Amalgamation & Merger: Methods of Valuation Goodwill,

Shares, Business, and Consolidated Financial statement

A Project Submitted to

University of Mumbai for partial completion of the degree of

Master in Commerce

Under the Faculty of Commerce

By

Manisha Saradarmal Kumavat

ROLL NO. 24

Under the Guidance of

K. A. SHAMA

KONKAN GYANPEETH URAN COLLEGE

OF COMMMERCE AND ARTS
URAN – RAIGAD - 400702

MARCH 2022

1
 Acknowledgment

To list who all have helped me is difficult because they are so numerous and the depth
is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to
do this project.

I would like to thank my Principal, Dr.Baliram N Gaikwad for providing the

necessary facilities required for completion of this project.

I take this opportunity to thank our Coordinator K.A. Shama, for her moral support
and guidance.

I would also like to express my sincere gratitude towards my project guide K.A.
Shama whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.

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 Declaration by learner

I the undersigned Ms. Manisha Sardarmal Kumavat hereby, declare that the work
embodied in this project work titled “Amalgamation & Merger: Methods of Valuation
Goodwill, Shares, Business, and Consolidated Financial statement” Forms my own
contribution to the research work carried out under the guidance of Kishor Shama Sir is
a result of my own research work and has not been previously submitted to any other
university for any other degree of diploma to this or any other university.
Wherever reference has been made to previous work of other, it has been clearly
indicated as such and included in the bibliography.
I, herby further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Manisha Sardarma Kumavat

Certified by,
Kishor Shama Sir,

3
 KONKAN GYANPEETH URAN COLLEGE
OF COMMMERCE AND ARTS
URAN – RAIGAD - 400702

Certificate

This is to certify that Ms. Manisha Sardarmal Kumavat has worked and duly
completed her Project Work for the degree of Master in Commerce under the Faculty of
Commerce in the subject of and her/his project is entitled, Amalgamation & Merger:
Methods of Valuation Goodwill, Shares, Business, and Consolidated Financial
statement” undermy supervision. I further certify that the entire work has been done by
the learner under my guidance and that no part of it has been submitted previously for
any Degree or Diploma of any University. It is her own work and facts reported by
her/his personal findings and investigations.

K.A.Shama

Date of submission:

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 INDEX

SR. PARTICULARS PAGE NO.

NO.
1 Chapter No. 1 - Introduction 07
2 Chapter No. 2 - Research Methodology 10
3 Chapter No. 3 – Literature Review 12
4 Chapter No. 4 – Data Analysis, Data Interpretation and 14
Presentation
 Types of Amalgamation 15

 Objectives of Amalgamation 16
 Limitation 17
 Advantages and Disadvantages 23
 Procedure Of Amalgamation 24
 Chapterisation 28
 Introduction on Merger and Acquisition 37
 History of Merger and Acquisition 42
 Types of Merger 43
 Advantages of Merger 45
 Procedure of Merger and Acquisition 50
 Procedure of Bank Merger 51
 Disadvantages of Merger 53
 Reason for Merger Failure 54
 Reason for Motivation For Merger and Acquisition 57
 Difference between Merger and Acquisition 60
 Case Study 61
 Valuation of Purchased Goodwill 62
 Methods of valuing goodwill Of a company 64
 Methods of valuation of Shares 68
 Business of Valuation Methods 70
 Procedure of Bank Merger 75
 Exchange Ratio 78
5 Chapter No. 5 Conclusion 89
Bibliography 90

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CHAPTER NO. 1 – INTRODUCTION

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 Introduction

Following the financial changes in India in the post – 1991 period, there is a perceivable
pattern among promoters and built up corporate gatherings towards union of piece of the
overall industry and expansion into new zones through obtaining takeover of
organizations yet in a more articulated way through mergers or amalgamations1. Under
the Companies Act 2013, the idea of merger and amalgamation is completely clarified
though under organizations Act 1956, the term 'merger' isn't characterized and
furthermore under the Income Tax Act, 1961. The merger is a mix of at least two
substances into one, it isn't only the gathering of advantages and liabilities of the
particular elements, yet the association of element into one business. Focal Government
issued notice for authorization of areas identified with merger and amalgamation on
seventh November 2016. Despite the fact that significant changes have been joined in the
new demonstration yet at the same time there are sure arrangements which stay unaltered,
for example, pre-condition to merger and amalgamation of tolerating plan by three-
fourths of investors is as yet a pre-condition under the new demonstration. Focal
government still has the ability to arrange merger and amalgamation in light of a
legitimate concern for the country. There is additionally a commitment to keep up records
of merger and amalgamation under area 239. There are some different arrangements
which stay unaltered identified with gathering gatherings, getting the authorization of
administrative specialists and focal government. Application recorded in connection to
the reproduction of the organization under segment 230 for trade off and course of action
or which includes merger or amalgamation of at least two organizations need to indicate
the motivation behind the plan. Aim of the Study The aim of the study is used to know
about the amalgamation and merger of the company. Hypothesis HO The common reason
in increase merge is sustain growth, it couldn’t be achieved by increasing market share
and gaining access to additional customer. HA the common reason in increase merge is
sustain growth; it could be achieved by increasing market share and gaining access to
additional customer.

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 What is Amalgamation?

Amalgamation is defined as the combination of one or more companies into a new entity.
It includes:

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

II. Absorption or blending of one by the other

Thereby, amalgamation includes absorption.

However, one should remember that Amalgamation as its name suggests, is nothing but
two companies becoming one. On the other hand, Absorption is the process in which the
one powerful company takes control over the weaker company.

Generally, Amalgamation is done between two or more companies engaged in the same
line of activity or has some synergy in their operations. Again the companies may also
combine for diversification of activities or for expansion of services

Transfer or Company means the company which is amalgamated into another company;
while Transfer Company means the company into which the transfer or company is
amalgamated.

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CHAPTER NO. 2 – RESEARCH METHODOLOGY

9
 Methodology

In this research the researcher used the descriptive method. Descriptive Research
More simply put, descriptive research is all about describing people who take part in the
study. There are three ways a researcher can go about doing a descriptive research
project, and they are: Observational, defined as a method of viewing and recording the
participants.

Sources of Study

Various books, e-sources and journals are used for the study related to amalgamation and
merger of the company.

Research Question

Whether the mergers and amalgamation is that it provides productive platform for the
company to grow under Companies act 2013 with comparison to Income tax act 1961.

10
CHAPTER NO. 3 - LITERATURE REWIEW

11
 Literature Review
It is the shareholders who have created it and they can bring it to a close. The other means
by which a company can cease its identity is by merging with another company. This is
called merger. Alternately, two companies can join to form a new company. This is called
amalgamation( Author : Khan Jain , 2007) Following the economic reforms in India in
the post- 1991 period, there is a discernible trend among promoters and established
corporate groups towards consolidation of market share and diversification into new
(Author : Machiraju. H.R, 2007) Business combinations, corporate restructuring and
corporate reorganizations are terms used to cover mergers, acquisitions, amalgamations
and takeovers. They are critical to the healthy expansion of business firms as they evolve
through successive stages of growth and development( Author: Prasanna Chandra,2010)
he central government is provided with an opportunity to have a say in the matter of
amalgamations of companies before the scheme of amalgamation is approved The law
relating to mergers also explicitly prescribed that any merger or amalgamation which
increased concentration of asset ownership(Author : Godbole Prasad .G, 2006)
Amalgamation, however, doesn't involve formation of a new company to carry on the
business of an old company. As per Companies Act, 2013, legislation that facilitates
amalgamation in India, 10 the terms merger and amalgamation are synonymous and not
defined anywhere in the Act. Sections 390-396A of Companies (Author: Beena.P.L,
2011) this section summarises the important and relevant tax provisions applicable to
amalgamations, acquisitions, mergers and demergers. Tax Aspects Related to
Amalgamation/Mergers Amalgamation for the purposes of income tax is
recognised(Author: Ray Ghosh kamal , 2014) Thus, corporate restructuring can take
different forms like mergers, acquisitions, spin-offs or divestitures in order to increase a
firm's value. However, according to Section 2 (IB) of the Income Tax Act, "an
amalgamation means the merger of one or more companies with another company or the
merger of two or more (Author: Rajasekhar, 2010) As co-operative banks are under dual
control, with both the RBI and the RCS (Registrar of Co-operative Societies) for merger
to take place the RBI must issue a no- objection certificate (NOC) to RCS. Amalgamation
and mergers of co-operative banks falls under the purview (Author: Pradeep Mehta.S,
2008) Mergers and Amalgamation Concentration of economic power may result from
merger, amalgamation or take -over. The MRTP Act does not prohibit merger,

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amalgamation or take-over, but seeks to ensure (Author: Orithazzan, 2016) Nature and
Significance Business combinations, corporate restructuring and corporate
reorganizations are terms used to cover mergers, acquisitions, amalgamations and
takeovers. They are critical to the healthy expansion of business firms as they evolve
through successive stages of growth(Author: S.petitt Barbara, 2007) The least
contentious, perhaps, is that legislated municipal amalgamation is not a new policy, in the
United States at International Journal of Pure and Applied Mathematics Special Issue 737
least. Much else about the lessons from Philadelphia's story would likely besubject to
heated dispute. Without focusing on Philadelphia, the aims of this report are to explore
the history of municipal (Author: Eric Barr.J, 2009).

13
CHAPTER NO. 4 – DATA ANALYSIS, INTERPRETATION AND
PRESENTATION

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 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. If the purchase
consideration exceeds the net assets value then the excess amount is recorded as the
goodwill, while if it is less than the net assets value it is recorded as the capital reserves.

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 Objective

To know about the procedure for merger and Amalgamation under

 Companies act 2013, to understand the process of terms mergers and Amalgamation.

 1 Jain, Khan, Financial Management, published by Springer, on 2007, in India.

International Journal of Pure and Applied Mathematics Special Issue 736 to analysis the
concept of merger and Amalgamation of the company

 To achieve growth of the company.

Objectives of Amalgamation of Companies:

The following are the main objectives of amalgamation of companies:

1. To avoid competition:
The main purpose of amalgamation of   companies is to avoid competition among
themselves. This will give the company an edge over its competitors.

2. To reduce cost:
The amalgamated company can derive the operating cost advantage through lowering the
cost of production. This is possible because of ‘economies of large scale’.

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

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

5. To diversify the activities:

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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.

Limitation

The research has been limited to only referring to online sources and books. The
topic is very vast with limited time.

Limitation Sentence Examples

• Even with this limitation the subject is too vast for us to enter into details.

• But this limitation is always taken for granted.

• Was this limitation a reason for sacrificing the advantages we had gained?

• All that it is necessary to assume is that the effects of the successive zones
gradually diminish, whether from the increasing obliquity of the secondary ray or because
(on account of the limitation of the region of integration) the zones become at last more
and more incomplete.

• Thus the limitation of the Milanese duchy under Filippo Maria Visconti, and its
consolidation under Francesco Sforza, were equally effectual in preparing the balance of
power to which Italian politics now tended.

• There was a new scepticism - at the very least a doctrine of limitation in human
knowledge; but in its extremer forms an absolute agnosticism.

• The most important step taken by President Harding during the first year of his
administration was the calling of an international conference on the limitation of
armaments.

• Limitation as to the officiating ministers of the sanctuary.

• They were at the height of their power in the period during the limitation of the
monarchy.

17
• When the popular vote was taken, in the following April, every eastern county
gave a majority against the convention, but the West, even with the limitation which was
decidedly.

