M & A

• 1.MERGERS • Merger is defined as “ a combination of two or more companies into a single company.” • A merger an take place either as an amalgamation or absorption.

• 2. ACQUISITIONS: • Acquisition, a broad term, inter alia, subsumes the following transactions: A. Merger B. Purchase of Division of Plant C. Take-over.

.. MERGER: • A combination of two or more companies into one company. It may involve absorption or consolidation. • In an absorption.. one company acquires another company. For ex: H L L absorbed Tata Oil Mills Ltd. two or more companies combine to form a new company. • In Consolidation.• A.

. For ex: SRF bought the nylon cord division of CEAT Ltd. • The shareholders in the amalgamating companies receive shares in the amalgamated company in some exchange ratio. • B.. mergers are called amalgamations in the legal parlance. PURCHASE OF DIVISION OF PLANT: • A company may acquire a division of plant of another company..• In India.

• Unlike a merger or Purchase of Division. INDAL was merged into HINDALCO).• C. however. TAKE-OVERS: • A takeover generally involves the acquisition of a certain stake in the equity capital of a company which enables the acquirer to exercise control over the affairs of the company.( Subsequently. a takeover does not involve transfer of assets. • For ex: HINDALCO took over INDAL from it‟s overseas parent ALCAN. .

• Takeover may be defined as “a transaction or series of transactions whereby an individual or group of individuals or company acquires control over the management of the company by acquiring equity shares carrying majority voting power”. . • Companies having potential growth are normally taken over by big companies.

. A controlling interest is that proportion of the total shareholding which results in control of the administration of the company through a majority in the Board of Directors. • However.• If shares totalling 51% of the total value of capital are held by the acquirer. There exists a concept called „controlling interest‟. in most corporate takeovers. it is not necessary to acquire 51% or more of the shareholding. the takeover is complete and the acquirer gets the status similar to that of a „holding company‟. This could be as low as 5% or as high as 51% of the total number of shares.

DIVESTMENT/ DIVESTITURES: • While acquisitions lead to expansion of assets or increase of control. divestitures result in contraction of assets or relinquishment of control. Demerger • C. Partial Sell-Off • B.• 3. . Equity Carveout. The common forms of divestitures are: • A.

PARTIAL SELL-OFF: • This involves a sale of a biz division or plant of one company to another. . DEMERGER: • Demerger involves the transfer by a company of one or more of it‟s biz divisions to another company which is newly set-up. • B. • The company whose biz division is transferred is called the demerged company and the company to which the biz division is transferred is called the resultant company.• A.

EQUITY CARVEOUT: • Here.• C. • For ex: The Indian government sold 10% share in ONGC through a public issue. The sale may be to the general investin public or a strategic investor. the parent company sells a portion of it‟s equity in a wholly owned subsidy. .

Split-Offs • C. CONTRACTION • Contraction is a form of restructuring which results in a reduction in the size of the firm.• 4. It can take in the form of: • A. Spin-Offs • B. Split-Ups .

. SPIN-OFFS: • This is a transaction in which a company distributes on a pro-rata basis all of the shares it owns in a subsidiary to it‟s own shareholders. For ex: Air India has formed a separate company named Air India Engineering Services Ltd. by spinning-off it‟s engineering division. • The new entity has it‟s own management and is run independently from the parent company.• A. .

• B. SPLIT-OFFS: • In a split-off, a new company is created to take over the operations of an existing division or unit. A portion of the existing shareholders receives stock in a subsidiary (new company) in exchange for parent company stock. • A split-off does not result in any cash inflow to the parent company.

• C. SPLIT-UPS: • In a split-up, the entire company is broken up in series of spin-offs, so that the parent company no longer exists. For ex: Karnataka Electricity Board was split-up in 1999-2000 as part of power sector reforms, into KPC, BESCOM, MESCOM and so on. KPC generates power and other split-ups distribute the power.

• 5. ASSET PURCHASE: • Asset purchase/ acquisition involve buying the assets of another company. These assets may be tangible assets like manufacturing division or intangible asset like brands. • Ex: Coca Cola paid Rs. 170 Crore to Parle to acquire it‟s soft-drinks brands like Thums-Up, Limca, Gold Spot,etc.,.

.• 6. • When a company is cash-starved. it may sell one or more assets to generate cash so that it can comfortably operate the remaining assets( Plant or Divisions). ASSETS SALE: • It involves the sale of tangible or intangible assets of a company to generate cash.

LEVERAGED BUYOUTS ( LBOs) 8. ESOP LEVERAGED BUYOUTS LBO is a financing technique where debt is used in the acquisition of a company.• • • • • • CHANGES IN OWNERSHIP STRUCTURE 7.c by debt. • A management buyout is an LBO in which managers of the company buy a division or the entire company by paying p. . GOING PRIVATE 9.

GOING PRIVATE • It refers to the transformation of a public corporation into a privately-held company. It involves the purchase of the entire equity holding previously held by the government by a small group of investors.• 8. .

