CHAPTER 6 SICK INDUSTRIAL COMPANIES- MEASURES RESORTED TO EXPEDITE REVIVAL

A. INTRODUCTION A restructuring wave is sweeping the corporate world. From banking to oil exploration and telecommunication to power generation, companies are coming together as never before. Corporate Restructuring through acquisitions, mergers, amalgamations, arrangements and takeovers has become integral to corporate strategy today. In India, the concept has caught like wild fire with a merger or two being reported every second day. The process of restructuring through mergers and

amalgamations has been a regular feature in the developed and free economy nations like Japan, USA and European countries more particularly UK, where hundreds of mergers take place every year. Also the mergers and takeovers of multinational corporate houses across the borders has become a normal phenomenon. Never have the mergers and amalgamations been so popular, from all angles policy considerations, businessmens outlook and even consumers point of view. Even though such transactions may create potential monopoly, consumer activities do not oppose them. Courts too have been sympathetic towards mergers, the classic example being the following remarks of Supreme Court in the HLL TOMCO merger case: In this era of hypercompetitive capitalism and technological change, industrialists have realized that mergers/acquisitions are perhaps the best route to reach a size comparable to global companies so as to effectively compete with them. The harsh reality of globalisation has dawned the companies which cannot compete globally must sell out as an inevitable alternative. The major marriages in the finance sector have included Traveller- Citicorp, Nationsbank Bankamerica and Northwest Wells Fargo. The Great Western Financial H.F. Ahmanson merger created the largest thrift and savings institution in

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the US. A similar trend was also witnessed in Europe too. In Europe much of the action- the mergers between Zurich group and BATS insurance interests, and between Swedens Nordbankan and Finlands Merita, and the hostitle offer from italys General Finance AGF was in the financial sector. (i) Cross Border Mergers and Acquisitions There has been a substantial increase in the quantum of funds flowing across nations in search of takeover candidates. The UK has been the most important foreign investor in the USA in recent years, with British companies making large acquisitions. With the advent of the Single Market, the European Union now

represents the largest single market in the world. European as well as Japanese and American companies have sought to increase their market presence by acquisitions. Many cross-border deals have been in the limelight. The biggest were those of Daimler Benz-Chrysler, BP-Arnoco, Texas Utilities Energy Group, Universal Studios Polygram, Northern Telecom- Bay Networks and Deutsche Bank-bankers Trust. Nearly 80 percent of the transactions were settled in stock rather than through case. The markets even witnessed merger between publishing groups Reed Elsevier and Wolters Kluwer and a hostile bid for U.K. building materials company Red Line from the French Cement group Lafarge. In telecommunications, the biggest deals include AT & T TCI: Bell Atlantic GTE and SBC-Ameritech. The acquisition of MCI by World Com also took place. Low international oil prices promoted huge oil sector mergers, the biggest being Exxon-Mobil, BP-Amoco and Total Petrofina. The healthcare industry has also witnessed significant activity. The major deals include Zeneca-Astra, Hoechst-Rhone Poulenc and Sanofi-Synthelabo. Quite a few deals have even fallen through. This category includes American Home Products-SmithKline Beecham, American Home Products-Monsanto and Glaxo Welcome-SmithKline Beecham. Not untouched by the Mergers and Acquisition wave has been the audit business. Big audit firms are going in for mega mergers to become global auditors. Price Water House has merged with Coopers and Lybrand, KPMG is planning to merge with Ernst & young. The new Ernst-KPMG entity will be top dog, with $ billion in revenues, followed by Price-Coopers, Andersen Worldwide, and Deloittee 195

& Touche. Executives at the merging firm say they need more bodies to meet client needs for services worldwide Says James J Schiro, CEO of Price Waterhouse. There is an almost insatiable demand for intellectual capital. It is estimated that one-in-four US workers have been affected by the current wave of Mergers and Acquisition activity. It is argued that the significant slowing of Japanese FDI outflows at a time of major global growth in flows, and heightened US and West Europe Cross-border M&A activity, may weaken Japanese global competitiveness. But it should also be noted that Mergers and Acquisitions are less relevant in the Japanese context as they believe more in alliances and Joint Ventures than Mergers and Acquisitions. The Japanese consider acquisition to be a last resort strategy, when all other alternatives are considered inappropriate. Their decision to takeover an organization willusually imply that they already have previous experience working with the company like in the case of the SONY-CBS partnership. Interestingly, unlike British and American negotiating teams which depend heavily on legal advisors and financial consultants, Japanese decision makers seek out the opinion of their operational and human resources managers. AT the same time other research has shown that the Japanese are the least preferred merger partner/acquirer by the British, French, Germans and Americans. The reasons that have been cited are incompatible language and understanding. The British prefer Americans for their positive attitude, the French prefer only French as they believe they know where they stand, Germans prefer only Germans because of market access, and Americans prefer British because of their professional approach. Euroland would see hectic merger and acquisition activity in the next couple of years, more for strategic reasons than operational due to the inherent strength of the eleven European Union (EU) countries, the Euro. The new currency is likely to lead to a wave of consolidation in the Eurozone as seen from the recent merger of Bankers Trust with Deulsche Bank and the ongoing

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consolidation attempts involving Society Generate, Paribas and Banque Nationale de Paris.. (ii) Why Companies Merge? What are the key drivers of this unprecedented merger and amalgamation activity globally? There is no doubt about the extent of excess capacity in almost all industrial segments, across all regions. The excess capacity increases competition, erodes profits and reduces growth. Instinctively, companies adopt the easiest way to insulate themselves from competition induced pressures. As neither governments nor consumers allow companies to insulate themselves through cartels, they have been taken the M & A route to achieve earnings growth and competitiveness. M & A, which earlier used to be about conglomerates, is now about concentration. (iii) Motivations behind Cross-border Acquisitions Briefly stating, companies go in for international acquisitions for a number of strategic or tactical reasons such as the following: Growth orientation : To escape small home market, to extend markets served, to achieve economy of scale. Access to inputs: To access raw materials to ensure consistent supply, to access technology, to access latest innovations, to access cheap and productive labour. Exploit unique advantages: To exploit the companys brands, reputation, design, production and management capabilities. Defensive: To diversify across products and markets to reduce earnings volatility, to reduce dependence on exports, to avoid home country political and economic instability, to compete with foreign competitors in their territory, to circumvent protective trade barriers in the host country. Response to client needs: To provide home country clients with service for their overseas subsidiaries, e.g. banks and accountancy firms. Opportunism: To exploit temporary advantages, e.g. a favourable exchange rate making foreign acquisitions cheap.

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(iv)

Regulation of Mergers and Acquisitions Overseas A Brief USA - In the United States, the Securities and Exchange Commission

regulates the conduct of takeovers. The Justice Department and the Federal Trade Commission regulate economic and antitrust issues. Many industries also have their own regulatory bodies, such as the Federal Reserve Board (banking), the Federal Communications Commission (Broadcasting), the Interstate Commerce Commission (railroads and trucking), and the Transportation Department (Airlines). Germany Hostile takeovers in Germany are rare. The biggest impediment to a hostile acquisition in Germany is the structure of the German supervisory board. A majority of the stock in large public corporations is controlled by the corporations Hausbank. So the cooperation of this bank is essential support the labour force is also necessary, because employees control one-half of the seats on the supervisory boards of public corporations with more than two thousand employees. The effectively eliminates the practice (more commonly seen in the United States) whereby a hostile buyer moves production of a major product to foreign site to reduce costs. France In France the Treasury is responsible for regulating the conduct of an acquisition, and the Monopolies Commission reviews antitrust considerations. U.K.- In the United Kingdom takeover rules are determined by the City Panel on Takeovers, a self-regulatory agency of the London Stock Exchange. The

Monopolies and Mergers Commission handles antitrust issues and has the power to stop mergers and acquisitions that it considers anticompetitive. Rather than having a separate regulatory body for each industry, the Secretary of State for Trade and Industry regulates all U.K. industries, Governmental policies are more likely to be consistent across industries with a single regulatory body but the cost of this regulatory consistency in the United Kingdom is the lower level of regulatory expertise in any single industry. Japan In Japan most of the takeovers are friendly acquisitions between related companies and the sums involved are usually small relative to the size of the Japanese stock market.

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Foreign acquisitions of Japanese firms are extremely rare given the size of the Japanese economy and the number of Japanese acquisitions of Japanese companies. There are three impediments to a hostile foreign acquisition of a Japanese company. The first and weakest barrier is a requirement that foreign bidders notify the Japanese Ministry of Finance of their intention to acquire a Japanese company. The Ministry of Finance and the Japanese Fair Trade Commission can delay acquisitions (especially foreign acquisitions) for a suspense period that can last for several months. This allowed target management time to erect takeover defenses. A second and more important barrier to hostile foreign acquisitions is a cultural aversion to hostile and aggressive social behaviour. Japanese business

practices place a heavy emphasis on reciprocity and cooperation. Keiretsu members strive for harmony within the keiretsu group, and they prize trust, loyalty and friendship in their business dealings. It is not surprising that most Japanese find American style takeovers to be repugnant Institutional owners and other Keirelsu members strongly resist foreign intrusion into their keiretsu relationships. The third and most powerful barrier to a hostile foreign acquisition of a Japanese firm is the convention of reciprocal share cross-holdings among the members of each keiretsu. These cross-holdings ensure that a large fraction of

outstanding shares are in the hands of friendly business partners, including the keiretsus main bank. When faced with a hostile acquisition, Japanese managers rely on the shares held by their business partners as a source of stability during turbulent times. Sick Industrial Companies (Special Provisions) Act, 1985, (SICA) which is being repealed, and the Companies (Second Amendment) Act, 2002, replacing SICA provides for the rehabilitation of a sick industrial company through various measures including the change in or take over of the management, sale of assets, transfer of property or liability, or amalgamation and any other incidental, consequential and supplemental measure necessary for a sick industrial company to revitalize itself. The measures as resorted for the revival of a company for the rehabilitation under the old enactment are almost identical in the new enactment with

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the only distinguishing feature of the new Act aiming at expediting the process of revival. A scheme entails for the revival of a Sick Industrial Company as a sick industrial company is not in a position to revive itself on its own in the absence of the external support. As such in a proper planned manner and with the requisite assistance of the secured lenders and other parties a sick industrial company can rehabilitate itself. B. (i) MEASURES RESORTED TO EXPEDITE REVIVAL Release of Financial Assistance The most common measure for the rehabilitation of a sick industrial company is the release of financial assistance by the Banks and FIs along with the induction of the funds by the promoters of a company. Revival strategy envisions relief and concessions in the form of waiver of interest and at times through the One Time Settlement of the dues of the secured lenders. The scheme may also entail sacrifices from the statutory authorities. The scheme may further provide for payment of the dues of the unsecured creditors of the Company. As such the dues payable by a sick industrial company are re-structured substantially and the terms of payment eased in accordance with cash flows ensuring sustained revival of a sick industrial company. The provision of requisite financial assistance though initially creates a dent on the finances of the Banks and FIs, subsequently results in facilitating the payment of the dues of the Banks and FIs through improved working of the sick company and thus contain the aggravating problem of Non-performing assets. 1 (ii) Change in Management of A Sick Industrial Company In a situation where the existing management due to skewed financial capability or for any other reason is unable to carry on the industrial activity the provision for change in management is resorted to. This measure is most commonly resorted to but with the limited success through replacement of the old management with a new management by change in, or takeover of, the management of the sick industrial company. It may include a change in, or the appointment of the board of
1

Naik, S.A.: The Law of Sick Industrial Companies, 2nd Edn. (1999) Wadhwa Nagpur, 208

and Company,

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directors or reduction of the interest or rights, which the shareholders have in that company through taking over the controlling shares, or substantial shareholders interest. Change in management of the company is also possible through the sale of the assets of a Sick Industrial Company on a going concern basis or otherwise i.e. the whole of the sick industrial Company or any of its undertaking is disposed off. Where the whole of the undertaking of the sick industrial company is sold under a sanctioned scheme, the sale proceeds may be distributed to the parties entitled thereto in accordance with the provisions of section 529A and other provisions of the Companies Act, 1956 or in the alternate the distribution can take place through the terms of a scheme formulated by the Authority sanctioning the scheme. The need for change in management is felt when the promoters of a sick industrial company do not have the resources to revive the Company and the Banks and FIs as also the other parties including the State and the Central Government who are to provide relief and concessions express reservation dissent in providing the relief and concessions which are envisaged for the rehabilitation as they apprehend that provision of relief and concessions may further prejudice their interest. The under lying reason may be lack of faith and confidence in the existing management or the change in management is contemplated in a situation where the sickness is management induced. The new management inducted through the process of the change of management is expected to be financially strong with a good track record and through their efficient management of operations are likely to bring out the sick company from the purview of SICA. However, the process of change of management is usually opposed by the existing promoters of a sick industrial company and the issue of change of management normally results in litigation which, in turn, prolongs the rehabilitation. One of the latest schemes sanctioned by the BIFR involving change of management of a sick company through sale of its assets to another company is the case of Hindustan Flurocarbons Ltd. In that case the sale of assets is being disputed and the

