Expansion and Financial Restructuring

Table of contents

Sr.

No.Title Page No.

1 Introduction 2

2 Meaning of Corporate Restructuring 4

3 Financial Restructuring 7

4 Organizational Restructuring 9

0

EXPANSION

AND FINANCIA

L RESTRUCTURI

NG

5 The Important Methods Of Corporate Restructuring 11

6 Mergers: Meaning, Definition And What Mergers Actually Mean 21

7 Mergers Vs. Acquisitions 23

8 Purpose Of Mergers 24

9 Reasons Why Companies Merge 26

10 Motivation For Mergers 30

11 Types Of Mergers 33

12 Concerns For Mergers 35

13 Steps In Bringing About Mergers Of Companies 37

14 Legal Procedure For Mergers 39

15 Corporate Merger Procedure 41

16 Why Mergers Fail? 41

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Cases Of Mergers

Case 1: Arcelor-Mittal Merger

Case 2: Deutsche-Dresdner Bank Merger

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18 References 46

Introduction

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We have been learning about the companies coming together to from another company and companies taking over the existing companies to expand their business.

With recession taking toll of many Indian businesses and the feeling of insecurity surging over our businessmen, it is not surprising when we hear about the immense numbers of corporate restructurings taking place, especially in the last couple of years. Several companies have been taken over and several have undergone internal restructuring, whereas certain companies in the same field of business have found it beneficial to merge together into one company.

In this context, it would be essential for us to understand what corporate restructuring and mergers are all about.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side Mergers may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers. Many have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing shareholder value.

To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors that the management may have to look into before going for merger. Considerable amount of brainstorming would be required by the managements to reach a conclusion. e.g. a due diligence report would clearly identify the status of the company in respect of the financial position along with the net worth and pending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company.

Corporate restructuring refers to a broad array of activities that expands or contracts a firms operation or substantially modify its

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financial structure or bring about a significant change in its organizational structure and internal functioning. It includes mergers, takeovers, acquisitions, slump sales, demergers etc.

Mergers, acquisitions and restructuring have become a major force in the financial and economic environment all over the world. Essentially an American phenomenon till mid-1970s, they have become a dominant global business theme since then.

On the Indian scene, too, corporates are seriously looking at mergers, acquisitions and restructuring which has indeed become the order of the day. The pace of corporate restructuring has increased since the beginning of the liberalization era, thanks to greater competitive pressures and a more permissive environment.

Mergers, acquisitions and restructuring evoke a great deal of public interest and perhaps represent the most dramatic facet of corporate finance. This report discusses various facets of mergers.

CORPORATE RESTRUCTURING3

Corporate restructuring is one of the most complex and fundamental phenomena that management confronts. Each company has two opposite strategies from which to choose: to diversify or to refocus on its core business. While diversifying represents the expansion of corporate activities, refocus characterizes a concentration on its core business. From this perspective, corporate restructuring is reduction in diversification.

Corporate restructuring is an episodic exercise, not related to investments in new plant and machinery which involve a significant change in one or more of the following

Pattern of ownership and control Composition of liability Asset mix of the firm.

It is a comprehensive process by which a company can consolidate its business operations and strengthen its position for achieving the desired objectives:

Synergetic Competitive Successful

It involves significant re-orientation, re-organization or realignment of assets and liabilities of the organization through conscious management action to improve future cash flow stream and to make more profitable and efficient.

Meaning and Need for corporate restructuring

Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why corporate restructuring may take place and what it can mean for the company.

Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production

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process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share.

Corporate restructuring may also take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place

In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually a hope, what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability.

Purpose of Corporate Restructuring -

To enhance the share-holder value, The company should continuously evaluate its:

1. Portfolio of businesses,2. Capital mix,3. Ownership &4. Asset arrangements to find opportunities to increase the share-

holder’s value.

To focus on asset utilization and profitable investment opportunities.

To reorganize or divest less profitable or loss making businesses/products.

The company can also enhance value through capital Restructuring, it can innovate securities that help to reduce cost of capital.

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Characteristics of Corporate Restructuring –

1. To improve the company’s Balance sheet, (by selling unprofitable division from its core business).

2. To accomplish staff reduction ( by selling/closing of unprofitable portion).

3. Changes in corporate management.4. Sale of underutilized assets, such as patents/brands.5. Outsourcing of operations such as payroll and technical support to

a more efficient 3rd party.6. Moving of operations such as manufacturing to lower-cost

locations.7. Reorganization of functions such as sales, marketing, &

distribution.8. Renegotiation of labor contracts to reduce overhead.9. Refinancing of corporate debt to reduce interest payments.10. A major public relations campaign to reposition the company

with consumers.

Corporate Restructuring entails a range of activities including financial restructuring and organization restructuring.

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1. FINANCIAL RESTRUCTURING

Financial restructuring is the reorganization of the financial assets and liabilities of a corporation in order to create the most beneficial financial environment for the company. The process of financial restructuring is often associated with corporate restructuring, in that restructuring the general function and composition of the company is likely to impact the financial health of the corporation. When completed, this reordering of corporate assets and liabilities can help the company to remain competitive, even in a depressed economy.

Just about every business goes through a phase of financial restructuring at one time or another. In some cases, the process of restructuring takes place as a means of allocating resources for a new marketing campaign or the launch of a new product line. When this happens, the restructure is often viewed as a sign that the company is financially stable and has set goals for future growth and expansion.

Need For Financial Restructuring:

The process of financial restructuring may be undertaken as a means of eliminating waste from the operations of the company.

For example, the restructuring effort may find that two divisions or departments of the company perform related functions and in some cases duplicate efforts. Rather than continue to use financial resources to fund the operation of both departments, their efforts are combined. This helps to reduce costs without impairing the ability of the company to still achieve the same ends in a timely manner

In some cases, financial restructuring is a strategy that must take place in order for the company to continue operations. This is especially true when sales decline and the corporation no longer generates a consistent net profit. A financial restructuring may include a review of the costs associated with each sector of the business and identify ways to cut costs and increase the net profit. The restructuring may also call for the reduction or suspension of production facilities that are obsolete or currently produce goods that are not selling well and are scheduled to be phased out.

