MERGERS AND ACQUISITION

AN INTERNATIONAL PERSPECTIVE TO INORGANIC GROWTH

This Report Aims At Covering The Width And Breadth Of Corporate Restructuring On An International Perspective. The Gargantuan Umbrella That Covers Mergers And Acquisitions, The Issue Which Keeps The Entire Media Underneath Today. This Report Is Aimed To Prove A Guide To Corporate Restructuring Leaving No Stones Unturned.

Rahul Chandalia 08BS0002495

IBS -Mumbai

A REPORT ON CORPORATE RESTRUCTURING COVERING MERGERS & ACQUISITIONS AND INTERNATIONAL TAKEOVERS BY RAHUL CHANDALIA (08BS0002495)
IN PARTIAL SUBMISSION FOR THE REQUIREMENTS OF MBA (FINANCE)-IBS-MUMBAI UNDER GUIDANCE OF

Prof. VINOD. K. AGARWAL ADJUNCT FACULTY (IBS-MUMBAI)

ACKNOWLEDGEMENT
I would like to take this opportunity to express my heartfelt gratitude towards my faculty guide Prof. VINOD K. AGARWAL, who has been constant resources of guidance and inspiration during the course of my entire project work. From time to time he advised me and kept me focused towards the fulfillment of my project objectives. I would like to thank ICFAI University for availing me of such an enjoyable experience in the industry practically with such kind or research papers. A special vote of thanks to my faculty guide for providing me with his valuable inputs and resources and coordinating brilliantly with me in making my research more informative and useful. In addition a special vote of thanks to the entire administration of IBS-MUMBAI that had helped me and supported me in making my project here informative and enjoyable. They have rendered full help and support to me whenever I needed. I would like this support and warmth to be kept continued with me not only till the end of the project but forever.

INDEX
Abstract 1 Introduction 2 3 4 5 Difference between Merger and Acquisition Mergers a. Classification of Mergers Acquisitions a. Classification of Acquisitions Motives Behind Acquisitions and Mergers a. Economies of Scale b. Synergy c. Fast Growth d. Tax Benefits e. Diversification f. Sales Enhancement g. Improved Management h. Information Effect i. Wealth Transfer j. Hubris Hypothesis k. Resource Transfer l. Managements Personal Agenda m. Managers Compensation n. Vertical Integration Financial Framework a. Determining the Firms Value i.Book Value ii. Appraisal Value iii. Market Value iv. Earnings per Share b. Financing Techniques in Merger i.Cash ii. Ordinary Share Financing iii. Debt and Preference Share Financing iv. Deferred Payment Plan v. Tender Offer c. Analysis of the Merger as a Capital Budgeting Decision i. The DCF Approach a. Determination of incremental projected Free Cash Flows to the Firm(FCFF) Page No. 08 09 11 12 14 16

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30 31

b. Determination of Terminal Value c. Determination of appropriate Discount Rate

d. Determination of Present Value of FCFF e. Determination of Cost of Acquisition ii. The AVP Approach 7 Taxation Aspects a. Tax Concessions to Amalgamated Company i. Carry Forward and Set off of Business Losses And Unabsorbed Depreciation ii. Expenditure on Scientific Research iii. Expenditure on Acquisition of Patent Rights or Copy Rights iv. Expenditure on Know-how v. Expenditure for Obtaining License to Operate Telecommunication Services vi. Preliminary Expenses vii. Expenditure on Prospecting of Certain Minerals viii. Capital Expenditure on Family Planning ix. Bad Debts b. Tax Concessions to Amalgamating Company i. Free of Capital Gains Tax ii. Free of Gift Tax c. Tax Concessions to Shareholders of Amalgamating Company Legal and Procedural Aspects a. Scheme of Merger/Amalgamation a. Essential Features of the Scheme of Amalgamation b. Scheme of Acquisitions / Takeovers i. The SEBI Substantial Acquisition of Shares and Take over Code (SEBI Takeover Code) 1. Disclosure of Shareholding and Control in a Listed Company a)Continual Disclosure
b) Power to call for Information 2. Substantial Acquisition of Shares/Voting Rights/Control Over a Limited Company a) Power to Remove Difficulties b) Acquisition of 15% or more Shares/Voting Rights c) Acquisition of Control d) Appointment of Merchant Banker e) Public Announcement of the Offer f) Contents of the Public Announcement of the Offer g) Submission of Letter of Offer to the SEBI h) Offer Price i) Offer Price under Creeping Acquisition j) Competitive Bid

33 34 34

37 37 38 38 38 42 42 44

k) Upward Revision of Offer l) Withdrawal of Offer m) Provision of Escrow 3. Bail Out Takeovers a) Manner of Acquisition of Shares b) Manner of Evaluation of Bids c) Person Acquiring Shares to Make an Offer and a Public Announcement d) Competitive Bid e) Exemption 4. Investigation and Action by the SEBI a) Obligations b) Directions by the SEBI c) Penalties for Non-compliance ii. Strategies for Hostile Takeovers and Company Resistance 1. Takeover Strategies 2. Company Resistance and Defensive Strategies 9 10 Merger and Acquisition Marketplace Difficulties Other Forms of Corporate Restructuring a. Demergers/Divestitures i. Reasons/Motives behind Demergers/Divestitures ii. Financial Evaluation of Demergers iii. Taxation Aspects a) Tax Concessions to the Resulting Company b) Tax Concessions To the Demerged Company c) Tax Concessions to the Shareholders iv. Methods of Demergers/Divestitures a) Sell-Offs b) Spin-Offs c) Split-Ups d) Equity Carve-Outs b. Going Private and Buyouts i. Motivations for Going Private ii. Leveraged Buyouts a) Characteristics of Desirable LBO Candidates c. Leveraged Recapitalizations i. Valuation Implications d. Reverse Mergers i. The Process ii.Benefits iii. Drawback e. Financial Restructuring (Internal Reconstruction) i. Restructuring Scheme Some Cases of Corporate Restructurings From The Real World a. The Great Merger Movement, 1895-1905 i. Short-Run Factors ii. Long-Run Factors b. Merger of Reliance Petrochemicals Ltd (RPL) With Reliance Industries Ltd (RIL), 1992

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55

58

60 62 63 63 64 64

66

68

71 72

75 77 77 79

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c. Demerger of DCM Ltd, 1990 d. Acquisition of Ranbaxy Laboratories Ltd by Daiichi Sankyo, 2008 e. Bail Out Merger of ITC Classic Financial Ltd With ICICI Ltd, 1997-98 f. Acquisition of Corus by Tata Steel, 2007 g. Acquisition of Hutchinson Essar by Vodafone, 2007 h. Reverse Merger Of ICICI Ltd With ICICI Bank Ltd, 2002 i. Acquisition Of Jaguar And Land Rover By Tata Motors,2008 j. The Leveraged Buyout of Rayovac by Thomas H. Lee, 1996 Materials and Methods Conclusion and Discussions Future Prospects Appendices Appendix 1 Accounting treatment of mergers, acquisitions or other forms of Restructuring Appendix 2 Corporate Voting and Control Appendix 3 Distress Restructuring Appendix 4 Indirect References & Bibliography

81 84 86 89 92 94 96 100 103 104 105 106 106 106 107 108

Abstract
This project aims at analyzing the needs, forms, various aspects, effects, advantages and disadvantages of corporate restructuring. Activities related to expansion or contraction of a firms operations or changes in its assets or financial or ownership structure are referred to as corporate reconstructing. The most common form of corporate restructuring are mergers/amalgamations, acquisitions/takeovers, financial restructuring, divestitures/demergers and buyouts. Profitable growth constitutes one of the prime objectives of most of the business firms. It can be achieved internally by expanding/enlarging the capacity of existing product(s). Alternatively the growth factor can be facilitated externally by acquisitions of existing business firms. The acquisitions may be in the form of mergers, acquisitions, amalgamations, takeovers, absorption, and consolidation and so on. Acquisitions/mergers obviates, in most of the situations, financing problem as substantial/full payments are normally made in the form of shares of the purchasing company. Further, it also expedites the pace of growth as the acquired firm already has the facilities or products (acceptable to the market) and therefore, obviously, saves the time otherwise required in building up the new facilities from scratch in the case of internal expansion program. Thus, a firm will opt for merger if it adds to the wealth of shareholders, otherwise merger will not be financially viable proposition. However, merger suffers from certain weaknesses. First a merger may not turn out to be a financially profitable preposition in view of non-realization of potential economies in terms of cost reduction. Second the management of the two companies may not go along because of friction. Third, dissenting minority shareholders may cause problems. Finally, it may attract government antitrust action in terms of the Competition Act. There are also some other marketplace difficulties which the companies face due to restructuring processes. We shall also discuss the Taxation, Legal, and Procedural aspects of corporate restructurings. The other forms of corporate restructuring such as demergers, buyouts and internal reconstructions are also practiced by companies and these also tend to be successful depending on the goals of the company and the existing business scenario. This discussion is supported by some cases of domestic and international takeovers and corporate restructuring from the real world, analyzing the effects and impacts of restructuring in real terms. Well known cases like the merger of Reliance Petroleum with Reliance Industries Limited, 1992, acquisition of Hutch by Vodafone, 2007, the global expansion of Tata in the past few years support the case.

CORPORATE RESTUCTURING
The name Corporate Restructuring can be constructed as almost any change in capital structure, in operations, or in ownership that is outside the ordinary course of business. Corporate restructuring is a broad umbrella that covers many things. The most common thing is the mergers and takeovers. In addition to mergers, takeovers, and contests for corporate control, there are other types of corporate restructuring: divestitures, rearrangements, and ownership reformulations. In other words, corporate restructuring implies activities related to expansion / contraction of a firms operations or changes in its assets or financial or ownership structure. Corporate restructuring transactions fall into broad categories of divestiture, ownership restructuring, and distress restructuring. Under this project, we shall discuss the various aspects of mergers and acquisitions (M&A), divestitures, spin-offs, sell-offs, equity carve-outs, leveraged buyouts and leveraged recapitalizations. Stock repurchase is also often a part of an overall corporate restructuring plan. The restructuring of a company in financial distress differs from the above. Here the pressure is external, from creditors. There are defined legal remedies, and in any restructuring these must be observed. Still management often is able to influence the outcome, as we shall see. A merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board.

An acquisition, also known as a takeover, is the buying of one company (the target) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons.

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Difference between Merger and Acquisition

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. It is quite normal though for M&A deal communications to take place in a so called confidentiality bubble' whereby information flows is restricted due to confidentiality agreements (Harwood, 2006).

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MERGERS
A merger is a combination of two corporations in which only one survives. The merged corporations go out of existence. Mostly the two corporations merge together under a third name which is a combination of the two. For example, the two automobile companies Maruti and Suzuki merged to form Maruti Suzuki.

Classification of Mergers
Notwithstanding terminological differences mergers can be usefully distinguished into four types
1. Horizontal Merger A horizontal merger takes place when two or more

corporate firms dealing in similar lines of activity combine together. Elimination or reduction in competition, putting an end to price-cutting, economies of scale in production, research and development, marketing and management are often motives underlying such mergers. For example- the merger of Whirlpool and Kelvinator of India (1996).
2. Vertical Merger Vertical merger occurs when a firm acquires firms upstream

or downstream from it. Thus the combination involves two or more stages of production or distribution that are usually separate. Lower buying costs of materials, lower distribution costs, assured supplies and market, increasing or creating barriers to entry for potential competitors or placing them at a cost disadvantage are the chief gains accruing from such mergers. For example- the merger of America Online Inc. (AOL) and Time Warner (2000).
3. Conglomerate Merger Conglomerate merger is a combination in which a firm

established in one industry combines with a firm from an unrelated industry. In other words, firms engaged in two different or unrelated economic/business activities combine together. Diversification of risk constitutes the rationale for such mergers. For example-the merger of Royal Dutch Petroleum Co. with Shell Transport & Trading Co. (2004).
4. Congeneric Merger A Congeneric merger occurs where two merging firms are

in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Diversification again becomes a rationale for such mergers. For examplePrudentials acquisition of Bache & Company.

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5. Reverse Merger A unique type of merger called a reverse merger is used as a

way of going public without the expense and time required by an IPO. In this type of merger, a company merges with its own subsidiary. Increasing market share, increased access to funds and decreased cost of production or distribution may act as motives behind such mergers. For example- the merger of ICICI Ltd. with ICICI Bank Ltd. Again, mergers may be classified on financial basis, i.e. on the basis of increase or decrease in the Earnings per Share (EPS) of the companies Accretive mergers Accretive mergers are those 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.
1)

Dilutive Mergers Dilutive mergers are the opposite of above, whereby a company's EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.
2)

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ACQUISITIONS/TAKEOVERS
Takeover implies acquisition of controlling interest in a company by another company. It does not lead to the dissolution of the company whose shares are being acquired. In other words, an acquisition, also known as a takeover, is the buying of one company (the target) by another group.

Classification of Acquisitions
On the basis of response of the Target Company, takeovers or acquisitions can assume three forms
1) Negotiated / Friendly Takeover Such takeovers are organized by the

incumbent management with a view to parting with the control of the management to another group, through negotiation. The terms and conditions of the takeover are mutually settled by both the groups.
2) Hostile / Open Market Takeover Hostile takeovers are also referred to as

raid on the company. In order to take over the management of, or acquire controlling interest in, the target company, a person / group of persons acquire shares from the open market/financial institutions/mutual funds/willing shareholders at a price higher than the prevailing market price. Such takeovers are hostile to the existing management.
3) Bail Out Takeover When a profit earning company takes over a financially

sick company to bail it out, it is called a Bail out takeover. Normally, such takeover are in pursuance of a scheme of rehabilitation approved by public financial institutions/scheduled banks. The takeover bids, in respect of purchase price, track record of the acquirer and his financial position, are evaluated by a leading financial institution Again on the basis of the motive of the acquirer company, takeovers can be classified into two
1) Strategic Acquisitions A strategic acquisition occurs when a company

acquires another as part of its overall strategy. Perhaps cost advantages result, or it may be that the target company provides revenue enhancement through product extension or market dominance. The key is that there is a strategic reason for blending the two companies together. Strategic acquisitions can either be with stock, where a ratio of exchange occurs, denoting the relative value

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weightings of the two companies with respect to earnings and to market prices, or also with cash.
2) Financial Acquisition A financial acquisition occurs when a financial promoter,

is the acquirer. The motivation is to sell off assets, cut costs, and operate whatever remains more efficiently than before, in the hope of producing value above what was paid. The acquisition is not strategic, for the company acquired is operated as an independent entity. Such an acquisition invariably involves cash, and payment to the selling stockholders is funded importantly with debt. Further again, on the basis of the way of acquisition, takeovers may be classified as two
1) The buyer buys the shares, and therefore control, of the target company being

purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going business, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.

2) The buyer buys the assets of the target company. The cash the target receives

from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like- kind exchanges or other arrangements that are tax-free or tax-neutral, both to thebuyer and to the seller's shareholders.

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MOTIVES BEHIND ACQUISITIONS AND MERGERS

The basic purpose of a merger or takeover is creation of value. There are some reasons why we can expect value to be created or rearranged due to a merger/acquisition
1) Economies of Scale The operating cost advantage in terms of economies of

scale are considered to be primary motive for mergers, especially horizontal and vertical mergers. They result in lower average cost of production and sales due to a higher level of operations. For instance, overhead costs can be substantially reduced on account of sharing central services such as accounting and finance, office, executive and top level management, legal, sales promotion and advertisement, and so on. Koutsoyiannis classifies these economies into two groups

Real economies Economies which arise from a reduction in the factor inputs per unit of output. In operational terms, real economies may arise from
a. The production activity of the firm b. The research and development/technological activities c. The synergy effects

d. Marketing and distribution activities

e. e. Transport, storage and inventories

f. Managerial economies

Pecuniary economies Economies which are realized from paying lower prices for factor inputs due to bulk transactions.

Cheaper finance is the most vital ingredient of pecuniary economies. A post merger large firm is likely to raise finance at cheaper rates than either of the pre-merger firms could have. The reason is that the larger the firm, the more secure the investors consider their funds. Besides, the floatation costs (in making new issues) per unit decreases with the increase in the size of shares and debentures. The idea is to concentrate a greater volume of activity into a given facility, into a given number of people, into a given distribution system, and so forth. In other words, increases in volume permit a more efficient utilization of resources.
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But, like anything else, it has limits. Beyond a point, increases in volume may cause more problems than they remedy, and a company may actually become less efficient. Economists describe this as an envelope curve with economies of scale possible up to some optimal point, after which diseconomies occur.
2) Synergy Synergy means that the combined value of the merged firm will be

greater than the sum of the values of the individual pre-merger firms (or units). It results from complimentary activities. For instance, one firm may have a substantial amount of financial resources while the other has profitable investment opportunities. Similarly, one firm may have well established brand of its products but lacks marketing organization and the other firm may have a very strong marketing organization. Likewise, one firm may have a strong research and development (R&D) team whereas the other firm may have a very efficiently organized production department. The merged business unit in all these cases will be more efficient than the individual firms. Symbolically, Combined Value = Stand alone value of acquiring firm, V A + Stand alone value of acquiring firm, VT + Value of Synergy, VAT Normally, the value of synergy is positive and this constitutes the rationale for merger. In valuing synergy, costs attached with acquisitions should also be taken into account. These costs primarily consist of costs of integration and payment made for acquisition of the target firm, in excess of its value, VT. Therefore, the net gain from the merger is equal to the difference between the value of synergy and costs. Net Gain = Value of Synergy, VAT Costs
3) Fast Growth A merger often enables the amalgamating firm to grow at a rate

faster than is possible under the internal expansion route, because the acquiring company enters a new market quickly, avoiding the delay associated with building a new plant and establishing a new line of products. Internal growth is time consuming, requiring research and development, organization of the product, market penetration, and in general, a smoothly working organization. Above all, there may sometimes be an added problem of raising adequate funds to execute the required capital budgeting projects. A merger obliviates all these obstacles and, thus, steps up the pace of corporate growth

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4) Tax Benefits A motivation in some mergers is tax. These conditions relate to

the tax laws allowing set off and carry forward of losses. In the case of a taxloss carry forward, a company with cumulative tax-losses may have little prospect of earning enough in the future to utilize fully its tax-loss carry forward. By merging with a profitable company, it may be possible for the surviving company to utilize the carry forward more effectively. The argument is that this tax-loss carry forward will reduce the taxable income of the newly merged firm, with its obvious impact on the reduction of tax liability. In operational terms, the losses of the target firm will be allowed to be set off against the profits of the acquiring firm. However, there are restrictions that limit its utilization to a percentage of the fair market value of the acquired company. Still, there can be an economic gain, at the expense of the government, that cannot be realized by either company separately. The Tax Reform Act, 1986, sharply reduced tax-motivated mergers. The technical tax advantages that remain provide little in the way of value.

5) Diversification Diversification is yet another major advantage, especially in a

conglomerate merger. The argument is that a merger between two unrelated firms would tend to reduce business risk, and, thus, increase the market value. Also, by acquiring a firm in different line of business, a company may be able to reduce cyclical instability in earnings. In other words, such mergers help stabilize or smoothen overall corporate income, which would otherwise fluctuate due to seasonal or economic cycles. In operational terms, the greater the combination of statistically independent, or negatively correlated income streams of the merged companies, the higher will be the reduction in the business risk factor and the greater will be the benefit of diversification or vice versa. However, such diversification can also be attained by individual shareholders by diversifying their individual investment portfolio. Therefore, the financial managers should ensure that the merger should not be at a cost higher than the one at which shareholders would have attained on their own; corporate diversification should be less expensive than personal diversification.

