Mergers & AcquisitionMergers & Acquisition

AcquisitionAcquisition also known as Takeover is also known as Takeover is the buying of one company( the target) the buying of one company( the target) by another ( the acquirer)by another ( the acquirer)Can be friendly – through negotiation Can be friendly – through negotiation and consent or Hostile (Black Knight)- and consent or Hostile (Black Knight)- through creeping acquisition (Dawn through creeping acquisition (Dawn raids)raids)When a smaller company acquires When a smaller company acquires management control over a bigger management control over a bigger company it is referred as “ Reverse company it is referred as “ Reverse Takeover”Takeover”

Mergers & AcquisitionMergers & AcquisitionTypes of AcquisitionsTypes of Acquisitions

The buyer buys the Shares and therefore The buyer buys the Shares and therefore the control of the target company, with all the control of the target company, with all liabilities and risks( tax neutral)liabilities and risks( tax neutral)

The buyer buys the Assets by “ cheery The buyer buys the Assets by “ cheery picking”. The cash received by the Target picking”. The cash received by the Target company is paid to their shareholders as company is paid to their shareholders as dividend or through liquidation settlement.dividend or through liquidation settlement.

(has tax implications)(has tax implications)

Mergers & AcquisitionMergers & Acquisition

Merger is a combination of two Merger is a combination of two companies into one larger company.companies into one larger company.

Involve Stock swap or Cash payment Involve Stock swap or Cash payment

May result in a new company May result in a new company name/new branding.name/new branding.

The term merger is used as it is The term merger is used as it is softer than acquisition sometimes.softer than acquisition sometimes.

Mergers & AcquisitionMergers & AcquisitionClassification of MergersClassification of Mergers

Horizontal MergerHorizontal Merger:- where two merging :- where two merging companies produce similar products in the companies produce similar products in the same industry.same industry.Vertical MergerVertical Merger:- when two firms each :- when two firms each working at different stages in the production working at different stages in the production of the same goods, combine.of the same goods, combine.Congeneric MergersCongeneric Mergers:-where two merging :-where two merging firms are in the same general industry, but firms are in the same general industry, but they have no mutual buyer/customer or they have no mutual buyer/customer or supplier relationships, such as a merger supplier relationships, such as a merger between a bank and a leasing company.between a bank and a leasing company.Conglomerate Mergers:-Conglomerate Mergers:- take place when the take place when the two firms operate in different industries. two firms operate in different industries. Reverse MergerReverse Merger: - When a bigger company : - When a bigger company merges with a smaller company it is referred merges with a smaller company it is referred as “ Reverse Merger”as “ Reverse Merger”

Mergers & AcquisitionMergers & Acquisition Classification of Mergers Classification of Mergers

Accretive MergersAccretive Mergers:- When an :- When an acquiring company's EPS increases. acquiring company's EPS increases.

Dilutive Mergers-Dilutive Mergers- When an acquiring When an acquiring company's EPS decreases. company's EPS decreases.

Mergers & AcquisitionMergers & AcquisitionIs it always a success story ?Is it always a success story ?

Very often results in a net loss of Value Very often results in a net loss of Value due to:-due to:-– Incompatibility of technology, equipments, Incompatibility of technology, equipments,

corporate culture.corporate culture.– Inadequate research or concealment of losses Inadequate research or concealment of losses

or liabilities.or liabilities.– Overlapping subsidiaries or redundant staffOverlapping subsidiaries or redundant staff– Disrupting employee culture/confidence.Disrupting employee culture/confidence.

A successful merger is one which increases A successful merger is one which increases shareholder value faster or prevents shareholder value faster or prevents deterioration in Value.deterioration in Value.

