Corporate Restructuring

Module - 1
Introduction
With Indian corporate houses showing sustained growth over the last decade, many
have shown an interest in growing globally by choosing to acquire or merge with other
companies outside India. One such example would be the acquisition of Britains orus
by !ata an Indian conglomerate by way of a leveraged buy"out. !he !atas also acquired
#aguar and $and %over in a signi&cant cross border transaction. Whereas both
transactions involved the acquisition of assets in a foreign 'urisdiction, both
transactions were also governed by Indian domestic law.
Whether a merger or an acquisition is that of an Indian entity or it is an Indian entity
acquiring a foreign entity, such a transaction would be governed by Indian domestic
law. In the sections which follow, we touch up on di(erent laws with a view to educate
the reader of the broader areas of law which would be of signi&cance. )ergers and
acquisitions are methods by which distinct businesses may combine. #oint ventures are
another way for two businesses to wor* together to achieve growth as partners in
progress, though a 'oint venture is more of a contractual arrangement between two or
more businesses.
Corporate Restructuring Classifications
A. MERGERS AND AMALGAMATIONS .
The term merger is not defined under the Companies Act, 1956 (the Companies Act), the Income Ta
Act, 1961 (the ITA) or an! other Indian "a#. $imp"! put, a merger is a com%ination of t#o or more distinct
entities into one& the desired effect %eing not 'ust the accumu"ation of assets and "ia%i"ities of the distinct
entities, %ut to achie(e se(era" other %enefits such as, economies of sca"e, ac)uisition of cutting edge
techno"ogies, o%taining access into sectors * mar+ets #ith esta%"ished p"a!ers etc. ,enera""!, in a merger, the
merging entities #ou"d cease to %e in eistence and #ou"d merge into a sing"e sur(i(ing entit!.
-er! often, the t#o epressions .merger. and .ama"gamation. are used s!non!mous"!. /ut there is, in fact, a
difference. 0erger genera""! refers to a circumstance in #hich the assets and "ia%i"ities of a compan!
(merging compan!) are (ested in another compan! (the merged compan!). The merging entit! "oses its
identit! and its shareho"ders %ecome shareho"ders of the merged compan!. 1n the other hand, an
ama"gamation is an arrangement, #here%! the assets and "ia%i"ities of t#o or more companies (ama"gamating
companies) %ecome (ested in another compan! (the ama"gamated compan!). The ama"gamating companies
a"" "ose their identit! and emerge as the ama"gamated compan!& though in certain transaction structures the
ama"gamated compan! ma! or ma! not %e one of the origina" companies. The shareho"ders of the
ama"gamating companies %ecome shareho"ders of the ama"gamated compan!.
2hi"e the Companies Act does not define a merger or ama"gamation, $ections 394 to 395 of the Companies
Act dea" #ith the ana"ogous concept of schemes of arrangement or compromise %et#een a compan!, it
shareho"ders and*or its creditors. A merger of a compan! A #ith another compan! / #ou"d in(o"(e t#o
schemes of arrangements, one %et#een A and its shareho"ders and the other %et#een / and its shareho"ders.
0ergers ma! %e of se(era" t!pes, depending on the re)uirements of the merging entities6
Horizontal Mergers. A"so referred to as a hori7onta" integration, this +ind of merger ta+es p"ace %et#een
entities engaged in competing %usinesses #hich are at the same stage of the industria" process.8 A hori7onta"
merger ta+es a compan! a step c"oser to#ards monopo"! %! e"iminating a competitor and esta%"ishing a
stronger presence in the mar+et. The other %enefits of this form of merger are the ad(antages of economies of
sca"e and economies of scope.
Vertical Mergers. -ertica" mergers refer to the com%ination of t#o entities at different stages of the
industria" or production process. 9or eamp"e, the merger of a compan! engaged in the construction %usiness
#ith a compan! engaged in production of %ric+ or stee" #ou"d "ead to (ertica" integration. Companies stand
to gain on account of "o#er transaction costs and s!nchroni7ation of demand and supp"!. 0oreo(er, (ertica"
integration he"ps a compan! mo(e to#ards greater independence and se"f:sufficienc!. The do#nside of a
(ertica" merger in(o"(es "arge in(estments in techno"og! in order to compete effecti(e"!.
Congeneric Mergers. These are mergers %et#een entities engaged in the same genera" industr! and
some#hat interre"ated, %ut ha(ing no common customer:supp"ier re"ationship. A compan! uses this t!pe of
merger in order to use the resu"ting a%i"it! to use the same sa"es and distri%ution channe"s to reach the
customers of %oth %usinesses.3
Conglomerate Mergers. A cong"omerate merger is a merger %et#een t#o entities in unre"ated industries.
The principa" reason for a cong"omerate merger is uti"i7ation of financia" resources, en"argement of de%t
capacit!, and increase in the (a"ue of outstanding shares %! increased "e(erage and earnings per share, and %!
"o#ering the a(erage cost of capita".5 A merger #ith a di(erse %usiness a"so he"ps the compan! to fora! into
(aried %usinesses #ithout ha(ing to incur "arge start:up costs norma""! associated #ith a ne# %usiness.
Cas Merger. In a t!pica" merger, the merged entit! com%ines the assets of the t#o companies and grants the
shareho"ders of each origina" compan! shares in the ne# compan! %ased on the re"ati(e (a"uations of the t#o
origina" companies. ;o#e(er, in the case of a cash merger, a"so +no#n as a cash:out merger, the
shareho"ders of one entit! recei(e cash in p"ace of shares in the merged entit!. This is a common practice in
cases #here the shareho"ders of one of the merging entities do not #ant to %e a part of the merged entit!.
Triang!lar Merger. A triangu"ar merger is often resorted to for regu"ator! and ta reasons. As the name
suggests, it is a tripartite arrangement in #hich the target merges #ith a su%sidiar! of the ac)uirer. /ased on
#hich entit! is the sur(i(or after such merger, a triangu"ar merger ma! %e for#ard (#hen the target merges
into the su%sidiar! and the su%sidiar! sur(i(es), or re(erse (#hen the su%sidiar! merges into the target and the
target sur(i(es).
/. AC"#ISITIONS .
An ac)uisition or ta+eo(er is the purchase %! one compan! of contro""ing interest in the share capita", or a""
or su%stantia""! a"" of the assets and*or "ia%i"ities, of another compan!. A ta+eo(er ma! %e friend"! or hosti"e,
depending on the offerer compan!s approach, and ma! %e effected through agreements %et#een the offerer
and the ma'orit! shareho"ders, purchase of shares from the open mar+et, or %! ma+ing an offer for ac)uisition
of the offerees shares to the entire %od! of shareho"ders.
$rien%l& ta'eo(er. A"so common"! referred to as negotiated ta+eo(er, a friend"! ta+eo(er in(o"(es an
ac)uisition of the target compan! through negotiations %et#een the eisting promoters and prospecti(e
in(estors. This +ind of ta+eo(er is resorted to further some common o%'ecti(es of %oth the parties.
Hostile Ta'eo(er. A hosti"e ta+eo(er can happen %! #a! of an! of the fo""o#ing actions6 if the %oard re'ects
the
offer, %ut the %idder continues to pursue it or the %idder ma+es the offer #ithout informing the %oard
%eforehand. The ac)uisition of one compan! (ca""ed the target compan!) %! another (ca""ed the ac)uirer) that
is accomp"ished not %! coming to an agreement #ith the target compan!<s management, %ut %! going direct"!
to the compan!s shareho"ders or fighting to rep"ace management in order to get the ac)uisition appro(ed. A
hosti"e ta+eo(er can %e accomp"ished through either a tender offer or a pro! fight.
Le(erage% )!&o!ts. These are a form of ta+eo(ers #here the ac)uisition is funded %! %orro#ed mone!.
1ften
the assets of the target compan! are used as co""atera" for the "oan. This is a common structure #hen ac)uirers
#ish to ma+e "arge ac)uisitions #ithout ha(ing to commit too much capita", and hope to ma+e the ac)uired
%usiness ser(ice the de%t so raised.
)ailo!t Ta'eo(ers. Another form of ta+eo(er is a %ai" out ta+eo(er in #hich a profit ma+ing compan!
ac)uires a sic+ compan!. This +ind of ta+eo(er is usua""! pursuant to a scheme of
reconstruction*reha%i"itation #ith the appro(a" of "ender %an+s*financia" institutions. 1ne of the primar!
moti(es for a profit ma+ing compan! to ac)uire a sic+*"oss ma+ing compan! #ou"d %e to set off of the "osses
of the sic+ compan! against the profits of the ac)uirer, there%! reducing the ta pa!a%"e %! the ac)uirer. This
#ou"d %e true in the case of a merger %et#een such companies as #e"".
C. STRATEGIC ALLIANCE
A partnership #ith another %usiness in #hich !ou com%ine efforts in %usiness efforts in a %usiness effort
in(o"(ing an!thing from getting a %etter price for goods %! %u!ing %u"+ together, to see+ing %usiness
together, #ith each of !ou pro(iding part of the product. The %asic idea %ehind a""iances is to minimi7e ris+
#hi"e maimising !our "e(erage.
D. *OINT VENT#RES .
A 'oint (enture is the coming together of t#o or more %usinesses for a specific purpose, #hich ma! or ma!
not %e for a "imited duration. The purpose of the 'oint (enture ma! %e for the entr! of the 'oint (enture parties
into a ne# %usiness, or the entr! into a ne# mar+et, #hich re)uires the specific s+i""s, epertise, or the
in(estment of each of the 'oint (enture parties. The eecution of a 'oint (enture agreement setting out the
rights and o%"igations of each of the parties is usua""! a norm for most 'oint (entures. The 'oint (enture
parties ma! a"so incorporate a ne# compan! #hich #i"" engage in the proposed %usiness. In such a case, the
%!e"a#s of the 'oint (enture compan! #ou"d incorporate the agreement %et#een the 'oint (enture parties.
=. DEMERGERS .
A demerger is the opposite of a merger, in(o"(ing the sp"itting up of one entit! into t#o or more entities. An
entit! #hich has more than one %usiness, ma! decide to hi(e off or spin off one of its %usinesses into a
ne# entit!. The shareho"ders of the origina" entit! #ou"d genera""! recei(e shares of the ne# entit!. If one of
the %usinesses of a compan! is financia""! sic+ and the other %usiness is financia""! sound, the sic+ %usiness
ma! %e demerged from the compan!. This faci"itates the restructuring or sa"e of the sic+ %usiness, #ithout
affecting the assets of the hea"th! %usiness. Con(erse"!, a demerger ma! a"so %e underta+en for situating a
"ucrati(e %usiness in a separate entit!. A demerger, ma! %e comp"eted through a court process under the
0erger >ro(isions, %ut cou"d a"so %e structured in a manner to a(oid attracting the 0erger >ro(isions.
The terms .demerger., .spin:off. and .spin:out. are sometimes used to indicate a situation #here one
compan! sp"its into t#o, generating a second compan! #hich ma! or ma! not %ecome separate"! "isted on a
stoc+ echange.
$. DIVESTIT#RES
A ?i(estiture is the sa"e of part of a compan! to a third part!. Assets, product "ines, su%sidiaries, or di(isions
are so"d for cash or securities or some com%ination thereof. The %u!ers are t!pica""! other corporations or,
increasing"!, in(estor groups together #ith the current managers of the di(ested operation.
Reasons 6 ?ismant"ing Cong"omerates
@estructuring acti(it!
