Financial Decision Analysis

7/29/2019 Financial Decision Analysis

1/31

1

Financial Decision Analysis

Merger and Acquisitions

A merger may be regarded as the fusion or absorption of one thing or right into another. Amerger has been defined as an arrangement whereby the assets, liabilities and businesses of two

or more companies become vested in, or under the control of one company, which may or may

not be the original two companies, which has as its shareholders, all or substantially all the

shareholders of the two companies. In merger, one of the two existing companies merges its

identity into another existing company or one or more existing companies may form a new

company and merge their identities into the new company by transferring their business and

undertakings including all other assets and liabilities to the new company, known as the merged

company. The process of merger is also alternatively referred to as amalgamation. The

amalgamating companies loose their identity and the shareholders of the amalgamating

companies become shareholders of the amalgamated company.

The term amalgamation has not been defined in the Companies Act, 1956. However, the Income-

Tax Act, 1961 defines amalgamation as follows:

Amalgamation, in relation to companies, means the merger of one or more companies with

another company or the merger of two or more companies to form one company. The company

or companies which so merge being referred to as the amalgamating company or companies and

the company with which they merge or which is formed as a result of the merger, as the

amalgamated company in such a manner that::-

all the property of the amalgamating company or companies immediately before theamalgamation becomes the property of the amalgamated company by virtue of the

amalgamation;

all the liabilities of the amalgamating company or companies immediately before theamalgamation become the liabilities of the amalgamated company by virtue of the

amalgamation;


2/31

2

shareholders holding not less than three-fourths in value of the shares in theamalgamating company or companies (other than shares already held therein immediately

before the amalgamation by, or by a nominee for, the amalgamated company or its

subsidiary) become shareholders of the amalgamated company by virtue of the

amalgamation, and not as a result of the acquisition of the property of one company by

another company pursuant to the purchase of such property by the other company or as a

result of the distribution of such property to the other company after the winding up of

the first-mentioned company;

Types of mergers:

Mergers are generally classified as follows:

1. Cogeneric mergers or mergers within same industries

2. Conglomerate mergers or mergers within different industries

1. Cogeneric mergers

These mergers take place between companies within the same industries. On the basis of merger

motives, cogeneric mergers may further classified as:

(i) Horizontal Mergers

(ii) Vertical Mergers

Horizontal mergers takes place between companies engaged in the same business activities for

profit; i.e., manufacturing or distribution of same types of products or rendering of similar

services. A classic instance of horizontal merger is the acquisition of Mobil by Exxon. Typically,

horizontal mergers take place between business competitors within an industry, thereby leading

to reduction in competition and increase in the scope for economies of scale and elimination of

duplicate facilities. The main rationale behind horizontal mergers is achievement of economies

of scale. However, horizontal mergers promote monopolistic trend in an industry by inhibiting

competition.


3/31

3

Vertical mergers take place between two or more companies which are functionally

complementary to each other. For instance, if one company specializes in manufacturing a

particular product, and another company specializes in marketing or distribution of this product,

a merger of these two companies will be regarded as a vertical merger. The acquiring company

may expand through backward integration in the direction of production processes or forward

integration in the direction of the ultimate consumer. The merger of Tea Estate Ltd. with Brooke

Bond India Ltd. was a case of vertical merger. Vertical mergers too discourage competition in

the industry.

2. Conglomerate mergers

Conglomerate mergers take place between companies from different industries. The businesses

of the merging companies obviously lack commonality in their end products or services and

functional economic relationships. A company may achieve inorganic growth through

diversification by acquiring companies from different industries. A conglomerate merger is a

complex process that requires adequate understanding of industry dynamics across diverse

businesses vis--vis the merger motives of the merging entities.

Besides the above, mergers may be classified as:

Up stream merger, in which a subsidiary company is merged with its parent company.

Down stream merger, in which a parent company is merged with its subsidiary company.

Reverse merger, in which a company with a sound financial track record amalgamates with a

loss making or less profitable company.

Acquisitions

An acquisition may be only slightly different from a merger. In fact, it may be different in name

only. Like mergers, acquisitions are actions through which companies seek economies of scale,

efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm

purchasing another - there is no exchange of stock or consolidation as a new company.

Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times,

acquisitions are more hostile. In an acquisition, as in some of the merger deals we discuss above,


4/31

4

a company can buy another company with cash, stock or a combination of the two. Another

possibility, which is common in smaller deals, is for one company to acquire all the assets of

another company. Company X buys all of Company Y's assets for cash, which means that

Company Y will have only cash (and debt, if they had debt before). Of course, Company Y

becomes merely a shell and will eventually liquidate or enter another area of business. Another

type of acquisition is a reverse merger, a deal that enables a private company to get publicly-

listed in a relatively short time period. A reverse merger occurs when a private company that has

strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one

with no business and limited assets. The private company reverse merges into the public

company, and together they become an entirely new public corporation with tradable shares.

Regardless of their category or structure, all mergers and acquisitions have one common goal:

they are all meant to create synergy that makes the value of the combined companies greater than

the sum of the two parts. The success of a merger or acquisition depends on whether this synergy

is achieved.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous,

the terms merger and acquisition mean slightly different things. When one company takes over

another and clearly established itself as the new owner, the purchase is called an acquisition.

From a legal point of view, the target company ceases to exist, the buyer "swallows" the business

and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens

when two firms, often of about the same size, agree to go forward as a single new company

rather than remain separately owned and operated. This kind of action is more precisely referred

to as a "merger of equals." Both companies' stocks are surrendered and new company stock is

issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two

firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual

mergers of equals don't happen very often. Usually, one company will buy another and, as part of

the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals,

even if it's technically an acquisition. Being bought out often carries negative connotations,

therefore, by describing the deal as a merger, deal makers and top managers try to make the


5/31

5

takeover more palatable. Investopedia.com the resource for investing and personal finance

education.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the

best interest of both of their companies. But when the deal is unfriendly - that is, when the target

company does not want to be purchased - it is always regarded as an acquisition. Whether a

purchase is considered a merger or an acquisition really depends on whether the purchase is

friendly or hostile and how it is announced. In other words, the real difference lies in how the

purchase is communicated to and received by the target company's board of directors, employees

and shareholders.