 The high court was the supreme source of justice for the military class; and in its
composition and procedure the same limitation of the crown, which appears in
regard to military service, is again evident.
 A secondary wave suitable when the primary wave is undisturbed, with mere
limitation of the integration to the transparent parts of the screen.
 "It is hardly necessary to add," he remarks, "that anything which any insulated
body or system of bodies can continue to furnish without limitation cannot
possibly be a material substance; and it appears to me to be extremely difficult, if
not quite impossible, to form any distinct idea of anything capable of being excited
and communicated in the manner that heat was excited and communicated in these
experiments, except I"It is hardly necessary to add," he remarks, "that anything
which any insulated body or system of bodies can continue to furnish without
limitation cannot possibly be a material substance; and it appears to me to be
extremely difficult, if not quite impossible, to form any distinct idea of anything
capable of being excited and communicated in the manner that heat was excited
and communicated in these experiments, except it be motion."
 In embryology the method finds its expression in the limitation of comparisons to the
corresponding stages of low and high forms and the exclusion of the comparisons
between the adult stages of low forms and the embryonic stages of higher forms.
 We owe to Buffon the recognition of the limitation of groups of species to regions
separated from one another by natural barriers.
 As we have already seen, and in the general practice of the regal period, there was
no limitation as to the priesthood, but a definite order of priesthood, viz.
 Competition, in the sense in which the word is still used in many economic works, is
merely a special case of the struggle for survival, and, from its limitation, does not go
far towards explaining the actual working of modern institutions.
 Gain, the arrangement followed in the Pterylographie was of course based on
pterylographical considerations, and we have its author's own word for it that he
was persuaded that the limitation of natural groups could only be attained by the

18
 most assiduous research into the species of which they are composed from every
point of view.
 There is practically no limitation, but the will of the parties, as to the persons to
whom a lease may be granted.
 They refused to permit the vital problem of limitation of armaments to be side-
tracked, and surprised the conference by proposing a ten-year naval holiday and a
drastic scrapping of tonnage by the three chief naval Powers.
 The appointment of one man to preach, to the exclusion of others, whether he feels
a divine call so to do or not, is regarded as a limitation of the work of the Spirit
and an undue concentration of that responsibility which ought to be shared by a
wider circle.
 Thus comparative anatomy came into existence as a branch of inquiry apart from
zoology, and it was only in the latter part of the 19th century that the limitation of
the word " zoology " to a knowledge.
 The failure of the material carrying a positive character to divide so as to distribute
itself among all the reproductive cells of a hybrid individual, and the limitation of
its distribution to half only of those cells, must prevent the swamping " of a newly
appearing character in the course of the inter-breeding of those individuals
possessed of the character with those which do not possess it.
 The analysis of the specific variations of organic form so as to determine what is
really the nature and limitation of a single " character " or " individual variation,"
and whether two such true and strictly defined single variations of a single
structural unit can actually " blend " when one is transmitted by the male parent
and the other by the female parent, are matters which have yet to be determined.
 Since the limitation of the width of the central band in the image of a luminous
line depends upon discrepancies of phase among the secondary waves, and since
the discrepancy is greatest for the waves which come from the edges of the
aperture, the question arises how far the operation of the central parts of the
aperture is advantageous.
 When Matthew Arnold questioned his importance in conversation with Sainte-
Beuve, the answer was, "He is important to us," and it was a true answer; but the
limitation is obvious.

19
 His chief writings were: An essay in Lux Mundi on "The Incarnation as the Basis
of Dogma" (1889); a paper, Belief in a Personal God (1891); Reason and Religion
(1896), a protest against the limitation of the reason to the understanding;
Ministerial Priesthood (1897); and Atonement and Personality (1901).
 The circuit of the justices in Eyre, or their deputies, continued down to 1635; they
were virtually ended by the Act for the Limitation of Forests (1640), though
Charles II.
 1912 in order to make tentative proposals for an agreement regarding the
limitation of new construction.
 The question then arises whether, by removing the limitation as to the position
That after the said limitation shall take effect as aforesaid, judges' commissions be
made quadrium se benegesserint and their salaries ascertained and established; but
upon, the address of both houses of parliament it may be lawful to remove
themBut in ancient times it was not so; and under Joash, the contemporary of
Elisha, such a limitation of the people of Yahweh is wholly inconceivable.
 They have the perpetuity of conventions which contain no time limitation; but,
like every human convention, they can be denounced, in the form in use for
international treaties, and for good reasons, which are summed up in the
exigencies of the general good of the country.
 The multitude of species and the many intermediate forms render their exact
limitation difficult, but those presenting sufficiently marked characters to justify
specific rank probably approach 300 in number.
 It has precisely the same limitation as the treatment of form and emotion; it cannot
change as the work proceeds.
 The absence of marked natural boundaries makes any precise north and south
limitation difficult.
 A further consequence directly followed from the limitation as to sanctuary, viz.
 He refused to join Napoleon in any proposal for the coercion of Austria or the
limitation of her armaments.
 The telegraph companies proposed to effect an amalgamation so as to enable the
services to be consolidated and extended, and they proposed to submit to various
conditions for the protection of the public, such as maximum rates

20
 and limitation of dividends, with the provision that new issues of capital should
be offered by auction, but public opinion was averse to the proposal.
 Schelling conceives of the gradual self-evolution of nature in a succession of
higher and higher forms as brought about by a limitation of her infinite
productivity, showing itself in a series of points of arrest. The British delegates
wrote that it appeared that there were at that time but two methods of securing the
suppression of the bounty system - an arrangement for limitation of the French
and Russian bounties acceptable to the other sugar-producing states, in return for
the total abolition of their bounties; or, a convention between a certain number of
these states, providing for the total suppression of their bounties, and for the
prohibition of entry into their territory of bounty-fed sugars, or countervailing
duties prohibiting importation.
 It is to be noted that, whilst the zoological system took the form of a genealogical
tree, with main stem and numerous diverging branches, the actual form of that
tree, its limitation to a certain number of branches corresponding to a limited
number of divergences in structure, came to be regarded as the necessary
consequence of the operation of the physico-chemical laws of the universe, and it
was recognized that the ultimate explanation of that limitation is to be found only
in the constitution of matter itself.
 Thus his name is associated with the Fines and Recoveries Abolition Act 1833; the
Inheritance Act 1833; the Dower Act 1833; the Real Property Limitation Act
1833; the Wills Act 1837; one of the Copyhold Tenure Acts 1841; and the
Judgments Act 1838.
 From this we may infer the limitation upon the width of the source of light, in
order that the bands may be properly formed.
 The ego and non-ego limit one another, or determine one another; and,
as limitation is negation of part of a divisible quantum, in this third act, the
divisible ego is op-posed to a divisible non-ego.
 Later investigations by Fraunhofer, Airy and others have greatly widened the field,
and under the head of " diffraction " are now usually treated all the effects
dependent upon the limitation of a beam of light, as well as those which arise from
irregularities of any kind at surfaces through which it is transmitted, or at which it
is reflected.

21
 Subject to a limitation which we shall examine later, the velocity of a longitudinal
disturbance along a wire or rod depends only on the material of the rod, and not
upon the cross-section.
 Some reforms were adopted, the public peace was proclaimed without any
limitation of time and a general tax was levied.

22
 Advantages of Amalgamation

 Competition between the companies gets eliminated

 R&D facilities are increased
 Operating cost can be reduced
 Stability in the prices of the goods is maintained

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

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 Why Amalgamate?

a. To acquire cash resources

b. Eliminate competition
c. Tax savings
d. Economies of large scale operations
e. Increase shareholders value
f. To reduce the degree of risk by diversification
g. Managerial effectiveness
h. To achieve growth and gain financial

Procedure for Amalgamation

1. The terms of amalgamation are finalized by the board of directors of the

amalgamating companies.
2. A scheme of amalgamation is prepared and submitted for approval to the respective
High Court.
3. Approval of the shareholders’ of the constituent companies is obtained followed by
approval of SEBI.
4. A new company is formed and shares are issued to the shareholders’ of the transferor
company.
5. The transferor company is then liquidated and all the assets and liabilities are taken
over by the transferee company.

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 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.

Computation of purchase consideration: For computing purchase consideration,

generally two methods are used:

1. Purchase Consideration using net asset method: Total of assets taken over and this
should be at fair values minus liabilities that are taken over at the agreed amounts.

Particulars Rs.

Agreed value of assets taken over XXX

Less: Agreed value of liabilities taken over XXX

Purchase Consideration XXX

2. Agreed value means the amount at which the transfer or company has agreed to sell and
the transferee company has agreed to take over a particular asset or liability.
3. Purchase consideration using payments method: Total of consideration paid to both
equity and preference shareholders in various forms.

25
Example: A. Ltd takes over B. Ltd and for that it agreed to pay Rs 5, 00,000 in cash.
4,00,000 equity shares of Rs 10 each fully paid up at an agreed value of Rs 15 per share.
The Purchase consideration will be calculated as follows:

Particulars Rs
Cash
5,00,000

4,00,000 equity shares of Rs10 fully paid up at Rs15 per share

60,00,000

Purchase Consideration
65,00,000

26
 Other examples of Amalgamations

1. Maruti Motors operating in India and Suzuki based in Japan amalgamated to form a
new company called Maruti Suzuki (India) Limited.
2. Gujarat Gas Ltd (GGL) is an amalgamation of Gujarat Gas Company Ltd (GGCL)
and GSPC Gas.
3. Satyam Computers and Tech Mahindra Ltd

4. Tata Sons and the AIA group of Hong Kong amalgamated to form Tata AIG Life
Insurance.

Recently announced Amalgamation

One of the recent amalgamations announced on the corporate front is of PVR Ltd.
Multiplex operator PVR Ltd has approved an amalgamation scheme between Bijli
Holdings Pvt Ltd and itself to simplify PVR’s shareholding structure. As per the
management, the purpose of the amalgamation is to simplify the shareholding structure of
PVR and reduction of shareholding tiers. It also envisages demonstrating Bijli Holdings’
direct engagement with PVR. After the amalgamation, individual promoters will directly
hold shares in PVR and there will be no change in the total promoters’ shareholding of
PVR.

27
 Chapterisation

 The entire study is divided into two chapters with an introduction and a
conclusion. Chapter - I this paper deals with Scheme for merger and
amalgamation. Chapter–II this paper deals with the meeting and information of the
company
 Scheme for Merger and Amalgamation

 Wherever two/more organizations consent to converge with each other, they need
Scheme for merger and amalgamation. To set up a plan of amalgamation. The
obtaining organization ought to set up the plan in meeting with its shipper
banker(s)/money related advisors. The fundamental substance of a model plan,
between alia, is as recorded beneath. Description of the exchange and the
transferee organization and the matter of the transferor. International Journal of
Pure and Applied Mathematics Special Issue 738 Their approved, issued and
bought in/paid – up capital.

 Basis of plan : Main terms of the plan in independent sections on the

 Suggestion of valuation report, covering exchange of benefits/liabilities, exchange
date, lessening or union of capital, application to monetary foundations as lead
organization for authorization et cetera. Change of name, question statement and
bookkeeping year.
 Protection of work.
 Dividend position and prospects.
 Management : Board of executives, their number and interest of
 Transferee organization's chiefs on the board. Application under area 291 and 394
of the Companies Act, 1956, to get
 Higher Court's endorsement. Expenses of amalgamation.
 Conditions of the plan to wind up successful and agent, successful date of
amalgamation. The premise of merger/amalgamation in the plan ought to be the
reports of the value’s of advantages of both the merger accomplice organizations3.
The plan ought to be set up based on the value’s report, reports of contracted

28
 bookkeepers drew in for money related examination and obsession of trade
proportion, report of evaluators and inspected records of both the organizations
arranged up to the delegated date. It ought to be guaranteed that the plan is simply
and fair to the investors, workers of every one of the amalgamating organization
and to the general population. Essential Features of Scheme of Amalgamation The
essential features pre-requisites for any scheme of amalgamation are as
enumerated.
 Below. Determination of Transfer Date (Appointed Date) this includes settling of
the cut-off date from which all properties, mobile and additionally steady and
rights connected theretoare looked to be exchanged from amalgamating
organization to the amalgamated organization. This date is known as exchange
date or the selected date and is typically the primary day of the money related year
going before the budgetary year for which the examined accounts are accessible
with the organization. Approval from Creditors/Financial Institutions/Banks
Endorsements are required from the loan bosses, banks and monetary
organizations to the plan of amalgamation as far as their separate courses of action
with each of the amalgamating and the amalgamated organizations as 2 Chandra.,
Prasanna., Fund of Financial Management ., published by Kluwer Law
International., on 2010., in Sweden. 3 Godbole. Prasad .G. Merger and
Amalgamation and Corporate restricting. Published by Universal law on 2006. In
England. http://shodhganga.inflibnet.ac.in/handle/10603/7210 International
Journal of Pure and Applied Mathematics Special Issue 739 likewise under
Section 391.for the Scheme The plan of merger/amalgamation is administered by
the arrangements of Section 391-394 of the Companies Act.5 The legitimate
procedure expects endorsement to the plans as nitty gritty underneath approval
from Shareholders to the extent Section 391, financial specialists of both the
amalgamating and the amalgamated associations should hold their individual
social events under the headings of the different high courts and consider the
arrangement of amalgamation. An alternate get-together of both slant and esteem
financial specialists should be met hence reason6. Further, as far as Section
81(1A), the investors of the amalgamated organization are required to pass a
unique determination for issue of offers to the investors of the amalgamating

29
 organization as far as the plan of amalgamation. Endorsement from Respective
High Court(s) Approvals of the individual high court(s) as far as Section 391-394,
affirming the plan of amalgamation are required. The courts issue orders for
dissolving the amalgamating organization without ending up on receipt of the
reports from the official outlet and the local executive, Company Law Board, that
the issues of the amalgamating organization have not been directed in a way
biased to the interests of its individuals or to open interests. Presently let us
examine stepwise methodology for amalgamation. Question Clause The initial
step is to analyze the items provisos of the reminder of relationship of the
transferor and the transferee organizations in order to determine whether the
energy of amalgamation exists or not. The items proviso of transferee organization
ought to take into account carrying on the matter of the transferor organization. On
the off chance that it isn't along these lines, it is important to change the items
provision. So also, it ought to be learned whether the approved capital of the
transferee organization would be sufficient after the merger/amalgamation. On the
off chance that isn't along these lines, this condition ought to likewise be revised.
Appropriate arrangements for these could be consolidated in the plan itself.
 CHAPTER – II Meeting and Information of the Company Holding of meeting of
the top managerial staff of both the transferor and the transferee organizations:
(a) to choose the selected date and the powerful date
(b) to favor the plan of amalgamation and trade proportion
(c) To approve chiefs/officers to make applications to the suitable high
court for vital.