Adding -a"ue %! se""ing into a %etter fit
Aarge additiona" in(estment re)uired
;ar(esting >ast in(estments successfu""!
?iscarding Bn#anted /usiness di(isions
G. LEVERAGED )#+O#TS ,L)O-
A "e(eraged /u!out or C/ootstrapD transaction occurs #hen a financia" sponsor gains contro" of a ma'orit! of
a target compan!s e)uit! through the use of %orro#ed mone! or de%t. A A/1 is essentia""! a strateg!
in(o"(ing the ac)uisition of another compan! using a significant amount of %orro#ed mone! (%onds or "oans)
to meet the cost of ac)uisition. 1ften, the assets of the compan! %eing ac)uired are used as co""atera" for the
"oans in addition to the assets of the compan!.
H. EM.LO+EE STOC/ O.TION .LAN ,ESO.-
=$1 p"ans are a""o#s emp"o!ees can %u! compan!s stoc+ after certain "ength of emp"o!ment or the! can
%u! share at an! time. $ome corporations ha(e po"icies to compensate emp"o!ees #ith compan!s shares
instead of other monetar! %enefits. This #i"" increase the accounta%i"it! and commitment of emp"o!ee #ith
his #or+ and organi7ationa" gro#th. At the same time accumu"ation of shares to emp"o!ees hands a"so
#ea+ens the po#er of top management.
I. SELL0O$$S
A se"":off, a"so +no#n as a di(estiture, is the outright sa"e of a compan! su%sidiar!. Eorma""!, se"":offs are done
%ecause the su%sidiar! doesn<t fit into the parent compan!<s core strateg!. The mar+et ma! %e under(a"uing the
com%ined %usinesses due to a "ac+ of s!nerg! %et#een the parent and su%sidiar!. As a resu"t, management and the
%oard decide that the su%sidiar! is %etter off under different o#nership.
*. E"#IT+ CARVE0O#TS 0ore and more companies are using e)uit! car(e:outs to %oost shareho"der (a"ue.
A parent firm ma+es a su%sidiar! pu%"ic through an initia" pu%"ic offering (I>1) of shares, amounting to a partia"
se"":off. A ne# pu%"ic"!:"isted compan! is created, %ut the parent +eeps a contro""ing sta+e in the ne#"! traded
su%sidiar!
/. S.INO$$S
A spinoff occurs #hen a su%sidiar! %ecomes an independent entit!. The parent firm distri%utes shares of the
su%sidiar! to its shareho"ders through a stoc+ di(idend. $ince this transaction is a di(idend distri%ution, no cash is
generated. Thus, spinoffs are un"i+e"! to %e used #hen a firm needs to finance gro#th or dea"s. Ai+e the car(e:out,
the su%sidiar! %ecomes a separate "ega" entit! #ith a distinct management and %oard.
/
E Merger & Acquisition
Basic Concepts
Mergers and acquisitions represent the ultimate in change for a business. No other event is more difficult,
challenging, or chaotic as a merger and acquisition. It is imperative that everyone involved in the process
has a clear understanding of how the process works. Hopefully this short course will provide you with a
better appreciation of what is involved. You might be asking yourself, why do I need to learn the merger and
acquisition M ! "# process$
%ell for starters, mergers and acquisitions are now a normal way of life within the business world. In today&s
global, competitive environment, mergers are sometimes the only means for long'term survival. In other
cases, such as (isco )ystems, mergers are a strategic component for generating long'term growth.
"dditionally, many entrepreneurs no longer build companies for the long'term* they build companies for the
short'term, hoping to sell the company for huge profits. In her book +he "rt of Merger and "cquisition
Integration, "le,andra -eed .a/ou, puts it best0 1irtually every ma/or company in the 2nited )tates today
has e,perienced a ma/or acquisition at some point in history.
M & A Defined
%hen we use the term 3merger3, we are referring to the merging of two companies where one new company
will continue to e,ist. +he term 3acquisition3 refers to the acquisition of assets by one company from another
company. In an acquisition, both companies may continue to e,ist. However, throughout this course we will
loosely refer to mergers and acquisitions M ! " # as a business transaction where one company acquires
another company. +he acquiring company will remain in business and the acquired company which we will
sometimes call the +arget (ompany# will be integrated into the acquiring company and thus, the acquired
company ceases to e,ist after the merger.
Distinction 1et2een Mergers an% Ac3!isitions
A"though the! are often uttered in the same %reath and used as though the! #ere s!non!mous, the terms merger
and ac)uisition mean s"ight"! different things.
2hen one compan! ta+es o(er another and c"ear"! esta%"ished itse"f as the ne# o#ner, the purchase is ca""ed an
ac)uisition. 9rom a "ega" point of (ie#, the target compan! ceases to eist, the %u!er .s#a""o#s. the %usiness and
the %u!er<s stoc+ continues to %e traded.
In the pure sense of the term, a merger happens #hen t#o firms, often of a%out the same si7e, agree to go for#ard
as a sing"e ne# compan! rather than remain separate"! o#ned and operated. This +ind of action is more precise"!
referred to as a .merger of e)ua"s.. /oth companies< stoc+s are surrendered and ne# compan! stoc+ is issued in its
p"ace. 9or eamp"e, %oth ?aim"er:/en7 and Chr!s"er ceased to eist #hen the t#o firms merged, and a ne#
compan!, ?aim"erChr!s"er, #as created.
In practice, ho#e(er, actua" mergers of e)ua"s don<t happen (er! often. Bsua""!, one compan! #i"" %u! another
and, as part of the dea"<s terms, simp"! a""o# the ac)uired firm to proc"aim that the action is a merger of e)ua"s,
e(en if it<s technica""! an ac)uisition. /eing %ought out often carries negati(e connotations, therefore, %!
descri%ing the dea" as a merger,
Merger Theories
Differential efficiency theory.
Inefficient management theory.
Synergy.
Pure diversification.
Strategic realignment to changing environment.
Hubris hypothesis
Differential efficiency theory.
ccording to this theory if the management of firm is more
efficient than the firm ! and if the firm ac"uires firm !# the
efficiency of firm ! is li$ely to be brought up to the level of the
firm .
The theory implies that some firms operate belo% their potential
and as a result have belo% average efficiency.
Such firms are most vulnerable to ac"uisition by other more
efficient firms in the same industry. This is because firms %ith
greater efficiency %ould be able to identify firms %ith good
potential but operating at lo%er efficiency.
According to this theory, some firms operate below their potential and consequently
have low efficiency. Such firms are likely to be acquired by other, more efficient firms
in the same industry. This is because, firms with greater efficiency would be able to
identify firms with good potential operating at lower efficiency. They would also have
the managerial ability to improve the latters performance.
However, a difficulty would arise when the acquiring firm overestimates its impact on
improving the performance of the acquired firm. This may result in the acquirer paying
too much for the acquired firm. Alternatively, the acquirer may not be able to improve
the acquired firms performance up to the level of the acquisition value given to it.
The managerial synergy hypothesis is an etension of the differential efficiency theory.
!t states that a firm, whose management team has greater competency than is required
by the current tasks in the firm, may seek to employ the surplus resources by acquiring
and improving the efficiency of a firm, which is less efficient due to lack of adequate
managerial resources. Thus, the merger will create a synergy, since the surplus
managerial resources of the acquirer combine with the non"managerial organi#ational
capital of the firm.
$hen these surplus resources are indivisible and cannot be released, a merger enables
them to be optimally utili#ed. %ven if the firm has no opportunity to epand within its
industry, it can diversify and enter into new areas. However, since it does not possess
the relevant skills related to that business, it will attempt to gain a &toehold entry by
acquiring a firm in that industry, which has organi#ational capital alongwith
inadequate managerial capabilities.

Inefficient management theory.

This is similar to the concept of managerial efficiency but it is
different in that inefficient management means that the
management of one company simply is not performing upto its
potential.
Inefficient management theory simply represents that is
incompetent in the complete sense.
Synergy.
Synergy refers to the type of reactions that occur %hen t%o
substances or factors combine to produce a greater effect together
than that %hich the sum of the t%o operating independently could
account for.
The ability of a combination of t%o firms to be more profitable
than the t%o firms individually.
There are t%o types of synergy&
'inancial synergy.
(perating synergy.
Pure diversification.
Diversification provides numerous benefits to managers#
employees# o%ners of the firms and to the firm itself.
Diversification through mergers is commonly preferred to
diversification through internal gro%th# given that the firm may
lac$ internal resources or capabilities re"uires.
Strategic realignment to changing environment.
It suggests that the firms use the strategy of M)s as %ays to
rapidly ad*ust to changes in their e+ternal environments. ,hen a
company has an opportunity of gro%th available only for a
limited period of time slo% internal gro%th may not be sufficient.
Hubris hypothesis
Hubris hypothesis implies that manager-s loo$ for ac"uisition of
firms for their o%n potential motives and that the economic gains
are not the only motivation for the ac"uisitions.
This theory is particularly evident in case of competitive tender
offer to ac"uire a target. The urge to %in the game often results in
the %inners curse refers to the ironic hypothesis that states that
the firm %hich overestimates the value of the target mostly %ins
the contest.
Module . II
/aluing synergy in M) deals A
4very merger has its own unique reasons why the combining of two companies is a good business decision.
+he underlying principle behind mergers and acquisitions M ! " # is simple0 5 6 5 7 8. +he value of
(ompany " is 9 5 billion and the value of (ompany : is 9 5 billion, but when we merge the two companies
together, we have a total value of 9 8 billion. +he /oining or merging of the two companies creates additional
value which we call 3synergy3 value.
Synergy value can take three forms:
1. Revenues0 :y combining the two companies, we will reali;e higher revenues then if the two companies
operate separately.
2. Expenses: :y combining the two companies, we will reali;e lower e,penses then if the two companies
operate separately.
3. Cost of Capital: :y combining the two companies, we will e,perience a lower overall cost of capital.
Why Mergers?- Motives
+he dominant rationale used to e,plain M!" activity is that acquiring firms seek improved financial performance. +he
following motives are considered to improve financial performance0
0conomy of scale6 This refers to the fact that the com%ined compan! can often reduce its fied costs
%! remo(ing dup"icate departments or operations, "o#ering the costs of the compan! re"ati(e to the same
re(enue stream, thus increasing profit margins.
0conomy of scope6 This refers to the efficiencies primari"! associated #ith demand:side changes,
such as increasing or decreasing the scope of mar+eting and distri%ution, of different t!pes of products.
Increased revenue or mar$et share6 This assumes that the %u!er #i"" %e a%sor%ing a ma'or
competitor and thus increase its mar+et po#er (%! capturing increased mar+et share) to set prices.
Cross.selling& 9or eamp"e, a %an+ %u!ing a stoc+ %ro+er cou"d then se"" its %an+ing products to the
stoc+ %ro+er<s customers, #hi"e the %ro+er can sign up the %an+<s customers for %ro+erage accounts. 1r, a
manufacturer can ac)uire and se"" comp"ementar! products.
Synergy& 9or eamp"e, manageria" economies such as the increased opportunit! of manageria"
specia"i7ation. Another eamp"e are purchasing economies due to increased order si7e and associated
%u"+:%u!ing discounts.
Ta+ation& A profita%"e compan! can %u! a "oss ma+er to use the target<s "oss as their ad(antage %!
reducing their ta "ia%i"it!. In the Bnited $tates and man! other countries, ru"es are in p"ace to "imit the
a%i"it! of profita%"e companies to .shop. for "oss ma+ing companies, "imiting the ta moti(e of an
ac)uiring compan!.
