M & A

• 1.MERGERS

• Merger is defined as “ a combination of two or more companies into a single company.”

• A merger an take place either as an amalgamation or absorption.

• 2. ACQUISITIONS:

• Acquisition, a broad term, inter alia, subsumes the following transactions:

A. Merger

B. Purchase of Division of Plant

C. Take-over.

• A. MERGER: • A combination of two or more companies

into one company. It may involve absorption or consolidation.

• In an absorption, one company acquires another company. For ex: H L L absorbed Tata Oil Mills Ltd.,.

• In Consolidation, two or more companies combine to form a new company.

• In India, mergers are called amalgamations in the legal parlance.

• The shareholders in the amalgamating companies receive shares in the amalgamated company in some exchange ratio.

• B. PURCHASE OF DIVISION OF PLANT:• A company may acquire a division of plant of

another company. For ex: SRF bought the nylon cord division of CEAT Ltd.,.

• C. TAKE-OVERS:• A takeover generally involves the acquisition of a

certain stake in the equity capital of a company which enables the acquirer to exercise control over the affairs of the company.

• For ex: HINDALCO took over INDAL from it’s overseas parent ALCAN.( Subsequently, however, INDAL was merged into HINDALCO).

• Unlike a merger or Purchase of Division, a takeover does not involve transfer of assets.

• Takeover may be defined as “a transaction or series of transactions whereby an individual or group of individuals or company acquires control over the management of the company by acquiring equity shares carrying majority voting power”.

• Companies having potential growth are normally taken over by big companies.

• If shares totalling 51% of the total value of capital are held by the acquirer, the takeover is complete and the acquirer gets the status similar to that of a ‘holding company’.

• However, in most corporate takeovers, it is not necessary to acquire 51% or more of the shareholding. There exists a concept called ‘controlling interest’. A controlling interest is that proportion of the total shareholding which results in control of the administration of the company through a majority in the Board of Directors. This could be as low as 5% or as high as 51% of the total number of shares.

• 3. DIVESTMENT/ DIVESTITURES: • While acquisitions lead to expansion of

assets or increase of control, divestitures result in contraction of assets or relinquishment of control. The common forms of divestitures are:

• A. Partial Sell-Off• B. Demerger • C. Equity Carveout.

• A. PARTIAL SELL-OFF:• This involves a sale of a biz division or plant of

one company to another.• B. DEMERGER:• Demerger involves the transfer by a company of

one or more of it’s biz divisions to another company which is newly set-up.

• The company whose biz division is transferred is called the demerged company and the company to which the biz division is transferred is called the resultant company.

• C. EQUITY CARVEOUT:

• Here, the parent company sells a portion of it’s equity in a wholly owned subsidy. The sale may be to the general investin public or a strategic investor.

• For ex: The Indian government sold 10% share in ONGC through a public issue.

• 4. CONTRACTION

• Contraction is a form of restructuring which results in a reduction in the size of the firm. It can take in the form of:

• A. Spin-Offs

• B. Split-Offs

• C. Split-Ups

• A. SPIN-OFFS:• This is a transaction in which a company

distributes on a pro-rata basis all of the shares it owns in a subsidiary to it’s own shareholders.

• The new entity has it’s own management and is run independently from the parent company. For ex: Air India has formed a separate company named Air India Engineering Services Ltd., by spinning-off it’s engineering division.

• B. SPLIT-OFFS:• In a split-off, a new company is created to

take over the operations of an existing division or unit. A portion of the existing shareholders receives stock in a subsidiary (new company) in exchange for parent company stock.

• A split-off does not result in any cash inflow to the parent company.

• C. SPLIT-UPS:• In a split-up, the entire company is broken

up in series of spin-offs, so that the parent company no longer exists. For ex: Karnataka Electricity Board was split-up in 1999-2000 as part of power sector reforms, into KPC, BESCOM, MESCOM and so on. KPC generates power and other split-ups distribute the power.

• 5. ASSET PURCHASE: • Asset purchase/ acquisition involve buying

the assets of another company. These assets may be tangible assets like manufacturing division or intangible asset like brands.

• Ex: Coca Cola paid Rs. 170 Crore to Parle to acquire it’s soft-drinks brands like Thums-Up, Limca, Gold Spot,etc.,.

• 6. ASSETS SALE:

• It involves the sale of tangible or intangible assets of a company to generate cash.

• When a company is cash-starved, it may sell one or more assets to generate cash so that it can comfortably operate the remaining assets( Plant or Divisions).

• CHANGES IN OWNERSHIP STRUCTURE • 7. LEVERAGED BUYOUTS ( LBOs)• 8. GOING PRIVATE• 9. ESOP• LEVERAGED BUYOUTS • LBO is a financing technique where debt is

used in the acquisition of a company.• A management buyout is an LBO in which

managers of the company buy a division or the entire company by paying p.c by debt.

• 8. GOING PRIVATE

• It refers to the transformation of a public corporation into a privately-held company. It involves the purchase of the entire equity holding previously held by the government by a small group of investors.

