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[EVENT RETURN STUDY] Mergers & Acquisitions

1 N. R. Institute of Business Management

1.Indian Economy- Mergers & Acquisitions

The Indian economy has undergone a major transformation and structural change

during the past decade or so as a result of economic reforms introduced by the

Government of India since 1991 in the wake of policy of economic liberalization and

globalization. In this liberalized era, size and "core competence" have become the

focus of every business enterprise. Naturally, this requires companies to grow and

expand in businesses that they understand well. Thus, leading corporate houses have

undertaken a massive restructuring exercise to create a formidable presence in their

core areas of interest. Mergers and acquisitions (M&As) is one of the most effective

methods of corporate restructuring and has, therefore, become an integral part of the

long-term business strategy of corporate.

The M&A activity has its impact on various diverse groups such as corporate

management, shareholders and investors, investment bankers, regulators, stock

markets, customers, government and taxation authorities, and society at large.

Therefore, it is not surprising that it has received considerable attention at the hands

of researchers world over. A number of studies have been carried out abroad

especially in the developed capital markets of Europe, Australia, Hong Kong, and US.These studies have largely focused on different aspects, viz., (a) the rationale of

M&As, (b) allocational and redistr ibution role of M&As, (c) effect of takeovers on

shareholders' wealth, (d) corporate financial performance, etc. Some studies have

also been carried out to predict corporate takeovers using financial ratios. M&As,

being a new phenomenon in India, has not received much attention of researchers. In

fact, no comprehensive study has been undertaken to examine various aspects

especially after the Takeover Code came into being in1997. This study has been

undertaken to fill this gap.

Until upto a couple of years back, the news that Indian companies having acquired

American-European entities was very rare. However, this scenario has taken a sudden

U turn. Nowadays, news ofIndian Companies acquiring foreign businesses are more

common than other way round.
http://trak.in/Tags/Business/2007/05/30/india%e2%80%99s-new-found-confidence-global-acquisitions/http://trak.in/Tags/Business/2007/07/02/the-indian-mergers-and-acquisitions-are-growing-exponentially/http://trak.in/Tags/Business/2007/07/02/the-indian-mergers-and-acquisitions-are-growing-exponentially/http://trak.in/Tags/Business/2007/05/30/india%e2%80%99s-new-found-confidence-global-acquisitions/


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Buoyant Indian Economy, extra cash with Indian corporates, Government policies and

newly found dynamism in Indian businessmen have all contributed to this new

acquisition trend. Indian companies are now aggressively looking at North American

and European markets to spread their wings and become the global players.

The Indian IT and ITES companies already have a strong presence in foreign markets;

however, other sectors are also now growing rapidly. The increasing engagement of

the Indian companies in the world markets, and particularly in the US, is not only an

indication of the maturity reached by Indian Industry but also the extent of their

participation in the overall globalization process.

The Top 10 acquisitions made by Indian companies worldwide

Acquirer Target Company Country targetedDeal value

($ ml)Industry

Tata Steel Corus Group plc UK 12,000 Steel

Hindalco Novelis Canada 5,982 Steel

Videocon Daewoo Electronics Corp. Korea 729 Electronics

Dr. Reddys Labs Betapharm Germany 597 Pharmaceutical

Suzlon Energy Hansen Group Belgium 565 Energy

HPCLKenya Petroleum

Refinery Ltd.Kenya 500 Oil and Gas

Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical

Tata Steel Natsteel Singapore 293 Steel

Videocon Thomson SA France 290 Electronics

VSNL Teleglobe Canada 239 Telecom
http://trak.in/Tags/Business/2007/04/30/the-indian-economy-can-it-be-stopped-somehow/http://trak.in/Tags/Business/2007/04/28/indian-it-companies-flush-with-cash/http://trak.in/Tags/Business/2007/05/30/india%e2%80%99s-new-found-confidence-global-acquisitions/http://trak.in/Tags/Business/2007/06/20/vijay-mallya-kingfisher-airlines-enters-overseas-market-biggest-airbus-order/http://trak.in/Tags/Business/2007/04/28/indian-it-companies-flush-with-cash/http://trak.in/Tags/Business/2007/04/30/the-indian-economy-can-it-be-stopped-somehow/


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2.Mergers & Acquisitions

Meaning of Merger

A merger is a tool used by companies for the purpose of expanding their operations

often aiming at an increase of their long term profitability. There are 15 different types

of actions that a company can take when deciding to move forward using M&A.

Usually mergers occur in a consensual (occurring by mutual consent) setting where

executives from the target company help those from the purchaser in a due diligence

process to ensure that the deal is beneficial to both parties. Acquisitions can also happen

through a hostile takeover by purchasing the majority of outstanding shares of acompany in the open market against the wishes of the target's board. In the United

States, business laws vary from state to state whereby some companies have limited

protection against hostile takeovers. One form of protection against a hostile takeover is

the shareholder rights plan, otherwise known as the poison pill.

In business or economics a merger is a combination of two companies into one larger

company. Such actions are commonly voluntary and involve stock swap or cash

payment to the target. Stock swap is often used as it allows the shareholders of the two

companies to share the risk involved in the deal. A merger can resemble a takeover but

result in a new company name (often combining the names of the original companies)

and in new branding; in some cases, terming the combination a "merger" rather than an

acquisition is done purely for political or marketing reasons.

Historically, mergers have often failed to add significantly to the value of the

acquiring firm's shares. Corporate mergers may be aimed at reducing marketcompetition, cutting costs (for example, laying off employees, operating at a more

technologically efficient scale, etc.), reducing taxes, removing management, "empire

building" by the acquiring managers, or other purposes which may or may not be

consistent with public policy or public welfare. Thus they can be heavily regulated.


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Classification of Merger

Horizontal mergers take place where the two merging companies produce

similar product in the same industry.

Vertical mergersoccur when two firms, each working at different stages in the

production of the same good, combine.

Market Extension Merger and Product Extension Merger

Market Extension Merger

As per definition, market extension merger takes place between two companies thatdeal in the same products but in separate markets. The main purpose of the market

extension merger is to make sure that the merging companies can get access to abigger market and that ensures a bigger client base.

Product Extension Merger

According to definition, product extension merger takes place between two businessorganizations that deal in products that are related to each other and operate in the

same market. The product extension merger allows the merging companies to grouptogether their products and get access to a bigger set of consumers. This ensures that

they earn higher profits.

Congeneric mergers occur where two merging firms are in the same general

industry, but they have no mutual buyer/customer or supplier relationship, such

as a merger between a bank and a leasing company.

Conglomerate mergers take place when the two firms operate in different

industries.

A unique type of merger called a reverse merger is used as a way of going public

without the expense and time required by an IPO.

The contract vehicle for achieving a merger is a "merger sub".
http://en.wikipedia.org/wiki/Horizontal_integrationhttp://en.wikipedia.org/wiki/Horizontal_integrationhttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Vertical_integrationhttp://en.wikipedia.org/wiki/Vertical_integrationhttp://en.wikipedia.org/w/index.php?title=Congeneric_integration&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Congeneric_integration&action=edit&redlink=1http://en.wikipedia.org/wiki/Conglomerate_%28company%29http://en.wikipedia.org/wiki/Reverse_mergerhttp://en.wikipedia.org/wiki/IPOhttp://en.wikipedia.org/wiki/IPOhttp://en.wikipedia.org/wiki/Reverse_mergerhttp://en.wikipedia.org/wiki/Conglomerate_%28company%29http://en.wikipedia.org/w/index.php?title=Congeneric_integration&action=edit&redlink=1http://en.wikipedia.org/wiki/Vertical_integrationhttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Horizontal_integration


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Accretive mergers are those in which an acquiring company's earnings per

share (EPS) increase. An alternative way of calculating this is if a company with

a high price to earnings ratio (P/E) acquires one with a low P/E.

