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Nov 18, 2014
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MERGERSMERGERS
ANDAND
ACQUISTIONACQUISTION
MERGERMERGER
A merger is when you integrate the business A merger is when you integrate the business
with another and share control of the combined with another and share control of the combined
businesses with other owner. Abusinesses with other owner. A merger merger
involves the mutual decision of twoinvolves the mutual decision of two companies companies
toto combine and become one entity. combine and become one entity.
Merger: 2 firms combine all Assets and LiabilitiesMerger: 2 firms combine all Assets and LiabilitiesAcquirer TargetAcquirer TargetUsually take a new nameUsually take a new name
Types of MergersTypes of Mergers
Horizontal MergerHorizontal Merger
Combination of two or more firms Combination of two or more firms operating in the same stage of productionoperating in the same stage of production..
Example: The merger of ACC with Example: The merger of ACC with Damodar Cements.Damodar Cements.
Vertical MergerVertical Merger
Combination of two firms that operate in Combination of two firms that operate in different stages of production.different stages of production.
Types of MergersTypes of Mergers
Example: Cement manufacturing company Example: Cement manufacturing company acquires a company engaged in civil acquires a company engaged in civil construction.construction.
Conglomerate MergerConglomerate Merger
Merger of firms in unrelated lines of Merger of firms in unrelated lines of business that are neither competitors nor business that are neither competitors nor potential or actual customers or suppliers potential or actual customers or suppliers of each other.of each other.
Types of MergersTypes of Mergers
Example: General Electric buying NBC Example: General Electric buying NBC television.television.
Product Extension Merger Product Extension Merger It is executed among companies It is executed among companies which sell different products of a related which sell different products of a related category.category.
Market Extension MergerMarket Extension Merger It occurs between two companies that sell It occurs between two companies that sell
identical products in different markets.identical products in different markets.
ACQUISITIONACQUISITION
Acquisition may be defined as an act Acquisition may be defined as an act of acquiring effective control over of acquiring effective control over assets or management of a company assets or management of a company by another company without any by another company without any combination of businesses or combination of businesses or companies.companies.
Types of AcquisitionTypes of Acquisition
Friendly AcquisitionFriendly Acquisition
The acquisition of a target company that The acquisition of a target company that is willing to be taken over.is willing to be taken over.
Hostile AcquisitionHostile Acquisition
A takeover in which the target has no A takeover in which the target has no desire to be acquired and actively rebuffs desire to be acquired and actively rebuffs the acquirer and refuses to provide any the acquirer and refuses to provide any confidential information.confidential information.
Parties in the AcquisitionParties in the Acquisition
Holding company – Holding company – It is a company that It is a company that holds more than half of the nominal value holds more than half of the nominal value of the equity capital of another company, of the equity capital of another company, or controls the composition of its Board of or controls the composition of its Board of Directors.Directors.
Subsidiary company – Subsidiary company – The company The company with the lesser number of share is called with the lesser number of share is called subsidiary company.subsidiary company.
Divestitures and Divestitures and RestructuringsRestructurings
DivestitureDivestiture – company sells a piece of itself to another – company sells a piece of itself to another
companycompany
Equity carve-outEquity carve-out – company creates a new company out – company creates a new company out
of a subsidiary and then sells a minority interest to the of a subsidiary and then sells a minority interest to the
public through an IPOpublic through an IPO
Spin-offSpin-off – company creates a new company out of a – company creates a new company out of a
subsidiary and distributes the shares of the new company subsidiary and distributes the shares of the new company
to the parent company’s stockholdersto the parent company’s stockholders
Split-upSplit-up – company is split into two or more companies – company is split into two or more companies
and shares of all companies are distributed to the original and shares of all companies are distributed to the original
firm’s shareholdersfirm’s shareholders
Financing M&AFinancing M&A
Cash: Cash: Payment by cash. Such transactions are Payment by cash. Such transactions are
usually termed acquisitions rather than mergers usually termed acquisitions rather than mergers
because the shareholders of the target company are because the shareholders of the target company are
removed from the picture and the target comes under removed from the picture and the target comes under
the (indirect) control of the bidder's shareholders the (indirect) control of the bidder's shareholders
alone.alone.