1eographical or other diversification6 This is designed to smooth the earnings resu"ts of a compan!,
#hich o(er the "ong term smoothens the stoc+ price of a compan!, gi(ing conser(ati(e in(estors more
confidence in in(esting in the compan!. ;o#e(er, this does not a"#a!s de"i(er (a"ue to shareho"ders (see
%e"o#).
Resource transfer6 resources are une(en"! distri%uted across firms (/arne!, 1991) and the interaction
of target and ac)uiring firm resources can create (a"ue through either o(ercoming information
as!mmetr! or %! com%ining scarce resources.
/ertical integration6 -ertica" integration occurs #hen an upstream and do#nstream firm merges (or
one ac)uires the other). There are se(era" reasons for this to occur. 1ne reason is to interna"i7e
an eterna"it! pro%"em. A common eamp"e of such an eterna"it! is dou%"e margina"i7ation. ?ou%"e
margina"i7ation occurs #hen %oth the upstream and do#nstream firms ha(e monopo"! po#er and each
firm reduces output from the competiti(e "e(e" to the monopo"! "e(e", creating t#o dead#eight "osses.
9o""o#ing a merger, the (ertica""! integrated firm can co""ect one dead#eight "oss %! setting the
do#nstream firm<s output to the competiti(e "e(e". This increases profits and consumer surp"us. A merger
that creates a (ertica""! integrated firm can %e profita%"e.
FGH
Hiring& some companies use ac)uisitions as an a"ternati(e to the norma" hiring process. This is
especia""! common #hen the target is a sma"" pri(ate compan! or is in the startup phase. In this case, the
ac)uiring compan! simp"! hires the staff of the target pri(ate compan!, there%! ac)uiring its ta"ent (if
that is its main asset and appea"). The target pri(ate compan! simp"! disso"(es and "itt"e "ega" issues are
in(o"(ed.
bsorption of similar businesses under single management 6 simi"ar portfo"io in(ested %! t#o
different mutua" funds name"! united mone! mar+et fund and united gro#th and income fund, caused the
management to a%sor% united mone! mar+et fund into united gro#th and income fund.
;o#e(er, on a(erage and across the most common"! studied (aria%"es, ac)uiring firms< financia"
performance does not positi(e"! change as a function of their ac)uisition acti(it!.
F9H
Therefore, additiona"
moti(es for merger and ac)uisition that ma! not add shareho"der (a"ue inc"ude6
Diversification& 2hi"e this ma! hedge a compan! against a do#nturn in an indi(idua" industr! it fai"s
to de"i(er (a"ue, since it is possi%"e for indi(idua" shareho"ders to achie(e the same hedge %! di(ersif!ing
their portfo"ios at a much "o#er cost than those associated #ith a merger.
(b*ectives in a M) transaction2
An opportunit! for achie(ing faster gro#th
1%taining ta concessions
="iminating competition
Achie(ing di(ersification #ith minimum cost
Impro(ing corporate image and %usiness (a"ue
,aining access to management or technica" ta"ent
(b*ective for Companies to offer themselves for sale2
?ec"ining earnings and profita%i"it!
To raise funds for more promising "ines of %usiness
?esire to maimi7e gro#th
,i(e itse"f the %enefit of image of "arger compan!
Aac+ of ade)uate management or technica" s+i""s
<or the most part, the biggest source of synergy value is lower e,penses. Many mergers are driven by the
need to cut costs. (ost savings often come from the elimination of redundant services, such as Human
-esources, "ccounting, Information +echnology, etc. However, the best mergers seem to have strategic
reasons for the business combination.
These strategic reasons include:
Positioning ' +aking advantage of future opportunities that can be e,ploited when the two companies
are combined. <or e,ample, a telecommunications company might improve its position for the future if it
were to own a broad band service company. (ompanies need to position themselves to take advantage of
emerging trends in the marketplace.
Gap Filling ' =ne company may have a ma/or weakness such as poor distribution# whereas the other
company has some significant strength. :y combining the two companies, each company fills'in strategic
gaps that are essential for long'term survival.
rgani!ational Co"petencies ' "cquiring human resources and intellectual capital can help improve
innovative thinking and development within the company.
#roader $ar%et &ccess ' "cquiring a foreign company can give a company quick access to emerging
global markets.
$ergers can also 'e driven '( 'asic 'usiness reasons) such as:
#argain Purchase ' It may be cheaper to acquire another company then to invest internally. <or
e,ample, suppose a company is considering e,pansion of fabrication facilities. "nother company has very
similar facilities that are idle. It may be cheaper to /ust acquire the company with the unused facilities then to
go out and build new facilities on your own.
*iversification ' It may be necessary to smooth'out earnings and achieve more consistent long'term
growth and profitability. +his is particularly true for companies in very mature industries where future growth
is unlikely. It should be noted that traditional financial management does not always support diversification
through mergers and acquisitions. It is widely held that investors are in the best position to diversify, not the
management of companies since managing a steel company is not the same as running a software
company.
+hort Ter" Gro,th ' Management may be under pressure to turnaround sluggish growth and
profitability. (onsequently, a merger and acquisition is made to boost poor performance.
-ndervalued Target ' +he +arget (ompany may be undervalued and thus, it represents a good
investment. )ome mergers are e,ecuted for 3financial3 reasons and not strategic reasons. <or e,ample,
>ohlberg >ravis ! -oberts acquires poor performing companies and replaces the management team in
hopes of increasing depressed values.
The Overall rocess
The Merger & Acquisition Process can be broken o!n into five "hases:
Phase 1 - Pre Acquisition Review: +he first step is to assess your own situation and determine if a merger
and acquisition strategy should be implemented. If a company e,pects difficulty in the future when it comes
to maintaining core competencies, market share, return on capital, or other key performance drivers, then a
merger and acquisition M ! "# program may be necessary.
Phase 2 - Search & Screen Targets: +he second phase within the M ! " ?rocess is to search for possible
takeover candidates. +arget companies must fulfill a set of criteria so that the +arget (ompany is a good
strategic fit with the acquiring company. <or e,ample, the target&s drivers of performance should compliment
the acquiring company. (ompatibility and fit should be assessed across a range of criteria ' relative si;e,
type of business, capital structure, organi;ational strengths, core competencies, market channels, etc. It is
worth noting that the search and screening process is performed in'house by the "cquiring (ompany.
-eliance on outside investment firms is kept to a minimum since the preliminary stages of M ! " must be
highly guarded and independent.
Phase 3 - Investigate & Value the Target0 +he third phase of M ! " is to perform a more detail analysis of the
target company. You want to confirm that the +arget (ompany is truly a good fit with the acquiring company.
+his will require a more thorough review of operations, strategies, financials, and other aspects of the +arget
(ompany. +his detail review is called 3due diligence.3 )pecifically, ?hase I @ue @iligence is initiated once a
target company has been selected. +he main ob/ective is to identify various synergy values that can be
reali;ed through an M ! " of the +arget (ompany. Investment :ankers now enter into the M ! "
process to assist with this evaluation.
Phase 4 - Acquire through egotiation: Now that we have selected our target company, it&s time to start the
process of negotiating a M ! ". %e need to develop a negotiation plan based on several key questions0
How much resistance will we encounter from the +arget (ompany$
%hat are the benefits of the M ! " for the +arget (ompany$
%hat will be our bidding strategy$
How much do we offer in the first round of bidding$
+he most common approach to acquiring another company is for both companies to reach agreement
concerning the M ! "* i.e. a negotiated merger will take place. +his negotiated arrangement is sometimes
called a 3'ear hug.3 +he negotiated merger or bear hug is the preferred approach to a M ! " since having
both sides agree to the deal will go a long way to making the M ! " work.
Phase ! - Post "erger Integration0 If all goes well, the two companies will announce an agreement to merge
the two companies. +he deal is finali;ed in a formal merger and acquisition agreement. +his leads us to the
fifth and final phase within the M ! " ?rocess, the integration of the two companies. 4very company is
different ' differences in culture, differences in information systems, differences in strategies, etc. "s a result,
the ?ost Merger Integration ?hase is the most difficult phase within the M ! " ?rocess. Now all of a sudden
we have to bring these two companies together and make the whole thing work. +his requires e,tensive
planning and design throughout the entire organi;ation.
+he integration process can take place at three levels0
1. Full: "ll functional areas operations, marketing, finance, human resources, etc.# will be merged into one
new company. +he new company will use the 3best practices3 between the two companies.
2. $oderate: (ertain key functions or processes such as production# will be merged together. )trategic
decisions will be centrali;ed within one company, but day to day operating decisions will remain
autonomous.
3. $ini"al0 =nly selected personnel will be merged together in order to reduce redundancies. :oth strategic
and operating decisions will remain decentrali;ed and autonomous. "s mentioned at the start of this course,
mergers and acquisitions are e,tremely difficult. 4,pected synergy values may not be reali;ed and
therefore, the merger is considered a failure.
)ome of the reasons behind failed mergers are0
Poor strategic fit ' +he two companies have strategies and ob/ectives that are too different and they
conflict with one another.
Cultural and +ocial *ifferences ' It has been said that most problems can be traced to 3people
problems.3 If the two companies have wide differences in cultures, then synergy values can be very elusive.
.nco"plete and .nade/uate *ue *iligence ' @ue diligence is the 3watchdog3 within the M! " ?rocess.
If you fail to let the watchdog do his /ob, you are in for some serious problems within the M ! " ?rocess.
Poorl( $anaged .ntegration ' +he integration of two companies requires a very high level
of quality management. In the words of one (4=, 3give me some people who know the drill.3 Integration is
often poorly managed with little planning and design. "s a result, implementation fails.
Pa(ing too $uch ' In today&s merger fren;y world, it is not unusual for the acquiring company to pay a
premium for the +arget (ompany. ?remiums are paid based on e,pectations of synergies. However, if
synergies are not reali;ed, then the premium paid to acquire the target is never recouped.
verl( pti"istic ' If the acquiring company is too optimistic in its pro/ections about the +arget
(ompany, then bad decisions will be made within the M ! " ?rocess. "n overly optimistic forecast or
conclusion about a critical issue can lead to a failed merger.
' ( A )aluation approaches
Valuation of Target Company
The principa" incenti(e for a merger is that the %usiness (a"ue of the com%ined %usiness is epected to %e
greater than the sum of the independent %usiness (a"ues of the merging entities. The difference %et#een the
com%ined (a"ue and the sum of the (a"ues of indi(idua" companies is the s!nerg! gain attri%uta%"e to the
0IA transaction. ;ence,
-a"ue of ac)uirer J $tand a"one (a"ue of Target J -a"ue of $!nerg! K Com%ined -a"ue.
There is a"so a cost attached to an ac)uisition. The cost of ac)uisition is the price premium paid o(er the
mar+et (a"ue plus other costs of integration. Therefore, the net gain is the (a"ue of s!nerg! minus premium
paid.
$uppose
-A K @s. 844 (0erging Compan!, or Ac)uirer)
-/ K @s. 54 (0erging Compan!, or Target)
-A/ K @s. 344 (0erged or Ama"gamated =ntit!)
Therefore,
$!nerg! K -A/ L ( -A J -/ ) K @s. 54. If the premium paid for this merger is @s. 84, Eet gain from merger
of A and / #i"" %e @s. 34 (i.e. @s. 54 L @s. 84). It is this 34, %ecause of #hich companies merge or ac)uire.
