human challenges in merger intergration and buy back of shares

Post on 30-May-2018

215 views

Category:

Documents

0 download

Embed Size (px)

TRANSCRIPT

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    1/25

    Mergers and Acquisitions

    HUMAN CHALLENGES IN MERGER

    INTERGRATION AND

    BUY BACK OF SHARES

    GROUP NO: 6

    GROUP MEMBERS:

    AMRITHA

    KEWIN

    MAHESH

    RAMEEZ

    REKHA

    RONALD

    SARAH

    SUBMITTED TO:

    Dr. BEENA DIAZ

    ASSOCIATE PROFESSOR

    AIMIT

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    2/25

    Mergers and Acquisitions

    HUMAN CHALLENGES IN MERGER INTERGRATION

    Introduction

    In an ideal merger, the newly created entity pools the best features of the two merging

    organizations. A well planned process built on the foundations of an open, honest and

    consistent communication strategy can pave the way.

    Mergers and acquisitions have become a common phenomenon in recent times. A merger

    of any size has implications for the workforce of these companies across the globe.

    Although the merging entities give a great deal of importance to financial matters and the

    outcomes, HR issues are the most neglected ones. Ironically studies show that most of themergers fail to bring out the desired outcomes due to people related issues. The

    uncertainty brought out by poorly managed HR issues in mergers and acquisitions have

    been the major reason for these failures.

    HUMAN ISSUES IN PRE-MERGER INTEGRATION

    The human resource issues in the mergers and acquisitions (M&A) can be classified in

    two phases

    The pre-merger phase

    The post merger phase.

    Literature provides ample evidence of difference in between the human resource activities

    in the two stages: the pre-acquisition and post acquisition period. Due diligence is

    important in the first phase while integration issues take the front seat in the later.

    The pre acquisition period involves due diligence which is a due diligence in various

    industries is the process through which a potential acquirer evaluates a target company or

    its assets for acquisition and also assessment of the cultural and organizational differences,

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    3/25

    Mergers and Acquisitions

    which will include the organizational cultures, role of leaders in the organization, life

    cycle of the organization, and the management styles.

    The organizational culture plays an important role during mergers and acquisitions as

    the organizational practices, managerial styles and structures to a large extent are

    determined by the organizational culture. Each organization has a different set of beliefs

    and value systems, which may clash owing to the M&A activity. The exposure to a new

    culture during the M&A leads to a psychological state called culture shock. The

    employees not only need to abandon their own culture, values and belief but also have to

    accept an entirely different culture. This exposure challenges the old organizational value

    system and practices leading to stress among the employees. Research has found that

    dissimilar cultures can produce feeling of hostility and significant discomfort which can

    lower the commitment and cooperation on the part of the employees. In the case of culture

    clash, of the cultures that is dominant culture may get preference in the organization

    causing frustration and feelings of loss for the other set of employees. The employees of

    non-dominating culture may also get feelings of loss of identity associated with the

    acquired firm. In certain cases like acquisition of a lesser known or less profitable

    organization by a better one can lead to feelings of superiority complex among the

    employees of the acquiring organization. In case of hostility in the environment the

    employees of two organizations may develop us versus them attitude which may be

    detrimental to the organizational growth.

    Problems of Integration

    The post-merger integration problems may arise from the following sources:

    Determinism

    Determinism is a characteristic of managers who believe that the acquisition blue print can

    be implemented without any change and without regard for ground realities. They tend to

    forget that the blueprint was based on incomplete information. They do not consider that

    the implementation process is where mutual learning between the acquirer and the

    acquired takes place and the course of process is especially adaptive in the light of this

    learning. Determinism leads to a rigid and unrealistic programme of integration and builds

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    4/25

    Mergers and Acquisitions

    up hostility from the managers. Such hostility leads to non co-operative attitude among

    managers and vitiating the atmosphere for a healthy transfer.

    Value Destruction

    At personal level, the acquisition is value destroying for managers, if integration

    experience is contrary to their expectations. Value destruction may take the form of

    reduced remuneration in the post merger firm or loss of power or of symbols of corporate

    status. For instance, the target firm managers may be given positions which fail to

    acknowledge their seniority in the pre merger target or their expertise. Where there is

    perceived value destruction of this kind, again smooth integration is not possible.

