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Assignment Unit 1_2

Q1: Distinguish between Horizontal Merger and Vertical Merger?

Ans Horizontal mergers are o!ten a t"#e o! non$!inancial merger %n other words& a horizontalmerger is underta'en !or reason that ha(e little to do with mone"& at least directl" )im#l" stated&a horizontal merger is usuall" the ac*uisition o! a com#etitor who is in the same line o! businessas the ac*uiring business +" ac*uiring the com#etitor& the ac*uiring com#an" is reducing thecom#etition in the mar'et#lace

,ne e-cellent e-am#le o! horizontal mergers o(er the #ast ./ "ears is in the ban'ing industr" %n10 /& he De#ositor" %nstitutions Deregulation and Monetar" 3ontrol Act o! 10 / was #assed

b" 3ongress At the time& no one 'new what wide$ranging e!!ects this act would ha(e but wecertainl" 'now now his legislation allowed in(estment and commercial ban'ing to share someo! the same !unctions %t also allowed ban's to branch across state lines along with e-#anding the

#owers o! ban' holding com#anies

his deregulation act allowed in(estment and commercial ban's to underta'e more horizontalmergers than the" had e(er been allowed to underta'e in the #ast he result was a contraction inthe ban'ing industr" and !ewer ban's %n(estment ban's could o!!er ser(ices that onl"commercial ban's had been allowed to o!!er be!ore 10 / and (ice (ersa )mall& hometown ban'swere gobbled u# b" big regional ban's he (er" de!inition o! a horizontal merger ha##ened on agrand scale $ larger com#etitors ac*uired smaller com#etitors and the result was !ewer ban's inthe U )

4hen the 5reat 6ecession o! 2// ha##ened& we saw some o! the results o! the deregulation acto! 10 / Man" ban's !ailed 7arge in(estment ban's had abused the #ower that had been gi(ento them b" the deregulation act here was a call !or re$regulation in the ban'ing industr" his isthe reason that go(ernment anti$trust o!!icials watch horizontal mergers care!ull" he" can leadto too much mar'et #ower !or the ac*uiring !irms

Vertical mergers or (ertical integration ha##ens when the ac*uiring !irm bu"s bu"ers or sellerso! goods and ser(ices to the com#an" %n other words& a (ertical merger is usuall" between amanu!acturer and a su##lier %t is a merger between two com#anies that #roduce di!!erent

#roducts or ser(ices along the su##l" chain toward the #roduction o! some !inal #roduct Verticalmergers usuall" ha##en in order to increase e!!icienc" along the su##l" chain which& in turn&increases #ro!its !or the ac*uiring com#an"

8ust li'e horizontal mergers& (ertical mergers can result in anti$trust #roblems in the mar'et#lace b" reducing com#etition An e-am#le would be i! an automobile manu!acturing com#an" wereto bu" u# other businesses that e-ist along its su##l" chain %t ta'es man" di!!erent t"#es o!

businesses to su##ort automobile manu!acturing %! an automobile com#an" bought a seat beltmanu!acturing com#an"& com#anies that manu!actured di!!erent #arts o! the engine bloc' andthe transmission& as well as sources o! its raw materials& trans#ortation& technolog"& and sales

http://www.kansascityfed.org/PUBLICAT/EconRev/EconRevArchive/1982/1q82west.pdfhttp://economics.about.com/od/governmenttheeconomy/a/antitrust.htmhttp://logistics.about.com/od/supplychainintroduction/a/into_scm.htmhttp://economics.about.com/od/governmenttheeconomy/a/antitrust.htmhttp://logistics.about.com/od/supplychainintroduction/a/into_scm.htmhttp://www.kansascityfed.org/PUBLICAT/EconRev/EconRevArchive/1982/1q82west.pdf

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9dealershi#s & imagine the mar'et #ower that would accrue to that automobile manu!acturingcom#an" %t would e!!ecti(el" totall" control the #rice !or its (ehicles without ha(ing to consideran" other !actors hat is the 'ind o! mar'et #ower that anti$trust laws are meant to control

Q2: 4hat do "ou mean b" demerger? 5i(e an e-am#le

Ans A business strateg" in which a single business is bro'en into com#onents& either to o#erateon their own& to be sold or to be dissol(ed A de$merger allows a large com#an"& such as aconglomerate& to s#lit o!! its (arious brands to in(ite or #re(ent an ac*uisition& to raise ca#ital b"selling o!! com#onents that are no longer #art o! the business;s core #roduct line& or to createse#arate legal entities to handle di!!erent o#erations

