* Mergers &

Acquisitions
Group Members
Syed Asif Tanveer F09MB024
Habib ur Rehman F09MB003
Arslan Rafique F09MB039
* What are Acquisitions and Mergers
* Traditionally, the term described a situation
when a larger corporation purchases the assets
or stock of a smaller corporation, while control
remained exclusively with the larger
corporation.

*Acquisition
* Hostile Acquisition
* The company, which is to be bought has no information about the
acquisition.
* The company, which would be sold is taken by surprise.
* Friendly Acquisition
* Two companies cooperate with each other and settle matters
related to acquisitions.
* Reverse Take Over
* Smaller company manages to take control of the management of
a bigger company
* At the same time retains its name for the combination of both
the companies.

*Types of Acquisitions
* The union of two or more organizations under
single ownership, through the direct
acquisition by one organization of the net
assets or liabilities of the other.
* A merger can be the result of a friendly
takeover, which results in the combining of
companies on an equal footing.

*Merger
* Horizontal Merger
* Involves firms from the same industry
* Vertical Merger
* Involves firms from the same supply chain
* Circular Merger
* Involves firms with different products but similar distribution
channels
* Conglomerate Merger
* A conglomerate company is produced by the union of firms with
few or no similarities in production or marketing but that come
together to create a larger economic base and greater profit
potential.

*Categories of Merger
*Examples
*Acquisition
*When one company
takes over another and
clearly establishes itself
as the new owner
*Target company ceases
to exist.
*Buyer "swallows" the
business
*Buyer's stock continues
to be traded
*Difference Between Merger &
• Merger
• Two firms agree to go
forward as a single new
company rather than
remain separately
owned and operated.
• Firms are often of
about the same size.
• Both companies' stocks
are surrendered and
new company stock is
issued in its place.
Acquisition
* Economy of scale:
* The combined company can often reduce its fixed
costs by removing duplicate departments or
operations, lowering the costs of the company
relative to the same revenue stream, thus
increasing profit margins.
* Revenue – Market Share
* This assumes that the buyer will be absorbing a
major competitor and thus increase its market
power

*Reasons for M&A

* Cross Selling
* For example, a bank buying a stock broker could
then sell its banking products to the stock
broker's customers, while the broker can sign up
the bank's customers for brokerage accounts.
* Taxation
* A profitable company can buy a loss maker to
use the target's loss as their advantage by
reducing their tax liability.

* contd..
* The Competition Commission of Pakistan (CCP) was
established on 2 October 2007 under the Competition
Ordinance, 2007. With competition and consumer
protection jurisdiction in broad sectors of the economy,
the Commission deals with issues that touch the economic
life of every Pakistani.
* The Ordinance sets out the principles and norms of sound
competitive behavior as well as the manner in which
these norms are to be enforced. It provides a legal
framework in which a business environment based on
healthy competition towards improving economic
efficiency, developing competitiveness and protecting
consumers from anti-competitive practices is to be
created.
* Competition Commission of
Pakistan
*Cartels n Mergers
* Takes action with respect to any kind of collusive
arrangement or agreement violative of the
Ordinance.
* accords or withholds clearance to mergers and
acquisitions after analyzing the potential impact
on competition

* Major Functional
Departments
*Monopolies & Trading Abuses
* Department investigates matters pertaining to
the abuse of dominant position or practices that
prevent, restrict, reduce, or distort competition
in the relevant market.
* Apart from cartelization or other forms of
collusive behavior (e.g., bid rigging) any
agreement or practice that is competition
adverse.

* Major Functional
Departments
* The law prohibits situations which tend to lessen,
distort or eliminate competition. Such as actions
constituting an
* Abuse of market dominance,
* Competition restricting agreements
* Deceptive market practices.
* Sets out procedures relating to review of mergers
and acquisitions, enquiries, imposition of penalties
and other essential aspects of law enforcement.

*Competition
Ordinance
* Merger control provisions are aimed at ensuring
that mergers do not lead to market concentration,
which in turn may lead to abusive behavior.
* Pakistan follows a mandatory reporting regime,
where parties to merger that meet notification
thresholds, must file a merger clearance.
* The objective of the clearance process is to
identify any potential anticompetitive effects of
the merger and to block it if it poses serious
competition concerns.

