Merger and Aquisition

MERGERS & ACQUISITIONS

A Merger is a combination of two
companies into one larger company.

An Acquisition, also known as takeover ,
is the buying of one company(the target)
by another.
An Acquisition can be friendly or hostile.

ACQUISITION
i. Buying one organization by
another.
ii. It can be friendly takeover or
hostile takeover.
iii. Acquisition is less expensive
than merger.
iv. Buyers cannot raise their
enough capital.
v. It is faster and easier
transaction.

DIFFERENCE BETWEEN MERGER AND
ACQUISITION
MERGER
i. Merging of two organization in
to one.
ii. It is the mutual decision.
iii. Merger is expensive than
acquisition(higher legal cost).
iv. Through merger shareholders can
increase their net worth.
v. It is time consuming and the
company has to maintain so
much legal issues.
Types of mergers

Horizontal Merger
Vertical merger
Co-generic merger
Conglomerate merger
Horizontal Merger
This kind of merger exists between two companies
who compete in the same industry segment. The
two companies combine their operations and gains
strength in terms of improved performance,
increased capital, and enhanced profits.

Vertical Merger
Vertical merger is a kind in which two or more
companies in the same industry but in different
fields combine together in business.
Co-generic Merger
A type of merger where two companies are in the
same or related industries but do not offer the same
products.
An example of a co generic merger is Citigroup's acquisition of Travelers
Insurance. While both were in the financial services industry, they had
different product lines.
Conglomerate Merger
Conglomerate merger is a kind of venture in which
two or more companies belonging to different
industrial sectors combine their operations.

Why Mergers and Acquisitions Fail?
Cultural Difference
Flawed Intention
No guiding principles
No ground rules
No detailed investigating
Poor stake holder outreach

PROBLEM WITH MERGER
i. Clash of corporate
cultures
ii. Increased business
complexity
iii. Employees may be
resistant to change
MERGER:WHY & WHY NOT
WHY IS IMPORTANT
i. Increase Market Share.
ii. Economies of scale
iii. Profit for Research and
development.
iv. Benefits on account of
tax shields like carried
forward losses or
unclaimed
depreciation.

8
PROBLEM WITH ACUIQISITION
i. Inadequate valuation
of target.
ii. Inability to achieve
synergy.
iii. Finance by taking
huge debt.
WHY IS IMPORTANT

i. Increased market share.
ii. Increased speed to
market
iii. Lower risk comparing to
develop new products.
iv. Increased diversification
v. Avoid excessive
competition
ACQUISITION:WHY & WHY NOT
1. Tata Steel-Corus: $12.2 billion
January 30, 2007
Largest Indian take-over
After the deal TATAS
became the 5
th
largest
STEEL co.
100 % stake in CORUS
paying Rs 428/- per share
Image: B Mutharaman, Tata Steel MD; Ratan
Tata, Tata chairman; J Leng, Corus chair;
and P Varin, Corus CEO.

2. Vodafone-Hutchison Essar:
$11.08 billion

TELECOM sector
11
th
February 2007
2
nd
largest takeover
deal
67 % stake holding in
hutch

Image: The then CEO of Vodafone
Arun Sarin visits Hutchison
Telecommunications head office in
Mumbai.
3. ONGC-Imperial Energy:$2.8billion

January 2009
Acquisition deal
Imperial energy is a
biggest chinese co.
ONGC paid 880 per
share to the shareholders
of imperial energy
ONGC wanted to tap the
siberian market

Image: Imperial Oil
CEO Bruce March.
4. HDFC Bank-Centurion Bank of
Punjab: $2.4 billion

February, 2008
Banking sector
Acquisition deal
CBoP shareholders got
one share of HDFC Bank
for every 29 shares held
by them.
9,510 crore
Image: Rana Talwar (rear) Centurion
Bank of Punjab chairman, Deepak
Parekh, HDFC Bank chairman.
5. Tata Motors-Jaguar Land Rover:
$2.3 billion

March 2008 (just a year
after acquiring Corus)
Automobile sector
Acquisition deal
Gave tough competition
to M&M after signing
the deal with ford