Reasons for Mergers and Acquisitions Reasons for M & A

Every merger has its own unique reasons why the combining of two companies is a good

business decision. The underlying principle behind mergers and acquisitions ( M & A ) is simple:

2 + 2 = 5. The value of Company A is $ 2 billion and the value of Company B is $ 2 billion, but

when we merge the two companies together, we have a total value of $ 5 billion. The joining or

merging of the two companies creates additional value which we call "synergy" value.

Synergy value can take three forms:

1. Revenues: By combining the two companies, we will realize higher revenues then if the two

companies operate separately.

2. Expenses: By combining the two companies, we will realize lower expenses then if the two

companies operate separately.

3. Cost of Capital: By combining the two companies, we will experience a lower overall cost of

capital.

For the most part, the biggest source of synergy value is lower expenses. Many mergers are

driven by the need to cut costs. Cost savings often come from the elimination of redundant

services, such as Human Resources, Accounting, Information Technology, etc. However, the

best mergers seem to have strategic reasons for the business combination. These strategic reasons

include:


6/31

6

1. Positioning - Taking advantage of future opportunities that can be exploited when the two

companies are combined. For example, a telecommunications company might improve its

position for the future if it were to own a broad band service company. Companies need to

position themselves to take advantage of emerging trends in the marketplace.

2. Gap Filling- One company may have a major weakness (such as poor distribution) whereas

the other company has some significant strength. By combining the two companies, each

company fills-in strategic gaps that are essential for long-term survival.

3. Organizational Competencies - Acquiring human resources and intellectual capital can help

improve innovative thinking and development within the company.

4. Broader Market Access - Acquiring a foreign company can give a company quick access to

emerging global markets.

Mergers can also be driven by basic business reasons, such as:

Bargain Purchase - It may be cheaper to acquire another company then to investinternally. For example, suppose a company is considering expansion of fabrication

facilities. Another company has very similar facilities that are idle. It may be cheaper to

just acquire the company with the unused facilities then to go out and build new facilities

on your own.

Diversification - It may be necessary to smooth-out earnings and achieve more consistentlong-term growth and profitability. This is particularly true for companies in very mature

industries where future growth is unlikely. It should be noted that traditional financial

management does not always support diversification through mergers and acquisitions. It

is widely held that investors are in the best position to diversify, not the management of

companies since managing a steel company is not the same as running a software

company.

Short Term Growth - Management may be under pressure to turnaround sluggish growthand profitability. Consequently, a merger and acquisition is made to boost poor

performance.

Undervalued Target - The Target Company may be undervalued and thus, it represents agood investment. Some mergers are executed for "financial" reasons and not strategic


7/31

7

reasons. For example, Kohlberg Kravis & Roberts acquires poor performing companies

and replaces the management team in hopes of increasing depressed values.

Process of M & A

The Merger & Acquisition Process can be broken down into five phases:

Phase 1 - Pre Acquisition Review: The first step is to assess your own situation and determine

if a merger and acquisition strategy should be implemented. If a company expects difficulty in

the future when it comes to maintaining core competencies, market share, return on capital, or

other key performance drivers, then a merger and acquisition (M & A) program may be

necessary. It is also useful to ascertain if the company is undervalued. If a company fails to

protect its valuation, it may find itself the target of a merger. Therefore, the pre-acquisition phase

will often include a valuation of the company - Are we undervalued? Would an M & A Program

improve our valuations?

The primary focus within the Pre Acquisition Review is to determine if growth targets can be

achieved internally. If not, an M & A Team should be formed to establish a set of criteria

whereby the company can grow through acquisition. A complete rough plan should be developed

on how growth will occur through M & A, including responsibilities within the company, how

information will be gathered, etc.Phase 2 - Search & Screen Targets: The second phase within the M & A Process is to search

for possible takeover candidates. Target companies must fulfill a set of criteria so that the Target

Company is a good strategic fit with the acquiring company. For example, the target's drivers of

performance should complement the acquiring company. Compatibility and fit should be

assessed across a range of criteria - relative size, type of business, capital structure,

organizational strengths, core competencies, market channels, etc. It is worth noting that the

search and screening process is performed in-house by the Acquiring Company. Reliance on

outside investment firms is kept to a minimum since the preliminary stages of M & A must be

highly guarded and independent.

Phase 3 - Investigate & Value the Target: The third phase of M & A is to perform a more

detail analysis of the target company. You want to confirm that the Target Company is truly a

good fit with the acquiring company. This will require a more thorough review of operations,


8/31

8

strategies, financials, and other aspects of the Target Company. This detail review is called "due

diligence." Specifically, Phase I Due Diligence is initiated once a target company has been

selected. The main objective is to identify various synergy values that can be realized through an

M & A of the Target Company. Investment Bankers now enter into the M & A process to assist

with this evaluation.

A key part of due diligence is the valuation of the target company. In the preliminary phases of

M & A, we will calculate a total value for the combined company. The calculation can be

summarized as follows:

Value of Our Company (Acquiring Company) $ 560

Value of Target Company $ 176

Value of Synergies per Phase I Due Diligence $ 38

Less M & A Costs (Legal, Investment Bank, etc.) -$ 9

Total Value of Combined Company $ 765

Phase 4 - Acquire through Negotiation: Now that we have selected our target company, it's

time to start the process of negotiating a M & A. We need to develop a negotiation plan based on

several key questions:

How much resistance will we encounter from the Target Company? What are the benefits of the M & A for the Target Company?

What will be our bidding strategy? How much do we offer in the first round of bidding?

The most common approach to acquiring another company is for both companies to reach

agreement concerning the M & A; i.e. a negotiated merger will take place. This negotiated

arrangement is sometimes called a "bear hug." The negotiated merger or bear hug is the preferred

approach to a M & A since having both sides agree to the deal will go a long way to making the

M & A work. In cases where resistance is expected from the target, the acquiring firm will

acquire a partial interest in the target; sometimes referred to as a "toehold position." This toehold

position puts pressure on the target to negotiate without sending the target into panic mode.

In cases where the target is expected to strongly fight a takeover attempt, the acquiring company

will make a tender offer directly to the shareholders of the target, bypassing the target's

management. Tender offers are characterized by the following:

The price offered is above the target's prevailing market price.


9/31

9

The offer applies to a substantial, if not all, outstanding shares of stock. The offer is open for a limited period of time. The offer is made to the public shareholders of the target.