Dilutive mergers are the opposite of above, whereby a company's EPS

decreases. The company will be one with a low P/E acquiring one with a high

P/E.

The completion of a merger does not ensure the success of the resulting

organization; indeed, many mergers (in some industries, the majority) result in a net

loss of value due to problems. Correcting problems caused by incompatibility

whether of technology, equipment, or corporate culture diverts resources away

from new investment, and these problems may be exacerbated by inadequate

research or by concealment of losses or liabilities by one of the partners.

Overlapping subsidiaries or redundant staff may be allowed to continue, creating

inefficiency, and conversely the new management may cut too many operations or

personnel, losing expertise and disrupting employee culture. These problems are

similar to those encountered in takeovers. For the merger not to be considered a

failure, it must increase shareholder value faster than if the companies were

separate, or prevent the deterioration of shareholder value more than if the

companies were separate.


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Meaning of Acquisition

An acquisition, also known as a takeover, is the buying of one company (the

target) by another. An acquisition may be friendly or hostile. In the former case,

the companies cooperate in negotiations; in the latter case, the takeover target is

unwilling to be bought or the target's board has no prior knowledge of the offer.

Acquisition usually refers to a purchase of a smaller firm by a larger one.

Sometimes, however, a smaller firm will acquire management control of a larger or

longer established company and keep its name for the combined entity. This is

known as a reverse takeover.

Types of Acquisition

A company is said to have "Acquired" a company, when one company buys another

company. Acquisitions can be either:

Hostile

Friendly

In case of hostile acquisitions, the company, which is to be bought has no

information about the acquisition. The company, which would be sold is taken by

surprise.

In case of friendly acquisition, the two companies cooperate with each other and

settle matters related to acquisitions.

There are times when a much smaller company manages to take control of the

management of a bigger company but at the same time retains its name for the

combination of both the companies. This process is known as "reverse takeover".

Kinds of acquisitions:

There may be two types of acquisitions depending on the option adopted by the

buying company. In one case, the buying company may buy all the shares of the

smaller company. The other option is buying the assets of the smaller companies.
http://en.wikipedia.org/wiki/Takeover#Friendly_and_hostile_takeovershttp://en.wikipedia.org/wiki/Takeover#Friendly_and_hostile_takeovershttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Reverse_takeoverhttp://en.wikipedia.org/wiki/Reverse_takeoverhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Takeover#Friendly_and_hostile_takeovers


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2.1 Business Valuation

The five most common ways to evaluate a business are

Asset valuation

Historical earnings valuation

Future maintainable earnings valuation

Earnings Before Interest Taxes Depreciation and Amortization (EBITDA)

valuation

Shareholder's Discretionary Cash Flow (SDCF) valuation.

Professionals who valuate businesses generally do not use just one of these methods

but a combination of some of them, as well as possibly others that are not

mentioned above, in order to obtain a more accurate value. These values are

determined for the most part by looking at a company's balance sheet and/or income

statement and withdrawing the appropriate information. The information in the

balance sheet or income statement is obtained by one o f three accounting measures:

a Notice to Reader, a Review Engagement or an Audit.

Accurate business valuation is one of the most important aspects of M&A as

valuations like these will have a major impact on the price that a business will be

sold for. Most often this information is expressed in a Letter of Opinion of Value

(LOV) when the business is being valuated for interest's sake. There are other, more

detailed ways of expressing the value of a business. These reports generally get

more detailed and expensive as the size of a company increases, however, this is not

always the case as there are many complicated industries which require more

attention to detail, regardless of size.

Financing Valuation

Mergers are generally differentiated from acquisitions partly by the way in which

they are financed and partly by the relative size of the companies. Various

methods of financing an M&A deal exist.


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Cash: Payment by cash. Such transactions are usually termed acquisitions rather

than mergers because the shareholders of the target company are removed from

the picture and the target comes under the (indirect) control of the bidder's

shareholders alone.

A cash deal would make more sense during a downward trend in the interest rates.

Another advantage of using cash for an acquisition is that there tends to lesser

chances of EPS dilution for the acquiring company. But a caveat in using cash is

that it places constraints on the cash flow of the company.

Financing: Financing capital may be borrowed from a bank, or raised by an

issue of bonds. Alternatively, the acquirer's stock may be offered as

consideration. Acquisitions financed through debt are known as leveraged

buyouts if they take the target private, and the debt will often be moved down

onto the balance sheet of the acquired company.

Hybrid: An acquisition can involve a combination of cash and debt, or a

combination of cash and stock of the purchasing entity.

Motives behind M&A

Synergy: This refers to the fact that the combined company can often reduce

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

to the same revenue stream, thus increasing profit

Increased revenue/Increased Market Share: This motive assumes that the

company will be absorbing a major competitor and thus increase its power (by

capturing increased market share) to set prices

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

Economies of Scale: For example, managerial economies such as the increased

opportunity of managerial specialization. Another example are purchasing

economies due to increased order size and associated bulk-buying discounts

Taxes: 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


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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

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

Resource transfer: resources are unevenly distributed across firms (Barney,

1991) and the interaction of target and acquiring firm resources can create value

through either overcoming information asymmetry or by combining scarce

resources.

These motives are considered to not add shareholder value

Diversification: While this may hedge a company against a downturn in an

individual industry it fails to deliver value, since it is possible for individual

shareholders to achieve the same hedge by diversifying their portfolios at a

much lower cost than those associated with a merger

Manager's hubris: manager's overconfidence about expected synergies from

M&A which results in overpayment for the target company

Empire building: Managers have larger companies to manage and hence more

power.

Manager's compensation: In the past, certain executive management teams had

their payout based on the total amount of profit of the company, instead of the

profit per share, which would give the team a perverse incentive to buy

companies to increase the total profit while decreasing the profit per share

(which hurts the owners of the company, the shareholders); although some

empirical studies show that compensation is linked to profitability rather than

mere profits of the company

Vertical integration: Companies acquire part of a supply chain and benefit

from the resources. However, this does not add any value since although one

end of the supply chain may receive a product at a cheaper cost; the other end

now has lower revenue. In addition, the supplier may find more difficulty in


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a one-time market for a one-time transaction. Certain types of merger and

acquisitions transactions involve securities and may require that these

"middlemen" be securities licensed in order to be compensated. Many, but not

all, transactions use intermediaries on one or both sides. Despite best intentions,

intermediaries can operate inefficiently because of the slow and limiting nature

of having to rely heavily on telephone communications. Many phone calls fail to

contact with the intended party. Busy executives tend to be impatient when

dealing with sales calls concerning opportunities in which they have no interest.

These marketing problems typify any private negotiated markets. Due to these

problems and other problems like these, brokers who deal with small to mid-

sized companies often deal with much more strenuous conditions than other

business brokers. Mid-sized business brokers have an average life-span of only

12-18 months and usually never grow beyond 1 or 2 employees.

