MERGERS AND ACQUISITIONS

NAME OF THE STUDENT: UMESHA.M REGISTRATION NUMBER: 200616254

SYMBIOSIS CENTRE FOR DISTANCE LEARNING (SCDL), PUNE

ACADEMIC YEAR 2009-2010

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DECLARATION REGARDING THE ORIGINALITY

This is to declare that I have carried out this project work myself in part fulfilment of the Post Graduate Diploma in Business Administration in Financial Management Program of SCDL. The work is original, and has not been submitted to any other university / institute for an award of any degree / diploma.

Date: Place: Mumbai

Signature: Name: Umesha.M

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CERTIFICATE OF SUPERVISOR

Certified that the work incorporated in this project report mergers and an acquisition submitted by Umesha.M is his original work and completed under my supervision. Material obtained from other sources has been duly acknowledged in the Project report.

Date: Place: Mumbai Signature of Guide

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CHAPTERS Sr. No. 1. 1.1 1.2 1.3 1.4 1.5 2. 3. 4. 4.1 4.2 4.3 4.4 4.4.1 4.4.2 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.11.1 4.11.2 4.11.3 4.12 4.13 4.14 4.15 4.16 4.16.1 4.16.2 4.17 4.18 Subjects Covered Introduction Merger Acquisitions Methods of acquisitions Take of over Demerger-or Corporate splits or division Objectives and scope of Mergers and acquisitions Limitations Theoretical perspectives of Mergers and acquisitions Corporate restructuring Expansion Corporate Controls Amalgamation Amalgamation in the nature of merger Amalgamation in the nature of purchase Acquisition Merger Absorption Consolidation Take over Takeover bid Types of takeover bid Negotiate bid Tender offer Hostile takeover bid Take over and merger Merger through BIFR Types of Merger Merger Procedure Important Elements of Merger Procedure Schemes of merger Valuation in a Merger Reverse merger Mergers acquisition in India
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Page Nos 6-6 7-8 8-8 8-8 8-8 9-9 9-9 10-10 10-10 11-11 12-12 13-14 14-15 15-16 15-16 16-16 17-17 17-17 17-17 17-18 19-19 19-19 19-20 20-20 20-21 21-21 21-23 23-26 27-29 29-29 29-30 31-34 34-35 34-35

1.0

INTRODUCTION

M&A are very important tools of corporate growth. A firm can achieve growth in several ways. It can grow internally or externally Internal Growth can be achieved if a firm expands its existing activities by up scaling capacities or establishing new firm with fresh investments in existing product markets. It can grow internally by setting its own units in to new market or new product. But if a firm wants to grow internally it can face certain problems like the size of the existing market may be limited or the existing product may not have growth potential in future or there may be government restriction on capacity enhancement. Also firm may not have specialized knowledge to enter in to new product/ market and above all it takes a longer period to establish own units and yield positive return. One alternative way to achieve growth is resort to external arrangements like Mergers and Acquisitions, Takeover or Joint Ventures. External alternatives of corporate growth have certain advantages. In case of diversified mergers firm can use resources and infrastructure that are already there in place. While in case of congeneric mergers it can avoid duplication of various activities and thus can achieve operating and financial efficiency. M&A has become a daily transaction now-a-days. Mergers and acquisitions are an important area of capital market activity in restructuring a corporation and had lately become one of the favored routes for growth and consolidation. The reasons to merge, amalgamate and acquire are varied, ranging from acquiring market share to restructuring the corporation to meet global competition. One of the largest and most difficult parts of a business merger is the successful integration of the enterprise networks of the merger partners. The main objective of each firm is to gain profits. M&A has a great scope in sectors like steel, aluminium, cement, auto, banking & finance, computer software, pharmaceuticals, consumer durable food products, textiles etc. It is an indispensable strategic tool for expanding product portfolios, entering into new market, acquiring new technologies and building new generation organization with power & resources to compete
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on global basis. With the increasing number of Indian companies opting for mergers and acquisitions, India is now one of the leading nations in the world in terms of mergers and acquisitions. Till few years ago, rarely did Indian companies bid for American-European entities. Today, because of the buoyant Indian economy, supportive government policies and dynamic leadership of Indian organizations, the world has witnessed a new trend in acquisitions. Indian companies are now aggressively looking at North American and European markets to spread their wings and become global players. Almost 85 per cent of Indian firms are using Mergers and Acquisitions as a core growth strategy. 1.1 Merger:

Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of: Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes. Classifications Mergers and Acquisitions Horizontal o A merger in which two firms in the same industry combine. o Often in an attempt to achieve economies of scale and/or scope. Vertical

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o A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. o Often in an attempt to control supply or distribution channels. Conglomerate o A merger in which two firms in unrelated businesses combine. o Purpose is often to diversify the company by combining uncorrelated assets and income streams Cross-border (International) M&As o A merger or acquisition involving a Canadian and a foreign firm an either the acquiring or target company. 1.2 Acquisition:

Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. 1.3 Methods of Acquisition:

An acquisition may be affected by (a) agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; (b) purchase of shares in open market; (c) to make takeover offer to the general body of shareholders; (d) purchase of new shares by private treaty; (e) Acquisition of share capital through the following forms of considerations viz. means of cash, issuance of loan capital, or insurance of share capital. 1.4 Takeover:

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A takeover is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfilment of goals of combination all are different in takeovers than in mergers. For example, process of takeover is unilateral and the offeror company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offered company being more co-operative. 1.5 De-merger or corporate splits or division:

De-merger or split or divisions of a company are the synonymous terms signifying a movement in the company. What will it take to succeed? Funds are an obvious requirement for would-be buyers. Raising them may not be a problem for multinationals able to tap resources at home, but for local companies, finance is likely to be the single biggest obstacle to an acquisition. Financial institution in some Asian markets is banned from leading for takeovers, and debt markets are small and illiquid, deterring investors who fear that they might not be able to sell their holdings at a later date. The credit squeezes and the depressed state of many Asian equity markets have only made an already difficult situation worse. Funds apart, a successful Mergers & Acquisition growth strategy must be supported by three capabilities: deep local networks, the abilities to manage uncertainty, and the skill to distinguish worthwhile targets. Companies that rush in without them are likely to be stumble. 2.0 OBJECTIVES AND SCOPE

The main objective of this is to study of mergers and acquisitions to full fill the PGDBA in Financial management, as well as to having awareness about mergers and acquisition. This project aims at understanding the overall study of mergers and acquisitions. A merger is where two or more businesses join forces to become one organization. After the merger, each of the businesses and their shares will no longer exist. Instead a new legal entity has been formed.
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An acquisition is the purchase or takeover of another business, so that the organization becomes the legal owner and controller of the business they have acquired. This can be expensive as the acquiring company will be paying for the net assets, goodwill and brand name of the company they are buying. Types of Mergers Horizontal merger Vertical merger Conglomeration merger Forward Merger Reverse Merger

3.0

LIMITATIONS

Mergers and acquisitions is a vast subject. It is not possible to provide information regarding all the different types of mergers and acquisitions. The project would have been much better if the comprehensive study of mergers and acquisitions. 4.0 THEORETICAL PERSPECIVE OF INDIAN SERVICE SECTOR

The decision to invest in a new asset would mean internal expansion for the firm. The new asset would generate returns raising the value of the corporation. Mergers offer an additional means of expansion, which is external, i.e. the productive operation is not within the corporation itself. For firms with limited investment opportunities, mergers can provide new areas for expansion. In addition to this benefit, the combination of two or more firms can offer several other advantages to each of the corporations such as operating economies, risk reduction and tax advantage. Today mergers, acquisitions and other types of strategic alliances are on the agenda of most industrial groups intending to have an edge over competitors. Stress is now being made on the larger and bigger conglomerates to avail the economies of scale and
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diversification. Different companies in India are expanding by merger etc. In fact, there has emerged a phenomenon called merger wave. The terms merger, amalgamations, take-over and acquisitions are often used interchangeably to refer to a situation where two or more firms come together and combine into one to avail the benefits of such combinations and re-structuring in the form of merger etc., have been attempted to face the challenge of increasing competition and to achieve synergy in business operations.

4.1 Corporate Restructuring Restructuring of business is an integral part of the new economic paradigm. As controls and restrictions give way to competition and free trade, restructuring and reorganization become essential. Restructuring usually involves major organizational change such as shift in corporate strategies to meet increased competition or changed market conditions. This activity can take place internally in the form of new investments in plant and machinery, research and development at product and process levels. It can also take place externally through mergers and acquisitions (M&A) by which a firm may acquire another firm or by which joint venture with other firms.

This restructuring process has been mergers, acquisitions, takeovers, collaborations, consolidation, diversification etc. Domestic firms have taken steps to consolidate their position to face increasing competitive pressures and MNCs have taken this opportunity to enter Indian corporate sector. The different forms of corporate restructuring are summarized as follows:

Expansion Amalgamat ion Absorption Tender offer Asset acquisition

Corporate Contraction Restructuring

Demerger Spin off Equity carve out Page Number Split off

Corporate Control Going Private Equity Buyback Anti Takeover

10

Fig: 1.0 corporate restructuring 4.2 Expansion

Amalgamation: This involves fusion of one or more companies where the companies

lose their individual identity and a new company comes into existence to take over the business of companies being liquidated. The merger of Brooke Bond India Ltd. And Lipton India Ltd. Resulted in formation of a new company Brooke Bond Lipton India Ltd.

Absorption: This involves fusion of a small company with a large company where the

smaller company ceases to exist after the merger. The merger of Tata Oil Mills Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL) is an example of absorption.

Tender offer: This involves making a public offer for acquiring the shares of a target

company with a view to acquire management control in that company. Takeover by Tata Tea of consolidated coffee Ltd. (CCL) is an example of tender offer where more than 50% of shareholders of CCL sold their holding to Tata Tea at the offered price which was more than the investment price. Asset acquisition: This involves buying assets of another company. The assets may be tangible assets like manufacturing units or intangible like brands. Hindustan lever limited buying brands of Lakme is an example of asset acquisition.

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 Joint venture: This involves two companies coming whose ownership is changed.

DCM group and DAEWOO MOTORS entered into a joint venture to form DAEWOO Ltd. to manufacturing automobiles in India.

There are generally the following types of DEMERGER: Spinoff: This type of demerger involves division of company into wholly owned subsidiary of parent company by distribution of all its shares of subsidiary company on Pro-rata basis. By this way, both the companies i.e. holding as well as subsidiary company exist and carry on business. For example Kotak, Mahindra finance Ltd. formed a subsidiary called Kotak Mahindra Capital Corporation, by spinning off its investment banking division. Split ups: This type of demerger involves the division of parent

company into two or more separate companies where parent company ceases to exist after the demerger. Equity carve out: This is similar to spin offs, except that same part of shareholding of this subsidiary company is offered to public through a public issue and the parent company continues to enjoy control over the subsidiary company by holding controlling interest in it. Divestitures: These are sale of segment of a company for cash or for securities to an outside party. Divestitures, involve some kind of contraction. It is based on the principle if anergy which says 5-3=3!

