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Mergers and AcquisitionsMergers and Acquisitions
K. R. Sharma
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Enterprise GrowthEnterprise Growth
y An expected phenomena
y Due to
1.E
conomy of scale2. Increased Efficiency and Profitability
3. Stability
4. Diversification* Globalisation Effect
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Forms of GrowthForms of Growth
Internal Growth
1. Fuller Utilisation ofExisting facilities2. Increased Production3. Installation of New Machines and Better
Technology4. Better Man power development5. Adding New Products6. Reaching New Markets & New Consumers External Growth1. Mergers2. Acquisitions
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Factors Driving External GrowthFactors Driving External Growth
Taxation
1. Set off and Carry Forward of Losses
2. Capital Gains taxed at a Lower Rate
Financial Leverage
1. Pyramiding
2. Holding Subsidiary Companies
3. Financial synergyMoney Market Factors
Diversification of Business
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Benefits of M & ABenefits of M & A
1. Drives growth
2. Enhances profitability
3.Mitigates risk
4. Cuts down competition
5. Reduces tax liability unabsorbed
depreciation and Accumulated Loss
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Merger (Amalgamation)Merger (Amalgamation)
A merger is a combination of two or morecompanies in which only one company survives.
Merger is also known as absorption.The Companies Act, 1956 does not define
merger or amalgamation.The company, which merges with another
company is known as the amalgamationcompany, and the company into which it so
merges or is formed as a result of themerger of two existing companies to form anew company is known as the amalgamatedcompany.
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Merger (Amalgamation)Merger (Amalgamation)
Under section 2 (1A) of the Income Tax Act, 1961 amalgamation in relationto companies, means the merger of one or more companies with another
company or the merger of two or more companies to form one companyin such a manner that:
1. All the property of the amalgamating company or companies immediately
before the amalgamation becomes the property of the amalgamatedcompany by virtue of the amalgamation;
2. All the liabilities of the amalgamating company or companies immediatelybefore the amalgamation becomes the liabilities of the amalgamatedcompany by virtue of the amalgamation; and
3. Shareholders holding not less than 90 per cent in value of the shares in
the amalgamating company or companies become shareholders of theamalgamated company by virtue of the amalgamation otherwise than as a
result of the acquisition of the property of one company by anothercompany pursuant to the purchase of such property by the other company
or as a result of the distribution of such property to the other companyafter the winding up of the mentioned company.
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Form of MergerForm of Merger
1. Purchase of Assets of A by B
2. Purchase ofEquity of A by B
3. Exchange Shares of B for Assets of A
4. Exchange Shares of A for Shares of B
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Restrictions on MergerRestrictions on Merger
The Companies Act, 1956 in India has put the following restrictions
on acquisition (merger) of companies.
1. Section 391 provides that the arrangement should be approved by amajority of three fourth () in value of creditors or members
(present at the meeting and voting) as the case may be. After theCourt's sanction it becomes binding on all parties concerned.
2. Section 394 provides that in case of transfer of property from onecompany to another, the court may order for (a) transfer of the
transferor company's property etc., to the transferee company, (b)allotment of shares, debentures etc., by the transferee company, (c)
dissolution of transferor company (without winding up), (d)provision for the dissenting persons, and (e) incidental matters to
effectively carry out the arrangement.
3. Section 396 provides for compulsory winding up of a company inpublic interest.
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Types of MergersTypes of Mergers
Nature
1. Horizontal Related business
2. Vertical Different stages of Value chain
3. Conglomerate unrelated business
Effect1. Cash Merger when some of the shareholders take
cash and quit
2. De- facto Merger Not meeting some of the legalrequirements yet for all purposes a merger.
3. Reverse Merger Merger of parent with offspring4. Triangular Merger Merger in a merged company
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DemergerDemerger
y Under section 2 (19AA) demerger is
transfer of property to a resulting
company under section 391 to 394. The
resulting company issues shares to theshareholders on proportionate basis.
y Under section 72 A (5) Central
Government can order de-merger.
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Benefits of DemergerBenefits of Demerger
1. Benefit of carry forward of accumulated
loss and unabsorbed depreciation
2. Benefit available for shipping business
u.s.33A (3)
3. Benefit regarding deduction of
expenditure incurred by the demerged
company on know how u.s. 35AB (3)
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Acquisition or TakeoverAcquisition or Takeover
y Acquisition of control of an existing
company through purchase or exchange
of shares.
y For acquisition either all or certain
number of shares are purchased from the
shareholders of the company directly by
making an offer or through stock marketwhere by the management control passes
on to the other company.
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Types of TakeoversTypes of Takeovers
1. FriendlyTakeover Through agreementbetween the management andshareholders of the two companies.
2. HostileTakeover In case theshareholders of target company do notgive consent then through legal processacquire the management control.
3. BailoutTakeover Takeover of a sick or
loss making company by cash rich andprofitable company to keep it live.4. Buyout Through purchase of shares in
market or through negotiations.
