Spring / February 2012

Master of Business Administration- MBA Semester 3 MF0011 Mergers and Acquisitions - 4 Credits (Book ID: B1209) Assignment Set- 1 (60 Marks) Note: Each Question carries 10 marks. Answer all the questions. Q1.What are the cultural aspects involved in a merger? Give sufficient examples. Ans.There are many factors which require attention of the management and tend to widen its role in post-merger integration. A list of such factors is give below in brief: Legal obligation Fulfillment of legal obligation becomes essential in post-merger integration. Such obligations depend upon the size of the company, debt structure and controlling regulations, distribution channels, and dealer net-work, suppliers relations etc. In all or some of these cases legal documentation would be involved. The rights and the interests of the stake holders should be protected with the new or changed management of the acquiring company. Regulatory bodies like RBI, Stock Exchanges, SEBI etc would also ensure adherence to their respective guidelines and regulations. It should be ensured at the time of integration that the company out its legal obligations in all related and requisite areas. Consolidation of operations Acquiring company has to consolidate the operations, blending the acquired companys operations with its own operation. The consolidation of operation covers not only the production process, adoption of new technology and engineering requirements in the production process, but also the entire technical aspects covering technical know-how, project engineering, plant layout, schedule of implementation, product designs, plant and equipments, manpower requirements, work schedule, pollution control measure etc. in the process leading to the final product. Installation of top management Merger and acquisition affect the top management structure. A cohesive team is required at board level as well as senior executive level. Installation of management combination of issues related to: in the process of integration involves

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Selection or transfer of managers Changes in organizational structure Development of consistent corporate culture, including a frame of reference to guide strategic decisions making Commitment and motivation of personnel Establishment of new leadership The integration would involve induction of the directors of the acquired company on the Board of acquiring company, or induction of persons outside who have expertise in directing and policy planning. At top level also, changes are required, particularly depending upon terms and conditions of the merger to adjust in suitable positions the top executive of the acquired company to create congenial environment within the organization. The mechanism of corporate control encompassing delegation of power and power of control, accounting responsibility, MIS and communication channels are the important factors to be taken into consideration in the process of integration. Rationalizing financial resources It is important to revamp the financial resources of the company to ensure availability of financial resources and liquidity. Sometimes on happening of certain uncontrollable events, the financing plans have got to be verified, reviewed and changed. Integration of financial structure This is an important aspect which concerns most of stake holders of the company. Generally, financial structure is reorganized as per the scheme of arrangement, merger or amalgamation approved by the shareholders and creditors. But in the case of takeover or acquisition of an undertaking made by one company of the other through acquiring financial stake by way of acquisition of shares, the integration of financial structure would be a post-merger event which might compel the company to change its capital base, revalue its assets and reallocate reserves. Toning up production and marketing management With regard to the size of the company and its operational scale, its production line is to be adjusted during post-merger period. Decisions are taken on the basis of feasibility studies done by the experts. For tuning up of production, it is also necessary that resources be properly allocated for planned programme for utilization of scarce and limited resources available to a firm so as to direct the production process to result into optimal production and operational efficiency. Revamping of marketing strategy is also essential in postmerger integration. This is done on the basis of market surveys and

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recommendations of the marketing experts. Pricing policy also deserve attention for gaining competitive strength in the different market segments. Corporate planning and control Corporate planning to a large extent is guided by the corporate policy. Corporate policy prescribes guidelines that govern the decision making process and regulates the implementation of the decisions. Control as an activity of management involves comparison of performance with predetermined standards. In each area of corporate activities whether it is personnel, material, financial management, planning is associated with control. Q2.Study a recent merger that you have read about and discuss the synergies that resulted from the merger.

Ans. By merging, the companies hope to benefit from the following:

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers - who have much to gain from a successful M&A deal will try to create an image of enhanced value. The market, however, eventually

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sees through this and penalizes the company by assigning it a discounted share price. We'll talk more about why M&A may fail in a later section of this tutorial. Varieties of Mergers From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. Market-extension merger - Two companies that sell the same products in different markets. Product-extension merger - Two companies selling different but related products in the same market. Conglomeration - Two companies that have no common business areas.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial.

Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

The following are examples of the types of synergies commonly anticipated. Although these benefits have been categorized as marketing, operating, financial and strategic, these classifications sometimes overlap. Marketing Benefits associated with increased market share, such as savings in advertising costs or increased corporate awareness; The elimination of a competitor, thereby reducing price competition and the threat of new products being introduced by that competitor; Improved market coverage resulting from the integration of product lines;

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Access to new customers to whom the acquirers' existing products can be sold; and Improved distribution of products from better utilization of the marketing organization and distribution channels of the combined entities. Operating The ability to immediately transfer technology of the purchaser's business to the vendor's business (or vice versa), thereby increasing profitability and eliminating the time that the vendor would otherwise require to develop the same capabilities internally; Higher capacity utilization leading to incremental throughput, utilization of engineering and design services, and overall operating efficiencies; Increased purchasing power; and headcount reductions. Q3.What are the basic steps in strategic planning for a merger? Merger and Acquisition Strategies are extremely important in order to derive the maximum benefit out of a merger or acquisition deal. It is quite difficult to decide on the strategies of merger and acquisition , specially for those companies who are going to make a merger or acquisition deal for the first time. In this case, they take lessons from the past mergers and acquisitions that took place in the market between other companies and proved to be successful. Through market survey and market analysis of different mergers and acquisitions, it has been found out that there are some golden rules which can be treated as the Strategies for Successful Merger or Acquisition Deal. Some of the essential elements in strategic planning process of merger and acquisition are as listed here below. 1. Before entering in to any merger or acquisition deal, the target company's market performance and market position is required to be examined thoroughly so that the optimal target company can be chosen and the deal can be finalized at a right price. 2. Assessment of changes in the organization environment 3. Evaluation of company capacities and limitations 4. Assessment of expectations of stakeholders 5. Analysis of company, international economies competitors, industry, domestic economy and

6. Formulation of the missions, goals and policies 7. Development of sensitivity to critical external environmental changes 8. Formulation of internal organizational performance measurements

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9. Formulation of long range strategy programs 10.Formulation of mid-range programmes and short-run plans 11.Organization, funding and other methods to implement all of the proceeding elements 12.Information flow and feedback system for continued repetition of all essential elements and for adjustment and changes at each stage 13.Review and evaluation of all the processes 14.Target holding unique market position 15.A potential turnaround situation 16.Complimentary skill sets 17.Geographic expansion move 18.Ability to cut duplicate costs and improve profit 19.Elimination of competition 20.Increase in breadth and depth of product line 21.Improvement of IPO possibility 22.Access to new customer base 23.Stopping opportunities for key competitor In each of these activities, staff and line personnel have important responsibilities in the strategic decision making processes. The scope of mergers and acquisition sets the tone for the nature of mergers and acquisition activities and in turn affects which have significant influence over these activities,. This can be seen by observing the factors considered during the different stages of mergers and acquisition activities. Proper identification of different phases and related activities smoothens the process involved in merger. Q4.List out the defense strategies in the face of a hostile takeover bid. Globalization and worldwide financial reforms have collectively contributed towards the development of international mergers and acquisitions to a substantial extent. International mergers and acquisitions are taking place in different forms, for example horizontal mergers, vertical mergers, conglomerate mergers, congeneric mergers, reverse mergers, dilutive mergers, accretive mergers and others.

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International mergers and acquisitions are performed for the purpose of obtaining some strategic benefits in the markets of a particular country. With the help of international mergers and acquisitions, multinational corporations can enjoy a number of advantages, which include economies of scale and market dominance. International mergers and acquisitions play an important role behind the growth of a company. These deals or transactions help a large number of companies penetrate into new markets fast and attain economies of scale. They also stimulate foreign direct investment or FDI. The reputed international mergers and acquisitions agencies also provide educational programs and training in order to grow the expertise of the merger and acquisition professionals working in the global merger and acquisitions sector. The rules and regulations regarding international mergers and acquisitions keep on changing constantly and it is mandatory that the parties to international mergers and acquisitions get themselves updated with the various amendments. Numerous investment banks Professionals, consultants and attorneys are there to offer valuable and knowledgeable recommendations to the merger and acquisition clients.

Motivations for M&A include: access to economies of scale and scope; market power; access to new markets; o access to inputs, including labor as well as raw materials and technologies; o complementarity of products; o diversification; o pre-emption; o o o Q5.Take a cross border acquisition by an Indian company and critically evaluate. Tata Corus acquisition On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company, at 455 pence per share of Corus. The following months saw a lot of negotiations from both sides of the deal. Tata Steel's bid to acquire Corus Group was challenged by CSN, the Brazilian steel maker. Finally, on January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at USD 12.04 Billion. The deal is the largest Indian