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6) Sales Enhancement An important reason for some acquisitions is the

enhancement of sales. By gaining market share, ever-increasing sales may be possible through market dominance. Or it may be that it will fill a gap in the product line, thereby enhancing sales throughout. To be a thing of value, such sales enhancements must be cost effective.

7) Improved Management Some companies are inefficiently managed with the

result the profitability is lower than it might be. To the extent the acquirer can provide better management an acquisition may make sense for this reason alone. While a company can change management itself, the practical realities of entrenchment may be such that an external acquisition is required for anything to happen. The idea is that the external financial markets discipline management.

8) Information Effect Value also could occur if new information is conveyed as a

result of the merger negotiation or takeover attempt. This notion implies asymmetric information between management (or the acquiring firm) and the general market for the stock. To the extent of stock is believed to be undervalued a positive signal may occur via the merger announcement which causes share price to rise. The idea is that the merger/takeover provides information on underlying profitability that otherwise cannot be convincingly conveyed. In a nutshell, it is that specific actions speak louder than words.

9) Wealth Transfer However, there may be wealth transfer from equity holders

to debt holders, via diversification, when a merger occurs. To the extent the combination lowers the relative variability of cash flows, debt-holders benefit from having a more creditworthy claim. As a result the market value of their claim should increase, all other things remaining the same. In effect, it is a zerosum game, and one party can gain only at the expense of the other.

10)

Hubris Hypothesis Roll argues that takeovers are motivated by bidders who get caught up in believing they can do no wrong and that their foresight is
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perfect Hubris refers to an animal like spirit of arrogant pride and self confidence. Such individuals are said not to have the rational behavior necessary to refrain from bidding. As a result, they bid too much for their targets. In other words, manager's overconfidence about expected synergies from M&A, which results in overpayment for the target company. The hubris hypothesis suggests that the excess premium paid for the target company benefits those stockholders, but that stockholders of the acquiring company suffer a diminution in wealth.

11)

Resource Transfer Resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

12)

Managements Personal Agenda Rather than hubris, it may be that the acquiring company overpays because management pursues personal as opposed to corporate wealth maximizing goals. Sometimes, management chases growth. Being larger may bring prestige, in whose glow management basks. Managers have larger companies to manage and hence more power. The goal may be diversification, because with unrelated businesses and risk spread out, management jobs may be more secure.

13)

Managers Compensation In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders); although some empirical studies show that compensation is linked to profitability rather than mere profits of the company.

14)

Vertical integration Companies acquire part of a supply chain and benefit from the resources. However, this does not add any value since although
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one end of the supply chain may receive a product at a cheaper cost; the other end now has lower revenue. In addition, the supplier may find more difficulty in supplying to competitors of its acquirer because the competition would not want to support the new conglomerate.

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FINANCIAL FRAMEWORK
Under this section, we will discuss the financial framework of a merger decision. It covers three inter-related aspects 1) Determining the firms value 2) Financing techniques in merger, and 3) Analysis of the merger as a capital budgeting decision

1) Determining the firms value The first step towards analyzing a potential

merger involves determining the value of the acquired firm. The value of a firm depends not only upon its earnings but also upon the operating and financial characteristics of the acquiring firm. Therefore, a single value cannot be placed for the acquired firm. Hence, a range of values is determined and the final value, within this range, is negotiated by the two firms. However, placing a value on qualitative factors, such as managerial talent, strong sales department, and so on is difficult. Therefore, more emphasis is given on quantitative factors the value of the assets, and the earnings of the firm. Based on these factors, the quantitative variables include

a) Book Value The book value of a firm is based on the balance sheet value of

owners equity. It is determined by dividing net worth by the number of equity shares outstanding. However, the book value, as a basis of determining a firms value, suffers from a limitation that it is based on the historical costs of the assets of the firm. Nevertheless, it is relevant to the determination of a firms value due to the following reasons i. ii. It can be used as a starting point to be compared and complemented by other analyses In industries where the ability to generate earnings requires large investments in fixed assets, the book value could be a critical factor where especially plant and equipment are relatively new.

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iii.

A study of the firms working capital is particularly appropriate and necessary in mergers involving businesses consisting primarily of liquid assets, like financial institutions.

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b) Appraisal Value The appraisal value of a firm is acquired from an

independent appraisal agency. This value is normally based on the replacement cost of assets. The merits of the appraisal value are
i) It is an important factor in special situations such as in financial companies,

natural resource enterprises or organizations that have been operating at a loss. ii) Appraisal by independent appraisers may permit reduction in accounting goodwill by increasing the recognized worth of specific assets. iii) Appraisal by an independent agency provides a test of reasonableness of result obtained through methods based upon the going concern concept.
iv) The appraiser may identify strengths and weaknesses that otherwise may not be

recognizable. For example in valuation of patents and partially completed research and development expenditure On the other hand, this method of determination of a firms value is not adequate by itself as individual values of assets may have little relation to the firms overall ability to generate earnings, and thus, the going concern value of the firm. In brief, the appraisal value procedure is useful if carried out in conjunction with other evaluation processes.
c) Market Value The market value, as reflected in stock market operations,

comprises yet another approach for estimating the value of a business. It is the most widely used approach in determining value especially of large listed firms. The market value of a firm is determined by investment as well as speculative factors. This value can change abruptly as a result of change not only in analytical factors but also due to purely speculative influences and is subject to market sentiments and personal decisions. In actual practice, a certain percentage premium above the market price is often offered as an inducement for the current owners to sell their shares. Operationally, a ratio of exchange occurs for the shareholders of the acquired company. For example, if the market price of the shares of the acquiring company is Rs.60 per share and that of acquired company is Rs. 30 per share, and the acquiring offers a half share of its stock for each share of the acquired company. However, the company being acquired finds a little enticement to accept a one to one market value ratio of exchange. The acquiring company must offer a price in excess of
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current market price per share of the company it wishes to acquire. Acquiring company may have to offer 0.667 shares, or Rs. 40 a share in current market value. Bootstrapping Earnings per Share In the absence of synergism, improved management, or the under-pricing of bought companys stock in an inefficient market, it is not in the interest of the acquiring stockholders to offer a price in excess of the bought companys current market price. Acquiring stockholders could be better off if their companys price/earnings ratio were higher than the bought companys and if somehow the surviving company were able to keep that same higher price/earnings ratio after the merger. Assume the following financial information Company A Present Earnings No. of Shares Market price per Share Price/Earnings Ratio Rs 20000000 6000000 Rs 3.33 18x Company B Rs 6000000 2000000 Rs3.00 10x

With an offer of 0.667 share of Acquiring Company for each share of bought company, or Rs 40 a share in value. Obviously, the stockholders of the acquired company are benefited as they are being offered more than their stock is worth. Stockholders of acquiring company also stand to benefit, if the price/earnings ratio of the surviving company stays at 18. The market price per share of the surviving company, after the acquisition, all other things held constant would be the reason for increase in the market price per share whereby the stockholders of both companies benefit is the difference in the price/earnings ratios.

25

However, in reasonably efficient capital markets, it is unlikely that the market will hold Surviving Company Total Earnings No. of Shares Earnings per Share Price/Earnings Ratio Market Price Per Share Rs 26000000 7333333 Rs 3.55 18x Rs 63.90

constant the price/earnings ratio of a company that cannot demonstrate growth potential in ways other than acquiring companies with lower price/earnings ratios.

Thus, the acquiring company must allow for the price/earnings ratio changing with an acquisition. If the market is relatively free from imperfection and if synergism and/or improved management are not expected, the price/earnings ratio of the surviving firm is expected to approach a weighted average of the two previous price/earnings ratios.
d) Earnings per Share According to this approach, the value of a prospective

acquisition is considered to be a function of the impact of the merger on the earnings per share (EPS). In other words, the analysis could focus on whether the acquisition will have a positive impact on the EPS after the merger (Accretive merger) or if it will have the effect of diluting the EPS (Dilutive merger). The future EPS will affect the firms share prices, which is a function of price/earnings (P/E) ratio and EPS. Thus, when the share exchange ratio is in proportion to the EPS, there is no effect on the EPS of the acquiring/surviving company as well as on the acquired firm. But when the share exchange ratio is different, it may cause accretion in the EPS of the acquired firm and dilution in the EPS of the surviving firm, or vice-versa. For management of a firm considering acquiring another firm, a merger that results in dilution in EPS should be avoided. However, the fact that the merger immediately dilutes a firms current EPS need not necessarily make the transaction undesirable. Such a criterion places undue emphasis upon the immediate effect of the prospective merger on the EPS. In examining the consequences of the merger upon the surviving concerns EPS, the analysis should be extended into future periods and the effect of the future growth rate in earnings should also be included in the analysis. Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the
26

business is being evaluated for interest's sake. There are other, more detailed ways of expressing the value of a business. These reports generally get more detailed and expensive as the size of a company increases; however, this is not always the case as there are many complicated industries which require more attention to detail, regardless of size.
2) Financing techniques in merger After the value of the firm has been

determined, the next step is the choice of the method of payment of the acquired firm. The choice of financial instruments and techniques of acquiring a firm usually have an effect on the purchasing agreement. The payment may take the form of either cash or securities, that is, ordinary shares, convertible securities, deferred payment plans and tender offers. Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies.

a)

Cash Here payment is made by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders alone. A cash deal would make more sense during a downward trend in the interest rates. Another advantage of using cash for an acquisition is that there tends to lesser chances of EPS dilution for the acquiring company. But a caution in using cash is that it places constraints on the cash flow of the company.

b)

Ordinary Share Financing When a company is considering the use of common (ordinary) shares to finance a merger, the relative price/earnings ratio (P/E) ratios of the two firms is an important consideration. For instance, for a firm with high P/E ratio, ordinary shares represent an ideal method for financing mergers and acquisitions. Similarly, ordinary shares are more advantageous for both companies when the firm to be acquired has a low P/E ratio. This is illustrated in the table below

27

a) Premerger Situation Firm A i. ii. iii. iv. v. Earnings After Tax Number of Shares Outstanding EPS (i+ii) (Rs) P/E Ratio MPS (iii*iv) (Rs) 500000 100000 5 10x 50 5000000 Firm B 250000 50000 5 4x 20 1000000

Total Market Value (ii*v)

c) Post Merger SituationAssuming Share exchange ratio as 1:2.5 i.

ii.

1:1 750000 150000 5.00 10 50 7500000

EAT (Rs) No. of outstanding Shares EPS of combined firm (i+ii) (Rs) P/E Ratio of Combines firm MPS per Share of combined firm

750000 120000 6.25 10 62.5 7500000

iii. iv. v.

Total Market Value of the Firm (ii*v)

The exchange ratio 1:2.5 is based on the current market prices of the shares of the two firms (20:50). This ratio implies that Firm A will issue 1 share for every2.5 shares of B.The final exchange ratio is determined by negotiation between the two firms on the basis of accrual of the merger gains to the stockholders of each company. It would depend on the relative bargaining process of the two firms and the market reaction of the merger move.

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c) Debt And Preference Shares Financing When some firms have a relatively

lower P/E ratio, as also the requirement of some investors might be different, the use of ordinary shares only for financing may not be advantageous. In such cases, other types of securities, in conjunction with or in lieu of equity shares, may be used for the purpose. The fixed income securities are compatible with the needs and purposes of mergers and acquisitions. The need for changing the financing leverage and the need for a variety of securities is partly resolved by the use of senior securities. In an attempt to shape a security to the requirements of investors who seek dividend / interest income in contrast to capital appreciation, convertible debentures and preference shares might be used to finance mergers. The use of such sources of financing has several advantages
i.

Potential earning dilution may be partially minimized by issuing a convertible security. Such an issue, if not restored to in place of equity shares, could ultimately result in reducing the dilution in the EPS. A convertible issue might serve the income objectives of the shareholders of the target firm without changing the dividend policy of the acquiring firm. Convertible security represents a possible way of lowering the voting power of the target company. Convertible security may appear more attractive to the acquired firm as it combines the protection of fixed security with the growth potential of ordinary shares

ii.

iii. iv.

d) Deferred Payment Plan Under this method, the acquiring firm, besides

making an initial payment, also undertakes to make additional payments in the future years to the target firm in the event of the former being able to increase earnings consequent to the merger. As the future payment is linked to the earnings of the firm, this plan is also known as earn-out plan. The deferred plan technique provides a useful means by which the acquiring firm can eliminate part of the guesswork involved in purchasing a firm.

29

Adopting such a plan gives several advantages to the acquiring firm

i.

It emerges to be an appropriate outlet for adjusting the differences between the value of shares the acquiring firm is willing to issue and the amount the target firm is agreeable to accept for the business. The acquiring firm will be able to show a high post-merger EPS immediately as a fewer number of shares are to be issued at the time of the merger. There is a built in protection to the acquiring firm as the total payment is not made at the time of acquisition. In other words, it gives the management of the acquiring company the privilege of hindsight.

ii.

iii.

But at the same time, there are certain problems in this mode of payment
i.

The target firm must be capable of being operated as an autonomous business entity so that its contribution to the total projects may be determined. There must be freedom of operation to the management of the acquired firm. On the part of the management of the acquiring form, there must be willing cooperation to work towards the success and growth of the target firm, realizing that only by this way the two firms can gain from the merger.

ii. iii.

There can be various types of deferred payment plans. The arrangement eventually agreed upon the managements of the two firms. The most common arrangement is called the base period earn-out. Under this plan, the shareholders of the target firm are to receive additional shares for a fixed number of years if the firm is able to improve its earnings with respect to the earnings of the base period (i.e. the year before the acquisition).
e) Tender Offer A tender offer, as a method of acquiring a firm, involves a bid

by the acquiring for controlling interest in the acquired firm. The essence of this approach is that the purchaser approaches the shareholders of the firm rather than the management to encourage them to sell their shares generally at a premium over the market price.

30

Since the tender offer is a direct appeal to the shareholders, prior approval of the management of the target firm is not required. The use of tender offer allows the acquiring company to bypass the management of the company it wishes to acquire and, therefore, serves as a threat in any negotiations with that management. The tender offer can be used also when there are no negotiations but when one company simply wants to acquire another. It is not possible to surprise another company, because the Securities and Exchange Commission requires rather extensive disclosures. The primary selling tool is the premium that is offered over the existing market price of the stock. In addition, brokers are often given attractive commissions for shares tendered through them. The tender offer itself is usually communicated through financial newspapers. Direct mailings are made to the stockholders of the company being bid for, if the bidder is able to obtain a list of stockholders. Although, a company is legally obligated to provide such a list, it is usually able to delay delivery long enough to frustrate the bidder. As a form of acquiring firms, the tender offer has certain advantages and disadvantages. The disadvantages are
i.

If the target firms management attempts to block it, the cost of executing the offer may increase substantially. The purchasing company may fail to acquire a sufficient number of shares to meet the objective of controlling the firm.

ii.

The advantages are

i.

If the offer is not blocked, say in a friendly takeover, it may be less expensive than the normal route of acquiring a company. This is so because it permits control by purchasing a smaller proportion of the firms shares. The fairness of the purchase price is not questionable as each shareholder individually agrees to part with his shares at the negotiated price.

ii.

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3) Analysis of the Merger as a Capital Budgeting Decision As a normative

financial framework, the merger should be evaluated as a capital budgeting decision. The target firm should be valued in terms of its potential to generate incremental future cash inflows. Such cash flows should be incremental future free cash flows likely to accrue due to the acquisition of the target firm.

The Direct Cash Flows (DCF) Approach Free cash flows, in the context of a
merger, are equal to after tax operating earnings (expected from acquisition) plus noncash expenses, such as depreciation and amortization (applicable to the target firm), less additional investments expected to be made in the long term assets and working capital of the acquired firm. These cash flows are then to be discounted at an appropriate rate that reflects the riskiness of the target firms business. Like the capital budgeting decisions, the present value of the expected benefits from the merger to be compared with the cost of the acquisition of the target firm. Acquisition costs include the payment made to the target firms shareholders and debenture holders, the payment to discharge the external liabilities, estimated value of the obligations assumed, liquidation expenses to be met by the acquiring firm and so on, less cash proceeds expected to be released by the acquiring firm from the sale of certain assets of the target firm (not intended to be used in business subsequent to merger). The decision criterion is to proceed with the merger if the Net Present Value, NPV, is positive; the decision would be against the merger in the event of the NPV being negative.

32

The following steps are used to evaluate the merger decision as per the capital budgeting approach a) Determination of incremental projected Free Cash Flows to the Firm (FCFF) These FCFF should be attributable to the acquisition of the business of the target firm. The constituents of these cash flows are

After tax Operating Earnings (+) Non-Cash expenses such as Depreciation and Amortization (-) Investment in Long Term Assets (-) Investments in Net Working Capital

All the financial inputs should be on incremental basis.

b)

Determination of Terminal Value The firm is normally acquired as a going concern. The projected FCFF in such situations are made in two segments, namely, during the explicit forecast period and after the forecast period.

Terminal Value, TV, is the present value of FCFF, after the forecast period. Its value can be determined as per the following equations
i.

When FCFF are likely to be constant till infinity TV = FCFFT+1 / K0 Where, FCFFT+1 refer to the expected FCFF in the first year after the explicit forecast period.

ii.

When CFF are likely to grow (g) at a constant rate TV = FCFFT (1 + g) / (K0 g) When FCFF are likely to decline at a constant rate TV = FCFFT (1 g) / (K0 + g)

iii.

