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TERM PAPER OF MGT-333



Topic:-MERSERS & ACCUISITIOM












Submitted to Submitted by

Ms. Shikha Dhawan Brishabh singh
Reg no-7450070146
Roll no-34
Section -RA17B1


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. Contents .




Topic Page No.


ntroduction to Mergers and Acquisition.

3-6
Purpose of merger and acquisition.

6-9
Types of Mergers.

9-11
Advantages of mergers and takeovers.

11-13
Consideration of Merger and Takeover.

13-17
Reverse Merger.

18-22
Procedure of Merger and Acquisition.

22-25
Why Mergers fail?.

25-25



Some case on the merger and acquisition 26-30

Ten biggest Mergers and Acquisitions deals in ndia 30-30

Conclusion 31-31
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ntroduction to Mergers and Acquisition

We have been learning about the companies coming together to Irom another company and
companies taking over the existing companies to expand their business.

With recession taking toll oI many Indian businesses and the Ieeling oI insecurity surging over
our businessmen, it is not surprising when we hear about the immense numbers oI corporate
restructurings taking place, especially in the last couple oI years. Several companies have been taken
over and several have undergone internal restructuring, whereas certain companies in the same Iield oI
business have Iound it beneIicial to merge together into one company.

In this context, it would be essential Ior us to understand what corporate restructuring and
mergers and acquisitions are all about.

All our daily newspapers are Iilled with cases oI mergers, acquisitions, spin-oIIs, tender oIIers, &
other Iorms oI corporate restructuring. Thus important issues both Ior business decision and public policy
Iormulation have been raised. No Iirm is regarded saIe Irom a takeover possibility. On the more positive
side Mergers & Acquisition`s may be critical Ior the healthy expansion and growth oI the Iirm. SuccessIul
entry into new product and geographical markets may require Mergers & Acquisition`s at some stage in
the Iirm's development. SuccessIul competition in international markets may depend on capabilities
obtained in a timely and eIIicient Iashion through Mergers & Acquisition's. Many have argued that
mergers increase value and eIIiciency and move resources to their highest and best uses, thereby
increasing shareholder value. .

To opt Ior a merger or not is a complex aIIair, especially in terms oI the technicalities involved.
We have discussed almost all Iactors that the management may have to look into beIore going Ior merger.
Considerable amount oI brainstorming would be required by the managements to reach a conclusion. e.g.
a due diligence report would clearly identiIy the status oI the company in respect oI the Iinancial position
along with the networth and pending legal matters and details about various contingent liabilities.
Decision has to be taken aIter having discussed the pros & cons oI the proposed merger & the impact oI
the same on the business, administrative costs beneIits, addition to shareholders' value, tax implications
including stamp duty and last but not the least also on the employees oI the TransIeror or TransIeree
Company.



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Merger:

Merger is deIined as combination oI two or more companies into a single company where one
survives and the others lose their corporate existence. The survivor acquires all the assets as well as
liabilities oI the merged company or companies. Generally, the surviving company is the buyer, which
retains its identity, and the extinguished company is the seller.

Merger is also deIined as amalgamation. Merger is the Iusion oI two or more existing companies.
All assets, liabilities and the stock oI one company stand transIerred to transIeree company in
consideration oI payment in the Iorm oI:

O quity shares in the transIeree company,
O Debentures in the transIeree company,
O Cash, or
O A mix oI the above modes.

Acquisition:

Acquisition in general sense is acquiring the ownership in the property. In the context oI business
combinations, an acquisition is the purchase by one company oI a controlling interest in the share capital
oI another existing company.

Methods of Acquisition:

An acquisition may be aIIected by

(a) agreement with the persons holding maiority interest in the company management like members
oI the board or maior shareholders commanding maiority oI voting power;
(b) purchase oI shares in open market;
(c) to make takeover oIIer to the general body oI shareholders;
(d) purchase oI new shares by private treaty;
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(e) Acquisition oI share capital through the Iollowing Iorms oI considerations viz. means oI cash,
issuance oI loan capital, or insurance oI share capital.

Takeover:

A takeover` is acquisition and both the terms are used interchangeably.
Takeover diIIers Irom merger in approach to business combinations i.e. the process oI takeover,
transaction involved in takeover, determination oI share exchange or cash price and the IulIillment oI
goals oI combination all are diIIerent in takeovers than in mergers. For example, process oI takeover is
unilateral and the oIIeror company decides about the maximum price. Time taken in completion oI
transaction is less in takeover than in mergers, top management oI the oIIeree company being more co-
operative.

De-merger or corporate splits or division:

De-merger or split or divisions oI a company are the synonymous terms signiIying a movement in
the company.


What will it take to succeed?

Funds are an obvious requirement Ior would-be buyers. Raising them may not be a problem Ior
multinationals able to tap resources at home, but Ior local companies, Iinance is likely to be the single
biggest obstacle to an acquisition. Financial institution in some Asian markets are banned Irom leading
Ior takeovers, and debt markets are small and illiquid, deterring investors who Iear that they might not be
able to sell their holdings at a later date. The credit squeezes and the depressed state oI many Asian equity
markets have only made an already diIIicult situation worse. Funds apart, a successIul Mergers &
Acquisition growth strategy must be supported by three capabilities: deep local networks, the abilities to
manage uncertainty, and the skill to distinguish worthwhile targets. Companies that rush in without them
are likely to be stumble.

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Assess target quality:

To say that a company should be worth the price a buyer pays is to state the obvious. But
assessing companies in Asia can be Iraught with problems, and several deals have gone badly wrong
because buyers Iailed to dig deeply enough. The attraction oI knockdown price tag may tempt companies
to skip crucial checks. Concealed high debt levels and deIerred contingent liabilities have resulted in large
deals destroying value. But in other cases, where buyers have undertaken detailed due diligence, they
have been able to negotiate prices as low as halI oI the initial Iigure.

