Master of Business Administration –

MBA Semester 3

Name: Rahul Sharma

Roll No.: 520961340

Subject: Mergers &

Acquisitions
Subject code: MF0002

Learning Centre: 01822

Assignment No: Set 1

and 2

Sign :

Submitted by: Rahul Sharma

Dated : 4th Dec, 2010

Assignment Set- 1

Q.1
Why are operating performance, financial techniques, and
Restructuring and financial engineering considered anti-
takeover defences and good business practice?

Ans:

Operating performance
Firm's performance measured against standard or prescribed
indicators of effectiveness, efficiency, and environmental
responsibility such as, cycle time, productivity, waste reduction, and
regulatory compliance.

Financial techniques
An entity whose income exceeds its expenditure can lend or invest
the excess income. On the other hand, an entity whose income is
less than its expenditure can raise capital by borrowing or selling
equity claims, decreasing its expenses, or increasing its income. The
lender can find a borrower, a financial intermediary such as a bank,
or buy notes or bonds in the bond market. The lender receives
interest, the borrower pays a higher interest than the lender
receives, and the financial intermediary earns the difference for
arranging the loan.
A bank aggregates the activities of many borrowers and lenders. A
bank accepts deposits from lenders, on which it pays interest. The
bank then lends these deposits to borrowers. Banks allow borrowers
and lenders, of different sizes, to coordinate their activity.
Finance is used by individuals (personal finance), by governments
(public finance), by businesses (corporate finance) and by a wide
variety of other organizations, including schools and non-profit
organizations. In general, the goals of each of the above activities
are achieved through the use of appropriate financial instruments
and methodologies, with consideration to their institutional setting.
Finance is one of the most important aspects of business
management and includes decisions related to the use and
acquisition of funds for the enterprise.
In corporate finance, a company's capital structure is the total mix of
financing methods it uses to raise funds. One method is debt
financing, which includes bank loans and bond sales. Another
method is equity financing - the sale of stock by a company to
investors. Possession of stock gives the investor ownership in the
company in proportion to the number of shares the investor owns. In
return for the stock, the company receives cash, which it may use to
expand its business or to reduce its debt.[5] Investors, in both bonds
and stock, may be institutional investors - financial institutions such
as investment banks and pension funds - or private individuals,
called private investors or retail investors.

Financial Restructuring
Financial Restructuring Services " Establishing new financing options
that provide an opportunity to move forward and grow further "
Rapid technological changes, rising stock market volatility and
intensifying competition across industry verticals have all increased
the burden on finance managers to deliver superior performance
and enhanced value for their shareholders. Assisting the financial
experts in fulfilling these objectives, Financial restructuring services
is the latest buzzword in the industry.
some of the financial restructuring services :
•Identifying businesses which create value
•Devising the optimum capital structure and restructuring debt to
match cash flows
•Providing HR & MIS interventions to align company with capital
market requirements
•Analyzing competitor and company cash flows, sustainable growth
rate, threshold margin, etc.
•Realignment of repayment schedule
•Funding/ waiver of interest due
•Tenure based risk return
•Interest cost realignment / reduction
•One time settlement (OTS)
•Credit enhancement & Securitisation
•Enhancement of security structure
•Conversion of debt into equity/ quasi equity
•Revisiting guarantees / terms
Restructuring is the corporate management term for the act of
reorganizing the legal, ownership, operational, or other structures of
a company for the purpose of making it more profitable, or better
organized for its present needs. Alternate reasons for restructuring
include a change of ownership or ownership structure, demerger, or
a response to a crisis or major change in the business such as
bankruptcy, repositioning, or buyout. Restructuring may also be
described as corporate restructuring, debt restructuring and
financial restructuring.
In education, restructuring refers a requirement in the No Child Left
Behind act of 2001, which requires schools identified as chronically
failing for 5 years or more to undertake rapid changes that affect
how the school is led and instruction delivered.[1]
Executives involved in restructuring often hire financial and legal
advisors to assist in the transaction details and negotiation. It may
also be done by a new CEO hired specifically to make the difficult
and controversial decisions required to save or reposition the
company. It generally involves financing debt, selling portions of the
company to investors, and reorganizing or reducing operations.
The basic nature of restructuring is a zero sum game. Strategic
restructuring reduces financial losses, simultaneously reducing
tensions between debt and equity holders to facilitate a prompt
resolution of a distressed situation.

Steps:
• ensure the company has enough liquidity to operate during
implementation of a complete restructuring
• produce accurate working capital forecasts
• provide open and clear lines of communication with creditors
who mostly control the company's ability to raise financing
• update detailed business plan and considerations

Financial engineering:-
Financial engineering is a multidisciplinary field relating to the
creation of new financial instruments and strategies, typically exotic
options and specialized interest rate derivatives. The field applies
engineering methodologies to problems in finance, and employs
financial theory and applied mathematics, as well as computation
and the practice of programming; see computational finance.
Despite its name, financial engineering does not belong to any of the
fields in traditional engineering. In the United States, the
Accreditation Board for Engineering and Technology (ABET) does not
accredit financial engineering degrees.
Financial engineering is normally employed in the securities and
banking industries. It is also used by quantitative analysts in
consulting firms or in general manufacturing and service firms, in
corporate treasury, corporate finance and risk management roles.
Financial engineers will often hold doctorates in computer science or
mathematics, although, increasingly, have instead completed a
specialized (terminal) masters degree - usually the Master of
Financial Engineering, or the more general Master of Quantitative
Finance.