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matter is subjudice and the scheme would remain a non-starter till the matter is finally adjudicated upon.2 (iii). Transfer of Property or Liability of Sick Industrial Company A sanctioned scheme may provide for the transfer of any property or liability of the sick industrial company in favour of any other company or person or where such scheme provides for the transfer of any property or liability of any other company or person in favour of the sick industrial company, then the property shall be transferred to and vested in, and the liability shall become the liability of such other company or person or as the case may be, the sick industrial company. It is by virtue of and to the extent provided in the scheme, on or from the date of coming into operation of the sanctioned scheme or any provision thereof. Transfer and vesting of property provides inter alia by virtue of, and to the extent provided in the scheme, on or from the date of coming into operation of the sanctioned scheme or any provision thereof, the property shall be transferred to and vest in such other company or person or , as the case may be, the sick industrial company. The expression transfer and vest in means that not only the property is transferred but should also vest in the transferee. The property vests in title as well as in possession. From such date the company, as the case may be, has the rights, power, and authority in respect of the vested property.3 As a result of vestment of the property or the liability of a sick industrial company to any company having the substantial resources, the Company who takes over the liability or a property of a sick industrial Company pays off the debts to the creditors. A sick Industrial company with the reduced debts is in a position to rehabilitate itself. On the other hand if a sick industrial company procure the property, it can utilise the same for the rehabilitation. (iv). Revival of a Sick Industrial Company Through Amalgamation Amalgamation is another effective measure for rehabilitation of a sick industrial company. It envisages amalgamation of a sick company with any other company or vice versa through the process of reverse merger.
2 3

Re. Hindustan Flurocarbons Ltd., Order Dated 24.7.2003 in BIFR Case No. 507/94 (unreported) Supra note 1 at 201-203

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Amalgamation implies the merger of the one industrial company with the other company. Two companies may join to form a new company, but there may be absorption or blending of one by the other. Both amount to amalgamation. When two companies are merged and are so joined to form a third company, or one is absorbed into one or blended with another, the amalgamating company loses its identity without being wound up. The transferor Company does not die either on amalgamation or on dissolution without winding up. It only merges into the transferee Company shedding its corporate shell and forming part of one corporate shell and because a company cannot have two shells and its corporate name being superfluous, the dissolution is death of its independent corporate name and shell but for all purposes remaining alive and thriving as part of the larger whole not being wound up on merger, as winding up unnecessary. On amalgamation and consequential dissolution all the attributes of the company which are not synonymous with the shell or name such as members comprising it, assets, property rights, and liabilities continue to live as part of larger entity. Chapter V of the Companies Act deals with the aspect of merger and amalgamation.4 However, in the case of merger of a sick industrial company with the healthy Industrial Company or vice versa through the process of reverse merger, the legislation meant to deal with the revival of sick industrial companies exclusively govern the same. Earlier SICA and now the Companies (Second Amendment) Act, 2002 provides wide powers to the respective authorities in regard to a scheme of amalgamation between a sick industrial company and a healthy company such as Change of constitution, name, memorandum articles, Board of Directors; Alteration, re-organization or reduction of capital; Transfer of property, assets or liabilities; and any other measure necessary to effectively carry out the scheme of amalgamation. On the amalgamation becoming effective, the sick companys name may be changed to that of the healthy company. Scheme of merger results in amalgamation of the constitution, name and registered office, the capital assets, powers, rights, interests, authorities and privileges, duties and obligation of the sick industrial company or, as the case may be, of the

Ramaiya, A.: Guide to the Companies Act, (15th Edn.),(2001), Wadhwa and Company Nagpur, 2903

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transferor company; the transfer to the transferee company of the business, properties, assets and liabilities of the sick industrial company on such terms and conditions as may be specified in the scheme; the alteration of the memorandum or articles of association of the sick industrial company or, as the case may be, of the transferee company for the purpose of altering the capital structure thereof, or for such other purposes as may be necessary to give effect to the reconstruction or amalgamation; the continuation by or against the sick industrial company or, as the case may be, the transferee company of any action or other legal proceeding pending against the sick industrial company immediately before the date of order made the allotment to the shareholders of the sick industrial company, of the shares in such company or, as the case may be , in the transferee company and where any shareholder claims payment in cash and not allotment of shares, or where it is not possible to allot shares to any shareholder, the payment of cash to those shareholders in full satisfaction of their claims in respect of their interest in shares in the sick industrial company before its reconstruction or amalgamation; and any other terms and conditions for the reconstruction or amalgamation of the sick industrial company. Scheme of amalgamation requires the approval by the shareholders of the transferor and the transferee Company through a special resolution. The scheme as prepared by the Tribunal is to be laid before the company other than the industrial company in the general meeting for approval by its shareholders. No scheme shall be proceeded with unless it has been approved, with or without modification, by a special resolution passed by the shareholders of the transferee company. Amalgamation is a blending of two of more existing undertakings into one undertaking, the shareholders of each blending company substantially the shareholders in the company, which is to carry on the blended undertaking. There may be amalgamation either by the transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to an existing company. The scheme of merger as such provides for the proper utilisation of the assets and the sick industrial company when its entity is dissolved and merged with a healthy company. The merger of Annapurna Foils Ltd. with Indian Aluminium

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Company

is an example of a Sick Company merging into a healthy Industry.

Merger if successful facilitates productive use of the assets of a sick company which is in wider public interest and provides an impetus to the industrial growth. As per the Companies (Second Amendment) Act, 2002, the time period for sanctioning the scheme of merger after the passing of the Special Resolution by the transferor company has been specified. It has been laid down that that within sixty days which could be extended to ninety days the scheme requires to be sanctioned and it is binding on all concerned. The provisions contained in Chapter V of the Companies Act, 1956 are all engrafted in Section 18 of SICA and also in the Amendment to the Companies Act which replaces SICA. Under the new dispensation once an order is made as to chart out the course of revival for a sick company the provisions analogous to Section 18 of SICA can be fully used to achieve expeditiously all the necessary approvals/ consents including change in management structure, reorganization of capital structure (which may include reduction of capital), change in the name of the sick company, change in the registered office and so on. Although Section 18 of SICA omits the use of expressions like compromise or arrangement there are indicated in good measure in sub-section 2 (f) and (g) and the analogous section 424 D sub section 2 (f) and (g) of the proposed amendment to the Companies act. What is unique in these provisions relating to merger, demerger etc. is that the areas of controversies are quite limited. For example a scheme sanctioned can also provide for rationalization of managerial personal supervisory staff and workmen in accordance with law. A sick industrial company can also be revived through the process of the demerger which in relation to the Companies means the transfer pursuant to a scheme of arrangement by a Company of one or more of its undertakings to any resulting company on a going concern basis in such a manner that all the assets and liabilities of the undertaking being transferred by the de-merged Company becomes the property of the resulting Company. Though it has not been clearly entailed as a measure to revive a sick industrial company but it has been used by the BIFR/AAIFR
5

Indian Aluminum Company v. BIFR & Ors. (Order dated 8.3.2002 in AAIFR Appeal No. 87/2001)

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for the purpose of the revival of a sick industrial company as the viable units of the Sick Industrial Company are de-merged and the remaining units revival is focused. This process is followed in the case of a Company having many units and some units are operating profitably. The noteworthy scheme of de-merger sanctioned by AAIFR is the de-merger of the cement undertakings of JK Synthetics Ltd. into JK Cements Ltd.6, whereby the JK Cements Ltd. proposes to clear the dues of the secured lenders with the resultant vacation of the charge on the assets of the whole of JK Synthetics Ltd. and the remaining units of the JK Synthetics Ltd. are to be revived on the vacation of charge. Both the SICA and the Companies (Second Amendment) Act, 2002 as such have laid down various measures to revive a Company, which is facing financial constraints and it is expected that a sick Company shall be able to revive itself with the measures so provided. However, the revival efforts of any sick company is possible only on the commitment of its promoters and the timely provision of the requisite financial help along with relief/ concession by the secured creditors and the others concerned to a sick industrial company. Indeed the market for the product being manufactured and its competition are the other external factors which govern the revival of a company. But a willing promoter with the tied up resources is essential to the rehabilitation of any sick industrial company. (v) Revival of a Sick Industrial Company through Merger7 An extensive appraisal of each merger scheme is done to patternise the causes of mergers. These hypothesized causes (motives) as defined in the mergers schemes and explanatory statement framed by the companies at the time of mergers can be conveniently categorized based on the type of merger. The possible causes of different type of merger schemes are as follows: (a) Horizontal merger: These involve mergers of two business companies operating and competing in the same kind of activity. It is a merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands as the firms operations in the same industry.
6 7

J.K.Synthetics Ltd. v. BIFR & Ors. (Order dated 21.3.2003 in AAIFR Appeal No. 301/2000) http://www.mbaknol.com/strategic-management/types-of-merger/

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Horizontal mergers are designed to produce substantial economies of scale and result in decrease in the number of competitors in the industry. The merger of Tata Oil Mills Ltd. with the Hindustan lever Ltd. was a horizontal merger. In case of horizontal merger, the top management of the company being meted is generally, replaced, by the management of the transferee company. One potential repercussion of the horizontal merger is that it may result in monopolies and restrict the trade. Weinberg and Blank define horizontal merger as follows: A takeover or merger is horizontal if it involves the joining together of two companies which are producing essentially the same products or services which compete directly with each other (for example sugar and artificial sweetness). In recent years, the great majority of takeover and mergers have been horizontal. As horizontal takeovers and mergers involve a reduction in the number of competing firms in an industry, they tend to create the greatest concern from an anti-monopoly point of view, on the other hand horizontal mergers and takeovers are likely to give the greatest scope for economies of scale and elimination of duplicate facilities. They seek to consolidate operations of both companies. These are generally undertaken to: Achieve optimum size Improve profitability Carve out greater market share Reduce its administrative and overhead costs.

(ii) Vertical merger: These are mergers between firms in different stages of industrial production in which a buyer and seller relationship exists. Vertical merger are an integration undertaken either forward to come close to customers or backwards to come close to raw materials suppliers. It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. If a company takes over its

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supplier/producers of raw material, then it may result in backward integration of its activities. On the other hand, Forward integration may result if a company decides to take over the retailer or Customer Company. Vertical merger may result in many operating and financial economies. The transferee firm will get a stronger position in the market as its production/distribution chain will be more integrated than that of the competitors. Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network (i.e., from the acquisition of raw material to the relating of final products). A takeover of merger is vertical where one of two companies is an actual or potential supplier of goods or services to the other, so that the two companies are both engaged in the manufacture or provision of the same goods or services but at the different stages in the supply

route (for example where a motor car manufacturer takes over a manufacturer of sheet metal or a car distributing firm). Here the object is usually to ensure a source of supply or an outlet for products or services, but the effect of the merger may be to improve efficiency through improving the flow of production and reducing stock holding and handling costs, where, however there is a degree of concentration in the markets of either of the companies, anti-monopoly problems may arise. These mergers are generally endeavored to:

Increased profitability Economic cost (by eliminating avoidable sales tax and excise duty payments)

Increased market power Increased size

(iii) Conglomerate merger: These are mergers between two or more companies having unrelated business. These transactions are not aimed at explicitly sharing

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resources, technologies, synergies or product .They do not have an impact on the acquisition of monopoly power and hence are favored through out the world. These mergers involve firms engaged in unrelated type of business activities i.e. the business of two companies are not related to each other horizontally ( in the sense of producing the same or competing products), nor vertically (in the sense of standing towards each other n the relationship of buyer and supplier or potential buyer and supplier). In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. In practice, however, there is some degree of overlap in one or more of this common factors. Conglomerate mergers are unification of different kinds of businesses under one flagship company. The purpose of merger remains utilization of financial resources enlarged debt capacity and also synergy of managerial functions. However these transactions are not explicitly aimed at sharing these resources, technologies, synergies or product market strategies. Rather, the focus of such conglomerate mergers is on how the acquiring firm can improve its overall stability and use resources in a better way to generate additional revenue. It does not have direct impact on acquisition of monopoly power and is thus favored through out the world as a means of diversification. They are undertaken for diversification of business in other products, trade and for advantages in bringing separate enterprise under single control namely:

Synergy arising in the form of economies of scale. Cost reduction as a result of integrated operation. Risk reduction by avoiding sales and profit instability. Achieve optimum size and carve out optimum share in the market.

