MERGER AND ACQUISITION

1 Introduction

2

2.1

2.2

Merger And Acquisition

Types of Merger and Acquisition

Motives in Merger and acquisition

3

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

Laws regulating Merger And Acquisition

The companies act, 1956

The competition act, 2002

Foreign exchange management act, 1999

SEBI takeover code 1994

The Indian income tax act (ITA), 1961

Mandatory permission by the courts

Stamp duty

Amendments In Companies Act 1956

4 Legal frame for Merger and Acquisition

5 Reasons why so many acquisition fails

6 Case studies

7 Conclusion

8 Bibliography

CHAPTER 1

INTRODUCTION

In the fast changing business world, companies have to strive hard to achieve quality and

excellence in their fields of Operation. Every Company has the prime objective to grow profitably. The

profitable growth for the companies can be possible internally as well as externally. The internal growth

can be achieved either through the process of introducing or developing new products or by expanding or

by enlarging the capacity of existing products or sustained improvement in sales. External growth can be

achieved by acquisition of existing business firms. Mergers and Acquisitions (M&A) are quite important

forms of external growth. In today’s globalized economy, mergers and acquisitions are being increasingly

used the world over as a strategy for achieving a larger asset base, for entering new markets, generating

greater market shares/additional manufacturing capacities, and gaining complementary strengths and

competencies, to become more competitive in the marketplace.

Mergers and Acquisitions (M&A) are an extensive worldwide phenomenon and Mergers and

Acquisitions (M&A) have emerged as the natural process of business restructuring throughout the world.

The last two decades have witnessed extensive mergers and acquisitions as a strategic means for

achieving sustainable competitive advantage in the corporate world. Mergers and Acquisitions (M&A)

have become the major force in the changing environment. The policy of liberalization, decontrol and

globalization of the economy has exposed the corporate sector to domestic and global competition.

Mergers and Acquisitions (M&A) have also emerged as one of the most effective methods of corporate

structuring, and have therefore, become an integral part of the long-term business strategy of corporate

sector all over the world. Almost 85 percent of Indian companies are using M&A as a core growth

strategy.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers,

and other forms of corporate restructuring. Thus important issues both for business decision and public

policy formulation have been raised. No company is regarded safe from takeover possibility. On the more

positive side Mergers and Acquisitions may be critical for the healthy expansion and growth of the

company. Successful entry into new product and geographical markets may require Mergers and

Acquisitions (M&A) at some stage in the company’s development. Successful competition in

international markets may depend on capabilities obtained in a timely and efficient fashion through

Mergers and Acquisitions (M&A). Many have argued that mergers increase value and efficiency and

move resources to their highest and best uses, thereby increasing shareholder value. To opt for a merger is

a complex affair, especially in terms of technicalities involved. Thus, Mergers and Acquisitions (M&A)

for corporate sector are the strategic concepts to take it up carefully. On observation it was found that

such business combinations, which may take forms of mergers, acquisitions, amalgamations and

takeovers, are important features of corporate structural changes. They have played an important role in

external growth also.

CHAPTER 2

MERGER AND ACQUISITION

A merger takes place when two companies combine together as equals to form an entirely new company.

Mergers are rare, since most often companies are acquired by other companies, and it is more of

absorption of operation of the target company. The term merger is more often used to show deference to

employees and former owners when another company is taken over. Mergers and acquisition are a means

to a long-term business strategy. New alliances, mergers or takeovers are usually based on company

vision and mission statements, and they have to truly reflect company corporate strategy in terms of what

it wants to achieve with the strategic move in the industry. The process of acquisition or a merger calls for

a disciplined approach by the decision makers at the company. Three important considerations should be

taken into account:

Company must be willing to take risk, and make investment early-on to benefit fully from the

merger, competitors and the industry takes heed and start to merger or acquirer themselves.

In order to reduce and diversify risk, multiple bets must be made, since some of the initiatives will

fail, while some will prove fruitful.

The management of the acquiring firm must learn to be resilient, patient and able to emulate

change owing to ever-changing business dynamics in the industry.

2.1 Types of Merger and Acquisition

Horizontal Mergers

Horizontal mergers happen when a company merges or takes over another company that offers the same

or similar product lines and services to the final consumers, which means that it is in the same industry

and at the same stage of production. Companies, in this case, are usually direct competitors. For example,

if a company producing cell phones merges with another company in the industry that produces cell

phones, this would be termed as horizontal merger. The benefit of this kind of merger is that it eliminates

competition, which helps the company to increase its market share, revenues and profits. Moreover, it

also offers economies of scale due to increase in size as average cost decline due to higher production

volume. These kinds of merger also encourage cost efficiency, since redundant and wasteful activities are

removed from the operations i.e. various administrative departments or departments suchs as advertising,

purchasing and marketing.

Vertical Mergers

A vertical merger is done with an aim to combine two companies that are in the same value chain of

producing the same good and service, but the only difference is the stage of production at which they are

operating. For example, if a clothing store takes over a textile factory, this would be termed as vertical

merger, since the industry is same, i.e. clothing, but the stage of production is different: one firm is works

in territory sector, while the other works in secondary sector. These kinds of merger are usually

undertaken to secure supply of essential goods, and avoid disruption in supply, since in the case of our

example, the clothing store would be rest assured that clothes will be provided by the textile factory. It is

also done to restrict supply to competitors, hence a greater market share, revenues and profits. Vertical

mergers also offer cost saving and a higher margin of profit, since manufacturer’s share is eliminated.