Complex Process

The market inefficiencies can prove detrimental for this important sector of the

economy. Beyond the intermediaries' high fees, the current process for mergers

and acquisitions has the effect of causing private companies to initially sell their

shares at a significant discount relative to what the same company might sell for

were it already publicly traded. An important and large sector of the entire

economy is held back by the difficulty in conducting corporate M&A (and also

in raising equity or debt capital). Furthermore, it is likely that since privately

held companies are so difficult to sell they are not sold as often as they might or

should be.

One part of the M&A process which can be improved significantly using

networked computers is the improved access to "data rooms" during the due

diligence process however only for larger transactions. For the purposes of

small-medium sized business, these datarooms serve no purpose and are

generally not used. Reasons for frequent failure of M&A was analyzed by

Thomas Straub in "Reasons for frequent failure in mergers and acquisitions - a

comprehensive analysis", DUV Gabler Edition, 2007.
http://en.wikipedia.org/wiki/Dataroomhttp://en.wikipedia.org/wiki/Dataroomhttp://en.wikipedia.org/wiki/Dataroom


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Short run factors

One of the major short run factors that sparked is the desire to keep prices high.

That is, with many firms in a market, supply of the product remains high. When

demand for the good falls, as illustrated by the classic supply and demand

model, prices are driven down. To avoid this decline in prices, firms found it

profitable to collude and manipulate supply to counter any changes in demand

for the good. This type of cooperation led to widespread horizontal integration

amongst firms of the era. Focusing on mass production allowed firms to reduce

unit costs to a much lower rate. These firms usually were capital-intensive and

had high fixed costs.

Long run factors

In the long run, due to the desire to keep costs low, it was advantageous for

firms to merge and reduce their transportation costs thus producing and

transporting from one location rather than various sites of different companies as

in the past. This resulted in shipment directly to market from this one location.

In addition, technological changes prior to the merger movement within

companies increased the efficient size of plants with capital intensive assembly

lines allowing for economies of scale. Thus improved technology and

transportation are forerunners to the M&A. In part due to competitors as

mentioned above, and in part due to the government, however, many of these

initially successful mergers were eventually dismantled. Price fixing with

competitors created a greater incentive for companies to unite and merge under

one name so that they were not competitors anymore and technically not price

fixing.

Cross border M&A

In a study conducted in 2000 by Lehman Brothers, it was found that, on average,

large M&A deals cause the domestic currency of the target corporation to appreciate

by 1% relative to the acquirer's. For every $1-billion deal, the currency of the target

corporation increased in value by 0.5%. More specifically, the report found that in

the period immediately after the deal is announced, there is generally a strong


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upward movement in the target corporation's domestic currency (relative to the

acquirer's currency). Fifty days after the announcement, the target currency is then,

on average, 1% stronger.

Due to the complicated nature of cross border M&A, the vast majority of cross

border actions have unsuccessful results. Cross border intermediation has many

more levels of complexity to it then regular intermediation seeing as corporate

governance, the power of the average employee, company regulations, political

factors customer expectations, and countries' culture are all crucial factors that could

spoil the transaction.

Merger and Acquisition Process

Procedure for merger and amalgamation is different from takeover. Mergers and

amalgamations are regulated under the provisions of the Companies Act, 1956

whereas takeovers are regulated under the SEBI Regulations.

The beginning to amalgamation may be made through common agreements between

the transferor and the transferee but mere agreement does not provide a legal cover

to the transaction unless it carries the sanction of company court for which the

procedure laid down U/s-391 of the Companies Act should be followed for giving

effect to amalgamation through the statutory instrument of the Courts Sanction.

The procedure is complex, involving not only the compromises or arrangements

between the company and its creditors or any class of them or between the company

and its members or any class of them, but it involves, safeguard of public interest

and adherence to public policy. These aspects are looked after by the Central Govt.

through Official Liquidator or Company Law Board, Department of Company

Affairs and the Court has to be satisfied of the same.


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Top Managements Commitments towards Merger and Amalgamation:

Top management defines the organizations goal and outlines the policy framework

to achieve these objectives. The organizations goal for business expansion could be

accomplished, inter alia through business combinations assimilating a target

corporate which can remove the present deficiencies in the organization and can

contribute in the required direction to accomplish the goal of business expansion

through enhanced commercial activity i.e. supply of inputs and market for out-put

product diversification, adding up new products and improved technological

process, providing new distribution channels and market segments, making

available technical personnel and experienced skilled manpower, research and

development establishments etc. Depending upon the specific need and cost

advantage with reference to creating a new set up or acquiring a well-established

set-up firm.

Search for a Merger Partner

The top management may use their own contacts with competitors in the same line

of economic activity or in the other diversified field which could be identified as

better merger partners or may use the contacts of merchant bankers, financial

consultants and other agencies in locating suitable merger partners. A number of

corporate candidates maybe short-listed and identified. Such identification should

be based on the detailed information of the merger partners collected from

published and private sources. Such information should reveal the following aspects

viz :-

i) Organizat ional history of business and promoters and capital structure

ii) Organizational goals

iii) Product, market and competitors

iv) Organizational set-up and management pattern

v) Assets profile: movable and immovable assets, land and building

vi) Manpower: skilled, un-skilled, technical personnels and detailed particulars

of management employees


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Negotiation

Top management can negotiate at a time with several identified short-listed

companies suited to be merger partner for settling terms of merger and pick-up one

of them which offers most favorable terms.

Negotiations can be had with target companies before making any acquisitional

attempt. Same drill of negotiations could be followed in the cases of merger and

amalgamation. The activity schedule for planning merger covers different aspects

like preliminary consultations with the perspective merger partner and seeking its

willingness to cooperate in investigations. There are other aspects, too, in the

activity schedule covering quantification, action plan, purpose, shape, and date of

merger, profitability and valuation, taxation aspects legal aspects and deve lopment

plan of the company after merger. The most important step at this stage of Valuation

of Shares and determination of Share Exchange Ratio.

Steps for Merger & Amalgamation

Once the merger partner has been identified and terms of merger are settled the

subsequent steps are given below:

1. Scheme of Amalgamation

The scheme of amalgamation should be prepared by the companies, which have

arrived at a consensus to merge. There is no specific form prescribed for scheme of

amalgamation but scheme should generally contain the following information :-

i) Particulars about transferee and transferor companies.

ii) Appointed date i.e. Cut-Off date from which the transferor company rest with

transferee company.

iii) Main terms of transfer of assets from transferor to transferee with power to

execute on behalf or for transferee the deed or documents being given to

transferee.

iv) Main terms of transfer liabilities from transferor to transferee covering any

conditions attached to loans/ debentures/ bonds/ other liabilities from

bank/financial institution/ trustees and listing conditions attached thereto

v) Effective date when the scheme will come into effect


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vi) Conditions as to carrying on the business activities by transferor between

appointed date and effective date.

vii) Description of happenings and consequences of the scheme coming into effect

on effective date

viii) Share capital of transferor company specifying authorized capital, issued

capital

and subscribed and paid-up capital

ix) Share capital of transferee company covering above heads

x) Description of proposed share exchange ratio, any conditions attached thereto,

any fractional share certificates to be issued, transferee companys responsibility

to obtain consent of concerned authorities for issue and allotment of shares and

listing

xi) Surrender of shares by share-holder of transferor company for exchange into

new share certificates

xii) Conditions about payment of dividend, ranking of equity shares pro-rata

dividend declaration and distribution

xiii) Status of employees of the transferor companies from effective date and the

status of the provident fund, gratuity fund, super annuity fund or any special

scheme or fund created or existing for the benefit of the employees;

xiv) Treatment on effective date of any debit balance of transferor company balance

sheet.

xv) Miscellaneous provisions covering income-tax dues, contingencies and other

accounting entries deserving attention or treatment.