*Section 11
* The merger review is conducted in 2 phases.
* Phase 1
* The first stage, to be completed within 30 days,
assesses whether the merger would substantially
lessen competition by creating a dominant position.
* Phase 2
* The second stage analysis, to be completed within
90 days, is based on detailed information provided
by the undertakings along with the evidence from
the first stage

* Merger Review by
Commission
* While reviewing the transactions, the Commission
considers the following factors:
* Analysis of the relevant product and geographic
markets;
* Identification of competitor undertakings;
* Calculation of market shares;
* Calculation of market concentration;
* Assessment of potential adverse effects of the
mergers, based on market concentration and other
characteristics of the market;
* Assessment of likelihood, in the absence of merger, of
either party to merger to fail causing its assets to exit
the market

*Merger Review
* Signing of Letter of Intent / Memorandum of understanding
between the potential buyer and the seller
* Seeking required regulatory approvals (Competition
Commission of Pakistan)
* Undertaking financial, legal, commercial and operational due
diligence
* Assessing value and negotiating price
* Signing of Sale and Purchase Agreement
* Closing the deal.
* Steps of a Business Entity
Acquisition
* Commits the parties to the transaction prior to
reaching a definitive agreement
* Is entered into if Due Diligence indicates both
parties desire to proceed
* Re-affirms confidentiality agreements

*Letter of Intent
* Deal Structure
* Identity of Parties
* What is being purchased?
* What is the legal structure of the deal?
* Employment Agreements
* Expenses – Who Pays ?
* Who Prepares Documentation

*Letter of Intent -
Terms
*Exclusivity
* Buyer may require seller to take the business off the market
for some period of time as an incentive to Buyer to expend
time and money to quickly complete diligence and close on the
transaction
*Break-Up Fee
* Compensation (liquidated damages) for buyer if seller does not
enter into a transaction with buyer and during a tail period
enters into a transaction with another buyer
*Standstill
* IfSeller is public, it may require an agreement to prevent
buyer from buying any of seller’s stock of seller for a specific
period of time to avoid a hostile takeover

*Letter of Intent –
Terms
* This includes:
* the merger parties;
* The nature of the merger, for example,
* merger is an anticipated merge
* an acquisition of sole or joint control
* a full-function joint venture
* The value of the transaction
* The purchase price or the value of all the assets involved
* The areas of activity and turnover worldwide and in
Pakistan for the last financial year

* Application to Competition
Commission
* Whole or parts of the business of parties are
subject to the merger
* The markets on which the merger will have an
impact
* a brief explanation of the economic and
financial structure of the merger

* Application to Competition
Commission
* Any one or two or more of the concerned parties as
soon as they agree in principle or sign a letter of intent
to proceed with the intended merger before
consummation of the merger, shall give notice to the
Commission.
*The pre-merger application to be made to the
commission
*The Commission may ask to submit any particular
information or document Form, if it considers that such
information or document is necessary for examination
of the application.

*Regulatory Approval
* The fee may be paid in the form of bank challan
or bank draft in favor of the Commission.
Turnover of the applicant undertaking(s)
* (i) Up to 500 million rupees. Rs. 250,000/-
* (ii)More than 500 million but not exceeding 750
million rupees. Rs. 400,000/-
* (iii) More than 750 million but not exceeding 1000
million rupees. Rs. 500,000/-
* (iv) Exceeding 1000 million rupees. Rs. 750,000/-

*Regulatory Approval
* The cooperation of two or more individuals or
businesses--each agreeing to share profit, loss
and control--in a specific enterprise.

* This is a good way for companies to partner

without having to merge. JVs are typically
taxed as a partnership.

*Joint Venture
 * A joint venture is also a form of merger. A merger shall be
deemed to have occurred if a collaborative arrangement by
which two or more undertaking devote their resources to pursue
a common objective; provided that such arrangement must be: 

•  subject to joint control; 

•  perform the functions of an autonomous entity; and 

•  on a long term basis. 

* Do the joint venture agreements fall

within meaning of the term, Merger?
* RECENT MERGERS IN PAKISTAN
* PICIC Ltd ,PICIC Commercial Bank Ltd
and NIB Bank Ltd.

* The Parties
* PICIC Ltd is a public limited company engaged in term financing for
industrial and commercial activities.
* PICIC Commercial Bank Ltd is involved in Commercial Bank and
Related Services.
* NIB Bank Ltd is a commercial bank involved in Commercial Bank and
Related services
* Findings
* Post merger composite market share would be less than 4%
* Conclusion
* Composite market share lies within 40% threshold
* The merger would not substantially lessen competition
* The merger was cleared.
 * Crescent Bahuman Energy Ltd,
Crescent bahuman Textile Limited and
Crescent Bahuman Limited.

* The Parties
* Crescent Bahuman Energy is involved in generation and selling of
electric power
* Crescent Textile is new and aims to manufacture Textile products
* Crescent Bahuman Ltd manufactures denim
* Findings
* All companies are involved in dissimilar business
* Conclusion
* The Merger was allowed.
Acquisitions
Friendly take-over
* In a friendly take-over, the bidder informs the company’s
board of directors before making an offer for acquiring
its shares.

Hostile take-over
* A take-over is considered hostile if:
* the board rejects the offer but the bidder continues to
pursue it, or
* the bidder makes the offer without informing the board
beforehand

*Types of Acquisition
White Knight
* A white knight is a company that acquires another company
with the intention of helping it, e.g. JP Morgan Chase
acquired Bear Stearns in 2008, which helped Bear Stearns
avoid insolvency after its share price declined to such an
extent that its market capitalization dropped by 92%.

Reverse take-over
* A reverse take-over is one where a private company
acquires a public company.