A few important points to be remembered:

Generally, tender offers are more expensive than negotiated M & A's due to theresistance of target management and the fact that the target is now "in play" and may

attract other bidders.

Partial offers as well as toehold positions are not as effective as a 100% acquisition of"any and all" outstanding shares. When an acquiring firm makes a 100% offer for the

outstanding stock of the target, it is very difficult to turn this type of offer down. Another

important element when two companies merge is Phase II Due Diligence. Once we start

the negotiation process with the target company, a much more intense level of due

diligence (Phase II) will begin. Both companies, assuming we have a negotiated merger,

will launch a very detail review to determine if the proposed merger will work. This

requires a very detail review of the target company - financials, operations, corporate

culture, strategic issues, etc.

Phase 5 - Post Merger Integration: If all goes well, the two companies will announce an

agreement to merge the two companies. The deal is finalized in a formal merger and acquisition

agreement. This leads us to the fifth and final phase within the M & A Process, the integration ofthe two companies. Every company is different - differences in culture, differences in

information systems, differences in strategies, etc. As a result, the Post Merger Integration Phase

is the most difficult phase within the M & A Process. Now all of a sudden we have to bring these

two companies together and make the whole thing work. This requires extensive planning and

design throughout the entire organization. The integration process can take place at three levels:

1. Full: All functional areas (operations, marketing, finance, human resources, etc.) will be

merged into one new company. The new company will use the "best practices" between the two

companies.

2. Moderate: Certain key functions or processes (such as production) will be merged together.

Strategic decisions will be centralized within one company, but day to day operating decisions

will remain autonomous.


10/31

10

3. Minimal: Only selected personnel will be merged together in order to reduce redundancies.

Both strategic and operating decisions will remain decentralized and utonomous.

Takeover

Takeover is a strategy of acquiring control over the management of another company either

directly by acquiring shares carrying voting rights or by participating in the management. Where

the shares of the company are closely held by a small number of persons a takeover may be

effected by agreement within the shareholders. However, where the shares of a company are

widely held by the general public, relevant regulatory aspects, including provisions of SEBI

(Substantial Acquisition of Shares and Takeovers) Regulations 1997 need to be borne in minds.

Takeovers may be broadly classified as follows:

Friendly takeover: It is a takeover effected with the consent of the taken over company.In this case there is an agreement between the managements of the two companies

through negotiations and the takeover bid may be with the consent of majority

shareholders of the target company. It is also known as negotiated takeover.

Hostile takeover: When an acquirer company does not offer the target company theproposal to acquire its undertaking but silently and unilaterally pursues efforts to gain

control against the wishes of the existing management, such acts are considered hostile

on the management and thus called hostile takeovers. The takeover of Great Offshore

Limited is an example of hostile takeover, where the Bharti Shipyard Limited acquired

management control of Great Offshore Limited against the wishes of the Great Offshore

promoters.

Bail out takeover: Takeover of a financially weak or a sick company by a profit earningcompany to bail out the former is known as bail out takeover. Such takeovers normally

take place in pursuance to a scheme of rehabilitation approved by the financial institution

or the scheduled bank, who have lent money to the sick company. In bail out takeovers,

the financial institution appraises the financially weak company, which is a sick industrial

company, taking into account its financial viability, the requirement of funds for revival

and draws up a rehabilitation package on the principle of protection of interests of


11/31

11

minority shareholders, good management, effective revival and transparency. The

rehabilitation scheme should provide the details of any change in the management and

may provide for the acquisition of shares in the financially weak company as follows:

1. An outright purchase of shares or

2. An exchange of shares or

3. A combination of both

The acquisition of Satyam Computers by Tech Mahindra is an example of bail out takeover.

Joint Venture

Joint venture (JV) is a strategic business policy whereby a business enterprise for profit is

formed in which two or more parties share responsibilities in an agreed manner, by providing

risk capital, technology, patent/trademark/ brand names and access to the market. It is a mode of

pooling of resources of the JV partners in order to attain better competencies and efficiencies. JV

with multinational companies contribute to the expansion of production capacity, transfer of

technology and penetration into the global market. In JVs, the assets are managed jointly. Skills

and knowledge flow from both the parties.

Leveraged/Management Buyout

Leveraged buyout (LBO) is defined as the acquisition of stock or assets by a small group of

investors, financed largely by borrowing. The acquisition may be either of all stock or assets of a

hitherto public company. The buying group forms a shell company to act as a legal entity for

making the acquisition.

The LBOs differ from the ordinary acquisitions in two main ways: firstly a large fraction of the

purchase price is debt financed and secondly the shares are not traded on open markets. In a

typical LBO programme, the acquiring group consists of number of persons or organizations

sponsored by buyout specialists.

The buyout group may not include the current management of the target company. If the group

does so, the buyout may be regarded as Management Buyout (MBO). A MBO is a transaction in


12/31

12

which the management buys out all or most of the other shareholders. The management may tie

up with financial partners and organizes the entire restructuring on its own.

An MBO begins with an arrangement of finance. Thereafter an offer to purchase all or nearly all

of the shares of a company (not presently held by the management) has to be made which

necessitates a public offer and even delisting. Consequent upon this restructuring of the company

may be affected and once targets have been achieved, the company can list its share on stock

exchange again.

Demerger

Demerger is a common form of corporate restructuring. In the past we have seen a number of

companies following a demerger route to unlock value in their businesses. Demerger has several

advantages including the following:

Creating a better value for shareholders by both improving profitability of businesses andchanging perception of the investors as to what are the businesses of the Company and

what is the future direction;

Improving the resource raising ability of the businesses;

Providing better focus to businesses and thereby improve overall profitability; Hedging risk by inviting participation from investors.

