1.

define merger and acquisition

ANS:-
Mergers: A merger is said to occur when two or more companies combine into one
company. Mergers may take any one of the following forms:

1. Absorption: Absorption is a combination of two or more companies into an existing

company. In this case there should be at least one liquidation and no formation of a new
company. All the companies except one company go into liquidation.
Example: Brook Bond Lipton India Ltd. was absorbed by Hindustan Lever Ltd.

2. Amalgamation: Ordinarily amalgamation means merger. Here two or more

companies are liquidated and a new company is formed to take over the business in
existing companies.
Example: UTI Bank and Global Trust Bank will be amalgamated and a new company
called UTI Global Bank will be formed.

3. Combinations: In simple words, combination means combining several things into a

united whole. Combinations may take the form of mergers. acquisitions,amalgamations,
holding company devices etc.

4. Acquisition: Acquisition means acquiring the ownership in the company. Here one
company/individual purchases the shares of a company in order to gain controlling
interest. In acquisition the companies remain independent separate legal entities, but
there may be change in the control of companies. It is not always necessary to have
50% voting power to control a company. The promoters control many of the companies
in India by having only 10-30% of the voting rights.

5. Takeover: Takeover is acquisition and both the terms are used interchangeably.
Takeover is also defined as obtaining control over the management of a company by
another. The term takeover is normally used to denote hostile takeover. In a hostile
takeover the management of the Target Company opposes the takeover. When the
management of both the companies mutually and willingly agree for the takeover, it is
called friendly takeover or acquisition

6. Demergers: Demerger or split or division of a company is opposite of mergers and

amalgamations. This happens when a part of the undertaking is transferred to a newly
formed company or to an existing company. The size of the first company after
demerger would reduce.
2. Reasons of mergers and acquisitions
Ans:- The following are important reasons for mergers and acquisition of firms.

Economies of scale: The combined firm can have a larger volume of operations than
the individual firms. Thus the combined firm can enjoy economies of scale. The
optimum utilization of plant capacity is possible to combine entity resulting in a fall in the
average cost of the output. The average cost curve of a typical company is 'U' shaped
as shown below. The 'U' shaped average cost curve indicates that the per unit cost
decreases as the output is increased upto a at a certain level and thereafter the per unit
cost also increases. The point at which The average cost is called optimum point. And
the corresponding output is known optimum output. The firm, which produces its output
at the minimum average cost, is known as optimum firm. To cut the long story short we
can say that, the mergers and acquisitions help the company to produce the goods
more economically through the full utilization of plant capacities.

Synergy: Synergy is simply defined as 2+2=5 phenomenon. The value of the

company formed through merger will be more than the sum of the value of the
individual companies just merged.

Symbolically:

V (A) + V (B) <V (AB)

V (A)= value of A Itd.

V(B)= value of B ltd.
V(AB)= value of Merged Company.
Diversification of risk: Company's profits and cash flows fluctuate widely when it
produces a single product. This increases the risk of a firm. So a company experiencing
wide fluctuations in the earnings may merge with another company whose earnings are
of different nature. The merger of companies whose earnings are negatively correlated
will bring stability in the earnings of the combined firm. So diversification reduces the
risk of the firm..

Growth: Growth is possible in 2 ways i.e., internal expansion of greenfield ventures or

external expansion through mergers and acquisitions. Internal expansion is slow and
takes time and also involves a lot of risk. Mergers and acquisitions help the company to
grow quickly without any gestation period.

Reduction in tax liability: In some cases tax shields may be the motivating factor for
mergers. Under Income Tax Act, there is a provision for set off and carry forward of
losses. A Sick Company may not be in a position to earn sufficient profits in future to
take advantage of the carry forward provision. So a sick company with accumulated
losses may like some profitable company to merge with it to take advantage of tax
benefits. Even the sick company with accumulated losses may be merged with a
profitable company and take advantage of income tax benefits with the approval of the
government.
The following is the list of some companies along with the amount of tax benefits
enjoyed.
● Ahmedabad Cotton Mills merged with Arvind Mills. (Rs. 3.34 crores)
● Sidhaper Mills merged with Reliance Industries Ltd. (Rs. 2.47 crores)

To increase market power and to kill competition: The merger can increase the
market share of a merged firm. Mergers also help the company to reduce competition in
the marketplace. Many mergers have been intended to kill the competition and to
increase the market power.
Example:
● TOMCO and HLL merger.
● Blow Plast and Universal Luggage Industries.
● Premier and Apollo Tyres. \
● Byju’s and Akash
3. Explain MBOs and LBOs
ANS:-
What is LBO?

