and put
them to optimum use.
•
Corporate Restructuring .....an Example

• ABC Limited has surplus funds but it is not able to consider any
viable projects.
• Whereas XYZ Limited has identified viable projects but has no
money to fund the cost of the project.
• The merger of ABC Limited and XYZ Limited is a mutually
beneficial option and would result in positive synergies of both
the Companies.
The various needs for undertaking a Corporate Restructuring exercise are as
follows:
1. Globalization of business caused restructuring, because in this era only
the lowest cost producers can survive.
2. Change in fiscal and government polices like deregulation/decontrol
has led many companies to go for newer markets
3. Information technology motivates many companies to adopt new
technology for technological advancement of the company.
4. Quality enhancement and cost reduction has necessitated downsizing
of work force both at work and managerial levels.
5. Economic value of currency and foreign exchange rate implications
6. Focus on core business and to develop synergies has established
Benefits of Corporate Restructuring

1. Diversification of product and service

offerings
2. An increase in plant capacity
3. Larger market share
4. Utilization of operational expertise and 
research and development (R&D)

5. Reduction of financial risk

Planning , formulation and Execution

1. Restructuring strategies Corporate restructuring strategies depends

on the nature of business, type of diversification required and
results in profit maximization through pooling of resources in
effective manner.
• 2. Planning the type of restructuring requires detailed business
study, expected business demand, available resources, utilized/idle
portion of resources, competitor analysis, environmental impact etc.
• 3. The bottom line is that the right restructuring strategy provides
optimum synergy for the organizations involved in the restructuring
process.
• 4. It involves examination of various aspects before and after the
restructuring process.
Aspects to be considered at
Planning Stage
• The restructuring process requires various aspects to be considered
before, during and after the restructuring. They are
• •Valuation & Funding
• •Legal and procedural issues
• •Taxation and Stamp duty aspects
• •Accounting aspects
• •Competition aspects etc.
• •Human and Cultural synergies
• Based on the analysis of various aspects, a right type of strategy is
chosen.
CORPORATE RESTRUCTURING -
HISTORICAL BACKGROUND: Indian
context
• In earlier years, India was a highly regulated economy.
• Though Government participation was overwhelming, the
economy was controlled in a centralized way by Government
participation and intervention.
• In other words, economy was closed as economic forces such as
demand and supply were not allowed to have a full fledged
liberty to rule the market.
• There was no scope of realignments and everything was controlled.
• In such a scenario, the scope and mode of Corporate
Restructuring were very limited due to restrictive government
policies and rigid regulatory framework.
• These restrictions remained in vogue, practically, for over two
decades.
• These, however, proved incompatible with the economic system in
keeping pace with the global economic developments if the
objective of faster economic growth were to be achieved.
• The Government had to review its entire policy framework and
under the economic liberalization measures removed the above
restrictions by omitting the relevant sections and provisions.
• The real opening up of the economy started with the Industrial
Policy, 1991 whereby 'continuity with change' was emphasized and
main thrust was on relaxations in industrial licensing, foreign
investments, transfer of foreign technology etc.
• With the economic liberalization, globalization and opening up of
economies, the Indian corporate sector started restructuring to
meet the opportunities and challenges of competition.
• The economic and liberalization reforms, have transformed the
business scenario all over the world.
• The most significant development has been the integration of
national economy with 'market-oriented globalized economy'.
• The multilateral trade agenda and the World Trade Organization
(WTO) have been facilitating easy and free flow of technology,
capital and expertise across the globe.
• A restructuring wave is sweeping the corporate sector all over the
world, taking within its fold both big and small entities, comprising
old economy businesses, conglomerates and new economy
companies and even the infrastructure and service sector.
• From banking to oil exploration and telecommunication to power
generation, petrochemicals to aviation, companies are coming
together as never before.
• Not only this new industries like e-commerce and biotechnology
have been exploding and old industries are being transformed
• With the increasing competition and the economy, heading towards
globalization, the corporate restructuring activities are expected to
occur at a much larger scale than at any time in the past.
• Corporate Restructuring play a major role in enabling enterprises to
achieve economies of scale, global competitiveness, right size, and a
host of other benefits including reduction of cost of operations and
administration.
Corporate
Restructuring
Merger is the combination of two
or more companies which can be
merged together either by way of
amalgamation or absorption or by
formation of a new company.

