Mergers & Acquisitions

Mergers & Acquisitions
Chapter 1 Introduction
Introduction Organic And Inorganic Growth Mergers & Acquisitions in India Definition of Merger & Acquisition Types Of Acquisition Distinction between Mergers and Acquisitions Types of Mergers Synergies & Objectives of Mergers & Acquisitions
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Introduction
We have been learning about the companies coming together to from another company and companies taking over the existing companies to expand their business. With recession taking toll of many Indian businesses and the feeling of insecurity surging over our businessmen, it is not surprising when we hear about the immense numbers of corporate restructurings taking place, especially in the last couple of years. Several companies have been taken over and several have undergone internal restructuring, whereas certain companies in the same field of business have found it beneficial to merge together into one company. In this context, it would be essential for us to understand what corporate restructuring and mergers and acquisitions are all about. All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side Mergers & Acquisitions may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisitions at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers & Acquisition's. Many have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing shareholder value. . To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors that the management may have to look into before going for merger. Considerable amount of brainstorming would be required by the managements to reach a conclusion. e.g. a due diligence report would clearly identify the status of the company in respect of the financial position along with the networth and pending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company.
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Organic and Inorganic Growth

Every company or a business wants to grow big in some or other way in order to survive in the business, so the company may use various methods to grow. So a company may use organic or inorganic growth strategies to survive in the business. As a business gets bigger, the growth will be organic or inorganic. Organic growth, also called internal growth, occurs when the company grows from its own business activity using funds from one year to expand the company the following year. While ploughing back profits into a business is a cheap source of finance it is also a slow way to expand and many firms want to grow faster. A company can do so by inorganic growth. Inorganic growth, or external growth, occurs when the company grows by merger or acquisition of another business. Getting involved with another company in this way makes good business sense as it can give a new source of fresh ideas and access to new markets. A company in order to survive in the industry has to adopt organic as well as inorganic growth, i.e one of the way in which a company can attain market leadership in its sector. The company needs to lower its cost, this can be achieved by supporting strong organic growth in its existing business coupled with a successful acquisition strategies. In this way the company can benefit in various ways like To benefit from economies of scale To spread the risk of doing business across different sector and/or different continents To increase market share To improve profits and thus return to shareholders.
Decisions like this for any company cannot be made overnight. They require a long-term strategy to ensure that opportunities are actively sought out. There are many motives for seeking a merger with another business. If a business can fit in with or complement the
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long-term business strategy it may be seen as an opportunity for inorganic growth. Other possible reasons for the mergers can be found in the following examples: Gillette and Parker Pen: By purchasing a successful brand Gillette increased their opportunities to improve their profits. As the two brands service different markets they are also spreading the risk of doing business across different sectors. TSB and Irish Permanent: This merger will mean increased economies of scale for the new financial institution while in the short term it will increase the branch network. Tesco and Quinnsworth: Tesco acquired sites throughout Ireland and access to an established market for its range of own-brand goods. This increased their share of the Irish market. A growth in the operations of a business that arises from mergers or takeovers, rather than an increase in the companies own business activity. Firms that choose to grow inorganically can gain access to new markets and fresh ideas that become available through successful mergers and acquisitions. Inorganic growth is seen often as a faster way for a company to grow when compared with organic growth. In many industries, such as technology, growth is often accelerated through increased innovation, and one way for firms to compete is to align themselves with those companies that are developing the innovative technology. Organic growth represents the true growth for the core of the company. It is a good indicator of how well management has used its internal resources to expand profits. Organic growth also identifies whether managers have used their skills to improve the business.
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Merger and Acquisition in India

The Indian economy has been growing with a rapid pace and has been emerging
at the top, be it IT, R&D, pharmaceutical, infrastructure, energy, consumer retail, telecom, financial services, media, and hospitality etc. It is second fastest growing economy in the world with GDP touching 9.3 % last year. This growth momentum was supported by the double digit growth of the services sector at 10.6% and industry at 9.7% in the first quarter of 2006-07. Investors, big companies, industrial houses view Indian market in a growing and proliferating phase, whereby returns on capital and the shareholder returns are high. Both the inbound and outbound mergers and acquisitions have increased dramatically. According to Investment bankers, Merger & Acquisition (M&A) deals in India will cross $100 billion this year, which is double last years level and quadruple of 2005. In the first two months of 2007, corporate India witnessed deals worth close to $40 billion. One of the first overseas acquisitions by an Indian company in 2007 was Mahindra & Mahindras takeover of 90 percent stake in Schoneweiss, a family-owned German company with over 140 years of experience in forging business. What hit the headlines early this year was Tatas takeover of Corus for slightly over $10 billion. On the heels of that deal, Hutchison Whampoa of Hong Kong sold their controlling stake in Hutchison-Essar to Vodafone for a whopping $11.1 billion. Bangalore-based MTRs packaged food division found a buyer in Orkala, a Norwegian company for $100 million. Service companies have also joined the M&A game. The taxation practice of Mumbai-based RSM Ambit was acquired by PricewaterhouseCoopers. There are many other bids in the pipeline. On an average, in the last four years corporate earnings of companies in India have been increasing by 20-25 percent, contributing to enhanced profitability and healthy balance sheets. For such companies, M&As are an effective strategy to expand their businesses and acquire global footprint.
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With the liberalization of the Indian economy in 1991, restrictions on M&As have been lowered. The numbers of M&As have increased many times in the last decade compared to the slack period of 1970-80s when legal hurdles trimmed the M&A growth. To put things in perspective, from 15 mergers in 1998, the number crossed to over 1000 in FY07. In India we find that the mergers have passed to different phases. In India Mergers between the same group companies have been in place for a long time. This used to happen because the capacities for the production were fixed during license permit raj and the group having the licenses used to merge the loss making companies with the profit making companies. This used to help them as taking over the loss making used to lower the tax burden as the losses on the balance sheet can be written out over a period of time and licenses could also be utilised through the better management by the profit making companies managers. The first wave of the hostile takeovers in India started not very long ago in the early eighties. The best case for this was the bids for the Escorts and DCM by the Swaraj Paul off the Capro group of Industries. He that time tried to acquire these companies with the help of the present day government of Indira Gandhi. The bids were unsuccessful but a number of people following his path made an industrial empire through these ways. The foremost names, which come to mind, are of R.P Goenka and Manu Chhabria. R.P Goenka acquired Ceat, CESC and a whole lot of other companies. And similarly Manu Chhabria also acquired Shaw Wallace, Dunlop and Bengal chemicals etc. These were the days when theses people were able to acquire companies through hook or crook. But then these were not great promoters as such. When today we see the position of the Shaw Wallace and Dunlop they have been stripped of the assets by these promoters and these companies are either loss making or on the verge of closure. Also the RPG group is now restructuring the group into few focus area, leaving behind the legacy of the unrelated diversification. They have sold companies like Remington Rand and Murphy.
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Through the eighties the we see that the government of the day instructed the Financial Institutions to keep help or not help the takeover artistes according to its convenience. But in the late eighties the government of the day came up with a policy keeping distance from the takeover struggles. This ruling had an effect that the Ambanis trying to takeover Larsen and Tourbo were not able to take over the company. The second wave splashed across a couple of years after the 1991 reforms started taking place. This was the phase the controls were broken and a whole lot of areas were open for the companies to expand. In this time period mergers like HLL & Tomco took place. Also during this time a new kind of takeover started that is the selling of the brands by the companies in the FMCG and the consumer durable segment to the foreign companies coming into India. The most famous is the case of Ramesh Chauhan of the Parle selling its soft drink brands to the Coca-Cola. Also, the Heinz purchased the OTC brands of the Glaxo for Rs. 210 crores. In this time also the consumer durable manufacturer like Kelvinator sold out to the brand to multinational giant Electrolux and the manufacturing facilities were sold to the Whirlpool. The third wave has been started in 1997-98 and this round of Mergers and Acquisitions is different from the earlier one's and the experts have given three reasons for this: Slower growth and thinner margins is forcing the companies to perform or sell out. Banks willing to finance the takeover tycoons The Financial Institutions have changed the earlier policy of remaining distant during takeover struggles to now saying their job is to maximise the returns on their investments rather than protect entrenched management. The takeover code being implemented which has somewhat taken away the need for the political muscle required in the hostile takeover.
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The significant point in the mergers and acquisitions taking place today is the restructuring and the recession in the economy that has occurred in the1997-99. The restructuring due the companies going in for their core competencies and shedding the businesses which they would not be able to sustain in the future. These are the business which Indian or the multinational businesses had acquired during the licensing period. A lot of the MNC also world over are merging and restructuring whose impact on their Indian operations is also happening as Glaxo world over has moved out of the OTC brands and they in India sold those to the Heinz. Also in the last year when the cyclical stocks where in down trend due to recession their stocks where very cheap and in those conditions it was very easy for a company to takeover weaker players in the industry. The prime example of this is the takeover of the Rassi Cement by the India Cement. Another factor, which works only in the Indian situation, is the difference of opinion between the major shareholders on the company's' policies. In Indian case the majority shareholders are the family members and these people in this scenario go along different paths by selling their stake to the Predator Company. A very recent example of the Atul Choksey of Asian Paints trying to sell his stake to ICI or the B.V. Raju's the CEO Rassi Cement's son-in-law selling his stake to the India Cement.
MERGERS AND ACQUISITIONS IN THE IT SECTOR

The past couple of years have seen a spate of mergers and acquisitions by Indian IT companies. Companies have taken to M&A for different reasons. M&A activity is on the rise in the Indian IT industry with the last couple of years having seen a few large mergers and acquisitions. Whether it was the merger of Polaris with OrbiTech or Wipro's acquisition of Spectramind and GE Medical Systems Information Technology (India) or Mphasis BFL's acquisition of a Chinese firm, mergers and acquisitions in the Indian IT industry are here to stay and more are expected to follow in the near future.
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REASONS FOR M&A IN THE IT SECTOR THE SIZE FACTOR Many companies have undertaken M&A to grow in size by adding manpower and to facilitate overall expansion. FOR EXAMPLE: The Polaris-OrbiTech merger saw a spurt in the merged entitys revenues from $60 million to $125 million. The merger also added 1,400 employees to Polaris, taking the total employee strength to 4,000. Similarly, for Bangalore-based vMoksha Technologies, the logic behind the acquisition of two US-based companies, Challenger Systems and X media, was to increase in size by widening its customer base. These acquisitions added 120 people to their staff. TO GAIN NEW CUSTOMERS One likely reason behind M&A has been to gain new customers. FOR EXAMPLE: Polaris Software had six major customer wins after it acquired the Intellectual Property Rights (IPR) of OrbiTechs Orbi suite framework of banking solutions. Vmoksha also saw a rise in the number of its customers (four new customers) due to acquisitions as it expanded considerably in the US market and leveraged on the existing customer base. Mphasis also added new customers in the Japanese and Chinese markets after the acquisition of Navion.
THE NEED FOR SKILL SET ENHANCEMENT

The need for skill set enhancement seems to be a major reason for companies to merge and make new acquisitions.
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FOR EXAMPLE: The Polaris-OrbiTech merger helped in combining skill sets of both companies, which in turn led to growth and expansion of the merged entity. While Polaris Software was looking for a specialized product suite, OrbiTech was looking forward to efficient marketing and service support for its products. Wipro acquired the global energy practice of American Management System and the R&D divisions of Ericsson; it acquired skilled professionals and a strong customer base in the areas of energy consultancy and telecom R&D. Vmoksha Technologies acquisition of two US-based companies helped it to increase its size, and leverage on the expertise of the acquired companies. Bangalore-based Mascot Systems was benefited by the technical expertise of Ejiva and Aqua Regia, the two companies it recently acquired. The acquisition also helped Mascot to extend its offerings through a portfolio of complementary services, technologies and skills.
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Here are the top 10 acquisitions made by Indian companies worldwide: Deal value ($ ml) 12,000 5,982 729 597 565 Industry Steel Steel Electronics Pharmaceutical Energy Oil and Gas Pharmaceutical Steel Electronics Telecom
Acquirer Tata Steel Hindalco Videocon Dr. Reddys Labs Suzlon Energy HPCL Ranbaxy Labs Tata Steel Videocon VSNL
Target Company
Country targeted
Corus Group plc UK Novelis Canada Daewoo Korea Electronics Corp. Betapharm Hansen Group Kenya Petroleum Refinery Ltd. Terapia SA Natsteel Thomson SA Teleglobe Germany Belgium Kenya Romania Singapore France Canada
500 324 293 290 239
If you calculate top 10 deals itself account for nearly US $ 21,500 million. This is more than double the amount involved in US companies acquisition of Indian counterparts.
Graphical representation of Indian outbound deals since 2000.
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Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3 billion in 2005, and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be remembered in Indias corporate history as a year when Indian companies covered a lot of new ground. They went shopping across the globe and acquired a number of strategically significant companies. This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of acquisitions were made with cash payments.
Mergers and Acquisitions