Due diligence can be diIIicult because disclosure practices are poor and companies oIten
lack the inIormation buyer need. Moreover, most Asian conglomerates still do not present
consolidated Iinancial statements, leaving the possibilities that the sales and the proIit Iigures
might be bloated by transactions between aIIiliated companies. The Iinancial records that are
available are oIten unreliable, with diIIerent proiections made by diIIerent departments within
the same company, and diIIerent proiections made Ior diIIerent audiences. Banks and investors,
naturally, are likely to be shown optimistic Iorecasts.


Purpose of Mergers and Acquisition

The purpose Ior an oIIeror company Ior acquiring another company shall be reIlected in
the corporate obiectives. It has to decide the speciIic obiectives to be achieved through
acquisition. The basic purpose oI merger or business combination is to achieve Iaster growth oI
the corporate business. Faster growth may be had through product improvement and competitive
position.

Other possible purposes Ior acquisition are short listed below: -

(1)Procurement of supplies:

1. to saIeguard the source oI supplies oI raw materials or intermediary product;
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. to obtain economies oI purchase in the Iorm oI discount, savings in transportation costs, overhead
costs in buying department, etc.;
3. to share the beneIits oI suppliers economies by standardizing the materials.

(2)Revamping production facilities:

1. to achieve economies oI scale by amalgamating production Iacilities through more intensive
utilization oI plant and resources;
. to standardize product speciIications, improvement oI quality oI product, expanding
3. market and aiming at consumers satisIaction through strengthening aIter sale
4. services;
5. to obtain improved production technology and know-how Irom the oIIeree company
6. to reduce cost, improve quality and produce competitive products to retain and
7. improve market share.

(3) Market expansion and strategy:

1. to eliminate competition and protect existing market;
. to obtain a new market outlets in possession oI the oIIeree;
3. to obtain new product Ior diversiIication or substitution oI existing products and to enhance the
product range;
4. strengthening retain outlets and sale the goods to rationalize distribution;
5. to reduce advertising cost and improve public image oI the oIIeree company;
6. strategic control oI patents and copyrights.

(4) Financial strength:

1. to improve liquidity and have direct access to cash resource;
. to dispose oI surplus and outdated assets Ior cash out oI combined enterprise;
3. to enhance gearing capacity, borrow on better strength and the greater assets backing;
4. to avail tax beneIits;
5. to improve !S (arning !er Share).


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(5) General gains:

1. to improve its own image and attract superior managerial talents to manage its aIIairs;
. to oIIer better satisIaction to consumers or users oI the product.

(6) Own developmental plans:

The purpose oI acquisition is backed by the oIIeror company`s own developmental plans.
A company thinks in terms oI acquiring the other company only when it has arrived at its own
development plan to expand its operation having examined its own internal strength where it
might not have any problem oI taxation, accounting, valuation, etc. but might Ieel resource
constraints with limitations oI Iunds and lack oI skill managerial personnel`s. It has to aim at
suitable combination where it could have opportunities to supplement its Iunds by issuance oI
securities, secure additional Iinancial Iacilities, eliminate competition and strengthen its market
position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic obiectives through
alternative type oI combinations which may be horizontal, vertical, product expansion,
market extensional or other speciIied unrelated obiectives depending upon the corporate
strategies. Thus, various types oI combinations distinct with each other in nature are
adopted to pursue this obiective like vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees oI cooperative spirit despite
competitiveness in providing rescues to each other Irom hostile takeovers and cultivate situations
oI collaborations sharing goodwill oI each other to achieve perIormance heights through business
combinations. The combining corporates aim at circular combinations by pursuing this obiective.

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(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level oI integration between the two
combining business houses. Such integration could be operational or Iinancial. This gives birth to
conglomerate combinations. The purpose and the requirements oI the oIIeror company go a long
way in selecting a suitable partner Ior merger or acquisition in business combinations.


Types of mergers
Merger or acquisition depends upon the purpose oI the oIIeror company it wants to achieve.
Based on the oIIerors` obiectives proIile, combinations could be vertical, horizontal, circular and
conglomeratic as precisely described below with reIerence to the purpose in view oI the oIIeror company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger with that company to expand
espousing backward integration to assimilate the resources oI supply and Iorward integration towards
market outlets. The acquiring company through merger oI another unit attempts on reduction oI
inventories oI raw material and Iinished goods, implements its production plans as per the obiectives
and economizes on working capital investments. In other words, in vertical combinations, the
merging undertaking would be either a supplier or a buyer using its product as intermediary material
Ior Iinal production.

The Iollowing main beneIits accrue Irom the vertical combination to the acquirer company i.e.
(1) it gains a strong position because oI imperIect market oI the intermediary products, scarcity oI
resources and purchased products;
() has control over products speciIications.



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(B) Horizontal combination:

It is a merger oI two competing Iirms which are at the same stage oI industrial process. The acquiring
Iirm belongs to the same industry as the target company. The mail purpose oI such mergers is to
obtain economies oI scale in production by eliminating duplication oI Iacilities and the operations and
broadening the product line, reduction in investment in working capital, elimination in competition
concentration in product, reduction in advertising costs, increase in market segments and exercise
better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common distribution and research
Iacilities to obtain economies by elimination oI cost on duplication and promoting market
enlargement. The acquiring company obtains beneIits in the Iorm oI economies oI resource sharing
and diversiIication.

(D) Conglomerate combination:

It is amalgamation oI two companies engaged in unrelated industries like DCM and Modi Industries.
The basic purpose oI such amalgamations remains utilization oI Iinancial resources and enlarges debt
capacity through re-organizing their Iinancial structure so as to service the shareholders by increased
leveraging and !S, lowering average cost oI capital and thereby raising present worth oI the
outstanding shares. Merger enhances the overall stability oI the acquirer company and creates balance
in the company`s total portIolio oI diverse products and production processes.