A + B = AB
(i) Horizontal Merger: It is a merger of two or more
companies that compete in the same industry.
(ii) Vertical Merger: It is a merger which takes place upon the

combination of two companies which are operating in the

same industry but at different stages of production or
distribution system.
(iii) Co generic Merger: It is the type of merger, where two

companies are in the same or related industries but do not

offer the same products, but related products and may share
similar distribution channels, providing synergies for the
merger.
(iv) Conglomerate Merger: Conglomerate mergers are merger
of different kinds of businesses under one flagship
company. The purpose of merger remains utilization of
financial resources enlarged debt capacity and also synergy
of managerial functions.
3. Reverse Merger Reverse merger is the opportunity for the
unlisted companies to become public listed company, without
opting for Initial Public offer (IPO).
In this process the private company acquires the majority
shares of public company, with its own name.
4. Forward merger: In a forward merger, the target merges
into the buyer. For e.g., when ICICI Bank acquired Bank of
Madura, Bank of Madura which was the target, merged with
the acquirer, ICICI Bank.
5. Subsidiary merger: A subsidiary merger is said to occur
when the buyer sets up an acquisition subsidiary which
merges into the target.
 Takeover/Acquisition

Takeover occurs when an acquirer takes over the control of the

target company. It is also known as acquisition. Normally this
type of acquisition is undertaken to achieve market supremacy.
It may be friendly or hostile takeover.

A + B = A
•

• One company takes over

the management of the
Friendly
target company with the
permission of the board.
takeover
•

• One company
the managem
target compan
its knowledge
against the wi
Board.
A merger occurs when two separate
entities, usually of comparable size,
combine forces to create a new, joint
organization in which both are
equal partners
Old company cease to exist and a new
company emerges
It requires two companies to
consolidate into a new entity with a
new ownership and management
Structure
An acquisition refers to the purchase
of one entity by another (usually, a
smaller firm by a larger one)
A new company does not emerge
It occurs when one company takes
over all of the operational
management decisions of another
Demerger

• It is a form of corporate restructuring in which the entity's

business operations are segregated into one or more
components.
• A demerger is often done to help each of the segments
operate more smoothly, as they can focus on a more
specific task after demerger.
 Disinvestment

• Disinvestment means the action of an organization or

government selling or liquidating an asset or subsidiary.
• It is also known as "divestiture".
Joint Venture (JV)

• A joint venture is an entity formed by two or more companies to undertake financial

activity together.
• The parties agree to contribute equity to form a new entity and share the revenues,
expenses, and control of the company.
• It may be Project based joint venture or Functional based joint venture.

Project based Joint venture:

The joint venture entered into by the companies in order to achieve a specific task is
known as project based JV.

Functional based Joint venture:

 Strategic Alliance

Any agreement between two or more parties to collaborate with

each other, in order to achieve certain objectives while continuing
to remain independent organizations is called strategic alliance.
Franchising

• Franchising may be defined as an arrangement

where one party (franchiser) grants another
party (franchisee) the right to use trade name
as well ascertain business systems and process,
to produce and market goods or services
according to certain specifications.
• The franchisee usually pays a one-time
franchisee fee plus a percentage of sales
 Slump sale