1ne of the essentia" steps in 0IA is the (a"uation of the Target Compan!. Ana"!sts use a #ide range of
mode"s in practice for measuring the (a"ue of the Target firm. These mode"s often ma+e (er! different
assumptions a%out pricing, %ut the! do share some common characteristics and can %e c"assified in %roader
terms. There are se(era" ad(antages to such a c"assification6 it is easier to understand #here indi(idua" mode"s
fit into the %igger picture, #h! the! pro(ide different resu"ts and #here the! ha(e fundamenta"
errors in "ogic.
There are on"! tree approaces to (a"ue a %usiness or %usiness interest. ;o#e(er, there are numerous
techni)ues #ithin each one of the approaches that the ana"!sts ma! consider in performing a (a"uation. The
Approaches and Techni)ues are as fo""o#s6 :
3. Income pproach
The Income Approac is one of three ma'or groups of methodo"ogies, ca""ed (a"uation approaches, used %!
appraisers. It is particu"ar"! common in commercia" rea" estate appraisa" and in %usiness appraisa". The
fundamenta" math is simi"ar to the methods used for financia" (a"uation, securities ana"!sis, or %ond pricing.
;o#e(er, there are some significant and important modifications #hen used in rea" estate or %usiness
(a"uation.
Bnder this approach t#o primar! used methods to (a"ue a %usiness interest inc"ude6
a) ?iscounted Cash f"o# method
%) Capita"i7ed Cash f"o# method
=ach of these methods depends on the present (a"ue of an enterprises future cash f"o#s.

Discounted Cash flo% Techni"ue
The ?iscounted Cash f"o# (a"uation is %ased upon the notion that the (a"ue of an asset is the present (a"ue of
the epected cash f"o#s on that asset, discounted at a rate that ref"ects the ris+iness of those cash f"o#s. The
nature of the cash f"o#s #i"" depend upon the asset, di(idends for an e)uit! share, coupons and redemption
(a"ue for %onds and the post ta cash f"o#s for a pro'ect. The $teps in(o"(ed in (a"uation under this method
are as under6
'C'0 Techni"ue 4'ree Cash 'lo% 'rom 0"uity5
The Capita"i7ed Cash f"o# techni)ue of income approach is the a%%re(iated (ersion of ?iscounted Cash f"o#
techni)ue #here the gro#th rate (g) and the discount rate (+) are assumed to remain constant in perpetuit!.
This mode" is represented as under6
-a"ue of 9irm K Eet Cash f"o# in !ear one ( + L g )
6. Mar$et pproach
The origin of mar'et approac o4 1!siness (al!ation is esta%"ished in the economic rationa"e of
competition. It states that in case of a free mar+et, the demand and supp"! effects direct the (a"ue of %usiness
properties to a particu"ar %a"ance. The purchasers are not read! to pa! higher amounts for the %usiness and the
(endors are not read! to recei(e an! amount, #hich is "o#er in comparison to the (a"ue of a corresponding
commercia" entit!. It is the (a"ue of a firm %! performing a comparison %et#een the firms concerned #ith
organi7ations in the simi"ar "ocation, of e)ua" (o"ume or operating in the simi"ar sector.
It has a "arge num%er of resem%"ances #ith the compara%"e sa"es techni)ue, #hich is genera""! uti"i7ed in case
of rea" estate estimation. The mar+et (a"ue of shares of companies that are traded pu%"ic"! and are in(o"(ed in
identica" commercia" acti(ities ma! %e a "ogica" signa" of the (a"ue of commercia" operation. In this case the
compan! shares are %ought and so"d in an open and free mar+et. This process a""o#s purposefu" comparison
of the mar+et (a"ue of shares.
The pro%"em eists in distinguishing pu%"ic companies, #hich are ade)uate"! corresponding to the compan!
concerned for this intention. In addition, in case of a pri(ate compan!, the "i)uidit! of the e)uit! is "o#er (put
different"!, its shares are difficu"t to trade) in comparison to a pu%"ic compan!. The (a"ue is regarded as
some#hat "esser in comparison to that a mar+et:%ased (a"uation #i"" render.
E.g. : $uppose a compan! operating in the same industr! as A/C #ith compara%"e si7e and other situations
has %een so"d at @s. 544 crores in "ast #ee+ pro(ides a good measurement for (a"uation of %usiness.
Considering the circumstances, 14 (a"ue of the %usiness of A/C shou"d %e around @s. 544 crores under
mar+et approach.
7. ssets pproach
The first step in using the assets approach is to o%tain a /a"ance $heet as c"ose as possi%"e to the (a"uation
date. =ach recorded asset inc"uding intangi%"e assets must %e identified, eamined and ad'usted to fair mar+et
(a"ue. Eo# a"" "ia%i"ities are to %e su%tracted, again at fair mar+et (a"ue, from the (a"ue of assets deri(ed as
a%o(e to reach at the fair mar+et (a"ue of e)uit! of the %usiness. It is important to note here that an!
unrecorded assets or "ia%i"ities shou"d a"so %e considered #hi"e arri(ing at the (a"ue of %usiness %! the assets
approach.
Net Asset Val!e Approac
Net asset (al!e (EA-) is a term used to descri%e the (a"ue of an entit!<s assets "ess the (a"ue of its "ia%i"ities.
The term is most common"! used in re"ation to open:ended or mutua" funds due to the fact that shares of such
funds are redeemed at their net asset (a"ue.
Economic Val!e A%%e% ,EVA- Approac
=conomic -a"ue Added or =-A is an estimate of economic profit, #hich can %e determined, among other
#a!s, %! ma+ing correcti(e ad'ustments to ,AA> accounting, inc"uding deducting the opportunit! cost of
e)uit! capita". =-A is simi"ar to @esidua" Income (@I), a"though under some definitions there ma! %e minor
technica" differences %et#een =-A and @I (for eamp"e, ad'ustments that might %e made to E1>AT %efore it
is suita%"e for the formu"a %e"o#).
Mar'et Val!e A%%e% Approac ,MVA-
0ar+et -a"ue Added (0-A) is the difference %et#een the current mar+et (a"ue of a firm and the capita"
contri%uted %! in(estors. If 0-A is positi(e, the firm has added (a"ue. If it is negati(e, the firm has destro!ed
(a"ue. The amount of (a"ue added needs to %e greater than the firm<s in(estors cou"d ha(e achie(ed in(esting
in the mar+et portfo"io, ad'usted for the "e(erage (%eta coefficient) of the firm re"ati(e to the mar+et.
The formu"a for 0-A is6
MVA 5 V 6 /
2here6
0-A is mar+et (a"ue added, - is the mar+et (a"ue of the firm, inc"uding the (a"ue of the firm<s e)uit! and
de%t M is the capita" in(ested in the firm The higher the 0-A the %etter it is. A high 0-A indicates the
compan! has created su%stantia" #ea"th for the shareho"ders. A negati(e 0-A means that the (a"ue of
management<s actions and in(estments are "ess than the (a"ue of the capita" contri%uted to the compan! %! the
capita" mar+et (or that #ea"th and (a"ue ha(e %een destro!ed).
!egal and Regulator" Considerations
Introduction
%hen one company decides to acquire another company, a series of negotiations will take place between
the two companies. +he acquiring company will have a well'developed negotiating strategy and plan in
place. If the +arget (ompany believes a merger is possible, the two companies will enter into a 3.etter of
Intent.3
+he .etter of Intent outlines the terms for future negotiations and commits the +arget (ompany to giving
serious consideration to the merger. " .etter of Intent also gives the acquiring company the green light to
move into ?hase II @ue @iligence. +he .etter of Intent attempts to answer several issues concerning the
proposed merger0
A. How will the acquisition price be determined$
5. %hat e,actly are we acquiring$ Is it physical assets, is it a controlling interest in the target, is it intellectual
capital, etc.$
B. How will the merger transaction be designed$ %ill it be an outright purchase of assets$ %ill it be an
e,change of stock$
C. %hat is the form of payment$ %ill the acquiring company issue stock, pay cash, issue notes, or use a
combination of stock, cash, andDor notes$
8. %ill the acquiring company setup an escrow account and deposit part of the purchase price$ %ill the
escrow account cover unrecorded liabilities discovered from due diligence$
E. %hat is the estimated time frame for the merger$ %hat law firms will be responsible for creating the M ! "
"greement$
F. %ill there be any ad/ustment to the final purchase price due to anticipated losses or events prior to the
closing of the merger$
M &
M & A Agree#ent
M & A Agree#ent
"s the negotiations continue, both companies will conduct e,tensive ?hase II @ue @iligence in an effort to
identify issues that must be resolved for a successful merger. If significant issues can be resolved and both
companies are convinced that a merger will be beneficial, then a formal merger and acquisition agreement
will be formulated. +he basic outline for the M ! " "greement is rooted in the .etter of Intent. However,
?hase II @ue @iligence will uncover several additional issues not covered in the .etter of Intent.
(onsequently, the M ! " "greement can be very lengthy based on the issues e,posed through ?hase II @ue
@iligence. "dditionally, both companies need to agree on the integration process. <or e,ample, a +ransition
)ervice "greement is e,ecuted to cover certain types of services, such as payroll.
+he +arget (ompany continues to handle payroll up through a certain date and once the integration process
is complete, the acquiring company takes over payroll responsibilities. +he +ransition )ervice "greement will
specify the types of services, timeframes, and fees associated with the integration process.
Inde#nification
"nother important element within the M ! " "greement is indemnification. +he M ! " "greement will specify
the nature and e,tent to which each company can recover damages should a misrepresentation or breach of
contract occur. " 3basket3 provision will stipulate that damages are not due until the indemnification amount
has reached a certain threshold. If the basket amount is e,ceeded, the indemnification amount becomes
payable at either the basket amount or an amount more than the basket amount. +he seller +arget
(ompany# will insist on having a ceiling for basket amounts within the M ! " "greement.
)ince both sides may not agree on indemnification, it is a good idea to include a provision on how disputes
will be resolved such as binding arbitration#. <inally, indemnification provisions may include a 3right of sell
off3 for the buyer since the buyer has deposited part of the purchase price into an escrow account. +he -ight
to )ell =ff allows the buyer acquiring company# to offset any indemnification claims against amounts
deferred within the purchase price of the merger. If the purchase price has been paid, then legal action may
be necessary to resolve the indemnification.
&ccounting For $ 0 &
=ne last item that we should discuss is the application of accounting principles to mergers and acquisitions.
(urrently, there are two methods that are used to account for mergers and acquisitions M ! "#0
Purchase0 +he M ! " is viewed prospectively restate everything and look forward# by treating the
transaction as a purchase. "ssets of the +arget (ompany are restated to fair market value and the difference
between the price paid and the fair market values are posted to the :alance )heet as goodwill.
Pooling of .nterest0 +he M ! " is viewed historically refer back to e,isting values# by combining the book
values of both companies. +here is no recognition of goodwill. It should be noted that ?ooling of Interest
applies to M ! "&s that involve stock only. In the good old days when physical assets were important* the
?urchase Method was the leading method for M ! " accounting. However, as the importance of intellectual
capital and other intangibles has grown, the ?ooling of Interest Method is now the dominant method for
M ! " accounting. However, therein lies the problem. :ecause intangibles have become so important to
businesses, the failure to recogni;e these assets from an M ! " can seriously distort the financial
statements. "s a result, the <inancial "ccounting )tandards :oard has proposed the elimination of the
?ooling of Interest Method. If ?ooling is phased out, then it will become much more important to properly
arrive at fair market values for the target&s assets.