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c)

Determination of appropriate Discount Rate or Cost of Capital In the event of the risk complexion of the target firm matching with the acquired firm (for example, in the case of horizontal merger and firms having virtually identical debt-equity ratio), the acquiring firm can use its own weighted average cost of capital (k0) as discount rate. In case the risk complexion of the acquired firm is different, the appropriate discount rate is to be computing reflecting the riskiness of the projected FCFF of the target firm.

d)

Determination of Present Value of FCFF The present value of FCFF during the explicit forecast period [as per step (a)] and of terminal value [as per step (b)] is determined by using the appropriate discount rate [as per step (c)].

e)

Determination of cost of acquisition The cost of acquisition is determined as follows

Payment to equity shareholders (Number of equity shares issued in acquiring company X Market price of Equity Share) (+) Payment to preference shareholders (+) Payment to debenture holders (+) Payment to other external liabilities (+) Obligations assumed to be paid in future (+) Dissolution Expenses (to be paid by acquiring firm) (+) Unrecorded/Contingent Liability (-) Cash proceeds from sale of assets of target firm (not be used in business after acquisition)

34

The Adjusted Present Value (APV) Approach The APV approach is a

variant of the DCF approach used to value the target firm. This approach is very appropriate for valuing companies with changing capital structures and for valuing target companies which are having capital structures substantially different from those of acquiring companies. The approach values FCFF of target firm in two components i) The value of the target firm if it were entirely equity financed ii) Value the impact of debt financing both in terms of the tax benefit and The APV based valuation has its genesis in the Modigliani-Miller (MM) propositions on capital structure, according to which in a world of no taxes, the valuation of the firm (equity + debt) is independent of capital structure (change in debt/equity proportion). In other words, the capital structure can affect the valuation only through taxes and other market imperfections and distortions. The APV approach uses these concepts of MM to show the impact of debt financing in terms of tax shield on valuation. The approach first values the company as if it were wholly equity financed by discounting future FCFF at a discount rate referred to as unlevered cost of equity. Since interest is a deductible item of expense to determine taxable income, it provides tax savings (assuming the firm has taxable income). The values of these tax savings are then added. Finally, to have the full impact of debt financing reflected in the valuation of the target, adjustment is required to be made for incremental bankruptcy costs; the adjustment value may be determined subjectively or may be based on some suitable financial surrogate. The discount rate to value the tax shield will depend on the circumstances of each case. When the firm has a low target debt ratio and business prospects are very promising, there is a greater probability of realizing tax shields in the future. Therefore, in such a situation, the cost of debt can be used as the discount rate. On the other hand, if the target debt ratio of the firm as well as its business risk is high, there is obviously a greater uncertainty in realizing potential tax shields and, hence, they should be subject to a higher discount rate. Finally, the finance manager may also consider a discount rate lying somewhere between the cost of debt and the weighted average cost of capital or unlevered cost of equity.
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TAXATION ASPECTS
This section summarizes the relevant and important tax provisions applicable to amalgamations, mergers and acquisitions. Amalgamation for the purposes of income tax is recognized only if the conditions given under Section 2 (1B) of the Income Tax Act, 1961 (ITA) are fulfilled. According to Section2 (1B) amalgamation, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies that so merge are referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger is the amalgamated company) in such a manner that 1) All the property/liabilities of the amalgamating company immediately before the amalgamation, becomes the property/liabilities of the amalgamated company by virtue of the amalgamation. 2) Shareholders holding not less than three-fourths (in value) of the shares in the amalgamating company become shareholders of the amalgamated company by virtue of the amalgamation.

Tax concessions to the Amalgamated Company

The amalgamated company enjoys the following tax benefits 1. Carry Forward Depreciation and Set off of Business Losses and Unabsorbed

According to Section 72 A, the amalgamated company is entitled to carry forward accumulated losses as well as unabsorbed depreciation of the amalgamating company, provided the following conditions are fulfilled a. The amalgamated company continuously holds, for a minimum period of 5 years, from the amalgamation at least three fourths of the above value of fixed assets of the amalgamating company, acquired in the scheme of amalgamation. b. The amalgamated company continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation. c. The amalgamated company fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purposes.

36

d. The amalgamation should be of a company owning an industrial undertaking or ship. Industrial undertaking, in the context, means an undertaking that is engaged in i) The manufacture or processing of goods; or ii) The manufacture of computer software; or iii) The business of generation or distribution of electricity or any other form of power; or iv) The business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and Internet services; or v) Mining; or vi) The construction of ships, aircrafts or rail systems. In case where any of these conditions are not complied with, the set off of loss or allowance of depreciation made in any previous years of books of the amalgamated company would be deemed to be the income of the amalgamated company and chargeable to tax for the year in which such conditions are not complied with. 2) Expenditure on Scientific Research Where an amalgamating company transfers any asset represented by capital expenditure on scientific research to the amalgamated Indian company, unabsorbed capital expenditure in the books of the amalgamating company would be eligible to be carried forward and set off in the hands of the amalgamated company. 3) Expenditure on Acquisition of Patent Rights or Copy Rights The expenditure on patents and copyrights not yet written off in the books of amalgamating company would be allowed to be written off by the amalgamated company in the same number of balance installments. Where such rights are later sold off by the amalgamated company, the profit/loss on such sales would be treated in the hands of amalgamated company, in the same manner as it would have been allowed to be treated by the amalgamating company. 4) Expenditure on Know-how Regarding the expenditure incurred on know-how, the amalgamated company would be entitled to claim deduction with respect to the transferred undertaking, to the same extent and for the same residual period as otherwise would have been allowed to the amalgamating company, had such an amalgamation not taken place.
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5) Expenditure for Obtaining License to Operate Telecommunication Services When an amalgamating company transfers license to the Indian amalgamated company, the expenditure on acquisition of license, not yet written off, is allowed to the amalgamated company in the same number of balance installments. When such license is sold by the amalgamated company, the surplus/deficiency would be the same as would have been in the case of the amalgamating company. 6) Preliminary expenses Deduction of preliminary expenses (to the extent not amortized) would be made in the books of the amalgamated company in the same company as would have been allowed to the amalgamating company. 7) Expenditure on Prospecting of Certain Minerals Where an amalgamating company mergers with the amalgamated company, the amount of expenditure on prospecting, etc., of certain minerals of the amalgamating company that are not yet written off, would be allowed in the same manner as would have been allowed to the amalgamating company. 8) Capital Expenditure on Family Planning The capital expenditure on family planning not yet written off would be allowed to the amalgamated company in the same number of balance installments. 9) Bad Debts When the debts of amalgamating company have been taken over by the amalgamated company and subsequently such debt or part becomes bad, they would be allowed as a deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company. In short, the Income Tax Act for all types of business reorganizations / amalgamations / mergers has become fully tax neutral. Virtually, all fiscal concessions / incentives / deductions that would otherwise have been available to the amalgamating company are made available to the amalgamated company as well. In other words, the unwritten off amount, with respect to all these items, is treated in the hands of the amalgamated company in the same manner as would have been treated in the hands of the amalgamating company. Thus, the amalgamated company is not put to any disadvantage as far as the income tax concessions and incentives are concerned. The present generous/favorable fiscal provisions are indicative / reflective of Government policy to facilitate, promote and create opportunities for more amalgamations and mergers.

38

Tax concessions to the Amalgamating Company 1) Free of Capital Gains Tax According to Section 47(vi), where there is a transfer of any capital asset by an amalgamating company to any Indian amalgamated company, such transfer will not be considered as a transfer for the purpose of capital gain. 2) Free of Gift Tax According to Section 45(b) of the Gift Tax Act, where there is a transfer of any asset by an Indian amalgamating company, gift tax will not be attracted. Tax concessions to the Shareholders of the Amalgamating Company According to Section 47(vii), where a shareholder of an Indian Amalgamating company transfers his shares, such transaction will be disregarded for capital gain purposes, provided the transfer of shares is made in consideration of the allotment of any share to him or shares in the amalgamated company. Further, for computing the period of holding of such shares, the period for which such shares were held in the amalgamating company would also be included so that the shareholders of the amalgamating company are not put to disadvantage.

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LEGAL AND PROCEDURAL ASPECTS After the economic reforms in India in the post-1991 period, there is an apparent trend among promoters and established corporate groups towards consolidation of market share and diversification into new areas through acquisitions of companies, and in a more pronounced manner through mergers or amalgamation. Although the financial evaluation and the economic considerations, in terms of motive and effect, of the above mentioned are similar, the legal and procedures involved are different. The merger and amalgamation of corporate constitutes the subject matter of the Companies Act, the courts and law and there are well laid down procedures for valuation of shares and rights of investors. The acquisition/takeover bids fall under the purview of the SEBI. Scheme of Merger / Amalgamation Whenever two or more companies agree to merge with each other, they have to prepare a scheme of amalgamation. The acquiring company should prepare the scheme in consultation with its merchant banker(s) / financial consultants The main contents of a model scheme, inter-alia, are listed below a) Description of the transfer, the transferee company and the business of the transferor. b) Their authorized, issued and subscribed and paid-up capital. c) Basis of the scheme Main terms of the scheme, in self-contained paragraphs, on the recommendations of the valuation report, covering transfer of assets and liabilities, transfer date, reduction or consolidation of capital, application to financial institution for permission and so on. d) Change of name, object clause and accounting year. e) Protection of employment. f) Dividend position and prospects. g) Management Board of directors, their number and participation of the transferee companys directors on the board. h) Application under sections 391 and 394 of the Companies Act, 1956 to obtain High Court approval.

40

i) Expenses of amalgamation. J) Conditions of the scheme to become effective and operative, effective date of amalgamation. The basis of merger/amalgamation in the scheme should be the reports of the values of assets of both the merger partner companies. The scheme should be prepares on the basis of the valuers report, report of chartered accountants engaged for financial analysis and fixation of exchange ratio and the report of the auditors and audited accounts of both the companies prepared up to the appointed date. It should be ensured that the scheme is just and equitable to the shareholders and employees of each of the amalgamating company and to the public. Approvals for the scheme The scheme of merger are governed by the provisions of Sections 391-394 of the Companies Act. The legal process requires approval to the schemes, as listed below 1) Approval from Shareholders In terms of Section 391, shareholders of both the companies should hold their respective meetings under the directions of the respective high courts and consider the scheme of amalgamation. A separate meeting of both preference and equity shareholders should be convened for this purpose. Further, in terms of Section 81(1A), the shareholders of the amalgamated company are required to pass a special resolution for the issue of shares to the shareholders of the amalgamating company. 2) Approval from Creditors / Financial Institutions / Banks Approvals are required from the creditors, banks and financial institutions to the scheme of amalgamation in terms of their respective agreements/arrangements with each of the amalgamating and the amalgamated companies as also u/s 391. 3) Approvals from respective High Courts Approval of the respective high courts scheme are required to confirm the amalgamation. The courts issues orders for dissolving the amalgamating company, without winding up, on receipt of reports from the official liquidator and the regional director, Company Law Board, stating that the affairs of the amalgamating company have not been conducted in a manner prejudicial to interests of its members or to public interests.

41

Essential Features of the Scheme of Amalgamation 1) Determination of Transfer Date (Appointed Date) This involves fixing of the cut-off date from which all properties, movable as well as immovable, and rights attached thereto, are sought to be transferred from the amalgamating company to the amalgamated company. This date is known as the transfer date or the appointed date and is normally the first day of the financial year preceding the financial year for which the audited accounts are available with the company. 2) Determination of Effective Date The effective date is the date when all the required approvals under various statues, viz., the Companies Act, Companies (Courts) Rules and Income Tax Act, 1961, would be obtained and the transfer and undertaking of the amalgamating company with the amalgamated company would take effect. A scheme of amalgamation should also normally contain conditions to be satisfied for the scheme to become effective. The effective date is important for income tax purposes. The effect of the requirement is that a mere order for the transfer of the properties/assets and liabilities to the transferee company would cause the vesting only from the date of that order. For tax considerations, a mention of the date of vesting in the order is of material consequence. 3) The scheme should clearly state the arrangements with secured and unsecured creditors, including the debenture holders. 4) It should also state the exchange ratio at which the shareholders of the amalgamating company would be offered shares in the amalgamated company. The ratio has to be worked out based on the valuation of shares of the respective companies as per the accepted methods of valuation, guidelines and the audited accounts of the company. 5) In cases where the shares of the amalgamating company are held by the amalgamated company or its subsidiaries, the scheme must provide for the reduction in the share capital to that extent and the manner in which the compensation for shares held in the amalgamating company should be given. 6) The scheme should also provide for transfer of the whole or part of the undertaking to the amalgamated company, continuation of level proceedings between the amalgamating and amalgamated companies, absorption of employees of the amalgamating company, obtaining the consent of dissenting shareholders and so on.

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Scheme of Acquisitions/Takeovers Corporate takeovers in the country are governed by the listing agreement with stock exchanges and the SEBI Substantial Acquisition of Shares and Takeover Code (SEBI Code).The main elements of the regulatory framework for takeovers are Listing Agreement The takeover of companies listed on the stock exchanges is regulated by Clause 40-A and 40-B of the listing agreement. While Clause 40-A deals with minimum level of public shareholding, Clause 40-B contains the requirements to be met when a takeover offer is made. 1) Minimum Level of Public Shareholding In order to ensure availability offloading stock, every listed company should maintain, on a continuous basis, public shareholding of at least 25 percent of the total number of issued shares of a class/kind of its listed shares. Public shareholding excludes shares held by a) b) Promoters / promoter group Custodians against which depository receipts are issued overseas.

The minimum level of public shareholding in a company which,

a)

Offers / had offered in the past a particular class / kind of shares to the public under Rule 19(2) (b) of the Securities Contracts (Regulation) Rules, or Has at least two crore shares outstanding with a market capitalization of at least Rs. 1000 crore, Should be at least 10 percent of the total number of shares issued.

b)

2) Takeover Offer The Company also agrees that it is a condition for continuous listing that whenever the takeover offer is made or there is any change in control of management of the company, the person who secures the control and the company whose shares have been acquired would comply with the relevant provisions of the SEBI Takeover Code.

43

The SEBI Substantial Acquisition of Shares and Takeover Code (SEBI Takeover Code) A takeover bid is generally understood to imply the acquisition of shares carrying voting rights in a company, in a direct or indirect manner, with a view to gaining control over the management of the company. Such takeovers could take place through a process of friendly negotiation or in a hostile manner. Both the substantial acquisition of shares and change in control of a listed company are covered by takeover bids. The main elements of SEBI Code are 1) Disclosure of Shareholding and Control in a Listed Company 2) Substantial Acquisition of Shares / Voting Rights / Control
3)

Bail out Takeovers

4) Investigation / Action by the SEBI

1) Disclosure of Shareholding and Control in a Listed Company An acquirer of shares/voting rights with a total of existing holdings in excess of 5% / 10% / 14% / 54% / 74% in a company, in any manner, is required to disclose at every stage, to the concerned company, the aggregate of its shareholding/voting rights, within two working days of the receipt of intimation of allotment/acquisition of shares/voting rights. Similarly, an acquirer who acquires shares/voting rights of a company under the provisions relating to the consolidation of holdings should disclose purchases/sales aggregating 2 per cent or more of the share capital of the target company to the target company and the concerned stock exchanges, within two days, along with the aggregate shareholding after such acquisition / sale. The stock exchange should immediately display the information on the trading screen / notice board / its website. The term control includes the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders/voting agreements or in any other manner.

44

Persons Acting in Concert comprises persons who, pursuant for an agreement / understanding (formal/informal), directly / indirectly, cooperate for a common objective / purpose of substantial acquisition of shares / voting rights / gaining control over the target company. Unless the contrary is established, the following are deemed to be persons acting in concert with other persons in the same category a) b) A company, its holding/subsidiary company, company under the same management, either individually or together with each other; A company with any of its directors/ any person entrusted with the management of the funds of the company; Directors and their associates [i.e., any relative / family trusts and Hindu Undivided Families (HUFs)]; Mutual funds with sponsors and/or trustee and/or asset Management Company; FIIs with sub-accounts; Merchant bankers with their client(s) as acquirer; Portfolio managers with their client(s) as acquirer; Venture capital funds with sponsors; Banks with financial advisors, stock brokers of the acquirer or any holding /subsidiary / relative of the acquirer; Any investment company, in cases where such companies are used as vehicles to make substantial acquisition of shares / voting rights in a company, with any person who has an interest as director / fund manager / trustee / shareholder, having not less than 2% of the paid up capital of the company.

c)

d)

e) f) g) h) i) j)

Continual Disclosure All persons holding more than 15% shares/voting rights have to disclose within 21 days form the end of each financial year, with respect to their holdings, as on March 31, to the company concerned. Within 30 days from the end of the financial year ending March 31 as well as the record date of the company, for the purpose of declaration of dividend, all listed companies have to make yearly disclosures
45

of changes in respect of the holdings of such persons/promoters to the concerned stock exchange.

46

Every listed company should maintain a register in the specified format to record information received from:1. Persons acquiring more than or equal to 5% shares/voting rights, and

2. Promoters / any person having control over a company Power to call for information The stock exchange and the concerned companies would have to furnish information regarding disclosure of shareholding and control as and when required to the SEBI. 2) Substantial Acquisition of Shares / Voting Rights / Control over a Limited Company The SEBI Code is applicable to a) Acquisition of 15% of shares/voting rights of any company b) Consolidation of holdings c) Acquisition of control over a company. However, the code is inapplicable in the following cases a) Allotment in a public issue. Firm allotment in a public issue would be exempt only if full disclosure about the identity of the acquirer acquiring shares, the purpose of acquisition, consequential changes in the Board of directors of the company or change in control over the company / voting rights and shareholding pattern of the company, are given in the prospectus. b) Allotment in rights issues
(i) to the extent of shareholder entitlement and (ii) Additional allotment within the limit of the acquisition permitted by the

regulations, in any period of 12 months, for consolidation of holdings. The limit specified in (ii) does not apply to any person presently in control of the company and who has, in the rights letter of offer, made disclosures that they intend to acquire additional shares, beyond entitlement, if the issue is undersubscribed. However, this exemption would not be available in case the acquisition results in the change of control of management. c) Allotment to underwriters in pursuance of any underwriting arrangement. d) Inter se transfer of shares amongst

47

1. Group companies, within the definition of a group in the MRTP Act, where persons constituting such groups have been shown as group in the last published annual report of the target company; 2. Relatives; 3. Qualifying promoters i. Qualifying Indian shareholders, and
ii. Qualifying

promoters

and

foreign

collaborators

who

are

promoters, provided the transferor(s) as well as the transferee(s) have been holding less shares in the target company for a period of at least 3 years prior to the proposed acquisition.

4. The acquirer / person acting in concert with him where such transfer of shares

takes place three years after the closure of public offer by them under these regulations. The exemption under iii) and iv) would not be available if the inter se transfer of shares is at a price higher than 25% of the price as determined in terms of the regulation relating to the offer price. e) Acquisition of shares in the ordinary course of business by i. ii. iii. iv. v. A registered stockbroker, on behalf of his clients; A registered market maker, during the course of market making; A public financial institution, on its own account; Banks and public financial institution, as pledges; The International Finance Corporation, Asian Development Bank, IBRD, Commonwealth Development Corporation and other international financial institutions; A merchant banker / promoter of a target company, pursuant to a safety net scheme under the provision of SEBI DIP Guidelines, in excess of the limit specified for consolidation of holdings.

vi.

f) Acquisition by a person in exchange of shares received under a public offer made under these regulations. g) Acquisition of shares by way of transmission on succession or inheritance.

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h) Acquisition of shares by government companies and statutory corporations. The exemption is not applicable if a government company acquires shares / voting rights / control of PSUs through the competitive bidding process of the Central / state government meant for the purpose of disinvestment. i) Transfer of shares from state level financial institutions, including their subsidiaries, to a co-promoter of the company or his successor / assignee or an acquirer who had substituted an erstwhile promoter, pursuant to an agreement between them.
i.

Transfer of shares from the SEBI registered VCFs / FVCIs to promoters of an unlisted VCU, which subsequently got listed, pursuant to an agreement between them

J) Pursuant to a scheme (i)Framed under Sick Industrial Companies Act, (ii)Of arrangement / amalgamation / merger / demerger under any law / regulation, Indian or foreign. i. Change in control by takeover of management or by the restoration of management of the borrower target company by the secure creditors in terms of Securitization and Reconstruction of Financial Assets and Enforcements of Security Interest Act.

k) Acquisition of shares in unlisted companies provided such acquisition / change of control of an unlisted company, whether in India or abroad, would not result in the acquisition of shares / voting rights / control over a listed company.
i.

Acquisition of shares in terms of guidelines / regulations regarding delisting of securities specified / framed by SEBI.