Activity 8 the shareholders and other members of the companies ought to likewise be
educated through official statement. The transferor the and transferee organizations ought
to illuminate the budgetary foundations, financiers/ debenture-trustees no less than 45
days before the load up meeting with the goal that their endorsement is accessible to the
proposed amalgamation at the season 5 Law Regulating mergers and Amalgamation by
Prabhanshu., in India. 6 Beena.P.L.Merger and acquisition under globalisation, published
by PHI Learning, Pvt ltd., on 2011, in London. 7 Machiraju. H.R, Mergers Acquisition
and Takeovers. Published by Kluwer Law International. 2007. 8 Machiraju. H.R, Mergers
Acquisition and Takeovers, published by Kluwer Law International., 2007. International

30
Journal of Pure and Applied Mathematics Special Issue 740 of executive gathering. 9 An
application for amalgamation can be presented by the organization, individuals or even
any of the banks. A part, in this setting implies any individual who has consented to be a
part and whose name shows up on the enroll of individuals. A bank incorporates all
people having financial cases against the organization for some sum whether present or
future, unmistakable or unexpected. Indeed, even one part or one such lender can make an
application for amalgamation. Where the application is proposed to be made by the
organization, just a man approved by the organization for this benefit can make an
application for amalgamation. It is, consequently, basic that the organization ought to
approve the director(s) or other officer (s) to make an application to the fitting high courts
and make fundamental move as might be required every once in a while. 10The chiefs
can, be that as it may, apply for amalgamation just when imperative power shows up in
the articles of affiliation initially or by method for alteration. Isolate applications under
Section 291 are required to be submitted to the fitting high courts by the amalgamating
and the amalgamated organizations with the end goal of the particular high courts issuing
bearings to gather gatherings of investors independently for inclination and value
investors to support the plan of amalgamation. It is officeholder on both the transferor and
the transferee organizations to get endorse of high courts having ward over them. Be that
as it may, where both the organizations are under the locale of a similar high court, a
joint-application might be made. Such an application can be moved notwithstanding
when a request for twisting up has been made. In any case, the transferee organization
require not get endorsement under Section 391 when the transferor organization is a
completely possessed auxiliary of the transferor organization. 11 The methodology for
making application to the high court has been set down under the Companies (Court)
Rules, 1959. An application under area 391 (1) for a request gathering a gathering of loan
bosses or potentially individuals or any class of them ought to be by a judge's summons
upheld by a sworn statement.

A duplicate of the proposed bargain or course of action ought to be added to the

testimony as a display. The summons ought to be moved ex-pardey. Where the
organization isn't the candidate, a duplicate of the summons and of the sworn statement
ought to be served on the organization, or where the organization is being ended up, on its
vendor, at the very least 14 days before the date settled for the becoming aware of the

31
summons. On receipt of the application by the high court, a hearing happens in the judge's
chamber, and after the hearing the judge may either expel the summons or request a
gathering of the individuals or may give such headings as he may think vital. In any case,
it is occupant on the 9 Mehta. Pradeep.S. A functional competition policy for India.
Published by pentagon press on 2008, in India. 10 Orithazzan. The merger model for
business Development. Published by little brown on 2016, in USA. 11 Merger and
Amalgamation under companies act 2013 by JyotiRawat International Journal of Pure and
Applied Mathematics Special Issue 741 court to be fulfilled that by all appearances the
plan is honest to goodness, banafide and to a great extent in light of a legitimate concern
for organization and its individuals. On being not happy with the plan, 12the court may
not by any means arrange the assembling of conference of lenders regardless of whether
the assent of the loan bosses has been withheld or malafide or subjective regardless of
whether the court considers the plan sensible and gainful to the leasers. The court may get
rid of the prerequisite of gathering a gathering where every one of the individuals from a
specific class have assented to the plan and have gone into important concurrence with
the transferee organization. Having known. Having known the proposed meeting the loan
bosses may likewise move the court for dismissal of the plan and the court may engage
such an application and after sensible examination may assemble off the conference. The
net advance is to hold isolate gatherings of the investors and leasers of the organization to
look for endorsement to the plan. The determination affirming the plan might be passed
by voting face to face or as a substitute according to the bearings of the high court. No
less than three-fourth in esteem of the individuals or class of individuals or banks must
vote for the determination supporting the plan of amalgamation. The individuals and the
leasers are required to be grouped into various classes to convene gatherings. This
procedure must be taken after promptly on receipt of application under segment 391

(1). In the event that gatherings of off base grouping are assembled and protest is taken
as to a specific lender of having enthusiasm contending with others, the organization risks
the plan being rejected. After characterization, the court may arrange gathering of the
separate gatherings of individuals or potentially lenders.13 Financial Framework The
financial framework of a merger decision covers three inter- related aspects

(i) Determining the value of the amalgamating firm

32
(ii) Financing techniques in merger, and

(iii) Analysis of merger as a capital budgeting decision. Determining the Firm’s Value
the primary issues in breaking down a potential merger includes deciding the estimation
of the obtained firm. The estimation of a firm depends upon its income as well as upon
the working and monetary characteristics of the securing firm. It is, along these lines,
impractical to put a solitary incentive for the gained firm14. Rather, a scope of qualities is
resolved that would be 12 Ghosh kamal, Ray. Evaluating companies for mergers and
acquisitions, published by PHI Learning, Pvt ltd, on 2014, in India.

14https://www.researchgate.net/publication/
258769054AStudy_on_Mergers_and_Acquisitions_Its_impact on
Management_and_Employees. International Journal of Pure and Applied Mathematics
Special Issue 742 monetarily legitimate to the planned acquirer. The last cost inside this
range is negotiated by the two firms15. To decide a worthy cost for a firm, various
elements, quantitative and additionally subjective, are significant. In any case, setting an
incentive on subjective factors, for example, administrative ability, solid, deals staff, great
generation division, et cetera is troublesome. Along these lines, the focal point of
deciding the association's esteem is on a few quantitative factors. The quantitative
components identify with the estimation of the benefits and 9b0 the profit of the firm. In
view of the benefits esteems and income, these elements incorporate book esteem,
examination esteem, advertise esteem and profit per share. Book Value The book of a
firm depends on the monetary record estimation of the proprietor's value. It decided
partitioning total assets, by the quantity of value shares extraordinary. The book esteem,
as the premise of deciding a company's esteem, experiences a genuine restriction as it
depends on the recorded expenses of the advantages of the firm. Authentic expenses don't
bear a relationship either to the estimation of the firm or to its capacity to produce profit.
Never the-less, it is important to the assurance of a company's an incentive for a few
reasons:

a) it can be utilized as a beginning stage to be thought about and supplemented by

different examinations.

33
b) in industries where the capacity to produce profit requires substantial interests in
settled resources, the book esteem could be basic factor where particularly plant
and hardware are moderately new.
c) an investigation of company's working capital is especially proper and essential in
mergers including a business comprising principally of fluid resources, for
example, budgetary establishments.
16 Appraisal Value Examination esteem as another measure of deciding a
company's esteem is procured from a free evaluation organization. This esteem is
ordinarily in view of the supplantment expenses of benefits. The appraisal esteem
has a few benefits. In any case, it is a critical factor in uncommon circumstances,
for example, in monetary organizations, characteristic asset undertakings or
associations that have been working at a misfortune. For example, the advantages
of a budgetary organization to a great extent comprise of securities. The estimation
of the individual securities has an immediate bearing on the company's acquiring
limit. So also, an organization working at a misfortune may just be justified
regardless of its liquidation esteem which would rough the examination esteem.
17Besides, the examination by independent appraisers may allow the
diminishment in bookkeeping altruism by expanding the perceived 15
http://www.theinternationaljournal.org/ojs/index.php. 16 Godbole. Prasad .G.
Merger and Amalgamation and Corporate restricting. Published by Universal law
on 2006 in England. 17 Machiraju. H.R, Mergers Acquisition and takeovers
published by Kluwer Law International., 2007. International Journal of Pure and
Applied Mathematics Special Issue 743 worth of particular resources. Generosity
comes about when the price tag of a firm surpasses the estimation of the individual
resources. Third evaluation by an indepengouge office gives a trial of the
sensibility of results acquired through techniques in light of the going-concern
idea. Furthe, the appraiser may distinguish qualities and shortcomings that
generally won't not be perceived, for example, in the valuation of licenses, mostly
finished innovative work consumption. Then again, this technique for
investigation isn't satisfactory without anyone else since the estimation of
individual resources may have little connection to the company's general capacity
to create profit and in this way the going concern estimation of the firm18. To sum

34
things up, the examination esteem strategy is helpful if completed in conjunction
with other assessment forms. In particular cases, it is a vital instrument for
esteeming a firm. Market Value The market an incentive as reflected in the share
trading system citations includes another approach for assessing the estimation of
a business. The support of market an incentive as an approximation of genuine
worth of a firm is gotten from the way that market citations all things considered
demonstrate the agreement of speculators with regards to the company's gaining
possibilities and the comparing hazard. The market esteem approach is a standout
amongst the most generally utilized as a part of deciding worth extraordinarily of
expansive recorded firms.19 The market estimation of a firm is controlled by
venture and in addition theoretical elements. This esteem can change suddenly
because of progress in the explanatory factors as well as absolutely theoretical
impacts and is liable to showcase estimations and individual choices. By and by,
the market esteem gives a nearby guess of the genuine estimation of a firm. In real
practice, a specific rate premium over the market is regularly offered as an
actuation for the present proprietors to offer their offers. 9. Conclusion The most
recent two decades have seen broad mergers and amalgamation as a vital means
for accomplishing reasonable upper hand in the corporate world. Mergers and
amalgamation (M&A) have turned into the significant power in the evolving
condition. The arrangement of progression, decontrol and globalization of the
economy has uncovered the corporate part to household and worldwide rivalry.
Mergers and amalgamation (M&A) have likewise developed as a standout
amongst the best strategies for corporate organizing, and have in this manner, turn
into a vital piece of the long haul business procedure of corporate segment
everywhere throughout the world. Right around 85 percent of Indian organizations
are utilizing M&A as a center development system.
18 Chandra, Prasanna, Fund of Financial Management., published by Kluwer Law
International., on 2010, in Sweden. 19 Rajasekhar, Corporate accounting,
published by Kluwer Law International., on 2010, in New Delhi. International
Journal of Pure and Applied Mathematics Special Issue 744.

35
 How is Amalgamation different from a Merger?

Amalgamation is different from Merger because neither of the two companies under
reference exists as a legal entity. Through the process of amalgamation a completely new
entity is formed to have combined assets and liabilities of both the companies.

