Merger & Acquisition

Merger
A limited has a paid-up equity capital of Rs. 10 crore consisting of 1 crore share of face value of Rs. 10 each. B limited has a paid-up equity capital of Rs. 50 crore consisting of 5 crore shares of face value Rs. 10 each. A limited is proposed to be merged with B limited. The swap ratio is 5:2. What will be the first work? What will be the structure of B limited after merger?

Consolidation
A limited has paid-up equity capital of 10 crore consisting of 1 crore shares of face value of Rs. 10 each. B limited has paidup equity capital of Rs. 50 crore consisting of 5 crore shares of face value of Rs. 10 each. A limited and B limited decide to consolidate themselves into C limited. Swap ratio for A is 5:1 and B is 2:1. What will be the first work? What will be the structure of C limited?

Acquisition
51% of voting capital can be acquire

Acquisition
In the above example (Slide no. 17), if we assume that Mr P, after acquiring 6 per cent equity shares in the market enters into an agreement only with Mr A to acquire his 10 per cent holding and consequently makes an open offer to acquire 20 per cent from the public. The offer gets partial response and Mr P is able to acquire only 15 per cent in the open offer. Thus, his total shareholding is now 31 per cent as against combined 30 per cent of M/s B, C and D. In this case, Mr A would certainly cease to be a promoter, but just because Mr P has 1 per cent more than existing remaining promoters, he would not be automatically able to dislodge M/s B, C and D as promoters. In all likelihood, he will become a promoter along with M/s B, C and D and would share the board representation and say in the management of the company along with them. This, thus, would be a partially unsuccessful acquisition.

Acquisition
Three brothers, M/s A, B, C are holding 10 per cent each of XYZ Limited and are the existing promoters of the company. Balance 70 per cent is widely held by the public. None of the brothers are ready to sell any shares to Mr P. So Mr P acquires 14 per cent from the market and makes an open offer for 30 per cent the shares. The offer fails miserably and Mr P is able to acquire only 3 per cent in the offer, taking his shareholding to 17 per cent. In this case Mr P may be able to get a small representation on the board, but M/s A, B and C would be able not to include his name in the list of promoters declared to stock exchange(s), nor would they cede much control to Mr P. Therefore, this will be a case of an unsuccessful acquisition.

Acquisition
Acquisition of a target company through acquisition of an investment or holding company
which is controlling the target company. ABC Limited is an unlisted company wherein 100 per cent of the equity shares are held by Shah family. ABC Limited has invested 40 per cent in the equity capital of XYZ Limited and Shah family has directly invested 10 per cent in it. The management of XYZ Limited is controlled by ABC Limited and therefore by Shah family. Shah family sells its entire shareholding in ABC Limited to Agrawal family, but retains its direct shareholding in XYZ Limited. This is a case of indirect acquisition of XYZ Limited by Agrawal family from Shah family. If XYZ Limited is a listed company, Agrawal family would have to make an open offer to the public shareholders of XYZ Limited even if ABC Limited is an unlisted company.

Acquisition
Acquisition of a target company through formal or informal agreement
ABC Limited is a listed software company that is doing well, but not as well as it should be doing. Its promoter Mr X, who is also its managing director, wants the company to grow much faster. Therefore, he approaches the renowned software guru Mr Z to help him run the company. He also offers Mr Z equity stake in the company. Mr Z on his part, accepts the offer to run the company, but declines to acquire any equity shares. He also refuses to take any remuneration or any seat on the board. However, he puts a condition that all policy decisions would henceforth be taken by Mr Z and Mr X would vote on all the special and ordinary resolutions as per requirements of Mr Z. Mr X and Mr Z enter into an agreement to that effect. This would be a case of acquisition of ABC Limited by Mr Z. As per the SEBI regulations, Mr Z will have to make an open offer to the public shareholders of ABC Limited, though he neither acquired any shares nor is the beneficiary of any kind.

Divestiture
Divestiture means an out and out sale of all or substantially all assets of the company or any of its business undertaking/divisions, usually for cash (or for a combination of cash and debt) and not against equity shares. Divestiture means sale of assets, but not in a piecemeal manner. Accordingly, all assets, i.e., fixed assets, capital works progress, current assets and many a times even investments are sold as one lump and the consideration is also determined as one lump sum amount and not for each asset separately. Due to this reason, it is also called slump sale under the Income Tax Act, 1961.

Divestiture

Demerger
Spin-off Split-up Split-off
ABC limited has three business divisions, A, B and C. A engaged in textiles, B engaged in steel and C is engaged in software. If ABC limited transfers the assets, liabilities and business of its division C, i.e., software business to a separate company and continue to run division A and B Textile and Steel. Then it is a Spin-off.

Demerger
If it transfer all of its assets of B and C and continue with A then it is also a case of Spin off. If it transfer all three divisions then it is a case of Split up. ABC limited is promoted by two brothers A and B. Paid up equity capital of the company is Rs. 10 crore consisting of 1 crore shares of face value 10. A and B each held 20 lakh shares and balance 60 percent was held by public.