The assets are allocated to the employees and are not taxed until withdrawn by them. as an anti-takeover defense.• 9. • ESOPS are involved in mergers and LBOs in two ways--. including through LBOs and secondly. E S O P • An Employee Stock Option Plan is a mechanism where • by a company can make tax deductible contributions of cash or stock into a trust.as a financing vehicle for the acquisition of companies. .

TAKEOVER DEFENSES • There are pre-bid and post-bid defenses for the target company to check (stop) the onslaught of the acquiring company. . the target implements post-bid (or active) defences. • When the pre-bid defenses fail to fend-off an unwanted bid. • Pre-bid defenses also called preventive defenses are employed to prevent a sudden.• 10. unexpected hostile bid from gaining control of the company.

• 11. HORIZONTAL MERGER • When a company takes over another company/companies in the same industry. then it called horizontal merger. both are companies in the telecom industry. For example: In India. VODAFONE took over HUTCHINSON. .

. such merger is called vertical merger. having forward/ backward integration merge. In the same way. an automobile company taking over automobile spareparts making company.• VERTICAL MERGER • When two or more companies. For ex: A tyre manufacturing company takes over nylon cord making company or/and rubber producing company.

HEALTHY/ FRIENDLY MERGER • If the BoD of the target company accepts the bid. HOSTILE MERGER • When the reaction of the BoD of the target company opposes the bid by an acquirer. • 14. • LAXMI MITTAL‟S TAKE OVER OF ARCELOR STEEL COMPANY IS A HOSTILE TAKEOVER. then it is deemed to be a friendly or healthy take over. then it is hostile merger.• 13. .

MOTIVES FOR MERGERS & TAKEOVERS M&T activities are primarily the result of following factors and strategies. . STRATEGIC MOTIVES 1. which are classified as: a) Strategic motives b) Financial motives c) Organizational motives. Dealing with the entry of MNCs – Merger or joint venture is a possible strategy for survival with the arrival of MNCs. Expansion and growth 2.

Economies of scale 4. Market penetration – Traditionally a company might be catering to the upper class or middle class segment. total reach to the market becomes easier. . By taking over a company which caters to other class. Synergy 5.3.

K. New product entry – Entering into a new product market is a time consuming effort. this becomes easier. Market leadership 7. By M&A. 9. the entry to new market is easy. New market entry – By taking over a company which is operating in a geographical area where the acquirer company is not presently operating. For ex: Tatas acquired Jaguar in U. . Backward/ Forward Integration 8.6.

say. If the main product is seasonal. say. it is difficult to survive for long without growing big. production capacity. Minimum size – In a growing market. “sugar” – it will be beneficial to add another non-seasonal product.10. managerial talent) M&T might offer good potential. Balancing product cycle – Combining with a complementary industry to compensate for the fluctuations in a product cycle may be good strategy. Surplus resources – To obtain additional mileage from an existing resource (be it funds. „plastics and nylons‟ in the company‟s fold. . marketing network. 12. 11.

13. by diversifying from traditional business activity to latest technology-related businesses like information technology. . 14. 15. it is wise to takeover the business belonging to a young and potential industry. Arresting downward trend – If the trend in the industry is pointing downward. print media. Growth and diversification strategy. Re-fashioning – Some companies resort to M&T as a strategy by entering into high profile business through acquisition route.

FINANCIAL MOTIVES 1. Deployment of surplus funds – The cash- rich companies always look around to take over cash-strapped companies with a view to deploy funds in investiable projects. 2. Fund raising capacity – The increase in fixed assets and current assets base will improve the fund-raising capacity. 3. Market capitalisation – The rise in income of target company increases the EPS as well as market value of share. This will result in increase of market capitalisation.

4. Operating economies – The combination will effect in saving overheads and other operating costs and will help in increasing the profitability of the organisation. 5. Tax benefits – A company which has accumulated losses and unabsorbed depreciation can carry forward and offset against future taxable profits and reduce tax liabilities in amalgamating company. 6. Revival of sick unit – If a viable unit becomes sick, a healthy company may like to merge it so as to reap the benefit of the hidden potentials of the sick unit.

7. Asset stripping – If the market value of the shares is quoted below the true net-worth of the company, it will be a target for acquisition. 8. Increasing EPS – If the bidding company has a lower EPS as compared to that of target company, the bidder can increase it‟s overall EPS after acquisition, if the share exchange ratio is 1:1. The process of increasing EPS through acquisition is called „boot-strapping’.

ORGANISATIONAL MOTIVES 1. . Ego satisfaction – The money power available with the top management of big corporate houses do prompt the managers to explore the possibilities of M&A. The size of the combined enterprise satisfies the ego of the entrepreneur and the senior managers. 2. This will enhance the stability and growth rate of both the companies. managerial skills are also pooled together. Superior management – By merger.

. M&T are attempted. Removal of inefficient management – M&A is a quick remedy to replace inefficient management from an organization which has high product strength. Retention of management talent – To assure growth to the senior management people in order to retain the management talent.3. 4.

