Professional Documents
Culture Documents
INDEX
Sl. No
Particulars
Page no.
1.
05
2.
Merger
07
3.
Acquisition
09
Types of Acquisition
4.
10
Takeover
11
Types of Takeover
12-13
5.
14-17
6.
Types of Merger
18-29
7.
30
8.
31
9.
32-35
10.
Benefits of Merger
36
11.
37-38
12.
39-43
13.
Valuations of Merger
44-47
14.
48-49
15.
50-52
Page 1
11.
53-56
12
57-59
13.
60
14.
61-63
15.
64-67
16.
68-71
17.
72-79
18.
Conclusion
80
19.
Bibliography
81
Page 2
Several companies have been taken over and several have undergone
Page 4
Merger
Merger is defined as combination of two or more companies into a single company
where one survives and the others lose their corporate existence. The survivor
acquires all the assets as well as liabilities of the merged company or companies.
Generally, the surviving company is the buyer, which retains its identity, and the
extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more
existing companies. All assets, liabilities and the stock of one company stand
transferred to Transferee Company in consideration of payment in the form of:
Equity shares in the transferee company,
Debentures in the transferee company,
Cash, or
A mix of the above modes.
In business or economics a merger is a combination of two companies into one
larger company. Such actions are commonly voluntary and involve stock swap or
cash payment to the target. Stock swap is often used as it allows the shareholders
of the two companies to share the risk involved in the deal.
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Acquisition
An Acquisition usually refers to a purchase of a smaller firm by a larger one.
Acquisition, also known as a takeover or a buyout, is the buying of one company
by another.
Acquisitions or takeovers occur between the bidding and the target company.
There may be either hostile or friendly takeovers. Acquisition in general sense is
acquiring the ownership in the property. In the context of business combinations,
an acquisition is the purchase by one company of a controlling interest in the share
capital of another existing company.
Methods of Acquisition:
An acquisition may be affected by
a) agreement with the persons holding majority interest in the company
management like members of the board or major shareholders commanding
majority of voting power;
b) purchase of shares in open market;
c) to make takeover offer to the general body of shareholders;
d) purchase of new shares by private treaty;
e) Acquisition of share capital through the following forms of considerations
viz. means of cash, issuance of loan capital, or insurance of share capital.
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Takeover:
Page 8
1. Friendly Takeovers
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2. Hostile Takeovers
A hostile takeover allows a suitor to bypass a target company's management
unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the
target company's board rejects the offer, but the bidder continues to pursue it, or
the bidder makes the offer without informing the target company's board
beforehand.
A hostile takeover can be conducted in several ways. A tender offer can be made
where the acquiring company makes a public offer at a fixed price above the
current market price. Tender offers in the USA are regulated with the Williams Act.
3. Reverse takeovers
A reverse takeover is a type of takeover where a private company acquires a public
company. This is usually done at the instigation of the larger, private company, the
purpose being for the private company to effectively float itself while avoiding
some of the expense and time involved in a conventional IPO. However, under
AIM rules, a reverse take-over is an acquisition or acquisitions in a twelve month
period which for an AIM company would:
exceed 100% in any of the class tests; or
result in a fundamental change in its business, board or voting control; or
in the case of an investing company, depart substantially from the investing
strategy stated in its admission document or, where no admission document
was produced on admission, depart substantially from the investing strategy
stated in its pre-admission announcement or, depart substantially from the
investing strategy
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The second wave mergers that took place from 1916 to 1929 focused on the
mergers between oligopolies, rather than monopolies as in the previous phase. The
economic boom that followed the post World War I gave rise to these mergers.
Technological developments like the development of railroads and transportation
by motor vehicles provided the necessary infrastructure for such mergers or
acquisitions to take place.
The government policy encouraged firms to work in unison. This policy was
implemented in the 1920s. The 2nd wave mergers that took place were mainly
horizontal or conglomerate in nature. Te industries that went for merger during this
phase were producers of primary metals, food products, petroleum products,
transportation equipments and chemicals. The investments banks played a pivotal
role in facilitating the mergers and acquisitions.
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Types of Merger
Merger or acquisition depends upon the purpose of the offeror company it wants to
achieve. Based on the offeror objectives profile, combinations could be vertical,
horizontal, circular and conglomeratic as precisely described below with reference
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Acquisition Lookup
Equipment
and
Machinery
Estimation
2. Horizontal Mergers
Page 22
The following main benefits accrue from the vertical combination to the acquirer
company i.e.
