Mergers Project

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Effects of

Mergers & acquisition

OnPerformance of company

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Table of contents

Sr.

No.title Page no.

1 Introduction 2

2Mergers: meaning, definition and what mergers

actually mean4

3 Mergers vs. acquisitions 64 Purpose of mergers 75 Reasons why companies merge 9

6 Motivation for mergers 137 Types of mergers 168 Concerns for mergers 189 Steps in bringing about mergers of companies 2010 Legal procedure for mergers 2211 Corporate merger procedure 2412 Why mergers fail? 24

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Cases of mergers

Case 1: Arcelor-Mittal merger

Case 2: deutsche-Dresdner bank merger

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2714 references 29

Introduction

We have been learning about the companies coming together to fromanother company and companies taking over the existing companies toexpand their business.

With recession taking toll of many Indian businesses and the feeling ofinsecurity surging over our businessmen, it is not surprising when we

hear about the immense numbers of corporate restructurings takingplace, especially in the last couple of years. Several companies have

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been taken over and several have undergone internal restructuring,whereas certain companies in the same field of business have found itbeneficial to merge together into one company.

In this context, it would be essential for us to understand what corporaterestructuring and mergers are all about.

All our daily newspapers are filled with cases of mergers, acquisitions,spin-offs, tender offers, & other forms of corporate restructuring. Thusimportant 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 may be critical for the healthyexpansion and growth of the firm. Successful entry into new product andgeographical markets may require Mergers at some stage in the firm's

development. Successful competition in international markets maydepend on capabilities obtained in a timely and efficient fashion throughMergers. Many have argued that mergers increase value and efficiencyand move resources to their highest and best uses, thereby increasingshareholder value.

To opt for a merger or not is a complex affair, especially in terms of thetechnicalities involved. We have discussed almost all factors that themanagement may have to look into before going for merger.Considerable amount of brainstorming would be required by the

managements to reach a conclusion. e.g. a due diligence report wouldclearly identify the status of the company in respect of the financialposition along with the net worth and pending legal matters and detailsabout various contingent liabilities. Decision has to be taken after havingdiscussed the pros & cons of the proposed merger & the impact of thesame on the business, administrative costs benefits, addition toshareholders' value, tax implications including stamp duty and last butnot the least also on the employees of the Transferor or TransfereeCompany.

Corporate restructuring refers to a broad array of activities thatexpands or contracts a firms operation or substantially modify itsfinancial structure or bring about a significant change in itsorganizational structure and internal functioning. It includes mergers,takeovers, acquisitions, slump sales, demergers etc.

Mergers, acquisitions and restructuring have become a major force inthe financial and economic environment all over the world. Essentiallyan American phenomenon till mid-1970s, they have become a dominant

global business theme since then.

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On the Indian scene, too, corporates are seriously looking at mergers,acquisitions and restructuring which has indeed become the order of theday. The pace of corporate restructuring has increased since thebeginning of the liberalization era, thanks to greater competitivepressures and a more permissive environment.

Mergers, acquisitions and restructuring evoke a great deal of publicinterest and perhaps represent the most dramatic facet of corporatefinance. This report discusses various facets of mergers.

Mergers

Meaning

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

completely absorbed by another corporation. The less important

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company loses its identity and becomes part of the more importantcorporation, which retains its identity.

Merger Law Definition

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

2. In criminal law, the inclusion of a lesser offense within a moreserious one, rather than charging it separately, this might causedouble jeopardy.

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

4. The combination under modern codes of civil procedure of law andequity into a single court.

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

What Mergers actually mean:

A merger is a combination of two companies where one corporation iscompletely absorbed by another corporation. It may involve absorptionor 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, HindustanInstruments Limited, Indian Software Company Limited, and IndianReprographics Limited combined to form HCL Limited.

The less important company loses its identity and becomes part of themore important corporation, which retains its identity. A mergerextinguishes the merged corporation, and the surviving corporationassumes all the rights, privileges, and liabilities of the mergedcorporation. A merger is not the same as a consolidation, in which twocorporations lose their separate identities and unite to form a

completely new corporation. In India mergers are called amalgamationsin legal parlance.