Concentric Mergers

Concentric mergers take place between firms that serve the same customers in a particular industry, but

they don’t offer the same products and services. Their products may be complements, product which go

together, but technically not the same products. For example, if a company that produces DVDs mergers

with a company that produces DVD players, this would be termed as concentric merger, since DVD

players and DVDs are complements products, which are usually purchased together. These are usually

undertaken to facilitate consumers, since it would be easier to sell these products together. Also, this

would help the company diversify, hence higher profits. This would enable business to offer one-stop

shopping, and therefore, convenience for consumers. The two companies in this case are associated in

some way or the other. Usually they have the production process, business markets or the basic

technology in common. It also includes extension of certain product lines. These kinds of mergers offer

opportunities for businesses to venture into other areas of the industry reduce risk and provide access to

resources and markets unavailable previously.

Conglomerate Merger

When two companies that operates in completely different industry, regardless of the stage of production,

a merger between both companies is known as conglomerate merger. This is usually done to diversify

into other industries, which helps reduce risks.

MAJOR POINTS OF DISTINCTION BETWEEN MERGERS AND ACQUISITION ARE AS FOLLOWS

MERGER ACQUISITION

Target company disappears Target company continues

Consideration is exchange of shares Consideration can be exchange of shares

or cash or both

No more tax implications Usually tax liability

No sales tax implications Sales tax implication

No out flow of funds by acquiring

company

Outflows of funds may take place

Cannot acquire part Can acquire part

2.2 Motives in Merger and acquisition

If strategy is choice, then what motives lie behind a choice to take a risk by investing in a takeover or

merging with another firm? It’s an important question and one that students researching external growth

via takeovers and mergers need to consider. By understanding the key motives for a takeover, it makes it

easier for students to evaluate the likely success or failure of the transaction, including the potential for

synergies to provide sufficient shareholder value.:

The motives for M&A into three main groups:

(1) Strategic

(2) Financial

(3) Managerial

Strategic:

In general, strategic motives tend to be the easiest to justify and the majority of transactions they are the

most influential and important. However, just because there is a strong stated strategic motive doesn’t

guarantee success. The chosen takeover target might be the wrong one; the price paid might be too high;

the integration process poorly managed. On balance, though, if a takeover has a sensible strategic fit (it

makes sense in that it supports the achievement of corporate objectives) then a student can legitimately

suggest a takeover had the right motives.

As you can see from the graphic below, there is a wide variety of potential strategic motives. Indeed, a

takeover can have more than one strategic motive - it all depends on what the corporate objectives are.

For example, takeovers that involve horizontal integration (e.g. Cooperative / Somerfield & WM

Morrison / Safeway) are often pursued to increase both the scale and the market share of the combined

firm. Successful horizontal integration ought to involve the achievement of significant cost synergies,

which in turn ought to lead to higher profit margins and lower unit costs, which therefore ought to be

make the combined business more competitive.

Financial:

All takeovers and mergers have financial motives of one kind or another - each is designed to

achieve a satisfactory rate of return for the investment and risk been taken, However, there are also

circumstances where the underlying motive for the transaction is financial rather than strategic. In other

words, it is the financial returns that are most important and which drive the deal.

A good example for students to consider would be any takeover involving a private equity (or

venture capital) buyer. Private equity firms are professional investors who manage investment funds

specifically designed to be used in corporate transactions.  These can range from relatively small-

scale management buy-outs to much larger “leveraged buy-outs” where a substantial proportion of the

finance used is in the form of debt (rather than equity). 

Private equity firms have been highly active in takeovers across developed economies for many

years now. Almost by definition, they do not have strategic motives for their investments, since they are

simply acting as financial investors.

Managerial :

When a takeover or merger fails, you can often trace it back to what are called “managerial

motives”. In general these are bad news for the shareholders of a business that is pursuing the takeover; it

often results in a transaction that destroys significant amounts of shareholder value.

Improving financial performance or reducing risk

1. Economies of scale: This refers to the fact that the combined company can often reduce its fixed

costs by removing duplicate departments or operations, lowering the costs of the company relative

to the same revenue stream, thus increasing profit margins.

2. Economy of scope: This refers to the efficiencies primarily associated with demand-side changes,

such as increasing or decreasing the scope of marketing and distribution, of different types of

products.

3. Increased revenue or market share: This assumes that the buyer will be absorbing a major

competitor and thus increase its market power (by capturing increased market share) to set prices.

4. Cross-selling: For example, a bank buying a stock broker could then sell its banking products to

the stock broker's customers, while the broker can sign up the bank's customers for brokerage

accounts. Or, a manufacturer can acquire and sell complementary products.

5. Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by

reducing their tax liability. In the United States and many other countries, rules are in place to

limit the ability of profitable companies to "shop" for loss making companies, limiting the tax

motive of an acquiring company.

6. Geographical or other diversification: This is designed to smooth the earnings results of a

company, which over the long term smoothens the stock price of a company, giving conservative

investors more confidence in investing in the company. However, this does not always deliver

value to shareholders.