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and now no better #er!ormance& ca#ital gain can be realisedB9E o ma'e !inancial and managerial resources a(ailable !or de(elo#ing other more #ro!itable

o##ortunitiesB9F )elling unwanted and sur#lus or unconnected #arts in the business as a restructuring strateg"

to get rid o! sic' #art o! the com#an"

he abo(e list o! reasons !or sell out is not e-hausti(e or conclu$si(e as more reasons could beadded de#ending u#on the numerous in!luences emanating !rom #olitical& economic& social andinternational bac'grounds ,ne thing remains cr"stal clear that the ob ecti(e underl"ingdi(estitures or sell o!!s in the cor#orate world is to ensure resource mobilit" essential to e!!ecti(eo#erations o! an enter#rise and mo(ing these resources !rom less$(alued uses to higher$(alueduses

Effect of demerger :

9i a- neutralit" o! the assets trans!erred to resulting com#an"

9ii o e-tend the bene!it o! carr" !orward o! loss or de#reciation relating to trans!erredunderta'ing to resulting com#an"

9iii o e-tend the bene!its li'e ) /%A& ) /%+& etc to the s#lit o!! unit9i( o allow the e-#enditure incurred !or demerger9( a- neutralit" o! the demerger !or the shareholders o! demerged com#an"

Applicability :

9i 3om#anies incor#orated under the 3om#anies Act& 10 E9ii An" authorit" or a bod" constituted or established under a 3entral& )tate or >ro(incial Act

9iii A local authorit"9i( A #ublic sector com#an"9( A !oreign com#an"9(i An" institution& association or bod" assessed as com#an" or declared b" the 3+D as a

com#an"

Conditions of demerger (S. !AA" : Conditions :

9i he trans!er is #ursuant to a scheme o! arrangement uGs .01 to uGs .0C o! the 3om#aniesAct& 10 E

9ii rans!er o! all the assetsG liabilities o! one or more underta'ings b" a demerged com#an" toan" resulting com#an" at boo' (alue on going concern basis& otherwise than b" wa" o!ac*uisition

9iii he resulting com#an" issues shares to the shareholders o! demerged com$ #an" on #ro#ortionate basis

9i( )hareholders holding at least F o! the share ca#ital become shareholders o! resultingcom#an"

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9( %n accordance with the conditions noti!ied uGs F2A9 b" the 3entral go(t9(i rans!er should be with re!erence to trans!er o! a business acti(it" and not an" indi(idual

assets or liabilities or an" combination thereo!9(ii A#art !rom s#eci!ic liabilities relating to a business& general liabilities are to be a##ortioned

in the ratio o! assets relating to each business

9(iii 6e(aluation o! assets will be ignored9i- 6econstruction o! an" bod"& authorit"9- %n case the conditions are discontinued to be com#lied with& the set o!! o! loss or

de#reciation made in an" earlier "ears in the hands o! the amalgamated com#an" shall bedeemed to be the income o! the amalgamated com#an" ta-able !or the "ear in which there isnon$com#liance

9-i %n case o! demerger& accumulated loss and unabsorbed de#reciation o! demerged com#an"shall be allowed to be carried !orward and set o!! in the hands o! the resulting com#an" tothe e-tent o! :9a i! such lossGde#reciation is directl" relatable to trans!erred underta'ing I 1//9b i! such lossGde#reciation is not directl" relatable to trans!erred underta'ing& that

#ro#ortion which the assets o! the underta'ing trans!erred bear to the total assets o! thedemerged com#an"

9-ii 4here a !irm or #ro#rietar" concern is succeeded b" a com#an" !ul!illing the conditions o!) CF9-iii or ) CF9-i( & the unabsorbed lossGde#reciation shall be deemed to be the lossGde#reciation o! the successor com#an" !or the "ear in which reorganisation is e!!ected %ncase an" o! the conditions are not continued to be !ul!illed in an" o! the "ears a!ter suchreorganisation& the set o!! o! loss or de#reciation shall be in case o! the "ear in whichconditions are discontinued to be !ul!illed

9-iii Accumulated loss relates to the head ;>ro!its or gains o! business or #ro!ession 9other thans#eculation business ; onl"