Mergers & Acquisitions

M&A

There is a great deal of confusion and disagreement regarding the precise meaning of terms relating to the business combination viz. Merger, acquisition, takeover, amalgamation and consolidation. Sometimes, these terms are used in broad sense encompassing most dimensions of business combination, while sometimes they are defined in a restricted legal sense. We shall define these terms keeping in mind the relevant legal framework in India.
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Merger or Amalgamation

A merger is said to occur when two or more companies combine into one company. One or more companies may merger with an existing company or they may merger to form a new company. Laws in India use the terms amalgamation for merger. For example, Section 2(1A) of the Income Tax Act, 1961 defines amalgamation as the merger of two or more companies with another company or the merger of two or more companies (called amalgamating company or companies) to form a new company (called amalgamated company) in such a way that all assets and liabilities of the amalgamating company or companies become assets and liabilities of the amalgamated company and shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. 3

Merger or Amalgamation

Merger or amalgamation may take two forms: a) Merger through absorption b) Merger through consolidation

Absorption: An absorption is a combination of two or more companies into an existing company. All companies except one lose their identity in a merger through absorption. An example of this type of merger is the absorption of Tata Fertilisers Ltd. (TFL) by Tata Chemicals Ltd. (TCL). TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL. Under the scheme of merger, TFL shareholders were offered 17 shares of TCL (market value per share being Rs.114) for every 100 shares of TFL held 4 by them.

Merger or Amalgamation

Consolidation: A consolidation is a combination of two or more companies into a new company. In this form of merger, all companies are legally dissolved and a new entity is created. In a consolidation, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash for exchange of shares. In a narrow sense, the terms amalgamation and consolidation are sometimes used interchangeably. An example of consolidation is the merger or amalgamation of Hindustan Computers Ltd., Hindustan Instruments Ltd., Indian Software Company Ltd., and Indian Reprographics Ltd. in 1986 to an entirely new company called HCL Ltd.
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Merger or Amalgamation

Acquisition A fundamental characteristic of merger (either through absorption or consolidation) is that the acquiring company (existing or new) takes over the ownership of other companies and combine their operations with its own operations. An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisitions two or more companies may remain independent, separate legal entity, but there may be change in control of companies. Ex: IVRCL acquires controlling stake in Hind-Dorr Ltd

Merger or Amalgamation

Acquisition A fundamental characteristic of merger (either through absorption or consolidation) is that the acquiring company (existing or new) takes over the ownership of other companies and combine their operations with its own operations. An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisitions two or more companies may remain independent, separate legal entity, but there may be change in control of companies. Ex: IVRCL acquires controlling stake in Hind-Dorr Ltd

Takeover Vs Acquisition

Takeover vs. acquisition: Sometimes, a distinction between takeover and acquisition is make. The term takeover is understood to connote hostility. When an acquisition is a forced or unwilling acquisition, it is called a takeover. In an unwilling acquisition, the management of target company would oppose a move of being taken over. When management of target companies mutually and willingly agree for the takeover, it is called acquisition or friendly takeover. An example of acquisition is the acquisition of controlling interest of Universal Luggage Manufacturing Company Ltd. by Blow Plast Ltd. Similarly, Mahindra and Mahindra Ltd. a leading manufacturer of jeeps and tractors acquired a 26 per cent equity stake in Allwyn Nissan Ltd. Yet another example is the acquisition of 28 per cent equity of International Data Management (IDM) by HCL Ltd. In recent years, due to the liberalization of financial sector as well as opening up of the economy for foreign investors, a number of hostile take-overs could be witnessed in India. Examples include takeover of Shaw Wallace, Dunlop, Mather and Platt and Hindustan Dorr Oliver by Chhabrias, Ashok Leyland by Hindujas and ICIM, 8 Harrison Malayalam and Spencers by Goenkas.

Motives of Mergers

Mergers and Acquisitions are strategic decisions leading to the maximization of a companys growth by enhancing its production and marketing operations. They have become popular in the recent times because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalization of business as a number of economies are being deregulated and integrated with other economies.

Motives of Mergers

Limit competition Utilize under-utilised market power Overcome the problem of slow growth and profitability in ones own industry Achiever diversification Gain economies of scale and increase income with proportionately less investment Establish a transnational bridgehead without excessive start-up costs to gain access to foreign market Utilize under-utilised resources human, physical & managerial Displace existing management Circumvent government regulations Reap speculative gains attendant upon new security issue or change in P/E ratio Create an image of aggressiveness and strategies opportunism, empire building and to amass vast economic powers of the 10 company.

Motives of Mergers
Maintaining or accelerating a companys growth, particularly when the internal growth is constrained due to paucity of resources; Enhancing profitability, through cost reduction resulting from economies of scale, operating efficiency and synergy; Diversifying the risk of the company, particularly when it acquires those businesses whose income streams are not correlated. Reducing tax liability because of the provision of setting-off accumulated losses and unabsorbed depreciation of one company against the profits of another. Limiting the severity of competition by increasing the 11 companys market power.

Advantages of M & A

Accelerated Growth
Growth is essential for sustaining the viability, dynamism and valueenhancing capability of a company. a growth-oriented company is not only able to attract the most talented executives but it would also be able to retain them. Growing operations provide challenges and excitement to the executives as well as opportunities for their job enrichment and rapid career development. This helps to increase managerial efficiency. Other things being the same, growth leads to higher profits and increase in the shareholders value. A company can achieve its growth objective by:

Expanding its existing markets Entering in new markets

A company may expand and/or diversify its markets internally or externally. If the company cannot grow internally due to lack of physical and managerial resources, it can grow externally by combining its operations with other companies through mergers and acquisitions. Mergers and acquisitions may help to accelerate the pace of a companys growth in a convenient and inexpensive 12 manner.

Advantages of M & A
2) Enhanced Profitability:

The combination of two or more companies may result in more than the average profitability due to cost reduction and efficient utilization of resources. This may happen because of the following reasons: Economies of scale Operating economies Synergy
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Advantages of M & A
Economies of scale: Economies of scale arise when increase in the volume of productions leads to a reduction in the cost of production per unit. Merger may help to expand volume of production without a corresponding increase in fixed costs. Thus, fixed costs are distributed over a large volume of production causing the unit cost of production to decline. Economies of scale may also rise from other indivisibilities such as production facilities, management functions and management resources and systems. For example, a given mix of plant and machinery can produce scale economies when its capacity utilization is increased. Economies will be maximized when it is optimally utilized. Similarly, economies in the use of the marketing function can be achieved by covering wider markets and customers using a given sales force and promotion and advertising efforts. Economies of scale may also be obtained from the optimum utilization of management resource and systems of planning, budgeting, reporting and control. A combined firm with a large size can make the optimum use of the management resource and 14 systems resulting in economies of scale.

Advantages of M & A

Operating economies: In addition to economies of scale, a combination of two or more firms may result into cost reduction due to operating economies. A combined firm may avoid or reduce over-lapping functions and facilities. It can consolidate its management functions such as manufacturing, marketing, R&D and reduce operating costs. For example, a combined firm may eliminate duplicate channels of distribution, or create a centralized training centre, or introduce an integrated planning and control system. In a vertical merger, a firm may either combine with its suppliers of input (backward integration) and/or with its customers (forward integration). Such merger facilities better coordination and administration of the different stages of business operations purchasing, manufacturing, and marketing eliminate the need for bargaining (with suppliers and/or customers), and minimizing uncertainty of supply of inputs and demand for product and saves costs of communication. 15

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Why M&A?
Underlying Principle for M&A Transactions 2+24 Additional Value of Synergy

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