mergers & acquistions -introduction

8/13/2019 Mergers & Acquistions -Introduction

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Mergers & Acquisitions -

Introduction


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Amalgamation

When two or more companies merge together

to form a new company, the process is known as

amalgamation. Although the terms merger and

amalgamation appear synonymous there is a

difference between the two.

All amalgamations are necessarily mergers, all

mergers may not necessarily be amalgamations.


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Kinds of Mergers

Cogeneric mergers: These mergers happen

between companies that operate within the

same industry

Horizontal mergers: These mergers are between

companies in the same business activity

Vertical mergers: These mergers are between

two or more companies which are engaged in a

different functions within the same industry


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Kind of mergers

Conglomerate mergers: Mergers betweencompanies that belong to different industries

Upstream merger: Merger in which the subsidiary ismerged with the parent company

Down-stream merger: Merger in which a parent ismerged with its subsidiary

Reverse Merger: Merger in which a company with asound financial track record amalgamates with aloss making or less profitable company


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Takeover

Takeover is a strategy of acquiring control over

the management of another companyeither

directly by acquiring shares of the company that

carry voting rights or indirectly by participating

in the management.


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Takeover

Where the shares of the company as closelyheld by a small number of shareholders, atakeover might be affected by an agreement

with the shareholders.Where the share of a company are widely heldby the general public it involves the process asset out in the SEBI guidelines called SubstantialAcquisition of Shares and TakeoversRegulation,1997


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Kinds of Takeovers

Friendly Takeover- Takeover with the consentof the target company achieved throughnegotiations between the management

Hostile Takeover- Where a company silentlyand unilaterally pursues efforts to gain controlagainst the wishes of the existing mangement,such an attempt is considered hostile.Example: LN Mittal group acquired control ofArcelor


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Kinds of takeovers

Bailout takeover: Takeover of a financially weak

company by a financially stable company to

bailout the former is known as bailout takeover.

In the Indian context the financial institution

appraises the financially weak company which is

not a sick industrial company, and draws up a

rehabilitation plan on the principle of protectionof interests of the minority shareholders, good

management, effective revival and transparency.


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Kind of takeovers

Leveraged buyout:

This form of takeover is defined as acquisition of stock orassets of a company by an acquirer, in a manner that theconsideration is financed largely by borrowing (i.e. debtfunding) and a small component of equity. The acquirerforms a shell company to act as a legal entity making theacquisition. The LBO differs from a normal acquisition ontwo grounds:

A Large fraction of the acquisition is debt financed

The shares of the target company are not publiclytraded


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Kind of takeovers

Management buyout: Acquisition of a

company by its management is referred to as

MBO. In this form the management will buy

out all or most of the shareholders


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Economic Aspects of M&A

Shareholders wealthenhancing shareholdersvalue

Synergy --- Synergy signifies an improvement in the

performanceMarket Share- the merged entity could get asubstantial market share e.g. coke buying theTHUMS UP

Core competenceMergers enhance the corecompetence of a company that already hasexpertise in a business domain


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Economic Aspects of M&A

Diversification: Merger gives a tool for the

company to diversify into new business area

Increased debt capacity: A merged company

would have a higher capacity to absorb debt


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Definition of Merger as per Company

Law

Section 390 of the Companies Act defines the

term arrangement to include re-organisation of

share capital of a company by the consolidation

of shares of different classes, or by the divisionof shares into shares of different classes or by

both these methods


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Broad procedure to be followed for sanction of

an amalgamation

Stage 1- Drafting the scheme and obtaining boardsapproval

The scheme incorporates the following:

Transfer of assets and liabilities Transfer of employees, legal proceedings, contracts,

permits, licences etc of the transferor company tothe transferee company

Appointed date of transfer of assets and laibilities Consideration for the amalgamation and manner of

discharge


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an amalgamation

Stage 1:

Method of accounting

Dissolution of the transferor company


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Stage 2

In the case of listed companies after board of

approval, the scheme needs to be approved by

the Stock Exchange where the shares of the

companies concerned are listed

Clause 24(f) of listing agreement with BSE/NSE


an amalgamation


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Stage 3Application to be filed in the High Court

seeking directions to convene the meeting of

shareholders and creditors to obtain consent,

for approval of scheme of amalgamation


an amalgamation


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Stage 4. Meeting of shareholders and creditors

and filing of petitions--- The scheme would have

to be approved by three-fourths in value of the

shareholders and creditors present and voting atsuch meetings.