Asset sale: This involves sale of tangible or intangible assets of a company to

generate cash. A partial sell off, also called slump sale, involves the sale of a business unit or plant of one firm to another. It is the mirror image of a purchase of a business unit or plant. From the sellers perspective, it is a form of contraction: from the buyers point of view it is a form of expansion. For example, When Coromandal Fertilizers Limited sold its cement division to India Cement limited, the size of Coromandal Fertilizers contracted whereas the size of India Cements Limited expanded.

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4.3

Corporate controls

Going private: This involves converting a listed company into a private company by

buying back all the outstanding shares from the markets. Several companies like Castrol India and Phillips India have done this in recent years. A well known example from the U.S. is that of Levi Strauss & company.

Equity buyback: This involves the company buying its own shares back from the

market. This results in reduction in the equity capital of the company. This strengthens the promoters position by increasing his stake in the equity of the company.

Anti takeover defences: With a high value of hostile takeover activity in recent years,

takeover defences both premature and reactive have been restored to by the companies.

Leveraged buyouts: This involves raising of capital from the market or institutions by

the management to acquire a company on the strength of its assets.

Merger is a marriage between two companies of roughly same size.

It is thus a

combination of two or more companies in which one company survives in its own name and the other ceases to exist as a legal entity. The survivor company acquires assets and liabilities of merged companies. Generally the company which survives is the buyers which retiring its identity and seller company is extinguished2. 4.4 Amalgamation

Amalgamation is an arrangement or reconstruction. It is a legal process by which two or more companies are to be absorbed or blended with another. As a result, the amalgamating company loses its existence and its shareholders become shareholders of new company or the amalgamated company. In case of amalgamation a new company may came into existence or an old company may survive while amalgamating company may lose its existence.

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According to Halsburys law of England amalgamation is the blending of two or more existing companies into one undertaking, the shareholder of each blending companies becoming substantially the shareholders of company which will carry on blended undertaking. There may be amalgamation by transfer of one or more undertaking to a new company or transfer of one or more undertaking to an existing company. Amalgamation signifies the transfers of all are some part of assets and liabilities of one or more than one existing company or two or more companies to a new company. The Accounting Standard, AS-14, issued by the Institute of Chartered Accountants of India has defined the term amalgamation by classifying (i) Amalgamation in the nature of merger, and (ii) Amalgamation in the nature of purchase. 4.4.1 Amalgamation in the nature of merger: As per AS-14, an amalgamation is

called in the nature of merger if it satisfies all the following condition:

All the assets and liabilities of the transferor company should become, after

amalgamation; the assets and liabilities of the other company.

Shareholders holding not less than 90% of the face value of the equity shares of the

transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

The consideration for the amalgamation receivable by those equity shareholders of

the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity share in the transferee company, except that cash may be paid in respect of any fractional shares.

The business of the transferor company is intended to be carried on, after the

amalgamation, by the transferee company.

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No adjustment is intended to be made in the book values of the assets and liabilities

of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

Amalgamation in the nature of merger is an organic unification of two or more entities or undertaking or fusion of one with another. It is defined as an amalgamation which satisfies the above conditions. 4.4.2 Amalgamation in the nature of purchase: Amalgamation in the nature of

purchase is where one companys assets and liabilities are taken over by another and lump sum is paid by the latter to the former. It is defined as the one which does not satisfy any one or more of the conditions satisfied above. As per Income Tax Act 1961, merger is defined as amalgamation under sec.2 (1B) with the following three conditions to be satisfied.

1. All the properties of amalgamating company(s) should vest with the amalgamated company after amalgamation.

2. All the liabilities of the amalgamating company(s) should vest with the amalgamated company after amalgamation.

3. Shareholders holding not less than 75% in value or voting power in amalgamating company(s) should become shareholders of amalgamated companies after amalgamation Amalgamation does not mean acquisition of a company by purchasing its property and resulting in its winding up. According to Income tax Act, exchange of shares with 90%of shareholders of amalgamating company is required. 4.5 Acquisition

Acquisition refers to the acquiring of ownership right in the property and asset without any combination of companies. Thus in acquisition two or more companies may remain
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independent, separate legal entity, but there may be change in control of companies. Acquisition results when one company purchase the controlling interest in the share capital of another existing company in any of the following ways:
a)

Controlling interest in the other company. By entering into an agreement with a person By subscribing new shares being issued by the other company. By purchasing shares of the other company at a stock exchange, and By making an offer to buy the shares of other company, to the existing shareholders of

or persons holding b) c) d)

that company.

4.6

Merger

Merger refers to a situation when two or more existing firms combine together and form a new entity. Either a new company may be incorporated for this purpose or one existing company (generally a bigger one) survives and another existing company (which is smaller) is merged into it. Laws in India use the term amalgamation for merger. Merger through absorption Merger through consolidation

4.7

Absorption

An absorption is a combination of two or more companies into an

existing company. All companies except one lose their identity in a merger through absorption. An example of this type of merger is the absorption of Tata Fertilisers Ltd. (TFL) TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company ( a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

4.8

Consolidation

A consolidation is a combination of two or more companies into a

new company .In this type of merger, all companies are legally dissolved and a new entity is created. In a consolidation, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. An example of consolidation is the

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merger of Hindustan Computers Ltd., Hindustan Instruments Ltd., and Indian Reprographics Ltd., to an entirely new company called HCL Ltd.

4.9

Takeover

Acquisition can be undertaken through merger or takeover route. Takeover is a general term used to define acquisitions only and both terms are used interchangeably. A Takeover may be defined as series of transacting whereby a person, individual, group of individuals or a company acquires control over the assets of a company, either directly by becoming owner of those assets or indirectly by obtaining control of management of the company.

Takeover is acquisition, by one company of controlling interest of the other, usually by buying all or majority of shares. Takeover may be of different types depending upon the purpose of acquiring a company.

1. A takeover may be straight takeover which is accomplished by the management of the taking over company by acquiring shares of another company with the intention of operating taken over as an independent legal entity.

2. The second type of takeover is where ownership of company is captured to merge both companies into one and operate as single legal entity.

3. A third type of takeover is takeover of a sick company for its revival. This is

accomplished by an order of Board for Industrial and financial Reconstruction (BIFR) under the provision of Sick Industrial companies Act, 1985. In India, Board for Industrial and Financial reconstruction (BIFR) has also been active for arranging mergers of financially sick companies with other companies under the package of rehabilitation.
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These merger schemes are framed in consultation with the lead bank, the target firm and the acquiring firm. These mergers are motivated and the lead bank takes the initiated and decides terms and conditions of merger. The recent takeover of Modi Cements Ltd. By Gujarat Ambuja Cement Ltd. was an arranged takeover after the financial reconstruction Modi Cement Ltd.

4. The fourth kind is the bail-out takeover, which is substantial acquisition of shares in a

financial weak company not being a sick industrial company in pursuance to a scheme of rehabilitation approved by public financial institution which is responsible for ensuring compliance with provision of substantial acquisition of shares and takeover Regulations, 1997 issued by SEBI which regulate the bailout takeover.

4.10

Takeover Bid

This is a technique for affecting either a takeover or an amalgamation. It may be defined as an offer to acquire shares of a company, whose shares are not closely held, addressed to the general body of shareholders with a view to obtaining at least sufficient shares to give the offer or, voting control of the company. Takeover Bid is thus adopted by company for taking over the control and management affairs of listed company by acquiring its controlling interest.

While a takeover bid is used for affecting a takeover, it is frequently against the wishes of the management of Offeree Company. It may take the form of an offer to purchase shares for cash or for share for share exchange or a combination of these two firms. Where a takeover bid is used for effecting merger or amalgamation it is generally by consent of management of both companies. It always takes place in the form of share for share exchange offer, so that accepting shareholders of Offree Company become shareholders of Offer or Company.

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4.11

Types of Takeover Bid

There are three types of takeover bid 1. Negotiated bid 2. Tender offer 3. Hostile takeover bid

4.11.1

Negotiated bid: It is also called friendly merger. In this case, the

management /owners of both the firms sit together and negotiate for the takeover. The acquiring firm negotiates directly with the management of the target company. So the two firms reach an agreement, the proposal for merger may be placed before the shareholders of the two companies. However, if the parties do not reach at an agreement, the merger proposal stands terminated and dropped out. The merger of ITC Classic Ltd. with ICICI Ltd.; and merger of Tata oil mills Ltd. With Hindustan Lever Ltd. were negotiated mergrs. However, if the management of the target firm is not agreeable to the merger proposal, then the acquiring firm may go for other procedures i.e. tender offer or hostile takeover.

4.11.2

Tender offer: A tender offer is a bid to acquire controlling interest in a target

company by the acquiring firm by purchasing shares of the target firm at a fixed price. The acquiring firm approaches the shareholders of the target firm directly firm to sell their shareholding to the acquiring firm at a fixed price. This offered price is generally, kept at a level higher than the current market price in order to induce the shareholders to disinvest their holding in favour of the acquiring firm. The acquiring firm may also stipulate in the tender offer as to how many shares it is willing to buy or may purchase all the shares that are offered for sale.

In case of tender offer, the acquiring firm does not need the prior approval of the management of the target firm. The offer is kept open for a specific period within which the shares must be tendered for sale by the shareholders of the target firm. Consolidated
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Coffee Ltd. was takeover by Tata Tea Ltd. by making a tender offer to the shareholders of the former at a price which was higher than the prevailing market price. In India, in recent times, particularly after the announcement of new takeover code by SEBI, several companies have made tender offers to acquire the target firm. A popular case is the tender offer made by Sterlite Ltd. and then counter offer by Alean to acquire the control of Indian Aluminium Ltd.

4.11.3

Hostile Takeover Bid: The acquiring firm, without the knowledge and consent

of the management of the target firm, may unilaterally pursue the efforts to gain a controlling interest in the target firm, by purchasing shares of the later firm at the stock exchanges. Such case of merger/acquisition is popularity known as raid. The caparo group of the U.K. made a hostile takeover bid to takeover DCM Ltd. and Escorts Ltd. Similarly, some other NRIs have also made hostile bid to takeover some other Indian companies. The new takeover code, as announced by SEBI deals with the hostile bids. 4.12 Takeover and merger

The distinction between a takeover and merger is that in a takeover the direct or indirect control over the assets of the acquired company passes to the acquirer in a merger the shareholding in the combined enterprises will be spread between the shareholders of the two companies. In both cases of takeover and merger the interests of the shareholders of the company are as follows:
1. Company should takeover or merge with another company only if in doing so, it

improves its profit earning potential measured by earning per share,

2. The company should agree to be taken if, and only if, shareholders are likely to be better off with the consideration offered, whether cash or securities of the company than by retaining their shares in the original company.

