Aquisitions & Mergers

8/9/2019 Aquisitions & Mergers

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Group MembersSyed Asif Tanveer F09MB024

Habib ur Rehman F09MB003

Arslan Rafique F09MB039

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*Traditionally, the term described a situation

when a larger corporation purchases the assetsor stock of a smaller corporation, while control

remained exclusively with the larger

corporation.


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*Hostile Acquisition

*The company, which is to be bought has no information about the

acquisition.

*The company, which would be sold is taken by surprise.

*Friendly Acquisition

*Two companies cooperate with each other and settle matters

related to acquisitions.

*Reverse Take Over

*Smaller company manages to take control of the management of

a bigger company

*At the same time retains its name for the combination of both the

companies.


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*The union of two or more organizations under

single ownership, through the directacquisition by one organization of the net

assets or liabilities of the other.

*A merger can be the result of a friendly

takeover, which results in the combining of

companies on an equal footing.


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*Horizontal Merger

* Involves firms from the same industry

*Vertical Merger

* Involves firms from the same supply chain

*Circular Merger

* Involves firms with different products but similar distribution

channels*Conglomerate Merger

*A conglomerate company is produced by the union of firms withfew or no similarities in production or marketing but that come

together to create a larger economic base and greater profit

potential.


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*Acquisition

*When one company

takes over another and

clearly establishes itself

as the new owner

*Target company ceases

to exist.

*Buyer "swallows" the

business

*Buyer's stock continues

to be traded

Merger

Two firms agree to go

forward as a singlenew company ratherthan remain separatelyowned and operated.

Firms are often of

about the same size. Both companies' stocks

are surrendered andnew company stock isissued in its place.


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*Economy of scale:

*The combined company can often reduce itsfixed costs by removing duplicate departments oroperations, lowering the costs of the companyrelative to the same revenue stream, thusincreasing profit margins.

*Revenue Market Share

*This assumes that the buyer will be absorbing amajor competitor and thus increase its marketpower


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*Cross Selling

*For example, a bank buying a stock broker couldthen sell its banking products to the stock

broker's customers, while the broker can sign up

the bank's customers for brokerage accounts.

*Taxation

*A profitable company can buy a loss maker to usethe target's loss as their advantage by reducing

their tax liability.


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* The Competition Commission of Pakistan (CCP) wasestablished on 2 October 2007 under the Competition

Ordinance, 2007. With competition and consumerprotection jurisdiction in broad sectors of the economy,

the Commission deals with issues that touch the economic

life of every Pakistani.

* The Ordinance sets out the principles and norms of sound

competitive behavior as well as the manner in which

these norms are to be enforced. It provides a legalframework in which a business environment based on

healthy competition towards improving economicefficiency, developing competitiveness and protecting

consumers from anti-competitive practices is to be

created.


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*Cartels n Mergers

*Takes action with respect to any kind of collusivearrangement or agreement violative of the

Ordinance.

*accords or withholds clearance to mergers and

acquisitions after analyzing the potential impact

on competition


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*Monopolies & Trading Abuses

*Department investigates matters pertaining tothe abuse of dominant position or practices that

prevent, restrict, reduce, or distort competition

in the relevant market.

*Apart from cartelization or other forms of

collusive behavior (e.g., bid rigging) anyagreement or practice that is competition

adverse.


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*The law prohibits situations which tend tolessen, distort or eliminate competition. Suchas actions constituting an

*Abuse of market dominance,

*Competition restricting agreements

*Deceptive market practices.

*Sets out procedures relating to review ofmergers and acquisitions, enquiries, impositionof penalties and other essential aspects of lawenforcement.


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*Merger control provisions are aimed at ensuring that

mergers do not lead to market concentration, which

in turn may lead to abusive behavior.

*Pakistan follows a mandatory reporting regime,

where parties to merger that meet notification

thresholds, must file a merger clearance.

*The objective of the clearance process is to identify

any potential anticompetitive effects of the merger

and to block it if it poses serious competition

concerns.


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*The merger review is conducted in 2 phases.

*Phase 1*The first stage, to be completed within 30 days,

assesses whether the merger would substantially

lessen competition by creating a dominant position.