Financing: Financing: Financing capital may be borrowed from Financing capital may be borrowed from
a bank, or raised by an issue of bonds. Alternatively, a bank, or raised by an issue of bonds. Alternatively,
the acquirer's stock may be offered as considerationthe acquirer's stock may be offered as consideration . .
Hybrids: An acquisition can involve a Hybrids: An acquisition can involve a combination of cash and debt or of cash combination of cash and debt or of cash and stock of the purchasing entity. and stock of the purchasing entity.
Motives & Benefits of M&AMotives & Benefits of M&A
Economies of large scaleEconomies of large scale: : Pooling of resources Pooling of resources
definitely will bring about the economies of scale. The definitely will bring about the economies of scale. The
combination of two or more companies will result in combination of two or more companies will result in
large volume of operations and it will result in large volume of operations and it will result in
economies of scale.economies of scale.
Increased Revenue/ Increased Market ShareIncreased Revenue/ Increased Market Share: : ThisThis motive assumes that the company will be motive assumes that the company will be
absorbing the major competitor and thus increase its absorbing the major competitor and thus increase its
power (by capturing increased market share) to set power (by capturing increased market share) to set
prices.prices.
Synergy: If the resources of one company are Synergy: If the resources of one company are
capable of merging with the resources of another capable of merging with the resources of another
company effortlessly, resulting in higher company effortlessly, resulting in higher
productivity.productivity.
Taxes: A profitable can buy a loss maker to use the Taxes: A profitable can buy a loss maker to use the target’s tax right off i.e. wherein a sick company is target’s tax right off i.e. wherein a sick company is bought by giants. bought by giants.
Expansion and Growth: It is less time consuming and Expansion and Growth: It is less time consuming and more cost effective if allowed by the government.more cost effective if allowed by the government.
Surplus Resource: To obtain additional mileage from Surplus Resource: To obtain additional mileage from an existing resource, this may offer a good potential.an existing resource, this may offer a good potential.
Wider customer base and increase in Wider customer base and increase in market sharemarket share
Product , services and business Product , services and business diversificationdiversification
Reducing competitionReducing competition
Reasons for M&AReasons for M&A
## Accessing new markets Accessing new markets
# maintaining growth momentum# maintaining growth momentum
# acquiring visibility and international # acquiring visibility and international brands brands
# buying cutting edge technology rather than # buying cutting edge technology rather than importing it importing it
# taking on global competition# taking on global competition
# improving operating margins and # improving operating margins and efficienciesefficiencies
# developing new product mixes# developing new product mixes
Problems of M&AProblems of M&A
Integration Difficulties: Integration Difficulties: Differing Differing financial and control systems can make financial and control systems can make integration of firms difficult.integration of firms difficult.
Inadequate Evaluation of Target: Inadequate Evaluation of Target: Acquirer to overpay for firm.Acquirer to overpay for firm.
Large or Extraordinary Debt: Large or Extraordinary Debt: Costly Costly debt can create burden on cash outflowsdebt can create burden on cash outflows..
Inability to Achieve Synergy: Inability to Achieve Synergy: Justifying Justifying acquisition can increase estimate of expected acquisition can increase estimate of expected benefits.benefits.
Overly Diversified: Overly Diversified: Acquirer doesn’t have Acquirer doesn’t have expertise required to manage unrelated expertise required to manage unrelated businesses.businesses.
Managers Overly Focused on Acquisition: Managers Overly Focused on Acquisition: Managers may fail to objectively assess the value Managers may fail to objectively assess the value of outcome achieved through the firm’s of outcome achieved through the firm’s acquisition strategy.acquisition strategy.
Too Large: Too Large: Large bureaucracy reduces Large bureaucracy reduces innovation and flexibility.innovation and flexibility.