Demerger
The shares are traded in the market at Rs. 550 to 600 where as valuation based on the cash flow is Rs 525. The company has two business division software and BPO, which are valued more or less equally. Suppose the bothers are not well to go along and would like to demarge BPO business. Therefore they will form a company XYZ company which will controlled by B only. A will not have any holding in XYZ limited and B will not have any holding in ABC limited.

Demerger
A scheme is worked out in which a new company XYZ is incorporated with authorized capital of 1 crore share of face value of 10 each. B allotted 20 lakh shares mixakefe at per prior to demerge. In demerger A will not allotted any shares of XYZ limited. Rest of the shareholders are allotted one share of XYZ limited with one share of ABC limited.

Carve out
It is a hybrid of divestiture and spin off. In this process a company transfer all the assets, liabilities, loans and business of one of its divisions / undertakings to its 100 percent subsidiary. At the time of transfer, the shares are issued to the transferor company itself and not to its original share sholder.

Joint Venture
The venture is very risky and with very unpredictable result. The joint venture partners are very competitive but they want to reduce the competition. Neither of the partner is willing to dilute their control over the company.

Joint venture
To ensure the management control of the common business or project is shared in the agreed proportion through charter of agreement. To ensure the common reward of the business or the project are shared in the predetermined ratio without the possibility of manipulation in favour of either side.

Reduction of capital
What is reduction of capital? This is a legal process u/s 100 to 104 of the companies act 1956 by which a company is allowed to extingush or reduce liability . Why would a company do it? By reducing liability. By writing off or cancelling the capital which is lost By reducing extra capital which is not required

Employee stock option plan

Creating SPV Giving options directly to the employee
Performance of the employee as indicated by the annual performance appraisal. Minimum period of service Present and potential contribution for the employee. Other factors deemed to be relevant for the success of the company.

Giving options directly to the employee

Employee stock option scheme (ESOS) Employees are allowed to buy a stock at and predetermined price any stage after that defined period. Employee stock purchase plan (ESPP) Share appreciation scheme

Buy back of shares/tender offer

It is controlled by Companys act 1956 by article no. 77A, 77AA and 77B, SEBI regulation 1999, Department of Company Affairs rules 1999 article number 77A(2)(f) and (g) respectively.
To increase promoters holding To increase the EPS To rationalise the capital structure by writing off capital not represented by available assets. To support share value To avoid take over To utilize extra cash not required by the company

Buy back of shares/tender offer

Where do the resources for buyback come from?
Free reserve Share premium account Proceeds from any shares or other specified reserve

Conditions to be fulfilled for buyback

A special resolution should be passed A listed company has to take approval by postal ballot. If the amount of shares to be bought back is 10% or less of the paid up capital and free reserve, a board resolution is adequate to go ahead with the buyback. The shares that are being bought should be free from lock in period / non transferability clause. The buyback of equity shares in any financial year should not exceed 25% of the total paid-up equity capital in that financial year. The debt equity ratio should not exceed the ratio 2:1 after the buyback.

Conditions to be fulfilled for buyback

A company is going for buybcak should not default in the followings: Repayment of deposit or interest payable thereon. Redemption of debenture Redemption of preference share Payment of dividend, if declared, to all share holders within the stipulated time of 30 day from the date of declaration of dividend. Repayment of term loan interest of any financial institutions. Company should not violate any income tax rule or any companies act.

Conditions to be fulfilled for buyback

The shares or other specified securities intended to be bought back should be fully paid. If the company is listed in any of the stock exchange then the adherence of rules of SEBI for buyback is necessary. A private or closely held company also needs to the regulation of buyback of shares. After passing the resolution but before going ahead with the buy back company has to fill form 4A with the Registrar of Company and SEBI. The declaration must be accompanied by an affidavit by the board certifying that the company is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the board. The affidavit has to be signed by two directors one of them will be managing director.

Conditions to be fulfilled for buyback

Once the buyback is completed, the company is required to maintain a register of the securities/share bought and enter the following details in the register: The consideration paid for the shares/securities bought back. The date of cancellation of securities The date of extinguishing and physical destruction of securities. The provision say a company has to extinguish and physically destroy the securities bought back within seven days of the last date of completion of buyback.

Conditions to be fulfilled for buyback

Every buyback has to completed with in 12 months from the date of passing the special resolution No right issue or IPO with in next six months is allowed.

Leveraged buy outs

It has certain benefits: Heavy interest and principle payment force managements to improve performance and operating facility. Debt may encourage managements to focus on initiatives such as divesting non core business, downsizing, cost cutting and investing in technological upgrades. LBOs are able to generate healthy returns for they focus on reducing uncessary overheads and selling unrelated business units, thus cutting the company down to a productive core.

Leveraged buy outs

The use of debt increases the financial return to private equity firms. Tax shield increase the benefit.