Q.2
What is the nature of strategy as an adaptive learning
process?
Ans:
There are two reasons why research on knowledge sharing through
knowledge acquisition would benefit from an organizational learning
perspective. First, as noted earlier, the acquisition of a company for
the purpose of grafting technologies should be studied as a process
of organizational learning. Secondly, as many companies are
becoming frequent buyers, learning not only takes place during the
process of knowledge sharing but also as a process of knowledge re-
use.
In other words, companies learn from others in order to incorporate
external knowledge and learn from themselves by incorporating past
experience into their future strategy and management of
acquisitions. The occurrence of the latter type of learning seems to
differ among organizations. As Haspeslagh & Jemison (1991)
mention, some companies seem to learn from their acquisitions
experiences faster than others. Below we will discuss the two
aspects of learning in more detail with the help of a learning model
of knowledge acquisitions as shown in figure 2 which is an extended
model of the research model mentioned above.
Learning from others
Research on acquisitions can be divided into various schools.
Combining these various schools provides more useful insight into
the concept of knowledge acquisitions. More specifically, combining
an organizational behaviour perspective with a process perspective
yields greater insight into the strategic aspects of acquisitions. This
paper takes a step in that direction. The assumption is that
individuals and groups, through the process of knowledge sharing,
have a strategic impact. By perceiving knowledge sharing in the post
acquisition phase as a process of learning through grafting, the
assumptions is made that through knowledge sharing, individuals
have an impact on the process of acquisition and as a result, affect
the outcome. This organizational learning approach and the
influence of human aspects are even further supported by the
introduction of the concept of social capital as an important pre-
condition for knowledge sharing and its influence on value creation.
Thus, the process of learning through grafting seems to be not only
“a potentially important determinant of acquisition outcomes”
(Jemison & Sitkin, 1986), but of strategic importance. Therefore,
learning from experiences of grafting actions of organizations could
enable better knowledge acquisition strategies and management.
Increasingly, research is being conducted on how the process of
knowledge sharing affects final outcomes. These researchers believe
that, as a result of impediments to learning, many acquisitions fail.
Although, much more research is needed to support this argument
literature in strategic alliances other than acquisitions have already
pointed to the strategic impact of knowledge transfer by knowledge
sharing individuals (Inkpen, 1998; Kogut & Zander, 1996; Larssen et
al 1998).

Learning from the past

For many companies, acquiring a company is not a single unique
event. In fact large companies particularly in the high tech area
have a track record of buying more than one firm a year. To them,
these interventions could be a product of organizational learning
from the past through feedback information.
There are various authors who have proposed such a systems
dynamics approach to organizational learning (Argyris & Schon,
1978; March & Olsen, 1976: Senge, 1991: Bateson, 1973). Argyris &
Schon (1978), following Bateson (1973) have introduced two ways in
which organizations learn from feedback information: single loop
learning and double loop learning. Single loop learning happens
when an organization reacts to information regarding the results of
organizational actions, by adjusting its future actions. In general,
organizations tend to do reasonably well as single loop learners
(Argyris & Schon, 1978). Double loop learning occurs when
organizations react to feedback signals by reflecting first on the
governing variables such as the hidden norms and values that
trigger the actions. Organizations in general are not very good in
double loop learning (Argyris & Schon, 1978). As discussed below, it
is believed that this also applies to learning from past acquisitions,
although more research is needed to support this impression. While
single loop learning happens through adapting actions to
experiences with previous acquisitions, double loop learning
happens when previous experiences are taken into account in the
decision making prior to the deal. Learning from past acquisitions by
adjusting knowledge management tools to foster knowledge sharing
can be seen as an act of single loop learning. The organization
learns by adjusting action strategies but leaves governing variables
untouched (Argyris & Schon, 1978). Single loop learning happens
through ex-post interventions: knowledge management tools to
improve knowledge sharing. This concerns interventions to improve
knowledge sharing after the deal is made.
Learning from past experiences can also be supported by codifying
the lessons learned and storing them in manuals, knowledge
databases etc. This strategy represents one of the most traditional
knowledge management tools. Experience with knowledge
management in organizations indicates however that codifying past
experience in order to support knowledge re-use has its problems.
For example, people have difficulty contributing to a re-use policy,
for several reasons: their knowledge cannot easily be expressed in
words, they do not benefit from it, they do not spend time reflecting
on past experiences, an unwillingness to use knowledge of others, or
just because these past experiences do not fit the present situation
(Huysman & De Wit, 2002). These experiences might imply that
codifying past experience is not a viable option or that other media
should be used, such as for example videos. Double loop learning
sets in when companies already think about and create favourable
conditions for knowledge shariing before the deal is closed. Double
loop learning happens through ex-ante interventions, by including
knowledge audits in due diligence. This concerns interventions to
improve knowledge sharing before the deal is made. Rivera et al.
(2001) proposes the introduction of an interface or organizational
structure in charge of dealing with gathering experiences from
previous collaborations in order to support subsequent
collaborations. Such an interface can be centralized: just one
structure or team supervising the operation, or decentralized: no
central structure, each collaboration supervised and managed
independently. Centralization can both facilitate and hinder learning.
Facilitate as it can build on past experience, hinder as there is a
danger for path-dependency in the identification process. It would
therefore be more efficient when the centralized interface captures
the diversity of the group of employees as to recognize and
understand the target-knowledge. During the due diligence stage
the feasibility of the deal is assessed and analyzed.
One would suggest that during this stage attention is given to
questions like what and whose knowledge needs to be shared and
how should this knowledge be shared. Most often, these “knowledge
audits” do not occur or occur sporadically or superficially. With
knowledge audits reference is made to strategies or mechanisms
that can be used to improve the selection of potentially successful
targets. Knowledge audits are meant to reflect on the question “how
can we more accurately identify the most critical knowledge to be
shared before the deal is closed?” The pre-conditions for effective
knowledge sharing along with successful knowledge management
tools to support them, as discussed in chapter 2 of this paper, could
be the focus of these knowledge audits in the form of a knowledge
due diligence. For example, the acquirer should analyze the various
degrees of similarities with the target, such as the degree of similar
knowledge base, similar size, similar culture, information systems
etc. (Mowery et al, 1996) in order to see if and how knowledge can
be shared.