CHAPTER 3

LAWS OF REGULATING MERGER AND ACQUISITION

3.1 The companies act, 1956

Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations, mergers and the

procedure to be followed for getting the arrangement, compromise or the scheme of amalgamation

approved. Though, section 391 deals with the issue of compromise or arrangement which is different

from the issue of amalgamation as deal with under section 394, as section 394 too refers to the procedure

under section 391 etc., all the section are to be seen together while understanding the procedure of getting

the scheme of amalgamation approved. Again, it is true that while the procedure to be followed in case of

amalgamation of two companies is wider than the scheme of compromise or arrangement though there

exist substantial overlapping.

The procedure to be followed while getting the scheme of amalgamation and the important points, are as

follows:-

(1) Any company, creditors of the company, class of them, members or the class of members can file an

application under section 391 seeking sanction of any scheme of compromise or arrangement. However,

by its very nature it can be understood that the scheme of amalgamation is normally presented by the

company. While filing an application either under section 391 or section 394, the applicant is supposed to

disclose all material particulars in accordance with the provisions of the Act.

(2) Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order for the meeting of

the members, class of members, creditors or the class of creditors. Rather, passing an order calling for

meeting, if the requirements of holding meetings with class of shareholders or the members, are

specifically dealt with in the order calling meeting, then, there won’t be any subsequent litigation. The

scope of conduct of meeting with such class of members or the shareholders is wider in case of

amalgamation than where a scheme of compromise or arrangement is sought for under section 391.

(3) The scheme must get approved by the majority of the stake holders viz., the members, class of

members, creditors or such class of creditors. The scope of conduct of meeting with the members, class of

members, creditors or such class of creditors will be restrictive some what in an application seeking

compromise or arrangement.

(4) There should be due notice disclosing all material particulars and annexing the copy of the scheme as

the case may be while calling the meeting.

(5) In a case where amalgamation of two companies is sought for, before approving the scheme of

amalgamation, a report is to be received form the registrar of companies that the approval of scheme will

not prejudice the interests of the shareholders.

(6) The Central Government is also required to file its report in an application seeking approval of

compromise, arrangement or the amalgamation as the case may be under section 394A.

(7) After complying with all the requirements, if the scheme is approved, then, the certified copy of the

order is to be filed with the concerned authorities.

3.2 The Competition Act, 2002 

following provisions of the Competition Act, 2002 deals with mergers of the company:-

(1) Section 5 of the Competition Act, 2002 deals with “Combinations” which defines combination by

reference to assets and turnover 

(a) exclusively in India and 

(b) in India and outside India.

For example, an Indian company with turnover of Rs. 3000 crores cannot acquire another Indian company

without prior notification and approval of the Competition Commission. On the other hand, a foreign

company with turnover outside India of more than USD 1.5 billion (or in excess of Rs. 4500 crores) may

acquire a company in India with sales just short of Rs. 1500 crores without any notification to (or

approval of) the Competition Commission being required.

(2) Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into a

combination which causes or is likely to cause an appreciable adverse effect on competition within the

relevant market in India and such a combination shall be void. 

All types of intra-group combinations, mergers, demergers, reorganizations and other similar transactions

should be specifically exempted from the notification procedure and appropriate clauses should be

incorporated in sub-regulation 5(2) of the Regulations. These transactions do not have any competitive

impact on the market for assessment under the Competition Act, Section 6.

3.3 Foreign Exchange Management Act,1999

The foreign exchange laws relating to issuance and allotment of shares to foreign entities are contained in

The Foreign Exchange Management (Transfer or Issue of Security by a person residing out of India)

Regulation, 2000 issued by RBI vide GSR no. 406(E) dated 3rd May, 2000. These regulations provide

general guidelines on issuance of shares or securities by an Indian entity to a person residing outside India

or recording in its books any transfer of security from or to such person. RBI has issued detailed

guidelines on foreign investment in India vide “Foreign Direct Investment Scheme” contained in

Schedule 1 of said regulation.

3.4 SEBI Take over Code 1994

SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to 55%,

provided the acquirer does not acquire more than 5% of shares or voting rights of the target company in

any financial year. [Regulation 11(1) of the SEBI Takeover Regulations] However, acquisition of shares

or voting rights beyond 26% would apparently attract the notification procedure under the Act. It should

be clarified that notification to CCI will not be required for consolidation of shares or voting rights

permitted under the SEBI Takeover Regulations. Similarly the acquirer who has already acquired control

of a company (say a listed company), after adhering to all requirements of SEBI Takeover Regulations

and also the Act, should be exempted from the Act for further acquisition of shares or voting rights in the

same company.

3.5 The Indian Income Tax Act (ITA), 1961 

Merger has not been defined under the ITA but has been covered under the term 'amalgamation' as

defined in section 2(1B) of the Act. To encourage restructuring, merger and demerger has been given a

special treatment in the Income-tax Act since the beginning. The Finance Act, 1999 clarified many issues

relating to Business Reorganizations thereby facilitating and making business restructuring tax neutral. As

per Finance Minister this has been done to accelerate internal liberalization. Certain provisions applicable

to mergers/demergers are as under: Definition of Amalgamation/Merger — Section 2(1B). Amalgamation

means merger of either one or more companies with another company or merger of two or more

companies to form one company in such a manner that: 

(1) All the properties and liabilities of the transferor company/companies become the properties and

liabilities of Transferee Company.

(2) Shareholders holding not less than 75% of the value of shares in the transferor company (other than

shares which are held by, or by a nominee for, the transferee company or its subsidiaries) become

shareholders of the transferee company.