Demerger is a court approved process and requires compliance with the provisions of sections

391-394 of the CoAct. It requires approval from the High Courts of the States in which the

registered offices of the demerged and resulting companies are located. Under the Act,

demerger, in relation to companies, means the transfer, pursuant to a scheme of arrangement,

by a demerged company of its one or more undertakings to any resulting company in such a

manner that:

all the property of the undertaking, being transferred by the demerged company,immediately before the demerger, becomes the property of the resulting company by

virtue of the demerger;


13/31

13

all the liabilities relatable to the undertaking, being transferred by the demergedcompany, immediately before the demerger, become the liabilities of the resulting

company by virtue of the demerger;

the property and the liabilities of the undertaking or undertakings being transferred by thedemerged company are transferred at values appearing in its books of account

immediately before the demerger;

the resulting company issues, in consideration of the demerger, its shares to theshareholders of the demerged company on a proportionate basis;

the shareholders holding not less than three-fourths in value of the shares in the demergedcompany (other than shares already held therein immediately before the demerger, or by

a nominee for, the resulting company or, its subsidiary) become shareholders of the

resulting company or companies by virtue of the demerger, otherwise than as a result of

the acquisition of the property or assets of the demerged company or any undertaking

thereof by the resulting company;

the transfer of the undertaking is on a going concern basis; the demerger is in accordance with the conditions, if any, notified under sub-section (5)

of section 72A by the Central Government in this behalf.

As evident from the above definition, demerger entails transfer of one or more undertakings of

the demerged company to the resulting company and the resultant issue of shares by the resulting

company to the shareholders of the demerged company. The satisfaction of the above conditions

is necessary to ensure tax neutrality of the demerger.

In case of demerger of a listed company of its undertaking, the shares of the resulting company

are listed on the stock exchange where the demerged companys shares are t raded. For instance,

the largest demerger in India was in the case of Reliance Industries wherein its 4 businesses were

demerged into separate companies and the resulting companies were listed on the stock

exchanges. The shareholders of Reliance Industries were allotted shares in the resulting

companies based on a predetermined share swap ratio.


14/31

14

SlumpSale/Hive off

Slump sale is another mode of corporate restructuring, where a company hives off its

undertaking. The rationale for hiving off could be diverse viz. hiving off of non-core businesses,

selling of its business with a view to raise finances etc.

The Act defines slump sale as follows:

Slump sale means the transfer of one or more undertakings as a result of the sale for a lump

sum consideration without values being assigned to the individual assets and liabilities in such

sales.

In a slump sale, a company sells or disposes of the whole or substantially the whole of its

undertaking for a lump sum pre-determined consideration. i.e. without values being assigned to

individual assets and liabilities transferred. The business to be hived off is transferred from the

transferor company to an existing or a new company. A Business Transfer Agreement is drafted

containing the terms and conditions of business transfer.

Legal aspects of M&A

Merger/Demerger is a court approved process which requires compliance of provisions under

sections 391-394 of the companies act. Accordingly, a merger/demerger scheme is presented to

the courts in which, the registered office of the transferor and transferee companies are situated

for their approval. However in the case of listed companies such scheme before filing with the

State High Court, need to the submitted to Stock Exchange where its shares are listed.

The Courts then require the transferor and transferee companies to comply with the provisions of

the companies act relating to calling for shareholders and creditors meeting for passing a

resolution of merger/ demerger and the resultant issue of shares by the transferee company. The

Courts accord their approval to the scheme provided the scheme is not prejudicial to public

interest and the interests of the creditors and stakeholders are not jeopardized.

The Companies Bill, 2008 was introduced in the Parliament based on J.J. Irani Committee's

recommendation and on detailed consultations with various Ministries, Departments and


15/31

15

Government Regulators. The Bill proposes certain changes to existing provisions with respect to

M&A.

The key features of the bill as regards M&A are as follows:

Cross border mergers (both ways) seem to be possible under the proposed Bill, withcountries as may be notified by Central Government form time to time. (Clause 205 of

Companies Bill, 2008) unlike prohibition in case of a foreign transferee company under

existing provisions.

Currently merger of a listed transferor company into an unlisted transferee companytypically results in listing of shares of the unlisted company. The Bill proposes to give an

option to the transferee company to continue as an unlisted company with payment of

cash to shareholders of listed transferor company who decide to opt out of the unlisted

company.

The Bill proposes a valuation report to be given alongwith notice of meeting and also atthe time of filing of application with the National Company Law Tribunal (NCLT) to

the shareholders and the creditors which is not required as per the current provisions.

The Bill proposes that in case of merger or hive off, in addition to the notice requirementsfor shareholders and creditors meetings, confirmation of filing of the scheme with

Registrar and supplementary accounting statement where the last audited accounting

statement is more than six months old before the first meeting of the Company will be

required.

In order to enable fast track and cost efficient merger of small companies, the Billproposes a separate process for a merger and amalgamation of holding and wholly owned

subsidiary companies or between two or more small companies.

The Bill provides that fees paid by the transferor company on authorized share capitalshall be available for setoff against the fees payable by the transferee company on its

authorized share capital subsequent to the merger. This may enable clubbing of

authorized share capital.


16/31

16

Subsequently, Companies Bill, 2009 was introduced in the Lok Sabha in August 2009 and was

referred to the Standing Committee on Finance of the Parliament for examination and report. The

SCF has carried out extensive deliberations and interventions on the clauses of the Bill and

recommended certain changes in the provisions of the Bill. Some of the key changes of the SCF

from M&A perspective are highlighted as under;

Postal ballot for adoption of compromise / arrangement with creditors to be allowed Any compromise or arrangement to be sanctioned only if the accounting treatment, if

any, proposed is in accordance with the accounting standards.

The provisions relating to the exit mechanism for investors of a listed company, in caseof merger of a listed company with an unlisted company, to be modified to bring

reference to regulations made by SEBI for giving a better opt-out or exit mechanism.

Merger and amalgamation of an Indian company with a foreign company or vice versa torequire prior approval of RBI.

Economic aspects of M&A

Some of the key economic considerations in an M&A process are as follows:

Shareholder wealth:An M&A transaction may enhance shareholders value in two waysvalue

creation and value capture. Value creation is a long term phenomenon which results from the

synergy generated from a transaction. Value creation may be achieved by way of functional skill

or management skill transfers. Value capture is a one time phenomenon, wherein the

shareholders of the acquiring company gain the value of the existing shareholders of the acquired

company.

Synergy:Synergy from mergers and acquisitions has been characteristically connoted by 2+2=5.

It signifies improvement of the performance of the acquired company by the strength of the

acquiring company or vice versa. There may be operational synergies through improved

economies of scale or financial synergies through reduction in cost of capital. Realisation of

synergies through consolidation domestic and global have been one of the main aims of the

worldwide M&A activities today.


17/31

17

Market share: The co-relation between increased market share and improved profitability

underlies the motive of constant increase of market share by companies. The focus on new

markets and increase in product offerings, leads to higher level of production and lower unit

costs. Thus this motive is closely aligned with the motive to achieve economies of scale.