When an outsider, typically a person having interest in controlling a company, arranges

money to buyout sufficient stocks of the company to be able to control equity of the
company, it is referred to as Leveraged Buyout. Usually, this investor borrows a very high
percentage of money which is returned back by selling the assets of the acquired company.
The money usually comes from banks and debt capital markets. History is replete with
instances of LBO where people with no or very little money acquired controlling powers in a
company through LBO. What is surprising is that the assets of the company being acquired
are used as collateral for the money being borrowed. To raise money, the acquiring
company issues bonds to investors that are risky in nature and should not be considered as
investment grade as there are substantial risks involved in the procedure. In general, the
debt portion in LBO ranges from 50-85% though there have been instances when more
than 95% of the LBO was carried out with debt.

What is MBO?

MBO is Management Buyout which is a type of LBO. Here it is the internal management of
the company instead of outsiders that try to buyout the control of the company. This is
usually resorted to make the managers more interested in improving the affairs of the
company as they become equity holders and therefore partners in profits. When MBO
occurs a publicly listed company becomes private. MBO affects restructuring of the
organization and also assumes significance in acquisitions and mergers. There are people
who say that MBO is these days being utilized by managers to buy the company at a lower
price and then affect changes to increase share prices to benefit in a huge way. The
supporters of this view say that managers try to mismanage reducing the output and
thereby stock prices. After a successful MBO where they gain control at a cheap rate, they
govern the company in an efficient manner to make the stocks rise abruptly.

4. What is exchange ratio what are the significance.

ANS:-
Exchange ratio:-
An exchange ratio calculates the number of shares that a shareholder receives after a
merger or acquisition. Whether one company is acquiring another or two companies are
merging to form a new firm, the exchange ratio helps determine how many shares each
shareholder should receive, using either a fixed or a floating ratio.

The exchange ratio only exists in deals that are paid for in stock or a mix of stock and
cash as opposed to just cash. The calculation for the exchange ratio is:
​

𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒

𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 = 𝑇𝑎𝑟𝑔𝑒𝑡 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒
​
​

The target share price is the price offered for the target shares. Because both share
prices can change from the time the initial numbers are drafted to when the deal closes,
the exchange ratio is usually structured as a fixed exchange ratio or a floating exchange
ratio.

A fixed exchange ratio is fixed until the deal closes. The number of issued shares is
known but the value of the deal is unknown. The acquiring company prefers this method
as the number of shares is known therefore the percentage of control is known.

A floating exchange ratio is where the ratio floats so that the target company receives a
fixed value no matter the changes in price shares. In a floating exchange ratio, the
shares are unknown but the value of the deal is known. The target company, or seller,
prefers this method as they know the exact value they will be receiving.

5. How do you avoid hostile takeover?

ANS:-
The company can take the following defensive measures to avoid hostile takeover:
1. Advance preventive measures for defense.
2. Defense in face of takeover bid.

Advance preventive measures: The target company should take precautions when
it feels that a takeover bid is imminent. Some of the advance measures that can be
taken by the Target Company to fight the takeover threat are given below:
i) Joint holding or joint voting agreements: Two or more major shareholders may
enter into an agreement to support the existing management.

ii) Interlocking shareholders or cross shareholdings: Here two or more group

companies acquire shares of each other in large quantity to avoid threat of takeovers.
Example: Company A purchases 20% shares of the company B. B purchases 20%
shares of company A.

iii) Issue of block of shares to friends and associates: When the promoters cannot
buy the majority stake, they can request their friends and associates to buy a block of
the shares. They naturally support the promoters whenever there is a hostile takeover
attempt.

iv) Defensive merger: The directors of the company may acquire another company as
a defense measure to avoid hostile takeover from that company.

v) Issue of preference shares: Preference shares do not enjoy the normal voting
rights. So these shares can be issued to outsiders to raise finance without any fear of
losing control.

vi) High leverage: To make the company less attractive, the company may borrow loan
capital in large proportion. This discourages the hostile bidder.

vii) Dissemination of information to the shareholders: The company should

disseminate favorable financial information and future prospects to the shareholders. In
that case, they may support the existing management during a hostile takeover battle.

viii) Maintaining a fraction of share capital uncalled: The uncalled capital can be
called during any emergency like takeover threat.

ix) Formation of cartel: Companies may form a cartel (association) to fight against any
future bid or takeover threat against any of their member companies.

x) Consolidation of holdings through creeping acquisitions: The promoters can

increase the holdings every year through creeping acquisitions upto 10% of the share
capital of the company per year as per SEBI takeover code.
x) Buy back of shares: A company is allowed to buy back its own shares. Buy back
reduces the number of shares and thereby increases the proportion of shares of
promoters it they do not participate in the buy back programme.

xii) ESOP plan: Employees stock option plan may be introduced in the company
whereby the employees are eligible to get the shares of the company at concessional
rates. Normally employees support existing management during takeover threat

