Effects of

Mergers & acquisition

On
Performance of company

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 Table of contents
Sr.
title Page no.
No.
1 Introduction 2
2 Mergers: meaning, definition and what mergers actually mean 4
3 Mergers vs. acquisitions 6
4 Purpose of mergers 7
5 Reasons why companies merge 9
6 Motivation for mergers 13
7 Types of mergers 16
8 Concerns for mergers 18
9 Steps in bringing about mergers of companies 20
10 Legal procedure for mergers 22
11 Corporate merger procedure 24
12 Why mergers fail? 24
Cases of mergers 25

13 Case 1: Arcelor-Mittal merger 25

Case 2: deutsche-Dresdner bank merger 27

14 references 29

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

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

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

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender
offers, & other forms of corporate restructuring. Thus important issues both for business
decision and public policy formulation have been raised. No firm is regarded safe from a
takeover possibility. On the more positive side Mergers may be critical for the healthy
expansion and growth of the firm. Successful entry into new product and geographical
markets may require Mergers at some stage in the firm's development. Successful
competition in international markets may depend on capabilities obtained in a timely and
efficient fashion through Mergers. Many have argued that mergers increase value and
efficiency and move resources to their highest and best uses, thereby increasing shareholder
value.

To opt for a merger or not is a complex affair, especially in terms of the technicalities
involved. We have discussed almost all factors that the management may have to look into
before going for merger. Considerable amount of brainstorming would be required by the
managements to reach a conclusion. e.g. a due diligence report would clearly identify the
status of the company in respect of the financial position along with the net worth and
pending legal matters and details about various contingent liabilities. Decision has to be
taken after having discussed the pros & cons of the proposed merger & the impact of the
same on the business, administrative costs benefits, addition to shareholders' value, tax
implications including stamp duty and last but not the least also on the employees of the
Transferor or Transferee Company.

Corporate restructuring refers to a broad array of activities that expands or contracts a

firms operation or substantially modify its financial structure or bring about a significant
change in its organizational structure and internal functioning. It includes mergers,
takeovers, acquisitions, slump sales, demergers etc.

Mergers, acquisitions and restructuring have become a major force in the financial and
economic environment all over the world. Essentially an American phenomenon till mid-
1970s, they have become a dominant global business theme since then.

On the Indian scene, too, corporates are seriously looking at mergers, acquisitions and
restructuring which has indeed become the order of the day. The pace of corporate
restructuring has increased since the beginning of the liberalization era, thanks to greater
competitive pressures and a more permissive environment.

Mergers, acquisitions and restructuring evoke a great deal of public interest and perhaps
represent the most dramatic facet of corporate finance. This report discusses various facets
of mergers.

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 Mergers
Meaning

A merger is a combination of two companies where one corporation is completely absorbed

by another corporation. The less important company loses its identity and becomes part of
the more important corporation, which retains its identity.

Merger Law Definition

1. In contract law, the action of superceding all prior written or oral agreements on the
same subject matter.
2. In criminal law, the inclusion of a lesser offense within a more serious one, rather than
charging it separately, this might cause double jeopardy.
3. In litigation, the doctrine that all of the plaintiff’s prior claims are superceded by the
judgment in the case, which becomes the plaintiff’s sole means of recovering from the
defendant.

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4. The combination under modern codes of civil procedure of law and equity into a single
court.
5. In corporate law, the acquisition of one company by another, and their combination into
a single legal entity.

What Mergers actually mean:

A merger is a combination of two companies where one corporation is completely absorbed

by another corporation. It may involve absorption or consolidation.

In absorption one company acquires another company. For example, Hindustan Lever
Limited acquired Tata Oil Mills Company.

In consolidation, two or more companies combine to form a new company. For example,
Hindustan Computers Limited, Hindustan Instruments Limited, Indian Software Company
Limited, and Indian Reprographics Limited combined to form HCL Limited.

The less important company loses its identity and becomes part of the more important
corporation, which retains its identity. A merger extinguishes the merged corporation, and
the surviving corporation assumes all the rights, privileges, and liabilities of the merged
corporation. A merger is not the same as a consolidation, in which two corporations lose
their separate identities and unite to form a completely new corporation. In India mergers
are called amalgamations in legal parlance.

