ASSAM UNIVERSITY, SILCHAR

CORPORATE GOVERNANCE
COURSE CODE- 904
TOPIC: MERGER

SUBMITTED BY- BAISHALI BHATTACHARJEE

ROLL NO- 16 SEMESTER- 9TH

SUBMITTED TO- DRISHTIRUPA PATGIRI MA’AM

ASSISTANT PROFESSOR
DEPARTMENT OF LAW
ASSAM UNIVERSITY, SILCHAR
 TABLE OF CONTENTS

Introduction .................................................................................................

What is Merger?......................................................................................

Types of Mergers ….....................................................................................

Companies Act, 2013 Provisions …...........................................................

Conclusion............................…….…………………………………………...

References …...........................................................................................
Introduction

At what stage does a company decide to merge with another company or acquire
another company?
The chart depicts the trajectory of growth of the company and the funding around it as it
grows.
Let’s take an example of Byjus must have initially started of with the savings of the
owner that is Ravindra Byjus or from funding from his friends or family. With the
increase in growth of e-learning byjus would have next approached the angel investors
(high-net-worth individual who provides financial backing for small start-ups or
entrepreneurs, typically in exchange for ownership equity in the company).This happens
the pre revenue stage of the company where company is not making much money.
As time passes revenue starts growing with more of capital expenditure e.g.
Advertisements, brand promotions, hiring costs etc.
Next company would approach the venture capitalists (a private equity investor that
provides capital to companies exhibiting high growth potential in exchange for an
equity stake.) E.g. Byjus raised lots of money from the American venture capital firm
called Sequoia capital.
To grow further and expand its operation around the country company comes to a stage
where it will start looking different strategies apart from the usual funding routes to thrive
further
These options are:
1. Build (organic)- increasing hiring , geographical expansion, product launches
etc.
2. Borrow– Franchising, joint ventures.
3. Buy( inorganic)- Merger or Acquisition with other company.
This depends on the growth objectives of a company and by doing a cost benefit
analysis.
This is where M&A comes into picture.
The primary goals of mergers are to increase the growth of the merged entity, enter new
markets, maximise shareholder value and earnings per share, replace inefficient
management with efficient managers, gain access to new products and technologies
etc. Another key objective sought to be achieved by mergers is to gain economies of
scale, i.e., to achieve the best possible/lowest cost of production. This occurs when
entities in the manufacturing industry merge with entities engaging in the activity of
supply of raw materials.
What is Merger?

‘Merger’ has not been defined under the Companies Act, 2013 or Income Tax Act,
1961, but as a concept ‘merger’ is a combination of two or more entities into one; with
the accumulation of their assets and liabilities, and coming together of the entities into
one business.
Mergers usually take place between companies that are equal in repute and scale of
operations.
Merger is also called ‘Amalgamation’. Under The Income Tax Act, 1961 (ITA)
‘amalgamation’ is defined as the merger of one or more entities with another company,
or the merger of two or more entities forming one company. It also mentions other
conditions to be satisfied for an ‘Amalgamation’ to benefit from the beneficial tax
treatment.
In India it is a complex court driven process wherein the NCLT has to mandatorily
approve of the merger and if the two merging companies have a registrar office in
different states then the approval of state NCLT is also essential.
A and B merge to form a new company C and they cease to exist as independent
companies.
At times the new company can retain the name of either company A or B if they feel
they can reap benefits of the goodwill and reputation of the merging company A or B.
In a merger NCLT supervision is important for protecting the interest of the creditors and
shareholders as the company goes through a complete reorganisation of its capital
structure and gets a new management. It usually takes 8-12 months to achieve a
successful merger.
Consideration of a merger can flow to the shareholders of merging company either in
cash or shares. They have a preference of cash if they do not want to be a part of the
new merging entity, but if they choose to continue then they are allotted shares of the
merged company.
Types of Mergers

Conglomerate mergers
A conglomerate merger can be defined as a merger that occurs between entities that
engage in totally unrelated business activities. Conglomerate mergers are further
divided into two parts:

Pure conglomerate mergers

These mergers occur between entities that engage in completely unrelated business
activities. For example, if a textile manufacturing company merges with a mobile phone
manufacturing company, it would be deemed to be a pure conglomerate merger.

