SUBMITTED TO: Mrs.

Anjana Singh

SUBMITTED BY; KOMAL

Topic- Mergers & Amalgamations

ACKNOWLEDGEMENT I take this opportunity to express my deep and sincere gratitude to Prof. Anjana Singh for her valuable guidance and encouragement in implementing the knowledge through her lectures. It is because of her and Prof. J.C.Gandhi (Director of G.D.Memorial College of Management & Technology) supported so that I could synchronize the efforts in covering the manifold features of the topic. I also thank my friends who helped in collecting the data required and continuous support during the preparation of the topic of presentation.

KOMAL MUTNEJA

Preface Merger is combination of two or more firms into one of the firms . A merger results into an economic advantage when the combined firms are worth more together than as separate entities. Merger benefits may result from economies of scale, shields or shared resources. Merger should be undertaken when the acquiring companys gain exceed cost. Cost is premium than the buyer (acquiring company) pays for the selling company (Target Company) over its value as a separate entity. Discounted cash flow technique can be used to determine value of the target company to the acquiring company. Merger & amalgamation activities are regulated under various laws in INDIA. The objective of laws as well as stock exchange requirements is to make merger deals transparent & protect interest of all shareholders.

Contents 1. Introduction 2. Meaning & Definition 3. Types of Mergers 4. Need for Merger & Acquisition 5. Disadvantage 6. Financial Problems of Mergers 7. Bibliograhy

Introduction Corporate restructuring includes mergers & amalgamation (M&As), takeovers, spin-offs, leveraged buy-outs, buy back of shares, capital reorganization etc. M&As are the most popular means of corporate restructuring or business combinations. M&As is a combination of two or more companies into one company. It may be in the form of one or more companies being merged into an existing company or new company may be formed to merge two or more existing company. The Income Tax act, 1961 of INDIA uses the term amalgamation for merger. Meaning &Definition When mutual combinations takes place between different businesses can get rid of illeffects of competition among themselves, & can succeed in earning maximum profit by following a uniform policy with mutual co-operation. Then, it is known as merger or amalgamation.

According to section 2(1A) of Income Tax Act,1961; The term merger or amalgamation means the merger of one or more companies with another company or merger of two or more companies to form one company in such a manner: 1) All the property of amalgamating company or companies immediately before the amalgamation becomes the property of amalgamated company by virtue of amalgamation. 2) All the liabilities of amalgamating company or companies immediately before the amalgamation becomes the liabilities of amalgamated company by virtue of amalgamation. 3) Shareholders holding not less than nine-tenths in value of shares in amalgamating company or companies (other than shares already held therein immediately before the amalgamation by or by a nominee for, the amalgamated company by virtue of amalgamation)

According to the Companies Act, 1956;

Merger or amalgamation refers to as a state of things under which either two companies are joined so as to form a third entity or one is absorbed into or blended with another.

Types of Merger:1) Horizontal MergerWhen two or more concerns dealing in same product or service join together, it is known as horizontal merger. The idea behind this merger is to avoid competition between the units. 2) Vertical MergerA vertical merger represents a merger of firms engaged at different stages of production or distribution of same product or service. In this case two or more companies dealing in same product but at different stages may join to carry out whole process itself. The idea behind this type of merger is to take up two different stages of work to ensure speedy production or quick service. 3) Conglomerate MergerWhen two concerns dealing in totally different activities join hands it will be a case of conglomerate merger. The merging concerns are neither horizontally nor vertically related to each other. There may be some common features in merging companies, such as technology, distribution channels etc. This type of merger is undertaken to diversify the activities.

Need for Mergers & Acquisition The major reason for mergers is liberalization of Indian economy. Liberalization is forcing companies to enter new businesses, exit from others, & consolidate in some simultaneously. Other important reasons for mergers or amalgamations; 1. Operating Economies :