Image: A Union flag flies behind a
Jaguar car emblem outside a
dealership in Manchester, England.
Vodafone
purchased stake in
Hutch
(Hutchison Telecom International)
for USD 11.08 billion.
Background Vodafone
Type : Private
Founded : 1983 as Racal Telecom.
Headquarters : Newbury, England, UK.
Industry : Mobile Telecommunications.
Predecessors : Hutchison Essar ltd.
Services : Wireless broadband , Network services etc.
Parent : Vodafone group.
Website: www.vodafone.in


Vodafone Holdings International (Vodafone), a
Dutch company, purchased shares of a Cayman
Company CGP Investments (Holdings) Ltd from a
foreign company Hutchinson Telecommunications
International Limited HTIL for a total
consideration of $11.2 billion. CGP Investments in
turn held 67% stake of an Indian Telecom company
(Hutch Essar) through intermediate companies
situated in Mauritius.
The sale ultimately resulted in the ownership of
Hutch Essar by Vodafone Holdings International.
The Indian Foreign Investment Promotion Board
(FIPB) approved the said transaction on the
condition that Vodafone would comply with all
Indian municipal laws.
A new joint venture called the Vodafone Essar
Ltd. (the new name of Hutch Essar Ltd.) came
into existence.
As a result of this sale, capital gains, estimated
at $ 2 billion, accrued to the Cayman Islands
SPV. Considered from the point of view of
jurisdictions, it is clear that the sale transaction
took place between the Dutch SPV (owned by
a UK group) and the Cayman Islands SPV
(owned by a Hong Kong company).
The ultimate effect however was the transfer
of controlling shares of an Indian company.

Since the deal was offshore, neither party
thought it was taxable in India.
But the tax department disagreed. It claimed
that capital gains tax, most people paid on
the transaction and that tax should have
been deducted by Vodafone whilst paying
Hutch.
Arguments of Vodafone:
Vodafone argued that the transaction took
place between offshore entities owned by
itself and Hutchison and was outside Indias
jurisdiction and moreover the deal was not
taxable in India as the funds were paid outside
India for the purchase of shares in an offshore
company.

Arguments of Tax Authority:
But the tax department seeks to show that
since most of the assets were in India, the deal
was liable to Indian capital gains tax. Hutch had
sold Vodafone valuable rights - including tag
along rights, management rights and the right
to do business in India and that the offshore
transaction had resulted in Vodafone having
operational control over the Indian asset,
which is the second largest telecom service
provider in India.
Treatment of Capital Gains on extra territorial
transaction:
According to Section 9 of the Income Tax Act,
where a non-resident earns any income by a
transfer of capital asset in India (whether direct
or indirect), the capital gains tax would apply.
But Section 9 does not state that the transfer of
the capital asset can be direct or indirect. It is
only income which can be direct or indirect.
Observations of the High Court:
The Court inferred that the subject matter of
the transaction between Vodafone and HTIL is
nothing but transfer of interest, tangible and
intangible, in Indian companies of the Hutch
Group, in favour of Vodafone and not just an
acquisition of shares of CGP Investments.

continued

Vodafone had failed to produce the original
agreement between Hutchinson
Telecommunications International Limited
and Vodafone, which makes it difficult to
understand the true nature of the transaction
between the parties, which leaves scope for
various assumptions.
Observations of the Supreme Court:
After the negative verdict of high court the
company filed the SPL in Supreme court in
2008.
And in 2012 Supreme court gave verdict in
favor of the company.

Conclusion:
This transaction is one of the largest Mergers and Acquisition
deals in India and the issues surrounding this case can have wider
ramifications on the Mergers and Acquisitions landscape in India.

This case raises certain pertinent questions and shows the
loopholes of the Indian Tax system like
1) how to access the impact on cross border transactions
between two non-resident entities which have Indian assets and
whether an Indian Company can be treated as agent of the non-
resident purchaser and held liable for deduction of tax.
2) Would there be an adverse effect on the foreign
inflows where the foreign investors would think twice
before investing in India if they are wary of the hassles
involving such issues of tax, jurisdiction and deal
structuring.

These questions are required to be answered at the
earliest as it may raises apprehensions in the minds of
the foreign investors who would like to have a long term
investment strategy for India.

Effect on Indian Economy
This case can have effect on the inflow of FDI
in the country .

Also have adverse effect on many future M&A
in India.

Thank You

Merger and Aquisition

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MERGERS & ACQUISITIONS

MERGERS & ACQUISITIONS

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