(iv)

Reverse merger: Reverse mergers involve mergers of profir making

companies with companies having accumulated losses in order to:

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Claim tax savings on account of accumulated losses that increase profits.

Set up merged asset base and shift to accelerate depreciation.

(v) Group company mergers: These mergers are aimed at restructuring the diverse units of group companies to create a viable unit. Such mergers are initiated with a view to affect consolidation in order to:

Cut costs and achieve focus. Eliminate intra-group competition Correct leverage imbalances and improve borrowing capacity.

(A) (i)

Laws Governing Merger in India8 Banking Regulation Act, 1949

Amalgamation of One Banking Company with Another Banking Company Provisions of Banking Regulation Act, 1949 Amalgamation of one banking company with another banking company is governed by the provisions of Banking Regulation Act, 1949. provisions of the Companies Act, 1956 are not applicable in this case. According to section 2 (5) of the Companies Act, 1956 Banking company has the same meaning as in the Banking Companies Act, 1949. (now the Banking Regulation Act, 1949). Section 44A of the Banking Regulation Act, 1949 provides for the procedure for amalgamation of banking companies. The RBIs power under section 44A shall not affect the power of the Central government to provide for the amalgamation of two or more banking companies under section 396 of the companies Act. But, in such a case the Central Government must consult the RBI before passing any order under section 396. Approval of Scheme of Amalgamation
8

The

http://www.mbaknol.com/legal-framework/laws-governing-merger-in-india/

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To amalgamate one banking company with another banking company, a scheme of amalgamation must be placed in draft before the shareholders of each of the banking companies concerned separately.

To approval of the shareholders must be secured at an extraordinary general meeting of each of the concerned companies, specially convened for the purpose of approving the scheme.

In the first instance, the scheme shall be placed before the Board of Directors of each of the concerned companies.

The Board will pass resolutions to

(a) approve the scheme of amalgamation; (b) fix the time date and place of the extraordinary general meeting. (c) Authorize the Managing Director/Company Secretary/ any director or officer of the company to issue notice of the meeting. (d) Do such other acts, things and deeds as may be necessary or expedient to do for the purpose of securing approval of the shareholders or others to the scheme and becoming it effective. Convening General Meeting Notice of every extraordinary general meeting as is referred to above must be given to every shareholder of each of the banking companies concerned in accordance with the relevant articles of association. The notice of the meeting must indicate the time, place and object of the meeting.9 The notice of the meeting must also be published at least once a week for three consecutive weeks in not less than two newspapers which circulate in the locality or localities where the registered offices of the banking companies concerned are situated, one of such newspapers being in a language commonly understood in the locality or localities.10
9

10

Section 44A (2) of Banking Regulation Act, 1949 Section 44A (2) of Banking Regulation Act, 1949.

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It is advisable to explain in a note the salient features of the scheme and also to enclose to the notice full scheme of amalgamation.

Resolution for Approval of the Scheme. The scheme of amalgamation must be approved by means of a resolution passed at the general meeting, by a majority in number representing twothird in value of the shareholders of each of the said companies, present either in persons or proxy at a meeting called for the purpose.11 Dissenting Shareholders Right to Claim Return of Capital Any shareholder who has voted against the scheme of a amalgamation at the meeting or has given notice in writing at or prior to the meeting to the company concerned or to the presiding officer of the meeting that he dissents from the scheme of amalgamation, shall be entitled in the event of the scheme being sanctioned by the RBI, to claim from the banking company concerned, in respect of the shares held by him in that company their value as determined by the RBI when sanctioning the scheme.12 The determination by the RBI the value of the shares to be paid to the dissenting shareholders shall be final for all purposes.13 Approval by the Reserve Bank of India If the scheme of amalgamation is approved by the requisite majority of shareholders in accordance with the provisions of this section shall be submitted to the RBI (reserve Bank of India) for its sanction to the scheme.14 The RBI may sanction a scheme, but if the RBI decides to sanction it, it must be sanctioned by an order in writing. A scheme sanctioned by the RBI shall be binding on the banking companies concerned and also on all the shareholders thereof.
11 12

Section 44A (1) of Banking Regulation Act, 1949. Section 44A (3) of Banking Regulation Act, 1949. 13 Ibid. 14 Section 44A (4)of Banking Regulation Act, 1949.

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An order sanctioning a Scheme of Amalgamation, passed by the RBI under section 44A (4) shall be conclusive evidence that all the requirements of this section relating to amalgamation have been complied with.15

A copy of the said order certified in writing by an officer of the RBI to be a true copy of such order and a copy of the scheme certified in the like manner to be a true copy thereof shall, in all legal proceedings (whether in appeal or otherwise) be admitted as evidence to the same extent as the original order and the original scheme.16

Transfer of Property On the sanctioning of a scheme of amalgamation by the RBI, the property of the amalgamated banking company, i.e. the transferor company, shall, by virtue of the order of sanction, be transferred to and vest in the transferee company. No other or further document will be necessary for effecting the transfer and vesting of the property from the transferor company to the transferee company.17 Dissolution of Transferor Company Where a scheme of amalgamation is sanctioned by the RBI, the RBI may by a further order in writing direct that on the date specified in the order the amalgamated banking company i.e. the transferor company, shall stand dissolved.18 A copy of the order directing dissolution of the amalgamated banking company shall be forwarded by the RBI to the office of the Registrar of companies at which it has been registered. On receipt of such order the Registrar shall strike off the name of the company.

15 16

Section 44A (6C) of Banking Regulation Act, 1949. Ibid. 17 Section 44A (6) of Banking Regulation Act, 1949. 18 Section 44A (6A) of Banking Regulation Act, 1949.

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(ii)

Indian Companies Act, 1956 This has provisions specifically dealing with the amalgamation of a company

or certain other entities with similar status. The most common form of merger involves as elaborate but time-bound procedure under sections 391 to 396 of the Act. Powers in respect of these matters were with High Court (usually called Company Court). These powers are being transferred to National Company Law Tribunal (NCLT)19 by Companies (Second Amendment) Act, 2002. The Compromise, arrangement and Amalgamation/reconstruction require approval of NCLT while the sale of shares to Transferee Company does not require approval of NCLT. (a) Power to compromise or make arrangements (Sec. 391): Where a compromise or arrangement is proposed: (a) between a company and its creditors or any class of them; or (b) between a company and its members or any class of them; the
20

[Tribunal] on the application of the company or of any creditor or member of

the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members to be called, held and conducted in such manner as the directs.22 If a majority in number representing three-fourths in value of the creditors, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the
23 21

[Tribunal]

[Tribunal], be binding on all the creditors, all the members, and

also on the company, or in the case of a company which is being wound up, on the liquidator and contributories of the company. No order sanctioning any compromise or arrangement shall be made by the

Substituted for Court Companies (Second Amendment) Act , 2002 yet to take effect. Ibid. 21 Ibid. 22 Sec. 391 (1). 23 Substituted for "Court" by the Companies (Second Amendment) Act, 2002 yet to take effect.
19 20

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24

[Tribunal] unless the 25[Tribunal] is satisfied that the company or any other person
26

by whom an application has disclosed to the

[Tribunal], by affidavit or otherwise,

all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, independency of any investigation proceedings in relation to the company under sections 235 to 251, and the like.27 An order made by the [Tribunal] shall have no effect until a certified copy of the order has been filed with the Registrar.28 A copy of every such order shall be annexed to every copy of the memorandum of the company.29 If default is made, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to [one hundred rupees] for each copy in respect of which default is made. 30 The
31

[Tribunal] may, at any time after an application has been made to it,
32

stay the commencement or continuation of any suit or proceeding against the company on such terms as the disposed of. (b) Power of Tribunal to enforce compromise and arrangement [Sec. 392] 33 Where the Tribunal makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it(a) shall have power to supervise the carrying out of the compromise or an arrangement; and (b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise
24 25

[Tribunal] thinks fit, until the application is finally

Ibid. Ibid. 26 Ibid.. 27 Sec. 391 (2). 28 Sec. 391 (3). 29 Sec. 391 (4). 30 Sec. 391 (5). 31 Substituted for "Court" by the Companies (Second Amendment) Act, 2002 yet to take effect. 32 Ibid. 33 Ibid.

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or arrangement.34 If the Tribunal is satisfied that a compromise or an arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company, and such an order shall be deemed to be an order made under section 433 of this Act.35 Where a meeting of creditors or any class of creditors, or of members or any class of members, is called under section 391, (a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect, and in particular, stating any material interests of the directors, managing director or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons; and (b) in every notice calling the meeting which is given by the advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.36 Where the compromise or arrangement affects the rights of debenture holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company's directors.37 Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall, on making an application in the
34 35

Sec. 392 (1). Sec. 392 (2). 36 Sec. 393 (1). 37 Sec. 393 (2).

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manner indicated by the notice, be furnished by the company, free of charge, with a copy of the statement.38 Where default is made in complying with any of the requirements of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty thousand rupees and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company. A person shall not be punishable under this sub-section if he shows that the default was due to the refusal of any other person to supply the necessary particulars as to his material interests.39 Every director, managing director or manager of the company, and every trustee for debenture holders of the company, shall give notice to the company of such matter relating to himself as may be necessary for the purposes of this section; and if he fails to do so, he shall be punishable with fine which may extend to five thousand rupees.40 (c) Reconstruction and Amalgamation of Companies (Sec. 394) Where an application is made to the
41

[Tribunal] under section 391 as are

mentioned in that section, and it is shown to the 42[Tribunal]. (a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and (b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme is to be transferred to another company; the 43[Tribunal] may, sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters:38 39

Sec. 393 (3). Sec. 393 (4). 40 Sec. 393 (5). 41 Substituted for "Court" by the Companies (Second Amendment) Act, 2002 yet to take effect 42 Ibid. 43 Ibid.

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(i)

the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company;

(ii)

the allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;

(iii)

the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;

(iv) (v)

the dissolution, without winding up, of any transferor company; the provision to be made for any person who, within such time and in such manner as the arrangement; and
44

[Tribunal] directs, dissent from the compromise or

(vi)

such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out: No compromise or arrangement proposed for the purposes of, or in connection

with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies, shall be sanctioned by the
46 45

[Tribunal] unless the

[Tribunal] has received a report from the Registrar that the affairs of the company

have not been conducted in a manner prejudicial to the interests of its members or to public interest.47 No order for the dissolution of any transferor company under clause (iv) shall be made by the
49 48

[Tribunal] unless the Official Liquidator has made a report to the

[Tribunal] that the affairs of the company have not been conducted in a manner

prejudicial to the interests of its members or to public interest. Where an order provides for the transfer of any property or liabilities, then, by
44 45

Ibid.. Substituted for "Court" by the Companies (Second Amendment) Act, 2002 yet to take effect. 46 Ibid. 47 Sec. 394 (1). 48 Substituted for "Court" by the Companies (Second Amendment) Act, 2002 yet to take effect. 49 Ibid.

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virtue of the order, that property shall be transferred to and vest in, and those liabilities shall be transferred to and become the liabilities of the transferee company; and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.50 Within thirty days after the making of an order, every company shall cause a certified copy to be filed with the Registrar for registration. If default is made, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees.51 The
52

[Tribunal] shall give notice of every application made to it under

section 391 or 394 to the Central Government, and shall take into consideration the representations, made to it by that Government before passing any order under any of these sections.53 (d) Purchase of Shares of one company by another company (Sec. 395) Where a scheme or contract involving the transfer of shares or any class of shares in a company to another company has, within four months after the making of the offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved. The transferee company may, at any time within two months after the expiry of the said four months give notice in the prescribed manner to any dissenting shareholder, that it desires to acquire his shares; and when such a notice is given, the transferee company shall, unless on an application made by the dissenting shareholder within one month from the date on which the notice was given. the
54

[Tribunal] thinks fit to order

otherwise, be entitled and bound to acquire those shares on the terms on which, under the scheme or contract. The shares of the approving shareholders are to be transferred to the transferee company.55 Where, in pursuance of any such scheme or contract, share, or shares of any

50 51

Sec. 394 (2). Sec. 394 (3). 52 Substituted for Court by the Companies (Second Amendment) Act, 2002 yet to take effect. 53 Sec. 394A. 54 Sec. 394A. 55 Sec. 395 (1).