A number of operating economies will be available with merger of two or more companies. Duplicating facilities in accounting, purchasing, marketing, etc. will be eliminated. Operating inefficiencies of small concerns will be controlled by the superior management emerging from amalgamation. The amalgamated companies will be in a better position to operate than the amalgamating companies individually. 2. Synergy : Synergy refers to the greater combined value of merged firms than the sum of values of individual units. It is something like one plus one more than two. It results from benefits other than those related to economies of scale. The other instances which may results into synergy benefit include, strong R & D facilities of one firm merged with better organized production facilities of another unit, enhanced managerial capabilities, the substantial financial resources of one being combined with profitable investment opportunities of other, etc. 3. GrowthMerger or amalgamation enables satisfactory & balanced growth of a company. Growth through merger or amalgamation is also cheaper & less risky. 4. Utilization of tax shieldsWhen a company merges with a concern earning profits then accumulated losses of one unit will be set off against the future profits of other unit. In this way, the merger or amalgamation will enable the concern to avail tax benefits. 5. Increase in ValueOne of major reasons for which merger or amalgamation is done is the increase in value of the merged company. The value of merged company is greater than the sum of independent values of merged companies.

6. Elimination of CompetitionThe merger or amalgamation of two or more companies will eliminate competition among them. The companies will be able to save their advertising expenses thus enabling them to reduce their prices. Thus, customer will benefit in form of cheaper goods being made available to them. 7. Better Financial Planning-

The merged companies will be able to plan their resources in a better way. The collective finances of merged companies will be more & their utilization may be better than separate concerns. 8. Economic NecessityEconomic necessity may force the merger of some units. If there are two sick units, government may force their merger to improve their financial position & overall working. A sick unit may be required to merge with a healthy unit to ensure better utilization of resources, improve returns & better management. Rehabilitation of sick units is a social necessity because their closure may result in unemployment, etc.

9. Dilution of FEMAA foreign company operating in INDIA may merge with an INDIAN company in order to meet the requirements of Foreign Exchange Management Act (FEMA) for diluting its foreign shareholdings. 10. Personal ReasonsThe shareholders of a closely held company may desire that their company be acquired by another company that has an established market for its shares. This will also facilitate the valuation of their shareholders for wealth tax purposes. Moreover, shareholders of such company can improve their liquidity position by selling some of their shares & diversifying their investments. 11. Stabilization by DiversificationAmalgamation helps a company in achieving stabilization in its earnings by diversifying its operations. A company experiencing wide economic fluctuations & cyclical phases in earnings due to nature of its product or business may merge with another company which has totally different line of product or business. Thus, the merger would act as a safeguard against business cyclical fluctuations & bring stabilization in the earnings of company. Disadvantage of Mergers1. Elimination of Healthy Competition-

Merger may involve absorption of efficient, small & growing units into a larger unit. Thus, it eliminates individual undertakings competent to offer stiff competition necessary for healthy growth of industrial units. 2. Concentration of Economic PowerAll types of mergers have inherent tendency of concentration of economic power. Monopolistic conditions may be created which are ultimately to the disadvantage of consumers. 3. Adverse Effects on National EconomyConcentration of economic power, elimination of competition, etc. may ultimately result in deterioration in the performance of merged undertakings. This going to affect adversely the national economy .

Financial Problems of Mergers After mergers the companies face a number of financial problems. Some of the financial problems of merging companies are as follows; 1. Cash ManagementThe liquidity problem is usual problem faced by acquiring companies. Before merger, the companies had their own methods of payments, cash behavior patterns & arrangements with financial institutions. The cash pattern will have to be adjusted according to the present needs of business. 2. Credit PolicyThe credit policies of the companies are unified so that same terms & conditions may be applied to the customers. If the market areas of the companies are

different, then same old policies may be followed. The problem arises only when operating areas of the companies are the same credit policy will have to be pursued. 3. Financial PlanningThe companies may be following different plans before mergers. The methods of budgeting & financial control may also be different. After mergers, a unified financial planning is followed. The divergent financial controls will be unified to suit the needs of acquiring concerns.

4. Dividend PolicyThe companies may be following different policies for paying dividend. The shareholders will be expecting higher rates of dividend after merger on the belief that financial position & earning capacity has increased after combining the resources of companies. This is a ticklish problem & management will have to devise an acceptable payout policy. In the earlier stage of merger may be difficult to maintain even the old rates of dividend. 5. Depreciation PolicyThe methods of depreciation, the rates of depreciation & the amount to be taken to revenue accounts will be different. After merger the first thing to be decided will be about depreciable & non-depreciable assets. The second will be about the rates of depreciation. Different assets will be in different stages of use & appropriate amounts of depreciation should be decided.

Bibliography Books M R Aggarwal, I M PANDEY, Khan & Jain