*Phase 2

*The second stage analysis, to be completed within90 days, is based on detailed information provided

by the undertakings along with the evidence from

the first stage


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*While reviewing the transactions, the Commission

considers the following factors:

* Analysis of the relevant product and geographic

markets;

* Identification of competitor undertakings;

*Calculation of market shares;

*Calculation of market concentration;

* Assessment of potential adverse effects of the

mergers, based on market concentration and other

characteristics of the market;

* Assessment of likelihood, in the absence of merger, of

either party to merger to fail causing its assets to exit

the market


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*Signing of Letter of Intent / Memorandum of understanding

between the potential buyer and the seller*Seeking required regulatory approvals (Competition

Commission of Pakistan)

*Undertaking financial, legal, commercial and operational due

diligence

*Assessing value and negotiating price

*Signing of Sale and Purchase Agreement

*Closing the deal.


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*Commits the parties to the transaction prior to

reaching a definitive agreement

*Is entered into if Due Diligence indicates both

parties desire to proceed

*Re-affirms confidentiality agreements


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*Deal Structure

*Identity of Parties

*What is being purchased?

*What is the legal structure of the deal?

*Employment Agreements

*Expenses Who Pays ?

*Who Prepares Documentation


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*Exclusivity* Buyer may require seller to take the business off the market

for some period of time as an incentive to Buyer to expendtime and money to quickly complete diligence and close onthe transaction

*Break-Up Fee* Compensation (liquidated damages) for buyer if seller does

not enter into a transaction with buyer and during a tailperiod enters into a transaction with another buyer

*Standstill* If Seller is public, it may require an agreement to prevent

buyer from buying any of sellers stock of seller for a specificperiod of time to avoid a hostile takeover


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*This includes:

* the merger parties;

*The nature of the merger, for example,

*merger is an anticipated merge

* an acquisition of sole or joint control

* a full-function joint venture

*The value of the transaction

*The purchase price or the value of all the assetsinvolved

*The areas of activity and turnover worldwide and inPakistan for the last financial year


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*Whole or parts of the business of parties are

subject to the merger

*The markets on which the merger will have an

impact

*a brief explanation of the economic and

financial structure of the merger


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* Any one or two or more of the concernedparties as soon as they agree in principle or

sign a letter of intent to proceed with theintended merger before consummation of themerger, shall give notice to the Commission.

*The pre-merger application to be made to thecommission

*The Commission may ask to submit anyparticular information or document Form, if itconsiders that such information or document isnecessary for examination of the application.


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*The fee may be paid in the form of bank challan orbank draft in favor of the Commission. Turnover of

the applicant undertaking(s)* (i) Up to 500 million rupees. Rs. 250,000/-

* (ii) More than 500 million but not exceeding 750million rupees. Rs. 400,000/-

*(iii) More than 750 million but not exceeding 1000million rupees. Rs. 500,000/-

* (iv) Exceeding 1000 million rupees. Rs. 750,000/-


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*The cooperation of two or more individuals or

businesses--each agreeing to share profit, loss

and control--in a specific enterprise.

*This is a good way for companies to partner

without having to merge. JVs are typically

taxed as a partnership.


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*A joint venture is also a form of merger. A merger shall be

deemed to have occurred if a collaborative arrangementby which two or more undertaking devote their resourcesto pursue a common objective; provided that sucharrangement must be:

subject to joint control;

perform the functions of an autonomous entity; and

on a long term basis.


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*The Parties

*PICIC Ltd is a public limited company engaged in term financing forindustrial and commercial activities.

*PICIC Commercial Bank Ltd is involved in Commercial Bank andRelated Services.

*NIB Bank Ltd is a commercial bank involved in Commercial Bank andRelated services

*Findings

*Post merger composite market share would be less than 4%*Conclusion

*Composite market share lies within 40% threshold

*The merger would not substantially lessen competition

*The merger was cleared.


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*The Parties

*Crescent Bahuman Energy is involved in generation and selling ofelectric power

*Crescent Textile is new and aims to manufacture Textile products

*Crescent Bahuman Ltd manufactures denim

*Findings

*All companies are involved in dissimilar business

*Conclusion

*The Merger was allowed.


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Acquisitions


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Friendly take-over

* In a friendly take-over, the bidder informs the companysboard of directors before making an offer for acquiring

its shares.

Hostile take-over

* A take-over is considered hostile if:

* the board rejects the offer but the bidder continues to

pursue it, or* the bidder makes the offer without informing the board

beforehand


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White Knight

* A white knight is a company that acquires another company

with the intention of helping it, e.g. JP Morgan Chaseacquired Bear Stearns in 2008, which helped Bear Stearns

avoid insolvency after its share price declined to such an

extent that its market capitalization dropped by 92%.