36
 INTRODUCTION ON MERGER & ACQUISITION

We have been learning about the companies coming together to from another company
and companies taking over the existing companies to expand their business. With
recession taking toll of many Indian businesses and the feeling of insecurity surging over
our businessmen, it is not surprising when we hear about the immense numbers of
corporate restructurings taking place, especially in the last
Coupleofyears.Several companies have been taken over and several have undergone inter
nalrestructuring whereas certain companies in the same field of business have found
it beneficial to merge together into one company.
In this context, it would be essential for us to understand what corporaterestructuring and
mergers and acquisitions are all about. All our daily newspapers are filled with cases of
mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring.
Thus important issues both for business decision and public policy formulation have been
raised. No firm is regarded safe from a takeover possibility. On the more positive side
Mergers &Acquisitions may be critical for the healthy expansion and growth of the firm.
Successful entry into new product and geographical markets may require Mergers
&Acquisitions at some stage in the firm's development. Successful competition in
international markets may depend on capabilities obtained in a timely and efficient
fashion through Mergers & Acquisition’s. Many have argued that mergers increase value
and efficiency and move resources to their highest and best uses, thereby increasing
shareholder value.
To opt for a merger or not is a complex affair, especially in terms of thetechnicaliti
es involved. We have discussed almost all factors that the management may have to look
into before going for merger. Considerable amount of brainstorming would be required
by the managements to reach a conclusion. E.g. A due diligence report would clearly
identify the status of the company in respect of the financial position along with the net
worth and pending legal matters and details about various contingent liabilities. Decision
has to be taken after having discussed the pros & cons of the proposed merger & the
impact of the same on the business, administrative costs benefits, addition to
shareholders' value, tax implications including stamp duty and last but not the least also
on the employees of the Transferor or Transferee Company.

37
 WHAT IS MERGER?

Merger is defined as combination of two or more companies into a single company where
one survives and the others lose their corporate existence. The survivor acquires all the
assets as well as liabilities of the merged company or companies. Generally, the surviving
company is the buyer, which retains its identity, and the extinguished company is the
seller. Merger is also defined as amalgamation. Merger is the fusion of two or more
existing companies. All assets, liabilities and the stock of one company stand transferred
to Transferee Company in consideration of payment in the form of:

• Equity shares in the transferee company,

• Debentures in the transferee company,
• Cash, or
• A mix of the above modes.

38
 WHAT IS ACQUISITION?

Acquisition in general sense is acquiring the ownership in the property. In the

context of business combinations, an acquisition is the purchase by one
company of controlling interest in the share capital of another existing company.

Other possible purposes for acquisition are short listed below: -

(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or intermediary product;
2. To obtain economies of purchase in the form of discount, savings in transportation
costs, overhead costs in buying department, etc.
3. To share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilities through more
intensive utilization of plant and resources;
2. To standardize product specifications, improvement of quality of product, expanding
3. Market and aiming at consumers satisfaction through strengthening after sale Services
4. To obtain improved production technology and know-how from the offeredcompany
5. To reduce cost, improve quality and produce competitive products to retain and
improve market share.

(3) Market expansion and strategy:

1. To eliminate competition and protect existing market;
2. To obtain a new market outlets in possession of the offered;
3. To obtain new product for diversification or substitution of existing products and to
enhance the product range;
4. Strengthening retain outlets and sale the goods to rationalize distribution;
5. To reduce advertising cost and improve public image of the offered company;

39
6. Strategic control of patents and copyrights.

(4) Financial strength:

1. To improve liquidity and have direct access to cash resource;
2. To dispose of surplus and outdated assets for cash out of combined enterprise;
3. To enhance gearing capacity, borrow on better strength and the greater assets backing;
4. To avail tax benefits;
5. To improve EPS (Earning per Share).

(5) General gains:

1. To improve its own image and attract superior managerial talents to manage its affairs;
2. To offer better satisfaction to consumers or users of the product.
(6) Own developmental plans:
The purpose of acquisition is backed by the offer or company’s own developmental plans.
A company thinks in terms of acquiring the other company only when it has arrived at its
own development plan to expand its operation having examined its own internal strength
where it might not have any problem of taxation, accounting,valuation,etc. But
might feel resource constraints with limitations of funds and
lack of skillmanagerial personnel’s. It has to aim at suitable combination where it could h
ave opportunities to supplement its funds by issuance of securities, secure additional
financial facilities eliminate competition and strengthen its market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through
alternative type of combinations which may be horizontal, vertical, product expansion,
market extensional or other specified unrelated objectives depending upon the corporate
strategies. Thus, various types of combinations distinct with each other in nature are
adopted to pursue this objective like vertical or horizontal combination.

(8) Corporate friendliness:
Although it is rare but it is true that business houses exhibit degrees of cooperative spirit
despite competitiveness in providing rescues to each other from hostile

40
takeoversand cultivate situations of collaborations sharing goodwill of each other to achie
ve performance heights through business combinations. The combining corporate aim at
circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the
two combining business houses. Such integration could be operational
or financial. This gives birth to conglomerate combinations. The purpose and there
requirement of the offeror company go a long way in selecting a suitable partner
for merger or acquisition in business combinations.

41
 History of Merger &Acquisition

In the ongoing scenario, when the stress is on globalisation, opening up of the economy,
worldwide competition, expanding markets, extending beyond the national frontiers, fast
changing technologies, never ending need for finance, necessity for diversification and
similar such situations, small is no longer beautiful in the fields of business, trade,
commerce and developing economies of the nations. The stress now is on larger and
bigger establishments/conglomerates to achieve more efficiency for standing up against
global challenges and world in India and abroad, there is a 'merger' wave. Various
establishments/banks, wide competition by availing of the economies of scale and one up
man ship. Thus, all around multinationals and transnational are fast expanding by
amalgamations, mergers and takeovers/acquisitions. In India there had been quite few
mergers/takeovers like that of Hindustan Lever and tea companies, mergers of financial
companies like SCICI Limited and ICICI Limited, buyout of Gujarat Gas by British Gas
etc. There is thus greater need and enormous potential in India, particularly in the context
of clear commitment to continue liberalizing the economy. There is increased focus on
infrastructure development, which cannot be handled by small organizations commanding
minor resources. So combinations, mergers, amalgamations, takeovers have become the
order of the day. 15 In market-oriented economies, mergers and takeovers to be regarded
as a major corporate preoccupation. M&A activity in the United States has long been
described as occurring in waves. For example, the merger wave which began at the 19th
century and an over into the beginning of the 20th created a large number of monopolies.
The second merger wave which took place in the 1920s replaced monopolies with
"oligopolies". After the second merger wave in the 20s, the government intervened
strongly to discourage mergers, which could increase "concentration" or "market power".
The third mergers wave of the 60s avoided this legislation by creating "conglomerates".
The fourth merger wave of the 80s saw the return to corporate specialization. Similar
trends in mergers acquisitions have been witnessed in many other developed economies.
With the accent on globalisation round, the numbers of cross-border mergers have
increased dramatically over the last few years. The large scale privatization programs that
are on anvil in the East European countries and in many of the developing countries and
the formation of common markets like the single European market are some of the other

42
barriers built into different industries, and the merger at a low ebb. Having said that, we
must add this scenario is currently undergoing a sea change, thanks to the several far-
reaching measures of liberalization and globalisation initiated by the government. With
foreign companies being invited to invest in India; projectionist tariff walls being
progressively demolished; fetters on the growth of large business houses being removed;
the gateway to competition being opened up in almost every sector of the Indian
economy; and infusion of private capital being encouraged in many industries hitherto
reserved for the public sector, the government has made the domestic companies realize
that there is going to be more competition than ever before in the Indian market. One of
the consequences of such realization is thelarge scale corporate restructuring that has
started through a spate of mergers, acquisitions, strategic alliances and divestitures.

Types of Mergers

Merger or acquisition depends upon the purpose of the offer or company it wants
toa c h i e v e .   B a s e d   o n   t h e   o f f e r o r s ’   o b j e c t i v e s   p r o f i l e ,   c o m b i n a t i o n s   c o
u l d   b e   v e r t i c a l , Horizontal, circular and conglomeratic as precisely described below
with reference to the purpose in view of the offer or company.

(A) Vertical combination:
A company would like to take over another company or seek its merger
with that company to expand espousing backward integration to assimilate the resources
of supply and forward integration towards market outlets. The acquiring company
through merger of another unit attempts on reduction of inventories of
raw material and finished goods, implements its production plans as per the
objectives and economizes on working capital investments. In other words, in vertical
combinations, the merging undertaking would be either a supplier or a buyer using its
product as intermediary material for final production. The following main benefits
accrue from the vertical combination to the acquirer  company i.e.1.It gains a
strong position because of imperfect market of the intermediary products,
scarcity of resources and purchased products;

43
2. Has control over products specifications.

(B) Horizontal combination:
It is a merger of two competing firms which are at the same stage of industrial process.
The acquiring firm belongs to the same industry as the target company. The
mail purpose of such mergers is to obtain economies of scale in production by
eliminating duplication of facilities and the operations and broadening the product line,
reductionininvestment in working capital, elimination in competition concentration in pro
duct, reduction in advertising costs, increase in market segments and exercise better
control on market.

(C) Circular combination:
Companies producing distinct products seek amalgamation to share c
o m m o n distribution and research facilities to obtain economies by elimination of cost on
duplication and promoting market enlargement. The acquiring company obtains benefits
in the form of economies of resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCMand Modi

Industries. The basic purpose of such amalgamations remains utilization
of financial resources and enlarges debt capacity through re-organizing their financialstru
cture so as to service the shareholders by increased leveraging and EPS, lowering average
cost of capital and thereby raising present worth of the outstanding shares.Merger
enhances the overall stability of the acquirer company and creates balance in the
company’s total portfolio of diverse products and production processes.

44
 Advantages of Mergers

Mergers and takeovers are permanent form of combinations which vest inmanagement co
mplete control and provide centralized administration which are notavailable in combinati
ons of holding company and its partly owned subsidiary.Shareholders in the selling
company gain from the merger and takeovers as the premium offered to induce
acceptance of the merger or takeover offers much more price than the book value of
shares. Shareholders in the buying company gain in the long run with the growth of the
company not only due to synergy but also due to “boots trapping earnings”. Mergers and
acquisitions are caused with the support of shareholders, manager ‘sad promoters of the
combing companies. The factors, which motivate the shareholders and managers to lend
support to these combinations and the resultant consequences they have to bear, are
briefly noted below based on the research work by various scholars globally.

(1)From the standpoint of shareholders

Investment made by shareholders in the companies subject to merger should enhance in
value. The sale of shares from one company’s shareholders to another and holding
investment in shares should give rise to greater values i.e. the opportunity
gains in alternative investments. Shareholders may gain from merger in
different waives. From the gains and achievements of the company i.e. through
(a)Realization of monopoly profits;
(b)Economies of scales;
(c)Diversification of product line;
(d)Acquisition of human assets and other resources not available otherwise;
(e)Better investment opportunity in combinations.
One or more features would generally be available in each merger where
shareholders may have attraction and favour merger.

(2)From the standpoint of managers

45
Managers are concerned with improving operations of the company, managing theaffairs
of the company effectively for all round gains and growth of the company whichwill
provide them better deals in raising their status, perks and fringe benefits.
Mergerswhere all these things are the guaranteed outcome get support from the
managers. At thesame time, where managers have fear of displacement at the
hands of new management in amalgamated company and also resultant
depreciation from the merger then supportfrom them becomes difficult.
(3) Promoter’s gains
Mergers do offer to company promoters the advantage of increasing the size
of their company and the financial structure and strength. They can convert a
closely heldand private limited company into a public company without
contributing much wealthand without losing control.
(4) Benefits to general public
Impact of mergers on general public could be viewed as aspect of
b e n e f i t s a n d costs to:
(a)Consumer of the product or services;
(b) Workers of the companies under combination;
(c)General public affected in general having not been user or consumer or the worker in
the companies under merger plan.

(a) Consumers
The economic gains realized from mergers are passed on to consumers in the formof
lower prices and better quality of the product which directly raise their
standard of living and quality of life. The balance of benefits in favour of
consumers will dependupon the fact whether or not the mergers increase or decrease
competitive economic and productive activity which directly affects the degree of welfare
of the consumers throughchanges in price level, quality of products, after sales service,
etc.

