PAN African E-Network Project Mergers and Acquisitions: Semester - IV

PAN African e-Network Project
MFC
Mergers and Acquisitions
Semester – IV
Session - 1
By –Suraj Prakash
Copyright © Amity University

OBJECTIVE
• To inter-link mergers and acquisition with

the major strategic financial decisions of a
proactive firm.

CONTENTS
Restructuring
Introduction to Mergers and Acquisition
Types of Mergers
Laws regulating Mergers and Acquisition

CORPORATE RESTRUCTURING
Corporate restructuring
EXPANSION CONTRACTION CORPORATE CONTROLS

• Restructuring is an integral part of the changing

economic paradigm.
• Usually involves major organizational changes:
- Internally- new investments, research and
development etc.
- Externally- in the form of mergers and
acquisition

Corporate Restructuring
• The name “Corporate Restructuring” can be
constructed as almost any change in capital
structure, in operations, or in ownership that is
outside the ordinary course of business.
Corporate restructuring is a broad umbrella that
covers many things.
• The most common thing is the mergers and
takeovers. In addition to mergers, takeovers,
and contests for corporate control, there are
other types of corporate restructuring:

• In other words, corporate restructuring
implies activities related to expansion /
contraction of a firm’s operations or
changes in its assets or financial or
ownership structure.
• Corporate restructuring transactions fall
into broad categories of divestiture,
ownership restructuring, and distress
restructuring.

• The restructuring of a company in financial
distress differs from the above. Here the
pressure is external, from creditors. There
are defined legal remedies, and in any
restructuring these must be observed. Still
management often is able to influence the
outcome, as we shall see.

EXPANSION
• Merger
• Absorption/acquisition
• Tender offer
• Joint venture

MERGER
Merger is defined as the combination of two or

more companies into a single company where
one survives and the other loses its corporate
existence. The survivor acquires the assets as
well as the liabilities of the merged company.
Generally the company which survives is the
buyer, which retains the identity and the seller
company is extinguished.
.

MERGER
• A merger is a tool used by companies for the
purpose of expanding their operations often
aiming at an increase of their long term
profitability.
• Usually mergers occur in a consensual
(occurring by mutual consent) setting where
executives from the target company help those
from the purchaser in a due diligence process to
ensure that the deal is beneficial to both parties.

MERGER
• For example, in the 1999 merger of Glaxo

Wellcome and SmithKline Beecham, both
firms ceased to exist when they merged,
and a new company, GlaxoSmithKline,
was created

MERGER
The term ‘merger’ refers to a combination of two or
more companies into a single company and this
combination may be either through
consolidation/amalgamation or absorption.
Generally, mergers take place between two
companies of more or less the same size. typical
merger, in other words, involves two relatively
equal companies, which combine to become one
legal entity with the goal of producing a
company that is worth more than the sum of its
parts.
MERGER
In a merger of two corporations, the shareholders
usually have their shares in the old company
exchanged for an equal number of shares in the
merged entity. For example, back in 1998, American
Automaker, Chrysler Corp. merged with German
Automaker, Daimler Benz to form DaimlerChrysler.
This has all the makings of a merger of equals as the
chairmen in both organizations became joint-leaders
in the new organization. The merger was thought to
be quite beneficial to both companies as it gave
Chrysler an opportunity to reach more European
markets and Daimler Benz would gain a greater
presence in North America.

MERGER
• A merger is a combination of two corporations in which
only one survives. The merged corporations go out of
existence. Mostly the two corporations merge together
under a third name which is a combination of the two Or
a Merger can be called as a,
• “A transaction where two firms agree to integrate their
operations because they have resources and capabilities
that together may create stronger competitive
advantage”.For example, the two tea companies Brooke
Bond and Lipton merged to form Brooke bond Lipton
India limited.

MERGER
A consolidation is a combination of two or more
companies into a third entirely new company
formed for the purpose. The new company
absorbs the assets, and possibly liabilities, of
both original which ceases to exist. When two
firms merge, stocks of both are surrendered and
new stocks in the name of new company are
issued.
Eg: A+B= C, Here combining the two entities A and
B, the new entity C is formed such that A and B
cease to exist.
MERGER
• In case of absorption one company absorbs another
company i.e. it purchases either the assets or shares
of that company The merger by absorption is always
friendly in nature i.e. both the companies agree to the
terms of absorption.
A+B= A. Here two entities A & B merge such that one,

say B loses entity, A, becomes an enlarged one. In
this case A is the acquiring company and B is the
target company.

