44
Chapter – II
Law relating to Amalgamation of
Companies - Historical Perspective
Introduction
Mergers and amalgamations are very important features of the modern capitalist.
The history of big modern corporations is a clear testimony of the importance of
mergers and amalgamations in the corporate world and has unquestionably played
an important part in the growth of most of the leading corporations of the world.
Statistics have shown that almost 2/3rd
of large public corporations in the USA have
had a merger and amalgamation in their history and the top 200 corporations in the
USA are known to own about half of the total corporate wealth of the USA1. That is
why, from time to time, companies have preferred the external means of growth by
way of merger and amalgamations. Indeed mergers and amalgamations have tended
to follow a historic pattern of ‘waves with periods of frenetic takeover activity
punctuating periods of relative sedateness.’2
TIME SERIES OF MEGER AND ACQUISITIONS IN INDUSTRIES:
From past decades, there exist five time-series statistics of merger in manufacturing
and mining industries. Each of these series covers a different and largely non
overlapping period. These are:
Nelson Series (1959) for 1895-1920.
Thorp Series (1941) for 1919-1939.
Federal Trade Commission (FTC, 1972) for 1940-1971.
1 Sen S.C, Merger, Amalgamation and Takeover, 1969, Pg.10. 2 Sudarsanam, P.S., Essence of Merger and Acquisitions, 1997, Pg.1
45
Federal Trade Commission (1981) ‘overall merger series’ for 1972-
1979.
Federal Trade Commission (1981)’larger merger series’ for 1948-
1979.
The W.T. Grimm Series Since 1963
Merger and Acquisition, Magazine Series since, 1972
(i) NELSON SERIES FOR 1895-1920
This series includes the acquisitions that were greater than $ 35,000 for the
1895-1914 period, of $ 64,000 for the later period. In this series the size of
acquisition is measured as the authorized capitalization of firm resulting from a
multiform merger by acquisition. For the 1895-1920 period of merger activity,
approximately 70 percent of the firms that disappeared were absorbed into
multiform consolidation, while the remaining 30 percent disappeared through
merger by acquisition. This series was complied on a quarterly series basis. The rule
used in assigning dates was to record the date of transfer of control of the acquired
firm.
(ii) THE THROP SERIES FOR 1919-1939
This series overlaps the Nelson series in 1919 and 1920 and includes about three
times as many firms disappearances as the Nelson series. According to Nelson the
information source for the Thorp series was the Standard Daily Trade service which
probably reported small mergers more completely than the one on which Nelson
relied on. This series gives only the number of disappearances and not by size, in the
mining and manufacturing industries.
46
(iii) THE FEDERAL TRADE COMMISSION 1940-1971
The Federal Trade Commission continued to compile merger series after 1939,
which maintained comparability to Throp Series. This series was discontinued in
1972 after the introduction of Overall merger Series by Federal Trade Commission.
(iv) THE FEDERAL TRADE COMMISSION OVERALL MERGER
SERIES FOR 1972-1979
In 1972 the Federal Trade Commission introduced overall merger series which was
compiled from a number of sources and included the acquisition of firms outside
manufacturing and mining industries. This new series included the completed
acquisitions only.
(v) THE FEDERAL TRADE COMMISSION LARGE MERGER SERIES
FOR 1948-1979
According to this series the acquiring firm must be a manufacturing or mining
concern having assets of at least $ 10 million at the time of acquisition. Sources used
in compiling that series were Moody’s Manuals, Standard and Poor’s Stock
Exchange reports, newspapers, company annual report and Federal Trade
Commission premerger notification information. This series gives a detailed
information with respect to acquired and the acquiring company names, assets, profit
data, industry classification, date of consummation and type of acquisition
(horizontal, vertical or conglomerate).
In addition this series of Federal Trade Commission shows the extent of acquisition
(partial or whole), the medium of exchange (cash and securities) and the
consideration paid by the company. This series shows that the number of mergers as
well as the size of merger is increased because of inflation.