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Financial restructuring also take place in response to a drop in sales, due to a sluggish economy or temporary concerns about the economy in general. When this happens, the corporation may need to reorder finances as a means of keeping the company operational through this rough time. Costs may be cut by combining divisions or departments, reassigning responsibilities and eliminating personnel, or scaling back production at various facilities owned by the company. With this type of corporate restructuring, the focus is on survival in a difficult market rather than on expanding the company to meet growing consumer demand.

All businesses must pay attention to matters of finance in order to remain operational and to also hopefully grow over time. From this perspective, financial restructuring can be seen as a tool that can ensure the corporation is making the most efficient use of available resources and thus generating the highest amount of net profit possible within the current set economic environment.

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2. ORGANIZATIONAL RESTRUCTURING

In organizational restructuring, the focus is on management and internal corporate governance structures. Organizational restructuring has become a very common practice amongst the firms in order to match the growing competition of the market. This makes the firms to change the organizational structure of the company for the betterment of the business.

Need For Organization Restructuring

New skills and capabilities are needed to meet current or expected operational requirements.

Accountability for results are not clearly communicated and measurable resulting in subjective and biased performance appraisals.

Parts of the organization are significantly over or under staffed. Organizational communications are inconsistent, fragmented, and

inefficient. Technology and/or innovation are creating changes in workflow

and production processes. Significant staffing increases or decreases are contemplated. Personnel retention and turnover is a significant problem. Workforce productivity is stagnant or deteriorating. Morale is deteriorating.

Some of the most common features of organizational restructures are:

Regrouping of business: This involves the firms regrouping their existing business into fewer business units. The management then handles theses lesser number of compact and strategic business units in an easier and better way that ensures the business to earn profit.

Downsizing: Often companies may need to retrench the surplus manpower of the business. For that purpose offering voluntary retirement schemes (VRS) is the most useful tool taken by the firms for downsizing the business’s workforce.

Decentralization: In order to enhance the organizational response to the developments in dynamic environment, the firms go for decentralization. This involves reducing the layers of

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management in the business so that the people at lower hierarchy are benefited.

Outsourcing: Outsourcing is another measure of organizational restructuring that reduces the manpower and transfers the fixed costs of the company to variable costs.

Enterprise Resource Planning: Enterprise resource planning is an integrated management information system that is enterprise-wide and computer-base. This management system enables the business management to understand any situation in faster and better way. The advancement of the information technology enhances the planning of a business.

Business Process Engineering: It involves redesigning the business process so that the business maximizes the operation and value added content of the business while minimizing everything else.

Total Quality Management: The businesses now have started to realize that an outside certification for the quality of the product helps to get a good will in the market. Quality improvement is also necessary to improve the customer service and reduce the cost of the business.

The perspective of organizational restructuring may be different for the employees. When a company goes for the organizational restructuring, it often leads to reducing the manpower and hence meaning that people are losing their jobs. This may decrease the morale of employee in a large manner. Hence many firms provide strategies on career transitioning and outplacement support to their existing employees for an easy transition to their next job.

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THE IMPORTANT METHODS OF CORPORATE RESTRUCTURING ARE:

1. Joint ventures2. Sell off and spin off3. Divestitures4. Equity carve out5. Leveraged buy outs (LBO)6. Management buy outs7. Master limited partnerships8. Employee stock ownership plans (ESOP)

1. Joint Ventures

Joint ventures are new enterprises owned by two or more participants. They are typically formed for special purposes for a limited duration. It is a combination of subsets of assets contributed by two (or more) business entities for a specific business purpose and a limited duration. Each of the venture partners continues to exist as a separate firm, and the joint venture represents a new business enterprise. It is a contract to work together for a period of time each participant expects to gain from the activity but also must make a contribution.

For Example:

GM-Toyota JV: GM hoped to gain new experience in the management techniques of the Japanese in building high-quality, low-cost compact & subcompact cars. Whereas, Toyota was seeking to learn from the management traditions that had made GE the no. 1 auto producer in the world and In addition to learn how to operate an auto company in the environment under the conditions in the US, dealing with contractors, suppliers, and workers.

DCM group and Daewoo motors entered in to JV to form DCM DAEWOO Ltd. to manufacture automobiles in India.

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Reasons for Forming a Joint Venture

Build on company’s strengths Spreading costs and risks Improving access to financial resources Economies of scale and advantages of size Access to new technologies and customers Access to innovative managerial practices

Rational For Joint Ventures

To augment insufficient financial or technical ability to enter a particular line or business.

To share technology & generic management skills in organization, planning &       control.

To diversify risk To obtain distribution channels or raw materials supply To achieve economies of scale To extend activities with smaller investment than if done

independently To take advantage of favorable tax treatment or political incentives

(particularly in foreign ventures).

Tax aspects of joint venture:

If a corporation contributes a patent technology to a Joint Venture, the tax consequences may be less than on royalties earned though a licensing arrangements.

Example:

One partner contributes the technology, while another contributes depreciable facilities. The depreciation offsets the revenues accruing to the technology. The J.V. may be taxed at a lower rate than any of its partner & the partners pay a later capital gain tax on the returns realized by the J.V. if and when it is sold. If the J.V. is organized as a

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corporation, only its assets are at risk. The partners are liable only to the extent of their investment, this is particularly important in hazardous industries where the risk of workers, production, or environmental liabilities is high.

2. Spin-off

Spinoffs are a way to get rid of underperforming or non-core business divisions that can drag down profits.

Process of spin-off

1. The company decides to spin off a business division.2. The parent company files the necessary paperwork with the

Securities and Exchange Board of India (SEBI).3. The spinoff becomes a company of its own and must also file

paperwork with the SEBI.4. Shares in the new company are distributed to parent company

shareholders.5. The spinoff company goes public.

Notice that the spinoff shares are distributed to the parent company shareholders. There are two reasons why this creates value:

1. Parent company shareholders rarely want anything to do with the new spinoff. After all, it’s an underperforming division that was cut off to improve the bottom line. As a result, many new shareholders sell immediately after the new company goes public.

2. Large institutions are often forbidden to hold shares in spinoffs due to the smaller market capitalization, increased risk, or poor financials of the new company. Therefore, many large institutions automatically sell their shares immediately after the new company goes public.

Simple supply and demand logic tells us that such large number of shares on the market will naturally decrease the price, even if it is not fundamentally justified. It is this temporary mispricing that gives the enterprising investor an opportunity for profit.

There is no money transaction in spin-off. The transaction is treated as stock dividend & tax free exchange.

