INTRODUCTION TO MERGERS,

ACQUISITIONS AND RESTRUCTURING

CORPORATE RESTRUCTURING
 Broad array of activities that
 expand or contract a firm’s operations
 substantially modify its financial structure
 change its organizational structure and
internal functioning

 Includes different activities such as:

 Mergers
 Purchases of business units
 Takeovers
 Slump sales
 Demergers
 Leveraged buyouts
 Organizational restructuring

MEANING AND TYPES OF MERGERS

 A combination of two or more companies
into one company
 Absorption: one company acquires another
company
  Consolidation: two or more companies
combine to form a new company
 Horizontal: merger of firms engaged in
same line of business
 Vertical: merger of firms engaged at
different stages of production in an
industry
 Conglomerate: merger of firms engaged in
unrelated lines of business
 Congeneric: merger of firms engaged in
related lines of business

REASONS FOR MERGERS

(A) Plausible Reasons
1) Strategic benefit
2) Economies of Scale
3) Economies of Scope
4) Economies of Vertical Integration
5) Complementary Resources
6) Tax Shields
7) Utilization of Surplus Funds
8) Managerial Effectiveness

(B) Dubious Reasons

1) Diversification
2) Lower financing costs
 3) Earnings growth
MECHANICS OF A MERGER
According to Sec 391 to 394 of Indian
Companies Act 1956, the procedure for
amalgamation involves:

1) Examining the object clauses of both

companies
2) Intimating stock exchanges where the
amalgamated and amalgamating companies
are listed
3) Getting draft amalgamation proposal
approved by respective boards of directors
4) Applying to National Company Law Tribunal
5) Dispatching notice to shareholders and
creditors
6) Holding meetings of shareholders and
creditors
7) Presenting petition to NCLT for confirming
and passing order of amalgamation
8) Filing NCLT order with ROC
9) Transferring assets and liabilities of
amalgamating company to amalgamated
company
10) Issuing shares and/or
debentures of the amalgamated company
TAXATION ASPECTS
 For obtaining tax concessions, the
amalgamated company should satisfy the
following conditions:
a) all the properties and liabilities of the
amalgamating company should become
the properties and liabilities of the
amalgamated company by virtue of the
amalgamation
b) at least 90% of the shareholders of the
amalgamating company (by value of
shares) should become the shareholders
of the amalgamated company
 If the amalgamating company is an
Indian company, certain tax concessions
are available
 Unabsorbed or unfulfilled deductions
of the amalgamating company that are
available to the amalgamated company
after the amalgamation:
1) capital expenditure on scientific
research
 2) expenditure on patents, copyrights,
know-how
3) expenditure on license for operating
telecommunication services
4) amortization of preliminary expenses
5) carry forward of losses
6) unabsorbed depreciation

PURCHASE OF A DIVISION/PLANT
 For company purchasing: purchase
 For company selling: divestiture
 Value of such purchase: future
benefits (free cash flow plus horizon value)
discounted at opportunity cost of capital
 Horizon value: value of the purchase
on the horizon date
 Horizon date: last date of the horizon
period used for defining free cash flow
 Horizon period: period beyond which
growth rate of free cash flow is constant
 Free cash flow (FCF): cash flow from
the purchase net of investments needed
for its operation
 FCF = NOPAT – Net Investment
Approaches for Horizon Value
a) Value of purchase on horizon date
discounted to the present
b) Market value –NOPAT ratio approach:
multiply NOPAT in year H+1 by m (market
value-NOPAT ratio)
c) Market value – book value approach:
multiply book value of assets in year H by
MBR (market value – book value ratio)
TAKEOVERS
 Acquisition of a certain block of
equity capital of a company enabling the
acquirer to exercise control over the affairs
of the company
 Theoretically, more than 50% of
equity needed for complete control
 Practically, 20-40% sufficient for
exercising control
 Various methods for takeovers:
a) Open market purchase: buying shares of
the listed company in the stock market;
usually hostile takeovers
b) Negotiated acquisition: buying shares of
target company from one/more existing
shareholders (mostly promoters) in a
negotiated transaction
 c) Preferential allotment: buying shares of
target company through preferential
allotment of equity; friendly acquisition
 Various conflicting views for and
against takeovers