(vi) THE W.T. GRIMM SERIES SINCE 1963
This series represents formal transfers of ownership of at least 10 percent of a
company’s assets or equity. The purchase price must be at least $ 500,000 and one
47
of parties must be a United States firm or company. The number and size of
transactions are recorded as they are announced, not as they are completed. This
makes the series unique and more useful.
The Grimm statistics also record divestitures, medium of payment, industry
classification, and foreign acquisition of United States companies and United States
acquisitions of foreign companies. The series includes tender offers since 1972.
(vii) THE MERGER AND ACQUISITION, MAGAZINE SERIES SINCE
1972
This magazine reports transactions valued at $ 1 million or more in cash, market
value of capital stock exchanged, or debt securities. Partial acquisitions of 5 percent
or more of company’s capital stock are included if the size requirement is met.
Included in the ‘Roster’ are the merger/acquisition activity of United States firms,
takeovers of United States companies by foreign companies and acquisition of the
foreign companies by American corporations.
Historical Pattern of United Kingdom Takeover Activity
In 1968, 1972 and 1989 the UK witnessed peaks of takeover activity in terms of
value and average size of takeover. Britain experienced the transition from a sense
of war to a sense of peace during the war years. The interruption to the world trade
affecting some of the major market, the decline of many of its important 19th
century
industries and the effect of the great depression was bound to have effect on many
companies and upon old and new amalgamations. Thus even where larger
companies have combined, many of them declined absolutely or relatively and then
were replaced by new firms in new industries.
According to the Stock Exchange Year Book 1947, on the whole, the successful
mergers were of firms in the same trade where the one process activity was carried
out on a large scale, unlike many of the post war mergers covering a multitude of
different activities during the war years.
48
The successful merger movement that occurred in pre-war years in Britain was
Associated Biscuit Manufacturers (1921), British Match Corporation (1927), British
Plaster Board (1932), Great Universal Stores (1931) and Rugby Portland Cement
(1935) and so on.
(i) Post war mergers and amalgamations in the UK
In the UK the most recent surge in takeover activity was in the period of 1984 to
1989 where the average size of an acquisition increased from $9.64 million to
$20.38 million.3 The reasons for the enormous volume of acquisitions in the post-
war period are manifold. Some of them are listed as under:
- The stock market in the UK, in harmony with markets in other countries,
experienced a strong bull phase which culminated in the October crash of
1987.
- The government held a more relaxed, lenient attitude to mergers and
acquisitions embodied in the new vision of Thatcherism
- In the early post-war world the government followed the policy of
encouraging dividend restraint as a part of anti-inflationary policy. This
policy was in accordance with the philosophy of paying as little as possible.
No doubt post profits are a major source of capital for an expanding
company. Many companies retained a large portion of their profits for capital
expenditure thereby according with anti-inflationary policy as a result
became more liquid, with large amounts of cash and tax reserve certificates.
As the share price tended to reflect the dividends paid shares in these
companies were comparatively ‘cheap’ relative to their actual earning. This
provided good opportunity to bidders who could offer a price which was
high to the existing shareholder. The policy was adopted. Dividend restraints
gave the other liquid resources to buy other companies.
3 Acquisitions and Mergers within U.K., Central Statistical Office Bulletin, London , May 1993.
49
- In the post-war world some entrepreneurs could see greater opportunities
than others. As wars have always been followed by depression during that
period, where the directors were not using their resources and where the
management was considered to be sluggish, they were given the opportunity
to offer a price which was relatively high in relation to current prospects and
were worthwhile.
- Bidding for other companies gave an easy way of acquiring needed assets
when official policy made this difficult. During that period the work of the
capital issues committee, the operation of building licences and the control
over the location of industries all made it difficult for firms to undertake
physical expansion directly. But by buying other firms with suitable
accommodation in the right place the company’s problems could be solved.
The effect of these post-war circumstances was to force the ‘board room revolution’
where directors recognised that paying inadequate dividends could lead to their
displacements by people who offer the shareholder brighter prospects for the future.
In the 1950s this bid disappeared but in the late 1960s it became active again and
ideas of ‘rationalisation’ were revised, these were prevalent in the 1920s.