(1) it gains a strong position because of imperfect market of the intermediary
products, scarcity of resources and purchased products;
(2) has control over products specifications.
Vertical mergers may violate the competitive spirit of markets. It can be used to
block competitors from accessing the raw material source or the distribution
channel. Hence, it is also known as "vertical foreclosure". It may create a sort of
bottleneck problem. As per research, vertical integration can affect the pricing
incentive of a downstream producer. It may also affect a competitors incentive for
selecting input suppliers.
There are multiple reasons, which promote the vertical integration by firms.
Some of them are discussed below.
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6. Conglomeration
Two companies that have no common business areas.
As per definition, a conglomerate merger is a type of merger whereby the two
companies that merge with each other are involved in different sorts of businesses.
The importance of the conglomerate mergers lies in the fact that they help the
merging companies to be better than before.
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Shareholders in the selling company gain from the merger and takeovers as the
premium offered to induce acceptance of the merger or takeover offers much more
price than the book value of shares. Shareholders in the buying company gain in
the long run with the growth of the company not only due to synergy but also due
to boots trapping earnings.
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The sale of shares from one companys shareholders to another and holding
investment in shares should give rise to greater values i.e. the opportunity gains in
alternative investments. Shareholders may gain from merger in different ways viz.
from the gains and achievements of the company i.e. through
(a) realization of monopoly profits;
(b) economies of scales;
(c) diversification of product line;
(d) acquisition of human assets and other resources not available otherwise;
(e) better investment opportunity in combinations.
One or more features would generally be available in each merger where
shareholders may have attraction and favour merger.
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Mergers where all these things are the guaranteed outcome get support from the
managers. At the same time, where managers have fear of displacement at the
hands of new management in amalgamated company and also resultant
depreciation from the merger then support from them becomes difficult.
The economic gains realized from mergers are passed on to consumers in the form
of lower prices and better quality of the product which directly raise their standard
of living and quality of life.
The balance of benefits in favour of consumers will depend upon the fact whether
or not the mergers increase or decrease competitive economic and productive
activity which directly affects the degree of welfare of the consumers through
changes in price level, quality of products, after sales service, etc.
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Page 33
Benefits of Mergers
1. Limit competition
2. Utilize under-utilized market power
3.
4. Achieve diversification
5. Gain economies of scale and increase income with proportionately less
investment
6. Establish a transnational bridgehead without excessive start-up costs to gain
access to a foreign market.
7. Utilize under-utilized resources- human and physical and managerial skills.
8. Displace existing management.
9. Circum government regulations.
10. Reap speculative gains attendant upon new security issue or change in P/E
ratio.
11. Create an image of aggressiveness and strategic opportunism, empire
building and to amass vast economic power of the company.
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2. Enhanced Profitability :
Page 37
b) Operating Economies :
In addition to economies of scale, a combination of two or more firm may
result into cost reduction due to operating economies. A combined firm may
avoid or reduce functions and facilities. It can consolidate its management
functions such as manufacturing, R & D and reduce operating costs. Foe
example, a combined firm may eliminate duplicate channels of distribution or
create a centralized training center or introduce an integrated planning and
control system.
c) Strategic Benefits :
Page 38
d) Complementary Resources :
If two firms have complementary resources it may make sense for them to
merge. For example, a small firm with an innovative product may need the
engineering capability and marketing reach of a big firm. With the merger of
the two firms it may be possible to successfully manufacture and market the
innovative product. Thus, the two firms, thanks to their complementary
resources, are worth more together than they are separately.
e) Tax Shields :
When a firm with accumulated losses and unabsorbed tax shelters merges
with a profit making firm, tax shields are utilized better. The firm with
accumulated losses and unabsorbed tax shelters may not be able to derive tax
advantages for a long time. However, when it merges with a profit making firm,
its accumulated losses and unabsorbed tax shelters can be set off against the
profits of the profit making firm and tax benefits can be quickly realized.
Page 39
4 Managerial Effectiveness:
One of the potential gains of merger is an increase in managerial
effectiveness. This may occur if the existing management team, which is
performing poorly, is replaced by a more effective management team. Another
allied benefit of a merger may be in the form of greater congruence between the
interests of managers and the shareholders. A common argument for creating a
favorable environment for mergers is that it imposes a certain discipline on the
management.