• 9. E S O P • An Employee Stock Option Plan is a

mechanism where• by a company can make tax deductible

contributions of cash or stock into a trust. The assets are allocated to the employees and are not taxed until withdrawn by them.

• ESOPS are involved in mergers and LBOs in two ways--- as a financing vehicle for the acquisition of companies, including through LBOs and secondly, as an anti-takeover defense.

• 10. TAKEOVER DEFENSES • There are pre-bid and post-bid defenses for the

target company to check (stop) the onslaught of the acquiring company.

• Pre-bid defenses also called preventive defenses are employed to prevent a sudden, unexpected hostile bid from gaining control of the company.

• When the pre-bid defenses fail to fend-off an unwanted bid, the target implements post-bid (or active) defences.

• 11. HORIZONTAL MERGER

• When a company takes over another company/companies in the same industry, then it called horizontal merger. For example: In India, VODAFONE took over HUTCHINSON, both are companies in the telecom industry.

• VERTICAL MERGER • When two or more companies, having

forward/ backward integration merge, such merger is called vertical merger. For ex: A tyre manufacturing company takes over nylon cord making company or/and rubber producing company. In the same way, an automobile company taking over automobile spareparts making company.

• 13. HOSTILE MERGER • When the reaction of the BoD of the target

company opposes the bid by an acquirer, then it is hostile merger.

• 14. HEALTHY/ FRIENDLY MERGER• If the BoD of the target company accepts the

bid, then it is deemed to be a friendly or healthy take over.

• LAXMI MITTAL’S TAKE OVER OF ARCELOR STEEL COMPANY IS A HOSTILE TAKEOVER.

MOTIVES FOR MERGERS & TAKEOVERS

M&T activities are primarily the result of following factors and strategies, which are classified as:

a) Strategic motivesb) Financial motivesc) Organizational motives. STRATEGIC MOTIVES1. Expansion and growth 2. Dealing with the entry of MNCs – Merger or

joint venture is a possible strategy for survival with the arrival of MNCs.

3. Economies of scale

4. Synergy

5. Market penetration – Traditionally a company might be catering to the upper class or middle class segment. By taking over a company which caters to other class, total reach to the market becomes easier.

6. Market leadership7. Backward/ Forward Integration8. New product entry – Entering into a new product

market is a time consuming effort. By M&A, this becomes easier.

9. New market entry – By taking over a company which is operating in a geographical area where the acquirer company is not presently operating, the entry to new market is easy. For ex: Tatas acquired Jaguar in U.K.

10. Surplus resources – To obtain additional mileage from an existing resource (be it funds, production capacity, marketing network, managerial talent) M&T might offer good potential.

11. Minimum size – In a growing market, it is difficult to survive for long without growing big.

12. Balancing product cycle – Combining with a complementary industry to compensate for the fluctuations in a product cycle may be good strategy. If the main product is seasonal, say, “sugar” – it will be beneficial to add another non-seasonal product, say, ‘plastics and nylons’ in the company’s fold.

13. Arresting downward trend – If the trend in the industry is pointing downward, it is wise to takeover the business belonging to a young and potential industry.

14. Growth and diversification strategy.15. Re-fashioning – Some companies resort to

M&T as a strategy by entering into high profile business through acquisition route, by diversifying from traditional business activity to latest technology-related businesses like information technology, print media.

FINANCIAL MOTIVES1. Deployment of surplus funds – The cash- rich

companies always look around to take over cash-strapped companies with a view to deploy funds in investiable projects.

2. Fund raising capacity – The increase in fixed assets and current assets base will improve the fund-raising capacity.

3. Market capitalisation – The rise in income of target company increases the EPS as well as market value of share. This will result in increase of market capitalisation.

4. Operating economies – The combination will effect in saving overheads and other operating costs and will help in increasing the profitability of the organisation.

5. Tax benefits – A company which has accumulated losses and unabsorbed depreciation can carry forward and offset against future taxable profits and reduce tax liabilities in amalgamating company.

6. Revival of sick unit – If a viable unit becomes sick, a healthy company may like to merge it so as to reap the benefit of the hidden potentials of the sick unit.

7. Asset stripping – If the market value of the shares is quoted below the true net-worth of the company, it will be a target for acquisition.

8. Increasing EPS – If the bidding company has a lower EPS as compared to that of target company, the bidder can increase it’s overall EPS after acquisition, if the share exchange ratio is 1:1. The process of increasing EPS through acquisition is called ‘boot-strapping’.

ORGANISATIONAL MOTIVES1. Superior management – By merger,

managerial skills are also pooled together. This will enhance the stability and growth rate of both the companies.

2. Ego satisfaction – The money power available with the top management of big corporate houses do prompt the managers to explore the possibilities of M&A. The size of the combined enterprise satisfies the ego of the entrepreneur and the senior managers.

3. Retention of management talent – To assure growth to the senior management people in order to retain the management talent, M&T are attempted.

4. Removal of inefficient management – M&A is a quick remedy to replace inefficient management from an organization which has high product strength.

• WHY DO COMPANIES ACQUIRE?• Companies seek to expand and grow instantly to

become formidable force in the market. They want become market-leaders, in the sense, they want to multiply their turn-overs so that they have a greater say such as price-leadership, brand monopoly, etc.,. The quick and effective way to gain this control is by fattening themselves. This is done by acquring other companies.