During that period it was believed that when a company is facing bad times, it is
vulnerable to a bid, even though it has taken measures to bring about a recovery and
this is an ideal situation for the bidder because if such a recovery takes place it can
attributed to the new management. For example, Courtaulds reduction in dividend
was the opportunity for the ICI bid and the ups and downs in the electricity profits
gave General Electric Company (GEC) the opportunity to acquire Associated
Electric Company.
(ii) Famous mergers in Britain
British history is the living evidence of the mergers of three of the largest firms in to
one group namely:
50
- General Electric Company, Associated Electric Company and English
Electric Company merged famously in a merger called the electric merger.
- Motor merger which is the merger of Austin and Morris in 1957 to for
British Motor Corporation
- Textile merger of ICI with Courtaulds.
Mergers in the United States of America
Several merger movements have occurred in the USA and each one was more or less
dominated by a particular type of merger. All the merger movements occurred when
the economy experienced sustained a high rate of growth and coincided with
particular developments in the business environment.
One reason of merger activity in the periods of high business activity may be that the
firms are not motivated to make large investment outlays when the business
prospects are not favourable. Only when future benefits accruing to a business
endeavour exceeds its costs in the action warranted and when such favourable
business prospects are joined with changes in competitive conditions directly
motivating a new business strategy does merger and amalgamation activity get
simulated.4
An insight into the history of American Business strategy shows that merger activity
in the USA is associated over the last century and runs in cycles.5 The peaks of these
cycles typically accompany peaks in either economic activity or the stock prices.6
Merger activities have been classified by various authors into so called ‘waves’ by
clustering activities during various periods. Weston (1953) has identified three major
periods of merger movements while studying the US business behaviour.
- First merger wave between 1895-1904
4 J. Fred Weston and Kwang S.Chung, Merger Restructuring and Corporate Control, 1997 Pg.8. 5 Shiva Ramu S., Corporate Growth through Merger and Acquisition 1998, Pg.16. 6 Makan S. and Wolf A Weinhold, Diversification through Acquisition, 1979, Pg.10.
51
- Second merger wave between 1922-1929
- Third merger wave between 1940-1960
(i) First Merger wave (1895-1904)
The first wave was characterised by horizontal mergers, this increased concentration
in a number of industries. Before 1890 there existed a predominance of ‘poly
market’ structure which reduced with the passage of time thereby increasing partial
monopolies. The motivation for mergers was to expand operations, achieve
economies of scale and counter competition more effectively. This period appears to
have been a period of consolidation and horizontal diversification and resulted in the
emergence of a number of companies dominant in industries which were formerly,
before the mergers, a number of small enterprises. Thus the characteristic feature of
mergers during this period was the simultaneous consolidation of produces within
numerous industries. These mergers were typically made in search of market
dominance. George Stingler has characterised this merger wave as ‘merging for
monopoly’.
Many of today’s industrial giants including several descendants of Standard Oil
Trust, US Steel, General Electric, United Fruit, Eastman Kodak, American Can,
American Tobacco, US Rubber, and US Gypsum have originated in this period. The
relaxation of corporate laws in the USA helped mergers in this period.
Transportation Networks and National Markets were developed which increased the
possibility of achieving economies of size. The movement peaked in 1899 and ended
in 1903 when a severe economic recession set in.
The decision of the Supreme Court in the USA in the leading case of Northern
Securities 7 has contributed a lot in ending this merger wave, wherein it was
established that merger could be successfully attacked under the then antitrust law.
Thus the merger wave during 1895-1904 involved an estimated 15% of all
manufacturing assets and the employees and accompanied major changes in the
7 U.S. vs. Northern Securities Co.120 fed. 721.
52
nation’s social and technological infrastructure. Over 80% of these combinations
occurred in the shorter period of 1897 through 1904. This merger movement
accompanied major changes in the economic infrastructure and protection
technologies and followed the completion of the transcontinental railroad system,
the advent of electricity and increased use of coal.
(ii) Second Merger wave (1922-1929)
This wave appeared to have been characterised by a higher incidence of vertical
integration and diversified mergers. However the immediate post-war merger boom
was relatively smaller. The difference between these two periods can be described as
‘mergers for monopoly’ and ‘mergers for oligopoly.’