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class, in a company are transferred to another company or its nominee. and those shares together with any other shares or any other shares (the same class, as the case may be, in the first-mentioned company held at the date of the transfer by, or by a nominee for, the transferee company or in subsidiary comprise nine-tenths in value of the shares, or the shares of that class the case may be. in the first-mentioned company, then: (a) the transferee company shall, within one month from the date of the transfer (unless on a previous transfer in pursuance of the scheme or contract it has already complied with this requirement), give notice of that fact in the prescribed manner to the holders of the remaining share or of the remaining shares of that class, as the case may be, who have not assented to the scheme or contract; and (b) any such holder may, within three months from the giving of the notice to him require the transferee company to acquire the shares in question. and where a shareholder gives notice under clause (b) with respect to any share the transferee company shall be entitled and bound to acquire those shares on the terms on which, under the scheme or contract. The shares of the approval shareholders were transferred to it, or on such other terms as may be agreed, or the 56[Tribunal] on the application of either the transferee company or the shareholder thinks fit to order.57 Where a notice has been given by the transferee company under sub-section (1) and the
58

[Tribunal] has not, on application made by the dissenting shareholder,

made an order to the contrary, the transferee company shall, on the expiry of one month from the date on which the notice has been given, or, if application to the
59

[Tribunal] by the dissenting shareholder is then pending, at that application has

been disposed of, transmit a copy of the notice to transferor company together with an instrument of transfer executed on behalf the shareholder by any person appointed by the transferee company and on own behalf by the transferee' company, and on its transfer to the transfer company the amount or other consideration representing the
Substituted for Court by the Companies (Second Amendment) Act 2002 yet to take effect. Sec. 395 (2). 58 Substituted for Court by the Companies (Second Amendment) Act 2002 yet to take effect. 59 Ibid.
56 57

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price payable by transferee company for the shares which, by virtue of this section, that company is entitled to acquire; and [the transferor company shall(a) (b) thereupon register the transferee company as the holder of those shares, and within one month of the date of such registration, inform the dissenting shareholders of the fact of such registration and of the receipt of the amount or other consideration representing the price payable to them by the transferee company]60 Any sums received by the transferor company under this section shall be paid into a separate bank account, and any such sums and any other consideration so received shall be held by that company in trust for the several persons entitled to the shares in respect of which the said sums or other considerations were respectively received.61 The following provisions shall apply in relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company, 62 namely: (i) every such offer or every circular containing such offer or every recommendation to the members of the transferor company by its directors to accept such offer shall be accompanied by such information as may be prescribed63; (ii) every such offer shall contain a statement by or on behalf of the tranferee company, disclosing the steps it has taken to ensure that necessary cash will be available; (iii) every circular containing or recommending acceptance of, such offer shall be presented to the Registrar for registration and no such circular shall be issued until it is so registered; (iv) the Registrar may refuse to register any such circular which does not contain the information required to be given under sub-clause (i) or which sets out such information in a manner likely to give a false impression; and

60 61

Sec. 395 (3). Sec. 395 (4). 62 Inserted by Act 31 of 1965, Section 51. w.e.f. 15-10-1965 63 Form 35A. Companies (Central Government's) General Rules and Forms, 1956

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(v)

an appeal shall lie to the 64[Tribunal] against an order of the Registrar refusing to register any such circular.

(b)

Whoever issues a circular which has not been registered, shall be punishable with fine which may extend to five thousand rupees. 65

(e)

Amalgamation of Companies in National Interest (Sec. 396) Where the Central Government is satisfied that in amalgamation of two or

more companies is essential in public interest 66 than the Central Government may by an order notified in the Official Gazette, provide for the amalgamation of those companies into a single company. The amalgamated company shall have such constitution, property, powers, rights, interests and privileges as well as such liabilities, duties and obligations as may be specified in governments order.67 Every member or creditor of each of the companies shall have, the same interest in or rights as he had in the company of which he was originally a member or creditor; and to the extent to which the interest or rights of such member or creditor in or against the company resulting from the amalgamation are less than his interest in or rights against the original company, he shall be entitled to compensation which shall be assessed by such authority and every such assessment shall be published in the Official Gazette. The compensation so assessed shall be paid to the member or creditor concerned by the company resulting from the amalgamation.68 Any person aggrieved by any assessment of compensation made by the prescribed authority may, within thirty days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the 69[Tribunal] and thereupon the assessment of the compensation shall be made by the 70[Tribunal].71 Order shall not be made, unless a copy of the proposed order has been sent in draft to each of the companies concerned. The Central Government has considered and made such modifications, if any, in the draft order as may seem to it desirable in the light of any suggestions and objections which may be received by it. Copies of
Substituted for "Court" by the Companies (Second Amendment) Act, 2002 yet to take effect. Substituted for "five hundred rupees" by the Companies (Amendment) Act, 2000, w.e.f. 13-12-2000. 66 Substituted by Art. 65 of 1960, section 152 for "national interest" 67 Section 396(1). 68 Section 396 (3). 69 Substituted for "Company Law Board" by the Companies (Second Amendment) Act, 2002 yet to take effect. 70 Ibid. 71 Section 396 (3A).
64 65

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every order made shall be laid before both Houses of Parliament. The books and papers of a company which has been amalgamated with, or whose shares have been acquired by, another company shall not be disposed of without the prior permission, of the Central Government and before granting such permission, that Government may appoint a person to examine the books and papers or any of them for the purpose of ascertaining whether they contain any evidence of the commission of an offence in connection with the promotion or formation, or the management of the affairs, of the first-mentioned company or its amalgamation or the acquisition of its shares. Amalgamation of two companies also possible under Sec. 494 of Companies Act, where the liquidator of a company transfer its assets and liability to another company. (iii) Monopolies and Restrictive Trade practices Act, 1969 (MRTP 1969) Certain Amendments in the MRTP Act were brought about in 1991. The Government has removed restrictions on the size of assets; market shares and on the requirement of prior government approvals for mergers that created entities that would violate prescribed limits. The Supreme Court, in a recent judgment, decided that prior approval of the central government for sanctioning a scheme of amalgamation is not required in view of the deletion of the relevant provision of the MRTP Act and the MRTP Commission was justified in not passing an order restraining implementation of the scheme of amalgamation of two firms in the same field of consumer articles. (iv) Foreign Exchange Regulation Act 1973 (FERA 1973) FERA is the primary Indian Law which regulates dealings in foreign exchange. Although there are no provisions in the Act which deal directly with transactions relating to amalgamations, certain provisions of the Act become relevant when shares in Indian companies are allotted to non- residents, where the undertaking sought to be acquired is a company which is not incorporated under any law in India. Section 29 of FERA provides that no foreign company or foreign national can acquire any share of an Indian company except with prior approval of the reserve Bank of India. The Act has been amended to facilitate transfer of shares two non residents and to allow Indian companies to set up subsidiaries and joint ventures abroad without the prior approval of the Reserve Bank of India.

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(v)

Income Tax Act, 1961 Income Tax Act, 1961 is vital among all tax laws which affect the merger of

firms from the point view of tax savings/liabilities. However, the benefits under this act are available only if the following conditions mentioned in Section 2 (1B) of the Act are fulfilled: a) All the amalgamating companies should be companies within the meaning of the section 2 (17) of the Income Tax Act, 1961. b) All the properties of the amalgamating company (i.e., the target firm) should be transferred to the amalgamated company (i.e., the acquiring firm). c) All the liabilities of the amalgamating company should become the liabilities of the amalgamated company, and d) The shareholders of not less than 90% of the share of the amalgamating company should become the shareholders of

amalgamated company. In case of mergers and amalgamations, a number of issues may arise with respect to tax implications. Some of the relevant provisions may be summarized as follows: Depreciation: The amalgamated company continues to claim depreciation on the basis of written down value of fixed assets transferred to it by the amalgamating company. The depreciation charge may be based on the consideration paid and without any re-valuation. However, unabsorbed depreciation, if any, cannot be assigned to the amalgamated company and hence no tax benefit is available in this respect. Capital Expenditures: If the amalgamating company transfers to the amalgamated company any asset representing capital expenditure on scientific research, then it is deductible in the hands of the amalgamated company under section 35 of Income Tax Act, 1961. Exemption from Capital Gains Tax: The transfer of assets by amalgamating company to the amalgamated company, under the scheme of amalgamation is exempted for capital gains tax subject to conditions namely (i) that the amalgamated company should be an Indian Company, and (ii) that the shares are issued in

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consideration of the shares, to any shareholder, in the amalgamated company. The exchange of old share in the amalgamated company by the new shares in the amalgamating company is not considered as sale by the shareholders and hence no profit or loss on such exchange is taxable in the hands of the shareholders of the amalgamated company. Carry Forward Losses of Sick Companies: Section 72A(1) of the Income Tax Act, 1961 deals with the mergers of the sick companies with healthy companies and to take advantage of the carry forward losses of the amalgamating company. But the benefits under this section with respect to unabsorbed depreciation and carry forward losses are available only if the followings conditions are fulfilled: 1. 2. 3. 4. The amalgamating company is an Indian company. The amalgamating company should not be financially viable. The amalgamation should be in public interest. The amalgamation should facilitate the revival of the business of the amalgamating company. 5. 6. The scheme of amalgamation is approved by a specified authority, and The amalgamated company should continue to carry on the business of the amalgamating company without any modification Amalgamation Expenses: In case an expenditure is incurred towards professional charges of Solicitors for the services rendered in connection with the scheme of amalgamation, then such expenses are deductible in the hands of the amalgamated firm. (vi) (a) SICK Industrial Companies (Special Provisions) Act, 1985 Merger Through Reconstruction)72 BIFR (Board For Industrial and Financial

The Companies (Amendment) Act, 2002 has repealed the Sick Industrial Companies Act (SICA) 1985, in order to bring sick industrial companies within the purview of Companies Act 1956 from the jurisdiction of SICA, 1985. The Act has introduced new provisions for the constitution of a tribunal known as the National

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Company Law Tribunal with regional benches which are empowered with the powers earlier vested with the Board for Industrial and Financial reconstruction (BIFR).73 Before the evolution of SICA, the power to sanction the scheme of amalgamation was vested only with the high court. However, sec. 18 of the SICA 1985 empowers the BIFR to sanction a scheme of amalgamation between sick industrial company and another company over and above the power of high court as per section 391-394 of Companies Act, 1956. The amalgamation take place under SICA have a special place in law and are not bound by the rigor of Companies Act, 1956, and Income Tax Act, 1961. There is no need to comply with the provisions of sec. 391-394 of Companies Act, 1956 for amalgamation sanctioned by BIFR. The scheme of amalgamation however must be approved by shareholders of healthy company after getting approval from BIFR. Sec. 72A of the Income Tax Act has been enacted with a view to providing incentives to healthy companies to takeover and amalgamation with companies which would otherwise become burden on the economy. The accumulated losses and unabsorbed depreciation of the amalgamating company is deemed to loss or allowance for depreciation of the amalgamated company. So amalgamated company gets the advantage of unabsorbed depreciation and accumulated loss on the precondition of satisfactory revival of sick unit. A certificate from specialized authority to the effect that adequate steps have been taken for rehabilitation or revival of sick industrial undertaking has to be obtained to get these benefits. Thus the main attraction for the healthy company to takeover a sick company through a scheme of amalgamation is the tax benefits that may be available to it consequent to amalgamation. The approach usually followed is to quantify the possible tax benefits first and then get an order as part of rehabilitation package from BIFR. Once BIFR is convinced about the rehabilitation benefit it passes an appropriate order to see that benefits of tax concessions properly ensure to the transferee isolation

73

Board for Industrial and Financial Reconstruction (BIFR) was established by central government under SICA, 1985 for detection of sick and potentially sick industrial units and speedy determination pf their remedial measures and to exercise the jurisdiction and powers and discharge the functioning and duties imposed on the Board by or under the Act.

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Various measures to be recommended by the operating agency in the scheme to be prepared by it for submission to the BIFR concerning the sick industrial unit.74 Before the amendment, in 1994 under SICA, only normal amalgamation (of sick company with healthy one) was possible and the Act did not provide for reverse merger of a profitable company with sick company. Now the amended Sec.18 of the Act contains provision for effecting both normal and reverse merger. It provides for the amalgamation of

Sick industrial company with any other company Any other company with the sick industrial company. REVIVAL OF SICK INDUSTRIAL COMPANY THROUGH TAKE OVER Meaning of Takeover Takeover has been defined as a business transaction whereby an individual or

(vi) (a)

a group of individuals or a company acquires control over the assets of a company, either directly by becoming owner of those assets or indirectly by obtaining control of the management of the company. In the ordinary case, the company taken over is smaller but in a reverse takeover a smaller company gains control over the larger company. This is different from merger wherein the shareholding in the combined enterprise will be spread between the shareholders of the two companies. Normally the company which wants to takeover the other company acquires the shares of the target company either in a single transaction or a series of transactions. In case of amalgamation under Section 391-394 of the Companies Act, 1956 the amalgamating as well as amalgamated company have to apply to the High Court(s) for making order of amalgamation. However the regulatory framework for controlling the takeover activities of a company consists of the Companies Act, 1956 Listing Agreement with Stock Exchange and SEBIs Takeover Code.