*Types of Acquisition
* RECENT ACQUISITIONS IN PAKISTAN
 * IBL Modaraba Management (pvt) Ltd.
And Dr. Hasan Sohaib Murad
* The Parties
* IBL is a company engaged in Modaraba business
* Dr. Hasan Murad runs the University of Management and
Technology.
* Findings
* It was assessed that IBL Modaraba and UMT were involved in
dissimilar activities.
* Conclusion
* The acquisition would not substantially lessen competition
* The Acquisition was cleared.
 * Wazir Ali Industries and DALDA
Foods Private Limited
* The Parties
* Wazir Ali Industries Ltd is engaged in the maufacture of sale of
banaspati ghee and cooking oil
* Dalda Foods Pvt Ltd is also engaged in the maufacture of sale of
banaspati ghee and cooking oil
* Findings
* Wazir Ali Industries were on the verge of Bankrupcy so Dalda
Foods wanted to help it
* Conclusion
* The acquisition would not substantially lessen competition in
ghee and cooking oil market.
* The Acquisition was approved.
 *
ABN AMRO BANK and
Royal Bank of Scotland (99.3%)
* The Parties
* ABN AMRO Bank is a scheduled bank and engaged in retail
banking and corporate banking.
* RBS is a consortium of foreign banks i.e RBS, Fortis, Banco
Santadar.
* Findings
* As RBS bank has no existence in Pakistan before this acquisition
so it would d not result in change in market share.
* Conclusion
* There was a limited possibility of a substantial lessening of
competition by this dominant undertaking.
* The Acquisition was approved.
* Banking Sector observed extraordinary M&A during past few years
* In order to comply with the statutory requirement of raising
their paid up capital to at-least Rs.6 billion by the end of 2009
* The privatisation policy of the government has resulted in
acquisitions of ABL, UBL and PTCL.
* LINKdotNET also expanded its operations and acquired WOL and
DANCOM ONLINE to become the largest ISP in the country,
representing the largest horizontal M&A transaction in this sector
* Dalda Foods (Pvt) Ltd acquired Wazir Ali Industries, thereby
eliminating competitors in the edible oil market of the country by
acquiring the famous ‘Tullo’ brand, which was a horizontal M&A
activity. This resulted in increased market share of the edible oil
sector for the acquirer.

*M&A Highlights
Now Lets get little
technical
Mergers and acquisitions result in number of
benefits including:
* Revenue enhancement
* Cost reductions
* Diversification of business activities
* Transfer of talents and resources
* Tax benefits

* Benefits of Mergers and

Acquisitions
* The income tax ordinance, 2001 allows companies
to set off their business losses against the profits
of other companies in group, provided that all
the companies in the group continue their
operations from the date of acquisition.
* The finance bill 2008 has also proposedto allow
banking companies, non banking financial
companies, modarabas and insurance companies
to adjust accumulated losses against the income
of the group during tax year.

*Tax benefits for

groups
* Any unused loss will also be allowed to be
carried forward for six tax years following the
tax year in which loss arises.
* Companies in the group transfer goods at no
profit & loss, so goods or services provided by
one company in a group to another company
will not be taxable.

*Contd…
Accounting
Challenges
Types of Treatment Accounting Treatment

* Subsidiary * Full Consolidation

* Associate * Equity Accounting
* Joint Venture * Proportional Consolidation /
Equity Accounting

*Accounting
Treatment for group
Companies
The accounting of M&A covers the following
Areas.
* Goodwill calculation
* Non controlling interest
* Treatment of pre/post acquisition profits
* Elimination of inter-group transactions

*Contd..
IFRS 3 Defines goodwill as “Goodwill is an asset
representing the future economic benefit
arising from other assets acquired in a business
combination that are not individually
identified and separately recognized”.
Goodwill is calculated as the excess of the
consideration transferred for acquisition of
assets.

*Goodwill Accounting
In some acquisitions parent may not own all of
the shares in the subsidiary, e.g. If P owns 80%
of the ordinary shares of S, there is a non
controlling interest of 20%

*Non controlling
interest
Pre-acquisition profits are the reserves which
exist in a subsidiary company at the date when
it is acquired. They are capitalized at the date
of acquisition by including the in the goodwill
calculation.
Post-acquisition profits are profits made and
included in the retained earnings of the
subsidiary company following acquisition. They
are included in group reserves.

* Treatment of pre/post
acquisition profits
Companies in the group will probably trade on
credit, leading to:
* Receivables
* Payables
These are amounts owing within the group
rather than outside the group and therefore
they must not appear in the statement
consolidated of financial position.

*Inter-group trading
At the year end current accounts may not agree,
owing to the existence of in-transit terms such
as goods and cash
The usual rules are as follows:
If cash is in-transit then
Dr cash in transit
Cr receivables
Once in agreement the current accounts may be
may be cancelled against each other.

*Contd..
‘If you fail to plan, you plan to fail’

*Conclusion
*Thank You