Mixed conglomerate mergers

These mergers occur between entities that engage in unrelated business activities but
could be deemed as a market extension or product extension strategy of the merging
entities. For example, if a mobile phone manufacturing company merges with a laptop
manufacturing company, even though they are unrelated businesses, the intent of the
merger is product and market expansion. Thus, it would be deemed to be a mixed
conglomerate merger.

Advantages of conglomerate mergers

Diversification
Since the merged entity has business operations in different industries and different
markets, they are free from industry-specific risks that may affect their investments and
result in losses. Even if there is economic uncertainty in one industry, the merged entity
can be assured that their entire business operation is not at risk.
Synergy
Once the two entities merge, they generate synergy and this results in an increase in
the net value of the company.
Human capital
Experience is shared across the employees of the merged entities resulting in the
generation of a positive workforce.
Cross-selling
The merged entities can cross-sell their products in the markets of each other using the
existing supply and distribution channels thereby increasing the market share and reach
of the merged entity.

Disadvantages of conglomerate mergers

Management costs
The merged entity will have a large workforce and therefore the cost of managing the
workforce will increase substantially.
Tax advantage
As an individual entity, a company may receive certain tax benefits on the products it
deals with because of the group structure of taxation. However, once the merger is
completed, due to the variety of products falling under the same group, there will be a
reduction in the tax advantages.
Cultural barriers
The culture of every organisation is different. The merger of two entities is also the
merger of human values and diverse business expertise of the employees and the
employees may face difficulties in adjusting to the work culture and values of each
other.

The America Online-Time Warner merger

America Online (AOL) and Time Warner had announced their merger in January 2000.
AOL was a leading company in the dial-up internet connection market. Time Warner on
the other hand was a company that owned several media and publishing houses and
had ownership rights over several movies and cable programs. Thus, it can be
concluded that both these companies were engaged in completely unrelated
businesses and the merger of these two companies was a conglomerate merger.
The intention behind the merger was that Time Warner would utilise the internet
services of AOL and screen its content online. The expected synergy of the merger was
$350 billion. However, post-merger, AOL could not keep up with the change in
technology and soon the broadband connections which provided a higher speed and
stability took over the internet world. Also, there were several cultural clashes between
the employees of AOL and Time Warner. All these factors resulted in the failure of the
merger and AOL that was valued at $226 billion at the time of the merger soon perished
and its value came down to $20 billion.

Horizontal merger
A horizontal merger can be defined as a merger that occurs between entities that render
the same products or services and thereby engage in business activities in the same
industry. These mergers usually occur in industries having high competition. Higher
competition results in firms looking for ways to increase their market share and generate
maximum synergy. For example, Coca-Cola and PepsiCo are two companies that
engage in business activities in the beverage industry and a merger between these two
companies would be termed a horizontal merger.

Advantages of horizontal merger

Economies of scale
Since the same raw materials and machinery is used during the manufacturing process,
a lower cost of manufacturing the product can be achieved.
Synergy
Once the two entities merge, they generate synergy and this results in an increase in
the net value of the company.
Lower competition
Since the merging entities belong to the same industry, the individual competition of
each merging entity is reduced post-merger.
Customer base
Since the merging entities cater to the same customer base and each customer has a
preference for one product over the other, the merged entity will have an increased
customer base.
Market share and profits
Due to the increased customer base of the merged entity and lower competition in the
industry, the market share and profits of the merged entity automatically increase.

Disadvantages of horizontal mergers

Antitrust regulations
There are strict regulations in place in all countries that regulate unfair competition in
the market. If a merger will result in the capture of a substantial amount of market share
so as to create a monopoly in that industry, such a merger will not be allowed.
Cultural barriers
The culture of every organisation is different. The merger of two entities is also the
merger of human values and diverse business expertise of the employees and the
employees may face difficulties in adjusting to the work culture and values of each
other.
Management issues
The large and versatile workforce of the merged entity could be difficult to manage.
Also, there is a probability of a lack of coordination between the top and middle-level
management for the implementation of new ideas or the launching of new products.