Federal laws regulate mergers. Regulation is based on the concern that mergers inevitably
eliminate competition between the merging firms. This concern is most acute where the
participants are direct rivals, because courts often presume that such arrangements are more
prone to restrict output and to increase prices. The fear that mergers and acquisitions reduce
competition has meant that the government carefully scrutinizes proposed mergers. On the
other hand, since the 1980s, the federal government has become less aggressive in seeking
the prevention of mergers.

Despite concerns about a lessening of competition, firms are relatively free to buy or sell
entire companies or specific parts of a company. Mergers and acquisitions often result in a
number of social benefits. Mergers can bring better management or technical skill to bear
on underused assets. They also can produce economies of scale and scope that reduce costs,
improve quality, and increase output. The possibility of a takeover can discourage company
managers from behaving in ways that fail to maximize profits. A merger can enable a
business owner to sell the firm to someone who is already familiar with the industry and
who would be in a better position to pay the highest price. The prospect of a lucrative sale
induces entrepreneurs to form new firms.

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Antitrust merger law seeks to prohibit transactions whose probable anticompetitive
consequences outweigh their likely benefits. The critical time for review usually is when
the merger is first proposed. This requires enforcement agencies and courts to forecast
market trends and future effects. Merger cases examine past events or periods to understand
each merging party's position in its market and to predict the merger's competitive impact.

Merger is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and the stock of one company stand transferred to
Transferee Company in consideration of payment in the form of:

 Equity shares in the transferee company,

 Debentures in the transferee company,
 Cash, or
 A mix of the above mode

Mergers vs. Acquisitions

These terms are commonly used interchangeably but in reality, they have slightly different
meanings. An acquisition refers to the act of one company taking over another company
and clearly becoming the new owner. From a legal point of view, the target company, the
company that is bought, no longer exists. Acquisition in general sense is acquiring the
ownership in the property. In the context of business combinations, an acquisition is the
purchase by one company of a controlling interest in the share capital of another existing
company.

A merger is a joining of two companies that are usually of about the same size and agree to
meld into one large company. In the case of a merger, both company’s stocks cease to be
traded as the new company chooses a new name and a new stock is issued in place of the
two separate company’s stock. This view of a merger is unrealistic by real world standards
as it is often the case that one company is actually bought by another while the terms of the
deal that is struck between the two allows for the company that is bought to publicize that a
merger has occurred while the company that is doing the buying backs up this claim. This
is done in order to allow the company that is bought to save face and avoid the negative
connotations that go along with selling out

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 Purpose of Mergers:
Purposes for mergers are short listed below: -

(1)Procurement of supplies:

To safeguard the source of supplies of raw materials or intermediary product; to obtain

economies of purchase in the form of discount, savings in transportation costs, overhead
costs in buying department, etc.
To share the benefits of suppliers economies by standardizing the materials

(2)Revamping production facilities:

To achieve economies of scale by amalgamating production facilities through more

intensive utilization of plant and resources;
To standardize product specifications, improvement of quality of product, expanding
market and aiming at consumers’ satisfaction through strengthening after sale services;
To obtain improved production technology and know-how from the offeree company
To reduce cost, improve quality and produce competitive products to retain and improve
market share.

(3) Market expansion and strategy:

To eliminate competition and protect existing market;

To obtain a new market outlets in possession of the offeree;
To obtain new product for diversification or substitution of existing products and to
enhance the product range;
Strengthening retain outlets and sale the goods to rationalize distribution;
To reduce advertising cost and improve public image of the offeree company;
Strategic control of patents and copyrights

(4) Financial strength:

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To improve liquidity and have direct access to cash resource;
To dispose of surplus and outdated assets for cash out of combined enterprise;
To enhance gearing capacity, borrow on better strength and the greater assets backing;
To avail tax benefits;
To improve EPS (Earning Per Share)

(5) General gains:

To improve its own image and attract superior managerial talents to manage its affairs;
To offer better satisfaction to consumers or users of the product

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company’s own developmental plans.
A company thinks in terms of 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 of taxation, accounting, valuation, etc. but might feel
resource constraints with limitations of funds and lack of skill managerial personnel’s. It
has to aim at suitable combination where it could have opportunities to supplement its
funds by issuance of securities; secure additional financial facilities, eliminate competition
and strengthen its market position.