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Advantages of mergers and takeovers
Mergers and takeovers are permanent Iorm oI combinations which vest in management complete
control and provide centralized administration which are not available in combinations oI
holding company and its partly owned subsidiary. Shareholders in the selling company gain Irom
the merger and takeovers as the premium oIIered to induce acceptance oI the merger or takeover
oIIers much more price than the book value oI shares. Shareholders in the buying company gain
in the long run with the growth oI the company not only due to synergy but also due to 'boots
trapping earnings¨.

Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support oI shareholders, manager`s ad
promoters oI the combing companies. The Iactors, which motivate the shareholders and
managers to lend support to these combinations and the resultant consequences they have to
bear, are brieIly noted below based on the research work by various scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subiect to merger should enhance in
value. The sale oI shares Irom one company`s shareholders to another and holding investment in
shares should give rise to greater values i.e. the opportunity gains in alternative investments.
Shareholders may gain Irom merger in diIIerent ways viz. Irom the gains and achievements oI
the company i.e. through
(a) realization oI monopoly proIits;
(b) economies oI scales;
(c) diversiIication oI product line;
(d) acquisition oI human assets and other resources not available otherwise;
(e) better investment opportunity in combinations.

One or more Ieatures would generally be available in each merger where shareholders
may have attraction and Iavour merger.

(2)From the standpoint of managers

Managers are concerned with improving operations oI the company, managing the aIIairs
oI the company eIIectively Ior all round gains and growth oI the company which will provide
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them better deals in raising their status, perks and Iringe beneIits. Mergers where all these things
are the guaranteed outcome get support Irom the managers. At the same time, where managers
have Iear oI displacement at the hands oI new management in amalgamated company and also
resultant depreciation Irom the merger then support Irom them becomes diIIicult.

(3) Promoter`s gains

Mergers do oIIer to company promoters the advantage oI increasing the size oI their
company and the Iinancial structure and strength. They can convert a closely held and private
limited company into a public company without contributing much wealth and without losing
control.

(4) Benefits to general public

Impact oI mergers on general public could be viewed as aspect oI beneIits and costs to:
(a) Consumer oI the product or services;
(b) Workers oI the companies under combination;
(c) General public aIIected in general having not been user or consumer or the
worker in the companies under merger plan.
(a) Consumers

The economic gains realized Irom mergers are passed on to consumers in the Iorm oI
lower prices and better quality oI the product which directly raise their standard oI living
and quality oI liIe. The balance oI beneIits in Iavour oI consumers will depend upon the
Iact whether or not the mergers increase or decrease competitive economic and
productive activity which directly aIIects the degree oI welIare oI the consumers through
changes in price level, quality oI products, aIter sales service, etc.

(b) Workers community

The merger or acquisition oI a company by a conglomerate or other acquiring company
may have the eIIect on both the sides oI increasing the welIare in the Iorm oI purchasing
power and other miseries oI liIe. Two sides oI the impact as discussed by the researchers
and academicians are: firstly. mergers with cash payment to shareholders provide
opportunities Ior them to invest this money in other companies which will generate
Iurther employment and growth to upliIt oI the economy in general. Secondly. any
restrictions placed on such mergers will decrease the growth and investment activity with
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corresponding decrease in employment. Both workers and communities will suIIer on
lessening iob opportunities, preventing the distribution oI beneIits resulting Irom
diversiIication oI production activity.

(c) General public

Mergers result into centralized concentration oI power. conomic power is to be
understood as the ability to control prices and industries output as monopolists. Such
monopolists aIIect social and political environment to tilt everything in their Iavour to
maintain their power ad expand their business empire. These advances result into
economic exploitation. But in a Iree economy a monopolist does not stay Ior a longer
period as other companies enter into the Iield to reap the beneIits oI higher prices set in
by the monopolist. This enIorces competition in the market as consumers are Iree to
substitute the alternative products. ThereIore, it is diIIicult to generalize that mergers
aIIect the welIare oI general public adversely or Iavorably. very merger oI two or more
companies has to be viewed Irom diIIerent angles in the business practices which protects
the interest oI the shareholders in the merging company and also serves the national
purpose to add to the welIare oI the employees, consumers and does not create hindrance
in administration oI the Government polices.



Consideration of Merger and Takeover

Mergers and takeovers are two diIIerent approaches to business combinations. Mergers are
pursued under the Companies Act, 1956 vide sections 391/394 thereoI or may be envisaged
under the provisions oI Income-tax Act, 1961 or arranged through BIFR under the Sick
Industrial Companies Act, 1985 whereas, takeovers Iall solely under the regulatory Iramework oI
the SBI Regulations, 1997.

Minority shareholders rights

SBI regulations do not provide insight in the event oI minority shareholders not agreeing to the
takeover oIIer. However section 395 oI the Companies Act, 1956 provides Ior the acquisition oI shares oI
the shareholders. According to section 395 oI the Companies Act, iI the oIIerer has acquired at least 90°
in value oI those shares may give notice to the non-accepting shareholders oI the intention oI buying their
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shares. The 90° acceptance level shall not include the share held by the oIIerer or it`s associates. The
procedure laid down in this section is brieIly noted below.

1. In order to buy the shares oI non-accepting shareholders the oIIerer must have reached the 90°
acceptance level within 4 months oI the date oI the oIIer, and notice must have been served on
those shareholders within months oI reaching the 90° level.

. The notice to the non-accepting shareholders must be in a prescribed manner. A copy oI a notice
and a statutory declaration by the oIIerer (or, iI the oIIerer is a company, by a director) in the
prescribed Iorm conIirming that the conditions Ior giving the notice have been satisIied must be
sent to the target.

3. Once the notice has been given, the oIIerer is entitled and bound to acquire the outstanding shares
on the terms oI the oIIer.

4. II the terms oI the oIIer give the shareholders a choice oI consideration, the notice must give
particulars oI options available and inIorm the shareholders that he has six weeks Irom the date oI
the notice to indicate his choice oI consideration in writing.