The second merger movement witnessed greater merger movements and began with
an upturn in business activity in 192 and ended with the onset of a severe economic
slowdown in 1929. The merger movement involved either small market share
additions or vertical integration. The motive behind these mergers was to achieve
technical gains from integration and to avoid dependence on other firms for raw
materials. Mergers were also formed to consolidate sales and distribution networks
as well as to save the advertising expenditure.
This period was affected by the formation of holding companies especially gas,
electric and water utility holding companies which acquired the controlling share of
a large number of small companies over a relatively broad range of products. Thus,
many combinations in this period occurred outside the previously consolidated
heavy manufacturing industries. The public utilities and the banking industries were
among the most active.
As 60% of the mergers occurred in the still fragmented food processing chemicals
and mining sectors the question of monopoly was not applicable in most case and
there existed transformations of near monopoly to an oligopoly. George Stingler has
characterised this period of merger as an activity of ‘Merger for oligopoly.’
53
A large portion of mergers in the 1920s represents product extension merger and in
the case of IBM, General Goods and Allied Companies Chemical, market extension
mergers in food retailing, departmental stores, motion pictures, theatre, Radio
Corporation of America and national dairy products. The motivating factors of these
mergers are transportation, communication and merchandising. Mergers in such
industries accompanied the rise of automobile transportation. The rise of home
radios facilitated product of differentiation through national branch advertising. By
the 1920s mass distribution with low profit margins became the new method of
merchandising which encouraged mergers. The end of this wave activity came with
a stock market crash in 1929 and the worldwide depression from 1930 to 1933.
During the 1930s most of the recently created utility holding companies collapsed
into bankruptcy and major segments of American industry underwent severe
contraction.
(iii) Third Merger wave (1940–1947)
This was smaller than the earlier movements. According to a study done by the
Federal Trade Commission there existed disappearing of 2500 firms during this
period. The surge in the merger activity in this period can be credited to economic
growth that occurred during the Second World War and early post-war years. This
merger movement lacked any significant changes in technological and business
environment. Thus there existed simply conventional motives for this merger. It has
been noticed that government regulations and tax policies motivated mergers during
this period. According to George Stingler large numbers of firms merged vertically
to circumvent price control and allocation during war time and post-war periods.
During this period, there existed growth of eight of the largest steel corporations.
(iv) The Conglomerate Merger movement of the 1960s
The third wave of merger activity started after World War II and peaked in the late
1960s. In contrast to the previous merger periods this merger didn’t involve the
nation’s largest companies or resulted in a substantial degree of intra-industry
54
concentration. Most of the acquirers in this period were small to medium sized
companies whose acquisitions were operating outside the acquiring company’s
narrowly defined industry.
During the 1960s the merger wave developed what was a new class of firms known
as ‘conglomerates’ with their activities in several unrelated product markets.
Moreover the Cellar Kefauver Act 1950 amended Section 7 of Clayton Act of 1914
thus closing the ‘asset-purchase’ loophole and granting the Federal Government
additional power to declare illegal those mergers that tended to increase the
concentration.8 The Clayton Act had prohibited a corporation from acquiring the
stock of another corporation (if competition were to the substantially lessened).
All this resulted in declining the importance of horizontal and vertical mergers and
the increase of conglomerate mergers. The growing importance of conglomerates in
American industries during this period can be accessed from the fact that in the
1960s the term ‘conglomerates’ and ‘unrelated business’ were roughly equivalent.
The most important characteristic of the third merger and acquisition wave was
diversification which was being adopted into business activities outside their
traditional areas of interest. The acquired firms were also small or medium sized and
‘operating in either fragmented industry or periphery of major industrial sectors’.
Reasons for the conglomerates to diversify were as follows:
- Avoid sales and profit instability
- Adverse growth developments
- Technological adolescence
- Increased uncertainties associated with their industries.
As a result of diversification, although the continuing concentrations of the nation’s
industrial assets occurred, it did not result in significantly increased concentration
within industries.
8 The Clayton Act, 1914 Sec. 7
55
As the wave of activity brought corporate growth but not concentrated market
power, this merger wave was referred by many economists as ‘merging for growth.’