(7) Strategic purpose:

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

(8) Corporate friendliness:

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

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the
two combining business houses. Such integration could be operational or financial. This
gives birth to conglomerate combinations. The purpose and the requirements of the offeror

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company go a long way in selecting a suitable partner for merger or acquisition in business
combinations.

Reasons why companies merge:

The principal economic rationale of a merger id that the value of the combined entity is
expected to be greater than the sum of the independent values of the merging entities. For
example, if firms A and B merge, the value of the combined entity, V (AB), is expected to
be greater than (VA+VB), the sum of the independent values of A and B.

A variety of reasons like growth, diversification, economies of scale, managerial

effectiveness and so on are cited in support of merger proposals. Some of them appear to be
plausible in the sense that they create value; others seem to be dubious as they don’t create
value.

Plausible reasons:

The most plausible reasons in favor of mergers are strategic benefits, economies of scale,
economies of scope, economies of vertical integration, complementary resources, tax
shields, utilization of surplus funds, and managerial effectiveness.

» Strategic benefit:

♦ As a pre-emptive move it can prevents competitor from establishing a similar

position in that industry.
♦ It offers a special timing advantage because the merger alternative enables the
firm to ‘leap frog’ several stages in the process of expansion.
♦ It may entail less risk and even less cost
♦ In a ‘saturated market’, simultaneous expansion and replacement (through
merger) makes more sense than creation of additional capacity through internal
expansion

» Economies of scale:

When two or more firms combine, certain economies are realized due to larger volume of
operations of the combined entity. These economies arise because of more intensive
utilization of production capacity, distribution networks, and research and development
facilities, data processing systems and so on. Economies of scale are prominent in
horizontal mergers where the scope of more intensive utilization of resources is greater.
Even in conglomerate mergers there is scope for reduction of certain overhead expenses.

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» Economies of scope:

A company may use a specific set of skills or assets that it possesses to widen the scope of
its activities. For example: proctor and gamble can enjoy economies or scope if it acquires
a consumer product company that benefits from its highly regarded consumer marketing
skills.

» Economies of vertical integration:

When companies engaged at different stages of production or value chain merge,

economies of vertical integration may be realized. For example, the merger of a company
engaged in oil exploration and production (like ONGC) with a company engaged in
refining and marketing (like HPCL) may improve co-ordination and control.
Vertical integration, however, is not always a good idea. If a company does everything in-
house it may not get the benefit of outsourcing from independent suppliers who may be
more efficient in their segments of the value chain.

» Complementary resources:

If two firms have complementary resources, it may make sense for them to merge. A good
example of a merger of companies which complemented each other well is the merger of
Brown Bovery and Asea that resulted in AseaBrownBovery (ABB). Brown Bovery was
international, where as Asea was not. Asea excelled in management, whereas Brown
Bovery did not. The technology, markets, and cultures of the two companies fitted well.

» Tax shields:

When a firm with accumulated losses and/or unabsorbed depreciation merges with a profit
making firm, tax shields are utilized better. The firm with accumulated losses and/or
unabsorbed depreciation may not be able to derive tax advantages for a long time.
However, when it merges with a profit making firm, its accumulated losses and/or
unabsorbed depreciation can be set off against the profits of the profit making firm and the
tax benefits can be quickly realized.

» Utilization of surplus funds:

A firm in a mature industry may generate a lot of cash but may not have opportunities for
profitable investment. Such a firm ought to distribute generous dividends and even buy
back its shares, if the same is possible. However, most managements have a tendency to
make further investments, even though they may not be profitable. In such a situation, a
merger with another firm involving cash compensation often represents a more efficient
utilization of surplus funds.

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» Managerial effectiveness:

One of the potential gains of merger is an increase in managerial effectiveness. This may
occur if the existing management team, which is performing poorly, is replaced by a more
effective management team. Another allied benefit of a merger may be in the form of
greater congruence between the interests of the managers and the share holders.

Dubious Reasons:

Often mergers are motivated by a desire to diversify and lower financing costs. Prima facie,
these objectives look worthwhile, but they are not likely to enhance value.