4.13 Merger through BIFR

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The companies (Amendment) Act, 2001 has repealed the sick Industrial Companies Act (SICA) 1985, in order to bring sick industrial companies within the purview of companies Act 1956 from the jurisdiction of SICA, 1985. The Act has introduced new provisions for the constitution of a tribunal known as the National Company Law Tribunal with regional benches which are empowered with the powers earlier vested with the Board for Industrial and Financial reconstruction (BIFR). Board for Industrial and Financial Reconstruction was established by central government under SICA, 1985 for detection of sick and potentially sick industrial units and speedy determination of their remedial measures and to exercise the jurisdiction and powers and discharge the functioning and duties imposed on the Board by or under the Act. Before the evolution of SICA, the power to sanction the scheme of amalgamation was vested only with the high court. However, sec.18 of the SICA 1985 empowers the BIFR to sanction a scheme of amalgamation between sick industrial company and another company over and above the power of high court as per section 391-394 of companies Act, 1956. The amalgamation take place under SICA have a special place in law and are not bound by the rigour of companies Act, 1956, and Income Tax Act,1961. There is no need to comply with the provisions of sec.391-394 of companies Act, 1956 for amalgamation sanctioned by BIFR. The scheme of amalgamation however must be approved by shareholders of healthy company after getting approval from BIFR. Sec.72A of the Income Tax Act has been enacted with a view to providing incentives to healthy companies to takeover and amalgamation with companies which would otherwise become burden on the economy. The accumulated losses and unabsorbed depreciation of the amalgamating company is deemed to loss or allowance for depreciation of the amalgamated company. So amalgamated company gets the advantage of unabsorbed depreciation and accumulated loss on the precondition of satisfactory revival of sick unit. A certificate from specialized authority to the effect that adequate steps have been taken for rehabilitation or revival of sick industrial undertaking has to be obtained to get these benefits. Thus the main attraction for the healthy company to takeover a sick company through a scheme of amalgamation is the tax benefits that may be available to it consequent to amalgamation. The approach usually followed is to quantify the possible tax benefits first and then get an order as part of rehabilitation
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package from BIFR. Once BIFR is convinced about the rehabilitation benefit it passes an appropriate order to see that benefits of tax concessions properly ensure to the transferee isolation Section 18 of SICA provides for various measures to be recommended by the operating agency in the scheme to be prepared by it for submission to the BIFR concerning the sick industrial unit. Before the amendment, in 1994 under SICA, only normal amalgamation (of sick company with healthy one) was possible and the Act did not provide for reverse merger of a profitable company with sick company. Now the amended Sec.18 of the Act contains provision for effecting both normal and reverse merger. It provides for the amalgamation of Sick industrial company with any other company Any other company with the sick industrial company.

4.14

Types of Merger

There are four types of merger are as follows: 4.14.1 Horizontal merger:

It is a merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands as the firms operations in the same industry. Horizontal mergers are designed to produce substantial economies of scale and result in decrease in the number of competitors in the industry. The merger of Tata Oil Mills Ltd. with the Hindustan lever Ltd. was a horizontal merger. In case of horizontal merger, the top management of the company being meted is generally, replaced, by the management of the transferee company. One potential repercussion of the horizontal merger is that it may result in monopolies and restrict the trade. Weinberg and Blank define horizontal merger as follows: A takeover or merger is horizontal if it involves the joining together of two companies which are producing essentially the same products or services or products or services
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which compete directly with each other (for example sugar and artificial sweetness). In recent years, the great majority of takeover and mergers have been horizontal. As horizontal takeovers and mergers involve a reduction in the number of competing firms in an industry, they tend to create the greatest concern from an anti-monopoly point of view, on the other hand horizontal mergers and takeovers are likely to give the greatest scope for economies of scale and elimination of duplicate facilities. 4.14.2 Vertical merger:

It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. If a company takes over its supplier/producers of raw material, then it may result in backward integration of its activities. On the other hand, Forward integration may result if a company decides to take over the retailer or Customer Company. Vertical merger may result in many operating and financial economies. The transferee firm will get a stronger position in the market as its production/distribution chain will be more integrated than that of the competitors. Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network (i.e., from the acquisition of raw material to the relating of final products). A takeover of merger is vertical where one of two companies is an actual or potential supplier of goods or services to the other, so that the two companies are both engaged in the manufacture or provision of the same goods or services but at the different stages in the supply route (for example where a motor car manufacturer takes over a manufacturer of sheet metal or a car distributing firm). Here the object is usually to ensure a source of supply or an outlet for products or services, but the effect of the merger may be to improve efficiency through improving the flow of production and Reducing stock holding and handling costs, where, however there is a degree of concentration in the markets of either of the companies, anti-monopoly problems may arise. 4.14.3 Congeneric Merger:

In these, mergers the acquirer and target companies are related through basic technologies, production processes or markets. The acquired company represents an
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extension of product line, market participants or technologies of the acquiring companies. These mergers represent an outward movement by the acquiring company from its current set of business to adjoining business. The acquiring company derives benefits by exploitation of strategic resources and from entry into a related market having higher return than it enjoyed earlier. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources. Western and Mansinghka classified co generic mergers into product extension and market extension types. When a new product line allied to or complimentary to an existing product line is added to existing product line through merger, it defined as product extension merger, Similarly market extension merger help to add a new market either through same line of business or adding an allied field . Both these types bear some common elements of horizontal, vertical and conglomerate merger. For example, merger between Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a Product extension merger and merger between GMM Company Ltd. and Xpro Ltd. contains elements of both product extension and market extension merger. 4.14.4 Conglomerate merger: These mergers involve firms engaged in unrelated type of business activities i.e. the business of two companies are not related to each other horizontally ( in the sense of producing the same or competing products), nor vertically( in the sense of standing towards each other n the relationship of buyer and supplier or potential buyer and supplier). In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. In practice, however, there is some degree of overlap in one or more of this common factor. Conglomerate mergers are unification of different kinds of businesses under one flagship company. The purpose of merger remains utilization of financial resources, enlarged debt capacity and also synergy of managerial functions. However these transactions are not explicitly aimed at sharing these resources, technologies, synergies or product market strategies. Rather, the focus of such conglomerate mergers is on how the acquiring firm can improve its overall stability and use resources in a better way to generate additional
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revenue. It does not have direct impact on acquisition of monopoly power and is thus favored throughout the world as a means of diversification.

4.14.5 Demerger It has been defined as a split or division. As the same suggests, it denotes a situation opposite to that of merger. Demerger or spin-off, as called in US involves splitting up of conglomerate (multi-division) of company into separate companies. This occurs in cases where dissimilar business are carried on within the same company, thus becoming unwieldy and cyclical almost resulting in a loss situation. Corporate restructuring in such situation in the form of demerger becomes inevitable. Merger of SG chemical and Dyes Ltd. with Ambalal Sarabhai enterprises Ltd. (ASE) has made ASE big conglomerate which had become unwieldy and cyclic, so demerger of ASE was done. A part from core competencies being main reason for demerging companies according to their nature of business, in some cases, restructuring in the form of demerger was undertaken for splitting up the family owned large business empires into smaller companies. The historical demerger of DCM group where it split into four companies (DCM Ltd., DCM shriram industries Ltd., Shriram Industrial Enterprise Ltd. and DCM shriram consolidated Ltd.) is one example of family units splitting through demergers. Such demergers are accordingly, more in the nature of family settlements and are affected through the courts order. Thus, demerger also occur due to reasons almost the same as mergers i.e. the desire to perform better and strengthen efficiency, business interest and longevity and to curb losses, wastage and competition. Undertakings demerge to delineate businesses and fix responsibility, liability and management so as to ensure improved results from each of the demerged unit.

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Demerged Company, according to Section (19AA) of Income Tax Act, 1961 means the company whose undertaking is transferred, pursuant to a demerger to a resulting company. Resulting company, according to Section2(47A) of Income Tax Act,1961 means one or more company, (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger, and the resulting company in consideration of such transfer of undertaking issues shares to the shareholders of the demerged company and include any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger.

4.15 Merger Procedure:

A merger is a complicated transaction, involving fairly complex legal considerations. While evaluating a merger proposal, one should bear in mind the following legal provisions. Sections 391 to 394 of the companies act, 1956 contain the provisions for amalgamations. The procedure for amalgamation normally involves the following steps:

1. Examination of object Clauses:

The memorandum of association of both the

companies should be examined to check if the power to amalgamate is available. Further, the object clause of the amalgamated company (Transferee Company) should permit it to carry on the business of the amalgamating company (Transferor Company). If such clauses do not exists, necessary approvals of the shareholders, boards of directors and Company Law Board are required.

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2. Intimation to stock Exchanges: The stock exchanges where the amalgamated and

amalgamating companies are listed should be informed about the amalgamation proposal. From time to time, copies of all notices, resolutions, and orders should be mailed to the concerned stock exchanges.

3. Approval of the draft amalgamation proposal by the Respective Boards: The

draft amalgamation proposal should be approved by the respective boards of directors. The board of each company should pass a resolution authorizing its directors/executives to pursue the matter further.

4. Application to the National Company Law Tribunal (NCLT): Once the draft of

amalgamation proposal is approved by the respective boards, each company should make an application to the NCLT so that it can convene the meetings of shareholders and creditors for passing the amalgamation proposal.

5. Dispatch of notice to shareholders and creditors: In order to convene the meeting

of shareholders and creditors, a notice and an explanatory statement of the meeting, as approved by the NCLT, should be dispatched by each company to its shareholders and creditors so that they get 21 days advance intimation. The notice of the meetings should also be published in two newspapers (one English and one vernacular). An affidavit confirming that the notice has been dispatched to the shareholders/creditors and that the same has been published in newspapers should be filed with the NCLT.

6. Holding of Meetings of shareholders and creditors: A meeting of shareholders

should be held by each company for passing the scheme of amalgamation. At least 75 percent (in value) of shareholders in each class, who vote either in person or by proxy, must approve the scheme of amalgamation. Likewise, in a separate meeting, the creditors of the company must approve of the amalgamation scheme.

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7. Petition to the NCLT for confirmation and passing of NCLT orders: Once the

amalgamation scheme is passed by the shareholders and creditors, the companies involved in the amalgamation should present a petition to the NCLT for confirming the scheme of amalgamation. The NCLT will fix a date of hearing. A notice about the same has to be published in two newspapers. After hearing the parties the parties concerned ascertaining that the amalgamation scheme is fair and reasonable, the NCLT will pass an order sanctioning the same. However, the NCLT is empowered to modify the scheme and pass orders accordingly.

8. Filing the order with the Registrar: Certified true copies of the NCLT order must

be filed with the Registrar of Companies within the time limit specified by the NCLT.

9. Transfer of Assets and Liabilities: After the final orders have been passed by the

NCLT, all the assets and liabilities of the amalgamating company will, with effect from the appointed date, have to be transferred to the amalgamated company.