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Federal laws regulate mergers. Regulation is based on the concern thatmergers 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 proneto restrict output and to increase prices. The fear that mergers andacquisitions reduce competition has meant that the governmentcarefully scrutinizes proposed mergers. On the other hand, since the1980s, the federal government has become less aggressive in seekingthe prevention of mergers.

Despite concerns about a lessening of competition, firms are relativelyfree 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 onunderused assets. They also can produce economies of scale and scopethat reduce costs, improve quality, and increase output. The possibilityof a takeover can discourage company managers from behaving in waysthat fail to maximize profits. A merger can enable a business owner tosell the firm to someone who is already familiar with the industry andwho would be in a better position to pay the highest price. The prospectof a lucrative sale induces entrepreneurs to form new firms.

Antitrust merger law seeks to prohibit transactions whose probable

anticompetitive consequences outweigh their likely benefits. The criticaltime for review usually is when the merger is first proposed. Thisrequires enforcement agencies and courts to forecast market trends andfuture effects. Merger cases examine past events or periods tounderstand each merging party's position in its market and to predictthe merger's competitive impact.

Merger is also defined as amalgamation. Merger is the fusion of two ormore existing companies. All assets, liabilities and the stock of one

company stand transferred to Transferee Company in consideration ofpayment in the form of:

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

Mergers vs. Acquisitions

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These terms are commonly used interchangeably but in reality, theyhave slightly different meanings. An acquisition refers to the act of onecompany taking over another company and clearly becoming the newowner. From a legal point of view, the target company, the companythat is bought, no longer exists.Acquisition in general sense is acquiringthe ownership in the property. In the context of business combinations,an acquisition is the purchase by one company of a controlling interestin the share capital of another existing company.

A merger is a joining of two companies that are usually of about thesame size and agree to meld into one large company. In the case of amerger, both companys stocks cease to be traded as the new companychooses a new name and a new stock is issued in place of the twoseparate companys stock. This view of a merger is unrealistic by real

world standards as it is often the case that one company is actuallybought by another while the terms of the deal that is struck between thetwo allows for the company that is bought to publicize that a merger hasoccurred while the company that is doing the buying backs up thisclaim. This is done in order to allow the company that is bought to saveface and avoid the negative connotations that go along with selling out

Purpose of Mergers:

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Purposes for mergers are short listed below: -

(1)Procurement of supplies:

To safeguard the source of supplies of raw materials or intermediaryproduct; 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 thematerials

(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 ofproduct, expanding market and aiming at consumers satisfactionthrough strengthening after sale services;

To obtain improved production technology and know-how from theofferee company

To reduce cost, improve quality and produce competitive products toretain 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 existingproducts and to enhance the product range;Strengthening retain outlets and sale the goods to rationalizedistribution;

To reduce advertising cost and improve public image of the offereecompany;

Strategic control of patents and copyrights

(4) Financial strength:

To improve liquidity and have direct access to cash resource;To dispose of surplus and outdated assets for cash out of combinedenterprise;

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

To avail tax benefits;

To improve EPS (Earning Per Share)

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(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 owndevelopmental plans.A company thinks in terms of acquiring the other company only when ithas arrived at its own development plan to expand its operation havingexamined its own internal strength where it might not have any problem

of taxation, accounting, valuation, etc. but might feel resourceconstraints with limitations of funds and lack of skill managerialpersonnels. It has to aim at suitable combination where it could haveopportunities to supplement its funds by issuance of securities; secureadditional financial facilities, eliminate competition and strengthen itsmarket position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectivesthrough alternative type of combinations which may be horizontal,vertical, product expansion, market extensional or other specifiedunrelated objectives depending upon the corporate strategies. Thus,various types of combinations distinct with each other in nature areadopted 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 eachother from hostile takeovers and cultivate situations of collaborationssharing goodwill of each other to achieve performance heights throughbusiness combinations. The combining corporates aim at circularcombinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level ofintegration between the two combining business houses. Suchintegration could be operational or financial. This gives birth toconglomerate combinations. The purpose and the requirements of the

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offeror company go a long way in selecting a suitable partner for mergeror acquisition in business combinations.