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takeover of a foreign company and made Tata Steel the world's fifth-largest steel group. The involved companies 'Tata Steel', formerly known as TISCO (Tata Iron and Steel Company Limited), was the world's 56th largest and India's 2nd largest steel company with an annual crude steel capacity of 3.8 million tonnes. It is based in Jamshedpur, Jharkhand, India.[1][2] It is part of the Tata Group of companies. Post Corus merger, Tata Steel is India's second-largest and second-most profitable company in private sector with consolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350 crore during the year ended March 31, 2008.[3][4]. The company was also recognized as the world's best steel producer by World Steel Dynamics in 2005. The company is listed on BSE and NSE; and employs about 82,700 people (as of 2007). Corus was formed from the merger of Koninklijke Hoogovens N.V. with British Steel Plc on 6 October 1999. It has major integrated steel plants at Port Talbot, South Wales; Skuthorpe, North Lincolnshire; Teesside, Cleveland (all in the United Kingdom) and IJmuiden in the Netherlands. It also has rolling mills situated Q6.Choose any firm of your choice and identify suitable acquisition opportunity and give reasons for the same. Ans. Tata Corus acquisition On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company, at 455 pence per share of Corus. The following months saw a lot of negotiations from both sides of the deal. Tata Steel's bid to acquire Corus Group was challenged by CSN, the Brazilian steel maker. Finally, on January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at USD 12.04 Billion. The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifth-largest steel group. The involved companies 'Tata Steel', formerly known as TISCO (Tata Iron and Steel Company Limited), was the world's 56th largest and India's 2nd largest steel company with an annual crude steel capacity of 3.8 million tonnes. It is based in Jamshedpur, Jharkhand, India.[1][2] It is part of the Tata Group of companies. Post Corus merger, Tata Steel is India's second-largest and second-most profitable company in private sector with consolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350 crore during the year ended March 31, 2008.[3][4]. The company was also recognized as the world's best steel producer by World Steel Dynamics in 2005. The company is listed on BSE and NSE; and employs about 82,700 people (as of 2007). Corus was formed from the merger of Koninklijke Hoogovens N.V. with British Steel Plc on 6 October 1999. It has major integrated steel plants at Port Talbot, South Wales; Scunthorpe, North Lincolnshire; Teesside, Cleveland (all in the United Kingdom) and IJmuiden in the Netherlands. It also has rolling mills situated

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Spring / February 2012 Master of Business Administration- MBA Semester 3 MF0011 Mergers and Acquisitions - 4 Credits (Book ID: B1209) Assignment Set- 2 (60 Marks) Note: Each Question carries 10 marks. Answer all the questions. Q1. Discuss the factors in post-merger integration process. Ans. Factors in post-merger integration

Spring / February 2012

There are many factors which require attention of the management and tend to widen its role in post-merger integration. A list of such factors is give below in brief: Legal obligation Fulfillment of legal obligation becomes essential in post-merger integration. Such obligations depend upon the size of the company, debt structure and controlling regulations, distribution channels, and dealer net-work, suppliers relations etc. In all or some of these cases legal documentation would be involved. The rights and the interests of the stake holders should be protected with the new or changed management of the acquiring company. Regulatory bodies like RBI, Stock Exchanges, SEBI etc would also ensure adherence to their respective guidelines and regulations. It should be ensured at the time of integration that the company out its legal obligations in all related and requisite areas. Consolidation of operations Acquiring company has to consolidate the operations, blending the acquired companys operations with its own operation. The consolidation of operation covers not only the production process, adoption of new technology and engineering requirements in the production process, but also the entire technical aspects covering technical know-how, project engineering, plant layout, schedule of implementation, product designs, plant and equipments, manpower requirements, work schedule, pollution control measure etc. in the process leading to the final product. Installation of top management Merger and acquisition affect the top management structure. A cohesive team is required at board level as well as senior executive level. Installation of management in the process of integration involves combination of issues related to: Selection or transfer of managers Changes in organizational structure Development of consistent corporate culture, including a frame of reference to guide strategic decisions making Commitment and motivation of personnel Establishment of new leadership The integration would involve induction of the directors of the acquired company on the Board of acquiring company, or induction of persons outside who have expertise in directing and policy planning. At top level also, changes are

10

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required, particularly depending upon terms and conditions of the merger to adjust in suitable positions the top executive of the acquired company to create congenial environment within the organization. The mechanism of corporate control encompassing delegation of power and power of control, accounting responsibility, MIS and communication channels are the important factors to be taken into consideration in the process of integration. Rationalizing financial resources It is important to revamp the financial resources of the company to ensure availability of financial resources and liquidity. Sometimes on happening of certain uncontrollable events, the financing plans have got to be verified, reviewed and changed. Integration of financial structure This is an important aspect which concerns most of stake holders of the company. Generally, financial structure is reorganized as per the scheme of arrangement, merger or amalgamation approved by the shareholders and creditors. But in the case of takeover or acquisition of an undertaking made by one company of the other through acquiring financial stake by way of acquisition of shares, the integration of financial structure would be a post-merger event which might compel the company to change its capital base, revalue its assets and reallocate reserves. Toning up production and marketing management With regard to the size of the company and its operational scale, its production line is to be adjusted during post-merger period. Decisions are taken on the basis of feasibility studies done by the experts. For tuning up of production, it is also necessary that resources be properly allocated for planned programme for utilization of scarce and limited resources available to a firm so as to direct the production process to result into optimal production and operational efficiency. Revamping of marketing strategy is also essential in postmerger integration. This is done on the basis of market surveys and recommendations of the marketing experts. Pricing policy also deserve attention for gaining competitive strength in the different market segments.