In case of amalgamation of a wholly owned subsidiary into its

parent, the Bombay High court observed that the parent neednot file a petition for sanction-Mahaamba Investments v IDI

Limited (2001)


an amalgamation


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Stage V- Approvals from regional director and

official liquidator

Notice needs to be given to the Central

Government and to the official liquidator

attached to the High Court to obtain their

approval to the scheme of amalgamation


an amalgamation


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Stage VIApproval from the High Court

After considering all the relevant andcircumstances, the High Court may sanction the

scheme of amalgamation with or without

modifications as it deems fit.


an amalgamation


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Accounting aspect of Mergers

AS 14 deals with the accounting for

amalgamations and the treatment of any

resultant goodwill or reserves.

AS 14 classifies amalgamation into two broad

categories:

1. Amalgamation in the nature of merger

2. Amalgamation in the nature of purchase


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Amalgamation in the nature if merger

All the following conditions have to be satisfied:

All the assets and liabilities of the transferor company

become after amalgamation the assets and liabilities of

the transferee company

Shareholders holding not less than 90% of the equityshares become equity shareholders of the transferee

company

The consideration is wholly discharged by the issue of

equity shares of the transferee company The assets and liabilities of the transferor company are

recorded at their book value in the transferee company


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Amalgamation in the nature of merger

A very important aspect of the amalgamation in

the nature of merger is that any difference

between the amount of share capital issued and

the amount of share capital of the transferorcompany has to be as premium and adjusted in

the capital reserve (not free for distribution as

dividend)


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Examples

Two very good examples of pooling of interestare:

Amalgamation of I-Ven Interactive Limited

with Infomedia 18 Limited (effective dateAugust 25, 2009)

Amalgamation of Aptech Software Limited

with Aptech Limited(Appointed date beingApril 1, 2009)


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The normal accounting rules of purchase are

applicable to this method and hence reserves,

other than the reserves that are required by law

do not appear in the books of the transfereecompany. Any consideration paid over and

above the value of the assets/liabilities is

considered as goodwill. In case of a deficit thedifference is considered as capital reserve

Amalgamation in the nature of Purchase


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Amortisation of Goodwill

AS 14 as it stands requires goodwill to be

amortised

AS 28 requires that the goodwill be tested for

impairment


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Important Dates in Mergers

Appointed Date:

This is the date stated in the scheme as a date

appointed by the parties to the amalgamation

concerned. Sec. 391 of the Companies Act

Effective Date:

This is the date on which the order of the high

court approving the scheme is filed with the

registrar of companies


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Disclosure requirements

AS 14 requires the following disclosures for all

amalgamations to be made in the financial statements:

Names and general nature of business of the

amalgamating companies

Effective date of amalgamation for accountingpurposes

Method of accounting used to reflect the

amalgamation Particulars of the scheme sanctioned under a statute


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Disclosure requirements

If the amalgamation is under the pooling of interestmethod

Description and number of shares issued, together with theswap ratio; and

Amount of any difference between the consideration and the

value of net identifiable assets acquired and the treatmentthereof

If the amalgamation is under the purchase method

Consideration for amalgamation an d a description of theconsideration payable and ;

Amount of any difference between the consideration and thevalue of net identifiable assets acquired and the treatmentthereof including the period of amortisation of any goodwillarising on amalgamation


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Regulatory aspect


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SEBI Regulations

SEBI regulations are applicable when the

following conditions are satisfied:

A listed company is amalgamating with

another listed company

An unlisted company is amalgamating with a

listed company

A listed company is amalgamating with an

unlisted company


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Listing Agreement

All amalgamations involving listed companies require in-principle

approval of stock exchange. Listing agreement of stock

exchanges require all listed companies to file any scheme of

arrangement proposed to be filed before any Court or Tribunal

under s. 391, 394 and 101 of the Companies Act, with the stockexchange at least a month before it is presented to the Court or

Tribunal

Auditors certificate: The above filing with the exchange has to

be accompanied by the auditors certificate that states that theaccounting treatment in the scheme of amalgamation is in

compliance with all Accounting Standards


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Listing of an unlisted company without an IPO

This situation arises when a listed company gets merged into anunlisted company:

The shares for which the company seeks listing must have

been allotted to the holders of securities of the listed

company pursuant to the scheme sanctioned by the relevantHigh Court

The terms of their listing should be governed by the Scheme

and must not issue any shares not covered under the scheme

Atleast 25% of its fully diluted, paid-up share capital shouldbe issued to the public shareholders in the listed company


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Listing of an unlisted company without an IPO

Lock-in requirements:The increased promoters stake in the listed company has to be

locked-in as follows:

25% of increase in promoters stake for 3 years; or

Entire increase in the promoters stake for one year

Shares issued by the unlisted company in lieu of the locked-in

shares of the listed company must be subject to lock-in for theremaining period


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Income Tax Implications


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Definition of tax-neutral amalgamation under

the Income Tax Act

All properties of the transferor company become theproperties of the transferee company;