» Diversification:

A commonly stated motive for mergers is to achieve risk reduction through diversification.
The extent, to which risk is reduced, of course, depends on the correlation between the
earnings of the merging entities. While negative correlation brings greater reduction in risk,
positive correlation brings lesser reduction in risk.
Corporate diversification, however, may offer value in at least two special cases
1) If a company is plagued with problems which can jeopardize its existence and its
merger with another company can save it from potential bankruptcy.
2) If investors do not have the opportunity of ‘home made’ diversification because one
of the companies is not traded in the marketplace, corporate diversification may be
the only feasible route to risk reduction.

» Lower financing costs:

The consequence of larger size and greater earnings and stability, many argue, is to reduce
the cost of borrowing for the merged firm. The reason for this is that the creditors of the
merged firm enjoy better protection than the creditors of the merging firms independently.

» Increase Supply-Chain Pricing Power:

By buying out one of its suppliers or one of the distributors, a business can eliminate a
level of costs. If a company buys out one of its suppliers, it is able to save on the margins
that the supplier was previously adding to its costs; this is known as a vertical merger. If a
company buys out a distributor, it may be able to ship its products at a lower cost.

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» Eliminate Competition:

Many M&A deals allow the acquirer to eliminate future competition and gain a larger
market share in its product's market. The downside of this is that a large premium is usually
required to convince the target company's shareholders to accept the offer. It is not
uncommon for the acquiring company's shareholders to sell their shares and push the price
lower in response to the company paying too much for the target company.
» Synergy:

The most used word in M&A is synergy, which is the idea that by combining business
activities, performance will increase and costs will decrease. Essentially, a business will
attempt to merge with another business that has complementary strengths and weaknesses. 

Motivations for mergers

Mergers are permanent form of combinations which vest in management complete
control and provide centralized administration which are not available in
combinations of holding company and its partly owned subsidiary. Shareholders in
the selling company gain from the merger and takeovers as the premium offered to
induce acceptance of the merger or takeover offers much more price than the book
value of shares. Shareholders in the buying company gain in the long run with the
growth of the company not only due to synergy but also due to “boots trapping
earnings”.
Mergers are caused with the support of shareholders, manager’s ad promoters of the
combing companies. The factors, which motivate the shareholders and managers to
lend support to these combinations and the resultant consequences they have to bear,
are briefly noted below based on the research work by various scholars globally.

(1) From the standpoint of shareholders

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Investment made by shareholders in the companies subject to merger should enhance
in value. The sale of shares from 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 from merger in different ways viz.
from the gains and achievements of the company i.e. through
 Realization of monopoly profits;
 Economies of scales;
 Diversification of product line;
 Acquisition of human assets and other resources not available otherwise;
 Better investment opportunity in combinations.
One or more features would generally be available in each merger
where shareholders may have attraction and favor merger.

(2) From the standpoint of managers

Managers are concerned with improving operations of the company, managing the
affairs of the company effectively for all round gains and growth of the company
which will provide them better deals in raising their status, perks and fringe benefits.
Mergers where all these things are the guaranteed outcome get support from the
managers. At the same time, where managers have fear of displacement at the hands
of new management in amalgamated company and also resultant depreciation from
the merger then support from them becomes difficult.

(3) Promoter’s gains

Mergers do offer to company promoters the advantage of increasing the size of their
company and the financial 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 of mergers on general public could be viewed as aspect of benefits and costs to:
 Consumer of the product or services;
 Workers of the companies under combination;
 General public affected in general having not been user or consumer or the worker
in the companies under merger plan.

(a) Consumers

The economic gains realized from mergers are passed on to consumers in the form of lower
prices and better quality of the product which directly raise their standard of living and