Mergers & AcquisitionMergers & AcquisitionFinancing M & AFinancing M & A

By Cash payments:- target comes under By Cash payments:- target comes under indirect control of the bidders shareholders indirect control of the bidders shareholders alone. Makes sense in market with down alone. Makes sense in market with down trends in interest rates. This has lesser trends in interest rates. This has lesser chances of EPS dilution for the acquiring chances of EPS dilution for the acquiring company, but strains cash flows.company, but strains cash flows.By Issue of BondsBy Issue of BondsBy Leveraged Buy-outBy Leveraged Buy-outBy Hybrid financing.By Hybrid financing.By deferred payment plan.By deferred payment plan.By MBO from owners.By MBO from owners.

Mergers & AcquisitionMergers & AcquisitionMotives behind Mergers which Motives behind Mergers which addadd shareholders value:-shareholders value:-– Economies of scale.Economies of scale.– Increased revenue/increased market shareIncreased revenue/increased market share– Cross sellingCross selling– Synergy- use of complementary resourcesSynergy- use of complementary resources– Tax benefitsTax benefits– Geographical and other diversificationGeographical and other diversification– Resource transferResource transfer

Mergers & AcquisitionMergers & AcquisitionMotives behind Mergers which Motives behind Mergers which do not do not addadd value :- value :-– Diversification – Management issuesDiversification – Management issues– Manager’s overconfidence on Manager’s overconfidence on

expectations- higher payments.expectations- higher payments.– Empire Building syndromeEmpire Building syndrome– Manager’s compensation- % of profits or Manager’s compensation- % of profits or

profit per share ?profit per share ?– Vertical Integration-cheaper costs/lower Vertical Integration-cheaper costs/lower

revenue. Competitors reluctance to revenue. Competitors reluctance to supply.supply.

Mergers & AcquisitionMergers & AcquisitionFinancial synergies gained by merger are:-Financial synergies gained by merger are:-– Better credit worthinessBetter credit worthiness– Reduction in cost of capitalReduction in cost of capital– Increase in debt capacityIncrease in debt capacity– Increase in P/E ratio and value per share.Increase in P/E ratio and value per share.– Low floatation cost.Low floatation cost.– Better access to capital.Better access to capital.– Sometimes demergers, spin-offs, spin-outs Sometimes demergers, spin-offs, spin-outs

splits companies into two, generating a second splits companies into two, generating a second company separately listed in stock exchange company separately listed in stock exchange to unlock values.to unlock values.

Mechanics of Merger- Legal Mechanics of Merger- Legal ProcedureProcedure

Examination of Object ClausesExamination of Object Clauses Intimation to Stock ExchangesIntimation to Stock Exchanges Approval of the Draft Amalgamation Proposal by Approval of the Draft Amalgamation Proposal by

the respective boardsthe respective boards Application to the High CourtApplication to the High Court Dispatch of Notice to Shareholders and CreditorsDispatch of Notice to Shareholders and Creditors Holding of Meetings of Shareholders and CreditorsHolding of Meetings of Shareholders and Creditors Petition to the court for confirmation and passing of Petition to the court for confirmation and passing of

court orderscourt orders Filing the order with the RegistrarFiling the order with the Registrar Transfers of Assets and LiabilitiesTransfers of Assets and Liabilities Issue of Shares and DebenturesIssue of Shares and Debentures

Amalgamation in the nature of Merger- Amalgamation in the nature of Merger- Conditions to be metConditions to be met

All assets and liabilities of transferor company All assets and liabilities of transferor company should become the assets and liabilities of transferee should become the assets and liabilities of transferee company.company.Shareholders holding not less than 90% of the face Shareholders holding not less than 90% of the face value of shares of the transferor company should value of shares of the transferor company should become the shareholders of the transferee company.become the shareholders of the transferee company.Consideration to be paid by transferee company by Consideration to be paid by transferee company by way of equity shares. Cash can be paid to dissenting way of equity shares. Cash can be paid to dissenting shareholders.shareholders.Business of the transferor company is intended to be Business of the transferor company is intended to be carried on by transferee company.carried on by transferee company.Transferee company to incorporate in its Balance Transferee company to incorporate in its Balance sheet the book values of, assets & liabilities of the sheet the book values of, assets & liabilities of the transferor company ( including reserves & profits) transferor company ( including reserves & profits) with changes only for change in accounting policies.with changes only for change in accounting policies.IF ABOVE CONDITIONS NOT SATISIFIED IT IS ANIF ABOVE CONDITIONS NOT SATISIFIED IT IS AN “ “ ACQUISITION” and not a “ MERGER”ACQUISITION” and not a “ MERGER”