5. At the end oI the six weeks Irom the date oI the notice to the non-accepting shareholders the
oIIerer must immediately send a copy oI notice to the target and pay or transIer to the target the
consideration Ior all the shares to which the notice relates. Stock transIer Iorms executed on
behalI oI the non-accepting shareholders by a person appointed by the oIIerer must also be sent.
Once the company has received stock transIer Iorms it must register the oIIerer as the holder oI
the shares.

6. The consideration money, which is received by the target, should be held on trust Ior the person
entitled to shares in respect oI which the sum was received.

7. Alternatively, iI the oIIerer does not wish to buy the non-accepting shareholder`s shares, it must
still within one month oI company reaching the 90° acceptance level give such shareholders
notice in the prescribed manner oI the rights that are exercisable by them to require the oIIerer to
acquire their shares. The notice must state that the oIIer is still open Ior acceptance and speciIy a
date aIter which the right may not be exercised, which may not be less than 3 months Irom the
end oI the time within which the oIIer can be accepted. II the oIIerer Iails to send such notice it
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(and it`s oIIicers who are in deIault) are liable to a Iine unless it or they took all reasonable steps
to secure compliance.

8. II the shareholder exercises his rights to require the oIIerer to purchase his shares the oIIerer is
entitled and bound to do so on the terms oI the oIIer or on such other terms as may be agreed. II a
choice oI consideration was originally oIIered, the shareholder may indicate his choice when
requiring the oIIerer to acquire his shares. The notice given to shareholder will speciIy the choice
oI consideration and which consideration should apply in deIault oI an election.
9. On application made by an happy shareholder within six weeks Irom the date on which the
original notice was given, the court may make an order preventing the oIIerer Irom acquiring the
shares or an order speciIying terms oI acquisition diIIering Irom those oI the oIIer or make an
order setting out the terms on which the shares must be acquired.

In certain circumstances, where the takeover oIIer has not been accepted by the required 90° in
value oI the share to which oIIer relates the court may, on application oI the oIIerer, make an order
authorizing it to give notice under the Companies Act, 1985, section 49. It will do this iI it is satisIied
that:

a. the oIIerer has aIter reasonable enquiry been unable to trace one or more shareholders to whom
the oIIer relates;
b. the shares which the oIIerer has acquired or contracted to acquire by virtue oI acceptance oI the
oIIerer, together with the shares held by untraceable shareholders, amount to not less than 90° in
value oI the shares subiect to the oIIer; and
c. the consideration oIIered is Iair and reasonable.

The court will not make such an order unless it considers that it is iust and equitable to do so,
having regard, in particular, to the number oI shareholder who has been traced who did accept the oIIer.

Alternative modes of acquisition

The terms used in business combinations carry generally synonymous connotations and
can be used interchangeably. All the diIIerent terms carry one single meaning oI 'merger¨ but
each term cannot be given equal treatment in the discussion because law has created a dividing
line between take-over` and acquisitions by way oI merger, amalgamation or reconstruction.
!articularly the takeover Regulations Ior substantial acquisition oI shares and takeovers known
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as SBI (Substantial Acquisition oI Shares and Takeovers) Regulations, 1997 vide section 3
excludes any attempt oI merger done by way oI any one or more oI the Iollowing modes:

(a) by allotment in pursuant oI an application made by the shareholders Ior right issue
and under a public issue;

(b)preIerential allotment made in pursuance oI a resolution passed under section 81(1A)
oI the Companies Act, 1956;

(c) allotment to the underwriters pursuant to underwriters agreements;

(d)inter-se-transIer oI shares amongst group, companies, relatives, Indian promoters and
Foreign collaborators who are shareholders/promoters;

(e) acquisition oI shares in the ordinary course oI business, by registered stock brokers,
public Iinancial institutions and banks on own account or as pledges;

(I) acquisition oI shares by way oI transmission on succession or inheritance;

(g)acquisition oI shares by government companies and statutory corporations;

(h)transIer oI shares Irom state level Iinancial institutions to co-promoters in pursuance
to agreements between them;

(i) acquisition oI shares in pursuance to rehabilitation schemes under Sick Industrial
Companies (Special !rovisions) Act, 1985 or schemes oI arrangements, mergers,
amalgamation, De-merger, etc. under the Companies Act, 1956 or any other law or
regulation, Indian or Foreign;

(i) acquisition oI shares oI company whose shares are not listed on any stock exchange.
However, this exemption in not available iI the said acquisition results into control oI
a listed company;

(k)such other cases as may be exempted Irom the applicability oI Chapter III oI SBI
regulations by SBI.

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The basic logic behind substantial disclosure oI takeover oI a company through
acquisition oI shares is that the common investors and shareholders should be made aware oI the
larger Iinancial stake in the company oI the person who is acquiring such company`s shares. The
main obiective oI these Regulations is to provide greater transparency in the acquisition oI shares
and the takeovers oI companies through a system oI disclosure oI inIormation.

Escrow account

To ensure that the acquirer shall pay the shareholders the agreed amount in redemption oI his
promise to acquire their shares, it is a mandatory requirement to open escrow account and deposit therein
the required amount, which will serve as security Ior perIormance oI obligation.

The scrow amount shall be calculated as per the manner laid down in regulation 8(). Accordingly:
For oIIers which are subiect to a minimum level oI acceptance, and the acquirer does want to
acquire a minimum oI 0°, then 50° oI the consideration payable under the public oIIer in cash shall be
deposited in the scrow account.

Payment of consideration

Consideration may be payable in cash or by exchange oI securities. Where it is payable in cash
the acquirer is required to pay the amount oI consideration within 1 days Irom the date oI closure oI the
oIIer. For this purpose he is required to open special account with the bankers to an issue (registered with
SBI) and deposit therein 90° oI the amount lying in the scrow Account, iI any. He should make the
entire amount due and payable to shareholders as consideration. He can transIer the Iunds Irom scrow
account Ior such payment. Where the consideration is payable in exchange oI securities, the acquirer shall
ensure that securities are actually issued and dispatched to shareholders in terms oI regulation 9 oI SBI
Takeover Regulations.