ACQUISITIONS :
Acquisition refers to one company buying

out another to combine the bought entity
within itself. Acquisition increases the
interest of the acquiring company in the
target or acquired company. A transaction
where one firm buys another firm with the
intent of more effectively using a core
competence by making the acquired firm
its subsidiary within its portfolio of
business.
ACQUISITIONS :
• A corporate action in which a
company buys most, if not all, of the 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 more beneficial to take over an
existing firm's operations and niche compared to
expanding on its own. Acquisitions are often paid
in cash, the acquiring company's stock or a
combination of both

Classification of Acquisitions
On the basis of response of the Target
Company, takeovers or acquisitions can
assume three forms –
• Negotiated / Friendly Takeover – Friendly
acquisitions occur when the target firm
expresses its agreement to be acquired.
The terms and conditions of the takeover
are mutually settled by both the groups.

• Hostile / Open Market Takeover – Hostile
takeovers are also referred to as raid on the
company. In order to take over the management
of, or acquire controlling interest in, the target
company, a person / group of persons acquire
shares from the open market/financial
institutions/mutual funds/willing shareholders at
a price higher than the prevailing market price.
Such takeovers are hostile to the existing
management.

• Bail Out Takeover – When a profit earning
company takes over a financially sick company
to bail it out, it is called a Bail out takeover.
Normally, such takeover are in pursuance of a
scheme of rehabilitation approved by public
financial institutions/scheduled banks. The
takeover bids, in respect of purchase price, track
record of the acquirer and his financial position,
are evaluated by a leading financial institution

Again on the basis of the motive of the acquirer company,
takeovers can be classified into two –
Strategic Acquisitions – A strategic acquisition occurs when
a company acquires another as part of its overall
strategy. Perhaps cost advantages result, or it may be
that the target company provides revenue enhancement
through product extension or market dominance. The
key is that there is a strategic reason for blending the
two companies together. Strategic acquisitions can either
be with stock, where a ratio of exchange occurs,
denoting the relative value weightings of the two
companies with respect to earnings and to market
prices, or also with cash.

• Financial Acquisition – A financial acquisition
occurs when a financial promoter, is the
acquirer. The motivation is to sell off assets, cut
costs, and operate whatever remains more
efficiently than before, in the hope of producing
value above what was paid. The acquisition is
not strategic, for the company acquired is
operated as an independent entity. Such an
acquisition invariably involves cash, and
payment to the selling stockholders is funded
importantly with debt.

Further again, on the basis of the way of
acquisition, takeovers may be classified as two –
• The buyer buys the shares, and therefore
control, of the target company being purchased.
Ownership control of the company in turn
conveys effective control over the assets of the
company, but since the company is acquired
intact as a going business, this form of
transaction carries with it all of the liabilities
accrued by that business over its past and all of
the risks that company faces in its commercial
environment.

• The buyer buys the assets of the target
company. The cash the target receives from the
sell-off is paid back to its shareholders by
dividend or through liquidation. This type of
transaction leaves the target company as an
empty shell, if the buyer buys out the entire
assets. A buyer often structures the transaction
as an asset purchase to "cherry-pick" the assets
that it wants and leave out the assets and
liabilities that it does not.

Merger Vs Acquisition
With acquisition, one firm takes over another and

establishes its power as the single owner.
Generally, the firm which takes over is the bigger
and stronger one. The relatively less powerful,
smaller firm loses its existence, and the firm
taking over, runs the whole business with its own
identity. Unlike the merger, stocks of the
acquired firm are not surrendered, but bought by
the public prior to the acquisition, and continue
to be traded in the stock market.
When a deal is made between two companies in
friendly terms, it is typically proclaimed as a
merger, regardless of whether it is a buy out. In
an unfriendly deal, where the stronger firm
swallows the target firm, even when the target
company is not willing to be purchased, then the
process is labeled as acquisition.

Often mergers and acquisitions become

synonymous, because, in many cases, a
bigger firm may buy out a relatively less
powerful one and compel it to announce
the process as a merger. Although, in
reality an acquisition takes place, the firms
declare it as a merger to avoid any
negative impression.

