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Chapter-2 Mand A

Chapter-2 Mand A

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Published by: Mihir Kenia on Oct 07, 2010
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ChapterChapter-2 Mergers and acquisitions

Meaning of Merger/ amalgamation
A merger is a combination of two or more businesses into one business. Laws in India use the term 'amalgamation' for merger. The Income Tax Act, 1961 (Section )defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than nine-tenths in value of the shares in the nineamalgamating company or companies become shareholders of the amalgamated company. company. ExampleExample- Reliance merged with Bombay dyeing .

Mergers or amalgamations are of two forms

Merger through Absorption An absorption is a combination of two or more companies into an 'existing company'. All companies except one lose their company'. identity in such a merger. For example, absorption of Tata merger. Fertilizers Ltd (TFL) by Tata Chemicals Ltd. (TCL). TCL, an Ltd. (TCL). acquiring company (a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred exist. its assets, liabilities and shares to TCL. TCL.

company transfers its assets. shares. . Hindustan Instruments Ltd.Merger through Consolidation A consolidation is a combination of two or more companies into a 'new company'. liabilities and shares to the acquiring company for cash or exchange of shares. the acquired created. legally dissolved and a new entity is created. Ltd. Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd. all companies are company'. For example. Here. merger of Hindustan Computers Ltd. In this form of merger.

But Merger is not likely to result in any of the above if such merger is resorted due to reasons of concealing weakness of one unit through merger with another unit or to create an artificial appearance in the market / eyes of the public that the company is doing well   . Mergers occur due to reasons of -Growth . lower financing costs . Often Mergers intend to diversify. Managerial Effectiveness. Utilization of Tax shields. Synergy. Economies of Scale.Why Mergers?  The Principal economic rationale of a merger is that the value of the combined entity is expected to be greater than the sum of the independent values of the merging entities i.e. Broadening of Capital Base. achieve a higher rate of earnings growth . Lower Financing Costs. Diversification. Strategic Benefit.

i.Types of mergers Horizontal mergers Horizontal mergers are those mergers where the companies manufacturing similar kinds of commodities or running similar type of businesses merge with each other. Horizontal Monopoly ii. Horizontal Expansion .

with Orissa Power Supply Company The merger of ACC (erstwhile Associated Cement Companies Ltd. through the merger of Lipton India and Brook Bond The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of India) Bank The merger of BSES (Bombay Suburban Electric Supply) Ltd.) with Damodar Cement .Examples of Horizontal Mergers The formation of Brook Bond Lipton India Ltd.

Economies of scope b. Economies of scale .Advantages of Horizontal Merger: a.

Vertical mergers are commonly undertaken by firms as they seek to consolidate their production operations. Media giants like Disney and Viacom have merged with production companies to ensure a stream of programming as well as television stations to ensure a retail market for their products.Vertical mergers It occurs between firms in different stages of production operation. . For example. have been known to purchase pulp and paper mills. to ensure a steady supply of newsprint. For example Newspaper publishing companies. A vertical combination represents a combination of firms engaged at different stages of production in an industry expanding its activities either forward towards the ultimate consumer or backward towards the suppliers of raw materials. and even timber companies. joining of a TV manufacturing assembling company and a TV marketing company or joining of a spinning company and a weaving company.

electronic products. L&T and Voltas Ltd are examples of such mergers . For example. fertilizer products.Conglomerate mergers Conglomerate mergers are those firms which are engaged in unrelated types of business activity. These mergers have the potential for improved resource allocation. They also have the potential for synergy and transfer of managerial capabilities Among conglomerate mergers. It is collection of disassociation businesses. the following three types have been distinguished. insurance investment and advertising agencies. merging of different businesses like manufacturing of cement products.