• HOW MERGER IS EFFECTED? • By adopting Carrot and Stick Policy.• The intending acquirer keeps on buying the

equity shares of the target company in the open market( i.e., through stock-exchange) without leaving suspicion to the target co.,. Then the aquirer approaches the target with offer. If the target accepts the offer, it will be friendly takeover; otherwise it may turn out to be a hostile takeover.

• SELL-OFFS • A division/s may be sold-off in order to concentrate on

core biz divisions. In the following circumstances, a division/s may be sold-off:

• 1. Severe liquidity problem.• 2. To concentrate on core biz activities.• 3. To protect the firm from takeover bid by someone by

selling-off the desirable division to the bidder.• 4. To improve the profitability of the company by selling-

off loss-making division/s.

• WHY DIVESTMENT/DIVESTITURES?• Mergers, asset purchases, and take-overs

lead to expansion in some way or the other. They are based on the principle of SYNERGY which says 2+2=5!.

• Divestment, on the other hand, involves some kind of contraction. It is based on the principle of ANERGY which says

• 5-3=3!.

• WHY MERGER?

• Companies seek to expand and mergers are seen as a quick and effective way to do so.

• It is easier to acquire than setting-up a new company or setting-up a new division.

II. MERGER WAVES

• FIVE merger waves have been witnessed in the U.S till date.

• All the merger movements occurred when the economy experienced the sustained high growth rates.

• Firms are motivated to make large investments only when the biz prospects are favourable. Biz prospects coincided with competitive conditions directly motivate a new strategy results in stimulating M&A strategy.

I WAVE- 1897-1904

• In this wave, mainly horizontal mergers took place, which resulted in a near monopolistic market structure.

• Some of today’s industrial giants originated in this wave, such as GE, Navistar International, Du Pont Inc., Std Oil, Eastman Kodak and American Tobacco Inc.,.

• More than 3000 cos disappeared in this wave.• Another feature of this wave is the formation of

trusts such as J.P Morgan etc.,.

• This wave created large monopolies. The first billion-dollar mega merger deal between U.S Steel and Cornegie Steel took place during this period resulting in merger of 785 different steel cos.,.

• As firms expanded, they exploited economies of scale in production and distribution.

• The expansion of the scale of biz required greater managerial skills and lead to specialisation in management.

• The fraudulent financing of mergers resulted in collapse of companies in 1900s and the stock –market crash of 1904 and closure of many banks paved the way for the formation of the Federal Reserve.

• The era of easy availability of finance, one of the basic ingredients of take-overs ended, resulting in the halting of the first wave.

• The powerful anti-trust laws made a crackdown on large monopolies. For ex: Standard Oil which controlled about 80% of oil production and distribution was broken into 30 companies such as EXXON, MOBIL,CHEVRON, AMOCO,etc.,

II WAVE– 1916-1929

• This wave also began with an upturn in biz activity. The result was an oligopolistic industry structure(rather than monoplly).

• The consolidation pattern which was established in the first merger wave continued in this wave also.

• The most active areas were banking and public utilities industries.

• The second merger period witnessed the formation of many prominent corporations of today such as GM, IBM, UNION CARBIDE and JOHN DEERE.

• A total of 4600 merger took place. 12,000 manufacturing, mining, public utility and banking companies disappered in this wave.

• The expansion of railroad, motor transportation and radio(ads) enhanced competition among firms. This led to the era of mass merchandising.

• The second merger wave came to an end when the stock market crashed on October 29, 1929. Depression worsened.

• Note: INVESTMENT BANKERS PLAYED A KEY ROLE IN THE FIRST TWO PHASED OF MERGERS.

THE 1940s

• DURING THE SECOND WORLD WAR PERIOD, THE MERGERS WERE SLOW. The U.S Federal Govt., urged cos not to compete but work together to win against axis powers, i.e., Germany, Italy and Japan.

• ECONOMISTS POINTED OUT THAT GOVERNMENT REGULATIONS AND TAX POLICIES ARE MOTIVATING FACTORS BEHIND MERGERS.

III WAVE– 1965-1969

• The historically highest level of mergers was reached in this period, due to the booming economy.

• In this period, relatively smaller companies targeted larger companies for acquisition.

• MERGERS OF DIVERSIFIED ACTIVITIES TOOK PLACE ( CONGLOMERATE MERGERS) due to the tougher anti-trust enforcement. The Federal Govt.,( U.S Central Govt) came down heavily on both horizontal and vertical mergers.

• Firms with financial reso;urces, which sought to expand, found that the only alternative was to form conglomerates.

• The rapid growth in management science accelerated the conglomerate movement.

• MANAGEMENT GRADUATES WITH HIGH-SKILLED MANAGEMENT EDUCATION BELIEVED THAT THEY COULD MANAGE A WIDE VARIETY OF ORGANISATIONAL STRUCTURE,i.e., CONGLOMERATE STRUCTURE which became a reality.

• Around 6000 mergers with the disappearances of around 25000 cos took place in the U.S.

