1.

Distinguish between Amalgamation in the nature of Mergers and Amalgamation in the

nature of Acquisitio

(10 marks)
1. When an amalgamation be called as Merger and when as Takeover? Discuss

There are many important terms relating to mergers and acquisitions.

Merger:
In merger two or more existing companies combine into one company. In
amalgamation two or more existing transferor companies merge together form a new
company, whereby transferor companies lose their existence and their shareholders
become the shareholders of the new company.

Takeover: Takeover is a business strategy of acquiring management of the target

company - either directly or indirectly. The motive of the acquirer is to gain control
over the board of directors of the target company for synergy in decision making.
 Takeovers are of two types – “friendly” and “hostile”. In a friendly takeover, the
acquirer first approaches the promoters/ management of the target company for
negotiating and acquiring the shares. Friendly takeover is for the mutual advantage of
acquirer and acquired companies. On the other hand, “hostile takeover” is against the
wishes to the target company’s management. Acquirer makes a direct offer to the
shareholders of the target company, without the prior consent of the existing
promoters/ management.

MOTIVES BEHIND MERGER

1. Economy of scale:
2.Economy of scope:
3. Increased revenue or market share
4. Cross-selling:
5. Taxation
6. Taxation
7. Resource transfer:
8. Revamping production facilities

2. What is Balanced score card? Discuss its importance with suitable example.
The term balanced scorecard (BSC) refers to a strategic
management performance metric used to identify and improve various internal business
functions and their resulting external outcomes.

Corporations may use internal methods to develop scorecards. For instance, they
may conduct customer service surveys to identify the successes and failures of
their products and services or they may hire external firms to do the work for
them. J.D. Power is an example of one such firm that is hired by companies to
conduct research on their behalf.

Better Strategic Planning. ...

 Improved Strategy Communication & Execution. ...
 Better Alignment of Projects and Initiatives. ...
 Better Management Information. ...
 Improved Performance Reporting. ...
 Better Organisational Alignment. ...
 Better Process Alignment.

3. What are the reasons and motives for merger? Note down the defensive tactics against
the merger move.
MOTIVES BEHIND MERGER

1. Economy of scale:
2.Economy of scope:
3. Increased revenue or market share
 4. Cross-selling:
5. Taxation
6. Taxation
7. Resource transfer:
8. Revamping production facilities

4. What is Demerger? Discuss the different methods of demerger with suitable examples
Demerger is the business strategy wherein company transfers one or more of its
business undertakings to another company

Types Of Demerger

Types of Demerger
 Spinoff
When a line or division of a business of the conglomerate company divides into
being a separate entity then this type of demerger example is known as a spinoff.

Demerger example: Let’s say company W has two lines of business mainly
insurance and consultancy. However, if the company decides to separate its
consultancy service business into a separate entity then it is termed a spinoff.
Moreover, this must be noticed that both have separate legal entities, a new
company would come into existence and the parent company does not dissolve.

Demerger example: WIPRO IT division in the 1980s

Split-up

In case of a split-up, a conglomerate company splits up into two separate

companies each holding maybe one different line of business.

Demerger example: For split-up as a demerger example, company W separates

into two new companies X and V with insurance and consultancy as a business.
Moreover, this should be noticed that after company W would not exist.

Equity Carve-Out
This demerger example includes selling off a particular line of business to any
external company/party. As result, the parent company might sell its portion of
its equity to a strategic investor or third party. Therefore, this type of demerger is
known as equity carve-out.

Note:
Apart from the above explanations, there are a few points that must be kept in
mind.
  Firstly, splits and spinoffs do not include a sale to a third party.
Moreover, they do not constitute infusion of cash while equity carve-
out does.
 Secondly, company W remains owned by the same entity, whereas in
carved-out, the company becomes a part of the third party.

This explains that it is no longer a part of the parent company as an independent

unit.