Regulations governing Merger Regulations governing Merger and Acquisition in Indiaand Acquisition in India
The provision of the Companies The provision of the Companies Act,1956.Act,1956.
The Foreign Exchange Management The Foreign Exchange Management Act,1999.Act,1999.
The Income Tax Act,1961 andThe Income Tax Act,1961 and
The Securities and Controls The Securities and Controls (Regulations) Act,1956.(Regulations) Act,1956.
Legal proceduresLegal procedures
Permission for mergerPermission for merger: : Two or more Two or more
companies can amalgamate only when the companies can amalgamate only when the
amalgamation is permitted under their amalgamation is permitted under their
memorandum of association. Also, the acquiring memorandum of association. Also, the acquiring
company should have the permission in its object company should have the permission in its object
clause to carry on the business of the acquired clause to carry on the business of the acquired
company. In the absence of these provisions in company. In the absence of these provisions in
the memorandum of association, it is necessary the memorandum of association, it is necessary
to seek the permission of the shareholders, board to seek the permission of the shareholders, board
of directors and the Company Law Board before of directors and the Company Law Board before
affecting the merger.affecting the merger.
Information to the stock exchange:Information to the stock exchange: The acquiring and the The acquiring and the
acquired companies should inform the stock exchanges (where acquired companies should inform the stock exchanges (where
they are listed) about the merger.they are listed) about the merger.
Approval of board of directorsApproval of board of directors: The board of directors of the : The board of directors of the
individual companies should approve the draft proposal for individual companies should approve the draft proposal for
amalgamation and authorize the managements of the companies amalgamation and authorize the managements of the companies
to further pursue the proposal.to further pursue the proposal.
Application in the High Court: Application in the High Court: An application for approving An application for approving
the draft amalgamation proposal duly approved by the board of the draft amalgamation proposal duly approved by the board of
directors of the individual companies should be made to the directors of the individual companies should be made to the
High Court. High Court.
Shareholders' and creditors' meetingsShareholders' and creditors' meetings: The : The
individual companies should hold separate meetings of their individual companies should hold separate meetings of their
shareholders and creditors for approving the amalgamation shareholders and creditors for approving the amalgamation
scheme. At least, 75 percent of shareholders and creditors scheme. At least, 75 percent of shareholders and creditors
in separate meeting, voting in person or by proxy, must in separate meeting, voting in person or by proxy, must
accord their approval to the scheme. accord their approval to the scheme.
Sanction by the High CourtSanction by the High Court: After the approval of : After the approval of
the shareholders and creditors, on the petitions of the the shareholders and creditors, on the petitions of the
companies, the High Court will pass an order, sanctioning companies, the High Court will pass an order, sanctioning
the amalgamation scheme after it is satisfied that the the amalgamation scheme after it is satisfied that the
scheme is fair and reasonable. The date of the court's scheme is fair and reasonable. The date of the court's
hearing will be published in two newspapers, and also, the hearing will be published in two newspapers, and also, the
regional director of the Company Law Board will be regional director of the Company Law Board will be
intimated. intimated.
Filing of the Court orderFiling of the Court order: After the Court order, : After the Court order,
its certified true copies will be filed with the Registrar of its certified true copies will be filed with the Registrar of
Companies. Companies.
Transfer of assets and liabilitiesTransfer of assets and liabilities: The assets : The assets
and liabilities of the acquired company will be and liabilities of the acquired company will be
transferred to the acquiring company in accordance with transferred to the acquiring company in accordance with
the approved scheme, with effect from the specified the approved scheme, with effect from the specified
date. date.
Payment by cash or securitiesPayment by cash or securities: As per the : As per the
proposal, the acquiring company will exchange shares proposal, the acquiring company will exchange shares
and debentures and/or cash for the shares and and debentures and/or cash for the shares and
debentures of the acquired company. These securities debentures of the acquired company. These securities
will be listed on the stock exchange. will be listed on the stock exchange.