Defense in the face of takeover bid: The following measures can be used as
defense to fight against hostile takeovers

i) Golden parachute: Golden parachutes are special compensation agreements that

the company provides to upper management in case they are removed after the
takeover. The word "golden" is used due to the lucrative compensation that executives
covered by these agreements receive. Such an agreement discourages the bidder to
takeover. It is normally paid as so many months salary when an employee is terminated
due to hostile takeover. Generally the compensation that must be paid under golden
parachute constitutes only 1% or less of the total consideration, it will act only as a mild
deterrent against takeover.

ii) Silver parachute: This is just like a golden parachute but given to lower level
managers. It is also a compensation payable to an employee when he is terminated but
it is a small amount (generally one months salary).

iii) Green mail (targeted shares repurchase): Here the target firm agrees to
repurchase the shares held by an unfriendly individual or company at a substantial
premium, so that he can not initiate a bid for control of the company.

v) Stand-still agreements: It is a voluntary contract in which the green mailer agrees

not to make further purchases of shares in the target company during a specified period
of time (say 5 years). The stand-still agreement is normally entered into after the Target
Company buys the shares of green mailer at a premium. When the stand-still
agreement is made without share repurchases, he simply agrees not to make more
investments in the shares of the Target Company. These agreements are in return for a
fee or commission.

v) White knights: When the company has a threat of takeover from a potential
acquirer, it may seek the help of a white knight. White knight is another company or
individual that is a more acceptable suitor for the Target. White knight will make an offer
to buy shares at a higher price from the public than the original bidder. When the white
knight makes a higher offer, the predator might not remain interested in acquisition and
hence the target is protected from hostile takeover.

vi) Green knight; A friendly party of the target company who seeks to take over the
predator. For example: when A Ltd. tries to takeover B Ltd., C Ltd. takeover A Ltd. and
acts as a green knight to B Ltd.

vii)Whihe squire defense: White squire is a firm that agrees to purchase a large block
of shares of the target company as investment and not for control. This will help the
Target Company against hostile takeover. For Example Financial institutions the LIC,
ICICI, IDBI are acting as white squires in India. They are not interested in control, but
hold block of shares of many companies as investment.

viii) Disposing crown jewels: Precious assets of the company are called "crown
jewels". These precious assets attract the raider to bid for the Target Company. The
company as a delente strategy, may set the crown jewels or lease them or mortgages
them to make the company less attractive.

ix) Poison pills strategy: Here the company issues convertible securities which are
converted into shares. This dilutes the bider's shares and discourages acquisition.

6. What is divestitures and what are its types.

ANS:-
Divestiture: In a merger, two or more enterprises are coming together. However, there
are other aspects of corporate restructuring. A Company may divest itself of a portion of
the enterprise or liquidate entirely.

Divestiture represents the sale of a segment of a company to a third party. Assets,

product lines, subsidiaries or divisions are sold for cash or securities or some
combinations thereof.

The reasons for divestiture are many but the main reason is to increase the value of
shares to the shareholders. The recent trend is towards downsizing and restructuring
and focusing on core competencies. Conglomerates try to divest under-performing
business, which do not fit with their core business.
Corporate experts hold the view that demergers, divestitures and other spin offs are the
outcome of incapability of the parent company's management to manage dissimilar
assets profitably. Sometimes a company may buy the whole company and then sell the
businesses of the other company in which it has no experience.

Types of divestitures:
1. Spin-off:

It is a kind of demerger when an existing parent company distributes on a pro-rata basis

the shares of the new company to the shareholders of the parent company free of cost.
There is no money transaction, subsidiary's assets are not revalued, and the transaction
is treated as stock dividend. Both the companies exist and carry on their businesses
independently after spin off. During the spin-off, a new company comes into existence.
The shareholders of the parent company become the shareholders of the new company
spun-off.

Example: ITC has spin-off hotel business from the company and formed ITC Hotel Ltd.

2. Sell-off: It is a form of restructuring, when a firm sells a division to another company.

When the business unit is sold, payment is received generally in the form of cash or
securities.
When the firm decides to sell a poorly performing division, this asset goes to another
owner, who presumably values it more highly because he can use the asset more
advantageous than the seller. The seller receives cash in the place of the asset. So the
firm can use this cash more efficiently than it was utilizing the asset that was sold. The
firm can also get premium for the assets because the buyer can more advantageously
use such assets. Sell-off generally has a positive impact on the market price of shares
of both the buyer and seller companies. So sell-offs are good news for the shareholders
of both the companies.