Split-off:

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Is a transaction in which some, but not all, parent company shareholders receive shares in a subsidiary, in return for relinquishing their parent company’s share. In other words some parent company shareholders receive the subsidiary’s shares in return for which they must give up their parent company shares

Feature of split-offs is that a portion of existing shareholders receives stock in a subsidiary in exchange for parent company stock.

Split-up:

Is a transaction in which a company spins off all of its subsidiaries to its shareholders & ceases to exist?

The entire firm is broken up in a series of spin-offs. The parent no longer exists and Only the new offspring survive.

In a split-up, a company is split up into two or more independent companies. As a sequel, the parent company disappears as a corporate entity and in its place two or more separate companies emerge.

Sell-off:

Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on. Or General term for divestiture of part/all of a firm by any one of a no. of means: sale, liquidation, spin-off and so on.

Strategic Rationale

Divesting a subsidiary can achieve a variety of strategic objectives, such as:

Unlocking hidden value – Establish a public market valuation for undervalued assets and create a pure-play entity that is transparent and easier to value

Un-diversification – Divest non-core businesses and sharpen strategic focus when direct sale to a strategic or financial buyer is either not compelling or not possible

Institutional sponsorship – Promote equity research coverage and ownership by sophisticated institutional investors, either of which tend to validate Spin Co. as a standalone business.

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Public currency – Create a public currency for acquisitions and stock-based compensation programs.

Motivating management – Improve performance by better aligning management incentives with Spin Co’s performance (using Spin Co’s, rather than Parent Company, stock-based awards), creating direct accountability to public shareholders, and increasing transparency into management performance.

Eliminating dis-synergies – Reduce bureaucracy and give Spin Company management complete autonomy.

Anti-trust – Break up a business in response to anti-trust concerns.

Corporate defense – Divest “crown jewel” assets to make a hostile takeover of Parent Company less attractive

3.Divestures

Divesture is a transaction through which a firm sells a portion of its assets or a division to another company. It involves selling some of the assets or division for cash or securities to a third party which is an outsider.

Divestiture is a form of contraction for the selling company. means of expansion for the purchasing company. It represents the sale of a segment of a company (assets, a product line, a subsidiary) to a third party for cash and or securities.

Mergers, assets purchase and takeovers lead to expansion in some way or the other. They are based on the principle of synergy which says 2 + 2 = 5! , divestiture on the other hand is based on the principle of “anergy” which says 5 – 3 = 3!.

Among the various methods of divestiture, the most important ones are partial sell-off, demerger (spin-off & split off) and equity carve out. Some scholars define divestiture rather narrowly as partial sell off and some scholars define divestiture more broadly to include partial sell offs, demergers and so on.

Motives:

Change of focus or corporate strategy Unit unprofitable can mistake Sale to pay off leveraged finance Antitrust Need cash Defend against takeover Good price.

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4. Equity Carve-Out

A transaction in which a parent firm offers some of a subsidiaries common stock to the general public, to bring in a cash infusion to the parent without loss of control.

In other words equity carve outs are those in which some of a subsidiaries shares are offered for a sale to the general public, bringing an infusion of cash to the parent firm without loss of control. Equity carve out is also a means of reducing their exposure to a riskier line of business and to boost shareholders value.

Features

It is the sale of a minority or majority voting control in a subsidiary by its parents to outsider investors. These are also referred to as “split-off IPO’s”

A new legal entity is created. The equity holders in the new entity need not be the same as the

equity holders in the original seller. A new control group is immediately created.

Difference between Spin-off and Equity carve outs:

1. In a spin off, distribution is made pro rata to shareholders of the parent company as a dividend, a form of non-cash payment to shareholders. In equity carve out; stock of subsidiary is sold to the public for cash which is received by parent company

2. In a spin off, parent firm no longer has control over subsidiary assets. In equity carve out, parent sells only a minority interest in subsidiary and retains control.

5. Leveraged Buyout

A buyout is a transaction in which a person, group of people, or organization buys a company or a controlling share in the stock of a company. Buyouts great and small occur all over the world on a daily basis.

Buyouts can also be negotiated with people or companies on the outside. For example, a large candy company might buy out smaller candy companies with the goal of cornering the market more effectively and purchasing new brands which it can use to increase its customer base. Likewise, a company which makes widgets might decide to buy a

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company which makes thingamabobs in order to expand its operations, using an establishing company as a base rather than trying to start from scratch.

In a leveraged buyout, the company is purchased primarily with borrowed funds. In fact, as much of 90% of the purchase price can be borrowed. This can be a risky decision, as the assets of the company are usually used as collateral, and if the company fails to perform, it can go bankrupt because the people involved in in the buyout will not be able to service their debt. Leveraged buyouts wax and wane in popularity depending on economic trends.

The buyers in the buyout gain control of the company’s assets, and also have the right to use trademarks, service marks, and other registered copyrights of the company. They can use the company’s name and reputation, and may opt to retain several key employees who can make the transition as smooth as possible. However, people in senior management may find that they are not able to keep their jobs because the purchasing company does not want redundant personnel, and it wants to get its personnel into key positions to manage the company in accordance with their business practices.

A leveraged buyout involves transfer of ownership consummated mainly with debt. While some leveraged buyouts involve a company in its entirety, most involve a business unit of a company. Often the business unit is bought out by its management and such a transaction is called management buyout (MBO). After the buyout, the company (or the business unit) invariably becomes a private company.

What Does Debt Do? A leveraged buyout entails considerable dependence on debt.

What does it imply? Debt has a bracing effect on management, whereas equity tends to have a soporific influence. Debt spurs management to perform whereas equity lulls management to relax and take things easy.

Risks and Rewards, The sponsors of a leveraged buyout are lured by the prospect of wholly (or largely) owning a company or a division thereof, with the help of substantial debt finance. They assume considerable risks in the hope of reaping handsome rewards. The success of the entire operation depends on their ability to improve the performance of the unit, contain its business risks, exercise cost controls, and liquidate disposable assets. If they fail to do so, the high fixed financial costs can jeopardize the venture.

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Purpose of debt financing for Leveraged Buyout

The use of debt increases the financial return to the private equity sponsor.

The tax shield of the acquisition debt, according to the Modigliani-Miller theorem with taxes, increases the value of the firm.