The following provisions would be applicable to merger only if the conditions laid down in section 2(1B)

relating to merger are fulfilled:

(1) Taxability in the hands of Transferee Company — Section 47(vi) & section 47

(a) The transfer of shares by the shareholders of the transferor company in lieu of shares of the transferee

company on merger is not regarded as transfer and hence gains arising from the same are not chargeable

to tax in the hands of the shareholders of the transferee company. [Section 47(vii)]

(b) In case of merger, cost of acquisition of shares of the transferee company, which were acquired in

pursuant to merger will be the cost incurred for acquiring the shares of the transferor company. [Section

49(2)].

3.6 Mandatory permission by the courts

any scheme for mergers has to be sanctioned by the courts of the country. The company act provides that

the high court of the respective states where the transferor and the transferee companies have their

respective registered offices have the necessary jurisdiction to direct the winding up or regulate the

merger of the companies registered in or outside India.

The high courts can also supervise any arrangements or modifications in the arrangements after having

sanctioned the scheme of mergers as per the section 392 of the Company Act. Thereafter the courts would

issue the necessary sanctions for the scheme of mergers after dealing with the application for the merger

if they are convinced that the impending merger is “fair and reasonable”.

The courts also have a certain limit to their powers to exercise their jurisdiction which have essentially

evolved from their own rulings. For example, the courts will not allow the merger to come through the

intervention of the courts, if the same can be effected through some other provisions of the Companies

Act; further, the courts cannot allow for the merger to proceed if there was something that the parties

themselves could not agree to; also, if the merger, if allowed, would be in contravention of certain

conditions laid down by the law, such a merger also cannot be permitted. The courts have no special

jurisdiction with regard to the issuance of writs to entertain an appeal over a matter that is otherwise

“final, conclusive and binding” as per the section 391 of the Company act.

3.7 Stamp duty 

Stamp act varies from state to State. As per Bombay Stamp Act, conveyance includes an order in respect

of amalgamation; by which property is transferred to or vested in any other person. As per this Act, rate

of stamp duty is 10 per cent.

3.8 Amendments In Companies Act 1956

PROVISIONS FOR MERGER & AMALGAMATION

Under Companies Act, 1956 – Section 390-396A.

Under Companies Act, 2013- Section 230-240

Merger is generally a scheme of arrangement or Compromise between a Company, Shareholders and Creditors , whereas, Amalgamation is defined under section 2(1b) of Income Tax Act, 1961 as a Merger of one or more Companies with another Company or Merger of two or more Companies to form a new Company.

DISCLOSURES IN CONNECTION WITH MERGER & AMALGAMATION Under Companies Act, 1956

Tribunal had Power to sanction any compromise or arrangements with creditors and members if satisfied that company or any other person by whom an application has been made (by way of first motion Petition) has disclosed all material facts relating to company with an affidavit such as latest financial position of the Company, accounts of the company, latest auditor's report etc. For the compliance part, the notice of meeting was required to be sent along with statement setting forth the terms of the compromise or arrangement and explaining its affect in particular, the statement must state all material interest of directors of the company, whether in their capacity as such or as member or creditors of company or otherwise. The tribunal should also give notice to Central Government (Regional Director and Registrar of Companies) and shall take into consideration the representations, if any, made to it by that government before passing any order. Also, during the same period there was a requirement of newspaper publication and any objections by any of the shareholders, creditors if any, be raised before the Court during the hearing of the second motion Petition. All disclosure provision under 1956 Companies Act has been stated.2

Under Companies Act, 2013

The provisions of section 230 of the Companies Act, 2013 provide the additional disclosure if the proposed scheme involves; Reduction of Share Capital or the scheme is of Corporate Debt restructuring; consented not less then 75% in value of secured creditors, Every notice of meeting about scheme to disclose valuation report explaining affection various shareholders. Further, no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company's auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under section 133 of the Companies Act, 2013.

As per the provisions of Companies Act, 2013 dealing with the Arrangements; notice of meeting to consider Compromise or arrangement to be given to Central Government, Income Tax Authorities, Reserve Bank, Securities Exchange Board of India, Registrar of Companies, respective Stock Exchange, Official Liquidator, Competition Commission of India and other Authorities likely to be affected by the same.

These Authorities can voice their concern within 30 days of receipt of notice, failing which it will be presumed that they have no objection to the scheme3.

CROSS BORDER MERGER & AMALGAMATION Under Companies Act, 1956

As per section 394, Court can sanction arrangement between two or more Companies where whole or part of undertaking, property or liability of any company referred to as transferor Company is to be transferred to another company referred as transferee company. According to the provisions of Companies Act, 1956, Inbound merger (Foreign Company merges into an Indian Company) was permissible however, outbound merger (Indian company cannot merge with foreign Company) was not allowed. According to this section only inbound merger is allowed where transferor/target company means any body corporate whether or not registered under 1956 Act, that a foreign company could be transferor or target company. Transferee Company means an Indian Company. Cross Border merger allowed under 1956 Act as long as the Acquirer/transferee is Indian Company.

Under Companies Act, 2013

In bound and out bond foreign company merger are allowed, which means Foreign Company merging into Indian Company and Indian Company merging into foreign Company could be done with RBI approval. Therefore both these options are open under 2013 Act if foreign companies to be in notified countries, under Exchange Control Regulation, shares can be issued under Automatic route to non- resident, subject to certain consideration, consideration to shareholders of merging Company may include cash, depository receipts or combination of both. This section has widen the scope for Indian Companies as now they have both options of arrangement4.