• Slump sale means the transfer of one or more undertaking as a result of the
sale for a lump sum consideration without values being assigned to the
individual assets and liabilities in such sales.
• If a company sells or disposes of the whole or substantially the whole of its
undertaking for a predetermined lump sum consideration, then it results in a
slump sale.
 Expanding role of professionals in corporate
restructuring process
The restructuring process does not only involve strategic decision making based
on the market study, competitor analysis, forecasting of synergies on various
respects, mutual benefits, expected social impact etc,
BUT also the technical and legal aspects such as valuation of organizations
involved in restructuring process, swap ratio of shares if any, legal and procedural
aspects with regulators such as Registrar of Companies, High Court etc., optimum
tax benefits after merger, human and cultural integration, stamp duty cost
involved etc.
• It involves a team of professionals including business experts,
Company Secretaries, Chartered Accountants, HR professionals, etc.,
who have a role to play in various stages of restructuring process.
• The Company Secretaries being the vital link between the
management and stakeholders are involved in the restructuring
process through out as co-coordinator in addition to their
responsibility for legal and regulatory compliances.
 AMALGAMATION

Amalgamation is the combination of one or more companies

into a new entity. An amalgamation is distinct from
a merger because neither of the combining companies survives
as a legal entity; a completely new entity is formed to house the
combined assets and liabilities of both companies.

A B C
Amalgamation

• The word “amalgamation” is not defined under the Act whereas

section 2(1B) of Income Tax Act, 1961 defines Amalgamation as:
• “Amalgamation”, in relation to companies, means the merger of
one or more companies with another company or the merger of two
or more companies to form one company.
 Types of Mergers :

• Horizontal Merger: It is a merger of two or more companies

that compete in the same industry. They serve the same market
and sell the same product.
(i)

• Horizontal mergers are designed to achieve economies of

scale and result in reducing the number of competitors in the
industry.
Vertical Merger: It is a merger which takes place upon the
combination of two companies which are operating in the
same industry but at different stages of production or
distribution system.
•

• If a company takes over its

supplier/producers of raw
Backward
material, then it may result in
backward integration of its
activities.

• Forward integra
result if a comp
to take over the
Customer Com
Congeneric Merger: It is the type of merger, where two companies
are in the same or related industries but do not offer the same
products, but related products and may share similar distribution
channels, providing synergies for the merger. The potential
benefit from these mergers is high because these transactions offer
opportunities to diversify around a common case of strategic
resources.
Example: Citigroup’s acquisition of travelers insurance.
 Conglomerate Merger: These mergers involve firms engaged in
unrelated type of activities i.e. the business of two companies are
not related to each other horizontally or vertically. In a pure
conglomerate, there are no important common factors between
the companies in production, marketing, research and
development and technology.
A reverse takeover or reverse merger takeover(reverse IPO) is
the acquisition of a public company by a private company so that
the private company can bypass the lengthy and complex process
of going public. The transaction typically requires reorganization
of capitalization of the acquiring company.
 Facebook is a social
networking company that
has acquired more than 50
companies !!
Basic Understanding

• From a commercial and economic point of view, both types of

transactions generally result in the consolidation of assets and
liabilities under one entity, and the distinction between a "merger" and
an "acquisition" is less clear.
• Contemporary corporate restructurings are usually referred to as
merger and acquisition (M&A) transactions rather than simply a
merger or acquisition.
• In other words, the real difference lies in how the purchase is
communicated to and received by the target company's board of
directors, employees and shareholders.
TENDER OFFER

• One company offers to purchase the outstanding stock of the other

firm at a specific price.
• The acquiring company communicates the offer directly to the other
company's shareholders.
• Example: Johnson & Johnson made a tender offer in 2008 to acquire
Omrix Biopharmaceuticals for $438 million.
• India Cements gave an open market offer for the shares of Raasi
Cement.
ACQUISITION OF ASSETS

• In a purchase of assets, one company acquires the assets of another

company.
• The company whose assets are being acquired, obtain approval from
its shareholders.
• The purchase of assets is typical during bankruptcy proceedings,
where other companies bid for various assets of the bankrupt
company, which is liquidated upon the final transfer of assets to the
acquiring firm(s).
• For example, Laffarge of France acquired only the cement division of
Tata Group restricted itself to only 1.70 million tonne cement plant
and the assets relating to such divisions of Tata Group.
MANAGEMENT BUYOUT