Q.3
Explain the central forces in the high level merger activity
Industries of
(a) Telecommunications, (b) Financial services and (c)
Pharmaceuticals.
Ans:
The dominant rationale used to explain M&A activity is that
acquiring firms seek improved financial performance. The following
motives are considered to improve financial performance:
Economy of scale: This refers to the fact that the combined
company can often reduce its fixed costs by removing duplicate
departments or operations, lowering the costs of the company
relative to the same revenue stream, thus increasing profit margins.
Economy of scope: This refers to the efficiencies primarily associated
with demand-side changes, such as increasing or decreasing the
scope of marketing and distribution, of different types of products.
Increased revenue or market share: This assumes that the buyer will
be absorbing a major competitor and thus increase its market power
(by capturing increased market share) to set prices.
Cross-selling: For example, a bank buying a stock broker could
then sell its banking products to the stock broker's customers, while
the broker can sign up the bank's customers for brokerage accounts.
Or, a manufacturer can acquire and sell complementary products.
Synergy: For example, managerial economies such as the
increased opportunity of managerial specialization. Another example
are purchasing economies due to increased order size and
associated bulk-buying discounts.
Taxation: A profitable company can buy a loss maker to use the
target's loss as their advantage by reducing their tax liability. In the
United States and many other countries, rules are in place to limit
the ability of profitable companies to "shop" for loss making
companies, limiting the tax motive of an acquiring company. Tax
minimization strategies include purchasing assets of a non-
performing company and reducing current tax liability under the
Tanner-White PLLC Troubled Asset Recovery Plan.
Geographical or other diversification: This is designed to smooth the
earnings results of a company, which over the long term smoothens
the stock price of a company, giving conservative investors more
confidence in investing in the company. However, this does not
always deliver value to shareholders (see below).
Resource transfer: resources are unevenly distributed across firms
(Barney, 1991) and the interaction of target and acquiring firm
resources can create value through either overcoming information
asymmetry or by combining scarce resources.[3]
Vertical integration: Vertical integration occurs when an upstream
and downstream firm merge (or one acquires the other). There are
several reasons for this to occur. One reason is to internalise an
externality problem. A common example is of such an externality is
double marginalization. Double marginalization occurs when both
the upstream and downstream firms have monopoly power, each
firm reduces output from the competitive level to the monopoly
level, creating two deadweight losses. By merging the vertically
integrated firm can collect one deadweight loss by setting the
downstream firm's output to the competitive level. This increases
profits and consumer surplus. A merger that creates a vertically
integrated firm can be profitable. Absorption of similar businesses
under single management: similar portfolio invested by two different
mutual funds (Ahsan Raza Khan, 2009) namely united money market
fund and united growth and income fund, caused the management
to absorb united money market fund into united growth and income
fund.
However, on average and across the most commonly studied
variables, acquiring firms' financial performance does not positively
change as a function of their acquisition activity. Therefore,
additional motives for merger and acquisition that may not add
shareholder value include:
Diversification: While this may hedge a company against a
downturn in an individual industry it fails to deliver value, since it is
possible for individual shareholders to achieve the same hedge by
diversifying their portfolios at a much lower cost than those
associated with a merger. (In his book One Up on Wall Street, Peter
Lynch memorably termed this "diworseification".)
Manager's hubris: manager's overconfidence about expected
synergies from M&A which results in overpayment for the target
company.
Empire-building: Managers have larger companies to manage and
hence more power.
Manager's compensation: In the past, certain executive
management teams had their payout based on the total amount of
profit of the company, instead of the profit per share, which would
give the team a perverse incentive to buy companies to increase the
total profit while decreasing the profit per share (which hurts the
owners of the company, the shareholders); although some empirical
studies show that compensation is linked to profitability rather than
mere profits of the company.