    Leadership Vacuum

    The management of interface requires tough and enlightened leadership form the top

    managers of the acquirer. Where the integration task is delegated to the operational

    managers of the two firms without visible involvement or commitment of the top

    management, the integration process can degenerate into mutual frictions. The top

    management must be intervened to avoid frictions that arise between groups of mangers in

    the integration process.

    HUMAN ISSUES IN POST-MERGER INTEGRATION

    Mergers and acquisitions, like organizational transitions in general, are typically followed

    by major structural and cultural changes, which may arouse stress, anger, disorientation,

    frustration, confusion and fright among personnel. Uncertainty and other negative

    emotions, in turn, tend to lead on to the several negative organizational outcomes, like

    lowered commitment and productivity, increased dissatisfaction and disloyalty, high

    turnover, leadership and power struggles, sabotage and a general rise in dysfunctional

    behaviors.

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    5/25

    Mergers and Acquisitions

    The most often mentioned human risks related to the M&A situation are listed as

    follows

    Voluntary turnover of key people and losses of expertise

    Merger or acquisition process contains uncertainty, instability, disappointments

    and creates lack of commitment. When studying the IS personnel particularly, the

    voluntary labor turnover is one of the severest human risks caused by these negative

    emotions. Voluntary turnover is at its highest in the early stages of the M&A process. This

    is due to the uncertain and ambiguous situation where employees are uncertain of what

    will happen and in which time scale the changes will came true. In mergers, personnel

    issues such as job security, responsibility and salary become the most important factors

    for people leaving the company. In order to dispel the suspicions, it is of utmost

    importance to make sure the availability of clear information and consistency of

    the communication just from the beginning of the process. Unplanned personnel losses are

    specifically problematic because the probability of leaving is greatest amongst the most

    talented and experienced employees. This is because; the people who are most wanted to

    stay are also most readily employable elsewhere. In addition to the outflow of talent and

    expertise, the costs of recruitment and retraining, losses of valuable customer contacts

    and goodwill are the threats of high employee turnover. The departure of respected

    organizational role models and bitter dismissals may also be harmful to the wider

    reputation of the organization, which in turn causes difficulties in future recruitment

    Job losses

    This is common while merger and acquisition takes place. After merger the new

    company need not required all employees of both companies I,e acquired and acquiring

    company in such cases the company will try to short its employees. So there is a

    possibility of increased job losses.

    Lowered commitment and disloyalty

    After merger, definitely the culture varies in the firm so which will result in the

    lowered commitment and disloyalty in the firm. But the lowered commitment and

    disloyalty may not continue for long time, once the employees becomes familiar to the

    company they will try to increase the commitment.

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    6/25

    Mergers and Acquisitions

    Performance drops and lowered productivity

    Some employees may not work hard for the company after merger because they

    might have loose their interest in their job or designation so which will result in the poor

    performance and lowered productivity.

    Motivational problems

    After merger, the company may find it difficult to understand the needs and wants

    of the new employees. So which results in the motivational problems because the

    management will provide some other motivational aspects but it may not be the actual

    need of the employees.

    Dissatisfaction, frustration, confusion and stress

    It occurs when the merger and acquisition takes place, the initial stage of the

    merger the dissatisfaction, frustration, confusion and stress will be very high and there is a

    increased chances of voluntary turnover of people to avoid such things.

    Dysfunctional behavior

    The dissatisfied employees may stay in the organization but there is more chances

    for dysfunctional behavior by the employees. The dissatisfied will not get interest to work

    hardly or to put their great commitment to their job.

    People refusing assignments

    After merger the employees will not be ready to take any responsibility, each and

    everyone will point the others to assign the assignments. In such cases the assignment

    have to be allotted through force otherwise they will not accept it.

    Increased absenteeism

    The merger and acquisition may result in the increased absenteeism in the initial

    stage. Sometimes the employees may be physically present in the organization but they

    may not be mentally, such presence of employees will not benefit the organization.

    Health problems

    The employees may try to take more leaves to the organization with providing

    health problem reasons.

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    7/25

    Mergers and Acquisitions

    The measures to overcome the human issues in post merger integration are as

    follows.