Features of Leveraged Buyout

Low existing debt loads; A multi-year history of stable and recurring cash flows; Hard assets (property, plant and equipment, inventory,

receivables) that may be used as collateral for lower cost secured debt;

The potential for new management to make operational or other improvements to the firm to boost cash flows;

Market conditions and perceptions that depress the valuation or stock price.

Examples:

1. Acquisition of Corus by Tata.2. Kohlberg Kravis Roberts, the New York private equity firm, has

agreed to pay about $900 million to acquire 85 percent of the Indian software maker Flextronics Software Systems is the largest leveraged buyout in India.

6. Management buyout

In this case, management of the company buys the company, and they may be joined by employees in the venture. This practice is sometimes questioned because management can have unfair advantages in negotiations, and could potentially manipulate the value of the company in order to bring down the purchase price for themselves. On the other hand, for employees and management, the possibility of being able to buy out their employers in the future may serve as an incentive to make the company strong.

It occurs when a company’s managers buy or acquire a large part of the company. The goal of an MBO may be to strengthen the managers’ interest in the success of the company.

Purpose of Management buyouts

From management point of view may be:

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To save their jobs, either if the business has been scheduled for closure or if an outside purchaser would bring in its own management team.

To maximize the financial benefits they receive from the success they bring to the company by taking the profits for themselves.

To ward off aggressive buyers.

The goal of an MBO may be to strengthen the manager’s interest in the success of the company. Key considerations in MBO are fairness to shareholders price, the future business plan, and legal and tax issues.

Benefits of Management buyouts

It provides an excellent opportunity for management of undervalued co’s to realize the intrinsic value of the company.

Lower agency cost: cost associated with conflict of interest between owners and managers.

Source of tax savings: since interest payments are tax deductible, pushing up gearing rations to fund a management buyout can provide large tax covers.

7. Master Limited Partnership –

Master Limited Partnerships are a type of limited partnership in which the shares are publicly traded. The limited partnership interests are divided into units which are traded as shares of common stock. Shares of ownership are referred to as units.

MLPs generally operate in the natural resource (petroleum and natural gas extraction and transportation), financial services, and real estate industries.

The advantage of a Master Limited Partnership is it combines the tax benefits of a limited partnership (the partnership does not pay taxes from the profit – the money is only taxed when unit holders receive distributions) with the liquidity of a publicly traded company.

There are two types of partners in this type of partnership:

1. The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the Master Limited Partnership’s cash flow

2. The general partner is the party responsible for managing the Master Limited Partnership’s affairs and receives compensation that is linked to the performance of the venture.

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8. Employees Stock Option Plan (ESOP)

An Employee Stock Option is a type of defined contribution benefit plan that buys and holds stock. ESOP is a qualified, defined contribution, employee benefit plan designed to invest primarily in the stock of the sponsoring employer. Employee Stock Options are “qualified” in the sense that the ESOP’s sponsoring company, the selling shareholder and participants receive various tax benefits. With an ESOP, employees never buy or hold the stock directly.

Features:

Employee Stock Ownership Plan (ESOP) is an employee benefit plan.

The scheme provides employees the ownership of stocks in the company.

It is one of the profit sharing plans. Employers have the benefit to use the ESOP’s as a tool to fetch

loans from a financial institute. It also provides for tax benefits to the employers.

The benefits for the company: increased cash flow, tax savings, and increased productivity from highly motivated workers.

The benefit for the employees: is the ability to share in the company’s success.

How it works?

Organizations strategically plan the ESOPs and make arrangements for the purpose.

They make annual contributions in a special trust set up for ESOPs. An employee is eligible for the ESOP’s only after he/she has

completed 1000 hours within a year of service. After completing 10 years of service in an organization or reaching

the age of 55, an employee should be given the opportunity to diversify his/her share up to 25% of the total value of ESOP’s.

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Mergers

Meaning

A merger is a combination of two companies where one corporation is completely absorbed by another corporation. The less important company loses its identity and becomes part of the more important corporation, which retains its identity.

Merger Law Definition

1. In contract law, the action of superceding all prior written or oral agreements on the same subject matter.

2. In criminal law, the inclusion of a lesser offense within a more serious one, rather than charging it separately, this might cause double jeopardy.

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3. In litigation, the doctrine that all of the plaintiff’s prior claims are superceded by the judgment in the case, which becomes the plaintiff’s sole means of recovering from the defendant.

4. The combination under modern codes of civil procedure of law and equity into a single court.

5. In corporate law, the acquisition of one company by another, and their combination into a single legal entity.

What Mergers actually mean:

A merger is a combination of two companies where one corporation is completely absorbed by another corporation. It may involve absorption or consolidation.

In absorption one company acquires another company. For example, Hindustan Lever Limited acquired Tata Oil Mills Company.

In consolidation, two or more companies combine to form a new company. For example, Hindustan Computers Limited, Hindustan Instruments Limited, Indian Software Company Limited, and Indian Reprographics Limited combined to form HCL Limited.

The less important company loses its identity and becomes part of the more important corporation, which retains its identity. A merger extinguishes the merged corporation, and the surviving corporation assumes all the rights, privileges, and liabilities of the merged corporation. A merger is not the same as a consolidation, in which two corporations lose their separate identities and unite to form a completely new corporation. In India mergers are called amalgamations in legal parlance.

Federal laws regulate mergers. Regulation is based on the concern that mergers inevitably eliminate competition between the merging firms. This concern is most acute where the participants are direct rivals, because courts often presume that such arrangements are more prone to restrict output and to increase prices. The fear that mergers and acquisitions reduce competition has meant that the government carefully scrutinizes proposed mergers. On the other hand, since the 1980s, the federal government has become less aggressive in seeking the prevention of mergers.

Despite concerns about a lessening of competition, firms are relatively free to buy or sell entire companies or specific parts of a company.

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Mergers and acquisitions often result in a number of social benefits. Mergers can bring better management or technical skill to bear on underused assets. They also can produce economies of scale and scope that reduce costs, improve quality, and increase output. The possibility of a takeover can discourage company managers from behaving in ways that fail to maximize profits. A merger can enable a business owner to sell the firm to someone who is already familiar with the industry and who would be in a better position to pay the highest price. The prospect of a lucrative sale induces entrepreneurs to form new firms.