Reasons why companies merge:

The principal economic rationale of a merger id that the value of thecombined entity is expected to be greater than the sum of theindependent values of the merging entities. For example, if firms A andB merge, the value of the combined entity, V (AB), is expected to begreater 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 mergerproposals. Some of them appear to be plausible in the sense that theycreate 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 verticalintegration, 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 mergeralternative enables the firm to leap frog several stages in theprocess of expansion.

It may entail less risk and even less cost

In a saturated market, simultaneous expansion andreplacement (through merger) makes more sense than creationof additional capacity 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 economiesarise because of more intensive utilization of production capacity,

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distribution networks, and research and development facilities, dataprocessing systems and so on. Economies of scale are prominent inhorizontal mergers where the scope of more intensive utilization ofresources is greater. Even in conglomerate mergers there is scope forreduction of certain overhead expenses.

Economies of scope:

A company may use a specific set of skills or assets that it possesses towiden the scope of its activities. For example: proctor and gamble canenjoy economies or scope if it acquires a consumer product companythat benefits from its highly regarded consumer marketing skills.

Economies of vertical integration:

When companies engaged at different stages of production or valuechain merge, economies of vertical integration may be realized. Forexample, the merger of a company engaged in oil exploration andproduction (like ONGC) with a company engaged in refining andmarketing (like HPCL) may improve co-ordination and control.Vertical integration, however, is not always a good idea. If a companydoes everything in-house it may not get the benefit of outsourcing fromindependent suppliers who may be more efficient in their segments ofthe value chain.

Complementary resources:

If two firms have complementary resources, it may make sense for themto merge. A good example of a merger of companies whichcomplemented each other well is the merger of Brown Bovery and Aseathat resulted in AseaBrownBovery (ABB). Brown Bovery wasinternational, 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 depreciationmerges with a profit making firm, tax shields are utilized better. The firmwith accumulated losses and/or unabsorbed depreciation may not beable to derive tax advantages for a long time. However, when it mergeswith a profit making firm, its accumulated losses and/or unabsorbeddepreciation can be set off against the profits of the profit making firm

and the tax benefits can be quickly realized.

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Utilization of surplus funds:

A firm in a mature industry may generate a lot of cash but may not haveopportunities for profitable investment. Such a firm ought to distributegenerous dividends and even buy back its shares, if the same ispossible. However, most managements have a tendency to make furtherinvestments, even though they may not be profitable. In such asituation, a merger with another firm involving cash compensation oftenrepresents a more efficient utilization of surplus funds.

Managerial effectiveness:

One of the potential gains of merger is an increase in managerialeffectiveness. This may occur if the existing management team, which isperforming poorly, is replaced by a more effective management team.Another allied benefit of a merger may be in the form of greatercongruence between the interests of the managers and the shareholders.

Dubious Reasons:

Often mergers are motivated by a desire to diversify and lower financingcosts. Prima facie, these objectives look worthwhile, but they are notlikely to enhance value.

Diversification:

A commonly stated motive for mergers is to achieve risk reductionthrough diversification. The extent, to which risk is reduced, of course,

depends on the correlation between the earnings of the mergingentities. While negative correlation brings greater reduction in risk,positive correlation brings lesser reduction in risk.Corporate diversification, however, may offer value in at least twospecial cases

1) If a company is plagued with problems which can jeopardize itsexistence and its merger with another company can save it frompotential bankruptcy.

2) If investors do not have the opportunity of home madediversification because one of the companies is not traded in the

marketplace, corporate diversification may be the only feasibleroute to risk reduction.

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Lower financing costs:

The consequence of larger size and greater earnings and stability, manyargue, is to reduce the cost of borrowing for the merged firm. Thereason for this is that the creditors of the merged firm enjoy betterprotection 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 businesscan eliminate a level of costs. If a company buys out one of itssuppliers, it is able to save on the margins that the supplier waspreviously adding to its costs; this is known as a vertical merger. If acompany buys out a distributor, it may be able to ship its products at alower 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 ofthis is that a large premium is usually required to convince the targetcompany's shareholders to accept the offer. It is not uncommon for theacquiring company's shareholders to sell their shares and push the pricelower in response to the company paying too much for the targetcompany.

