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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.
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
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:
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.
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.
+ Split off
+ Split up
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.
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.
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
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.
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