All liabilities of the transferor company become the liabilitiesof the transferee company;

Shareholders holding 75% or more in value of the shares in

the transferor company (excluding shares already heldimmediately before the amalgamation by the transferorcompany or its subsidiaries or its nominees) becomeshareholders of the transferee company

The above must be achieved by virtue of the merger and notby way of purchase of properties by one company fromanother or by way of distribution of properties pursuant tothe winding up of a company concerned


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What is a tax neutral amalgamation

All properties of the transferor company become the

properties of the transferee company

All liabilities of the transferor company become the liabilities

of the transferee company

Shareholders holding 75% or more in value of the shares in

the transferor company (excluding shares already held

immediately before the amalgamation by the transferor

company or its subsidiaries or its nominees) become

shareholders of the transferee company, and;

The above must be achieved by way of merger and not bypurchase


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ILLUSTRATION: Scenario 1

Pre-amalgamation structure

Mr A and (60%) Mr B(40%) are

shareholders in AB Ltd.

Mr C (50%) and Mr D (50%) are

shareholders in CD Ltd.

AB Ltd. Is merged in CD Ltd. , the share holding pattern now is

Mr A (30%), Mr B(20%), Mr C (25%), Mr D(25%)

The above amalgamation would qualify as amalgamation under the ACT

but if the Mr B had received cash instead of shares and thus only 60% of

the AB Ltd. shareholders would be merged, the merger would not qualify

as an amalgamtion under the act


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Section 47(vi)

The act specifically provides under sec. 47(vi) that any transfer of

capital assets in a scheme of amalgamation would be regarded

as exempt transfer and accordingly would not attract capital

gains.

The CBDT has also clarified vide its circular no 5P(LXXVI-63) of

1967 dated October 9, 1967 that where a company transfers its

assets pursuant a amalgamation, such transfer will not be

regarded as distribution of accumulated profits


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Implications for shareholders of the

amalgamating company

Amount (Rs)

Year 1. Mr A purchased 100 shares of A Ltd for Rs 20. 2000

Year 5: A Ltd. Amalgamates with B Ltd. The share swap ratio is

for one share of A Ltd. the shareholder will get 10 shares of B

Ltd.Year 5: Fair value of 1 share of B Ltd. Is Rs 5

Year 5: Mr A receives 1000 shares of B Ltd. Hence he will get

shares that are worth

5000

Gain on receipt of shares of B Ltd on amalgamation 3000


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Tax Implication to the transferee company

1. Actual cost of assets, depreciation, WDV in respect of capitalassets transferred

2. Tax holiday benefits

3. Allowability of amalgamation expenses

4. Carry forward of losses of transferor company5. Continuity of certain deduction of certain specific expenses

incurred by transferor company


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Actual cost of assets, depreciation, WDV in

respect of capital assets transferred

-When a capital asset is transferred by a transferor company to atransferee company pursuant to an amalgamation, the latter

being an Indian company, the actual cost of the transferred asset

to the transferee company should be the same as it would have

been to the transferor company, if the amalgamation had not

taken place

Pursuant to amalgamation, where a block of assets is transferred

by transferor company to transferee company, then, the opening

written down value of the block of assets transferred by the

transferor company is regarded as the WDV of the block for the

transferee company


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Actual cost of assets, depreciation, WDV in

respect of capital assets transferred

The tax depreciation is calculated differently for the year inwhich the amalgamation takes place. The aggregate annual

depreciation in respect of depreciable assets which are

transferred by a transferor company to the transferee company

is required to be apportioned between the amalgamating and

amalgamated company in the ratio of the number of days of

usage of those assets by the respective companies


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Tax Holiday benefits

All Tax holidays benefits other than the tax holiday enjoyedunder Sec.80 IA of the Income Tax Act will be treated as follows:

No tax holiday deduction will be allowed to the transferor

company in the year of amalgamation The amalgamated company would be entitled to the tax

holiday for the unexpired period, as if the amalgamation had

not taken place


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Tax Holiday benefits under 80 IA

Circular No 3 dated March 12, 2008 of CBDT has made thefollowing clear:

Any Tax Holiday enjoyed under sec. 80-IA will not be enjoyed by

the amalgamated company if such amalagamation/de-mergerhas happened after 31/3/2007. There was a special subsection

(12) added to the section 80-IA.


