JAI NARAIN VYAS UNIVERSITY

FACULTY OF LAW
JODHPUR

SESSION – 2021-22

PROJECT REPORT

MERGER AND AMALGAMATION

SUBJECT – COMPANY LAW AND NEGOTIABLE

INSTRUMENT ACT

SUBMITTED BY SUBMITTED TO

DINESH CHOUDHARY PAMILA SHAH MAM’M

B.A.LL.B 8TH SEM

ROLL NO. 18BAL50016

 ACKNOWLDGMENT
I have taken lots of efforts in this assignment. However it would not have been
possible without the kind support of Mrs. PAMILA SHAH MAM’M sir. I
would like to express my sincere thanks to her.

I m highly indebted to jai Narayan vyas university for this guidance and
constant supervision as well as for providing necessary information regarding
this assignment.

I would like to express my gratitude towards my family and friends for their
kind cooperation and encouragement which helped me in completing my
assingnment.

My thanks also goes to those people who directly or indirectly helped me in

completing my project report.
CHAPTER 1

MERGER OF COMPANY

INTRODUCTION

 A company merger is when two companies combine to form a new

company.
 Companies merge to expand their market share, diversify products,
reduce risk and competition, and increase profits.
 Common types of company mergers include conglomerates, horizontal
mergers, vertical mergers, market extensions and product extensions.
 This article is for business owners who are considering merging their
company with another business.

A company merger can happen for many reasons. Although very few business
owners build their business in anticipation of one day merging with another
company, the right business mergers can be very beneficial. Learn about the
different types of mergers and their benefits. 

MEANING OF MERGER

A company merger occurs when two firms come together to form a new
company with one combined stock. Although a merger is typically thought of as
an equal split in which each side maintains 50% of the new company, that's not
always the case. In some mergers, one of the original entities gets a larger
percentage of ownership of the new company. 

A ―merge is kind of procedure when two or more than two companies merge
into one company. And their all shareholders or substantially all, exchanging
their shares (either voluntarily or as the results of legal operation) for shares in
the other or a third company21 .In such a case, two companies which may be
similar in size agree on becoming a single entity, thus forming an all new
company. This way the operation of the new company is operated at one place.
the process is termed as a merger. If a foreign company intends to merge with
company which is Indian entity, it can do so with the prior approval of RBI. The
Indian company must be registered under the Act and it is true for the opposite
case too. The merger might involve payment of consideration to shareholders of
the companies coming under the merger. The payment can be made either in
cash or in depository receipts which is drawn up for the purposes. Foreign
company in the discussion alludes to such a company that was established
outside India, whether it has its branches in India or not. Generally, the CEO's
of the two companies decide on the synergistic value of their companies
working together and decide on a merger. So, the merger often takes place when
two companies of equal sizes decide to come together as one. The stocks of the
two companies are surrendered, and fresh stocks are allocated to the new joint
venture. The legal rights and privileges lie with the head of both the companies.

TYPES OF MERGER/ACQUISATION

Companies merge and acquire each other for many different reasons.
From a hostile takeover to a friendly merger or a strategic alliance – there are
many ways companies can combine forces.
In this article we look at four of the main types of mergers and acquisitions and
provide a mini-case study of a well-known merger that did not turn out as
planned.

4 Types of Mergers and Acquisitions

Companies will merge together and acquire each other for a variety of reasons.
Here are four of the main ways companies join forces:

Horizontal Merger / Acquisition

Two companies come together with similar products / services. By merging
they are expanding their range but are not essentially doing anything new. In
2002 Hewlett Packard took over Compaq Computers for $24.2 billion. The aim
was to create the dominant personal computer supplier by combining the PC
products of both companies.

Vertical Merger / Acquisition

Two companies join forces in the same industry but they are at different points
on the supply chain. They become more vertically integrated by improving
logistics, consolidating staff and perhaps reducing time to market for products.
A clothing retailer who buys a clothing manufacturing company would be an
example of a vertical merger.

Conglomerate Merger / Acquisition

Two companies in different industries join forces or one takes over the other in
order to broaden their range of services and products. This approach can help
reduce costs by combining back office activities as well as reduce risk by
operating in a range of industries.
Concentric Merger / Acquisition
In some cases, two companies will share customers but provide different
services. An example would be Sony who manufacture DVD players but who
also bought the Columbia Pictures movie studio in 1989. Sony were now able to
produce films to be able to be played on their DVD players. Indeed, this was a
key part of the strategy to introduce Sony Blu-Ray DVD players.