Corporate planning and control Corporate planning to a large extent is guided by the corporate policy. Corporate policy prescribes guidelines that govern the decision making process and regulates the implementation of the decisions. Control as an activity of management involves comparison of performance with predetermined standards. In each area of corporate activities whether it is personnel, material, financial management, planning is associated with control.

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Q2.What are the legal compliance issues a company has to adhere to in case of a merger? Explain through an example. Mergers and acquisitions that are well-conceived and properly executed can create greater value. Whether it be companies merging together to strengthen their market position or the acquisition of a failing business, the global recession has created ample opportunity for M&A across sectors. However, according to Bain & Company, many acquirers lose huge amounts of value in these deals, as they often stumble during the postmerger integration process. The business consulting firm explains that companies should tailor their integration process to identify value, keep their best employees and focus on critical decisions which will affect the deal. In a new report titled 10 Steps to successful M&A integration, Bain & Company has provided guidelines that businesses should follow to aid smooth and successful business integration. Successful integration-the key to avoiding the risks of a merger or acquisition and to realizing its potential value-is always a challenge. And it is complicated by the simple fact that no two deals should be integrated in the same way, with the same priorities, or under exactly the same timetable. But 10 essential guidelines can make the task far more manageable and lead to the right outcome:

1. Follow the money: Every merger or acquisition needs a well-thought-out deal

thesis-an objective explanation of how the deal enhances the company's core strategy. "This deal will give us privileged access to attractive new customers and channels." "This deal will take us to clear leadership positions in our 10 priority markets." A clear deal thesis shows where the money is to be made and where the risks are. It clarifies the five to 10 most important sources of value-and danger-and it points you in the direction of the actions you must take to be successful. It should be the focus of both the due diligence on the deal and the subsequent integration. It is the essential difference between a disciplined and an undisciplined acquirer. The integration taskforces are then structured around the key sources of value. It is also necessary to translate the deal thesis into tangible nonfinancial results that everyone in the organization can understand and rally around-for example, one sales force or one order-to-cash process. The teams naturally need to understand the value for which they are accountable, and should be challenged to produce their own bottom-up estimates of value right from the start. That will allow you to update your deal thesis continuously as you work toward close and cutover-the handoff from the integration team to frontline managers.

2. Tailor your actions to the nature of the deal : Anyone undertaking a merger
or acquisition must be certain whether it is a scale deal-an expansion in the same or highly overlapping business-or a scope deal-an expansion into a new market, product or channel (some deals, of course, are a mix of the two types). The answer to the scale-or-scope question affects a host of subsequent decisions, including what you choose to integrate and what you

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will keep separate; what the organizational structure will be; which people you retain; and how you manage the cultural integration process. Scale deals are typically designed to achieve cost savings and will usually generate relatively rapid economic benefits. Scope deals are typically designed to produce additional revenue. They may take longer to realize their objectives, because cross-selling and other paths to revenue growth are often more challenging and time-consuming than cost reduction. There are valid reasons for doing both types of transactions-though success rates in scope deals tend to be lower-but it is critical to design the integration program to the deal, not vice versa. Consider the recent spate of announcements about computer hardware companies buying services businesses. In 2008, it was Hewlett-Packard buying EDS. More recently, Dell announced the acquisition of Perot Systems, and Xerox made a bold move for ACS that will more than double the size of its workforce. These are clearly scope deals, as these companies search for ways to move up the value chain into more profitable lines of business. And they require a new type of integration effort for these hardware companies. If HP, for example, applied the same principles and processes that it used in integrating Compaq, it would greatly complicate the EDS acquisition.

3. Resolve the power and people issues quickly: The new organization should be
designed around the deal thesis and the new vision for the combined company. You'll want to select people from both organizations who are enthusiastic about this vision and can contribute the most to it. Set yourself an ambitious deadline for filling the top levels and stick to it-tough people decisions only get harder with time. Moreover, until you announce the appointments, your best customers and your best employees will be actively poached by your competitors when you are most vulnerable to attack. The sooner you select the new leaders, the quicker you can fill in the levels below them, and the faster you can fight the flight of talent and customers and the faster you can get on with the integration. Delay only leads to endless corridor debate about who is going to stay or go and spending time responding to headhunter calls. You want all this energy focused on getting the greatest possible value out of the deal. The fallout from delays in crucial personnel decisions is all too familiar. When GE Capital agreed to buy Heller Financial in 2001, paying a nearly 50 percent premium over Heller's share price at the time, GE Capital indicated that it would need to reduce Heller's workforce by roughly 35 percent to make the deal viable. But it didn't move quickly to say who would remain. Key players departed before waiting to find out, and several helped Merrill Lynch create a rival middle-market unit the following year.