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quality of life. The balance of benefits in favor of consumers will depend upon the fact
whether or not the mergers increase or decrease competitive economic and productive
activity which directly affects the degree of welfare of the consumers through changes in
price level, quality of products, after sales service, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or other acquiring company

may have the effect on both the sides of increasing the welfare in the form of purchasing
power and other miseries of life. Two sides of the impact as discussed by the researchers
and academicians are: firstly, mergers with cash payment to shareholders provide
opportunities for them to invest this money in other companies which will generate further
employment and growth to uplift of the economy in general. Secondly, any restrictions
placed on such mergers will decrease the growth and investment activity with
corresponding decrease in employment. Both workers and communities will suffer on
lessening job opportunities, preventing the distribution of benefits resulting from
diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power is to be

understood as the ability to control prices and industries output as monopolists. Such
monopolists affect social and political environment to tilt everything in their favor to
maintain their power ad expand their business empire. These advances result into economic
exploitation. But in a free economy a monopolist does not stay for a longer period as other
companies enter into the field to reap the benefits of higher prices set in by the monopolist.
This enforces competition in the market as consumers are free to substitute the alternative
products. Therefore, it is difficult to generalize that mergers affect the welfare of general
public adversely or favorably. Every merger of two or more companies has to be viewed
from different angles in the business practices which protects the interest of the
shareholders in the merging company and also serves the national purpose to add to the
welfare of the employees, consumers and does not create hindrance in administration of the
Government polices.

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 Types of mergers:
Merger depends upon the purpose of the offeror company it wants to achieve. Based on the
offerors’ objectives profile, combinations could be vertical, horizontal, circular and
conglomeratic as precisely described below with reference to the purpose in view of the
offeror 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 of supply and forward
integration towards market outlets. The acquiring company through merger of another unit
attempts on reduction of inventories of raw material and finished goods, implements its
production plans as per the objectives 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 for final production.

The following main benefits accrue from the vertical combination to the acquirer company
i.e.

1. It gains a strong position because of imperfect market of the intermediary products,

scarcity of resources and purchased products;

2. Has control over products specifications.

(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrial process. The
acquiring firm belongs to the same industry as the target company. The mail purpose of
such mergers is to obtain economies of scale in production by eliminating duplication of
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facilities 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 facilities to obtain economies by elimination of cost on duplication and
promoting market enlargement. The acquiring company obtains benefits in the form of
economies of resource sharing and diversification.

(D) Conglomerate combination:

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

Some more types of mergers:

Market-extension Merger
This involves the combination of two companies that sell the same products in different
markets. A market-extension merger allows for the market that can be reached to become
larger and is the basis for the name of the merger.

Product-extension Merger
This merger is between two companies that sell different, but somewhat related products, in
a common market. This allows the new, larger company to pool their products and sell
them with greater success to the already common market that the two separate companies
shared.

Accretive mergers
Those in which an acquiring company's earnings per share (EPS) increase. An alternative
way of calculating this is if a company with a high price to earnings ratio (P/E) acquires
one with a low P/E.

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 Concerns of mergers

Horizontal, vertical, and conglomerate mergers each raise distinctive competitive concerns.

Horizontal Mergers Horizontal mergers raise three basic competitive problems. The first
is the elimination of competition between the merging firms, which, depending on their
size, could be significant. The second is that the unification of the merging firms'
operations might create substantial market power and might enable the merged entity to
raise prices by reducing output unilaterally. The third problem is that, by increasing
concentration in the relevant market, the transaction might strengthen the ability of the
market's remaining participants to coordinate their pricing and output decisions. The fear is
not that the entities will engage in secret collaboration but that the reduction in the number
of industry members will enhance tacit coordination of behavior.

Vertical Mergers Vertical mergers take two basic forms: forward integration, by which a
firm buys a customer, and backward integration, by which a firm acquires a supplier.
Replacing market exchanges with internal transfers can offer at least two major benefits.
First, the vertical merger internalizes all transactions between a manufacturer and its
supplier or dealer, thus converting a potentially adversarial relationship into something
more like a partnership. Second, internalization can give management more effective ways
to monitor and improve performance.
Vertical integration by merger does not reduce the total number of economic entities
operating at one level of the market, but it might change patterns of industry behavior.
Whether a forward or backward integration, the newly acquired firm may decide to deal
only with the acquiring firm, thereby altering competition among the acquiring firm's
suppliers, customers, or competitors. Suppliers may lose a market for their goods; retail
outlets may be deprived of supplies; or competitors may find that both supplies and outlets
are blocked. These possibilities raise the concern that vertical integration will foreclose
competitors by limiting their access to sources of supply or to customers. Vertical mergers
also may be anticompetitive because their entrenched market power may impede new
businesses from entering the market.

