Mergers and Acquisitions Tax Impact and Valuation 1218303144224732 8

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Roles of Management Graduates in

Mergers and Acquisitions

By

Prof. Augustin Amaladas M.Com.,AICWA.,PGDFM.,B.Ed.For IMIS Bhubaneshwar

28/04/08 ±at 9.20 AM



Issues related to Mergers and

Acquisitions.

Direct Tax implications

Sales tax implications

Foreign Direct investments

Method of valuation

Anti Trust Act

Financing of Mergers and Aquisitions

Role of Investment Bankers

Accounting of Mergers.



Recent Mergers and

Acquisitions

HORIZONTAL MERGER

As Ford announced the sale of the two British

iconic cars to Tata Motors Ltd.for 2.3 billion.

Ford acquired Jaguar for $2.5 bn in 1989 and

Land Rover for $2.75 bn in 2000 but put them

on the market last year after posting losses of $12.6 bn in 2006 - the heaviest in its 103-year

history.



The Hutch and Vodafone

merger

Vodafone(Briton)

A Foreign company

HTIL(Whampoa group

of Li-Ka Shing.Hong Kong

A foreign company

HutchisonEssor

Indian

Company

67%

Takes over

Asim Ghosh-12%

A.Singh and other companies

(Minority)

Essor group



INCOME TAX RELATED ISSUES FOR AMALGAMATION

CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2(1B)

1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE

THE ASSETS OF THE TRANSFREE CO.2. SHARE HOLDERS HOLDING NOT LESS THAN 3/4TH IN VALUE

OF SHARES OTHER THAN SHARES ALREADY HELD SHOULDBECOME SHARE HOLDERS OF AMALGAMATED COMPANY

EX. NO. OF SHARES OF Altd CO. 1,00,000

NO. OF SHARES HELD BY Bltd IN Altd IS 20,000

NOMINAL VALUE OF SHARE IS RS.10ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 =

60,000 TO BE THE SHARE HOLDES OF B CO.

NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHAREHOLDERS



OTHER CONDITIONS THE AMALGAMATED CO. IS AN INDIAN CO.

EXCEPTION

1. IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFOREMERGER AND SUCH FOREIGN CO. TAKEN OVER BY

ANOTHER FOREIGN CO.

2. ATLEAST 25% OF THE FOREIGN CO. (BEFORE

MERGER) TO BE SHARE HOLDERS OF THE NEW

FOREIGN CO.

? WHAT IS THE BENEFIT TO THE AMALGAMATED CO.

AMALGAMATING CO.(OLD CO.)



NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BYTHE TRANSFEROR CO. UNDER SEC 47(VI) OF I.T ACT

? CAN NEW CO. CARRY FORWAD AND SET OF LOSS ANDDEPRECIATION

SEC 72 A TO BE FULFILLED1. ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR

MORE YEARS

2. 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARSBEFORE AMALGAMATION

3. THE AMALGAMATED CO. CONTINUES TO HOLD 3/4TH OF

BOOK VALUE ATLEAST FOR 5 YEARS4. NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS

5. NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLEDCAPACITY BEFORE END OF 5 YEARS AND SHOULDCONTINUE FOR 5 YEARS



A LTD AMALGAMATES WITH B

LTD AS ON 1st April 2008

PARTICULARS DOES NOT

SATISFY SEC

2(1B) & 72 A

SATISFIES 2(1B)

BUT DOES NOT

SATISFY 72 A

SATISFIES

BOTH 2(1B) &

72 A

A MERGES

WITH B (A GOES

OUT)

NO BENEFIT

TO A & B

DOES NOT

ATTRACT

CAPITAL GAINFOR A BUT NO

GAIN FOR B

NO CAPITAL

GAIN TAX &

ACCUMULATED LOSSES &

UNABSORBED

DEPERICIATIO

N CAN BE

CARRIED

FORWARD



? If B merges with A . If B goes out of market who

gains under above 3 situations

? If A&B merge with c. what are the tax implication

under above situations?. Assume B is a loss making co. Can accumulated

losses & unabsorbed depreciations be carried

forward and set off by the new company?

? If C is not an Indian co?



Tax Concession To Share

Holders Of Amalgamating Co.