4. Start integration when you announce the deal: Ideally, the acquiring company
should begin planning the integration process even before the deal is announced. Once it is announced, there are several priorities that must be immediately addressed. Identify everything that must be done prior to close. Make as many of the major decisions as you can, so that you can move quickly once close day arrives. Get the top-level organization and people in

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place fast, as we noted-but don't do it so fast that you lose objectivity or that you shortcut the necessary processes. One useful tool is a clean team-a group of individuals operating under confidentiality agreements and other legal protocols who can review competitive data that would otherwise be off limits to the acquirer's employees. Their work can help get things up to speed faster once the deal closes. In late 2006, for example, Travel port-owner of the Galileo global distribution system (GDS) for airline tickets-announced that it intended to acquire World span, a rival GDS. The two companies used a clean team to work through many critical people and technology issues while they awaited final regulatory approval from the European Commission. When regulators gave the green light, the company was able to begin integration immediately rather than spending weeks waiting to gather the necessary data and making critical decisions in a rush.

5. Manage the integration through a "Decision Drumbeat: Companies can

create endless templates and processes to manage integration. But too much program office bureaucracy and paperwork distract from the critical issues, suck the energy out of the integration and demoralize all concerned. The most effective integrations instead employ a Decision Management Office (DMO); and integration leaders, by contrast, focus the steering group and taskforces on the critical decisions that drive value. They lay out a decision roadmap and manage the organization to a Decision Drumbeat to ensure that each decision is made by the right people at the right time with the best available information. To get started, ask the integration taskforce leaders to play back the financial and nonfinancial results they are accountable for, and in what timeframe. That will help identify the key decisions they must make to achieve these results, by when and in what order. Using this method, one global consumer products company recently was able to exceed its synergy targets by 40 percent-faster than originally planned-while retaining 75 percent of the top talent identified.

6. Handpick the leaders of the integration team: An acquisition or merger needs

a strong leader for the Decision Management Office. He or she must have the authority to make triage decisions, coordinate taskforces and set the pace. The individual chosen should be strong on strategy and content, as well as process-in other words, one of your rising stars. Ideally, this individual and other taskforce leader will spend about 90 percent of their time on the integration. Given the importance of maintaining the base business's performance while you're pursuing integration, one solution is to put the No. 2 person in a country or function in charge of the integration taskforce. The chief can take over the No. 2's responsibilities for the duration. Q3.What is the basis for valuation of a target company?

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A Decision Drumbeat is the way to focus your senior management and integration taskforces quickly on the critical decisions necessary for a merger integration to succeed. Here's how one global consumer products company applied this approach to sucessfully integrate a major competitor in record time: Focus on the fundamentals. The first rule is to clearly articulate the financial and non-financial results you expect, and by when. Parcel out these results to each of the integration taskforces, and have them work out the decisions necessary to get there. Pare these decisions down to the bare essentials-just what's necessary to deliver one integrated company on schedule. It's important to distinguish between integration and optimization decisions. The latter should be put off until the integration is complete. For the consumer products company, it was imperative to quickly equip the sales force with an integrated portfolio of brands for the busy trading period, despite the fact that some of the brands were aimed at the same consumers and were positioned in similar ways. The answer in this case was to quickly decide how to target the brands at different outlets, and to leave decisions about fundamental brand repositioning for later, after cutover to a single combined company. Coordinate decisions. Any integration involves a large number of decisions in a short time frame, and many of those decisions are highly interdependent. So the timing of decisions needs to be closely coordinated, and everyone needs to understand the impact their actions have on others. For instance, most marketing teams would prefer to wait until the end of the integration process to recommend the final product portfolio. Recognizing this tendency, the consumer products company quickly made a decision on the brand portfolio. That set up a series of cascading decisions: Within four weeks, the company had created new SKU lists, order forms and sales scripts, and had trained the sales force so that they were able to sell each brand when they hit the streets representing the combined company. The Decision Management Office plays an important coordinating role: first, by helping the taskforces work out which decisions must be made to deliver their results; second, by ensuring that the decisions are made and executed in the right order to support the decision deadlines of other taskforces. No one else has the integrated view of the timing and the value at stake. Assign decision rights and roles. The Decision Management Office should then map out who is responsible for each decision and communicate that to all involved. One of the most effective ways to clarify decision roles, in our experience, is a system we call RAPIDa loose acronym for Recommend (which usually involves 80 percent of the work);

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offer Input; Agree or sign off on (limited to rare circumstances, for example, when fiduciary responsibilities are involved); Decide, with one person assigned the "D"; and Perform, or execute the decision. The resulting decision roadmap shows who is accountable for each major decision and when that decision needs to be taken. At the consumer products company, the steering group focused on the 20 percent of decisions that were most critical to integration success, leaving the remainder of the decisions to the integration taskforces. That meant the integration was able to move at maximum speed and, by empowering the taskforce leaders, many gained priceless management experience that led to eventual promotions.

