Introduction to Mergers and Acquisition

7/28/2019 Introduction to Mergers and Acquisition

1/90

1

CHAPTER-1

Introduction to Mergers and Acquisition

We have been learning about the companies coming together to from anothercompany and companies taking over the existing companies to expand their

business.

With recession taking toll of many Indian businesses and the feeling of

insecurity surging over our businessmen, it is not surprising when we hear

about the immense numbers of corporate restructurings taking place, especially

in the last couple of years. Several companies have been taken over and

several have undergone internal restructuring, whereas certain companies in the

same field of business have found it beneficial to merge together into one

company.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-

offs, tender offers, & other forms of corporate restructuring. Thus important

issues both for business decision and public policy formulation have been

raised. No firm is regarded safe from a takeover possibility. On the more

positive side Mergers may be critical for the healthy expansion and growth of

the firm. Successful entry into new product and geographical markets may

require Mergers at some stage in the firm's development. Successful

competition in international markets may depend on capabilities obtained in a

timely and efficient fashion through Mergers. Many have argued that mergers

increase value and efficiency and move resources to their highest and best uses,

thereby increasing shareholder value.

In this context, it would be essential for us to understand what corporate

restructuring and mergers and acquisitions are all about. The phrase mergers

and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy,

corporate finance and management dealing with the buying, selling and


2/90

2

combining of different companies that can aid, finance, or help a growing

company in a given industry grow rapidly without having to create another

business entity.

India in the recent years has showed tremendous growth in the M&A deal. Ithas been actively playing in all industrial sectors. It is widely spreading far

across the stretches of all industrial verticals and on all business platforms. The

increasing volume is witnessed in various sectors like that of finance,

pharmaceuticals,telecom, FMCG, industrial development, automotives and

metals. The volume of M&A transactions in India has apparently increased to

about 67.2 billion USD in 2010 from 21.3 billion USD in 2009. At present the

industry is witnessing a whopping 270% increase in M&A deal in the first

quarter of the financial year. This increasing percentage is mainly attributed tothe increasing cross-border M&A transactions .Large Indian companies are

going through a phase of growth as all are exploring growth potential in foreign

markets and on the other end even international companies is targeting Indian

companies for growth and expansion. Some of the major factors resulting in this

sudden growth of merger and acquisition deal in India are favorable

government policies, excess of capital flow, economic stability, corporate

investments, and dynamic

The recent merger and acquisition 2011 made by Indian companies worldwide

are those of Tata Steel acquiring Corus Group plc, UK based company with a

deal of US $12,000 million and Hindalco acquiring Novelis from Canada for

US $6,000 million.

With these major mergers and many more on the annual chart, M&A services

India is taking a revolutionary form. Creating a niche on all platforms of

corporate businesses, merger and acquisition in India is constantly rising with

edge over competition.

An entrepreneur may grow its business either by internal expansion or byexternal expansion. In the case of internal expansion, a firm grows graduallyover time in the normal course of the business, through acquisition of newassets, replacement of the technologically obsolete equipments and theestablishment of new lines of products. But in external expansion, a firm


3/90

3

acquires a running business and grows overnight through corporatecombinations. These combinations are in the form of mergers, acquisitions,amalgamations and takeovers and have now become important features ofcorporate restructuring. They have been playing an important role in theexternal growth of a number of leading companies the world over. They have

become popular because of the enhanced competition, breaking of tradebarriers, free flow of capital across countries and globalisation of businesses. Inthe wake of economic reforms, Indian industries have also started restructuringtheir operations around their core business activities through acquisition andtakeovers because of their increasing exposure to competition both domesticallyand internationally.

Mergers and acquisitions are strategic decisions taken for maximisation of acompany's growth by enhancing its production and marketing operations. They

are being used in a wide array of fields such as information technology,telecommunications, and business process outsourcing as well as in traditionalbusinesses in order to gain strength, expand the customer base, cut competitionor enter into a new market or product segment.


4/90

4

Top 10 Mergers & Acquisitions in India for 2010

Tata Chemicals buys British salt

Tata Chemicals bought British Salt; a UK based white salt producing company

for about US $ 13 billion. The acquisition gives Tata access to very strong brine

supplies and also access to British Salts facilities as it produces about 800,000

tons of pure white salt every year

Reliance Power and Reliance Natural Resources merger

This deal was valued at US $11 billion and turned out to be one of the biggest

deals of the year. It eased out the path for Reliance power to get natural gas for

its power projects

Airtels acquisition of Zain in Africa

Airtel acquired Zain at about US $ 10.7 billion to become the third biggest

telecom major in the world. Since Zain is one of the biggest players in Africa

covering over 15 countries, Airtels acquisition gave it the opportunity to

establish its base in one of the most important markets in the coming decade

Abbotts acquisition of Piramal healthcare solutions

Abbott acquired Piramal healthcare solutions at US $ 3.72 billion which was 9

times its sales. Though the valuation of this deal made Piramals take this move,Abbott benefited greatly by moving to leadership position in the Indian market

GTL Infrastructure acquisition of Aircel towers

This acquisition was worth about US $ 1.8 billion and brought GTL

Infrastructure to the third position in terms of number of mobile towers

33000. The money generated gave Aircel the funds for expansion throughout

the country and also for rolling out its 3G services

ICICI Bank buys Bank of Rajasthan

This merger between the two for a price of Rs 3000 crore would help ICICI

improve its market share in northern as well as western India
http://www.vccircle.com/500/news/tata-chemicals-buys-uks-british-salt-for-rs-673crhttp://trak.in/tags/business/2010/05/11/reliance-ambani-brothers-past-present-future/http://trak.in/tags/business/2010/05/11/reliance-ambani-brothers-past-present-future/http://trak.in/tags/business/2010/03/31/bharti-zain-acquisition-deal/http://www.abbott.com/global/url/pressRelease/en_US/60.5:5/Press_Release_0890.htmhttp://economictimes.indiatimes.com/news/news-by-industry/telecom/GTL-Infra-acquires-Aircel-tower-business-for-Rs-8400-cr/articleshow/5446498.cmshttp://www.livemint.com/2010/05/18173143/ICICI-Bank-to-buy-Bank-of-Raja.htmlhttp://www.livemint.com/2010/05/18173143/ICICI-Bank-to-buy-Bank-of-Raja.htmlhttp://economictimes.indiatimes.com/news/news-by-industry/telecom/GTL-Infra-acquires-Aircel-tower-business-for-Rs-8400-cr/articleshow/5446498.cmshttp://www.abbott.com/global/url/pressRelease/en_US/60.5:5/Press_Release_0890.htmhttp://trak.in/tags/business/2010/03/31/bharti-zain-acquisition-deal/http://trak.in/tags/business/2010/05/11/reliance-ambani-brothers-past-present-future/http://trak.in/tags/business/2010/05/11/reliance-ambani-brothers-past-present-future/http://www.vccircle.com/500/news/tata-chemicals-buys-uks-british-salt-for-rs-673cr