• THE BOOMING STOCK MARKET PRICES PROVIDED EQUITY FINANCING TO MOST OF THE CONGLOMERATE TAKE-OVERS. Investment bankers were not in the scene.

• Many of the mergers failed as managers of the diverse cos had little knowledge of specific industries that were under their control. For ex: REVLON– a cosmetic manufacturing co., took-over healthcare co., and its core biz suffered.

IV WAVE– 1981-1989

• This wave started soon after 1974-75 recession in the U.S. HOSTILE MERGERS PLAYED A SIGNIFICANT ROLE IN THIS WAVE.

• The fourth wave was a period of mega mergers. Deregularisation in some industries was the majin reason behind mega mergers , e.g., deregularisation of airline industry.

• THE FOURTH WAVE ALSO WITNESSED THE EMERGENCE OF CORPORATE RAIDERS.

• INVESTMENT BANKERS PLAYED AN AGGRESSIVE ROLE . M&A ADVISORY SERVICES BECAME A LUCRATIVE SOURCE OF INCOME FOR INVESTMENT BANKS.

• The merger specialists at investment banks and law firms developed many techniques to facilitate and prevent takeovers.

• Another important feature of this wave is the increased use of debt to finance acquisition.

• The yield on junk bonds was significantly higher than that of investment grade bonds. The phenomenon LEVERAGED BUYOUTS EMERGED.

• The investment bank DREXEL BURNHAM LAMBERT pioneered the growth of the junk bond market.

V WAVE– 1992 ONWARDS

• This wave is witnessing mega mergers.• The number of strategic mergers outnumber the

hostile takeovers.• This wave is emphasizing strategy more than

quick financial gains. Most of the deals are financed through the increased use of equity shares.

• Deregulation and rapid techological changes are leading to high level of mergers.

• Banking, telecommunications, entertain-ment and media industries are some of the leading consolidations.

• Many banks are grown larger than Central Banks.

• The merger activity is not confined to U.S, and due to globalisation, CROSS-BORDER mergers are taking place.

Major mergers in the Telecom Sector

• ACQUIRER TARGET• Vodafone Mannesman• MCI Worldcom Spirit• Bell Atlantic GTI, NYNEX• AT&T McCaw Cellula• SBC Ameritech,• Pacific Telesis• U.S West Global Crossing

Major mergers in Media&Entertainment sector

• ACQUIRER TARGET

• America On-Line Time Warner

• Viacom CBS

• Walt Disney Capital Cities/ ABC

• AT&T Media One

• Time Warner Turner Broadcasting

MERGERS & ACQUISTIONS IN INDIA

• FIRST PHASE: PRE-LIBERALISATION ERA.

• This is upto 1990.License Raj existed upto 1990. Industry capacity was restricted due to licensing. Still cos resorted to conglomerate mergers.

• The landmark event was when Tata Tea acquired 50% of equity of Consolidated Coffee Ltd and took-over it.

THE POST-LIBERALISATION ERA

• The recession in the 1990s and the liberal-isation created new challenges.

• Indian cos should grow to withstand the competitions from multi-nationals, or perish.

• Bulk of M&A deals have been on cash basis.

• Finance and IT cos score heavily in M&A.

• Since there are no barriers for entry of new cos, so the chances of M&A are also high.

• M&As have been found useful to consolidate the market position. For ex: In the Cement Industry, the French firm LAFARGE bought the cement unit owned by TISCO, and GUJARAT AMBUJA acquired DLF Cement and half of TATA’s share in ACC to capture a major share in the market between the two of them.

• The larger cellular cos are consolidating their market share through buyouts.

• Some global mergers like the mergers of ANZ GRINDLAYS BANK and STANDARD CHARTERED BANK, HEWLETTE &PACKARD and COMPAQ have shook-up the Indian markets handled by their Indian subsidiaries.

• KPMG study found that only 30% of cases of M&A in India created shareholders’ value while in 31% cases, the shareholder value was diluted.

• In 2005, the highest M&A took place in India, second only to Japan.

• Indian M&A activity is spreading as Indian cos are acquiring cos overseas.

What are the real advantages of M&A ?

• 1.Growth, Profitability through economy of scale, Operating Efficiency and Synergy.

• . But more important advantages are:• 2.Diversifying the risk of the co.,.• 3. Reducing the tax liability because of the

provision of setting-off accumulated losses and unabsorbed depreciation of one co., against the profits of another.

• 4. To overcome the extinction fear.• 5. Limiting the severity of competition.

TAX BENEFITS OF M&A

• A co., is allowed to C/fd losses to set-off against it’s future profits, for calculating it’s tax liability. By taking a loss-making co., at a cheaper price, the acquirer hits two birds with one stone.

• A large no. of cos have merged in India to take advantage of this provision.

• When two cos merge through exchange of shares, the shareholders of vendor co., can save tax………..

• A strong urge to reduce tax liability is a strong motivation for the merger of cos.,.

• The high rate of tax was the main reason for high merger activity in the U.S in the post-second world war period. So far, tax benefits are responsible for 1/3 mergers in the U.S and more than 70% mergers in India.