Antitrust merger law seeks to prohibit transactions whose probable anticompetitive consequences outweigh their likely benefits. The critical time for review usually is when the merger is first proposed. This requires enforcement agencies and courts to forecast market trends and future effects. Merger cases examine past events or periods to understand each merging party's position in its market and to predict the merger's competitive impact.

Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:

Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above mode

Mergers vs. AcquisitionsThese terms are commonly used interchangeably but in reality, they have slightly different meanings. An acquisition refers to the act of one company taking over another company and clearly becoming the new owner. From a legal point of view, the target company, the company that is bought, no longer exists. Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company.

A merger is a joining of two companies that are usually of about the same size and agree to meld into one large company. In the case of a merger, both company’s stocks cease to be traded as the new company chooses a new name and a new stock is issued in place of the two separate company’s stock. This view of a merger is unrealistic by real world standards as it is often the case that one company is actually

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bought by another while the terms of the deal that is struck between the two allows for the company that is bought to publicize that a merger has occurred while the company that is doing the buying backs up this claim. This is done in order to allow the company that is bought to save face and avoid the negative connotations that go along with selling out

Purpose of Mergers:

Purposes for mergers are short listed below: -

(1)Procurement of supplies:

To safeguard the source of supplies of raw materials or intermediary product; to obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.To share the benefits of suppliers economies by standardizing the materials

(2)Revamping production facilities:

To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources;

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To standardize product specifications, improvement of quality of product, expanding market and aiming at consumers’ satisfaction through strengthening after sale services;To obtain improved production technology and know-how from the offeree company To reduce cost, improve quality and produce competitive products to retain and improve market share.

(3) Market expansion and strategy:

To eliminate competition and protect existing market;To obtain a new market outlets in possession of the offeree;To obtain new product for diversification or substitution of existing products and to enhance the product range;Strengthening retain outlets and sale the goods to rationalize distribution;To reduce advertising cost and improve public image of the offeree company;Strategic control of patents and copyrights

(4) Financial strength:

To improve liquidity and have direct access to cash resource;To dispose of surplus and outdated assets for cash out of combined enterprise;To enhance gearing capacity, borrow on better strength and the greater assets backing;To avail tax benefits;To improve EPS (Earning Per Share)

(5) General gains:

To improve its own image and attract superior managerial talents to manage its affairs; to offer better satisfaction to consumers or users of the product

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company’s own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation, accounting, valuation, etc. but might feel resource constraints with limitations of funds and lack of skill

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managerial personnel’s. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities; secure additional financial facilities, eliminate competition and strengthen its market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate strategies. Thus, various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. The combining corporates aim at circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. Such integration could be operational or financial. This gives birth to conglomerate combinations. The purpose and the requirements of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations.

Reasons why companies merge:

The principal economic rationale of a merger id that the value of the combined entity is expected to be greater than the sum of the independent values of the merging entities. For example, if firms A and B merge, the value of the combined entity, V (AB), is expected to be greater than (VA+VB), the sum of the independent values of A and B.

A variety of reasons like growth, diversification, economies of scale, managerial effectiveness and so on are cited in support of merger

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proposals. Some of them appear to be plausible in the sense that they create value; others seem to be dubious as they don’t create value.

Plausible reasons:

The most plausible reasons in favor of mergers are strategic benefits, economies of scale, economies of scope, economies of vertical integration, complementary resources, tax shields, utilization of surplus funds, and managerial effectiveness.

» Strategic benefit:

♦As a pre-emptive move it can prevents competitor from establishing a similar position in that industry.

♦ It offers a special timing advantage because the merger alternative enables the firm to ‘leap frog’ several stages in the process of expansion.

♦ It may entail less risk and even less cost

♦ In a ‘saturated market’, simultaneous expansion and replacement (through merger) makes more sense than creation of additional capacity through internal expansion

» Economies of scale:

When two or more firms combine, certain economies are realized due to larger volume of operations of the combined entity. These economies arise because of more intensive utilization of production capacity, distribution networks, and research and development facilities, data processing systems and so on. Economies of scale are prominent in horizontal mergers where the scope of more intensive utilization of resources is greater. Even in conglomerate mergers there is scope for reduction of certain overhead expenses.

» Economies of scope:

A company may use a specific set of skills or assets that it possesses to widen the scope of its activities. For example: proctor and gamble can enjoy economies or scope if it acquires a consumer product company that benefits from its highly regarded consumer marketing skills. » Economies of vertical integration:

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When companies engaged at different stages of production or value chain merge, economies of vertical integration may be realized. For example, the merger of a company engaged in oil exploration and production (like ONGC) with a company engaged in refining and marketing (like HPCL) may improve co-ordination and control. Vertical integration, however, is not always a good idea. If a company does everything in-house it may not get the benefit of outsourcing from independent suppliers who may be more efficient in their segments of the value chain.

» Complementary resources:

If two firms have complementary resources, it may make sense for them to merge. A good example of a merger of companies which complemented each other well is the merger of Brown Bovery and Asea that resulted in AseaBrownBovery (ABB). Brown Bovery was international, where as Asea was not. Asea excelled in management, whereas Brown Bovery did not. The technology, markets, and cultures of the two companies fitted well.

» Tax shields:

When a firm with accumulated losses and/or unabsorbed depreciation merges with a profit making firm, tax shields are utilized better. The firm with accumulated losses and/or unabsorbed depreciation may not be able to derive tax advantages for a long time. However, when it merges with a profit making firm, its accumulated losses and/or unabsorbed depreciation can be set off against the profits of the profit making firm and the tax benefits can be quickly realized.

» Utilization of surplus funds:

A firm in a mature industry may generate a lot of cash but may not have opportunities for profitable investment. Such a firm ought to distribute generous dividends and even buy back its shares, if the same is possible. However, most management has a tendency to make further investments, even though they may not be profitable. In such a situation, a merger with another firm involving cash compensation often represents a more efficient utilization of surplus funds.

» Managerial effectiveness:

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One of the potential gains of merger is an increase in managerial effectiveness. This may occur if the existing management team, which is performing poorly, is replaced by a more effective management team. Another allied benefit of a merger may be in the form of greater congruence between the interests of the managers and the share holders.

Dubious Reasons:

Often mergers are motivated by a desire to diversify and lower financing costs. Prima facie, these objectives look worthwhile, but they are not likely to enhance value.