10. Issue of shares and debentures: The amalgamated company, after fulfilling the

provisions of the law, should issue shares and debentures of the amalgamated company. The new shares and debentures so issued will then be listed on the stock exchange.

4.16

Important elements of merger procedure are:

4.16.1 Scheme of merger The scheme of any arrangement or proposal for a merger is the heart of the process and has to be drafted with care. There is no specific form prescribed for the scheme. It is designed to suit the terms and conditions relevant to the proposal but it should generally contain the following information as per the requirements of sec. 394 of the companies Act, 1956: 1. Particulars about transferor and transferee companies 2. appointed date of merger
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3. Terms of transfer of assets and liabilities from transferor company to transferee company 4. Effective date when scheme will came into effect 5. Treatment of specified properties or rights of transferor company 6. Terms and conditions of carrying business by transferor company between appointed date and effective date 7. Share capital of Transferor Company and Transferee Company specifying authorized, issued, subscribed and paid up capital. 8. Proposed share exchange ratio, any condition attached thereto and the fractional share certificate to be issued. 9. Issue of shares by transferee company 10. Transferor companys staff, workmen, employees and status of provident fund, Gratuity fund, superannuation fund or any other special funds created for the purpose of employees. 11. Miscellaneous provisions covering Income Tax dues, contingent and other accounting entries requiring special treatment. 12. Commitment of transferor and Transferee Company towards making an application U/S 394 and other applicable provisions of companies Act, 1956 to their respective High court. 13. Enhancement of borrowing limits of transferee company when scheme coming into effect. 14. Transferor and transferee companies consent to make changes in the scheme as ordered by the court or other authorities under law and exercising the powers on behalf of the companies by their respective boards. 15. Description of power of delegates of Transferee Company to give effect to the scheme. Qualifications attached to the scheme which requires approval of different agencies.
16. Effect of non receipt of approvals /sanctions etc.

17. Treatment of expenses connected with the scheme. 4.16.2 Valuation in a merger: Determination of share exchange ratio

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An important aspect of merger procedure relates to valuation of business relates to valuation of business in order to determine share exchange ratio in merger. Valuation is the means to assess the worth of a company which is subject to merger or takeover so that consideration amount can be quantified and the price of one company for other can be fixed. Valuation of both companies subject to business combination is required for fixing the consideration amount to be paid in the form of exchange of share. Such valuation helps in determining the value of shares of acquired company as well as acquiring company to safeguard the interest of shareholders of both the companies. Broadly there are three (3) methods used for valuation of business: 1. Net Value Asset (NAV) Method NAV is the sum total of value of asserts (fixed assets, current assets, investment on the date of Balance sheet less all debts, borrowing and liabilities including both current and likely contingent liability and preference share capital). Deductions will have to be made for arrears of preference dividend, arrears of depreciation etc. However, there may be same modifications in this method and fixed assets may be taken at current realizable value (especially investments, real estate etc.) replacement cost (plant and machinery) or scrap value (obsolete machinery). The NAV, so arrived at, is divided by fully diluted equity (after considering equity increases on account of warrant conversion etc.) to get NAV per share. The three steps necessary for valuing share are: 1. Valuation of assets 2. Ascertainment of liabilities 3. Fixation of the value of different types of equity shares.

All assets (value by appropriation method All liabilities - preference shares) NAV =
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Fully diluted equity shares

2.

Yield Value Method

This method also called profit earning capacity method is based on the assessment of future maintainable earnings of the business. While the past financial performance serves as guide, it is the future maintainable profits that have to be considered. Earnings of the company for the next two years are projected (by valuation experts) and simple or weighted average of these profits is computed. These net profits are divided by appropriate capitalization rate to get true value of business. This figure divided by equity value gives value per share. While determining operating profits of the business, it must be valued on independent basis without considering benefits on account of merger. Also, past or future profits need to be adjusted for extra ordinary income or loss not likely to recur in future. While determining capitalization rate, due regard has to be given to inherent risk attribute to each business. Thus, a business with established brands and excellent track record of growth and diverse product portfolio will get a lower capitalization rate and consequently higher valuation where as a cyclical business or a business dependent on seasonal factors will get a higher capitalization rate. Profits of both companies should be determined after ensuring that similar policies are used in various areas like depreciation, stock valuation etc. 3. Market Value Method This method is applicable only in case where share of companies are listed on a recognized stock exchange. The average of high or low values and closing prices over a specified previous period is taken to be representative value per share. Now, the determination of share exchange ratio i.e., how many shares of amalgamating company, are to be exchanged for how many shares of amalgamated company, is basically an exercise in valuation of shares of two or more of amalgamating company. The problem of valuation has been dealt with by Weinberg and Blank (1971)49 by giving the relevant factors to be taken into account while determining the final share exchange
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ratio. These relevant factors has been enumerated by Gujarat High court in Bihari Mills Ltd. and also summarized by the Apex court in the case of Hindustan Levers. Employees union vs. Hindustan Lever Ltd. (1995) as under.

1. The stock exchange prices of the shares of the companies before the commencement of negotiations or the announcement of the bid.

2. The dividends presently paid on the shares of two companies. It is often difficult to induce a shareholder to agree to a merger if it involves a reduction in his dividend income.

3. The relative growth prospects of the two companies.

4. The cover, (ratio of after tax earnings to divided paid during the year) for the present dividends of the two companies. The fact that the dividend of one company is better covered than the other is a factor which has to be compensated to same extent.

5. The relative gearing of the shares of the two companies. The gearing of an ordinary share is the ratio of borrowings to equity capital.

6. The value of net assets of the two companies.

7. The voting strength in the company of shareholder of the two companies.

8. The past history of the prices of two companies.

There are however, no rules framed specially for the working out of share exchange ratio in case of amalgamations. According to Delhi High Court statement, The valuation of
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shares is a technical matter which requires considerable skills and expertise. There are bound to be difference of opinion as to what the correct value of the shares of the company is. If it is possible to the value the shares in a manner difference from the one adopted in the given case, it cannot be said, that the valuation agreed upon has been unfair. In CWT vs. Mahadeo Jalan (1972) 86 ITR 621 (SC), Supreme Court has evolved the following guidelines and aspects which should be considered: Regard should be had to price of shares prevailing in stock market

Profit earning capacity (yield method) or dividend declared by the company

(dividend method) should be considered. If result of two methods differs, a golden mean should be found.

In computing yields, abnormal expenses will be added back to calculate yield (e.g.

company incurring expenses disproportionate to the commercial venture, possibly to reduce income tax liability)

If lower dividend or profits are due to temporary reasons, then estimate of share

value before the set-back and proportionate fall in price of quoted shares of companies which have suffered similar reverses should be considered

If company is ripe for winding up, breakup value method to determine what would be

realized in winding up process should be considered.

Valuation can be done on basis of asset value, if reasonable estimation of future

profits and dividend is not possible due to wide fluctuations in profits and uncertain conditions.

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Valuation of shares on book value method is proper and valid mode of valuation of shares- Tinsukhia Electric Co. Ltd. vs. State of Assam. Often share value cannot be finalized on basis of one parameter only. Thus, final decision depends on judicious consideration of usual methods of valuation i.e. break up value, yield value, market value or on net worth basis. Qualitative factors like market fluctuations, competition, Government policy, managerial skills are also relevant for the purpose-Sanghi industries Ltd. 4.17 Reverse Merger Normally, a small company merges with large company or a sick company with healthy company. However in some cases, reverse merger is done. reasons. Some reasons for reverse merger are: a) The transferee company is a sick company and has carry forward losses and Transferor Company is profit making company. If Transferor Company merges with the sick transferee company, it gets advantage of setting off carry forward losses without any conditions. If sick company merges with healthy company, many restrictions are applicable for allowing set off. When a healthy company merges with a sick or a small company is called reverse merger. This may be for various

b) The transferee company may be listed company. In such case, if Transferor Company merges with the listed company, it gets advantages of listed company, without following strict norms of listing of stock exchanges.

In such cases, it is provided that on date of merger, name of Transferee Company will be changed to that of Transferor Company. Thus, outside people even may not know that the transferor company with which they are dealing after merger is not the same as earlier one. One such approved in Shiva Texyarn Ltd. Many times, reverse mergers are also accompanied by reduction in the unwieldy capital of the sick company. This capital reduction helps in unity of the accumulated losses and other assets which are not represented by the share capital of the company. Thus, a capital reduction aim rehabilitation scheme is an ideal antidote (by way of reverse
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merger) for sick company. For example Godrej soaps Ltd. (GSL) with pre merger turnover of 436.77 crores entered into scheme of reverse merger with loss making Gujarat Godrej innovative Chemicals Ltd. (GGICL) (with pre merger turnover of Rs. 60 crores) in 1994.The scheme involved reduction of share capital of GGICL from Rs. 10 per share to Re. 1 per share and later GSL would be merged with 1 share of GGICL to be allotted to every shareholder of GSL. The post merger company, Godrej Soaps Ltd. (with post-merger turnover of Rs. 611.12 crores) restructured its gross profit of 49.08 crores, higher turnover GSCs pre-merger profits of Rs. 30 crores. The amalgamated company, GGICL reverted back to the old name of amalgamating company, Godrej Soaps Ltd. Thus, this innovative merger which was by way of forward integration in the name of GGICL was completed with the help of financial institutions like IDBI, IFCI, ICICI, UTI etc. All financial Institutions agreed to waive penal interest, liquidate damages besides finding of interest, reschedule outside loans and also lower interest rate on term loans.

4.18

Merger and Acquisition in India

Mergers and acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. An acquisition, also known as a takeover or a buyout, is the buying of one company (the target) by another. The acquisition process is very complex and various studies shows that only 50% acquisitions are successful. An acquisition may be friendly or hostile. In a friendly takeover a companies cooperate in negotiations. In the hostile takeover, 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

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established company and keep its name for the combined entity. This is known as a reverse takeover. Although merger and amalgamation mean the same, there is a small difference between the two. In a merger one company acquires the other company and the other company ceases to exist. In an amalgamation, two or more companies come together and form a new business entity. Governing Law: The Companies Act, 1956 does not define the term 'Merger' or 'Amalgamation'. It deals with schemes of merger/ acquisition which are given in s.390-394 'A', 395,396 and 396 'A'. 4.19 4.19.1 Classifications of mergers Horizontal merger is the merger of two companies which are in produce of

same products. This can be again classified into Large Horizontal merger and small horizontal merger. Horizontal merger helps to come over from the competition between two companies merging together strengthens the company to compete with other companies. Horizontal merger between the small companies would not effect the industry in large. But between the larger companies will make an impact on the economy and gives them the monopoly over the market. Horizontal mergers between the two small companies are common in India. When large companies merging together we need to look into legislations which prohibit the monopoly. 4.19.2 Vertical merger is a merger between two companies producing different

goods or services for one specific finished product. Vertical merger takes between the customer and company or a company and a supplier. IN this a manufacture may merge with the distributor or supplier of its products. This makes other competitors difficult to access to an important componet of product or to an important channel of distribution which are called as "vertical foreclosure" or "bottleneck" problem. Vertical merger helps to avoid sales taxes and other marketing expenditures.