Whether the deal results in a merger or an
acquisition also depends on the way it is
announced. In other words, the difference lies in
how the purchase is communicated to and
received by the target company's board of
directors, shareholders and employees.

Classifications of Mergers and
Acquisitions
Horizontal
• A merger in which two firms in the same industry
combine.
• Often in an attempt to achieve economies of scale
and/or scope.
Vertical
• A merger in which one firm acquires a supplier or
another firm that is closer to its existing customers.
• Often in an attempt to control supply or distribution
channels.

Vertical Merger
• Lower buying costs of materials, lower

distribution costs, assured supplies and
market, increasing or creating barriers to
entry for potential competitors or placing
them at a cost disadvantage are the chief
gains accruing from such mergers. For
example-US Pepsico Inc. merger with
Pepsi bottling group.

Acquisitions
Conglomerate
• A merger in which two firms in unrelated
businesses combine.Purpose is often to
‘diversify’ the company by combining
uncorrelated assets and income streams
Cross-border (International) M&As
• A merger or acquisition involving a Canadian
and a foreign firm a either the acquiring or
target company.

Acquisitions
• Congeneric Merger – A Congeneric
merger occurs where two merging firms
are in the same general industry, but they
have no mutual buyer/customer or supplier
relationship, such as a merger between a
bank and a leasing company.
Diversification again becomes a rationale
for such mergers. For example-
Prudential’s acquisition of Bache &
Company.

Acquisitions
• Reverse Merger – A unique type of merger
called a reverse merger is used as a way of
going public without the expense and time
required by an IPO. In this type of merger, a
company merges with its own subsidiary.
Increasing market share, increased access to
funds and decreased cost of production or
distribution may act as motives behind such
mergers. For example- the merger of ICICI Ltd.
with ICICI Bank Ltd.

Acquisitions
Again, mergers may be classified on financial
basis, i.e. on the basis of increase or decrease
in the Earnings per Share (EPS) of the
companies –
• Accretive mergers – Accretive mergers are those
in which an acquiring company's earnings per
share (EPS) increase. An alternative way of
calculating this is if a company with a high price
to earnings ratio (P/E) acquires one with a low
P/E.
Acquisitions
• Dilutive Mergers – Dilutive mergers are the
opposite of above, whereby a company's
EPS decreases. The company will be one
with a low P/E acquiring one with a high
P/E.

Mergers and Acquisition Activity
• M&A activity seems to come in ‘waves’

through the economic cycle domestically,
or in response to globalization issues
such as:
– Formation and development of trading zones
or blocks (EU, North America Free Trade
Agreement)
– Deregulation
– Sector booms such as energy or metals
Motivations for Mergers and Acquisitions
Creation of Synergy Motive for M&As
The primary motive should be the

creation of synergy.
Synergy value is created from economies

of integrating a target and acquiring a
company; the amount by which the value
of the combined firm exceeds the sum
value of the two individual firms.

Creation of Synergy Motive for
M&As
Synergy is the additional value created (∆V) :
[ 15-1] V  VAT -(VA  VT )
Where:
VT = the pre-merger value of the target firm
VA - T = value of the post merger firm
VA = value of the pre-merger acquiring firm
Value Creation Motivations for M&As
Operating Synergies
Operating Synergies
1. Economies of Scale
• Reducing capacity (consolidation in the number of firms in
the industry)
• Spreading fixed costs (increase size of firm so fixed costs
per unit are decreased)
• Geographic synergies (consolidation in regional disparate
operations to operate on a national or international basis)
2. Economies of Scope
• Combination of two activities reduces costs
3. Complementary Strengths
• Combining the different relative strengths of the two firms
creates a firm with both strengths that are complementary
to one another.
Value Creation Motivations for M&A
Efficiency Increases and Financing Synergies
Efficiency Increases
– New management team will be more efficient and
add more value than what the target now has.
– The combined firm can make use of unused
production/sales/marketing channel capacity
Financial Synergy
– Reduced cash flow variability
– Increase in debt capacity
– Reduction in average issuing costs
– Fewer information problems