NEED FOR REGULATION OF TAKEOVERS

Necessary to regulate takeovers in the
following areas:
1.Transparency
 Transparent process will
increase acceptance as legitimate
device among all parties involved

2. Interest of small shareholders

 Regulation should ensure that
shareholders holding small numbers of
shares should not suffer

3. Realization of economic gains

 Ensure that primary rationale for
takeover is efficiency of operations and
better utilization of resources
  Provision of suitable fiscal incentives
for takeovers of ailing units

4. No undue concentration of
market power
 Acquirer should not enjoy undue
concentration of market power which
may be used to detriment of customers
or others
ROLE OF FINANCIAL INSTITUTIONS
 Competent persons should be able to
participate in takeovers irrespective of
financial resources
 Financial institutions/investors should
provide funds to capable
managers/entrepreneurs to support their
takeover proposals

SEBI TAKEOVER CODE

Salient points of SEBI’s takeover code:
1) Disclosure
 Any acquirer who acquires holdings
(shares/voting rights) which alongwith
existing holdings add up to 5%, 10% and
14% of the total, should announce at each
stage to the company and concerned stock
exchange about such holdings
 Stock exchanges shall put up such
information on public display

2) Trigger Point
 No acquirer can acquire holdings which
alongwith his existing holdings become
equal to or more than 15% of the total
  An acquirer can do so only if he makes a
public announcement to acquire shares
through a public offer to the extent of 20%

3) Offer Price
 The offer price to the public should be

atleast the highest of the following:

a) negotiated price
b) average price paid by acquirer
c) preferential offer price (if made in
last 12 months)
d) average of weekly high and low for
last 26 months

4) Contents of Public Announcement

 The public announcement should provide
the following information:
a) number of shared proposed to be
acquired
b) minimum offer price
c) object of acquisition
d) date by which offer letter will be posted
e) dates of opening and closing of offer
  An acquirer can do so only if he makes a
public announcement to acquire shares
through a public offer to the extent of 20%

5) Creeping Acquisition
 No acquirer can acquire more than 5% of
holdings in any financial year without
complying with open offer requirements if
his existing holdings are between 15% and
75% of the total
 An acquirer can do creeping acquisition of
up to 5% per year without triggering off the
open offer requirements
 Any purchase/sale of holding amounting to
2% of the total should be reported within
two days of the transaction

ANTI-TAKEOVER DEFENCES IN THE US

(A) Pre-offer Defenses
1) Staggered Board: electing one group of
directors out of three every year
2) Super majority clause: high percentage
of votes (around 80%) required to
approve a merger
 3) Poison pills: granting existing
shareholders the right to purchase
convertible bonds or preference stock of
the acquiring firm on favorable terms in
the event of a merger
4) Dual class: creating new class of
shareholders with superior voting rights
5) Golden parachute: high compensation
to incumbent management in the event
of takeover

(B) Post-offer Defenses

1) Greenmail: buying acquired shares
from bidder at a premium in exchange
for his promise of refraining from
hostile takeover
2) Pacman defence: making counter bid
for the stock of the bidder
3) Litigation: filing a suit against the
bidder for violating anti-trust or
security laws
4) Asset restructuring: selling the most
attractive assets and/or buying assets
that are unwanted or problematic for
the bidder
 5) Liability restructuring: repurchasing
own shares at premium or issuing
shares to friendly third party
ANTI-TAKEOVER DEFENCES IN INDIA
1) Preferential allotment: allotting equity
shares or convertible securities
preferentially to promoters to enhance
their equity stake
2) Creeping enhancement: raising equity
holding by creeping enhancement
3) Amalgamate group companies:
amalgamating two or more group
companies to form a larger company
less vulnerable to takeover
4) Selling crown jewels: selling the assets
which are attractive to bidder
5) Searching for white knight: soliciting
support from a friendly third party
BUSINESS ALLIANCES
 Viable alternatives to mergers and
acquisitions
 Most commonly used forms:
 Joint ventures: independent legal entity
in which two or more separate legal
organizations participate preserving
their own corporate identity and
autonomy
 Strategic alliances: co-operative
relationship without creation of
separate legal entity
 Equity partnership: co-operative
relationship in which one party takes a
minority equity stake in the other
 Licensing: licensing of
technology/product/process or
trademark/copyright
 Franchising alliance: right to sell goods
and services to multiple licensees in
different geographical locations
 Network alliance: web of inter-
connecting alliances for collaborations
between companies
RATIONALE FOR BUSINESS ALLIANCES
 Sharing risks and resources
 Access to new markets
 Cost reduction through sharing or
combining of facilities
 Favorable regulatory treatment
 Preclude to acquisition or exit

