Merger and acquisition:

Merger
Merger refers to the combination of two or more business entities into a single business entity, with
one company continuing to operate while the other ceases to do so. The assets, liabilities, and stocks
of the defunct company or companies are acquired by the existing corporation. The buyer is usually an
existing firm, whereas the seller is usually a startup firm. Mergers are typically done to increase a
company’s market share, lower operating costs, expand into new locations, connect commonplace
items, increase revenues, and increase benefits—all of which can result in money for the company’s
shareholders.

Mergers come in a variety of forms

There seem to be a plethora of various mergers, from the perspective of commercial companies.
Mergers are categorized into the following categories from an economist’s perspective, based on the
relationship of the two business units:

Conglomerate merger
Typically, a merger of companies that have no shared business sectors or relationships of any kind.
Combined firms may sell similar commodities or share distribution and marketing networks, as well as
manufacturing methods. The following types of mergers can be generally defined:

Product-extension merger
Companies offering separate but related items in the same marketplace or selling non-competing
items and using the same marketing strategies of the manufacturing process are merged into
conglomerates. Phillip Morris-Kraft, Pepsico-Pizza Hut, Proctor and Gamble, and Clorox are just a few
examples.

Pure conglomerate merger

When two companies merge, there is no visible tie between them. Hughes Electronics, for example, is
a part of BankCorp of America.

Market-extension merger
Businesses that offer the same items in multiple regions/geographic areas join to form conglomerates.
Morrison stores and Safeway, for example, as well as Time Warner-TCI.

Horizontal merger
It occurs when two enterprises in direct competition maintain the same product categories and
markets, resulting in the merger of direct competitors. Exxon and Mobil, Ford and Volvo, Volkswagen
and Rolls-Royce, and Lamborghini are just a few examples.
Vertical merger
A client and company or a supplier and business, i.e. a merging of companies with an existing or
perceived buyer-seller connection, such as Ford and Bendix or Time Warner and TBS.

Merger, amalgamation, and takeover –

legal procedures
The Indian Companies Act, 1956, is the foundation law for mergers, and it operates in collaboration
with various statutory regulations.

Sections 391 to 396 of the Companies Act, 1956, which relate to the settlement and arrangement with
creditors and shareholders of a company required for a merger, contain the fundamental rules on
mergers, amalgamations, and reconstructions.

Section 391 grants the Tribunal the authority to sanction, subject to specific criteria, a compromise or
arrangement between a firm and its creditors/members. The Tribunal has the authority under Section
392 to compel and/or monitor such adjustments or settlements with creditors and members.

When creditors and members of the affected company agree to such an agreement, Section
393 ensures that the information requested by them is available.

By making an adequate application to the Tribunal, Section 394 offers measures for aiding company
reconstruction and amalgamation.

Section 395 gives the power and responsibility to acquire the shares of shareholders who disagree
with the majority’s scheme or contract.

Section 396 relates to the central government’s ability to facilitate the merger of corporations in the
national service.

Both the amalgamating company or firms and the merged firm should conform with the procedures
outlined in Sections 391 to 394 and provide information of all procedures for the Tribunal’s
consideration. It is insufficient if one of the companies completes all of the essential requirements on
its own.

Sections 394 and 394A of the Companies Act relating to the processes and practices to be undertaken
to accomplish company amalgamations, as well as regulations related to the Tribunal’s and the central
government’s authorities in this regard.

Following the filing of the application, the Tribunal will issue instructions setting the hearings dates
and providing a copy of the application to the Registrar of Companies and the Regional Director of the
Company Law Board following Section 394A, as well as the Official Liquidator for the report verifying
that the corporation’s activities have not been administered in a prejudicial-like manner that might
affect the interest of the shareholders or the public. Before authorizing the plan of merger, the
Tribunal must notify the national government of any request brought to it under Sections 391 to 394,
and the Tribunal must consider the government’s submissions, if any, before delivering any order
granting or denying the scheme of merger. As a result, the central government is given a role in the
topic of company mergers before the Tribunal approves or rejects the proposal.

The Company Law Board, through its Regional Directors, exercises the central government’s duties
and responsibilities in this area. The Tribunal would allow the petitioner firm an opportunity to respond
to all concerns presented by shareholders, creditors, the government, and others when considering
the petitions of the firms following the plan of amalgamation. As a result, the organization must
remain prepared to deal with a variety of arguments and difficulties.