2. Approval of Board of Directors for the Scheme

Respective Board of Directors for transferor and transferee companies are required

to approve the scheme of amalgamation.

3. Approval of the Scheme by Specialized Financial Institutions/ Banks/

Trustees for Debenture Holders

The Board of Directors should in fact approve the scheme only after it has been

cleared by the financial institutions/ banks, which have granted loans to these

companies or the debenture trustees to avoid any major change in the meeting of


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creditors to be convened at the instance of the Company Courts U/s-391 of the

Companies Act, 1956.

Approval of Reserve Bank of India is also needed where the scheme of

amalgamation contemplates issue of share/ payment of cash to non-resident Indians

or foreign national under the provisions of Foreign Exchange Management

(Transfer or Issue of Security by a Person Resident Outside India) Regulations,

2000. In particular, regulation 7 of the above regulations provide for compliance of

certain conditions in the case of scheme of merger or amalgamation as approved by

the court.

4. Intimation to Stock Exchange about Proposed Amalgamation

Listing agreements entered into between company and stock exchange require the

company to communicate price-sensitive information to the stock exchange

immediately and simultaneously when released to press and other electronic media

on conclusion of Board meeting according approval to the Scheme.

5. Application to Court for Directions

The next step is to make an application U/s-39(1) to the High Court having

jurisdiction over the Registered Office of the Company. The transferor and the

transferee company should make separate applications to the High Court. The

application shall be made by a Judges Summons in Form No -33 supported by an

affidavit in Form No-34 (See Rule-82 of the Companies (Court) Rules, 1959). The

following documents should be submitted with the Judges Summons:-

i) A true copy of the Companys Memorandum and Articles ;

ii) A true copy of the Companys latest audited balance sheet ;

iii) A copy of the Board Resolution, which authorizes the Director to make the

applicat ion to the High Court.

6. High Court Directions for Members Meeting

Upon the hearing of the summons, the High Court shall give directions fixing the

date, time and venue and quorum for the members meeting and appoint an

Advocate Chairman to preside over the meeting and submit a report to the Court


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Similar directions are issued by the court for calling the meeting of creditors in case

such a request has been made in the application.

7. Approval of Registrar of High Court to Notice for Calling the Meeting of

Members/ Creditors

Pursuant to the directions of the Court, the transferor as well as the transferee

companies shall submit for approval to the Registrar of the respective High Courts

the draft notices calling the meetings of the members in Form No-36 together with

the scheme of arrangements and explanations, statement U/s-393 of the Companies

Act and Form of Proxy in Form No-37 of the Companies (Court) Rules to be sent to

members along with the said notice. Once Registrar has accorded approval to the

notice, it should be got signed by the Chairman appointed for meeting by the High

Court who shall preside over the proposed meeting of members.

8. Dispatch of Notices to Members/ Shareholders

Once the notice has been signed by the Chairman of the forthcoming meeting as

aforesaid it could be dispatched to the members under Certificate of posting at least

21 days before the date of meeting.

9. Advertisement of the Notice of Members Meetings

The court may direct the issuance of notice of the meeting of these shareholders by

advertisement. In such case Rule-74 of the Companies (Court) Rules provides that

the notice of the meeting should be advertised in; such newspaper and in such

manner as the Court might direct not less than 21 clear days before the date fixed

for the meeting. The advertisement shall be in Form No-38 appended to the

Companies (Court) Rules. The companies should submit the draft for the notice to

be published in Form No-38 in English daily together with a translation thereof in

the regional language to the Registrar of High Court for his approval. The

advertisement should be released in the newspapers after the Registrar approves the

draft.

10. Confirmation about Service of the Notice

Ensure that at least one week before the date of the meeting, the Chairman

appointed for the meeting files an Affidavit to the Court about the service of notices


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to the shareholders that the directions regarding the issue of notices and

advertisement have been duly complied with.

11. Holding the Shareholders General Meeting and Passing the Resolutions

The general meeting should be held on the appointed date. Rule-77 of the

Companies (Court) Rules prescribes that the decisions of the meeting held pursuant

to the court order should be ascertained only by taking a poll. The amalgamation

scheme should be approved by the members, by a majority in number of members

present in person or on proxy and voting on the resolution and this majority must

represent at least thus in value of the shares held by the members who vote in the

poll.

12. Filing of Resolutions of General Meeting with Registrar of Companies

Once the shareholders general meeting approves the amalgamation scheme by a

majority in number of members holding not less than in value of the equity

shares, the scheme is binding on all the members of the company. A copy of the

resolution passed by the shareholders approving the scheme of amalgamation

should be filed with the Registrar of Companies in Form No-23 appended to the

Companies (Central Governments) General Rules and Forms, 1956 within 30 days

from the date of passing the resolution.

13. Submission of Report of the Chairman of the General Meeting to Court

The chairman of the general meeting of the shareholders is required to submit to the

court within seven days from the date of the meeting a report in Form No-39,

Companies (Court) Rules, 1959 setting out therein the number of persons who

attend either personally or by proxy, and the percentage of shareholders who voted

in favor of the scheme as well as the resolution passed by the meeting.

14. Submission of Joint Petition to Court for Sanctioning the Scheme

Within seven days from the date on which the Chairman has submitted his report

about the result of the meeting to the Court, both the companies should make a joint

petition to the High Court for approving the scheme of amalgamation. This petition

is to be made in Form No-40 of Companies (Court) Rules. The court will fix a date

of hearing of the petition. The notice of the hearing should be advertised in the same


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papers in which the notice of the meeting was advertised or in such other

newspapers as the court may direct, not less than 10 days before the date fixed for

the hearing.

15. Issue of Notice to Regional Director, Company Law Board U/s-394-A

On receipt of the petition for amalgamation U/s-391 of Companies Act, 1956 the

Court will give notice of the petition to the Regional Director, Company Law Board

and will take into consideration the representations, if any, made by him.

16. Hearing of Petition & Confirmation of Scheme

Having taken up the petition by the court for hearing it will hear the objections first

and if there is no objection to the amalgamation scheme from Regional Director or

from any other person who is entitled to oppose the scheme, the court may pass an

order approving the scheme of amalgamation in; Form No-41 or Form No-42 of

Companies (Court) Rules. The court may also pass order directing that all the

property, rights and powers of the transferor company specified in the schedules

annexed to the order be transferred without further act or deed to the transferee

company and that all the liabilities and duties of the transferor company be

transferred without further act or deed.

17. Filing of Court Order with ROC by both the Companies

Both the transferor and transferee companies should obtain the Courts order

sanctioning the scheme of amalgamation and file the same with ROC with their

respective jurisdiction as required vide Sec-394(3) of the Companies Act, 1956

within 30 days after the date of the Courts Order in Form No-21 prescribed under

the (Central Governments) General Rules and Forms, 1956. The amalgamation will

be given effect to from the date on which the High Courts Order is filed with the

Registrar.