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Resistance to TakeoverResistance to Takeover
Due to
1. Management not understanding the
situation
2. Against the interest of existing company
3. Tender price or exchange offer not
satisfactory
4. Existing management fear sack or
replacement
5. Employees fear for their jobs
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Methods of ResistanceMethods of Resistance
1. Shareholders may be organised to vote
against the takeover bid
2. List of shareholders not released to
delay the process
3. Approach to government or court for
blocking the takeover bid
4. Demand for higher swap ratio
5. Publicity campaign against the takeover
bid
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Restrictions on M & ARestrictions on M & A
1. Under section 391 majority of
members present and voting at the
meeting to approve a M & A.
2. Under section 394 M & A can take place
through court order
3. Under section 396 M & A can be for
compulsory winding up in publicinterest.
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Process of M & AProcess of M & A
Stage 1Exploration - Spotting the
company by features
1.Recent drop in profit of the company
but not of industry
2. Industry likely to be affected favourably
by forecasted economic changes
3. Break in Management Rank
4. Laggard company in industry
5. Complementary strengths between two
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Stage 2Stage 2 In depth examination &In depth examination &
Price discoveryPrice discoveryFocus of examination to be -
1. Synergistic Prospects
2. Accumulated Profit
3. Price earning multiple
4. Turn around prospects
5. Accumulated Net operating loss
6. Earning Impact on present earning and
future earning
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State 3State 3 -- Approaches to AcquisitionApproaches to Acquisition
Acquisition through
1. Negotiations with Management
2. Solicit tenders
3. Solicit Proxies from large shareholders
to vote the takeover
4. Create dissention among the ranks
5. Publicity drive to create environment
6. Court Action
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Stage 4Stage 4 -- Response of TargetResponse of Target
Company ManagementCompany Management1. Accept the offer
2. Reject the offer outright
3. Negotiations on Terms & Conditions
Purchase considerationAbsorption of workforce
Compensation to employees on VRS
Post retirement claims of employees
Position of minority shareholders in boardPositions in board of directors
Payment of liabilities created
Payment of purchase consideration
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Stage 5Stage 5 -- FinalisationFinalisation of Deal and Closureof Deal and Closure
1. Signing of agreement by Board of
directors representatives
2. Employees representatives
3. Financiers representatives
4. Registration of agreement
5. Public announcement
6. Submission of Returns to
Registrar of Joint Stock Companies
StockExchange
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Deal Makers in IndiaDeal Makers in India Top ThirteenTop Thirteen
1. Kotak Mahindra Capital Company,
2. Ernst & Young,
3. Morgan Stanley,
4. Merrill Lynch,
5. Citigroup,
6. DBS Group Holdings,
7. Standard Chartered Plc,
8. UBS,
9. HSBC,10. Enam,
11. Price Waterhouse Coopers,
12. JM Financial , and
13. Lazard Credit Capital.
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Raising Funds for Financing M & ARaising Funds for Financing M & A
1. Own Sources
Issue of Shares own, other company
Issue of Bonds
2. Borrowing from Market
Domestic Market
International Market
3. Out ofFuture Earnings
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Form of Payment of Purchase ConsiderationForm of Payment of Purchase Consideration
1. All Cash2. All Stock3. Part Cash and Part Shares
4. Part Stock, Part Bonds
5. Part Cash, Part stock Part Bonds
Basis of Issue of Shares can be
1. As per agreement between two companies
2. In the Proportion of- Number of Shares
- Market Value of Shares
- Earning Per Share
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Taxation aspect in M & ATaxation aspect in M & A
1. Unabsorbed depreciation
2. Unabsorbed Loss under capital gain can
not be carried forward
3. Amalgamating company not liable to pay
capital gain tax
4. In case of amalgamation of a sick
industrial company the loss can becarried forward as per Central
Government orders
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Regulatory Framework for M & A in IndiaRegulatory Framework for M & A in India
1. Indian Companies Act, 1956
2. Competition Act, 2002
3. Monopolies & Restrictive Trade Practices
Act,4. Income Tax Act, 1961
5. The SEBI Takeover Code 20th February1997
6. SEBI (Substantial Acquisition of Shares andTakeovers) Regulations, 1997
7. Listing Agreement with StockExchange
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Some M & A DealsSome M & A Deals
1. Arcelor Mittal
2. Tata Corus
3. Hindalco Novelis
4. Jet Airways Air Sahara
5. RIL IPCL
6. Vodafone Hutch
7. Air India Indian Airlines8. HDFC Bank Centurian Bank of Punjab
9. Tata & Ford for Jaguar Land rover Brands
10. King Fisher Air Deccan
11. Bharti Airtail Zen
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Problems & Challenges in M & AProblems & Challenges in M & A
y Protection of consumer interest
y Protection of general (retail) shareholders
y Independent valuation of shares
y Role of Board of Directors
y Legal complications
y Taxation problems
y Holding structure
y Employees Interest
y Post Merger Issues
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y Thanks