• A management buyout (MBO) is a transaction where a company’s

management team purchases the assets and operations of the
business they manage.
• MBO is appealing to professional managers because of the greater
potential rewards from being owners of the business rather than
employees.
• According to global consultancy giant Grant Thornton, the overall
deal activity -- including both mergers and acquisitions and PE
(private equity) -- was about $59 billion in the January-November
period of 2017, a 9 per cent rise from the year 2016.
DEMERGER
• It is a business strategy in which a single business is broken into components,
either to operate on their own, to be sold or to be dissolved.
• A demerger allows a large company, such as a conglomerate, to split off its
various brands to invite or prevent an acquisition.
• To raise capital by selling off components that are no longer part of the
business's core product line, or
• To create separate legal entities to handle different operations.
• Demerger is an arrangement whereby some part/undertaking of one company
is transferred to another company which operates completely separate from the
original company.
• Shareholders of the original company are usually given an equivalent stake of
ownership in the new company.
• Demerger under Section 2(19AA) of the Income tax Act, 1961.
• Reliance Industries demerged to Reliance Industries and Reliance
Communications Ventures Ltd. Reliance Energy Ventures Ltd, Reliance Capital
Ventures Ltd, Reliance Natural Resources Ltd.
Spin-offs

• A spin-off occurs when a subsidiary becomes an independent entity.

The parent firm distributes shares of the subsidiary to its
shareholders through a stock dividend.
• Since this transaction is a dividend distribution, no cash is generated.
Thus, spin-offs are unlikely to be used when a firm needs to finance
growth or deals.
• Like the carve-out, the subsidiary becomes a separate legal entity
with a distinct management and board.
Split-offs

• In the case of split-off, a new company is created in order to

takeover the operations of an existing division or unit of a company.
• A portion of the existing shareholders of the company obtains stocks
in the subsidiary (i.e., the new company) in exchange for stocks of
the parent company.
Split-ups:

• It is a process of reorganizing a corporate structure.

• Whereby all the capital stock and assets are exchanged for those of
two or more newly established companies,
• Resulting in the liquidation of the parentcorporation.
Equity Carved outs
• Equity Carved outs more and more companies are using equity carve-outs to
boost shareholder value.
• A parent firm makes a subsidiary public through an Initial Public Offering (IPO) of
shares, amounting to a partial sell-off.
• A new publicly-listed company is created, but the parent keeps a controlling
stake in the newly traded subsidiary.
• A carve-out is a strategic avenue a parent firm may take when one of its
subsidiaries is growing faster and carrying higher valuations than other
businesses owned by the parent.
• A carve-out generates cash because shares in the subsidiary are sold to the
public, but the issue also unlocks the value of the subsidiary unit and enhances
the parent’s shareholder value.
•
In January 2017, the Government of India divested 10 per cent stake in Coal
India Limited through the offer-for-sale (OFS) route at Rs.358 per share and
brought its holding down to 79.65 per cent.
DEBT RESTRUCTURING

• It involves a reduction of debt and an extension of payment terms or

change in terms and conditions, which is less expensive.
• It is nothing but negotiating with bankers, creditors, vendors. It is
the process of reorganizing the whole debt capital of the company.
It involves the reshuffling of the balance sheet items as it contains the
debt obligation of the company.
Debt capital of the company includes secured long term borrowing,
unsecured long-term borrowing, and short term borrowings.
EQUITY
RESTRUCTURING
• It is a process of reorganizing the equity capital. It includes a reshuffling of
the shareholders capital and the reserves that are appearing on the balance
sheet.
• Restructuring equity means changing how the firm’s residual cash flows are
divided and distributed among the firms shareholders, with the goal of
increasing the overall market value of the firms common stock.
• Restructuring of equity and preference capital becomes complex process
involving a process of law and is a highly regulated area.
• The following comes under equity restructuring:
• • Alteration of share capital
• • Reduction of share capital
• Buy-back of shares