As a result of the Tribunal’s order, the amalgamating firm’s assets and liabilities are passed to the
merged firm. The Tribunal is particularly entitled under Section 394 to make particular provisions in its
decision certifying an amalgamation for the transfer to the merged company of the whole or any
portion of the merged company’s properties, liabilities, and so on. Only in those situations where the
Tribunal specifically instructs so in its order would the workers of the amalgamating firm’s rights and
responsibilities be moved to the merged firm.

By the Tribunal’s order authorizing a plan of amalgamation, the assets and liabilities of the transferor
company are directly routed to the merged company. The Tribunal also sets guidelines for payments
to the covered entity companies’ shareholders, the continuance by or against the issuing corporation
of any court proceedings ongoing by or against any share capital, the dissolution (without winding up)
of any transferor company, and any other incidents. The corporation to which the decision relates
must produce the decision of the Tribunal providing sanction to the scheme of amalgamation (i.e., the
merging and amalgamated companies) to the Registrar of Companies within 30 days for certification.

Acquisition
Acquisition usually refers to a larger commercial entity acquiring a smaller company. The acquisition of
all or a portion of a company’s assets for the desired business is known as acquisition. The
development of an acquired firm to assemble the power or weaknesses of the acquiring firm is known
as company acquisition. A merger is similar to an acquisition, but it refers to the merging of the
interests of two companies into one stronger entity. As a result, the industry will grow at a faster and
more profitable rate than typical organic expansion would allow. An acquisition means the acquiring of
one firm by another without the creation of a new company.

Benefits of Mergers and Acquisitions

M&A are two permanent forms of corporate combinations used to manage, control, or administrate a
company’s operations. While purchasing the company, shareholders benefit from the M&A since the
premiums offered to promote approval of the M&A because it provides a much higher fee than the rate
of shares. Typically, companies engage in M&A to combine their market influence and control.

1. Synergy is created by combining two businesses that are sufficiently influential to boost
trade recital, financial growth, and overall shareholder value over time.
2. Competitive Advantage- The new company’s merged assets aid in obtaining and sustaining
a competitive advantage in the market.
3. “Cost Efficiency- The merger increases the company’s spending power, which aids in bulk
order negotiations, resulting in cost efficiency.”
4. Improved product range and industrial exposure – Businesses acquire other businesses to
expand their market reach and profit.
 5. A merger may increase the marketing and distribution capabilities of two organizations,
opening up new sales prospects.
6. A merger can also help a company’s reputation with investors: larger companies frequently
have a better time obtaining funding than smaller companies.
7. Economic remuneration may encourage mergers and companies to fully utilize tax shields,
improve financial control, and take advantage of alternative tax benefits.
8. Geographical or other capital investment: this is aimed to smooth a firm’s earnings
outcomes, which in turn smooths the stock price over time, providing conservative
investors more confidence in the company. However, this does not necessarily result in
shareholder value.
9. Resource transfer: Because resources are allocated differently across organizations, the
interplay of target and purchasing company resources can generate value by resolving
knowledge asymmetry or merging limited resources. For example, layoffs, tax cuts, and so
on.

Difference between Acquisitions and Mergers:

ACQUISITIONS MERGERS

Meaning

An acquisition is a cycle wherein one organisation A merger is a cycle wherein more than
assumes or takes over the responsibility for another one organisation’s approach functions
organisation. as one.
Issuance of Shares

No new shares are issued in case of acquisitions. New shares are issued in case of
mergers.
Mutual Consent and Decisions

The choice of acquisitions is probably not shared, or of A merged business entity is settled
mutual consent in nature; in the event that the upon by common assent and mutual
acquiring organisation assumes control over one more consent of the involved organisations.
venture without the acquired company’s assent, it is Rather it is a planned and friendly one.
named an unfriendly takeover or hostile takeover.
Company’s Name

The obtained or acquired organisation, for the most The merged business entity works
part, works under the name of the parent organisation. under another name or a new name.
Sometimes, nonetheless, the previous company can
hold its original name, assuming the parent
organisation permits it.
Stature, by Comparison

The acquiring organisation is independently stronger in The merged companies are of similar
terms of financial capability than the acquired business. stature, operations, size, and scale of
business.
Power or Authority over the Other
The acquired company has no say in terms of power or There is harmony when it comes to
authority by the acquiring company. merged companies.
Examples