    1. Company management selection criteria must reflect new requirements in

    management and leadership behavior and competencies.

    2. The selection process should be unbiased, professional, fast paced and managed in

    a top-down direction.

    3. Candidates from the former companies should be first in line for positions in the

    new company.

    4. To prevent political machinations a best of both worlds selection principle

    should be applied.

    5. When none of the former managers or employees fulfils the new requirements an

    executive search from external sources should be immediately initiated.

    6. Especially for strategic positions, the application of a best of the market

    candidate strategy is the only possible way to lead to optimal success.

    7. One of the highest priorities should be to retain the key talent residing in merging

    entities and to gain their commitment and active integration support.

    8. Merger-associated redundancies should be managed on a highly professional basis

    to decrease the possibility of a mergers negative impact on the rest of the

    organization.

    9. Extensive and honest communication helps to prevent destructive rumors.

    Managing M & A

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    8/25

    Mergers and Acquisitions

    Clearly defined communication strategy during M&A plays an important role in removing

    the employee fears and kill rumors floating around in the organization. The organizations

    need to reach their employees before the press as the employees will have feelings of

    getting cheated. Studies show that communication strategy that involves senior managers

    of the acquired organizations work well. Involving other employees who are trusted by the

    employees for instance trade union leaders are also helpful. The employees meeting in

    small groups so as to discuss their concerns, fears and positive feelings also helps to

    lessen the stress on employees of acquired firm. The group meetings seem to help because

    many-a-times employees are reluctant to come out and speak their concerns, whereas in

    groups where everyone shares same set of feelings to an extent, it becomes easier to come

    out with the common set of concerns and fears. This also provides confidence to

    employees that the new management is willing to listen to their concerns and feelings,

    building an atmosphere of mutual trust.

    The transition period also becomes crucial from communication point of view. In case of

    lengthy transition period the employee stress increases, the best strategy in this period is to

    convince the employees that they are part of new organization and their concerns will be

    taken care of. The transition period can also be used to improve communication with the

    employees of acquired firm. Improved communication will help to better understand each

    others cultures and practices. Firms can also use this period to analyze the human capital

    of the acquired firm and define their possible roles in the new organizations. The

    transition period provides ample opportunity to design the new organization, explain the

    new roles to the employees, plan synergies and train the employees as the new role. This

    will make the integration process easier for the acquiring organization.

    HR takes control

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    9/25

    Mergers and Acquisitions

    Train managers on the nature of change

    Technical retraining

    Family assistance programs

    Stress reduction program

    Meeting between the counter parts

    Orientation programs

    Explaining new roles

    Helping people who lost jobs

    Post merger team building

    Anonymous feedback helpline for employees

    The communication aspect being very important should be handled carefully by the

    human resource department. The communication should provide precise information to

    the employees, providing any piece of information which is unreal can lead to rumors and

    counteract. The communication should be sufficient enough to answer the queries and

    worries of the employees. The first set of information should be related to their future

    jobs, this will help to lessen their worries related to job security. The communication

    shouldnt involve false promises which may counteract later. The communication can be

    through trusted and credible employees of the acquired company and trade unions can be

    involved in the process too.

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    10/25

    Mergers and Acquisitions

    Acquisition strategy of GE Capital

    The GE Capital uses a successful model called Pathfinder for acquiring firms.

    The model disintegrates the process of M&A into four categories which are further

    divided into subcategories. The four stages incorporate some of the best practices for

    optimum results. The pre-aquisition phase of the model involves due diligence,

    negotiations and closing of deals. This involves the cultural assessments, devising

    communication strategies and evaluation of strengths and weaknesses of the business

    leaders. An integration manager is also chosen at this stage. The second phase is the

    foundation building. At this phase the integration plan is prepared. A team of executives

    from the GE Capital and the acquiring company is formed. Also a 100 day communication

    strategy is evolved and the senior management involvement and support is made clear.

    The needed resources are pooled and accountability is ensured. The third is the integration

    phase. Here the actual implementation and correction measures are taken. The processes

    like assessing the work flow, assignment of roles etc are done at this stage. This stage also

    involves continuous feedbacks and making necessary corrections in the implementation.