5/90

5

JSW and Ispat Ki Kahani

Jindal Steel Works acquired 41% stake at Rs 2,157 crore in Ispat Industries to

make it the largest steel producer in the country. This move would also help

Ispat return to profitability with time

Reckitt Benckiser goes shopping

Reckitt acquired Paras Pharma at a price of US $ 726 million to basically

strengthen its healthcare business in the country. This was Reckitts move to

establish itself as a strong consumer healthcare player in the fast growing Indian

market

Mahindra goes international

Mahindra acquired a 70% controlling stake in troubled South Korea auto major

Ssang Yong at US $ 463 million. Along with the edge it would give Mahindra

in terms of the R & D capabilities, this deal would also help them utilise the 98

country strong dealer network of Ssang Yong

Fortis Healthcare acquisitions

Fortis Healthcare, the unlisted company owned by Malvinder and Shivinder

Singh looks set to make it two in two in terms of acquisitions. Afteracquiring

Hong Kongs Quality Healthcare Asia Ltd for around Rs 882 cr last month,

they are planning on acquiring Dental Corp, the largest dental services provider

in Australia at Rs 450 cr
http://www.financialexpress.com/news/icici-bank-cheers-jsw-steelispat-deal/727666/http://www.hindu.com/2010/12/14/stories/2010121464992200.htmhttp://trak.in/tags/business/2010/11/24/mahindra-ssangyong-acquisition/http://www.newsbycompany.com/post/view/1258/Fortis-Global-to-acquire-Hong-Kong-s-Quality-Healthcare/http://www.newsbycompany.com/post/view/1258/Fortis-Global-to-acquire-Hong-Kong-s-Quality-Healthcare/http://www.newsbycompany.com/post/view/1258/Fortis-Global-to-acquire-Hong-Kong-s-Quality-Healthcare/http://www.newsbycompany.com/post/view/1258/Fortis-Global-to-acquire-Hong-Kong-s-Quality-Healthcare/http://www.newsbycompany.com/post/view/1258/Fortis-Global-to-acquire-Hong-Kong-s-Quality-Healthcare/http://trak.in/tags/business/2010/11/24/mahindra-ssangyong-acquisition/http://www.hindu.com/2010/12/14/stories/2010121464992200.htmhttp://www.financialexpress.com/news/icici-bank-cheers-jsw-steelispat-deal/727666/


6/90

6

CHAPTER-2

MERGER & ACQUISITION IN INDIA

Thus important issues both for business decision and public policy formulationhave been raised. No firm is regarded safe from a takeover possibility. On the

more positive side Mergers & Acquisitions may be critical for the healthyexpansion and growth of the firm.

Successful entry into new product and geographical markets may requireMergers & Acquisitions at some stage in the firm's development. Successfulcompetition in international markets may depend on capabilities obtained in atimely and efficient fashion through Mergers &Acquisition's. Many haveargued that mergers increase value and efficiency and move resources to theirhighest and best uses, thereby increasing shareholder value. To opt for a merger

or not is a complex affair, especially in terms of the technicalities involved. Wehave discussed almost all factors that the management may have to look into

before going for merger.

Considerable amount of brainstorming would be required by the managementsto reach a conclusion. e.g. a due diligence report would clearly identify thestatus of the company in respect of the financial position along with the networth and pending legal matters and details about various contingent liabilities.

Decision has to be taken after having discussed the pros & cons of the proposedmerger & the impact of the same on the business, administrative costs benefits,addition to shareholders' value, tax implications including stamp duty and last

but not the least also on the employees of the Transferor or TransfereeCompany.

The corporate sector all over the world is restructuring its operations throughdifferent types of consolidation strategies like mergers and acquisitions in orderto face challenges posed by the new pattern of globalisation, which has led to

the greater integration of national and international markets. The intensity ofsuch operations is increasing with the de-regulation of various government

policies as a facilitator of the neo-liberal economic regime. Earlier also thefirms were widely using consolidation strategies, but one of the striking featuresof the present wave of mergers and acquisitions is the presence of a largenumber of cross-border deals. The intensity of cross-border operations recordedan unprecedented surge since the mid-1990s and the same


7/90

7

trend continues (World Investment Report, 2000). Earlier, foreign firmswere satisfying their market expansion strategy through the setting upof wholly owned subsidiaries in overseas markets (Jones, 2005), whichhas now become a second best option since it involves much time andeffort that may not suit to the changed global scenario, where the watchword isplaction, that is plan and action together

1.Thus getting into cross-border mergers and acquisitionsbecame the first-bestoption to the leaders and others depended on the follow-the-leader strategy.

2.The Indian corporate sector too experienced such a boom in mergers andacquisitions that led restructuring strategies especially after liberalization, this isdue to the increasing presence of subsidiaries of big Multi NationalCorporations (MNC) here as well as due to the pressure exerted by suchstrategies on the domestic firms. Besides, many MNCs realised the fact that the

Indian market is a consumer base to meet their desired objectives. Thus theentry is unavoidable. They found that resorting into mergers, acquisitions andsimilar strategies is an easy way of entry into Indian market without much costof time and money. In order to facilitate globalisation, Indian government alsoimplemented various policies which marked a paradigm shift in the operation ofthe domestic firms as it removed the patronage enjoyed by the domesticfirms under the assumptions like Infant Industry argument and opened them forthe free play of market forces. More importantly, globalization reduced the

product life cycles and the firms began to bring out new products quickly to themarket as compared to the past. Computer aided manufacturing helped toreduce the time needed for production.

Shortened product life cycles meant high R&D intensity and this has tobe recouped before the technology becomes obsolete, which becomesespecially important if a rival firm wins-the-race to innovate a newgeneration product.

These circumstances again prompted firms to engage in various kinds ofagreements to reduce the high risk associated with innovation and to become

successful through the sharing of tangible and intangible assets. Given thisbroad context, the present study is an attempt to analyse the changing nature offoreign investment in the form of mergers and acquisitions using a newdatabase created, which prevented many scholars from making detailed studies.In the second section we will be discussing why firms are crossing borders andthe global scenario of cross-border deals and its significance in world ForeignDirect Investment, the third section will be dealing with the extent and nature


8/90

8

of mergers and acquisitions in India with special emphasis on cross borderdeals.

II) Why Firms are Crossing Borders?

When we look at the business history, we can see at least four types of growthstrategies adopted by the firms. Firms started with7 domestic production and

began to export to the foreign markets, establishment of subsidiaries in overseasmarket was the next stage and as a fourth phase, firms started to acquire firmsin foreign markets instead of establishing subsidiaries.

The increasing magnitude of investment through cross-border mergers andacquisitions and its emergence as a major component of FDI even in the case ofdeveloping countries such as India, demand us to think why firms are engagingin cross-border consolidations instead of establishing subsidiaries or to engagein export oriented growth. This necessitates us to merge the prime objectives of

foreign investment with that of mergers and acquisitions. We observed that inmany cases, the objectives of foreign investment are achieved throughconsolidation in an easier way, which is the raison dtre the increasingimportance of cross-border consolidation strategies. In this section we shall tryto bring together the above-mentioned two questions such as, why do firmsinvest abroad and what makes mergers and acquisitions-a preferred mode toother strategies.