The Dow DuPont merger

Dow was a chemical company engaging in the business of agricultural sciences and
performance materials and chemicals. DuPont also was a chemical company engaging
in the business of agricultural sciences and performance materials and chemicals. They
announced their merger in December 2015. Since both these companies engage in the
same industry and are competing with each other in the same industry, the merger
between the companies can be termed as a horizontal merger.
The intention behind the merger was to increase the net capital value of the company
and cater to a larger customer base by increasing the market share. At the time of the
merger, the merged company, i.e., DowDuPont had a combined net worth of $130
billion. Within 2 years of the merger, i.e., by 2017, DowDuPont had increased its net
worth to over $150 billion. However, the company submitted for dissolution in 2019.

Vertical mergers

A vertical merger can be defined as a merger between two or more entities that form
part of the same supply chain i.e., the entities are involved in different stages of
production or different stages of distribution of the same product. It is pertinent to note
that, unlike horizontal mergers where competition in the industry is one of the prominent
reasons for the merger, in vertical mergers, the merging entities are not competing with
each other but are only complementary to each other. For example, if an automobile
manufacturing company merges with a company that engages in the manufacture of
automobile engines it would be deemed to be a vertical merger because both
companies are not competing with each other but are complementary to each other and
form part of the same supply chain.
Vertical mergers are divided into two categories i.e., Forward vertical merger and
Backward vertical merger. The distinction between the two categories have been
enumerated below:

Forward vertical merger

This occurs when an upstream company merges with a downstream company on the
supply chain i.e., a manufacturing company merges with a distributing company. For
example, a company engaging in the production of milk merges with a company
engaging in the business of supply and distribution of milk.
Backward vertical merger
This occurs when a downstream company merges with an upstream company on the
supply chain i.e., a distributing company merges with a manufacturing company. For
example, a company engaging in the distribution of mobile phones and laptops merges
with a company engaging in the business of manufacturing mobile phones or laptops.

Advantages of vertical mergers

Economies of scale
Since the merger is between different entities in the same supply chain, the cost of
production of the final good will be reduced and thus economies of scale can be
achieved.
Technology
The involvement of different entities in the same supply chain can lead to the
introduction of new technology that could be used to improve the quality of the end
product.
Assurance
If a manufacturing company is merging with a company supplying raw materials, it can
be assured of timely and continuous supplies and therefore can assure that the
production of goods continues at a uniform speed.

Disadvantages of vertical mergers

Monopoly
Mergers in the same supply chain can result in entities having a monopoly over the
price, quality and distribution of the manufactured goods.
Diseconomies of scale
In the merged entity, there could be a disparity in the profits generated by the supplier of
raw materials and the manufacturer resulting in diseconomies of scale.
Discourages entry
New companies might find it difficult to enter into a market where there are vertical
mergers because the new companies will not be able to compete with the reduced
prices as offered by the merged entity.

The eBay-PayPal merger

eBay is a company that offers products for sale through an online platform. PayPal is a
company that allows customers to perform online transactions. The merger between
these two companies was announced in 2002. The intention of the merger was to
introduce a user-friendly online payment system through which customers can pay for
the products being purchased on eBay. It is pertinent to note that these two companies
were neither operating in the same industry nor competing with each other. Accepting
and processing payments was a part of the business of eBay and to facilitate the same
it merged with a specialised entity that offered such services. Both these companies
form part of the same supply chain and thus the merger can be termed as a vertical
merger.

Market extension mergers

A market extension merger can be defined as a merger between two or more entities
that render the same product or services but in different markets. For example, Tesla
and Maruti Suzuki are two companies that engage in the business of automobiles but
prominently operate in different markets i.e., USA and India. If these two companies
merge together it would be deemed to be a market extension merger.

Advantages of market extension merger

Technology
Merging with entities in different markets will allow the companies to exchange and
develop new technology and use the existing technology to modify their products and
make them suitable for each other’s markets.
Market share and profits
Due to the increased customer base of the merged entity, the market share and profits
of the merged entity automatically increase.
Synergy
Once the two entities merge, they generate synergy and this results in an increase in
the net value of the company.
Customer base
Since the merging entities cater to the same customer base in different markets, the
merged entity will cater to a large customer base in both markets and thus will have an
increased customer base.