• WHY DO COMPANIES ACQUIRE? • Companies seek to expand and grow instantly to become formidable force in the market. etc. brand monopoly.. The quick and effective way to gain this control is by fattening themselves. They want become market-leaders. This is done by acquring other companies.. . they want to multiply their turn-overs so that they have a greater say such as price-leadership. in the sense.

• The intending acquirer keeps on buying the equity shares of the target company in the open market( i. otherwise it may turn out to be a hostile takeover. it will be friendly takeover.• HOW MERGER IS EFFECTED? • By adopting Carrot and Stick Policy. . If the target accepts the offer...e. Then the aquirer approaches the target with offer.. through stock-exchange) without leaving suspicion to the target co.

To concentrate on core biz activities. To protect the firm from takeover bid by someone by selling-off the desirable division to the bidder. • 2.• SELL-OFFS • A division/s may be sold-off in order to concentrate on core biz divisions. . To improve the profitability of the company by sellingoff loss-making division/s. In the following circumstances. • 4. • 3. a division/s may be sold-off: • 1. Severe liquidity problem.

on the other hand. involves some kind of contraction. They are based on the principle of SYNERGY which says 2+2=5!. • Divestment.• WHY DIVESTMENT/DIVESTITURES? • Mergers. . It is based on the principle of ANERGY which says • 5-3=3!. asset purchases. and take-overs lead to expansion in some way or the other.

• It is easier to acquire than setting-up a new company or setting-up a new division. .• WHY MERGER? • Companies seek to expand and mergers are seen as a quick and effective way to do so.

.S till date.II. Biz prospects coincided with competitive conditions directly motivate a new strategy results in stimulating M&A strategy. MERGER WAVES • FIVE merger waves have been witnessed in the U. • Firms are motivated to make large investments only when the biz prospects are favourable. • All the merger movements occurred when the economy experienced the sustained high growth rates.

. • More than 3000 cos disappeared in this wave. Du Pont Inc. .I WAVE. Navistar International.. Eastman Kodak and American Tobacco Inc. such as GE. • Another feature of this wave is the formation of trusts such as J. • Some of today‟s industrial giants originated in this wave.1897-1904 • In this wave..P Morgan etc. mainly horizontal mergers took place. Std Oil... which resulted in a near monopolistic market structure.

.S Steel and Cornegie Steel took place during this period resulting in merger of 785 different steel cos.• This wave created large monopolies. • The expansion of the scale of biz required greater managerial skills and lead to specialisation in management. they exploited economies of scale in production and distribution. The first billion-dollar mega merger deal between U. . • As firms expanded..

one of the basic ingredients of take-overs ended. resulting in the halting of the first wave. • The era of easy availability of finance.• The fraudulent financing of mergers resulted in collapse of companies in 1900s and the stock –market crash of 1904 and closure of many banks paved the way for the formation of the Federal Reserve. .

• The powerful anti-trust laws made a crackdown on large monopolies.etc.. MOBIL. AMOCO.CHEVRON. . For ex: Standard Oil which controlled about 80% of oil production and distribution was broken into 30 companies such as EXXON.

• The consolidation pattern which was established in the first merger wave continued in this wave also. The result was an oligopolistic industry structure(rather than monoplly). . • The most active areas were banking and public utilities industries.II WAVE– 1916-1929 • This wave also began with an upturn in biz activity.

mining.• The second merger period witnessed the formation of many prominent corporations of today such as GM. . IBM.000 manufacturing. 12. • A total of 4600 merger took place. public utility and banking companies disappered in this wave. UNION CARBIDE and JOHN DEERE.

Depression worsened. • Note: INVESTMENT BANKERS PLAYED A KEY ROLE IN THE FIRST TWO PHASED OF MERGERS.• The expansion of railroad. motor transportation and radio(ads) enhanced competition among firms. 1929. . This led to the era of mass merchandising. • The second merger wave came to an end when the stock market crashed on October 29.

Italy and Japan. • ECONOMISTS POINTED OUT THAT GOVERNMENT REGULATIONS AND TAX POLICIES ARE MOTIVATING FACTORS BEHIND MERGERS.THE 1940s • DURING THE SECOND WORLD WAR PERIOD. urged cos not to compete but work together to win against axis powers.. THE MERGERS WERE SLOW. Germany. i. The U.e.S Federal Govt. ..

The Federal Govt.. . • In this period.III WAVE– 1965-1969 • The historically highest level of mergers was reached in this period.S Central Govt) came down heavily on both horizontal and vertical mergers.( U. • MERGERS OF DIVERSIFIED ACTIVITIES TOOK PLACE ( CONGLOMERATE MERGERS) due to the tougher anti-trust enforcement. relatively smaller companies targeted larger companies for acquisition. due to the booming economy.