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Reverse Merger

Generally, a company with the track record should have a less proIit earning or loss making but
viable company amalgamated with it to have beneIits oI economies oI scale oI production and marketing
network, etc. As a consequence oI this merger the proIit earning company survives and the loss making
company extinguishes its existence. But in many cases, the sick company`s survival becomes more
important Ior many strategic reasons and to conserve community interest. The law provides
encouragement through tax relieI Ior the companies that are proIitable but get merged with the loss
making companies. InIact this type oI merger is not a normal or a routine merger. It is, thereIore, called as
a Reverse Merger.

The allurement Ior such mergers is the tax savings under the Income-tax Act, 1961. Section 7A
oI the Act ensures the tax relieI which becomes attractive Ior amalgamations oI sick company with a
healthy and proIitable company to take the advantage oI carry Iorward losses. Taking advantage oI the
provisions oI section 7A through merger or amalgamation is known as reverse merger, which gives
survival to the sick unit by merging it with the healthy unit. The healthy unit extincts loosing its name and
the surviving sick company retains its name. Companies to take advantage oI the section Iollow this route
but aIter a year or so change their names to the one oI the healthy company as were done amongst others
by Kirloskar !neumatics Ltd. The company merged with Kirloskar Tractors Ltd, a sick unit and initially
lost its name but aIter one year it changed its name as was prior to merger.

Reverse Merger under Tax Laws

Section 7A oI the Income-tax Act, 1961 is meant to Iacilitate reiuvenation oI sick industrial
undertaking by merging with healthier industrial companies having incentive in the Iorm oI tax savings
designed with the sole intention to beneIit the general public through continued productive activity,
increased employment avenues and generation oI revenue.
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(1) Background

&nder the existing provisions oI the Income-tax Act, so much oI the business loss oI a year as
cannot be set oII by him against the proIits oI the Iollowing year Irom any business carried on by him. II
the loss cannot be so wholly set oII, the amount not so set oII can be carried Iorward to the next Iollowing
year and so on, up to a maximum oI eight assessment years immediately succeeding the assessment year
Ior which the loss was Iirst computed. The beneIit oI carry Iorward and set oII oI business loss is,
however, not available unless the business in which the loss was originally sustained is continued to be
carried on by the assessee. Further, only the assessee who incurred the loss by his predecessor. Similarly,
iI a business carried on one assessee is taken over by another, the unabsorbed depreciation allowance due
to the predecessor in business and set oII against his proIits in subsequent years. In view oI these
provisions, the accumulated business loss and unabsorbed depreciation allowance oI a company which
merges with another company under a scheme oI amalgamation cannot be carried Iorward and set oII by
the latter company against its proIits.

The very purpose oI section 7A is to revive the business oI an undertaking, which is Iinancially
non-viable and to bring it back to health. Sickness among industrial undertakings is a matter oI grave
national concern. xperience has shown that taking over oI such units by Government is not always the
most satisIactory or the most economical solution. The more eIIective course suggested was to Iacilitate
the amalgamation oI sick industrial units with sound ones by providing incentives and removing
impediments in the way oI such amalgamation. To save the Government Irom social costs in terms oI loss
oI production and employment and to relieve the Government oI the uneconomical burden oI taking over
and running sick industrial units is one oI the motivating Iactors in introducing section 7A. To achieve
this obiective so as to Iacilitate the merger oI sick industrial units with sound one, the general rule oI carry
Iorward and set oII oI accumulated losses and unabsorbed depreciation allowance oI amalgamating
company by the amalgamated company was statutorily related. By a deeming Iiction, the accumulated
loss or the unabsorbed depreciation oI the amalgamating is treated to be the loss or, as the case may be,
allowance Ior depreciation oI the amalgamated company Ior the previous year in which amalgamation
was eIIected.

There are three statutory conditions which are to be IulIilled under section 7A(1) Ior the beneIits
prescribed therein to be available to the amalgamated company, namely
(i) The amalgamating company was, immediately beIore such amalgamation, Iinancially non-viable
by reason oI its liabilities, losses and other relevant Iactors;
(ii) The amalgamation is in the public interest;
(iii) Such other conditions as the Central Government may by notiIication in the OIIicial Gazette,
speciIy, to ensure that the beneIit under this section is restricted to amalgamation, which would
Iacilitate the rehabilitation or revival oI the business oI amalgamating company.
20


(2)Reverse merger

As it can be now understood, a reverse merger is a method adopted to avoid the stringent
provisions oI Section 7A but still be able to claim all the losses oI the sick unit. For doing so, in case oI a
reverse merger, instead oI a healthy unit taking over a sick unit, the sick unit takes over/ amalgamates
with the healthy unit.

High Court discussed 3 tests Ior reverse merger:
a. assets oI transIeror company being greater than transIeree company;
b. equity capital to be issued by the transIeree company pursuant to the acquisition
exceeding its original issued capital, and
c. the change oI control in the transIeree company clearly indicated that the present
arrangement was an arrangement, which was a typical illustration oI takeover by reverse
bid.

Court held that 57ime facie the scheme oI merging a prosperous unit with a sick unit could not be
said to be oIIending the provisions oI section 7A oI the Income Tax Act, 1961 since the obiect
underlying this provision was to Iacilitate the merger oI sick industrial unit with a sound one.

(3)Salient features of reverse merger under section 72A

1. Amalgamation should be between companies and none oI them should be a Iirm oI partners or
sole-proprietor. In other words, partnership Iirm or sole-proprietary concerns cannot get the
beneIit oI tax relieI under section 7A merger.

. The companies entering into amalgamation should be engaged in either industrial activity or
shipping business. In other words, the tax relieI under section 7A would not be made
available to companies engaged in trading activities or services.