Conglomerate Mergers Conglomerate transactions take many forms, ranging from short-
term joint ventures to complete mergers. Whether a conglomerate merger is pure,
geographical, or a product-line extension, it involves firms that operate in separate markets.

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Therefore, a conglomerate transaction ordinarily has no direct effect on competition. There
is no reduction or other change in the number of firms in either the acquiring or acquired
firm's market.
Conglomerate mergers can supply a market or "demand" for firms, thus giving
entrepreneurs liquidity at an open market price and with a key inducement to form new
enterprises. The threat of takeover might force existing managers to increase efficiency in
competitive markets. Conglomerate mergers also provide opportunities for firms to reduce
capital costs and overhead and to achieve other efficiencies.
Conglomerate mergers, however, may lessen future competition by eliminating the
possibility that the acquiring firm would have entered the acquired firm's market
independently. A conglomerate merger also may convert a large firm into a dominant one
with a decisive competitive advantage, or otherwise make it difficult for other companies to
enter the market. This type of merger also may reduce the number of smaller firms and may
increase the merged firm's political power, thereby impairing the social and political goals
of retaining independent decision-making centers, guaranteeing small business
opportunities, and preserving democratic processes.

Steps in bringing about mergers of companies

Due diligence:

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It’s a term used for a number of concepts involving either the performance of an
investigation of a business or person, or the performance of an act with a certain standard
of care. It can be a legal obligation, but the term will more commonly apply to voluntary
investigations. A common example of due diligence in various industries is the process
through which a potential acquirer evaluates a target company or its assets for acquisition.

Origin of the term "Due Diligence":

The term "Due Diligence" first came into common use as a result of the US Securities Act
of 1933.
The US Securities Act included a defense referred to in the Act as the "Due Diligence"
defense which could be used by broker-dealers when accused of inadequate disclosure to
investors of material information with respect to the purchase of securities.
So long as broker-dealers conducted a "Due Diligence" investigation into the company
whose equity they were selling, and disclosed to the investor what they found, they would
not be held liable for nondisclosure of information that failed to be uncovered in the
process of that investigation.
The entire broker-dealer community quickly institutionalized as a standard practice, the
conducting of due diligence investigations of any stock offerings in which they involved
themselves.
Due diligence in capstone refers to performing the needful amount of effort, as in 'doing
diligence'.
Originally the term was limited to public offerings of equity investments, but over time it
has come to be associated with investigations of private mergers and acquisitions as well.
The term has slowly been adapted for use in other situations.

Due diligence in business transactions:

In business transactions, the due diligence process varies for different types of companies.
The relevant areas of concern may include the financial, legal, labor, tax, environment and
market/commercial situation of the company. Other areas include intellectual property, real
and personal property, insurance and liability coverage, debt instrument review, employee
benefits and labor matters, immigration, and international transactions.

Approval by shareholders:

A meeting of share holders should be held by each company for passing the scheme of
mergers at least 75% of shareholders who vote either in person or by proxy must approve
the scheme of merger.

Authorization of the scheme by the court:

Once the drafts of merger proposal is approved by the respective boards, each company
should make an application to the high court of the state where its registered office is
situated so that it can convene the meetings of share holders and creditors for passing the
merger proposal

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Once the mergers scheme is passed by the share holders and creditors, the companies
involved in the merger should present a petition to the HC for confirming the scheme of
merger. However the HC is empowered to modify the scheme and pass orders accordingly.
A notice about the same has to be published in 2 newspapers.

Legal Procedure for bringing about merger of

companies

» Examination of object clauses:

The MOA of both the companies should be examined to check the power to amalgamate is
available. Further, the object clause of the merging company should permit it to carry on
the business of the merged company. If such clauses do not exist, necessary approvals of
the share holders, board of directors, and company law board are required.

» Intimation to stock exchanges:

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The stock exchanges where merging and merged companies are listed should be informed
about the merger proposal. From time to time, copies of all notices, resolutions, and orders
should be mailed to the concerned stock exchanges.

» Approval of the draft merger proposal by the respective boards:

The draft merger proposal should be approved by the respective BOD’s.

The board of each company should pass a resolution authorizing
its directors/executives to pursue the matter further.
» Application to high courts:

Once the drafts of merger proposal is approved by the respective boards, each company
should make an application to the high court of the state where its registered office is
situated so that it can convene the meetings of share holders and creditors for passing the
merger proposal.