• Firms with financial reso. • The rapid growth in management science accelerated the conglomerate movement.i. • MANAGEMENT GRADUATES WITH HIGHSKILLED MANAGEMENT EDUCATION BELIEVED THAT THEY COULD MANAGE A WIDE VARIETY OF ORGANISATIONAL STRUCTURE. . found that the only alternative was to form conglomerates.urces. CONGLOMERATE STRUCTURE which became a reality. which sought to expand.e..

S.• Around 6000 mergers with the disappearances of around 25000 cos took place in the U. • THE BOOMING STOCK MARKET PRICES PROVIDED EQUITY FINANCING TO MOST OF THE CONGLOMERATE TAKE-OVERS. Investment bankers were not in the scene. .

took-over healthcare co. and its core biz suffered. For ex: REVLON– a cosmetic manufacturing co.. ..• Many of the mergers failed as managers of the diverse cos had little knowledge of specific industries that were under their control.

. • The fourth wave was a period of mega mergers. HOSTILE MERGERS PLAYED A SIGNIFICANT ROLE IN THIS WAVE..IV WAVE– 1981-1989 • This wave started soon after 1974-75 recession in the U. e.S.g. Deregularisation in some industries was the majin reason behind mega mergers . deregularisation of airline industry.


• The yield on junk bonds was significantly higher than that of investment grade bonds. . The phenomenon LEVERAGED BUYOUTS EMERGED. • The investment bank DREXEL BURNHAM LAMBERT pioneered the growth of the junk bond market.• Another important feature of this wave is the increased use of debt to finance acquisition.

V WAVE– 1992 ONWARDS • This wave is witnessing mega mergers. . • The number of strategic mergers outnumber the hostile takeovers. • This wave is emphasizing strategy more than quick financial gains. • Deregulation and rapid techological changes are leading to high level of mergers. Most of the deals are financed through the increased use of equity shares.

entertainment and media industries are some of the leading consolidations. and due to globalisation.S. CROSSBORDER mergers are taking place. • Many banks are grown larger than Central Banks.• Banking. telecommunications. • The merger activity is not confined to U. .

Pacific Telesis Global Crossing .Major mergers in the Telecom Sector • • • • • • • • ACQUIRER Vodafone MCI Worldcom Bell Atlantic AT&T SBC U.S West TARGET Mannesman Spirit GTI. NYNEX McCaw Cellula Ameritech.

Major mergers in Media&Entertainment sector • • • • • • ACQUIRER America On-Line Viacom Walt Disney AT&T Time Warner TARGET Time Warner CBS Capital Cities/ ABC Media One Turner Broadcasting .

License Raj existed upto 1990.MERGERS & ACQUISTIONS IN INDIA • FIRST PHASE: PRE-LIBERALISATION ERA. • This is upto 1990. . Industry capacity was restricted due to licensing. • The landmark event was when Tata Tea acquired 50% of equity of Consolidated Coffee Ltd and took-over it. Still cos resorted to conglomerate mergers.

THE POST-LIBERALISATION ERA • The recession in the 1990s and the liberalisation created new challenges. or perish. • Bulk of M&A deals have been on cash basis. • Finance and IT cos score heavily in M&A. . • Indian cos should grow to withstand the competitions from multi-nationals.

and GUJARAT AMBUJA acquired DLF Cement and half of TATA‟s share in ACC to capture a major share in the market between the two of them. the French firm LAFARGE bought the cement unit owned by TISCO. For ex: In the Cement Industry. so the chances of M&A are also high.• Since there are no barriers for entry of new cos. • M&As have been found useful to consolidate the market position. .

.• The larger cellular cos are consolidating their market share through buyouts. HEWLETTE &PACKARD and COMPAQ have shookup the Indian markets handled by their Indian subsidiaries. • Some global mergers like the mergers of ANZ GRINDLAYS BANK and STANDARD CHARTERED BANK.

• KPMG study found that only 30% of cases of M&A in India created shareholders‟ value while in 31% cases. the shareholder value was diluted. . second only to Japan. the highest M&A took place in India. • Indian M&A activity is spreading as Indian cos are acquiring cos overseas. • In 2005.

• 5.Growth. Profitability through economy of scale. . Reducing the tax liability because of the provision of setting-off accumulated losses and unabsorbed depreciation of one co.. To overcome the extinction fear.Diversifying the risk of the co.. • 4. Limiting the severity of competition. against the profits of another. But more important advantages are: • 2.. • 3.What are the real advantages of M&A ? • 1. • . Operating Efficiency and Synergy.

of cos have merged in India to take advantage of this provision. .. at a cheaper price. can save tax………. the acquirer hits two birds with one stone. • When two cos merge through exchange of shares. for calculating it‟s tax liability.TAX BENEFITS OF M&A • A co.. is allowed to C/fd losses to set-off against it‟s future profits. • A large no.. the shareholders of vendor co.. By taking a loss-making co.

tax benefits are responsible for 1/3 mergers in the U.• A strong urge to reduce tax liability is a strong motivation for the merger of cos.. . • The high rate of tax was the main reason for high merger activity in the U.S and more than 70% mergers in India.S in the post-second world war period. So far..