Financial Benefits of M&A

• M&A can result into FINANCIAL SYNERGY and benefits. A merger may help in:

• 1. Eliminating the financial constraints

• 2. Deploying surplus cash

• 3. Enhancing Debt capacity

• 4. Lowering the financial costs.

Value created by Merger

• Merger will create an economic advantage ( EA) when the combined P V of the merged cos is greater than the sum of their individual PVs as separate entities.

• EA = V a+b – ( V a + Vb )• The EA is divided between the

acquiring and the target cos in share exchange ratio.

M&A NEED, OBJECTIVES AND ADVANTAGES

• Why do mergers take place?• Mergers and acquisitions are strategic decisions

leading to the maximisation of a co’s growth by enhancing it’s production and marketing operations.

• Some of the reasons for M&A are:• 1. Limit competition 2.Utilise under-utilised

market power.3. Accelerate the growth 4. Achieve diversification 5. Gain economies of scale 6. Establish a transitional bridgehead.7. Displace existing management 8. Circumvent govt. regulations 9.Image of aggressiveness.

THEORIES OF MERGERS

• EFFICIENCY THEORIES

• These theories suggest that M&As provide a mechanism by which capital can be used more efficiently and that the productivity of the firm can be increased through economies of scale. According to these theories, M&As have the potential for social benefits.

• These theories can be further divided as:• Diffirential Efficiency Theory.• Inefficient Management Theory.• Synergy.• Pure Diversification.• Strategic Realighment to changing

Environment, and • Undervaluation.

MECHANICS OF A MERGER A merger is a complicated transaction, involving fairly complex legal,

accounting and tax considerationd. While evaluating a merger proposal, the following should be borne in mind:

I. Legal procedureII. Accounting provisionsIII. Tax aspects. I. LEGAL PROCEDURE: 1. Examination of Object Clause: The Memorandum of Association of

both the companies should be examined to check whether MA gives power for amalgamation. If such clause does not exist, then necessary approval of shareholders and Company Law Board should be obtained.

2. Intimation to stock exchanges: The stock exchanges where the amalgamated and amalgamating companies are listed, should be informed about the amalga-mation proposal.

3. Draft Amalgamation proposal: This should be approved by respective Boards.

4. Application to the Court (High Court): After the draft proposals are approved by the Boards, they have to approach the HC of the states in which their Registered Offices are situated, to get it’s approval to convene joint meetings of shareholders and creditors for passing special Resolution for merger.

5. Despatch of Meeting Notices to share-holders and creditors.

6. Holding of Joint Meetings of shareholders and creditors: A special resolution ( where atleast 75% of members present should vote in favour of the proposal) should be passed approving the merger.

7. Petition to the HCs for confirmation and passing or Orders: After step-6 as above, they have to present petitions to respective HCs for confirming the scheme of amalgamation. If the HCs feel the scheme of merger is fair and reasonable, the HCs pass Orders sanctioning the same. The HC is empowered to modify the scheme and pass Orders accordingly.

8. Filing the Court Order with the Registrar of Companies: Certified true copies of the HC order should be filed with the Registrar of Cos., by both the cos., within time limit specified by the Courts.

9. Transfer of Assets and Liabilities: Assets and Liabilities of amalgamating cos., should be transferred to merged company.

10. Issue of Shares and Debentures: The merged co., should issue shares and debentures as p.c. The new shares and debentures so issued will then be listed on the stock exchange.

II. ACCOUNTING FOR MERGER:

The ICAI (Institute of Chartered Accountants of India) has issued AS-14(Accounting Standard-14) regarding merger. According to AS-14, an amalgamation can be in the nature of either ‘uniting interests’ which is referred to as “Amalgamation in the nature of merger” or “Acquisition”.

The conditions to be fulfilled for an amalga-mation to be treated as an “Amalgamation in the nature of merger” are as follows:

i) All assets and liabilities of amalgamating company should become Assets and Lia-bilities of amalgamated co.,.

ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor co., (amalgamating co.,) should become shareholders in the transferee co., (amalgamated co/merged co.,).

iii) The p.c should be discharged by the transferee co., by issue of equity shares. Cash can be paid in respect of fractional shares.

vi) The biz of transferor co., is intended to be carried on by the transferee co.,.

v) The transferee co., intends to incorporate into it’s B/S the book-values of assets and liabilities of the transferor co., without any adjustment except to the extent needed to ensure uniformity of accounting policies as per AS.

An amalgamation which is not in the nature of merger (as shown above, i.e., if 5 conditions are not fulfilled) is treated as an Acquisition.

ACCOUNTING TREATMENT IN THE BOOKS OF TRANSFEREE COMPANY (AMALGAMATED CO.,):

The accounting treatment depends on the nature of amalgamation as stated above.

For a ‘merger’, the “pooling of interest” method is to be used and for an ‘acquisition’, the “purchase” method is to be used as AS-14.

“Pooling Interest” method: Under this method, the Assets and Liabilities of the merging companies are aggregated. Likewise, appearing in the B/S of the transferor company is c/fd into the B/S of the transferee company. The difference in capital on account of the share swaps is adjusted in the reserves.