    The last phase involves assimilation process where integration efforts are reassessed. This

    stage involves long term adjustment and looking for avenues for improving the

    integration. This is also the period when the organization actual starts reaping the benefits

    of the acquisition. The model is dynamic in the sense that company constantly improves it

    through internal discussions between the teams that share their experiences, effective tools

    and refine best practices.

    Acquisition strategy of Cisco

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    11/25

    Mergers and Acquisitions

    The acquisition strategy of Cisco is an excellent example of how thorough planning

    can help in successful acquisitions. After experiencing some failures in acquiring

    companies, Cisco devised a three step process of acquisition. This involved, analyzing the

    benefits of acquiring, understanding how the two organizations will fit together how the

    employees from the organization can match with Cisco culture and then the integration

    process. In the evaluation process, Cisco looked whether there is compatibility in terms of

    long term goals of the organization, work culture, geographical proximity etc. For

    example Cisco believes in an organizational culture which is risk taking and adventurous.

    If this is lacking in the working style of the target company, Cisco is not convinced about

    the acquisition. No forced acquisitions are done and the critical element is in convincing

    the various stakeholders of the target company about the future benefits. The company

    insists on no layoffs and job security is guaranteed to all the employees of the acquired

    company. The acquisition team of Cisco evaluates the working style of the management

    of the target company, the caliber of the employees, the technology systems and the

    relationship style with the employees. Once the acquisition team is convinced, an

    integration strategy is rolled out. A top level integration team visits the target company

    and gives clear cut information regarding Cisco and the future roles of the employees of

    the acquired firm. After the acquisition, employees of the acquired firm are given 30 days

    orientation training to fit into the new organizational environment. The planned process of

    communication and integration has resulted in high rate of success in acquisitions for

    Cisco.

    BUY BACK OF SHARES

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    12/25

    Mergers and Acquisitions

    INTRODUCTION

    Buy back of securities simply implies purchase of its own shares by the Company. The

    Company generally resorts to buyback so as to enhance the true or intrinsic value of its

    shares or to return surplus cash to its shareholders, or to achieve desired capital structure.

    The buy-back of the shares or other specified securities, if listed on a stock exchange,

    shall be carried out in accordance with the Regulations framed by the SEBI. However, in

    the case of securities of unlisted companies, the buy-back shall be done as per the

    guidelines framed by the Central Government.

    MEANING

    Buyback is reverse of issue of shares by a company where it offers to take back its shares

    owned by the investors at a specified price; this offer can be binding or optional to the

    investors.

    REASONS FOR COMPANIES TO BUYBACK

    Unused Cash

    If they have huge cash reserves with not many new profitable projects to invest in

    and if the company thinks the market price of its share is undervalued. Eg. Bajaj

    Auto went on a massive buy back in 2000 and Reliance's recent buyback.

    However, companies in emerging markets like India have growth opportunities.

    Therefore applying this argument to these companies is not logical. This argument

    is valid for MNCs, which already have adequate R&D budget and presence across

    markets. Since their incremental growth potential limited, they can buyback shares

    as a reward for their shareholders.

    Tax Gains

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    13/25

    Mergers and Acquisitions

    Since dividends are taxed at higher rate than capital gains companies prefer

    buyback to reward their investors instead of distributing cash dividends, as capital

    gains tax is generally lower. At present, short-term capital gains are taxed at 10%

    and long-term capital gains are not taxed.

    Market Perception

    By buying their shares at a price higher than prevailing market price company

    signals that its share valuation should be higher. Eg: In October 1987 stock prices

    in US started crashing. Expecting further fall many companies like Citigroup, IBM

    et al have come out with buyback offers worth billions of dollars at prices higher

    than the prevailing rates thus stemming the fall.

    Recently the prices of RIL and REL have not fallen, as expected, despite the spat

    between the promoters. This is mainly attributed to the buyback offer made at

    higher prices.

    Exit Option

    If a company wants to exit a particular country or wants to close the company.

    Escape Monitoring of Accounts and Legal Controls

    If a company wants to avoid the regulations of the market regulator by delisting.

    They avoid any public scrutiny of its books of accounts.