18. Transfer of the Assets & Liabilities

Section-394(2) vests power in the High Court to order for the transfer of any

property or liabilities from Transferor Company to Transferee Company. In

pursuance of and by virtue of such order such properties and liabilities of the


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transferor shall automatically stand transferred to transferee company without any

further act or deed from the date the Courts Order is filed with ROC.

19. Allotment of Shares to Shareholders of Transferor Company

Pursuant to the sanctioned scheme of amalgamation, the share-holders of the

transferor company are entitled to get shares in the transferee company in the

exchange ratio provided under the said scheme. There are three different situations

in which allotment could be given effect:-

i)Where transferor company is not a listed company, the formalities prescribed

under listing agreement do not exist and the allotment could take place without

setting the record date or giving any advance notice to shareholders except asking

them to surrender their old share certificates for exchange by the new ones ;

ii) The second situation will emerge different where Transferor Company is a listed

company. In this case, the stock exchange is to be intimated of the record date

by giving at least 42 days notice or such notice as provided in the listing

agreement.

20. Listing of the Shares at Stock Exchange

After the amalgamation is effected, the company which takes over the assets and

liabilities of the transferor company should apply to the stock exchanges where its

securities are listed, for listing the new shares allotted to the shareholders of the

transferor company.

21. Court order to be annexed to Memorandum of Transferee Company

It is the mandatory requirement vide Sec-391(4) of the Companies Act, 1956 that

after the certified copy of the Courts Order sanctioning the scheme of

amalgamation is filed with Registrar, it should be annexed to every copy of the

Memorandum issued by the transferee company. Failure to comply with

requirement renders the company and its officers liable to punishment.

22. Preservation of Books & Papers of Amalgamated Company


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Sec-396A of the Act requires that the books and papers of the amalgamated

company should be preserved and not be disposed of without prior permission of the

Central Government.

23. The Post Merger Secretarial Obligations

There are various formalities to be complied with after amalgamation of the

companies is given effect to and allotment of shares to the shareholders of the

transferor company is over. These formalities include filing of the returns with

Registrar of Companies, transfer of investments of transferor company in; the name

of the transferee, intimating banks and financial institutions, creditors and debtors

about the transfer of the transferor companys assets and liabilities in the name of

the transferee company, transfer of employees, gratuity, PF and Pension funds etc.

24. Withdrawal of the Scheme not Permissible

Once the scheme for merger has been approved by requisite majority of

shareholders and creditors, the scheme cannot be with-drawn by subsequent

meeting of shareholders by passing Resolution for withdrawal of the petition

submitted to the court U/s-391 for sanctioning the scheme.


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Different aspects of Mergers and Acquisition

Accounting Aspects of Merger

Introduction

This standard deals with accounting for amalgamations and the treatment of any

resultant goodwill or reserves. This standard is directed principally to companies

although some of its requirements also apply to financial statements of other

enterprises.

This standard does not deal with cases of acquisitions which arise when there is a

purchase by one company of the whole or part of the shares, or the whole or part of

the assets, of another company in consideration for payment in cash or by issue of

shares or other securities in the acquiring company or partly in one form and partly

in the other. The distinguishing feature of an acquisition is that the acquired

company is not dissolved and its separate ent ity continues to exist.

Definitions

The following terms are used in this statement with the meanings specified:

a) Amalgamation means an amalgamation pursuant to the provisions of the

Companies Act, 1956 or any other statute which may be applicable to

companies.

b) Transferor Company means the company which is amalgamated into another

company.

c) Transferee company means the company into which a transferor company is

amalgamated.

d) Reserve means the portion of earnings, receipts or other surplus of an enterprise

(whether capital or revenue) appropriated by the management for a general or a

specific purpose other than a provision for depreciation or diminution in the

value of assets or for a known liability.


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e) Amalgamation in the nature of merger is an amalgamation which satisfies all the

following conditions.

(i) All the assets and liabilities of the transferor company become, after

amalgamation, the assets and liabilities of the transferee company.

(ii)Shareholders holding not less than 90% of the face value of the equity shares of

the transferor company (other than the equity shares already held therein,

immediately before the amalgamation, by the transferee company or its

subsidiaries or their nominees) become equity shareholders of the transferee

company by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders

of the transferor company who agree to become equity shareholders of the

transferee company is discharged by the transferee company wholly by the issue

of equity shares in the transferee company, except that cash may be paid in

respect of any fractional shares.

(iv) The business of the transferor company is intended to be carried on, after the

amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and

liabilities of the transferor company when they are incorporated in the financial

statements of the transferee company except to ensure uniformity of accounting

policies.

f) Amalgamation in the nature of purchase is an amalgamation which does not

satisfy any one or more of the conditions specified in sub-paragraph (e) above

g) Consideration for the amalgamation means the aggregate of the shares and other

securities issued and the payment made in the form of cash or other assets by the

t

transferee company to the shareholders of the transferor company.


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h) Fair value is the amount for which an asset could be exchanged between a

knowledgeable, willing buyer and a knowledgeable, willing seller in an arms

length

transaction.

i) Pooling of interests is a method of accounting for amalgamations the object of

which

is to account for the amalgamation as if the separate businesses of the

amalgamating companies were intended to be continued by the transferee

company. Accordingly, only minimal changes are made in aggregating the

individual financial statements of the amalgamating companies.

Methods of Accounting for Amalgamations

There are two main methods of accounting for amalgamations:

1. The Pooling of Interests Method

Under the pooling of interests method, the assets, liabilities and reserves of the

transferor company are recorded by the transferee company at their existing

carrying amounts.

If, at the time of the amalgamation, the transferor and the transferee companies have

conflicting accounting policies, a uniform set of accounting policies is adopted

following the amalgamation. The effects on the financial statements of any changes

in accounting policies are reported in accordance with Accounting Standard (AS) 5,

Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting

Policies.

2. The Purchase Method

Under the purchase method, the transferee company accounts for the

amalgamation either by incorporating the assets and liabilities at their existing

carrying amounts or by allocating the consideration to individual identifiable

assets and liabilities of the transferor company on the basis of their fair values at

the date of amalgamation. The identifiable assets and liabilities may include

assets and liabilities not recorded in the financial statements of the transferor

company.


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Where assets and liabilities are restated on the basis of their fair values, the

determination of fair values may be influenced by the intentions of the transferee

company. For example, the transferee company may have a specialized use for an

asset, which is not available to other potential buyers. The transferee company may

intend to effect changes in the activities of the transferor company which necessitate

the creation of specific provisions for the expected costs, e.g. planned employee

termination and plant relocation costs.

Treatment of Goodwill Arising on Amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation of

future income and it is appropriate to treat it as an asset to be amortized to income

on a systematic basis over its useful life. Due to the nature of goodwill, it is

frequently difficult to estimate its useful life with reasonable certainty. Such

estimation is, therefore, made on a prudent basis. Accordingly, it is considered

appropriate to amortize goodwill over a period not exceeding five years unless a

somewhat longer period can be justified.

Factors which may be considered in estimating the useful life of goodwill arising on

amalgamation include:

(a) The foreseeable life of the business or industry;

(b) The effects of product obsolescence, changes in demand and other economic

factors;

(c) The service life expectancies of key individuals or groups of employees;

(d) Expected actions by competitors or potential competitors; and

(e) Legal, regulatory or contractual provisions affecting the useful life.

