Merger,acquisition And Corporate Restructuring

Structure
• • • • • • Conceptual framework Financial framework Corporate restructuring Accounting for amalgamation Tax benefits Exercise

CONCEPTIONAL FRAMEWORK
MEANING OF • MERGERS • ACQUSITIONS • AMALAMATIONS • TAKEOVERS • ABSORPTIONS

TYPES OF MERGERS • HORIZONTAL MERGER – SIMILAR LINES OF ACTIVITY ADVANTAGES • REDUCTION OF COMPETITION • PUTTING AN END TO PRICE CUTTING • ECONOMIES OF SCALE IN PRODUCTION • RESEACH AND DEVELOPMENT • MARKETING AND MANAGEMENT .

VERTICAL MERGER – FIRMS SUPPLYING RAW MATERIALS MERGE WITH FIRM THAT SELLS ADVANTAGE • LOWER BUYING COST OF MATERIAL • LOWER DISTRIBUITION COST • ASSURED SUPPLIES AND MARKET • COST ADVANTAGE .

CONGLOMERATE MERGER UNRELATED INDUSTRIES MERGE PURPOSE • DIVERSIFICATION OF RISK • Egs Time warner-(they were into media & movie production) & AOL-(leading american website .

FINANCIAL FRAMEWORK IT COVERS THREE INTERRELATED ASPECTS 1.FINANCING TECHNIQUES IN MERGER 3.CAPITAL BUDGETING .DETERMINING THE FIRM’S VALUE 2.

THE VALUE OF THE ASSETS • BOOK VALUE – OWNERS EQUITY • DEPENDS ON FIXED ASSETS AND WORKING CAPITAL 2. EARNING PER SHARE AND P/E RATIO – IMPACT OF EPS AFTER MERGER .DETERMINIG THE FIRMS VALUE QUANTITATIVE FACTORS – BASED ON 1. MARKET VALUE – BASED ON STOCK MARKET QUATATIONS .BUT CHANCE FOR SPECULATION 4.INDEPENDENT APPRISAL AGENCIES 3. APPRAISAL VALUE.

125 COMPANY B • NO.5 .EXERCISE COMPANY A • NO. OF SHARES 1 LAC • MARKET VALUE RS.3.18.25 • EPS RS. OF SHARES 2 LACS • MARKET VALUE PER SHARE RS.2.75 • EPS RS.

CONCLUSIONS • EXCHANGE AT EPS – NO EFFECT ON EPS AFTER MERGER • EXCHANGE MORE THAN EPS RATIO – COMPANY WITH LOWER EPS GAINS • IF LESS THAN EPS RATIO – COMPANY WITH HIGHER EPS BEFORE MERGER GAINS .

OF EQUITY SHARES • MARKET PRICE = P/E (NO. OF TIMES) * EPS .PRICE EARNING RATIO APPROACH • MEANING • COMPUTATION : P/E RATIO = MP/EPS • EPS = EAT/NO.

000 .00.00.000 1.000 3.00.000 2.5 18.000 2.5 P/E RATIO(TIMES) MARKET PRICE PER SHARE(MPS) TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO) 8 25 50.25.EXAMPLE PRE MERGER SITUATION EAT NO.75 18.125 2. OF SHARES EPS FIRM A FIRM B 6.75.000 7.50.

00.00.00.500 .00.000=2.5 EPS P/E RATIO (ASSUMED TO BE THE SAME) MPS 8.125*8=25 21.000+1.8 6.5=8.47.75 2.000/3.0 00 8.000 65.75/2.825 TOTAL MARKET VALUE 70.5:3.75.91/ 7.125 8 3. OF SHARES 1:1 8.25+2.8 lakhs SITUATION 2 EXCHANE RATIO/ SWAP RATIO (ASSUMING) EAT(COMBINED FIRM) NO.8=3.75.000 2.125=.POST MERGER SITUATION 1 (BASED ON CURRENT MARKET PRICE 2.00.000=3.

POST MARKET PRICE SHARE INCREASED AT HIGHER RATE THAN EXCHANGED BELOW THIS RATIO .CONCLUSION • IF SHARES ARE EXCHANGED BASED ON CURRENT MARKET PRICE PER SHARE .

5:1 WHO GAINS WHO LOSES ? IF EXCHANGE RATIO IS 1:1 WHO GAINS WHO LOSES ? HOW TO CALCULATE TOLERABLE SHARE EXCHANGE RATIO .• MARKET VALUE AFTER MERGER = MARKET VALUE BEFORE MERGER = 68.00.75.000 ? IF EXCHANGE RATIO IS 2.000 • NET GAIN = 15.