    Show Rosier Financials

    Companies try to use buyback method to show better financial ratios. For example:

    When a company uses its cash to buy stock, it reduces outstanding shares and also

    the assets on the balance sheet (because cash is an asset). Thus, return on assets

    (ROA) actually increases with reduction in assets, and return on equity (ROE)

    increases as there is less outstanding equity. If the company earnings are identical

    before and after the buyback earnings per share (EPS) and the P/E ratio would

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    14/25

    Mergers and Acquisitions

    look better even though earnings did not improve. Since investors carefully

    scrutinize only EPS and P/E figures, an improvement could jump-start the stock.

    For this strategy to work in the long term, the stock should truly be undervalued.

    Increase Promoter's Stake

    Some companies buyback stock to contain the dilution in promoter holding, EPS

    and reduction in prices arising out of the exercise of ESOPs issued to employees.

    Any such exercising leads to increase in outstanding shares and to drop in prices.

    This also gives scope to takeover bids as the share of promoters dilutes. Eg.

    Technology companies which have issued ESOPs during dot-com boom in 2000-

    01 have to buyback after exercise of the same. However the logic of buying back

    stock to protect from hostile takeovers seem not logical. It may be noted that one

    of the risks of public listing is welcoming hostile takeovers. This is one method of

    market disciplining the management. Though this type of buyback is touted as

    protecting over-all interests of the shareholders, it is true only when management

    is considered as efficient and working in the interests of the shareholders.

    Generally the intention is mix of any of the above. Sometimes Governments nationalize

    the companies by taking over it and then compensates the shareholders by buying backtheir shares at a predetermined price. Eg. Reserve Bank of India in 1949 by buying back

    the shares.

    RESTRICTIONS ON BUYBACK BY INDIAN COMPANIES

    Some of the features in government regulation for buyback of shares are:

    1. A special resolution has to be passed in general meeting of the shareholders

    2. Buyback should not exceed 25% of the total paid-up capital and free reserves

    3. A declaration of solvency has to be filed with SEBI and Registrar Of Companies

    4. The shares bought back should be extinguished and physically destroyed;

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    15/25

    Mergers and Acquisitions

    5. The company should not make any further issue of securities within 2 years, except

    bonus, conversion of warrants, etc.

    These restrictions were imposed to restrict the companies from using the stock markets as

    short term money provider apart from protecting interests of small investors.

    BUY-BACK FROM THE OPEN MARKET

    A company can buy-back its shares from the open market by any one of the following two

    methods.

    Stock exchange

    Book building process

    Buy-back through exchange

    The important provisions of the SEBI regulation, as contained in the regulations

    15 and 16, in respect of this method are as follows:

    The resolution passed by the general body or the board has to specify the

    maximum price.

    The company shall appoint a merchant banker.

    Public announcement, as referred to in regulation8, has to be made at least

    seven days before commencement of purchase from the stock market and

    within two days of the announcement a copy, thereof, needs to be filed with

    SEBI.As referred to in regulations must be contained in the public

    announcement.

    Additionally, the public announcement shall disclose the names of stock

    exchanges and brokers through which buy back is to be effected.

    Buy-back can be done only though nationwide exchanges and though the

    normal order matching mechanism, i.e.,excludingall or none order matching

    system.

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    16/25

    Mergers and Acquisitions

    Further, identity of the company as a purchaser must appear on the electronic

    screen when the order is placed.

    The company and the merchant banker are required to submit to the stock

    exchange, information regarding shares or other specified securities bought on

    a daily basis. Further, they are also required to publish this information in a

    national daily on a fortnightly basis as also every time an additional 5 per cent

    purchase in made.

    The company has to complete the verification of the securities bought within

    fifteen days of the pay out, and the securities have to destroyed and

    extinguished in the same manner and time frame as in the case of buy-back

    through tender offer.

    Buy-back through book building:

    The important provisions of the SEBI regulations, as contained in the regulations 17 and

    18, in respect of this method are as follows:

    The resolution passed by the general body or the board has to specify the

    maximum price.

    The company shall appoint a merchant banker.

    Public announcement , as referred to in regulation 8, has to be made at least seven

    days before commencement of buy-back and within two days of the

    announcement a copy, thereof, needs to be filed with the SEBI. As referred to in

    regulation 8implies that all the details as specified in schedule 2 of the

    regulations must be contained in the public announcement.