Balance of Profit and Loss Account

In the case of an amalgamation in the nature of merger, the balance of the Profit

and Loss Account appearing in the financial statements of the transferor company is

aggregated with the corresponding balance appearing in the financial statements of


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the transferee company. Alternatively, it is transferred to the General Reserve, if

any.

In the case of an amalgamation in the nature of purchase, the balance of the Profit

and Loss Account appearing in the financial statements of the transferor company,

whether debit or credit, loses its identity.

Amalgamation after the Balance Sheet Date

When an amalgamation is effected after the balance sheet date but before the

issuance of the financial statements of either party to the amalgamation, disclosure

is made in accordance with AS 4, Contingencies and Events Occurring After the

Balance Sheet Date, but the amalgamation is not incorporated in the financial

statements. In certain circumstances, the amalgamation may also provide additional

information affecting the financial statements themselves, for instance, by allowing

the going concern assumption to be maintained.


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Tax aspect

An amalgamation involves the merger of one or more company into a existing

company of merger of two or more company into a new company form specifically

for this purpose. The merging companies are cold amalgamating companies and the

merged company is called amalgamated company. The amalgamated company is

entitling to various tax benefits, if the following condition is fulfilled.

1. All the properties and liabilities of amalgamating company immediately before

the

amalgamation become the properties and liabilities of amalgamated company by

the

virtue of amalgamation

2. Shareholders holding more than 90% in value of the shares in the amalgamating

company become shareholders of the amalgamated company by the virtue of the

amalgamation.

Tax concessions are granted to the amalgamated company only if the amalgamating

company is an Indian company. Following deduction to the extend available to the

amalgamating company and remaining unabsorbed or unfulfilled will be available

to the amalgamating company

1. capital expenditure on scientific research

2. expenditure on acquisition of patent right or copyright, know-how

3. expenditure on obtaining license to operate telecommunication service

4. amortization of preliminary expenses

5. carry forward of losses and unabsorbed depreciation

Subject to certain circumstances transfer of capital assets by the amalgamating

company to the amalgamated company neither is nor treated as transfer for the

purpose of computing capital gains.


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Of the above benefits the most important is the one relenting to the carry forward of

the losses and unabsorbed depreciation of the amalgamating company. Generally,

accumulate losses and unabsorbed depreciation of an assessee cannot be carried and

set of by another assessee. However, as an acceptation, carry forward and setoff is

available in case of amalgamation, subject to the fulfillment of following condition.

1. The amalgamating company owns an industrial undertaking or a ship.

2. The amalgamated company continues to hold at least 3/4 th of the book value of

the

fixed asset of the amalgamating company for the period of 5 years from the

effective date of amalgamation.

3. The amalgamated company continues the business of the amalgamating

company

for a minimum period of 5 years.

4. The amalgamated company achieves a level of production at least 50% of

installed capacity of the said undertaking before the end of 4 years from the date

of amalgamation and continuous to maintain the said minimum level of

production till the end of 5 years from the date of amalgamation.

On the fulfillment of above condition, the unabsorbed business losses and unabsorbed

depreciation of the amalgamated company are deemed to be the loss or depreciation

of the amalgamated company for the year of amalgamation thus resulting in a fresh

lease of 8 years for set off or carry forward.


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Legal Aspect

Companies Act, 1956, Chapter V

The Companies Act, 1956 has provided for a set of provisions specially dealing

with

Amalgamation of companies, to facilitate the transactions. The statutory provisions

relating to Merger and Amalgamations are contained in Sections 390 to 396A of the

Companies Act, 1956.Sections 390 to 396 of the Companies Act, 1956 govern

Rearrangements including Mergers, Amalgamations and Demergers.

Section 390

This section includes interpretation of Sections 391 and 393. Company means any

company liable to be wound up-arrangement includes a reorganization of the share

capital of the company by the consolidation of shares of different classes or by

division into or by both methods-

Section 391

This section about power to compromise or make arrangements with creditors and

members

1. Where a compromise or arrangement is proposed

-between a company and creditors/any class or member/any class

-the court may on application, order a meeting of in such manner as the court

directs

2. If majority in number representing 3/4th in value of creditors/members present

and voting either in person or by proxy[where allowed]agree and if sanctioned

by court, shall be binding on all members/creditors and company/ liquidator/

contributories.

3. No effect to court order till the time a certified copy of order is filed with the

Registrar of Companies.


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4. A copy of order of the Court to be annexed to every copy of Memorandum of

Association.

5. Default is punishable

6. Stay of suit or proceedings

Section 392

These details about the Power of High Court to enforce compromises and

arrangements

1. Court has the power to supervise and gives directions,

2. If court is satisfied that scheme is not workable; it can order winding up of the

company.

Section 393

According to this section information should be provided as to compromises or

arrangements to the creditors and members.

This section covers the procedures to be followed and the manner in which

information is to be given to the members and creditors.

1. Explanatory Statement with every notice setting forth terms of compromise and

directors' interest-

2. Trustees interest to be disclosed.

3. Statement setting terms and contract to be furnished to members.

Section 394

This includes provisions for facilitating reconstruction and amalgamation of

companies.


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1. when an application is made u/s 391 for compromise or arrangement and it is

shown to the court that[a] compromise or arrangement is proposed for the

purpose of a scheme of reconstruction of any company or companies or the

amalgamation of any two or more companies and

2. under scheme whole or any part of undertaking, property or liabilities of any

company concerned in the scheme [ transferor co] is to be transferred to another

co.[transferee co.], court may by order provide for transfer allotment

continuation of legal proceeding dissolution provision for dissenting

shareholders incidental matters

Section 394A

According to this section notice to be given to Central Government for applications

under section 391 and 394.

Section 395

Power and duty to acquire shares of shareholders dissenting from scheme or

contract approved by majority

Section 396

Power of Central Government to provide for amalgamation of companies in national

interest.

Section 396A

Preservation of books and papers of amalgamated company


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Objectives of the study:

Primary Objective

To explore the insights of a corporate event named Amalgamation which is a major

event by itself and it drags lot of attention and results into many drastic changes in

market valuations of a firm.

Secondary Objectives:

To study the impact ofAmalgamation on price and volume before and after

it takes place.

To verify existence of the abnormality in price and volume of the share as

announcement ofMergers & Acquisition.

To analyze the bearing of such abnormality (if it does exists) on the Market

Capitalization and Volumes traded on the stock market a month before and a

month after the Amalgamation takes place for all the scripts under study.

To measure the cumulative impact of Amalgamation event and try to

conceive a general trend based on it.


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Time-Frame of Data Collection:

In order to check the long run and short run effect of the amalgamation following

different time frames have been devised:

NO. Time Period Time Frame

1. 30 days before source date to 1 day before source

date

SD-30 to SD-1

2. 10 days before source date to 1 day before source

date

SD-10 to SD-1

3. The source date SD4. 1 day after source date to 1 day before effective

date

SD+1 to ED-1

5. The effective date ED

6. 1 day after effective date to 10 days after the

effective date

ED+1 to ED+10

7. 1 day after the effective date to 30 days after the

effective date

ED+1 to ED+30

The formulation of the time-frame is same for price and volume effect that we have

studied. The days are counted not as trading days but by normal days (i.e including

closed days on stock market), hence it might be possible that there are different

numbers of trading days for two firms in the time-frame.