Case Study – 1998 – Daimler Benz and Chrysler

Daimler Benz bought Chrysler in 1998 and combined to form Daimler Chrysler,
a $37 billion automotive giant that had a massive presence both sides of the
Atlantic. However, cultural clashes between the two companies were cited as a
key reason for the failure that led Daimler to selling Chrysler in 2007 for $7
billion.
In this case, the “efficient, conservative and safe” culture of Daimler clashed
with the “daring, diverse and creating” culture of Chrysler. The due diligence
work carried up front had not properly assessed the challenge both organisations
faced in working with each other.
Also, the transaction was described as a “merger of equals” and this was not the
reality within the new organisation. Chrysler had obviously been taken over and
there was little trust between the two organisations.
A failure on this scale shows the importance of a thorough and objective due
diligence process.

LAWS GOVERNING MERGER OR ACQUISATION

The Companies Act, 2013 has been heralded as a major milestone in the growth
of mergers and acquisitions in India. It is a replacement of the Companies Act,
1956. The new Act makes the process of mergers smoother and reduces the
litigation of shareholders. The new act ensures a business friendly environment,
more organized ways of doing business coupled with better governance and
lucidity. In order to achieve this, the Companies Act, 2013 has replaced the
power exercised by the High Court in governing mergers and acquisitions,
rather the power is now given to the National Company Law Tribunal (NCLT)
and National Company Law Appellate Tribunal (NCLAT) were provided
notification for the same on June 1, 2016. NCLT and NCLAT have started
functioning and already dealing with cases.

Providing the power of regulating mergers with NCLT, has been a welcoming
provision that would fasten the process of mergers and prevent the slow
proceedings of the court. The time required to get a merger approved would be
reduced. The Act also facilitates the merger of small companies without the
consent of the tribunal. It is only when the merger doesn't withstand the public
interest that it shall be governed by the NCLT

IMPACT OF MERGER OR ACQUISATION

1. Cutting down on workforce:

When two separate companies become one, there are many duplicate
departments that are formed. From these departments, the better ones are kept
and rest filtered. Many people thus lose their jobs as a consequence of mergers.
And when mergers and acquisitions fail, then too during lay-offs, staff is
thinned in order to save the cost of the company.

2. Management:

The management of the two companies don‘t get along easily. The process is
even more difficult when acquisition takes place, because in such a case
hierarchy of the acquiring company often dominates that of the acquired
company. Ego disrupts the functioning. Two different management strategies
under one roof makes it difficult to attain a single goal by sticking to one new
strategy.

3. Shareholders of acquiring firm:

Often the acquiring firm looses on its shareholders and is overtaken by the
acquired firm.

4. Shareholders of acquired firm:

They benefit from the acquisition. They are the ones who are aware of the
benefits and the drawbacks of the acquired firm. While, other consequences
highlighted by

5. Performance of merging firms:

The two firms now working together share their profits, growth rates, market
share and productivity. Thus, working together may either lead to gain amongst
all these. Or else,a downfall and a loss.

6. Can affect industry and aggregate concentration levels Mergers are prone to
more challenges mostly at the entry levels barriers. But law enforcement also is
found to be influenced significantly by political pressures on the antitrust
authorities from groups that stand to lose if a merger is approved, including
rivals worried that the transaction will create a more effective competitor.

7. Increase or decrease in share prices:

Often, while a merger is announced the shares of the acquiring and acquired
company undergoes change depending upon how the share market takes on the
mergers

CHARATERISTICS OF MERGER/ACQUISATION

1 Communication

During any Merger or Acquisition (M&A), communication is the key as these

types of events are very crucial in nature. This is not only applicable to
communication between the two executives or owners of both the companies in
question, but also the subordinates and employees. If proper and adequate
information is not passed on to the employees, they are going to look for other
jobs because they might lack security here. During such a critical process, low
employee retention can really be harmful to the company.

2 Growth and development

The main purpose of M&As is usually the growth and development of the
business. Any business that wants to grow has basically two options, either
acquire a company or just star up some new project. Only the rise in production
volume is not growth. Growth can be geographically, demographically, and in
products too. New goods and services can be brought up by the business which
is also called product/service expansion.

3 Transperency

Transparency is absolutely necessary throughout the M&A process. Right from

the initial discussion to the commencement of the new firm and after that too,
there must be open discussion and honest communication between the parties.
Everything must be made clear prior to avoid any confusions in the future. A
non-disclosure agreement is also signed most of the time for risking the limit of
somebody withholding information.