Lowering the financial costs. A merger may help in: • 1. Deploying surplus cash • 3. Eliminating the financial constraints • 2. .Financial Benefits of M&A • M&A can result into FINANCIAL SYNERGY and benefits. Enhancing Debt capacity • 4.

• EA = V a+b – ( V a + Vb ) • The EA is divided between the acquiring and the target cos in share exchange ratio. .Value created by Merger • Merger will create an economic advantage ( EA) when the combined P V of the merged cos is greater than the sum of their individual PVs as separate entities.

Limit competition 2. Achieve diversification 5. Circumvent govt.Image of aggressiveness.Utilise under-utilised market power. Displace existing management 8. • Some of the reasons for M&A are: • 1. Establish a transitional bridgehead.7. Accelerate the growth 4.3. regulations 9. OBJECTIVES AND ADVANTAGES • Why do mergers take place? • Mergers and acquisitions are strategic decisions leading to the maximisation of a co‟s growth by enhancing it‟s production and marketing operations. . Gain economies of scale 6.M&A NEED.

M&As have the potential for social benefits.THEORIES OF MERGERS • EFFICIENCY THEORIES • These theories suggest that M&As provide a mechanism by which capital can be used more efficiently and that the productivity of the firm can be increased through economies of scale. According to these theories. .

Pure Diversification. Strategic Realighment to changing Environment. and • Undervaluation. Synergy.• • • • • • These theories can be further divided as: Diffirential Efficiency Theory. . Inefficient Management Theory.

involving fairly complex legal. I. Examination of Object Clause: The Memorandum of Association of both the companies should be examined to check whether MA gives power for amalgamation.MECHANICS OF A MERGER A merger is a complicated transaction. If such clause does not exist. Legal procedure II. . then necessary approval of shareholders and Company Law Board should be obtained. Accounting provisions III. accounting and tax considerationd. While evaluating a merger proposal. LEGAL PROCEDURE: 1. Tax aspects. the following should be borne in mind: I.

Intimation to stock exchanges: The stock exchanges where the amalgamated and amalgamating companies are listed. they have to approach the HC of the states in which their Registered Offices are situated.2. should be informed about the amalga-mation proposal. Draft Amalgamation proposal: This should be approved by respective Boards. 4. 3. . Application to the Court (High Court): After the draft proposals are approved by the Boards. to get it‟s approval to convene joint meetings of shareholders and creditors for passing special Resolution for merger.

the HCs pass Orders sanctioning the same. Despatch of Meeting Notices to share-holders and creditors. Petition to the HCs for confirmation and passing or Orders: After step-6 as above. Holding of Joint Meetings of shareholders and creditors: A special resolution ( where atleast 75% of members present should vote in favour of the proposal) should be passed approving the merger. 7. 6. The HC is empowered to modify the scheme and pass Orders accordingly. If the HCs feel the scheme of merger is fair and reasonable. they have to present petitions to respective HCs for confirming the scheme of amalgamation.5. .

Filing the Court Order with the Registrar of Companies: Certified true copies of the HC order should be filed with the Registrar of Cos.8. The new shares and debentures so issued will then be listed on the stock exchange.c... 10... within time limit specified by the Courts. Transfer of Assets and Liabilities: Assets and Liabilities of amalgamating cos. . should issue shares and debentures as p. Issue of Shares and Debentures: The merged co. should be transferred to merged company. 9. by both the cos.

. an amalgamation can be in the nature of either „uniting interests‟ which is referred to as “Amalgamation in the nature of merger” or “Acquisition”. ACCOUNTING FOR MERGER: The ICAI (Institute of Chartered Accountants of India) has issued AS-14(Accounting Standard-14) regarding merger. According to AS-14.II.

by issue of equity shares...c should be discharged by the transferee co.The conditions to be fulfilled for an amalga-mation to be treated as an “Amalgamation in the nature of merger” are as follows: i) All assets and liabilities of amalgamating company should become Assets and Lia-bilities of amalgamated co.)...) should become shareholders in the transferee co. ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor co. (amalgamating co. Cash can be paid in respect of fractional shares. ... (amalgamated co/merged co. iii) The p..

is intended to be carried on by the transferee co.... if 5 conditions are not fulfilled) is treated as an Acquisition. . intends to incorporate into it‟s B/S the book-values of assets and liabilities of the transferor co.. i. An amalgamation which is not in the nature of merger (as shown above...e. v) The transferee co.vi) The biz of transferor co. without any adjustment except to the extent needed to ensure uniformity of accounting policies as per AS.

ACCOUNTING TREATMENT IN THE BOOKS OF TRANSFEREE COMPANY (AMALGAMATED CO.. the Assets and Liabilities of the merging companies are aggregated. the “pooling of interest” method is to be used and for an „acquisition‟. .): The accounting treatment depends on the nature of amalgamation as stated above. The difference in capital on account of the share swaps is adjusted in the reserves. “Pooling Interest” method: Under this method. For a „merger‟. Likewise. the “purchase” method is to be used as AS-14. appearing in the B/S of the transferor company is c/fd into the B/S of the transferee company.