(b) Workers community

46
The merger or acquisition of a company by a conglomerate or other
a c q u i r i n g company may have the effect on both the sides of increasing the welfare in
the form of purchasing power and other miseries of life. Two sides of the impact as
discussed by theirsearchers and academicians are:
Firstly,
Mergers with cash payment to shareholders  p r o v i d e o p p o r t u n i t i e s f o r t h e m t o
invest this money in other companies which w i l l generate further
employment and growth to uplift of the economy in general.
Secondly,
Any restrictions placed on such mergers will decrease the growth and investment
activitywith corresponding decrease in employment. Both workers and communities will
suffer on lessening toOpportunities, preventing the distribution of benefits resulting from
diversificationof production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power is to be
understood as the ability to control prices and industries output as monopolists. Such
monopolists affect social and political environment to tilt everything in their favour to
maintain their power ad expand their business empire. These advancesresult into
economic exploitation. But in a free economy a monopolist does notstay for a longer
period as other companies enter into the field to reap the benefitsof higher prices set in by
the monopolist. This enforces competition in the
marketa s   consumers are free to substitute the alternative products. Therefore, it isdifficul
t to generalize thatmergers affect the welfare of general public adversely orfavorably.
Every merger of two or more companies has to be viewed from different tangles in the
business practices which protects the interest of the shareholders inthe merging company
and also serves the national purpose to add to the welfare of the employees, consumers
and does not create hindrance in administration of theGovernment policies.

Advantages and disadvantages of Mergers and Acquisition

47
The advantage and disadvantages of merger and acquisition are depending of the new
companies short term and long term strategies and efforts. That is because of the factors
likes’ market environment, Variations in business culture, acquirement costs and changes
to financial power surrounding the business captured. So following are the some
advantages and disadvantages of merger and acquisition (M&A) are:

Advantages: Following are the some advantages

 The most common reason for firms to enter into merger and acquisition is to
merge their power and control over the markets.
 Another advantage is Synergy that is the magic power that allow for increased
value efficiencies of the new entity and it takes the shape of returns enrichment
and cost savings.
 Economies of scale is formed by sharing the resources and services (Richard etal,
2007). Union of 2 firm’s leads in overall cost reduction giving a competitive
advantage, that is feasible as a result of raised buying power and longer production
runs.
 Decrease of risk using innovative techniques of managing financial risk.
 To become competitive, firms have to be compelled to be peak of technological
developments and their dealing applications. By M&A of a small business with
unique technologies, a large company will retain or grow a competitive edge.
 The biggest advantage is tax benefits. Financial advantages might instigate
mergers and corporations will fully build use of tax- shields, increase monetary
leverage and utilize alternative tax benefits (Hayn, 1989).

Disadvantages: Following are the some difficulties encountered with a

merger-

48
  Loss of experienced workers aside from workers in leadership positions. This kind
of loss inevitably involves loss of business understand and on the other hand that
will be worrying to exchange or will exclusively get replaced at nice value.
 As a result of M&A, employees of the small merging firm may require exhaustive
re-skilling.
 Company will face major difficulties thanks to frictions and internal competition
that may occur among the staff of the united companies. There is conjointly risk of
getting surplus employees in some departments.
 Merging two firms that are doing similar activities may mean duplication and over
capability within the company that may need retrenchments.
 Increase in costs might result if the right management of modification and also the
implementation of the merger and acquisition dealing are delayed.
 The uncertainty with respect to the approval of the merger by proper assurances.
 In many events, the return of the share of the company that caused buyouts of
other company was less than the return of the sector as a whole.

The merger and acquisition (M&A) reduces flexibility. If a rival makes revolution and
may currently market vital resources those are of superior quality, shift is tough. The
change expense is the major distinction between the particular merger worth and also the
merchandising value of the firm that can be of larger distinction.

Examples of Mergers and Acquisitions in India

 Acquisition of Corus Group by Tata Steel in the year 2006.

 Acquisition of Myntra by Flipkart in the year 2014.
 The merger of Fortis Healthcare India and Fortis Healthcare International.
 Acquisition of Ranbaxy Laboratories by Sun Pharmaceuticals.
 Acquisition of Negma Laboratories by Wockhard

Procedure of Mergers & Acquisitions

49
Public announcement:
To make a public announcement an acquirer shall follow the following procedure:

1. Appointment of merchant banker:
The acquirer shall appoint a merchant banker registered as category – I with SEBI to
advise him on the acquisition and to make a public announcement of offer on his behalf.

2. Use of media for announcement:

Public announcement shall be made at least in one national English daily one Hindi daily
and one regional language daily newspaper of that place where the shares of that
company are listed and traded.

3. Timings of announcement:
Public announcement should be made within four days of finalization of negotiations or
entering into any agreement or memorandum of understanding to acquire the shares or the
voting rights.

4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBIRegulations.

50
 Procedure of Bank Merger
The procedure for merger either voluntary or otherwise is outlined in the respective state
statutes/ the Banking regulation Act. The Registrars, being the authorities invested with
the responsibility of administering the Acts, will be ensuring that the due process
prescribed in the Statutes has been complied with before they seek the approval of the
RBI. They would also be ensuring compliance with the statutory procedures for notifying
the amalgamation after obtaining the sanction of the RBI.
Before deciding on the merger, the authorized officials of the acquiring bank and the
merging bank sit together and discuss the procedural modalities and financial terms. After
the conclusion of the discussions, a scheme is prepared incorporating herein the all the
details of both the banks and the area terms and conditions.
Once the scheme is finalized, it is tabled in the meeting of Board of directors
of r e s p e c t i v e b a n k s . T h e b o a r d d i s c u s s e s t h e s c h e m e t h r e a d b a r e a n d
a c c o r d s i t s approval if the proposal is found to be financially viable and beneficial in
long run.
After the Board approval of the merger proposal, an extra ordinary general meeting of the
shareholders of the respective banks is convened to discuss the proposal and seek their
approval.
After the board approval of the merger proposal, a registered value is appointed to
valuate both the banks. The valuer valuates the banks on the basis of
i t s s h a r e capital, market capital, assets and liabilities, its reach and
anticipated growth and ends its report to the respective banks.
Once the valuation is accepted by the respective banks, they send the proposal
along with all relevant documents such as Board approval, shareholders’ approval,
valuation report etc. to Reserve Bank of India and other regulatory bodies
such Security& exchange board of India (SEBI) for their approval.
After obtaining approvals from all the concerned institutions, authorized officials of both
the banks sit together and discuss and finalize share allocation proportion  by
the acquiring bank to the shareholders of the merging bank (SWAP ratio).

51
 Concept of Mergers and Acquisition

The main idea behind mergers and acquisition is one plus one makes three. The
two companies together are more worth full than two classified companies at least that’s
the concluding behind mergers. Merger is the combination of two or more firms,
generally by offering the shareholders of one firm’s securities in the acquiring firm in
exchange for the acquiescence of their shares. Merger is the union of two or more firms in
making of a new body or creation of a holding company (European Central Bank, 2000,
Gaughan, 2002, Jagersma, 2005). In other words when two firms combine to create a new
firm with shared resources and corporate objectives, it is known as merger (Ghobodian,
liu and Viney 1999).

It involves the mutual resolution of two firms to merge and become one entity and it may
be seen as a choice created by two “equals”. The mutual business through structural and
operational benefits secured by the merger will reduce cost and increase the profits,
boosting stockholder values for each group of shareholders. In other words, it involves
two or more comparatively equal firms, which merge to become one official entity with
the goal of making that’s value over the sum of its components. During the merger of two
firms, the stockholders sometimes have their shares within the previous company
changed for an equal amount of shares within the integrated entity. The fundamental
principle behind getting an organization is to form shareholders wealth over and higher
than that of two firm’s wealth. The best example of merger is merger between AOL and
Time Warner in the year 2000. In 2000 the merger between AOL and Time Warner is one
of the biggest deal that later fails.

52
 Disadvantages: Following are the some difficulties encountered with a
merger-

Loss of experienced workers aside from workers in leadership positions. This kind of loss
inevitably involves loss of business understand and on the other hand that will be
worrying to exchange or will exclusively get replaced at nice value.

 As a result of M&A, employees of the small merging firm may require exhaustive
re-skilling.
 Company will face major difficulties thanks to frictions and internal competition
that may occur among the staff of the united companies. There is conjointly risk of
getting surplus employees in some departments.
 Merging two firms that are doing similar activities may mean duplication and over
capability within the company that may need retrenchments.
 Increase in costs might result if the right management of modification and also the
implementation of the merger and acquisition dealing are delayed.
 The uncertainty with respect to the approval of the merger by proper assurances.
 In many events, the return of the share of the company that caused buyouts of
other company was less than the return of the sector as a whole.

The merger and acquisition (M&A) reduces flexibility. If a rival makes revolution and
may currently market vital resources those are of superior quality, shift is tough. The
change expense is the major distinction between the particular merger worth and also the
merchandising value of the firm that can be of larger distinction.

53
 Reasons for merger Failures

1+1 = 3 sounds great but in practice or reality every time it’s not work properly
and go awry. Historical trends show that roughly 2 thirds of huge mergers can let down
on their own terms, which implies they’re going to lose worth on the stock exchange. The
motivations that mainly drive mergers are frequently blemished and efficiencies from
economies of scale might prove elusive (Investopedia, 2010).

Adoption of the new technology takes time for the normal company. In late twentieth
century dramatic changes has occur in web. Migration of recent mode of web service is
connected with high barricade and a number of other social and legal problems was
encircled around and recently established firms like yahoo, msn etc. was giving high edge
competition. Economical rate of inflation is high, to create economy stronger American
government has modified the policy and taxation rules have throwing a dispute for AOL
to beat this things merger with Time Warner became a fruit to the AOL. Public and
private policies are one of the reasons for the merger failure. The reasons of merger
failure is over valuation of AOL shares has shown a dramatic impact on the deal, whereas
stake holders are not satisfied and improper communication with consumers damages the
trust of user. The merger’s fail was a result not only because of the replete of the dot-com
bubble but it also the failings by AOL Time Warner management to ever really integrate
the two firms.

THE REASONS FOR MERGERS AND ACQUISITIONS

Mergers and acquisitions take place for many strategic business reasons, but the most
common reasons for any business combination are economic at their core. Following are
some of the various economic reasons:
Increasing capabilities: 
Increased capabilities may come from expanded research and development opportunities
or more robust manufacturing operations (or any range of core competencies a company
wants to increase). Similarly, companies may want to combine to leverage costly

54
manufacturing operations (as was the hoped for case in the acquisition of Volvo by
Ford).Capability may not just be a particular department; the capability may come from
acquiring a unique technology platform rather than trying to build it.
Biopharmaceutical companies are a hotbed for M&A activities due to the extreme
investment necessary for successful R&D in the market. In 2011 alone, the four biggest
mergers or acquisitions in the biopharmaceutical industry were valued at over US$75
billion.
Gaining a competitive advantage or larger market share: Companies may decide to merge
into order to gain a better distribution or marketing network. A company may want to
expand into different markets where a similar company is already operating rather than
start from ground zero, and so the company may just merge with the other company.
This distribution or marketing network gives both companies a wider customer base
practically overnight.
One such acquisition was Japan-based Takeda Pharmaceutical Company’s purchase of
Nycomed, a Switzerland-based pharmaceutical company, in order to speed market growth
in Europe. (That deal was valued at about US$13.6 billion, if you’re counting.)

Diversifying products or services: 

Another reason for merging companies is to complement a current product or service.
Two firms may be able to combine their products or services to gain a competitive edge
over others in the marketplace. For example, in 2008, HP bought EDS to strengthen the
services side of their technology offerings (this deal was valued at about US$13.9
billion).
Although combining products and services or distribution networks is a great way to
strategically increase revenue, this type of merger or acquisition is highly scrutinized by
federal regulatory agencies such as the Federal Trade Commission to make sure a
monopoly is not created. A monopoly is when a company controls an overwhelming share
of the supply of a service or product in any one industry.

Replacing leadership: 

55
In a private company, the company may need to merge or be acquired if the current
owners can’t identify someone within the company to succeed them. The owners may
also wish to cash out to invest their money in something else, such as retirement!

Cutting costs: 

When two companies have similar products or services, combining can create a large
opportunity to reduce costs. When companies merge, frequently they have an opportunity
to combine locations or reduce operating costs by integrating and streamlining support
functions.

This economic strategy has to do with economies of scale: When the total cost of

production of services or products is lowered as the volume increases, the company
therefore maximizes total profits.

Surviving: 

It’s never easy for a company to willingly give up its identity to another company, but
sometimes it is the only option in order for the company to survive. A number of
companies used mergers and acquisitions to grow and survive during the global financial
crisis from 2008 to 2012.

During the financial crisis, many banks merged in order to deleverage failing balance
sheets that otherwise may have put them out of business.

Mergers and acquisitions occur for other reasons, too, but these are some of the most
common. Frequently, companies have multiple reasons for combining.

Even though management and financial stakeholders view mergers and acquisitions as a
primarily financial endeavor, employees may see things a little differently (they’re
thinking WIIFM, or what’s in it for me?).

