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Mergers Acquisitions and Corporate Restructuring

Mergers Acquisitions and Corporate Restructuring

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CHAPTER-1
MERGER AND ACQUISITION: CONCEPTUAL FRAMEWORK

The present chapter discusses the conceptual framework of mergers
and acquisitions. It focuses on demarcations between various terms
like mergers, acquisitions, takeovers, consolidations, reverse
mergers, management buyouts etc. The concept of demerger is also
introduced. Various Indian laws and statutes having a bearing on
merger process have been outlined and trends traced. Few other
related procedural issues are also covered.

\u201cThe decision to invest in a new asset would mean internal expansion for the firm. The
new asset would generate returns raising the value of the corporation. Mergers offer an
additional means of expansion, which is external, i.e. the productive operation is not
within the corporation itself. For firms with limited investment opportunities, mergers
can provide new areas for expansion. In addition to this benefit, the combination of two
or more firms can offer several other advantages to each of the corporations such as
operating economies, risk reduction and tax advantage1.\u201d

Today mergers, acquisitions and other types of strategic alliances are on the agenda of
most industrial groups intending to have an edge over competitors. Stress is now being
made on the larger and bigger conglomerates to avail the economies of scale and
diversification. Different companies in India are expanding by merger etc. In fact, there
has emerged a phenomenon called merger wave.

The terms merger, amalgamations, take-over and acquisitions are often used
interchangeably to refer to a situation where two or more firms come together and
combine into one to avail the benefits of such combinations and re-structuring in the
form of merger etc., have been attempted to face the challenge of increasing
competition and to achieve synergy in business operations.

1.1 Corporate Restructuring

Restructuring of business is an integral part of the new economic paradigm. As controls
and restrictions give way to competition and free trade, restructuring and reorganization
become essential. Restructuring usually involves major organizational change such as
shift in corporate strategies to meet increased competition or changed market
conditions.

1 Schall, L.D. and Hally C.W., Introduction to financial Management, McGraw Hill
Book Company, New York, P.682.
Mergers & Acquisitions
Page 1 of 93

This activity can take place internally in the form of new investments in plant and
machinery, research and development at product and process levels. It can also take
place externally through mergers and acquisitions (M&A) by which a firm may acquire
another firm or by which joint venture with other firms.

This restructuring process has been mergers, acquisitions, takeovers, collaborations,
consolidation, diversification etc. Domestic firms have taken steps to consolidate their
position to face increasing competitive pressures and MNC\u2019s have taken this
opportunity to enter Indian corporate sector. The different forms of corporate
restructuring are summarized as follows:

Corporate Restructuring
Expansion
\u2022
Amalgamation: This involves fusion of one or more companies where the

companies lose their individual identity and a new company comes into existence to
take over the business of companies being liquidated. The merger of Brooke Bond
India Ltd. And Lipton India Ltd. Resulted in formation of a new company Brooke
Bond Lipton India Ltd.

\u2022
Absorption: This involves fusion of a small company with a large company where
the smaller company ceases to exist after the merger. The merger of Tata Oil Mills
Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL) is an example of absorption.
\u2022
Tender offer: This involves making a public offer for acquiring the shares of a target

company with a view to acquire management control in that company. Takeover by
Tata Tea of consolidated coffee Ltd. (CCL) is an example of tender offer where more
than 50% of shareholders of CCL sold their holding to Tata Tea at the offered price
which was more than the investment price.

Mergers & Acquisitions
Page 2 of 93
Expansion

\u2022Amalgamation
\u2022Absorption
\u2022Tender offer
\u2022Asset

acquisition
\u2022Joint Venture
Contraction
\u2022Demerger
+ Spin off
+ Equity carve out

+ Split off
+ Split up
+ Divestitures

\u2022Asset value
Corporate Control

\u2022Going Private
\u2022Equity Buyback
\u2022Anti Takeover
\u2022Leveraged

Buyouts
\u2022
Asset acquisition: This involves buying assets of another company. The assets may
be tangible assets like manufacturing units or intangible like brands. Hindustan
lever limited buying brands of Lakme is an example of asset acquisition.
\u2022
Joint venture: This involves two companies coming whose ownership is changed.
DCM group and DAEWOO MOTORS entered into a joint venture to form
DAEWOO Ltd. to manufacturing automobiles in India.
There are generally the following types of DEMERGER:
Spinoff: This type of demerger involves division of company into wholly owned

subsidiary of parent company by distribution of all its shares of subsidiary company on
Pro-rata basis. By this way, both the companies i.e. holding as well as subsidiary
company exist and carry on business. For example Kotak, Mahindra finance Ltd.
formed a subsidiary called Kotak Mahindra Capital Corporation, by spinning off its
investment banking division.

Split ups: This type of demerger involves the division of parent
company into two or more separate companies where parent company ceases to exist
after the demerger.
Equity carve out: This is similar to spin offs, except that same part of shareholding of

this subsidiary company is offered to public through a public issue and the parent
company continues to enjoy control over the subsidiary company by holding
controlling interest in it.

Divestitures: These are sale of segment of a company for cash or for securities to an
outside party. Divestitures, involve some kind of contraction. It is based on the
principle if \u201canergy\u201d which says 5-3=3!
\u2022
Asset sale: This involves sale of tangible or intangible assets of a company to

generate cash. A partial sell off, also called slump sale, involves the sale of a
business unit or plant of one firm to another. It is the mirror image of a purchase of
a business unit or plant. From the seller\u2019s perspective, it is a form of contraction:
from the buyer\u2019s point of view it is a form of expansion. For example, When
Coromandal Fertilizers Limited sold its cement division to India Cement limited,
the size of Coromandal Fertilizers contracted whereas the size of India Cements
Limited expanded.

Corporate controls
\u2022
Going private: This involves converting a listed company into a private company

by buying back all the outstanding shares from the markets. Several companies like
Castrol India and Phillips India have done this in recent years. A well known
example from the U.S. is that of Levi Strauss & company.

Mergers & Acquisitions
Page 3 of 93

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