» Diversification: A commonly stated motive for mergers is to achieve risk reduction through diversification. The extent, to which risk is reduced, of course, depends on the correlation between the earnings of the merging entities. While negative correlation brings greater reduction in risk, positive correlation brings lesser reduction in risk. Corporate diversification, however, may offer value in at least two special cases

1) If a company is plagued with problems which can jeopardize its existence and its merger with another company can save it from potential bankruptcy.

2) If investors do not have the opportunity of ‘home made’ diversification because one of the companies is not traded in the marketplace, corporate diversification may be the only feasible route to risk reduction.

» Lower financing costs:

The consequence of larger size and greater earnings and stability, many argue, is to reduce the cost of borrowing for the merged firm. The reason for this is that the creditors of the merged firm enjoy better protection than the creditors of the merging firms independently.

» Increase Supply-Chain Pricing Power:

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By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs; this is known as a vertical merger. If a company buys out a distributor, it may be able to ship its products at a lower cost.

» Eliminate Competition:

Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product's market. The downside of this is that a large premium is usually required to convince the target company's shareholders to accept the offer. It is not uncommon for the acquiring company's shareholders to sell their shares and push the price lower in response to the company paying too much for the target company.

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» Synergy:

The most used word in M&A is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Essentially, a business will attempt to merge with another

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business that has complementary strengths and weaknesses. 

Motivations for mergersMergers are permanent form of combinations which vest in management complete control and provide centralized administration which are not available in combinations of holding company and its partly owned subsidiary. Shareholders in the selling company gain from the merger and takeovers as the premium offered to induce acceptance of the merger or takeover offers much more price than the book value of shares. Shareholders in the buying company gain in the long run with the growth of the company not only due to synergy but also due to “boots trapping earnings”.Mergers are caused with the support of shareholders, manager’s ad promoters of the combing companies. The factors, which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear, are briefly noted below based on the research work by various scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to merger should enhance in value. The sale of shares from one company’s shareholders to another and holding investment in shares should give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in different ways viz. from the gains and achievements of the company i.e. through

Realization of monopoly profits; Economies of scales; Diversification of product line; Acquisition of human assets and other resources not available

otherwise;

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Better investment opportunity in combinations. One or more features would generally be available in each merger where shareholders may have attraction and favor merger.

(2) From the standpoint of managers

Managers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support from the managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult.

(3) Promoter’s gains

Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control.

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of benefits and costs to:

Consumer of the product or services; Workers of the companies under combination; General public affected in general having not been user or

consumer or the worker in the companies under merger plan.

(a) Consumers

The economic gains realized from mergers are passed on to consumers in the form of lower prices and better quality of the product which directly raise their standard of living and quality of life. The balance of benefits in favor of consumers will depend upon the fact whether or not the mergers increase or decrease competitive economic and productive activity which directly affects the degree of welfare of the consumers through changes in price level, quality of products, after sales service, etc.

(b) Workers community

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The merger or acquisition of a company by a conglomerate or other acquiring company may have the effect on both the sides of increasing the welfare in the form of purchasing power and other miseries of life. Two sides of the impact as discussed by the researchers and academicians are: firstly, mergers with cash payment to shareholders provide opportunities for them to invest this money in other companies which will generate further employment and growth to uplift of the economy in general. Secondly, any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. Both workers and communities will suffer on lessening job opportunities, preventing the distribution of benefits resulting from diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power is to be understood as the ability to control prices and industries output as monopolists. Such monopolists affect social and political environment to tilt everything in their favor to maintain their power ad expand their business empire. These advances result into economic exploitation. But in a free economy a monopolist does not stay for a longer period as other companies enter into the field to reap the benefits of higher prices set in by the monopolist. This enforces competition in the market as consumers are free to substitute the alternative products. Therefore, it is difficult to generalize that mergers affect the welfare of general public adversely or favorably. Every merger of two or more companies has to be viewed from different angles in the business practices which protects the interest of the shareholders in the merging company and also serves the national purpose to add to the welfare of the employees, consumers and does not create hindrance in administration of the Government polices.

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Types of mergers:

Merger depends upon the purpose of the offeror company it wants to achieve. Based on the offerors’ objectives profile, combinations could be vertical, horizontal, circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger with that company to expand espousing backward integration to assimilate the resources of supply and forward integration towards market outlets. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods, implements its production plans as per the objectives and economizes on working capital investments. In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the acquirer company i.e.

1. It gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products;

2. Has control over products specifications.

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(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The mail purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line, reduction in investment in working capital, elimination in competition concentration in product, reduction in advertising costs, increase in market segments and exercise better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger enhances the overall stability of the acquirer company and creates balance in the company’s total portfolio of diverse products and production processes.

Some more types of mergers:

Market-extension Merger

This involves the combination of two companies that sell the same products in different markets. A market-extension merger allows for the market that can be reached to become larger and is the basis for the name of the merger.

Product-extension Merger

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This merger is between two companies that sell different, but somewhat related products, in a common market. This allows the new, larger company to pool their products and sell them with greater success to the already common market that the two separate companies shared.

Accretive mergersThose 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.

Concerns of mergers

Horizontal, vertical, and conglomerate mergers each raise distinctive competitive concerns.

Horizontal Mergers Horizontal mergers raise three basic competitive problems. The first is the elimination of competition between the merging firms, which, depending on their size, could be significant. The second is that the unification of the merging firms' operations might create substantial market power and might enable the merged entity to raise prices by reducing output unilaterally. The third problem is that, by increasing concentration in the relevant market, the transaction might strengthen the ability of the market's remaining participants to coordinate their pricing and output decisions. The fear is not that the entities will engage in secret collaboration but that the reduction in the number of industry members will enhance tacit coordination of behavior.

Vertical Mergers Vertical mergers take two basic forms: forward integration, by which a firm buys a customer, and backward integration, by which a firm acquires a supplier. Replacing market exchanges with internal transfers can offer at least two major benefits. First, the vertical merger internalizes all transactions between a manufacturer and its supplier or dealer, thus converting a potentially adversarial relationship into something more like a partnership. Second, internalization can give management more effective ways to monitor and improve performance.

