(fs11) mergers and acquisitions

8/8/2019 (FS11) Mergers and Acquisitions

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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

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