Short-run factors
One of the major short run factors that sparked in The Great Merger
Movement was the desire to keep prices high. That is, with many
firms in a market, supply of the product remains high. During the
panic of 1893, the demand declined. When demand for the good
falls, as illustrated by the classic supply and demand model, prices
are driven down. To avoid this decline in prices, firms found it
profitable to collude and manipulate supply to counter any changes
in demand for the good. This type of cooperation led to widespread
horizontal integration amongst firms of the era. Focusing on mass
production allowed firms to reduce unit costs to a much lower rate.
These firms usually were capital-intensive and had high fixed costs.
Because new machines were mostly financed through bonds,
interest payments on bonds were high followed by the panic of
1893, yet no firm was willing to accept quantity reduction during
that period.

Long-run factors
In the long run, due to the desire to keep costs low, it was
advantageous for firms to merge and reduce their transportation
costs thus producing and transporting from one location rather than
various sites of different companies as in the past. This resulted in
shipment directly to market from this one location. In addition,
technological changes prior to the merger movement within
companies increased the efficient size of plants with capital
intensive assembly lines allowing for economies of scale. Thus
improved technology and transportation were forerunners to the
Great Merger Movement. In part due to competitors as mentioned
above, and in part due to the government, however, many of these
initially successful mergers were eventually dismantled. The U.S.
government passed the Sherman Act in 1890, setting rules against
price fixing and monopolies. Starting in the 1890s with such cases as
U.S. versus Addyston Pipe and Steel Co., the courts attacked large
companies for strategizing with others or within their own companies
to maximize profits. Price fixing with competitors created a greater
incentive for companies to unite and merge under one name so that
they were not competitors anymore and technically not price fixing.

Assignment Set II
Q.1
Explain the accounting treatment of share premium, goodwill
and other profits
Ans:

Accounting Treatment of shares on premium

Sometime a company can decide to issue of shares on premium or
on discount. In both situations we must know the basic concept
before doing any accounting treatment.
Issue of shares on premium
Issue of shares on premium means that if company wants to get
more money of each share. Then the company can demand
premium with the face value or nominal value of shares. This is
called issue of shares on premium. Suppose if the face value of
shares is RS.100 Company can issue of his 10000 @ Rs. 105 it
means company is also demanding RS. 5 per share as premium.
According to new amendments in Company law 1956, Company
must open security premium account, if co. issue shares on
premium. All money which got with name of premium will transfer to
security premium account. The following entry will passed in the
books of company
For the due of share Allotment money
1.
Shares Allotment Account Debit xxxx ( with the total amount )
Shares Capital Account Credit xxxx ( With the face value of shares)
Security Premium Account Credit xxxx( With the amount of
premium)
2. For Allotment money Received
Bank Account Debit xxxx ( face value + Premium )
To Share Allotment Account xxxx
If company has demanded the premium with his call money from
share holders , then on the place share allotment account we must
write share call account , all other journal entry will be same.
According to Section 78 , We will use this fund according to
guidelines of law.
Meaning of Issue of shares at discount :-
It means that company demands less amount than face value of
shares .This less amount is called discount on issue of shares .
Journal entry of discount on issue of shares
When we receive allotment by giving discount on issue of share
1 Amount due of allotment
Share Allotment Account Debit xxxx( face value of allotment –
discount)
Discount on issue of share account Debit xxxx( amount of discount)
To Share capital account
2. When allotment money actually received
Bank account debit xxx( face value of allotment –discount)
To share allotment account

Accounting treatment of goodwill

The issue of goodwill has been debated in many countries
throughout the world. Despite numerous efforts and the existence of
accounting standards and exposure drafts issued by various
professional bodies internationally, there is yet to be a universally
accepted accounting treatment for goodwill. The opinion on this
subject differs and changes frequently. The dichotomy of having to
preserve prescribed recognition criteria on the one hand and the
need to report useful information on the other has led to the many
controversial issues debated on the subject of goodwill. This study
centres around the international accounting treatment of goodwill in
the past, present and future. This study reviewed some of the issues
that surrounded the accounting for goodwill where it was found that
goodwill accounting had faced many problems. Besides problems,
this project also looks into the prospect of the accounting for
goodwill in the cyberspace era and emergence of the knowledge-
based economy. This study confirms that controversy remains
internationally with no solution in sight in the foreseeable future
internationally.
The Financial Accounting Standards Board (FASB) Statement #142,
Goodwill and Other Intangible Assets, addresses how intangible
assets that are acquired individually or with a group of other assets
should be accounted for in the acquiring company's financial
statements subsequent to their initial recognition. Under FAS 142,
goodwill and certain intangible assets will no longer be amortized
over a specified, hypothetical, useful life. In addition, goodwill and
other intangible assets will no longer be amortized using straight line
amortization meaning the amount of amortization will probably not
be the same each year.
Fundamentally, FAS 142 rejects the idea that all intangible assets
are necessarily "wasting" assets. Under FAS 142, goodwill and
intangible assets that have indefinite useful lives will not be
amortized over a theoretical fixed lifetime. Instead, they will be
tested annually for impairment - with the exception of intangible
assets that are identified as having finite useful lives that will
continue to be amortized, but without the constraint of an arbitrary
maximum useful life of forty years. Under FAS 142, goodwill and
other intangibles will still be recognized as assets. Impairment
testing will be done using a two-step process. The first step involves
reviewing the assets in question for impairment.