Mechanics Of Merger Merger has to be viewed from Legal . Tax and Accounting Consideration. The procedure for amalgamation/merger involves the following :: Examination of Object Clauses ± Whether MOA of both the companies provide for it or not  Intimation to Stock Exchange of such intentions  Approval of the draft amalgamation by the respective boards  Application to the High Court so that it can convene the meetings of shareholders and creditors for passing the amalgamation proposal .

one vernacular and one English and filing of an affidavit in the court of law that the notice has been published Holding of Meetings of Shareholders and creditors and approval of the same by atleast 75% of the stake holders Petition to the court for confirmation and passing of orders . Court is empowered to modify the scheme of amalgamation and pass the orders accordingly . Court to find out as to whether the amalgamation is fair and reasonable .21 days Advance intimation notice to the shareholders and creditors and publication of the notice of meetings in two news papers. Court to fix the date of hearing and the notice about the same has to be published in the news paper.

.Filing the order with the Registrar. Transfer of Assets and liabilities-All the assets and liabilities of liabilitiesthe amalgamating company to be transferred to the amalgamated company strictly as per the court orders. Amalgamated company after fulfilling the provisions of the law to issue shares and debentures of the amalgamated company to be followed by listing .Certified true copies of the Registrarcourt order must be filed with the Registrar of Companies within the time limit specified by the Court. the depreciation chargeable by the amalgamated company has to be based on the written down value of the assets before amalgamation . For accounting purposes . the depreciation charge may be based on the considertion paid for the assets . For tax purposes.

paid or payable and income tax litigation expenses are tax deductible expenses for the amalgamated company .Subject to the fulfillment of certain conditions as laid down in the Income Tax relevant to section 2(a). the accumulated loss and the un absorbed depreciation of the amalgamating company shall be deemed to be the loss/depreciation of the amalgamated company for the previous year in which the amalgamation is effected No capital gains tax is applicable to the amalgamating company or its shareholders if they get shares in the amalgamated company Other important provisions ::The amalgamated company is liable to pay the taxes of the amalgamating company. Expenses of amalgamation are not tax deductible Taxes on the income of the amalgamating company .

Bad debt arising out of the debt of amalgamating company taken over by the amalgamated company are not deductible for tax purposes. The amalgamated company is entitled to get the refund of taxes by the amalgamating company .

in an acquisition two or more companies may remain independent.Acquisitions and Takeovers An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Under the Monopolies and Restrictive Practices Act. it is called a takeover. In theory acquirer must buy more than 50% of the paid-up equity of the acquired company to enjoy paidcomplete control . When an acquisition is 'forced' or 'unwilling'. An acquisition or takeover does not necessarily entail full legal control. but there may be a change in control of the companies. a company's investment in the 372). shares of another company in excess of 10 percent of the subscribed capital can result in takeovers. percent of the voting power in a company. . Thus. takeover meant acquisition of not less than 25 Act. While in the Companies Act (Section 372). separate legal entities. A company can also have effective control over another company by holding a minority ownership.

Supply Co Ashok Leyland India World Indal Union Carbide Renamed ³Eveready´ .Some of the Prominent Take Overs. Chhabrias Goenkas Hindujas Satyam Hindalco Mcleod Russell Shaw Wallace Calcutta Ele.

the company which is to be bought has no information about the acquisition/ take over.Inthis. FriendlyFriendly. The company. There are times when a much smaller company manages to take control of the management of a bigger company but at the same time retains its name for the combination of both the companies. the two companies cooperate with each other and settle matters related to acquisitions. This process is known as "reverse takeover . which would be sold is taken by surprise.Types of Take overs/ Acquiistions Hostile takeover/ Acquisition ±In this.

Important guidelines relate to  Notification procedure to be followed by the acquirer  Offer Price Norms  Contents of the Public Announcement to be made by the acquirer The purpose of SEBI guidelines is to  Impart greater transparency to takeover deals  Ensure a greater amount of disclosure through public announcement and offer document Protect the interest of small shareholders .Take over guidelines SEBI has issued detailed guidelines for regulating substantial acquisition of shares and take overs of listed companies.

