Chapter-2

Mergers and acquisitions

 Meaning of Merger/ amalgamation

A merger is a combination of two or more businesses into one

business. Laws in India use the term 'amalgamation' for merger.
The Income Tax Act, 1961 (Section )defines amalgamation as the
merger of one or more companies with another or the merger of
two or more companies to form a new company, in such a way
that all assets and liabilities of the amalgamating companies
become assets and liabilities of the amalgamated company and
shareholders not less than nine-tenths in value of the shares in
the amalgamating company or companies become shareholders
of the amalgamated company.
Example- Reliance merged with Bombay dyeing .
 Mergers or amalgamations are of two forms

Merger through Absorption

An absorption is a combination of two or more companies into
an 'existing company'. All companies except one lose their
identity in such a merger. For example, absorption of Tata
Fertilizers Ltd (TFL) by Tata Chemicals Ltd. (TCL). TCL, an
acquiring company (a buyer), survived after merger while TFL,
an acquired company (a seller), ceased to exist. TFL transferred
its assets, liabilities and shares to TCL.
Merger through Consolidation
A consolidation is a combination of two or more companies into
a 'new company'. In this form of merger, all companies are
legally dissolved and a new entity is created. Here, the acquired
company transfers its assets, liabilities and shares to the
acquiring company for cash or exchange of shares. For example,
merger of Hindustan Computers Ltd, Hindustan Instruments Ltd,
Indian Software Company Ltd and Indian Reprographics Ltd into
an entirely new company called HCL Ltd.
 Why Mergers?
 The Principal economic rationale of a merger is that the value of
the combined entity is expected to be greater than the sum of the
independent values of the merging entities i.e. Synergy.

 Mergers occur due to reasons of -Growth , Diversification,

Economies of Scale, Managerial Effectiveness, Utilization of Tax
shields, Lower Financing Costs, Strategic Benefit, Broadening of
Capital Base.

 Often Mergers intend to diversify, lower financing costs , achieve

a higher rate of earnings growth . But Merger is not likely to
result in any of the above if such merger is resorted due to
reasons of concealing weakness of one unit through merger with
another unit or to create an artificial appearance in the market /
eyes of the public that the company is doing well
 Types of mergers
Horizontal mergers
► Horizontal mergers are those mergers where the companies
manufacturing similar kinds of commodities or running
similar type of businesses merge with each other.
i. Horizontal Monopoly
ii. Horizontal Expansion
Examples of Horizontal Mergers

► The formation of Brook Bond Lipton India Ltd. through the

merger of Lipton India and Brook Bond

► The merger of Bank of Mathura with ICICI (Industrial Credit

and Investment Corporation of India) Bank

► The merger of BSES (Bombay Suburban Electric Supply) Ltd.

with Orissa Power Supply Company

► The merger of ACC (erstwhile Associated Cement Companies

Ltd.) with Damodar Cement
 Advantages of Horizontal Merger:

a. Economies of scope
b. Economies of scale
Vertical mergers
► It occurs between firms in different stages of production
operation. A vertical combination represents a combination of
firms engaged at different stages of production in an industry
expanding its activities either forward towards the ultimate
consumer or backward towards the suppliers of raw materials.
► For example, joining of a TV manufacturing assembling
company and a TV marketing company or joining of a spinning
company and a weaving company.
► Vertical mergers are commonly undertaken by firms as they seek
to consolidate their production operations. For example
Newspaper publishing companies, have been known to purchase
pulp and paper mills, and even timber companies, to ensure a
steady supply of newsprint.
► Media giants like Disney and Viacom have merged with
production companies to ensure a stream of programming as well
as television stations to ensure a retail market for their products.
Conglomerate mergers
► Conglomerate mergers are those firms which are engaged in
unrelated types of business activity. It is collection of
disassociation businesses. These mergers have the potential for
improved resource allocation. They also have the potential for
synergy and transfer of managerial capabilities Among
conglomerate mergers, the following three types have been
distinguished.
For example, merging of different businesses like manufacturing of
cement products, fertilizer products, electronic products,
insurance investment and advertising agencies. L&T and Voltas
Ltd are examples of such mergers
 Mechanics Of Merger
Merger has to be viewed from Legal , Tax and Accounting
Consideration. The procedure for amalgamation/merger involves
the following :-
 Examination of Object Clauses – Whether MOA of both the
companies provide for it or not
 Intimation to Stock Exchange of such intentions
 Approval of the draft amalgamation by the respective boards
 Application to the High Court so that it can convene the
meetings of shareholders and creditors for passing the
amalgamation proposal
► 21 days Advance intimation notice to the shareholders and
creditors and publication of the notice of meetings in two news
papers, one vernacular and one English and filing of an affidavit
in the court of law that the notice has been published
► Holding of Meetings of Shareholders and creditors and approval
of the same by atleast 75% of the stake holders
► Petition to the court for confirmation and passing of orders .
Court to fix the date of hearing and the notice about the same has
to be published in the news paper. Court to find out as to whether
the amalgamation is fair and reasonable . Court is empowered to
modify the scheme of amalgamation and pass the orders
accordingly
► Filing the order with the Registrar- Certified true copies of the
court order must be filed with the Registrar of Companies within
the time limit specified by the Court.
► Transfer of Assets and liabilities-All the assets and liabilities of
the amalgamating company to be transferred to the amalgamated
company strictly as per the court orders.
► Amalgamated company after fulfilling the provisions of the law
to issue shares and debentures of the amalgamated company to
be followed by listing .
► For tax purposes, the depreciation chargeable by the
amalgamated company has to be based on the written down
value of the assets before amalgamation . For accounting
purposes , the depreciation charge may be based on the
considertion paid for the assets .
► Subject to the fulfillment of certain conditions as laid down in
the Income Tax relevant to section 2(a), the accumulated loss and
the un absorbed depreciation of the amalgamating company shall
be deemed to be the loss/depreciation of the amalgamated
company for the previous year in which the amalgamation is
effected
► No capital gains tax is applicable to the amalgamating company
or its shareholders if they get shares in the amalgamated
company
► Other important provisions :-
The amalgamated company is liable to pay the taxes of the
amalgamating company.
Expenses of amalgamation are not tax deductible
Taxes on the income of the amalgamating company , paid or
payable and income tax litigation expenses are tax deductible
expenses for the amalgamated company
► Bad debt arising out of the debt of amalgamating company taken
over by the amalgamated company are not deductible for tax
purposes.
► The amalgamated company is entitled to get the refund of taxes
by the amalgamating company
Acquisitions and Takeovers
An acquisition may be defined as an act of acquiring effective
control by one company over assets or management of another
company without any combination of companies. Thus, in an
acquisition two or more companies may remain independent,
separate legal entities, but there may be a change in control of
the companies. When an acquisition is 'forced' or 'unwilling', it is
called a takeover. Under
the Monopolies and Restrictive Practices Act, takeover meant
acquisition of not less than 25 percent of the voting power in a
company. While in the Companies Act (Section 372), a
company's investment in the shares of another company in
excess of 10 percent of the subscribed capital can result in
takeovers. An acquisition or takeover does not necessarily entail
full legal control. A company can also have effective control over
another company by holding a minority ownership. In theory
acquirer must buy more than 50% of the paid-up equity of the
acquired company to enjoy complete control .
 Some of the Prominent Take Overs.

► Chhabrias Shaw Wallace

► Goenkas Calcutta Ele.Supply Co
► Hindujas Ashok Leyland
► Satyam India World
► Hindalco Indal
► Mcleod Russell Union Carbide
Renamed “Eveready”
Types of Take overs/ Acquiistions
► Hostile takeover/ Acquisition –In this, the company which is to
be bought has no information about the acquisition/ take over.
The company, which would be sold is taken by surprise.
► Friendly- Inthis, the two companies cooperate with each other
and settle matters related to acquisitions.
There are times when a much smaller company manages to take
control of the management of a bigger company but at the same
time retains its name for the combination of both the companies.
This process is known as "reverse takeover
Take over guidelines
► SEBI has issued detailed guidelines for regulating substantial
acquisition of shares and take overs of listed companies.
Important guidelines relate to
 Notification procedure to be followed by the acquirer
 Offer Price Norms
 Contents of the Public Announcement to be made by the
acquirer
► The purpose of SEBI guidelines is to
 Impart greater transparency to takeover deals
 Ensure a greater amount of disclosure through public
announcement and offer document
► Protect the interest of small shareholders
Take over Code
► Introduced in 1997 by SEBI Based on P.N.Bhagwati Committee
recommendations
► It is meant to ensure that takeovers happen in a fair, transparent
and equitable manner
► Take over means acquiring the control or management interest in
a target company
► Major provisions: Informing the target company if the total
holding exceeds 5%: informing stock exchange if holding
exceeds 15% making open offer to public if the proposed
acquisition results in share holding in excess of 155. Code
amended in 2002.
Five sins of Acquisition
► Straying too far a field :- The temptation to stray in to unrelated
areas that appear exotic and very promising is often strong.Such
forays are often risky.
► Striving for bigness:- Size is perhaps a very important yardstick
by which most organisations , business or otherwise judge
themselves. The concern with size may lead to unwise
acquistions
► Leaping before looking:- Failure to investigate fully the business
of the seller is rather common .The problems here are that the
seller may possibly exaggerate the worth of intangible
assets(brand image, technical know-how , patents, copy rights
and so on , the accounting reports might have been deftly
window dressed , buyer may not be in a position to assess the
hidden problems and contingent liabilities
► Over Paying :- In a competitive situation, , the naïve ones tend to
bid more .Often the highest bidder is one who overestimates
value out of ignorance . He may turn out to be an unfortunate
winner in the game of acquistions.