Core competence: Cogeneric mergers often augment a firms competitiveness in an existing

business domain. This urge for core competence is closely aligned with the motive of defending

or fortifying a companys business domain and warding off competition.

Diversification: The M&A route serves as an effective tool to diversify into new businesses.

Increasing returns with set customer base and lower risks of operation form the rationale of such

conglomerate mergers.

Increased debt capacity: Typically a merged entity would enjoy higher debt capacity because

benefits of combination of two or more firms provide greater stability to the earnings level. This

is an important consideration for the lenders. Moreover, a higher debt capacity if utilized, would

mean greater tax advantage for the merged firm leading to higher value of the firm.

Customer pull: Increased customer consciousness about established brands have made it

imperative for companies to exploit their customer pull to negotiate better deals fulfilling the

twin needs of customer satisfaction and enhancement of shareholder value

Valuation aspects of M&A

Valuation is the central focus in fundamental analysis, wherein the underlying theme is that the

true value of the firm can be related to its financial characteristics, viz. its growth prospects, risk

profile and cash flows. In a business valuation exercise, the worth of an enterprise, which is

subject to merger or acquisition or demerger, is assessed for quantification of the purchase

consideration or the transaction price.

Generally, the value of the target from the bidders point of view is the pre -bid standalone value

of the target. On the other hand, the target companies may be unduly optimistic in estimating

value, especially in case of hostile takeovers, as their objective is to convince the shareholders

that the offer price is too low. Since valuation of the target depends on expectations of the timing


18/31

18

of realization as well as the magnitude of anticipated benefits, the bidder is exposed to valuation

risk. The degree of risk depends upon whether the target is a private or public company, whether

the bid is hostile or friendly and the due-diligence performed on the target.

Taxation aspects of M&A

Under the Income-tax Act 1961, a special provision is made which governs the provisions

relating to carry forward and set off of accumulated business loss and unabsorbed depreciation

allowance in certain cases of amalgamations and demergers.

1. On mergerIt is to be noted that as unabsorbed losses of the amalgamating company are deemed to be the

losses for the previous year in which the amalgamation was effected, the amalgamated company

will have the right to carry forward the loss for a period of eight assessment years immediately

succeeding the assessment year relevant to the previous year in which the amalgamation was

effected.

If any of the conditions for allowability of right to carry forward of loss, is violated in any year,

the set off of loss or allowance of depreciation made in any previous year in the hands of the

amalgamated company shall be deemed to be the income of the amalgamated company

chargeable to tax for the year in which the conditions are violated.

2. On DemergerThe Income Tax Act provides for movement of accumulated losses and unabsorbed depreciation

of the undertaking being demerged in case of a demerger. The manner of ascertaining the

accumulated losses and unabsorbed depreciation of the undertaking being demerged is given

below:

Scenario Method of allocation

Where the accumulated

business loss and unabsorbed

depreciation are directly

Entire amount of directly relatable losses and

unabsorbed depreciation is allowed to be carried

forward in the hands of the resulting company.


19/31

19

relatable to the undertaking

Where the accumulated

business loss and unabsorbed

depreciation are not directly

relatable to the undertaking

The business loss and unabsorbed depreciation

would be apportioned between the resulting

company and the demerging company in the ratio of

the assets transferred and assets retained.

Human aspects of M&A

The top executives involved in implementation of merger often overlook the human aspect of

mergers by neglecting the culture shocks facing the merger. Understanding different cultures and

where and how to integrate them properly is vital to the success of an acquisition or a merger.

Important factors to be taken note of would include the mechanism of corporate control

particularly encompassing delegation of power and power of control, responsibility towards

management information system, interdivisional and intra-divisional harmony and achieving

optimum results through changes and motivation.

The key to a successful M&A transaction is an effective integration that is capable of achieving

the benefits intended. It is at the integration stage immediately following the closing of the

transaction that many well-conceived transactions fail. Although often overlooked in the rush of

events that typically precede the closing of the transaction, it is at the integration stage with

careful planning and execution that plays an important role which, in the end, is essential to a

successful transaction.

Integration issues, to the extent possible, should be identified during the due diligence phase,

which should comprise both financial and HR exercises, to help to mitigate transaction risk and

increase likelihood of integration success.

In conclusion, to achieve a flawless M&A transaction lies in being able to start right, well before

the combination, plan with precision, and ensure a relentless clarity of purpose and concerted

action in the actual integration and post-integration stage.


20/31

20

Takeover

Meaning

In business, a takeover is the purchase of one companyby another (the acquirer, orbidder). In

the UK, the term refers to the acquisition of a public company whose shares are listed on a stock

exchange, in contrast to the acquisition of a private company.

Types of takeovers

Friendly takeovers

A friendly takeover is an acquisition which is approved by the management. Before a biddermakes an offerfor another company, it usually first informs the company's board of directors. In

an ideal world, if the board feels that accepting the offer serves the shareholdersbetter than

rejecting it, it recommends the offer be accepted by the shareholders.

In a private company, because the shareholders and the board are usually the same people or

closely connected with one another, private acquisitions are usually friendly. If the shareholders

agree to sell the company, then the board is usually of the same mind or sufficiently under the

orders of the equity shareholders to cooperate with the bidder. This point is not relevant to the

UK concept of takeovers, which always involve the acquisition of a public company.

Hostile takeovers

A hostile takeover allows a suitor to take over a target company whose management is unwilling

to agree to a mergeror takeover. A takeover is considered hostile if the target company's board

rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer directly after

having announced its firm intention to make an offer.

A hostile takeover can be conducted in several ways. A tender offercan be made where the

acquiring company makes a public offer at a fixed price above the current market price. Tender

offers in the United States are regulated by the Williams Act. An acquiring company can also

engage in a proxy fight, whereby it tries to persuade enough shareholders, usually a simple

majority, to replace the management with a new one which will approve the takeover. Another
http://en.wikipedia.org/wiki/Company_(law)http://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Tender_offerhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Tender_offerhttp://en.wikipedia.org/wiki/Market_pricehttp://en.wikipedia.org/wiki/Williams_Acthttp://en.wikipedia.org/wiki/Proxy_fighthttp://en.wikipedia.org/wiki/Majorityhttp://en.wikipedia.org/wiki/Majorityhttp://en.wikipedia.org/wiki/Majorityhttp://en.wikipedia.org/wiki/Majorityhttp://en.wikipedia.org/wiki/Proxy_fighthttp://en.wikipedia.org/wiki/Williams_Acthttp://en.wikipedia.org/wiki/Market_pricehttp://en.wikipedia.org/wiki/Tender_offerhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Tender_offerhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/Company_(law)


21/31

21

method involves quietly purchasing enough stock on the open market, known as a creeping

tender offer, to effect a change in management. In all of these ways, management resists the

acquisition, but it is carried out anyway.