The total M&A deals for the year during January-May 2007 have been 287 with a value of US$ 47.37 billion. Of these, the total outbound cross border deals have been 102 with a value of US$ 28.19 billion, representing 59.5 per cent of the total M&A activity in India. The total M&A deals for the period January-February 2007 have been 102 with a value of US$ 36.8 billion. Of these, the total outbound cross border deals have been 40 with a value of US$ 21 billion.
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There were 111 M&A deals with a total value of about US$ 6.12 billion in March and April 2007. Of these, the number of outbound cross border deals was 32 with a value of US$ 3.41 billion. There were 74 M&A deals with a total value of about US$ 4.37 billion in May 2007. Of these, the number of outbound cross border deals was 30 with a value of US$ 3.79 billion. The sectors attracting investments by Corporate India include metals, pharmaceuticals, industrial goods, automotive components, beverages, cosmetics and energy in manufacturing; and mobile communications, software and financial services in services, with pharmaceuticals, IT and energy being the prominent ones among these.
Acquisition in India
So far this year, Indian firms have made/announced 34 foreign takeovers, with an estimated value of $10.7 Billion. Last years total acquisitions of foreign companies by firms in India held a value of $23 Billion, which is five times as much as any previous record in India and more than the total investments made in Indian companies by foreign players. These recent acquisitions have been described as a buying binge and demonstrate the new-found respect that India commands in the global arena. If the rate of acquisitions continues at the rate is going, this year will definitely have a greater number and higher value of acquisitions of foreign companies by Indian firms than ever before. During March 2007, the Indian steel company Hindalco bought American rival Novelis for a mere $6 Billion. This made it the worlds largest aluminum -rolling company. This incredibly significant deal took place less than a week after Tata Steel, Indias largest private producer of steel, purchased the Dutch firm Corus for $13.2 billion. This price tag was 9 times larger than any foreign acquisition by an Indian organization before this. Both of these deals reflect the conditions which are permeating through India and encouraging Indian organizations, both large and small, to buy globally in the sectors of car parts, pharmaceuticals, energy, etc.
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By one estimate, 60% of Indias 200 leading companies are looking to invest this loot in foreign purchases. The increase in acquisitions by these Indian firms really represents the changing nature of the Indian organization. It can be said that Indian organizations, at the very least the leading ones, are going global. The trend of Indian investments in foreign companies will only continue to rise and these companies will only continue to grow and expand. To my knowledge, India has long been regarded as a somewhat unimportant player in the global market. In recent years, we have seen many large American organizations outsource to India in order to save money. India however, is now becoming a power player and some of these organizations have been able to purchase foreign organizations several times larger than they are. I think that this is very interesting because Indian companies are clearly becoming important characters in the global business world. I think it would be interesting to consider however, the implications of young and inexperienced Indian firms purchasing larger, more established firms. In the instance of Hindalco and Novelis, this would clearly result in enormous organizational change and many adjustments would have to be made. It would be interesting to see how successful some of these Indian acquisitions of foreign firms have been in terms of organizational mergers.
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Top M&A deals worldwide (in USD million) from 2000 onwards
Rank Year Purchaser 1 2 3 4 5 6 7 8 9 10 2000 Fusion: America Online Inc. (AOL)
Purchased Time Warner ABN-AMRO NV SmithKline Plc. Transport & Trading Co BellSouth Corporation AT&T Broadband & Internet Svcs Aventis SA Beecham Holding
Transaction value (in mil. USD) 164,747 90,839 75,961 74,559 72,671 72,041 60,243 59,974
2007 Schwebend: Barclays Plc 2000 Glaxo Wellcome Plc. 2004
Royal Dutch Petroleum Shell Co.
2006 AT&T Inc. 2001 Comcast Corporation 2004 Sanofi-Synthelabo SA 2000 Spin-off: Nortel Networks Corporation
2002 Pfizer Inc. 2004 JP Morgan Chase & Co
Pharmacia Corporation Bank One Corp
59,515 58,761
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Define Merger and Acquisition

Mergers and acquisition is a strategy adopted by the large corporate sector to consolidate its position and improve its competitive strength vis--vis competitors. It is, in fact, the least costly method of industrial restructuring. In India, the Mergers and acquisition activities got a boost after the announcement of the new economic policy 1991 with its focus on liberalization and opening up. The real momentum was gained after 1994 when the new takeover code was formulated. Takeovers and Acquisitions are used as synonyms. The meaning of takeover is that one company acquires another companys total or controlling interest. Subsequent to acquisition, the acquired company operates as a part of the acquiring company. Thus, the separate identity of the acquired company is lost and it is absorbed within the administrative framework of the acquiring company. As against this, in the case of mergers, all combining firms relinquish their individuality and independence to create a new firm. Thus, in case of merger, there is a change in both firms and administrative structure of both changes. Mergers generally occur between firms of smaller size and there is therefore a high degree of cooperation and interaction between the partners. As against this, in acquisition, firms often tend to be of unequal size and the smaller firm is expected to surrender its independence unilaterally to the other. Mergers and Acquisitions are transactions of great significance, not only to the companies themselves but also to many other communities, such as workers, managers, competitors, communities and the economy because it a means by which two companies are combined to achieve certain strategies and business objectives. Their success or failure has enormous consequences for shareholders and lenders and as well as the constituencies mentioned above. Investments worth billions of dollars are made when a company goes in for an acquisition.
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It is very crucial for the companies to make the right decision for a merger or an acquisition because it is the shareholder who might suffer the most in terms of losing their investments because of some important acquisition made by their companies. An acquisition is often motivated by the need to bring in efficiency and savings in production and other activities.
The Main Idea

One plus one makes Three: This equation is the special alchemy of a merger or acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies--at least, that's the reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.
What is a Merger?
A merger is a term given when companies come together to combine and share their resources to achieve common objectives whereas an acquisition is when one firm is purchasing the assets or shares of another, and with the acquired firms shareholders ceasing to be owners of that firm In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies)
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and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies- at least, thats the reasoning behind Mergers and Acquisition. 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.
Amalgamation
The term mergers and amalgamation are used interchangeably as forms of seeking external growth of business by an organization. A merger is a combination of two or more firms in which only one firm would survive and other would cease to exist, its assets/liabilities being taken over by the surviving firm. An amalgamation is an agreement in which the assets/liabilities of two or more firms become vested in another firm. The merger/amalgamation of firms in india is governed by the provisions of the companies act, 1956, it does not define the terms. The income tax act, 1961 stipulates two perquisites for any amalgamation through which the amalgamated company against its future profits u/s 72-A.
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DEFINITION OF AMALGAMATION UNDER THE INCOME TAX ACT, 1961: Section 2(1B) of the Income Tax Act, 1961 defines the term amalgamation as follows: amalgamation, in relation to companies, means the merger of one or more companies with another company or the merger of two or more company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that (i) All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation (ii) All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) Shareholders holding not less than 14(three-fourths) in value of the shares in the amalgamating company or companies (there than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company. It will be noticed that the definition uses the expression amalgamating company and amalgamated company to refer to the expressions Transferor Company and Transferee Company respectively. An important issue that arises in the case of amalgamation is that of capital gains arising from the transfer of shares or any kind of capital gains arising with respect to taxation of the capital gains. However the company may also stand to lose in cases of amalgamation as mergers in the Indian context are viewed as a tax planning measure. The deductibility has to be seen in the hands of the transferee company.
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To constitute amalgamation under the Income Tax Act, there must be satisfied the three conditions specified clauses(i) , (ii) and (ii) of the definition. 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 (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.
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TYPES OF ACQUISITIONS
The term acquisition means an attempt by one firm, called the acquiring firm, to
gain a majority interest in another firm, called target firm. The effort to control may be a prelude To a subsequent merger or To establish a parent-subsidiary relationship or To break-up the target firm, and dispose off its assets or To take the target firm private by a small group of investors.
There are broadly two kinds of strategies that can be employed in corporate acquisitions. These include: 1. Friendly Takeover The acquiring firm makes a financial proposal to the target firms management and board. This proposal might involve the merger of the two firms, the consolidation of two firms, or the creation of parent/subsidiary relationship. In this takeover, the management of the acquired and acquiring companies agrees mutually for the takeover. 2. Hostile Takeover A hostile takeover may not follow a preliminary attempt at a friendly takeover. In this an aggressive firm (known as a raider) tries to acquire a firm against the latters desire. Hostile takeovers are generally linked with poor management and performance. If a firm functions inefficiently resulting in its poor performance, its share price tumbles down. The raider then buys out its shares at a low price and gains control over the management of this firm. The raider replaces the inefficient management by an efficient team of managers. For example, it is not uncommon for an acquiring firm to embrace the target firms management in what is colloquially called a bear hug.
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Pros and Cons of Takeover Pros and cons of a takeover differ from case to case but still there are a few worth mentioning. Pros: 1. Increase in Sales / Revenues (e.g. Procter & Gamble takeover of Gillette) 2. Venture into new businesses and markets 3. Profitability of target company 4. Increase market share Cons: 1. Reduced competition and choice for consumers in oligopoly markets 2. Likelihood of price increases and job cuts 3. Cultural integration/conflict with new management 4. Hidden liabilities of target entity.
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Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were
synonymous, the terms "merger" and "acquisition" mean slightly different things. When a company takes over another one and clearly becomes the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist and the buyer "swallows" the business, and stock of the buyer continues to be traded. In the pure sense of the term, a merger happens when two firms, often about the same size, agree to go forward as a new single company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered, and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Often, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations. By using the term "merger," dealmakers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together in business is in the best interests of both their companies. But when the deal is unfriendly--that is, when the target company does not want to be purchased--it is always regarded as an acquisition. So, whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.
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TYPES OF MERGERS
1. Horizontal Mergers 2. Vertical Mergers 3. Conglomerate Mergers 4. Circular Mergers
1. Horizontal Mergers
This type of merger involves two firms that operate and compete in a similar kind of business. The merger is based on the assumption that it will provide economies of scale from the larger combined unit. The objective here is to improve the competitive strength in the market and increase the bargaining power in the industry. Example: Glaxo Wellcome Plc. and SmithKline Beecham Plc. mega merger The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline Beecham PLC early this year announced plans to merge resulting in the largest drug manufacturing company globally. The merger created a company valued at $182.4 billion and with a 7.3 per cent share of the global pharmaceutical market. The merged company expected $1.6 billion in pretax cost savings after three years.
2. Vertical Mergers
Vertical mergers take place between firms in different stages of
production/operation, either as forward or backward integration. The basic reason is to eliminate costs of searching for prices, contracting, payment collection and advertising and may also reduce the cost of communicating and coordinating production. Both production and inventory can be improved on account of efficient information flow within the organization.
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Unlike horizontal mergers, which have no specific timing, vertical mergers take place when both firms plan to integrate the production process and capitalize on the demand for the product. Example: Merger of Usha Martin and Usha Beltron Usha Martin and Usha Beltron merged their businesses to enhance shareholder value, through business synergies. The merger will also enable both the companies to pool resources and streamline business and finance with operational efficiencies and cost reduction and also help in development of new products that require synergies.
3. Conglomerate Mergers
Conglomerate mergers are affected among firms that are in different or unrelated business activity. Firms that plan to increase their product lines carry out these types of mergers. Firms opting for conglomerate merger control a range of activities in various industries that require different skills in the specific managerial functions of research, applied engineering, production, marketing and so on. This type of diversification can be achieved mainly by external acquisition and mergers and is not generally possible through internal development. These types of mergers are also called concentric mergers. Firms operating in different geographic locations also proceed with these types of mergers. Conglomerate mergers have been sub-divided into: Financial Conglomerates These conglomerates provide a flow of funds to every segment of their operations, exercise control and are the ultimate financial risk takers. They not only assume financial responsibility and control but also play a chief role in operating decisions. They also:

Improve risk-return ratio Reduce risk Improve the quality of general and functional managerial performance
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Provide effective competitive process Provide distinction between performance based on underlying potentials in the product market area and results related to managerial performance.
Managerial Conglomerates Managerial conglomerates provide managerial counsel and interaction on
decisions thereby, increasing potential for improving performance. When two firms of unequal managerial competence combine, the performance of the combined firm will be greater than the sum of equal parts that provide large economic benefits. Concentric Companies The primary difference between managerial conglomerate and concentric company is its distinction between respective general and specific management functions. The merger is termed as concentric when there is a carry-over of specific management functions or any complementarities in relative strengths between management functions.
4. Circular mergers
Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification.
Reverse Merger
Process In a reverse takeover, shareholders of the private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a "shell" since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors. The transaction can be accomplished within weeks. If the shell is an
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SEC-registered company, the private company does not go through an expensive and time-consuming review with state and federal regulators because this process was completed beforehand with the public company. The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement. At the closing, the shell company issues a substantial majority of its shares and board control to the shareholders of the private company. The private company's shareholders pay for the shell company by contributing their shares in the private company to the shell company that they now control. This share exchange and change of control completes the reverse takeover, transforming the formerly privately held company into a publicly held company. Benefits In addition, a reverse takeover is less susceptible to market conditions. Conventional ipos are risky for companies to undertake because the deal relies on market conditions, over which senior management has little control. If the market is off, the underwriter may pull the offering. The market also does not need to plunge wholesale. If a company in registration participates in an industry that's making unfavorable headlines, investors may shy away from the deal. In a reverse takeover, since the deal rests solely between those controlling the public and private companies, market conditions have little bearing on the situation. The process for a conventional IPO can last for a year or more. When a company transitions from an entrepreneurial venture to a public company fit for outside ownership, how time is spent by strategic managers can be beneficial or detrimental. Time spent in meetings and drafting sessions related to an IPO can have a disastrous effect on the growth upon which the offering is predicated, and may even nullify it. In addition, during the many months it takes to put an IPO together, market conditions can deteriorate, making the completion of an IPO unfavorable. By contrast, a reverse takeover can be completed in as little as thirty days.
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For a conventional IPO, it can cost as much as $200,000 just to release a preliminary prospectus. A reverse merger, however, can be done for $95,000 to $150,000.
Additionally, many shell companies carry forward what is known as a tax-loss. This means that a loss incurred in previous years can be applied to income in future years. This shelters future income from income taxes. Since most active public companies become dormant public companies after a string of losses, or at least one large one, it is more likely that a shell company will offer this tax shelter.
It is highly unusual to preserve any benefit from the tax loss carry forward in a shell company. The tax regulations normally reduce the loss carry forward by the percentage of the change in control. In a well structured reverse merger, the private company should end up with 95% or more of the stock after the merger, thus reducing the tax loss carry-forward by this amount. Drawbacks
Reverse Takeovers always come with some history, and some shareholders. Sometimes this history can be bad, and manifest itself in the form of unseen liabilities, sloppy records, lurking lawsuits (lying in wait for the company to gain assets which to pursue), and other skeletons in the closet. Additionally, these shells may sometimes come with angry or deceitful shareholders who are anxious to "dump" their stock at the first chance they get. Possibly the biggest caveat is that most CEO's are naive and inexperienced in the world of pubicly traded companies, and are not playing with fire, but playing with atomic power. Due dilligence and experienced advisors can overcome all of these drawbacks. RTO's can be explosive vehicles for corporate growth, but they are not to be taken lightly.
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Demerger
Demerger is the converse of a merger or acquisition. It describes a form of restructure in which shareholders in the parent company gain direct ownership in a subsidiary (the demerged entity). Underlying ownership of the companies and/or trusts that formed part of the group does not change. The company or trust that ceases to own the entity is known as the demerging entity. If the demerged entity represents the majority of the company's operations, the resulting company is referred to as the stub. Reasons Specialize Correct previous investments Help finance acquisition Get rid of sick parts A demerger is the opposite of an acquisition - a company spins off some business it owns into a completely separate company. A demerger is usually carried out by distributing shares in the business to be spun off to shareholders of the company carrying out the demerger, in proportion to their shareholding in the original company. Demergers can have beneficial effects on the quality of management as they allow the management of demerged companies to concentrate on their core business, they make companies easier for investors to analyse (by simplifying the business) and they often demonstrate a management focus on increasing shareholder value. A demerger may be full, or partial. A partial demerger means that the parent company retains a stake (sometimes a majority stake) in the demerged business.
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The motive for a partial demerger is sometimes to force the market to separately value the business that is demerged, in the expectation that this will lead to a higher sum of parts valuation of the parent company. A corporate restructuring in which one part of a company is spun off as a new company, often with quoted status of its own. Examples in the UK include Zeneca which was spun out of ICI, and Argos which was spun out of British American Tobacco. Like their opposite - mergers - demergers tend to go in and out of fashion. When share prices are rising, companies like to use their 'paper' (i.e. Shares) to acquire other companies, so their advisers encourage merger activity. In a market of falling prices, mergers and IPOs are less popular, and the merchant banks who earn their fees from corporate activity will start to look at demerger possibilities for their clients. From a tax point of view, when Company A splits into two or more parts, and distributes shares in each part to its original shareholders, there is no disposal for CGT purposes. Conditions of demerger (S. 19AA ) The transfer to be valid under companies act 1956 (sec 391 to 394) Undertaking to be transferred on a going concern basis Liabilities will include common borrowings Consideration for de-merger - issue of shares of resulting Co. on a proportionate basis Shareholders holding at least 75% of the share capital become shareholders of resulting company Transfer should be with reference to transfer of a business activity and not any individual assets or liabilities or any combination thereof
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Objective of Mergers and Acquisitions.

Why do companies go for Mergers and Acquisitions? Every action is taken to achieve a particular task or undertake a particular motive These motives are considered to add shareholder value: Economies of scale: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit. Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices. Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products. Synergy: Better use of complementary resources. It will be explained in detail later. Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company. Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below). Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.
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Vertical integration: Companies acquire part of a supply chain and benefit from the resources. Increased Market share, which can increase Market power, in an oligopoly market, increased market share generally, allows companies to raise prices. Note that while this may be in the shareholders' interest, it often raises antitrust concerns, and may not be in the public interest.
These motives are considered to not add shareholder value: Diversification: While this may hedge a company against an downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger. Overextension: Tend to make the organization fuzzy and unmanageable. Manager's hubris: Oftentimes the executives of a company will just buy others because doing so is newsworthy and increases the profile of the company. Empire Building: Managers have larger companies to manage and hence more power. Manager's Compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders); although some empirical studies show that compensation is rather linked to profitablity and not mere profits of the company. Bootstrapping
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A few examples in this regard are as follows: HLL and BBLIL merger - to gain synergy in operations, channel usage, etc. Tata Tea acquiring tea gardens - backward integration, provides better stability against price fluctuations. Increases shareholder value with increasing profits. Also reduces tax burden, sales tax in buying tea saved. HLL - TOMCO merger - increased the size of HLL market and got a number of soap brands on a golden platter.
Synergies
Synergy is the magic force that allows for enhanced cost efficiencies of the new business. For the most part, acquiring companies nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy; a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy. Let's face it; it would be highly unlikely for rational owners to sell if they would benefit more by not selling. That means buyers will need to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their company's future prospects. For buyers, the premium represents part of the post-merger synergy they expect can be achieved. The following equation offers a good way to think about synergy and how to determine whether a deal makes sense. The equation solves for the minimum required synergy:
In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action.
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Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:
Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.
Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.
Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.
Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones. That said, achieving synergy is easier said than done - it is not automatically
realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers who have much to gain from a successful M&A deal - will try to create an image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price.
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Chapter 2 Procedure for Merger & Amalgamation

Intermediaries Involved Top Managements Commitments towards Mergers & Amalgamation Search for a Merger Negotiations Step for Mergers And Amalgamations
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Procedure for merger and amalgamation is different from takeover. Mergers and amalgamations are regulated under the provisions of the Companies Act, 1956 whereas takeovers are regulated under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations.
Intermediaries Involved
Professionals: Investment Banker Legal Advisors Private Equity Advisors Company Secretaries Chartered Accountants Financial Institutions and Venture Capitalist Government: Registrars of Companies Official Liquidators Regional Director - Company Law Board Judiciary
The beginning to amalgamation may be made through common agreements between the
transferor and the transferee but mere agreement does not provide a legal cover to the transaction unless it carries the sanction of company court for which the procedure laid down under section 391 of the Companies Act should be followed for giving effect to amalgamation through the statutory instrument of the courts sanction. Although chapter V of the Companies Act, 1956 comprising sections 389 to 396-A
deals with the issue and related aspects covering arbitration, compromises, arrangements and reconstructions but at different times and under different circumstances in each case of merger and amalgamation application of other provisions of the Companies Act, 1956 and ruled made there-under may necessarily be attracted. So, the procedure does not remain simple or literally confined to chapter V.
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The procedure is complex, involving not only the compromises or arrangements between the company and its creditors or any class of them or between the company and its members or any class of them but it involves, safeguard of public interest and adherence to public policy. These aspects are looked after by the Central Government through official liquidator on Company Law Board, Department of Company Affairs and the court has to be satisfied of the same.
Top
Managements
commitments
towards
Merger
and
Amalgamation
Top management defines the organisations goal and outlines the policy framework to achieve these objectives. The organisations goal for business expansion could be accomplished, inter alia through business combinations assimilating a target corporate which can remove the present deficiencies in the organization and can contribute in the required direction to accomplish the goal of business expansion through enhanced commercial activity i.e. supply of inputs and market for output product diversification, adding up new products and improved technological process, providing new distribution channels and market segments, making available technical personnel and experienced skilled manpower, research and development establishments etc. Depending upon the specific need and cost advantage with reference to creating a new set up or acquiring a well-established set-up firm.
Search for a Merger Partner

The top management may use their own contacts with competitors in the same
line of economic activity or in the other diversified field which could be identified as better merger partners or may use the contacts of merchant bankers, financial consultants and other agencies in locating suitable merger partners. A number of corporate candidates may be shortlisted and identified. Such identification should be based on the detailed information of the merger partners collected from published and private sources. Such information should reveal the following aspects viz: 1) Organisational history of business and promoters and capital structure 2) Organisational goals
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3) Product, market and competitors 4) Organisational setup and management pattern 5) Assets profile: Movable and immovable assets, land and building 6) Manpower skilled, unskilled, technical personnels and detailed particulars of management employees.
Negotiations
Top management can negotiate at a time with several identified shortisted companies suited to be merger partner for settling terms of merger and pick up one of them which offers most favourable terms. Negotiations can be had with target companies before making any acquisitional attempt. Samedrill of negotiations could be followed in the cases of merger and amalgamation. During the negotiations the due diligence is there between the parties. Due diligence is the process by which confidential legal and financial information is exchanged, reviewed and appraised by the parties before a merger (or other legally binding) agreement is finalized. The essence of the due diligence process is an effort to make everyone on the negotiation committee, and by extension everyone on the board, as aware as a prudent board member can be of any liabilities the other party may bring to the table. The desire is to create a "no surprises" situation so that when, say, six months after a mergers effective date, a balloon payment on a loan must be met, no one can claim that the matter was hidden. Often attorneys or consultants undertake the due diligence on behalf of, and report their findings to, the negotiations committee. The committee undertake the process itself, relying on outside experts as necessary. In this way the negotiators become intimately familiar with the other partys operation. They can then provide more focused questions for any consultant and/or attorneys, saving time and money. Appendix II provides activity schedule for planning merger covering different aspects like preliminary consultations with the perspective merger partner and seeking its willingness to cooperate in investigations. There are other aspects, too, in the activity
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schedule covering, quantification action plan, purpose, shape, and date of merger, profitability and valuation, taxation aspects legal aspects and development plan of the company after merger.
Steps for Merger and Amalgamation