Value Creation Motivations for M&A
Tax Benefits and Strategic Realignments
Tax Benefits
– Make better use of tax deductions and credits
• Use them before they lapse or expire (loss carry-
back, carry-forward provisions)
• Use of deduction in a higher tax bracket to obtain
a large tax shield
• Use of deductions to offset taxable income (non-
operating capital losses offsetting taxable capital
gains that the target firm was unable to use)
Strategic Realignments
– Permits new strategies that were not feasible for
prior to the acquisition because of the acquisition of
new management skills, connections to markets or
people, and new products/services.
REASONS FOR MERGERS
 Economies of large scale business: One of the most

important reasons for M&A is that a large-scale
business organization enjoys both internal and external
economies which generally lead to reduction in cost and
increase in profits. Motives for Mergers & acquisitions
 Elimination of competition This is also one of the
motivating factors for M&A because it eliminates
severe, intense and wasteful expenditure by different
competing organizations.
 Adoption of modern technology The adoption of
modern scientific technology by a corporate
organization requires large resources which may be out
of reach of an individual firm. This may induce M&A of
different firms.

REASONS FOR MERGERS
 Lack of technical and managerial talent- In the developing
countries at the earlier stages of industrialization, scarcity of
entrepreneurial, managerial and technical talent is also one
of the important factors that leads to M&A
• Effect of Trade Cycles - Trade cycles are the periods of ups
and downs in an economy. Ups are the periods of boom
when production is on large scale, profits are more,
employment is maximum and new firms crop up
indiscriminately in all directions. This situations creates
unhealthy competition and acts as a motivating factors for
M&A. on the other hand, downs are the period of depression
when economic activity reaches to its lowest point. During
depression, only efficient and large firms manage to survive
and inefficient firms, to reduce the risk of failures, preferred
to be merged or acquired by strong firms.

REASONS FOR MERGERS
• Desire to enjoy monopoly power - M&A leads to
monopolistic control in the market. In the situation of
monopoly, a firm can easily make adjustment in the supply
and price of products and can also increased the profit of
the firm.
• Patent rights - The exclusive right to use the invention of
any new machines, method or idea is one of the reasons
favoring M&A. Patents have given monopoly position to
many firms in the market at national and international levels.
• Desire to unified control and self sufficiency - Firms
which depends on other units for their raw material
requirements or which are engaged in different process of
product for ensuring uninterrupted supply of raw materials
are encouraged and benefited by M&A. By bringing such
firms under unified control, their dependence on other firms
can be avoided.

REASONS FOR MERGERS
• Personal Ambition- One of the factors favoring M&A is
personal ambition of becoming the chief of a personal
empire. The desire of a person to increase profits and
enlarge his own industrial empire is the factor at the back
of many M&A.
• Government Pressure- Whenever the government of a

country feels that the competition among firms is
providing harmful to the country or it want to improve
overall efficiency of industrial undertakings, it can
pressurize for M&A through legislation.

Managerial Motivations for M&As
1. Increased firm size
– Managers are often more highly rewarded financially for
building a bigger business (compensation tied to assets
under administration for example)
– Many associate power and prestige with the size of the
firm.
2. Reduced firm risk through diversification
• Managers have an undiversified stake in the business
(unlike shareholders who hold a diversified portfolio of
investments and don’t need the firm to be diversified)
and so they tend to dislike risk (volatility of sales and
profits)
• M&As can be used to diversify the company and
reduce volatility (risk) that might concern managers.

DEMERGER/SPLIT/DIVISION
Opposite to merger.
Types of demerger:
• Divestiture: is a sale for cash or for
securities of a segment of a company to a
third party which is an outsider i.e. neither
part of the organization or management or
shareholders.

MODALITIES OF
MERGERS/ACQUISITION
A company can follow any one or combination of the
following modes to acquire/ merge a target firm:
By purchase of asset :
• The asset of company Y may be sold to company X.
Once this is done, company Y is then legally terminated
and company X survives. By purchase of asset
• By purchase of common shares :
• The common share of the company Y may be purchased
by company X. When company X holds all the shares of
company Y, it is dissolved. By purchase of common
shares

MODALITIES OF
MERGERS/ACQUISITION
• By exchange of shares for asset :
• Company X may give its shares to the
shareholders of company Y for its net assets.
Then company Y is terminated by its
shareholders who now holds shares of company
X. By exchange of shares for asset
• Exchange of shares for shares :
• Company X gives its shares to the shareholders
of company Y and then company Y is
terminated. Exchange of shares for shares