The main consequence of a bid being considered hostile is practical rather than legal. If the boardof the target cooperates, the bidder can conduct extensive due diligence into the affairs of the

target company, providing the bidder with a comprehensive analysis of the target company's

finances. In contrast, a hostile bidder will only have more-limited, publicly-available information

about the target company available, rendering the bidder vulnerable to hidden risks regarding the

target company's finances. An additional problem is that takeovers often require loans provided

by banks in order to service the offer, but banks are often less willing to back a hostile bidder

because of the relative lack of target information which is available to them.

Reverse takeovers

A reverse takeover is a type of takeover where a private company acquires a public company.

This is usually done at the instigation of the larger, private company, the purpose being for the

private company to effectively float itself while avoiding some of the expense and time involved

in a conventional IPO. However, underAIM rules, a reverse take-over is an acquisition or

acquisitions in a twelve month period which for an AIM company would:

exceed 100% in any of the class tests; or result in a fundamental change in its business, board or voting control; or in the case of an investing company, depart substantially from the investing strategy stated in

its admission document or, where no admission document was produced on admission,

depart substantially from the investing strategy stated in its pre-admission announcement or,

depart substantially from the investing strategy.

An individual or organization, sometimes known as corporate raider, can purchase a large

fraction of the company's stock and, in doing so, get enough votes to replace the board of

directors and the CEO. With a new agreeable management team, the stock is a much more

attractive investment, which would likely result in a price rise and a profit for the corporate

raider and the other shareholders.
http://en.wikipedia.org/wiki/Due_diligencehttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Reverse_takeoverhttp://en.wikipedia.org/wiki/Float_(finance)http://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Alternative_Investment_Markethttp://en.wikipedia.org/wiki/Corporate_raiderhttp://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/Profithttp://en.wikipedia.org/wiki/Profithttp://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/Corporate_raiderhttp://en.wikipedia.org/wiki/Alternative_Investment_Markethttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Float_(finance)http://en.wikipedia.org/wiki/Reverse_takeoverhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Due_diligence


22/31

22

Backflip takeovers

A backflip takeover is any sort of takeover in which the acquiring company turns itself into

a subsidiary of the purchased company. This type of takeover rarely occurs.

Reverse Cowgirl takeovers

A reverse cowgirl takeover is a when two companies decide to switch assets and company

profiles, while adding assets on top of such a deal in order to even up either company's position.

The main advantage to a reverse cowgirl takeover is that neither company suffers the capital gain

taxes which a normal cash transaction would involve. The most famous case of a reverse cowgirl

takeover was when AOL acquired Netscape in 2000. Although the deal involved minor amounts

of cash and stock, the primary commodity exchanged by AOL was free internet service for life to

the 478 Netscape employees. However, 3 years later, dial-up service was no longer functioningand instead the United States had shifted towards cable and DSL internet. This caused many

former Netscape employees regret for turning down stock and cash in exchange for free internet.

Financing a takeover

Often a company, acquiring another, pays a specified amount for it. This money can be raised in

a number of ways. Although the company may have sufficient funds available in its account,

remitting payment entirely from the acquiring company's cash on hand is unusual. More often, it

will be borrowed from a bank, or raised by an issue ofbonds. Acquisitions financed through debt

are known as leveraged buyouts, and the debt will often be moved down onto the balance

sheet of the acquired company. The acquired company then has to pay back the debt. This is a

technique often used by private equity companies. The debt ratio of financing can go as high as

80% in some cases. In such a case, the acquiring company would only need to raise 20% of the

purchase price.

Loan note alternatives

Cash offers forpublic companies often include a loan note alternative that allows shareholders to

take a part or all of their consideration in loan notes rather than cash. This is done primarily to

make the offer more attractive in terms oftaxation. A conversion of shares into cash is counted

as a disposal that triggers a payment ofcapital gains tax, whereas if the shares are converted into

othersecurities, such as loan notes, the tax is rolled over.
http://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Leveraged_buyoutshttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Public_companieshttp://en.wikipedia.org/wiki/Considerationhttp://en.wikipedia.org/w/index.php?title=Loan_note&action=edit&redlink=1http://en.wikipedia.org/wiki/Taxationhttp://en.wikipedia.org/wiki/Capital_gains_taxhttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Capital_gains_taxhttp://en.wikipedia.org/wiki/Taxationhttp://en.wikipedia.org/w/index.php?title=Loan_note&action=edit&redlink=1http://en.wikipedia.org/wiki/Considerationhttp://en.wikipedia.org/wiki/Public_companieshttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Leveraged_buyoutshttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Subsidiary


23/31

23

All share deals

A takeover, particularly a reverse takeover, may be financed by an all share deal. The bidder

does not pay money, but instead issues new shares in itself to the shareholders of the company

being acquired. In a reverse takeover the shareholders of the company being acquired end up

with a majority of the shares in, and so control of, the company making the bid. The company

has managerial rights.

Takeover Strategies

There are a variety of reasons why an acquiring company may wish to purchase another

company. Some takeovers are opportunistic - the target company may simply be very reasonably

priced for one reason or another and the acquiring company may decide that in the long run, it

will end up making money by purchasing the target company. The large holdingcompany Berkshire Hathaway has profited well over time by purchasing many companies

opportunistically in this manner.

Other takeovers are strategic in that they are thought to have secondary effects beyond the simple

effect of the profitability of the target company being added to the acquiring company's

profitability. For example, an acquiring company may decide to purchase a company that is

profitable and has good distribution capabilities in new areas which the acquiring company can

use for its own products as well. A target company might be attractive because it allows theacquiring company to enter a new market without having to take on the risk, time and expense of

starting a new division. An acquiring company could decide to take over a competitor not only

because the competitor is profitable, but in order to eliminate competition in its field and make it

easier, in the long term, to raise prices. Also a takeover could fulfill the belief that the combined

company can be more profitable than the two companies would be separately due to a reduction

of redundant functions.