Stick to the timetable. Actively ensure that everyone is on track to make their decisions. The Decision Management Office ensures that each taskforce has what it needs from other taskforces or from the steering group to make their decisions on time through the weekly drumbeat of meetings with each of the taskforces. When necessary, bring in experts to speed up team delivery; and bring teams together for major decision points and cutover plans, which require detailed and coordinated planning. Focus your working sessions on critical trade-offs and the additional work required to resolve them. Here, again, the consumer products company kept to the deadline by providing extra help to the taskforces when they risked missing decision deadlines-to ensure union negotiators had what they needed to secure agreement from manufacturing employees, for instance, or to work around obstacles in the distribution system when containers from the two companies did not fit on the same trucks. As one senior executive later said: "We focused on decisions, not on process for process's sake. From day one we had a focused plan that everyone understood and believed in, and that really energized the team." As we emerge from the global recession, companies should prepare to take advantage of attractive asset values and to capture the benefits garnered by frequent acquirers. But they must act with judgment and finesse. Winners in this game will bring a tailored approach to integration, adjusting their approach to the deal thesis with one eye constantly fixed on the critical sources of value and risk. The most experienced acquirers not only understand these 10 steps to a successful integration, they also understand how to adjust their application to the deal and the circumstances.

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Q4.Consider the following balance sheets of AA Ltd. and BB Ltd. as on 31st March 200X.
(Rs in lakhs) Liabilities AA Ltd. BB Ltd. Assets AA Ltd. BBLtd.

Share Capital Equity Share of Rs 10 each 55 0 3 2 5 6 0

Fixed Assets Land & Building 2 1 5 4 0 0 75 1 2 135

13% Preference Shares of Rs 10 each Reserves & Surplus General Reserve Development Allowance Reserve 20 0 1 2 4 0 Plant & Machinery Furniture Investment Current Assets, Loans & Advance Inventories Profit & Loss A/c Secured Loan 14% Debentures 7 0 20 0 5 0 1 0 0 Sundry Debtors Cash & Bank balance 2 5 85 30 225 5 0 1 5 3 0 250 5 0 8 0

Unsecured Loan Fixed Deposit Current Liabilities & Provisions Sundry Creditors Bills Payable Provision for Tax 7 5 5 0 3 0 4 0 121 5 5 0 5 5 3 0 8 3 5

Advance Tax

35

12 15

835

AA Ltd. takes over BB Ltd. on the above date for a total consideration of Rs 450 lakhs to be discharged fully by the issue of equity shares of AA Ltd. The market price per share of AA Ltd. as on the date of amalgamation is Rs 25. 17

Spring / February 2012 Prepare the balance sheet of AA Ltd. after merger, assuming it is a case of amalgamation in the nature of merger. Hint : B/S Total= Rs. 2050 lakhs
Ratio Company TA Company TB 2.5 10 Compan y TC 1 5 Averag e

Enterprise market value / 2 revenues Enterprise market value / 20 EBITDA Enterprise market value / 30 Free Cash Flow

20

25

Application of valuation Ratios to Company W Actual recent Average data for Ratios Company W Revenues =$200 EBITDA = $10 Free cash flows = $5 Ans : Ratio Company TA Company TB 2.5 Compan y TC 1 Averag e 4.83 Indicated Enterprise Market Value

Average=

Enterprise market value / 2 revenues Enterprise market value / 20 EBITDA Enterprise market value / 30 Free Cash Flow Average of Company TA

10

31.67

20

25

58.33

= 2.0 + 20+ 30

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3 = 52 3

= 17.33 2.5 + 10+ 20 3 32.5 3

Average of Company TB

= 10.83 1.0 + 5+ 25 3 31 3

Average of Company TC

= 10.33 Valuation Ratios to Company W Revenues = 200 EBITDA = 10 Free cash flows = 5 Enterprise value is calculated as follows: Market Capitalization + Total Debt - Cash = Enterprise Value 200 + 10 5 = 205 Enterprise Market Value = 205 Calculate Ratio Enterprise market value / revenues 205/ 200 1.02

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Enterprise market value / EBITDA 205/ 10 20.5 Enterprise market value / Free Cash Flow 205/5 41 1.02 + 20.5 + = 41 3 = 62.52 3