    Additionally, the public announcement has to contain details about the building

    process, the manner of acceptance, the format of acceptance to be sent by the

    security holder and the details of the bidding centres.

    Book building process has to be made through electronically linked transparent

    facility.

    The number of bidding centres shall not be less than thirty and each centre must

    have at least one electronically linked computer terminal.

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    17/25

    Mergers and Acquisitions

    The offer has to remain open for a minimum of fifteen days and a maximum of

    thirty days.

    The final buy-Back price, being the highest accepted price, shall be paid to all the

    shareholders.

    The provisions relating to the verification of securities, opening of a special

    account for making payment of the consideration and extinguishment of securities

    shall apply as in the case of buy-back through tender offer.

    The detailed procedures along with specified deadlines with regard to the buy-back

    from open market method and buy-back through book building method are give in a

    tabulated from in appendices 7 and 8 .The readers may go through the same.

    Obligations of the merchant banker:

    For any method of buy-back, the company has to appoint a merchant banker. For the

    obligations of the merchant banker as specified in regulation 20, readers are advised to

    refer to the text of these regulations reproduced in Appendix5. The gist of these provisions

    is that the merchant banker is responsible for not only carrying out the processes but also

    for:

    Ensuring that the company has an ability financial or otherwise-to carry out the buy-back and firm arrangements have been made for the payment of

    consideration.

    Ensuring adequacy of the escrow account and releasing it only after all

    obligations of the company under the regulations have been met with

    Ensuring that the contents of the public announcement and letter of offer are true,

    fair and adequate.

    Ensuring compliance with the SEBI regulations, the companies act, 1956,and any

    other applicable laws, rules and regulations.

    Procedure for buy back of Shares by the company

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    18/25

    Mergers and Acquisitions

    1. Where a company proposes to buy back its shares, it shall, after passing of the

    special/Board resolution make a public announcement at least one English

    National Daily, one Hindi National daily and Regional Language Daily at the

    place where the registered office of the company is situated.

    2. The public announcement shall specify a date, which shall be "specified date" for

    the purpose of determining the names of shareholders to whom the letter of offer

    has to be sent.

    3. A public notice shall be given containing disclosures as specified in Schedule I

    of the SEBI regulations.

    4. A draft letter of offer shall be filed with SEBI through a merchant Banker .

    The letter of offer shall then be dispatched to the members of the company.

    5. A copy of the Board resolution authorising the buy back shall be filed with

    the SEBI and stock exchanges.

    6. The date of opening of the offer shall not be earlier than seven days or later

    than 30 days after the specified date

    7. The buy back offer shall remain open for a period of not less than 15 days and

    not more than 30 days.

    8. A company opting for buy back through the public offer or tender offer shall open

    an escrow Account.

    Methods of buyback of shares

    Share buyback can take place in 3 ways:

    1. Shareholders are presented with a tender offer where they have the option to submit a

    portion of or all of their shares within a certain time period and at usually a price higher

    than the current market value.

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    19/25

    Mergers and Acquisitions

    Another variety of this is Dutch auction, in which companies state a range of prices at

    which it's willing to buy and accepts the bids. It buys at the lowest price at which it can

    buy the desired number of shares.

    2. Through book-building process.

    3. Companies can buy shares on the open market over a long-term period subject to

    various regulator guidelines like SEBI

    In both 1 & 2 promoters can participate in buyback and not in 3.

    Buyback and its effect on investors Wealth

    Background:

    Buyback of shares, i.e., buying of own shares by a company having substantial cash

    reserves, has been permitted in India with effect from 31st October, 1998. Before 1998, an

    Indian company could buy its own shares only in consequence of reduction of capital or

    ordered by the Company Law Board under Section 402, to give relief in a petition of

    oppression / mismanagement.

    In 1998, the Government of India in consensus with the captains of industry and stock

    market fraternity decided to introduce buyback in company legislation. Since 1998,

    around 250 companies have come up with Buyback offers.

    Analysis: The buyback programme has seen increasing popularity amongst MNCs which

    can be gauged from the growing number of open offers made by them. Over all while

    there were only six buyback offers in 1999, the figure rose to eight in 2000, and jumped to

    over 22 in 2008-09.