No capital gain tax provided, new co. is an

Indian co.& Shareholders are acquiredeverything in shares



EXERCISE

PARTICULARS CO. A CO. B

EAT 1,40,000 37,500

NO. OF SHARES 20,000 7,500

EPS 7 5

MARKET PRICE 70 40

P/E RATIO 10 8



Co. A is acquiring co. B. Exchanging one

share for every 1.5 shares of B Ltd & P/E

ratio will continue even after merger

? Are they better or worse of than they were

before in merger

?? A is an Indian co.

? A is a foreign co.

? A merges with T & formed a new co. AT ltd

? What are the tax planning required before &

after merger



CONCLUSIONS

EXCHANGE AT EPS ± NO EFFECT ON EPS

AFTER MERGER EXCHANGE MORE THAN EPS RATIO ±

COMPANY WITH LOWER EPS GAINS

IF LESS THAN EPS RATIO ± COMPANY

WITH HIGHER EPS BEFORE MERGER

GAINS



CONCLUSION

IF SHARES ARE EXCHANGED BASED

ON CURRENT MARKET PRICE PER

SHARE , POST MARKET PRICE

SHARE INCREASED AT HIGHER

RATE THAN EXCHANGED BELOW

THIS RATIO Boot strap effect



CONCLUSION

FIRM WITH HIGHER P/E RATIO CAN

ACQUIRE FIRM WITH LOWER P/E

RATIO WHICH WILL INVARIABLY

INCREASES MARKET VALUE AFTER

MERGER



Conclusion Fulfill section 2(1B) of Income tax act by transferor company

Amount to be in the form of shares

No cash to be received

Foreign Direct investments in selected sector can not exceed 74%by foreign company

Fulfill section 72A of the IT act so as to reap the benefit bytransferee company

Shareholders can not transfer their holdings with in 5 years.

Sales tax at the rate of 8% can not be avoided.

Set off and carry forward of losses is possible.

What are the losses can be carried forward and set off? How manyyears?



Some Facts-USA Companies

1897-1904-horizontal Mergers

Monopolistic Market structure

Mega merger between US Steel andCarnegie Steel.It also merged with 785separate firms-75% of Steel production

of US.As a result: ???? What happened to

Standard Oil?



Standard Oil(SO)

Broken in to 30 Companies. Some of them are

SO of New Jersey named EXXON

SO of New York named MOBIL

SO of California renamed CHEVRON

SO of Indiana renamed AMOCO

What is ANTI TRUST Act? What is known in

India?

HCL was formed?



HCL

Hindustan Computers, Hindustan

Reprographic, Hindustan

Telecommunications and Indian Software

Ltd.



In February 2008, as many as 38 cross-border

deals were announced with total value of $2.80

billion, of which 27 were outbound deals with avalue of $2.57 billion

.In March 2008 it has crossed $10 billion in

investment by Indian Companies outside India.



Diologic Meanwhile, global financial information provider

Diologic in its latest report said that India-targeted

M&A volumes reached $11.9 billion through 345deals so far this year. US was the leadingacquiring country with deals worth 1.6 billiondollars, followed by the UK with $904 million and

Germany with USD 584 million.



Some Facts Between 1926 and 1930- there were 4600

mergers took place

Result of which between 1919 and 1930 12,000companies went out of market.

The second wave came to an end whenstock market crashed on October29,1929.

Investment Bankers played in the first two phases of mergers.



1965-69 in USA Management principles were applied in

industries.

Management graduates were employed to manageconglomerate mergers.

There were 6000 mergers which leads to 25000firms disappeared.

Investment Bankers do not finance most of thesemergers

Finance:-????



Equity financing



EXERCISECOMPANY A

NO. OF SHARES 2

LACS

MARKET VALUE

PER SHARE RS.25

EPS RS.3.125

COMPANY B

NO. OF SHARES 1

LAC

MARKET VALUE

RS.18.75

EPS RS.2.5



PRICE EARNING RATIO

APPROACH

MEANING

COMPUTATION :P/E RATIO = MP/EPS

EPS = EAT/NO. OF EQUITY SHARES

MARKET PRICE = P/E (NO. OF TIMES)* EPS



EXAMPLEPRE MERGER SITUATION

FIRM A FIRM B

EAT 6,25,000 2,50,000

NO. OF SHARES 2,00,000 1,00,000

EPS 3.125 2.5

P/E RATIO(TIMES) 8 7.5

MARKET PRICE PER

SHARE(MPS)

25 18.75

TOTAL MARKET

VALUE (N*MPS) OR

(EAT*P/E RATIO)