They are 1) Resource seekers, 2) Market seekers, 3) Efficiency seekers and 4)Strategic assets or Capability seekers. Presently, firms have multiple objectivesand they fall under more than one of these categories. We shall discuss each ofthese categories and try to incorporate how mergers and acquisitions enable toachieve the desired objectives of each of these categories of investors.

1) The Resource Seekers (RS)

RS include the firms, which are investing abroad for obtaining specificresources at lower prices. They are either prompted by the non availability ofthese resources in home market or lower prices prevailing in foreign locationscompared to their home country. There may be three types of Resource Seekers

such as, seeking physical resources seeking skilled and semi-skilled labourers atlower cost and those, which seek technological capability, management ormarketing expertise, and organizational skills. Under all these categories themajor motivation is to make the investing enterprise more profitable andcompetitive in the market it serves or intends to serve than the previous levels.


9/90

9

2) The Strategic Asset Seekers (SS)This group includes the firms, which try to sustain or enhance their internationalcompetitiveness or weaken that of other firms through acquiring the assets offoreign corporations. The major motive of SS is to add to the existing product

portfolio of the firm rather than to exploit the marketing and other type ofsynergies.

3) The Market Seekers (MS)

As the name suggest, these are firms, which seek new markets inorder to expand and strengthen their operations outside the home country.They invest in a particular country or region to supply goods or servicesto market in these or adjacent countries. One of the major reasons for theemergence of market oriented FDI is due to the need to follow-the leader.

4) The Efficiency Seekers (ES) or Rationalized FDI

These are firms, which try to operate more efficiently by deriving economies ofscale and scope and by reducing risk. This is essentially rationalizing thestructure of the established resource based and market seeking investment. Theyare mainly aiming to take advantage of different factor endowments, cultures,institutional arrangements, economic systems and policies and market structures

by concentrating production in a limited number of locations. There are twotypes of Efficiency Seekers. First is to take advantage of the availability andcost of traditional factor endowments in different countries and the second isto take advantage of economies of scope and scale. Rationalized FDI andStrategic Asset Seekers are moving together to achieve their desired objectives..


10/90

10

GRAPH SHOWING THE MERGERS AND ACQUISITIONS FROM-1999-2011.


11/90

11

Here are top 8 billion dollar mergers and acquisitions India has seen:

1. . Tata Steels mega takeover of European steel major Corus for $12.2billion. The biggest ever for an Indian company. This is the first big thing

which marked the arrival of India Inc on the global stage. The next bigthing everyone is talking about isTata Nano.

2. Vodafones purchase of 52% stake in Hutch Essar for about $10billion.Essar groupstill holds 32% in the Joint venture.

3. Hindalcoof Aditya Birla groups acquisition of Novellis for$6 billion.4. Ranbaxyssale to Japans Daiichi for$4.5 billion. Sing brothers sold the

company to Daiichi and since then there is no real good news coming outof Ranbaxy.

5. ONGC acquisitionof Russia based Imperial Energy for $2.8 billion.This marked the turn around of Indias hunt for natural reserves to

compete with China.

6. NTT DoCoMo-Tata Tele services deal for$2.7 billion. The secondbiggest telecom deal after the Vodafone. Reliance MTN deal if went

through would have been a good addition to the list.

7. HDFC Bankacquisition of Centurion Bank of Punjab for$2.4 billion.8. Tata Motors acquisition of luxury car makerJaguar Land

Rover for$2.3 billion. This could probably the most ambitious deal after

the Ranbaxy one. It certainly landed Tata Motors into lot of trouble.
http://trak.in/tags/business/2009/02/28/world-cant-get-enough-of-nano-the-2000-car-2/http://trak.in/tags/business/2009/02/28/world-cant-get-enough-of-nano-the-2000-car-2/http://www.indianomics.com/2009/03/03/aegis-bpo-of-essar-group-to-acquire-ictg/http://www.indianomics.com/2009/03/03/aegis-bpo-of-essar-group-to-acquire-ictg/http://www.indianomics.com/2009/03/03/aegis-bpo-of-essar-group-to-acquire-ictg/http://trak.in/tags/business/2008/09/16/india-hub-for-world-board-meetings/http://trak.in/tags/business/2008/09/16/india-hub-for-world-board-meetings/http://trak.in/tags/business/2008/11/16/tata-teleservices-stake-sale-to-docomo-and-the-future-of-indian-telecom/http://trak.in/tags/business/2008/11/16/tata-teleservices-stake-sale-to-docomo-and-the-future-of-indian-telecom/http://trak.in/tags/business/2008/09/16/india-hub-for-world-board-meetings/http://www.indianomics.com/2009/03/03/aegis-bpo-of-essar-group-to-acquire-ictg/http://trak.in/tags/business/2009/02/28/world-cant-get-enough-of-nano-the-2000-car-2/


12/90

12

CHAPTER-3

Mergers

Meaning

A merger is a combination of two companies where one corporation is

completely absorbed by another corporation. The less important company loses

its identity and becomes part of the more important corporation, which retains

its identity.

Merger Law Definition

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

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

3. In litigation, the doctrine that all of the plaintiffs prior claims aresuperceded by the judgment in the case, which becomes the plaintiffs sole

means of recovering from the defendant.

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

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


13/90

13

What Mergers actually mean:

A merger is a combination of two companies where one corporation is

completely absorbed by another corporation. It may involve absorption or

consolidation.

In absorption one company acquires another company. For example, Hindustan

Lever Limited acquired Tata Oil Mills Company.

In consolidation, two or more companies combine to form a new company. For

example, Hindustan Computers Limited, Hindustan Instruments Limited, Indian

Software Company Limited, and Indian Reprographics Limited combined to

form HCL Limited.

The less important company loses its identity and becomes part of the more

important corporation, which retains its identity. A merger extinguishes the

merged corporation, and the surviving corporation assumes all the rights,

privileges, and liabilities of the merged corporation. A merger is not the same as

a consolidation, in which two corporations lose their separate identities and

unite to form a completely new corporation. In India mergers are called

amalgamations in legal parlance.

Federal laws regulate mergers. Regulation is based on the concern that mergers

inevitably eliminate competition between the merging firms. This concern is

most acute where the participants are direct rivals, because courts often

presume that such arrangements are more prone to restrict output and to

increase prices. The fear that mergers and acquisitions reduce competition has

meant that the government carefully scrutinizes proposed mergers. On the other

hand, since the 1980s, the federal government has become less aggressive in

seeking the prevention of mergers.

Despite concerns about a lessening of competition, firms are relatively free to

buy or sell entire companies or specific parts of a company. Mergers and

acquisitions often result in a number of social benefits. Mergers can bring better

management or technical skill to bear on underused assets. They also can


14/90

14

produce economies of scale and scope that reduce costs, improve quality, and

increase output.

Antitrust merger law seeks to prohibit transactions whose probable

anticompetitive consequences outweigh their likely benefits. The critical time

for review usually is when the merger is first proposed. This requiresenforcement agencies and courts to forecast market trends and future effects.

Merger cases examine past events or periods to understand each merging party's

position in its market and to predict the merger's competitive impact.

