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Mergers and Acquisition

Mergers and Acquisition

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Published by Mohammed Yunus

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Published by: Mohammed Yunus on Jan 02, 2011
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CHAPTER-1
MERGER AND ACQUISITION: CONCEPTUAL FRAMEWORK 
 The present chapter discusses the conceptual framework of mergersand acquisitions. It focuses on demarcations between various termslike mergers, acquisitions, takeovers, consolidations, reversemergers, management buyouts etc. The concept of demerger is alsointroduced. Various Indian laws and statutes having a bearing onmerger process have been outlined and trends traced. Few otherrelated procedural issues are also covered.
“The decision to invest in a new asset would mean internal expansion for the firm. Thenew asset would generate returns raising the value of the corporation. Mergers offer anadditional means of expansion, which is external, i.e. the productive operation is notwithin the corporation itself. For firms with limited investment opportunities, mergerscan provide new areas for expansion. In addition to this benefit, the combination of twoor more firms can offer several other advantages to each of the corporations such asoperating economies, risk reduction and tax advantage
1
.”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 beingmade on the larger and bigger conglomerates to avail the economies of scale anddiversification. Different companies in India are expanding by merger etc. In fact, therehas emerged a phenomenon called
merger wave.
 The terms merger, amalgamations, take-over and acquisitions are often usedinterchangeably to refer to a situation where two or more firms come together andcombine into one to avail the benefits of such combinations and re-structuring in theform of merger etc., have been attempted to face the challenge of increasingcompetition and to achieve synergy in business operations.
1.1 Corporate Restructuring
Restructuring of business is an integral part of the new economic paradigm. As controlsand restrictions give way to competition and free trade, restructuring and reorganization become essential. Restructuring usually involves major organizational change such asshift in corporate strategies to meet increased competition or changed marketconditions. 
1
Schall, L.D. and Hally C.W., Introduction to financial Management, McGraw HillBook 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 andmachinery, 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 acquireanother 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’s have taken thisopportunity to enter Indian corporate sector. The different forms of corporaterestructuring are summarized as follows: 
Corporate Restructuring
Expansion
Amalgamation
: This involves fusion of one or more companies where the companieslose 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. AndLipton India Ltd. Resulted in formation of a new company Brooke Bond Lipton IndiaLtd.
Absorption:
This involves fusion of a small company with a large company wherethe 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.
Tender offer:
This involves making a public offer for acquiring the shares of a targetcompany with a view to acquire management control in that company. Takeover by TataTea of consolidated coffee Ltd. (CCL) is an example of tender offer where more than50% of shareholders of CCL sold their holding to Tata Tea at the offered price which wasmore than the investment price. Mergers & Acquisitions
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Expansion
Amalgamation
Absorption
Tender offer 
Assetacquisition
Joint Venture
Contraction
Demerger + Spin off + Equity carve out+ Split off + Split up+ Divestitures
Asset value
Corporate Control
Going Private
Equity Buyback 
Anti Takeover 
LeveragedBuyouts
 
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.
Joint venture:
This involves two companies coming whose ownership is changed.DCM group and DAEWOO MOTORS entered into a joint venture to form DAEWOOLtd. to manufacturing automobiles in India.There are generally the following types of DEMERGER:
Spinoff:
This type of demerger involves division of company into wholly ownedsubsidiary of parent company by distribution of all its shares of subsidiary company onPro-rata basis. By this way, both the companies i.e. holding as well as subsidiarycompany exist and carry on business. For example Kotak, Mahindra finance Ltd.formed a subsidiary called Kotak Mahindra Capital Corporation, by spinning off itsinvestment banking division.
Split ups:
This type of demerger involves the division of parentcompany into two or more separate companies where parent company ceases to existafter 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 parentcompany continues to enjoy control over the subsidiary company by holdingcontrolling interest in it.
Divestitures:
These are sale of segment of a company for cash or for securities to anoutside party. Divestitures, involve some kind of contraction. It is based on the principle if “anergy” which says 5-3=3!
Asset sale:
This involves sale of tangible or intangible assets of a company togenerate cash. A partial sell off, also called slump sale, involves the sale of a businessunit or plant of one firm to another. It is the mirror image of a purchase of a businessunit or plant. From the seller’s perspective, it is a form of contraction: from the buyer’s point of view it is a form of expansion. For example, When Coromandal FertilizersLimited sold its cement division to India Cement limited, the size of CoromandalFertilizers contracted whereas the size of India Cements Limited expanded.
Corporate controls
Going private:
This involves converting a listed company into a private company by buying back all the outstanding shares from the markets. Several companies likeCastrol India and Phillips
 
India have
 
done this in recent years
.
A well known examplefrom the U.S. is that of Levi Strauss & company.Mergers & Acquisitions
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