Disadvantages of market extension merger

Cultural barriers
The culture of every organisation is different. The merger of two entities is also the
merger of human values and diverse business expertise of the employees and the
employees may face difficulties in adjusting to the work culture and values of each
other.
Management issues
The large and versatile workforce of the merged entity could be difficult to manage.
Also, there is a probability of a lack of coordination between the top and middle-level
management for the implementation of new ideas or the launching of new products.
Diseconomies of scale
In the merged entity, there could be a disparity in the profits generated in one market
over the other resulting in diseconomies of scale.

The Eagle Bancshares – RBC Centura merger

Eagle Bancshares is a company engaged in providing financial services in the Northern
American regions. RBC Centura is a company that provides financial services in
Canada. These two companies merged in 2002. Since both companies are dealing in
the same business activities but in different markets, the merger of these two
companies can be termed as a Market extension merger. Post-merger, RBC Centura
had the opportunity to introduce and grow its operations in the Northern American
markets and Eagle Bancshares had set its footprint in the Canadian market.

Product extension merger

A product extension merger can be defined as a merger between two or more entities
that render products or services in the same market that are either related to each other
or are co-consumed together. For example, if a laptop manufacturing company merges
with a company that manufactures laptop bags, it would be deemed to be a product
extension merger.

Advantages of product extension merger

Market share and profits
Due to the increased customer base of the merged entity, the market share and profits
of the merged entity automatically increase.
Synergy
Once the two entities merge, they generate synergy and this results in an increase in
the net value of the company.
Customer base
Since the merging entities cater to the same customer base in the same market, the
merged entity will cater to a large customer base in the market and thus will have an
increased customer base.
Disadvantages of product extension merger
Cultural barriers
The culture of every organisation is different. The merger of two entities is also the
merger of human values and diverse business expertise of the employees and the
employees may face difficulties in adjusting to the work culture and values of each
other.
Management issues
The large and versatile workforce of the merged entity could be difficult to manage.
Also, there is a probability of a lack of coordination between the top and middle-level
management for the implementation of new ideas or the launching of new products.
Diseconomies of scale
In the merged entity, there could be a disparity in the profits generated by one product
over the other resulting in diseconomies of scale.

The PepsiCo – Pizza Hut merger

PepsiCo is a company that engages in the business of beverages and on the other
hand Pizza Hut is an enterprise rendering service of food and food delivery. These two
companies merged in 1977. The intention behind the merger was that both products
should be co-consumed, i.e., at every Pizza Hut store, only the beverages
manufactured by PepsiCo should be sold. Since consumers prefer to have a beverage
along with pizzas, the objective behind the merger was achieved. It is pertinent to note
that since the products sold by both the companies complement each other and are co-
consumed, the merger can be termed as a Product extension merger.

Congeneric or Concentric merger

A congeneric merger can be defined as a merger wherein two or more entities are
operating in the same market but are engaging in the business of different products or
services that are complementary to each other. For example, if two companies
operating in the financial services industry i.e., a bank and an insurance company
merge, it would be deemed to be a congeneric merger because the products/services
offered by a bank and insurance company are different yet complementary to one
another.
Advantages of product extension merger
Customer base
Since the merging entities cater to a similar customer base in the same market, the
merged entity will cater to a large customer in the market and thus will have an
increased customer base.
Market share and profits
Due to the increased customer base of the merged entity, the market share and profits
of the merged entity automatically increase.
Synergy
Once the two entities merge, they generate synergy and this results in an increase in
the net value of the company.

Disadvantages of product extension merger

Cultural barriers
The culture of every organisation is different. The merger of two entities is also the
merger of human values and diverse business expertise of the employees and the
employees may face difficulties in adjusting to the work culture and values of each
other.
Management issues
The large and versatile workforce of the merged entity could be difficult to manage.
Also, there is a probability of a lack of coordination between the top and middle-level
management for the implementation of new ideas or the launching of new products.
Diversification
Since both the merging entities engage in similar businesses, there is a threat as to
diversification of the business to different sectors or different industries.