Accounting treatment of goodwill

• Capitalisation and amortisation method

Companies valuing goodwill, follow the residuum approach to
capitalise their assets. The net affect of this approach is that, the
goodwill account also includes all other assets that are identifiable
by the company. Thereby the goodwill account reflects an incorrect
picture of intangible assets. One method of correcting this error is to
use the ‘Hidden Assets approach’. Under this method, the excess
purchase price that companies pay over the fair market value of
assets is for assets that are not shown or hidden from the balance
sheet.
These hidden assets can be both tangible and as intangible in
nature. They must be identified, recorded in the balance sheet and
then amortised over their appropriate economic life. Then, the
goodwill account reflects the true picture of only intangible assets.
Amortisation of recorded goodwill enables the company to match
the cost of intangible assets with benefits from their use. The point
of focus in this case is the period over which amortisation must take
place. If the life of the asset is not determinable, as in the case of
goodwill, amortisation of its value is done over a period of about 40
years. This will cause a minimal impact of writing off of goodwill on
the annual net income.

Showing the accounting treatment by means of an example

of ABC Ltd.
Assets Rs.20000
Liabilities Rs.5000
Owner’s equity Rs.15000
ABC owns land the historical cost of which is Rs.6000, but currently
worth Rs.13000. Market value of the land is Rs.7000 more than its
book value.
PQR ltd. purchases the outstanding stock of ABC for Rs.32000, price
based on the market position and earnings performance of the
company over the past few years.
Market value of acquired assets is calculated as follows:
Assets: Rs.20000 + Rs.7000 excess land value = Rs.27000
Market value of acquired liabilities Rs.5000
Market value of net assets Rs.22000
The firm sold all its assets and paid off its liabilities. Purchase price is
Rs.32000.hence PQR ltd. will record Rs.10000 as goodwill on the
purchase. It must be noted that Rs.7000 from the excess Rs.10000
is attributable to the excess of market value of land over the book
value.
Hence Rs.32000 purchase price can be divided into three amounts
for accounting purposes:
Acquired company’s Rs.15000
owner’s equity
Excess of market Rs.7000
value of land
Goodwill Rs.10000

Total purchase price Rs.32000

PQR ltd. capitalises goodwill and assumes a 10-year period as the

economic life of goodwill. The annual accounting entry for goodwill
would be:
Journal entry: amortisation of goodwill -------------dr 1000
To goodwill 1000

• Capitalisation and no amortisation

This method is most beneficial for a company. The company using
this method gets to record the asset in the balance sheet instead of
deducting it from owner’s equity. As there is no amortisation, there
is no yearly reduction of net income. The reason for such a
treatment is that goodwill consisting of managerial ability,
reputation and experience generally increases in value over time.
This method views goodwill as an investment and hence it should
stay on the balance sheet amortised.

• Write off method

Under this method, goodwill is immediately written off against the
equity stockholder’s account, generally from retained earnings.

Accounting treatment for other Profit,

1. you can pay arbitrage commission. For that you have to make
agreement with dealer to pay commission of sharing basis and TDS
provisions for commission would be applicable.
2. You can employ dealers and can pay salary to them. If you opt
this treatment then you have to pay them a fix basic salary and
variable performance incentive to them. In this case, TDS provisions
for salary would be applicable.
3. If you are a main broker, you can share your profits. For that, you
have to make agreement for sharing of profits with dealers. In the
agreement, you should made provisions such as margin would be
payable upfront by the dealer and if he fails to do so, you would
charge interest on your funding and you and dealer would share
profit with a fix ratio, etc. In this case, you are not required to deduct
TDS.

Q2.
Describe the techniques of raid and defenses against
takeover bid
Ans:

Raid Techniques
Techniques used in raids are such as Techniques of raid takeover bid
and tender offer. The procedure for organizing takeovers includes
collection of relevant information and its analysis, examine
shareholders' profile, investigation of title and searches into
indebtedness, examining of articles of association etc,. Defence
against takeover bid may be in the form of advance preventive
measures for defence such as - joint holdings or joint voting
agreement, interlocking shareholdings or cross shareholdings, issue
of block of shares to friends and associates, defensive merger apart
from other things. Tactical defence' strategies include friendly
purchase of shares, emotional attachment, loyalty and patriotism,
recourse to legal action, operation ‘White Knights', "Golden
Parachutes" etc,.
Four basic tactics or schemes can be carved out when we study the
practice of corporate raiding which are bankruptcy, corporate,
litigation, and land schemes to be the most widespread apart from
the other supplementary tactics such as the creation and
presentation of false evidence in civil litigation. At least three causes
can be identified, first is the general uncertainty of property rights
resulting from the privatization of state assets, second cause is poor
corporate governance and final cause of raiding is the fact that the
legal system is simply not yet equipped to deal with this novel form
of crime. The court structure, the inadequacy of criminal law, the
flaws in criminal investigation, the problems of good faith purchaser
and the verification of corporate documents are also among the
loopholes that can be identified. In order to address this problem, a
new bankruptcy law must be imposed with more stringent screening
and ethical requirements for trustees, expanding the time for judges
to consider and take decisions, and also expand debtors' rights to
contest creditors' petitions.
The corrupt acquisition of control over the target company usually
by falsifying internal corporate documents and/or corruptly obtaining
control over a significant portion of the voting stock or the board of
directors of the target company is common in nature. The raider
may create a false power of attorney or other document authorizing
him or a co-conspirator to enter into transactions on behalf of the
target company and then transfer the target's assets to himself or
affiliated companies or the raider bribes officials at state registration
agencies to alter the target company's registration documents to
give him and/or his confederates faux control over the target
company. He then uses this control to drain off the target's assets.
Another important tactic that may be used by raider is the creation
and presentation of false evidence in civil litigation. For example, in
answering claims by victims, raiders typically offer false evidence,
such as fabricated contracts and corporate resolutions, to "prove"
the alleged legitimacy of their acquisitions. There are certain
measures that businesses can take to protect themselves. These
measures include retaining qualified legal counsel to draft and
review all incorporation documents and contracts, retaining
corporate investigation firms to investigate partners and major
customers, and, above always complying with all relevant laws and
regulations.
The term ‘takeover' is nowhere defined in the Companies Act 1956
(Act) or in Securities and Exchange Board of India Act, 1992 (SEBI
Act), or in SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (Takeover Code). In the absence of a legal
definition, the term takeover has to be understood from its
commercial usage. In commercial parlance, the term takeover
denotes the act of a person or group of persons (acquirer) acquiring
shares or acquiring voting rights or both of a company (target
company), from its shareholders, either through private negotiations
with majority shareholders, or by a public offer in the open market
with an intention to gain control over its management. A takeover is
considered ‘hostile' when the management of the target company
resists the attempted takeover.
The basic principle is that when acquisition becomes a takeover, the
Takeover Code becomes applicable besides other provisions of the
Act. In other words, in case of a takeover, compliance of both the
Takeover Code as well as that of the Act is necessary, while in case
of acquisition, compliance of only the Act is required. Further, if an
acquisition results in a ‘combination', then the provisions of the
Competition Act 2002 also become applicable, and the approval of
the Competition Commission of India is required. If the acquisition
results in either inflow or outflow of funds, to or from India, then the
provisions of the Foreign Exchange Management Act 1999 would
become applicable and in such a case, the permission from either
the Reserve Bank of India or the Central Government may be
required.
The objective behind the Takeover Code is to bring transparency in
takeover and acquisition transactions in public listed companies and
to ensure that if minority shareholders are not given a raw deal
through price fixation. The Takeover Code lays down the mandatory
and compulsory disclosure of an acquisition if the acquirer intends to
do. The procedure in case an investor wants to takeover has been
clearly laid down in the Companies Act, 1956, the Takeover Code
etc,. These regulatory mechanisms also lays down the offences,
penalties in case of any violation, obligations and restrictions upon
the merchant bankers, acquirers, the company itself etc,. Acquisition
for the purpose of combination is not only the acquisition of shares
or voting rights or control of management, but also acquisition of or
control of assets of the target company. Thus, for the purposes of
Competition Act, 2002, acquisition of shares, voting rights, assets
and control of management have to be considered. In Any
combination that would result in appreciable adverse effect on
competition, within the relevant market in India, would be declared
null and void and such an effect is to be enquired by the CCI for
which the powers and the procedure is laid down under the
Competition Act, 2002.

However, the era of the corporate raider appears to be largely over.

In the later 1980s the famous raiders suffered from a number of bad
purchases that lost money (for their backers, primarily) and the
credit lines dried up. In addition, corporations became more adept at
fighting hostile takeovers through mechanisms such as the poison
pill. Finally the overall price of the stock market increased, which
reduced the number of situations in which a company's share price
was low with respect to the assets that it controlled

Defence techniques
Preventive measures
Preventive measures against hostile takeovers are much more
effective than reactive measures implemented once takeover
attempts have already been launched. The fi rst step in a company’s
defence, therefore, is for management and controlling shareholders
to begin their preparations for a possible fight long before the battle
is joined. There are several principal weapons in the hands of target
management to prevent takeovers, some of which are described
below.

Control over the register

The raider needs to know who the shareholders of the target are in
order to approach them with the offer to sell their shares. With joint
stock companies this information is contained in the share register.
In particular, the share register provides for the possibility to identify
the owners of the shares, quantity, nominal value and type of shares
held by shareholders. So it is very important to ensure that non-
authorized persons do not have access to the share register of the
company by taking the following steps:
• Careful consideration is needed when choosing the registrar; the
preference should be given to a reputable registrar;
• Check the track record of the share registrar in regards to its
involvement in hostile takeovers in the past;
• Check who controls the registrar company. In case of transfer of
shares to a nominee holder (custodian or depository) information on
the beneficiary owners of shares is not stated in the share register.
Instead, the share register contains information on the nominee
holders. This makes it much more difficult for the raider to identify
who is the real owner of the shares.