Averag e

= 20.84

Q5.Explain the key regulatory provisions of M&A under: (a) FEMA, 1999 (5Marks) (b) Listing Agreement (5 Marks) An Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. BE it enacted by Parliament in the Fiftieth Year of the Republic of India as follows: 1. (1) This Act may be called the Foreign Exchange Management Act, 1999. (2) It extends to the whole of India. (3) It shall also apply to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention thereunder committed outside India by any person to whom this Act applies. (4) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint: Provided that different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision. Definitions

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2. In this Act, unless the context otherwise requires, (a) "Adjudicating Authority" means an officer authorised under sub-section (1) of section 16; (b) "Appellate Tribunal" means the Appellate Tribunal for Foreign Exchange established under section 18; (c) "authorised person" means an authorised dealer, money changer, offshore banking unit or any other person for the time being authorised under sub-section (1) of section 10 to deal in foreign exchange or foreign securities; (d) "Bench" means a Bench of the Appellate Tribunal; (e) "capital account transaction" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6; (f) "Chairperson" means the Chairperson of the Appellate Tribunal; (g) "Chartered accountant" shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949); (h) "currency" includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank; (i) "Currency notes" means and includes cash in the form of coins and bank notes; (j) "Current account transaction" means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes:(i) Payments due in business,services, and shortcourse of business, connection with foreign trade, other current term banking and credit facilities in the ordinary

(ii) Payments due as interest on loans and as net income from investments, (iii) Remittances for living expenses of parents, spouse and children residing abroad, and (iv) Expenses in connection with foreign travel, education and medical care of parents, spouse and children;

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(k) "Director of Enforcement" means the Director of Enforcement appointed under sub-section (1) of section 36; (l) "Export", with its grammatical variations and cognate expressions, means (i) The taking out of India to a place outside India any goods, (ii) Provision of services from India to any person outside India; (m) "Foreign currency" means any currency other than Indian currency; (n) "Foreign exchange" means foreign currency and includes, (i) Deposits, credits and balances payable in any foreign currency, (ii) Drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, (iii) Drafts, travelers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency; (o) "foreign security" means any security, in the form of shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency and includes securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency; (p) "Import", with its grammatical variations and cognate expressions, means bringing into India any goods or services; (q) "Indian currency" means currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934); (r) "Legal practitioner" shall have the meaning assigned to it in clause (i) of sub-section (1) of section 2 of the Advocates Act, 1961 (25 of 1961); (s) "Member" means a Member of the Appellate Tribunal and includes the Chairperson thereof; (t) "Notify" means to notify in the Official Gazette and the expression "notification" shall be construed accordingly; (u) "Person" includes (i) An individual, (ii) A Hindu undivided family,

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(iii) A company, (iv) A firm, (v) An association of persons or a body of individuals, whether incorporated or not, (vi) Every artificial juridical person, not falling within any of the preceding sub-clauses, and (vii) Any agency, office or branch owned or controlled by such person; (v) "Person resident in India" means (i) A person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include (A) A person who has gone out of India or who stays outside India, in either case (a) For or on taking up employment outside India, or (b) For carrying on outside India a business or vocation outside India, or (c) For any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; (B) A person who has come to or stays in India, in either case, otherwise than (a) For or on taking up employment in India, or (b) For carrying on in India a business or vocation in India, or (c) For any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period; (ii) Any person or body corporate registered or incorporated in India, (iii) An office, branch or agency in India owned or controlled by a person resident outside India, (iv) An office, branch or agency outside India owned or controlled by a person resident in India; (w) "Person resident outside India" means a person who is not resident in India;

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(x) "Prescribed" means prescribed by rules made under this Act; (y) "Repatriate to India" means bringing into India the realised foreign exchange and (i) The selling of such foreign exchange to an authorised person in India in exchange for rupees, or (ii) the holding of realised amount in an account with an authorised person in India to the extent notified by the Reserve Bank, and includes use of the realised amount for discharge of a debt or liability denominated in foreign exchange and the expression "repatriation" shall be construed accordingly; (z) "Reserve Bank" means the Reserve Bank of India constituted under subsection (1) of section 3 of the Reserve Bank of India Act, 1934 (2 of 1934); (z a) "security" means shares, stocks, bonds and debentures, Government securities as defined in the Public Debt Act, 1944 (18 of 1944), savings certificates to which the Government Savings Certificates Act, 1959 (46 of 1959) applies, deposit receipts in respect of deposits of securities and units of the Unit Trust of India established under sub-section (1) of section 3 of the Unit Trust of India Act, 1963 (52 of 1963) or of any mutual fund and includes certificates of title to securities, but does not include bills Listing Agreement Share issue and allotment Posting of All letters of allotment and letters of right will be issued allotment letters simultaneously. These will be serially numbered, printed and and letters of signed. [Clause 1] right Allotment within Allotment should be made within 30 days. Otherwise, interest @ 30 days 15% is payable. [Clause 44] Letter of offer of Letters of offer in respect of rights issue should be dispatched on right issue same day. These should be serially numbered. Form of renunciation should be printed along with letter of offer of right. Right issue with Rights issue will be with right of renunciations in all cases. right of Renunciation forms should be forwarded to stock exchange. renunciation Fractional coupons will be issued or payment of equivalent value of rights. At least four weeks to be given to members from date of opening of issue. /Letter of allotment of right issue should be sent within 6 weeks. Issue of security Shares will be issued as per SEBI guidelines. True and fair as per SEBI disclosures will be made in offer documents. [Clause 24(b)]. guidelines No shares with A listed company shall not issue shares in any manner which may superior rights confer on any person superior rights as to voting or dividend visas to dividend or -vis the rights on equity shares that are already listed [Clause