» Dispatch of notice to share holders and creditors:

In order to convene the meetings of share holders and creditors, a notice and an explanatory
statement of the meeting, as approved by the high court, should be dispatched by each
company to its shareholders and creditors so that they get 21 days advance intimation. The
notice of the meetings should also be published in two news papers.

» Holding of meetings of share holders and creditors:

A meeting of share holders should be held by each company for passing the scheme of
mergers at least 75% of shareholders who vote either in person or by proxy must approve
the scheme of merger. Same applies to creditors also.

» Petition to High Court for confirmation and passing of HC orders:

Once the mergers scheme is passed by the share holders and creditors, the companies
involved in the merger should present a petition to the HC for confirming the scheme of
merger. A notice about the same has to be published in 2 newspapers.

» Filing the order with the registrar:

Certified true copies of the high court order must be filed with the registrar of companies
within the time limit specified by the court.

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» Transfer of assets and liabilities:

After the final orders have been passed by both the HC’s, all the assets and liabilities of the
merged company will have to be transferred to the merging company.

» Issue of shares and debentures:

The merging company, after fulfilling the provisions of the law, should issue shares and
debentures of the merging company. The new shares and debentures so issued will then be
listed on the stock exchange.

Corporate merger procedure

State statutes establish procedures to accomplish corporate mergers. Generally, the board of
directors for each corporation must initially pass a resolution adopting a plan of merger that
specifies the names of the corporations that are involved, the name of the proposed merged
company, the manner of converting shares of both corporations, and any other legal
provision to which the corporations agree. Each corporation notifies all of its shareholders
that a meeting will be held to approve the merger. If the proper number of shareholders
approves the plan, the directors sign the papers and file them with the state. The secretary
of states issues a certificate of merger to authorize the new corporation.
Some statutes permit the directors to abandon the plan at any point up to the filing of the
final papers. States with the most liberal corporation laws permit a surviving corporation to
absorb another company by merger without submitting the plan to its shareholders for
approval unless otherwise required in its certificate of incorporation.
Statutes often provide that corporations that are formed in two different states must follow
the rules in their respective states for a merger to be effective. Some corporation statutes
require the surviving corporation to purchase the shares of stockholders who voted against
the merger.

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 Why Mergers Fail?

Revenue deserves more attention in mergers; indeed, a failure to focus on this important
factor may explain why so many mergers don’t pay off. Too many companies lose their
revenue momentum as they concentrate on cost synergies or fail to focus on post merger
growth in a systematic manner. Yet in the end, halted growth hurts the market performance
of a company far more than does a failure to nail costs.

Cases of mergers of prominent companies in the

recent past

Case 1: Arcelor Mittal merger details

(Merger success)
The Merger Process

2006 was a very exciting and challenging year for Arcelor Mittal. The new company was at
the forefront of the consolidation process, leading the industry through mergers and
acquisitions.

January 2006 Historic moment for the Global Steel Industry

The year started with the historic launch of the Mittal Steel offer to the shareholders of
Arcelor to create the world's first 100 million tonne plus steel producer. The aim of
increasing globalization and consolidation, necessary in the steel industry, defines the deal
and sets the pace for the industry.

February 2006 - Expansion and strong results

Mittal Canada completes the acquisition of three Stelco subsidiaries, the Norambar and
Stelfil plants, located in Quebec, and the Stelwire plant in Ontario. Stelfil and Stelwire will
add 250,000 tones of steel wire to the company's annual production capacity, providing a
wider product mix to better meet customers' needs.

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Arcelor acquires a 38.41% stake in Laiwu Steel Corporation, in China. Laiwu Steel
Corporation is China's largest producer of sections and beams, and will further boost its
operational excellence thanks to this partnership. It is still awaiting approval with the
Beijing authorities.

April 2006 - Renewal after Hurricane Katrina and new galvanized line

Out of the devastation of Hurricane Katrina, arose a revitalized Mississippi youth baseball
field, rebuilt with the help of Mittal Steel USA and Arcelor. The company provides money
towards the purchase of lighting fixtures and steel cross bar support. It also arranges for and
donates the labor costs for their installation.