SUCCESS FACTORS FOR BUSINESS ALLIANCES

 Complementary strengths of partners
 Sharing of exorbitant cost of developing
new product
 Ability of partners to cooperate with each
other
 Clarity of purpose, roles and
responsibilities
 Perception of equitable division of risks and
rewards among partners
 Similar time horizons and financial
expectations of partners
MANAGING AN ACQUISITION

DISCIPLINED ACQUISITION PROGRAMME

1. Manage the Pre-acquisition Phase
 Thorough evaluation of itself
 Brainstorming for acquisition ideas
2. Screen Candidates
3. Evaluate Remaining Candidates
4. Determine the Mode of Acquisition
5. Negotiate and Consummate the
Deal
6. Manage the Post-acquisition
Integration

PITFALLS/SINS OF ACQUISITION
1. Straying into very unrelated areas
2. Striving for large size
3. Failure to investigate thoroughly before
acquisition
4. Overpaying
5. Failing in post-acquisition integration
DIVESTITURES
a) Partial Sell-off
b) Demerger
c) Equity Carveout

A) PARTIAL SELL-OFF
 Sale of business unit/plant of one
company to another
 Also called slump sale

Motives for Sell-off

 Raising capital
 Curtailing losses
 Strategic realignment
 Efficiency gain

Financial Evaluation of Sell-off

 Estimating divisional post-tax cash flows
 Establishing discount rate for the division
taking as base cost of capital of some firm
of almost the same size engaged solely in
the same line of business
  Calculating PV of division by using discount
rate
 Finding market value of division specific
liabilities i.e. PV of obligations arising from
the division’s liabilities
 Deducing parent firm’s value of ownership
position (VOP)
VOP = PV of division’s CF – MV of division-
specific liabilities
 Comparing VOP with divestiture proceeds
(DP)
 Taking decision about sell-off

B) DEMERGER
 Transfer of one or more undertaking by a
company to another company
 Demerged company: whose undertaking
is transferred
 Resulting company: to which undertaking
is transferred
 May take form of spin-off or split-up
 Spin-off: undertaking/division of company
is spun off into an independent company;
 parent and spun off company are separate
corporate entities
 Split-up: company is split up into two or
more independent companies; parent
company disappears and new corporate
entities emerge
 Spin-offs and split-ups enable sharper
business focus
 Strengthens managerial incentives and
increases accountability

C) EQUITY CARVEOUT
 Parent company sells a portion of its
equity in a wholly owned subsidiary
 Sale may be made to general public or a
strategic investor
 Brings cash infusion to the company
 Helps induct strategic investor in a
subsidiary

OWNERSHIP RESTRUCTURING
a) Going Private
b) Leveraged Buyout
c) Holding Company
A) GOING PRIVATE
Converting publicly held company into
private company
Stock of private company usually held by
small group of investors with incumbent
management having substantial stake
Typically done by buying out shares held
by public
Factors prompting management:
 Cost savings
 Focus on long-term value creation

B) LEVERAGED BUYOUT
Transfer of ownership consummated
mainly with debt
Mostly involve a business unit of a
company
Often buyout is by management (MBO)
After LBO/MBO, unit becomes private
company
C) HOLDING COMPANY
Company holding stocks of other
companies to exercise control over them
Advantages:
 Control with fractional ownership
 Isolation of risk
 Enormous financial leverage
Disadvantages:
 Partial multiple taxation
 Parental responsibility
PRIVATIZATION
 Transfer of partial or total ownership
(represented by equity shares) of public
enterprise from the government to
individuals and non-government institutions
 Rationale behind privatization:
 Improving efficiency
 Generating resources
 Promoting popular capitalism

ORGANISATIONAL RESTRUCTURING
Elements in organizational restructuring
programmes:
 Regrouping of businesses
 Decentralization
 Downsizing
 Outsourcing
 Business process re-engineering (BPR)
 Enterprise resource planning (ERP)
 Total quality management (TQM)