Combining companies has some potential downsides for employees, who have to deal
with immediate fears about employment or business lines, but more positive sides of
merging may include more opportunities for advancement, or having access to more
resources to do one’s job.

56
57
 REASONSOR MOTIVATIONS FOR MERGERS AND
ACQUISITIONS:

1. Horizontalintegration:

Increasing market share and competitiveness as a motivation for mergers and acquisitions
On 25 September 2013, United States-based chip supplier Applied Materials Inc.
announced its intention to acquire Japan-based chip supplier Tokyo Electron Ltd. for
$9.39 billion. Roughly 10 months after the announcement, the two companies entered a
mutual merger of equals through an all-stock deal that in turn, paved the way for the
emergence of a new company-the Eteris. The deal created a market value worth $29
billion and resulted in horizontal integration. Remember that both companies are two of
the largest suppliers of semiconductor chips in the world. Industry trends and evolving
market behavior are several reasons that compel a company to merge with or acquire its
competitor. High degree of competition and internal management problems could also
leave a company with no choice but to succumb to acquisition by another company. Note
that key business customers of chips suppliers are embracing a new manufacturing trend.
To be specific, Intel Corp., Taiwan Semiconductor Manufacturing Co., and Samsung
Electronics Co. have been trying to reduce dependence on third-party suppliers by
building their respective technological capacity needed to produce their supplies. This
emerging supplier independence is shrinking the customer base of chip suppliers,
including Applied Materials and Tokyo Electron. Nonetheless, the merger between
Applied Materials and Tokyo Electron is a strategy to maintain market dominance,
specifically by combining their respecting customer bases and existing market shares,
thus creating a barrier to entry and improving their economies of scale.
2. Diversificationof business:

Exploring newer markets and segments through mergers and acquisitions Facebook, Inc.
acquired two Internet-related or online-enabled services just within two years. On 4
September 2012, the company acquired online and mobile-based photo-sharing social
networking platform and mobile app Instagram for $1 billion in cash and stock. This
marks the first largest acquisition made by the social networking company. Moreover, on

58
19 February 2014, Facebook bought the mobile-based messaging service provider and
app WhatsApp for $19 billion in cash and stock.

Mergers and acquisitions are common in Internet companies. Even Google, Inc. has
successfully expanded its Internet Empire through several large-scale acquisitions. One of
these includes a $1.65 billion stock deal to acquire YouTube in 2006. Note that Google
consolidated its businesses and restructured its organization under a single holding
company called Alphabet Inc.
One known motivation for mergers and acquisitions is business diversification through
exploration of newer markets and segments. Thus, instead of launching a new product or
a business unit and investing in operational and marketing efforts, companies opt to
acquire or merge with other companies with existing and established markets or
segments. Mergers and acquisition are also strategies. Take note that the acquisition of
YouTube signified the intent of Google to expand and diversify its business
beyond search engine, particularly by embracing onlinemultimedia entertainment and
social networking. The market for YouTube is clearly different from the market of a
search engine service provider. In the case of Facebook, as part of its attempt to explore
opportunities outsides its Facebook social networking site, it acquired two online-enabled
and mobile-based communication platforms. Thismarked the recognition of the emerging
mobile user market composed of different market segments, each having unique
characteristics and defined purposes.
3. Vertical integration:
Capacity building and technology sharing as a motivation for mergers and acquisitions
German sports car manufacturer Porsche merged with another German automaker
Volkswagen in May 2009. This merger was a response to the 2008 Financial Crisis that
threw the global economy into recession and subsequently, reduced vehicle sales. It is
also important to take note of the shared historical beginnings of the two companies.
Despite the heavy costs incurred by Porsche, the merger remains reasonable because, for
the longest time, the company has been Volkswagen’s main supplier of automotive parts.
Mergers and acquisitions are central to the history of the automotive industry. The
American automaker General Motors, for example, emerged from the consolidation of
minor automakers. Furthermore, the United Kingdom-based British Leyland dominated
the entire British car industry during its heydays in the 1970s by acquiring and owning
59
different subsidiaries and brands. Another reason for mergers and acquisitions is capacity
buildingand sharing, especially in the aspects of manufacturing capabilities and
technological competencies. These allow a company to build and maintain a competitive
advantage by creating a barrier to entry or a source of economies of scale.
Note that aside from consolidating and increasing market share, another reason why
Applied Materials and Tokyo Electron merged is to address the problem of emerging
production cost. Accordingly, for the past years, research and development have become
costly while sales and customer demands have dwindled. The merger is nonetheless
intended to cut cost by improving production processes through technology and capacity
sharing.
The acquisition of the Android mobile operating system in 2005 by Google stemmed
from the need to build a mobile presence and embrace the emerging trend in mobile
computing. Remember that Android does not generate direct revenues for Google.
However, because the company continues to develop the mobile operating system
platform and gives it away to mobile phone manufacturers, Android has provided Google
with the technological capacity needed to penetrate the mobile market.

4. Internationalization: Internationalization of business operation

through mergers and acquisitions:
There is an ongoing trend of global expansionism undertaken through cross-border
mergers and acquisitions. In fact, the dawn of the new millennium saw a series of mergers
and acquisitions that in turn, has now dominated the contemporary global business scene.
This is a globalization. India-based Tata Group and its subsidiaries, Tata Global Beverage
and Tata Steel, best exemplified how emerging Asian companies have expanded and
internationalized their business operations by acquiring established companies in existing
or emerging markets. Apart from the need to compete in the global landscape, another
reason for these cross-border mergers and acquisitions is the changing global economic
landscape. Accordingly, companies coming from Asian countries that are currently
experiencing strong economic growth are more predisposed toward making aggressive
strategic moves—such as cross-border mergers and acquisitions. Nonetheless, a robust
economic growth creates a suitable environment for companies to prosper. Hence, the

60
seeming global trend in mergers and acquisitions is an obvious indicator of the emerging
power, influence, and impact of rising economies in Asia.

Difference between Merger and Acquisition

BASIS FOR
MERGER ACQUISITION
COMPARISON

Meaning The merger means the fusion of When one entity purchases the
two or more than two companies business of another entity, it is
voluntarily to form a new known as Acquisition.
company.

Formation of a new Yes No

company

Nature of Decision The mutual decision of the Friendly or hostile decision of

companies going through acquiring and acquired
mergers. companies.

Minimum number of Three Two

companies involved

Purpose To decrease competition and For Instantaneous growth

increase operational efficiency.

Size of Business Generally, the size of merging The size of the acquiring
companies is more or less same. company will be more than the
size of acquired company.

Legal Formalities More Less

61
 Case study
The merger between AOL and Time Warner was declared on 10 January 2000 and
it was worth $183 billion. That was the biggest merger in the history of American
business world. AOL had about 40% share of online service in the United States and the
Time Warner have more than 18% of US media and cable households. The merger is
taken into account to be a vertical merger between one amongst the most important web
service suppliers and this one amongst the biggest media and entertainment firm. The
new company was formed and named as AOL Time Warner and was the fourth biggest
company in the US, as evaluated by stock market valuation. After the merger deal, AOL
become a subsidiary the Time Warner Company at stage and has operations in Europe,
North American countries and Asia. As a web service supplier, AOL on look severely
rival from Microsoft, Yahoo and different low price net access suppliers. Thus, the
corporate tries to induce advertising and e-commerce growth, thereby separate it by rival
(BBC, 2000).

62
 Valuation of purchased goodwill

1. Average profit method:

Under this method average profit is calculated on the basis of the past few year’s profits.
At the time of calculating average profit abnormal profit or loss will be ignored. After
calculating average profit, it is multiplied by a number (3 or 4 years), as agreed. The
product will be the value of the goodwill. Goodwill = Average Profit × No. of year
purchase

2. Weighted average profit method:

To obtain the average profit, the profit of the year must be multiplied by its weightage
and the grand total should be divided by the aggregate number of weights. After
calculating average profit, it is multiplied by a number (3 or 5), as agreed. The product
will be the value of the goodwill. Goodwill = Weighted average Profit × No. of year
purchase

3. Super-profit method:

Super profit is the excess of actual profit over the normal profit. Under this method, super
profits are taken as the basis for calculating goodwill in place of average profit. Goodwill
is calculated as follows: Step 1 Calculate capital employed Step 2 Calculate normal return
Normal Return = Capital employed × Rate of normal return Step 3 Calculate future
maintainable profit 13 432 CH. 13: VALUATION OF GOODWILL & SHARES 433
TAXMANN® Step 4 Calculate super profit Future Maintainable Profit xxxx Less:
Normal Return (xxx) Super Profit xxxx Step 5 Goodwill = Super profit × No. of years
purchases

4. Annuity method:

Under this method super profits should be discounted using appropriate discount factor.
When uniform annual super profit is expected, annuity factor can be used for discounting
the future values for converting into the present value. Goodwill = Super Profit × Annuity
factor

63
5. Capitalization of future maintainable method:

Under this method, the firm is valued by applying the following formula: Goodwill
=Future maintainable profit ×100 Normal rate return – Capital employed

6. Capitalization of super profits method:

Under this method, goodwill is calculated by capitalizing super-profits at agreed rate. The
goodwill is calculated directly by applying the following formula: Goodwill = Super
profit 100 Capitalization rate.

64
 METHODS OF VALUING GOODWILL OF A COMPANY

1. Years’ Purchase of Average Profit Method:

Under this method, average profit of the last few years is multiplied by one or more
number of years in order to ascertain the value of goodwill of the firm. How many years’
profit should be taken for calculating average and the said average should be multiplied
by how many number of years — both depend on the opinions of the parties concerned.
The average profit which is multiplied by the number of years for ascertaining the value
of goodwill is known as Years Purchase. It is also called Purchase of Past Profit Method
or Average Profit Basis Method.

ADVERTISEMENTS:

Profit Basis Method:

Value of Goodwill = Average Profit x Years’ Purchase

Illustration 1:
Majumdar & Co. decides to purchase the business of Banerjee & Co. on 31.12.2003.
Profits of Banerjee & Co. for the last 6 years were: 1998 Rs. 10,000; 1999 Rs. 8,000;
2000 Rs. 12,000; 2001 Rs. 16,000, 2002 Rs. 25,000 and 2003 Rs. 31,000.
The following additional information about Banerjee & Co. were also supplied:
(a) A casual income of Rs. 3,000 was included in the profit of 2000 which can never be
expected in future.
(b) Profit of 2001 was reduced by Rs. 1,000 as a result of an extraordinary loss by fire.
(c) After acquisition of the business, Majumdar & Co. has to pay insurance premium
amounting to Rs. 1,000 which was not paid by Banerjee & Co.
(d) S. Majumdar, the proprietor of Majumdar & Co., was employed in a firm at a monthly
salary of Rs. 1,000 p.m. The business of Banerjee & Co. was managed by a salaried
manager who was paid a monthly salary of Rs. 4,000. Now, Mr. Majumdar decides to
manage the firm after replacing the manager.

65
Compute the value of Goodwill on the basis of 3 years’ purchase of the average profit for
the last 4 years.

2. Years’ Purchase of Weighted Average Method:

This method is the modified version of Years’ Purchase of Average Profit Method. Under
this method, each and every year’s profit should be multiplied by the respective number
of weights, e.g. 1, 2, 3 etc., in order to find out the value of product which is again to be
divided by the total number of weights for ascertaining the weighted average profit.
Therefore, the weighted average profit is multiplied by the years’ purchase in order to
ascertain the value of goodwill. This method is particularly applicable where the trend of
profit is rising.

Value of Goodwill = Weighted Average Profit x Years Purchase

Illustration 2:

XYZ Co. Ltd. intends to purchase the business of ABC Co. Ltd. Goodwill for this
purpose is agreed to be valued at 3 years’ purchase of the weighted average profits of the
past four years.

66
The appropriate weights to be used:
1998 — 1; 1999 — 2; 2000 — 3; 2001-4.

The profits for these years were:

The following information were available:

(a) On 1.9.1999 a major repair was made in respect of a Plant at a cost of Rs. 8,000 and
this was charged to revenue. The said sum is agreed to be capitalized for Goodwill
calculation subject to adjustment of depreciation of 10% p.a. on Diminishing Balance
Method.

(b) The Closing Stock for the year 2000 was overvalued by Rs. 3,000.

(c) To cover the Management cost an annual charge of Rs. 10,000 should be made for the
purpose of Goodwill valuation.

You are asked to compute the value of Goodwill of the company.