L) Other cases as may be exempted by the SEBI. The acquirer would have to apply supported by a duly sworn affidavit together with a fee of Rs.25000 detailing the proposed acquisition and the grounds for seeking exemption. Within five days of the receipt of the application, the SEBI would refer it to a Takeover Panel constituted for the purpose, consisting of its own officers and majority representation of independent persons. The panel would make recommendations, within 15 days, on the basis of which the SEBI would pass an appropriate order within 30 days.

49

Power to remove difficulties In order to remove any difficulties in the interpretation / application of the provisions of the SEBI Code, the SEBI has the power to issue directions through guidance notes / circulars, which would be binding on the acquirers, target companies, shareholders, and merchant bankers. Acquisition of 15% or more Shares / Voting Rights An acquirer acquiring shares / voting rights that, together with existing holdings by him / person working in concert with him entitle him, to exercise 15% or more of the voting rights in a company, has to make a public announcement to that effect. Acquisition of Control No person can acquire control over the target company without making a public announcement, irrespective of whether or not there has been any acquisition of shares / voting rights. A change in control in pursuance to a special resolution of the shareholders passed in the general meeting is exempt from this requirement. For passing the special resolution, the facility of voting through a ballot box should also be provided. Acquisition would include direct / indirect acquisition of control of the target company by virtue of acquisition of companies, whether listed /unlisted and whether in India or abroad. Appointment of a Merchant Banker Before making any public announcement of the offer, the acquirer has to appoint a Category I merchant banker registered with the SEBI, who is not a group company / associate of the acquirer or the target company. Public Announcement of the Offer The merchant banker should announce the offer publicly not later than four working days of the agreement or the decision to acquire shares / voting rights in excess of the specified percentages. The public announcement should be made in all editions of one English national daily with wide circulation, one Hindi national daily with wide circulation and a regional language daily having circulation at the place of the registered office of the target company and the stock exchange where the shares are most frequently traded. Simultaneously, a copy should be
i.

submitted to the SEBI through the merchant banker Sent to all stock exchanges on which the shares are listed for being notified on the notice board Sent to the target company for being placed before its Board of Directors.

i. ii.

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Contents of the Public Announcement Offer The public announcement offer should contain the following a. b. c. d. e. The paid-up share capital of the target company, the number of fully paid up and partly paid-up shares; The total number and percentage of shares proposed to be acquired from the public, subject to the specified minimum; The minimum offer price for each fully paid-up or partly paid-up share; Mode of payment of consideration; The identity of the acquirer(s), and in case the acquirer is a company or companies, the identity of the promoters and or the persons having control over such company(ies) and the group, if any, to which the company(ies) belong; The existing holding, if any, of the acquirer in the shares of the target company, including holdings of persons acting concert with him; i. g. Existing shareholding, if any, of the merchant banker in the target company;

f.

Salient features of the agreement, if any, such as the date, the name of the seller, the price at which the shares are being acquired, the manner of payment of the consideration, and the number and percentage of shares in respect of which the acquirer has entered into agreement to acquire the shares or the consideration, monetary or otherwise, for the acquisition of control over the target company, as the case may be; The highest and average price paid by the acquirer or the persons acting in concert with him, for acquisition, if any, of shares of the target company made by him during the 12 months period prior to the date of public announcement; Object and purpose of acquisition of the shares; the future plans of acquirer, if any, for the target company, including the disclosure whether he proposes to dispose off or otherwise encumber any of the assets of the target company in the succeeding two years, except in the ordinary course of business of the target company;

h.

i.

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i.

An undertaking that the acquirer would not call / dispose off / otherwise encumber any substantial asset of the target company without the prior approval of shareholders;

j.

The specified date; The date by which individual letters of offer would be posted to the shareholders; The date of opening and closure of the offer and the manner in which and the date by which the acceptance or rejection of the offer should be communicated to the shareholders;

k.

l.

m. The date by which the shares, in respect of which the offer is accepted, would be acquired against payment of consideration; n. Disclosure to the effect that a firm arrangement for the financial resources required to implement the offer is already in place, including the details regarding the source of funds whether domestic or foreign; Provision for acceptance of the offer by person(s) who own the shares but are not the registered holders of such shares; The statutory approvals, if any, required to be obtained for the purpose of acquiring the shares under the Companies Act, the Monopolies and Restrictive Trade Practices Act, 1969, the Foreign Exchange Management Act (FEMA) and/or any other applicable laws; Approval of banks, and financial institutions required, if any; Whether the offer is subject to a minimum level of acceptance from shareholders; Such other information as is essential for the shareholders to make an informed decision with regard to the offer.

o. p.

q.
r.

s.

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Submission of Letter of Offer to the SEBI The acquirer should through its merchant banker file with the SEBI send a draft of the letter of offer containing the SEBI specified disclosures together with a fee of Rs. 50000, within 14days from the date of public announcement. Offer Price The offer should be payable in following ways a. In cash; a listed body corporate;
c.

b. By issue / exchange / transfer of shares of Acquirer Company if the acquirer is

By issue / exchange / transfer of secured instruments of the acquirer company with a minimum a grade rating from SEBI registered rating agency;

d. A combination of the three. The offer price should be the highest of a. The negotiated price under the agreement;

b. Price paid by the acquirer / person(s) acting in concert with him for acquisition, if any, including by way of allotment in public / rights / preferential issue during the 26 weeks prior to the date of announcement, whichever is higher; c. The average of weekly high and low of the closing prices of shares of the target company, as quoted in the stock exchange where they are most frequently traded during the 26 weeks, or, the average of the daily high and low of the closing prices of shares of the target company, as quoted in the stock exchange where they are most frequently traded during the two weeks preceding the date of announcement, whichever is higher.

Offer Price under Creeping Acquisition An acquirer making a public offer and seeking to acquire further shares for consolidation of holdings cannot acquire them during the period of six months from the date of closure of the public offer, at a price higher than the offer price. However, these restrictions would not be applicable to acquisitions made through the stock exchange(s). Competitive Bid Any person (other than the acquirer, making the first public announcement) who is desirous of making any offer, should, make a public announcement of his offer for the acquisition of the shares of the same target

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company, within a period of 21 days of the public announcement of the first offer. Such an offer is deemed to be a Competitive Bid.

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Any competitive bid/offer should be for such number of shares that when taken together with the shares already held by he / person acting in concert with him would at least equal the holding of the first bidder, including the number of shares for which the present offer by the first bidder has been made. Where there is a competitive bid, the date of closure of the original bid, as well as of all the competitive bids, would be the date of closure of the public offer under the last subsisting competitive bid and the public offer under all the subsisting bids would close on the same date. The option of making an upward revision of the offer, with respect to the price and number of shares to be acquired, is available to the bidders of the original bid as well as that of all the subsequent competitive bids, is available at any time up to 7 working days prior to the date of closure of the offer. However, the acquirer would not have the option to change any other terms and conditions of their offer except the mode of payment, following an upward revision in the offer.

Upward Revision of Offer Irrespective of whether or not there is a competitive bid, the acquirer who has made the public announcement of the offer, may make an upward revision of the offer, with respect to the price and number of shares to be acquired any time up to 7 working days prior to the date of closure of the offer. But any such upward revision of offer can be made only upon the acquirer a. Making a public announcement with respect to such changes or amendments in all the newspapers in which the original public announcement was made; b. Simultaneously with the issue of such public announcement, informing the SEBI, all stock exchanges on which the shares of the company are listed, and the target company, at its registered office; c. Increasing the value of escrow account.

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Withdrawal of Offer A public offer, once made, can be withdrawn only under the following circumstances a. The statutory approval(s) required have been refused

b. The sole acquirer, being a natural person, has died; c. Such circumstances as any in the opinion of the SEBI, merit withdrawal.

In the event of withdrawal, the merchant banker has to a. Make a public announcement in the same newspapers in which the public announcement of the offer was published, stating the reasons for withdrawal of the offer; b. Simultaneously with the issue of such public announcement, inform the SEBI, all stock exchanges on which the shares of the company are listed, and the target company, at its registered office.

Provision of Escrow The acquirer should as and by way of security of performance of his obligations deposit at least 25 percent of the total consideration payable in the public offer up to and including Rs 100 crore and10 percent of the consideration in excess of Rs 100 crore in an escrow account. The total consideration payable under the public offer should be calculated assuming full acceptances and at the highest price if the offer is subject to differential pricing, irrespective of whether the consideration for the offer is payable in cash or otherwise. The escrow account should consist of a. Cash deposit with a scheduled commercial bank;

b. Bank guarantee in favor of the merchant banker; c. Deposit of acceptable securities with appropriate margin, with the merchant banker The acquirer should empower the merchant banker, whilst opening the account, to operate the account and issue payments or realize the securities, for at least a period up to 20 days after the closure of the offer. In case of non-fulfillment of the obligations by the acquirer, the SEBI has the power to forfeit the escrow account, either in full or in part. In case of failure by the acquirer to obtain the approval of the shareholders for issue of securities as consideration within 21 days from date of closure of the offer, the amount in the escrow account may also be forfeited.
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3) Bail Out Takeovers A substantial acquisition of shares in a financially weak company, not being a sick industrial company, in pursuance to a scheme of rehabilitation approved by a public financial institution or a scheduled bank (lead institution), is referred to as a Bail out Takeover. A financially weak company means a company that has at the end of the previous financial year accumulated losses, which have resulted in the erosion of more than 50% but less than 100% of its net worth at the beginning of the previous financial year. The lead institution would be responsible for ensuring compliance with the SEBI Takeover Code. It would appraise the financially weak company, taking into account the financial viability and assess the requirement of funds for revival and then draw up the rehabilitation package on the principle of protection of the interests of the minority shareholders, good management, effective revival and transparency. The rehabilitation scheme has also to specify the details of any change in management.

Manner of Acquisition of Shares Before giving effect to any scheme of rehabilitation, the lead institution should invite offers for the acquisition of shares from at least three parties. The lead institution would provide the necessary information, to any person intending to make an offer to acquire shares, about the financially weak company and particularly in relation to its present management, technology, range of products manufactured, shareholding pattern, financial holding and performance and assets and liabilities of such a company for a period covering five years from the date of the offer. Manner of Evaluation of Bids The lead institution should evaluate the bids received with respect to the purchase price or exchange of shares, track record, financial resources, the management reputation of the person acquiring the shares, and ensure fairness and transparency in the process. Based on the evaluation, the offers received should be ranked in order of preference and after consultation with the management of the financially weak company; one of the bids should be accepted. Person Acquiring Shares to Make an Offer and a Public Announcement The person acquiring shares identified by the lead institution should on receipt of a communication in this behalf from the lead institution, make a formal offer to acquire shares from the promoters of the financially weak company, financial institutions and also other shareholders of the company, at a price determined by mutual negotiation between the acquirer and the lead institution.

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The person acquiring shares from the promoters of the financially weak company must also make a public announcement of his intention to acquire shares from the shareholders of the company, containing all relevant details and particulars as may be required by the SEBI. If the above offer results in the public shareholding being reduced to 10% or below of the voting capital of the company, the acquirer should a. Within a period of three months from the date of closure of the public offer, make an offer to buy out the outstanding shares remaining with the shareholders at the same offer price, which may have the effect of delisting the target company; or b. Undertake to disinvest through an offer for sale or by a fresh issue of capital to the public which would open within a period of six months from the date of closure of the public offer create such number of shares as would bring the public shareholding to a minimum of 25% or more of the voting capital of the target company so as to satisfy the listing requirements. Competitive Bid A person is not allowed to make a competitive bid for acquisition of shares of a financially weak company, once the lead institution has evaluated and accepted the bid of the acquirer who has made the public announcement of offer for acquisition of shares from shareholders other than the promoters of the said company. Exemption Offers made in pursuance of bail out takeovers can be exempted by the SEBI from the provisions of substantial acquisition of shares. But the lead institution or the acquirer, as far as may be possible, should adhere to the time limits specified for various activities of public offers in case of substantial acquisition of shares.

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4) Investigation and Action by the SEBI The SEBI may appoint one or more persons as investigating officer to undertake investigation for any of the following purposes a. Complaints received from the investors, the intermediates or any other person or any matter having a bearing on the allegations of substantial acquisition of shares and takeovers;

b. To investigate suo-moto upon its own knowledge or information, in the interest of securities market or investors interests, for any breach of the regulations; c. To ascertain whether the provisions of the SEBI Act and the regulations are being complied with or for any breach of these regulations

Before ordering such an investigation, it has to give not less than 10 days notice to the acquirer, the seller, the target company, or the merchant banker, as the case may be. However, if it is satisfied that in the interest of the investors, no such notice should be given, it may, by written order direct that such an investigation be taken up without notice. Obligations it would be the duty of the acquirer, the seller, the target company, or the merchant banker, whose affairs are being investigated, and of every director, officer and employee to produce such books, securities, accounts, records and other documents in its custody or control, to the investigating office, and furnish him with such statements and information, related to its activities, related to his activities, allow him reasonable access to premises occupied by them or person(s) acting in concert with them, as the investigating officer may require. The investigating officer, on completion of the investigation, would submit a report to the SEBI. After consideration of the investigation report, the SEBI would communicate the findings of the investigating officer to the acquirer, the seller, the target company, or the merchant banker, as the case may be, and give him a chance of being heard. On receipt of the reply, if any, it may call upon them to take such measures as it may deem fit in the interest of the securities market and for due compliance with the provisions of the SEBI Act and regulations.

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Directions by the SEBI In the interest of securities market or protection of the investor interest, in addition to its right to initiate action including criminal prosecution under Chapter VI-A and section 24 of the SEBI Act, the SEBI can issue such directions, as it deems fit, including a. Appointment of a merchant banker for the purpose of causing disinvestment of shares acquired in breach of regulations relating to i. ii. iii. Acquisition of 15% or more shares/voting rights of any company; Consolidation of holdings; Acquisition of control over a company, either through a public auction or market mechanism, in its entirety / in small lots, or through an offer for sale;

b. Transfer of any proceeds/securities to the Investors Protection Fund of a

recognized stock exchange; c. Cancellation of shares by the target company / depository where an acquisition of shares, pursuant to an allotment, is in breach of regulation in (a) above; d. Target company / depository not to give effect to transfer / further freeze the transfer of any such shares and not to permit the acquirer / any nominee / any proxy to exercise any voting rights attached to shares acquired in violation of regulations as seen in (a) above; e. Debar any person concerned from accessing the capital market /dealing in securities for such period as may be determined by it; f. The person concerned to make a public offer to the shareholders of the target company, to acquire such no. of shares, at such offer price as determined by it; g. Disinvestment of such shares as are in excess of the percentage of the shareholding / voting rights specified for disclosure requirements under the regulations relating to i. Holding / acquisition of 5% and more shares / voting rights; ii. Continual disclosures;

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h. The person concerned should not dispose off assets of the target company contrary to the undertaking given in the letter of offer; i. The person concerned, who has failed to make / delayed a public offer has to pay the shareholders, whose shares have been accepted I the public offer made after the delay, the consideration amount along with interest at rates not less than the applicable rate payable by banks on fixed deposits. Penalties for Non-Compliance Any person failing to make disclosures, as required, would be liable to action in as per terms of the regulations and the SEBI Act. a. Failure to carry out the obligations, under the regulations, by the acquirer or any person(s) acting in concert with him would lead to forfeiture of the entire or a part of the sum deposited with the bank in the escrow account and also action as per the terms of the regulations and the SEBI Act. b. In case the Board of Directors of the target company fail to carry out their obligations they would be liable for penal action. c. In case of failure in carrying out the requirements of the regulations by an intermediary, the SEBI may initiate action for suspension or cancellation of his registration, according to the procedure specified in the regulations applicable to such intermediary. d. For any misstatement / concealment of material information to be disclosed to the shareholders / directors, where the acquirer is a body corporate / directors of the target company, the merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for penal action. The penalties may include i. Criminal prosecution, ii. Monetary penalties, iii. Directions under the SEBI Act, iv. Cease and desist order in proceedings, and v. Adjudication proceedings. Any person aggrieved by any order of the SEBI may opt to appeal to the Securities Appellate Tribunal (SAT)

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Strategies for Hostile Takeovers and Company Resistance Takeover Strategies The acquirer company can use any of the following techniques aimed at taking over the target company
a. Street Sweep This technique requires that the acquirer should

accumulate large amounts of stock in a company before making an open offer. The advantage is that the target firm is left with no choice but to give in.
b. Bear Hug In this case, the acquirer puts pressure on the management

of the target company by threatening to make an open offer. The board capitulates straightaway and agrees to a settlement with the acquirer for change of control.
c. Strategic Alliance This strategy involves disarming the opposing by

offering a partnership rather than a buyout. The acquirer should assert control from within and takeover the target company.
d. Brand Power This implies entering into an alliance with powerful

brands to displace the partners brand and, as a result, buy out the weakened company. Company Resistance and Defensive Strategies The Company being bid for can use a number of defensive tactics. Management may try to persuade stockholders that the offer is not in their best interests. Usually, the argument is that the bid is too low in relation to the true, long run value of the firm. The target company can also use one of the following strategies to defend itself against the attack mounted by the acquiring company in its bid for open market takeover
1. Poison Pill This strategy involves issue of low price preferential shares

to existing shareholders to enlarge the capital base. This would make hostile takeover too expensive. The distribution of rights to existing shareholders allows them to purchase a new security, often a convertible preferred stock, on favorable terms. By favorable terms, the subscription price might be 40% of the true market value. However, the security offering is triggered only if an outside party acquires some percentage, frequently 20%, of the companys stock. This trigger is known as the flipin feature. The idea is to have available a security offering that is unpalatable to the acquirer. This can be respect to a bargain subscription price, or it can be with respect to voting rights or with respect to precluding a change in control unless a substantial premium is paid.
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2. Poison Put In this case, the target company can issue bonds that

encourage holders to cash in at high prices. The resultant cash drainage would make the target unattractive.
3. Greenmail In this strategy, the target company should repurchase the

shares cornered by the raider. The profits made by the raider are after all akin to blackmail and this would keep the raider at a distance from the target.
4. Pac-man Defense This strategy aims at the target company making a

counter bid for the raiders company. This would force the raider to defend him-self and consequently call off his raid.
5. White Knight In order to repel the move of the raider, the target

company can make an appeal to a friendly company to buy the whole, or part, of the company. The understanding is that the friendly buyer promises not to dislodge the management of the target company.
6. White Squire The strategy is essentially the same as White Knight and

involves sell out of the shares to a company that is not interested in the takeover. As a consequence, the management of the target company retains control over the company. For completed acquisitions, Robert Comment and G. William Schwartz found that the premium paid is high when a poison pill or other anti-takeover device is in place. Where a takeover attempt fails, management of the targeted company often undertakes actions that increase efficiency and shareholder wealth. Assem Safieddine and Sheridan Titman found that the targeted companies that leverage discipline themselves to make improvements. Efficiencies involved include cutting some capital expenditures, selling assets, reducing employment, and increasing focus. As a result, cash flows and share price performance are better on average than benchmarks in about 5 years following the failed takeover attempt.