EXAMPLES OF
MERGERS/ACQUISITIONS
• Tokyo based Nippon Chemiphar Co. Ltd : 2002 Pharmacy market
Ranbaxy (RLL) Helps to understand Japanese regulatory framework
and market environment. Product advantage 2.Ranbaxy-Tokyo
based Nippon Chemiphar Co. Ltd EXAMPLES
• AOL sells call centre to Essar : April 1st 2008 Aegis BPO of Essar
takes over to Ranbaxy acquire AOL call centre in white field It is
estimated at $100 million Payable in cash. Purpose is to enhance its
voice and non voice offerings in the technological support space.
3.AOL sells call centre to Essar EXAMPLES
• HP and Compaq Product line synergy : 2002 Deal for $25 billion
Exchange ratio 0.6325 in shares of HP for 1 share in Compaq
Compaq is good in consumer desk top, better distribution net work
HP is global leader in printers and scanners. Purpose- large
customer base and elimination of computer overlapping product lines
4.HP and Compaq Product line synergy EXAMPLES

Laws Regulating Merger
• Following are the laws that regulate the merger of the
company:-
(I) The Companies Act , 1956
Section 390 to 395 of Companies Act, 1956 deal with
arrangements, amalgamations, mergers and the procedure
to be followed for getting the arrangement, compromise or
the scheme of amalgamation approved. Though, section
391 deals with the issue of compromise or arrangement
which is different from the issue of amalgamation as deal
with under section 394, as section 394 too refers to the
procedure under section 391 etc., all the section are to be
seen together while understanding the procedure of getting
the scheme of amalgamation approved. Again, it is true that
while the procedure to be followed in case of amalgamation
of two companies is wider than the scheme of compromise
or arrangement though there exist substantial overlapping.

• The procedure to be followed while getting the scheme
of amalgamation and the important points, are as
follows:-
(1) Any company, creditors of the company, class of
them, members or the class of members can file an
application under section 391 seeking sanction of any
scheme of compromise or arrangement. However, by its
very nature it can be understood that the scheme of
amalgamation is normally presented by the company.
While filing an application either under section 391 or
section 394, the applicant is supposed to disclose all
material particulars in accordance with the provisions of
the Act.

• (2) Upon satisfying that the scheme is prima facie
workable and fair, the Tribunal order for the meeting of
the members, class of members, creditors or the class of
creditors. Rather, passing an order calling for meeting, if
the requirements of holding meetings with class of
shareholders or the members, are specifically dealt with
in the order calling meeting, then, there won’t be any
subsequent litigation. The scope of conduct of meeting
with such class of members or the shareholders is wider
in case of amalgamation than where a scheme of
compromise or arrangement is sought for under section
391

• (3) The scheme must get approved by the
majority of the stake holders viz., the members,
class of members, creditors or such class of
creditors. The scope of conduct of meeting with
the members, class of members, creditors or
such class of creditors will be restrictive some
what in an application seeking compromise or
arrangement.
• (4) There should be due notice disclosing all
material particulars and annexing the copy of the
scheme as the case may be while calling the
meeting.

• (5) In a case where amalgamation of two companies is
sought for, before approving the scheme of
amalgamation, a report is to be received form the
registrar of companies that the approval of scheme will
not prejudice the interests of the shareholders.
• (6) The Central Government is also required to file its
report in an application seeking approval of compromise,
arrangement or the amalgamation as the case may be
under section 394A.
• (7) After complying with all the requirements, if the
scheme is approved, then, the certified copy of the order
is to be filed with the concerned authorities.

• (II) The Competition Act ,2002
Following provisions of the Competition Act, 2002 deals
with mergers of the company:-
(1) Section 5 of the Competition Act, 2002 deals with
“Combinations” which defines combination by reference to
assets and turnover
(a) exclusively in India and
(b) in India and outside India.
• For example, an Indian company with turnover of Rs. 3000
crores cannot acquire another Indian company without prior
notification and approval of the Competition Commission.
On the other hand, a foreign company with turnover outside
India of more than USD 1.5 billion (or in excess of Rs. 4500
crores) may acquire a company in India with sales just
short of Rs. 1500 crores without any notification to (or
approval of) the Competition Commission being required.

• (2) Section 6 of the Competition Act, 2002 states that, no
person or enterprise shall enter into a combination which
causes or is likely to cause an appreciable adverse effect
on competition within the relevant market in India and
such a combination shall be void.
All types of intra-group combinations, mergers,
demergers, reorganizations and other similar
transactions should be specifically exempted from the
notification procedure and appropriate clauses should be
incorporated in sub-regulation 5(2) of the Regulations.
These transactions do not have any competitive impact
on the market for assessment under the Competition Act,
Section 6.