Once the merger partner has been identified and terms of merger are settled the
procedure summarized in Appendix III can be followed. An explanation to the said steps is given below:
1) Scheme of Amalgamation
The scheme of amalgamation should be prepared by the companies, which have arrived at a consensus to merge. There is no specific form prescribed for scheme of amalgamation but scheme should generally contain the following information: a) Particulars about transferee and transferor companies b) Appointed date c) Main terms of transfer of assets from transferor to transferee with power to execute on behalf or for transferee the deed or documents being given to transferee. d) Main terms of transfer liabilities from transferor to transferee covering any conditions attached to loans/debentures/ bonds/other liabilities from bank /financial institution/ trustees and listing conditions attached thereto. e) Effective date when the scheme will come into effect f) Conditions as to carrying on the business activities by transferor between appointed date and effective date. g) Description of happenings and consequences of the scheme coming into effect on effective date. h) Share capital of Transferor Company specifying authorized capital, issued capital and subscribed and paid up capital i) Share capital of Transferee Company covering above heads. j) Description of proposed share exchange ratio, any conditions attached thereto, any fractional share certificates to be issued, Transferee Companys responsibility to obtain consent of concerned authorities for issue and allotment of shares and listing.
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k) Surrender of shares by shareholder of Transferor Company for exchange into new share certificates. l) Conditions about payment of dividend, ranking of equity shares, pro rata dividend declaration and distribution. m) Status of employees of the transferor companies from effective date and the status of the provident fund, gratuity fund, super annuity fund or any special scheme or funds created or existing for the benefit of the employees. n) Treatment on effective date of any debit balance of transferor company balance sheet. o) Miscellaneous provisions covering income-tax dues, contingencies and other accounting entries deserving attention or treatment. p) Commitment of transferor and transferee companies towards making applications/petitions under section 391 and 394 and other applicable provisions of the Companies Act, 1956 to their respective High Courts. q) Enhancement of borrowing limits of the transferee company upon the scheme coming into effect. r) Transferor and transferee companies give assent to change in the scheme by the court or other authorities under the law and exercising the powers on behalf of the companies by their respective Boards. s) Description of powers of delegate of transferee to give effect to the scheme. t) Qualification attached to the scheme, which require approval of different agencies, etc. u) Description of revocation/cancellation of the scheme in the absence of approvals qualified in clause 20 above not granted by concerned authorities. v) Statement to bear costs etc. in connection with the scheme by the transferee company. (2) Approval of Board of Directors for the scheme Respective Board of Directors for transferor and transferee companies is required to approve the scheme of amalgamation. (3) Approval of the scheme by specialised financial institutions/banks/trustees for debenture holders
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The Board of Directors should in fact approve the scheme only after it has been cleared by the financial institutions/banks, which have granted loans to these companies or the debenture trustees to avoid any major change in the meeting of creditors to be convened at the instance of the Company Courts under section 391 of the Companies Act, 1956. Approval of Reserve Bank of India is also needed where the scheme of amalgamation contemplates issue of share/payment of cash to non-resident Indians or foreign national under the provisions of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000. In particular, regulation 7 of the above regulations provide for compliance of certain conditions in the case of scheme of merger or amalgamation as approved by the court. (4) Intimation to Stock Exchange about proposed amalgamation Listing agreements entered into between company and stock exchange require the company to communicate price-sensitive information to the stock exchange immediately and simultaneously when released to press and other electronic media on conclusion of Board meeting according approval to the scheme. (5) Application to Court for directions The next step is to make an application under section 39(1) to the High Court having jurisdiction over the Registered Office of the company, and the transferee company should make separate applications to the High Court. The application shall be made by a Judges summons in Form No. 33 supported by an affidavit in Form No. 34. The following documents should be submitted with the Judges summons: (a) A true copy of the Companys Memorandum and Articles (b) A true copy of the Companys latest audited balance sheet (c) A copy of the Board resolution, which authorises the Director to make the application to the High Court.
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(6) High Court directions for members meeting Upon the hearing of the summons, the High Court shall give directions fixing the date, time and venue and quorum for the members meeting and appoint an Advocate Chairman to preside over the meeting and submit a report to the Court. Similar directions are issued by the court for calling the meeting of creditors in case such a request has been made in the application. (7) Approval of Registrar of High Court to notice for calling the meeting of members/ creditors Pursuant to the directions of the Court, the transferor as well as the transferee companies shall submit for approval to the Registrar of the respective High Courts the draft notices calling the meetings of the members in Form No. 36 together with a scheme of arrangements and explanations, statement under section 393 of the Companies Act and form of proxy in Form No. 37 of the Companies (Court) Rules to be sent members alongwith the said notice. Once Registrar has accorded approval to the notice, it should be got signed by the Chairman appointed for meeting by the High Court who shall preside over the proposed meeting of members. (8) Despatch of notices to members/ shareholders Once the notice has been signed by the chairman of the forthcoming meeting as aforesaid it could be despatched to the members under certificate of posting at least 21 days before the date of meeting (Rule 73 of Companies (Court) Rules, 1959). (9) Advertisement of the notice of members meetings The Court may direct the issuance of notice of the meeting of these shareholders by advertisement. In such case rule 74 of the Companies (Court) Rules provides that the notice of the meeting should be advertised in; such newspaper and in such manner as the Court might direct not less than 21 clear days before the date fixed for the meeting. The advertisement shall be in Form No. 38 appended to the Companies (Court) Rules. The companies should submit the draft for the notice to be published in Form No. 38 in an English daily together with a translation thereof in the regional language to the Registrar
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of High Court for his approval. The advertisement should be released in the newspapers after the Registrar approves the draft. (10) Confirmation about service of the notice Ensure that at least one week before the date of the meeting, the Chairman appointed for the meeting files an Affidavit to the Court about the service of notices to the shareholders that the directions regarding the issue of notices and advertisement have been duly complied with. (11) Holding the shareholders general meeting and passing the resolutions The general meeting should be held on the appointed date. Rule 77 of the Companies (Court) Rules prescribes that the decisions of the meeting held pursuant to the court order should be ascertained only by taking a poll. The amalgamation scheme should be approved by the members, by a majority in number of members present in person or on proxy and voting on the resolution and this majority must represent at least 3/4ths in value of the shares held by the members who vote in the poll. (12) Filing of resolutions of general meeting with Registrar of Companies Once the shareholders general meeting approves the amalgamation scheme by a majority in number of members holding not less than 3/4 in value of the equity shares, the scheme is binding on all the members of the company. A copy of the resolution passed by the shareholders approving the scheme of amalgamation should be filed with the Registrar of Companies in Form No. 23 appended to the Companies (Central Governments) General Rules and Forms, 1956 within 30 days from the date of passing the resolution. (13) Submission of report of the chairman of the general meeting to Court The chairman of the general meeting of the shareholders is required to submit to the Court within seven days from the date of the meeting a report in Form No. 39, Companies (Court) Rules, 1959 setting out therein the number of persons who attend
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either personally or by proxy, and the percentage of shareholders who voted in favour of the scheme as well as the resolution passed by the meeting. (14) Submission of Joint petition to court for sanctioning the scheme Within seven days from the date on which the Chairman has submitted his report about the result of the meeting to the Court, both the companies should make a joint petition to the High Court for approving the scheme of amalgamation. This petition is to be made in Form No. 40 of Companies (Court) Rules. The Court will fix a date of hearing of the petition. The notice of the hearing should be advertised in the same papers in which the notice of the meeting was advertised or in such other newspapers as the Court may direct, not less than 10 days before the date fixed for the hearing (Rule 80 of Companies (Court) Rules]. (15) Issue of notice to Regional Director, Company Law Board under section 394 A On receipt of the petition for amalgamation under section 391 of Companies Act, 1956 the Court will give notice of the petition to the Regional Director, Company Law Board and will take into consideration the representations, if any, made by him. (16) Hearing of petition and confirmation of scheme Having taken up the petition by the Court for hearing it will hear the objections first and if there is no objection to the amalgamation scheme from Regional Director or from any other person who is entitled to oppose the scheme, the Court may pass an order approving the scheme of amalgamation in; Form No. 41 or Form No. 42 of Companies (Court) Rules. The court may also pass order directing that all the property, rights and powers of the transferor company specified in the schedules annexed to the order be transferred without further act or deed to the transferee company and that all the liabilities and duties of the transferor company be transferred without further act or deed. (17) Filing of Court order with ROC by both the companies Both the transferor and transferee companies should obtain the Courts order sanctioning the scheme of amalgamation and file the same with ROC with their
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respective jurisdiction as required vide section 394(3) of the Companies Act, 1956 within 30 days after the date of the Courts order in Form No. 21 prescribed under the (Central Governments) General Rules and Forms, 1956. The amalgamation will be given effect to from the date on which the High Courts order is filed with the Registrar. (18) Transfer of the assets and liabilities Section 394(2) vests power in the High Court to order for the transfer of any property or liabilities from transferor company to transferee company. In pursuance of and by virtue of such order such properties and liabilities of the transferor shall automatically stand transferred to transferee company without any further act or deed from the date the Courts order is filed with ROC. (19) Allotment of shares to shareholders of Transferor Company Pursuant to the sanctioned scheme of amalgamation, the shareholders of the transferor company are entitled to get shares in the transferee company in the exchange ratio provided under the said scheme. There are three different situations in which allotment could be given effect: 1. Where transferor company is not a listed company, the formalities prescribed under listing agreement do not exist and the allotment could take place without setting the record date or giving any advance notice to shareholders except asking them to surrender their old share certificates for exchange by the new ones. 2. The second situation will emerge different where Transferor Company is a listed company. In this case, the stock exchange is to be intimated of the record date by giving at least 42 days notice or such notice as provided in the listing agreement. 3. The third situation is where allotment to Non-Resident Indians is involved and permission of Reserve Bank of India is necessary. The allotment will take place only on receipt of RBI permission. In this connection refer to regulations 7, 9 and 10B of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident
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Outside India) Regulations, 2000 as and where applicable. Having made the allotment, the tranferee company is required to file with ROC with return of allotment in Form No. 2 appended to the Companies (Central Governments) General Rules and Forms within 30 days from the date of allotment in terms of section 75 of the Act. Transferee company shall having issued the new share certificates in lieu of and in exchange of old ones, surrendered by transferors shareholders should make necessary entries in the register of members and index of members for the shares so allotted in terms of sections 150 and 151 respectively of the Companies Act, 1956. (20) Listing of the shares at stock exchange After the amalgamation is effected, the company which takes over the assets and liabilities of the transferor company should apply to the Stock Exchanges where its securities are listed, for listing the new shares allotted to the shareholders of the transferor company. (21) Court order to be annexed to memorandum of Transferee Company It is the mandatory requirement vide section 391(4) of the Companies Act, 1956 that after the certified copy of the Courts order sanctioning the scheme of amalgamation is filed with Registrar, it should be annexed to every copy of the Memorandum issued by the transferee company. Failure to comply with requirement renders the company and its officers liable to punishment. (22) Preservation of books and papers of amalgamated Co. Section 396A of the Act requires that the books and papers of the amalgamated company should be preserved and not be disposed of without prior permission of the Central Government. (23) The Post merger secretarial obligations There are various formalities to be complied with after amalgamation of the companies is given effect to and allotment of shares to the shareholders of the transferor company is over. These formalities include filing of returns with Registrar of Companies,
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Transfer of investments of Transferor Company in; the name of the transferee, intimating banks and financial institutions, creditors and debtors about the transfer of the transferor Companys assets and liabilities in the name of the Transferee Company, etc. All these aspects along with restructuring of organization and management and capital are discussed in chapter relating to post-merger reorganization of Transferee Company. (24) Withdrawal of the Scheme not permissible Once the scheme for merger has been approved by requisite majority of shareholders and creditors, the scheme cannot be withdrawn by subsequent meeting of shareholders by passing Resolution for withdrawal of the petition submitted to the court under section 391 for sanctioning the scheme. (25) Cancellation of the scheme and order of winding-up It was held by the Supreme Court in J.K (Bombay) (P) Ltd. Vs. New Kaiser-IHind that the effect of winding up order is that except for certain preferential payments provided in the Act, the property of the company is applied in satisfaction of its liabilities pari passu. Pari passu distribution is to be made in satisfaction of its liabilities as they exist at the commencement of the winding-up. So long as the scheme is in operation and is bind on the company and its creditors, the rights and obligations of those on whom it is binding are undoubtedly governed by its provisions. But once the scheme is cancelled under section 392(2) on the ground that it cannot be satisfactorily worked and a windingup order passed such an order is deemed to be for all purposes to be one made under section 433. It is not because as if the scheme has been sanctioned undersection 391 that a winding-up order under section 392 (2) cannot be made.
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Chapter 3 Legal Framework