74

Section 18 of Sick Industrial Companies Act, 1985.

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(b)

Takeover Bid In simple language a takeover is acquisition of shares voting rights in a

company with a view to gaining control over the management of the company. A takeover bid is an offer addressed to each shareholder of a company, whose shares are not closely held to buy his shares in the company at the offered price within the stipulated period of time. It is addressed to the shareholders with a view to acquiring sufficient number of shares to give the offered price within the stipulated period of time. It is addressed to the shareholders with a view to acquiring sufficient number of shares to give the offeror company, voting control of the largest company. It is usually expressed to be conditional upon a specified percentage of shares being the subject-matter of acceptance by or before a stipulated date. A takeover bid is a technique, which is adopted by a company for taking over control of the management and affairs of another company by acquiring its controlling shares. (c) Kinds of Takeovers 1. 2. (i) Friendly takeover Hostile takeover

Friendly Takeover A friendly takeover is with the consent of taken over company. There is an

agreement between the management of two companies through negotiations and the takeover bid may be with consent of majority or all shareholders of the target company, which is referred to as friendly takeover bid. (ii) Hostile Takeover When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally persues efforts to gain control against the wishes of existing management such acts of acquirer are known as takeover raids or hostile takeover bids. The main distinction between a friendly takeover and hostile takeover is whether there is a mutual understanding between the acquirer and the taken over company. When there is a mutual understanding, it is

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friendly takeover otherwise it is termed as hostile takeover. Few instances of note worthy takeovers are (1) Swaraj Paul and Sethia groups attempted raids on Escorts Ltd. and DCM Ltd. but did not succeed. (2) NRI Chhabria Group acquired crucial stake in Shaw Wallace, Mather & Plant Hidnustan Dock Oliver, Dunlop India. (3) The Goenkas of Calcutta have during 1988 successfully taken over Ceat Typres, Herdillia Chemicals, Polychem etc. (4) (5) Oberoi Group has taken over Pleasant Hotels of Rane Group. Mahendra and Mahendra Ltd. (M&M) has taken over the automotive pressing unit of Guest Keen Williams Ltd. (6) (7) (8) Shalimar Paints by Jindals. Crystal Investment & Finance by MRF. Tata Tea in 1988 had made public offer to take over Consolidated Coffee Ltd. (CCL) and acquired 50% stake. (d) Types of Takeovers In a takeover the taking over company has two options, viz. (1) to merge both companies into one and operate both the undertakings as a single entity and (ii) to keep the takenover company a separate and independent company, with changed management changed policies or even with a changed name. Takeover may be of different types depending upon the intention of the management of the taking over company. 1. A takeover may be a straight takeover which is accomplished by the management of the taking over company by acquisition of shares of another company with an intention to maintain and operate the takeover company as an independent legal entity. 2. Another type of takeover may be with an intention of capluring the ownership of the takenover company in order to merge both companies

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into one and operate business and undertakings of both the companies as a single legal entity. 3. A third type of take over is the takeover of a sick industrial company for the purpose of revival of its business. This is accomplished by an order of the Board of Industrial and Financial reconstruction (BIFR) under the provisions of the Sick Industrial Companies (Special Provisions) Act 1985. 4. Bail out takeover, is substantial acquisition of shares in a financially weak company not being a sick industrial company, in pursuance to a scheme of rehabilitation approved by a public financial institution or a scheduled bank (hereinafter referred to as the lead institution). The lead institution is responsible for ensuring compliance with the provisions of the SEBI (Substantial Acquisition and Takeovers) Regulations, 1997 which regulate the bail out takeovers. C. FACTORS TO CONSIDER IN A CROSS-BORDER MERGER OR ACQUISITION75 Cross border mergers and acquisitions are playing an important role in the growth of international production. Not only they dominate FDI flows in developing countries, they have also begun to take hold as a mode of entry into developing countries and economies in transition. Although the basic merger or acquisition is the same worldwide, undertaking a cross-border transaction is more complex than those conducted in market because of the multiple sets of laws, customs, cultures, currencies, and other factors that impact the process. (a) How should the transaction be financed? The financial structure of the transaction might be impacted by which country the target is in. For example, from a valuation perspective, flowback can have a negative impact on the acquirors stock price and cause regulatory problems (i.e. stock flowing back to the acquirors home jurisdiction). Other types of

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considerations include the change in the nature of the investments held by institutional investors caused by a stock exchange merger these investors may be compelled under their own investment guidelines to sell newly acquired stock in the acquiror; and the possible change in the tax treatment of dividends that encourages the sale of the stock (e.g. foreign tax credit is useless to US tax-exempt investors).The following are issues for an acquiror to address when structuring the transaction. If the transaction involves issuing stock, will the stock be common or preferred stock, and will the stock be issued directly to the target the transaction. or to the targets stockholders? Is the acquiror prepared to be subject to the laws of the targets country if it issues stock in the transaction, particularly the financial disclosure laws? After issuing stock, how will the acquirors stockholder base be composed? How many shares are held by cross-border investors? Does the new composition shift stockholder power dramatically? Will any of the new stockholders cause problems? If the transaction involves debt, where will the debt be issued, from in country or cross-border? What type of debt will be issued senior, secured, unsecured, or mezzanine? If the transaction involves cash, will cash be raised by raising capital in the public markets, and if so, in which market will the stock be issued? If cash financing is obtained in the targets country, can the acquiror comply with any applicable margin requirements, such as those promulgated by the Federal Reserve Board in the US? (b) How are the customs and cultures of the parties different? Before contemplating the transaction, the acquiror should be able to express a clear vision of how the target will be operated and funded. This will be necessary to share with the target and its employees and shareholders, as well as with its own shareholders. Public relations are important in winning the hearts of the targets employees, communities, and shareholders. One cultural issue is whether the target will still be 231

managed in country, or whether it will be part of a regional center or managed solely from the acquirors headquarters. Employees worry about overseas managers and communities wonder about loss of jobs. From a financial perspective, investors will want pro forma information to understand how the combined company will operate going forward. This may require disclosure of financial information to which the targets investors are accustomed, but which is new for the acquiror. (c) How do the applicable laws govern the transaction? If the transaction is public, such as a tender offer, the parties generally must abide by the law of the country where the offer will be made. In comparison, the parties can choose which law governs if the transaction is private. They can select ground rules that are the laws from either of the home countries, or even a thirdparty country with established merger laws like the US. If two sets of laws are involved, particularly if one is based on a code system and the other is common law, it is common for both the acquiror and target to have two sets of advisors, one from the country of each party. It is also fairly routine for non-US parties to have their own US investment banker and law firm as advisors in a transaction even if neither party is from the US. Even if the parties do not use the targets countrys laws as the ground rules, an acquiror must consider the laws of the target in deciding whether to pursue a combination. For example, there could be laws that pose substantial obstacles to consummating a deal, such as restrictions on ownership. There are more than a few instances of cross-border bids that have failed because the targets government blocked the transaction to stop a company from falling into the hands of another country. The following are issues for an acquiror to address before a deal is struck with a target. Will the target insist on in market customs, and if so, will these customs be used as a shield to stall or prevent a transaction?

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How difficult will it be to obtain complete financial information? Are there laws that prohibit disclosure or enable the target to share data that are not reliable?

What is the role of regulators in the targets country? Do they have tools to effectively stall or prevent a transaction, such as requisite governmental approval under exchange control or national security laws? For example, in the US, under the Exon-Florio provisions of the Trade Act, the President of the United States has the power to block the acquisition or to render it void after it has been completed.

Will the acquisition have to be approved by the targets shareholders, and does the targets country have laws that make this difficult?

Does the target have subsidiaries or do business in countries other than its home country, such as Canada, Australia, or Germany, that makes the transfer of those subsidiaries difficult so that they will have to be forcibly divested to consummate the deal?

Is the target or any of its subsidiaries in a heavily regulated industry (e.g. defense contracting, banking, or insurance) that requires regulatory approval, and if so, will the regulatory delays make it appropriate for the acquisition to take the form of a one-step merger (i.e. without an initial tender offer)?

How will the formal merger or acquisition agreement be drafted? Will it be local to the acquiror or the target, or a US agreement with one of the local laws governing, or a pure US agreement?

(d)

What level of due diligence is appropriate? Due diligence is critical in a cross-border transaction since there is a greater

likelihood for undesirable surprises to surface after an agreement has been reached initially. It is important to establish in the formal agreement what type of due diligence is permitted and what the consequences are of finding certain types of surprises.

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The acquiror should ensure that it has adequate access to the targets documentation and personnel to facilitate the due diligence process. In addition to access to all financial information, the acquiror should review the targets loan agreements, severance plans, and other employee agreements to see if the targets change in control would impose any previously undisclosed costs or obligations (e.g. constitute an event of default so as to accelerate outstanding indebtedness). Similarly, any other major agreements should be reviewed, such as licensing and joint venture agreements, to determine whether any benefits may be lost due to the pending change in control. The targets charter and bylaws should be checked to see if they have any peculiar provisions that might make it more difficult for the acquiror to gain full control of the target. For example, the acquiror should determine whether the target has a shareholder rights plan or poison pill, or has a provision that requires a supermajority vote to approve mergers. (e) Are there any significant antitrust or non competition issues? Although the US generally has the most aggressively enforced antitrust laws in the world, the European Union has become quite aggressive (e.g. blocking the General Electric-Honeywell merger). Overall, more than 70 countries have their own competition laws, and there are a number of regional economic organizations that have competition law frameworks. If the target is involved in operations out of its home country, the acquiror should conduct a review of the relevant antitrust laws. Even if a significant antitrust problem is not present, it may be necessary to report the acquisition in advance to a governmental agency. In the US, the Hart-ScottRodino Antitrust Improvements Act requires a notice and waiting period unless the transaction is below specified minimal levels. The following are issues for an acquiror to address before pursuing a target. To what extent do the acquiror and target compete in a line of business? Will the acquisition substantially lessen competition in any line of business in any particular country? 234

What products or services does the acquiror sell to the target now, or vice versa?

(f)

Are there any significant tax or currency issues? The acquiror should structure the transaction with a complete understanding of

the tax implications. This requires an analysis of the interplay of local law and tax treaties as well as the expectation of where future revenues and deductions will be derived. Based on the acquirors own tax preferences, it may desire current income (i.e. dividends) or capital gain, and should structure the transaction accordingly. The acquiror must also take care to consider the volatility of any currencies that are implicated in the transaction and ensure that it has adequate protection from downward swings in them before the transaction is closed. If it cannot tolerate the currency risk that is involved in the targets operations, the acquiror should consider the ongoing impact of a volatile currency after the transaction is complete Case Study - I: The Hewlett-Packard and Compaq Merger76 Hewlett-Packard (HP) It all began in the year 1938 when two electrical engineering graduates from Stanford University called William Hewlett and David Packard started their business in a garage in Palo Alto. In a years time, the partnership called Hewlett-Packard was made and by the year 1947, HP was incorporated. The company has been prospering ever since as its profits grew from five and half million dollars in 1951 to about 3 billion dollars in 1981. The pace of growth knew no bounds as HPs net revenue went up to 42 billion dollars in 1997. Starting with manufacturing audio oscillators, the company made its first computer in the year 1966 and it was by 1972 that it introduced the concept of personal computing by a calculator first which was further advanced into a personal computer in the year 1980. The company is also known for the laser-printer which it introduced in the year 1985.