• (III) Foreign Exchange Management Act,1999
The foreign exchange laws relating to issuance and
allotment of shares to foreign entities are contained in
The Foreign Exchange Management (Transfer or Issue
of Security by a person residing out of India) Regulation,
2000 issued by RBI vide GSR no. 406(E) dated 3rd May,
2000. These regulations provide general guidelines on
issuance of shares or securities by an Indian entity to a
person residing outside India or recording in its books
any transfer of security from or to such person. RBI has
issued detailed guidelines on foreign investment in India
vide “Foreign Direct Investment Scheme” contained in
Schedule 1 of said regulation.

• (IV) SEBI Take over Code 1994
SEBI Takeover Regulations permit consolidation of shares
or voting rights beyond 15% up to 55%, provided the
acquirer does not acquire more than 5% of shares or
voting rights of the target company in any financial year.
[Regulation 11(1) of the SEBI Takeover Regulations]
However, acquisition of shares or voting rights beyond
26% would apparently attract the notification procedure
under the Act. It should be clarified that notification to CCI
will not be required for consolidation of shares or voting
rights permitted under the SEBI Takeover Regulations.
Similarly the acquirer who has already acquired control of
a company (say a listed company), after adhering to all
requirements of SEBI Takeover Regulations and also the
Act, should be exempted from the Act for further
acquisition of shares or voting rights in the same company.

• (V) The Indian Income Tax Act (ITA), 1961
Merger has not been defined under the ITA but has been covered
under the term 'amalgamation' as defined in section 2(1B) of the Act.
To encourage restructuring, merger and demerger has been given a
special treatment in the Income-tax Act since the beginning. The
Finance Act, 1999 clarified many issues relating to Business
Reorganizations thereby facilitating and making business
restructuring tax neutral. As per Finance Minister this has been done
to accelerate internal liberalization. Certain provisions applicable to
mergers/demergers are as under: Definition of
Amalgamation/Merger — Section 2(1B). Amalgamation means
merger of either one or more companies with another company or
merger of two or more companies to form one company in such a
manner that:

(1) All the properties and liabilities of the transferor

company/companies become the properties and
liabilities of Transferee Company.
(2) Shareholders holding not less than 75% of
the value of shares in the transferor company
(other than shares which are held by, or by a
nominee for, the transferee company or its
subsidiaries) become shareholders of the
transferee company

• The following provisions would be applicable to merger
only if the conditions laid down in section 2(1B) relating
to merger are fulfilled:
(1) Taxability in the hands of Transferee Company —
Section 47(vi) & section 47
(a) The transfer of shares by the shareholders of the
transferor company in lieu of shares of the transferee
company on merger is not regarded as transfer and
hence gains arising from the same are not chargeable to
tax in the hands of the shareholders of the transferee
company. [Section 47(vii)]
(b) In case of merger, cost of acquisition of shares of the
transferee company, which were acquired in pursuant to
merger will be the cost incurred for acquiring the shares
of the transferor company. [Section 49(2)]

• (VI) Mandatory permission by the courts
Any scheme for mergers has to be sanctioned by the
courts of the country. The company act provides that the
high court of the respective states where the transferor
and the transferee companies have their respective
registered offices have the necessary jurisdiction to direct
the winding up or regulate the merger of the companies
registered in or outside India.
• The high courts can also supervise any arrangements or
modifications in the arrangements after having
sanctioned the scheme of mergers as per the section 392
of the Company Act. Thereafter the courts would issue
the necessary sanctions for the scheme of mergers after
dealing with the application for the merger if they are
convinced that the impending merger is “fair and
reasonable”.

• The courts also have a certain limit to their powers to
exercise their jurisdiction which have essentially evolved
from their own rulings. For example, the courts will not
allow the merger to come through the intervention of the
courts, if the same can be effected through some other
provisions of the Companies Act; further, the courts
cannot allow for the merger to proceed if there was
something that the parties themselves could not agree
to; also, if the merger, if allowed, would be in
contravention of certain conditions laid down by the law,
such a merger also cannot be permitted. The courts
have no special jurisdiction with regard to the issuance of
writs to entertain an appeal over a matter that is
otherwise “final, conclusive and binding” as per the
section 391 of the Company act.