“Purchase Method”: Under this method. it should be amortized over a period of 5 years. The difference between the p. If Goodwill arises.. ( problem to be solved on these two methods) . the Assets and Liabilities of the transferor co..c and fair book values of assets and liabilities is treated as “Goodwill” or “Capital Reserve” as the case may be. at their fair market values. are carried into the books of the transferee co.

Tax concessions are granted to the amalgamated company if it is an Indian company.III. if the following conditions are fulfilled: (a) All the assets and liabilities of amalga-ting companies are transferred to amalgamated company.: . TAX ASPECTS: The amalgamated company is entitled to various tax benefits. (b) Shareholders holding not less than 90% in face value of the shares of the amalgamating company become shareholders of the amalgamated company. Following deductions to the extent available to the amalgamating company and remaining unabsorbed or unfulfilled will be available to the amalgamated co..

will become c/fd of losses and unabsorbed depreciation of amalgamated co. copy-right and know-how.. • Amortization of preliminary expenses. The c/fd loss and unabsorbed depreciation gets a fresh lease of 8 years in amalgamated co. e. on certain conditions. • Expenditure for obtaining license to operate telecommunication services. atleast for 5 years from the date of amalgamation.... • *C/fd of losses and unabsorbed depreciation. • Expenditure on acquisition of patent.g.. *C/fd of losses and unabsorbed depreciation of amalgamating co.• Capital Expenditure on scientific research.. to set-off and c/fd. should carry on the business of amalgamating co. . the amalgamated co.

and 14% of the total. Disclosure: Any acquirer who acquires shares or voting rights in a company (shares or voting rights in a company is termed as “holding”) which exceeds 5%. 10%.SEBI TAKEOVER CODE The important provisions of the SEBI Takeover Code are as below: 1. shall disclose at every stage of the aggregate of the holdings to the company and to the concerned stock exchange/s. . The stock exchange makes public announcement of the same.

. 3. the acquirer has to appoint a Category 1 merchant banker registered with SEBI. unless the acquirer makes a public announcement to acquire shares through a public offer. The merchant banker should ensure that the public announcement of the offer is made in accordance with the SEBI regulations.2. and necessary funds are arranged by the acquirer for the purpose. Trigger Point: No acquirer shall acquire holdings equal to or exceeding 20% of the total (total voting rights in the target company). the acquirer is able to implement the offer. Merchant Banker: Before making a public offer.

and the opening and closing date of the offer. the merchant banker should make a public announcement.4. average price paid by the acquirer. . 5. object of acquisition. preferential offer price made in the last 12 months. Public Announcement: Within 4 working days of the agreement or the decision of the acquirer to acquire shares/voting rights in excess of the specified percentages. the minimum offer price. Offer Price: The Offer price to the public shall not be less than the highest of the following: negotiated price. and the average of the weekly high and low for the last 26 weeks. The public announcement should provide information about the number of shares proposed to be acquired.

6. Obligations of the Acquirer: The acquirer must ensure that the letter of offer reaches shareholders within 45 days from the date of public announcement and payment is made to shareholders who have accepted the offer within a period of 30 days from the date of the closure of the offer. 7. . Obligations of the Board of the Target Company: After the public offer made by the acquiring company. the Target company should arrange a shareholders meeting and obtain the approval of the shareholders to respond to the public offer of the acquirer.

or deposit of acceptable securities with the merchant banker. 100 Crore in an escrow account. 100 Crore and 10% of the amount exceeding Rs. the acquirer is required to deposit atleast 50% of the amount payable for the public offer in an escrow account. The escrow account should consist of cash deposit. If the competitive bid by some other bidder is higher than the offer of the acquirer. or bank guarantee in favour of the merchant banker. the can make a revised offer. Competitive Bids: Competitive bids can be made within a period of 21 days of the public announcement of the first offer.8. Provision of Escrow: As a guarantee. When an offer is subject to a minimum level of acceptance. the acquirer is required to deposit atleast 25% of the amount payable for the public offer up to Rs. 9. .

Creeping Acquisition: An acquirer who already has more than 15% holding in the target company can do a creeping acquisition of up to 5% per year without triggering off the open offer requirements. .10.

. physical work environ-ment.. etc. etc.. • H R due diligence attempts to evaluate how people are managed between the two companies such as their pay. leadership styles. rules. incentives. pension plans.DUE DILIGENCE • Each company will have it‟s own culture.. compensation plans. internal communication. derived from several components--. .corporate policies. • Cultural due diligence attempts to answer the questions as to what extent can the two companies change and adopt to differences between the two corporate cultures.