Synergy:

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

combining business activities, performance will increase and costs willdecrease. Essentially, a business will attempt to merge with anotherbusiness that has complementary strengths and weaknesses.

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Motivations for mergers

Mergers are permanent form of combinations which vest inmanagement complete control and provide centralizedadministration which are not available in combinations of holdingcompany and its partly owned subsidiary. Shareholders in theselling company gain from the merger and takeovers as thepremium 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 thegrowth of the company not only due to synergy but also due toboots trapping earnings.Mergers are caused with the support of shareholders, managers adpromoters of the combing companies. The factors, which motivatethe shareholders and managers to lend support to thesecombinations and the resultant consequences they have to bear,are briefly noted below based on the research work by various

scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject tomerger should enhance in value. The sale of shares from onecompanys shareholders to another and holding investment inshares should give rise to greater values i.e. the opportunity gainsin alternative investments. Shareholders may gain from merger in

different ways viz. from the gains and achievements of thecompany 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 favormerger.

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(2) From the standpoint of managers

Managers are concerned with improving operations of the

company, managing the affairs of the company effectively for allround gains and growth of the company which will provide thembetter deals in raising their status, perks and fringe benefits.Mergers where all these things are the guaranteed outcome getsupport from the managers. At the same time, where managershave fear of displacement at the hands of new management inamalgamated company and also resultant depreciation from themerger then support from them becomes difficult.

(3) Promoters gains

Mergers do offer to company promoters the advantage ofincreasing the size of their company and the financial structure andstrength. They can convert a closely held and private limitedcompany into a public company without contributing much wealthand without losing control.

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect ofbenefits 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 consumersin the form of lower prices and better quality of the product whichdirectly raise their standard of living and quality of life. The balance ofbenefits in favor of consumers will depend upon the fact whether or notthe mergers increase or decrease competitive economic and productiveactivity which directly affects the degree of welfare of the consumersthrough changes in price level, quality of products, after sales service,etc.

(b) Workers community

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The merger or acquisition of a company by a conglomerate or otheracquiring company may have the effect on both the sides of increasingthe welfare in the form of purchasing power and other miseries of life.

Two sides of the impact as discussed by the researchers andacademicians are: firstly, mergers with cash payment to shareholdersprovide opportunities for them to invest this money in other companieswhich will generate further employment and growth to uplift of theeconomy in general. Secondly, any restrictions placed on such mergerswill decrease the growth and investment activity with correspondingdecrease in employment. Both workers and communities will suffer onlessening job opportunities, preventing the distribution of benefitsresulting from diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic poweris to be understood as the ability to control prices and industries outputas monopolists. Such monopolists affect social and political environmentto tilt everything in their favor to maintain their power ad expand theirbusiness empire. These advances result into economic exploitation. Butin a free economy a monopolist does not stay for a longer period asother companies enter into the field to reap the benefits of higher pricesset in by the monopolist. This enforces competition in the market asconsumers are free to substitute the alternative products. Therefore, it is

difficult to generalize that mergers affect the welfare of general publicadversely or favorably. Every merger of two or more companies has tobe viewed from different angles in the business practices which protectsthe interest of the shareholders in the merging company and also servesthe national purpose to add to the welfare of the employees, consumersand does not create hindrance in administration of the Governmentpolices.

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Types of mergers:

Merger depends upon the purpose of the offeror company it wants toachieve. Based on the offerors objectives profile, combinations could bevertical, horizontal, circular and conglomeratic as precisely describedbelow 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 mergerwith that company to expand espousing backward integration to

assimilate the resources of supply and forward integration towardsmarket outlets. The acquiring company through merger of another unitattempts on reduction of inventories of raw material and finished goods,implements its production plans as per the objectives and economizeson working capital investments. In other words, in vertical combinations,the merging undertaking would be either a supplier or a buyer using itsproduct as intermediary material for final production.

The following main benefits accrue from the vertical combination to theacquirer company i.e.