Companies Act 1956 FEMA Act 2000 Competition Act Accounting Standard 14 Tax Law Implication
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Mergers and takeovers are prevalent in India right from the post independence period. But Government policies of balanced economic development and to curb the concentration of economic power through introduction of Industrial Development and Regulation Act-1951, MRTP Act, FERA Act etc. made these activities almost impossible and only a very few M&A and Takeovers took place in India prior to 90s. But policy of decontrol and liberalization coupled with globalization of the economy after 1980s, especially after liberalization in 1991 had exposed the corporate sector to severe domestic and global competition. This had been further accentuated by the reversionary trends resulted in falling demand, which in turn resulted in overcapacity in several sectors of the economy. Companies started to consolidate themselves in areas of their core competence and divest those businesses where they do not have any competitive advantage. It led to an era of corporate restructuring through Mergers and Acquisitions in India. The structural adjustment program and the new industrial policy adopted by the Government of India allowed business houses to undertake without restriction any program of expansion either by entering into a new market or through expansion in an existing market. In that context, it also appears that Indian business houses are increasingly resorting to mergers and acquisitions as a means to growth.
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COMPANIES ACT, 1956 (SEC.391-394)

Sec 391 - Power to compromise or make arrangements with creditors and members. (1) Where a compromise or arrangement is proposed (a) Between a company and its creditors or any class of them ; or (b) Between a company and its members or any class of them ; the Court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs. (2) If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the company or any other person by whom an application has been made under subsection (1) has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 251, and the like. (3) An order made by the Court under sub-section (2) shall have no effect until a certified copy of the order has been filed with the Registrar.
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(4) A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the case of a company not having a memorandum, to every copy so issued of the instrument constituting or defining the constitution of the company. (5) If default is made in complying with sub-section (4), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one hundred rupees for each copy in respect of which default is made. (6) The Court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the Court thinks fit, until the application is finally disposed of. (7) An appeal shall lie from any order made by a Court exercising original jurisdiction under this section to the Court empowered to hear appeals from the decisions of that Court, or if more than one Court is so empowered, to the Court of inferior jurisdiction. The provisions of sub-sections (3) to (6) shall apply in relation to the appellate order and the appeal as they apply in relation to the original order and the application. Sec 392 - Power of High Court to enforce compromises and arrangements. (1) Where a High Court makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it (a) shall have power to supervise the carrying out of the compromise or arrangement ; and (b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. (2) If the Court aforesaid is satisfied that a compromise or arrangement sanctioned under section 391 cannot be worked satisfactorily with or without modifications, it may, either
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on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company, and such an order shall be deemed to be an order made under section 433 of this Act. (3) The provisions of this section shall, so far as may be, also apply to a company in respect of which an order has been made before the commencement of this Act under section 153 of the Indian Companies Act, 1913 (7 of 1913), sanctioning a compromise or an arrangement. Sec 393 - Information as to compromises or arrangements with creditors and members. (1) Where a meeting of creditors or any class of creditors, or of members or any class of members, is called under section 391, (a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting forth the terms of the compromise or arrangement and explaining its effect; and in particular, stating any material interests of the directors, managing director or manager of the company, whether in their capacity as such or as members or creditors of the company or otherwise, and the effect on those interests, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons ; and (b) in every notice calling the meeting which is given by the advertisement, there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid. (2) Where the compromise or arrangement affects the rights of debenture holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company's directors.
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(3) Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall, on making an application in the manner indicated by the notice, be furnished by the company, free of charge, with a copy of the statement. (4) Where default is made in complying with any of the requirements of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty thousand rupees ; and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company : Provided that a person shall not be punishable under this sub-section if he shows that the default was due to the refusal of any other person, being a director, managing director, manager or trustee for debenture holders, to supply the necessary particulars as to his material interests. (5) Every director, managing director or manager of the company, and every trustee for debenture holders of the company, shall give notice to the company of such matter relating to himself as may be necessary for the purposes of this section; and if he fails to do so, he shall be punishable with fine which may extend to five thousand rupees. Sec 394 - Provisions for facilitating reconstruction and amalgamation of companies. (1) Where an application is made to the Court under section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court (a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies ; and
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(b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (in this section referred to as a "transferor company") is to be transferred to another company (in this section referred to as the "transferee company") The Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters: (i) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company ; (ii) the allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person ; (iii) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company ; (iv) the dissolution, without winding up, of any transferor company ; (v) the provision to be made for any person who, within such time and in such manner as the Court directs, dissent from the compromise or arrangement ; and (vi) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out : Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies, shall be sanctioned by the Court unless the Court has received a report from the Company Law Board or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest :
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Provided further that no order for the dissolution of any transferor company under clause (iv) shall be made by the Court unless the Official Liquidator has, on scrutiny of the books and papers of the company, made a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. (2) Where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order, that property shall be transferred to and vest in, and those liabilities shall be transferred to and become the liabilities of, the transferee company; and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect. (3) Within thirty days after the making of an order under this section, every company in relation to which the order is made shall cause a certified copy thereof to be filed with the Registrar for registration. If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees. (4) In this section (a) " property includes property, rights and powers of every description; and liabilities includes duties of every description; and (b) " Transferee company does not include any company other than a company within the meaning of this Act; but transferor company includes any body corporate, whether a company within the meaning of this Act or not.
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Securities Exchange Board of India

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has defined substantial quantity of shares or voting rights distinctly for two different purposes: (I) Threshold of disclosure to be made by acquirer(s): 1) 5% or more but less than 15% shares or voting rights: A person who, along with PAC, if any, (collectively referred to as Acquirer hereinafter) acquires shares or voting rights (which when taken together with his existing holding) would entitle him to exercise 5% or 10% or 14% shares or voting rights of target company, is required to disclose the aggregate of his shareholding to the target company within 2 days of acquisition or within 2 days of receipt of intimation of allotment of shares. 2) More than 15% shares or voting rights: (a) Any person who holds more than 15% shares but less than 75% or voting rights of Target Company, and who purchases or sells shares aggregating to 2% or more shall disclose such purchase/sale along with the aggregate of his shareholding to the target company and the stock exchanges within 2 working days. (b) Any person who holds more than 15% shares or voting rights of target company or every person having control over the Target Company within 21 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration, disclose every year his aggregate shareholding to the target company. The target company, in turn, is required to inform all the stock exchanges where the shares of Target Company are listed, every year within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration.
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(II) Trigger point for making an open offer by an acquirer 1) 15% shares or voting rights: An acquirer who intends to acquire shares which along with his existing shareholding would entitle him to exercise 15% or more voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire at least additional 20% of the voting capital of target company from the shareholders through an open offer. 2) Creeping acquisition limit: An acquirer who is having 15% or more but less than 75% of shares or voting rights of a target company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year only after making a public announcement to acquire at least 20% shares of target company from the shareholders through an open offer. 3) Consolidation of holding: An acquirer, who is having 75% shares or voting rights of a target company, can acquire further shares or voting rights only through an open offer from the shareholders of the target company.
SEBI (Substantial Acquisition of Shares and Takeovers) (2nd Amendment) Regulations, 2004
In exercise of the powers conferred by Section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following regulations to amend the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, namely:1. (i) These regulations may be called the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2004. (ii) These regulations shall come into force on the date of their publication in the Official Gazette.
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2. In the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997(i) in regulation 2, in sub-regulation (1), (a) for clause (h) the following shall be substituted, namely:(h) promoter, unless otherwise provided elsewhere, means(i) any person who is directly or indirectly in control of the company; or (ii) any person named as promoter in any document for offer of securities to the public or existing shareholders or in the shareholding pattern disclosed by the company under the provisions of the Listing Agreement, whichever is later; or (iii) any person named as person acting in concert with the promoter in any disclosure made in terms of the Listing Agreement with the stock exchange or any other regulations or guidelines made or issued by the Board under the Act. and includes, (a) where such person is an individual, (i) his spouse , parents, brothers, sisters or children; (ii) any company in which twenty six per cent.(26%) or more of the equity share capital is held by him or by the persons mentioned in sub-clause (i) or any firm or Hindu Undivided Family in which he or any of the persons mentioned in sub-clause (i) is a partner or member; (iii) any company in which a company specified in sub-clause (ii), holds more than fifty per cent.(50%) of the equity share capital; (iv) any firm in which the aggregate of his holding and the holdings of the persons mentioned in sub-clause (i) is more than fifty per cent.(50%) . (b) where such person is a body corporate, (i) a subsidiary or holding company of that body corporate; (ii) any company in which the said body corporate holds twenty six per cent.(26%) or more of the equity share capital; (iii) any company which holds twenty six per cent.(26%) or more of the equity share capital of the said body corporate;
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(iv) any company in which persons acting in concert hold twenty six per cent.(26%) or more of the equity share capital and those persons acting in concert also hold twenty six per cent.(26%) or more of the equity share capital in such body corporate; (v) any other body corporate under the same management as the said body corporate within the meaning of sub-section (1B) of section 370 of the Companies Act, 1956. Explanation I: A financial institution, scheduled commercial bank, foreign institutional investor, mutual fund and a venture capital fund shall not be deemed to be a promoter merely by virtue of its shareholding. Explanation II: A financial institution, scheduled commercial bank, foreign institutional investor or a venture capital fund shall be deemed to be a promoter of its subsidiary and of the mutual fund sponsored by it, as applicable. (b) for clause (j), the following shall be substituted, namely (j) public shareholding means shareholding held by persons other than promoters as defined under clause (h). (ii) in regulation 3, (a) in sub-regulation (1), (1) in clause (e), in sub-clause (iii), after the proviso, the following Explanation shall be inserted, namely - : Explanation: For the purpose of the exemption under sub-clause (iii) the term promoter" means (i) any person who is directly or indirectly in control of the company; or (ii) any person named as promoter in any document for offer of securities to the public or existing shareholders or in the shareholding pattern disclosed by the company under the provisions of the Listing Agreement, whichever is later; and includes, (a) where the promoter is an individual, (1) a relative of the promoter within the meaning of section 6 of the Companies Act, 1956 (1 of 1956);
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(2) any firm or company, directly or indirectly, controlled by the promoter or a relative of the promoter or a firm or Hindu undivided family in which the promoter or his relative is a partner or a coparcener or a combination thereof: Provided that, in case of a partnership firm, the share of the promoter or his relative, as the case may be, in such firm should not be less than fifty per cent.(50%)"; (b) where the promoter is a body corporate,(1) a subsidiary or holding company of that body; or (2) any firm or company, directly or indirectly, controlled by the promoter of that body corporate or by his relative or a firm or Hindu undivided family in which the promoter or his relative is a partner or coparcener or a combination thereof: Provided that, in case of a partnership firm, the share of such promoter or his relative, as the case may be, in such firm should not be less than fifty per cent.(50%). (2) after clause (k), the following shall be inserted, namely (ka) acquisition of shares in terms of guidelines or regulations regarding delisting of securities specified or framed by the Board. (b) after sub-regulation (1) the following sub-regulation shall be inserted, namely: (1A) The benefit of availing exemption under the relevant clauses of sub-regulation (1), shall be subject to compliance with requirement specified in sub-regulation (2A) of regulation 11. (iii) in regulation 7, in sub-regulation (1), after the words fourteen per cent. the words or fifty four per cent. or seventy four per cent. shall be inserted; (iv) in regulation 10, the following proviso shall be inserted, namelyProvided that no acquirer shall acquire shares or voting rights, through market purchases and preferential allotment pursuant to a resolution passed under section 81 of the Companies Act, 1956 or any other applicable law, which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise more than fifty five per cent. of the voting rights in the company;
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Provided further that if the acquirer has acquired shares or voting rights through such market purchases or preferential allotment beyond fifty five per cent. of the voting rights in the company, he shall forthwith disinvest the shares acquired in excess of fifty five per cent. and shall be liable for action under these Regulations and the Act. Explanation : In case of acquisition through preferential allotment the limit of fifty five per cent. voting rights as provided under this regulation shall be reckoned with reference to the increased share capital pursuant to such preferential allotment. (v) in regulation 11, (a) in sub-regulation (1), for the figure and words 75 per cent. the words and figure fifty five per cent.(55%) shall be substituted; (b) for sub-regulation (2), the following shall be substituted, namely (2) An acquirer, who together with persons acting in concert with him has acquired, in accordance with the provisions of law, fifty five per cent(55%) or more but less than seventy five per cent. (75%) of the shares or voting rights in a target company, may acquire either by himself or through persons acting in concert with him any additional share or voting right, only if he makes a public announcement to acquire shares or voting rights in accordance with these regulations: Provided that no acquirer shall acquire shares or voting rights, through market purchases and preferential allotment pursuant to a resolution passed under section 81 of the Companies Act, 1956 or any other applicable law, which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise more than fifty five per cent. of the voting rights in the company; Provided further that if the acquirer has acquired shares or voting rights through such market purchases or preferential allotment beyond fifty five per cent. of the voting rights in the company, he shall forthwith disinvest the shares acquired in excess of fifty five per cent. and shall be liable for action under these Regulations and the Act.
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Explanation : In case of acquisition through preferential allotment the limit of fifty five per cent. voting rights as provided under sub - regulation (ii) shall be reckoned with reference to the increased share capital pursuant to such preferential allotment. (c) after sub-regulation (2), the following shall be inserted, namely (2A) Unless otherwise provided in these regulations, an acquirer, who seeks to acquire any shares or voting rights whereby the public shareholding in the target company may be reduced to a level below the limit specified in the Listing Agreement with the stock exchange for the purpose of listing on continuous basis, may acquire such shares or voting rights, only in accordance with the of guidelines or regulations regarding delisting of securities specified by the Board: Provided that, the provisions of this sub-regulation shall not apply in case of acquisition by virtue of global arrangement which may result in indirect acquisition of shares or voting rights or control of the target company. (vi) in regulation 20, in sub-regulation (7), after the proviso, the following shall be inserted, namely Provided further that the shares or voting rights so acquired taken together with the acquisition under the public offer and shares or voting rights, if any, held by him or by persons acting in concert with him, do not result in public shareholding in the target company being reduced to a level below the limit specified in the Listing Agreement with the stock exchange for the purpose of listing on continuous basis. (vii) in regulation 21, (a) in sub-regulation (1), the following proviso shall be inserted, namely Provided that where any public offer is made in pursuance of sub-regulation (2) of regulation 11, such public offer shall be for such percentage of voting capital of the target company so that the acquisition does not result in the public shareholding in such company being reduced to a level below the limit specified in the Listing Agreement with the stock exchange for the purpose of listing on continuous basis. (b) after sub-regulation (1), the following sub-regulation shall be inserted, namely
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(2) Where an acquirer acquires more than fifty five per cent. (55%) shares or voting rights in the target company through an agreement or memorandum of understanding and the public offer made under regulation 10 or sub-regulation (1) of regulation 11 to acquire minimum percentage of voting capital as specified in sub regulation (1) of regulation 21 results in public shareholding being reduced to a level below the limit specified in the Listing Agreement with the stock exchange for the purpose of listing on continuous basis, the acquirer shall acquire only such number of shares under the agreement or the memorandum of understanding so as to maintain the minimum specified public shareholding in the target company; (c) for sub-regulation (3), the following shall be substituted, namely (3) If consequent to the public offer made in pursuance of global arrangement referred to in proviso to sub regulation (2A) of regulation 11, the public shareholding falls to a level below the limit specified in the Listing Agreement with the stock exchange for the purpose of listing on continuous basis, the acquirer shall undertake to raise the level of public shareholding to the levels specified for continuous listing specified in the Listing Agreement with the stock exchange, within a period of twelve months from the date of closure of the public offer, by (i) issue of new shares by the company in compliance with the provisions of the Companies Act, 1956 and the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000; or (ii) disinvestment through an offer for sale in compliance with the provisions of the Companies Act, 1956 and the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000, of such number of shares held by him so as to satisfy the listing requirements; or (iii) sale of his holdings through the stock exchange. Provided that in case of acquisition of shares or voting rights or control in a target company where the public shareholding is below the limit specified for the purpose of listing on continuous basis in terms of the Listing Agreement with the stock exchange, the acquirer shall undertake to raise the level of public shareholding to the levels specified for continuous listing in terms of the listing conditions specified in the Listing
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Agreement with the stock exchange, within the period specified under the Listing Agreement. (viii). in regulation 45, in sub-regulation 6, after clause (c), the following shall be inserted, namely (d) directions under section 11(4) of the Act; (e) cease and desist order in proceedings under section 11D of the Act; (f) adjudication proceedings under section 15HB of the Act.
Regulation for Substantial Acquisition of Shares in Listed Companies