Takeovers may also benefit from principalagent problems associated with top executive

compensation. For example, it is fairly easy for a top executive to reduce the price of his/her

company's stock due to information asymmetry. The executive can accelerate accounting of

expected expenses, delay accounting of expected revenue, engage in off balance

sheet transactions to make the company's profitability appear temporarily poorer, or simply

promote and report severely conservative estimates of future earnings. Such seemingly adverse
http://en.wikipedia.org/wiki/Reverse_takeoverhttp://en.wikipedia.org/w/index.php?title=All_share_deal&action=edit&redlink=1http://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Holding_companyhttp://en.wikipedia.org/wiki/Holding_companyhttp://en.wikipedia.org/wiki/Berkshire_Hathawayhttp://en.wikipedia.org/wiki/Distribution_(business)http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Off_balance_sheethttp://en.wikipedia.org/wiki/Off_balance_sheethttp://en.wikipedia.org/wiki/Off_balance_sheethttp://en.wikipedia.org/wiki/Off_balance_sheethttp://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Distribution_(business)http://en.wikipedia.org/wiki/Berkshire_Hathawayhttp://en.wikipedia.org/wiki/Holding_companyhttp://en.wikipedia.org/wiki/Holding_companyhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/w/index.php?title=All_share_deal&action=edit&redlink=1http://en.wikipedia.org/wiki/Reverse_takeover


24/31

24

earnings news will be likely to reduce share price. There are typically very few legal risks to

being 'too conservative' in one's accounting and earnings estimates.

A reduced share price makes a company an easier takeover target. When the company gets

bought outat a dramatically lower pricethe takeover artist gains a windfall from the formertop executive's actions to surreptitiously reduce share price. This can represent tens of billions of

dollars transferred from previous shareholders to the takeover artist. The former top executive is

then rewarded with a golden handshake for presiding over the fire sale that can sometimes be in

the hundreds of millions of dollars for one or two years of work. This is just one example of

some of the principal-agent /perverse incentive issues involved with takeovers.

Similar issues occur when a publicly held asset or non-profit organization

undergoes privatization. Top executives often reap tremendous monetary benefits when a

government owned or non-profit entity is sold to private hands. Just as in the example above,

they can facilitate this process by making the entity appear to be in financial crisis. This

perception can reduce the sale price and make non-profits and governments more likely to sell. It

can also contribute to a public perception that private entities are more efficiently run,

reinforcing the political will to sell off public assets.

Pros and cons of Takeovers

While pros and cons of a takeover differ from case to case, there are a few reoccurring onesworth mentioning.

Pros:

1. Increase in sales/revenues (e.g. Procter & Gamble takeover ofGillette)2. Venture into new businesses and markets3. Profitability of target company4. Increase market share5. Decreased competition (from the perspective of the acquiring company)6. Reduction of overcapacity in the industry7. Enlarge brand portfolio (e.g. L'Oral's takeover ofBody Shop)8. Increase in economies of scale
http://en.wikipedia.org/wiki/Golden_handshakehttp://en.wikipedia.org/wiki/Fire_salehttp://en.wikipedia.org/wiki/Principal-agenthttp://en.wikipedia.org/wiki/Perverse_incentivehttp://en.wikipedia.org/wiki/Privatizationhttp://en.wikipedia.org/wiki/Procter_%26_Gamblehttp://en.wikipedia.org/wiki/The_Gillette_Companyhttp://en.wikipedia.org/wiki/L%27Or%C3%A9alhttp://en.wikipedia.org/wiki/Body_Shophttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Body_Shophttp://en.wikipedia.org/wiki/L%27Or%C3%A9alhttp://en.wikipedia.org/wiki/The_Gillette_Companyhttp://en.wikipedia.org/wiki/Procter_%26_Gamblehttp://en.wikipedia.org/wiki/Privatizationhttp://en.wikipedia.org/wiki/Perverse_incentivehttp://en.wikipedia.org/wiki/Principal-agenthttp://en.wikipedia.org/wiki/Fire_salehttp://en.wikipedia.org/wiki/Golden_handshake


25/31

25

9. Increased efficiency as a result of corporate synergies/redundancies (jobs withoverlapping responsibilities can be eliminated, decreasing operating costs)

Cons:

1. Goodwill, often paid in excess for the acquisition2. Culture clashes within the two companies causes employees to be less-efficient or

despondent

3. Reduced competition and choice for consumers in oligopoly markets. (Bad forconsumers, although this is good for the companies involved in the takeover)

4. Likelihood of job cuts5. Cultural integration/conflict with new management6. Hidden liabilities of target entity7. The monetary cost to the company8. Lack of motivation for employees in the company being bought.

Takeovers also tend to substitute debt for equity. In a sense, any government tax policy of

allowing for deduction of interest expenses but not ofdividends, has essentially provided a

substantial subsidy to takeovers. It can punish more-conservative or prudent management that do

not allow their companies to leverage themselves into a high-risk position. High leverage will

lead to high profits if circumstances go well, but can lead to catastrophic failure if circumstances

do not go favorably. This can create substantial negative externalities for governments,

employees, suppliers and otherstakeholders.

New Takeover Code

On 23rd September, 2011, the Securities and Exchange Board of India (SEBI) amended the 13

year old takeover rules and notified them with the new set of takeover rules i.e.; the SEBI

(Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (commonly referred to as

the takeover code) to align it closer to global practices. The main purpose for the new takeover

code is also to prevent hostile takeovers and at the same time, provide some more opportunities

of exit to innocent shareholders who do not wish to be associated with a particular acquirer.
http://en.wikipedia.org/wiki/Goodwill_(accounting)http://en.wikipedia.org/wiki/Culture_clashhttp://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Negative_externalitieshttp://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Negative_externalitieshttp://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Culture_clashhttp://en.wikipedia.org/wiki/Goodwill_(accounting)


26/31

26

Important Definitions

(a) Acquirer [Regulation 2(1)(a)]

Acquirer means:

Any person who, directly or indirectly, acquires oragrees to acquire whether by himself, or

through, or with persons acting in concert with him,

shares or voting rights in, or control over a target company.