1. It gains a strong position because of imperfect market of theintermediary products, scarcity of resources and purchasedproducts;

2. Has control over products specifications.

(B) Horizontal combination:

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It is a merger of two competing firms which are at the same stage ofindustrial process. The acquiring firm belongs to the same industry asthe target company. The mail purpose of such mergers is to obtaineconomies of scale in production by eliminating duplication of facilitiesand the operations and broadening the product line, reduction ininvestment in working capital, elimination in competition concentrationin product, reduction in advertising costs, increase in market segmentsand exercise better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to sharecommon distribution and research facilities to obtain economies byelimination of cost on duplication and promoting market enlargement.

The acquiring company obtains benefits in the form of economies ofresource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industrieslike DCM and Modi Industries. The basic purpose of such amalgamationsremains utilization of financial resources and enlarges debt capacitythrough re-organizing their financial structure so as to service theshareholders by increased leveraging and EPS, lowering average cost ofcapital and thereby raising present worth of the outstanding shares.Merger enhances the overall stability of the acquirer company andcreates balance in the companys total portfolio of diverse products andproduction processes.

Some more types of mergers:

Market-extension Merger

This involves the combination of two companies that sell the sameproducts in different markets. A market-extension merger allows for themarket that can be reached to become larger and is the basis for thename of the merger.

Product-extension Merger

This merger is between two companies that sell different, but somewhat

related products, in a common market. This allows the new, larger

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company to pool their products and sell them with greater success tothe already common market that the two separate companies shared.

Accretive mergers

Those in which an acquiring company's earnings per share (EPS)increase. An alternative way of calculating this is if a company with ahigh price to earnings ratio (P/E) acquires one with a low P/E.

Concerns of mergers

Horizontal, vertical, and conglomerate mergers each raise distinctivecompetitive concerns.

Horizontal Mergers Horizontal mergers raise three basic competitive

problems. The first is the elimination of competition between themerging firms, which, depending on their size, could be significant. Thesecond is that the unification of the merging firms' operations mightcreate substantial market power and might enable the merged entity toraise prices by reducing output unilaterally. The third problem is that, byincreasing concentration in the relevant market, the transaction mightstrengthen the ability of the market's remaining participants tocoordinate their pricing and output decisions. The fear is not that theentities will engage in secret collaboration but that the reduction in thenumber of industry members will enhance tacit coordination of behavior.

Vertical Mergers Vertical mergers take two basic forms: forwardintegration, by which a firm buys a customer, and backward integration,by which a firm acquires a supplier. Replacing market exchanges withinternal transfers can offer at least two major benefits. First, the verticalmerger internalizes all transactions between a manufacturer and itssupplier or dealer, thus converting a potentially adversarial relationshipinto something more like a partnership. Second, internalization can givemanagement more effective ways to monitor and improve performance.Vertical integration by merger does not reduce the total number of

economic entities operating at one level of the market, but it mightchange patterns of industry behavior. Whether a forward or backward

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integration, the newly acquired firm may decide to deal only with theacquiring firm, thereby altering competition among the acquiring firm'ssuppliers, customers, or competitors. Suppliers may lose a market fortheir goods; retail outlets may be deprived of supplies; or competitorsmay find that both supplies and outlets are blocked. These possibilitiesraise the concern that vertical integration will foreclose competitors bylimiting their access to sources of supply or to customers. Verticalmergers also may be anticompetitive because their entrenched marketpower may impede new businesses from entering the market.

Conglomerate Mergers Conglomerate transactions take many forms,ranging from short-term joint ventures to complete mergers. Whether aconglomerate merger is pure, geographical, or a product-line extension,it involves firms that operate in separate markets. Therefore, aconglomerate transaction ordinarily has no direct effect on competition.

There is no reduction or other change in the number of firms in eitherthe acquiring or acquired firm's market.Conglomerate mergers can supply a market or "demand" for firms, thusgiving entrepreneurs liquidity at an open market price and with a keyinducement to form new enterprises. The threat of takeover might force

existing managers to increase efficiency in competitive markets.Conglomerate mergers also provide opportunities for firms to reducecapital costs and overhead and to achieve other efficiencies.Conglomerate mergers, however, may lessen future competition byeliminating the possibility that the acquiring firm would have enteredthe acquired firm's market independently. A conglomerate merger alsomay convert a large firm into a dominant one with a decisivecompetitive advantage, or otherwise make it difficult for othercompanies to enter the market. This type of merger also may reduce thenumber of smaller firms and may increase the merged firm's political

power, thereby impairing the social and political goals of retainingindependent decision-making centers, guaranteeing small businessopportunities, and preserving democratic processes.