1. Diversification of Risk:
A commonly stated motive for mergers is to achieve risk reduction through
diversification. The extent to which risk is reduced, of course, depends on the
correlation between the earnings of the merging entities. While negative
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Page 41
Valuations of Merger
Valuations: Any understanding on M&A is incomplete without a discussion on
valuation. During the course of a merger procedure, normally a Chartered
Accountant or a category-I Merchant Banker is appointed to work out the value
of shares of companies involved in the merger. Based on the values so
computed the exchange ratio is worked out. It is the value at which a buyer and
seller would make a deal. There are certain basic factors, which determine the
value of a company's share. As these are very subjective factors, valuations
generally vary from case to case depending on assumptions and future
projections. The following steps are involved in the valuation of a merger
which can be broadly discussed as follows:
Page 42
Evaluate the impact of the merger on EPS (Earning Per Share) and PE
(Price-earningratio).
1. Cash Flow approach:
In a merger or acquisition the acquiring firm is buying the business of the target
firm rather than a specific asset. Thus merger is a special type of capital
budgeting decision. This should include the effect of operating efficiencies and
synergy. The acquiring firm should appraise merger as a capital budgeting
decision. The acquiring firm incurs a cost (in buying the business of the target
firm) in the expectation of a stream of benefits (in the form of cash flows) in the
future. The merger will be advantageous to the acquiring firm if the present
value of the target merger is greater than the cost of acquisition.
Mergers and acquisitions involve complex set of managerial problems than the
purchase of an asset. Discounted Cash Flow (DCF) approach is an important
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Another aspect of the financing costs is issue costs. A merged firm is able to
realize economies of scale in flotation and transaction costs related to an issue of
capital. Issue costs are saved when the merged firm makes a larger security issue.
In view of the benefit that accrues under section 72A(1) the concerned firm
should check with the specified authority fairly early in the amalgamation
process whether the benefit is likely occur.
Since the benefit under section 72A(1) is often not easily forthcoming merging
firm generally resort to a reverse merger. In a reverse merger, a loss making
firm acquires a profit making firm.
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Investment
Allowance,
Development
Rebate
and
Development
Allowance:
Investment allowance, development rebate and development allowance
remaining unabsorbed in the hands of the amalgamating firm can be carried
forward by the amalgamated firm provided various requirements regarding sale
or transfer of asset and creation and utilization of reserves are satisfied by the
amalgamated firm.
5 Capital Gain Tax:
No capital gain tax is applicable to the amalgamating firm or its shareholders if
they get share in the amalgamated firm.
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4. Contents of Announcement:
Public announcement of offer is mandatory as required under the SEBI
Regulations.
(3) The minimum offer price for each fully paid up or partly paid up share.
Page 52
(8) The highest and the average paid by the acquirer or persons acting in concert
with him for acquisition, if any, of shares of the target company made by him
during the twelve month period prior to the date of the public announcement.
(9) Objects and purpose of the acquisition of the shares and the future plans of
the acquirer for the target company, including disclosers whether the acquirer
proposes to dispose of or otherwise encumber any assets of the target company:
Provided that where the future plans are set out, the public announcement shall
also set out how the acquirers propose to implement such future plans;
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(11) The date by which individual letters of offer would be posted to each of the
shareholders.
(12) The date of opening and closure of the offer and the manner in which and
the date by which the acceptance or rejection of the offer would be
communicated to the share holders.
(13) The date by which the payment of consideration would be made for the
shares in respect of which the offer has been accepted.
(14) Disclosure to the effect that firm arrangement for financial resources
required to implement the offer is already in place, including the details
regarding the sources of the funds whether domestic i.e. from banks, financial
institutions, or otherwise or foreign i.e. from Non-resident Indians or otherwise.
(15) Provision for acceptance of the offer by person who own the shares but are
not the registered holders of such shares.
(16) Statutory approvals required to obtained for the purpose of acquiring the
shares under the Companies Act, 1956, the Monopolies and Restrictive Trade
Practices Act, 1973, and/or any other applicable laws.
Page 54
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There are different factors that played their parts in facilitating the mergers and
acquisitions in India. Favorable government policies, buoyancy in economy,
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Page 60
acquired
Teleglobe
through
deal
of
$239
million.