“Purchase Method”: Under this method, the Assets and Liabilities of the transferor co., are carried into the books of the transferee co., at their fair market values. The difference between the p.c and fair book values of assets and liabilities is treated as “Goodwill” or “Capital Reserve” as the case may be.

If Goodwill arises, it should be amortized over a period of 5 years.

( problem to be solved on these two methods)

III. TAX ASPECTS:The amalgamated company is entitled to various tax

benefits, if the following conditions are fulfilled:(a) All the assets and liabilities of amalga-ting companies

are transferred to amalgamated company. (b) Shareholders holding not less than 90% in face value

of the shares of the amalgamating company become shareholders of the amalgamated company.

Tax concessions are granted to the amalgamated company if it is an Indian company.

Following deductions to the extent available to the amalgamating company and remaining unabsorbed or unfulfilled will be available to the amalgamated co.,:

• Capital Expenditure on scientific research.• Expenditure on acquisition of patent, copy-right and know-how.• Expenditure for obtaining license to operate telecommunication

services.• Amortization of preliminary expenses.• *C/fd of losses and unabsorbed depreciation. *C/fd of losses and unabsorbed depreciation of amalgamating co., will

become c/fd of losses and unabsorbed depreciation of amalgamated co., on certain conditions, e.g., the amalgamated co., should carry on the business of amalgamating co., atleast for 5 years from the date of amalgamation.

The c/fd loss and unabsorbed depreciation gets a fresh lease of 8 years in amalgamated co., to set-off and c/fd.

SEBI TAKEOVER CODE

The important provisions of the SEBI Takeover Code are as below:

1. Disclosure: Any acquirer who acquires shares or voting rights in a company (shares or voting rights in a company is termed as “holding”) which exceeds 5%, 10%, and 14% of the total, shall disclose at every stage of the aggregate of the holdings to the company and to the concerned stock exchange/s. The stock exchange makes public announcement of the same.

2. Trigger Point: No acquirer shall acquire holdings equal to or exceeding 20% of the total (total voting rights in the target company), unless the acquirer makes a public announcement to acquire shares through a public offer.

3. Merchant Banker: Before making a public offer, the acquirer has to appoint a Category 1 merchant banker registered with SEBI. The merchant banker should ensure that the public announcement of the offer is made in accordance with the SEBI regulations, the acquirer is able to implement the offer, and necessary funds are arranged by the acquirer for the purpose.

4. Public Announcement: Within 4 working days of the agreement or the decision of the acquirer to acquire shares/voting rights in excess of the specified percentages, the merchant banker should make a public announcement. The public announcement should provide information about the number of shares proposed to be acquired, the minimum offer price, object of acquisition, and the opening and closing date of the offer.

5. Offer Price: The Offer price to the public shall not be less than the highest of the following: negotiated price; average price paid by the acquirer; preferential offer price made in the last 12 months; and the average of the weekly high and low for the last 26 weeks.

6. Obligations of the Acquirer: The acquirer must ensure that the letter of offer reaches shareholders within 45 days from the date of public announcement and payment is made to shareholders who have accepted the offer within a period of 30 days from the date of the closure of the offer.

7. Obligations of the Board of the Target Company: After the public offer made by the acquiring company, the Target company should arrange a shareholders meeting and obtain the approval of the shareholders to respond to the public offer of the acquirer.

8. Competitive Bids: Competitive bids can be made within a period of 21 days of the public announcement of the first offer. If the competitive bid by some other bidder is higher than the offer of the acquirer, the can make a revised offer.

9. Provision of Escrow: As a guarantee, the acquirer is required to deposit atleast 25% of the amount payable for the public offer up to Rs. 100 Crore and 10% of the amount exceeding Rs. 100 Crore in an escrow account.

When an offer is subject to a minimum level of acceptance, the acquirer is required to deposit atleast 50% of the amount payable for the public offer in an escrow account.

The escrow account should consist of cash deposit, or bank guarantee in favour of the merchant banker, or deposit of acceptable securities with the merchant banker.

10. Creeping Acquisition: An acquirer who already has more than 15% holding in the target company can do a creeping acquisition of up to 5% per year without triggering off the open offer requirements.

DUE DILIGENCE

• Each company will have it’s own culture, derived from several components--- corporate policies, rules, compensation plans, leadership styles, internal communication, physical work environ-ment, etc.,.

• Cultural due diligence attempts to answer the questions as to what extent can the two companies change and adopt to differences between the two corporate cultures.

• H R due diligence attempts to evaluate how people are managed between the two companies such as their pay, incentives, pension plans, etc.,.

• Failure to address cultural, social, and HR issues are reasons behind failed mergers.

• Consider people as financial asset.• There are two main processes prior to

negotiating a deal in which HR factors need to be covered:

1. Planning the acquisition strategy, i.e., Planning the attack.

2. Conducting Due Diligence.

1. PLANNING THE ATTACK:The importance of human factors as a contributor to the

overall acquisition strategy will vary, depending on the nature of the deal. Following are some factors:

• Culture---- what are they like? Will the acquirer need to make changes if he (the acquiring company) buys the target?