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Compaq The company is better known as Compaq Computer Corporation. This was company that started itself as a personal computer company in the year 1982. It had the charm of being called the largest manufacturers of personal computing devices worldwide. The company was formed by two senior managers at Texas Instruments. The name of the company had come from-Compatibility and Quality. The company introduced its first computer in the year 1983 after at a price of 2995 dollars. In spite of being portable, the problem with the computer was that it seemed to be a suitcase. Nevertheless, there were huge commercial benefits from the computer as it sold more than 53,000 units in the first year with a revenue generation of 111 million dollars. Reasons for the Merger A very simple question that arises here is that, if HP was progressing at such a tremendous pace, what was the reason that the company had to merge with Compaq? Carly Fiorina, who became the CEO of HP in the year 1999, had a key role to play in the merger that took place in 2001. She was the first woman to have taken over as CEO of such a big company and the first outsider too. She worked very efficiently as she travelled more than 250,000 miles in the first year as a CEO. Her basic aim was to modernize the culture of operation of HP. She laid great emphasis on the profitable sides of the business. This shows that she was very extravagant in her approach as a CEO. In spite of the growth in the market value of HPs share from 54.43 to 74.48 dollars, the company was still inefficient. This was because it could not meet the targets due to a failure of both company and industry. HP was forced to cut down on jobs and also be eluded from the privilege of having Price Water House Coopers to take care of its audit. So, even the job of Fiorina was under threat. This meant that improvement in the internal strategies of the company was not going to be sufficient for the companys success. Ultimately, the company had to certainly plan out something different. So, it was decided that the company would be acquiring Compaq in a stock transaction whose net worth was 25 billion dollars. Initially, this merger was not planned. It started with a telephonic conversation between CEO HP, Fiorina and Chairman and CEO Compaq, Capellas. The idea behind the conversation was to discuss on a licensing agreement but it continued as a discussion on competitive

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strategy and finally a merger. It took two months for further studies and by September, 2001, the boards of the two companies approved of the merger. In spite of the decision coming from the CEO of HP, the merger was strongly opposed in the company. The two CEOs believed that the only way to fight the growing competition in terms of prices was to have a merger. But the investors and the other stakeholders thought that the company would never be able to have the loyalty of the Compaq customers, if products are sold with an HP logo on it. Other than this, there were questions on the synchronization of the organizations members with each other. This was because of the change in the organization culture as well. Even though these were supposed to serious problems with respect to the merger, the CEO of HP, Fiorina justified the same with the fact that the merger would remove one serious competitor in the over-supplied PC market of those days. She said that the market share of the company is bound to increase with the merger and also the working unit would double. Advantages of the Merger Even though it seemed to be advantageous to very few people in the beginning, it was the strong determination of Fiorina that she was able to stand by her decision. Wall Street and all her investors had gone against the company lampooning her ideas with the saying that she has made 1+1=1.5 by her extravagant ways of expansion. Fiorina had put it this way that after the companys merger, not only would it have a larger share in the market but also the units of production would double. This would mean that the company would grow tremendously in volume. Her dream of competing with the giants in the field, IBM would also come true. She was of the view that much of the redundancy in the two companies would decrease as the internal costs on promotion, marketing and shipping would come down with the merger. This would produce the slightest harm to the collection of revenue. She used the ideas of competitive positioning to justify her plans of the merger. She said that the merger is based on the ideologies of consolidation and not on diversification. She could also defend allegations against the change in the HP was. She was of the view that the HP has always encouraged changes as it is about innovating and taking bold steps. She said that the company requires being consistent with creativity,

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improvement and modification. This merger had the capability of providing exactly the same. Advantages to the Shareholders The following are the ways in which the company can be advantageous to its shareholders:

Unique Opportunity: The position of the enterprise is bound to better with the merger. The reason for the same was that now the value creation would be fresh, leadership qualities would improve, capabilities would improve and so would the sales and also the companys strategic differentiation would be better than the existing competitors. Other than this, one can also access the capabilities of Compaq directly hence reducing the cost structure in becoming the largest in the industry. Finally, one could also see an opportunity in reinvesting.

Stronger Company: The profitability is bound to increase in the enterprise, access and services sectors in high degrees. The company can also see a better opportunity in its research and development. The financial conditions of the company with respect to its EBIT and net cash are also on the incremental side.

Compelling Economics: The expected accumulation in IIP gains would be 13% in the first financial year. The company could also conduct a better segmentation of the market to forecast its revenues generation. This would go to as much as 2 and a half billion dollars of annual synergy.

Ability to Execute: As there would be integration in the planning procedures of the company, the chances of value creation would also be huge. Along with that the experience of leading a diversified employee structure would also be there.

Opposition to the Merger In fact, it was only CEO Fiorina who was in favor of going with the merger. This is a practical application of Agency problem that arises because of change in financial strategies of the company owners and the management. Fiorina was certain 238

to lose her job if the merger didnt take effect. The reason was that HP was not able to meet the demand targets under her leadership. But the owners were against the merger due to the following beliefs of the owners:

The new portfolio would be less preferable: The position of the company as a larger supplier of PCs would certainly increase the amount of risk and involve a lot of investment as well. Another important reason in this context is that HPs prime interest in Imaging and Printing would not exist anymore as a result diluting the interest of the stockholders. In fact the company owners also feel that there would be a lower margin and ROI (return on investment).

Strategic Problems would remain Unsolved: The market position in highend servers and services would still remain in spite of the merger. The price of the PCS would not come down to be affordable by all. The requisite change in material for imaging and printing also would not exist. This merger would have no effect on the low end servers as Dell would be there in the lead and high-end servers either where IBM and Sun would have the lead. The company would also be eluded from the advantages of outsourcing because of the surplus labor it would have. So, the quality is not guaranteed to improve. Finally, the merger would not equal IBM under any condition as thought by Fiorina.

Huge Integrated Risks: There have been no examples of success with such huge mergers. Generally when the market doesnt support such mergers, dont do well as is the case here. When HP could not manage its organization properly, integration would only add on to the difficulties. It would be even more difficult under the conditions because of the existing competitions between HP and Compaq. Being prone to such risky conditions, the company would also have to vary its costs causing greater trouble for the owner. The biggest factor of all is that to integrate the culture existing in the two companies would be a very difficult job.

Financial Impact: This is mostly because the market reactions are negative. On the other hand, the position of Compaq was totally different from HP. As the company would have a greater contribution to the revenue and HP being 239

diluted at the same time, the problems are bound to develop. This would mean that drawing money from the equity market would also be difficult for HP. In fact this might not seem to be a very profitable merger for Compaq as well in the future. The basic problem that the owners of the company had with this merger was that it would hamper the core values of HP. They felt that it is better to preserve wealth rather than to risk it with extravagant risk taking. This high risk profile of Fiorina was a little unacceptable for the owners of the company in light of its prospects. So, as far as this merger between HP and Compaq is concerned, on side there was this strong determination of the CEO, Fiorina and on the other side was the strong opposition from the company owners. This opposition continued from the market including all the investors of the company. So, this practical Agency problem was very famous considering the fact that it contained two of the most powerful hardware companies in the world. There were a number of options like Change Management, Economic wise Management, and Organizational Management which could be considered to analyze the issue. But this case study can be solved best by a strategy wise analysis. (HP-Compaq merger faces stiff opposition from shareholders stock prices fall again, 2001) Strategic Analysis of the Case Positive Aspects A CEO will always consider such a merger to be an occasion to take a competitive advantage over its rivals like IBM as in this case and also be of some interest to the shareholders as well. The following are the strategies that are related to this merger between HP and Compaq:

Having an eye over shareholders value: If one sees this merger from the eyes of Fiorina, it would be certain that the shareholders have a lot to gain from it. The reason for the same is the increment in the control of the market. So, even of the conditions were not suitable from the financial perspective, this truth would certainly make a lot of profits for the company in the future.

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Development of Markets: Two organizations get involved in mergers as they want to expand their market both on the domestic and the international level. Integration with a domestic company doesnt need much effort but when a company merges internationally as in this case, a challenging task is on head. A thorough situation scanning is significant before putting your feet in International arena. Here, the competitor for HP was Compaq to a large degree, so this merger certainly required a lot of thinking. Organizations merge with the international companies in order to set up their brands first and let people know about what they are capable of and also what they eye in the future. This is the reason that after this merger the products of Compaq would also have the logo of HP. Once the market is well-known, then HP would not have to suffer the branding created by Compaq. They would be able to draw all the customers of Compaq as well.

Propagated Efficiencies: Any company by acquiring another or by merging makes an attempt to add to its efficiencies by increasing the operations and also having control over it to the maximum extent. We can see that HP would now have an increased set of employees. The only factor is that they would have to be controlled properly as they are of different organizational cultures. (Benefits of Mergers:, 2010)

Allowances to use more resources: An improvised organization of monetary resources, intellectual capital and raw materials offers a competitive advantage to the companies. When such companies merge, many of the intellects come together and work towards a common mission to excel with financial profits to the company. Here, one cant deny the fact that even the top brains of Compaq would be taking part in forming the strategies of the company in the future.

Management of risks: If we particularly take an example of this case, HP and Compaq entering into this merger can decrease the risk level they would have diversified business opportunities. The options for making choice of the supply chain also increase. Now even though HP is a pioneer in inkjet orienting, it would not have to use the Product based Facility layout which is more expensive. It can manage the risk of taking process based facility layout

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and make things cheaper. Manufacturing and Processing can now be done in various nations according to the cost viability as the major issue.

Listing potential: Even though Wall Street and all the investors of the company are against the merger, when IPOs are offered, a development will definitely be there because of the flourishing earnings and turnover value which HP would be making with this merger.

Necessary political regulations: When organizations take a leap into other nations, they need to consider the different regulations in that country which administer the policies of the place. As HP is already a pioneer in all the countries that Compaq used to do its business, this would not be of much difficulty for the company. The company would only need to make certain minor regulations with the political parties of some countries where Compaq was flourishing more than HP.

Better Opportunities: When companies merge with another company, later they can put up for sale as per as the needs of the company. This could also be done partially. If HP feels that it would not need much of warehouse space it can sell the same at increased profits. It depends on whether the company would now be regarded a s a make to stock or a make to order company.

Extra products, services, and facilities: Services get copyrights which enhances the level of trade. Additional Warehouse services and distribution channels offer business values. Here HP can use all such values integrated with Compaq so as to increase its prospects.

Negative Aspects There are a number of mergers and acquisitions that fail before they actually start to function. In the critical phase of implementation itself, the companies come to know that it would not be beneficial if they continue as a merger. This can occur in this merger between HP and Compaq due to the following reasons.

Conversations are not implemented: Because of unlike cultures, ambitions and risk profiles; many of the deals are cancelled. As per as the reactions of the owners of HP, this seems to be extremely likely. So, motivation amongst

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the employees is an extremely important consideration in this case. This requires an extra effort by the CEO, Fiorina. This could also help her maintain her position in the company.

Legal Contemplations: Anti-competitive deals are often limited by the rules presiding over the competition rules in a country. This leads to out of order functioning of one company and they try to separate from each other. A lot of unnecessary marketing failures get attached to these conditions. If this happens in this case, then all that money which went in publicizing the venture would go to be a waste. Moreover, even more would be required to re-promote as a single entity. Even the packaging where the entire inventory from Compaq had the logo of HP would have to be re-done, thus hampering the finance even further. (Broc Romanek, 2002)

Compatibility problems: Every company runs on different platforms and ideas. Compatibility problems often occur because of synchronization issues. In IT companies such as HP and Compaq, many problems can take place because both the companies have worked on different strategies in the past. Now, it might not seem necessary for the HP management to make changes as per as those from Compaq. Thus such problems have become of greatest concern these days.

Fiscal catastrophes: Both the companies after signing an agreement hope to have some return on the money they have put in to make this merger happen and also desire profitability and turnovers. If due to any reason, they are not able to attain that position, then they develop a abhorrence sense towards each other and also start charging each other for the failure.

Human Resource Differences: Problems as a result of cultural dissimilarities, hospitality and hostility issues, and also other behavior related issues can take apart the origin of the merger.

Lack of Determination: When organizations involve, they have plans in their minds, they have a vision set; but because of a variety of problems as mentioned above, development of the combined company to accomplish its mission is delayed. Merged companies set the goal and when the goal is not 243

accomplished due to some faults of any of the two; then both of them develop a certain degree of hatred for each other. Also clashes can occur because of bias reactions. (William, 2008)

Risk management failure: Companies that are involved in mergers and acquisitions, become over confident that they are going to make a profit out of this decision. This can be seen as with Fiorina. In fact she can fight the whole world for that. When their self-confidence turns out into over-confidence then they fail. Adequate risk management methods should be adopted which would take care of the effects if the decision takes a downturn. These risk policies should rule fiscal, productions, marketing, manufacturing, and inventory and HR risks associated with the merger.

Strategic Sharing

Marketing: Hp and Compaq would now have common channels as far as their buying is concerned. So, the benefits in this concern is that even for those materials which were initially of high cost for HP would now be available at a cheaper price. The end users are also likely to increase. Now, the company can re frame its competitive strategy where the greatest concern can be given to all time rivals IBM. The advantages of this merger in the field of marketing can be seen in the case of shared branding, sales and service. Even the distribution procedure is likely to be enhanced with Compaq playing its part. Now, the company can look forward to cross selling, subsidization and also a reduced cost.

Operations: The foremost advantage in this area is that in the location of raw material. Even the processing style would be same making the products and services synchronized with the ideas and also in making a decent operational strategy. As the philosophical and mechanical control would also be in common, the operational strategy would now be to become the top most in the market. In this respect, the two companies would now have co-production, design and also location of staff. So, the operational strategy of HP would now be to use the process based facility layout and function with the mentioned shared values. 244

Technology: The technical strategy of the company can also be designed in common now. There is a disadvantage from the perspective of the differentiation that HP had in the field of inkjet printers but the advantages are also plentiful. With a common product and process technology, the technological strategy of the merged company would promote highly economical functioning. This can be done through a common research and development and designing team.