The Guiding Principles of the Regulation are defined to include: (1) Equality of treatment and opportunity to all shareholders; (2) Transparency in acquisition of shares; (3) Fair and truthful disclosure through public announcement; (4) Availability of sufficient time for shareholders to make properly informed decision; (5) Avoidance of undesirable practices in substantial acquisition of shares and clandestine transactions; (6) Protection of rights for small and minority shareholders and, (7) Avoidance of use of price sensitive information concerning a public offer by all persons privy to confidential information for their own profits. (1) Disclosure If on the date of coming into effect of this Regulation, a person holds shares carrying more than 5% or more of the voting capital of a company, he shall disclose his aggregate shareholding to (a)SEBI and, (b) all stock exchanges on which the shares of the company are listed, within two months. Similar disclosure is required by any person who subsequently crosses the 5% threshold. (2) Negotiated Purchases When a person who holds shares in a company has agreed to acquire further shares through negotiations, which taken together with shares already held, would carry
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more than 10% of the voting capital, he shall not acquire further shares, unless he makes, a public announcement of an offer to the remaining shareholders of the company. Procedures for Negotiated Purchases (i) A public offer shall be made at a minimum offer price which means, the negotiated price or the average of the weekly high and low of the closing prices of the company whose shares are being acquired, whichever is higher. (ii) A public announcement for an offer to the remaining shareholders shall be made in at least one national English daily and one vernacular newspaper wherever the regional stock exchange of the company whose shares are being acquired is located. (iii) A public announcement of offer shall contain the terms of offer; identity of the ultimate acquirer; details of his existing holdings in the company (iv) The public offer shall open after not more than one month from the date of public announcement of offer and the offer shall be kept open for a period of 6 weeks thereafter. (3) Purchases in the Open Market When a person who holds shares in a company has agreed to acquire further shares through negotiations, which taken together with shares already held, would carry more than 10% of the voting capital, unless he makes, a public announcement of his intention to acquire such additional shares through open market in a manner prescribed by SEBI. Procedures for Purchases in the Open Market (i) A public announcement for an offer to the remaining shareholders shall be made in at least one national English daily and one vernacular newspaper wherever the regional stock exchange of the company whose shares are being acquired is located. (ii) A public announcement of offer shall contain the terms of offer; identity of the ultimate acquirer; details of his existing holdings in the company (iii) The period of purchases shall not in any case exceed 6 weeks from the date of announcement. (iv) Competitive acquisition by any other person may be made on the same company within 2 weeks from the date of first public announcement.
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(4) Institutional Operations Public Financial Institutions shall not sell any shares exceeding 1% or more of the paid up capital of any company by negotiation to the same person, unless, they make a public announcement of the intention to sell the block of shares. Mutual funds shall also follow the same procedure in case of any negotiated sale. Public Financial Institutions selling in the open market shall make a public announcement of the sale. (5) Bail Out Takeovers Revival of non-BIFR sick companies through bail out takeovers are exempted from some of the above provisions. The lead financial institution is vested with the task of evaluating various bids and is given the discretion to accept or reject them. Penalties Violations of the provisions of this regulation shall be liable to fine and imprisonment or both and no prosecution can be filed by anyone other than an officer of SEBI.
Undesirable Practices
We outline below some of the more important and serious undesirable practices that have been observed in the context of takeover bids in India and abroad. In our opinion, regulatory action to curb these practices would be well worth the effort. 1. The Acquirer buys substantial number of shares through clandestine transactions at high prices. The majority of shareholders do not realize what is going on and do not get an opportunity to dispose off their holdings at the same favorable terms. 2. The acquirer forces the shareholders to a hasty decision through the veiled threat that if they dither for long, the acquirer may, no longer, be ready to buy the shares. This threat is credible because once the acquirer has obtained a controlling shareholding, he need buy no more.
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3. The acquirer resorts to a two step takeover. In the first step he acquires sufficient shares at premium rates to achieve partial control. From this position of strength, he then proceeds to squeeze out the remaining shareholders through gradual purchases, preferential allotment and other means. The second step becomes a relatively cheap operation for the acquirer. 4. Closely related to the above, is the attempt to make the takeover self financing, in what is often called a `bootstrap takeover. In the second step of the takeover operation, the acquirer diverts the acquirees own funds to himself by merger by open or surreptitious credit and by fraudulent transfer pricing methods. To facilitate this operation, the acquirer may force the acquiree to sell part of its assets or tap its unutilized borrowing capacity. 5. The acquiree companys management faced with a hostile takeover seeks to frustrate it by : a) refusing share transfer b) painting rosy picture of the companys future to suggest that the price offered by the acquirer is inadequate. c) selling the companys assets, acquiring onerous obligations or many other stratagems to make the company less attractive to the acquirer. d) issuing further shares or instruments convertible into shares so as to reduce the acquirers current shareholding percentage. e) where there are competing offers, attempt to favor its preferred suitor even if its bid is less advantageous to the shareholders. 6. Insider trading by the acquirer, the acquirees management and their
advisors/associates.
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Foreign Exchange Management Act 2000