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MERGER AND ACQUISITION MARKETPLACE DIFFICULTIES No marketplace currently exists for the mergers and acquisitions of privately owned small to mid-sized companies. Market participants often wish to maintain a level of secrecy about their efforts to buy or sell such companies. Their concern for secrecy usually arises from the possible negative reactions a company's employees, bankers, suppliers, customers and others might have if the effort or interest to seek a transaction were to become known. This need for secrecy has thus far thwarted the emergence of a public forum or marketplace to serve as a clearinghouse for this large volume of business. At present, the process by which a company is bought or sold can prove difficult, slow and expensive. A transaction typically requires six to nine months and involves many steps. Locating parties with whom to conduct a transaction forms one step in the overall process and perhaps the most difficult one. Qualified and interested buyers of multimillion dollar corporations are hard to find. Even more difficulties attend bringing a number of potential buyers forward simultaneously during negotiations. Potential acquirers in an industry simply cannot effectively "monitor" the economy at large for acquisition opportunities even though some may fit well within their company's operations or plans. An industry of professional "middlemen" (known variously as intermediaries, business brokers, and investment bankers) exists to facilitate M&A transactions. These professionals do not provide their services cheaply and generally resort to previously- established personal contacts, direct-calling campaigns, and placing advertisements in various media. In servicing their clients they attempt to create a one-time market for a one-time transaction. Certain types of merger and acquisitions transactions involve securities and may require that these "middlemen" be securities licensed in order to be compensated. Many, but not all, transactions use intermediaries on one or both sides. Despite best intentions, intermediaries can operate inefficiently because of the slow and limiting nature of having to rely heavily on telephone communications. Many phone calls fail to contact with the intended party. Busy executives tend to be impatient when dealing with sales calls concerning opportunities in which they have no interest. These marketing problems typify any private negotiated markets. Due to these problems and other problems like these, brokers who deal with small to mid-sized companies often deal with much more strenuous conditions than other business brokers. Mid-sized business brokers have an average life-span of only 12-18 months and usually never grow beyond 1 or 2 employees. Exceptions to this are few and far between. Some of these exceptions include:-

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The Sundial Group, Geneva Business Services and Robbinex. The market inefficiencies can prove detrimental for this important sector of the economy. Beyond the intermediaries' high fees, the current process for mergers and acquisitions has the effect of causing private companies to initially sell their shares at a significant discount relative to what the same company might sell for where it already publicly traded. An important and large sector of the entire economy is held back by the difficulty in conducting corporate M&A (and also in raising equity or debt capital). Furthermore, it is likely that since privately held companies are so difficult to sell they are not sold as often as they might or should be. Previous attempts to streamline the M&A process through computers have failed to succeed on a large scale because they have provided mere "bulletin boards" static information that advertises one firm's opportunities. Users must still seek other sources for opportunities just as if the bulletin board was not electronic. A multiple listings service concept was previously not used due to the need for confidentiality but there are currently several listings in operation. The most significant of these are run by the California Association of Business Brokers (CABB) and the International Business Brokers Association (IBBA) these organizations have effectively created a type of virtual market without compromising the confidentiality of parties involved and without the unauthorized release of information. One part of the M&A process which can be improved significantly using networked computers is the improved access to "data rooms" during the due diligence process however only for larger transactions. For the purposes of small-medium sized business, these data rooms serve no purpose and are generally not used.

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OTHER FORMS OF CORPORATE RESTRUCTURING DEMERGERS / DIVESTITURES A divestiture / demerger involves, unlike a merger or amalgamation in which all assets are sold, selling of some of the assets. These assets may be in the form of a plant, division, product line, subsidiary and so on. Divestitures can be involuntary or voluntary. An involuntary divestiture usually is the result of an antitrust ruling by the government. A voluntary divestiture is a willful decision by management to divest. Pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, a demerger means the transfer, by the demerged company, of one or more of its undertakings to any resulting company in such manner that 1. All the property / liabilities of the undertaking, being transferred by the demerged company, immediately before the demerger becomes the property / liabilities of the resulting company by the virtue of the demerger; 2. The property / liabilities of the undertaking, being transferred by the demerged company, immediately before the demergers are transferred at values appearing in its books of account; The resulting company issues, in consideration of the demerger, its shares on a proportionate basis to the shareholders of the demerged company;
3.

4. Shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for the resulting company or, its subsidiary) become shareholders of the resulting company or companies by the virtue of the demerger; 5. The transfer of the undertaking is on a going concern basis;

6. The demerger is in accordance with the conditions, if any, notified in this behalf under section 72 A (5) by the Central Government.

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Reasons / motives behind Divestitures / Demergers 1) Efficiency Gains and Refocus Although divestiture or demerger causes contraction from the viewpoint of the selling firm, it may not, however, entail decrease in its profits. On the contrary, it is believed by the selling firm that its value will be enhanced by parting / divesting / demerging some of its assets / divisions / operating units. By selling such unproductive/underperforming assets and utilizing cash proceeds in expanding / rejuvenating other leftover assets / operating units, the firm is likely to augment the profits of the demerged firm. As Gitman aptly states, the motives for divestiture is to generate cash for the other product lines, to get rid of a poorly performing operation, to streamline the corporate form, or to restructure the companys business consistent with its strategic goals. In other words, it implies that the operating units are worth much more to other firms than to the firm itself. In technical terms, it is referred to as reverse synergy, i.e. 4 2 = 3. 2) Information Effect Another reason for divestiture involves the information it conveys to investors. If there is asymmetric information not known by investors, the announcement of a divestiture may be interpreted as a change in the investment strategy or in operating efficiency. 3) Wealth Transfers If a company divests apportion of the enterprise and distributes the proceeds to stockholders, there will be a wealth transfer from debt holders to stockholders. The transaction reduces the probability that debt will be paid, and it will have a lesser value, all other things the same. 4) Tax Reasons As in mergers, sometimes tax reasons enter into a reason to divest. If a company loses money and is unable to use a tax-loss carry-forward, divestiture in whole or in part may be the only way to realize the tax benefit. Under some circumstances, an Employee Stock Ownership Plan (ESOP) is tax advantageous. Other, more technical tax issues also come into play. Financial Evaluation of Divestitures For the purpose of financial evaluation, the divestiture / demerger decision can be considered akin to reverse capital budgeting decision in that the selling firm receives cash by divesting an asset, say a division of the firm, and these cash inflows received are then compared with the present value of the CFAT (cash Inflows After Taxes) sacrificed on account of
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parting of a division / asset. Given the basic conceptual framework of capital budgeting, the following format contains the steps involved in assessing whether the divestiture decision is profitable for the selling firm or not. a) Decrease in CFAT due to sale of division (for years 1, 2, n) b) Multiply by appropriate cost of capital relevant to division (given its risk level) c) Decrease in present value of the selling firm (a X b) d) ( Present value of obligations related to the liabilities of the decision e) Present value lost due to sale of division (c d) Taxation Aspects Just like in mergers, in demerger also, the associated parties enjoy some tax benefits. They can be listed as below Tax Concessions to Resulting Company The resulting company is entitled virtually to all the tax concessions as are available to the amalgamated company. These are Carry forward and Set off of Business Losses and Unabsorbed Depreciation of the Demerged Company The accumulated losses and unabsorbed depreciation in a demerger should be allowed to be carried forward by the resulting company, if these are directly related to the undertaking proposed to be transferred. Where it is not plausible to relate these to the undertaking, such loss and depreciation would be apportioned between the demerged company and the resulting company in proportion of the assets coming to the share of each as a result of the demerger.
1.

Expenditure on Acquisition of Patent Rights or Copyrights Where the patent or copyrights acquired by the demerged company is transferred to the resulting Indian company, the expenditure on patents or copyrights not written off would be allowed to be written off in the hands of the resulting company in the same number of balance installments. On their subsequent sales, the treatment of deficiency / surplus in the resulting company would be the same as would have been in the case of the demerged company.
2.

3. 4.

Expenditure on Know How Expenditure for Obtaining License to Operate Telecommunication Services

5. Expenditure on Prospecting, etc of Certain Minerals Where there is a transfer of items listed (3 to 5) above by the demerged company to the resulting Indian company, the amount of expenditure not yet written off would be allowed to be written off in the hands of the resulting company in the same number of
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balance installments. On their subsequent sales, the treatment of deficiency / surplus in the resulting company would be the same as would have been in the case of the demerged company. 6. Preliminary Expenses Where the undertaking of an Indian company is transferred before the expiry of 10/5 years, to another company, the preliminary expenses of such an undertaking that are not yet written off would be allowed as deduction in the same manner as would have been allowed to the demerged company. 7. Bad Debts Where due to demerger, the debts of the demerged company have been taken over by the resulting company and subsequently such debt or part thereof becomes bad, such bad debts would be allowed as a deduction to the resulting company. Expenditure Related to Demerger In the case of expenditures that are incurred after the April 1, 1999, wholly and exclusively for the purpose of the demerger of an undertaking, the resulting Indian company incurring such an expenditure would be allowed a deduction of an amount equal to one-fifth of such expenditure for five successive previous years beginning with the previous year in which the demerger takes place.
8.

Tax Concessions to Demerged Company The concession for the demerged company are 1. Free of Capital Gains Tax Where there is a transfer of any capital asset in a demerger, such transfer would not be regarded as a transfer for the purpose of capital gain. 2. Reserves for Shipping Business Where a ship acquired out of the reserve is transferred even within the period of eight years of acquisition, there would be no deemed profits to the demerged company.

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Tax Concessions to the Shareholders Any transfer or issue of shares by the resulting company to the shareholders of the demerged company would not be regarded as transfer if the transfer or issue is made in consideration of the demerger of the undertaking. In case of demerger, the existing shareholders of the demerged company would hold shares in the resulting company as well as shares in the demerged company. Further, for computing the period of holding of such shares in the resulting company, the period for which such shares were held in the demerged company would also be included. Methods of Demergers / Divestitures A demerger can be carried out in several ways. The most common of them are 1) Sell Offs The sale of assets can consist of the entire company or of some business unit, such as a subsidiary, a smaller business unit, or a product line.
a. Liquidating the Overall Firm The decision to sell a firm in its entirety should be

rooted in value creation for the stockholders. Assuming the situation does not involve financial failure, the idea is that the assets may have a higher value in liquidation than the present value of the expected cash flow stream emanating from them. With a complete liquidation, the debt of the company must be paid off at its face value. If the market value of the debt was previously below this, debt holders realize a wealth gain, which ultimately is at the expense of the equity holders. b. Partial Sell offs In the case of a sell-off, only part of the company is sold. When a business unit is sold, payment generally is in the form of cash or securities. The decision should result in some positive net present value to the selling company. The key is whether the value received is more than the present value of the stream of expected future cash flows if the operation were to be continued. 2) Spin Offs A spin off involves a decision to divest a business unit such as a standalone subsidiary or division. In a spin-off, the business unit is not sold for cash or securities. Rather, common stock in the unit is distributed to the stockholders of the company on a pro rata basis, after which the operation becomes a completely separate company with its own traded stock. Such a distribution enables the existing shareholders to maintain the same proportion of ownership in the newly created firm as they had in the original firm. The newly created entity becomes an independent company, taking its own decisions and developing its own policies and strategies which
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need not necessarily be the same as those of the parent company. However, spin-off, like a sell-off, does not bring any cash to the parent company.

Motives for a spin-off a. A motive for a spin off may reduce information asymmetry about a companys individual business units. This may argue for highly diversified firms engaging in more spin-offs than less diversified firms. b. It may be possible with a spin-off to obtain greater flexibility in contracting things such as labor, debt, taxes and regulations. Greater contracting flexibility, in turn, should lead to improved productivity. c. Finally, the spin-off may make the financial markets more complete. With a publicly traded stock, the opportunity set of securities available to investors is expanded. 3) Split Ups A variation of spin-off is the split up. In broad terms, the split up involves the breaking up of the entire firm in a series of spin-offs (in terms of newly created separate legal entities) so that the parent firm no longer exists and only the new offspring survive. Since demerged units are relatively smaller in size, they are logistically more conveniently managed. Therefore, it is expected that split-ups and spin-offs are likely to enhance efficiency and may prove instrumental in achieving better performance. 4) Equity Carve Outs An equity carve-out is similar in some ways to the two previous forms of divestiture. However, common stock in the business unit is sold to the public. The initial public offering of the subsidiarys stock usually involves only a small part of it. Typically, the parent continues to have an equity stake in the subsidiary and does not relinquish immediate control. A minority interest, usually less than 20%, is sold in an IPO. The difference between the equity carve-out and the parent selling stock under its own name is that the claim is on the subsidiarys cash flows and assets. For the first time, the value of the subsidiary becomes observable in the marketplace. Some equity carveouts are later followed by a spin-off of the remaining shares to the parents stockholders.

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Motives for a Carve-out a. One motivation for an equity carve-out is that with a separate stock price and public trading, managers may have more incentive to perform well. For one thing, the size of operations is such that their efforts will not go unnoticed, as they sometimes do in a multi-business company. b. With separate stock options, it may be possible to attract and retain better managers and to motivate them c. An equity carve-out is also a favorable means for financing growth. When the subsidiary is in leading-edge technology but not particularly profitable, the equity carve-out may be a more effective vehicle for financing than financing through the parent. d. Another motivation may be a belief by management that though the parents stock is undervalued, a subsidiary would not be undervalued and may be even overvalued by the market. e. Also, with a separately traded subsidiary, the market may become more complete because investors are able to obtain a pure-play investment.

GOING PRIVATE AND BUYOUTS Going private simply means transforming a company whose stock is publicly held into a private one. The privately held stock is owned by a small group of investors, with incumbent management usually having a large equity stake. In this ownership reorganization, a variety of vehicles are used to buy out the public stockholders. Such a buyout is generally known as a Management Buyout (MBO). In the corporate world, MBOs are the more usual modes of acquisition. The management to which the firm is sold need not necessarily be from the same firm. The management may be from the same firm or may be form outside (entrepreneurs) or may assume a hybrid form (i.e. the management may be of the existing firm as well as from outside). The most common way of going private is cashing the stockholders out and merging the company into a shell corporation owned solely by the private investor / management group. Rather than a merger, the transaction may be treated as an asset sale to the private group. The result is that the company ceases to exist as a publicly held entity and the stockholders receive a valuable consideration for their shares. Though most transactions involve cash, sometimes non-cash compensations, such as
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notes, are employed. The stockholders must agree to a company going private, and the incentive paid to them is the premium in price paid. Even when the majority vote is in favor, other stockholders can sue, claiming the price is not high enough. Motivations for Going Private There are a number of factors that may motivate the management to take a company private. Some of them are a. There are costs to being a publicly held company. The stock must be registered, stockholders must be serviced, there are administrative expenses in paying dividends and sending out materials, and there are legal and administrative expenses in filing reports with the Securities and Exchange Commission and other regulators. In addition, there are annual meetings and meetings with security analysts leading to embarrassing questions that most CEOs would rather do without. All these can be avoided by being a private company. b. With a publicly held company, some feel there is a fixation on quarterly accounting earnings as opposed to long-run economic earnings. To the extent these decisions are directed more toward building economic value, going private may improve resource allocation decisions and thereby enhance value.
c. Another motivation is to realign and improve management incentives. With

increase equity ownership by management, there may be an incentive to work more efficiently and longer. The rewards are linked more closely to their decisions. The greater the performance and profitability, the greater the reward. In a publicly held company, the compensation level is not so directly linked, particularly for decisions that produce high profitability. When compensation is high in a publicly held company, there are always questions from security analysts, stockholders and the press. LEVERAGED BUYOUTS Going private can be a straight transaction or it can be a leveraged buyout (LBO), where there are third- or sometimes fourth-party investors. In general, when the potential acquiring management may not / does not have adequate financial resources of its own to pay the acquisition price, it seeks financial support from other sources, say, investors, venture funds, banks and so on. When finance is arranged by outside investors, it is normal for them to secure representation on the board of the corporate. According to Emery and Finnerty, a leveraged buyout is an acquisition that is financed principally, sometimes more than 90 percent, by borrowing on a secured basis. Sometimes called asset-based financing, the debt is secured by the assets of the enterprise involved. Another distinctive feature is that leveraged buyouts are cash
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purchases, as opposed to stock purchases. Also, the business unit involved invariably becomes a privately held, as opposed to a publicly held company.

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Characteristics of Desirable LBO Candidates a. Since LBOs cause substantial financial risk, it is desired that LBO acquisitions / firms should have a relatively low degree of operating / business risk. LBOs will not be a suitable form of corporate restructuring if the acquired firm already has a high degree of business risk. b. Frequently, the company has a several-year window of opportunity where major expenditures can be deferred. Often, it is a company that has gone through a heavy capital expenditures program, and whose plant is modern. Companies with high R&D requirements, like drug companies, are not good LBO candidates. For the first several years, cash flows must be dedicated to debt service. Capital expenditures, advertising, R&D, and personnel development take a back seat. If the company has subsidiary assets that can be sold without adversely impacting the core business, this may be attractive. Such asset sales provide cash for debt service in the early years. c. Stable, predictable operating cash flows are prized. In this regard, consumerbranded products dominate commodity type businesses. Proven historical performance with an established market position means a lot. Also, the less cyclical the business, the better it is. d. As a rule, the assets must be physical assets or brand names. Management, however, is important. The experience and quality of senior management are critical to success. When such management is not in place, outsiders must be brought in. e. Finally, the absence of pre-existing leverage is desirable.

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LEVERAGED RECAPITALIZATIONS The LBO must be distinguished from a Leveraged Recapitalization, or Leveraged Recap as it is known. With a LBO, public stockholders are bought out and the company or the business unit becomes private. With a leveraged recap, a publicly traded company raises cash through increased leverage, usually massive leverage. The cash then is distributed to stockholders, often by means of a huge dividend. In contrast to a LBO, the stockholders continue to hold shares in the company. The firm remains a public corporation with a traded stock. These shares are known as stub shares. Obviously, they are worth a lot less per share, owing to the huge cash payout. While a cash payout is more common, stockholders could receive debt securities or even preferred stock. In the transaction, management and other insiders do not participate in the payout but take additional shares instead. As a result, their proportional ownership of the corporation increases considerably. Thus, management obtains a large equity stake in the company, but unlike an LBO, this stake is represented by publicly traded stock. The leveraged recap does not lend itself to a business unit, as does an LBO; it must involve the company as a whole. Often, leveraged recaps occur in response to a hostile takeover threat or to managements perception that the company is vulnerable though not directly under attack. A leveraged recap can occur without putting the company up for sale, as is required by a LBO.