Buying: The buying strategy of the company would also follow a common mechanism. Here, the raw materials, machinery, and power would be common hence decreasing the cost once again. This can be done through a centralized mechanism with a lead purchaser keeping common policies in mind. Now Hp would have to think with a similar attitude for both inkjet printers as well as personal computers. This is because the parameters for manufacturing would also run on equal grounds.

Infrastructure: This is the most important part of the strategies that would be made after the merger. The companies would have common shareholders for providing the requisite infrastructure. The capital source, management style, and legislation would also be in common. So, the infrastructure strategies would have to take these things into account. This can be done by having a common accounting system. HP does have an option to have a separate accounting system for the products that it manufactures but that would only arouse an internal competition. So, the infrastructural benefits can be made through a common accounting, legal and human resource system. This would ensure that the investment relations of the company would improve. None of the Compaq investors would hesitate in making an investment if HP follows a common strategy. HP would now have to ensure another fact that with this merger they would be

able to prove competitors to the present target and those of competitors like IBM as well. Even the operations and the output market needs to be above what exists at present. The company needs to ensure that the corporate strategy that it uses is efficient enough to help such a future. The degree of diversification needs to be

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managed thoroughly as well. This is because; the products from the two companies have performed exceptionally well in the past. So, the most optimum degree of diversification is required under the context so that the company is able to meet the demands of the customers. This has been challenged by the owners of HP but needs to be carried by the CEO Fiorina. Case Study - II: America Online (AOL) Merger with Time Warner (Twx)77 A merger between America Online (AOL) and Time Warner (TWX) was announced on January 10, 2000. A new company named AOL Time Warner Incorporated was planned outcome of the merger. AOL shareholders would receive 1 new share for each AOL share, and TWX shareholders would receive 1.5 new shares for each TWX share. The merger captured the imagination of the public. AOL agreed to pay stock worth about $165 billion for Time Warner, a 70% premium. At the announcement, it was estimated that the market value of the combined companies would be $350 billion. As important as the large value of the deal was the combination of new economy and old economy companies. AOLs stock prices boomed in the late 1990s as a hot Internet stock. Investors saw its potential for the significant future earnings growth based on its implementation of technology. Meanwhile, Time Warner (TWX) was a leader of old-line media, owning publishing, television, cable, movie, and other entertainment properties. Although AOL only brought 18% of the revenues and 30% of the operating cash flows to the table, AOL shareholders would own 55% of the combined firm. New technologies were crucial in transforming the industries of America Online (AOL) and Timer Warner. The Internet industry underwent rapid transformation in the 1990s. In the early part of the decade, it was seen as a kind of virtual library. The Internet would be the means to exchange tremendous amounts of academic information easily. The introduction of Netscape Navigator in 1994 made the Internet more accessible to the masses. During the late 1990s, e-commerce became a central function of the Internet, with shopping online becoming the next
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big thing. Many analysts believe the AOL Time Warner merger is the sign that multimedia entertainment will be the next major step for the Internet and a precursor to combining more old and new economy industries. For all the promise of the Internet as a source of multimedia entertainment many challenges have to be overcome. Although some believe that internet sources eventually will replace print media, many find it cumbersome to read from a computer screen for long time period. Television on demand (where consumers pay to watch programming of their own choosing) has long been a dream for media companies, but so far it never has been implemented effectively. The movie and music industries have experienced challenges from the Internet in the form of piracy. In particular, some consumers are finding it easier to download their favorite songs from the Internet than to purchase CDs. However, virtually all these multimedia activities are eased by faster Internet connections, sparking the conversion to broadband. The reasons for AOL Timer Warner merger reflect the challenges that both companies face in the changing business environment. AOL was a content distributor. As Internet service provider (ISP), monthly fees are the source of 70% of its revenues; AOL faces competition from Microsoft and from free and low-cost Internet access providers. In order to continue profits growth, AOL had to pursue increased advertising and e-commerce. It needed unique content and services to distinguish itself from its competitors. Furthermore, America Online (AOL) was constricted in a world shifting towards high-speed Internet connections. AOL currently relies on dialup modems using regular telephone lines. The speed restrictions are bottleneck for multimedia content delivery. Because AOL doesnt own any high-speed lines, it would have been forced to hash out deals with companies that do (e.g. AT&T). Once it became the future of the ISP industry. AOL became the most vocal supporter of government intervention to force cable firms to open their cables to outside ISPs. This would allow firms of other firms without having to own the pipes that carry information to the home. Uncertainly concerning the future of open access was a motivation for AOL to acquire its own cable system.

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TWX was content producer and a broadband content distributor. Its revenues were growing at 10% to 15% per year. Any opportunity for higher growth would require developing a successful Internet business. So far, it had no clear Internet strategy and had been frustrated by its inability to exploit its cable and media assets more effectively in the Internet. Its interactive TV, Full Service Network, failed. Its Pathfinder site was fiasco. Its broadband distribution over cable lines through its partial ownership of the Internet provider Road Runner had not grown as rapidly as was hoped. Thus, the merger answered AOLs concerns about how it would implements its broadband strategy without owning content or having access to highspeed lines. It allows TWX to leverage its entertainment assets more effectively online with the benefit of AOL Internet resources and expertise. The merger will link AOLs broad customer relationships to TWXs content and service distribution. The premier Internet Distribution Company in the world will be paired with the leading owner of copyrights in the world. AOL brings its worldwide Internet services, AOL and CompuServe, with a combined 22.2 million subscribers base or 54% of the total ISP business; portal sites such as Netscape navigator and Communicator; and several leading internet brand such as ICQ and A.I.M. instant messaging. Digital City, AOL moviefone and Mapquest.com. TWX brings the second-largest U.S. cable TV system with 13 million subscribers in Time Warner Cable and 3, 50,000 subscribers in its partially owned broadband internet providers, Roadrunner; print media businesses that include Time Incorporated with 33 magazines such as Entertainment Weekly, Fortune, Life, People, Sports Illustrated, and Time, with an estimated 120 to 130 million readers and 21% share of the 1998 consumer magazine advertising dollars; the eighth-largest book publishing business, which includes Book-of-the-Month Club, Time Life, Little Brown, and Warner Books; television broadcasting with 10 cable channels including CNN with a global reach of more than 1 billion, HBO with 30 million subscribers, TNT and TBS with 75 million homes, and WB Network; movie and TV production such as Warner Bros. and New Line cinema with 8% of the domestic film market; and music with Warner Music Group, which accounted for 16% of all sold. The new company embraces nearly all types of media including cable, magazine, movies, and online, offering new opportunities for cross promotion and expanded e-commerce. 248

It was estimated that the combination would save $1.0 billion in 2001. Potential cost savings would arise from administrative savings and from substantially lower advertising and promotion costs. The new management team states that layoffs are unlikely and the intention is to expand the company. In the future, broadband strategies could represent substantial savings; for example, it could dramatically cut manufacturing and shipping costs associated with audio and video delivery. Perhaps due to skepticism about the estimates of synergies or the overall strategic vision of the merger, the market had a negative initial reaction to the announcement of the merger. Although TWX stock took off, due to large premium, AOL stock suffering, as illustrated by figure B1.1. On February 19, 2000, AOL stock reached its low point of 54 and more than 80% of its pre-merger levels. Some people attributed the loss of value to the fact that investors did not yet get the merger. In some mergers, the complexity of the deal makes it hard to immediately recognize future revenue sources, cost savings, and other synergies that may arise. The AOL TWX deal was covered by media financial analysts, and Time Warner was covered by Media financial analysts. No analysts were fully conversant with both businesses. This provides a summary of the economic and business aspects of the transaction. Strong views have been expressed on other issues. One concern is media independence. Another is editorial integrity. These issues were raised directly by Jim Lehrer in his January 12, 2000, interview with Steve Case; head of AOL, and Gerald Levin, Head of TWX. Luce assured Jim Lehrer that Henry Luce had left a legacy that Time was to be operated not only in the interest of shareholders, but also in the interest of the public. Case emphasized that AOL would support the public service objective. He argued that individual segments of the combined firm in the future would be even more independent of other segments to demonstrate their integrity. Some critics fear that a small number of firms increasingly control viewer choices. Other argues the opposite. In earlier decades, viewers were limited to the offerings of four major networks; today every viewer has a multiplicity of choices. At least dozens of choices are possible through cable TV, although the majority of cable channels are owned by the few large media firms that control the networks. Thus, critics argue that although the majority of choices have increased, fewer viewpoints

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are represents in deciding what those choices will be. The AOL TWX merger is an indicator that the Internet may fall under the same media influence that control TV and other media outlets. Indeed, the merger gave rise to speculation about other firms that could follow the same new and old media combination strategy. Prominently mentioned were Yahoo! and Disney as potential partners. The convergence between TV, the PC, and the Internet will continue to evolve. No one knows for sure what the nature of the ultimate development will be. Many firms and internet groups will shape the future of the media industry. Other media firms are going to have to decide if they will follow TWX and seek a strong Internet Partner, or if they will continue independently. Cable providers like AT&T and the new AOL Time Warner will have to resolve the debate with Internet service providers to determine who will bring broadband Internet access into peoples homes. Entertainment firms will have to coordinator with technology firms if they are to achieve interactive TV. Such dynamic interactions will be shaped by mergers, joint venture, strategic alliances, and other forms of interfirm relationships. D. RECENT MEASURES TO STRENGTHEN THE MERGERS AND ACQUISITIONS The Competition Commission of India (CCI)78 notified regulations requiring corporates to seek its approval before going in for high value mergers and acquisitions. As per the notification, the CCI will take a view on the proposed merger deals within 180 days of the filing of notice by the companies. The regulation -Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011, shall come into force from June 1, 2011, the competition watchdog said. The parties would have to submit a fee of up to Rs 1 lakh for getting the CCI approval. The CCI Act empowers the Commission to regulate combinations which have caused or are likely to cause appreciable adverse effect on competition, it said.

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According to the regulation, the Commission can either approve the merger proposal, reject it or modify it. The regulations follow the notification of Section 5 and 6 of the Competition Commission Act, 2002, dealing with mergers and acquisition (M&A) in March by the government. According to the provisions in the Act, companies with a turnover of over Rs 1,500 crore will have to approach the CCI for approval before merging with another firm. Only those proposals would need the CCI's nod where the companies have combined assets of Rs 1,000 crore or more, or a combined turnover of Rs 3,000 crore or more, as per the Act. Also, the target company's net assets have to be a minimum of Rs 200 crore or it should have a turnover of Rs 600 crore for CCI intervention. The CCI has held wide consultations with the industry bodies and law experts before coming out with the final regulations. The Commission became fully functional in 2009, with the appointment of a chairman and six members. At present, it has the power to check anti-competitive agreements and abuse of dominant position drawn from Sections 3 and 4 of the Competition Act, 2002. E. ACQUISITION STRATEGY DEVELOPMENT79 Not all firms that make acquisitions have acquisition strategies, and not all firms that have acquisition strategies stick with them. In this section, we consider a number of different motives for acquisitions and suggest that a coherent acquisition strategy has to be based on one or another of these motives. These motives were studied in detail in the last chapter, as the motives behind merger and motives behind acquisitions are same. Firms that are undervalued by financial markets can be targeted for acquisition by those who recognize this mispricing. The acquirer can then gain the difference between the value and the purchase price as surplus. For this strategy to work, however, three basic components need to come together. 1. A capacity to find firms that trade at less than their true value: This capacity would require either access to better information than is available to other investors in the market, or better analytical tools than those used by other market participants.
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2. Access to the funds that will be needed to complete the acquisition: Knowing a firm is undervalued does not necessarily imply having capital easily available to carry out the acquisition. Access to capital depends upon the size of the acquirer large firms will have more access to capital markets and internal funds than smaller firms or individuals and upon the acquirers track record a history of success at identifying and acquiring undervalued firms will make subsequent acquisitions easier. 3. Skill in execution: If the acquirer, in the process of the acquisition drives the stock price up to and beyond the estimated value, there will be no value gain from the acquisition. To illustrate, assume that the estimated value for a firm is $100 million and that the current market price is $75 million. In acquiring this firm, the acquirer will have to pay a premium. If that premium exceeds 33% of the market price, the price exceeds the estimated value, and the acquisition will not create any value for the acquirer. While the strategy of buying under valued firms has a great deal of intuitive appeal, it is daunting, especially when acquiring publicly traded firms in reasonably efficient markets, where the premiums paid on market prices can very quickly eliminate the valuation surplus. The odds are better in less efficient markets or when acquiring private businesses. Acquire poorly managed firms and change management Some firms are not managed optimally and others often believe they can run them better than the current managers. Acquiring poorly managed firms and removing incumbent management, or at least changing existing management policy or practices, should make these firms more valuable, allowing the acquirer to claim the increase in value. This value increase is often termed the value of control. Prerequisites for Success While this corporate control story can be used to justify large premiums over the market price, the potential for its success rests on the following.