4 Defined goals
Well-defined goals are a very important pre-requisite during the
accomplishment of mergers and acquisitions. When a company is purchasing
another business, a pre-designed goal or objective is necessary because the
vision of the acquisition should be well thought-after. When a successful
Merger and Acquisition(M&A) takes place, the territories are expanded, sales
are boosted, patents are acquired and an all-new market is entered.

5 Discounted cash flow

A prime valuation tool in M&A is a discounted cash flow analysis that

determines the current value of the company. This is calculated on the basis of
forecasted future cash flows. The estimated free cash flows are discounted in
comparison to the present value using the weighted average costs of capital
(WACC) of the company. This value is difficult to get, but with the help of a
few tools, this valuation method can work easily.

6 Replacement cost

Considering various cases, acquisition is many times based on the cost of

replacement of the target company. It takes a long period of time for assembling
good management, purchase of right equipment and acquiring a property. This
method is used to establish a certain price but does not make sense in a service
industry where the prime assets are ideas and people. Costs can be reduced by
eliminating staffing redundancies.

7 Multiple bidders

The most profitable deal for sellers normally occurs when there are several
potential bidders. Sellers can obtain better deal terms, a higher price, or both by
leveraging the competitive situation. The selling company can go into a
significant disadvantage if they negotiate with just one single bidder. This is
mainly when the selling company agrees on signing an exclusivity agreement
that limits its ability to speak to other potential buyers for a specific period of
time. 

OBJECTIVES OF MERGER/ACUISATION

1 Security

here is a security against failure enjoyed by smaller companies when they merge
with a huge industry giant. The larger firm has the capacity and financial
resources to handle expensive lawsuits and paddle through the market storms.
On the other hand, when faced with similar situations, small businesses tend to
go bankrupt on their own. The small firms gain the prestige and reputation of a
highly respected and well-known industry brand name while large companies
gain new talent and ideas.

2 Scale of economics

he main objective of M&As is basically to achieve economies of scale, that is,

to increase the final output and the firm size as a whole. The cost per item is
reduced by spreading the fixed cost over a huge quantity. The efficiency is also
increased by specialization of the production process leading to cost advantages.
Additionally, by implementing a more effective firm structure, economies of
scale are achieved efficiently. 

3 Incentives of managers

M&As are basically inspired by the goals and personal interests of the
company’s top management. It is usually guaranteed that the managers enjoy
more prestige and power after an M&A. This is also referred to as ‘empire
building’ where the managers begin to favor the size of the firm more than the
actual performance. This could be reinforced by the ego of the managers and
their intentions for building the biggest company in the industry in terms of size.
This is also because the size of the company goes hand-in-hand with the
compensation of the managers. Huge companies can afford to give higher
salaries and bonuses to their executives and managers.

4 Diversification

 Many times, M&As take place for the purpose of diversification such as
offering new products and services or entering into new markets. Furthermore,
the risks are also diversified relating to the operations of a company. The
shareholders are not always happy with the situation where an M&A occurs
with the aim of risk diversification.

5 Tax benefits

When two or more firms merge or during an acquisition, many tax implications
arise. Due to an M&A, many tax benefits can be enjoyed by using net operating
losses to shield income or taking advantage of existing tax laws. In the case
where a loss-making company is acquired by a profit-making firm, the tax
burden is reduced by using net operating losses (NOL) of the target firm.
Moreover, a company that can upsurge its depreciation charges after an M&A,
can save on tax costs and increase in value. 

6 Eliminating competition

The M&As are done on a large scale for the purpose of eliminating competition
in the industry. It is usually done for substantially decreasing competition or for
the creation of a monopoly status in the market. This eliminated competition
and a solo status can prove very beneficial to the company. They can have the
freedom to keep their prices higher and enjoy profits for the business.

7 Brand image

he mergers that take place on a huge scale create a media giant and demands a
higher prestige in the market. Most managers really appreciate the prestige of
working and creating for a big company. This can also lead to a rise in their
salaries. When two companies merge together, the new brand that is formed
enjoys the brand image of both the firms. There is also talent-sharing where the
talents of reputed managers are put into this new firm. The good image of the
managers also adds to the higher market reputation enjoyed by the resulting
company.