FAST TRACK MERGER

Fast Track merger or quick form merger is the new provision which is added in Companies Act, 2013. Fast track merger is merger between two or more small companies5, holding company and its wholly own subsidiary and such other company as may be prescribed.

Fast Track merger does not involve Court or Tribunal, approval of National Company Law Tribunal is also not required. For fast track merger board of directors of both the Companies would approve the scheme. However, notice has to be issued to ROC and official liquidator and objections / suggestions has to be placed before the members. The scheme needs to be approved by members holding at least 90 percent of the total number of shares or by creditors representing nine-tenths in value of the creditors or class of creditors of respective companies.6 Once the scheme is approved, notice would have to be given to the Central Government, ROC and Official Liquidator. NCLT may confirm the scheme or order that consider as normal merger under section 232 of Companies Act, 2013.

Therefore Fast track merger will be a speedy process as it does not require approval for NCLT available to certain kind of truncations. It opens the scope for small companies who wanted to merge and can propose the scheme of Merger or Amalgamation through their Board of directors. There is also no requirement for sending notices to RBI or income-tax or providing a valuation report or providing auditor certificate for complying with the accounting standard.

OBJECTION TO SCHEME OF AMALGAMATION

Scheme of Amalgamation can be objected as per section 230(4) of Companies Act, 2013, only by shareholders having not less than 10% holdings or creditors debt is not less than 5% of total outstanding debt as per the last audited financial statement. whereas earlier under Companies Act, 1956 there was no such limit which state that person holding even 1% in the company can object the scheme which was not fair at all therefore the new threshold limit for raising objections in regard to scheme or arrangement will protect the scheme from small shareholders' and creditors' unnecessary litigation and objection.

MEETING OF CREDITORS/SHAREHOLDERS TO APPROVE THE SCHEME Under Companies Act, 1956

Scheme to approved by 3/4th value of creditors or members, agree to scheme, then it will be binding, if sanctioned by court as stated under section 391(2), voting in person or a proxy at meeting. E-Voting is not permitted under 1956 Act.

Under Companies Act, 2013

Scheme is to be approved by 3/4th of creditors or members, agree to scheme, then it will be binding, if sanctioned by National Company Law Tribunal as stated under section 230(6)(1). The 2013 Act additionally allows the approval of the scheme by postal ballot. Postal ballot gives an equal opportunity of vote to all stake holders. E-Voting is permitted under new 2013 Act. Therefore concept of E-Voting is introduced under new Act and section 108 of the Companies Act, 2013 read with rule 20 of Companies(Management and Administrative) rules, 2014 deal with exercise of right to vote by member by electronic means. Therefore postal ballot system and introduction E-Voting will protect the shareholders interest and will also increase the participation of shareholders of the company in voting.

MERGER OF A LISTED COMPANY INTO UNLISTED COMPANY7

The Companies Act, 2013 requires that in case of merger between a listed transferor company and an unlisted transferee company, transferee company would continue to be unlisted until it becomes listed. Shareholders of listed Company have the option to exit on payment of value of their shares, as otherwise they will continue as a shareholder of the unlisted company. the Payment to such shareholders willing to exit shall be made on pre-determined price formula or after valuation. Whereas; under Companies Act, 1956 there was no such provision. Therefore reverse merger of listed Company into an unlisted Company does not automatically result in a listing of surviving entity, which may be the unlisted Company.

BODY OF APPROVING MERGER

Approval of scheme requires an independent body of oversight and fairness. According to 1956 Companies Act , scheme of arrangement was to be approved by respective High Court which has jurisdiction over Acquirer and Target companies. Whereas; under Companies Act, 2013 National Company Law Tribunal will deal with matters related to Merger & Acquisition.

NCLT would be one specified body dealing with cases opposed to multiple High Court in case of the companies falling under the jurisdiction of different high courts.

VALUATION REPORT

The 2013 Act makes it mandatory that notice of meeting to discuss a scheme must be accompanied by valuation report prepared by an expert whereas, Companies Act,1956 Act is silent on disclosing the valuation report to the stakeholders, as a matter of transparency and good corporate governance. Courts also required annexing of the valuation report to the application submitted before them.

CHAPTER 4

LEGAL FRAME FOR MERGER AND ACQUISITION

Legal Procedure For Bringing About Merger Of Companies

(1) Examination of object clauses:

The MOA of both the companies should be examined to check the power to amalgamate is available.

Further, the object clause of the merging company should permit it to carry on the business of the merged

company. If such clauses do not exist, necessary approvals of the share holders, board of directors, and

company law board are required. 

(2) Intimation to stock exchanges:

The stock exchanges where merging and merged companies are listed should be informed about the

merger proposal. From time to time, copies of all notices, resolutions, and orders should be mailed to the

concerned stock exchanges. 

(3) Approval of the draft merger proposal by the respective boards:

The draft merger proposal should be approved by the respective BOD’s. The board of each company

should pass a resolution authorizing its directors/executives to pursue the matter further. 

(4) Application to high courts:

Once the drafts of merger proposal is approved by the respective boards, each company should make an

application to the high court of the state where its registered office is situated so that it can convene the

meetings of share holders and creditors for passing the merger proposal.

(5) Dispatch of notice to share holders and creditors:

In order to convene the meetings of share holders and creditors, a notice and an explanatory statement of

the meeting, as approved by the high court, should be dispatched by each company to its shareholders and

creditors so that they get 21 days advance intimation. The notice of the meetings should also be published

in two news papers.