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Steps in bringing about mergers ofcompanies

Due diligence:

Its a term used for a number of concepts involving either theperformance of an investigation of a business or person, or the

performance of an act with a certain standard of care. It can be a legalobligation, but the term will more commonly apply to voluntaryinvestigations. A common example of due diligence in various industriesis the process through which a potential acquirer evaluates a targetcompany or its assets for acquisition.

Origin of the term "Due Diligence":

The term "Due Diligence" first came into common use as a result of theUS 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 whenaccused of inadequate disclosure to investors of material informationwith respect to the purchase ofsecurities.So long as broker-dealers conducted a "Due Diligence" investigation intothe company whose equity they were selling, and disclosed to theinvestor what they found, they would not be held liable for nondisclosureof information that failed to be uncovered in the process of thatinvestigation.

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The entire broker-dealer community quickly institutionalized as astandard practice, the conducting of due diligence investigations of anystock offerings in which they involved themselves.Due diligence in capstone refers to performing the needful amount ofeffort, 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 privatemergers and acquisitions as well. The term has slowly been adapted foruse in other situations.

Due diligence in business transactions:

In business transactions, the due diligence process varies for differenttypes of companies. The relevant areas of concern may include the

financial, legal, labor, tax, environment and market/commercial situationof the company. Other areas include intellectual property, real andpersonal property, insurance and liability coverage, debt instrumentreview, employee benefits and labor matters, immigration, andinternational transactions.

Approval by shareholders:

A meeting of share holders should be held by each company for passingthe scheme of mergers at least 75% of shareholders who vote either in

person or by proxy must approve the scheme of merger.

Authorization of the scheme by the court:

Once the drafts of merger proposal is approved by the respectiveboards, each company should make an application to the high court ofthe state where its registered office is situated so that it can convenethe meetings of share holders and creditors for passing the mergerproposalOnce the mergers scheme is passed by the share holders and creditors,

the companies involved in the merger should present a petition to theHC for confirming the scheme of merger. However the HC is empoweredto modify the scheme and pass orders accordingly. A notice about thesame has to be published in 2 newspapers.

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Legal Procedure for bringing about mergerof companies

Examination of object clauses:

The MOA of both the companies should be examined to check the powerto amalgamate is available. Further, the object clause of the mergingcompany should permit it to carry on the business of the mergedcompany. If such clauses do not exist, necessary approvals of the shareholders, board of directors, and company law board are required.

Intimation to stock exchanges:

The stock exchanges where merging and merged companies are listedshould be informed about the merger proposal. From time to time,copies of all notices, resolutions, and orders should be mailed to theconcerned stock exchanges.

Approval of the draft merger proposal by the respective

boards:

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The draft merger proposal should be approved by the respective BODs.The board of each company should pass a resolution authorizingits directors/executives to pursue the matter further.

Application to high courts:

Once the drafts of merger proposal is approved by the respectiveboards, each company should make an application to the high court ofthe state where its registered office is situated so that it can convenethe meetings of share holders and creditors for passing the mergerproposal.

Dispatch of notice to share holders and creditors:

In order to convene the meetings of share holders and creditors, anotice and an explanatory statement of the meeting, as approved by thehigh court, should be dispatched by each company to its shareholdersand creditors so that they get 21 days advance intimation. The notice ofthe meetings should also be published in two news papers.

Holding of meetings of share holders and creditors:

A meeting of share holders should be held by each company for passingthe scheme of mergers at least 75% of shareholders who vote either inperson or by proxy must approve the scheme of merger. Same appliesto creditors also.

Petition to High Court for confirmation and passing of HC

orders:

Once the mergers scheme is passed by the share holders and creditors,the companies involved in the merger should present a petition to theHC for confirming the scheme of merger. A notice about the same has tobe published in 2 newspapers.