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Amalgamation Expenses

Under section 35DD of the Act:

The transferee company is allowed a deduction of 1/5thof the

expenses incurred wholly and exclusively for the purpose of the

Scheme over a period of five successive years beginning from theyear in which the amalgamation takes place


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Amalgamation Expenses

Under section 35DD of the Act:

The transferee company is allowed a deduction of 1/5thof the

expenses incurred wholly and exclusively for the purpose of the

Scheme over a period of five successive years beginning from theyear in which the amalgamation takes place


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Carry forward of losses

Section 72A, 72AA and 72AB of the Act provides that accumulated losses of the

transferor company would be deemed to be those of the transferee companyprovided :

1. The transferor company has been engaged in the business in which theaccumulated losses occurred or depreciation remains unabsorbed, for 3 ormore years

2. The transferor company has held continuosly as on the date of amalgamation

at least 75% of the book value of the fixed assets held by it 2 years prior tothe date of amalgamation

3. The transferee company continues to hold 75% of the book value of the fixedassets for at least 5 years

4. The transferee company carries on the business of the amalgamatingcompany for at least 5 years

5. The transferee company should achieve the level of production of at least50% of the installed capacity before the end of the 4 years from the date ofamalgamation and continue to maintain this level of production till the endof 5 years from the date of amalgamation


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Preliminary Expenses

The Act provides that if an Indian Company having an

unamortised preliminary expenditure is amalgamated with

another Indian company before the expiry of five years of the

amortisation period, the unamortised preliminary expenses can

be claimed by the transferee company for the unexpired period.

l d f b l


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Capital Expenditure for obtaining licence to

operate telecommunication services

The capital expenditure incurred by the transferor company for

obtaining a telecommunications licence and for which payment

has been actually made.

Where in a scheme of amalgamation any such licence is

transferred by the transferor company to the transfereecompany the expense is not allowed as a deduction for the

transferor company but allowed for the transferee company as if

the amalgamation did not take place

di i f i l


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Expenditure on prospecting for minerals or

development of mines

Expenditure incurred for prospecting minerals or development

of mines is deductible in ten equal installments in respect of any

expenditure incurred after March 31, 1970.

Such expenditure is not allowed as a deduction for the transferor

company in the year the amalgamation takes place, but allowed

to the transferee company from the previous year the

amalgamation takes place as if the amalgamation has never

taken place.


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ILLUSTRATION

Consider the amalgamation of AB Ltd. and CDLtd. Both the companies have accumulated

losses 100 crore and 200 crore respectively, the

fair values of the companies are Rs 5,100 crore

and Rs. 4,900 crore respectively.

The shares are alloted in the ratio of the

valuation that they have arrived at. There couldthree scenarios that could happen


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Shareholder of AB Ltd 100% Shareholder of CD Ltd 100%

100 cr. loss 200 cr. loss

AB Ltd. Is merged in CD Ltd. , the share holding pattern now is

Shareholders of AB Ltd. get 51% and CD Ltd. get 49%

Because CD Ltd. Shareholding has been reduced to 49% the 300 crore set-

off of losses WILL NOT BE AVAILABLE FOR CARRY FORWARD, BUT THE

LOSSES OF AB LTD.OF A 100 CRORE IS AVAILABLE FOR SET-OFF


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CD Ltd. Is merged in AB Ltd. , the share holding pattern now is


In this scenario since CD has merged with AB Ltd. The 51% shareholding of

AB Ltd. Continue to be 51% and hence the losses of AB and also of CD

would not lapse


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AB and CD both merge into a new company called ABCD


In this scenario the losses of both AB and CD would continue to be allowed

to be carried forward and set-off against future profits


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Stamp Duty(Not in detail)State Stamp Duty on amalgamation

Andhra Pradesh 2% of the market value of the property

Gujurat Maximum of 10 crores

1% of the market value of the shares issued or allotted

OR

1% of the immovable property of the transferor

company situated in the state of gujurat

Whichever is higher

Karnataka 2% of the market value of the property of the

transferor company located in karnataka

OR

1% of the aggregate market value of shares issued or

allottedWhichever is higher

Madhya Pradesh 7% of the market value of immovable property

transferred which is located in MP

OR

0.7% of the aggregate market value of the shares

issued


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Stamp Duty (not in detail)

State Stamp Duty on amalgamation

Maharashtra Maximum of 25 crore10% of the market value of shares transferred or issued

The amount of duty shall not exceed:

(i) 5% of the true market value of the immovable

property located within the State of Maharashtra

OR

(ii) 0.7% of the aggregate of the market value of theshares issued or allotted in exchange

Whichever is higher

Rajasthan 4% of the market value of the property transferred

which was located in Rajasthan

West Bengal 8% of the aggregate market value of the shares issuedor allotted in exchange or otherwise

Tamil Nadu 2% of the market value of the immovable property of

the transferor company loacted in the state

OR

0 6% f h k l f h h

mergers & acquistions -introduction

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