The Citicorp-Travellers Group merger

Citicorp is a company that provided banking services to its consumers and on the other
hand Travellers group provided insurance and brokerage services. Both the companies
were dealing with different products in the financial services industry. These two
companies merged in 1998 to create Citigroup Inc. The intention of the merger was to
combine the services being offered by these companies and cater to a large customer
base in the financial services industry. Since both the companies were offering different
products and services within the same market, the merger can be termed as a
Congeneric merger.
Companies Act, 2013- Section 230-240-
Compromise, Arrangement and Amalgamation
Section 230- Compromise & Arrangement
 Under this Section an applicant (member, creditor, company or liquidator of
company depending on the situation of the company.) to enter into a
compromise, arrangement or amalgamation (including takeover) has to give an
application under 230(1) to National Company Law Tribunal (NCLT).
 This application has to be given along with – Material facts, reduction of share
capital (if any), consent of creditors (75%), and other disclosures
 As soon as NCLT receives the application it will immediately order a meeting.
 The notice of the meeting will go to – all the members, creditors and debenture
holders.
 Additionally, the notice has to be published on the website of the company and
an advertisement in the newspaper (1 English newspaper and 1 vernacular
newspaper) has to be given.
 If the company is a listed company the notice has to be given to Securities
Exchange Board of India (SEBI) so that SEBI notify the same under its website.
 Notice has to be given to some authorities like – The central Government,
Income Tax Authority, Reserve Bank of India RBI, Competition Commission of
India (CCI) for their representations or objections within 30 days.
 If the Authorities do not give in their replies within 30 days, the company will
assume that there is no objection.
 After the order, the meeting shall be conducted and there shall be proper voting
at the meeting which must conclude within the period of 1 month. Voting at the
meeting can be done via- voters themselves, Proxy, postal ballet and E- Voting.
 The Resolution at the meeting shall be approved and passed by 75% majority.
 Any person can object to the scheme provided if a shareholder has minimum
10% of share capital or a creditor has 5% outstanding debt.
 Once the resolution is approved the scheme goes back to the NCLT for passing
a final order along with ancillary orders. This final order has to be filled with ROC
within 30 days.
Section 231- Power of Tribunal to enforce compromise or arrangement under
section 230
 The tribunal has the power to oversee the implementation of the compromise or
arrangement.
 It has power to give further directions.
 If the tribunal feels that the amalgamation is not taking place according to the
terms and conditions ordered by the tribunal or are impossible or impractical to
follow the order to do so then it can even order winding up of the company.
Section 232 – Merger and amalgamation of companies
 Section 230 talks about compromise or arrangement (Internal reconstruction) ,
but if there is a compromise or arrangement that also involves a merger or an
amalgamation (External Reconstruction) then both Section 230 and 232 will
apply to such companies.
 This section is a continuation of section 230 for merging or amalgamating
companies where in there are some additional requirements to be followed.
 Along with the notice of the meeting in section 230, the following must also be
given- Draft scheme of merger and amalgamation (M/A), report of effect or
impact of such M/A on each class of shareholders, report of valuation and other
disclosures.
 While passing the final order, tribunal can make provisions for other required
matters.
Section 233- Merger or Amalgamation of certain companies
 ‘Certain companies’ under this section are – 2 or more small companies merging
(private companies having paid-up capital of less than INR 100 million and
turnover of less than INR 1 billion per last audited financial statements), holding
and its wholly owned subsidiary merging or any other such class of companies
as may be prescribed.
 These companies will merge according to section 233 not 232 which is also
called Fast Track Mergers. Such companies get an easier route to merge.
 Steps involve in this type of merger are- Step 1- Invite objections and
suggestions from Registrar of company (ROC), Liquidator, any other person
affected by the scheme.
 Step 2- Scheme shall be approved by 90% majority shareholders.
 Step 3- File declaration of solvency (capability of paying off debts) with ROC.
 Step 4- Scheme shall be approved by 90% majority Creditors
 Step 5- Send the scheme to Central Government and Roc for approval.
 Step 6- If Roc has any objection it has to give to the Central Government within
30 days.
 Step 7- If the central Government feels the scheme is in the interest of public and
creditors then it will approve the scheme and will communicate the scheme to
Roc but at the same time if ROC had any objections and the central Government
feels the scheme is not in the interest of public and creditors then it will refer the
companies to NCLT (section 232- No easy route available)
Section 234- Merger or Amalgamation of a company with a foreign company
 If an Indian company wants to merge with a foreign company, then it has to
follow the procedure given under Section 232 and additionally approval of the
RBI must be obtained and the scheme must provide for the manner of payment
of considerations.
Section 235- Power to acquire shares of shareholders dissenting from the
scheme approved by majority
 Step 1– The Transferee Company offers to acquire shares from shareholders of
Transferor Company. Out of all the shareholders 90% or more accept the offer
and the rest 10% or less dissent and are not willing to sell their shareholding.
 Step 2 – Now the transferee Company will send a notice to dissenting
shareholders saying that since 90% shareholders have agreed to sell their
shares the company will acquire the rest as well.
 Step 3- Dissenting shareholders will give an application to NCLT against
acquisition of their shares.
 Step 4- Transferee Company will give an application to NCLT to acquire the
shares.
 Step 5- Since more than 90% shareholders have accepted to the offer thus
NCLT passes a final order to Transferor Company to register the transfer and
order the transferee company to pay the consideration. NCLT does not reject the
application of the transferee company at this stage as it does not favour in
affecting the decisions of the transferee company due to only a mere 5-10% of
shareholders dissenting.
Section 236- Purchase of minority shares
 In this section, if the acquirer along with persons acting in concert (PAC –
persons who have a common objective or purpose to acquisition shares or
voting rights or control over a company) already holds 90% or more shares of
the target company then the acquirer will give the remaining shareholders an
offer to sell their shares as well.
 For this the acquirer company with keep the consideration money in a separate
bank account and will pay off the remaining shareholders within 60 days.
Section 237- Power of the Central Government to provide for Amalgamation in
public interest
 If it is essential in public interest, the Central Government by notification in the
official gazette can order amalgamation of the companies.
 Central Government usually passes such amalgamation order between a healthy
company with a sick company to revive the sick company and its employees.
 Central Government will have to give orders for pending legal proceedings by or
against Transferor Company.
 Central Government will also have to give orders for all members, creditors to
have nearly same interest in the transferee company and if there is any
difference then they have to be compensated.
 If any person is aggrieved by the compensation can appeal to the NCLT.
 If the transferor and transferee company have any objections with the order for
amalgamation then they can put forward their objections to the NCLT. NCLT will
hear their objection and pass a final order.
Section 238- Registration of offer of schemes involving transfer of shares
 Whenever a transferee company wants to give a circular (offer and details of
share transfer) to the shareholders, it has to first get the circular registered with
the ROC only then it can give the same to the shareholders.
Section 239- Preservation of books and papers of the Amalgamated company
 Books and papers of the Amalgamated Company (the company that ceases to
exist after the merger) shall not be disposed off, without the permission of the
Central Government.
 Before giving the permission the Central Government has to appoint a person to
examine books and papers.
Section 240- Liability of officers in respect of offenses committed prior to the
merger or amalgamation
 The liability of officers who had committed an offense prior to merger or
amalgamation will continue even after merger or amalgamation.