00.000 10. 1 SHARE IN FIRM A 1:3.000 1. OF SHARES OF A TO A CO.000/65 = 15.000 65.000/15385 = 3. OF EQUTY SHARES TO BE ISSUED BASED ON DESIRED MARKET PRICE TOLERANCE SHARE EXCHANGE RATIO 75.385 SHARES 50.25 .25 SHARES OF FIRM B. SHARE HOLDERS DESIRED POST MERGER MPS NO.00.000 65 PER SHARE 10.00.00.00.DETERMINATION OF TOLERABLE SHARE EXCHANGE RATIO TOTAL MV LESS: MINIMUM TO BE GIVEN TO B NET BENEFIT TO A NO.

CONCLUSION • FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES MARKET VALUE AFTER MERGER .

CAPITAL BUDGETING • THE TARGET FIRM SHOULD BE VALUED BASED ON PV OF INCREMENTAL CASH INFLOWS .

CORPORATE RESTRUCTURING • FINANCIAL RESTRUCTURING • RESTRUCTURING SCHEMES : INTENAL AND EXTERNAL RESTRUCTURING • DEMERGERS • BUYOUTS .

NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR CO. THE BUSINESS OF NEW CO. . 2. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS SHOULD BE SHAREHOLDERS OF NEW CO. SHOULD CONTINUE 5. 3. PURCHACE CONSIDERATION TO BE SETTLED BY THE NEW CO. TO BE THE ASSETS OF THE TRANSFREE CO. 4.ACCOUNTING FOR AMALGAMATION • POOLING INTEREST METHOD CONDITIONS AS PER AS 14: 1.

OTHER ACCOUNTING TREATMENTS 1. CROSS HOLDINGS OF SHARES TO BE CANCELLED SUBSIQUENT TO MERGER 2. TRANSACTIONS LIKE DEBTORS AND CREDITORS – SALE OF GOODS FROM ONE CO. INTER CO. SALES TAX PAID ALREADY CAN NOT BE RECOVERED . TO ANOTHER 3.

000 NOMINAL VALUE OF SHARE IS RS.000 NO.000 TO BE THE SHARE HOLDES OF B CO.00. SHARE HOLDERS HOLDING NOT LESS THAN 3/4TH IN VALUE OF SHARES OTHER THAN SHARES ALREADY HELD SHOULD BECOME SHARE HOLDERS OF AMALGAMATED COMPANY EX.10 ASSUME Altd MERGE WITH Bltd THEN 75% OF 1. OF SHARES HELD BY Bltd IN Altd IS 20. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. 1.INCOME TAX RELATED ISSUES FOR AMALGAMATION CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B) 1. NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHARE HOLDERS .000 = 60. NO.20. 2. TO BE THE ASSETS OF THE TRANSFREE CO. OF SHARES OF Altd CO.000.00.

IF SHARES OF INDIAN CO. ATLEAST 25% OF THE FOREIGN CO. EXCEPTION 1.HELD BY FOREIGN BEFORE MERGER AND SUCH FOREIGN CO.OTHER CONDITIONS • THE AMALGAMATED CO. TAKEN OVER BY ANOTHER FOREIGN CO. AMALGAMATING CO. (BEFORE MERGER) TO BE SHARE HOLDERS OF THE NEW FOREIGN CO.) . IS AN INDIAN CO.(OLD CO. ? WHAT IS THE BENEFIT TO THE AMALGAMATED CO. 2.

THE AMALGAMATED CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS 5. CONTINUES TO HOLD 3/4TH OF BOOK VALUE ATLEAST FOR 5 YEARS 4. NEW CO. ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MORE YEARS 2. CARRY FORWAD AND SET OF LOSS AND DEPRECIATION SEC 72 A TO BE FULFILLED 1. NEW CO.• NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY THE TRANSFEROR CO.T ACT ? CAN NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS . 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS BEFORE AMALGAMATION 3. UNDER SEC 47(VI) OF I.

CBDT .6. THE NEW AMALGAMATED CO. SHOULD FURNISH TO ASSESSING OFFICER ABOUT PARTICULARS OF PRODUCTION BENEFIT • THIS SCHEME IS ALSO APPLICABLE TO BANKING INSTITUTIONS ?TATA VOLTAS & KELVINATOR HYDERABAD DIVISION vs.

EXAMPLE A LTD AMALGAMATES WITH B LTD AS ON 2007 PARTICULARS DOES NOT SATISFY SEC 2(1B) & 72 A NO BENEFIT TO A & B SATISFIES 2(1B) BUT DOES NOT SATISFY 72 A DOES NOT ATTRACT CAPITAL GAIN FOR A BUT NO GAIN FOR B SATISFIES BOTH 2(1B) & 72 A NO CAPITAL GAIN TAX & ACCUMULATED LOSSES & UNABSORBED DEPERICIATION CAN BE CARRIED FORWARD A MERGES WITH B (A GOES OUT) .