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Valuation Implications Though the leveraged recap is a defensive tactic and such devices usually work to the disadvantage of stockholders, this is different. a. As a case, leverage and increased equity stake may give management more incentive to manage efficiently and to reduce wasteful expenditures.
b. There is also the tax shield that accompanies the use of debt.

c. By the virtue of absorbing free cash flows, leverage may have a productive effect on management efficiency. d. Also, under the discipline of debt, internal organization changes may now be possible that lead to improvements in operating performance. Though there are other darker sides to this too a. With the high degree of leverage, there is little margin for error. Not surprisingly, a number of leveraged recaps do not make it. b. Operating difficulties, often due to industry wide problems, beyond the control of the company, are magnified by the financial leverage. c. Another disadvantage, relative to an LBO, is that as a public company, shareholder servicing costs and security regulations and disclosures remain. REVERSE MERGERS One of the options available to small- to medium-sized privately held companies that are looking to raise additional capital or to make acquisitions is the reverse merger. A reverse takeover occurs when a publicly-traded smaller company acquires ownership of a larger company. It typically requires reorganization of capitalization of the acquiring company. In the event the larger company is not publicly traded, the reverse takeover results in a privately held company becoming a publicly held company by circumventing the traditional process of filing a prospectus and undertaking an initial public offering (IPO). It is accomplished by the shareholders of the private company selling their shares in the private company to the public company in exchange for shares of the public company. Reverse merger financial transactions are becoming increasingly popular and accepted. It is an alternative means for private companies to go public.
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The reverse merger originated as an alternative to the traditional initial public offering (IPO) process for companies that want the benefits of being a public company without the expense and complexities of the traditional IPO. The reverse merger is often suggested as the best option to provide greater access to the capital markets, increase the companys visibility in the investment community, and offer the opportunity to utilize its stock to make acquisitions. The traditional IPO process is difficult for a reason. It is part of the vetting process for keeping companies that are not ready for the harsh spotlight of the public markets out of the public markets. A study of companies choosing the reverse merger route over the past two years indicates that the majority of them end up becoming effectively publicly traded private companies with small market capitalizations, single digit (or lower) stock prices, and little to no visibility in the investment community. The Process In a reverse merger a private company merges with a publicly listed company that doesnt have any assets or liabilities. The publicly traded corporation is called a shell since all that remains of the original company is the corporate shell structure. By merging into such an entity the private company becomes public. After the private company obtains a majority of the public companys stock and completes the merger, it appoints new management and elects a new Board of Directors. Shell companies used in reverse mergers are generally one of two types. The first is a failed public company that remains to be sold in order to recoup some of the costs of the failed business. These shells have the potential for unknown liabilities, lawsuits, dissatisfied shareholders, and other potential skeletons in the closet.The second are created for the specific purpose of being sold as a shell in a reverse merger transaction. These typically carry less risk of having unknown liabilities. Benefits a. The advantages of public trading status include the possibility of commanding a higher price for a later offering of the company's securities. Going public through a reverse takeover allows a privately held company to become publicly held at a lesser cost, and with less stock dilution than through an initial public offering (IPO). While the process of going public and raising capital is combined in an IPO, in a reverse takeover, these two functions are separate. A company can go public without raising additional capital. Separating these two functions greatly simplifies the process.
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b. In addition, a reverse takeover is less susceptible to market conditions.

Conventional IPOs are risky for companies to undertake because the deal relies on market conditions, over which senior management has little control. If the market is off, the underwriter may pull the offering. The market also does not need to plunge wholesale. If a company in registration participates in an industry that's making unfavorable headlines, investors may shy away from the deal. In a reverse takeover, since the deal rests solely between those controlling the public and private companies, market conditions have little bearing on the situation. c. The process for a conventional IPO can last for a year or more. When a company transitions from an entrepreneurial venture to a public company fit for outside ownership, how time is spent by strategic managers can be beneficial or detrimental. Time spent in meetings and drafting sessions related to an IPO can have a disastrous effect on the growth upon which the offering is predicated, and d. Additionally, many shell companies carry forward what is known as a taxloss. This means that a loss incurred in previous years can be applied to income in future years. This shelters future income from income taxes. Since most active public companies become dormant public companies after a string of losses, or at least one large one, it is more likely that a shell company will offer this tax shelter. e. It is highly unusual to preserve any benefit from the tax loss carry forward in a shell company. The tax regulations normally reduce the loss carry forward by the percentage of the change in control. In a well structured reverse merger, the private company should end up with 95% or more of the stock after the merger, thus reducing the tax loss carry-forward by this amount. Drawbacks a. These have an illiquid, low priced stock, a low valuation, and little to no institutional following. The newly public company is effectively worse off after completing the reverse merger than it was prior to leaving the private domain. Other problems awaiting companies that emerge from the private arena include issues surrounding the disclosures required by a public firm and the regulatory requirements that the SEC demands. Public companies are required to file regular quarterly and annual reports, meet stringent accounting standards, and make them available to their public investors. Small to medium size private companies often lack the infrastructure and back office capabilities to support
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b.

the requirements of a public company. This requires additional capital expenditures in order to meet the regulatory and financial burdens of a publicly traded company.

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FINANCIAL RESTRUCTURING (INTERNAL RECONSTRUCTION) Financial restructuring is carried out internally in the firm with the consent of its various stakeholders. This form of reconstruction is relatively easier to put to ground. Financial restructuring is a suitable mode of restructuring of corporate firms that have incurred accumulated sizable losses over a number of years. As a result, the share capital of such firms, in many cases, gets substantially lost / eroded. In fact, in some cases, the accumulated losses may even be higher than the share capital, causing negative net worth. Given such dismal state of financial affairs, such firms are likely to have a dubious potential for liquidation. Financial restructuring or internal reconstruction is one measure of revival of only those firms that hold promise / prospects for better financial performance in the future years. To achieve the desired objective, such firms warrant / merit a restart with a fresh balance sheet, which does not contain the past accumulated losses and fictitious assets and shows share capital at its real worth. Restructuring Scheme Financial restructuring is achieved by formulating an appropriate restructuring scheme involving a number of legal formalities, including consent of the court and the consent of the affected stakeholders, say, creditors, lenders, and shareholders. It is normal for equity shareholders to make the maximum sacrifice, followed by preference shareholders and debenture holders, lenders and creditors respectively. The sacrifice may be a. In terms of waiver of a part of the sum payable to various liability holders; b. In terms of acceptance of new securities with a lower coupon rate, with a view to reduce the future financial burden on the firm; c. The arrangement may also take the form of conversion of debt into equity; sometimes, creditors, apart from reducing their claim, may also agree to convert their dues in to securities to avert pressure of payment. As a result of all these measures, the firm may have better liquidity to work with. Thus financial restructuring implies a significant change in the financial / capital structure of firms, leading to a change in the payment of fixed financial charges and change in the pattern of ownership and control.

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In other words, financial restructuring, or internal reconstruction, aims at reducing the debt/ payment burden of the firm. The aggregate sum resulting from a. b. The reduction / waiver in the claims from various liability holders, and Profit accruing from the appreciation of assets such as land and buildings,

Is then utilized to write off accumulated losses and fictitious assets, such as preliminary expenses, and create provision for bad and doubtful debts and downward revaluation of certain assets, such as plant and machinery, if they are overvalued. In practice, the restructuring scheme is drawn in such a way so that all the above requirements of write off are duly met. In brief, financial restructuring is unique in nature and is company specific. It is carried out, in practice, when all the stakeholders are prepared to sacrifice and are convinced that the restructured firm, reflecting true value of assets, capital and other significant financial parameters, can now be put back on the profit track. This type of restructuring helps in the revival of firms that otherwise would have faced closure or liquidation.

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SOME CASES OF CORPORATE RESTRUCTURINGS FROM THE REAL WORLD

In the United States, the first merger wave occurred between 1890 and 1904 and the second began at the end of World War I and continued through the 1920s. The third merger wave commenced in the latter part of World War II and continues to the present day. About two-thirds of the large public corporations in the USA have merger or amalgamations in their history. In India, about 1180 proposals for amalgamation of corporate bodies involving about 2400 companies were filed with the High Courts during1976-1986. These formed 6 % of the 40600 companies at work at the beginning of 1976. Mergers and acquisitions, the way in which they are understood in the western countries have started taking place in India in the recent years. A number of mega mergers and hostile takeovers could be witnessed in India now.

THE GREAT MERGER MOVEMENT (1895-1905) The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicles used were so-called trusts. To truly understand how large this movement wasin 1900 the value of firms acquired in mergers was 20% of GDP. In1990 the value was only 3% and from 19982000 was around 1011% of GDP. Organizations that commanded the greatest share of the market in 1905 saw that command disintegrate by 1929 as smaller competitors joined forces with each other. However, there were companies that merged during this time such as DuPont, Nabisco, US Steel, and General Electric that have been able to keep their dominance in their respected sectors today due to growing technological advances of their products, patents, and brand recognition by their customers. These companies that merged were consistently mass producers of homogeneous goods that could exploit the efficiencies of large volume production. The companies which had specific fine products, such as fine writing paper, took no part in the Great Merger Movement as they earned their profits on high margin rather than volume.

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Short run Factors One of the major short run factors that sparked in The Great Merger Movement was the desire to keep prices high. That is, with many firms in a market, supply of the product remains high. During the panic of 1893, the demand declined. When demand for the good falls, as illustrated by the classic supply and demand model, prices are driven down. To avoid this decline in prices, firms found it profitable to collude and manipulate supply to counter any changes in demand for the good. This type of cooperation led to widespread horizontal integration amongst firms of the era. Focusing on mass production allowed firms to reduce unit costs to a much lower rate. These firms usually were capital-intensive and had high fixed costs. Due to the fact that new machines were mostly financed through bonds, interest payments on bonds were high followed by the panic of 1893, yet no firm was willing to accept quantity reduction during this period. Long run Factors In the long run, due to the desire to keep costs low, it was advantageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than various sites of different companies as in the past. This resulted in shipment directly to market from this one location. In addition, technological changes prior to the merger movement within companies increased the efficient size of plants with capital intensive assembly lines allowing for economies of scale. Thus improved technology and transportation were forerunners to the Great Merger Movement. In part due to competitors as mentioned above, and in part due to the government, however, many of these initially successful mergers were eventually dismantled. The U.S. government passed the Sherman Act in 1890, setting rules against price fixing and monopolies. Starting in the 1890s with such cases as U.S. versus Addyston Pipe and Steel Co., the courts attacked large companies for strategizing with others or within their own companies to maximize profits. Price fixing with competitors created a greater incentive for companies to unite and merge under a single name so that they were not competitors anymore and technically not price fixing.

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MERGER OF RELIANCE PETROCHEMICALS INDUSTRIES LTD (RIL), 1992

LTD

(RPL)

WITH

RELIANCE

The merger of RPL with RIL in March 1992 was the biggest merger till date and resulted in the creation of the largest Indian corporate. RIL was engaged in the manufacture and sale of textile, fiber and fiber intermediates and petrochemicals. In particular, it was engaged in the manufacture of polyester staple fiber (PSF), polyester teraphtalic acid (PTA), linear alkyl benzene (LAB) and other products. Its paid up capital (Rs 157.94 crore) consisted of i.
ii.

Equity share capital, Rs 152.14 crore (15.21 crore shares of Rs 10 each), 11 percent cumulative redeemable preference shares of Rs 100 each, Rs 30 lakhs, 15 percent cumulative redeemable preference shares of Rs 100 each, Rs 5.5 crore.

iii.

The RPL was incorporated in November 1988 with the main objective of manufacturing poly-vinyl chloride (PVC), mono ethylene glycol (MEG) and high density poly ethylene (HDPE). Its paid up capital stood at Rs 749.30 crore consisting of 74.93 crore shares of Rs 10 each. In terms of a scheme of amalgamation approved by the shareholders of the two companies and the Mumbai and Gujarat High Courts in July/August 1992, the RPL was merged with RIL w.e.f. March 2, 1992. The merger was aimed to enhance shareholders value by realizing significant synergies of both the companies. Liberalization of government policy and the accompanying economic reforms created this opportunity for the shareholders of RIL. As per the scheme of amalgamation, the expected benefits of merger to the amalgamated entity, inter-alia, were
i.

Benefit from diversification as the risks involved in the operation of different units would be minimized Business synergy due to economies of scale and integrated operations Higher retained earnings leading to enhanced intrinsic values of shareholding to investors. The capital requirement would also be at manageable levels Strong fundamentals which would enhance its credit rating and resource raising ability in financial markets, both national and international
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ii. iii. iv.

The exchange ratio was one equity share of Rs 10 each in RIL for every 10 equity shares of RPL with a par value of Rs 10 each. The exchange ratio was based on the expert valuation made by three reputed firms of chartered accountants, namely, S.B. Billimoria & Co, Choksi & Co, and Heribhakthi & Co. Pursuant to the above, 74926428 equity shares of Rs 10 each were issued as fully paid up to the shareholders of RIL without payment being received in cash. All assets, liabilities and obligations of RPL were taken over by the merged entity RIL. The excess of assets over liabilities taken over by RIL consequent on the amalgamation less the face value of the equity shares issued to the shareholders of the RPL represented amalgamation reserve. All the employees of RPL on the date immediately preceding the effective date became the employees of the RIL. The post merger scenario of the RIL is reflected in the increase in its capital, turnover, net profit and equity dividend. Compared to the pre-merger capital of 157.94 crore, the post-merger capital rose to 358.74 crore. The turnover increased from Rs 2298 crore in1991-92 to Rs 7019 crore in 1994-95. Net profit of RIL stood at Rs 10651 crore in 1994-95 compared to Rs 163 crore in 1991-92. The equity dividend rose phenomenally to 55 percent in 1994-95 from 30 percent in 1991-92. The RIL emerged post-merger as a mega corporation and became a global player. Its foreign earnings in 1994-95 aggregated Rs 174 crore.

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DEMERGER OF DCM LTD, 1990 DCM Ltd, promoted by Late Shri Ram in 1889 became a conglomerate of 13 units with multifarious manufacturing activities in sugar, textile, chemicals, rayon tyre cord, fertilizers, and so on. These units on their own being of the size of independent companies, the directors felt that greater focus on the operation of the various units of the company would result in substantial improvement in the results of their operations. The post-reorganization slogan was The Trimmer we are, the Faster we are .To achieve the objective of carrying the business of DCM Ltd more smoothly and profitably, DCM Ltd was reorganized by dividing its business among four companies having shareholders with the same interest inter-se in DCM but to be managed and operated independently. The companies resulting from this division were 1) DCM Ltd comprising DCM Mills (DCM Estate), DCM Engineering Products, DCM Data Products, Hissar Textile Mills, Shri Ram Fibers Ltd, and DCM Toyota Ltd.
2) DCM Shri Ram Industries Ltd comprising Shri Ram Rayons, Daurala

Sugar Works, and Hindon River Mills. 3) DCM Shri Ram Industries Ltd comprising Shri Ram Fertilizers and Chemicals Industries Ltd, Shri Ram Cement Works Ltd, Swatantra Bharat Mills Ltd, and DCM Silk Mills Ltd.
4) Shri Ram Industrial Enterprises Ltd comprising Shri Ram Food and

Fertilizers Ltd, and Mawana Sugar Works Ltd. The division of DCM Ltd took place through the scheme of arrangement approved by the Delhi High Court on April 16, 1990 according to which three new companies were formed. The scheme of arrangement became effective from April 1, 1990. The four companies thereafter started operating independently, each with their respective Board of Directors. i) The total paid-up capital of Rs 23 crore was divided equally. ii) The allocation of various assets and liabilities among them was done as under iii) Though the liability of for debentures was divided, the debentures were physically retained in DCM Ltd. The mortgage of assets of various units already created with the
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trustees for debenture-holders were modified to the effect that each groups assets would stand charged only for the liability allocated to it.

Some of the notable features of the scheme of reorganization of the erstwhile DCM Ltd in to the four companies were DCM Shri Ram DCM Shri Ram Shri Ram DCM Ltd Industries Ltd Consolidated Ltd Industrial Enterprises Ltd 16% 33% 36% 15% 16% 12% 16.66% 36% 33.333% 36% 33.33%

Fixed Deposits Debentures

Common 16.66% assets / liabilities /income / benefit Expenses and 16.66% cost of arrangement Specific Assets

16.66%

33.33%

33.33%

(All at book value as on 1.4.1990 unit-wise)

iv) For payment of interest and principal amount to debenture holders, Indian Bank, which was the debenture trustees was appointed a Registrar by all the four companies and they remitted their share of liabilities to the Registrar on due dates for onward payment to debenture-holders. The cost of Registrar would be shared by all the companies. v) The fixed deposit receipts were split into four new receipts in the proportion in which the fixed deposits appeared in the books of account as on the effective date. vi) Upon transfer of undertakings to them, the new companies allotted one equity share each to the holders of four equity shares in DCM Ltd. The paid-up value of DCM equity was reduced thereupon fro Rs 10 per share to Rs 2.5 per share. Thereafter, the DCM equity shares were consolidated into equity shares of the face value of Rs 10 each. Any fraction arising on allotment / consolidation of shares was disposed off and sales proceeds distributed pro rata to the eligible shareholders. vii) The equity shares of the four companies were subsequently listed in the stock exchanges.
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viii) Disputes with respect to the provisions of the scheme of arrangement were to be settled by two arbitrators and an umpire appointed by the arbitrators. Thus, the demerger of DCM Ltd was completed with lots of innovation and practical solutions to the complex problem of reorganizing a century-old company. After the demerger, all the DCM Group companies have grown tremendously. From a nondividend position prior to the demerger, all the companies have grown manifold adding value both to the shares as well as to the new entities.

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ACQUISITION OF RANBAXY LABORATORIES LTD BY DAIICHI SANKYO, 2008 Ranbaxy Laboratories Limited, India's largest pharmaceutical company, is an integrated, research based, international pharmaceutical company, producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. The Company is ranked amongst the top ten global generic companies and has a presence in 23 of the top 25 pharmacy markets of the world. Ranbaxy was incorporated in 1961 and went public in 1973. For the year 2007, the Company's Global Sales at US$ 1,619 million reflected a growth of 21%. The company has a total paid up capital of Rs 28,022.12 million and also has a substantial amount of reserves and surplus. Daiichi Sankyo Co., Ltd. was created through the merger of two of Japans oldest pharmaceutical companies Sankyo Co., Ltd. and Daiichi Pharmaceutical Co., Ltd. Its manufacturing operations in Japan, where it has nine factories, are handled primarily by Daiichi Sankyo Propharma Co, Ltd. There are five major plants overseas one each in Europe, Taiwan and Brazil and two in China. Together, these facilities form a global supply chain network. All have established quality assurance systems based on and compliant with the Good Manufacturing Practice (GMP), which defines manufacturing and quality management requirements for pharmaceuticals. Daiichi Sankyos net sales, although affected by the spin-off of non-pharmaceutical businesses from the Group, increased by 0.4% year on year to 929.5 billion. It has a paid up share capital of US $ 1,524,237,000. The Japanese drug maker, Daiichi Sankyo recently announced the acquisition of an Indian pharmaceutical company, agreeing to buy out the promoters in a deal totally valued at $3.4-4.6 billion. Daiichi Sankyos open offer for up to 20 per cent stake in Ranbaxy Laboratories will open on August 8, as announced in the public announcement made on June 16, 2008. The Japanese company has agreed to acquire 34.81 per cent of the stake of the company from the promoters Mr. Malvinder Singh and family. The open offer for up to20 per cent at Rs 737 a share would increase Daiichi Sankyos stake in the company to a maximum of 58.09 per cent. The purchase price of Rs 737 by Daiichi Sankyo represents a premium of 53.5 per cent to Ranbaxys average daily closing price on NSE for the three months ending June 10, 2008. The letter of open offer will be sent to those who are the companys shareholders as on as on June 27, Daiichi Sankyo said in the public announcement.
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The closing date of the offer is August 27, 2008. The last date for a competitive bid (if anybody wants to make a counter bid to that of Daiichi Sankyo) for Ranbaxy is July 7, as stated in the public announcement. Once the deal is completed, the Singh family will cease to have any stake in the company though Mr. Malvinder Singh will continue to lead the pharmaceutical major as its Chief Executive Officer and Managing Director. Post acquisition, Ranbaxy would become a debt-free firm. The two firms said they plan to keep Ranbaxy a listed entity in India even as it retained the identity and brand. The combined market capitalization of both companies would be around $30 billion making it the worlds 15th largest pharmaceutical company. The transaction is expected to be completed by the end of March 2009. The company has also decided not to pursue the proposed demerger of its New Drug Discovery Research (NDDR) in a bid to synergize the R&D unit with Daiichi Sankyos research capabilities.