50,00,000 18,75,000



CONCLUSION

IF SHARES ARE EXCHANGED BASED

ON CURRENT MARKET PRICE PER

SHARE , POST MARKET PRICE

SHARE INCREASED AT HIGHER

RATE THAN EXCHANGED BELOW

THIS RATIO Boot strap effect



MARKET VALUE AFTER MERGER =MARKET VALUE BEFORE MERGER =

68,75,000 NET GAIN = 15,00,000

? IF EXCHANGE RATIO IS 2.5:1 WHO GAINSWHO LOSES

? IF EXCHANGE RATIO IS 1:1 WHO GAINSWHO LOSES

? HOW TO CALCULATE TOLERABLESHARE EXCHANGE RATIO



DETERMINATION OF

TOLERABLE SHARE

EXCHANGE RATIO

TOTAL MV

LESS: MINIMUM TO BE GIVEN TO B

75,00,000

10,00,000

NET BENEFIT TO A 65,00,000

NO. OF SHARES OF A TO A CO.

SHARE HOLDERS

1,00,000

DESIRED POST MERGER MPS 65 PER SHARE

NO. OF EQUTY SHARES TO BE

ISSUED BASED ON DESIREDMARKET PRICE

10,00,000/65 = 15,385 SHARES

TOLERANCE SHARE EXCHANGE

RATIO

50,000/15385 = 3.25 SHARES OF FIRM

B, 1 SHARE IN FIRM A

1:3.25



CONCLUSION

FIRM WITH HIGHER P/E RATIO

CAN ACQUIRE FIRM WITH LOWER

P/E RATIO WHICH WILL

INVARIABLY INCREASES MARKET

VALUE AFTER MERGER



POST MERGER SITUATION 1

(BASED ON CURRENT

MARKET PRICE

SITUATION 2

EXCHANE RATIO/ SWAP

RATIO (ASSUMING)

2.5:3.125=.8 1 : 1

EAT(COMBINED FIRM) 6.25+2.5=8.75 8,75,000

NO. OF SHARES 2.8 lakhs 2,00,000+1,00,000=3,00,0

00

EPS 8.75/2.8=3.125 8,75,000/3,00,000=2.91/

P/E RATIO

(ASSUMED TO BE THE

SAME)

8 7.5

MPS 3.125*8=25 21.825

TOTAL MARKET VALUE 70,00,000 65,47,500



ACCOUNTING FOR

AMALGAMATION POOLING INTEREST METHOD

CONDITIONS AS PER AS 14:

1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TOBE THE ASSETS OF THE TRANSFREE CO.

2. AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS

SHOULD BE SHAREHOLDERS OF NEW CO.

3. PURCHACE CONSIDERATION TO BE SETTLED BY THE

NEW CO.

4. THE BUSINESS OF NEW CO. SHOULD CONTINUE

5. NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK

VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR

CO.



Life Education

Abraham Lincolin



Thank You All.



Pricing of Capital issues Step-I

Total assets

Less: Preference Capital

Secured and unsecured borrowings Current liabilities

Contingent liabilities

---------------------------------------------------

A.Net Worth

---------------------------------------------------



Method II(Liability Approach) Equity Share capital

Add: Free reserves

-------------------------------

Less:-

Contingent Liabilities

---------------------------------------------

Net worth

--------------------------------------------



2.Profit Earning Capacity Value-

PECV Weighted Adjusted Average Profit before Tax

Less: Provision for Tax at %

------------------------------------------------Weighted average profit after Tax

Less : Preference dividend

----------------------------------------------

Net profit after Tax and dividend

Number of Equity shares including Fresh and bonus shares-------------------------------------------------------------------------

EPS

PECV= Capitalisation of Profit at 15%/12%/10%/8% respectively

= Net Profit After tax and dividend*100/15



3.Fair value (Net Asset value +Profit Earning Capacity

Value)/2



4.Average Market Price Year I High Low Average

Year II Year (Current Year)

4. Monthwise: 1 2

3

4 etc for 12 months

(Average market price for the three years)



5. Capitalisation rate If MV not more than 20% of FV-15%

If MV more than 20%-50% -12% Between 51-75 - 10%

Above 75% - 8%



PE- Multiple Average P/E ratio of related companies are

Considered to discount

Documents

Mergers and Acquisitions Tax Impact and Valuation 1218303144224732 8