Merger is also defined as amalgamation. Merger is the fusion of two or more

existing companies. All assets, liabilities and the stock of one company stand

transferred to Transferee Company in consideration of payment in the form of:

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


15/90

15

CHAPTER-4

Types of mergers:

Merger depends upon the purpose of the offeror company it wants to achieve.

Based on the offerors objectives profile, combinations could be vertical,

horizontal, circular and conglomeratic as precisely described below with

reference to the purpose in view of the offeror company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger with

that company to expand espousing backward integration to assimilate the

resources of supply and forward integration towards market outlets. The

acquiring company through merger of another unit attempts on reduction of

inventories of raw material and finished goods, implements its production plans

as per the objectives and economizes on working capital investments. In other

words, in vertical combinations, the merging undertaking would be either a

supplier or a buyer using its product as intermediary material for final

production.

The following main benefits accrue from the vertical combination to the

acquirer company i.e.

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

2. Has control over products specifications.


16/90

16

(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrialprocess. The acquiring firm belongs to the same industry as the target company.The mail purpose of such mergers is to obtain economies of scale in production

by eliminating duplication of facilities and the operations and broadening the

product line, reduction in investment in working capital, elimination incompetition concentration in product, reduction in advertising costs, increase inmarket segments and exercise better control on market. In horizontal merger,merger is done between two competing firms which are at the same stage ofIndustrial process. Both these companies belong to the same line of Industry.For example- a merger between Boeing & McDonnel Douglas. In this merger,

both the companies were strong in different areas. While McDonell Douglaswas strong in military aircraft programs, it did not do well on civil side, thecase with Boeing is exactly the opposite. Through this, its beneficial for both

the companies as the new company will be able to effectively handle both civiland military aircraft programs as well as the space projects. Other examples ofhorizontal merger are- Staples-Office Depot(unconsummated); ChaseManhattan-Chemical Bank; Pabst-Blatz; LTV-Republic Steel; KonishirokuPhoto-Minolta. This type of merger is mainly done with the aim of-

Promotion of elimination of state of art facilities and operations that are

duplicate in nature

Diversification of the product line

To reduce the expenditure on working capital of the company

To reduce the Research and Development expenditure

Increasing customer base through time and place utility

Depletion of competition through better concentration of products

Hence, in precise and simpler terms, horizontal mergers are formed at an aim ofachieving Economies of Scale in the production of the company.


17/90

17

(C) Circular combination:

Companies producing distinct products seek amalgamation to share commondistribution and research facilities to obtain economies by elimination of cost onduplication and promoting market enlargement. The acquiring company obtains

benefits in the form of economies of resource sharing and diversification.

Companies which are producing distinct products seek amalgamation to sharecommon research and distribution facility so as to obtain economies of scale

by elimination of duplication of cost. Acquiring a company like this alsobenefits in the forms of economies of diversification as well as resourcesharing.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM

and Modi Industries. The basic purpose of such amalgamations remains

utilization of financial resources and enlarges debt capacity through re-

organizing their financial structure so as to service the shareholders by

increased leveraging and EPS, lowering average cost of capital and thereby

raising present worth of the outstanding shares. Merger enhances the overall

stability of the acquirer company and creates balance in the companys total

portfolio of diverse products and production processes.

Some more types of mergers:

Market-extension MergerThis involves the combination of two companies that sell the same products in

different markets. A market-extension merger allows for the market that can be

reached to become larger and is the basis for the name of the merger.

Product-extension MergerThis merger is between two companies that sell different, but somewhat related

products, in a common market. This allows the new, larger company to pool


18/90

18

their products and sell them with greater success to the already common market

that the two separate companies shared.

Accretive MergerThose in which an acquiring company's earnings per share (EPS) increase. An

alternative way of calculating this is if a company with a high price to earnings

ratio (P/E) acquires one with a low P/E.
http://en.wikipedia.org/wiki/EPShttp://en.wikipedia.org/wiki/P/Ehttp://en.wikipedia.org/wiki/P/Ehttp://en.wikipedia.org/wiki/P/Ehttp://en.wikipedia.org/wiki/P/Ehttp://en.wikipedia.org/wiki/EPS


19/90

19

Acquisition

An acquisition is the purchase of one business or company by another

company or other business entity. Consolidation occurs when two companies

combine together to form a new enterprise altogether, and neither of the

previous companies survives independently. Acquisitions are divided into

"private" and "public" acquisitions, depending on whether the acquireee or

merging company (also termed a target) is or is not listed on public stock

markets. An additional dimension or categorization consists of whether anacquisition isfriendlyorhostile.

Achieving acquisition success has proven to be very difficult, while various

studies have shown that 50% of acquisitions were unsuccessful.[1]The

acquisition process is very complex, with many dimensions influencing its

outcome.[2]

Whether a purchase is perceived as being a "friendly" one or a "hostile"

depends significantly on how the proposed acquisition is communicated to and

perceived by the target company's board of directors, employees and

shareholders. It is normal for M&A deal communications to take place in a so-

called 'confidentiality bubble' wherein the flow of information is restricted

pursuant to confidentiality agreements.[3]

In the case of a friendly transaction,

the companies cooperate in negotiations; in the case of a hostile deal, the board

and/or management of the target is unwilling to be bought or the

target's board has no prior knowledge of the offer. Hostile acquisitions can, andoften do, ultimately become "friendly", as the acquiror secures endorsement of

the transaction from the board of the acquiree company. This usually requires

an improvement in the terms of the offer and/or through negotiation.
http://en.wikipedia.org/w/index.php?title=Stock_listing&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Stock_listing&action=edit&redlink=1http://en.wikipedia.org/wiki/Takeover#Friendly_takeovershttp://en.wikipedia.org/wiki/Takeover#Friendly_takeovershttp://en.wikipedia.org/wiki/Takeover#Friendly_takeovershttp://en.wikipedia.org/wiki/Takeover#Hostile_takeovershttp://en.wikipedia.org/wiki/Takeover#Hostile_takeovershttp://en.wikipedia.org/wiki/Takeover#Hostile_takeovershttp://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-0http://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-0http://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-0http://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-1http://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-1http://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-1http://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-2http://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-2http://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-2http://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Bargaininghttp://en.wikipedia.org/wiki/Bargaininghttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-2http://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-1http://en.wikipedia.org/wiki/Mergers_and_acquisitions#cite_note-0http://en.wikipedia.org/wiki/Takeover#Hostile_takeovershttp://en.wikipedia.org/wiki/Takeover#Friendly_takeovershttp://en.wikipedia.org/w/index.php?title=Stock_listing&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Stock_listing&action=edit&redlink=1


20/90

20

There is different type of acquisitions:

A. Reverse takeover: - Sometimes, however, a smaller firm will acquiremanagement control of a larger or longer established company andkeep its name for the combined entity. This is known as a reversetakeover .

a. Reverse takeover occurs when the target firm is larger than the biddingfirm. In the course of acquisitions the bidder may purchase the share orthe assets of the target company.

b. In the former case, the companies cooperate in negotiations; in the lattercase, the takeover target is unwilling to be bought or the target's boardhas no prior knowledge of the offer.