(6) Holding of meetings of share holders and creditors:

A meeting of share holders should be held by each company for passing the scheme of mergers at least

75% of shareholders who vote either in person or by proxy must approve the scheme of merger. Same

applies to creditors also.

(7) Petition to High Court for confirmation and passing of HC orders:

Once the mergers scheme is passed by the share holders and creditors, the companies involved in the

merger should present a petition to the HC for confirming the scheme of merger. A notice about the same

has to be published in 2 newspapers.

(8) Filing the order with the registrar:

Certified true copies of the high court order must be filed with the registrar of companies within the time

limit specified by the court.

(9) Transfer of assets and liabilities:

After the final orders have been passed by both the HC’s, all the assets and liabilities of the merged

company will have to be transferred to the merging company.

(10) Issue of shares and debentures:

The merging company, after fulfilling the provisions of the law, should issue shares and debentures of the

merging company. The new shares and debentures so issued will then be listed on the stock exchange.

Waiting Period In Merger

International experience shows that 80-85% of mergers and acquisitions do not raise competitive

concerns and are generally approved between 30-60 days. The rest tend to take longer time and, therefore,

laws permit sufficient time for looking into complex cases. The International Competition Network, an

association of global competition authorities, had recommended that the straight forward cases should be

dealt with within six weeks and complex cases within six months. 

The Indian competition law prescribes a maximum of 210 days for determination of combination, which

includes mergers, amalgamations, acquisitions etc. This however should not be read as the minimum

period of compulsory wait for parties who will notify the Competition Commission. In fact, the law

clearly states that the compulsory wait period is either 210 days from the filing of the notice or the order

of the Commission, whichever is earlier. In the event the Commission approves a proposed combination

on the 30th day, it can take effect on the 31st day. The internal time limits within the overall gap of 210

days are proposed to be built in the regulations that the Commission will be drafting, so that the over

whelming proportion of mergers would receive approval within a much shorter period.

The time lines prescribed under the Act and the Regulations do not take cognizance of the compliances to

be observed under other statutory provisions like the SEBI (Substantial Acquisition of Shares and

Takeovers) Regulations, 1997 (‘SEBI Takeover Regulations’). SEBI Takeover Regulations require the

acquirer to complete all procedures relating to the public offer including payment of consideration to the

shareholders who have accepted the offer, within 90 days from the date of public announcement.

Similarly, mergers and amalgamations get completed generally in 3-4 months’ time. Failure to make

payments to the shareholders in the public offer within the time stipulated in the SEBI Takeover

Regulations entails payment of interest by the acquirer at a rate as may be specified by SEBI. [Regulation

22(12) of the SEBI Takeover Regulations] It would therefore be essential that the maximum turnaround

time for CCI should be reduced from 210 days to 90 days.

CHAPTER 5

WHY MANY MERGER AND ACQUISITION FAIL

From an entrepreneur’s-eye-view, M&A provides lucrative shareholder exits. Viewed through the lens of

the public company, innovation-through-acquisition can be a legitimate strategy for entering exciting new

technologies or markets by first allowing startups to do the de-risking.

And yet history shows that, in at least half of all cases, after the deal closes, acquisitions sour. (There are

dozens of studies and papers, and estimates of how many M&A deals fail to meet financial expectations

run from 50 percent to as high as 90 percent.)

So all too often from a startup’s perspective, the good news is that entrepreneurs, option-holders and

investors cash out, but the bad news is that the employees find themselves in an oxygen-starved

bureaucracy and the startup’s customers end up confused or even orphaned. And from the acquiring

company’s perspective, it’s all too common for the business advantages they sought – some combination

of access to new products, access to new markets or geographies, market share increases, growth faster

than purely organic growth, and/or economies of scale – to simply fail to materialize.

I’ve sat on both sides of the fence in M&A on multiple occasions, selling my startups to public companies

as well as being on the acquiring side. I’ve witnessed things from the executive seat, the board seat, and

as an advisor, and I’ve experienced superb outcomes, mediocre results, and unmitigated disasters.

From that perspective, here’s my list of 6 key reasons why M&A deals come unraveled after the fact –

and what you can do about it:

1. Misgauging Strategic Fit

If the acquisition is too far outside the parent company’s core competency, things aren’t likely to work. A

company that sells to its business customers chiefly through catalog and Internet sales ought to be very

cautious about acquiring a company that relies on direct sales – even if the products are, broadly-

speaking, in the same industry. Similarly, a company whose traditional strength lies in selling products to

businesses might want to think twice before making a foray into a consumer-oriented business.

Consulting firms have been known to acquire software companies driven by the rationale that the parent’s

client companies use these sorts of software apps, and the applications are in the same broad domain as

the consulting firm’s expertise; then they discover that selling B2B applications is wholly different from

managing consulting engagements. An honest strategy audit up-front is the answer: don’t stray beyond

your core competencies, and ask whether the target company fits your strategy, your operations, and your

distribution channels.   