Module 8 III
S0!I Ta$eover Code
SEC#RITIES AND E7CHANGE )OARD O$ INDIA. Ta'eo(er Co%e
If an ac)uisition is contemp"ated %! #a! of issue of ne# shares 84, or the ac)uisition of eisting shares, of a
Aisted compan!, to or %! an ac)uirer, the pro(isions of the Ta+eo(er Code ma! %e app"ica%"e. Bnder the
Ta+eo(er Code, an ac)uirer, a"ong #ith persons acting in concert.
cannot ac)uire shares or (oting rights #hich (ta+en together #ith shares or (oting rights, if an!, he"d %!
him and %! persons acting in concert), entit"e such ac)uirer to eercise 15N or more of the shares or (oting
rights in the target,
#ho has ac)uired, 15N or more %ut "ess than 55N of the shares or (oting rights in the target, cannot
ac)uire, either %! himse"f or through persons acting in concert
#ho ho"ds 55N or more %ut "ess than O5N of the shares or (oting rights in the target, cannot ac)uire
either %! himse"f or through persons acting in concert, an! additiona" shares or (oting rights therein
#ho ho"ds O5N of the shares or (oting rights in the target, cannot ac)uire either %! himse"f or through
persons acting in concert, an! additiona" shares or (oting rights therein.
un"ess the ac)uirer ma+es a pu%"ic announcement to ac)uire the shares or (oting rights of the target in
accordance #ith the pro(isions of the Ta+eo(er Code. The term ac)uisition #ou"d inc"ude %oth, direct
ac)uisition in an Indian "isted compan! as #e"" as indirect ac)uisition of an Indian "isted compan! %! (irtue
of ac)uisition of companies, #hether "isted or un"isted, #hether in India or a%road. 9urther, the aforesaid
"imit of 5N ac)uisition is ca"cu"ated aggregating a"" purchases, #ithout netting of sa"es.
;o#e(er, (ide a recent amendment, an! person ho"ding 55N or more (%ut "ess than O5N) shares is permitted
to further increase his shareho"ding %! not more than 5N in the target #ithout ma+ing a pu%"ic announcement
if the ac)uisition is through open mar+et purchase in norma" segment on the stoc+ echange %ut not through
%u"+ dea" *%"oc+ dea"* negotiated dea"* preferentia" a""otment or the increase in the shareho"ding or (oting
rights of the ac)uirer is pursuant to a %u!%ac+ of shares %! the target.
Though there #ere certain am%iguities as to the period during #hich the 5N "imit can %e ehausted, $=/I has
c"arified that the 5N "imit sha"" %e app"ica%"e during the "ifetime of the target #ithout an! "imitation as to
financia" !ear or other#ise. ;o#e(er, 'ust "i+e the ac)uisition of 5N up to 55N, the ac)uisition is ca"cu"ated
aggregating a"" purchases, #ithout netting of sa"es.
The $=/I ma! a"so re)uire (a"uation of such infre)uent"! traded shares %! an independent (a"uer.
'ode of payment of offer price. The offer price ma! %e paid in cash, %! issue, echange or transfer of shares
(1ther than preference shares) of the ac)uirer, if the ac)uirer is a "isted entit!, %! issue, echange or transfer
of secured instruments of the ac)uirer #ith a minimum A grade rating from a credit rating agenc! registered
#ith the $=/I, or a com%ination of a"" of the a%o(e
*on"compete payments. >a!ments made to persons other than the target compan! under an! non:compete
agreement eceeding 85N of the offer price arri(ed at as per the re)uirements mentioned a%o(e, must %e
added to the offer price.
+ricing for indirect acquisition or control. The offer price for indirect ac)uisition or contro" sha"" %e
determined #ith reference to the date of the pu%"ic announcement for the parent compan! and the date of the
pu%"ic announcement for ac)uisition of shares of the target compan!, #hiche(er is higher, in accordance #ith
re)uirements set out a%o(e.
If the ac)uirer intends to dispose of * encum%er the assets in the target compan!, ecept in the ordinar!
course of %usiness, then he must ma+e such a disc"osure in the pu%"ic announcement or in the "etter of offer to
the shareho"ders, fai"ing #hich, the ac)uirer cannot dispose of or encum%er the assets of the target compan!
for a period of 8 !ears from the date of c"osure of the pu%"ic offer
@estrictions on the target compan!.
After the pu%"ic announcement is made %! the ac)uirer, the target
compan! is a"so su%'ect to certain restrictions. The target compan! cannot then (a) se"", transfer, encum%er or
other#ise dispose off or enter into an agreement for sa"e, transfer, encum%rance or for disposa" of assets,
ecept in the ordinar! course of %usiness of the target compan! and its su%sidiaries, (%) issue or a""ot an!
securities carr!ing (oting rights during the offer period, ecept for an! su%sisting o%"igations, and (c) enter
into an! materia" contracts.
The fo""o#ing ac)uisitions * transfers #ou"d %e eempt from the +e! pro(isions of the Ta+eo(er Code6
ac)uisition pursuant to a pu%"ic issue&
ac)uisition %! a shareho"der pursuant to a rights issue to the etent of his entit"ement and su%'ect to
certain other restrictions&
inter:se transfer of shares amongst6
o )ua"if!ing Indian promoters and foreign co""a%orators #ho are shareho"ders,
o )ua"if!ing promoter, pro(ided that the parties ha(e %een ho"ding shares in the target compan! for a
period of at "east three !ears prior to the proposed ac)uisition,
o the ac)uirer and >AC, #here the transfer of shares ta+es p"ace three !ears after the date of c"osure of
the pu%"ic offer made %! them under the Ta+eo(er Code and the transfer is at a price not eceeding
185N of the price determined as per the Ta+eo(er Code (as mentioned a%o(e)&
ac)uisition of shares in the ordinar! course of %usiness %! (a) %an+s and pu%"ic financia" institutions as
p"edgees, (%) the Internationa" 9inance Corporation, Asian ?e(e"opment /an+, Internationa" /an+ for
@econstruction and ?e(e"opment, Common#ea"th ?e(e"opment Corporation and such other internationa"
financia" institutions&
ac)uisition of shares %! a person in echange of shares recei(ed under a pu%"ic offer made under the
Ta+eo(er Code&
ac)uisition of shares %! #a! of transmission on succession or inheritance&
transfer of shares from (enture capita" funds or foreign (enture capita" in(estors registered #ith the $=/I
to promoters of a (enture capita" underta+ing or to a (enture capita" underta+ing, pursuant to an
agreement %et#een such (enture capita" fund or foreign (enture capita" in(estors, #ith such promoters or
(enture capita" underta+ing&
change in contro" %! ta+eo(er of management of the %orro#er target compan! %! the secured creditor or
%! restoration of management to the said target compan! %! the said secured creditor in terms of the
$ecuriti7ation and @econstruction of 9inancia" Assets and =nforcement of $ecurit! Interest Act, 8448&
ac)uisition of shares in companies #hose shares are not "isted on an! stoc+ echange, un"ess it resu"ts in
the ac)uisition shares*(oting rights*contro" of a compan! "isted in India& and
ac)uisition of shares in terms of guide"ines or regu"ations regarding de"isting of securities framed %! the
$=/I.
#inancing M&A $eals
0ergers are genera""! differentiated from ac)uisitions part"! %! the #a! in #hich the! are financed and part"!
%! the re"ati(e si7e of the companies. -arious methods of financing an 0IA dea" eist6
Cash
>a!ment %! cash. $uch transactions are usua""! termed ac)uisitions rather than mergers %ecause the
shareho"ders of the target compan! are remo(ed from the picture and the target comes under the (indirect)
contro" of the %idder<s shareho"ders.
+toc%
>a!ment in the form of the ac)uiring compan!<s stoc+, issued to the shareho"ders of the ac)uired compan! at
a gi(en ratio proportiona" to the (a"uation of the "atter.
Financing options
There are some e"ements to thin+ a%out #hen choosing the form of pa!ment. 2hen su%mitting an offer, the
ac)uiring firm shou"d consider other potentia" %idders and thin+ strategica""!. The form of pa!ment might %e
decisi(e for the se""er. 2ith pure cash dea"s, there is no dou%t on the rea" (a"ue of the %id (#ithout
considering an e(entua" earn out). The contingenc! of the share pa!ment is indeed remo(ed. Thus, a cash
offer preempts competitors %etter than securities. Taes are a second e"ement to consider and shou"d %e
e(a"uated #ith the counse" of competent ta and accounting ad(isers. Third, #ith a share dea" the %u!ers
capita" structure might %e affected and the contro" of the %u!er modified.
If the issuance of shares is necessar!, shareho"ders of the ac)uiring compan! might pre(ent such capita"
increase at the genera" meeting of shareho"ders. The ris+ is remo(ed #ith a cash transaction. Then, the
%a"ance sheet of the %u!er #i"" %e modified and the decision ma+er shou"d ta+e into account the effects on the
reported financia" resu"ts. 9or eamp"e, in a pure cash dea" (financed from the compan!s current account),
"i)uidit! ratios might decrease. 1n the other hand, in a pure stoc+ for stoc+ transaction (financed from the
issuance of ne# shares), the compan! might sho# "o#er profita%i"it! ratios (e.g. @1A). ;o#e(er, economic
di"ution must pre(ai" to#ards accounting di"ution #hen ma+ing the choice. The form of pa!ment and
financing options are tight"! "in+ed. If the %u!er pa!s cash, there are three main financing options6
Cash on hand6 it consumes financia" s"ac+ (ecess cash or unused de%t capacit!) and ma! decrease
de%t rating. There are no ma'or transaction costs.
It consumes financia" s"ac+, ma! decrease de%t rating and increase cost of de%t. Transaction costs
inc"ude under#riting or c"osing costs of 1N to 3N of the face (a"ue.
Issue of stoc+6 it increases financia" s"ac+, ma! impro(e de%t rating and reduce cost of de%t.
Transaction costs inc"ude fees for preparation of a pro! statement, an etraordinar! shareho"der meeting
and registration.
If the %u!er pa!s #ith stoc+, the financing possi%i"ities are6
Issue of stoc+ (same effects and transaction costs as descri%ed a%o(e).
$hares in treasur!6 it increases financia" s"ac+ (if the! dont ha(e to %e repurchased on the mar+et),
ma! impro(e de%t rating and reduce cost of de%t. Transaction costs inc"ude %ro+erage fees if shares are
repurchased in the mar+et other#ise there are no ma'or costs.
In genera", stoc+ #i"" create financia" f"ei%i"it!. Transaction costs must a"so %e considered %ut tend to ha(e a
greater impact on the pa!ment decision for "arger transactions. 9ina""!, pa!ing cash or #ith shares is a #a! to
signa" (a"ue to the other part!, e.g.6 %u!ers tend to offer stoc+ #hen the! %e"ie(e their shares are o(er(a"ued
and cash #hen under(a"ued.
F6H
S"ecialist M&A avisory firms
A"though at present the ma'orit! of 0IA ad(ice is pro(ided %! fu"":ser(ice in(estment %an+s, recent !ears
ha(e seen a rise in the prominence of specia"ist 0IA ad(isers, #ho on"! pro(ide 0IA ad(ice (and not
financing). These companies are sometimes referred to as Transition companies, assisting %usinesses often
referred to as .companies in transition.. To perform these ser(ices in the B$, an ad(isor must %e a "icensed
%ro+er dea"er, and su%'ect to $=C (9IE@A) regu"ation. 0ore information on 0IA ad(isor! firms is pro(ided
at corporate ad(isor!