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BAIL OUT MERGER OF ITC CLASSIC FINANCIAL LTD WITH ICICI LTD, 1997-98 The Classic Leasing and Financial Services Ltd was merged into The Sage Investments, Summit Investments and Pinnacle Investments of the ITC group and renamed as ITC Classic Financial Ltd in 1986. Its main business was leasing, hire- purchase, capital market operations, investments and merchant banking. The company suffered a loss of Rs 285 crore in 1996-97 and Rs 74 crore during the first half of1997-98. The ITC Classic was amalgamated with the ICICI Ltd on and from April 21, 1998 with effect from April 1, 1997 in terms of the scheme of the scheme of merger sanctioned by the Mumbai and Kolkata High Courts. Accordingly, the undertaking and the entire business, all the properties, assets, rights and powers of ITC were transferred to and vested in, the ICICI Ltd. All the debts, liabilities and obligations were also transferred. The merger resulted in the transfer of assets, liabilities and reserves and the issue of shares as consideration therefore of the following summarized values Particulars Amount(in Rs Crore) Assets 1319 Liabilities 1325 R&S (41) Consideration for amalgamation (exchange ratio)- 3 1 equity share of Rs 10 each in ICICI Ltd for every 15 equity shares in ITC of Rs 10 each Adjustment of cancellation of ICICIs holdings in ITC 33 Amalgamation reserves arising out of merger The benefits of merger of ITC Classic envisaged by the ICICI were i. ii. iii. iv. Its plan to expand retail by tapping ITC Classics fixed deposit base The retail distribution infrastructure of ITC Classic consisting of 10 branches and12 franchises Existing retail investors base of ITC Classic of over 700000 Additional capital infusion in the form of preference capital by ITC to help in leveraging the operations.

The terms of the scheme of merger, preference shares of the aggregate value of Rs350 crore were issued on the effective date by adjustment of advance of Rs 350 crore received towards the issue. The ITC subscribed Rs 350 crore by way of preference
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shares in ICICI Ltd. These shares has a face value of Rs 1 crore each, with dividend of Rs 100 per annual per share redeemable at par after 20 years from the effective date of allotment. The 14% cumulative redeemable preference shares of Rs 100 each of the ITC Classic aggregating Rs 21.8 crore were repaid by the ICICI Ltd after the effective date of merger. The tax set-off and the low cost of funds were the major benefits of the merger of the ITC Classic with the ICICI Ltd. For instance, the ICICI Ltd made total provisions of Rs 495 crore against bad and doubtful debts (Rs 311 crore) and against substandard assets (Rs 184 crore) on account of the ITC Classic. Provision against bad and doubtful debts of Rs 311 crore included Rs 264 crore being provision and write off made against assets vested upon merger of the ITC Classic. The assets provided against include those which would have been classified as a non-performing asset based on guidelines applicable to financial institutions and assets that were expected by the management to carry limited possibility for realization of amounts lent and the balance principal value of the leased assets and stock on hire. These provisions were made by the appropriations of
i. ii.

Rs 5 crore from Reserves for loan loss Rs 21 crore from allocation in terms of Section 36(1) (vii-a) of the Income Tax Act Rs 189 crore from Special Reserves in terms of Section 36(1) (viii) of the Income Tax Act Rs 280 crore transferred to General Reserves out of Special Reserves created in terms of Section 36(1) (viii) of the Income Tax Act.

iii.

iv.

As a result of the provisioning for NPA / withdrawal from reserves to availing of tax deductions for bad debts, the effective tax rate of ICICI Ltd declined to 8.4% in 199798 from 12.14% in 1996-97.

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The merger scheme was specifically conditional upon and subject to a. Infusion of funds by ITC itself or through affiliates. Rs 350 crore as interest free advance before November-December 1997; b. The discharge before the agreed sales of all secured creditors and release of all charges; c. Satisfying the ICICI that there were no charges; d. The purchase by ITC Group of all outside investments held by ITC Classic for an aggregate consideration of Rs 241 crore; e. The transfer to ITC Classic, of Rs 7.12 crore in discharge of obligations by another company; f. The purchase by ITC Group of assets leased by ITC Classic at a net value of Rs31.1 crore; g. Redemption of shares of ITC Classic; h. Discharge of intercorporate debt of ITC of Rs 88 crore; i. Ensuring vacant, lawful possession of all immovable properties of ITC Classic;
j. Making of cash contribution of ITC of losses in excess of Rs 30 crore; k. Payment of commitment charges by ITC to ITC Classic of Rs 15 crore.

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ACQUISITION OF CORUS BY TATA STEEL, 2007 The London-based Corus Group is one of the world's largest producers of steel and aluminum. Corus was formed in 1999 following the merger of Dutch group Koninklijke Hoogovens N.V. with the UK's British Steel Plc on October 6, 1999. It employs 47,300 people worldwide and 24,000 people in the United Kingdom. It is listed on the London Stock Exchange, Euro next Amsterdam and the New York Stock Exchange. Corus has four divisions strip products division, long products division, distribution and building systems division, and aluminum division. Corus has an annual turnover of$18 billion. Corus is a customer focused, innovative value-driven company, which manufactures processes and distributes steel products and services to customers worldwide. Corus is Europe's second largest steel producer with annual revenues of around 12 billion and a crude steel production of over 20 million tones. Corus supplies a variety of innovative solutions to a broad range of markets including automotive, construction, Energy and Power, Rail, Engineering and business services, consumer products etc. Founded in the mid-19th century, the Tata Group now has 96 companies in sectors ranging from services to energy to consumer products. The Group, which last year saw revenues of $21.9 billion, employs around 202,700 people. It has a market capitalization of $49.2 billion. Tata has plenty of experience in M&As. In 2002, its tea division bought a controlling stake in U.K. firm Tetley for$407 million. In 2004, Tata Steel acquired Singaporean firm NatSteel for $486 million. In 2005, Videsh Sanchar Nigam Limited acquired U.S. firm Teleglobe, a provider of voice, data and mobile signaling services, for $239 million. This year, Tata Tea bought a stake in the U.S. water manufacturer Glaceau for $677 million, and Tata Coffee acquired Eight Oclock Coffee of the U.S. for $220 million. Tata Steel, which was set up in 1907, prides itself on being one of the lowest cost producers of steel in the world. Company CEO B. Muthuraman said the company produces steel at $160 a ton. Corus makes it at $540 a ton, mainly because of high raw material costs. In 2005, Tata Steel was only the world's 56th biggest steel producer and its takeover of Corus represents its first expansion outside Asia. After the takeover, the firm will become the worlds 5th largest producer of steel. Initially, Tata Steel made an offer for Corus at 455 pence per share, valuing the firm at about US$ 7.6 billion. Then after a competitive bid by Companhia Siderurgica Nacional ("CSN") of 603 pence in cash per Corus Share, it revised it offer at 608 pence per share valuing it about 12.16 billion dollars or approximately 6.2 billion.
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Terms of the Revised Acquisition Under the terms of the Revised Acquisition, Corus Shareholders were entitled to receive 608 pence in cash for each Corus Share (the "Revised Price"). This represents a price of 1216 pence in cash for each Corus ADS. The terms of the Revised Acquisition value the entire existing issued and to be issued share capital of Corus at approximately 6.2 billion and the Revised Price represents
i.

An increase of approximately 33.6 per cent. Compared to 455 pence, being the Price under the original terms of the Acquisition; On an enterprise value basis, a multiple of approximately 7.0 times EBITDA from continuing operations for the year ended 31 December 2005 and a multiple of approximately 9.0 times EBITDA from continuing operations for the twelve months to 30 September 2006 (excluding the non-recurring pension credit of96 million); A premium of approximately 68.7 per cent. To the average closing mid-market price of 360.5 pence per Corus Share for the twelve months ended 4 October2006, being the last Business Day prior to the announcement by Tata Steel that it was evaluating various opportunities including Corus; A premium of approximately 49.2 per cent. to the closing mid-market price of407.5 pence per Corus Share on 4 October 2006, being the last Business Day prior to the announcement by Tata Steel that it was evaluating various opportunities including Corus; and A premium of approximately 21.6 per cent to the revised acquisition announced by Tata Steel on 10 December 2006 at a price of 500 pence per Corus Share.

ii.

iii.

iv.

v.

Financing The additional finance required under the proposed terms of the Revised Acquisition was funded by way of a combination of additional credit facilities and a cash contribution by Tata Steel to Tata Steel UK. ABN AMRO and Deutsche Bank, as joint financial advisers to Tata Steel and Tata Steel UK, ensured the availability of sufficient resources to satisfy in full the consideration payable to Corus Shareholders under the proposed terms of the Revised Acquisition. The acquisition was completed on January 31, 2007. The post-takeover result of the steel giant has been astounding. The company made a net profit of Rs 12,321.76 crore for the year ended March 31, 2008 as compared to Rs4, 165.61 crore in financial year 2007. Consolidated total income increased from Rs 25,650.45 crore for the year ended March 31, 2007 to Rs 132110.09 crore for
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fiscal2008.The full-year profit, excluding contributions from Corus Group Plc, rose 11%, aided by higher product prices. Net profit rose to Rs 4,687 crore in the year ended March 31, compared with Rs 4,222 crore a year ago. Net sales rose 12% to Rs 19,690 crore from a year earlier. The Tata Steel stock was up 1.90% to close at Rs 757.10 on the Bombay Stock Exchange. The stock is down 19% this year compared with a 29% drop in Indias benchmark sensitive index. A global shortage of steel helped Tata increase product prices for builders and auto companies, more than covering record raw material costs. Today, Tata Steel sells more than two-third of its output in Europe.

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ACQUISITION OF HUTCHINSON ESSAR BY VODAFONE, 2007 Vodafone Group Plc is the world's leading mobile telecommunications company, with a significant presence in Europe, the Middle East, Africa, Asia Pacific and the United States through the Company's subsidiary undertakings, joint ventures, associated undertakings and investments. The Group's mobile subsidiaries operate under the brand name 'Vodafone'. In the United States the Group's associated undertaking operates as Verizon Wireless. During the last two financial years, the Group has also entered into arrangements with network operators in countries where the Group does not hold an equity stake. Under the terms of these Partner Network Agreements, the Group and its partner networks co-operate in the development and marketing of global services under dual brand logos. At 31st March 2008, based on the registered customers of mobile telecommunications ventures in which it had ownership interests at that date, the Group had 260 million customers, excluding paging customers, calculated on a proportionate basis in accordance with the Company's percentage interest in these ventures. The Company's ordinary shares are listed on the London Stock Exchange and the Company's American Depositary Shares ('ADSs') are listed on the New York Stock Exchange. The Company had a total market capitalization of approximately 99 billion at 31 December 2007.Vodafone Group Plc is a public limited company incorporated in England under registered number 1833679. Its registered office is Vodafone House, The Connection, Newbury, and Berkshire, RG14 2FN, England. Hutch or Hutchison Essar is a leading telecom operator in India, controlled by the Hutchinson-Essar Group, consisting of Hutchison Telecom International and Essar. It provides prepaid and postpaid cellular services in about 75% of the total geographical Indian expanse. The company has a total of about 1.2 million subscribers all over India and has recently been one of the most successful mobile operators in the Indian subcontinent. In the race of acquiring Hutch, Vodafone has beaten players like Reliance Communications, the Hindujas (along with Russias Altimo and Qatar Telecom), and Essar itself. Vodafone has acquired the 67 per cent stake of Hutchison Telecom International in Indian mobile company Hutchison Essar. The enterprise value of Hutch Essar was valued at $18.8 billion. So Vodafone paid $11.1 billion to HTIL for the 67 per cent stake. Vodafone assumed net debt of approximately $2.0 billion. As of now, it looks like Essar will remain the minority partner with 33 per cent. Vodafone, however, said that it
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would make an offer to buy Essars stake at the equivalent price per share it has agreed with HTIL. Vodafone also said in a statement that it will sell 5.6 per cent stake in Indian Telco Bharti Airtel back to promoters for $1.6 billion. It will retain the remaining 4.4 per cent stake as financial investment. More importantly, Vodafone and Bharti have reached an infrastructure sharing agreement. The transaction closed in the second quarter of calendar year 2007.After the acquisition; Vodafone has renamed Hutch as under the Brand name of Vodafone and has also shown reasonable growth by providing attractive services to customers. Vodafone has got access to a greater market with increasing potentials and strives to compete in the growing competition.

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REVERSE MERGER OF ICICI LTD WITH ICICI BANK LTD, 2002 The ICICI Ltd was one of the leading development / public financial institutions (D/P FIs). It had sponsored a large number of subsidiaries including ICICI Bank Ltd. In 2002, the RBI permitted D/P FIs to transform themselves into banks. As a bank, ICICI Ltd would have access to low-cost (demand) deposits and could offer a wide range of products and services and greater opportunities for earning non-fund based income in the form of fee / commission. The ICICI Bank Ltd also considered various strategic alternatives in the context of emerging competitive scenario in Indian banking. It identified a large capital base and size and scale of operations as key success factors. The ICICI Ltd and its two other subsidiaries, namely, ICICI Capital Services Ltd (ICICI Capital) and ICICI Personal Financial Services Ltd (ICICI PFs) amalgamated in reverse merger with the ICICI Bank in view of its significant shareholding and the strong business synergies between them. As a financial institution, ICICI Ltd was offering a wide range of products and services to corporate and retail customers in India through a number of business operations, subsidiaries and affiliates. The ICICI PFs, a subsidiary of ICICI, was acting as a focal point for marketing, distribution and servicing the retail product portfolio of ICICI including auto/commercial vehicle loans, credit cards, consumer loans and so on. The ICICI Capital was engaged in sale and distribution of various financial and investment products like bonds, fixed deposits, Demat services, mutual funds and so on. The appointed dare for the merger was March 30, 2002. The effective date was May 3, 2002. The (reverse) merger of ICICI Ltd and two of its subsidiaries with ICICI Bank has combined two organizations with complementary strengths and products and similar processes and operating structure. The merger has combined the large capital base of ICICI Ltd with strong deposit raising capacity of ICICI Bank, giving ICICI Bank improved ability to increase its market share in banking fee and commission while lowering the overall cost of funding through access to lower-cost retail deposits. The ICICI Bank would now be able to fully leverage the strong corporate relationship that ICICI has built seamlessly, providing the whole range of financial products and services to corporate clients. The merger has also resulted in the integration of the retail financial operations of the ICICI and its two merging subsidiaries and ICICI Banks into one entity, creating an optimum structure for the retail business and allowing the full range of assets and liability products to be offered to retail customers.

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As per the scheme of amalgamation (reverse merger) approved by the High Court of Gujarat and High Court of Mumbai in March / April 2002, the exchange ratio (consideration) of the merger was one fully paid up equity share of Rs 10 of ICICI Bank for 2 fully paid up equity shares of the ICICI Ltd of the face value of Rs 10 each. No shares were issued pursuant to the amalgamation of ICICI PFs and ICICI Capital. The exchange ratio was determined on the basis of a comprehensive evaluation process incorporating international best practices, carried out by two separate financial advisors (JM Morgan Stanley and DSP Merrill Lynch) and an independent accounting firm (Deloite, Haskins and Sells). The equity shares of the ICICI Bank held by ICICI Ltd were transferred to a trust, to be divested by appropriate placement. The proceeds of such divestment would accrue to the merged entity. The ICICI Bank has issued to the holders of preference shares of Rs 1 crore each of ICICI, one preference share of Rs 1 crore fully paid up on the same terms and conditions. As both ICICI Ltd and ICICI Bank were listed in India and U.S. markets, effective communication to a wide range of investors was a critical part of the merger process. It was equally important to communicate the rationale of the merger to domestic and international institutional lenders and to rating industries. The merger process was required to satisfy legal and regulatory procedures in India, as well as to comply with the U.S. Securities and Exchange Commission requirements under U.S. security laws. The merger also involved significant accounting complexities. In accordance with the best practices in accounting, the merger has been accounted for under the purchase method of accounting under the Indian GAAPs. Consequently, ICICIs assets have been fair-valued for their incorporation in the books of accounts. The fair value of ICICIs loan portfolio was determined by an independent valuers while its equity and related investment portfolio was fair-valued by determining its mark-to-market value. The total additional provisions and write-offs required to reflect the fair value of the ICICIs assets have de-risked the loan and investment portfolios and created a significant cushion in the balance sheet while maintaining healthy levels of capital adequacy. The merger was approved by the shareholders of both companies in January 2002 and by the Gujarat and Mumbai High Courts in March / April 2002.

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ACQUISITION OF JAGUAR AND LAND ROVER BY TATA MOTORS, 2008 Jaguar is a brand that has epitomized luxury in British cars, just as British racing has been identified with Aston Martin. The brand's "Britishness" can be determined from the interesting fact that it is one of the few trademarks to hold Royal Warrants of Appointment from both Queen Elizabeth and Prince Charles. Such warrants have been issued for centuries to those who supply goods to the British royal family, and enable the suppliers to advertise this fact, lending them an air of prestige and exclusivity. This illustrious brand had its humble beginnings in 1922 as the Swallow Sidecar Company founded by two motorcycle enthusiasts, William Lyons and William Walmsley. The company was originally located in Black pool but moved to Coventry in1928 when demand for the popular Austin Swallow overshot the factory's capacity. Today, Jaguars are assembled at Castle Bromwich in Birmingham and Hale wood in Liverpool after the historic Browns Lane plant closed in 2005.The Jaguar name first appeared in one of the company's products in 1935 - a 2.5L sedan named the SS Jaguar, where "SS" stood for "Swallow Sidecar". After World War II, the company was force to abandon the "SS" name because of the unfortunate connotation with the Nazi secret police, the Schutzstaffel. Hence, it adopted the "Jaguar" name in 1945. Jaguar went through a lot of mergers and de-mergers over the next few decades. It bought the Daimler Motor Company, which had acquired the right to use the "Daimler" name in Great Britain from Gottlieb Daimler himself, in 1960. This company was different from the more-famous Daimler-Benz of Germany, and was a part of Birmingham Small Arms Company from 1910 until its acquisition by Jaguar, who then used the brand for its premium models. Jaguar merged with the British Motor Corporation (BMC) to form British Motor Holdings (BMH) in 1966. BMC had earlier been created by the merger of the Austin Motor Company and the Nuffield Organization (parent of the Morris car company, MG, Riley and Wolseley) in 1952. Then was the merger with Leyland in 1968, which had already acquired Rover and Standard Triumph. The resultant entity was named the British Leyland Motor Corporation (BLMC). However, BLMC came under severe financial difficulties, which resulted in the Ryder Report of the UK's National Enterprise Board recommending government support, and effective nationalization in 1975 when the company was renamed as British Leyland Ltd (later simply BL plc).