Filing the order with the registrar:

Certified true copies of the high court order must be filed with theregistrar of companies within the time limit specified by the court.

Transfer of assets and liabilities:

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After the final orders have been passed by both the HCs, all the assetsand liabilities of the merged company will have to be transferred to themerging company.

Issue of shares and debentures:

The merging company, after fulfilling the provisions of the law, shouldissue shares and debentures of the merging company. The new sharesand debentures so issued will then be listed on the stock exchange.

Corporate merger procedure

State statutes establish procedures to accomplish corporate mergers.Generally, the board of directors for each corporation must initially passa resolution adopting a plan of merger that specifies the names of thecorporations that are involved, the name of the proposed mergedcompany, the manner of converting shares of both corporations, andany other legal provision to which the corporations agree. Eachcorporation notifies all of its shareholders that a meeting will be held toapprove the merger. If the proper number of shareholders approves the

plan, the directors sign the papers and file them with the state. Thesecretary of states issues a certificate of merger to authorize the newcorporation.Some statutes permit the directors to abandon the plan at any point upto the filing of the final papers. States with the most liberal corporationlaws permit a surviving corporation to absorb another company bymerger without submitting the plan to its shareholders for approvalunless otherwise required in its certificate of incorporation.Statutes often provide that corporations that are formed in two differentstates must follow the rules in their respective states for a merger to be

effective. Some corporation statutes require the surviving corporation topurchase the shares of stockholders who voted against the merger.

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Why Mergers Fail?

Revenue deserves more attention in mergers; indeed, a failure to focuson this important factor may explain why so many mergers dont payoff. Too many companies lose their revenue momentum as theyconcentrate on cost synergies or fail to focus on post merger growth in asystematic manner. Yet in the end, halted growth hurts the marketperformance of a company far more than does a failure to nail costs.

Cases of mergers of prominent companiesin the recent past

Case 1: Arcelor Mittal merger details(Merger success)

The Merger Process

2006 was a very exciting and challenging year for Arcelor Mittal. Thenew company was at the forefront of the consolidation process, leadingthe industry through mergers and acquisitions.

January 2006 Historic moment for the Global Steel Industry

The year started with the historic launch of the Mittal Steel offer to theshareholders of Arcelor to create the world's first 100 million tonne plussteel producer. The aim of increasing globalization and consolidation,necessary in the steel industry, defines the deal and sets the pace forthe industry.

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February 2006 - Expansion and strong results

Mittal Canada completes the acquisition of three Stelco subsidiaries, theNorambar and Stelfil plants, located in Quebec, and the Stelwire plant in

Ontario. Stelfil and Stelwire will add 250,000 tones of steel wire to thecompany's annual production capacity, providing a wider product mix tobetter meet customers' needs.

Arcelor acquires a 38.41% stake in Laiwu Steel Corporation, in China.Laiwu Steel Corporation is China's largest producer of sections andbeams, and will further boost its operational excellence thanks to thispartnership. It is still awaiting approval with the Beijing authorities.

April 2006 - Renewal after Hurricane Katrina and new galvanized

line

Out of the devastation of Hurricane Katrina, arose a revitalizedMississippi youth baseball field, rebuilt with the help of Mittal Steel USAand Arcelor. The company provides money towards the purchase oflighting fixtures and steel cross bar support. It also arranges for anddonates the labor costs for their installation.

Mittal Steel USA places a new line into operation in Cleveland to providetop-quality galvanized sheet steel to automakers and other demanding

customers. The new line is designed to produce in excess of 630,000tones of corrosion-resistant sheet annually, using the hot-dip galvanizingprocess.

May 2006 - US clears the way for bid

Mittal Steel announces US antitrust clearance for Arcelor bid and theapproval of the offer documents by European regulators. Theacceptance period starts in Luxembourg, Belgium and France on 18 May2006 (some days later for Spain and the United States) and lasts until 29

June 2006.

Arcelor contributes to the first anti-seismic school building in Izmit(Turkey), where a school building had been destroyed by an earthquakein 1999.

