Assignment Unit 1_2

Q1: Distinguish between Horizontal Merger and Vertical Merger?

Ans Horizontal mergers are o!ten a t"#e o! non$!inancial merger %n other words& a horizontal
merger is underta'en !or reason that ha(e little to do with mone"& at least directl" )im#l" stated&
a horizontal merger is usuall" the ac*uisition o! a com#etitor who is in the same line o! business
as the ac*uiring business +" ac*uiring the com#etitor& the ac*uiring com#an" is reducing the
com#etition in the mar'et#lace
,ne e-cellent e-am#le o! horizontal mergers o(er the #ast ./ "ears is in the ban'ing industr" %n
101/& 2he De#ositor" %nstitutions Deregulation and Monetar" 3ontrol Act o! 101/ was #assed
b" 3ongress At the time& no one 'new what wide$ranging e!!ects this act would ha(e but we
certainl" 'now now 2his legislation allowed in(estment and commercial ban'ing to share some
o! the same !unctions %t also allowed ban's to branch across state lines along with e-#anding the
#owers o! ban' holding com#anies
2his deregulation act allowed in(estment and commercial ban's to underta'e more horizontal
mergers than the" had e(er been allowed to underta'e in the #ast 2he result was a contraction in
the ban'ing industr" and !ewer ban's %n(estment ban's could o!!er ser(ices that onl"
commercial ban's had been allowed to o!!er be!ore 101/ and (ice (ersa )mall& hometown ban's
were gobbled u# b" big regional ban's 2he (er" de!inition o! a horizontal merger ha##ened on a
grand scale $ larger com#etitors ac*uired smaller com#etitors and the result was !ewer ban's in
the U)
4hen the 5reat 6ecession o! 2//1 ha##ened& we saw some o! the results o! the deregulation act
o! 101/ Man" ban's !ailed 7arge in(estment ban's had abused the #ower that had been gi(en
to them b" the deregulation act 2here was a call !or re$regulation in the ban'ing industr" 2his is
the reason that go(ernment anti$trust o!!icials watch horizontal mergers care!ull" 2he" can lead
to too much mar'et #ower !or the ac*uiring !irms
Vertical mergers or (ertical integration ha##ens when the ac*uiring !irm bu"s bu"ers or sellers
o! goods and ser(ices to the com#an" %n other words& a (ertical merger is usuall" between a
manu!acturer and a su##lier %t is a merger between two com#anies that #roduce di!!erent
#roducts or ser(ices along the su##l" chain toward the #roduction o! some !inal #roduct Vertical
mergers usuall" ha##en in order to increase e!!icienc" along the su##l" chain which& in turn&
increases #ro!its !or the ac*uiring com#an"
8ust li'e horizontal mergers& (ertical mergers can result in anti$trust #roblems in the mar'et#lace
b" reducing com#etition An e-am#le would be i! an automobile manu!acturing com#an" were
to bu" u# other businesses that e-ist along its su##l" chain %t ta'es man" di!!erent t"#es o!
businesses to su##ort automobile manu!acturing %! an automobile com#an" bought a seat belt
manu!acturing com#an"& com#anies that manu!actured di!!erent #arts o! the engine bloc' and
the transmission& as well as sources o! its raw materials& trans#ortation& technolog"& and sales
9dealershi#s:& imagine the mar'et #ower that would accrue to that automobile manu!acturing
com#an" %t would e!!ecti(el" totall" control the #rice !or its (ehicles without ha(ing to consider
an" other !actors 2hat is the 'ind o! mar'et #ower that anti$trust laws are meant to control
Q2: 4hat do "ou mean b" demerger? 5i(e an e-am#le
Ans A business strateg" in which a single business is bro'en into com#onents& either to o#erate
on their own& to be sold or to be dissol(ed A de$merger allows a large com#an"& such as a
conglomerate& to s#lit o!! its (arious brands to in(ite or #re(ent an ac*uisition& to raise ca#ital b"
selling o!! com#onents that are no longer #art o! the business;s core #roduct line& or to create
se#arate legal entities to handle di!!erent o#erations <or e-am#le& in 2//1& +ritish 2elecom
conducted a de$merger o! its mobile #hone o#erations& +2 4ireless& in an attem#t to boost the
#er!ormance o! its stoc' +ritish 2elecom too' this action because it was struggling under high
debt le(els !rom the wireless (enture Another e-am#le would be a utilit" that se#arates its
business into two com#onents: one to manage the utilit";s in!rastructure assets and another to
manage the deli(er" o! energ" to consumers
%n 1001& the then <inance Minister started the liberalisation o! econom" which has been carried
on b" successi(e <inance Ministers ,ne o! the things he had introduced was to allow !oreign
in(estors to bring their ca#ital in %ndia and in(est it in di!!erent areas =ow& 5o(ern$ment o!