VII) Stamp duty

Stamp act varies from state to State. As
per Bombay Stamp Act, conveyance
includes an order in respect of
amalgamation; by which property is
transferred to or vested in any other
person. As per this Act, rate of stamp duty
is 10 per cent.

Legal Procedure For Bringing About
Merger Of Companies
(1) Examination of object clauses:
The MOA of both the companies should be examined to check the
power to amalgamate is available. Further, the object clause of the
merging company should permit it to carry on the business of the
merged company. If such clauses do not exist, necessary approvals
of the share holders, board of directors, and company law board are
required.
(2) Intimation to stock exchanges:
The stock exchanges where merging and merged companies are
listed should be informed about the merger proposal. From time to
time, copies of all notices, resolutions, and orders should be mailed to
the concerned stock exchanges.
(3) Approval of the draft merger proposal by the respective boards:
The draft merger proposal should be approved by the respective
BOD’s. The board of each company should pass a resolution
authorizing its directors/executives to pursue the matter further.

Merger Of Companies
(4) Application to high courts:
Once the drafts of merger proposal is approved by the respective
boards, each company should make an application to the high court
of the state where its registered office is situated so that it can
convene the meetings of share holders and creditors for passing the
merger proposal.
(5) Dispatch of notice to share holders and creditors:

In order to convene the meetings of share holders and creditors, a
notice and an explanatory statement of the meeting, as approved by
the high court, should be dispatched by each company to its
shareholders and creditors so that they get 21 days advance
intimation. The notice of the meetings should also be published in
two news papers.

Merger Of Companies
6) Holding of meetings of share holders and creditors:
A meeting of share holders should be held by each company for
passing the scheme of mergers at least 75% of shareholders who
vote either in person or by proxy must approve the scheme of
merger. Same applies to creditors also.
(7) Petition to High Court for confirmation and passing of HC orders:

Once the mergers scheme is passed by the share holders and
creditors, the companies involved in the merger should present a
petition to the HC for confirming the scheme of merger. A notice
about the same has to be published in 2 newspapers.
(8) Filing the order with the registrar:

Certified true copies of the high court order must be filed with the
registrar of companies within the time limit specified by the court.

Merger Of Companies
(9) Transfer of assets and liabilities:
After the final orders have been passed by both
the HC’s, all the assets and liabilities of the
merged company will have to be transferred to
the merging company.
(10) Issue of shares and debentures:
The merging company, after fulfilling the
provisions of the law, should issue shares and
debentures of the merging company. The new
shares and debentures so issued will then be
listed on the stock exchange

REVIEW QUESTIONS
MCQs
Q1. ___________________ is the combination of

at least two firms doing similar businesses at
the same market level.
a. Diversified activity Merger
b. Horizontal Merger
c. Joint Venture
d. Vertical Merger.

REVIEW QUESTIONS
Q2. Which of the following is not is not an

acquisition objective?
a. Brand Equity (Recognition/Loyalty/Image)
b. New Products and Services (R&D/Strategic
Relationships)
c. Increased EPS
d. Customers (Market Share)

KEYS TO THE QUESTIONS
• Q1. b
• Q2.c

Thank You
Please forward your query
To: surajamity@yahoo.com

PAN African E-Network Project Mergers and Acquisitions: Semester - IV

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• To inter-link mergers and acquisition with

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EXPANSION CONTRACTION CORPORATE CONTROLS

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• Restructuring is an integral part of the changing

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Copyright © Amity University

Copyright © Amity University

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Copyright © Amity University

Merger is defined as the combination of two or

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• For example, in the 1999 merger of Glaxo

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A+B= A. Here two entities A & B merge such that one,

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Acquisition refers to one company buying

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Copyright © Amity University

Copyright © Amity University

Copyright © Amity University

Copyright © Amity University

Copyright © Amity University

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With acquisition, one firm takes over another and

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Often mergers and acquisitions become

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• Lower buying costs of materials, lower

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• M&A activity seems to come in ‘waves’

The primary motive should be the

Synergy value is created from economies

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[ 15-1] V  VAT -(VA  VT )

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 Economies of large scale business: One of the most

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• Government Pressure- Whenever the government of a

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Copyright © Amity University

Copyright © Amity University

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