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4.19.3

Market-extension merger - is a merger of two companies that deal in same

products in different markets. Market extension merger helps the companies to have access to the bigger market and bigger client base. 4.19.4 Product-extension merger takes place between the two or more companies

which sells different products but related to the same category. This type of merger enables the new company to go in for a pooling in of their products so as to serve a common market, which was earlier fragmented among them. This merger is between two companies that sell different, but somewhat related products, in a common market. This allows the new, larger company to pool their products and sell them with greater success to the already common market that the two separate companies shared. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits. 4.19.5 Conglomeration - Two companies that have no common business areas. A

conglomeration is the merger of two companies that have no related products or markets. In short, they have no common business ties. Conglomerate merger in which merging firms are not competitors, but use common or related production processes and/or marketing and distribution channels. 4.19.6 Congeneric merger: Merger between firms in the same general industry but

having no mutual buyer-seller relationship, such as a merger between a bank and a leasing company. A merger in which one firm acquires another firm that is in the same general industry but neither in the same line of business nor a supplier or customer. 4.19.7 Purchase mergers - this kind of merger occurs when one company purchases

another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the
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difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. 4.19.8 Consolidation mergers - With this merger, a brand new company is formed

and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase 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. 4.19.9 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. 4.19.10 high P/E. 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

4.20

Merger and Acquisition Procedures:

1. Memorandum Of Association (M/A):-The Memorandum of Association must provide the power to amalgamate in its objects clause. It M/A is silent, amendment in M/A must take place. 2. Board Meeting:-A Board Meeting shall be convened to consider and pass the following requisite resolutions: - approve the draft scheme of amalgamation; - to authorize filing of application to the court for directions to convene a general meeting; - to file a petition for confirmation of scheme by the High Court.

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Through an application under s.391/ 394 of Companies Act, 1956 can be made by the member or creditor of a company, the court may not be able to sanction the scheme which is not approved by the company by a Board or members resolution. Directors who are given the necessary powers by the AoA may present a petition on behalf of the company without first obtaining the approval of the company in general meeting. 3. Application to the Court:- An application shall be made to the court for directions to convene a general meeting by way of Judge's summons(Form No. 33) supported by an affidavit(Form No. 34). The proposed scheme of amalgamation must be attached to such affidavit.. The summons should be accompanied by: -A certified copy of the M&A of both companies -A certified true copy of the latest audited B/S and P&L A/c of Transferee Company The application to convene meeting under s.391 (1) is required to be made to the respective jurisdictional HC by the company concerned depending on the location of its registered office. Similarly an application for the scheme of arrangement will have to be made to the concerned HC where the companys registered office is situated. Person entitled to apply:(i) U/s.391 & 394, members of the company have right to apply to court (ii) A successor to a share of a deceased member has in the normal course, locus standi to maintain an application u/s.391, 395. (iii) An application can also be made by the transferee of shares. (iv)The creditor also have right to apply to court. (v) The liquidator is also empowered to make an application to the court. 4. Copy to Regional Director:-A copy of application made to concerned H.C. shall also be sent to the R.D. of the region. Although, such notice is supposed to be sent by the H.C., usually the company sends it without waiting for the H.C. to send it. 5. Order Of High Court (Orders in - Form No. 35):-On hearing of the summons, the H.C. shall pass the necessary orders which shall include:
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(a) Time and place of the meeting, (b) Chairman of the meeting, (c) Fixing the quorum, (d) Procedure to be followed in the meeting for voting by the proxy, (e) Advertisement of notice of the meeting, (f) Time limit for the chairman to submit the report to the court regarding the result of the meeting. Where the court observes that any of the following circumstances exist in the case of the merger it may not order a meeting when shareholders are few in number; or where the membership is restricted to a single family, HUF or close relatives; or where shareholding pattern of transferor and transferee companies is identical.

6. Notice Of The Meeting(Notice in - Form No. 36):-The notice of the meeting shall be sent to the creditors and/or all the shareholders individually (including preference shareholders) by the chairman so appointed by registered post enclosing: (a) A statement setting forth the following: - Terms of amalgamation and its effects - Any material interests of the director, MDs or Manager, in any capacity - Effect of the arrangement on those interests. (b) A copy of the proposed scheme of amalgamation (c) A form of proxy, (Proxy in - Form No. 37) (d) Attendance slip, (e) Notice of the resolution for authorizing issue of shares to persons other than existing shareholders Computation: The notice that is required to be given u/s.393 of the Act for the meeting of the members/creditors shall be by 21 clear days notice. 7. Advertisement of Notice Of Meeting (Advertisement in - Form No. 38):-The notice of the meeting shall be advertised in an English and Hindi Newspapers as the court may
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direct by giving not less than 21 clear days notice before the date fixed for the meeting. However in some instances, the 21 days period can be condoned if reasons are found justifiable. 8. Notice To Stock Exchange: - In case of the listed company, 3 copies of the notice of the general meeting along with enclosures shall be sent to the Stock Exchange where the company is listed. 9. Filing of Affidavit for the Compliance: - An affidavit not less than 7 days before the meeting shall be filed by the Chairman of the meeting with the Court showing that the directions regarding the issue of notices and advertisement have been duly complied with. 10. General Meeting:-The General Meeting shall be held to pass the following resolutions: (a) Approving the scheme of amalgamation by th majority e.g. if a meeting is attended by say 100 members holding 100 shares, the scheme shall be deemed to have been approved only when it is supported by at least 51 members holding together 750 shares amounts themselves; (b) Special Resolution authorizing allotment of shares to persons other than existing shareholders or an ordinary resolution be passed subject to getting Central Government's approval for the allotment as per the provisions of Section 81(1A) of the Companies Act, 1956, (c) The resolution to empower directors to dispose of the shares not taken up by the dissenting shareholders at their discretion. (d) An ordinary/special resolution shall be passed to increase the Authorized share capital, if the proposed issue of shares exceeds the present authorized capital. The decision of the meeting shall be ascertained only by taking a poll on resolutions. In case of Transfer company need not to pass a special resolution for offering shares to the persons other than the existing shareholders. 11. Reporting of Result of the Meeting (Report in - Form No. 39):-The Chairman of the meeting shall report the result of the meeting to the court within the time fixed by the judge or within 7 days, as the case may be. A copy of proceedings of the meeting shall also be sent to the concerned Stock Exchange.

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12. Formalities with ROC: - The following documents shall be filed with ROC along-with the requisite filing fees: (i)Form No. 23 of Companies General Rules & Forms + copy of Special Resolution, (there is no need for the transferor company to file Form No. 23 of the Companies General Rules and Forms with the Registrar of Companies.) (ii)Resolution approving the scheme of amalgamation, (iii) Special resolution passed for the issue of shares to persons other than existing shareholders. 13. Petition (Petition in - Form No. 40):- For approval of the scheme of amalgamation, a petition shall be made to the H.C. within 7 days of the filing of report by the chairman. If the Regd. Offices of the companies are in same state - then both the companies may move jointly to the High Court. If the Regd. Offices of the companies are in different states - then each company shall move the petition in respective High Court for directions. However in a recent judgment of Jaipur Polypin Ltd. v. Rajasthan Spinning & Weaving Mills, it was held that when the two companies are at different places, then no need to file an application at two different places. 14. Sanction of The Scheme: - The Court shall sanction the scheme on being satisfied that: (i) the whole scheme is annexed to the notice for convening meeting. (This provision is mandatory in nature) (ii) The scheme should have been approved by the company by means of th majority of the members present. (iii)The scheme should be genuine and bona fide and should not be against the interests of the No. 41). The requirement of law is permission or approval of court to the scheme. creditors, the company and the public interest. After satisfying itself, the court shall pass orders in the requisite form (Orders in - Form

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The application made by the company is to seek courts approval to the company scheme of amalgamation and not merely ordering a meeting. The court may order a meeting of members too. The court must consider all aspects of the matter so as to arrive at a finding that the scheme is fair, just and reasonable and does not contravene public policy or any statutory provision. While interpreting s.394 r/w s.391, we find that the Tribunals power of ordering amalgamation/reconstruction is limited by two provisos of s.394: Firstly, Tribunal has to await the receipt of report from the Registrar of Companies about the manner in which affairs of the Company are conducted. Secondly, when the transferor company is proposed to be dissolved without winding up, the Tribunal shall await. 15. Stamp Duty: A scheme sanctioned by the court is an instrument liable to stamp duty. 16. Filing with ROC: The following documents shall be filed with ROC within 30 days of order: -A certified true copy of Court's Order -Form No. 21 of Companies General Rules & Forms 17. Copy of Order to be annexed: A copy of court's order shall be annexed to every copy of the Memorandum of Association issued after the certified copy of the order has been filed with as aforesaid. 18. Allotment of shares: A Board Resolution shall be passed for the allotment of shares to the shareholders in exchange of shares held in the transferor-company and to fix the record date for this purpose. 4.21 ACQUISITION OF SATYAM COMPUTERS BY TECHMAHINDRA

Details of Acquisition of Satyam Computers: To acquire the scandal hit company M/s sat yam computers 3 bidders namely:

1) M/s Tech Mahindra 2) M/s Larsen and toubro

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3) M/s Wilberross Were shortlisted after evaluation of technical bids. When the price bids were opened M/s Tech-Mahindra was found to be highest bidder with Rs 58/share as against Rs 45.90 by M/s Larsen and toubro and Rs 20 by M/s Wilberross. M/s Tech-Mahindra approach was as a strategic bidder. As per the terms of offer M/s Tech-Mahindra will buy preferential equity shares of 31% of satyam equity capital followed by a further acquisition of 20% through an open offer to existing shareholders. M/s Tech-Mahindra will have to pay roughly Rs 2908 crores for the 51% stake. After the bid opening the share market also welcomed the move sending Tech-Mahindra stock 12%.

Fig 1.1: Opportunities and Threats 1) Restriction on M/s Tech-Mahindra by Company Law Board (CLB):

i). Tech-Mahindra cannot sell any of satyam assets for 2 years, including some of the real estate valuing around 1200 1500 crores. ii). Tech-Mahindra cannot have more than four members on satyam board. iii). Government nominees on satyam board will stay. iv). Tech-Mahindra will have to handle satyam liabilities.

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v). Tech-Mahindra is locked into the acquisition for 3 years i.e. they cannot sell their holdings during this period.

2) Advantages to M/s Tech-Mahindra:

i). with this acquisition Tech-Mahindra acquired the 4th position in the information technology sector. Earlier satyam computers were holding the position prior to discloser of this scam. ii). Tech-Mahindra has acquired a wide base of new clients, with this it has become a complete package in IT sector , they can now offer comprehensive solutions for various users. iii). about 75% of Tech-Mahindra revenues are from British market whereas 70% of satyam revenues come from American market. So this can be called as marriage made in heaven because Tech-Mahindra will now have World Wide operations. iv). Tech-Mahindra subsidiary such as Bristlecone are also benefited with this acquisition because they provide supply chain management solution using SAP.