Tata Motors acquisition of Jaguar Land Rover Merging of Glaxo Wellcome and
SmithKline Beecham to
GlaxoSmithKline

Difference between Acquisitions and Mergers:

ACQUISITIONS MERGERS

Meaning

An acquisition is a cycle wherein one organisation A merger is a cycle wherein more than
assumes or takes over the responsibility for another one organisation’s approach functions
organisation. as one.
Issuance of Shares

No new shares are issued in case of acquisitions. New shares are issued in case of
mergers.
Mutual Consent and Decisions

The choice of acquisitions is probably not shared, or of A merged business entity is settled
mutual consent in nature; in the event that the upon by common assent and mutual
acquiring organisation assumes control over one more consent of the involved organisations.
venture without the acquired company’s assent, it is Rather it is a planned and friendly one.
named an unfriendly takeover or hostile takeover.
Company’s Name

The obtained or acquired organisation, for the most The merged business entity works
part, works under the name of the parent organisation. under another name or a new name.
Sometimes, nonetheless, the previous company can
hold its original name, assuming the parent
organisation permits it.
Stature, by Comparison

The acquiring organisation is independently stronger in The merged companies are of similar
terms of financial capability than the acquired business. stature, operations, size, and scale of
 business.
Power or Authority over the Other

The acquired company has no say in terms of power or There is harmony when it comes to
authority by the acquiring company. merged companies.
Examples

Tata Motors acquisition of Jaguar Land Rover Merging of Glaxo Wellcome and
SmithKline Beecham to
GlaxoSmithKline

Corporate restructuting need concept and scope:

 Corporate restructuring is an action taken by the corporate entity to modify its capital structure
or its operations significantly. Generally, corporate restructuring happens when a corporate
entity is experiencing significant problems and is in financial jeopardy.

Introduction
The process of corporate restructuring is considered very important to eliminate all the financial
crisis and enhance the company’s performance. The management of the concerned corporate
entity facing the financial crunches hires a financial and legal expert for advisory and assistance
in the negotiation and the transaction deals.

Usually, the concerned entity may look at debt financing, operations reduction, any portion of
the company to interested investors. In addition to this, the need for corporate restructuring
arises due to the change in the ownership structure of a company. Such change in the
ownership structure of the company might be due to the takeover, merger, adverse economic
conditions, adverse changes in business such as buyouts, bankruptcy, lack of integration
between the divisions, over-employed personnel, etc.

Types of Corporate Restructuring

 Financial Restructuring: This type of restructuring may take place due to a severe fall in
the overall sales because of adverse economic conditions. Here, the corporate entity may
alter its equity pattern, debt-servicing schedule, equity holdings, and cross-holding pattern.
All this is done to sustain the market and the profitability of the company.

 Organisational Restructuring: Organisational Restructuring implies a change in the

organisational structure of a company, such as reducing its level of the hierarchy,
redesigning the job positions, downsizing the employees, and changing the reporting
relationships. This type of restructuring is done to cut down the cost and to pay off the
outstanding debt to continue with the business operations in some manner.
 Reasons for Corporate Restructuring
Corporate restructuring is implemented in the following situations:

 Change in the Strategy: The management of the distressed entity attempts to improve its
performance by eliminating certain divisions and subsidiaries which do not align with the
core strategy of the company. The division or subsidiaries may not appear to fit
strategically with the company’s long-term vision. Thus, the corporate entity decides to
focus on its core strategy and dispose of such assets to the potential buyers.

 Lack of Profits: The undertaking may not be enough profit-making to cover the cost of
capital of the company and may cause economic losses. The poor performance of the
undertaking may be the result of a wrong decision taken by the management to start the
division or the decline in the profitability of the undertaking due to the change in customer
needs or increasing costs.

 Reverse Synergy: This concept is in contrast to the principles of synergy, where the value
of a merged unit is more than the value of individual units collectively. According to reverse
synergy, the value of an individual unit may be more than the merged unit. This is one of
the common reasons for divesting the assets of the company. The concerned entity may
decide that by divesting a division to a third party can fetch more value rather than owning
it.

 Cash Flow Requirement: Disposing of an unproductive undertaking can provide a

considerable cash inflow to the company. If the concerned corporate entity is facing some
complexity in obtaining finance, disposing of an asset is an approach in order to raise
money and to reduce debt.