Control over debts

Creditor indebtedness of the company may be used by a raider as
the principal or auxiliary tool in the process of hostile takeover. In
particular, the raider may employ so-called “contract bankruptcy” in
order to acquire the assets of the target. In connection with this the
following cautionary measures should be taken:
• Monitor the creditors of company carefully;
• Prevent overdue debts;
• If there is indirect evidence that a bankruptcy procedure is about
to be launched, the company should do its best to pay all
outstanding debts;
• Accumulate all the debts and risks relating to commercial activity
of the company on a special purpose vehicle that does not hold any
substantial assets.

Cross shareholding
Several subsidiaries of a company (at least three) have to be
established, where the parent company owns 100% of share capital
in each subsidiary. The parent transfers to subsidiaries the most
valuable assets as a contribution to the share capital. Then the
subsidiaries issue more shares. The amount of these should be more
than four times the initial share capital. Subsidiaries then distribute
the shares among themselves. The result of such an operation is
that the parent owns less that 25% of the share capital of each
subsidiary. In other words the parent company does not even have a
blocking shareholding. When implementing this
Golden parachute
This measure discourages an unwanted takeover by offering
lucrative benefits to the current top executives, who may lose their
job if their company is taken over by another fi rm. The “triggering”
events that enable the golden parachute clause are change of
control over the company and subsequent dismissal of the executive
by a raider provided that this dismissal is outside the executive’s
control (for instance, reduction in workforce2 or dismissal of the
head of the board of directors due to the decision of the general
meeting of shareholders provided such additional ground for
dismissal is stated in the labour contract with the head of the
board3). Benefits written into the executives’ contracts may include
items such as stock options, bonuses, hefty severance pay and so
on. Golden parachutes can be prohibitively expensive for the
acquiring firm and, therefore, may make undesirable suitors think
twice before acquiring a company if they do not want to retain the
target’s management nor dismiss them at a high price. The golden
parachute defence is widely used by American companies. The
presence of “golden parachute” plans at Fortune 1000 companies
increased from 35% in 1987 to 81% in 2001, according to a survey
by Executive Compensation Advisory Services. Notable examples
include ex- Mattel CEO Jill Barad’s USD 50 million departure
payment, and Citigroup Inc. John Reed’s USD 30 million in severance
and USD 5 million per year for life.

Change of control clauses (“Shark Repellents”)

The company may include in loan agreements or some other
agreements conditional covenants that in the event of the company
passing under the control of a third party, the other party to the
agreement has the right to accelerate the debt or terminate the
contract. The result of such agreements is that a potential raider
may not be sure whether it will be able to benefit from important
advantages enjoyed by the target. Although one of the effects of
change of control clauses is to discourage raiders, their purpose is
legitimate: to protect creditors from being placed in a worse position
than they visualised.
Q3. Write short notes on:
a. Golden Parachutes
b. Shark Repellent
c. Green Mail
d. Poison Put
Ans:
a. Golden Parachutes
A golden parachute is an agreement between a company and an
employee (usually upper executive) specifying that the employee
will receive certain significant benefits if employment is
terminated. Sometimes, certain conditions, typically a change in
company ownership, must be met, but often the cause of
termination is unspecified. These benefits may include severance
pay, cash bonuses, stock options, or other benefits. They are
designed to reduce perverse incentives—paradoxically (and
ironically) they may create them.
Proponents of golden parachutes argue that they provide three
main benefits:
1. Golden parachutes make it easier to hire and retain
executives, especially in industries more prone to mergers.
2. They help an executive to remain objective about the
company during the takeover process.
3. They dissuade takeover attempts by increasing the cost of a
takeover, often part of a Poison Pill strategy, although tin
parachutes (giving every employee takeover benefits and/or job
protection) are generally far more effective in this regard.
Critics have responded to the above by pointing out that:
1. Dismissal is a risk in any occupation, and executives are
already well compensated.
2. Executives already have a fiduciary responsibility to the
company, and should not need additional incentives to stay
objective.
3. Golden parachute costs are a very small percentage of a
takeover's costs and do not affect the outcome.
The use of golden parachutes have caused some investors[who?]
[citation needed] concern since they don't specify that the
executive has to perform successfully to any degree. However,
benchmarks have never been an aspect of golden parachutes
and their absence only became an issue of public concern
following the stock market declines of 2008 and 2009 and the
negative populist sentiment that ensued afterwards.
The first known use of the term "golden parachute" dates back to
when creditors sought to oust Howard Hughes from control of
TWA airlines. The creditors provided Charles C. Tillinghast Jr. an
employment contract—dubbed a golden parachute in
likely[original research?] reference to the protection a parachute
offered—with protection against the almost definite[according to
whom?] job loss Tillinghast would have faced if famed aviator
Howard Hughes had successfully maintained control of TWA.
 The use of the term "golden parachute" has significantly
increased in 2008 because of the global economic recession,
especially being used by news media and in the 2008
Presidential Debates.
The use of golden parachutes expanded greatly in the early
1980s in response to the large increase in the number of
takeovers and mergers.
According to a 2006 study by the Hay Group human resource
management firm, the French executives' golden parachutes are
the highest in Europe, and equivalent to the funds received by
50% of the American executives. In contrast, the French
standard revenues for executives located themselves in the
European average. French executives receive roughly the double
of their salary and bonus in their golden parachute