Discuss the pre-offer and Post-Offer of antitakeover defense strategy

PRE-OFFER DEFENSE MECHANISMS-

These kinds of defence mechanisms are opted before the offer has been
made to the target entity. Generally, they are created at a very initial stage and
are mentioned in the company documents pertaining to mergers and
acquisitions. These mechanisms are as follows-

1. Poison Pill: This gives the current shareholders of the target company, a

right to purchase additional shares of the new entity at a discount. This
causes dilution of the new entity and increases the cost to the acquirer.
Under this, a Dead Hand Provision can also be included where only the
existing directors has the right to cancel this Poison Pill and the new
directors are deprived of such a right.
2. Poison Put: This gives a right to the existing bondholders of the target
entity to ask for immediate redemption of their debt. This is to create an
additional cash burden on the acquirer which might make the
acquisition unprofitable.
3. States with Restrictive Takeover Laws (US): Companies would like to
be incorporated in the countries which have restrictive takeover laws as
it would be very cumbersome for the acquirer to fulfil the requirements
asked by the regulatory authorities. United States of America is one of
the examples of such jurisdiction.
 4. Staggered Board of Directors: Under this, only a part of BOD can be
changed every year. For example, a company has 12 directors on the
board with only one third (4) of them coming up for election in one year.
This requires the acquirer at least two years to gain majority in the
board of directors.
5. Restricted Voting Rights: A provision can be added by the company that
if the stake of one of the shareholders crosses a threshold percentage,
that shareholder will lose his voting rights. This provision can also be
levied by the regulatory authorities to conserve the competition in the
market.
6. Supermajority Voting Provision for Mergers: A provision can be
included where a majority of more than 51% is required to approve a
takeover. For example, if a provision is added where at least 75% of the
votes should be in the favour of the acquisition for it to take place, a
shareholder with just 26% stake can also resist the takeover.
7. Fair Price Amendment: This provision restricts the takeover to happen
unless the shareholders are being paid a “fair price” for their shares. The
valuation of the company is done through a special formula or by an
independent appraiser who enlighten the shareholders with the
appropriate amount that they should ask from the acquirer.
8. Golden Parachutes: Compensation agreements can be made between
the target company and the top-level management for lucrative cash
pay-outs in case they leave the company following an acquisition. Since
these managers are paid in abundance, this can be huge burden on the
acquirer.

POST-OFFER DEFECE MECHANISMS-

These kinds of defence mechanisms are used after an offer is received from
the acquirer. They are as follows-
 1. Just Say “NO” Defence: If the acquirer goes directly to the shareholders
with a tender offer, the target company can make a public
announcement addressing the shareholders why the acquirer’s offer is
not in the shareholder’s best interest. They might also communicate
that there are a lot of opportunities available in the near future which the
acquirer would not be able to monetize.
2. Litigation: File a lawsuit against the acquirer claiming that some law will
be violated if this acquisition takes place. Some basic grounds for these
kinds of lawsuits can be-
1. Anti-trust: Defines that this acquisition will lead to a Monopoly in
the market which is against the Competitions Law.
2. Violation of Securities Law: The target company might claim that
the acquirer has bought the shares in an illegal way.

Even if this measure does not relieve the target company from the acquisition
completely, it will still buy them a lot of time.

3. Greenmail: Under this, some amount is paid to the acquirer to terminate

the takeover offer. In some cases, the target company purchase the
shares from the acquirer at a premium following an agreement that the
acquirer will not make another takeover attempt. This is hardly followed
in the US now as the profits made by the acquirer are charged at a tax
rate of 50% by the government.
4. Share Repurchase: The target company can submit a tender offer for its
own shares which will compete with the bid offered by the acquirer. This
can require the acquirer to raise its own bid which might make the
takeover less attractive for the acquirer.
5. Levered Recapitalisation: In this case, the target company takes up
large amount of debt just to make significant changes in the capital
structure and make the acquisition less attractive for the acquirer. This
 debt can also be taken up at unfavourable terms to create problems for
the acquirer. They are ready to face the brunt if the acquisition does not
take place.
6. Crown Jewel Defence: The target entity might sell of the subsidiary or
the asset that was the major reason behind the offer made by the
acquirer. The subsidiary or the asset is generally sold to a neutral third
party.
7. Pac-Man Defence: This is quite an interesting takeover defence
mechanism where the target makes a counter offer to acquire the
acquirer.
8. White Knight Defence: The target company invites a friendly third party
with a good strategic fit to get acquired. This justifies a higher price
than a hostile takeover. It may also lead to a competitive bid and
therefore the acquirer overpaying.
9. White Squire Defence: In this case also, the target company invites a
friendly third party, but this time to acquire a minority stake in the entity,
just to block the hostile acquirer from gaining enough shares to
complete the merger.

CONCLUSION-

The management adopts a lot of strategies to defend a hostile takeover.

Using the appropriate defence mechanism according to the situation of the
company is really important. It is rightly said, “Good managers can make or
break the company.”