Planning the attack.• Failure to address cultural. i. • There are two main processes prior to negotiating a deal in which HR factors need to be covered: 1. Conducting Due Diligence. . • Consider people as financial asset. social..e. 2. Planning the acquisition strategy. and HR issues are reasons behind failed mergers.

PLANNING THE ATTACK: The importance of human factors as a contributor to the overall acquisition strategy will vary.If we buy.1. Following are some factors: • Culture---. depending on the nature of the deal.what is in the talent bank of target? Do they have the skill we (acquirer) need? • HR processes---. what are the opportunities to add value? .what are they like? Will the acquirer need to make changes if he (the acquiring company) buys the target? • Talent----.

. • Employment agreement and legal compliance. • Remuneration. DUE DILIGENCE: What to look for? • Culture and Talent indicators. • Workforce assessment.2.

Through these measures.TAKEOVER DEFENSES like the • The presence of certain characteristics strong and stable cashflows.. So. low levels of debt in the capital structure. make the company vulnerable to a takeover. . low stock(share) price compared to the value of the assets of the firm. etc. the pace of the takeover attempt can be slowed down and the acquisition becomes more expensive for the bidder. some preventive measures are to be adopted before hand to demotivate a bidder.



• I. acqusition of certain % of the co‟s shares by the bidder. . POISON PILL • Additional shares are issued to share-holders to make the firm less valuable in the eyes of a hostile bidder.e.. the company activates these shares and shares gain value. The moment it is known that the bidder has acquired the shares in the company. This makes the bidder an insignificant shareholder and he retreats. These shares have no value till the happening of a triggering event i.

the rights are activated.• Basically there are two types of Poison Pills: Flip In and Flip Over. Whenever the bidder acquires a certain % of stock. In this case. . the shareholders are given common stock dividend in the form of rights to acquire the firm‟s common or preference shares at an exercise price above the market price.Whenever bidder surfaces. • FLIP IN PLAN: IN this plan. shareholders are given a common stock dividend in the form of rights for each they own. the rights are activated. • FLIP OVER PLAN: in this. the shareholders can purchase the bidder‟s shares at a heavy discount.

the shareholders receive a rights dividend which gives them the capacity to exchange the right to stock (shares) for cash or senior securities (old debentures) that are equal in value to a specific back end price fixed by the BoD.• II. . BACK END PLANS: • This is an alternative to Poison Pill. Under these plans. These rights are excercisable when a bidder purchases shares in excess of a specific % of the target‟s o/s shares. These plans are also known as note purchase rights plan.

• POISON PUTS • This involves issuance of bonds that contain a put option which become excercisable in the event of a hostile takeover bid. The Option allows the holders to sell the securities to other individuals or companies for a specific price. In the event of takeover. . the large cash payout to the bond-holders becomes inevitable– this discourages the bidder in his attempt to takeover.

• IV. . the entire management team threatens to resign in the event of takeover. The fear of loosing good team may discourage the raider and he may withdraw.This threat is especially useful if the incumbent mgt is a very good team. PEOPLE PILL • Sometimes.

Only one class is up for re-election each year.• CORPORATE CHARTER AMENDMENTS • V. This delays the effective transfer of control in takeover. of different classes or groups. This discourages him from hostile takeover attempt. • So. the hostile bidder has to wait for few more AGMs to gain the control of the board in spite of holding the majority of shares. STAGGERED OR CLASSIFIED BOARDS • The BoD is divided into no. .

.• VI. DUAL CAPITALISATION • Under this defense mechanism. the BoD are authorised to create a new class of securities with special voting rights. This voting power is given to a group of stockholders who are friendly to the mgt.This results in the mgt increasing it‟s voting control of the company and the bidder‟s plan is defeated.

provides to the top managements. GOLDEN PARACHUTE • These are distinctive compensation agreements that the co. This provides for lump-sum payments to certain senior mgt people on either VRS or compulsory termination of their jobs.• VII. . This compensation package may be used in advance of a hostile bid to make the target less attractive. This may also be used in the midst of a takeover battle. The liquidity of the target is drained and the bidder is no more interested..

This is a spin-off of blackmail... The potential acquirer is required to sign an agreement called STANDSTILL AGREEMENT whereby he undertakes not to begin a bid for the control of the co. .POST-OFFER DEFENSES • VIII. GREEN MAIL: • This refers to the buying back of shares at a substantial premium from the stock-holder holding a significant majority of shares in return for an agreement that he will not initiate bid for control of the company.

that would be more acceptable suitor for the target.. is called a WHITE KNIGHT. . on more favourable terms than those of the original bidder.• IX.. WHITE KNIGHT: • When a co. Such „another co‟. it may seek the help of another co.. is the target of an unwanted bid or the threat of a bid. • The White Knight must be willing to acquire the target co..

There ends the matter.. Then the target co..• A target co. • The favourable terms are offered only to the White Knight. The bidder may withdraw. may not keep up it‟s promise to White Knight. may find a White Knight on it‟s own or through the assistance of an investment banker. .