B. Reverse merger: - A deal that enables a private company to getpublicly listed in a short time period .

a. A reverse merger occurs when a private company that has strongprospects and is eager to raise financing buys a publicly listed shellcompany, usually one with no business and limited assets.

b. Achieving acquisition success has proven to be very difficult, whilevarious studies have showed that 50% of acquisitions were unsuccessful.The acquisition process is very complex, with many dimensionsinfluencing its outcome.


21/90

21

TAKEOVER

In business, a takeover is the purchase of one company (the target) by another(the acquirer, or bidder). In the UK, the term refers to the acquisition of a publiccompany whose shares are listed on a stock exchange, in contrast to theacquisition of a private company. A takeover is acquisition and both the termsare used interchangeably. Takeover differs from merger in approach to businesscombinations i.e. the process of takeover, transaction involved in takeover,determination of share exchange or cash price and the fulfillment of goals ofcombination all are different in takeovers than in mergers. For example, processof takeover is unilateral and the offeror company decides about the maximum

price. Time taken in completion of transaction is less in takeover than in

mergers, top management of the offeree company being more co-operative

There are different types of takeover:-

1. Friendly takeovers2. Hostile takeovers3. Reverse takeovers

Friendly takeovers-

Before a bidder makes an offer for another company, it usually first

informs that company's board of directors. If the board feels thataccepting the offer serves shareholders better than rejecting it, itrecommends the offer be accepted by the shareholders. In a privatecompany, because the shareholders and the board are usually the same

people or closely connected with one another, private acquisitions areusually friendly. If the shareholders agree to sell the company, then the

board is usually of the same mind or sufficiently under the orders of theshareholders to cooperate with the bidder. This point is not relevant to theUK concept of takeovers, which always involve the acquisition of a

public company..

Hostile takeovers

A hostile takeover allows a suitor to bypass a target company'smanagement unwilling to agree to a merger or takeover. A takeover isconsidered "hostile" if the target company's board rejects the offer, butthe bidder continues to pursue it, or the bidder makes the offer withoutinforming the target company's board before hand. A hostile takeover can


22/90

22

be conducted in several ways. A tender offer can be made where theacquiring company makes a public offer at a fixed price above the currentmarket price. Tender offers in the USA are regulated with the WilliamsAct.

Another method involves quietly purchasing enough stock on the open market,known as a creeping tender offer, to effect a change in management. In all ofthese ways, management resists the acquisition but it is carried out anyway.

Reverse takeovers

A reverse takeover is a type of takeover where a private company acquiresa public company. This is usually done at the instigation of the

larger, private company, the purpose being for the private company toeffectively float itself while avoiding some of the expense and timeinvolved in a conventional IPO. However, under AIM rules, a reverse take-over is an acquisition or acquisitions in a twelve month period which for anAIM company would exceed 100% in any of the class tests; or result in afundamental change in its business, board or voting control; or in the caseof an investing company, depart substantially from the investing strategystated in its admission document or, where no admission document was

produced on admission, depart substantially from the investing strategystated in its pre-admission announcement or, depart substantially from theinvesting strategy.


23/90

23

CHAPTER-5

BUSINESS ACQUISITION AGREEMENT

This agreement ("Agreement) is made this {date} of{month}, {year}, by andbetween {name of seller}, hereinafter known as "Seller," and {name of buyer},

hereinafter known as "Buyer," for the purchase of{business name}, hereinafterknown as the "Business," and all related assets.

Buyer and Seller both agree to the following provisions as conditions for thesale of the Business:

1. Purchase Description-Assets and Liabilities

Buyer is purchasing the following assets from Seller:

{Here is where the assets should be listed. If this is simply a sale of assets, andSeller is retaining name rights only to the business/corporation, please note thathere. Otherwise, make a list, including value, of each asset which will be sold tothe Buyer from the Seller. If necessary, reference "schedules," or attachments,and include them with this document, with the understanding that both partiesare signing off on the schedules as well as the provisions listed here. The list ofassets may be done in any way, but a convenient method might be to include asimple table with the details. See sample table below.}

ASSETS VALUECustomer accounts $200,000

Inventory/Goods $150,000

Rental Properties $75,000

Equipment $95,000

IntellectualProperty

$50,000

Building(s) $350,000

{also be sure to include, if applicable, that Buyer will receive title(s) to any

properties the Seller will be purchasing, as well as how the transfer of customeraccounts, if any, will proceed}

{after listing the assets, you must also include a list of liabilities, if any, that theBuyer will be assuming from the Seller. Again, using a table is an efficient wayto accomplish this task.}

DEBT AMOUNT


24/90

24

Mortgage/Lease $100,000

AdvertisingContract

$10,000

Equipment RentalContract

$30,000

2. Purchase Price

Owing to the total value of the assets and liabilities listed in Section 1, as wellas{any other considerations that fall within the purchase price}, the total

purchase price of the Business is {amount in dollars}, which will be paid in thefollowing manner:

{here you outline the details of the payment plan, including whether it will bepaid in cash, in installments, whether interest and/or late fees will be added,etc.}

3. Competition

Seller agrees that for a period of{length of time}, {he/she} will not engage inany activities related, directly or indirectly, to the Business, and will not attemptto solicit business or services from any customers, clients, etc. who originallywere such during the Seller's ownership of the Business. This non-competeclause applies to {name the geographic region, such as the state, tri-state area,nation, etc.}.

4. Indemnity

If either party is found to be in breach of this Agreement, the offending partywill indemnify the offended party for any legal fees accrued as a result of the

breach. Lost profits incurred as a result of any such breach {will/will not} berepaid by the offending party.

5. Severability

Should any provision in this Agreement be deemed in some way invalid, the

remaining provisions shall remain intact and enforceable by law.


25/90

25

6. Jurisdiction

This Agreement shall be governed by the laws and regulations of the stateof{State Name}.

Both parties agree to the provisions listed above, as well as any applicableschedules or attachments included with this Agreement.

Signed this {date} of{month}, {year}.


26/90

26

Procedure for Takeover and Acquisition

Public announcement-

Appointment of merchant banker:

The acquirer shall appoint a merchant banker registered as category I with

SEBI to advise him on the acquisition and to make a public announcement of

offer on his behalf.

Use of media for announcement:Public announcement shall be made at least in one national English daily one

Hindi daily and one regional language daily newspaper of that place where theshares of that company are listed and traded.

Timings of announcement:Public announcement should be made within four days of finalizationof negotiations or entering into any agreement or memorandum ofunderstanding to acquire the shares or the voting rights.

Contents of announcement:

Public announcement of offer is mandatory as required under the SEBIRegulations.


27/90

27

Q/A RELATING TO ACQUIISITION AND TAKEOVER-

What is meant by Takeovers & Substantial acquisition of shares?

When an acquirer takes over the control of the target company, it is termedas takeover. When an acquirer acquires substantial quantity of shares or votingrights of the Target Company, it results into substantial acquisition of shares.The term Substantial which is used in this context has been clarifiedsubsequently.

What is a Target Company?

A Target Company is a company whose shares are listed on any stock exchangeand whose shares or voting rights are acquired/being acquired or whose controlis taken over/being taken over by an acquirer.

Who is an Acquirer?