3. AIter amalgamation the 'sick¨ or 'Iinancially unviable company¨ shall survive and other
income generating company shall extinct. In other words essential condition to be IulIilled is
that the acquiring company will be able to revive or rehabilitate having consumed the healthy
company.
21


4. One oI the merger partner should be Iinancially unviable and have accumulated losses to
qualiIy Ior the merger and the other merger partner should be proIit earning so that tax relieI to
the maximum extent could be had. In other words the company which is Iinancially unviable
should be technically sound and Ieasible, commercially and economically viable but Iinancially
weak because oI Iinancial stringency or lack oI Iinancial recourses or its liabilities have
exceeded its assets and is on the brink oI insolvency. The second requisite qualiIication
associated with Iinancial unavailability is the accumulation oI losses Ior past Iew years.

5. Amalgamation should be in the public interest i.e. it should not be against public policy, should
not deIeat basic tenets oI law, and must saIeguard the interest oI employees, consumers,
creditors, customers and shareholders apart Irom promoters oI company through the revival oI
the company.

6. The merger must result into Iollowing beneIit to the amalgamated company i.e. (a) carry
Iorward oI accumulated business loses oI the amalgamated company; (b) carry Iorward oI
unabsorbed depreciation oI the amalgamating company and (c) accumulated loss would be
allowed to be carried Iorward set oI Ior eight subsequent years.

7. Accumulated loss should arise Irom '!roIits and Gains Irom business or proIession¨ and not be
loss under the head 'Capital Gains¨ or 'Speculation¨.

8. For qualiIying carry Iorward loss, the provisions oI section 7 should have not been
contravened.

9. Similarly Ior carry Iorward oI unabsorbed depreciation the conditions oI section 3 should not
have been violated.

10. SpeciIied authority has to be satisIied oI the eligibility oI the company Ior the relieI under
section 7 oI the Income Tax Act. It is only on the recommendations oI the speciIied authority
that Central Government may allow the relieI.

11. The company should make an application to a 'speciIied authority¨ Ior requisite
recommendation oI the case to the Central Government Ior granting or allowing the relieI.

22

1. !rocedure Ior merger or amalgamation to be Iollowed in such cases is same as in any other
cases. SpeciIied Authority makes recommendation aIter taking into consideration the court`s
direction on scheme oI amalgamation.

Procedure for Takeoverand Acquisition

Public announcement:

To make a public announcement an acquirer shall Iollow the Iollowing procedure:

1. Appointment of merchant banker:

The acquirer shall appoint a merchant banker registered as category I with SBI to
advise him on the acquisition and to make a public announcement oI oIIer on his behalI.

2. &se of media for announcement:

Þubllc announcemenL shall be made aL leasL ln one naLlonal Lnallsh dallv one Plndl dallv and
one realonal lanauaae dallv newspaper of LhaL place where Lhe shares of LhaL companv are llsLed and
LradedŦ

3. Timings of announcement:

!ublic announcement should be made within Iour days oI Iinalization oI negotiations or
entering into any agreement or memorandum oI understanding to acquire the shares or the voting
rights.

23

4. Contents of announcement:

!ublic announcement oI oIIer is mandatory as required under the SBI Regulations.
ThereIore, it is required that it should be prepared showing therein the Iollowing inIormation:
(1) paid up share capital oI the target company, the number oI Iully paid up and
partially paid up shares.

() Total number and percentage oI shares proposed to be acquired Irom public
subiect to minimum as speciIied in the sub-regulation (1) oI Regulation 1
that is:
a) The public oIIer oI minimum 0° oI voting capital oI the company to the
shareholders;
b) The public oIIer by a raider shall not be less than 10° but more than 51°
oI shares oI voting rights. Additional shares can be had ( ° oI voting
rights in any year.

(3) The minimum oIIer price Ior each Iully paid up or partly paid up share;

(4) Mode oI payment oI consideration;

(5) The identity oI the acquirer and in case the acquirer is a company, the identity
oI the promoters and, or the persons having control over such company and
the group, iI any, to which the company belong;

(6) The existing holding, iI any, oI the acquirer in the shares oI the target
company, including holding oI persons acting in concert with him;

(7) Salient Ieatures oI the agreement, iI any, such as the date, the name oI the
seller, the price at which the shares are being acquired, the manner oI
payment oI the consideration and the number and percentage oI shares in
respect oI which the acquirer has entered into the agreement to acquirer the
shares or the consideration, monetary or otherwise, Ior the acquisition oI
control over the target company, as the case may be;

24

(8) The highest and the average paid by the acquirer or persons acting in concert
with him Ior acquisition, iI any, oI shares oI the target company made by him
during the twelve month period prior to the date oI the public announcement;

(9) Obiects and purpose oI the acquisition oI the shares and the Iuture plans oI
the acquirer Ior the target company, including disclosers whether the acquirer
proposes to dispose oI or otherwise encumber any assets oI the target
company:
!rovided that where the Iuture plans are set out, the public announcement
shall also set out how the acquirers propose to implement such Iuture plans;

(10) The speciIied date` as mentioned in regulation 19;

(11) The date by which individual letters oI oIIer would be posted to each oI the
shareholders;

(1) The date oI opening and closure oI the oIIer and the manner in which and the
date by which the acceptance or reiection oI the oIIer would be
communicated to the share holders;

(13) The date by which the payment oI consideration would be made Ior the
shares in respect oI which the oIIer has been accepted;

(14) Disclosure to the eIIect that Iirm arrangement Ior Iinancial resources required
to implement the oIIer is already in place, including the details regarding the
sources oI the Iunds whether domestic i.e. Irom banks, Iinancial institutions,
or otherwise or Ioreign i.e. Irom Non-resident Indians or otherwise;

(15) !rovision Ior acceptance oI the oIIer by person who own the shares but are
not the registered holders oI such shares;

(16) Statutory approvals required to obtained Ior the purpose oI acquiring the
shares under the Companies Act, 1956, the Monopolies and Restrictive Trade
!ractices Act, 1973, and/or any other applicable laws;
23


(17) Approvals oI banks or Iinancial institutions required, iI any;

(18) Whether the oIIer is subiect to a minimum level oI acceptances Irom the
shareholders; and

(19) Such other inIormation as is essential Iort the shareholders to make an
inIormed design in regard to the oIIer.