• Talent----- what is in the talent bank of target? Do they have the skill we (acquirer) need?

• HR processes---- If we buy, what are the opportunities to add value?

2. DUE DILIGENCE:

What to look for?

• Culture and Talent indicators.

• Workforce assessment.

• Remuneration.

• Employment agreement and legal compliance.

TAKEOVER DEFENSES

• The presence of certain characteristics like the strong and stable cashflows, low levels of debt in the capital structure, low stock(share) price compared to the value of the assets of the firm, etc., make the company vulnerable to a takeover. So, some preventive measures are to be adopted before hand to demotivate a bidder. Through these measures, the pace of the takeover attempt can be slowed down and the acquisition becomes more expensive for the bidder.

• PRE-OFFER DEFENSES• I.POISON PILL• II. BACK END PLANS• III. POISON PUTS• IV. PEOPLE PUTS• V. STAGGERED OR CLASSIFIED BOARDS• VI. DUAL CAPITALISATION• VII. GOLDEN PARACHUTE.

• POST-OFFER DEFENSES• VIII. GREEN MAIL• IX. WHITE KNIGHTS• X. WHITE SQUIRE• XI. RECAPITALISATION• XII. ESOPS• XIII. LITIGATION• XIV. PACMAN DEFENSE• XV. “ JUST SAY NO” DEFENSE• XVI. CROWN JEWELS SALE• XVII. SHARE REPURCHASES• XVIII. RESTRUCTURING.

• I. POISON PILL• Additional shares are issued to share-holders to

make the firm less valuable in the eyes of a hostile bidder. These shares have no value till the happening of a triggering event i.e., acqusition of certain % of the co’s shares by the bidder. The moment it is known that the bidder has acquired the shares in the company, the company activates these shares and shares gain value. This makes the bidder an insignificant shareholder and he retreats.

• Basically there are two types of Poison Pills: Flip In and Flip Over.

• FLIP IN PLAN: IN this plan, shareholders are given a common stock dividend in the form of rights for each they own. Whenever the bidder acquires a certain % of stock, the rights are activated.

• FLIP OVER PLAN: in this, the shareholders are given common stock dividend in the form of rights to acquire the firm’s common or preference shares at an exercise price above the market price.Whenever bidder surfaces, the rights are activated.

In this case, the shareholders can purchase the bidder’s shares at a heavy discount.

• II. BACK END PLANS:• This is an alternative to Poison Pill. These plans are

also known as note purchase rights plan. Under these plans, the shareholders receive a rights dividend which gives them the capacity to exchange the right to stock (shares) for cash or senior securities (old debentures) that are equal in value to a specific back end price fixed by the BoD. These rights are excercisable when a bidder purchases shares in excess of a specific % of the target’s o/s shares.

• POISON PUTS• This involves issuance of bonds that contain a

put option which become excercisable in the event of a hostile takeover bid. The Option allows the holders to sell the securities to other individuals or companies for a specific price. In the event of takeover, the large cash payout to the bond-holders becomes inevitable– this dis-courages the bidder in his attempt to takeover.

• IV. PEOPLE PILL

• Sometimes, the entire management team threatens to resign in the event of takeover.This threat is especially useful if the incumbent mgt is a very good team. The fear of loosing good team may discourage the raider and he may withdraw.

• CORPORATE CHARTER AMENDMENTS• V. STAGGERED OR CLASSIFIED BOARDS• The BoD is divided into no. of different classes

or groups. Only one class is up for re-election each year. This delays the effective transfer of control in takeover.

• So, the hostile bidder has to wait for few more AGMs to gain the control of the board in spite of holding the majority of shares. This discourages him from hostile takeover attempt.

• VI. DUAL CAPITALISATION• Under this defense mechanism, the BoD

are authorised to create a new class of securities with special voting rights. This voting power is given to a group of stockholders who are friendly to the mgt.This results in the mgt increasing it’s voting control of the company and the bidder’s plan is defeated.

• VII. GOLDEN PARACHUTE • These are distinctive compensation agreements

that the co., provides to the top managements. This provides for lump-sum payments to certain senior mgt people on either VRS or compulsory termination of their jobs. This compensation package may be used in advance of a hostile bid to make the target less attractive. This may also be used in the midst of a takeover battle. The liquidity of the target is drained and the bidder is no more interested.

POST-OFFER DEFENSES

• VIII. GREEN MAIL:• This refers to the buying back of shares at a

substantial premium from the stock-holder holding a significant majority of shares in return for an agreement that he will not initiate bid for control of the company. The potential acquirer is required to sign an agreement called STANDSTILL AGREEMENT whereby he undertakes not to begin a bid for the control of the co.,. This is a spin-off of blackmail.

• IX. WHITE KNIGHT:• When a co., is the target of an unwanted

bid or the threat of a bid, it may seek the help of another co., that would be more acceptable suitor for the target. Such ‘another co’., is called a WHITE KNIGHT.

• The White Knight must be willing to acquire the target co., on more favourable terms than those of the original bidder.

• A target co., may find a White Knight on it’s own or through the assistance of an investment banker.