Reverse take-over

* A reverse take-over is one where a private companyacquires a public company.


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*The Parties

* IBL is a company engaged in Modaraba business

*Dr. Hasan Murad runs the University of Management and

Technology.

*Findings

* It was assessed that IBL Modaraba and UMT were involved in

dissimilar activities.

*Conclusion

*The acquisition would not substantially lessen competition

*The Acquisition was cleared.


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*The Parties

*Wazir Ali Industries Ltd is engaged in the maufacture of sale of

banaspati ghee and cooking oil

*Dalda Foods Pvt Ltd is also engaged in the maufacture of sale of

banaspati ghee and cooking oil

*Findings

*Wazir Ali Industries were on the verge of Bankrupcy so Dalda

Foods wanted to help it

*Conclusion*The acquisition would not substantially lessen competition in

ghee and cooking oil market.

*The Acquisition was approved.


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*The Parties

*ABN AMRO Bank is a scheduled bank and engaged in retail

banking and corporate banking.

*RBS is a consortium of foreign banks i.e RBS, Fortis, BancoSantadar.

*Findings

* As RBS bank has no existence in Pakistan before this acquisition

so it would d not result in change in market share.

*Conclusion

*There was a limited possibility of a substantial lessening of

competition by this dominant undertaking.

*The Acquisition was approved.


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*Banking Sector observed extraordinary M&A during past few years

* In order to comply with the statutory requirement of raising

their paid up capital to at-least Rs.6 billion by the end of 2009

*The privatisation policy of the government has resulted in

acquisitions of ABL, UBL and PTCL.

*LINKdotNET also expanded its operations and acquired WOL and

DANCOM ONLINE to become the largest ISP in the country,

representing the largest horizontal M&A transaction in this sector

*Dalda Foods (Pvt) Ltd acquired Wazir Ali Industries, thereby

eliminating competitors in the edible oil market of the country by

acquiring the famous Tullo brand, which was a horizontal M&A

activity. This resulted in increased market share of the edible oil

sector for the acquirer.


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Now Lets get little

technical


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Mergers and acquisitions result in number of

benefits including:

*Revenue enhancement

*Cost reductions

*Diversification of business activities

*Transfer of talents and resources

*Tax benefits


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*The income tax ordinance, 2001 allows companies

to set off their business losses against the profits of

other companies in group, provided that all thecompanies in the group continue their operations

from the date of acquisition.

*The finance bill 2008 has also proposed to allow

banking companies, non banking financial

companies, modarabas and insurance companies toadjust accumulated losses against the income of the

group during tax year.


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*Any unused loss will also be allowed to be

carried forward for six tax years following the

tax year in which loss arises.

*Companies in the group transfer goods at no

profit & loss, so goods or services provided by

one company in a group to another company

will not be taxable.


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Accounting

Challenges


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Types of Treatment

* Subsidiary

* Associate

* Joint Venture

Accounting Treatment

* Full Consolidation

* Equity Accounting

* Proportional Consolidation /Equity Accounting


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The accounting of M&A covers the following

Areas.

*Goodwill calculation

*Non controlling interest

*Treatment of pre/post acquisition profits

*Elimination of inter-group transactions


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IFRS 3 Defines goodwill as Goodwi

llis

an ass

etrepresenting the future economic benefit

arising from other assets acquiredin a

business combination that are not individually

identified andseparately recognized.

Goodwill is calculated as the excess of theconsideration transferred for acquisition of

assets.


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In some acquisitions parent may not own all ofthe shares in the subsidiary, e.g. If P owns 80%

of the ordinary shares of S, there is a non

controlling interest of 20%


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Pre-acquisition profits are the reserves whichexist in a subsidiary company at the date when

it is acquired. They are capitalized at the date

of acquisition by including the in the goodwill

calculation.

Post-acquisition profits are profits made and

included in the retained earnings of thesubsidiary company following acquisition. They

are included in group reserves.


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Companies in the group will probably trade on

credit, leading to:

*Receivables

*Payables

These are amounts owing within the group

rather than outside the group and therefore

they must not appear in the statementconsolidated of financial position.


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At the year end current accounts may not agree,owing to the existence of in-transit terms such

as goods and cashThe usual rules are as follows:

If cash is in-transit then

Dr cash in transit

Cr receivablesOnce in agreement the current accounts may be

may be cancelled against each other.


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If you fail to plan, you plan to fail


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Aquisitions & Mergers

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