Mittal Steel USA places a new line into operation in Cleveland to provide top-quality
galvanized sheet steel to automakers and other demanding customers. The new line is
designed to produce in excess of 630,000 tones of corrosion-resistant sheet annually, using
the hot-dip galvanizing process.

May 2006 - US clears the way for bid

Mittal Steel announces US antitrust clearance for Arcelor bid and the approval of the offer
documents by European regulators. The acceptance period starts in Luxembourg, Belgium
and France on 18 May 2006 (some days later for Spain and the United States) and lasts
until 29 June 2006.

Arcelor contributes to the first anti-seismic school building in Izmit (Turkey), where a
school building had been destroyed by an earthquake in 1999.

June 2006 - Historic agreement to create the No.1 Global Steel Company

Creating the world's largest steel company, Mittal Steel and Arcelor reach an agreement to
combine the two companies in a merger of equals. The terms of the transaction were
reviewed by the Boards of Arcelor and Mittal Steel which each recommended the
transaction to their shareholders. The combined group, domiciled and headquartered in
Luxembourg, is named Arcelor Mittal.

Demonstrating the commitment to extend markets in developing nations, a strategic

partnership between Arcelor Mittal and SNI (Société Nationale d'Investissement) is
concluded concerning the development of Sonasid. This consolidates and develops the
position of Sonasid on the Moroccan market, allowing the company to benefit from the
transfer of Arcelor Mittal's technologies and skills in the long carbon steel product sector

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 Case 2: Deutsche – Dresdner Bank
(Merger Failure)

The merger that was announced on March 7, 2000 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 powerful banking group in the world with the balance
sheet total of nearly 2.5 trillion marks and a stock market value around 150 billion marks.
This would put the merged bank for ahead of the second largest banking group, U.S. based
Citigroup, with a balance sheet total amounting to 1.2 trillion marks and also in front of the
planned Japanese book mergers of Sumitomo and Sukura Bank with 1.7 trillion marks as
the balance sheet total.

The new banking group intended to spin off its retail banking which was not making much
profit in both the banks and costly, extensive network of 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 future core business lines of 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 finally
financially corporate clients ranging from major industrial corporation to the mid-scale
companies.

With this kind of merger, the new bank would have reached the no.1 position of the US and
create new dimensions of aggressiveness in the international mergers.
But barely 2 months after announcing their agreement to form the largest bank in the world,
had negotiations for a merger between Deutsche and Dresdner Bank failed on April 5,
2000.

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

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In the preliminary negotiations it had been agreed that Kleinwort Benson would be
integrated into the merged bank. But from the outset these considerations encountered
resistance from 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 Grenfell and the American Banker’s trust. This division alone contributed over
60% of Deutsche Bank’s profit. The top people at the asset management were not ready to
undertake a new process of integration with Kleinwort Benson. So there was only one
option left with the Dresdner Bank i.e. to sell Kleinwort Benson completely. However
Walter, the chairman of the Dresdner Bank was not prepared for this. This led to the
withdrawal of the Dresdner Bank from the merger negotiations.

In economic and political circles, the planned merger was celebrated as Germany’s advance
into the premier league of the international financial markets. But the failure of the merger
led to the disaster of Germany as the financial center.

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 References:

Bibliography:

i. Chandra, P.C., 2006, Financial Management, Tata McGraw-hill

Webliography:

i. http://www.arcelormittal.com/index.php?lang=en&page=539
ii. http://law.jrank.org/pages/8550/Mergers-Acquisitions.html

iii. http://law.jrank.org/pages/8543/Mergers-Acquisitions-Types-Mergers.html
iv. http://law.jrank.org/pages/8545/Mergers-Acquisitions-Competitive-Concerns.html
v. http://law.jrank.org/pages/8544/Mergers-Acquisitions-Corporate-Merger-Procedures.html
vi. http://www.learnmergers.com/mergers-types.shtml
vii. http://www.learnmergers.com/mergers-mergers.shtml
viii. http://en.wikipedia.org/wiki/Mergers_and_acquisitions
ix. http://en.wikipedia.org/wiki/Due_diligence
x. http://www.investopedia.com/ask/answers/06/m&areasons.asp

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