3. Voluntary corporate liquidation or bust ups: It is also known as complete sell-off.

The companies normally go for voluntary liquidation because they create value to the
shareholders. The firm may have a higher value in liquidation than the current market
value. Here the firm sells its assets/divisions to multiple parties which may result in a
higher value being realized than if they had to be sold as a whole. Through a series of
spin-offs or sell-offs a company may go ultimately for liquidation.

4. Equity carveouts: It is a different type of divestiture and different from spin-. off and
sell-off. It resembles Initial Public Offering (IPO) of some portion of equity stock of a
wholly owned subsidiary by the parent company.
The parent company may sell a 100% interest in the subsidiary company or it may
choose to remain in the subsidiary's line of business by selling only a partial interest
(shares) and keeping the remaining percentage of ownership. After the sale of shares to
the public, the subsidiary company's shares will be listed and traded separately in the
capital market. The parent company receives cash from the sale of shares of the
subsidiary company. The parent company may still control the company by holding
controlling interest in the subsidiary.

7. Reasons of divestitures.
ANS:-
A) Poor fit of a division: When the parent company feels that a particular division
within the company cannot be managed profitably, it may think of selling the division to
another company. This does not mean the division itself is unprofitable. The other firm
with greater expertise in the line of business could manage the division profitably. This
means the division can be managed better by someone else than the selling company.

B) Reverse synergy: Reverse synergy exists when the parts are worth more
separately than they are within the parent company's corporate structure. In other
words, 4-1=5. In such a case, an outside bidder might be able to pay more for a division
than what the division is worth to the parent company.

C) Poor performance: Companies may want to divest divisions when they are not
sufficiently profitable. The division may earn a rate of return, which is less than the cost
of capital of the parent company. A division may turn out to be unprofitable due to
various reasons such as increase in the material and labour cost, decline in the demand
etc.

D) Capital market factors: A divestiture may also take place because the post
divestiture firm, as well as the divested division, has greater access to capital markets.
The combined capital structure may not help the company to attract the capital from the
investors. Some investors are looking at steel companies and others may be looking for
cement companies. These 2 groups of investors are not interested in investing in
combined companies, with cement and steel businesses due to the cyclical nature of
businesses. So each group of investors are interested in stand-alone cement or steel
company.
E) Cash flow factors: Selling a division results in immediate cash in flows. The
companies that are under financial distress or in insolvency may be forced to sell
profitable and valuable divisions to tide over the crisis.

F)To correct the mistakes committed in investment decisions: Many companies in

India diversified into unrelated areas during the pre liberalization period. Afterwards they
realised that such a diversification into unrelated area was a big mistake. To correct the
mistake committed earlier, they had to go for divestiture.

G) To realise profit from the sale of profitable divisions: This type of divestiture
occurs when a firm acquires underperforming businesses, makes it profitable and then
sells it to other companies. The parent company may repeat this process to make profit
out of it.
H) To reduce the debt burden: Many companies sell their assets or divisions to
reduce their debt and bring the balance in the capital structure of the firm.

I) To help to finance new acquisitions: Companies may sell less profitable divisions
and buy more profitable divisions in order to increase the profitability of the company as
a whole.

8. What is corporate restructuring what are it's objectives.

Ans:-
The term corporate restructuring may be defined as a comprehensive process by which
a company can consolidate its business operations and strengthen its position for
achieving the desired objective. It involves significant reorientation or realignment of
assets and liabilities of the organization through conscious management actions with
the objective of drastically altering the quality and quantity of future cash flows. The very
objective of corporate restructuring is to fight competition and to conduct the business in
an efficient and effective manner, so as to consolidate the position of the business.
Corporate restructuring embraces many things besides mergers. It can be understood
as any change in capital structure, operations, size or ownership that is outside the
ordinary course of business. Such things as mergers, acquisitions, joint ventures, sell
offs, spin-offs, split-ups, LBO's, MBO's, divestitures, going private, buyback of shares,
etc. are some examples of corporate restructuring.

Objectives of corporate restructuring:

The following are some of the objectives behind corporate restructuring.

Growth: Growth may be essential to any company to survive in the marketplace, to

maintain leadership and to increase the market share. Growth is measured in terms of
sales, profits and assets. Increases in assets are needed to increase the sales, which in
turn increases the profits of the company.

Growth strategies: A company may grow by:

● Increasing the sales to the current customers.
● Pulling the customers from competitors.
● Converting the non-user into users.
● Adding new channels of distribution, and
● Entering a new geographical area.

Technology: The fast change in technology makes it obligatory for the technologically
weak firms to enter into technological collaboration with other firms.

Government policy: In order to adapt itself to changed environment, a firm may

go for corporate restructuring.

To reduce dependency on others: For raw materials or finished goods, a company

may go for forward and backward integration.

Economic stability: Economic cycles of booms and depressions may also force a firm
to go for mergers and acquisitions and other forms of corporate restructuring.