June 2006 - Historic agreement to create the No.1 Global Steel

Company

Creating the world's largest steel company, Mittal Steel and Arcelorreach an agreement to combine the two companies in a merger of

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equals. The terms of the transaction were reviewed by the Boards ofArcelor and Mittal Steel which each recommended the transaction totheir shareholders. The combined group, domiciled and headquarteredin Luxembourg, is named Arcelor Mittal.

Demonstrating the commitment to extend markets in developingnations, a strategic partnership between Arcelor Mittal and SNI (SocitNationale d'Investissement) is concluded concerning the development ofSonasid. This consolidates and develops theposition of Sonasid on theMoroccan market, allowing the company to benefit from the transfer ofArcelor Mittal's technologies and skills in the long carbon steel productsector

Case 2: Deutsche Dresdner Bank(Merger Failure)

The merger that was announced on March 7, 2000 between DeutscheBank and Dresdner Bank, Germanys largest and the third largest bankrespectively was considered as Germanys response to increasinglytough competition markets.

The merger was to create the most powerful banking group in the worldwith the balance sheet total of nearly 2.5 trillion marks and a stockmarket value around 150 billion marks. This would put the merged bankfor ahead of the second largest banking group, U.S. based Citigroup,with a balance sheet total amounting to 1.2 trillion marks and also in

front of the planned Japanese book mergers of Sumitomo and SukuraBank with 1.7 trillion marks as the balance sheet total.

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The new banking group intended to spin off its retail banking which wasnot making much profit in both the banks and costly, extensive networkof bank branches associated with it.

The merged bank was to retain the name Deutsche Bank but adoptedthe Dresdner Banks green corporate color in its logo. The future corebusiness lines of the new merged Bank included investment Banking,asset management, where the new banking group was hoped to outsidethe traditionally dominant Swiss Bank, Security and loan banking andfinally financially corporate clients ranging from major industrialcorporation to the mid-scale companies.

With this kind of merger, the new bank would have reached the no.1

position of the US and create new dimensions of aggressiveness in theinternational mergers.But barely 2 months after announcing their agreement to form thelargest bank in the world, had negotiations for a merger betweenDeutsche and Dresdner Bank failed on April 5, 2000.

The main issue of the failure was Dresdner Banks investment arm,Kleinwort Benson, which the executive committee of the bank did notwant to relinquish under any circumstances.

In the preliminary negotiations it had been agreed that Kleinwort Bensonwould be integrated into the merged bank. But from the outset theseconsiderations encountered resistance from the asset managementdivision, which was Deutsche Banks investment arm.

Deutsche Banks asset management had only integrated with Londonsinvestment group Morgan Grenfell and the American Bankers trust. Thisdivision alone contributed over 60% of Deutsche Banks profit. The toppeople at the asset management were not ready to undertake a new

process of integration with Kleinwort Benson. So there was only oneoption left with the Dresdner Bank i.e. to sell Kleinwort Bensoncompletely. However Walter, the chairman of the Dresdner Bank was notprepared for this. This led to the withdrawal of the Dresdner Bank fromthe merger negotiations.

In economic and political circles, the planned merger was celebrated asGermanys advance into the premier league of the international financialmarkets. But the failure of the merger led to the disaster of Germany asthe financial center.

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References:

Bibliography:

i. Chandra, P.C., 2006, Financial Management, Tata McGraw-hill

Webliography:

i. http://www.arcelormittal.com/index.php?lang=en&page=539

ii. http://law.jrank.org/pages/8550/Mergers-Acquisitions.html

iii. http://law.jrank.org/pages/8543/Mergers-Acquisitions-Types-Mergers.htmliv. http://law.jrank.org/pages/8545/Mergers-Acquisitions-Competitive-

Concerns.html

v. http://law.jrank.org/pages/8544/Mergers-Acquisitions-Corporate-Merger-Procedures.html

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vi. http://www.learnmergers.com/mergers-types.shtmlvii. http://www.learnmergers.com/mergers-mergers.shtmlviii. http://en.wikipedia.org/wiki/Mergers_and_acquisitionsix. http://en.wikipedia.org/wiki/Due_diligencex. http://www.investopedia.com/ask/answers/06/m&areasons.asp
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Mergers Project