. transparent and equitable manner Take over means acquiring the control or management interest in a target company Major provisions: Informing the target company if the total holding exceeds 5%: informing stock exchange if holding exceeds 15% making open offer to public if the proposed acquisition results in share holding in excess of 155. Code amended in 2002.N.Bhagwati Committee recommendations It is meant to ensure that takeovers happen in a fair.Take over Code Introduced in 1997 by SEBI Based on P.

copy rights knowand so on . Striving for bigness:.Size is perhaps a very important yardstick bigness:by which most organisations .Failure to investigate fully the business looking:of the seller is rather common . buyer may not be in a position to assess the hidden problems and contingent liabilities .The problems here are that the seller may possibly exaggerate the worth of intangible assets(brand image. technical know-how .The temptation to stray in to unrelated :areas that appear exotic and very promising is often strong.Such forays are often risky. business or otherwise judge themselves.Five sins of Acquisition Straying too far a field :. The concern with size may lead to unwise acquistions Leaping before looking:. patents. the accounting reports might have been deftly window dressed .

. He may turn out to be an unfortunate winner in the game of acquistions. the naïve ones tend to :bid more . Failing to integrate well Even the best strategy can be ruined by poor implementation . acquistions.In a competitive situation.Often the highest bidder is one who overestimates value out of ignorance .Over Paying :.

People pill Sandbag Shark Repellent Golden parachute Raider Saturday Night Special Macaroni defense .Strategies taken to prevent take over.

Merger and Acquisition Process Preliminary Assessment or Business Valuation  Phase of Proposal  Exit Plan  Structured Marketing  Stages of Integration  Once the process is initiated  Closure of the deal of merger or acquisition  .

Impact of mergers and acquisitions on top level management 4. 2.Impact Of Mergers And Acquisitions on workers or employees 3.The impact of mergers and acquisitions on various sects of the company may differ.Impact of Mergers and acquisitions 1.Impact of mergers and acquisitions on shareholders .

‡ To improve profitability and EPS ‡ .Benefits of Mergers and Acquisitions Greater Value Generation ‡ When the companies are weathering through the tough times. ‡ When the companies are weathering through the tough times.

 Purchase Method Pooling of Interests Method .Costs of Mergers and Acquisitions Replacement Costs  Discounted Cash Flow Method  Comparative Ratio calculation method Merger and acquisition accounting is done either by the purchase or pooling of interests methods.

means the Incometransfer of one or more business undertakings. 'slump sale' under Section2(42C) of the Income-tax Act. or a unit or division of an undertaking or a business activity taken as a whole.Meaning of Slump sales Under the Indian tax law."Undertaking" includes any part of an undertaking. . 1961. but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Under clause (19AA) of section 2 .

Bought Out Deals In a bought out deal . The wholesalers invariably is either a merchant banker or sometimes just a company with surplus cash These could be individuals and other smaller companies participating in the syndicate . in addition to the sponsors A bought out deal helps the companies mobilise the funds indirectly from the public and cost of raising funds is since public issue expenses are not involved . an existing company off-loads a part offof the promoters capital to a wholesaler instead of making a public issue .

A spin-off separates spindiverse units of the firm and results in two companies that have dissimilar assets .Spin offs Corporate spin-offs are important corporate spinrestructurings that are associated with significant positive abnormal stock returns at their announcement.

certain acceptable security against funds to be borrowed . Both the banks agree to reverse this transaction on a pre-determined future date at agreed interest precost.Repurchase Options or Ready Forward Repos are the transactions where the borrowing bank places with lender bank . However generally repo transactions are for minimum period of 3 days to 14 days . These transactions are short tenure and provide flexibility to suit both lender and borrower No fixed period has been prescribed for this transaction.

The interest rate is market determined and built in the structure of repo transactions Allowed only through SGL account with RBI in Mumbai Repo is a very popular mode of raising funds against its securities without altering its asset mix while lender finds a safe avenue giving attractive return Moreover the funds management for bothe borrower and lender improves as the date of reversal of transactions is known in advance. .

a leveraged buy out involves the acquistion of a division or a unit of a company Occasionally it entails the purchase of an entire company . Generally .Leveraged Buy Out It involves a transfer of ownership consummated mainly with debt.

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