    An analysis of the price movement of 22 companies which made buyback offers in 2008-

    09 are as follows.

    Appreciation or Depreciation of Share price after announcing Buyback

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    20/25

    Mergers and Acquisitions

    Co Name Date Price on

    approval

    CMP as on 17th

    Mar-09

    Returns

    (%)

    Reliance Infra Mar-08 1460 500 -65.75

    Madras Cement Jan-08 220 66 -70.00

    Sasken Com. Apr-08 190 54 -71.58

    SRF Apr-08 160 73 -54.38GT Offshore Mar-08 637 230 -63.89

    Rain Comm. Sep-08 307 73 -76.22DLF Jul-08 365 170 -53.42

    TTK Healthcare Feb-09 98 96 -2.04

    Supreme Indust. Dec-08 130 96 -26.15GDL Jul-08 110 48 -56.36

    Bosch Sep-08 4048 2972 -26.58

    Gujrat Floro Aug-08 300 70 -76.67Avon Org Nov-08 21 14 -33.33

    ANG Auto Jul-08 99 27 -72.73

    Goldiam Inter Apr-08 65 11 -83.08HEG Sep-08 210 100 -52.38T V India Mar-08 75 74 -1.33

    India Infoline Dec-08 70 50 -28.57

    IPCA Dec-08 398 307 -22.86Monnet Ispat Nov-08 156 151 -3.21

    EID Parry Dec-08 160 140 -12.50

    Godrej Consumer Dec-08 145 112 -22.76

    All the companies studied have shown a decline in their share prices. More than 50% (12)

    of the companies have seen their share price decline by over 50% from the date of the

    announcement till the date of the study, some companies declined by as much as 83

    percent.

    From a study of the fundamentals, its understand that price should appreciate, but as is

    visible from the table above, we can see that the share prices have depreciated

    substantially in general.

    Indeed as a result of the buyback EPS will be stronger and price should appreciate

    but people have the fear that the buyback programmes reveal that there is limited

    scope of business expansion, therefore promoters put surplus money in strengthening

    promoters' stake. The reason for this belief is simple, when a company has no plan of

    capex or expansion and at the same time has huge cash in hand and bank, the company

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    21/25

    Mergers and Acquisitions

    goes for buyback. This also indicates that the company has not been left with any option

    of expansion or capex. Therefore people expect that growth is limited and share price

    starts declining.

    Conclusion of the study :

    Going by the statistical data, we find that the share price always declines abruptly after the

    announcement of buyback

    It is a bad signal for retail investors who enter at high price during or immediately before

    the announcement of buyback and exit at low prices. Therefore the prudent suggestion for

    retail investors is not to enter into such scrips and the concerned authority should also take

    note of the same.

    Recent Examples of Buy back by MNCs in India

    Reliance Infra buys back shares worth Rs127 crore April 15, 2009,

    Anil Ambani controlled Reliance Infrastructure has bought-back 2.5 million shares,

    worth Rs 127.38 crore at an average price of Rs 509.54 a share. The company has

    extinguished 21, 74,572 shares till date and is in the process of extinguishing 325,428

    shares that bought- back.

    The buy-back commenced on February 25, 2009 and closed on April 08, 2009.

    DLF buys back shares worth Rs 140.69 cr May 2, 2009,

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    22/25

    Mergers and Acquisitions

    The country's largest realty player, DLF, today said it has bought back over 76.38 lakh

    equity shares worth Rs 140.69 crore and will close the offer with effect from May 6.

    "As on May 1, the company has bought back over 76.38 lakh equity shares for an

    aggregate amount of Rs 140.69 crore".

    Godrej Ind to buyback shares February . 24. 2008

    Godrej Industries (GIL) is to buy back up to 2.46 crore equity shares of Rs. 6 each

    representing 40 per cent of the capital from the shareholders at Rs. 18 per share.

    Bosch to buy back equity shares December 8, 2008,

    Bosch, the Indian subsidiary of Germany's Bosch Group, a supplier of technology and

    services in the areas of automotive and industrial technology, consumer goods and

    building technology, today announced yet another open offer to buy back its fully paid-up

    equity shares from its shareholders.