Characteristics of Corporate Restructuring

 To improve the Balance Sheet of the company (by disposing of the unprofitable division
from its core business)

 Staff reduction (by closing down or selling off the unprofitable portion)

 Changes in corporate management

 Disposing of the underutilised assets, such as brands/patent rights.

 Outsourcing its operations such as technical support and payroll management to a more
efficient 3rd party.

 Shifting of operations such as moving of manufacturing operations to lower-cost locations.

 Reorganising functions such as marketing, sales, and distribution.

 Renegotiating labour contracts to reduce overhead.

 Rescheduling or refinancing of debt to minimise the interest payments.

 Conducting a public relations campaign at large to reposition the company with its
consumers.

Important Aspects to be Considered in

Corporate Restructuring Strategies
 Legal and procedural issues

 Accounting aspects

 Human and Cultural synergies

 Valuation and funding

 Taxation and Stamp duty aspects

 Competition aspects, etc.

Types of Corporate Restructuring Strategies

 Merger: This is the concept where two or more business entities are merged together
either by way of absorption or amalgamation or by forming a new company. The merger of
two or more business entities is generally done by the exchange of securities between the
acquiring and the target company.

 Demerger: Under this corporate restructuring strategy, two or more companies are
combined into a single company to get the benefit of synergy arising out of such a merger.
 Reverse Merger: In this strategy, the unlisted public companies have the opportunity to
convert into a listed public company, without opting for IPO (Initial Public offer). In this
strategy, the private company acquires a majority shareholding in the public company with
its own name.

 Disinvestment: When a corporate entity sells out or liquidates an asset or subsidiary, it is

known as “divestiture”.

 Takeover/Acquisition: Under this strategy, the acquiring company takes overall control of
the target company. It is also known as the Acquisition.

 Joint Venture (JV): Under this strategy, an entity is formed by two or more companies to
undertake financial act together. The entity created is called the Joint Venture. Both the
parties agree to contribute in proportion as agreed to form a new entity and also share the
expenses, revenues and control of the company.

 Strategic Alliance: Under this strategy, two or more entities enter into an agreement to
collaborate with each other, in order to achieve certain objectives while still acting as
independent organisations.

 Slump Sale: Under this strategy, an entity transfers one or more undertakings for lump
sum consideration. Under Slump Sale, an undertaking is sold for consideration irrespective
of the individual values of the assets or liabilities of the undertaking.
FINANCIAL RESTRUCTURING:

Creation and maximization of value (also called wealth) is said to be the objective function of Financial
Management. There are diverse ways by which value maximization occurs in a business firm. When the
demand for goods and services is growing, firms tend to expand their business capacity and seize the
opportunity of increasing demand. This could be done by constructing more production units or opening
up of more and more operational units. Alternatively, expansion of business activity also, could be made
possible through the acquisition of other businesses. It is natural to acquire business units of similar
nature or producing the same or similar goods and services. Sometimes, companies also expand their
size of operations by taking over of unrelated businesses; not having any relation to the present
business or businesses carried out. The former is called ‘related diversification’ and later is known as
‘unrelated diversification’. Some of the takeovers that happened in India in the present century are: (1)
Mittal Steel taking over of Arcelor Steel, (2) Vodafone and Idea merging into one, (3) Wal-Mart acquiring
Flipkart, (4) Tata Steel bought out Corus Steel, and (5) Vodafone acquiring majority stake in Hutch Essar.
These are all the examples for related diversification. Companies that are prospering well and that have
accumulated cash surpluses venture to diversify into many other areas of business activity as has been
done by big business houses in India such as Reliance Industries, Bharti Enterprises, Birla Group, ITC,
Adani Group, Videocon Industries, and many others. In all these cases, the main objective is to maximize
the value of the individual business firm or the Group. In the broader sense, this is termed as ‘Corporate
Restructuring’. Let us know about this in much more detail.

METHODS OF FINANCIAL RESTRUCTURING

As could be noticed from the above discussion, there are many methods of Financial Restructuring.
Quoted above are examples of just two of the variants (buyback of shares and repayment of Debt). The
following is the list of such methods, which are presently resorted to by companies in India. Each of
these methods is explained in detail.

• Buy back of shares.

• Conversion of Debt/Preference Shares into Equity

• Corporate Debt Restructuring

• Leverages Buyouts

• Equity Restructuring

• Divestiture

• Disinvestment

• Changes in Capital Structure