The famous firms which come under conglomerate mergers were Textron and The
American Machine Foundry Aerospace Industry and Autoparts companies.
Low growth prospects were associated with a major long term decline in some
markets especially railway equipment industry, textile and tobacco industry. Not
only this, a number of firms sought to diversify during this period in the attempt to
acquire access to new technologies that had developed after World War II. A large
category of conglomerates were firms originally based in the natural resource
industries.
Defensive diversification was a strong motivation among the conglomerate firms. In
additions to factors such as tax considerations, some of the conglomerates pursued
positive programme like applying advanced technology in industries and firms
where technology has lagged for e.g. the Litton industry. Others were attempting to
utilise effectively the special capabilities in financial planning and control like ITT
and Transamerica Defensive Diversification also provided a motive for merger in
which research, manufacturing and marketing and other managerial capabilities
were extended and complemented.
For conglomerates, the wave subsided in 1969-70 with the collapse of the stock
market. During 1967-69 the conglomerates were responsible for most of the
acquisition activities as a result of which large numbers of mergers took place in the
UK, USA, Japan and Italy. Many of the mergers in the above mentioned countries
were with the view to form big and giant units with the ultimate saving of overheads
and also for avoiding unnecessary competition side by side. Many of the mergers
were affected with a view to obtain the utilised resource of acquired units.
According to statistics concerning conglomerate merger activity in 1966 merger
activity outpaced the previous record of the year 1965. The federal trade commission
56
records indicate 1893 mergers in 1965 compared to 1345 in 1960 and 1245 in 1929,
the peak year during the second wave of mergers.9
According to W.T. Grimm and Co. a Chicago based financial consulting firm
reported in early 1968 that merger activity in 1967 was over 25% higher than in
1966. About 2975 mergers were consummated in 1967 as compared to 2377 in the
preceding year.10
One of the interesting features of the merger activity in 1966 is that much of that
year was categorised by soft stock prices, relatively tight money conditions,
substantial budgets for capital involvements and apparently renewed interest by the
government in the antitrust activities. Several institutional business groups got
involved in the post World War II merger period.
Merger trends since 1976
The most recent merger and acquisitions stretch from the peak in the market of the
later 1960s through the economic slowdown of the 1970s. Following the recession
in 1974-75 the USA economy entered a long period of expansion during which
mergers and amalgamations moved upward.
According to the federal commission report there were small to medium sized
acquisitions in the 1967-73 period. During 1967-69 the conglomerates were
responsible for most of the acquisition activity whereas during 1970-73 the
industrial firms expanding their product market commitments tended to be more
acquisitive. In 1976-78 the number of large and very large acquisitions increased
although the total number of recorded acquisitions remained relatively leveled. The
statistics also confirm the notion that during the late 1970s although the two hundred
largest industrial companies were making fewer acquisitions they were making
larger acquisitions than before. From 1961 to 1978 over 70% of the total assets
9 Bureau of Economics, FTC Statistical Report on Mergers & Acquisitions, December 1978 and
Bureau of Economics FTC Current Trends in Merger Activity, 1971, May 1972 as quoted in Wyatt &
Kieso, Business Combinations, Planning & Action, 1969, Pg.1 10 W.T. Grimm & Co, Merger State Review, 1989
57
acquired by the industrial companies have resulted from the acquisition falling into
the federal trade commission’s ‘broad definition’ of the diversifying acquisitions.
These acquisitions include all acquisitions extending operations beyond present
products or the geographic market. The data above clarifies that during the height of
the activity in the late 1960s a special interest in ‘pure conglomerate’ or ‘unrelated
mergers’ developed. There was a decline in interest during 1972-74. In 1975 again a
dramatic resurgence of investment in unrelated diversifying acquisitions took place.
When judged from the historical perspective the acquisition activity during 1975-78
was reaching the 1967-69 peaks but the amount of acquired assets relative to the
existing assets was just approaching the average acquisitions rate for the 1960-66
period. The background data shows that the years 1955-56 and 1963-71 had higher
mergers and acquisition activity. 11
The upswing in the merger and acquisitions activity beginning in 1975 indicated a
wave of corporate marriages. Many leading firms were acquired during this period
from 1975-78. Many of the acquisitions oriented companies in the late 1970s were
well established, conservative, old-line giants with a substantial bulk of their
activities concentrated in a few closely related businesses.