1. FEMA Guidelines for Acquisition and Transfer of Immovable Property in India. 1.1 A person resident outside India who is a citizen of India (NRI) can acquire by way of purchase any immovable property in India other than agricultural/ plantation /farm house. He may transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India or a person resident in India. He may however transfer, agricultural land/ plantation property/ farm house only to Indian citizens permanently residing in India. 1.2. A person resident outside India who is a Person of Indian Origin (PIO) can acquire any immovable property in India other than agricultural land/ farm house/ plantation property a) By way of purchase out of funds received by way of inward remittance through normal banking channels or by debit to his NRE/FCNR (B)/NRO account. b) By way of gift from a person resident in India or a NRI or a PIO c) By way of inheritance from a person resident in India or a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force or FEMA regulations at the time of acquisition of the property. 1.3 A PIO may transfer any immoveable property other than agricultural land/Plantation property / farmhouse in India a) By way of sale to a person resident in India b) By way of gift to a person resident in India or a Non resident Indian or a PIO. 1.4 A PIO may transfer agricultural Land/ Plantation property /farmhouse in India by way of sale or gift to person resident in India who is a citizen of India
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2.
Purchase/
Sale
of
Immovable
Property
by
Foreign
Embassies
Diplomats/Consulate Foreign Embassy/Diplomat/Consulate General has been allowed to purchase/ sell immovable property in India other than agricultural land/ plantation property / farm house provided (i) clearance from Government of India, Ministry of External Affairs is obtained for such purchase/sale; (ii) the consideration for acquisition of immovable property in India is paid out of funds remitted from abroad through banking channel. 3. Acquisition of Immovable Property for carrying on a permitted activity. A person resident outside India who has a branch, office or other place of business, (excluding a liaison office) for carrying on his business activity with requisite approvals, in India may acquire an immovable property in India which is necessary for or incidental to carrying on such activity provided that all applicable laws, rules, regulations or directions for the time being in force are duly complied with. The entity/concerned person would have to file a declaration in the form IPI with the Reserve Bank, within ninety days from the date of such acquisition. The non-resident is eligible to transfer by way of mortgage the said immovable property to an authorized dealer as a security for any borrowing.
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Competition Act
Combination
The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises, ifa)any acquisition where(i)the parties to the acquisition, being the acquirer and the enterprise, whose control, shares, voting rights or assets have been acquired or are being acquired jointly have,(A)either, in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (B) (ii) in India or outside India, in aggregate, the assets of the value of more than five the group, to which the enterprise whose control, shares, assets or voting rights hundred million US dollars or turnover more than fifteen hundred million US dollars; or have been acquired or are being acquired, would belong after the acquisition, jointly have or would jointly have,(A) either in India, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars or turnover more than six billion US dollars; or b) acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service, if(i) the enterprise over which control has been acquired along with the enterprise over which the acquirer already has direct or indirect control jointly have,(A) either in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars or turnover more than fifteen hundred million US dollars; or
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(ii) the group, to which enterprise whose control has been acquired, or is being acquired, would belong after the acquisition, jointly have or would jointly have,(A) either in India, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars or turnover more than six billion US dollars; or c) any merger or amalgamation in which(i) the enterprise remaining after merger or the enterprise created as a result of the amalgamation, as the case may be, have,(A) either in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars or turnover more than fifteen hundred million US dollars; or (ii) the group, to which the enterprise remaining after the merger or the enterprise created as a result of the amalgamation, would belong after the merger or the amalgamation, as the case may be, have or would have,(A) either in India, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or (B) in India or outside India, the assets of the value of more than two billion US dollars or turnover more than six billion US dollars. Explanation.-For the purposes of this section,(a) "control" includes controlling the affairs or management by(i) one or more enterprises, either jointly or singly, over another enterprise or group; (ii) one or more groups, either jointly or singly, over another group or enterprise; (b) "group" means two or position to (i) exercise twenty-six per cent. or more of the voting rights in the other enterprise; or (ii) appoint more than fifty per cent. of the members of the board of directors in the other enterprise; or (iii) control the management or affairs of the other enterprise;
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more enterprises which, directly or indirectly, are in a
(c) the value of assets shall be determined by taking the book value of the assets as shown, in the audited books of account of the enterprise, in the financial year immediately preceding the financial year in which the date of proposed merger falls, as educed by any depreciation, and the value of assets shall include the brand value, value of goodwill, or value of copyright, patent, permitted use, collective mark, registered proprietor, registered trade mark, registered indication, geographical indications, design user, or homonymous geographical in layout-design or similar other
commercial rights, if any, referred to in sub-section (5) of section 3.
Regulation of combinations
1) No person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. 2) Subject to the provisions contained in sub-section (1), any person or enterprise, who or which proposes to enter into a combination, may, at his or its option, give notice to the Commission, in the form as may be specified, and the fee which may be d termined, by regulations, disclosing the details of the proposed combination, within seven days of(a) approval of the proposal relating to merger or amalgamation, referred to in clause (c) of section 5, by the board of directors of the enterprises concerned with such merger or amalgamation, as the case may be; (b) execution of any agreement or other document for acquisition referred to in clause (a) of section 5 or acquiring of control referred to in clause (b) of that section. 3) The Commission shall, after receipt of notice under sub-section (2), deal with such notice in accordance with the provisions contained in sections 29, 30 and 31. 4)The provisions of this section shall not apply to share subscription or financing
facility or any acquisition, by a public financial institution, foreign institutional investor,
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bank or venture capital investment agreement.
fund, pursuant
to
any covenant of a loan agreement or
5) The public financial institution, foreign institutional investor, bank or venture capital fund, referred to in sub-section (4), shall, within seven days from the date of the acquisition, file, in the form as may be specified by regulations, with the commission the details of the acquisition including the details of control, the circumstances for exercise of such control and the consequences of default arising out of such loan agreement or investment agreement, as the case may be. Explanation.-For the purposes of this section, the expression(a) "foreign institutional investor" has the same meaning as assigned to it in clause (a) of the Explanation to section 115AD of the Income-tax Act, 1961 (43 of 1961); (b) "venture capital fund" has the same meaning as assigned to it in clause (b) of the Explanation to clause (23FB) of section 10 of the Income-tax Act, 1961 (43 of 1961).
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Accounting for Amalgamations
Accounting Standard (AS) 14
(Issued 1994)
The following is Accounting Standard (AS) 14, Accounting for Amalgamations, issued by the Council of the Institute of Chartered Accountants of India. This standard came into effect in respect of accounting periods commencing from 1.4.1995 and are mandatory in nature.
Introduction
This standard deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves. This standard is directed principally to companies although some of its requirements also apply to financial statements of other enterprises. However, this standard does not deal with cases of acquisitions which arise when there is a purchase by one company (referred to as the acquiring company) of the whole or part of the shares/assets, of another company (referred to as the acquired company) in consideration for payment in cash or by issue of shares or other securities in the acquiring company or partly in one form and partly in the other. The distinguishing feature of an acquisition is that the acquired company is not dissolved and its separate entity continues to exist.
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Definitions
The following terms are used with the meanings specified: (a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies. (b) Transferor company means the company which is amalgamated into another company. (c) Transferee company means the company into which a transferor company is amalgamated. (d) Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. (e) Consideration for the amalgamation means the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company. (f) Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller. (g) Pooling of interests is a method of accounting for amalgamations the object of which is to account for the amalgamation as if the separate businesses of the amalgamating companies were intended to be continued by the transferee company. Accordingly, only minimal changes are made in aggregating the individual financial statements of the amalgamating companies.
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Types of Amalgamations
Generally speaking, amalgamations fall into two broad categories. In the first category are those amalgamations where there is a genuine pooling not merely of the assets and liabilities of the amalgamating companies but also of the shareholders interests and of the businesses of these companies. Such amalgamations are Amalgamations which are in the nature of Merger and the accounting treatment of such amalgamations should ensure that the resultant figures of assets, liabilities, capital and reserves more or less represent the sum of the relevant figures of the amalgamating companies. The second category are those amalgamations which are a mode by which one company acquires another company and, as a consequence, the shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company, or the business of the company which is acquired is not intended to be continued. Such amalgamations are Amalgamations in the nature of Purchase. An amalgamation is classified as an amalgamation in the nature of merger when all the conditions listed below are satisfied. There are, however, differing views regarding the nature of any further conditions that may apply. Some believe that, in addition to an exchange of equity shares, it is necessary that the shareholders of the transferor company obtain a substantial share in the transferee company even to the extent that it should not be possible to identify any one party as dominant therein. This belief is based in part on the view that the exchange of control of one company for an insignificant share in a larger company does not amount to a mutual sharing of risks and benefits. Others believe that the substance of an amalgamation in the nature of merger is evidenced by meeting certain criteria regarding the relationship of the parties, such as the former independence of the amalgamating companies, the manner of their amalgamation, the absence of planned transactions that would undermine the effect of the amalgamation,
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and the continuing participation by the management of the transferor company in the management of the transferee company after the amalgamation. An amalgamation may be either (a) Amalgamation in the nature of merger, or (b) Amalgamation in the nature of purchase. An amalgamation should be considered to be an amalgamation in the nature of merger when all the following conditions are satisfied: (i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. (ii) 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. (iii) 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 shares in the transferee company, except that cash may be paid in respect of any fractional shares. (iv)The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. (v) No adjustment is intended to be made to 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.
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An amalgamation should be considered to be an amalgamation in the nature of purchase, when any one or more of the conditions specified above is not satisfied.
The Pooling of Interests Method

In preparing the transferee companys financial statements, the assets, liabilities and reserves (whether capital or revenue or arising on revaluation) of the transferor company should be recorded at their existing carrying amounts and in the same form as at the date of the amalgamation. The balance of the Profit and Loss Account of the transferor company should be aggregated with the corresponding balance of the transferee company or transferred to the General Reserve, if any. If, at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies should be adopted following the amalgamation. The effects on the financial statements of any changes in accounting policies should be reported in accordance with Accounting Standard (AS) 5 Prior Period and Extraordinary Items and Changes in Accounting Policies. The difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company should be adjusted in reserves.
The Purchase Method

In preparing the transferee companys financial statements, the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or, alternatively, the consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation. The reserves (whether capital or revenue or arising on revaluation) of the transferor company, other than the statutory reserves, should not be included in the financial statements of the transferee company.
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Any excess of the amount of the consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognised in the transferee companys financial statements as goodwill arising on amalgamation. If the amount of the consideration is lower than the value of the net assets acquired, the difference should be treated as Capital Reserve. The goodwill arising on amalgamation should be amortised to income on a systematic basis over its useful life. The amortization period should not exceed five years unless a somewhat longer period can be justified. Where the requirements of the relevant statute for recording the statutory reserves in the books of the transferee company are complied with, statutory reserves of the transferor company should be recorded in the financial statements of the transferee company. The corresponding debit should be given to a suitable account head (e.g., Amalgamation Adjustment Account) which should be disclosed as a part of miscellaneous expenditure or other similar category in the balance sheet. When the identity of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account should be reversed.
Consideration
The consideration for the amalgamation should include any non-cash element at fair value. In case of issue of securities, the value fixed by the statutory authorities may be taken to be the fair value. In case of other assets, the fair value may be determined by reference to the market value of the assets given up. Where the market value of the assets given up cannot be reliably assessed, such assets may be valued at their respective net book values. Where the scheme of amalgamation provides for an adjustment to the consideration contingent on one or more future events, the amount of the additional payment should be included in the consideration if payment is probable and a reasonable estimate of the amount can be made. In all other cases, the adjustment should be
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recognised as soon as the amount is determinable [Accounting Standard (AS) 4, Contingencies and Events occurring after the Balance Sheet Date].
Treatment of Reserves on Amalgamation

If the amalgamation is an amalgamation in the nature of merger, the identity of the reserves is preserved and they appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company. Thus, for example, the General Reserve of the transferor company becomes the General Reserve of the transferee company; while the Revaluation Reserve of the transferor company becomes the Revaluation Reserve of the transferee company. As a result of preserving the identity, reserves which are available for distribution as dividend before the amalgamation would also be available for distribution as dividend after the amalgamation. The difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company is adjusted in reserves in the financial statements of the transferee company. If the amalgamation is an amalgamation in the nature of purchase, the identity of the reserves, other than the statutory reserves, is not preserved. The amount of the consideration is deducted from the value of the net assets of the transferor company acquired by the transferee company. If the result of the computation is negative, the difference is debited to Goodwill arising on amalgamation. If the result of the computation is positive, the difference is credited to Capital Reserve.
Treatment of Goodwill Arising on Amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income on a
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systematic basis over its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it is considered appropriate to amortise goodwill over a period not exceeding five years unless a somewhat longer period can be justified. Factors which may be considered in estimating the useful life of goodwill arising on amalgamation include: The foreseeable life of the Business or Industry; The effects of product obsolescence, changes in demand and other economic factors; The service life expectancies of key individuals or groups of employees; Expected actions by competitors or potential competitors; and Legal, regulatory or contractual provisions affecting the useful life.
Balance of Profit and Loss Account

In the case of an amalgamation in the nature of merger, the balance of the Profit and Loss Account appearing in the financial statements of the transferor company is aggregated with the corresponding balance appearing in the financial statements of the transferee company. Alternatively, it is transferred to the General Reserve, if any. In the case of an amalgamation in the nature of purchase, the balance of the Profit and Loss Account appearing in the financial statements of the transferor company, whether debit or credit, loses its identity.
Treatment of Reserves Specified in a Scheme of Amalgamation

Where the scheme of amalgamation sanctioned under a statute prescribes the treatment to be given to the reserves of the transferor company after amalgamation, the same should be followed. Where the scheme of amalgamation sanctioned under a statute prescribes a different treatment to be given to the reserves of the transferor company after amalgamation as compared to the requirements of this Standard that would have been
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followed had no treatment been prescribed by the scheme, the following disclosures should be made in the first financial statements following the amalgamation: (a) A description of the accounting treatment given to the reserves and the reasons for following the treatment different from that prescribed in this Standard. (b) Deviations in the accounting treatment given to the reserves as prescribed by the scheme of amalgamation sanctioned under the statute as compared to the requirements of this Standard that would have been followed, had no treatment been prescribed by the scheme. (c) The financial effect, if any, arising due to such deviation.
Disclosure
For all amalgamations, the following disclosures should be made in the first financial statements following the amalgamation: (a) Names and general nature of business of the amalgamating companies; (b) Effective date of amalgamation for accounting purposes; (c) The method of accounting used to reflect the amalgamation; and (d) Particulars of the scheme sanctioned under a statute. For amalgamations accounted for under the Pooling of Interests method, the following additional disclosures should be made in the first financial statements following the amalgamation: (a) Description and number of shares issued, together with the percentage of each companys equity shares exchanged to effect the amalgamation; (b) The amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof. For amalgamations accounted for under the Purchase method, the following additional disclosures should be made in the first financial statements following the amalgamation:
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(a) Consideration for the amalgamation and a description of the consideration paid or contingently payable; and (b) The amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof including the period of amortisation of any goodwill arising on amalgamation.
Amalgamation after the Balance Sheet Date

When an amalgamation is effected after the balance sheet date but before the issuance of the financial statements of either party to the amalgamation, disclosure should be made in accordance with AS 4, Contingencies and Events Occurring After the Balance Sheet Date, but the amalgamation should not be incorporated in the financial statements. In certain circumstances, the amalgamation may also provide additional information affecting the financial statements themselves, for instance, by allowing the going concern assumption to be maintained.
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Present Scenario of Accounting Standard (AS 14)