An acquirer means any individual/company/any other legal entity which intendsto acquire or acquires substantial quantity of shares or voting rights of targetcompany or acquires or agrees to acquire control over the target company. Itincludes persons acting in concert (PAC) with the acquirer.

What is meant by the term Persons Acting in Concert (PACs)?

PACs are individual(s)/company(ies)/ any other legal entity(ies) who are acting

together for a common objective or for a purpose of substantial acquisition ofshares or voting rights or gaining control over the target company pursuant toan agreement or understanding whether formal or informal. Acting in concertwould imply co-operation, co-ordination for acquisition of voting rights orcontrol, either direct or indirect.The concept of PAC assumes significance in the context of substantialacquisition of shares since it is possible for an acquirer to acquire sharesor voting rights in a company in concert with any otherperson in sucha manner that the acquisition made by them may remain individually

below the threshold limit but collectively may exceed the threshold limit.

Unless the contrary is established certain entities are deemed to bepersons acting in concert like companies with its holding company orsubsidiary company, mutual funds with its sponsor / trustee / assetmanagement company, etc.


28/90

28

How substantial quantity of shares or voting rights is defined?The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,1997 has defined substantial quantity of shares or voting rights distinctlyfor two different purposes:(I) Threshold of disclosure to be made by acquirer(s):1) 5% or more but less than 15% shares or voting rights: A person who,alongwith PAC, if any, (collectively referred to as Acquirer hereinafter)acquires shares or voting rights (which when taken together with his existingholding) would entitle him to exercise 5% or 10% or 14% shares or votingrights of target company, is required to disclose the aggregate of hisshareholding to the target company within 2 days of acquisition or within 2days of receipt of intimation of allotment of shares.2) More than 15% shares or voting rights:(a) Any person who holds more than 15% shares but less than 75% or voting

rights of target company, and who purchases or sells shares aggregating to 2%

or more shall disclose the purchase and sale of aggregate shareholding to thetarget company and the stock exchanges within 2 working days.

(b) Any person who holds more than 15% shares or voting rights of targetcompany or every person having control over the Target Company within 21days from the financial year ending March 31 as well as the record date fixedfor the purpose of dividend declaration, disclose every year his aggregateshareholding to the target company.The target company, in turn, is required to inform all the stock exchangeswhere the shares of target company are listed, every year within 30 daysfrom the financial year ending March 31 as well as the record date fixedfor the purpose of dividend declaration.

What is a Public Announcement (PA)?

A public announcement is an announcement made in the newspapersby the acquirer primarily disclosing his intention to acquire shares of thetarget company from existing shareholders by means of an open offer.

What information do I get in the Public Announcement?

The disclosures in the announcement include the offer price, number of sharesto be acquired from the public, identity of acquirer, purpose of acquisition,future plans of acquirer, if any, regarding the target company, change in controlover the target company, if any, the procedure to be followed by acquirer in


29/90

29

accepting the shares tendered by the shareholders and the period within whichall the formalities pertaining to the offer would be completed.

What is the objective of Public Announcement?

The Public Announcement is made to ensure that the shareholders of the targetcompany are aware of an exit opportunity available to them through ensuingopen offer.

Who is required to make a Public Announcement and when is the

Public Announcement required to be made?

The Acquirer is required to make PA through the Merchant Banker (MB)

within four working days of the entering into an agreement to acquire shares ordeciding to acquire shares/voting rights of target company or after any suchchange or changes as would result in change in control over the target company.Incase of indirect acquisition or change in control, acquirer can make Publicannouncement within 3 months of communication , acquisition or change incontrol or restructuring of the parent or the Company holding shares of orcontrol over the target Company in India.

What is a letter of offer?

A letter of offer is a document addressed to the shareholders of the targetcompany containing disclosures of the acquirer/PACs, target company, theirfinancials, justification of the offer price, the offer price, number of shares to beacquired from the public, purpose of acquisition, future plans of acquirer, ifany, regarding the target company, change in control over the target company,if any, the procedure to be followed by acquirer in accepting the shares tendered

by the shareholders and the period within which all the formalities to the offerwould be completed.

Can an acquirer withdraw the offer once made?

No, the offer once made can not be withdrawn except in the followingcircumstances:a. statutory approval(s) required have been refused;

b. the sole acquirer being a natural person has died;


30/90

30

How can I avail the offer if I have not received the letter of offer?

The PA contains procedure for such cases i.e. where the shareholders do notreceive the letter of offer or do not receive the letter of offer in time. Theshareholders are usually advised to send their consent to registrar to offer, if anyor to MB on plain paper stating the name, address, number of shares held,distinctive folio no., number of shares offered and bank details alongwith thedocuments mentioned in the PA, before closure of the offer. The PA and theletter of offer along with the form of acceptance is available on the SEBIwebsite atwww.sebi.gov.in.

Am I compulsorily required to accept the offer?

No. The decision to accept or forgo the offer lies exclusively with you.

How do I decide as to whether I should hold the shares or accept theoffer or sell the shares in the share market?

The decision as to whether you should hold your shares or accept the offer orshould sell the shares in the share market lies with you. However, you shouldread the letter of offer and take a decision in this regard after consideringvarious factors such as the price of the offer, number of shares likely to beaccepted under the offer, etc.

Will be compensated for delay in getting payment under the offer?

Acquires are required to complete the payment of consideration to shareholderswho have accepted the offer within 30 days from the date of closure of theoffer. In case the delay in payment is an account of non receipt of statutoryapprovals and if the same is not due to wilful default or neglect on part of theacquire, the acquires would be liable to pay interest to the shareholders for thedelayed period in accordance with Regulations.If the delay in payment of consideration is not due to the above reasons, itwould be treated as a violation of the Regulations and therefore, also liable for

other action in terms of the Regulations.

Is the acquirer required to accept all my shares under the open offer?

No, if the shares received by the acquirer under the offer are more than theshares agreed to be acquired by him, the acceptance would be on a

proportionate basis
http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.sebi.gov.in/


31/90

31

Reasons why companies merge:

The principal economic rationale of a merger id that the value of the combinedentity is expected to be greater than the sum of the independent values of the

merging entities. For example, if firms A and B merge, the value of the

combined entity, V (AB), is expected to be greater than (VA+VB), the sum of

the independent values of A and B.

A variety of reasons like growth, diversification, economies of scale,

managerial effectiveness and so on are cited in support of merger proposals.

Some of them appear to be plausible in the sense that they create value; others

seem to be dubious as they dont create value.

Plausible reasons:

The most plausible reasons in favor of mergers are strategic benefits, economies

of scale, economies of scope, economies of vertical integration, complementary

resources, tax shields, utilization of surplus funds, and managerial effectiveness.

Strategic benefit:

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

It offers a special timing advantage because the merger alternativeenables the firm to leap frog several stages in the process of

expansion.

It may entail less risk and even less cost In a saturated market, simultaneous expansion and replacement(through merger) makes more sense than creation of additionalcapacity through internal expansion

Economies of scale:When two or more firms combine, certain economies are realized due to larger

volume of operations of the combined entity. These economies arise because of


32/90

32

more intensive utilization of production capacity, distribution networks, and

research and development facilities, data processing systems and so on.