%ndia has brought out the conce#t o! demerger to ta- to neutralise demerger& i! it ta'es #lace b"
!ul!illing the #rescribed conditions >erha#s& the go(t has been #ressed b" these in(estors to
bring out such thing so that the %ndian #artner ma" get demerged !rom his !oreign #artner and the
!oreign #artner ma" ta'e bac' his in(estment % #ersonall" !eel that it is the main reason !or the
introduction o! the conce#t o! demerger %n other words& it is the main cause !or ta- neutra$
lisation o! demerger
Demerger Definition :
4hen one com#an"& sa" ? 7td ha(ing 1/ underta'ings& trans!ers one or more o! its
underta'ings to a new com#an"& sa" @ 7td& it is a case o! demerger ? 7td is the demerged
com#an" and @ 7td is the resulting com#an"
Reasons for demerger :
%t is di!!icult to list out the reasons which gi(e e!!ect to demerger because reasons ma" di!!er
!rom time to time& com#an" to com#an"& countr" to countr" and e(en industr" to industr" within
the countr" Howe(er& researchers ha(e s#eci!ied some reasons !or demerger as noted below :
91: 3or#orate attem#t to adAust to changing economic and #olitical en(ironment o! the countr"B
92: )trateg" to enable others to e-#loit o##ortunit" e!!ecti(el" to o#timise returns when the
#arent com#an" is unable to do soB
9.: 2o correct the #re(ious in(estment decisions where the com#an" mo(ed into the o#erational
!ield ha(ing no e-#ertise or e-#erience to run the show on a #ro!itable basisB
9C: 2o hel# !inance an ac*uisitionB
9D: 2o realise ca#ital gains !rom the assets ac*uired at the time when the" were under #er!orming
and now no better #er!ormance& ca#ital gain can be realisedB
9E: 2o ma'e !inancial and managerial resources a(ailable !or de(elo#ing other more #ro!itable
o##ortunitiesB
9F: )elling unwanted and sur#lus or unconnected #arts in the business as a restructuring strateg"
to get rid o! sic' #art o! the com#an"
2he abo(e list o! reasons !or sell out is not e-hausti(e or conclu$si(e as more reasons could be
added de#ending u#on the numerous in!luences emanating !rom #olitical& economic& social and
international bac'grounds ,ne thing remains cr"stal clear that the obAecti(e underl"ing
di(estitures or sell o!!s in the cor#orate world is to ensure resource mobilit" essential to e!!ecti(e
o#erations o! an enter#rise and mo(ing these resources !rom less$(alued uses to higher$(alued
uses
Effect of demerger :
9i: 2a- neutralit" o! the assets trans!erred to resulting com#an"
9ii: 2o e-tend the bene!it o! carr" !orward o! loss or de#reciation relating to trans!erred
underta'ing to resulting com#an"
9iii: 2o e-tend the bene!its li'e ) 1/%A& ) 1/%+& etc to the s#lit o!! unit
9i(: 2o allow the e-#enditure incurred !or demerger
9(: 2a- neutralit" o! the demerger !or the shareholders o! demerged com#an"
Applicability :
9i: 3om#anies incor#orated under the 3om#anies Act& 10DE
9ii: An" authorit" or a bod" constituted or established under a 3entral& )tate or >ro(incial Act
9iii: A local authorit"
9i(: A #ublic sector com#an"
9(: A !oreign com#an"
9(i: An" institution& association or bod" assessed as com#an" or declared b" the 3+D2 as a
com#an"
Conditions of demerger (S. !AA" :
Conditions :
9i: 2he trans!er is #ursuant to a scheme o! arrangement uGs.01 to uGs.0C o! the 3om#anies
Act& 10DE
9ii: 2rans!er o! all the assetsG liabilities o! one or more underta'ings b" a demerged com#an" to
an" resulting com#an" at boo' (alue on going concern basis& otherwise than b" wa" o!
ac*uisition
9iii: 2he resulting com#an" issues shares to the shareholders o! demerged com$
#an" on #ro#ortionate basis
9i(: )hareholders holding at least FDH o! the share ca#ital become shareholders o! resulting
com#an"
9(: %n accordance with the conditions noti!ied uGsF2A9D: b" the 3entral go(t
9(i: 2rans!er should be with re!erence to trans!er o! a business acti(it" and not an" indi(idual
assets or liabilities or an" combination thereo!
9(ii: A#art !rom s#eci!ic liabilities relating to a business& general liabilities are to be a##ortioned
in the ratio o! assets relating to each business
9(iii: 6e(aluation o! assets will be ignored
9i-: 6econstruction o! an" bod"& authorit"
9-: %n case the conditions are discontinued to be com#lied with& the set o!! o! loss or
de#reciation made in an" earlier "ears in the hands o! the amalgamated com#an" shall be
deemed to be the income o! the amalgamated com#an" ta-able !or the "ear in which there is
non$com#liance
9-i: %n case o! demerger& accumulated loss and unabsorbed de#reciation o! demerged com#an"
shall be allowed to be carried !orward and set o!! in the hands o! the resulting com#an" to
the e-tent o! :
9a: i! such lossGde#reciation is directl" relatable to trans!erred underta'ing I 1//H
9b: i! such lossGde#reciation is not directl" relatable to trans!erred underta'ing& that
#ro#ortion which the assets o! the underta'ing trans!erred bear to the total assets o! the
demerged com#an"
9-ii: 4here a !irm or #ro#rietar" concern is succeeded b" a com#an" !ul!illing the conditions o!
) CF9-iii: or ) CF9-i(:& the unabsorbed lossGde#reciation shall be deemed to be the lossG
de#reciation o! the successor com#an" !or the "ear in which reorganisation is e!!ected %n
case an" o! the conditions are not continued to be !ul!illed in an" o! the "ears a!ter such
reorganisation& the set o!! o! loss or de#reciation shall be in case o! the "ear in which
conditions are discontinued to be !ul!illed
9-iii: Accumulated loss relates to the head ;>ro!its or gains o! business or #ro!ession 9other than
s#eculation business:; onl"