8 Multiple share

he basic objective behind horizontal M&A is that less number of competitors

will increase the prices in a specific market and lead to a rise in market power.
This kind of M&A is particularly favorable in saturated markets because
internal growth would result in excess in supply and thus decrease in prices. If
there are numerous sellers in a competitive type of market, few M&A deals will
not affect the pricing power so much. Usually, it is possible for the oligopolistic
companies to upsurge their pricing power through M&A.

9 Synergy Effects

When two companies combine together to form a third one, there is a synergy
effect achieved as this combination creates an added value. A huge company is
considered to bear a low amount of risks, thus, financial synergy is achieved
through cheaper access to capital. The main motive is to make the best use of
these financial resources for the shareholders and improving overall financial
performance. Operational synergy is achieved by combining functions such as
distribution and production, or by transfer of knowledge.

10 Market power

The prime objective of an M&A is to gain a higher share in the market. This
helps the company to enjoy the power of monopoly in the industry. Higher
prices can be, thus, set by the firm because of this status. Hence, mergers are
regulated frequently by the government. However, because the companies
operate in several industries, it is debatable whether this specific merger
genuinely increases market power.

CHAPTER 2

AMALGAMATION

Amalgamation :

Amalgamation is defined as the combination of one or more companies into a

new entity. Instead, a completely new entity is formed to house the combined
assets and liabilities of both companies. It includes:

i. Two or more companies join to form a new company

ii. Absorption or blending of one by the other

Types of Amalgamation

i. Amalgamation in the nature of merger:

In this type of amalgamation, not only is the pooling of assets and liabilities is
done but also of the shareholders’ interests and the businesses of these
companies. In other words, all assets and liabilities of the transferor company
become that of the transfer company. In this case, the business of the transfer or
company is intended to be carried on after the amalgamation. There are no
adjustments intended to be made to the book values. The other conditions that
need to be fulfilled include that the shareholders of the vendor company holding
at least 90% face value of equity shares become the shareholders’ of the vendee
company.

ii. Amalgamation in the nature of purchase:

This method is considered when the conditions for the amalgamation in the
nature of merger are not satisfied. Through this method, one company is
acquired by another, and thereby the shareholders’ of the company which is
acquired normally do not continue to have proportionate share in the equity of
the combined company or the business of the company which is acquired is
generally not intended to be continued.

Objectives and Advantages of Amalgamation:

a. Eliminate competition :

Companies at times amalgamate with the object of avoiding competition among

themselves. This will give the company an edge over its competitor.

b. Tax savings :

The amalgamated company can derive financial gain which may be in the form
of tax advantage, higher credit worthiness and lower rate of borrowing.

c. Economies of large scale operations :

The amalgamated company can derive the operating cost advantage through
lowering the cost of production. This is possible because of economies of large
scale operations.

d. Increase shareholders value :

The amalgamated company increases the value of the company. It increases the
shareholders value of the company.

e. Diversification :

The risk of a company can be lowered by diversifying its activities into two or
more industries. At times, amalgamation may act as hedging the weak operation
with a stronger one.

f. Managerial effectiveness :
Effectiveness is the degree of attainment of a predetermined goal. An
amalgamated company can pool its intellectual resources to achieve managerial
effectiveness.

g. To achieve growth and gain financially :

The amalgamated company can pool its resources to facilitate internal growth
and to prevent the advent of a new competitor.

h. To acquire cash resources :

The amalgamated company acquire the cash resources of other company which
increases the cash resources of the amalgamated company.

Accounting of Amalgamation:

A. Pooling of Interests Method:

Through this accounting method, the assets, liabilities and reserves of the
transfer or company are recorded by the transferee company at their existing
carrying amounts.

B. Purchase Method:

In this method, the transfer company accounts for the amalgamation either by
incorporating the assets and liabilities at their existing carrying amounts or by
allocating the consideration to individual assets and liabilities of the transfer or
company on the basis of their fair values at the date of amalgamation.

Disadvantages of Amalgamation :

 Amalgamation may lead to elimination of healthy competition.

 Reduction of employees may take place.

 There could be additional debt to pay.

 Business combination could lead to monopoly in the market, which is not

always positive.

 The goodwill and identity of the old company is lost.

CONCLUSION

Mergers and acquisitions have gained importance in recent times. All most in
every sector we can see there is a lot of amalgamation & acquisition takes place
through the world. Which will eventually helps to business firms to get more
business & competitive advantage over its competitors in terms of more quality
products, reliable & faster services and generates more profits for the
companies. Thus this amalgamation process also helps to bankrupted companies
to start a new era of business through restructuring & rebranding. Therefore,
this may lead to come out from economic downturn & employee turnovers.