& Have accumulated losses & unabsorbed depreciation ? If c is not an Indian co.? If b merges with a & b goes out of market who gains under above 3 situations ? If a&b merge with c what are the tax implication under above situations Assume b is a loss making co. .

2. 4. 6. Expenditure on amalgamation or de-merger – allowed under sec 35DD both revenue and capital expenditure allowed Expenditure on scientific research can be carried forward Expenditure on acquisition of patent rights copyrights – depreciation can be provided Expenditure for obtaining license for tele-communication service can be written off Preliminary expenses Capital expenditure on family planning Bad debts are allowed . 3. 5. 7.OTHER TAX BENEFITS 1.

• No capital gain tax provided new co.& Shareholders are acquired everything in shares . Is a Indian co.Tax Concession To Share Holders Of Amalgamating Co.

500 NO. OF SHARES 20.000 EPS 7 7.000 CO. A 1.EXERCISE PARTICULARS EAT CO.500 5 40 8 MARKET PRICE 70 P/E RATIO 10 . B 37.40.

AT ltd ? What are the tax planning required before & after merger . B Exchanging one share for every 1. ? A merges with T & formed a new co. ? A is a foreign co. A is acquiring co.• Co.5 shares of B ltd & p/e ratio will continue even after merger ? Are they better or worse of than they were before in merger ? Determine the range of minimum & maximum ratio between the two firms ? A is an Indian co.

#%  "&##% #!.

 #% '# #$$#%'&%# ## .

!%&% W %%#%#$ & '&$ !'  #%$ $ .

 #! #% #$%#&%&# W #$%#&%&# W #$%#&%&#$$ %%# #$%#&%&# W ##$ W & &%$ .

 &% # %  ! %#$%%   % $$!#$  $$%$%$ %#$# # %  %$$%$ %%#$#  %$%   ' "&%$# #$ $ &$# #$   !&# $#% % $%%%   %&$$$  $ & %&   &$%%$%% %   '& $$%$%$ %#$# # W .

%# &% %#%%$  # $$ $ $#$%  $&$"&%% ##  %# %#$% $ % #$#% #$ $   $#   %  %#  $$%!# % # '# .

 %#% $$&$ # %   % $ % &# %%$   $$%$%$ %#$# # % % $$%$ %%#$# $# #$  %$$%.

% '&   $#$ %#%$#$#$ &  $# #$ % !    $#$ 9/    $#$9/9/$  '& $#$#$  $$&9/#%9/%     % %$# $   %$# #$"&% #!##$#  #$ .

%# % $ W %% $ !%   $#$   # # ##$& # % '#  %# #  %$% % #   ###  % $# #$ % # %$%%% %%  %  .

 !% %#$# !%$$%$% %#$# # &#$ '   %%  ## #$%  $$ !#%  $% &  &&% $$$#&$ # # # # #$    '&% %$% ##$  #%   %%  %&$%  .

%   '&%$% ##$   $ & %& # %##$   $ &'%$%  $% !% # #$$ & %&  ##$ W .

 %% $ &&#$% $$$$ #  &%!#%&#$ !# &%  % W %$$$$ !!% $%%&% $ %%' %$ '% ##'$ .8 % .

! %%$%% $   !#%&#$  $ % $%$$     $%$$   $%$$ % &% $ %     $%$  $ % %%#% !%  #&%   #  !% %  &&%  $$$  &$ # !#%   ##  ## #$%  %   $ &% %   .

.8349..9438 88:20-8.33/.3.3. -20709. -4084:9412..709 4.:2:.-4.9438 1.1-207089..089:.-4.943:3/07.90/48808 :3..0 .4 ..-847-0/ /0570.943 1. 25.9.70909.4882.4 .089:.38:3/07.

..7.45798 /0570.40/ 503/9:70438..0 .7080.94347/0 20707 ./0/ 503/9:701474-9.70. -4970.//0-98...70503808 .59..03:0..943 ..0391.59.3-0574.3/.943807.0503/9:70431.770/147..40/ .2.%#%%$        503/9:7043.3-079903411 !7023..9039798.6:8943415.3-0.333 .40/:3/0780.33.7/ 503/9:7043.0503/9:70.25.2..422:3.0380147900 .

70.4 8.4 $.70 4/078 12.3.079338.704/078.%....934 W 4.6:70/ 0.574.59.43.2..708 . 3/.08843%4$.39./0/30.

#$ !#%&#$ %                $#$  !$  #%!#  !.

#%   .

708419/ 5.4 .W 4 8.6:73.70147 0.334308...07 8.

2:2 7.9.94-0900390941728 8.07.390070-01470 320707 0907230907.3.333706:70/-01470 .4393:0 0.5.94.70909.4 %9/ .1907 20707 .4 207089% 14720/.14703.33/.4  8.03.3041232:2 2.190720707 7090-09907474780419.30.