67
3. Capitalization Method:

Under this method, the value of the entire business is determined on the basis of normal
profit. Goodwill is taken as the difference between the Values of the Business minus Net
Tangible Assets.

Under this method, the following steps should be taken into consideration for
ascertaining the amount of goodwill:
(i) Expected Average Net Profit should be ascertained;
(ii) Capitalised value of profit is to be calculated on the basis of normal rate of return;
(iii) Net Tangible Assets (i.e. Total Tangible Assets – Current Liabilities) should also be
calculated;
(iv) To deduct (iii) from (ii) in order to ascertain the value of Goodwill.
Capitalised Value of Profit = Profit (Adjusted)/Normal Rate of Return x 100
Value of Goodwill = Capitalised Value of Profit – Net Tangible Assets

68
 Methods of Valuation of Shares

1. Net Asset Method:

This is also known as Balance Sheet Method or Intrinsic Method or Break-up Value
Method or Valuation of Equity basis or Asset Backing Method. Here the emphasis is on
the safety of investment as the investors always need safety for their investments. Under
this method, net assets of the company are divided by the number of shares to arrive at
the net asset value of each share.
The following points may be borne in mind:
(1) The value of goodwill will be ascertained.
(2) Fixed assets of the company, disclosed or undisclosed in Balance Sheet, are taken at
their realisable values.
(3) Floating assets are to be taken at market value.
(4) Remember to exclude fictitious assets, such as Preliminary Expenses, Accumulated
Losses etc.
(5) Provision for depreciation, bad debts provision etc. must be considered.
(6) Find out the external liabilities of the company payable to outsiders including
contingent liabilities.
Thus the value of net asset is:
Total of realisable value of assets – Total of external liabilities = Net Assets (Intrinsic
value of asset)
Total Value of Equity shares = Net Assets – Preference share capital
Value of one Equity share = Net Assets – Preference share capital/Number of Equity
shares

2. Yield Method:
Under the Net Asset Method, the weightage is given on the safety of the investment. One,
who invests money on shares, always needs safety. Even if the return is low, safety is
always looked upon. At the same time under the yield method, the emphasis goes to the
yield that an investor expects from his investment. The yield, here we mean, is the

69
possible return that an investor gets out of his holdings—dividend, bonus shares, right
issue. If the return is more, the price of the share is also more. Under this method the
valuation of shares is obtained by comparing the expected rate of return with normal rate
of return. For instance, if paid up value of a share is
Rs. 10 and expected rate of return is 9% while normal rate of return is 6%, then the value
of shares will be Rs. 15.
Formula for this:

Value of Right Shares:

According to Sec. 81 of the Company Act, 1956, a company, if it so desires, can increase
its share capital by issuing new shares. In that case, the existing shareholders must be
given the priority of purchasing those shares according to their paid-up value. Since the
existing shareholders have got such right to purchase the newly issued shares, they are
called Right Shares.
In order to make a proper valuation of right relating to Right Shares, the market value of
the old holdings and the total issue price of the new holdings must be added and the same
must be divided by the total number of new and old holdings. Value of right will be the
difference between the result that is obtained and market value of shares.
Hence:
Value of Right = Number of Right Shares/Total Holdings (i.e. holdings = Old + New) x
(Market Value – Issue Price)

3. Earning Capacity:
When someone is interested to have majority of shares of a company in order to have
controlling interest in it, he makes use of earning capacity method for the purpose of
valuation of shares.
He is interested to know the disposable profits of the company. The profit is found out by
deducting reserves and taxes from the net profit of the company.

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Thus profits earned by the company are compared with the amount of capital
employed in the business and rate of earning is found out in the following manner:
Profit earned/Capital Employed x 100 = Rate of earning
4. Fair Value Method:
There are some accountants who do not prefer to use Intrinsic Value or Yield Value for
ascertaining the correct value of shares. They however, prescribe the Fair Value Method
which is the mean of intrinsic value and Yield Value method and the same provides a
better indication about the value of shares than the other methods.
Fair Value = (Intrinsic Value + Yield Value)/2.

Business Valuation Methods

Definition
A set of procedures or techniques used to determine the business value.

What It Means
Under each of the three broad approaches to business valuation, there are a number of
procedures, called business valuation methods, which you can use to calculate
the business value.
The methods under each business valuation approach rely upon the same set of economic
principles. However, the procedural and mathematical details of each business valuation
method may differ considerably.
Asset-based business valuation methods
Sometimes referred to as the cost-based methods, these business valuation methods
estimate the value of a business as the sum total of the costs required to create another
business of equal economic utility.
Asset based business valuation methods are useful for accurate business purchase price
allocation, an important element of structuring a business acquisition deal.
The central methods under the asset approach are these:
Asset accumulation method
Excess earnings method

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The asset accumulation method is a framework for tabulating the market values of
business assets and liabilities. The difference is the business value. Note that the method
differs from the typical cost basis accounting balance sheet.
Important off balance sheet assets include the internally developed intellectual property,
customer lists, and valuable business agreements. On the other side, the method accounts
for contingent liabilities such as pending legal action judgments and costs associated with
regulatory compliance.
A classical asset based business valuation method is Capitalized Excess Earnings, also
known as the Treasury Method. In addition to business value calculation this method lets
you determine the value of business goodwill.
Income-based business valuation methods
The income methods, as the name implies, determine the business value based on its
income producing capacity and risk.
The main business valuation techniques used by these methods are capitalization and
discounting. Business risk is captured in the form of discount and capitalization rates.
Income business valuation methods most commonly used in business appraisals are:
Capitalization of earnings
Multiple of discretionary earnings
Discounted cash flow
The well-known capitalization method is Multiple of Discretionary Earnings.
The Discounted Cash Flow business valuation method is the most common way of
determining business value by discounting its income.
Market-based business valuation methods
These methods help you estimate the subject business value by comparison to the recent
selling prices of similar businesses.
Professional business appraisals often include these market valuation methods:
 Guideline publicly traded company method

Comparative transaction method

Both types of methods work by comparing the subject business to similar companies that
sold recently. For private companies, the sales of similar privately owned businesses can
offer a compelling source of market comparable. However, the quality of such data is
usually not nearly as reliable as transaction data filed by public companies. Transactions

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involving small capitalization public companies are often used as evidence of business
value for privately owned firms.
Valuation Formulas derived from comparable business sales are a standard way to
determine the business fair market value.
Use of multiple methods in business appraisals
Using a number of business valuation methods is highly recommended for accurate
determination of business value.
To conclude what a business is worth, you can take the results of several business
valuation methods into account. This process is often referred to as business value
synthesis.

BUSINESS VALUATION
The leading business valuation associations, the American Society of Appraisers
(ASA), the Institute of Business Appraisers (IBA), and the National Association of
Certified Valuation Analysts (NACVA), all agree on three major approaches to business
valuation: the Income Approach, the Market Approach, and the Cost Approach. Under
each of these approaches there are several methods that might be employed to determine
business valuation depending on the specific nature of the company being valued .

VALUATION APPROACHES AND METHODS:

1. IncomeApproach:

The Income Approach involves valuation methods that convert future anticipated
economic benefits (e.g., cash flow) into a single present dollar amount. Depending on the
valuation method used, “Income” might be represented by after-tax profit, pre-tax profit,
EBIT (earnings before interest and taxes), EBITDA (EBIT plus depreciation and
amortization), or other cash flow measures. The two most commonly used methods under
this approach are the Single Period Capitalization Method and the Multiple Period
Capitalization Method.

2. MarketApproach

The Market Approach involves valuation methods that use transactional data to help
determine a company’s value. These methods might involve private company

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transactions, public company transactions, as well as public company valuation measures
using current stock market data. The theory behind this approach is that valuation
measures of similar companies that have been sold in arms-length transactions should
represent a good proxy for the specific company being valued.

3. CostApproach

The Cost Approach, also known as the Asset-based Approach, involves methods of
determining a company’s value by analyzing the market value of a company’s assets.
This valuation approach often serves as a valuation floor since most companies have
greater value as a going concern than they would if liquidated, i.e., the present value of
future cash flows generated by the assets usually far exceed the liquidation value of those
assets. This difference between the asset value and going concern value is commonly
referred to as “goodwill”. An exception to this might be a low-margin business in a
competitive industry that owns its real estate, which has appreciated over time due to its
development value. In this case, the asset value may exceed the going concern value of
the business.

4. True Value

The valuation methods discussed above represent some of the most commonly used by
business valuation professionals to generate an opinion of value. Although considerable
time and effort is involved in preparing formal business valuations, unfortunately the
results may or may not reflect the “real world” value of a specific company if it were
formally offered for sale.

Consulting a professional investment banker can best help you assess the true value of
your company. These professionals will assess your company’s strengths and weaknesses
and employ some of the commonly used valuations methods used by business valuators.
They will also leverage their insight into the current marketplace to help determine
financing availability and assess many other factors to determine your company’s
potential value in the market place.

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Change in scenario of Banking Sector:

1.The first mega merger in the Indian banking sector that of the HDFC Bank with Times
Bank, has created an entity which is the largest private sector bank in the country
2. The merger of the city bank with Travelers Group and the merger of Bank of America
with Nation Bank have triggered the mergers and acquisition market in the banking sector
worldwide.
3. Europe and Japan are also on their way to restructure their financial sector thought
merger and acquisitions. Merger will help banks with added money power, extended
geographical reach with diversified branch Network, improved product mix, and
economies of scale of operations. Merger will also help banks to reduced them borrowing
cost and to spread total risk associated with the individual banks over the combined
entity. Revenues of the combine entity are likely to shoot up due
tomoreeffective allocation of bank funds. ICICI Bank has initiated merger talks with
Centurian Bank but due to difference arising over swap ration the merger didn’t
materialized. Now UTI Bank is egeingCenturian Bank. The proposed merger of UTI
Bank and Centurian Bank will make them third largest private banks in terms of size and
market Capitalization State Bank of India has also planned to merge seven of its
associates or part of its long-term policies to regroup and consolidate its position. Some
of the Indian Financial Sector players are already on their way for mergers to strengthen
their existing base.4.In India mergers especially of the PSBS may be subject to
technology and trade union related problem. The strong trade union may prove to be big
obstacle for the PSB Smergers.Technology of the merging banks to should complement
each other NPA management. Management of efficiency, cost reduction, tough
competition from the market players and strengthen of the capital base of the banks are
some of the problem which can be faced by the merge entities. Mergers for private sector
banks will be much smoother and easier as again that of PSBS.
4. Bank traditionally involve working capital financing have started offering
consumer loans and housing loans. Some of the banks have started offering travel loans,
as well as many banks have started capitalizing on recent capital market boom by
providing IPO finance to the investors.

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 Procedure of Bank Merger

The procedure for merger either voluntary or otherwise is outlined in the respective state
statutes/ the Banking regulation Act. The Registrars, being the authorities vested with the
responsibility of administering the Acts, will be ensuring that the due process prescribed
in the Statutes has been complied with before they seek the approval of the RBI. They
would also be ensuring compliance with the statutory procedures for notifying the
amalgamation after obtaining the sanction of the RBI. Before deciding on the merger,
the authorized officials of the acquiring bank and the merging bank sit together and
discuss the procedural modalities and financial terms. After the conclusion of the
discussions, a scheme is prepared incorporating therein the all the details of both the
banks and the area terms and conditions. Once the scheme is finalized, it is tabled in the
meeting of Board of directors of respective banks. The board discusses the scheme thread
bare and accords its approval if the proposal is found to be financially viable and
beneficial in long run. After the Board approval of the merger proposal, an extra ordinary
general meeting of the shareholders of the respective banks is convened to discuss the
proposal and seek their approval.
After the board approval of the merger proposal, a registered value is appointed to valuate
both the banks. The valuer valuates the banks on the basis of its share capital, market
capital, assets and liabilities, its reach and anticipated growth and sends its report to
the respective banks.
Once the valuation is accepted by the respective banks, they send the proposal long with
all relevant documents such as Board approval, shareholders’ approval, valuation report
etc. to Reserve Bank of India and other regulatory bodies such Security& exchange board
of India(SEBI) for their approval. After obtaining approvals from all the concerned
institutions, authorized officials of both the banks sit together and discuss and finalize
share allocation proportion by the acquiring bank to the shareholders of the merging bank
(SWAP ratio).