 

2. Getting the Deal Structure Or Price Wrong

We all understand that if the acquiring company pays too much in an auction environment, it’s going to

be tough to get the acquisition to show a positive ROI. To protect themselves, some acquiring companies

like to structure acquisitions with half or more of the purchase price held back based on achievement of

future performance hurdles. But watch out: such earn-outs can backfire on the acquiring company in

unexpected ways. If, for instance, a major payment milestone is based on post-acquisition sales

performance but 99 percent of the sales people are working for the parent company – and therefore are

neither aware of nor incentivized by the sales milestones – then the acquired company employees may

well feel demoralized due to having scant control over achieving major payment milestones.  I’ve seen

similar things happen with product-delivery-oriented earn-out payments: the good news is that the parent

company hires in dozens of additional product developers, but the bad news is that only a tiny proportion

of the newly-constituted product team knows about or is incentivized by achievement of a major earn-out

milestone for the acquired company. In both cases, well-intentioned deal structures that held back

payments based on future performance ended up having unintended consequences and souring the deal.

The better bet – easier said than done – is negotiating a fair price up-front.  

 

3. Misreading The New Company’s Culture

Just because your two companies are in the same industry doesn’t mean you’ve got the same culture.  It’s

all too easy for the acquiring company’s integration team to swagger in with “winner’s syndrome,” and

fulfill the worst fears of the new staff. Far better if they enter the new company’s offices carrying

themselves with the four H’s: honesty, humanity, humility, and humor. 

 

4. Not Communicating Clearly — Or Enough

In the absence of information and clear communication, rumors will fly, and people at the acquiring

company will assume the worst. Communicate to the entire team, not just the top

executives. Communicate clearly and honestly and consistently.  If there’s bad news, be sure to deliver it

all it once, not piecemeal, and make it clear that that’s all there is – that folks don’t have to worry waiting

for another shoe to drop. And when you think you’ve communicated enough, you’re one-quarter of the

way there.

5. Blindly Focusing On Integration For Its Own Sake

Don’t assume that all integration is good. I’ve watched all too often as the parent company insists on

fixing things that aren’t broken: The acquired company has established a strong brand, but the parent

insists on “improving things” by replacing it with something that blandly blends with the corporate

naming conventions. New standard operating procedures are imposed that suck all the oxygen from the

room and demoralize the team. A small sales team has clear account authority, but the parent knows

better and makes the newly-acquired offering the 1,400th anonymous product in its sales force’s price

list.  The acquired product works perfectly well as-is, but the parent company insists on rebuilding it so

that it fits into the parent’s technical architecture – thereby punishing customers and freezing all product

enhancements for years. The bottom line is don’t be too heavy-handed. If this company was worth

acquiring, it’s probably worth trusting, funding and encouraging to thrive.

6. Not Focusing Enough On Customers And Sales (vs. Cost Synergies)

The most fundamental scorecard of acquisition success is financial performance, and on that count it’s far

more important to focus on revenue growth than cost control. An insightful McKinsey study (published a

decade ago, but whose conclusions remain completely valid) pointed out that small changes in revenue

can outweigh major changes in planned cost savings. A merger with a 1% shortfall in revenue growth

requires a 25% improvement in cost savings to stay on-track to create value. Conversely, exceeding your

revenue-growth targets with your newly-acquired company by only 2 to 3 percent can offset a 50 percent

failure on cost-reduction.

And the worst thing you can do is have a sales drop-off immediately after the acquisition – which is all

too common given confusion among the newly-merged team and the customer base – because you can

never make up those lost sales. Knowing the paramount importance of uninterrupted revenue – read: sales

momentum – the first thing the parent company ought to do in concert with the acquired-company team is

get out in front of customers, tell them what’s going on, and reassure them. Yet it’s amazing how rarely

that happens. As with the acquired company’s staff, with their customers, in the absence of clear

communication, rumors and negative assumptions will fill the void.  So get out in front of your newly-

acquired customers, tell them they’re still loved, and provide them with a clear, comfortable, consistent

and honest story. And when you think you’re done communicating with your new customers… you’re

probably one-quarter of the way there.

CHAPTER 6

CASE STUDIES

CAPGEMINI AQUIRES IGATE

Paris-headquartered IT services and software company Capgemini’s acquisition of IGate for over $4

billion is much more than just getting a stronger presence in India. 

The acquisition just shows how the European firms are getting aggressive to take the share in the global

IT services market, which so far has been dominated by US players, Indian IT player. The sole company

that has managed to be a serious contender to global players has been Accenture. The Ireland

incorporated firm boost revenue of $30 billion in 2014, much ahead of both Capgemini and Atos. 

Capgemini is not new to acquiring India based companies. In 2006 it acquired Kanbay, which was

headquartered in the US but had operation team based out of India. The acquisition then, one of the

biggest, was done for $1.25 billion. Capegemini had given a 15.9 per cent premium to Kanbay’s shares

then. 

But more than the valuation it was the strong foothold that Capgemini got in the banking industry.

Kanbay boosted of clients such as Household International, Morgan Stanley among others. 

Despite the acquisition of Kanbay and then other targets, Capgemini’s growth in taking the bigger share

of the US market was not as fast as compared to some of the Indian or MNC players. 

Rather European firms in the services sector have been a tad slow in taking on the outsourcing pie share.

This is not only true for Capgemini, but also for its closest peer and competitor Atos. 

Atos too in a bid to diversify has over the past few years stepped on the gas on inorganic route. It recently

signed a deal to acquire Xerox’s ITO business for $1.05 billion. This acquisition while tripled its US

revenues it also enhanced its presence offshore capabilities. The acquisition gave the company centre in

India, Mexico and Philippines. 