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voting 28A of Listing Agreement inserted w.e.f. 21-7-2009] 1% Security If fresh securities are offered, 1% amount will be kept as security deposit in case with stock exchange, before opening of subscription list. The of fresh issue amount will be refunded after issue is over and there are no complaints subject to submission of NOC from SEBI. Otherwise, it can be forfeited. Even if deposit is forfeited, company is still liable for compliance of statutory and listing requirements. Mutual funds are exempted from 1% deposit. [Clause 42]. No lien on Company will not have any lien on fully paid up shares, except in shares respect of partly paid shares to the extent of moneys called or payable. [Clause 34(a)]. Dealing with Often shares issued in public offer remain unclaimed. In such unclaimed case, the unclaimed shares shall be credited to demat suspense shares account opened with depository participant. Corporate benefits like bonus shares, split etc. shall be credited to such account. Voting rights shall be frozen till rightful owner claims the shares. Details shall be disclosed in annual report. Allottees account shall be credited when he/she approaches the issuer [clause 5A inserted w.e.f. 24-4-2009]

Q6.What are the key tax implications of demerger? There is a common misconception amongst the corporate world that demerger and hiving-off are similar as far as the Indian corporate scenario is concerned, and hence, undertaking corporate restructuring using any one of the two modes for investment purposes, for raising capital or for increasing profits through cost-reduction, does not make any difference. This article takes this view as its starting point and dispels the notion by undertaking analysis of "hiving off" and "demerger" concepts, both from the legal and taxation perspectives. The article further draws on the various provisions of Indian company law, Indian tax law and judicial decisions to conclude that these two concepts are significantly different on various points such as how the consideration is to be paid and proportioned, how the assets would be valued, how the depreciation will be carried forward to the investing partner and what would be the cost of assets in the hands of the investor, depending on whether the transaction is a demerger, or hiving-off. The article recommends that corporations, both as sellers or as foreign direct investors, ought to be aware of the implication of both strategies, as choosing one over the other may have considerable financial advantages as well as undertaking the correct required procedural compliances. Demerger The expression Demerger is not expressly defined in the Companies Act, 1956. However, it is covered under the expression arrangement, as defined in clause (b) of Section 390 of Companies Act. Division of a company takes place when 1. Part of its undertaking is transferred to a newly formed company or an

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existing company and the remainder of the first companys division/undertaking continues to be vested in it; and 2. Shares are allotted to certain of the first companys shareholders. A demerger is a form of restructure in which owners of interests in the head entity (for example, shareholders or unit-holders) gain direct ownership in an entity that they formerly owned indirectly (the demerged entity). Underlying ownership of the companies and/or trusts that formed part of the group does not change. The company or trust that ceases to own the entity is known as the demerging entity. The entities that emerge have its own board of directors and, if listed on a stock exchange, have separate listings. The purpose of demerger is to revive a company's flagging commercial fortunes, or simply to lift its share price. Mode Of Demerger: Under the scheme of arrangement with approval of the court U/s 391 of the Companies Act. Procedure for Demerger: 1. Demerger forms part of the scheme of arrangement or compromise within the ambit of Section 390, 391, 392, 393, 394 besides Sec 394A 2. Demerger is most likely to attract the other provisions of the companies Act, envisaging reduction of Share capital comprising Sec. 100 to 105 3. The company is required to pass a special resolution which is subject to the confirmation by the court by making an application. 4. The notice to the shareholders convening the meeting for the approval will usually consist of the following detail: (a) Full Details of the scheme (b) Effect of the scheme on shareholders, creditors employee (c) Details of the valuation Report 5. An application has to be made for approval of the High Court for the scheme of arrangement 6. It is necessary that the Articles of Association should have the provision of reduction of its Share Capital in any way, and its MOA should provide for demerger, Division or split of the Company in any way. Demerger thus, resulting into reduction of Companies share capital would also require the Co. to amend its MOA.

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