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Fig 1.2: Reason to cheer 2) Challenges before M/s Tech-Mahindra: i). Tech-Mahindra has to deal with law suits which could impose damages amounting to crores of dollars. The suits were filed by 2 U.S law firms Izard Nobel LLP and Vianale LLP, for losses due to inflated stock prices. ii). Apart from above there is high profile law suit by Upaid Systems against satyam last year. satyam group had fraudulently used Upaid developed softwares. iii). any other law suit which may arise in future. iv). they have to re-establish goodwill among satyam clients. v). Managing excess manpower is a uphill task for Tech-Mahindra. They have to deal with 45000 employees which have to be gradually reduced to drastically levels. They have to atleast 100 key peoples because Tech-Mahindra does not readily have specialized manpower for satyam areas. vi). Certain operations of Satyam like BPO (employing about 5000 employees) have to be closed down because there is no strategic interest of Tech-Mahindra in BPO operations due to negligible revenues. vii). Re establishment of accounts is still being done and is likely to take for more months pending this Tech-Mahindra will find it difficult to take major financial decisions.

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Fig 1.3 Bitter sweet deal Latest Updates:1). New Name for Satyam Computers: Management of Tech-Mahindra has decided to Rename M/s Satyam computers as M/s Mahindra Satyam, with immediate effect, with a view to have true reflection of Mahindra culture. 2). New Top Management for Mahindra Satyam: Soon after renaming satyam computers, new management has been announced as detailed below:Name Mr. Vineet Nayyar New Assignment Executive Chairman Mr. C.P.Gurnanai CEO Vice Earlier Position CEO & MD (TechM) Head Int.Opr(TechM) Mr. S Durgashankar CFO Sr. VP (M & M)

Above announcements were made by Mr. Anand Mahindra, Vice Chairman, Mahindra and Mahindra group. 3). Fund drain from Satyam Computers:
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Central bureau has recently informed high court, Andhra Pradesh that they have detected large scale fund drain from satyam computers to foreign accounts by Mr. Raju Lingam and his associates who are under judicial custody for fraud in this company during their tenure. 4). Business Expansion by Tech Mahindra: Tech Mahindra management has recently announced that they will shortly enter into two new articles related to BPO operations consequent upon acquisition of satyam computers. This is with a view to utilize infrastructure and other resources of satyam computers. 5). Tech Mahindra has announced that the merger process of satyam Mahindra with TechMahindra will be completed within two years. 6). New Logo of Mahindra Satyam:

5.0 RESEARCH METHODOLOGY AND PROCEDURE OF WORK

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Fig 1.4: Research methodology Chart

5.1

Research Design:

Descriptive research design will be used.

Type: Descriptive Study Scope: combination of theoretical study as well as Statistical Study Environment: Field Research

Most sciences have their own specific scientific methods, which are supported by methodologies (i.e., rationale that support the method's validity). The social sciences are methodologically diverse using qualitative, quantitative, and mixed-methods approaches. Qualitative methods include the case study, phenomenology, grounded theory, and ethnography, among others. Quantitative methods include hypothesis testing, power analysis, Ratio analysis, observational studies, re sampling, randomized controlled trials, regression analysis, multilevel modeling, and high-dimensional data analysis, among others.

5.2 Types of Research

The research study under consideration is exploratory type. Basically there are two broad kinds of researches Exploratory Research : Conclusive Research : This seeks to discover new relationships. It is designed to help executive choose the various Course of action. As research design applicable to exploratory studies are different from objectives firmly in mind while designing the research. Which searching for hypothesis, exploratory designs are appropriate; when hypothesis have been established and are to be listed, conclusive
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designs are needed. It should be noted however, that the research process tends to become circular over a period of time. Exploratory research may define hypothesis, which are then tested by conclusive research; but a by product of the conclusive research may be a suggestion of a new opportunity or a new difficulty. Other characteristics of exploratory research are flexibility and ingenuity, which characterize the investigation. As we proceed with the investigating it must be on the alert to recognize new ideas, as it can then swing the research in the new direction until they have exhausted it or have found a better idea. Thus they may be constantly changing the focus of invest as new possibilities come to attention. It should be added here that formal design in the researcher is the key factor. Study of secondary sources of information.

The reason for selecting this mode of research for this type is that its a probably quickest and most economical way for research to find possible hypothesis and to take advantage of the work of to others and utilize their own earlier efforts. Most large companies that have maintained marketing research programs over a number of years have accumulated significant libraries of research organizations furnishing continuing data. 5.3 Procedure

As it is a secondary research, all the data is selected after rigorous analysis of articles from newspapers, magazines and internet. All the research collected is done by professional analyst across the world and is compiled in this project to understand the financial and business impact of merger and acquisition more effectively. 6.0 ANALYSIS OF DATA

Data will be analyzed with the help of certain statistical tools. 1. Questionnaire method 2. Method of observation
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7.0 7.1

FINDINGS, INFERENCES AND RECOMMENDATIONS. Abstract:

Just as mergers and acquisitions may be fruitful in some cases, the impact of mergers and acquisitions on various sects of the company may differ. In the article below, details of how the shareholders, employees and the management people are affected has been briefed. Mergers and acquisitions are aimed at improving profits and productivity of a company. Simultaneously, the objective is also to reduce expenses of the firm. However, mergers and acquisitions are not always successful. At times, the main goal for which the process has taken place loses focus. The success of mergers, acquisitions or takeovers is determined by a number of factors. Those mergers and acquisitions, which are resisted not only affects the entire work force in that organization but also harm the credibility of the company. In the process, in addition to deviating from the actual aim, psychological impacts are also many. Studies have suggested that mergers and acquisitions affect the senior executives, labour force and the shareholders.

7.2

Employees: Impact Of Mergers And Acquisitions on workers or employees:

Aftermath of mergers and acquisitions impact the employees or the workers the most. It is a well known fact that whenever there is a merger or an acquisition, there are bound to be layoffs. In the event when a new resulting company is efficient business wise, it would require less number of people to perform the same task. Under such circumstances, the company would attempt to downsize the labour force. If the employees who have been laid off possess sufficient skills, they may in fact benefit from the lay off and move on for greener pastures. But it is usually seen that the employees those who are laid off would not have played a significant role under the new organizational set up. This accounts for their
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removal from the new organization set up. These workers in turn would look for re employment and may have to be satisfied with a much lesser pay package than the previous one. Even though this may not lead to drastic unemployment levels, nevertheless, the workers will have to compromise for the same. If not drastically, the mild undulations created in the local economy cannot be ignored fully. 7.3

Management at the top: Impact of mergers and acquisitions on top level management:

Impact of mergers and acquisitions on top level management may actually involve a "clash of the egos". There might be variations in the cultures of the two organizations. Under the new set up the manager may be asked to implement such policies or strategies, which may not be quite approved by him. When such a situation arises, the main focus of the organization gets diverted and executives become busy either settling matters among themselves or moving on. If however, the manager is well equipped with a degree or has sufficient qualification, the migration to another company may not be troublesome at all. 7.4

Shareholders: Impact of mergers and acquisitions on shareholders:

We can further categorize the shareholders into two parts:

The Shareholders of the acquiring firm The shareholders of the target firm. Shareholders of the acquired firm:

7.5

The shareholders of the acquired company benefit the most. The reason being, it is seen in majority of the cases that the acquiring company usually pays a little excess than it what should. Unless a man lives in a house he has recently bought, he will not be able to know its drawbacks. So that the shareholders forgo their shares, the company has to offer an amount more then the actual price, which is prevailing in the market. Buying a company at a higher price can actually prove to be beneficial for the local economy.
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7.6

Shareholders of the acquiring firm:

They are most affected. If we measure the benefits enjoyed by the shareholders of the acquired company in degrees, the degree to which they were benefited, by the same degree, these shareholders are harmed. This can be attributed to debt load, which accompanies an acquisition.

8.0

CONCLUSION

Mergers and acquisition has become very popular over the years especially during the last two decades owing to rapid changes that have taken place in the business environment. Business firms now have to face increased competition not only from firms within the country but also from international business giants thanks to globalization, liberalization, technological changes and other changes. Generally the objective of M&As is wealth maximization of shareholders by seeking gains in terms of synergy, economies of scale, better financial and marketing advantages, diversification and reduced earnings volatility, improved inventory management, increase in domestic market share and also to capture fast growing international markets abroad. But astonishingly, though the number and value of M&As are growing rapidly, the results of the studies on the impact of mergers on the performance from the acquirers shareholders perspective have been highly disappointing. In this paper an attempt has been made to draw the results of some of the earlier studies while analyzing the causes of failure of majority of the mergers. While making the merger deals, it is necessary not only to look into the financial aspects of the deal but also to analyse the cultural and people issues of both the concerns for proper post-acquisition integration and for making the deal successful. But it is unfortunate that in many deals only financial and economic benefits are considered while neglecting the cultural and people issues. Thus in nut shell we can say that M&A have become common in our countrys business set up. There is a tremendous need for people to grow and become global players expanding their business spheres. If success is to be achieved in M&A cohesive, well integrated and motivated workforce is required who is willing to take on the challenges that arise in the process of M&A and there should be proper organization among employees and they should be provided with proper working conditions.
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9.0

Summary of the project:

Merger: Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller. Acquisition: Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. Takeover: A takeover is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfilment of goals of combination all are different in takeovers than in mergers. For example, process of takeover is unilateral and the offer or company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offered company being more co-operative.

Corporate Restructuring

Restructuring of business is an integral part of the new economic paradigm. As controls and restrictions give way to competition and free trade, restructuring and reorganization
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become essential. Restructuring usually involves major organizational change such as shift in corporate strategies to meet increased competition or changed market conditions. This activity can take place internally in the form of new investments in plant and machinery, research and development at product and process levels. It can also take place externally through mergers and acquisitions (M&A) by which a firm may acquire another firm or by which joint venture with other firms.