*E#T RE+TR-CT-R.1G
*e't restructuring is a process that allows a private or public company facing cash flow problems and financial
distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it
can continue its operations.
" debt restructuring is usually less e,pensive and a preferable alternative to bankruptcy. +he main costs associated
with a business debt restructuring are the time and effort to negotiate with bankers, creditors, vendors and ta,
authorities. @ebt restructurings typically involve a reduction of debt and an e,tension of payment terms
Definition of 'Debt Restructuring'
A method used by companies with outstanding debt obligations to alter the terms of the debt
agreements in order to achieve some advantage.
Companies use de%t restructuring to a(oid defau"t on eisting de%t or to ta+e ad(antage of a "o#er interest
rate. A compan! #i"" often issue ca""a%"e %onds to a""o# them to readi"! restructure de%t in the future. The
eisting de%t is ca""ed and then rep"aced #ith ne# de%t at a "o#er interest rate. Companies can a"so
restructure their de%t %! a"tering the terms and pro(isions of the eisting de%t issue.
Related ter#s
-eplacement of old debt by new debt when not under financial distress is referred to as %efinancing
*e't consolidation entails taking out one loan to pay off many others. +his is often done to secure a lower interest
rate, secure a fi,ed interest rate or for the convenience of servicing only one loan
+hare #u('ac% 2or3 +hare Repurchase
A program %! #hich a compan! %u!s %ac+ its o#n shares from the mar+etp"ace, reducing the num%er of
outstanding shares. $hare repurchase is usua""! an indication that the compan!<s management thin+s the
shares are under(a"ued. The compan! can %u! shares direct"! from the mar+et or offer its shareho"der the
option to tender their shares direct"! to the compan! at a fied price.
/ecause a share repurchase reduces the num%er of shares outstanding (i.e. supp"!), it increases earnings per
share and tends to e"e(ate the mar+et (a"ue of the remaining shares. 2hen a compan! does repurchase shares,
it #i"" usua""! sa! something a"ong the "ines of, .2e find no %etter in(estment than our o#n compan!..
1. $hareho"ders ma! %e presented #ith a tender offer #here%! the! ha(e the option to su%mit (or tender) a portion or a"" of their
shares #ithin a certain time frame and at a premium to the current mar+et price. This premium compensates in(estors for tendering
their shares rather than ho"ding on to them.
8. Companies %u! %ac+ shares on the open mar+et o(er an etended period of time.
Sare Rep!rcase
+lternative to the payment of cash dividends, the company may purchase the shares
bac*. ,urchase of shares outstanding can be done through the secondary mar*et -toc*
.xchange. -hares purchased are included in treasury stoc* account. !heoretically, the
value of the company before and after the purchase of shares will be the same again.
The Advantages of Stock Repurchases
Buying back shares could save on taxes.
Announcement of buy-back could be considered a positive signal by investors, because Stock repurchases
often driven by the motivation of managers who assume that the undervalued stock price (lower than they
should.
!ayment of dividends is usually done with a stable pattern.
Shareholders have the option to Stock "epurchases. #hen need cash, they can sell the shares they ac$uire.
%onversely, if do not need cash, or evading taxes, they can invest back into the company stock.
&n some specific situations, Stock "epurchases done selectively
The Disadvantages of Stock Repurchases
'he shareholders may have different preferences between cash dividends and Stock "epurchases (profits
derived from capital gains. %ash dividends tend to be (unreliable) because it gives a clear income (cash
received, and relatively stable.
'he %ompany may pay the repurchase price is too high, to the detriment of current shareholders (who still
holds the shares.
Shareholders who sell their shares may not know exactly the implications and the Stock "epurchases
program effects. &f it turns out to feel aggrieved, they can sue the company.
PMerits o4 Sare Rep!rcase
Re%!ce ta'eo(er cances8
/u!i ng %ac+ s t oc+ us es up eces s cas h. Ther e t ur ns on eces s cas h i n mone! mar +et
account s can dr ag do#n o(er a" " compan! performance. Cash rich companies are a"so (er! attracti(e
ta+eo(er t ar get s . /u!i ng %ac+ s t oc+ a" " o#s t he compan! t o ear n a %et t er r et ur n on
ecess cash and +eep itse"f from %ecoming a ta+eo(er target.
PIncrease ROE8
/u!ing %ac+ stoc+ can increase the return on e)uit! (@1=). Thi s ef f ect i s gr eat er t he mor e
under (a" ued t he s har es ar e #hen t he! ar e repurchased. If shares are under(a"ued, this ma! %e the
most profita%"e course of action for the compan!.
P .s&cological E44ect8
2h e n a c o m p a n ! p u r c h a s e s i t s o # n s t o c + i t i s es s ent i a" " ! t e" " i ng t he mar +
et t hat t he! t hi n+ t hat t he compan!s s t oc+ i s under(a"ued. This can ha(e a ps!cho"ogica" effect
on the mar+et.
P
/u!ing %ac+ stoc+ a""o#s a compan! to pass on etra cash to shareho"ders #ithout raising the
di(idend. If the cash is temporar! in nature it ma! pro(e more %eneficia" to pass on (a"ue to
shareho"ders through %u!%ac+s rather than raising the di(idend.
P E9cellent Tool 4or $inancial Reengineering8
In the case of profit ma+ing, h i g h d i ( i d e n d :
p a ! i n g c o mp a n i e s #h o s e s h a r e p r i c e s a r e " a n g u i s h i n g , %u!%ac+s can actua""! %oost
their %ottom "ines since di(idends attract taes. A %u!%ac+ and t he s u%s e)uent neut r a" i s at i on of
s har es can r educe di (i dend outf"o#s, and if the opportunit! cost of funds used is "o#er than the
di(idend sa(ings, the compan! can "augh a"" the #a! to the %an+.
P Ta9 Implication8
=empt i on i s a(ai " a%" e on" ! i f t he s har es ar e s o" d on a recognised stoc+ echange and
if securities transaction ta ($TT) on the sa"e has %een pai d. I n a %u!%ac+ s cheme,
nei t her does t he s a" e t a+e p" ace on a recognised echange nor is the $TT paid. $o, !ou #i"" ha(e
to pa! income ta on !our "ong:term capita" gain on the %u!%ac+ after deducting the ac)uisition cost of !our
shares p"us the %enefit of indeation from the !ear of purchase to the !ear of %u!%ac+. 1n the resu"tant
gain, the ta #ou"d %e 84 per cent p"us the app"ica%"e surcharge, if an!, p"us 8 per cent education cess.
Qou ma! a"so #or+ out the ta at 14 per cent of the gain #ithout considering indeation. Qour ta
"ia%i"it! #i"" %e "imited to the "o#er of the t#o ca"cu"ations.
P
$toc+ %u!%ac+s a"so raise the demand for the stoc+ on the open mar+et. This point is rather
se"f ep"anator! as the compan! is competing against other in(estors to purchase shares of its o#n
stoc+.
Demerits o4 Sare Rep!rcase
6
P Sen%ing Negati(e Signals8
A %u!%ac+ announcement can send a negati(e signa" i n t hes e s i t uat i ons . A t !pi ca" eamp" e i s
t he ;> cas e6 9r om Eo(em%er 199G through 1cto%er 8444, the computer giant ;e#"ett:
>ac+ard spent RG.8 %i""ion to %u! %ac+ 18G mi""ion of its shares. The aim #as to ma+e opportunistic
purchases of ;> stoc+ at attracti(e pricesSin other #ords, at prices the! fe"t under(a"ued the
compan!. Instead of signa""ing good operating prospects to the mar+et, the %u!%ac+ signa" #as
comp"ete"! dro#ned out more po#erfu" contradictor! signa"s
a%out t he compan!s f ut ur e #hi ch ar e an a%or t ed ac)ui s i t i on, a pr ot r a ct ed %us i nes s
r es t r uct ur i ng, s " i ppi ng f i nanc i a" r es u" t s , and a deca! i n t he gener a" profita%i"it! of +e!
mar+ets. /! "ast Tanuar!, ;>s shares #ere trading at around ha"f the a(erage R65 per share paid to
repurchase the stoc+.
P
)ac'4ire8
/u!%ac+s can a"so %ac+fire for a compan! competing in a high:gro#th industr! %ecause the! ma! %e
read as an admission that the compan! has fe# i mpor t ant ne# oppor t uni t i es on #hi ch t o
ot her #i s e s pend i t s mone!. I n s uch cases, "ong:term in(estors #i"" respond to a %u!%ac+
announcement %! se""ing the compan!s shares
The s har e %u!%ac+ s cheme mi ght %ecome a %i g di s ad(ant age t o t he compan! #hen i t
pa!s t oo much f or i t s o#n s har es . I ndeed, i t i s f oo" i s h t o %u! i n an o(erpriced mar+et.
Instead, the compan! shou"d put the mone! into assets that can %e easi"! con(erted %ac+ into cash. This
#a!, #hen the mar+et s#ings the other #a! and is trading %e"o# its true (a"ue, shares of the compan!
can %e %ought %ac+ at a discount, ensuring current shareho"ders recei(e maimum %enefit. $trict"!,
acompan! shou"d repurchase its shares on"! #hen its stoc+ is trading %e"o# its epected (a"ue
and #hen no %etter in(estment opportunities are a(ai"a%"e.

.ROVISIONS : CONDITIONS RELATING TO )#+)AC/.
The restrictions #ere imposed to restrict the companies from using the stoc+ mar+ets as short term mone!
pro(ider apart from protecting interests of sma"" in(estors. $ec OOA6 >o#er of a compan! to purchase its o#n
securities. $ection OOA #as introduced %! the Companies (Amendment) Act, 1999, pursuant to the report of
the #or+ing group #hich #as set up to suggest reforms to the Companies Act. $ection OOA(8) of the
Companies Act, 19566
1)Authorised %! Artic"es of Association and a $pecia" @es o"ution
8 ) /u ! % a c + s h o u " d % e e ) u a " t o o r " e s s t h a n 8 5 No f t h e t o t a " p a i d u p
c a p i t a " a n d f r e e reser(es
3) $har es t o %e %ought %ac+ s hou" d %e f u" " ! pai d up
5)?e%t =)uit! ratio shou"d not eceed 861 post %u!%ac+
5)Eotice of meeting to the shareho"ders shou"d ha(e a"" the detai"s necessar!
6)/u!%ac+ of shares "isted on an! recognised stoc+ echange shou"d %e in accordance #ith
$=/I guide"ines
O)=p"anator! statement stating the fo""o#ing shou"d %e prepared:
a)A fu"" and comp"ete disc"osure of a"" materia" facts&
%) The neces s i t ! f or t he %u!: %ac+
c)The c"ass of securit! intended to %e purchased under the %u!:%ac+&
d)The amount to %e in(ested under the %u!:%ac+& and
e) The t i me " i mi t f or comp" et i on of %u!: %ac+
G)A dec"aration of so"(enc! has to %e fi "ed #ith $=/I and @egistrar 1f Companies
9)Comp"etion of the %u!%ac+ shou"d %e #ithin 18 months
14) The shares %ought %ac+ shou"d %e etinguished and ph!sica""! destro!ed&
11) The compan! shou"d not ma+e an! further issue of securities #ithin 8 !ears, ecept %onus,
con(ersion of #arrants, etc.