    The company intends to buy back equity shares of face value of Rs 10 each at a price notexceeding Rs 4,500 per equity share for an aggregate not exceeding Rs 639.2 crore.

    Madras Cements buyback at Rs 4,200/share January 31, 2008

    The board of directors of Madras Cements, which met today, approved a proposal to buy

    back shares at a maximum price of Rs 4,200 per share. The current market price is around

    Rs 3,831.

    Sken buys back shares worth Rs 15.48 cr November 04, 2008,

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    23/25

    Mergers and Acquisitions

    Telecom software services provider Sasken Communications promoters have bought

    back about 14.49 lakh shares worth Rs 15.48 crore from the open market under its

    buyback offer.

    The promoters purchased 14.49 lakh shares, of a face value of Rs 10 each, at an average

    buyback price of Rs 106.80.

    ADVANTAGES OF BUY-BACK

    1. One of the major advantages is that it may provide a way of increasing insider

    control in firms, for they reduce the number of shares outstanding. If the insiders

    do not tender their shares back, they will end up holding a larger proportion of the

    firm and, consequently having a greater control.

    2. Equity repurchase are much more focused in terms of paying out cash to those

    stockholders who need it.

    3. The decision to repurchase stock affords firms much more flexibility to reverse

    themselves and/to spread the repurchase over a longer period than does the

    decision to pay an equivalent special dividend. There is substantial evidence that

    many firms that announce ambition stock repurchase plans do not carry them

    through to completion.

    4. In case of equity repurchase, shareholders have option not to sell their shares back

    to firm and therefore they do not have to realize the capital gains in the period of

    the equity repurchases. In the case of tax on dividends, impact of tax cannot be

    avoided. Given the option between dividend and stock buy-back, both firm and an

    individual stockholder stand to gain, if latter is opted for.

    5. Unlike regular dividends, which imply a commitment to continue payment in

    future periods, equity repurchase are viewed primarily as one-time returns of cash.

    6. Equity repurchase may provide firms with a way of supporting their stock prices

    when they are under assault.

    7. Achieve even higher overall shareholder value enhancement.

    8. Manage volatility in share price. Neutralize the impact of speculative forces and

    attract long term investors.

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    24/25

    Mergers and Acquisitions

    9. Send powerful signal to the market on perceived under-valuation.

    10. Improve financial parameters, like ROE, EPS and optimize WACC, thereby

    enhancing global competencies.

    11. By issuing debt (source of financing) and buy-back its stock, companies should be

    able to increase its leverage and accomplish financial restructuring.

    DISADVANTAGES OF BUY-BACK

    Manipulation: If companies are allowed buy-back of shares, management may resort to

    manipulation. They may, through collusive trading, depress prices, create anxiety among

    common investors, and tempt them to sell the shares to the company by making

    apparently attractive offers. Corporate energies may be diverted from the main business of

    the company to stock market games that may hurt the more gullible shareholders. A

    company that has long-term plans would not indulge in such practices.

    CONCLUSION

    Buyback has no impact on the fundamentals of the economy or the company.

    Therefore investors should be cautious of unscrupulous promoters' traps.

    Thus buy-back is a procedure, which enables the Company to go back to its

    shareholders and offer to purchase from them the shares that they hold. The decision

    to buy-back reflects managements view that the Companys future prospects are good

    and hence investing in its own shares is the best option. It also signals undervaluationof the Companys shares in relation to its intrinsic value. It appears that only

    financially sound companies should be able to resort to buy-back. Companies should

    follow the principles of model corporate governance and there should be transparency

    in buy-back deals.

    Presented By Group No 6

  • 8/14/2019 HUMAN CHALLENGES IN MERGER INTERGRATION AND BUY BACK OF SHARES

    25/25

    Mergers and Acquisitions

    ************

    BIBLIOGRAPHY

    http://www.indianmba.com/Occasional_Papers/OP78/op78.html

    http://en.wikipedia.org/wiki/Share_repurchase

    http://ekikrat.in/Buy-Back-Shares

    http://en.wikipedia.org/wiki/Treasury_stock

    http://www.legalserviceindia.com/articles/shares.htm