Economies of scale are prominent in horizontal mergers where the scope of

more intensive utilization of resources is greater. Even in conglomerate mergers

there is scope for reduction of certain overhead expenses.

Economies of scope:A company may use a specific set of skills or assets that it possesses to widen

the scope of its activities. For example: proctor and gamble can enjoy

economies or scope if it acquires a consumer product company that benefits

from its highly regarded consumer marketing skills.

Economies of vertical integration:

When companies engaged at different stages of production or value chain

merge, economies of vertical integration may be realized. For example, the

merger of a company engaged in oil exploration and production (like ONGC)

with a company engaged in refining and marketing (like HPCL) may improve

co-ordination and control.

Vertical integration, however, is not always a good idea. If a company does

everything in-house it may not get the benefit of outsourcing from independent

suppliers who may be more efficient in their segments of the value chain.

Complementary resources:If two firms have complementary resources, it may make sense for them to

merge. A good example of a merger of companies which complemented each

other well is the merger of Brown Bovery and Asea that resulted in

AseaBrownBovery (ABB). Brown Bovery was international, where as Asea

was not. Asea excelled in management, whereas Brown Bovery did not. The

technology, markets, and cultures of the two companies fitted well.

Tax shields:When a firm with accumulated losses and/or unabsorbed depreciation merges

with a profit making firm, tax shields are utilized better. The firm with


33/90

33

accumulated losses and/or unabsorbed depreciation may not be able to derive

tax advantages for a long time. However, when it merges with a profit making

firm, its accumulated losses and/or unabsorbed depreciation can be set off

against the profits of the profit making firm and the tax benefits can be quickly

realize

Utilization of surplus funds:A firm in a mature industry may generate a lot of cash but may not have

opportunities for profitable investment. Such a firm ought to distribute generous

dividends and even buy back its shares, if the same is possible. However, most

managements have a tendency to make further investments, even though they

may not be profitable. In such a situation, a merger with another firm involving

cash compensation often represents a more efficient utilization of surplus funds.

Managerial effectiveness:One of the potential gains of merger is an increase in managerial effectiveness.

This may occur if the existing management team, which is performing poorly,

is replaced by a more effective management team. Another allied benefit of a

merger may be in the form of greater congruence between the interests of themanagers and the share holders.

Dubious Reasons:

Often mergers are motivated by a desire to diversify and lower financing costs.

Prima facie, these objectives look worthwhile, but they are not likely to enhance

value.

Diversification:A commonly stated motive for mergers is to achieve risk reduction through

diversification. The extent, to which risk is reduced, of course, depends on the

correlation between the earnings of the merging entities. While negative

correlation brings greater reduction in risk, positive correlation brings lesser

reduction in risk.


34/90

34

Corporate diversification, however, may offer value in at least two special cases

1) If a company is plagued with problems which can jeopardize its existenceand its merger with another company can save it from potential

bankruptcy.2) If investors do not have the opportunity of home made diversification

because one of the companies is not traded in the marketplace, corporatediversification may be the only feasible route to risk reduction.

Lower financing costs:The consequence of larger size and greater earnings and stability, many argue,

is to reduce the cost of borrowing for the merged firm. The reason for this is

that the creditors of the merged firm enjoy better protection than the creditors of

the merging firms independently.

Increase Supply-Chain Pricing Power:By buying out one of its suppliers or one of the distributors, a business can

eliminate a level of costs. If a company buys out one of its suppliers, it is able to

save on the margins that the supplier was previously adding to its costs; this

is known as a vertical merger. If a company buys out a distributor, it may be

able to ship its products at a lower cost.

Eliminate Competition:Many M&A deals allow the acquirer to eliminate future competition and gain a

larger market share in its product's market. The downside of this is that a large

premium is usually required to convince the target company's shareholders to

accept the offer. It is not uncommon for the acquiring company's

shareholders to sell their shares and push the price lower in response to the

company paying too much for the target company.
http://www.investopedia.com/terms/m/margin.asphttp://www.investopedia.com/terms/v/verticalmerger.asphttp://www.investopedia.com/terms/v/verticalmerger.asphttp://www.investopedia.com/terms/m/margin.asp


35/90

35

Synergy:The most used word in M&A is synergy, which is the idea that by combining

business activities, performance will increase and costs will decrease.

Essentially, a business will attempt to merge with another business that has

complementary strengths and weaknesses. 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:

! 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 market place.

! 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.

! Organizational Competencies - Acquiring human resources and intellectual

capital can help improve innovative thinking and development within the

company.

! Broader Market Access - Acquiring a foreign company can give a company

quick access to emerging global markets.
http://www.investopedia.com/terms/s/synergy.asphttp://www.investopedia.com/terms/s/synergy.asp


36/90

36

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

! Bargain Purchase - It may be cheaper to acquire another company then to

invest internally. 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 goout and build new facilities on your own.

! Diversification - It may be necessary to smooth-out earnings and achieve more

consistent long-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 growth and profitability. Consequently, a merger and acquisition is

made to boost poor performance.

! Undervalued Target - The Target Company may be undervalued and thus, it

represents a good investment. Some mergers are executed for "financial"

reasons and not strategic reasons. For example, Kohlberg Kravis & Roberts

acquires poor performing companies and replaces the management team inhopes of increasing depressed values.


37/90

37

THE OVERALL PROCESS-

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 (such as 10% market growth over the next 3 years) 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 for acquisition. A complete rough plan

should be developed on how growth will occur through M & A, includingresponsibilities 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

compliment 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.


38/90

38

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, 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 beenselected. 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. We have already calculated a value for our company (acquiring

company). We now want to calculate a value for the target as well as all other

costs associated with the M & A. 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?


39/90

39

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 a merger 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.

! 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 worth noting:

! Generally, tender offers are more expensive than negotiated M & A's due to

the resistance 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. As you may recall, Phase I Due Diligence started

when we selected our target company. 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


40/90

40

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 finalphase within the M & A Process, the integration of the 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.

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

redundancies. Both strategic and operating decisions will remain decentralized

and autonomous. If post merger integration is successful, then we should

generate synergy values. However, before we embark on a formal merger and

acquisition program, perhaps we need to understand the realities of mergers and

acquisitions.


41/90

41

Purposes for mergers are short listed below: -

(1)Procurement of supplies:

To safeguard the source of supplies of raw materials or intermediary product; to obtain

economies of purchase in the form of discount, savings in transportation costs, overhead

costs in buying department, etc.

To share the benefits of suppliers economies by standardizing the materials

(2)Revamping production facilities:

To achieve economies of scale by amalgamating production facilities through more intensive

utilization of plant and resources;

To standardize product specifications, improvement of quality of product, expanding market

and aiming at consumers satisfaction through strengthening after sale services;

To obtain improved production technology and know-how from the offeree company

To reduce cost, improve quality and produce competitive products to retain and improve

market share.