Conclusion

The types of mergers discussed above have both advantages and disadvantages. A
particular form of merger might not be suitable for a particular company. Therefore, the
management should take utmost care while deciding which form of the merger they
wish to undertake. Apart from deciding the type of merger, there are several other
factors like due diligence, effect on shareholder value, earnings per share, synergy
levels, cultural clashes etc. that need to be taken into consideration while making an
informed decision.
The managers should compare both internal growth options like organic growth
(expansion strategies, developing new products etc), inorganic growth (asset
acquisitions) and external revenue growth opportunities like franchising, joint ventures
etc to the growth being offered by a merger transaction so as to properly evaluate
whether or not to go forward with a merger.

References
 Company law ( Avtar Singh)
 5 Types of Company Mergers.
 PEPSICO TO SPIN OFF RESTAURANTS
 Citicorp–Travelers Group Merger
 DowDuPont Merger Successfully Completed
 HISTORY’S Moment in Media: AOL Time Warner Merger
 https://www.investopedia.com/terms/m/mergersandacquisitions.asp
 https://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-
Acquisition-In-India.html
 https://singhania.in/blog/mergers-acquisition-laws-in-india-frequently-
asked-questions
 https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research
%20Papers/Mergers___Acquisitions_in_India.pdf
 https://taxguru.in/company-law/merger-acquisition-india-issues-
challenges.html
 https://indiankanoon.org/doc/167519/