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Mergers and
Dipjoy Das
Types of Business
• Merger or Amalgamation
– Merger or amalgamation may take two forms:
• Absorption  is a combination of two or more
companies into an existing company.
• Consolidation is a combination of two or more
companies into a new company.
– In merger, there is complete amalgamation of
the assets and liabilities as well as
shareholders’ interests and businesses of the
merging companies. There is yet another mode
of merger. Here one company may purchase
another company without giving proportionate
ownership to the shareholders’ of the acquired
company or without continuing the business of
the acquired company. 2
Types of Business
• Forms of Merger:
– Horizontal merger 
it is a merger when two or more firms
dealing in the similar lines of activity
combine together. 
– Vertical merger  
it is a merger that includes two or
more stages of production/distribution
that are usually separate.
– Conglomerate merger 
it is a merger in which the firms engaged
of totally different unrelated activities
combine together.

• Acquisition may be defined as an
act of acquiring effective control over
assets or management of a company
by another company without any
combination of businesses or
• A substantial acquisition occurs
when an acquiring firm acquires
substantial quantity of shares or
voting rights of the target company.
Types of Business

Takeover – The term takeover is understood
to connote hostility. When an acquisition is a
‘forced’ or ‘unwilling’ acquisition, it is called a
• Takeover can assume three forms—
--open market/hostile
--bail out
• Parties in the Acquisition -
g) Holding company – it is a company that holds
more than half of the nominal value of the
equity capital of another company, or controls
the composition of its Board of Directors.
h) Subsidiary company- the company with the
lesser number of share is called subsidiary
company. Both the companies maintain 5
Motives of Mergers and
• Mergers and Acquisition are
intended to:
– Limit competition.
– Utilise under-utilised market power.
– Overcome the problem of slow growth and
profitability in one’s own industry.
– Achieve diversification.
– Gain economies of scale and increase income
with proportionately less investment.
– Establish a transnational bridgehead without
excessive start-up costs to gain access to a
foreign market.
Motives and Benefits of
Mergers and Acquisitions
– Utilise under-utilised resources–human and
physical and managerial skills.
– Displace existing management.
– Circumvent government regulations.
– Reap speculative gains attendant upon new
security issue or change in P/E ratio.
– Create an image of aggressiveness and
strategic opportunism, empire building and to
amass vast economic powers of the company.

Benefits of Mergers and
• The most common advantages
of M&A are:
– Accelerated Growth
– Enhanced Profitability
• Economies of scale --
it is prevalent among horizontal and vertical
mergers. They result in lower average cost of
production and sales due to higher level of
• Synergy—
it results from complementary activities. Eg. One
firm may have a substantial amount of financial
resource while the other may have a profitable
investment opportunity.
Benefits of Mergers and
– Reduction in Tax Liability
– Financial Benefits
• Financing constraint 
• Surplus cash 
• Debt capacity 
• Financing cost 
– Increased Market Power

Analysis of Mergers and
• There are three important steps
involved in the analysis of mergers or
– Planning
– Search and screening
– Financial evaluation
it is very important part of merger and
acquisition it deals with evaluating the financial
aspects of the target firm.
§ book value
§ Appraisal value
§ Market value
Financing a Merger
• Cash Offer:
– A cash offer is a straightforward means of financing a
merger. It does not cause any dilution in the earnings
per share and the ownership of the existing
shareholders of the acquiring company.
• Share Exchange:
– A share exchange offer will result into the sharing of
ownership of the acquiring company between its
existing shareholders and new shareholders (that is,
shareholders of the acquired company). The earnings
and benefits would also be shared between these two
groups of shareholders. The precise extent of net
benefits that accrue to each group depends on the
exchange ratio in terms of the market prices of the
shares of the acquiring and the acquired companies.
– The bootstrapping phenomenon.
Merger Negotiations:
Significance of P/E Ratio and
• The mergers and acquisitions decisions are also
evaluated in terms of EPS, P/E ratio, book value
• Share Exchange Ratio
• The share exchange ratio (SER) would be as

• The exchange ratio in terms of the market value
of shares will keep the position of the
shareholders in value terms unchanged after
the merger since their proportionate wealth
would remain at the pre-merger level.

Regulation of Mergers
and Takeovers in India
• In India, mergers and
acquisitions are regulated
– The provision of the Companies Act, 1956,
– The Monopolies and Restrictive Trade Practice
(MRTP) Act, 1969,
– The Foreign Exchange Regulation Act (FERA),
– The Income Tax Act, 1961, and
– The Securities and Controls (Regulations) Act,
• The Securities and Exchange Board of India (SEBI)
has issued guidelines to regulate mergers, 13
Regulation of Mergers
and Takeovers in India
• Legal Measures against Takeovers
• Refusal to Register the Transfer of
– a legal requirement relating to the transfer of shares
have not be complied with; or
– the transfer is in contravention of the law; or
– the transfer is prohibited by a court order; or
– the transfer is not in the interests of the company
and the public.
• Protection of Minority Shareholders’
• SEBI Guidelines for Takeovers:
– Disclosure of share acquisition/holding
– Public announcement and open offer
• Offer price
• Disclosure
Legal Procedures
• Permission for merger
• Information to the stock exchange
• Approval of board of directors
• Application in the High Court
• Shareholders’ and creditors’ meetings
• Sanction by the High Court
• Filing of the Court order
• Transfer of assets and liabilities
• Payment by cash or securities

Accounting for Mergers and
• Pooling of Interests Method
In the pooling of interests method of
accounting, the balance sheet items and the
profit and loss items of the merged firms are
combined without recording the effects of
merger. This implies that asset, liabilities and
other items of the acquiring and the acquired
firms are simply added at the book values
without making any adjustments.
• Purchase Method
Under the purchase method, the assets
and liabilities of the acquiring firm after the
acquisition of the target firm may be stated at
their exiting carrying amounts or at the
amounts adjusted for the purchase price paid