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In the 1970s the Jaguar and Daimler Marques formed part of BL's specialist car division or Jaguar Rover Triumph Ltd until a restructuring in the early 1980's saw most of the car manufacturing side of BL becoming the Austin Rover Group from which Jaguar and Daimler were excluded. Jaguar was floated on the London Stock Exchange in 1984 by the Thatcher government and subsequently purchased by the Ford Motor Company in 1990 for $2.5 billion. In 1999 it became part of Ford's new Premier Automotive Group of foreign automakers, along with Aston Martin, Volvo Cars and, from 2000, Land Rover; Aston Martin was subsequently sold off in 2007.Jaguar was one of the first entrants to the then-nascent world of competitive racing, and registered victories throughout the 1950s in the grueling Le Mans 24 Hours endurance race. Jaguar dropped out of the event after these initial successes but returned triumphantly in the 1980s as an engine manufacturer for the Tom Walkinshaw Racing team. Over the years, Ford spent close to a total of $10 billion on the brand but failed to return a profit. After incurring heavy losses for two consecutive years in 2006 and2007, Ford decided to cut its losses and finally sold off the brand in March 2008.The story of the Land Rover began with the launch of a pioneering civilian all-terrain utility vehicle at the Amsterdam Motor Show on 30 April 1948. Now, the name is a common brand for several distinct models, all four- wheel drive. It has had a succession of owners over the last six decades, starting from its parent Rover, to British Leyland, British Aerospace, BMW and Ford. Now, it forms part of Tata Motors who acquired this brand along with its sister marque Jaguar from Ford Motors. Long before the Mitsubishi Pajeros and the Toyota Land Cruisers and the Humvees, sports utility vehicles (SUV) and all-terrain vehicles (ATV) meant only two names - Jeep and Land Rover. In fact, Jeep and Land Rover are the two oldest SUV names in automotive history. The first Land Rover was designed in 1947 when it was still part of the Rover group. The latter became part of the Leyland Motor Corporation (LMC) in 1967, which was subsequently merged with British Motor Holdings (BMH) next year to become British Leyland Motor Corporation (BLMC). This is where the fates of Jaguar and Land Rover converged, as the former was already part of BMH.BLMC, renamed as British Leyland Ltd (later simply BL plc), underwent a major restructuring in the late 1970s and early 1980s where the mass-market car section was hived off as the Austin Rover Group in 1982. Jaguar and Daimler were not part of this group. This was after nationalization in 1975 and a major cross-holding arrangement with Honda in 1979.The Austin Rover Group was taken over by German automobile major BMW in 1994, who sold off the
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company in 2000 after splitting it into three parts. The Mini marque was retained by BMW; Land Rover was sold to Ford Motors for an estimated sum of $3 billion (although BMW retained the Rover trademark). Ford Motors had already bought Jaguar in 1999, leading to a common home for the Jaguar and Land Rover brands .As we have said earlier, the first Land Rover was designed in 1947 and unveiled in1948. The early inspiration was the iconic Jeep of World War II. A distinctive feature was their bodies, constructed of a lightweight rustproof proprietary alloy of aluminum and magnesium called Birmabright. This was born out of necessity owing to the shortage of steel after war and abundance of aircraft aluminum. This corrosion-resistant metal alloy helped build the Land Rover's legendary reputation of toughness and durability. This especially endeared Land Rover vehicles to the British Army and the farming community. Although it did lose some ground to Japanese imports in the 1970s and 1980s, it regained its standing with improvements in engine and chassis. In 1970, Land Rover had introduced the luxury SUV Range Rover that has enjoyed considerable popularity over the years. In its latest avatar as the Range Rover Sport since 2005, it is of the most off-road capable vehicle on the road today. In fact, in the acclaimed motoring show Top Gear on BBC, host Jeremy Clarkson had pitted it against a Challenger tank. Land Rover's Wolf is also famous for being the primary utility vehicle of the British Army. The 75th Ranger Regiment of the United States Army also adapted twelve versions of the Land Rover that were officially designated the RSOV (Ranger Special Operations Vehicle).Both Land Rover and out-of-house contractors have offered a huge range of conversions and adaptations to the basic vehicle, such as fire engines, excavators, cherry picker' hydraulic platforms, ambulances, snow ploughs, and 6-wheel drive versions, as well as one-off special builds including amphibious Land Rovers and vehicles fitted with tracks instead of wheels. Tata Motors is India's largest automobile company, with revenues of US$ 8.8 billion in 2007-08. With over 4 million Tata vehicles plying in India, it is the leader in commercial vehicles and among the top three in passenger vehicles. It is also the world's fourth largest truck manufacturer and the second largest bus manufacturer. Tata cars, buses and trucks are being marketed in several countries in Europe, Africa, the Middle East, South Asia, South East Asia and South America. Through subsidiaries and associate companies, Tata Motors has operations in South Korea, Thailand and Spain. It also has a strategic alliance with Fiat. Tata Motors acquired the Jaguar Land Rover businesses from Ford Motor Company for a net consideration of US $2.3 billion, as announced on March 26, in an all-cash

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transaction on June 2, 2008. Ford has contributed about US $600 million to the Jaguar Land Rover pension plans. Mr. David Smith, the acting Chief Executive Officer of Jaguar Land Rover, would be the new CEO of the business. Mr. Smith has 25 years of experience with Jaguar Land Rover and Ford. Before recently returning to Jaguar Land Rover as its Chief Financial Officer, he was Director Finance and Business Strategy for PAG and Ford of Europe. Jaguar Land Rover has been acquired at a cost of US$ 2.3 billion on a cash free, debtfree basis. The purchase consideration includes the ownership by Jaguar and Land Rover or perpetual royalty-free licenses of all necessary Intellectual Property Rights, manufacturing plants, two advanced design centers in the UK, and worldwide network of National Sales Companies. Long term agreements have been entered into for supply of engines, stampings and other components to Jaguar Land Rover. Other areas of transition support from Ford include IT, accounting and access to test facilities. The two companies will continue to cooperate in areas such as design and development through sharing of platforms and joint development of hybrid technologies and power train engineering. The Ford Motor Credit Company will continue to provide financing for Jaguar Land Rover dealers and customers for a transition period. Tata Motors is in an advanced stage of negotiations with leading auto finance providers to support the Jaguar Land Rover business in the UK, Europe and the US, and is expected to select financial services partners shortly. The cash purchase, part of plans by India's top vehicle maker to expand its reach beyond Asia, capped months of talks with Ford Motor Co., which is selling the prestige brands to focus on turning around its North American operations after losing 15.3billion dollars over the past two years. Tata Motors plans to acquire the brands through a mix of existing cash reserves and new debt. It recently announced plans to raise up to one billion dollars to fund its domestic and global expansion. It is reportedly planning to launch an additional threebillion-dollar syndicated loan, much of it bridge financing, to cover its working capital needs for the purchase. The deal is expected to close by the end of the June quarter, subject to regulatory approvals, the companies said. With the purchase, Tata Motors is in the unusual position of making the cheapest car in the world as well as some of the costliest, with the sleek Jaguar XK selling for around80000 dollars. Tata showcased its 1-lakh (about 2500 dollars) car in the 2008 New Delhi Auto Expo this January and is all ready to roll out the Nanos in Indian showrooms.

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THE LEVERAGED BUYOUT OF RAYOVAC BY THOMAS H. LEE, 1996 Founded in 1906 as the French Battery Company, Rayovac is the third largest manufacturer and marketer of batteries in the United States. The company is headquartered in Madison, Wisconsin, and as of July 1996, Rayovac employed 2480 employees. In 1996, Thomas Pyle, chairman and CEO of the company, together with his family, owned 91.3% of the Rayovacs capital stock. The remainder was owned by the officers of the company. Within the general battery market, the company is the leader in a number of areas, including 1) The household rechargeable and heavy duty battery segments, 2) Hearing aid batteries, 3) Lantern batteries, and 4) Lithium batteries for personal computer memory backup. In addition, Rayovac is one of the leading marketers of flashlights and other batterypowered lighting products in the U.S. market. The company markets and sells its products in the United States, Europe, Canada and Far East through a variety of distribution channels, including retail, industrial, professional, and OEMs. By positioning its products as a value brand in the early 1980s, the company became the leader in the mass merchandise retail channel, a rapidly growing retail segment in the United States and Canada. Rayovac offers batteries of substantially the same quality and performance, but at a lower price than those of its competitors. Rayovacs financial performance depends on a number of factors, including general retailing trends, the companys product mix, and the companys relative market position, which is affected by the behavior of its competitors. At the end of financial year 1995-96, the company had a net profit of $ 14.3 million. In late 1995, Rayovacs principal owner and CEO, Thomas Pyle, contacted Merrill Lynch to discuss the companys strategic alternatives. As Mr. Pyle edged closer to retirement, he wished to consider the possibility of liquidating all or part of his investment in the company. They narrowed their search to two alternatives a private sale to financial buyer or a sale to a competitor, such as Duracell or energizer. As the Merrill Lynch descriptive memorandum made its way into the hands of a number of potential suitors, few bids were offered. Despite the fact that the deal had begun to seem excessively shopped, Thomas H. Lee (THL) decided it was worth careful consideration. THLs interest was driven by a number of factors

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The overall growth of the battery market had grown at an average of 5% over the past 5 years and was expected to continue to grow at or above this rate over the short term.
a.

b. Rayovac had superior positions in hearing aid, rechargeable, and lithium battery markets over its competitors. c. Rayovac had invested considerably over the past 3 years to modernize its production facilities. d. The existing management team offered strong experience in the battery market. e. The company generated strong and steady cash flow.

f. There was potential for significant cost savings.THL also had a number of concerns. The business had declined during the time the company was up for sale. In addition, Mr. Pyle had it clear that he planned to step aside under any deal scenario. As a result the top priority for THL was finding the right management team to take over in event they were successful in the bid. THL recruited Mr. David Jones to manage the company. Prior to the Rayovac opportunity, Jones was COO, CEO and chairman of Thermoscan Inc., a manufacturer and marketer of infrared ear thermometers, also controlled by THL. Jones had over 25 years of work experience, involving positions in operations, manufacturing and marketing. Merlin Tomlin and Randall Steward were also invited to leave Thermoscan and join Jones as senior vice president of sales and senior vice president and CFO, respectively. On September 12, 1996, THL came to terms with Mr. Pyle on a deal to buy a majority of Rayovacs common stock. The transaction valued Rayovac at $ 326 million or approximately 7.5x trailing 12 months EBITDA, a sharp discount to the 15.0x multiple Gillette had paid for Duracell just weeks earlier. In addition, it represented a deep discount from the $ 500 million valuation that Rayovac and Merrill Lynch had considered at the start of the process.

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Simultaneous with the acquisition of the company, THL recapitalized Rayovac. As a result of recapitalization, THL, together with David Jones, owned 80.2%; Pyle owned9.9% and existing management 9.9% of Rayovacs common stock. The sources and uses of funds in connection with the recapitalization are given below SOURCES Revolving Credit Facility Term Loan Facility Bridge Notes Equity Investment by THL Continuing Shareholders Equity Investment Foreign Debt and Capital Leases Total sources Retirement of Rayovac Common Stock Purchase of Newly Issued Common Stock by THL Continuing Shareholders Equity Investment Repayment of Existing Debt Fees and Expenses Related to the Recapitalization Foreign Debt and Capital Leases Total Uses $ 26.0 105.0 100.0 72.0 18.0 5.5 $ 326.5 $127.4 72.0 18.0 85.2 18.4 5.5 $326.5

After the leveraged buyout, the new management team immediately went to work implementing the plan to reduce costs and grow revenues formulated during the diligence period. The plan focused on the following a. Reinvigorating the Rayovac brand name through increased advertizing; b. Growing market share by expanding Rayovacs presence in underrepresented retail channels, such as food stores, drug stores, and warehouses; c. Reducing costs by rationalizing manufacturing and distribution, improving plant utilization, and reducing overheads; and d. Increasing worker productivity through installation of new information systems and training. In total, Joness near-term targets were 10% top line growth and 20% EBIT growth per annum. Jones and his management team worked hard to push decision making lower into the organization and expected employees to accept responsibility. This initiative was aided by the introduction of a new incentive structure that encouraged
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communication across divisions, risk taking, and continuous improvement. Although many Rayovac employees prospered in the new performance-based environment, the company lost 30 to 40 percent of its corporate staff in the first year after the buyout. At an early stage, the plan began to show results. The cost reduction plan resulted in cash cost savings of $ 6.3 million for fiscal 1997 and was projected to yield $ 8.6 million in savings on an ongoing basis. Rayovacs gross margins increased from 43.1% in1996 to 45.8% in 1997, reflecting not only its cost reduction but also its marketing efforts and greater focus on high margin products. In terms of market share, Rayovac continued its domination of the rechargeable and hearing aid battery segments, in addition to achieving gains in the alkaline battery sales. Materials and Methods The report is based solely on secondary data and information, gathered from the internet as well as books on the topic. The information gathered about companies has been taken from their respective official websites or publications to ensure reliable and valid data or information, as the case may be.

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Conclusions and Discussions Thus we see that the market for corporate control is one where various management teams compete to gain control of corporate resources, hoping to put them to more productive uses. Though there are several difficulties and barriers to the success of a restructuring scheme, the market for the same is constantly increasing. On an average about eight to ten restructurings are proposed every working day all over the world. Though most of them are successful, some fail. Mergers and acquisition remain the most popular form of restructuring and constitute more than 80 percent of the total proposed restructurings. The successful restructurings, as discussed in the case studies, came out to be very advantageous for the concerned parties. If the proposed restructuring scheme is analyzed keeping in view the circumstances, the various aspects and the possible outcomes, then the restructuring is sure to be beneficial for the companies involved, create value for them and enhance shareholder wealth. Now a days, companies expansion plans comprise essentially and mostly of propositions of acquisitions and mergers, within the country or cross-border. The most famous example for this is the TATA group, headed by Ratan Tata. The company has acquired numerous companies from all over the world under its expansion scheme over the last few years including 17 in 2005, 8 in 2006, 8 in 2007 (including the euro steel giant Corus), and 5 in 2008 (till April10th). All these expansions have helped Tata to enhance its shareholders value considerably and have shown magnificent financial results over the past years. However, in pursuing these acquisitions, the company has also raised significant amount of leverage. This may a point of concern for the management. Thus the tool of acquisitions and mergers, if applied carefully, presents a unique and very attractive way of expansion as well as other benefits like tax benefits, market domination etc. as discussed earlier.

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Future Prospects This project has a lot of potential for further research works. Further research can be based solely on any of the forms of corporate restructuring like mergers, acquisitions, demergers, buyouts, recapitalizations, or internal restructuring. Researches or studies can also be based on the various aspects of the restructuring process like taxation, legal, procedural, etc. Projects based on functions or actions of the SEBI can also take part of this project as an input. The project can also act as an input for various event studies related to the various forms of restructurings, supplying information for them to establish empirically. The project can act as a guide to event analyses or studies based on corporate restructuring.

Bibliography References from

www.mcagov.in www.sebi.gov.in www.icai.org www.icsi.edu www.google.com www.investopedia.com www.scribd.com www.wikipedia.com www.financialtimes.com Newspapers and Periodicals Mergers and Acquisitions A to Z, by Andrew J. Sherman and Milledge A. Hart.

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Appendices

Appendix 1 Accounting treatment of mergers, acquisitions or other forms of restructuring Earlier, there were two methods of accounting for acquisitions purchase or poolingof-interests governed by something called APB 16. During the late 1980s and throughout the 1990s, the American accounting profession had lengthy and spirited discussions on the issue of accounting for business combinations. As a result of those discussions, the Financial Accounting Standards Board (FASB) issued FAS 141- Business Combinations, and FAS 142 - Goodwill and Other Intangible Assets. Under FAS 141, all business combinations are accounted for under rules called "the acquisition method." Recently the FASB has issued a 236 page exposure draft of a new statement as part of a joint effort with the International Accounting Standards Board (IASB) "to improve financial reporting while promoting the international convergence of accounting standards". The new statement would replace FAS 141. While proposed statement makes a number of changes, the result is still that all business combinations are accounted for under the acquisition method. Appendix 2 Corporate Voting and Control In as much as the common stockholders of a company are its owners, they are entitled to elect a board of directors. The board in turn selects the management which actually controls the operations of the company. Depending upon the corporate character, the board of directors is elected either under a majority voting system, in which each shareholder casts one vote per share held for each director position open, or under a cumulative voting system, under which a shareholder is able to accumulate votes and cast them for less than the total number of directors being elected. The total number of votes is the number of shares held times the number of directors being elected. Proxies and Proxy Contests Voting may be either in person at the stockholders annual meeting or by proxy. A proxy is a form a stockholder signs giving his or her right to vote to another person or persons. The Securities and Exchange Commission (SEC) regulates the solicitation of proxies and also requires companies to disseminate information to its stockholders through proxy mailings. Because of the fact that management is able to mail
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information to stockholders at the companys expense and the proxy system, the management has a distinct advantage in the voting process. But outsiders can also seize control of a company through a Proxy contest. When an outsider undertakes a proxy raid, it is required to register its proxy statement with the SEC to prevent the presentation of misleading or false information. In a proxy contest, the odds favor the management to win as it has both the organization and the use of companys resources to carry on the proxy fight. Appendix 3 Distress Restructuring Companies experiencing financial difficulty are often restructured. While some of the corporate restructuring devices illustrated in this project may be applicable, this usually is not the case. Instead different strategies are in order for management, for equity holders, and for creditors. As what can be done is rooted in bankruptcy law, there are some remedies available to a failing company. These vary in harshness according to the degree of financial difficulty. These remedies include Voluntary settlements and workouts where the company negotiates with its lenders or creditors for an extension of maturity period or pro rata settlement in cash and/or promissory notes, informally, out of the courts. , though lawyers may be involved. Voluntary liquidation represents an orderly private liquidation of a company apart from the bankruptcy courts. It is likely to be more efficient and the creditors also receive a higher settlement as many of the costs of bankruptcy are avoided. Liquidation -If there is no hope for the successful operation of the company, liquidation under the bankruptcy law is the only feasible alternative. Upon petition of bankruptcy, the debtor obtains temporary relief from creditors until a decision is reached by the bankruptcy court. The court appoints an interim trustee to take over the operation of the company, with the responsibility of liquidating the property of the company and distributing liquidating dividends to creditors. Reorganization -Conceptually, a firm should be reorganized if its reorganized worth as an operating entity is greater than its liquidating value. Reorganization is an effort to keep a company alive by changing its capital structure. As long as the corporation has some option value, they may benefit in the future, whereas with liquidation they usually receive nothing. The fact that a high proportion of companies that reorganize later must be liquidated, calls into question the tendency to preserve companies.

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Prepackaged bankruptcy -Sometimes, management will arrange a prepackaged bankruptcy, which falls somewhere between a workout and a formal, extended bankruptcy. At the time of filing a bankruptcy petition, the distressed company also files a reorganization plan. Management has previously struck an agreement with most creditors as to the terms of the plan. The advantage of prepackaged bankruptcy is that it reduces the time in reorganization and the costs. Also, as opposed to an informal workout, permits more flexible use of net operating loss carry-forwards for tax purposes. This is a cash flow advantage to the firm.

End of Report

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