Companies in the USA such as Mobil, General Electric, Atlantic, Richfield, United
Technologies, RJ Reynold, PepsiCo and Continental Groups all fall into this class.
The types of mergers that occurred in this period were horizontal integration,
unrelated, related complementary, supplementary and vertical integration. None of
these companies were considered to be acquisitive diversifiers in the 1960s. Not to
be undone were the foreign acquirers of the US companies such as Bayer, Nestlé,
British Oxygen, Imetal, Saboz, Ciba-Giegy and INCO.
When the foreign companies could not obtain total ownerships substantial minority
interest was brought as in the case of Kobert Busch’s 9.9% interest in Bory-Warner
and Flick Groups’ 30% in W.R. Grace.
11 Bureau of Economics, FTC, Statistical Report on Mergers & Acquisitions, December 1978
58
Most of the mergers during the period involved payments of cash or packages of
cash and cash equipments which is in contrast to the 1960s when the common stock
or convertibles where the principle medium of exchange. In addition to the hostile
tender offers were much more common than during earlier periods.
In 1975 and 1976 almost twice as many hostile offers were initialised than in 1968.
A further increase in the number of hostile offers as well as a degree of hostility
occurred in 1977-78. Open bidding was between two, three of even four corporate
suitors developed for particularly desirable properties.
The nature and size of assets involved in mergers and acquisitions during 1975-78
also gave the period a distinctive profile. In 1976 divestitures involved only half of
all acquisitions versus approximately 10% in the 1960s. These divestitures as well as
outright corporate acquisitions also tended to be much larger than before.
Acquisitions over $100 million grew nine fold.12
According to the statistics since
1976 over 20 transactions have fallen into the $300 million class.
The merger movement between 1980 and 1990
While mergers and acquisitions are a constant feature in the modern business world
the activity is sometimes higher than other times. The speed of this activity seems to
be greater during the period when business activity and natural growth of industries
is high pitch. This means mergers occur at rapid growth when a particular industry
goes through a period of rapid activity.
The basic motivation behind most mergers during the 1980s and 1990s appears to be
either on account of acquisitions of assets including managerial skills below their
value or saving time.
A company always strives to acquire the assets of some of the company at
undervalue if it is possible. The assets may be in the shape of managerial skills
where a small corporation has a very efficient management and organisation which
12 Merger and Acquisitions: The Journal of Corporate Value, 1975-1979
59
the other large company finds it useful to acquire. The second motivation viz. saving
time arises out of impatience which is dormant in human nature. Rather than
organise something in a new field it is very common for management of large
corporations to decide to acquire an existing business which saves its time and a lot
of arrangements are necessary for building up of an industry or business right from
the beginning.
In 1980s and 1990s companies in the USA were responding to a common set of
environmental and macro factors by opting for restructuring exercises. Many of
these exercises were due to the following three macro-trends:
- Globalisation of industries
- De-regularisation of industrial sectors
- Increasing threat to takeover bids
All these factors gave led to the reconfiguration of business. Restructuring activities
of the 1980s also took place due to the ‘bandwagon’ effect. As a result many
companies followed the lead of early corporate restructuring strategy.
The structure of an industry depends on factors such as the technology, Government
strategy and demand and supply conditions. A stock in any factor causes a shift in
the industry structure. It can range from de-regulation and input price volatility to
technological change. In the 1980s the steel industry resorted to downsizing and
achieving economies of scale in response to a decline in demand.
For instance de-regulation affected air transport, natural gas, transport and foreign
textile effected textiles, steel, tyre and rubber and OPEC oil prices affected the
energy dependant industries.