b. Shark Repellent
Any corporate activity that is undertaken to discourage a hostile
takeover, such as a golden parachute, scorched earth policy or
poison pill.
The companies amend their Bye-Laws and regulations to be less
attractive for the raider company. Such features are called Shark
Repellents. The company may issue that 80-95% of the
shareholders should approve for the takeover and 75% of the
Board of Directors consent.
There are instances when a target company, which is being
aimed at for a takeover resists the same. The target firm may do
so by adopting different means. Some of the ways include
manipulating shares as well as stocks and their values. All these
attempts of the target firm resisting its acquisition or takeover
are known as shark repellent
Slang term for any one of a number of measures taken by a
company to fend off an unwanted or hostile takeover attempt. In
many cases, a company will make special amendments to its
charter or bylaws that become active only when a takeover
attempt is announced or presented to shareholders with the goal
of making the takeover less attractive or profitable to the
acquisitive firm.
Also known as a "porcupine provision". Most companies want to
decide their own fates in the marketplace, so when the sharks
attack, shark repellent can send the predator off to look for a less
feisty target.
While the concept is a noble one, many shark repellent measures
are not in the best interests of shareholders, as the actions may
 damage the company's financial position and interfere with
management's ability to focus on critical business objectives.
Some examples of shark repellents are poison pills, scorched
earth policies, golden parachutes and safe harbor strategies.

c. Green Mail
Greenmail or greenmailing is the practice of purchasing enough
shares in a firm to threaten a takeover and thereby forcing the
target firm to buy those shares back at a premium in order to
suspend the takeover.
The term is a neologism derived from blackmail and greenback
as commentators and journalists saw the practice of said
corporate raiders as attempts by well-financed individuals to
blackmail a company into handing over money by using the
threat of a takeover.
Tactic
Corporate raids aim to generate large amounts of money by
hostile takeovers of large, often undervalued or inefficient (i.e.
non-profit-maximizing) companies, by either asset stripping
and/or replacing management and employees. However, once
having secured a large share of a target company, instead of
completing the hostile takeover, the greenmailer offers to end
the threat to the victim company by selling his share back to it,
but at a substantial premium to the fair market stock price.
From the viewpoint of the target, the ransom payment may be
referred to as a goodbye kiss. The origin of the term as a
business metaphor is unclear, although it will certainly be
understood in context as kissing the greenmailer and, certainly,
millions of dollars goodbye. A company which agrees to buy back
the bidder's stockholding in the target avoids being taken over.
In return, the bidder agrees to abandon the takeover attempt
and may sign a confidential agreement with the greenmailer who
will agree not to resume the maneuver for a period of time.
While benefiting the predator, the company and its shareholders
lose money. Greenmail also perpetuates the company's existing
management and employees, which would have most certainly
seen their ranks reduced or eliminated had the hostile takeover
successfully gone through.
Examples
Greenmail proved lucrative for investors such as T. Boone
Pickens and Sir James Goldsmith during the 1980s. In the latter
example, Goldsmith made $90 million from the Goodyear Tire
 and Rubber Company in the 1980s in this manner. Occidental
Petroleum paid greenmail to David Murdoch in 1984.
The St. Regis Paper Company provides an example of greenmail.
When an investor group led by Sir James Goldsmith acquired
8.6% stake in St. Regis and expressed interest in taking over the
paper concern, the company agreed to repurchase the shares at
a premium. Goldsmith's group acquired the shares for an
average price of $35.50 per share, a total of $109 million. It sold
its stake at $52 per share, netting a profit of $51 million. Shortly
after the payoff in March 1984, St. Regis became the target of
publisher Rupert Murdoch. St Regis turned to Champion
International and agreed to a $1.84 billion takeover. Murdoch
tendered his 5.6% stake in St. Regis to the Champion offer for a
profit.
Prevention
Changes in the details of corporate ownership structure, in the
investment markets generally, and the legal requirement in
some jurisdictions for companies to impose limits for launching
formal bids, or obligations to seek shareholder approval for the
buyback of its own shares, and in Federal tax treatment of
greenmail gains (a 50% excise tax) have all made greenmail far
less common since the early 1990s.

d. Poison Put
In bond trading, a bond indenture that gives the bondholder the
right to demand redemption before maturity at its high par value
in case certain event happen. Such pre-designated events
include restructuring of the bond issuing company, excessive
dividend distribution to its stockholders, a leveraged buyout, or a
hostile takeover attempt. A poison put helps the management of
the target company to deter the takeover attempt by making it
very costly for the bidder. In times of low liquidity, however, this
put works against the management as the bond holders can
pressure the company into a reorganization or to increase its
borrowing costs.
In stocks trading, the rights assigned to common stockholders
that sharply escalates the price of their stockholding, or allows
them to purchase the company's shares at a very attractive fixed
price, in case of a hostile takeover attempt. also called event risk
covenant. A covenant allowing the bond holder to demand repayment in
the event of a hostile takeover.
A bond that allows bondholders to redeem before maturity at a
high price should certain, named events take place. These
events commonly include restructuring, a leveraged buyout, an
attempted hostile takeover, or paying dividends in excess of a
certain amount or percentage. Poison-put bonds can act as an
anti-takeover measure; they help management discourage
takeovers by raising their expense. On the other hand, when the
company is going through a difficult time, poison-put bonds can
limit management's restructuring options for the same reason.