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M ER G ER ,A C Q U IS ITIO N ,TA

K EO V ER

Merge
A
r: merger occurs when two companies

combine to form a single company. A


merger is very similar to an acquisition
or takeover, except that in the case of a
merger existing stockholders of both
companies involved retain a shared
interest in the new corporation. By
contrast, in an acquisition one company
purchases a bulk of a second
company's stock, creating an uneven
balance of ownership in the new
combined company.

The entire merger process is usually kept


secret from the general public, and often
from the majority of the employees at the
involved companies. Since the majority of
merger attempts do not succeed, and
most are kept secret, it is difficult to
estimate how many potential mergers
occur in a given year. It is likely that the
number is very high, however, given the
amount of successful mergers and the
desirability of mergers for many
companies.

A merger may be sought for a number


of reasons, some of which are
beneficial to the shareholders, some of
which are not. One use of the merger,
for example, is to combine a very
profitable company with a losing
company in order to use the losses as
a tax write-of to ofset the profits,
while expanding the corporation as a
whole.

Increasing one's market share is


another major use of the merger,
particularly amongst large
corporations. By merging with major
competitors, a company can come to
dominate the market they compete in,
giving them a freer hand with regard
to pricing and buyer incentives. This
form of merger may cause problems
when two dominating companies
merge, as it may trigger litigation
regarding monopoly laws.

A merger is usually handled by an


investment banker, who aids in
transferring ownership of the company
through the strategic issuance and sale
of stock. Some have alleged that this
relationship causes some problems, as it
provides an incentive for
investment banks to push existing
clients towards a merger even in cases
where it may not be beneficial for the
stockholders.

Types of
merger:

A vertical merger
Horizontal
mergers
Conglomerate mergers

A vertical merger:
A vertical merger is one of the most
common types of mergers. When a
company merges with either a supplier or
a customer to create an extension of the
supply chain, it is known as a vertical
merge or integration. An example of a
vertical merger may be a steel company
merging with a car manufacturer. The
steel company was previously a supplier
to the car manufacturer but after the
merge would be part of the same
company.

Horizontal
mergers:
Horizontal mergers are types of mergers that involve
companies in direct competition with one another.
Often horizontal mergers are considered hostile,
which means a larger company "takes over" a smaller
one in more of an acquisition than a merger. An
example of a horizontal merger in the traditional
sense is the combination of car companies Chrysler
and Daimler Benz. Both companies wanted the
merger and once combined were called Daimler
Chrysler. In the Daimler Chrysler case, there was
synergy in market share, financial obligations, and
operating costs that made the resulting company
better than the two companies had been separately.

Conglomerate
mergers:

Conglomerate mergers are types of


mergers that are in diferent market
businesses. There is no relationship
between the type of business one
company is in and the type the other is
in. The merger is typically part of a desire
on the part of one company to grow its
financial wealth. By merging with a
completely unrelated, but often equally
profitable company, the resulting
conglomerate gains a revenue stream in
many types of industries.

Acquisition:
A corporate action in which a
companybuysmost, if not all, ofthe
target company's ownership stakes in
order to assume control of the target
firm.Acquisitions are often made as
part of a company's growth strategy
whereby it is morebeneficial to take
over an existing firm's operations and
nichecompared to expanding on its
own. Acquisitions are often paid in
cash, the acquiring company's stock or

Acquisitions can be either friendly or


hostile. Friendly acquisitions occur when the
target firm expresses its agreement to be
acquired,whereas hostile acquisitions don't
have the same agreement from the target
firm and the acquiring firm
needstoactively purchase large stakes of
the target companyin order to have a
majority stake.

In either case,the acquiring company often


ofers a premium on the market price of
thetarget company's shares in order to
entire shareholders to sell. For example,
News Corp.'s bid to acquire Dow Jones
wasequal to a65% premium overthe
stock'smarket price.

TAKEO VER
In general parlance takeover also means

acquisition. Thus a takeover occurs when


acquiring company acquires the control of
target company by possessing substantial
shares of target company.
Under monopoly restrictive trade practices
act takeover means acquisition of not less
than 25% of the voting rights of a target firm.
Section 372 of Indian companys act defines
takeover as investment of more than 10% of
subscribed capital in a company.

Definition:
Acquiring control of a corporation,
called a target, by stock purchase or
exchange, either hostile or friendly.

Kinds of Takeover:

I. LEGAL CONTEXT:
From legal perspective , takeover is of
three types:
Friendly takeover
Bail out takeover
Hostile takeover

Friendly or Negotiated Takeover:


Friendly takeover means takeover of one
company by change in its management &
control through negotiations between the
existing promoters and prospective
invester in a friendly manner. Thus it is
also called Negotiated Takeover. This kind
of takeover is resorted to further some
common objectives of both the parties.
Generally, friendly takeover takes place as
per the provisions of Section 395 of the
Companies Act, 1956.

Bail Out Takeover :


Takeover of a financially sick
company by a financially rich
company as per the provisions of
Sick Industrial Companies (Special
Provisions) Act, 1985 to bail out
the former from losses.

Hostile takeover:
Hostile takeover is a takeover where one
company unilaterally pursues the
acquisition of shares of another company
without being into the knowledge of that
other company. The most dominant purpose
which has forced most of the companies to
resort to this kind of takeover is increase in
market share. The hostile takeover takes
place as per the provisions of SEBI
(Substantial Acquisition of Shares and
Takeover) Regulations, 1997.

II. BUSINESS CONTEXT:


Horizontal
Takeover
Vertical takeover
Conglomerate
takeover

Horizontal Takeover:
Takeover of one company by another
company in the same industry. The main
purpose behind this kind of takeover is
achieving the economies of scale or
increasing the market share. E.g. takeover
of Hutch by Vodafone.

Vertical takeover:
Takeover by one company of its
suppliers or customers. The former is
known as Backward integration and
latter is known as Forward integration.
E.g. takeover of Sona Steerings Ltd. By
Maruti Udyog Ltd. is backward takeover.
The main purpose behind this kind of
takeover is reduction in costs.

Conglomerate takeover:
Takeover of one company by another
company operating in totally diferent
industries. The main purpose of this
kind of takeover is diversification.