Amalgamation in the nature of Acquisition Amalgamation in the nature of Acquisition -Purchase- Conditions to be met-Purchase- Conditions to be met

Assets and outside liabilities of transferor Assets and outside liabilities of transferor company carried at their fair market values.company carried at their fair market values.The difference between purchase The difference between purchase consideration and value is treated as “ consideration and value is treated as “ Goodwill and amortized over 5 years. If the Goodwill and amortized over 5 years. If the difference is negative treat as “ Capital difference is negative treat as “ Capital Reserve”.Reserve”.Due to higher write up of assets, leading to Due to higher write up of assets, leading to higher depreciation and amortization of higher depreciation and amortization of goodwill, profits under this method are lower.goodwill, profits under this method are lower.In this method Reserves and Profits of In this method Reserves and Profits of transferor company are not merged in the transferor company are not merged in the Balance Sheet.Balance Sheet.

Methods of accounting for mergers?Methods of accounting for mergers?

Pooling of interests MethodPooling of interests Method::

– Assumes a merger among equals.Assumes a merger among equals.

– New balance sheet is merely the sum of the New balance sheet is merely the sum of the two existing balance sheets.two existing balance sheets.

– No income statement effects other than No income statement effects other than summing the two income statements. (P&L)summing the two income statements. (P&L)

– Difference between share capital issued to Difference between share capital issued to transferor company and the amount of share transferor company and the amount of share capital of transferor company is adjusted to capital of transferor company is adjusted to General Reserves.General Reserves.

Purchase Method :Purchase Method :– The assets of the acquired firm are “written up” to The assets of the acquired firm are “written up” to

reflect purchase price if it is greater than the net asset reflect purchase price if it is greater than the net asset value.value.

– GoodwillGoodwill is often created, which appears as an asset on is often created, which appears as an asset on the balance sheet.the balance sheet.

– Common equity account is increased to balance assets Common equity account is increased to balance assets and claims.and claims.

– Goodwill is amortized and expensed over time, thus Goodwill is amortized and expensed over time, thus reducing future reported earnings.reducing future reported earnings.

– If any special Reserve is to be carried forward for more If any special Reserve is to be carried forward for more years, create Amalgamation Adjustment Account( Dr.) years, create Amalgamation Adjustment Account( Dr.) and maintain the Reserve.and maintain the Reserve.

– Balances in P & L account and General Reserves a/c will Balances in P & L account and General Reserves a/c will no more exist as cash purchase consideration is made. no more exist as cash purchase consideration is made.

PROCEDURE FOR MERGERS:-PROCEDURE FOR MERGERS:-

Appointment of the merchant banker – Appointment of the merchant banker – Acquirer has to appoint category 1 merchant Acquirer has to appoint category 1 merchant banker.banker.

Public announcement of the offer- Public announcement of the offer-

1) Merchant Banker would make 1) Merchant Banker would make announcement within 4 days from the announcement within 4 days from the decision to acquire shares.decision to acquire shares.

2) Public announcement in one English, one 2) Public announcement in one English, one Hindi and one regional language daily.Hindi and one regional language daily.

3) Notification should be sent to concerned 3) Notification should be sent to concerned stock exchanges and to the target company.stock exchanges and to the target company.

Submission of letter of offer to SEBI-The MB Submission of letter of offer to SEBI-The MB should file with SEBI the draft of the letter of should file with SEBI the draft of the letter of offer with the fees of Rs. 50,000/-within 14 offer with the fees of Rs. 50,000/-within 14 days from the date of public announcement.days from the date of public announcement.