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Vertical integration by merger does not reduce the total number of economic entities operating at one level of the market, but it might change patterns of industry behavior. Whether a forward or backward integration, the newly acquired firm may decide to deal only with the acquiring firm, thereby altering competition among the acquiring firm's suppliers, customers, or competitors. Suppliers may lose a market for their goods; retail outlets may be deprived of supplies; or competitors may find that both supplies and outlets are blocked. These possibilities raise the concern that vertical integration will foreclose competitors by limiting their access to sources of supply or to customers. Vertical mergers also may be anticompetitive because their entrenched market power may impede new businesses from entering the market.

Conglomerate Mergers Conglomerate transactions take many forms, ranging from short-term joint ventures to complete mergers. Whether a conglomerate merger is pure, geographical, or a product-line extension, it involves firms that operate in separate markets. Therefore, a conglomerate transaction ordinarily has no direct effect on competition. There is no reduction or other change in the number of firms in either the acquiring or acquired firm's market.Conglomerate mergers can supply a market or "demand" for firms, thus giving entrepreneurs liquidity at an open market price and with a key inducement to form new enterprises. The threat of takeover might force existing managers to increase efficiency in competitive markets. Conglomerate mergers also provide opportunities for firms to reduce capital costs and overhead and to achieve other efficiencies.Conglomerate mergers, however, may lessen future competition by eliminating the possibility that the acquiring firm would have entered the acquired firm's market independently. A conglomerate merger also may convert a large firm into a dominant one with a decisive competitive advantage, or otherwise make it difficult for other companies to enter the market. This type of merger also may reduce the number of smaller firms and may increase the merged firm's political power, thereby impairing the social and political goals of retaining independent decision-making centers, guaranteeing small business opportunities, and preserving democratic processes.

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Steps in bringing about mergers of companies

Due diligence:

It’s a term used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for acquisition.

Origin of the term "Due Diligence":

The term "Due Diligence" first came into common use as a result of the US Securities Act of 1933.The US Securities Act included a defense referred to in the Act as the "Due Diligence" defense which could be used by broker-dealers when accused of inadequate disclosure to investors of material information with respect to the purchase of securities.So long as broker-dealers conducted a "Due Diligence" investigation into the company whose equity they were selling, and disclosed to the investor what they found, they would not be held liable for nondisclosure

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of information that failed to be uncovered in the process of that investigation.The entire broker-dealer community quickly institutionalized as a standard practice, the conducting of due diligence investigations of any stock offerings in which they involved themselves.Due diligence in capstone refers to performing the needful amount of effort, as in 'doing diligence'.Originally the term was limited to public offerings of equity investments, but over time it has come to be associated with investigations of private mergers and acquisitions as well. The term has slowly been adapted for use in other situations.

Due diligence in business transactions:

In business transactions, the due diligence process varies for different types of companies. The relevant areas of concern may include the financial, legal, labor, tax, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions.

Approval by shareholders:

A meeting of share holders should be held by each company for passing the scheme of mergers at least 75% of shareholders who vote either in person or by proxy must approve the scheme of merger.

Authorization of the scheme by the court:

Once the drafts of merger proposal is approved by the respective boards, each company should make an application to the high court of the state where its registered office is situated so that it can convene the meetings of share holders and creditors for passing the merger proposalOnce the mergers scheme is passed by the share holders and creditors, the companies involved in the merger should present a petition to the HC for confirming the scheme of merger. However the HC is empowered to modify the scheme and pass orders accordingly. A notice about the same has to be published in 2 newspapers.

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Legal Procedure for bringing about merger of companies

» Examination of object clauses:

The MOA of both the companies should be examined to check the power to amalgamate is available. Further, the object clause of the merging company should permit it to carry on the business of the merged company. If such clauses do not exist, necessary approvals of the share holders, board of directors, and company law board are required.

» Intimation to stock exchanges:

The stock exchanges where merging and merged companies are listed should be informed about the merger proposal. From time to time, copies of all notices, resolutions, and orders should be mailed to the concerned stock exchanges.

» Approval of the draft merger proposal by the respective boards:

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The draft merger proposal should be approved by the respective BOD’s.The board of each company should pass a resolution authorizing its directors/executives to pursue the matter further.

» Application to high courts:

Once the drafts of merger proposal is approved by the respective boards, each company should make an application to the high court of the state where its registered office is situated so that it can convene the meetings of share holders and creditors for passing the merger proposal.

» Dispatch of notice to share holders and creditors:

In order to convene the meetings of share holders and creditors, a notice and an explanatory statement of the meeting, as approved by the high court, should be dispatched by each company to its shareholders and creditors so that they get 21 days advance intimation. The notice of the meetings should also be published in two news papers.

» Holding of meetings of share holders and creditors:

A meeting of share holders should be held by each company for passing the scheme of mergers at least 75% of shareholders who vote either in person or by proxy must approve the scheme of merger. Same applies to creditors also.

» Petition to High Court for confirmation and passing of HC orders:

Once the mergers scheme is passed by the share holders and creditors, the companies involved in the merger should present a petition to the HC for confirming the scheme of merger. A notice about the same has to be published in 2 newspapers.

» Filing the order with the registrar:

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

» Transfer of assets and liabilities:

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After the final orders have been passed by both the HC’s, all the assets and liabilities of the merged company will have to be transferred to the merging company.

» Issue of shares and debentures:

The merging company, after fulfilling the provisions of the law, should issue shares and debentures of the merging company. The new shares and debentures so issued will then be listed on the stock exchange.

Corporate merger procedure

State statutes establish procedures to accomplish corporate mergers. Generally, the board of directors for each corporation must initially pass a resolution adopting a plan of merger that specifies the names of the corporations that are involved, the name of the proposed merged company, the manner of converting shares of both corporations, and any other legal provision to which the corporations agree. Each corporation notifies all of its shareholders that a meeting will be held to approve the merger. If the proper number of shareholders approves the plan, the directors sign the papers and file them with the state. The secretary of states issues a certificate of merger to authorize the new corporation. Some statutes permit the directors to abandon the plan at any point up to the filing of the final papers. States with the most liberal corporation laws permit a surviving corporation to absorb another company by merger without submitting the plan to its shareholders for approval unless otherwise required in its certificate of incorporation.Statutes often provide that corporations that are formed in two different states must follow the rules in their respective states for a merger to be effective. Some corporation statutes require the surviving corporation to purchase the shares of stockholders who voted against the merger.

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Why Mergers Fail?