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77
 Impact of deal on the performance

After the official announcement of deal merger between AOL and Time Warner growth
rate in revenue has dramatically declined. The profitability suffered a good plunge when
the alliance. The potency of the new united firm was terribly poor as determined from the
asset turnover ratio. Even the liquidity of the firm suffered once the merger as evident
from this ratio. There are several reasons for failure however the foremost vital reason
was the unequal size of the companies, wherever AOL was overvalued as a result of web
bubble. According to New York share exchange before the deal the share price of AOL is
73 and Time Warne is 90 but after announcement of the merger deal the shareholders
dissatisfaction shown on share market of AOL and Time Warner and the shares drop
down to 47 and 71 respectively. AOL and Time Warner fail to keep up shareholders
satisfaction levels this conjointly one among the rationale to loosing stability of
shareholders according to the Times magazine (Kane and Margaret, 2003).

The market valuation of both the companies AOL and Time Warner were decline from
the starting of the merger to end of the deal. AOL has drop down approximately 60
percent and Time Warner around 30 percent of market value once the deal has been
closed. The market valuation of both the companies from 2000 to 2011 was dropped
down drastically. The AOL market value has dropped from 167$ billion to 107$ billion
and the Time Warner 124$ billion to 99$ billion and is the biggest dropped down of any
company in American history.

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Exchange Ratio:

Whatis the Exchange Ratio?

The exchange ratio is the relative number of new shares that will be given to existing
shareholders of a company that has been acquired or that has merged with another. After
the old company shares have been delivered, the exchange ratio is used to give
shareholders the same relative value in new shares of the merged entity.

In mergers and acquisitions (M&A), the share exchange ratio measures the number
of shares the acquiring company has to issue for each individual share of the target firm.
For M&A deals that includes shares as part of the consideration (compensation) for the
deal, the share exchange ratio is an important metric. Deals can be all cash, all shares, or a
mix of the two.

Formula

Exchange Ratio = Offer Price for the Target’s Shares / Acquirer’s Share Price

Breakingdown exchange ratio:

An exchange ratio is designed to give shareholders an asset with the same relative

value of the asset delivered upon the acquisition of the acquired company. Relative value
does not mean, however, that the shareholder receives the same number of shares or same
dollar value based on current prices. Instead, the intrinsic value of the shares and the
underlying value of the company are considered when coming up with an exchange ratio.

Exampleof Exchange Ratio:

The exchange ratio in a merger and acquisition is the opposite of a fixed value deal in
which a buyer offers a dollar amount to the seller, meaning that the number of shares or
other assets backing the dollar value can fluctuate in an exchange ratio. For example,
imagine that the buyer offers the seller 2 shares of the buyer's company in exchange for 1
share of the seller's company. Prior to the announcement of the deal, the buyer's or
acquirer's shares may be trading at $10, while the seller's or target's shares trade at $15.

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Due to the 2 to 1 exchange ratio, the buyer is effectively offering $20 for a seller share
that is trading at $15.

Fixed exchange ratios are usually limited by caps and floors to reflect extreme changes in
stock prices. Caps and floors prevent the seller from receiving significantly less
consideration than anticipated, and they likewise prevent the buyer from giving up
significantly more consideration than anticipated. Exchange ratio can also be
accompanied by a cash component in a merger or acquisition, depending on the
preferences of the companies involved in the deal.

InvestmentImplications:

Post announcement of a deal, there is usually a gap in valuation between the seller's and
buyer's shares to reflect time value of money and risks. Some of these risks include the
deal being blocked by the government, shareholder disapproval, or extreme changes in
markets or economies. Taking advantage of the gap, believing that the deal will go
through, is referred to as merger arbitrage and is practiced by hedge funds and other
investors. Leveraging the example above, assume that the buyer's shares stay at $10 and
the seller's shares jump to $18. There will be a $2 gap that investors can secure by buying
1 seller share for $18 and shorting 2 buyer shares for $20. If the deal closes, investors will
receive 2 buyer shares in exchange for 1 seller share, closing out the short position and
leaving investors with $20 in cash. Minus the initial outlay of $18, investors will net $2.

ExchangeRatioExample:

Assume Firm A is the acquirer and Firm B is the target firm. Firm B has 10,000
outstanding shares and is trading at a current price of $17.30 and Firm A is willing to pay
a 25% takeover premium. This means the Offer Price for Firm B is $21.63. Firm A is
currently trading at $11.75 per share.

To calculate the exchange ratio we take the offer price of $21.63 and divide it by Firm
A’s share price of $11.75.

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The result is 1.84x. This means Firm A has to issue 1.84 of its own shares for every 1
share of the Target it plans to acquire.

Importance of the Exchange Ratio

In the event of an all-cash merger transaction, the exchange ratio is not a useful metric. In
fact, in this situation, it would be fine to exclude the ratio from the analysis. Often
times, M&A valuation models will note the ratio as “0.000” or blank, when it comes to a
full cash transaction. Alternatively, the model may display a theoretical exchange ratio, if
the same value of the cash transaction were instead to be carried out by a stock
transaction.

However, in the event of a 100% stock deal, the exchange ratio becomes a powerful
metric. It becomes virtually essential and allows the analyst to view the relative value of
the offer between the two firms.

In the event of a split deal, where a portion of the transaction involves cash and a portion
involves a stock deal, the percentage of stock involved in the transaction must be
considered. Excluding any cash effects, what is the actual exchange ratio based on the
stock. Additionally, M&A models may want to also show what this transaction would
look like if there was a 100% stock deal.

Complications
For a deal structured as a stock sale (as opposed to when the acquirer pays with cash —
read about the difference here), the exchange ratio represents the number of acquirer
shares that will be issued in exchange for one target share. Since acquirer and target share
prices can change between the signing of the definitive agreement and the closing date of
a transaction, deals are usually structured with:
1. A fixed exchange ratio: the ratio is fixed until closing date. This is used in a majority
of U.S. transactions with deal values over $100 million.

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2. A floating exchange ratio: The ratio floats such that the target receives a fixed value
no matter what happens to either acquirer or target shares.
3. A combination of a fixed and floating exchange, using caps and collars.
The specific approach taken is decided in the negotiation between buyer and seller.
Ultimately, the exchange ratio structure of the transaction will determine which party
bears most of the risk associated with pre-close price fluctuation.  BThe differences
described above can be broadly summarized as follows:

Fixed exchange ratio Floating exchange ratio

Shares issued are known Value of transaction is known

Value of transaction is unknown Shares issued are unknown

Preferred by acquirers because the Preferred by sellers because the deal value
issuance of a fixed number of shares is defined (i.e. the seller knows exactly
results in a known amount of ownership how much it is getting no matter what)
and earnings accretion or dilution

Fixed exchange ratio

Below is fact pattern to demonstrate how fixed exchange ratio work.

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 Terms And Condition:

 The target has 24 million shares outstanding with shares trading at $9; the acquirer
shares are trading at $18.

 On January 5, 2014 (“announcement date”) the acquirer agrees that, upon completion
of the deal (expected to be February 5, 2014) it will exchange .6667 of a share of its
common stock for each of the target’s 24 million shares, totaling 16m acquirer shares.

 No matter what happens to the target and acquirer share prices between now and
February 5, 2014, the share ratio will remain fixed.

 On announcement date, the deal is valued at: 16m shares * $18 per share = $288
million. Since there are 24 million target shares, this implies a value per target share of
$288 million/24 million = $12. That’s a 33% premium over the current trading price of
$9.

Acquirer share price drops after announcement

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 By February 5, 2014, the target’s share price jumps to $12 because target shareholders
know that they will shortly receive .6667 acquirer shares (which are worth $18 *
0.6667 = $12) for each target share.

 What if, however, the value of acquirer shares drop after the announcement to $15 and
remain at $15 until closing date?

 The target would receive 16 million acquirer shares and the deal value would
decline to 16 million * $15 = $240 million. Compare that to the original compensation
the target expected of $288 million.
Bottom line: Since the exchange ratio is fixed, the number of shares the acquirer must
issue is known, but the dollar value of the deal is uncertain.
REAL WORLD EXAMPLE

CVS’s 2017 acquisition of Aetna was partially funded with acquirer stock using a fixed
exchange ratio. Per the CVS merger announcement press release, each AETNA
shareholder receives a 0.8378 CVS share in addition to $145 per share in cash in
exchange for one AETNA share.
Floating exchange (fixed value) ratio:
While fixed exchange ratios represent the most common exchange structure for larger
U.S. deals, smaller deals often employ a floating exchange ratio. Fixed value is
based upon a fixed per-share transaction price. Each target share is converted into the
number of acquirer shares that are required to equal the predetermined per-target-share
price upon closing.
Let's look at the same deal as above, except this time, we'll structure it with a floating
exchange ratio:

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 Target has 24 million shares outstanding with shares trading at $12. Acquirer shares
are trading at $18.

 On January 5, 2014 the target agrees to receive $12 from the acquirer for each of
target’s 24 million shares (.6667 exchange ratio) upon the completion of the deal,
which is expected happen February 5, 2014.

 Just like the previous example, the deal is valued at 24m shares * $12 per share = $288
million.

 The difference is that this value will be fixed regardless of what happens to the target
or acquirer share prices. Instead, as share prices change, the amount of acquirer shares
that will be issued upon closing will also change in order to maintain a fixed deal
value.
While the uncertainty in fixed exchange ratio transactions concerns the deal value, the
uncertainty in floating exchange ratio transactions concerns the number of shares the
acquirer will have to issue.

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 So what happens if, after the announcement, the acquirer shares drop to $15 and
remain at $15 until the closing date?

 In a floating exchange ratio transaction, the deal value is fixed, so the number of shares
the acquirer will need to issue remains uncertain until closing.

Collars and caps

Collars may be included with either fixed or floating exchange ratios in order to limit
potential variability due to changes in acquirer share price.

1. Fixedexchange ratio collar

Fixed exchange ratio collars set a maximum and minimum value in a fixed exchange ratio
transaction:

 If acquirer share prices fall or rise beyond a certain point, the transaction switches to a
floating exchange ratio.

 Collar establishes the minimum and maximum prices that will be paid per target share.

 Above the maximum target price level, increases in the acquirer share price will result
in a decreasing exchange ratio (fewer acquirer shares issued).

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 Below the minimum target price level, decreases in the acquirer share price will result
in an increasing exchange ratio (more acquirer shares issued).

2. Floatingexchange ratio collar

The floating exchange ratio collar sets a maximum and minimum for numbers of shares
issued in a floating exchange ratio transaction:

 Collar establishes the minimum and maximum exchange ratio that will be issued for a
target share.

 Below a certain acquirer share price, exchange ratio stops floating and becomes fixed
at a maximum ratio. Now, a decrease in acquirer share price results in a decrease in
value of each target share.

Above a certain acquirer share price, the exchange ratio stops floating and becomes fixed
at a minimum ratio. Now, an increase in acquirer share price results in an increase in the
value of each target share, but a fixed number of acquirer shares is issued.

Walkaway rights

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 This is another potential provision in a deal that allows parties to walk away from the
transaction if acquirer stock price falls below a certain predetermined minimum trading
price.

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CHAPTER NO. 5 - CONCLUSION

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 Conclusion
I take the project on Financial Accounting in this project I studied about all the concepts
related to Financial Accounting &Amalgamation & Merger. In this I studied about
Methods of valuation of Goodwill, share, Business, Determination of Exchange Ratio.

In this Project I Also studied about the Amalgamation is defined as the combination of
one or more companies into a new entity. It includes: - Two or more companies join to
form a new company Absorption or blending of one by the other.

Merger is defined as combination of two or more companies into a single company

where one survives and the others lose their corporate existence. The survivor acquires all
the assets as well as liabilities of the merged company or companies.

Methods of Valuation Of Goodwill in this Methods of Valuation of goodwill is as

follows:- Average profit method, Weighted average profit method, Super-profit method,
Annuity method, Capitalization of future maintainable method, Under Capitalization of
super profits method. Methods of Valuation of Shares is Net Asset Method, Yield
Method, and Earning Capacity.

BUSINESS VALUATION The leading business valuation associations, the American Society
of Appraisers (ASA), the Institute of Business Appraisers (IBA), and the National
Association of Certified Valuation Analysts (NACVA), all agree on three major
approaches to business valuation: the Income Approach, the Market Approach, and the
Cost Approach.

Exchange Ratio:-The exchange ratio is the relative number of new shares that will be
given to existing shareholders of a company that has been acquired or that has merged
with another. After the old company shares have been delivered, the exchange ratio is
used to give shareholders the same relative value in new shares of the merged entity.

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 Bibliography

www.scribd.com

www,google.com

www.project.com

www.incometax.india.gov.in

www.financialexpress.com

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