Type of Research:

Causal Research


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Data and Sample

The study is constrained to the amalgamation announcements during the years 2007 to

2009. The data have been collected for all publicly listed companies who announced

their amalgamation plans in this specific time period. Out of that data 30 companies

have been selected. Those 30 companies are further bifurcated into 10 sectors. The

data for the companies is collected from Capitaline and Prowess Software. The stock

exchange considered as the market is the Bombay Stock Exchange of India Ltd. All

the data for prices, volumes and indices of the companies is collected from the

website of the Bombay Stock Exchange of India Ltd. (www.bseindia.com).

The following criteria have been considered to select the merger & acquisition

announcement as an eligible one for sample:

The amalgamation source date is the date on which the stock exchange that is

Bombay Stock Exchange of India Ltd. is informed that the mergers &

acquisitions are approved by the Board of Directors.

The closing price for days of time-frame decided for a particular firm is

according to what is available on the website of Bombay Stock Exchange of

India Ltd.

The indices taken for the study of companies is BSE-500.

Type of Sampling: Simple Random Sampling


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Research Methodology

In this part we will explain you how we have calculated the abnormal return using the

excel worksheet from the data that we got from the www.bseindia.com. We will also

explain you how to read each and every data and information that we collected and

mentioned in the report. Following are the steps:

Steps to find out Abnormal Price Effect

A.Collect data from bseindia.com and send it to Excel worksheet

As we mentioned earlier, we collected daily share price data from bseindia.com and

sent to excel worksheet. The above picture of excel worksheet represents the type of

share price data which is collected for every individual firms. The data that we have

collected include daily share prices, No. of shares, No.of trades etc. which is required

to do analysis. The data is collected for all firms as per the time-frame decided earlier.


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As we have taken BSE-500 indices as base, we also collected daily indices for the

specific years required in analysis.

B.Find out daily script return

After collecting data, process of analyzing the data starts. Here, we need to find out

daily script return of each day. It is difference between two consecutive days closing

price divided by the first days closing price. We can find out easily by seeing the

above picture. The script return 1.32% is difference between closing price of two

consecutive days i.e. 4th and 5thJune 2008 divided by the 4th Junes closing price.


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C.Find out daily market return

To find out daily market return we used the same formula as we have used in finding

out daily script return. Instead of closing price, we have taken BSE 500 indices

closing value. As we can see in above picture, we found out the BSE-500 return by

taking previous days closing as a base. The return that we found out by the formula

mentioned was in terms of numbers but we turned it into percentage to make

meaningful interpretation.

D.Find out the regression between script return and market return

After finding out the daily script return and market return for the event period, the

next step is to find out the regression between script and market return. To find out

the regression we selected the period of 3 months before the source date of the merger

or acquisition to 1 month before the source date of the Amalgamation (SD-90 to SD-

30). This is because we assume that most of the abnormality in trading can start at the


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max one month before the amalgamation announcement due to some insider leakage

of information, before that period script tends to react in normal manner. So in my

research that period would be the standard normal period which could be used to find

out expected return.

As we can see in this window the X range indicate BSE 500% market return for the

above mentioned period and Y range indicate script return for the above mentioned

period. Then using the MS Excel Regression analysis tool (which is in the Data menu)

we found out the regression analysis chart which is shown below. [To get the

regression tool go to toolbar, in that go to more commands and select Add-Ins. There

we need to select Analysis Tool Pack which gets installed automatically. Then again

when we go to Data menu, we will find option of Data Analysis. In that, we will find

option of regression.]


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Once we feed data in the above model we find out the summary output as mentioned

in the above picture. From the summary that we got, there are three things important

for my research. They are shown here i.e. R-Square, Alpha and Beta. The explanation

of the each of the terms and how to read the data is given below.

R-square:

The R-squared value shows how reliable the dependent variable on independent

variable is. It varies between zero and one. An R-squared value of one indicates

perfect correlation with the index. The higher the R-square, the better correlation

exists between the script return and market return. So that leads to some of good

decision making and helps in proper judgment and interpretation. Generally R-square

of more than 0.50 is considered to be good.


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Suppose we know that a is 3 and b is 2. Let us determine what X would be for an

Y equal to 5. When awe substitute the values of a, b and X in the above equation we

find the corresponding value of X to be 13. As mentioned in the above regression line

we found out the expected return for the event period (AD-30 to ED+30). The

formula used can be seen in this above picture of excel worksheet.

F. Find out the Abnormal Return

The abnormal return for a given day can be found out by subtracting expected return

for a day (which is found by using regression line as shown above) from the actual

return for a day (which is found out in step B). This picture represents the same thing.

Positive abnormal return indicate that how much positive effect is generated by the

event among the investors, in the same way negative abnormal return indicate clearly

the opposite scenario for the script. As we can see in this picture the abnormal return

for 5-June-08 is -0.02% because the actual return on the script is 1.32% which is

marginally lower than expected return of 1.34% for that day. This return is for only

one day. The real effect of such event can be seen by taking broader view and seeingcumulative effect through a particular period.


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G.Find out Cumulative Abnormal Return

As mentioned above, to study the long term and short term effect of the event, we

have divided the event period in different windows. So, to check the cumulative effect

of the abnormal return in a given time window can be found out by calculating

cumulative abnormal return for that period.

So, we have found out the

cumulative abnormal return for

each time window by using the

formula which can be seen in theformula bar shown in the picture

of worksheet. The detail of

cumulative abnormal return for

each script is shown in the next

chapter.

H.Find out Cumulative Abnormal Return for a given Time Window

From the picture of worksheet shown below we can see how to find out cumulative

abnormal return for a given time window. As we can see in window SD-30 to SD-1,

the cumulative abnormal return is -0.07% , so there is negative abnormality in return

can be seen one month before the amalgamation was announced but we can see in

other window SD-10 to SD-1 that the cumulative abnormal return has become

positive i.e. 2.40% which indicates some kind of leakage in information must be done


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before the amalgamation was actually announced. In the same we can observe

cumulative abnormal return (CAR) for different window.

In order to draw overall inferences for the event of interest, the abnormal return

observations are aggregated along two dimensions-through times and across

securities. The following measures of abnormal performance are used:


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Cumulative Abnormal Return (CAR):cumulative sum of stock Is prediction

error (abnormal returns) over the window (t1,t2)

CARi(t1,t2)=1/T = ARij

Average Abnormal Return (AAR): stock is cumulative abnormal return divided

by the number of days in the window (t1,t2)

AARi (t1,t2)= CARi (t1,t2) / ni (t1,t2)

Mean Cumulative Abnormal Return (MCAR): average of the cumulative

abnormal returns across observations (firms), it is a measure of the abnormal

performance over the event period.

MCAR (t1, t2) = 1/N = CARi (t1, t2)

Mean Average Abnormal Return (MAAR): sampleaverage of the cumulative

abnormal returns sample average of firm AARs. This measure of abnormal

performance takes into account the fact that the number of days in that window

(t1,t2) may be different across firms and therefore gives a greater weight to the

ARs o f firms for which this window is shorter. On the contrary, MCAR gives same

weight to every ARs. This implies that MAAR is more powerful when the

abnormal behaviour of returns is concentrated in short window, while MCAR is

more powerful in detecting abnormal performance over long window.