When it comes to mergers and acquisitions deals in India, the total number
was 287 from the month of January to May in 2007. It has involved
monetary transaction of US $47.37 billion. Out of these 287 merger and
acquisition deals, there have been 102 cross country deals with a total
valuation of US $28.19 billion.
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2. Board Meeting:-A Board Meeting shall be convened to consider and pass the
following requisite resolutions:
- approve the draft scheme of amalgamation;
- to authorize filing of application to the court for directions to convene a general
meeting;
- to file a petition for confirmation of scheme by the High Court.
Through an application under s.391/ 394 of Companies Act, 1956 can be made by
the member or creditor of a company, the court may not be able to sanction the
scheme which is not approved by the company by a Board or members resolution.
Directors who are given the necessary powers by the AOA may present a petition
on behalf of the company without first obtaining the approval of the company in
general meeting.
must
be
attached
to
such
affidavit..
Page 63
9. Filing Of Affidavit For The Compliance: - An affidavit not les than 7 days
before the meeting shall be filed by the Chairman of the meeting with the Court
showing that the directions regarding the issue of notices and advertisement have
been duly complied with.
10. General Meeting:-The General Meeting shall be held to pass the following
resolutions:
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12. Formalities With ROC:- The following documents shall be filed with ROC
along-with the requisite filing fees:
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14. Sanction of The Scheme: - The Court shall sanction the scheme on being
satisfied that:
(i) The whole scheme is annexed to the notice for convening meeting. (This
provision is mandatory in nature)
(ii) The scheme should have been approved by the company by means of th
majority of the members present.
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of
the
creditors,
the
company
and
the
public
interest.
After satisfying itself, the court shall pass orders in the requisite form(Orders in Form No. 41).
The requirement of law is permission or approval of court to the scheme.
The application made by the company is to seek courts approval to the company
scheme of amalgamation and not merely ordering a meeting. The court may order
a meeting of members too.
The court must consider all aspects of the matter so as to arrive at a finding that the
scheme is fair, just and reasonable and does not contravene public policy or any
statutory provision.
While interpreting s.394 r/w s.391, we find that the Tribunals power of ordering
amalgamation/reconstruction is limited by two provisos of s.394: Firstly, Tribunal
has to await the receipt of report from the Registrar of Companies about the
manner in which affairs of the Company are conducted. Secondly, when the
transferor company is proposed to be dissolved without winding up, the Tribunal
shall await.
15. Stamp Duty :A scheme sanctioned by the court is an instrument liable to stamp
duty.
16. Filing with ROC: The following documents shall be filed with ROC within 30
days of order:
-A certified true copy of Court's Order
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17. Copy of Order to be annexed: A copy of court's order shall be annexed to every
copy of the Memorandum of Association issued after the certified copy of the
order has been filed with as aforesaid.
18. Allotment of shares: A Board Resolution shall be passed for the allotment of
shares to the shareholders in exchange of shares held in the transferor-company
and to fix the record date for this purpose.
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Conclusions
The following conclusions have been drawn from the study:
1. Post- liberalization, most Indian business houses are undergoing major
structural changes, the level of restructuring activity is increasing rapidly
and the consolidations through M&A have reached every corporate
boardroom.
2. Most of the mergers that took place in India during the last decade seemed
to have followed the consequence of mergers in India corroborate the
conclusions of research work in U.S. with most of the M&A are taking place
in Indiato improve the size to withstand international competition which
they have been exposed to in the Post-liberalization regime.
3. The M&A activity is undertaken with the objective of financial restructuring
and to avail of the benefits of financial restructuring. Nowadays, before
financial restructuring, it has become a pre-requisite that companies need to
merge or acquire. Moreover, financial restructuring becomes easier because
of M&A. the small companies cannot approach international markets
without becoming big i.e. without merging or acquiring.
4. Market capitalalisation of a company sometimes is found to be going up or
down without any corresponding change in the EVA and MVA since the
stock may be strong because of the general bullish scenario in the markets
is observed in most of the cases in our study.
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BIBLIOGRAPHY
Books: - Merger, Acquisition and corporate restructuring in India (Rachnajawa)
Financial services 3rd edition (M.Y.khan)
Website: -
www.google.com
www.wikipedia.com
www.mergersindia.com
www.mergerdigest.com
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