It means that any person who enters into an agreement for acquiring the shares in future will

also be an acquirer for the purpose of the takeover code.

(b) Acquisition [Regulation 2(1)(b)]

Acquisition means

Directly or indirectly, acquiring oragreeing to acquire

Shares or voting rights in, or control over a target company.

It means that any agreement entered into between two persons for acquiring the shares in future

will also be covered within acquisition for the purpose of the takeover code.

(c) Persons acting in concert [Regulation 2(1)(q)]

Persons acting in concert means:

Persons who, with a common objective or purpose of

acquisition of shares or voting rights in, orexercising control over a target company,

pursuant to an agreement or understanding, formal or informal, directly or indirectly cooperate

for acquisition of shares orvoting rights in, or exercise of control over the company.

A company, its holding company, subsidiary company and any company under the same

management group;

Immediate relatives;

Promoters and members of the promotergroup.

(d) Control [Regulation 2(1)(e)]

Control includes the right:

to appoint majority of the directors or

to control the management or policy decisions

exercisable by a person or persons acting individually or in concert, directly or indirectly,

Including by virtue of their shareholding or management rights or shareholders agreements


27/31

27

or voting agreements or in any other manner.

The concept of control brings such type of persons under the purview of the takeover code that

does not hold the shares in their name, but actually control the majority of the directors or control

the management or the policy decisions of the company.

Computation of Offer Price [Regulation 8(1)]

The takeover regulations govern the computation of offer price because had there been no

standard method for computing the offer price, it would have led to the following two types of

adverse situations:

a. Suppose the market price of the share is R500 and the acquirer offers to buy the shares of the

remaining shareholders at just R5 per share, then no one would have would have accepted his

offer due to such a low price being offered. Thus, the acquirer would have fulfilled his obligation

and ending up with no requirement to buy the shares of other shareholders and that too,

completely within the provisions of the law.

b. In another case, suppose the market price of the share is R500 and the acquirer offers to buy

the shares of the remaining shareholders at a very high price of R2000 per share, then most of the

remaining shareholders would have accepted the offer of the acquirer due to such a high price

being offered by the acquirer and hence, the acquirer would have easily gained a majority stake

in the company and that too, completely within the provisions of the law. This would have meant

that hostile takeover can be done by complying with the provisions of law itself.

To avoid such type of adverse situations, the SEBI (Substantial Acquisition of Shares and

Takeover) Regulations, 2011 has prescribed that the offer price shall be the higher of the

following:

(a) The highest negotiated price per share of the target company for any acquisition under the

agreement attracting the obligation to make a public announcement of an open offer;

(b) The volume-weighted average price paid or payable for acquisitions, whether by the acquirer

or by any person acting in concert with him, during the 52 weeks immediately preceding the date

of the public announcement;

(c) The highest price paid or payable for any acquisition, whether by the acquirer or by any

person acting in concert with him, during the 26 weeks immediately preceding the date of the

public announcement;


28/31

28

(d) The volume-weighted average market price of such shares for a period of 60 trading days

immediately preceding the date of the public announcement as traded on the stock exchange

where the maximum volume of trading in the shares of the target company are recorded during

such period, provided such shares are frequently traded;

(e) Where the shares are not frequently traded, the price determined by the acquirer and the

manager to the open offer taking into account valuation parameters including, book value,

comparable trading multiples, and such other parameters as are customary for valuation of shares

of such companies; and

(f) The per share value computed under sub-regulation (5), if applicable.

Withdrawal of Offer [Reg.23]

A public offer can be withdrawn only in the following circumstances:

Some statutory approvals have not been received; or

The acquirer, being a natural person, has died; or

any condition stipulated in the agreement for acquisition attracting the obligation to make the

open offer is not met for reasons outside the reasonable control of the acquirer, and such

agreement is rescinded, subject to such conditions having been specifically disclosed in the

detailed public statement and the letter of offer; or

such circumstances as in the opinion of the SEBI, merit withdrawal.

Old Takeover Code v/s New Takeover Code


29/31

29

Rationale behind the New Takeover Code

The main rationale behind the new takeover code is to align India's M&A scene to the global

practices.

The earlier threshold limit of 15% was too early to trigger an open offer considering thefact that a major portion of almost all the listed companies is financed by the Private

Equity (PE) firms. The 15% limit meant that the PE firms had to restrict their holding in

the company to less than 15% if they didn't want to make an open offer. The new

threshold limit of 25% is one at which a potential acquirer can exercise de factopositive

control over a company and is able to get a majority of votes in a shareholder's meeting.

Also, the Companies Act recognises any holding in excess of 25% as the threshold at

which a special resolution can be blocked.

The minimum offer size has been increased from 20% to 26%. However, this has been amatter of controversy among many. The twelve member takeover advisory committee

had recommended a 100% public offer once the trigger button is pressed as it will give all

minority shareholders an opportunity to exit. Even though this proposal appears to be fine

in theory, the corporate sector was not in favour of the proposal; and they had their valid

reasons. A public offer to all the remaining shareholders would have proven to be very

expensive as there would be a lot of financial issues in raising finances for the entire

remaining shareholding. The main financial concern is that the RBI doesn't allow banks


30/31

30

to finance domestic acquisitions; hence a public offer to all the remaining shareholders

would have meant that the buyers would have had to raise expensive funds from other

sources. Hence, a middle path was chosen and the minimum offer size was increased

from 20% to 26%.

Impact of New Takeover Code

The new takeover code spells different things to various stakeholders.

(a) For retail investors

The retail investors should benefit with the removal of the non compete fees as now, the price

premium will be distributed over a wider base of shareholders and not just to the promoters.

(b) For Institutional investors

The Institutional investors, especially the PE firms will now be able to acquire up to 24.99%

without triggering an open offer. This also means that the listed companies do not necessarily

have to depend only on public markets for capital.

(c) For promoters

The new takeover code means that the promoters with low holdings should increase their

holdings to shield themselves from a potential hostile bid.

Summary

Though the new takeover code has increased the threshold limit and the minimum offer size, it is

also felt that the RBI should do away with the restriction on banks to fund domestic acquisitions.

The SEBI has successfully done one part of the reform process by preparing the new takeover

code; the other part requires it successful implementation. To summarise, one may say that the

takeover code operates in the following manner:


31/31

31

Documents

Financial Decision Analysis