Revenue deserves more attention in mergers; indeed, a failure to focus on this important factor may explain why so many mergers don’t pay off. Too many companies lose their revenue momentum as they concentrate on cost synergies or fail to focus on post merger growth in a systematic manner. Yet in the end, halted growth hurts the market performance of a company far more than does a failure to nail costs.

Cases of mergers of prominent companies in the recent past

Case 1: Arcelor Mittal merger details(Merger success)

The Merger Process

2006 was a very exciting and challenging year for Arcelor Mittal. The new company was at the forefront of the consolidation process, leading the industry through mergers and acquisitions.

January 2006 Historic moment for the Global Steel Industry

The year started with the historic launch of the Mittal Steel offer to the shareholders of Arcelor to create the world's first 100 million tonne plus steel producer. The aim of increasing globalization and consolidation, necessary in the steel industry, defines the deal and sets the pace for the industry.

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February 2006 - Expansion and strong results

Mittal Canada completes the acquisition of three Stelco subsidiaries, the Norambar and Stelfil plants, located in Quebec, and the Stelwire plant in Ontario. Stelfil and Stelwire will add 250,000 tones of steel wire to the company's annual production capacity, providing a wider product mix to better meet customers' needs.

Arcelor acquires a 38.41% stake in Laiwu Steel Corporation, in China. Laiwu Steel Corporation is China's largest producer of sections and beams, and will further boost its operational excellence thanks to this partnership. It is still awaiting approval with the Beijing authorities.

April 2006 - Renewal after Hurricane Katrina and new galvanized line

Out of the devastation of Hurricane Katrina, arose a revitalized Mississippi youth baseball field, rebuilt with the help of Mittal Steel USA and Arcelor. The company provides money towards the purchase of lighting fixtures and steel cross bar support. It also arranges for and donates the labor costs for their installation.

Mittal Steel USA places a new line into operation in Cleveland to provide top-quality galvanized sheet steel to automakers and other demanding customers. The new line is designed to produce in excess of 630,000 tones of corrosion-resistant sheet annually, using the hot-dip galvanizing process.

May 2006 - US clears the way for bid

Mittal Steel announces US antitrust clearance for Arcelor bid and the approval of the offer documents by European regulators. The acceptance period starts in Luxembourg, Belgium and France on 18 May 2006 (some days later for Spain and the United States) and lasts until 29 June 2006.

Arcelor contributes to the first anti-seismic school building in Izmit (Turkey), where a school building had been destroyed by an earthquake in 1999.

June 2006 - Historic agreement to create the No.1 Global Steel Company

Creating the world's largest steel company, Mittal Steel and Arcelor reach an agreement to combine the two companies in a merger of

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equals. The terms of the transaction were reviewed by the Boards of Arcelor and Mittal Steel which each recommended the transaction to their shareholders. The combined group, domiciled and headquartered in Luxembourg, is named Arcelor Mittal.

Demonstrating the commitment to extend markets in developing nations, a strategic partnership between Arcelor Mittal and SNI (Société Nationale d'Investissement) is concluded concerning the development of Sonasid. This consolidates and develops the position of Sonasid on the Moroccan market, allowing the company to benefit from the transfer of Arcelor Mittal's technologies and skills in the long carbon steel product sector

Case 2: Deutsche – Dresdner Bank(Merger Failure)

The merger that was announced on March 7, 2000 between Deutsche Bank and Dresdner Bank, Germany’s largest and the third largest bank respectively was considered as Germany’s response to increasingly tough competition markets.

The merger was to create the most powerful banking group in the world with the balance sheet total of nearly 2.5 trillion marks and a stock market value around 150 billion marks. This would put the merged bank for ahead of the second largest banking group, U.S. based Citigroup, with a balance sheet total amounting to 1.2 trillion marks and also in front of the planned Japanese book mergers of Sumitomo and Sukura Bank with 1.7 trillion marks as the balance sheet total.

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The new banking group intended to spin off its retail banking which was not making much profit in both the banks and costly, extensive network of bank branches associated with it.

The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Bank’s green corporate color in its logo. The future core business lines of the new merged Bank included investment Banking, asset management, where the new banking group was hoped to outside the traditionally dominant Swiss Bank, Security and loan banking and finally financially corporate clients ranging from major industrial corporation to the mid-scale companies.

With this kind of merger, the new bank would have reached the no.1 position of the US and create new dimensions of aggressiveness in the international mergers.But barely 2 months after announcing their agreement to form the largest bank in the world, had negotiations for a merger between Deutsche and Dresdner Bank failed on April 5, 2000.

The main issue of the failure was Dresdner Bank’s investment arm, Kleinwort Benson, which the executive committee of the bank did not want to relinquish under any circumstances.

In the preliminary negotiations it had been agreed that Kleinwort Benson would be integrated into the merged bank. But from the outset these considerations encountered resistance from the asset management division, which was Deutsche Bank’s investment arm.

Deutsche Bank’s asset management had only integrated with London’s investment group Morgan Grenfell and the American Banker’s trust. This division alone contributed over 60% of Deutsche Bank’s profit. The top people at the asset management were not ready to undertake a new process of integration with Kleinwort Benson. So there was only one option left with the Dresdner Bank i.e. to sell Kleinwort Benson completely. However Walter, the chairman of the Dresdner Bank was not prepared for this. This led to the withdrawal of the Dresdner Bank from the merger negotiations.

In economic and political circles, the planned merger was celebrated as Germany’s advance into the premier league of the international financial markets. But the failure of the merger led to the disaster of Germany as the financial center.

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References:

Bibliography:

i. Chandra, P.C., 2006, Financial Management, Tata McGraw-hill

Webliography:

i. http://www.arcelormittal.com/index.php?lang=en&page=539

ii. http://law.jrank.org/pages/8550/Mergers-Acquisitions.html

iii. http://law.jrank.org/pages/8543/Mergers-Acquisitions-Types- Mergers.html

iv. http://law.jrank.org/pages/8545/Mergers-Acquisitions-Competitive- Concerns.html

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v. http://law.jrank.org/pages/8544/Mergers-Acquisitions-Corporate-Merger- Procedures.html

vi. http://www.learnmergers.com/mergers-types.shtml vii. http://www.learnmergers.com/mergers-mergers.shtml viii. http://en.wikipedia.org/wiki/Mergers_and_acquisitions ix. http://en.wikipedia.org/wiki/Due_diligence x. http://www.investopedia.com/ask/answers/06/m&areasons.asp

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