Why Mergers fail?
Revenue deserves more attention in mergers; indeed, a Iailure to Iocus on this important Iactor
may explain why so many mergers don`t pay oII. Too many companies lose their revenue
momentum as they concentrate on cost synergies or Iail to Iocus on post merger growth in a
systematic manner. Yet in the end, halted growth hurts the market perIormance oI a company Iar
more than does a Iailure to nail costs.

Some case on the merger and acquisition
CASE-1
GlaxoSmithKline Pharmaceuticals Limited. ndia (Merger Success).

Mumbai -- Glaxo India Limited and SmithKline Beecham !harmaceuticals (India)
Limited have legally merged to Iorm GlaxoSmithKline !harmaceuticals Limited in India (GSK).
It may be recalled here that the global merger oI the two companies came into eIIect in
December 000.

Commenting on the prospects oI GSK in India, Vice Chairman and Managing Director,
GlaxoSmithKline !harmaceuticals Limited, India, Mr. V Thyagaraian said, 'The two
companies that have merged to become GlaxoSmithKline in India have a great heritage a Iact
that gets reIlected in their products with strong brand equity.¨ He added, 'The two companies
have a long history oI commitment to India and enioy a very good reputation with doctors,
26

patients, regulatory authorities and trade bodies. At GSK it would be our endeavor to leverage
these strengths to Iurther consolidate our market leadership.¨

GlaxoSmithKline. ndia

The merger in India brings together two strong companies to create a Iormidable presence in the
domestic market with a market share oI about 7 per cent.

With this merger, GlaxoSmithKline has increased its reach signiIicantly in India. With a Iield
Iorce oI over ,000 employees and more than 5,000 stockiest, the company`s products are available across
the country. The enhanced basket oI products oI GlaxoSmithKline, India will help serve patients better by
strengthening the hands oI doctors by oIIering superior treatment and healthcare solutions.


GlaxoSmithKline. Worldwide

GlaxoSmithKline plc is the world`s leading research-based pharmaceutical and healthcare
company. With an R&D budget oI over £.3 billion (Rs.16, 130 crores), GlaxoSmithKline has a
powerIul research and development capability, encompassing the application oI genetics, genomics,
combinatorial chemistry and other leading edge technologies.

A truly global organization with a wide geographic spread, GlaxoSmithKline has its corporate
headquarters in the West London, &K. The company has over 100,000 employees and supplies its
products to 140 markets around the world. It has one oI the largest sales and marketing operations in the
global pharmaceutical industry.
27

CASE 2

Deutsche - Dresdner Bank (Merger Failure)

The merger that was announced on march 7, 000 between Deutsche Bank and Dresdner Bank,
Germany`s largest and the third largest bank respectively was considered as Germany`s response to
increasingly tough competition markets.

The merger was to create the most powerIul banking group in the world with the balance sheet
total oI nearly .5 trillion marks and a stock market value around 150 billion marks. This would put the
merged bank Ior ahead oI the second largest banking group, &.S. based citigroup, with a balance sheet
total amounting to 1. trillion marks and also in Iront oI the planned Japanese book mergers oI Sumitomo
and Sukura Bank with 1.7 trillion marks as the balance sheet total.

The new banking group intended to spin oII its retail banking which was not making much proIit
in both the banks and costly, extensive network oI bank branches associated with it.

The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Bank`s green
corporate color in its logo. The Iuture core business lines oI the new merged Bank included investment
Banking, asset management, where the new banking group was hoped to outside the traditionally
dominant Swiss Bank, Security and loan banking and Iinally Iinancially corporate clients ranging Irom
maior industrial corporation to the mid-scale companies.

With this kind oI merger, the new bank would have reached the no.1 position oI the &S and
create new dimensions oI aggressiveness in the international mergers.
But barely months aIter announcing their agreement to Iorm the largest bank in the world, negotiations
Ior a merger between Deutsche and Dresdner Bank Iailed on April 5, 000.

The main issue oI the Iailure was Dresdner Bank`s investment arm, Kleinwort Benson,
which the executive committee oI the bank did not want to relinquish under any circumstances.

28

In the preliminary negotiations it had been agreed that Kleinwort Benson would be integrated into
the merged bank. But Irom the outset these considerations encountered resistance Irom the asset
management division, which was Deutsche Bank`s investment arm.

Deutsche Bank`s asset management had only integrated with London`s investment group Morgan
GrenIell and the American Banker`s trust. This division alone contributed over 60° oI Deutsche Bank`s
proIit. The top people at the asset management were not ready to undertake a new process oI integration
with Kleinwort Benson. So there was only one option leIt with the Dresdner Bank i.e. to sell Kleinwort
Benson completely. However Walter, the chairman oI the Dresdner Bank was not prepared Ior this. This
led to the withdrawal oI the Dresdner Bank Irom the merger negotiations.

In economic and political circles, the planned merger was celebrated as Germany`s
advance into the premier league oI the international Iinancial markets. But the Iailure oI the
merger led to the disaster oI Germany as the Iinancial center.

CASE 3

Standard Chartered Grindlay`s (cquisition Success)

It has been a hectic year at London-based Standard Chartered Bank, going by its acquisition spree
across the Asia-!aciIic region. At the helm oI aIIairs, globally, is Rana Talwar, group CO. The
quintessential general, he knew what he was up against when he propounded his 'emerging stronger'
strategy - oI growth through consolidation oI emerging markets - Ior the turn oI the Millennium: loads oI
scepticism. The central issue: Stan Chart`s August 000 acquisition oI ANZ Grindlays Bank, Ior $1.3
billion.

veryone knows that acquisition is the easy part, merging operations is not. And recent
history has shown that banking mergers and acquisitions (MRGRS & ACQ&ISITION`s), in
particular, are not as simple to execute as uniIying balance sheets. Can Stan Chart`s proposed
merger with ANZ Grindlays be any diIIerent?