“IGate is a good strategic fit for Capgemini it is of a size big enough to move the needle yet small enough

to absorb. Capgemini is better positioned to absorb IGate than it was the EY consulting practice,” said

Peter Bendour-Samuel, CEO, Everest Group.

With IGate Capgemini will further up its share in the US. According to the company’s release the

acquisition grows its presence in North America, it is at the top of the Group’s strategic agenda. The

combination of IGATE and Capgemini increases the group’s revenues in the region by 33 per cent to an

estimated $4 billion, making North America its first market with approximately 30 per cent of the pro-

forma combined revenues in 2015. An estimated 50,000 employees will be servicing Capgemini’s North

American clients. 

Analyst however, feel that Capgemini should focus on acquiring newer technology that will give it a

niche focus. “Most of the leading service providers today are looking at niche buys that specifically add

software IP or a vertical capability, such as Cognizant/Trizetto, or Infosys/Panaya However, in

Capgemini’s case, there are still some significant holes in its portfolio to fill out, most notably a more

powerful presence in India, a stronger portfolio of US enterprise clients, and a deeper foothold in

financial services.  iGATE brings these to the table. Net-net, we applaud the boldness of this move, and

hope, for Capgemini’s sake, the French mothership can integrate the two firms effectively,” said Phil

Fersht, CEO of US based HfS Research in his blog.  

But industry experts are also saying that merger of these companies will be crucial for the success.

“Integration will be challenging with two very different cultures. It has recent experience gained from the

successful acquisition of Kanbay and a growing Indian presence. Over all this is a nice move but will

require Capgemini to move quickly to successfully integrate IGate and stem any talent losses. It also

points to the growing momentum of industry consolidation and will not be the last such move,” added

Bendour-Samuel. 

That is perhaps one of the reasons why Capgemini wants to continue to keep IGate listed on Nasdaq as

well as continue with the branding. “For us IGate is a strategic play. We do not want to take IGate

private,” said Paul Hermelin, chairman and CEO of Capgemini.

TCS AQUIRE CMC

Mumbai, October 16, 2014: Tata Consultancy Services (TCS) (BSE: 532540, NSE: TCS), the leading IT

services, consulting and business solutions firm today announced that the Board of Directors of TCS and

CMC Limited (CMC), a subsidiary of TCS, have today approved the amalgamation of CMC with TCS

pursuant to the provisions of Sections 391 to 394 of the Companies Act, 1956. As per the terms of the

Scheme of Amalgamation (Scheme), shareholders of CMC will receive 79 equity share of ` 1 each of

TCS for 100 equity shares of ` 10 each of CMC. The swap ratio has been arrived at based on the valuation

report prepared by B.S.R. & Associates LLP. After the amalgamation, the paid-up share capital of TCS

will increase from ` 195.87 crore to ` 197.04 crore. The Scheme is subject to, court, regulatory,

shareholders and other necessary approvals. The consolidated revenue of TCS, for the quarter ended

September 30, 2014, was ` 23,816.48 crore, with profit after tax of ` 5,244.28 crore based on Indian

GAAP. For the same period, the consolidated revenue of CMC was ` 616.68 crore with profit after tax of

` 76.00 crore based on Indian GAAP. CMC, where TCS holds a 51.12% stake, is engaged in the design,

development and implementation of software technologies and applications, providing professional

services in India and overseas, and procurement, installation, commissioning, warranty and maintenance

of imported/indigenous computer and networking systems, and in education and training. The

amalgamation will enable TCS to consolidate CMC’s operations in a single company with rationalized

structure, enhanced reach, greater financial strength and flexibility aiding in achieving economies of

scale, more focused operational efforts, standardization and simplification of business processes and

productivity improvements. About Tata Consultancy Services Ltd. (TCS) Tata Consultancy Services is an

IT services, consulting and business solutions organization that delivers real results to global business,

ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of

IT, BPS, infrastructure, engineering and assurance services. This is delivered through its unique Global

Network Delivery Model™, recognized as the benchmark of excellence in software development. A part

of the Tata group, India’s largest industrial conglomerate, TCS has over 310,000 of the world’s best-

trained consultants in 46 countries. The company generated consolidated revenues of US $13.4 billion for

year ended March 31, 2014 and is listed on the National Stock Exchange and Bombay Stock Exchange in

India.

CHAPTER 7

CONCLUSION

Continuous growth and survival are the ultimate objectives of any organization and M&A is one of the

forms of survival strategy. One of the most important ways to grow profitably and maximizing

shareholders’ wealth is the nuptials of Companies in Corporate World. But painstaking pre-merger

planning including conducting appropriate due diligence, valuable communication during the integration,

efficient management and committed leadership, and pace at which the integration plan is done, together

is required to handle these nuptials of companies successfully. Mergers and Acquisitions (M&A) are the

expression of strategic concepts pertaining to the corporate sector. They envisage management of

processes related to selling, buying and combining one or more companies for obtaining a common cause.

Common cause consists of aiding, financing or assisting a company to grow at a much faster rate.

Corporate Mergers and Acquisitions are very crucial for any country's economy. This is so because the

Corporate Mergers and Acquisitions can result in significant restructuring of the industries and can

contribute to rapid growth of industries by generating Economies of Scale, increased competition in the

market and raise the vulnerability of the stockholders as the value of stocks experience ups and downs

after a merger or acquisition. Although the concept of Merger and Acquisition are different from one

another but both can be used as engines of growth. As a result, M&As are considered as most strategic

concepts to make sure growth for the companies in the Corporate world.