• The favourable terms are offered only to the White Knight. The bidder may withdraw. Then the target co., may not keep up it’s promise to White Knight. There ends the matter.

X. WHITE SQUIRE:

This defense is similar to the White Knight defense. In the White Squire defense, the target co., seeks to implement a strategy that will preserve the target’s independence. A White Squire is a firm that consents to purchase a large block of target’s shares. The convertible stock might have already been redeemed through a blank cheque. This drama keeps the bidder away.

O

• XI. RECAPITALISATION:• This is also called as leveraged recapitali-

sation. Under this plan, shareholders are usually offered with a super-dividend that is funded through the issue of debt. In addition to dividends, the shareholders at times receive a stock certificate called ‘STUB’ that represent their new shares of ownership in the co.,.

• One of the advantages of this plan is that it allows a co., to act as it’s own “ White Knight”. Most of the cos., which are victims of a hostile takeover attempts, would either look for an outside co., to serve as a White Knight or go for an LBO deal. The recapitalisation plan is a substitute to both.

• The increase in co’s debt in large-scale makes the co., less attractive to the bidder.

• XII. ESOPS:

• An ESOP can make an unfriendly take-over more difficult because the bidder is afraid that the employee’s loyalty to the management of the target cannot be bought.

• XIII. LITIGATION:• This is one of the common anti-takeover defenses.

Takeover litigation includes anti-trust concerns, alleged violation of securities laws, inadequate disclosure by the bidder, etc.,. Target co., often get a Court injunction for temporarily stopping the takeover attempt. Such an injunction prevents the acquirer from buying more stock and the firm, in turn, buys more time to put up more takeover defenses including seeking a White Knight. Another important benefit of litigation is to give the bidder an impression that if the offer price and terms are improved, the target would drop the litigation.

• XIV. “JUST SAY NO” DEFENCE:• The target refuses the offer by the bidder,

saying that it has many optimistic plans for the future of the company.

• XV. CROWN JEWELS SALE:• The crown jewel may be a highly profit-able

production division, an undervalued fixed asset or an intangible asset like brand or patent. If it is made known to the bidder that in the event of takeover, he would not get this crown jewel, the firm may become less attractive and the bidder retreats.

• XVI. SHARE REPURCHASES:• This involves the co., buying back it’s own

shares from the public. This is a sound strategy. • The amount of floating stock which is available

for the raider in the open market is reduced. At the same time, management’s holding % in the capital of the co., increases.

• If the share repurchase is financed through debt, then the co., becomes less attractive and the bidder retreats.

• XVII. RESTRUCTURING:• This may involve privatising the company, the

sale of attractive assets, undertaking a major acquisition or even liquidating the company.

• The proceeds from the sale of attractive assets can be utilised in other defenses like the shares repurchases or payment of special stockholder dividend.

• contd…..

• Sometimes, in order to defend itself against an acquisition bid, the target ,in turn, makes an acquisition to drain it’s liquidity position and issues debt to make itself less attractive.

• Another drastic measure is that the co., may prefer to liquidate itself when it believes that proceeds from liquidation will be more than the offer made by the bidder.

ANTITRUST REGULATION

• Mergers, at times, lead to a sort of monopoly or oligopoly and, as such, it is to the detriment of consumers. The first two mergers resulted like this in the US. So, antitrust laws (anti-merger or merger-regulatory laws) have been passed by developed countries to ward-off the evils of mergers and takeovers.

THE U K ANTITRUST REGIMERegulation of mergers is part of the UK

government policy, aimed at maintaining effective competition in various product markets in the UK.

The Monopolies and Mergers Act, 1965 was passed and thus mergers became the explicit focus of government competition policy.

Under the above Act, an administrative means of merger control is done by Competition Commission, an autonomous authority.

ANTITRUST REGULATION IN THE US The US has the longest tradition of antitrust

regulation, starting with the Sherman Act, 1890. This Act declared contracts and combinations (joint ventures and mergers) which restricted interstate trade or trade with other countries illegal, and any attempt to monopolize this trade is a criminal offence.

The Sherman Act was not particularly suitable for the prevention of prospective mergers and monopolies, especially in the form of acquisition of stock (shares) to gain control of companies.

The Clayton Act, 1914 was passed to overcome the shortcomings of the Sherman Act, and later was extended by the Celler-Kefauver Act, 1950 to make it more effective in dealing with mergers.

The Clayton Act prohibits horizontal, related and conglomerate acquisitions.

The various statutory rules are enforced by the Federal Department of Justice (DoJ) and the Federal Trade Commission (FTC). Prospective mergers have to be notified to these agencies.

Both agencies then investigate and, if necessary, initiate proceedings in Federal courts.

In addition to the above Federal regulation (US Central govt., is known as US Federal Govt.,), individual states have their own antitrust laws applying to mergers that will not affect inter-state trade.

Antitrust enforcement in the US has, in the past, fluctuated from great vigour to deep indifference, depending upon the political current of the times. In the Clinton era, the antitrust agencies launched an aggressive crusade and one of the most important targets was Microsoft.

EUROPEAN UNION and OTHER MAJOR ECONOMIES HAVE ANTITRUST LAWS.

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