The '1' reIers to the new entity, which will be India's No 1 Ioreign bank once the integration is
completed. This should take around 18 months; till then, ANZ Grindlays will exist separately as Standard
29

Chartered Grindlays (SCG). The '' and '3' are Citibank and Hong Kong and Shanghai Banking Corp
(HSBC), India's second and third largest Ioreign banks, respectively.

That makes the new entity the world's biggest 'emerging markets' bank. By way oI strengths, it
will have treasury operations that will probably go unchallenged as the country's most sophisticated. Best
oI all, it will be a dynamic bank. Thanks to pre-merger initiatives taken by both banks, it could per- haps
boast oI the country's Iastest growing retail-banking business.

StanChart is rated highly on other parameters too. It is currently targeting global cost-savings oI
$108 million in 001, having reported a proIit-beIore-tax oI $650 million in the Iirst halI oI 000, up 31
per cent Irom the same period last year. Net revenue increased 6 per cent to $ billion Ior the same period.
Consumer banking, a typically low-proIit business which accounted Ior less than 40 per cent oI its global
operating proIits till Iour years ago, now brings in 55 per cent oI proIits. So the company's global report
card looks Iairly good.

StanChart knows it mustn't let its energy dissipate. It has been growing at a claimed annual
rate oI 5 per cent in the last two years, well over the industry average oI below 10 per cent. But
maintaining this pace won't prove easy, with Citibank and HSBC iust waiting to snip at it. The
ANZ Grindlays acquisition had happened iust beIore that, though the process started in early
1999, at Stan Chart`s headquarters in London. At Iirst, it was iust talk oI a strategic tie-up with
ANZ Grindlays, which had the same colonial British
antecedents.

But this plan was abandoned when it became evident that all decision-making would
vacillate between Melbourne and London, where the two are headquartered. By December, ANZ
had expressed a willingness to sell out, and StanChart initiated the due-diligence proceedings. It
wasn't until March that a Iew senior Indian bank executives were let into the secret. Now, it's
time to get going. A new vehicle, navigators in place, engines revving and map charted, the road
ahead is challenging and Iull oI promise. To steer clear oI trouble is the only caution advised by
industry analysts, as the two banks integrate their businesses. Sceptics don't see how StanChart
can really be greater than the sum oI its parts.

The aggression, though, is not as raw as it sounds. Behind it all is a strategy that everyone
at StanChart seems to be in synchrony with. And behind that strategy is Talwar, very much the
originator oI the oIt-repeated phrase uttered by every executive - "getting the right Iootprint".
The other key words that tend to Iind their way into every discussion are 'Iocus' and
30

'growth'.

StanChart India's net non-perIorming loans, as a percentage oI net total advances, is reported at
iust per cent Ior 1999-000. In terms oI capital adequacy too, the banks are doing Iine.
StanChart has a capital base oI 9.5 per cent oI its risk-weighted assets, while SCG has 10.9 per
cent. So, with or without a saIety net provided by the global group, the Indian operations are on
Iirm ground.

Ten biggest Mergers and Acquisitions deals in ndia

O @aLa SLeel acqulred 100Ʒ sLake ln Corus Croup on !anuarv 30ţ 2007Ŧ lL was an all cash deal whlch
cumulaLlvelv amounLed Lo $12Ŧ2 bllllonŦ
O Iodafone purchased admlnlsLerlna lnLeresL of 67Ʒ owned bv PuLchŴLssar for a LoLal worLh of
$11Ŧ1 bllllon on lebruarv 11ţ 2007Ŧ
O lndla Alumlnlum and copper alanL Plndalco lndusLrles purchased CanadaŴbased flrm novells lnc
ln lebruarv 2007Ŧ @he LoLal worLh of Lhe deal was $6ŴbllllonŦ
O lndlan pharma lndusLrv realsLered lLs flrsL blaaesL ln 2008 MƎA deal Lhrouah Lhe acqulslLlon of
!apanese pharmaceuLlcal companv uallchl Sankvo bv lndlan ma[or 8anbaxv for $4Ŧ3 bllllonŦ
O @he Cll and naLural Cas Corp purchased lmperlal Lnerav Þlc ln !anuarv 2009Ŧ @he deal amounLed
Lo $2Ŧ8 bllllon and was consldered as one of Lhe blaaesL Lakeovers afLer 96Ŧ8Ʒ of London based
companlesƌ shareholders acknowledaed Lhe buvouL proposalŦ
O ln november 2008 n@@ uoCoMoţ Lhe !apan based Lelecom flrm acqulred 26Ʒ sLake ln @aLa
@eleservlces for uSu 2Ŧ7 bllllonŦ
O lndlaƌs flnanclal lndusLrv saw Lhe meralna of Lwo promlnenL banks Ŵ PulC 8ank and CenLurlon
8ank of Þun[abŦ @he deal Look place ln lebruarv 2008 for $2Ŧ4 bllllonŦ
O @aLa MoLors acqulred !aauar and Land 8over brands from lord MoLor ln March 2008Ŧ @he deal
amounLed Lo $2Ŧ3 bllllonŦ
O 2009 saw Lhe acqulslLlon Asarco LLC bv SLerllLe lndusLrles LLdƌs for $1Ŧ8 bllllon maklna lL nlnLh
blaaesLŴever MƎA aareemenL lnvolvlna an lndlan companvŦ
O ln Mav 2007ţ Suzlon Lnerav obLalned Lhe CermanvŴbased wlnd Lurblne producer 8epowerŦ @he
10Lh laraesL ln lndlaţ Lhe MƎA deal amounLed Lo $1Ŧ7 bllllonŦ


31

Conclusion
'The phrase mergers and acquisitions reIers to the aspect oI corporate strategy, corporate
Iinance and management dealing with the buying, selling and combining oI diIIerent companies
that can aid, Iinance, or help a growing company in a given industry grow rapidly without having
to create another business entity.¨

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