Minimum Offer Price-It would be payable Minimum Offer Price-It would be payable

a)a)    In Cash and/or In Cash and/or

b)By exchange of shares of the acquirer if b)By exchange of shares of the acquirer if it is a listed co. it is a listed co.

    c) By exchange and/or transfer of secured c) By exchange and/or transfer of secured instruments with a minimum of ‘A ’grade instruments with a minimum of ‘A ’grade rating from the credit rating agencies.rating from the credit rating agencies.

d)d)    A combination of all of three.A combination of all of three.

Minimum offer priceMinimum offer price - It should be - It should be highesthighest of of

((a)Negotiated pricea)Negotiated price

(b)Highest price paid by the acquirer during (b)Highest price paid by the acquirer during the 26 weeks prior to the date of the 26 weeks prior to the date of announcement.announcement.

(c)price paid by acquirer under preferential (c)price paid by acquirer under preferential allotment. allotment.

(d)Average of the quoted weekly high and (d)Average of the quoted weekly high and low of the closing prices of the shares of low of the closing prices of the shares of the target co. during 26 weeks preceding the target co. during 26 weeks preceding the date of public announcement.the date of public announcement.

Minimum no. of shares to be acquired- It should Minimum no. of shares to be acquired- It should be made for minimum of 20% of the voting be made for minimum of 20% of the voting capital.capital.

General obligations of the acquirerGeneral obligations of the acquirer

1. The acquirer should send the copy of the draft 1. The acquirer should send the copy of the draft letter to the target co.letter to the target co.

2.To send the letter of offer to all the 2.To send the letter of offer to all the shareholders of the target co.shareholders of the target co.

3.To send the letter of offer to the custodians of 3.To send the letter of offer to the custodians of ADR/GDR holders.ADR/GDR holders.

4.The offer should remain open for the period of 4.The offer should remain open for the period of maximum 30days.maximum 30days.

5.During the offer period the acquirer should not 5.During the offer period the acquirer should not enter the board of directors of the target co.enter the board of directors of the target co.

6Acquirer should complete all the procedures 6Acquirer should complete all the procedures within 3o days from the date of closure.within 3o days from the date of closure.

General obligations of the target co.General obligations of the target co.1.1.During the offer period, the target co. should not sell, During the offer period, the target co. should not sell,

transfer, and dispose off its assets in the ordinary transfer, and dispose off its assets in the ordinary course of business of the co.course of business of the co.

2.He should not issue any authorized but not issued 2.He should not issue any authorized but not issued securities.securities.

3.The target co. should furnish a list of shareholders, 3.The target co. should furnish a list of shareholders, warrant holders, convertible debenture holders to warrant holders, convertible debenture holders to the Acquirer.the Acquirer.

4.After the announcement of public offer, the board of 4.After the announcement of public offer, the board of director should not appoint any person as an director should not appoint any person as an additional director.additional director.

5.Upon fulfillment of the obligations by the acquirer, 5.Upon fulfillment of the obligations by the acquirer, the board of directors would transfer the acquired the board of directors would transfer the acquired securities and give representation on the board or securities and give representation on the board or control over the co.control over the co.

SEBI substantial acquisition of shares and takeover code, SEBI substantial acquisition of shares and takeover code, 19971997

  Acquisition of shares / voting right- Acquirer holding 5% of Acquisition of shares / voting right- Acquirer holding 5% of voting rights is required to disclose to the concerned Co.voting rights is required to disclose to the concerned Co.

Continual Disclosure- Persons holding more than 15 % have Continual Disclosure- Persons holding more than 15 % have to disclose their holdings within 21 days from the financial to disclose their holdings within 21 days from the financial year-end to the respective co. year-end to the respective co.

  Power to call information- Stock exchanges.Concerned co. Power to call information- Stock exchanges.Concerned co. would have to furnish disclosures of shareholding.would have to furnish disclosures of shareholding.

