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.DETERMINING THE FIRMS VALUE 2.FINANCING TECHNIQUES IN MERGER 3.CAPITAL BUDGETING

DETERMINIG THE FIRMS VALUE

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

EXERCISE
COMPANY A NO. OF SHARES 2 LACS MARKET VALUE PER SHARE RS.25 EPS RS.3.125 COMPANY B NO. OF SHARES 1 LAC MARKET VALUE RS.18.75 EPS RS.2.5

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

PRICE EARNING RATIO APPROACH

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

EXAMPLE
PRE MERGER SITUATION EAT NO. OF SHARES EPS FIRM A FIRM B 6,25,000 2,00,000 3.125 2,50,000 1,00,000 2.5

P/E RATIO(TIMES) MARKET PRICE PER SHARE(MPS) TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO)

8 25 50,00,000

7.5 18.75 18,75,000

POST MERGER

SITUATION 1 (BASED ON CURRENT MARKET PRICE 2.5:3.125=.8 6.25+2.5=8.75 2.8 lakhs

SITUATION 2

EXCHANE RATIO/ SWAP RATIO (ASSUMING) EAT(COMBINED FIRM) NO. OF SHARES

1:1 8,75,000 2,00,000+1,00,000=3,00,0 00 8,75,000/3,00,000=2.91/ 7.5

EPS P/E RATIO (ASSUMED TO BE THE SAME) MPS

8.75/2.8=3.125 8

3.125*8=25

21.825

TOTAL MARKET VALUE

70,00,000

65,47,500

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

 MARKET VALUE AFTER MERGER = MARKET VALUE BEFORE MERGER = 68,75,000 NET GAIN = 15,00,000 ? IF EXCHANGE RATIO IS 2.5:1 WHO GAINS WHO LOSES ? IF EXCHANGE RATIO IS 1:1 WHO GAINS WHO LOSES ? HOW TO CALCULATE TOLERABLE SHARE EXCHANGE RATIO

DETERMINATION OF TOLERABLE SHARE EXCHANGE RATIO

TOTAL MV LESS: MINIMUM TO BE GIVEN TO B NET BENEFIT TO A NO. OF SHARES OF A TO A CO. SHARE HOLDERS DESIRED POST MERGER MPS NO. OF EQUTY SHARES TO BE ISSUED BASED ON DESIRED MARKET PRICE TOLERANCE SHARE EXCHANGE RATIO 75,00,000 10,00,000 65,00,000 1,00,000 65 PER SHARE 10,00,000/65 = 15,385 SHARES 50,000/15385 = 3.25 SHARES OF FIRM B, 1 SHARE IN FIRM A 1:3.25

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

ACCOUNTING FOR AMALGAMATION

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

OTHER ACCOUNTING TREATMENTS

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

INCOME TAX RELATED ISSUES FOR AMALGAMATION

CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B) 1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO. 2. 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. NO. OF SHARES OF Altd CO. 1,00,000 NO. OF SHARES HELD BY Bltd IN Altd IS 20,000 NOMINAL VALUE OF SHARE IS RS.10 ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 = 60,000 TO BE THE SHARE HOLDES OF B CO. NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHARE HOLDERS

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

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

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. CBDT

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)

? 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.& Have accumulated losses & unabsorbed depreciation ? If c is not an Indian co.

OTHER TAX BENEFITS

1.
2. 3. 4. 5. 6. 7.

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

Tax Concession To Share Holders Of Amalgamating Co.

No capital gain tax provided new co. Is a Indian co.& Shareholders are acquired everything in shares

EXERCISE
PARTICULARS
EAT

CO. A
1,40,000

CO. B
37,500

NO. OF SHARES 20,000

EPS 7

7,500
5 40 8

MARKET PRICE 70 P/E RATIO 10

 Co. A is acquiring co. B Exchanging one share for every 1.5 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. ? A is a foreign co. ? A merges with T & formed a new co. AT ltd ? What are the tax planning required before & after merger