?=T=@0IEATI1E 19 $2A> @ATI1 0IA ?=AA$
Definition of 'Swap Ratio'
'he ratio in which an ac$uiring company will offer its own shares in exchange for the target company*s
shares during a merger or ac$uisition. 'o calculate the swap ratio, companies analy+e financial
ratios such as book value, earnings per share, profits after tax and dividends paid, as well as other
factors, such as the reasons for the merger or ac$uisition.
,or example, if a company offers a swap ratio of -.-./, it will provide one share of its own company for
every -./ shares of the company being ac$uired.
'his can also be applied as a debt0e$uity swap, when a company wants investors to trade their bonds
with the company being ac$uired for the ac$uiring company*s own shares.
$#ap @atio (or =change @atio)
The shareho"ders of the ama"gamating compan! are gi(en the shares of the ama"gamated compan! in
echange for the shares he"d %! them in the ama"gamating compan!. 9or eamp"e #hen T10C1 #as
emerged #ith ;industan Ae(er Aimited, shareho"ders of T10C1 #ere gi(en the shares of ;industan Ae(er
Aimited in the ratio of 8615& that means 8 shares of ;industan "e(er Aimited #ere gi(en in "ieu of 15 shares of
T10C1 . ;o# is the echange ratio determinedU The common"! used %ases for esta%"ishing the echange
ratio are6 earnings per share, mar+et price per share, and %oo+ (a"ue per share.
Earnings per sare6 $uppose the earnings per share of the ac)uiring firm are @s 5.44 and the earnings per
share of the target firm @s 8.44. An echange ratio %ased on earnings per share #i"" %e 4.5 that is (8*5). This
means 8 shares of the ac)uiring firms #i"" %e echanged for 5 shares of the target firm.
2hi"e earnings per share ref"ect prime facie the earnings po#er, there are some pro%"ems in an echange ratio
%ased so"e"! on current earnings per share of the merging companies %ecause it fai"s to ta+e into account the
fo""o#ing6
V The difference in the gro#th rates of earnings of the t#o companies
V The gains in earnings arising out of merger
V The differentia" ris+s associated #ith the earnings of the t#o companies
0oreo(er, there is the measurement pro%"em of defining the norma" "e(e" of current earnings. The current
earnings per share ma! %e inf"uenced %! certain transient factors "i+e a #indfa"" profit, or an a%norma" "a%or
pro%"em, or a "arge ta re"ief. 9ina""!, ho# can earnings per share, #hen the! are negati(e, %e usedU
Mar'et .rice per sare6 The echange ratio ma! %e %ased on the re"ati(e mar+et prices of the shares of the
ac)uiring firm and the target firm. 9or eamp"e, if the ac)uiring firms e)uit! share se""s for @s 54 and the
target firms e)uit! share se""s for @s 14 the echange ratio %ased on the mar+et price is 4.8 that is (14*54).
This means that 1 share of the ac)uiring firm #i"" %e echanged for 5 shares of the target firm.
2hen the shares of the ac)uiring firm and the target firm are acti(e"! traded in a competiti(e mar+et, mar+et
prices ha(e considera%"e merit. The! ref"ect current earnings, gro#th prospects and ris+ characteristics. 2hen
the trading is meagre mar+et prices, ho#e(er, ma! not %e (er! re"ia%"e. In the etreme case mar+et prices
ma! not %e a(ai"a%"e if the shares are not traded. Another pro%"em #ith mar+et prices is that the! ma! %e
manipu"ated %! those #ho ha(e a (ested interest.
)oo' (al!e per sare6 The re"ati(e %oo+ (a"ues of the t#o firms ma! %e used to determine the echange
rate. 9or eamp"e, if the %oo+ (a"ue per share of the ac)uiring compan! is @s 85 and the %oo+ (a"ue per share
of the target compan! is @s 15, the %oo+ (a"ue %ased echange ratio is 4.6 K(15*85).
The proponents of %oo+ (a"ue contend that it pro(ides a (er! o%'ecti(es %asis. This ho#e(er is not
con(incing argument %ecause %oo+ (a"ues are inf"uenced %! accounting po"icies #hich ref"ect su%'ecti(e
'udgments. There are sti"" serious o%'ections against the use of the %oo+ (a"ue.
1. /oo+ (a"ues do not ref"ect changes in purchasing po#er of mone!.
8. /oo+ (a"ues often are high"! different from true economic (a"ues

SHARE )#+)AC/ IN REG#LATED IND#STRIES
The regu"ation is app"ica%"e to %u!%ac+ of shares or other specified securities of a compan! "isted on a $toc+
=change. The %u!%ac+ of shares can-t ta$e place for delisting of shares 4rom te Stoc' E9cange.
2hen the compan! is %u!ing %ac+ shares it cant %u! %ac+ through negotiated dea"s #ith an! person or
through spot transactions or through an! pri(ate arrangement.
Special Reg!lation
In case the 1ffer si7e is greater than 85N of its =)uit! share capita" I free reser(es, the compan! can
go ahead #ith the %u! %ac+ on"! if a specia" reso"ution is passed at the genera" meeting. 2hen the notice is
%eing sent to the shareho"ders an =p"anator! $tatement must %e anneed to the notice containing (arious
disc"osures T h e c o mp a n ! c a n a " s o c o mp a n ! c a n g o a h e a d #i t h t h e % u ! % a c + o n " !
i f a s p e c i a "
r es o" ut i on i s t hr ough t he pos t a" %a" " o t r out e as per The Compani es ( >as s i ng of t he
@eso"ution %! >osta" /a""ot) @u"es, 8441.C>osta" /a""otD inc"udes (oting %! share ho"ders %! posta"
or e"ectronic mode instead of (oting persona""! %! presenting for transacting %usinesses in a
genera" meeting of the compan!,
0ethod for sending notice6(a) The compan! ma! issue notices either,:(i) Bnder @egistered >ost
Ac+no#"edgement ?ue& or (ii) Bnder certificate of posting&
and( % ) 2i t h a n a d ( e r t i s e me n t p u % " i s h e d i n a " e a d i n g =n g " i s h Ee #s p a p e r a n d
i n o n e (er nac u" ar Ee#s paper ci r cu" at i ng i n t he $t a t e i n #hi ch t he r egi s t er ed
of f i ce of t he compan! is situated, a%out ha(ing despatched the %a""ot papers.D

E9planator& Statement
The compan! needs to ma+e the fo""o#ing disc"osures in the statement
1. The date of the /oard meeting at #hich the proposa" for %u! %ac+ #as appro(ed %! the /1?.
8 . Th e n e c e s s i t ! f o r t h e % u ! % a c +
3. The compan! ma! specif! one reason to %e adopt ed for %u!:%ac+ so that the shareho"ders
authori7e the /1? for the same.
5. The maimum amount re)uired under the %u! %ac+ and the sources of funds fr om #hich the
%u! %ac+ #ou"d %e financed.
5. The %as i s of ar r i (i ng at t he %u!: %ac+ pr i ce.
6. The num%er of securities that the compan! proposes to %u! %ac+.
O. a. The aggregate shareho"ding of the promoter and of the directors of the promoters, as on the
date of the notice con(ening the ,enera" 0eeting.
%. Aggregate num%er of shares purchased or so"d %! such persons during a period of si months
preceding the date of the /oard 0eeting
c. The maimum and minimum price at #hich purchases and sa"es #ere made a"ong #ith the
re"e(ant dates.
G. Intention of the promot ers and persons in contro" of the compan! to tender their shares for
%u!:%ac+ indicating the num%er of shares and detai"s of ac)uisition #ith dates and price.
9. A confirmation that there are no defau"ts su%sisting in repa!ment of deposits, redemption of
de%entures or preference shares or repa!ment of term "oans to an! financia" institutions or %an+s.
14. A confirmation that the /1? has made a fu"" en)uir! into the affairs and prospects of the compan! and
is of the opinion.

a. that there #i"" %e no grounds on #hich the compan! cou"d %e found una%"e to pa! its de%ts&
%.The compan! during that !ear, the compan! #i"" %e a%"e to meet its "ia%i"ities as and #hen the!
fa"" due and #i"" not %e rendered inso"(ent #ithin a period of one !ear from that ,enera" 0eeting date & and
c. In forming their opinion for the a%o(e purposes, the directors ha(e ta+en into account the
"ia%i"ities as if the compan! #ere %eing #ound up under the pro(isions of the Companies Act, 1956
;o Is Mercant )an'er<
A merchant %an+er, according to $=/I (0erchant /an+ers) @egu"ations, 1998 C
is a person who is engaged in the business of issue management either by making arrangements regarding
selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory
services in relation to such issue management,
0erchant %an+ers render ser(ices to meet the needs of trade, industr! and a"so in(estors %! performing as
intermediar!, consu"tant and a "iaison. 0erchant %an+ing is a ser(ice oriented industr! specia"i7ing in
in(estment and financia" decision ma+ing, assisting in ma+ing corporate strategies, assessing capita" needs
andhe"ping in procuring the e)uit! and de%t funds for corporate sectors and u"timate"! he"ping in esta%"ishing
fa(oura%"e economic en(ironment.
S;EAT E"#IT+ = COR.ORATE .ER$ORMANCE
What is 'Sweat Equity'?
+,eat e/uit( is a party&s contribution to a pro/ect in the form of effort '' as opposed to financial equity, which is a
contribution in the form of capital. In a partnership, some partners may contribute to the firm only capital and others
only sweat equity
%ontribution to a pro1ect or enterprise in the form of effort and toil. Sweat e$uity is the ownership
interest, or increase in value, that is created as a direct result of hard work by the owner(s. &t is the
preferred mode of building e$uity for cash-strapped entrepreneurs in their start-up ventures, since they
may be unable to contribute much financial capital to their enterprise. &n the context of real estate,
sweat e$uity refers to value-enhancing improvements made by homeowners themselves to their
properties. 'he term is probably derived from the fact that such e$uity is considered to be generated
from the 2sweat of one*s brow.2
,or example, consider an entrepreneur who has invested 3-44,444 in her start-up. After a year of
developing the business and getting it off the ground, she sells a 5/6 stake to an angel investor for
3/44,444. 'his gives the business a valuation of 35 million (i.e. 3/44,44404.5/, of which the
entrepreneur*s share is 3-./ million. Subtracting her initial investment of 3-44,444, the sweat e$uity
she has built up is 3-.7 million.
8aluation of sweat e$uity can become a contentious issue when there are multiple owners in an
enterprise, especially when they are performing different functions. 'o avoid disputes and complications
at a later stage, it may be advisable to arrive at an understanding of how sweat e$uity will be valued at
the outset or initial stage itself.
.mployee -toc* Option /.-O,0 and -weat .quity /-.0 are new tools, which are in use
by a lot of multinational companies and consulting companies coming to India and
engaging the real brain of Indian professionals who are o(ered .-O,1-. by such
companies as an incentive to them. In absence of any set law or precedent about its
legality, taxation and accounting, a great deal of confusion is prevailing and an
attempt is made to resolve the same.
Why ESO or SE !
!he employee stoc* option plan is a good management tool for retention of human
talent and guarding against poaching of sta( of a running organisa"tion by a rival
company.
When a company is newly formed or starts a new line of business, the company
engages the best executives and employees available, who bring in their I,%
/Intellectual ,roperty %ights0 and *now"how, s*ill and expertise with them, which ma*e
a value addition for the company. ertain *ey professionals would li*e to invest in the
companys capital and would li*e to ris* their own contribution to the capital of the
company along with their own I,%, *now"how, s*ill and expertise. -uch employees
would li*e to be a strategic part of the promoter group and would li*e to ma*e value
addition to their capital invested in the company. -uch an employee is awarded
with -weat .quity as an incentive to 'oin the company.