This restructuring process has been mergers, acquisitions, takeovers, collaborations, consolidation, diversification etc. Domestic firms have taken steps to consolidate their position to face increasing competitive pressures and MNCs have taken this opportunity to enter Indian corporate sector. The different forms of corporate restructuring are summarized as follows:

Corporate Restructuring

Expansion Amalgama tion Absorption Tender offer Asset acquisitio n

Contraction Demerger + Spin off + Equity carve out + Split off + Split up

Corporate Control Going Private Equity Buyback Anti Takeover Leveraged

Fig 1.5 Corporate restructuring Amalgamation

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Amalgamation is an arrangement or reconstruction. It is a legal process by which two or more companies are to be absorbed or blended with another. As a result, the amalgamating company loses its existence and its shareholders become shareholders of new company or the amalgamated company. In case of amalgamation a new company may came into existence or an old company may survive while amalgamating company may lose its existence. According to Halsburys law of England amalgamation is the blending of two or more existing companies into one undertaking, the shareholder of each blending companies becoming substantially the shareholders of company which will carry on blended undertaking. There may be amalgamation by transfer of one or more undertaking to a new company or transfer of one or more undertaking to an existing company. Amalgamation signifies the transfers of all are some part of assets and liabilities of one or more than one existing company or two or more companies to a new company. The Accounting Standard, AS-14, issued by the Institute of Chartered Accountants of India has defined the term amalgamation by classifying (i) Amalgamation in the nature of merger, and (ii) Amalgamation in the nature of purchase.
2. Amalgamation in the nature of merger: As per AS-14, an amalgamation is called

in the nature of merger if it satisfies all the following condition:

All the assets and liabilities of the transferor company should become, after

amalgamation; the assets and liabilities of the other company.

Shareholders holding not less than 90% of the face value of the equity shares of the

transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

The consideration for the amalgamation receivable by those equity shareholders of

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the transferor company who agree to become equity shareholders of the transferee

company is discharged by the transferee company wholly by the issue of equity share in the transferee company, except that cash may be paid in respect of any fractional shares.

The business of the transferor company is intended to be carried on, after the

amalgamation, by the transferee company.

No adjustment is intended to be made in the book values of the assets and liabilities

of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

Amalgamation in the nature of merger is an organic unification of two or more entities or undertaking or fusion of one with another. It is defined as an amalgamation which satisfies the above conditions.

2. Amalgamation in the nature of purchase: Amalgamation in the nature of purchase is where one companys assets and liabilities are taken over by another and lump sum is paid by the latter to the former. It is defined as the one which does not satisfy any one or more of the conditions satisfied above. As per Income Tax Act 1961, merger is defined as amalgamation under sec.2 (1B) with the following three conditions to be satisfied.

1.

All the properties of amalgamating company(s) should vest with the

amalgamated company after amalgamation.

2.

All the liabilities of the amalgamating company(s) should vest with the

amalgamated company after amalgamation.

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3.

Shareholders holding not less than 75% in value or voting power in

amalgamating company(s) should become shareholders of amalgamated companies after amalgamation

4.

Amalgamation does not mean acquisition of a company by purchasing its

property and resulting in its winding up. According to Income tax Act, exchange of shares with 90% of shareholders of amalgamating company is required.

1.2 Acquisition Acquisition refers to the acquiring of ownership right in the property and asset without any combination of companies. Thus in acquisition two or more companies may remain independent, separate legal entity, but there may be change in control of companies. Acquisition results when one company purchase the controlling interest in the share capital of another existing company in any of the following ways: 1. Controlling interest in the other company. By entering into an agreement with a person or persons holding 2. By subscribing new shares being issued by the other company. 3. By purchasing shares of the other company at a stock exchange, and 4. By making an offer to buy the shares of other company, to the existing shareholders of that company.

1.2.1

Merger

Merger refers to a situation when two or more existing firms combine together and form a new entity. Either a new company may be incorporated for this purpose or one existing company (generally a bigger one) survives and another existing company (which is smaller) is merged into it. Laws in India use the term amalgamation for merger. Merger through absorption Merger through consolidation

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Absorption

An absorption is a combination of two or more companies into an existing

company. All companies except one lose their identity in a merger through absorption. An example of this type of merger is the absorption of Tata Fertilisers Ltd. (TFL) TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

Consolidation

A consolidation is a combination of two or more companies into a new

company .In this type of merger, all companies are legally dissolved and a new entity is created. In a consolidation, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. An example of consolidation is the merger of Hindustan Computers Ltd., Hindustan Instruments Ltd., and Indian Reprographics Ltd., to an entirely new company called HCL Ltd.

1.2.2

Takeover

Acquisition can be undertaken through merger or takeover route. Takeover is a general term used to define acquisitions only and both terms are used interchangeably. A Takeover may be defined as series of individuals or a company acquires control over the assets of a company, either directly by becoming owner of those assets or indirectly by obtaining control of management of the company. of transacting whereby a person, individual, group

Takeover is acquisition, by one company of controlling interest of the other, usually by buying all or majority of shares. Takeover may be of different types depending upon the purpose of acquiring a company.

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1.

A takeover may be straight takeover which is accomplished by the management

of the taking over company by acquiring shares of another company with the intention of operating taken over as an independent legal entity.

2.

The second type of takeover is where ownership of company is captured to

merge both companies into one and operate as single legal entity.

3.

A third type of takeover is takeover of a sick company for its revival. This is

accomplished by an order of Board for Industrial and financial Reconstruction (BIFR) under the provision of Sick Industrial companies Act, 1985. In India, Board for Industrial and Financial reconstruction (BIFR) has also been active for arranging mergers of financially sick companies with other companies under the package of rehabilitation. These merger schemes are framed in consultation with the lead bank, the target firm and the acquiring firm. These mergers are motivated and the lead bank takes the initiated and decides terms and conditions of merger. The recent takeover of Modi Cements Ltd. By Gujarat Ambuja Cement Ltd. was an arranged takeover after the financial reconstruction Modi Cement Ltd.

4.

The fourth kind is the bail-out takeover, which is substantial acquisition of

shares in a financial weak company not being a sick industrial company in pursuance to a scheme of rehabilitation approved by public financial institution which is responsible for ensuring compliance with provision of substantial acquisition of shares and takeover Regulations, 1997 issued by SEBI which regulate the bail out takeover.

Types of Merger There are four types of merger are as follows: 1. Horizontal merger: It is a merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands as the firms operations in the same industry.
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Horizontal mergers are designed to produce substantial economies of scale and result in decrease in the number of competitors in the industry. The merger of Tata Oil Mills Ltd. with the Hindustan lever Ltd. was a horizontal merger. In case of horizontal merger, the top management of the company being meted is generally, replaced, by the management of the transferee company. One potential repercussion of the horizontal merger is that it may result in monopolies and restrict the trade. Weinberg and Blank define horizontal merger as follows: A takeover or merger is horizontal if it involves the joining together of two companies which are producing essentially the same products or services or products or services which compete directly with each other (for example sugar and artificial sweetness). In recent years, the great majority of takeover and mergers have been horizontal. As horizontal takeovers and mergers involve a reduction in the number of competing firms in an industry, they tend to create the greatest concern from an anti-monopoly point of view, on the other hand horizontal mergers and takeovers are likely to give the greatest scope for economies of scale and elimination of duplicate facilities.

2. Vertical merger: It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. If a company takes over its supplier/producers of raw material, then it may result in backward integration of its activities. On the other hand, Forward integration may result if a company decides to take over the retailer or Customer Company. Vertical merger may result in many operating and financial economies. The transferee firm will get a stronger position in the market as its production/distribution chain will be more integrated than that of the competitors. Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network (i.e., from the acquisition of raw material to the relating of final products).
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A takeover of merger is vertical where one of two companies is an actual or potential supplier of goods or services to the other, so that the two companies are both engaged in the manufacture or provision of the same goods or services but at the different stages in the supply route (for example where a motor car manufacturer takes over a manufacturer of sheet metal or a car distributing firm). Here the object is usually to ensure a source of supply or an outlet for products or services, but the effect of the merger may be to improve efficiency through improving the flow of production and Reducing stock holding and handling costs, where, however there is a degree of concentration in the markets of either of the companies, anti-monopoly problems may arise.

3. Co generic Merger: In these, mergers the acquirer and target companies are related through basic technologies, production processes or markets. The acquired company represents an extension of product line, market participants or technologies of the acquiring companies. These mergers represent an outward movement by the acquiring company from its current set of business to adjoining business. The acquiring company derives benefits by exploitation of strategic resources and from entry into a related market having higher return than it enjoyed earlier. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources.

Western and Mansinghka classified cogeneric mergers into product extension and market extension types. When a new product line allied to or complimentary to an existing product line is added to existing product line through merger, it defined as product extension merger, Similarly market extension merger help to add a new market either through same line of business or adding an allied field . Both these types bear some common elements of horizontal, vertical and conglomerate merger. For example, merger between Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a Product

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extension merger and merger between GMM Company Ltd. and Xpro Ltd. contains elements of both product extension and market extension merger.

4. Conglomerate merger: These mergers involve firms engaged in unrelated type of business activities i.e. the business of two companies are not related to each other horizontally ( in the sense of producing the same or competing products), nor vertically( in the sense of standing towards each other n the relationship of buyer and supplier or potential buyer and supplier). In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. In practice, however, there is some degree of overlap in one or more of this common factors. Conglomerate mergers are unification of different kinds of businesses under one flagship company. The purpose of merger remains utilization of financial resources, enlarged debt capacity and also synergy of managerial functions. However these transactions are not explicitly aimed at sharing these resources, technologies, synergies or product market strategies. Rather, the focus of such conglomerate mergers is on how the acquiring firm can improve its overall stability and use resources in a better way to generate additional revenue. It does not have direct impact on acquisition of monopoly power and is thus favored throughout the world as a means of diversification.

Demerger It has been defined as a split or division. As the same suggests, it denotes a situation opposite to that of merger. Demerger or spin-off, as called in US involves splitting up of conglomerate (multi-division) of company into separate companies. This occurs in cases where dissimilar business are carried on within the same company, thus becoming unwieldy and cyclical almost resulting in a loss situation. Corporate restructuring in such situation in the form of demerger becomes inevitable. Merger of SG
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chemical and Dyes Ltd. with Ambalal Sarabhai enterprises Ltd. (ASE) has made ASE big conglomerate which had become unwieldy and cyclic, so demerger of ASE was done. A part from core competencies being main reason for demerging companies according to their nature of business, in some cases, restructuring in the form of demerger was undertaken for splitting up the family owned large business empires into smaller companies. The historical demerger of DCM group where it split into four companies (DCM Ltd., DCM shriram industries Ltd., Shriram Industrial Enterprise Ltd. and DCM shriram consolidated Ltd.) is one example of family units splitting through demergers. Such demergers are accordingly, more in the nature of family settlements and are affected through the courts order. Thus, demerger also occur due to reasons almost the same as mergers i.e. the desire to perform better and strengthen efficiency, business interest and longevity and to curb losses, wastage and competition. Undertakings demerge to delineate businesses and fix responsibility, liability and management so as to ensure improved results from each of the demerged unit. Demerged Company, according to Section (19AA) of Income Tax Act, 1961 means the company whose undertaking is transferred, pursuant to a demerger to a resulting company. Resulting company, according to Section2(47A) of Income Tax Act,1961 means one or more company, (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger, and the resulting company in consideration of such transfer of undertaking issues shares to the shareholders of the demerged company and include any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger. Valuation in a merger: Determination of share exchange ratio An important aspect of merger procedure relates to valuation of business relates to valuation of business in order to determine share exchange ratio in merger. Valuation is
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the means to assess the worth of a company which is subject to merger or takeover so that consideration amount can be quantified and the price of one company for other can be fixed. Valuation of both companies subject to business combination is required for fixing the consideration amount to be paid in the form of exchange of share. Such valuation helps in determining the value of shares of acquired company as well as acquiring company to safeguard the interest of shareholders of both the companies. Broadly there are three (3) methods used for valuation of business:

1. Net Value Asset (NAV) Method NAV is the sum total of value of asserts (fixed assets, current assets, investment on the date of Balance sheet less all debts, borrowing and liabilities including both current and likely contingent liability and preference share capital). Deductions will have to be made for arrears of preference dividend, arrears of depreciation etc. However, there may be same modifications in this method and fixed assets may be taken at current realizable value (especially investments, real estate etc.) replacement cost (plant and machinery) or scrap value (obsolete machinery). The NAV, so arrived at, is divided by fully diluted equity (after considering equity increases on account of warrant conversion etc.) to get NAV per share. The three steps necessary for valuing share are: 1. 2. 3. Valuation of assets Ascertainment of liabilities Fixation of the value of different types of equity shares.