► Failing to integrate well Even the best strategy can be ruined by

poor implementation
Strategies taken to prevent take
over.
People pill
Sandbag
Shark Repellent
Golden parachute
Raider
Saturday Night Special
Macaroni defense
 Merger and Acquisition Process
 Preliminary Assessment or Business
Valuation
 Phase of Proposal
 Exit Plan
 Structured Marketing
 Stages of Integration
 Once the process is initiated
 Closure of the deal of merger or acquisition
 Impact of Mergers and
acquisitions

1.The impact of mergers and acquisitions on various sects of the

company may differ.
2.Impact Of Mergers And Acquisitions on workers or employees
3.Impact of mergers and acquisitions on top level management
4.Impact of mergers and acquisitions on shareholders
 Benefits of Mergers and
Acquisitions

• Greater Value Generation

• When the companies are weathering through the tough times.
• When the companies are weathering through the tough times.
• To improve profitability and EPS
 Costs of Mergers and
Acquisitions
 Replacement Costs
 Discounted Cash Flow Method
 Comparative Ratio calculation method
Merger and acquisition accounting is done either by the purchase or
pooling of interests methods.
► Purchase Method
► Pooling of Interests Method
Meaning of Slump sales

Under the Indian tax law, 'slump sale' under

Section2(42C) of the Income-tax Act, 1961. means the
transfer of one or more business undertakings. Under
clause (19AA) of section 2 - "Undertaking" includes
any part of an undertaking, or a unit or division of an
undertaking or a business activity taken as a whole, but
does not include individual assets or liabilities or any
combination thereof not constituting a business activity.
Bought Out Deals
► In a bought out deal , an existing company off-loads a part
of the promoters capital to a wholesaler instead of making
a public issue .
► The wholesalers invariably is either a merchant banker or
sometimes just a company with surplus cash
► These could be individuals and other smaller companies
participating in the syndicate , in addition to the sponsors
► A bought out deal helps the companies mobilise the funds
indirectly from the public and cost of raising funds is since
public issue expenses are not involved
► Spin offs
Corporate spin-offs are important corporate
restructurings that are associated with
significant positive abnormal stock returns
at their announcement. A spin-off separates
diverse units of the firm and results in two
companies that have dissimilar assets
Repurchase Options or Ready Forward
► Repos are the transactions where the borrowing
bank places with lender bank , certain acceptable
security against funds to be borrowed .
► Both the banks agree to reverse this transaction
on a pre-determined future date at agreed interest
cost. These transactions are short tenure and
provide flexibility to suit both lender and borrower
► No fixed period has been prescribed for this
transaction. However generally repo transactions
are for minimum period of 3 days to 14 days
► The interest rate is market determined and built in
the structure of repo transactions
► Allowed only through SGL account with RBI in
Mumbai
► Repo is a very popular mode of raising funds
against its securities without altering its asset mix
while lender finds a safe avenue giving attractive
return
► Moreover the funds management for bothe
borrower and lender improves as the date of
reversal of transactions is known in advance.
 Leveraged Buy Out

► Itinvolves a transfer of ownership

consummated mainly with debt.
► Generally , a leveraged buy out involves the
acquistion of a division or a unit of a
company
► Occasionally it entails the purchase of an
entire company