  Acquisition of 15 % or more shares-Acquirer has to make Acquisition of 15 % or more shares-Acquirer has to make public announcement at this stage.public announcement at this stage.

Contents of the public announcement offer-Contents of the public announcement offer- Existing paid up share capital of the target co.Existing paid up share capital of the target co. Total no. of shares proposed to be acquired from Total no. of shares proposed to be acquired from

public.public. Minimum offer price.Minimum offer price. Identity of the acquirer.Identity of the acquirer. Existing holdings of the acquirer in the target Existing holdings of the acquirer in the target

company.company. The average and the highest price paid by the The average and the highest price paid by the

acquirer for acquisitions.acquirer for acquisitions. Objective and purpose of acquisition, future plansObjective and purpose of acquisition, future plans           The date of opening and closure of the offer.The date of opening and closure of the offer. Whether the offer is subject to minimum no of Whether the offer is subject to minimum no of

shares from the shareholders.shares from the shareholders. Mode of payment of consideration.Mode of payment of consideration.

Competitive bidCompetitive bid

Any person within the 21 days from the public Any person within the 21 days from the public announcement should make the public announcement should make the public announcement of his offer for acquisition of the announcement of his offer for acquisition of the shares of the same target co.shares of the same target co.

Such offer should be at least equal to the no. of Such offer should be at least equal to the no. of shares for which the first announcement has shares for which the first announcement has been made.been made.

The first acquirer would (a) Revise the offer (b) The first acquirer would (a) Revise the offer (b) Withdraw the offer. Withdraw the offer.

  Upward revision of offer- Irrespective of the Upward revision of offer- Irrespective of the competitive bid it can be done any time up to 7 competitive bid it can be done any time up to 7 working days prior to the closing of the issue.working days prior to the closing of the issue.

Withdrawal of offer-Withdrawal of offer-

1.1. As a consequence of competitive bid.As a consequence of competitive bid.

2.2.TThe statutory approval required has been refusedhe statutory approval required has been refused

3.Sole acquirer has died.3.Sole acquirer has died.

DIVESTITURESDIVESTITURESMergers, Amalgamations, takeovers, Mergers, Amalgamations, takeovers, acquisitions- bring ‘synergy’- 3 + 2=6!!acquisitions- bring ‘synergy’- 3 + 2=6!!

Divestitures bring ‘Energy’- 5-3 =3 !!Divestitures bring ‘Energy’- 5-3 =3 !!

Types of Divestitures:-Types of Divestitures:-– Partial Sell-off- of DivisionsPartial Sell-off- of Divisions

If Div. Proceeds > Value of ownership position(VOP)If Div. Proceeds > Value of ownership position(VOP)

If Div. Proceeds = VOP – decision may be indifferentIf Div. Proceeds = VOP – decision may be indifferent

If Div. Proceeds < VOP – Retain holding.If Div. Proceeds < VOP – Retain holding.

Referred as “ Slump Sale” attracts Capital Gains.Referred as “ Slump Sale” attracts Capital Gains.

DIVESTITURESDIVESTITURESTypes of divestitures (contd):-Types of divestitures (contd):-Demergers:-Demergers:-– Spin- off:- of a division into an independent Spin- off:- of a division into an independent

company( cash disbursed to shareholders of company( cash disbursed to shareholders of existing co.)existing co.)

– Split-up:- when company splits into one or Split-up:- when company splits into one or more companiesmore companies

– Equity Carve-out:- Parent co. selling a portion Equity Carve-out:- Parent co. selling a portion of its equity in a subsidiary to public for CASH. of its equity in a subsidiary to public for CASH. Strategic investor may get inducted into the Strategic investor may get inducted into the subsidiary.subsidiary.

Ownership restructuringOwnership restructuring

Going Private:-Going Private:-

Private-Public PartnershipPrivate-Public Partnership

Leveraged Buy-outLeveraged Buy-out