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1. The poor performance of the firm being acquired should be attributable to the incumbent management of the firm, rather than to market or industry factors that are not under management control. 2. The acquisition has to be followed by a change in management practices, and the change has to increase value. Actions that enhance value increase cash flows from existing assets, increase expected growth rates, increase the length of the growth period, or reduce the cost of capital. 3. The market price of the acquisition should reflect the status quo, i.e, the current management of the firm and their poor business practices. If the market price already has the control premium built into it, there is little potential for the acquirer to earn the premium. In the last two decades, corporate control has been increasingly cited as a reason for hostile acquisitions. F. STRUCTURING PHASE OF ACQUISITION PROCESS80 Once the target firm has been identified and valued, the acquisition moves forward into the structuring phase. There are three interrelated steps in this phase. The first is the decision on how much to pay for the target firm, synergy and control built into the valuation. The second is the determination of how to pay for the deal, i.e., whether to use stock, cash or some combination of the two, and whether to borrow any of the funds needed. The final step is the choice of the accounting treatment of the deal because it can affect both taxes paid by stockholders in the target firm and how the purchase is accounted for in the acquiring firms income statement and balance sheets. (a) Deciding on an Acquisition Price The value determined in consideration of synergy and control represents a ceiling on the price that the acquirer can pay on the acquisition rather than a floor. If the acquirer pays the full value, there is no surplus value to claim for the acquirers stockholders and the target firms stockholders get the entire value of the synergy and
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control premiums. This division of value is unfair, if the acquiring firm plays an indispensable role in creating the synergy and control premiums. Consequently, the acquiring firm should try to keep as much of the premium as it can for its stockholders. Several factors, however, will act as constraints. They include: 1. The market price of the target firm, if it is publicly traded, prior to the acquisition: Since acquisitions have to base on the current market price, the greater the current market value of equity, the lower the potential for gain to the acquiring firms stockholders. For instance, if the market price of a poorly managed firm already reflects a high probability that the management of the firm will be changed, there is likely to be little or no value gained from control. 2. The relative scarcity of the specialized resources that the target and the acquiring firm bring to the merger: Since the bidding firm and the target firm are both contributors to the creation of synergy, the sharing of the benefits of synergy among the two parties will depend in large part on whether the bidding firms contribution to the creation of the synergy is unique or easily replaced. If it can be easily replaced, the bulk of the synergy benefits will accrue to the target firm. If it is unique, the benefits will be shared much more equitably. Thus, when a firm with cash slack acquires a firm with many high-return projects, value is created. If there are a large number of firms with cash slack and relatively few firms with high-return projects, the bulk of the value of the synergy will accrue to the latter. 3. The presence of other bidders for the target firm: When there is more than one bidder for a firm, the odds are likely to favor the target firms stockholders. Bradley, Desai, and Kim (1988) examined an extensive sample of 236 tender offers made between 1963 and 1984 and concluded that the benefits of synergy accrue primarily to the target firms when multiple bidders are involved in the takeover. They estimated the market-adjusted stock returns around the announcement 254

of the takeover for the successful bidder to be 2% in single bidder takeovers and -1.33% in contested takeovers. (b) Payment for the Target Firm Once a firm has decided to pay a given price for a target firm, it has to follow up by deciding how it is going to pay for this acquisition. In particular, a decision has to be made about the following aspects of the deal. 1. Debt versus Equity: A firm can raise the funds for an acquisition from either debt or equity. The mix will generally depend upon both the excess debt capacities of the acquiring and the target firm. Thus, the acquisition of a target firm that is significantly under levered may be carried out with a larger proportion of debt than the acquisition of one that is already at its optimal debt ratio. This, of course, is reflected in the value of the firm through the cost of capital. It is also possible that the acquiring firm has excess debt capacity and that it uses its ability to borrow money to carry out the acquisition. Although the mechanics of raising the money may look the same in this case, it is important that the value of the target firm not reflect this additional debt. The additional debt has nothing to do with the target firm and building it into the value will only result in the acquiring firm paying a premium for a value enhancement that rightfully belongs to its own stockholders. 2. Cash versus Stock: There are three ways in which a firm can use equity in a transaction. The first is to use cash balances that have been built up over time to finance the acquisition. The second is to issue stock to the public, raise cash and use the cash to pay for the acquisition. The third is to offer stock as payment for the target firm, where the payment is structured in terms of a stock swap shares in the acquiring firm in exchange for shares in the target firm. The question of which of these approaches is best utilized by a firm cannot be answered without looking at the following factors.

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3.

The availability of cash on hand: Clearly, the option of using cash on hand is available only to those firms that have accumulated substantial amounts of cash.

4. The perceived value of the stock: When stock is issued to the public to raise new funds or when it is offered as payment on acquisitions, the acquiring firms managers are making a judgment about what the perceived value of the stock is. In other words, managers who believe that their stock is trading at a price significantly below value should not use stock as currency on acquisitions, since what they gain on the acquisitions can be more than what they lost in the stock issue. On the other hand, firms that believe their stocks are overvalued are much more likely to use stock as currency in transactions. The stockholders in the target firm are also aware of this and may demand a larger premium when the payment is made entirely in the form of the acquiring firms stock. 5. Tax factors; when an acquisition is a stock swap, the stockholders in the target firm may be able to defer capital gains taxes on the exchanged shares. Since this benefit can be significant in an acquisition, the potential tax gains from a stock swap may be large enough to offset any perceived disadvantages. The final aspect of a stock swap is the setting of the terms of the stock swap, i.e., the number of shares of the acquired firm that will be offered per share of the acquiring firm. While this amount is generally based upon the market price at the time of the acquisition, the ratio that results may be skewed by the relative mispricing of the two firms securities, with the more overpriced firm gaining at the expense of the more under priced (or at least, less overpriced) firm. A fairer ratio would be based upon the relative values of the two firms shares. (c) Accounting Considerations There is one final decision that, in our view, seems to play a disproportionate role in the way in which acquisitions are structured and in setting their terms, and that 256

is the accounting treatment. In this section, we describe the accounting choices and examine why firms choose one over the other. (d) Purchase versus Pooling There are two basic choices in accounting for a merger or acquisition. In purchase accounting, the entire value of the acquisition is reflected on the acquiring firms balance sheet and the difference between the acquisition price and the restated value of the assets of the target firm is shown as goodwill for the acquiring firm. The goodwill is then written off (amortized) over a period of 40 years, reducing reported earnings in each year. The amortization is not tax deductible and thus does not affect cash flows. If an acquisition qualifies for pooling, the book values of the target and acquiring firms are aggregated. The premium paid over market value is not shown on the acquiring firms balance sheet. For an acquisition to qualify for pooling, the merging firms have to meet the following conditions.

Each of the combining firms has to be independent; pooling is not allowed when one of the firms is a subsidiary or division of another firm in the two years prior to the merger.

Only voting common stock can be issued to cover the transaction; the issue of preferred stock or multiple classes of common stock is not allowed.

Stock buybacks or any other distributions that change the capital structure prior to the merger are prohibited.

No transactions that benefit only a group of stockholders are allowed. The combined firm cannot sell a significant portion of the existing businesses of the combined companies, other than duplicate facilities or excess capacity. The question whether an acquisition will qualify for pooling seems to weigh

heavily on the managers of acquiring firms. Some firms will not make acquisitions if they do not qualify for pooling, or they will pay premiums to ensure that they do qualify.

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Furthermore, as the conditions for pooling make clear, firms are constrained in what they can do after the merger. Firms seem to be willing to accept these constraints, such as restricting stock buybacks and major asset divestitures, just to qualify for pooling. (e) In-process R&D In the last few years, another accounting choice has entered the mix, especially for acquisitions in the technology sector. Here, firms that qualify can follow up an acquisition by writing off all or a significant proportion of the premium paid on the acquisition as in process R&D. The net effect is that the firm takes a one-time charge at the time of the acquisition that does not affect operating earnings 12, and it eliminates or drastically reduces the goodwill that needs to be amortized in subsequent periods. The one-time expense is not tax deductible and has no cash flow consequences. In acquisitions such as Lotus by IBM and MCI by Worldcom, the inprocess R&D charge allowed the acquiring firms to write off a significant portion of the acquisition price at the time of the deal. The potential to reduce the dreaded goodwill amortization with a one-time charge is appealing for many firms and studies find that firms try to take maximum advantage of this option. Lev (1998) documented this tendency and also noted that firms that qualify for this provision tend to pay significantly larger premiums on acquisitions than firms that do not. In early 1999, as both the accounting standards board and the SEC sought to crack down on the misuse of in-process R&D, the top executives at high technology firms fought back, claiming that many acquisitions that were viable now would not be in the absence of this provision. It is revealing of managers obsession with reported earnings that a provision that has no effects on cash flows, discount rates and value is making such a difference in whether acquisitions get done. G CORPORATE RESTRUCTURING: UNITED KINGDOM, KOREA & THAILAND The RBI guidelines which govern the CDR system in India make a reference to the corporate restructuring programs in countries such as the United Kingdom, Thailand and Korea. The corporate restructuring practices in these countries date back 258

to the time of their respective economic crisis - England in early 1990s, Thailand and Korea around 1997-1998. During the Asian financial crisis at the close of the 20th century, certain SouthEast Asian countries were faced with their greatest economic challenges since the Great Depression. After decades of unprecedented economic growth, unemployment and poverty had led to food riots, labor unrest and political instability. To look into the strategy adopted by these crisis-struck countries, we may consult the Asian Development Bank's Annual Survey of economic developments from the year 2000. The strategy, broadly speaking, incorporated a two-step approach. Firstly, the governments attempted to revive market and investor confidence to contain the situation. Secondly, to escape from the crisis, an attempt was made to address the structural weaknesses which had led to the situation. In their search for an efficient manner to allocate losses and facilitate asset mobility to remove the paralyzing debt, they explored different models of restructuring corporate debt. The first was a Centralized Approach, adopted by countries such as Sweden and Hungary, which was centered on the government assuming a lead role in the restructuring process. However, this model was unsuitable because it necessitated high levels of confidence in the government, and the success of this model for complex restructuring in cases of large debt was unknown. Then there was the Decentralized Approach, like the one implemented in the USA. This approach entailed an informal and voluntary process without governmental involvement. This model was known to be more appropriate for complex restructuring and high levels of debt. However, the Asian countries chose to favor what came to be known as the London Approach to corporate restructuring. At the time of its economic crisis in the early 1990s, UK had developed a model for restructuring wherein the creditors and the company would work in close coordination with a governmental institution, the Bank of England. The charm of this model was that it retained the informality of the Decentralized Approach by keeping the process outside of the judiciary process, while including a representative role of the government, accruing the benefits of the Centralized Approach.

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The implementation of the restructuring process was one of the principle factors behind the swift economic turnaround in countries such as Korea, which implemented the system in 1998, after the Asian crisis. The fundamental principles involved were simple there was to be full information disclosure between the companies and the creditors, binding agreements with penal clauses, collective participation from creditors, well laid-out schedules for implementation of packages and a policy of shared-pains for losses amongst creditors. Soon, the model was replicated in India. H. CONCLUSION The law of mergers and acquisitions is quite competitive in India. The recent guidelines of the Competition Commission of India are may be not too much competitive but an initiative towards the alleviation of industrial sickness through mergers and acquisitions in India. The much-awaited regulations pertaining to mergers and amalgamations (M&A) issued by the Competition Commission of India (CCI) on 11th of May 2011, exempted companies from notifying such deals to the regulator talks for which were initiated before June 1, 2011. The competition watchdog agreed to almost all demands by Corporate India and significantly diluted the regulations when compared with the revised draft put in public domain in February this year. Besides sparing a bulk of routine transactions from knocking at its doors for approval, the CCI took care of the concerns of Indian multinationals by exempting Mergers and Acquisitions with no positive impact on the domestic market. We have exempted routine M&A deals from seeking our nod. So, almost 95 per cent of the deals will be cleared within 30 days and the rest in 180 calendar days, Competition Commission Chairman Dhanendra Kumar said at a press conference after releasing the norms. The regulations operationalise the sections 5 and 6 relating to mergers and combinations of the Competition Act, 2002. Hope always has high spirits. These new guidelines hope will provide the better tooth and tail to the mergers and acquisition laws in India, which otherwise is almost uncontrolled.

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