Distinction between mergers Distinction between mergers and acquisitionsand acquisitions
When one company takes over another and clearly When one company takes over another and clearly
establishes itself as the owner, the purchase is called an establishes itself as the owner, the purchase is called an
acquisition. From a legal point of view, the target company acquisition. From a legal point of view, the target company
ceases to exist, the buyer “ swallows” the business and the ceases to exist, the buyer “ swallows” the business and the
buyer’s stock continues to be traded.buyer’s stock continues to be traded.
In the pure sense of the term, a merger happens when two In the pure sense of the term, a merger happens when two
firms, often of about the same size agree to go forward as firms, often of about the same size agree to go forward as
a single new company rather than remain separately a single new company rather than remain separately
owned and operated. This kind of action is more precisely owned and operated. This kind of action is more precisely
referred to as a “merger of equals”. Both companies’ stock referred to as a “merger of equals”. Both companies’ stock
are surrendered and new company stock is issued in its are surrendered and new company stock is issued in its
placeplace..
Some M&A in IndiaSome M&A in India
The proposed merger between Bharti Airtel The proposed merger between Bharti Airtel and South Africa's MTN would be India's and South Africa's MTN would be India's biggest-ever M&A deal. The potential value biggest-ever M&A deal. The potential value of the Bharti Airtel-MTN deal would of the Bharti Airtel-MTN deal would amount to $23 billion. As per the amount to $23 billion. As per the exploring agreement, MTN and its exploring agreement, MTN and its shareholders would acquire around 36 per shareholders would acquire around 36 per cent economic interest in Bharti Airtel, cent economic interest in Bharti Airtel, while, the Sunil Mittal - promoted Bharti while, the Sunil Mittal - promoted Bharti Airtel would acquire 49 per cent stake in Airtel would acquire 49 per cent stake in South African telecom giant MTN.South African telecom giant MTN.
TTata Steel-Corus: $12.2 billionata Steel-Corus: $12.2 billion
On January 30, 2007, Tata Steel purchased a On January 30, 2007, Tata Steel purchased a
100% stake in the Corus Group at 608 pence 100% stake in the Corus Group at 608 pence
per share in an all cash deal, cumulatively per share in an all cash deal, cumulatively
valued at $12.2 billion.The deal is the largest valued at $12.2 billion.The deal is the largest
Indian takeover of a foreign company till date Indian takeover of a foreign company till date
and made Tata Steel the world's fifth-largest and made Tata Steel the world's fifth-largest
steel group.steel group.
VVodafone-Hutchison Essar: $11.1 odafone-Hutchison Essar: $11.1
billionbillion On February 11, 2007, Vodafone agreed to buy On February 11, 2007, Vodafone agreed to buy
out the controlling interest of 67% held by Li out the controlling interest of 67% held by Li
Ka Shing Holdings in Hutch-Essar for $11.1 Ka Shing Holdings in Hutch-Essar for $11.1
billion.billion.
This is the second-largest M&A deal ever This is the second-largest M&A deal ever
involving an Indian company.involving an Indian company.
Vodafone Essar is owned by Vodafone 52%, Vodafone Essar is owned by Vodafone 52%,
Essar Group 33% and other Indian nationals Essar Group 33% and other Indian nationals
15%.15%.
HHDFC Bank-Centurion Bank of DFC Bank-Centurion Bank of
Punjab: $2.4 billionPunjab: $2.4 billion
HDFC Bank approved the acquisition of HDFC Bank approved the acquisition of
Centurion Bank of Punjab for Rs 9,510 crore Centurion Bank of Punjab for Rs 9,510 crore
($2.4 billion) in one of the largest mergers in ($2.4 billion) in one of the largest mergers in
the financial sector in India in February, 2008. the financial sector in India in February, 2008.
CBoP shareholders got one share of HDFC CBoP shareholders got one share of HDFC
Bank for every 29 shares held by them. Post-Bank for every 29 shares held by them. Post-
acquisition, HDFC Bank became the second-acquisition, HDFC Bank became the second-
largest private sector bank in India.largest private sector bank in India.
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