All this resulted in clustering of takeover activity by industry during the 1980s in the
USA. There was clustering occurring in a narrow range of two years in original
equipment auto parts, home appliances and drugstore industry. According to WT
Grimm and co-research department the net number of mergers acquisition
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announcement in 1985 was only about half of what happened in 1969. During 1985
the constant dollar consideration in the merger-acquisition was 40% higher than the
level of 1968. In 1984, 1985 and 1988 merger and amalgamation activity exceeded
one percent of total assets of all corporations.
In 1981 for the first time merger and amalgamation exceeded 5% of all equities. But
a decline took place in 1982 and 1983 before beating the all time high of 6.9% in
1988.
According to the economic report of the president both merger and amalgamation
data and total equity values have been pushed upwards by the bull market. In
equities that began in the late summer of 1982 and appeared to end on 19 October
1987 and there was the effect of shrinking the denominator in their ratio. It has been
estimated by Salmon Bros and financial research organisation that during the years
1984-85 the total amount of equity values that have disappeared as a consequence of
merger and amalgamation activity has totalled $110 billion per year. In 1985, 1986
and 1988 the merger and amalgamation activity has risen to over 45% of plant and
equipment expenditures. During this period the level of investment activity is a
strong casual factor which has influenced the merger and amalgamation activity.
Thus it can be said that merger and amalgamation activity since 1976 has been
concentrated in such service industries as commercial and investment banking,
finance, insurance, wholesale, retails, broadcasting and healthcare as well as in
natural resources area. Especially the financial service industry which represents
over 15% of all mergers since 1976 has been undergoing changed caused by de-
regulation of industry. Moreover the changes in regulatory conditions have helped
increase the merger activity in broadcasting and health service industries.
Acquisition in broadcasting increased sharply in 1984 due to less restrictive federal
commission rules governing the ownership of television and radio-stations. Due to
revised medical guidelines and private efforts to control medical costs hospital
occupancy rates declined.
61
Both the wholesale and retailers and have been merging to improve operational
efficiency. Customer and supplier pressure on the distribution to become more
sophisticated in their operations such as automation, more service and large
inventories has led them to merge with larger firms for professional management
and financial assistances. Retail companies have faced limits in their internal growth
due to the new construction of major shopping malls and opted for the growth
through the acquisitions.
Acquisition activity in the natural resources area significantly increased since the
increase in prices of energy and minerals, oil, gas and mining properties represented
more than 20% of dollar value paid in all transactions during the 10 year period
since 1975.
Large oil companies were engaged in vertical integration by acquiring additional oil
reserves and also acquired other natural resources. Another character of the current
wave of merger activity is that divestitures become a substantial portion of
acquisition activity.
According to W.T. Grimm and Co financial report divestitures increased following
the 1981-82 recession. Throughout the 1980s they have represented over 35% of all
mergers and acquisition transactions.
In 1993 the merger and acquisitions were largely limited to few industries such as
banking, broadcasting, communication, leisure, wholesales and distribution. These
industries were responding to de-regulation, technological advances and other
fundamental factors. According to statistics the takeover activity is driven in part by
industry shocks rather than by actual sources of performance changes.
Conclusion
Indian industries experienced such shocks after the initiation of liberalisation of
economy in 1991. Therefore Indian companies have started responding to shocks
such as liberalisation and de-regulation. A few attempts in the merger and
62
amalgamation activities during the initial period were more in the nature of testing
environment.
The actual wave in Indian context has started after 1994 when the necessity of
formulating a new takeover code was felt by the regulatory agencies. Although
merger and amalgamations have taken place even before 1994 but those were few
and far between. Mergers between larger business firms have been negotiated and
concluded right through the post-independence period in India, a full list of mergers
and amalgamations settled during each year has been published only since 1972-73.
However the constrained choice of the years 1972-73 as the cut off period is not
wholly inappropriate because a number of significant changes in government
policies became operative immediately before or in that year. These changes were
heralded through the abolition of the managing agency system, the passage of the
MRTP Act 1969, the nationalisation of the banking system and the announcement of
the new provision granting tax relief in finance bill for 1967.13
All these initiatives
were aimed at curtailing the power of the big business houses and dealing with the
adverse consequences of the absence of price competition among the established
business groups. They, therefore, affected the process of growth through mergers as
well.