(3) Market expansion and strategy:

To eliminate competition and protect existing market;

To obtain a new market outlets in possession of the offeree;

To obtain new product for diversification or substitution of existing products and to enhance

the product range;

Strengthening retain outlets and sale the goods to rationalize distribution;

To reduce advertising cost and improve public image of the offeree company;

Strategic control of patents and copyrights

(4) Financial strength:

To improve liquidity and have direct access to cash resource;


42/90

42

To dispose of surplus and outdated assets for cash out of combined enterprise;

To enhance gearing capacity, borrow on better strength and the greater assets backing;

To avail tax benefits;

To improve EPS (Earning Per Share)

(5) General gains:

To improve its own image and attract superior managerial talents to manage its affairs;

To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror companys own developmental plans.

A company thinks in terms of acquiring the other company only when it has arrived at its

own development plan to expand its operation having examined its own internal strength

where it might not have any problem of taxation, accounting, valuation, etc. but might feel

resource constraints with limitations of funds and lack of skill managerial personnels. It has

to aim at suitable combination where it could have opportunities to supplement its funds by

issuance of securities; secure additional financial facilities, eliminate competition and

strengthen its market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through alternative

type of combinations which may be horizontal, vertical, product expansion, market

extensional or other specified unrelated objectives depending upon the corporate strategies.

Thus, various types of combinations distinct with each other in nature are adopted to pursue

this objective like vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit

despite competitiveness in providing rescues to each other from hostile takeovers and

cultivate situations of collaborations sharing goodwill of each other to achieve performance


43/90

43

heights through business combinations. The combining corporates aim at circular

combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between thetwo combining business houses. Such integration could be operational or financial. This

gives birth to conglomerate combinations. The purpose and the requirements of the offeror

company go a long way in selecting a suitable partner for merger or acquisition in business

combinations.


44/90

44

Motivations for mergers

Mergers are permanent form of combinations which vest in management complete control

and provide centralized administration which are not available in combinations of holding

company and its partly owned subsidiary. Shareholders in the selling company gain from the

merger and takeovers as the premium offered to induce acceptance of the merger or takeover

offers much more price than the book value of shares. Shareholders in the buying company

gain in the long run with the growth of the company not only due to synergy but also due to

boots trapping earnings.

Mergers are caused with the support of shareholders, managers ad promoters of the combingcompanies. The factors, which motivate the shareholders and managers to lend support to

these combinations and the resultant consequences they have to bear, are briefly noted belowbased on the research work by various scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to merger should enhance in

value. The sale of shares from one companys shareholders to another and holding

investment in shares should give rise to greater values i.e. the opportunity gains in alternative

investments. Shareholders may gain from merger in different ways viz. from the gains and

achievements of the company i.e. through

Realization of monopoly profits; Economies of scales; Diversification of product line; Acquisition of human assets and other resources not available otherwise; Better investment opportunity in combinations.

One or more features would generally be available in each merger where

shareholders may have attraction and favor merger.

(2) From the standpoint of managers

Managers are concerned with improving operations of the company, managing the affairs of

the company effectively for all round gains and growth of the company which will provide

them better deals in raising their status, perks and fringe benefits. Mergers where all these

things are the guaranteed outcome get support from the managers. At the same time, where

managers have fear of displacement at the hands of new management in amalgamated


45/90

45

company and also resultant depreciation from the merger then support from them becomes

difficult.

(3) Promoters gains

Mergers do offer to company promoters the advantage of increasing the size of theircompany and the financial structure and strength. They can convert a closely held and private

limited company into a public company without contributing much wealth and without losing

control.

(4) Benefits to general public

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

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

the companies under merger plan.

(a) Consumers

The economic gains realized from mergers are passed on to consumers in the form of lower

prices and better quality of the product which directly raise their standard of living and

quality of life. The balance of benefits in favor of consumers will depend upon the fact

whether or not the mergers increase or decrease competitive economic and productive

activity which directly affects the degree of welfare of the consumers through changes in

price level, quality of products, after sales service, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or other acquiring company may

have the effect on both the sides of increasing the welfare in the form of purchasing powerand other miseries of life. Two sides of the impact as discussed by the researchers and

academicians are: firstly, mergers with cash payment to shareholders provide opportunities

for them to invest this money in other companies which will generate further employment

and growth to uplift of the economy in general. Secondly, any restrictions placed on such

mergers will decrease the growth and investment activity with corresponding decrease in

employment. Both workers and communities will suffer on lessening job opportunities,

preventing the distribution of benefits resulting from diversification of production activity.


46/90

46

(c) General public

Mergers result into centralized concentration of power. Economic power is to be understood

as the ability to control prices and industries output as monopolists. Such monopolists affectsocial and political environment to tilt everything in their favor to maintain their power ad

expand their business empire. These advances result into economic exploitation. But in a free

economy a monopolist does not stay for a longer period as other companies enter into the

field to reap the benefits of higher prices set in by the monopolist. This enforces competition

in the market as consumers are free to substitute the alternative products. Therefore, it is

difficult to generalize that mergers affect the welfare of general public adversely or

favorably.


47/90

47

Steps in bringing about mergers of companies

Due diligence:

Its a term used for a number of concepts involving either the performance of an

investigation of a business or person, or the performance of an act with a certain

standard of care. It can be a legal obligation, but the term will more commonly

apply to voluntary investigations. A common example of due diligence in

various industries is the process through which a potential acquirer evaluates a

target company or its assets foracquisition.

Origin of the term "Due Diligence":

The term "Due Diligence" first came into common use as a result of the US

Securities Act of 1933.

The US Securities Act included a defense referred to in the Act as the "Due

Diligence" defense which could be used by broker-dealers when accused of

inadequate disclosure to investors of material information with respect to the

purchase ofsecurities.

So long as broker-dealers conducted a "Due Diligence" investigation into the

company whose equity they were selling, and disclosed to the investor what

they found, they would not be held liable for nondisclosure of information that

failed to be uncovered in the process of that investigation.

The entire broker-dealer community quickly institutionalized as a standard

practice, the conducting of due diligence investigations of any stock offerings in

which they involved themselves.

Due diligence in capstone refers to performing the needful amount of effort, as

in 'doing diligence'.

Originally the term was limited to public offerings of equity investments, but

over time it has come to be associated with investigations of private mergers
http://en.wikipedia.org/wiki/Standard_of_carehttp://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/Securities_Act_of_1933http://en.wikipedia.org/wiki/Broker-dealerhttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Equityhttp://en.wikipedia.org/wiki/Capstonehttp://en.wikipedia.org/wiki/Capstonehttp://en.wikipedia.org/wiki/Equityhttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Broker-dealerhttp://en.wikipedia.org/wiki/Securities_Act_of_1933http://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/Standard_of_care


48/90

48

and acquisitions as well. The term has slowly been adapted for use in other

situations.

Due diligence in business transactions:

Inbusiness transactions, the due diligence process varies for different types of

companies. The relevant areas of concern may include the financial, legal,

labor, tax, environment and market/commercial situation of the company. Other

areas include intellectual property, real and personal property, insurance and

liability coverage, debt instrument review, employee benefits and labor matters,

immigration, and international transactions.

Approval by shareholders:

A meeting of share holders should be held by each company for passing the

scheme of mergers at least 75% of shareholders who vote either in person or by

proxy

Documents

Introduction to Mergers and Acquisition