+s the company grows, the management would li*e to see that all its core
management team remains with them and further, such core management team is
given additional incentive as a reward for the e(orts put in by them in managing the
company. -uch employees are o(ered .-O, at a price which is less than the real value
of the share.
E"plo(ee +toc% ,nership Plan 2E+P3
"n employee stock ownership plan 4)=?# is a defined contribution plan that provides a
company&s workers with an ownership interest in the company. In an 4)=?, companies provide
their employees with stock ownership, typically at no cost to the employees. )hares are given
to employees and are held in the 4)=? trust until the employee retires or leaves the company,
or earlier diversification opportunities arise.
#SES O$ AN =$1>
A Rea%il& A(aila1le Mar'et 4or Controlling Sareol%ers
9re)uent"!, contro""ing shareho"ders desire to se"" a part of their shares in order to di(ersit! their ho"dings, or
to pro(ide "i)uidit! for in(estment or estate p"anning purposes. Bsua""!, ho#e(er, there is no mar+et for the
sa"e of a minorit! interest in a c"ose"!:he"d compan!.
A great dea" of f"ei%i"it! is a(ai"a%"e in structuring sa"es to the =$1>. If a shareho"der desires immediate
"i)uidit!, the p"an ma! o%tain a %an+ "oan and purchase the shares for cash. If a shareho"der does not need
immediate "i)uidit!, he ma! defer the ta on the sa"e %! se""ing his shares to the trust on an insta"ment sa"e
%asis, or %! se""ing on"! a portion of his shares to the trust on a !ear:%!:!ear %asis.
A Rea%il& A(aila1le Mar'et 4or Minorit& Sareol%ers an% O!tsi%e In(estors
The =$1> a"so pro(ides a readi"! a(ai"a%"e mar+et for the minorit! shareho"ders and other CoutsideD
in(estors #ho desire to rea"i7e their gain or to "i)uidate a part or a"" of their in(estment for rein(estment in
other companies. If the =$1> ac)uires at "east 34N o#nership, a minorit! shareho"der ma! a"so e"ect ta:free
ro""o(er treatment under W1458 of the Interna" @e(enue Code.
A Ta90A%(antage% Alternati(e to Sale or Merger
>urchase of an o#ners stoc+ %! an =$1> #i"" a"most a"#a!s %e more %eneficia" to the o#ner than sa"e or
merger. 9or eamp"e, in the case of a sa"e, the se""er #i"" incur an income ta, #i"" "ose contro", #i"" usua""!
"ose his sa"ar! and fringe %enefits, and #i"" se"dom %e a%"e to +eep an! retained e)uit!. In comparison, there
#i"" %e no ta to the se""er if he se""s stoc+ to the =$1> under the ta:free ro""o(er pro(ision of the 19G5 Ta
@eform Act. In addition, under an =$1>, the se""er can +eep contro", can continue to recei(e his sa"ar! and
fringe %enefits, and can +eep as much or as "itt"e of the stoc+ as he desires.
An E44ecti(e Tool 4or Increasing Cas $lo2 an% Net ;ort
A compan! can reduce its corporate income taes and increase its cash f"o# and net #orth %! simp"! issuing
treasur! stoc+ or ne#"! issued stoc+ to an =$1> in an! amount up to 85N of e"igi%"e annua" pa!ro"". Bsing
this approach, a compan! ma! drastica""! reduce or e(en e"iminate its corporate ta "ia%i"it!. The cash f"o#
impact can %e dramatic. If the contri%ution to the =$1> is made in "ieu of cash contri%utions to a profit
sharing p"an, the cash f"o# sa(ings are e(en more dramatic. 1f course, the o#ners must consider that these
contri%utions of stoc+ #i"" resu"t in some di"ution of their o#nership interest.
A S!perior Emplo&ee Incenti(e De(ice
An =mp"o!ee $toc+ 1#nership >"an is designed to pro(ide emp"o!ees #ith the incenti(e of a Cpiece of the
action,D and to ena%"e emp"o!ees to share in the capital growth of the compan!. =mp"o!ee stoc+ o#nership
gi(es emp"o!ees a direct and (ested interest in the success of their compan!, ena%"es emp"o!ees to share in
the profits of their o#n "a%or, and creates an identit! of interest %et#een management and "a%or.
As an emp"o!ee incenti(e de(ice, the =$1> is usua""! superior to other incenti(e p"ans. In an ordinar! profit
sharing p"an, for eamp"e, the funds are in(ested in stoc+s of unre"ated companies, and the incenti(e effects
are minima". In an =$1>, on the other hand, the emp"o!ees ac)uire an o#nership interest in their o#n
compan!, and the incenti(e e"ement is maimi7ed.
The =$1> is a f"ei%"e p"an that can %e used either in "ieu of or in com%ination #ith other emp"o!ee %enefits
p"ans. /ecause of its man! ad(antages, the =$1> is %ecoming an increasing"! popu"ar form of emp"o!ee
%enefit. The =$1> is particu"ar"! ad(antageous for companies #hose rapid gro#th has re)uired the
rein(estment of profits, resu"ting in a shortage of cash a(ai"a%"e for emp"o!ee %enefits. A co""atera" %enefit is
that the =$1> often ser(es to diminish emp"o!ee interest in unioni7ation.
A Ne2 ;a& to $inance De1t Re%!ction
Companies fre)uent"! find it necessar! to %orro# mone! in order to finance corporate gro#th. 1ne
disad(antage of de%t financing is that repa!ment of the "oan principa" is not a deducti%"e epense. An =$1>
can %e used to mitigate this pro%"em %! ha(ing the compan! issue ne#"! issued stoc+ or treasur! stoc+ to an
=$1>. The resu"ting ta sa(ings can then %e app"ied against the principa" pa!ments so that ta:deducti%"e
do""ars are used to pa! part, or a"", of the "oan principa".
Ho2 te .lan is Designe%
An =$1> is a p"an )ua"ified %! the Interna" @e(enue $er(ice as an e)uit!:%ased deferred compensation p"an.
As such, it is in the same fami"! as profit sharing p"ans and stoc+ %onus p"ans.
An =$1>, ho#e(er, differs from a profit sharing p"an in that an =$1> is re)uired to in(est primari"! in
emp"o!er securities, #hi"e a profit sharing p"an is usua""! prohi%ited from in(esting primari"! in emp"o!er
securities.
An =$1> a"so differs from profit sharing p"ans and from stoc+ %onus p"ans in that an =$1> is permitted and
authori7ed to engage in "e(eraged purchases of compan! stoc+. Conse)uent"!, an =$1> re)uired different
accounting procedures and a different method of a""ocating stoc+s and other in(estments among the
emp"o!ees than other t!pes of p"ans. 9or this reason, the p"an shou"d %e designed %! an =$1> specia"ist in
order to a(oid Interna" @e(enue $er(ice difficu"ties.
The =$1>, "i+e a profit sharing p"an, must co(er a"" non:union emp"o!ees #ho are at "east age 81 and ha(e
one !ear of ser(ice. An =$1> ma! either inc"ude or ec"ude union emp"o!ees. In practica" effect, share
o#nership under the p"an is usua""! proportionate to the re"ati(e sa"aries of the participants in the p"an.
Ho2 %o Stoc' .!rcase .lans 2or'<
#n%er a t&pical Stoc' .!rcase .lan> emplo&ees are gi(en an option to p!rcase teir emplo&er?s stoc'
generall& at a %isco!nte% price at te en% o4 an o44ering perio%. .rior to eac o44ering perio%> eligi1le
emplo&ees in%icate i4 te& 2is to participate in te plan.
I4 te emplo&ee 2ises to participate> e:se in%icates te percentage or %ollar amo!nt o4 compensation
to 1e %e%!cte% 4rom teir pa&roll tro!go!t te o44ering perio%. Te percentage or %ollar amo!nt
emplo&ees are allo2e% to contri1!te (aries 1& plan> o2e(er> te IRS limits te total p!rcase to
@AB>CCC ann!all&.
#n%er most stoc' p!rcase plans> te p!rcase price is set at a %isco!nt 4rom te 4air mar'et (al!e.
;ile some plans pro(i%e tat te %isco!nt is applie% to te (al!e on te stoc' on te p!rcase %ate
,e.g.> DBE o4 te 4air mar'et (al!e on tat %ate-> it is more common to appl& te %isco!nt to te (al!e
o4 te stoc' on te 4irst or last %a& o4 te o44ering perio%> 2ice(er is lo2er.
Most plans allo2 emplo&ees to increase or %ecrease teir pa&roll %e%!ction percentage at an& time
%!ring te o44ering perio%. Eac plan is !ni3!e> &o!r plan materials 2ill %etail o2 a speci4ic plan
2or's.
Top
T2o T&pes o4 Emplo&ee Stoc' .!rcase .lans
Tere are t2o t&pes o4 Emplo&ee Stoc' .!rcase .lans> classi4ie% 1& teir ta9 stat!s8
"!ali4ie% Emplo&ee Stoc' .!rcase .lans ,Section FAG-
"!ali4ie% Emplo&ee Stoc' .!rcase .lans meet con%itions %escri1e% 1& Section FAG o4 te Internal
Re(en!e Co%e. Tere is special ta9 treatment 4or sares tat are el% 4or more tan a &ear. A 3!ali4ie%
plan m!st meet te 4ollo2ing re3!irements8
Onl& emplo&ees o4 te compan& ,or its parent or s!1si%iar& corporations- ma& participate in te
plan
Te p!rcase plan m!st 1e appro(e% 1& te sareol%ers o4 te compan& 2itin te HA monts
1e4ore it is a%opte% 1& te 1oar%.
An& emplo&ee o2ning more tan BE o4 te compan& stoc' ma& not participate in te plan
All eligi1le emplo&ees m!st 1e allo2e% to participate in te plan> alto!g certain categories o4
emplo&ees ma& 1e e9cl!%e% ,e.g. emplo&ees emplo&e% less tan t2o &ears-
All emplo&ees m!st enIo& te same rigts an% pri(ileges !n%er te plan> e9pect tat te amo!nt
o4 stoc' tat ma& 1e p!rcase% ma& 1e 1ase% on compensation %i44erences
Te p!rcase price ma& not 1e less tan te lesser o4 DBE o4 te 4air mar'et (al!e o4 te stoc'
H- at te 1eginning o4 te o44ering perio%> or A- on te p!rcase %ate
Te ma9im!m o44ering perio% cannot e9cee% AJ monts !nless te p!rcase price is 1ase%
solel& on te 4air mar'et (al!e at time o4 p!rcase> in 2ic case te o44ering perio% ma& 1e as
long as B &ears
An emplo&ee ma& not p!rcase more tan @AB>CCC 2ort o4 stoc' ,1ase% on 4air mar'et (al!e
on te 4irst %a& o4 te o44ering perio%- 4or eac calen%ar &ear in 2ic te o44ering perio% is in
e44ect
Non0"!ali4ie% Emplo&ee Stoc' .!rcase .lans
Non0Section FAG Emplo&ee Stoc' .!rcase .lans are simple pa&roll %e%!ction plans tat allo2
emplo&ees to p!rcase compan& stoc'> sometimes at a %isco!nt. Tere is no special ta9 treatment o4
an& procee%s> an% te plan is not necessaril& a(aila1le to all emplo&ees.