MAAR (t1, t2) =1/N = AARi (t1, t2)


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Steps to find out Abnormal Volume Effect

A.Find out Average Daily Volume

We found out the abnormal volume trading by using simple average and deviation of

actual volume from the average volume. So to find out abnormal volume the very first

step is to find out average volume. As we assume that there is normal trading takes

place from the 3 months before the announcement date to the 1 month before the

announcement date. So we took the average of that period using simple average

formula as can be seen in this data sheet. The average we get is the daily average

volume and it becomes the benchmark for our study and we can compare the actual

volume with this average volume.


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B.Find out Abnormal Volume

To find out abnormal volume trading we subtract average volume from the total

volume for a day given. The abnormal volume can be positive of negative. But in real

life the volume traded cant be negative. Here negative abnormal volume indicates

how much less volume trading takes place in comparison to expected volume traded.

C.Find out Cumulative Abnormal Volume


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As we have found in cumulative price effect in the same way we can found out the

cumulative volume traded for a given time period. This sheet represents the same

thing. Cumulative abnormal volume is useful as it indicate how much abnormality in

volume can be seen in given window or time period.

D.Find out Cumulative Abnormal Volume for a given Window

As already explain in the price effect, in the same way cumulative abnormal volume

for a given window can be found out using the above mentioned formula. As we can

see that there is huge abnormal volume trading can be seen on announcement date and

dividend date.


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4.1 Introduction

In finance, the efficient-market hypothesis (EMH) asserts that financial markets are

"informationally efficient". The weak version of EMH suppose that prices on traded

assets (e.g., stocks, bonds, or property) already reflect all past publicly available

information. The semi-strong version supposes that prices reflect all publicly

available information and instantly change to reflect new information. The strong

version supposes that market reflects even hidden/inside information. There is some

disputed evidence to suggest that the weak and semi-strong versions are valid while

there is powerful evidence against the strong version. Therefore, according to theory,

it is improbable to consistently outperform the market by using any information thatthe market already has, except through inside trading. Information or news in the

EMH is defined as anything that may affect prices that is unknowable in the present

and thus appears randomly in the future. The hypothesis has been attacked by critics

who blame the belief in rational markets for much of the financial crisis of 2007

2010, with noted financial journalist Roger Lowenstein declaring "The upside of the

current Great Recession is that it could drive a stake through the heart of the academic

nostrum known as the efficient-market hypothesis."

The efficient-market hypothesis was developed by Professor Eugene Fama at the

University of Chicago Booth School of Business as an academic concept of study

through his published Ph.D. thesis in the early 1960s at the same school. It was widely

accepted up until the 1990s, when behavioral finance economists, who were a fringe

element, became mainstream. Empirical analyses have consistently found problems

with the efficient-market hypothesis, the most consistent being that stocks with low

price to earnings (and similarly, low price to cash-flow or book value) outperform

other stocks. Alternative theories have proposed that cognitive biases cause these

inefficiencies, leading investors to purchase overpriced growth stocks rather than

value stocks. Although the efficient-market hypothesis has become controversial

because substantial and lasting inefficiencies are observed, Beechey et al. (2000)

consider that it remains a worthwhile starting point.


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4.2 The Efficient Market Hypothesis

When the term efficient market was introduced into the economics literature thirty

years ago, it was defined as a market which adjusts rapidly to new information

(Fama et al 1969).It soon became clear, however, that while rapid adjustment to new

information is an important element of an efficient market, it is not the only one. A

more modern definition is that asset prices in an efficient market fully reflect all

available information (Fama 1991). This implies that the market processes

information rationally, in the sense that relevant information is not ignored, and

systematic errors are not made. As a consequence, prices are always at levels

consistent with fundamentals. The words in this definition have been chosen

carefully, but they nonetheless mask some of the subtleties inherent in defining an

efficient asset market. For one thing, this is a strong version of the hypothesis that

could only be literally true if all available information was costless to obta in. If

information was instead costly, there must be a financial incentive to obtain it. But

there would not be a financial incentive if the information was already fully

reflected in asset prices (Grossman and Stiglitz 1980). A weaker, but economically

more realistic, version of the hypothesis is therefore that prices reflect information up

to the point where the marginal benefits of acting on the information (the expected

profits to be made) do not exceed the marginal costs of collecting it (Jensen 1978).

Secondly, what does it mean to say that prices are consistent with fundamentals? We

must have a model to provide a link from economic fundamentals to asset prices.

While there are candidate models in all asset markets that provide this link, no-one is

confident that these models fully capture the link in an empirically convincing way.

This is important since empirical tests of market efficiency especially those that

examine asset price returns over extended periods of time are necessarily joint tests

of market efficiency and a particular asset-price model.When the joint hypothesis is

rejected, as it often is, it is logically possible that this is a consequence of deficiencies

in the particular asset-price model rather than inthe efficient market hypothesis. This

is the bad model problem (Fama 1991).


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Finally, a comment about the word efficient. It appears that the term was originally

chosen partly because it provides a link with the broader economic concept of

efficiency in resource allocation. Thus, Fama began his 1970 review of the efficient

market hypothesis (specifically applied to the stockmarket):

The primary role of the capital [stock] market is allocation of ownership of

theeconomys capitalstock. In general terms, the ideal is a market in which

pricesprovide accurate signals for resource allocation: that is, a market in which firms

can make production-investment decisions, and investors can choose among the

securities that represent ownership of firms activities under the assumption that

securities prices at any time fully reflect all available information.The link between

an asset market that efficiently reflects available information (atleast up to the point

consistent with the cost of collecting the information) and its role in efficient resource

allocation may seem natural enough. Further analysis has made it clear, however, that

an informationally efficient asset market need not generate allocative or production

efficiency in the economy more generally. The two concepts are distinct for reasons to

do with the incompleteness of markets and the information-revealing role of prices

when information is costly, and therefore valuable (Stiglitz 1981).

4.3 Predictions of Efficient Market Hypothesis

The efficient market hypothesis yields a number of interesting and testable predictions

about the behaviour of financial asset prices and returns. Consequently, a vast amount

of empirical research has been devoted to testing whether financial markets are

efficient. While the bad model problem plagues some of this research, it is possible

to draw important conclusions about the informational efficiency of financial markets

from the existing body of empirical research. This section presents a selective survey

of the evidence. Our conclusions are summarised in the table and explained in more

detail in the pages that follow.


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1.BANCO PRODUCTS (INDIA) LTD.

Abnormal Return (Price): (In Percentage)

SD-30to SD-1

SD-10to SD-1 SD

SD+1 toED-1 ED

ED+1 toED+10

ED+1 toED+30

MeanDaily AB.

Return

Cum.ABReturn 60.02% 8.21% 2.37% 608.22% 3.40% 14.22% 86.30% 1.53%

0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

600.00%

700.00%

SD-30

TO SD-

01

SD-10

TO SD-1

SD SD+1-

ED-1

ED ED+1-

ED+10

ED+1-

ED+30

AB.Return60.02% 8.21% 2.37% 608.22% 3.40% 14.22% 86.30%

60.02%

8.21% 2.37%

608.22%

3.40% 14.22%

86.30%%Cum.ABReturn

Time Period

Banco Products (India) Ltd.


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Interpretation:

Here we can see that before the amalgamation announced there was not much good

return but after the source date it started to become more positive. Here we can see in

the above chart that the l

merger n aquisition

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