In 1994 companies like Morgan Group and RPG sought to build industrial empires
through acquisitions. This followed the prevailing industrial structure of building a
conglomerate of diverse into one group.
The recent trend is more of restructuring firms through consolidation to face the
likely competition from the foreign companies.
In the years 1997-2000 takeover wars heated up in the Indian sub-continent.
Between April 1997 and September 2000 there had been 894 cases of takeovers,
mergers and acquisitions. Out of these 894 cases 221 companies made an open offer
13 The Income Tax Act 1961, contains special provisions for some type of amalgamation and provides
for some tax reliefs subject to certain conditions. The tax relief relates to development rebate and
development allowance. The Finance Act 1967 extended the sphere of relief in tax matters in relation
to amalgamation.
63
involving a sum of Rs. 5468.06 millions. Investors response to these 189 offers bid
was valued at Rs. 1714.77 millions 14
Apart from the open offer route there have
been 637 cases of acquisitions under the automatic exemption route and 71
additional cases that have been referred to the takeover panel. Out of these 36
companies 25 have been granted exemption from open offers. Interestingly 7 hostile
takeover cases are under SEBI’s Takeover Regulations 1997.15
In 1997-98 many
companies either changed hands or divested parts of their business. In all these cases
the promoters took the initiative. They did so because the slowdown had plunged so
many companies into liquidity crunch, a complete or partial sell off was keen as a
way out of an ineluctable crisis. Year 2000 has been the year of takeover for the
Indian insurance. As many as 72 companies fell prey to takeovers. The list includes
small firms like Selfridges Auto to giants such as Coates of Indian Aluminium
Corporation.
According to the data provided by SEBI 72 companies launched public offers to
acquire equities from ordinary shareholders. The offers followed acquisition of over
15% stakes from erstwhile promoters, a mandatory rule under the SEBI norms.
In India the takeover activity has also been active due to prevailing capital market
conditions wherein love for the technology shares coupled with an economic
slowdown in which the prices of old economy stocks started quoting at ridiculous
valuations. The real estate holding and liquid investments of many of these old
economy companies attracted corporate raiders. Thus capital market scenario
provided fertile ground for the raiders.
For example:
- The takeover of Saurashtra Cement of Autoriders in March 1998
involving an open offer of Rs.180 millions was the first hostile
takeover under the new takeover code.
14 Bhatia N.L., Takeover Games & SEBI Takeover Regulations, October 2002, Pg.154 15 SEBI (Acquisition of Shares & Takeover) Regulations, 1997.
64
- The takeover of Raasi Cement by India cement in May 1998 involving
an open offer of Rs.100 millions. In the financial year 2000-2001 there
had been 40 such cases in only the first 6 months.
- The prominent cases were BSES by Reliance Industries, Indian
Aluminium Company by Hindalco, Polyester and Aryan Pesticides by
Deepak Nitrite.
Further Calcutta based jute baron acquiring stake in Nusli Wadia controlled textile
firm was alarm bells for the promoters managing companies with minority holdings.
Promoters consolidating their stake in companies include American Remedies,
Rossel Industries and Philips India while the firms witnessing change of
management control include DLF Cement, Charminar Breweries, Coates of India,
International Bestfoods and Jindal Group.
In the last three and a half years the retail investors have gained about Rs. 5000
millions from the new takeover code on account of these takeovers, mergers and
acquisitions.
Thus it is observed that mergers and amalgamations were considered to occur in
waves since time immemorial. Accordingly the US merger and amalgamation
activities were previously classified into three waves. In 1990s scholars classified
the merger and amalgamation movements in five periods based characteristic
environment shocks which influenced the restricting firm in particular industrial
groups.
- 1890s for monopoly
- 1920s for oligopoly
- 1960s for conglomerate takeovers
- 1980s for hostile bust up takeovers
- 1990s driven by strategic synergistic factors
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While one can classify the US mergers and amalgamation activities there were some
individual attempts in India towards adopting the acquisition mode of expansion in
the 1980s. As such there was no wave akin to that in the US. But after liberalisation
of the economy in 1991 there have been initial steps towards merger and
amalgamation activities which have picked up since 1995.