WHITE SQUIRE: This defense is similar to the White Knight defense. . the target co. The convertible stock might have already been redeemed through a blank cheque. A White Squire is a firm that consents to purchase a large block of target‟s shares. This drama keeps the bidder away.. seeks to implement a strategy that will preserve the target‟s independence. In the White Squire defense.X.

shareholders are usually offered with a super-dividend that is funded through the issue of debt. the shareholders at times receive a stock certificate called „STUB‟ that represent their new shares of ownership in the co..O • XI.. . In addition to dividends. RECAPITALISATION: • This is also called as leveraged recapitalisation. Under this plan.

less attractive to the bidder. to serve as a White Knight or go for an LBO deal. which are victims of a hostile takeover attempts... to act as it‟s own “ White Knight”. Most of the cos. The recapitalisation plan is a substitute to both. would either look for an outside co.. . • The increase in co‟s debt in large-scale makes the co.• One of the advantages of this plan is that it allows a co..

• XII. . ESOPS: • An ESOP can make an unfriendly takeover more difficult because the bidder is afraid that the employee‟s loyalty to the management of the target cannot be bought.

often get a Court injunction for temporarily stopping the takeover attempt... Takeover litigation includes anti-trust concerns. the target would drop the litigation.. etc. buys more time to put up more takeover defenses including seeking a White Knight. Such an injunction prevents the acquirer from buying more stock and the firm. alleged violation of securities laws. Target co. . in turn. Another important benefit of litigation is to give the bidder an impression that if the offer price and terms are improved. LITIGATION: • This is one of the common anti-takeover defenses.• XIII. inadequate disclosure by the bidder.

CROWN JEWELS SALE: • The crown jewel may be a highly profit-able production division. • XV.• XIV. the firm may become less attractive and the bidder retreats. saying that it has many optimistic plans for the future of the company. . If it is made known to the bidder that in the event of takeover. he would not get this crown jewel. an undervalued fixed asset or an intangible asset like brand or patent. “JUST SAY NO” DEFENCE: • The target refuses the offer by the bidder.

This is a sound strategy. buying back it‟s own shares from the public. increases.. • If the share repurchase is financed through debt. then the co.• XVI.. becomes less attractive and the bidder retreats. • The amount of floating stock which is available for the raider in the open market is reduced. At the same time.. SHARE REPURCHASES: • This involves the co. . management‟s holding % in the capital of the co.

• XVII. RESTRUCTURING: • This may involve privatising the company, the sale of attractive assets, undertaking a major acquisition or even liquidating the company. • The proceeds from the sale of attractive assets can be utilised in other defenses like the shares repurchases or payment of special stockholder dividend. • contd…..

• Sometimes, in order to defend itself against an acquisition bid, the target ,in turn, makes an acquisition to drain it‟s liquidity position and issues debt to make itself less attractive. • Another drastic measure is that the co., may prefer to liquidate itself when it believes that proceeds from liquidation will be more than the offer made by the bidder.

• Mergers, at times, lead to a sort of monopoly or oligopoly and, as such, it is to the detriment of consumers. The first two mergers resulted like this in the US. So, antitrust laws (anti-merger or mergerregulatory laws) have been passed by developed countries to ward-off the evils of mergers and takeovers.

an autonomous authority.THE U K ANTITRUST REGIME Regulation of mergers is part of the UK government policy. Under the above Act. . 1965 was passed and thus mergers became the explicit focus of government competition policy. aimed at maintaining effective competition in various product markets in the UK. The Monopolies and Mergers Act. an administrative means of merger control is done by Competition Commission.

starting with the Sherman Act. 1890. This Act declared contracts and combinations (joint ventures and mergers) which restricted interstate trade or trade with other countries illegal. especially in the form of acquisition of stock (shares) to gain control of companies. and any attempt to monopolize this trade is a criminal offence. . The Sherman Act was not particularly suitable for the prevention of prospective mergers and monopolies.ANTITRUST REGULATION IN THE US The US has the longest tradition of antitrust regulation.

related and conglomerate acquisitions. The Clayton Act prohibits horizontal.The Clayton Act. Prospective mergers have to be notified to these agencies. . 1950 to make it more effective in dealing with mergers. 1914 was passed to overcome the shortcomings of the Sherman Act. and later was extended by the Celler-Kefauver Act. The various statutory rules are enforced by the Federal Department of Justice (DoJ) and the Federal Trade Commission (FTC).

if necessary.Both agencies then investigate and. .). individual states have their own antitrust laws applying to mergers that will not affect inter-state trade.. In addition to the above Federal regulation (US Central govt. initiate proceedings in Federal courts. is known as US Federal Govt..

depending upon the political current of the times. fluctuated from great vigour to deep indifference. In the Clinton era.Antitrust enforcement in the US has. EUROPEAN UNION and OTHER MAJOR ECONOMIES HAVE ANTITRUST LAWS. in the past. THE END . the antitrust agencies launched an aggressive crusade and one of the most important targets was Microsoft.

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