All assets (value by appropriation method all liabilities - preference shares) NAV =
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Fully diluted equity shares

2.

Yield Value Method

This method also called profit earning capacity method is based on the assessment of future maintainable earnings of the business. While the past financial performance serves as guide, it is the future maintainable profits that have to be considered. Earnings of the company for the next two years are projected (by valuation experts) and simple or weighted average of these profits is computed. These net profits are divided by appropriate capitalization rate to get true value of business. This figure divided by equity value gives value per share. While determining operating profits of the business, it must be valued on independent basis without considering benefits on account of merger. Also, past or future profits need to be adjusted for extra ordinary income or loss not likely to recur in future. While determining capitalization rate, due regard has to be given to inherent risk attribute to each business. Thus, a business with established brands and excellent track record of growth and diverse product portfolio will get a lower capitalization rate and consequently higher valuation where as a cyclical business or a business dependent on seasonal factors will get a higher capitalization rate. Profits of both companies should be determined after ensuring that similar policies are used in various areas like depreciation, stock valuation etc. 3. Market Value Method This method is applicable only in case where share of companies are listed on a recognized stock exchange. The average of high or low values and closing prices over a specified previous period is taken to be representative value per share. Now, the determination of share exchange ratio i.e., how many shares of amalgamating company, are to be exchanged for how many shares of amalgamated company, is basically an exercise in valuation of shares of two or more of amalgamating company. The problem of valuation has been dealt with by Weinberg and Blank (1971) by giving the relevant factors to be taken into account while determining the final share exchange
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ratio. These relevant factors has been enumerated by Gujarat High court in Bihari Mills Ltd. and also summarized by the Apex court in the case of Hindustan Levers. Employees union vs. Hindustan Lever Ltd. (1995) as under.

1. 2.

The stock exchange prices of the shares of the companies before the The dividends presently paid on the shares of two companies. It is often

commencement of negotiations or the announcement of the bid. difficult to induce a shareholder to agree to a merger if it involves a reduction in his dividend income. 3. 4. The relative growth prospects of the two companies. The cover, (ratio of after tax earnings to divided paid during the year) for the

present dividends of the two companies. The fact that the dividend of one company is better covered than the other is a factor which has to be compensated to same extent. 5. 6. 7. 8. The relative gearing of the shares of the two companies. The gearing of an The value of net assets of the two companies. The voting strength in the company of shareholder of the two companies. The past history of the prices of two companies. ordinary share is the ratio of borrowings to equity capital.

There are however, no rules framed specially for the working out of share exchange Governing Law: The Companies Act, 1956 does not define the term 'Merger' or 'Amalgamation'. It deals with schemes of merger/ acquisition which are given in s.390-394 'A', 395,396 and 396 'A'

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ANNEXURES

1) PROPOSAL 2) REFERENCE 3) LIST OF FIGURES, CHARTS, DIAGRAMS

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ANNEXUTE - A

PROJECT PROPOSAL

Name of the Learner Registration Number Program Name Address

: : : :

Umesha.M 200616254 PGDBA in Financial Management Bajaj Electricals Limited E&PBU, 15/17, Sant Savta Marg
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Reay Road, Mumbai 400 010 Title of the Project Objectives : : Mergers & Acquisitions The main objective of this is to study of mergers and acquisitions to full fill the PGDBA in Financial management, as well as to having awareness about mergers and acquisition. This project aims at understanding the overall study of mergers and acquisitions. Need for the Topic: M&A are very important tools of corporate growth. A firm can achieve growth in several ways. It can grow internally or externally Internal Growth can be achieved if a firm expands its existing activities by up scaling capacities or establishing new firm with fresh investments in existing product markets. It can grow internally by setting its own units in to new market or new product. But if a firm wants to grow internally it can face certain problems like the size of the existing market may be limited or the existing product may not have growth potential in future or there may be government restriction on capacity enhancement. Also firm may not have specialized knowledge to enter in to new product/ market and above all it takes a longer period to establish own units and yield positive return. One alternative way to achieve growth is resort to external arrangements like Mergers and Acquisitions, Takeover or Joint Ventures. External alternatives of corporate growth have certain advantages. In case of diversified mergers firm can use resources and infrastructure that are already there in place. While in case of congeneric mergers it can avoid duplication of various activities and thus can achieve operating and financial efficiency. M&A has become a daily transaction now-a-days. Mergers and acquisitions are an important area of capital market activity in restructuring a corporation and had lately become one of the favored routes for growth and consolidation. The reasons to merge, amalgamate and acquire are varied, ranging from acquiring market share to restructuring the corporation to meet global competition. One of the largest and most difficult parts of a business merger is the successful integration of the enterprise networks of the merger
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partners. The main objective of each firm is to gain profits. M&A has a great scope in sectors like steel, aluminium, cement, auto, banking & finance, computer software, pharmaceuticals, consumer durable food products, textiles etc. It is an indispensable strategic tool for expanding product portfolios, entering into new market, acquiring new technologies and building new generation organization with power & resources to compete on global basis. With the increasing number of Indian companies opting for mergers and acquisitions, India is now one of the leading nations in the world in terms of mergers and acquisitions. Till few years ago, rarely did Indian companies bid for American-European entities. Today, because of the buoyant Indian economy, supportive government policies and dynamic leadership of Indian organizations, the world has witnessed a new trend in acquisitions. Indian companies are now aggressively looking at North American and European markets to spread their wings and become global players. Almost 85 per cent of Indian firms are using Mergers and Acquisitions as a core growth strategy.

Merger: Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of: Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes. Classifications Mergers and Acquisitions
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Horizontal o A merger in which two firms in the same industry combine. o Often in an attempt to achieve economies of scale and/or scope.

Vertical o A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. o Often in an attempt to control supply or distribution channels.

Conglomerate o A merger in which two firms in unrelated businesses combine. o Purpose is often to diversify the company by combining uncorrelated assets and income streams

Cross-border (International) M&As o A merger or acquisition involving a Canadian and a foreign firm an either the acquiring or target company.

Acquisition: Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. Methods of Acquisition: An acquisition may be affected by (f) agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; (g) purchase of shares in open market; (h) to make takeover offer to the general body of shareholders;
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(i) purchase of new shares by private treaty; (j) Acquisition of share capital through the following forms of considerations viz. means of cash, issuance of loan capital, or insurance of share capital. Takeover: A takeover is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfilment of goals of combination all are different in takeovers than in mergers. For example, process of takeover is unilateral and the offeror company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offered company being more co-operative.

De-merger or corporate splits or division: De-merger or split or divisions of a company are the synonymous terms signifying a movement in the company. What will it take to succeed? Funds are an obvious requirement for would-be buyers. Raising them may not be a problem for multinationals able to tap resources at home, but for local companies, finance is likely to be the single biggest obstacle to an acquisition. Financial institution in some Asian markets is banned from leading for takeovers, and debt markets are small and illiquid, deterring investors who fear that they might not be able to sell their holdings at a later date. The credit squeezes and the depressed state of many Asian equity markets have only made an already difficult situation worse. Funds apart, a successful Mergers & Acquisition growth strategy must be supported by three capabilities: deep local networks, the abilities to manage uncertainty, and the skill to distinguish worthwhile targets. Companies that rush in without them are likely to be stumble. Methodology and Procedure of work: 1. Primary Data Questionnaire method
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2. Secondary data Internet, Books, Magazine

Chapteristion:

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CHAPTERS Sr. No. 1. 1.1 1.2 1.3 1.4 1.5 2. 3. 4. 4.1 4.2 4.3 4.4 4.4.1 4.4.2 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.11.1 4.11.2 4.11.3 4.12 4.13 4.14 4.15 4.16 4.16.1 4.16.2 4.17 4.18 Subjects Covered Introduction Merger Acquisitions Methods of acquisitions Take of over Demerger-or Corporate splits or division Objectives and scope of Mergers and acquisitions Limitations Theoretical perspectives of Mergers and acquisitions Corporate restructuring Expansion Corporate Controls Amalgamation Amalgamation in the nature of merger Amalgamation in the nature of purchase Acquisition Merger Absorption Consolidation Take over Takeover bid Types of takeover bid Negotiate bid Tender offer Hostile takeover bid Take over and merger Merger through BIFR Types of Merger Merger Procedure Important Elements of Merger Procedure Schemes of merger Valuation in a Merger Reverse merger Mergers acquisition in India
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Page Nos 6-6 7-8 8-8 8-8 8-8 9-9 9-9 10-10 10-10 11-11 12-12 13-14 14-15 15-16 15-16 16-16 17-17 17-17 17-17 17-18 19-19 19-19 19-20 20-20 20-21 21-21 21-23 23-26 27-29 29-29 29-30 31-34 34-35 34-35

Detailed Information of Guide:

Name Address

: :

Mr. Sunil Gaekwad Bajaj Electricals limited E&PBU, 15/17, Sant Savta Marg,Reay Road, Mumbai - 400 010

Qualifications Degree Mumbai University Post Degree Designation : : M.M.S from Mumbai University Sr.Manager Projects, Mumbai Branch Head. Projects Sales 12 Years : BE Electrical Engineering, VJTI Engineering College,

Special field of work : Experience :

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ANNEXURE B REFERENCES The information provided in this project is collected from various sources like; Web Sites and Search Engines

Google website www.Scribd.com www.Wikipedia.org www.indiabiznews.com www.indiainfoline.com www.equitymaster.com www.economywatch.com www.google.com www.ibef.org

Newspapers The Times Of India The Economic Times Business Standard Business Line

Books and Magazines Business World

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India Today

ANNEXURE C

List of Figures, Charts, and Diagrams and Tables Fig.1.0: Corporate restructuring Fig 1.1: Opportunities and Threats Fig 1.2: Reason to cheer Fig 1.3: Bitter sweet deal Fig 1.4: Research methodology chart

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