Cross-border acquisitions from India have been increasing at a rapid pace. According to Bloomberg, the total value of inbound, outbound and domestic M&A (merger and acquisition) deals was $40 billion during calendar 2006. Many, if not most, of these deals have involved Indian companies acquiring companies few times their size through LBO (leveraged buy-out) routes. The LBO route involves creation of an SPV, which funds the acquisition of a target (subsidiary), by securing the funding against the assets of the target acquired. With so much activity happening on the acquisition front by Indian companies in cross-border markets, which when combined with the activity in the domestic markets gains even further proportions. These deals involve complexities which have significant financial implications and hence need robust and evolving accounting guidance which ensures that these get appropriately reflected on the financial statements. Thus it is a perfect time for us in India to evaluate whether the accounting profession in India has kept pace with these developments and whether the accounting standards reflect these business realities. However, Indian GAAP (Generally Accepted Accounting Principles) does not have much accounting guidance supporting the complexities of deals done today, which does give Indian companies a clear flexibility to Window-dress their numbers. AS-14, `Accounting for Amalgamations', of the ICAI was issued more than 12 years ago. It deals only with the acquisitions where the acquired company goes out of existence. The standard does not cover acquisitions of entities through acquisition of shares, which is the structure in most of the LBO deals currently. Apart from one minor amendment, AS-14 continues to be the same as it was originally issued. As compared to this, to cover the peculiarities of acquisition deals, the corresponding International Standard has been revised more than once the last major revision being in 2003, and the standard is again under revision.
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This needs a significant revamp of the existing standards on acquisition and consolidation in India to bring them on a par with their IFRS equivalents (International), so that they are more tuned to the transactions and complexities of deals, both domestic and cross border, being done today. ICAI is trying to bring Indian Accounting on par with International Accounting Principles and it has made a deadline of 2011 for the same. This indirectly implies bringing Indian Accounting Standard relating to Mergers and Acquisitions at par with International Standards.
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INCOME-TAX ASPECTS Merger

In normal parlance, Merger(Amalgamation) takes place when two or more companies combine and form a new corporate entity after the previous corporate entities are dissolved. A merger signifies the absorption of one company by another which retains its name and corporate entity with the added capital, franchises and powers of a merged corporation. Section 2(1B) of Income-tax Act defines Amalgamation as follows. "amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form another company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that
"company" is defined under section 2(17) of IT Act as meaning any Indian Company, any body corporate incorporated by or under the laws of a country outside India or any institution, association or body assessed or assessable as a company under IT Act or which is declared by the Board as a Company.
Section 2(26) of IT Act defines an Indian Company Effective date of amalgamation will be the date specified in the scheme as the transfer date" and as approved by the Court.Marshall sons & Co. (India ) Limited v. ITO,(1997) 223 ITR 809,823(SC). Therefore notices issued under section 139(2) to file returns for the subsequent years were not warranted in law.
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i.
all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;
ii.
all the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation;
iii.
shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders by virtue of the amalgamation,
Three-fourths in value and not in number. "Shares" will include preference shares also. Otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first mentioned company;
This section was amended by Finance Act,1999 to relax the requirement of shareholders holding nine-tenths in value to become shareholders of the amalgamated company by"shareholders holding three-fourths in value."
Provisions of sub-clause (a) or (c) of section 2(22) are not attracted in a case where a company merges with another company in a scheme of amalgamation. Departmental Circular No. 5P(LXXVI-63)of 1967 dtd. 9th October,1967. Subclause (a) includes any distribution of accumulated profits, if it entails release to its shareholders of all or any part of the assets of the company. (c) Applies only on liquidation.
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DEMERGERThere were no specific provisions for demerger under Income-tax Act, 1961 upto Assessment Year 1999-00 Finance Act, 1999 made demergers tax neutral. The Act also distinguished sale of assets from demergers as a going concern. Accumulated losses and unabsorbed depreciation, in a demerger, are allowed to be carried forward by a resulting company if these are directly relatable to the undertaking proposed to be transferred. In other cases, such losses and depreciation shall be apportioned between the demerged company and the resulting company in proportion to the assets coming to the share of each as a result of demerger. Section 2(19AA) of Income-tax Act, 1961 defines 'demerger' as "Demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that

the definition is not an inclusive definition but is an exhaustive definitionone or more undertakings can be transferred-more than one undertaking can be transferred to more than one company provided other conditions of section2(19AA) are satisfied.
i.
all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger;

property should include intangible assets also. undertaking may first transfer some property to another person and then demerge
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i.
all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger;
ii.
the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger;
Section (19AAA): "demerged company" means the company whose undertaking is transferred, pursuant to a demerger, to a resulting company;. The recognition of demergers is one of the measures taken by the Finance Act, 1999 to provide that companies are allowed greater freedom to re-organise their business structuring , without suffering additional tax burdens in the process, and so that benefits such as depreciation and set off and carry forward of loss in respect of the transferred undertaking continue to be available to the resulting company. Section 2(41A): "resulting company" means one or more companies (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 includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger:"
Only shares can be issued-equity or preference-debentures or cash can not be issued Whether any liability on account of deemed dividend can arise in case of a demerger?
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Fifth proviso to clause (ii) of sub-section (1) of section 32 has been substituted w.e.f. 1-4-2000 by Finance Act,1999 to bring demerger on par with amalgamation with respect to sharing of depreciation between the demerged company and the resulting company like the transferor company and the transferee company- The aggregate deduction allowable to the predecessor and the successor in the case of succession referred to in clause (xiii) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger had not taken place and such deduction shall be apportioned First the aggregate depreciation need to be calculated at the prescribed rates as if the amalgamation or demerger did not take place and then the same to be apportioned in the ratio of number of days for which the assets were used by them.
Similar amendments have been carried out by Finance Act, 1999 to bring demerger on par with amalgamation, w.e.f. 1-4-2000 in following sections:-
Section 35A relating to deduction for expenditure on acquisition of patent rights or copyrights,-transfer of the rights to amalgamated or demerged company will not change the position. Section 35A(7) has been inserted to provide for demergers.
Section 35AB deduction in respect of expenditure on knowhow-1/6 th amount of any lumpsum consideration is available as a deduction [ amalgamated company or the resulting company entitled to claim deduction under this section in respect of such undertaking to the same extent and in respect of the residual period as it would have been allowable to the amalgamating company or the demerged company had such amalgamation or demerger not taken place],
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Section 35ABB(2),(3) and(4) relating to treatment of sale proceeds of a license to operate telecommunication services-capital expenditure incurred for acquiring any right to operate telecommunication services-deduction is available for an appropriate fraction for the period for which license is in force.sub-section (6) takes care of amalgamation while subsection(7) has been inserted for demergers. Transfer under scheme of amalgamation or demerger will not be treated a sale and the provisions will apply to amalgamated and demerged company as if license is not transferred.
Section 35D[5A] w.e.f. 1-4-2000 amortisation of preliminary expenses [in case of a demerger the resulting company will be able to claim amortization of preliminary expenses as if the demerger has not taken place. for applying the provisions to the demerged company as if demerger had not taken place], sub clause (5) refers to amalgamation
Section 35E(7A) deduction for expenditure on prospecting, etc. for certain minerals,
Amortisation of expenditure in case of amalgamation or demerger Provides for deduction of an amount equal to one-fifth of expenditure incurred wholly and exclusively for the purpose of amalgamation or demerger of an undertaking, for each of the 5 successive previous years beginning with the previous year in which the amalgamation or demerger takes place-No deduction shall be allowed under any other section.
Section 41 profits chargeable to tax ;- A new clause (iv) which provides that the "successor in business" includes the resulting company in the case of demerger has been inserted in Explanation 2 to section 41(1) w.e. f. 1-4-2000 to a successor in business for amounts received for which loss or expenditure was incurred and in respect of which the deduction or allowance has been made.
Explanation 2A specifies that where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then,
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notwithstanding anything contained in clause (1), the written down value of the block of assets of the demerged company for the immediately preceding previous year shall be reduced by book value of the assets written down value of the assets transferred to resulting company pursuant to the demerger. Explanation 2B:- where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause(1), the written down value of block of assets in the case of the resulting company shall be the value of the assets appearing in the books of account written down value of the transferred assets as appearing in the books of account of the demerged co immediately before demerger: Provided that if the value of the assets as appearing in the books of account of the demerged company immediately before demerger exceeds the written down value of such assets in the hands of the demerged company, the amount representing such excess shall be reduced from the written down value of the assets. This proviso is proposed to be omitted by the Finance Bill, 2000 with retrospective effect from 1-4-2000. The proposed amendment seeks to provide that the written down value of the assets, being transferred, shall be the uniform basis of adjustment in the hands of the demerged company as well as the resulting company.
Section 45 Capital Gain Any profit or gain arising from transfer of a capital asset shall be chargeable under the head.and be deemed to be the income of the year in which transfer took place.
Section 47- Transactions not regarded as a transfer Section 47 (vi)- any transfer, in the scheme of amalgamation of capital assets by the amalgamating company to an amalgamated company if an amalgamated company is an Indian company.
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Section 47(via)- any transfer, in the scheme of amalgamation of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if
(a) at least twenty-five percent of the shareholders of the amalgamating foreign company continue to remain shareholder of the amalgamated foreign company, and (b) such transfer does not attract tax on capital gain in the country in which the amalgamating company is incorporated with effect from 1-4-2000 Section 47(vib) any transfer, in a demerger of a capital asset by the demerged company to the resulting company if the resulting company is an Indian company
Section 47(vic)- any transfer, in a demerger ,of a capital asset being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if
a. at least seventy-five percent of the shareholders the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company, and b. such transfer does not attract tax on capital gain in the country in which the demerged foreign company is incorporated Provided sections 391 to 394 shall not apply to demergers referred here. The condition of 75% of shareholders was different from similar condition provided in sub-clause(v) of clause (19AA) of section 2 relating to the definition of demerger, which is stipulated at " three-fourths in value of shares", hence the proposed amendment. Section 47(vid) any transfer or issue of shares by the resulting company, in a scheme of demerger to the share holders of demerged company , if transfer or issue is made in consideration of demerger of undertaking.
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Section 47 (vii)- any transfer by shareholders, in the scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company if (a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and (b) the amalgamated company is an Indian company.
Section 47(xiii) where a firm is succeeded by a company in the business carried on by it
Section 47 (xiv) where a sole proprietary concern is succeeded by a company in the business carried on by it
Section 47A- Withdrawal of exemption in certain cases
Where at any time before the expiry of eight years from the date of a capital asset referred to in clause (iv)[[holding to subsidiary]] or, as the case may be, clause (v) of section 47 - such capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business: or the parent company or its nominees or, as the case may be the holding company ceases or cease to hold the whole of the share capital of the subsidiary company, the amount of profits or gain arising from transfer of such capital asset not charged under section 45 by virtue of the provision contained in the said clauses, (iv) or, as the case may be, clause (v) of section 47 shall, notwithstanding anything contained in the said clause be deemed to be income chargeable under the head "capital gains" of the previous year in which such transfer took place.

Section 48- Mode of Computation of capital gain Section 49(2) Cost of acquisition of shares in an amalgamated company is deemd to be cost of acquisition of shares of amalgamating company.
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With effect from 1-4-2000
Section 49(2C) The cost of acquisition of shares in resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in demerged company the same proportion as the net book value of assets transferred in demerger bears to the networth of demerged company immediately before demerger
Section 49(2D) The cost of acquisition of the original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under section 49 (2C).
Explanation.- for the purposes of this section"net worth" shall mean the aggregate of the paid up share capital and general Reserves as appearing in the books of account of the demerged company immediately before the demerger.
Section 50- Special provision for computation of capital gain in case of depreciable assets
Section 50B:- Special provision for computation of capital gains in case of slump sale with effect from 1-4-2000-
(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which transfer took place: Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by assessee for not more than 36 months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets. (2) In relation to capital assets being an undertaking or division transferrd by way of such sale, the "net worth" of the undertaking or division shall be deemed to be cost of
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acquisition and cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48. [indexed cost of acquisition and improvement] (3)Every assessee, in the case of a slump sale, shall furnish in the prescribed form along with the return of income a report of an accountant as defined in the Explanation below section 288(2) indicating the computation of the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section. Form No. 3CEA has been prescribed for Report of an Accountant by IT(Twenty-first Amdt.) rules, 199 9w.e.f. 25-6-99 Explanation:- For the purposes of this section, "networth" means the networth as defined clause (ga)of subsection (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act,1985 In section 50B of the Income-tax Act, for the Explanation, the following Explanations shall be substituted, namely:Explanation 1.-for the purposes of this section, " net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division appearing in its books of account: Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purpose of computing the net worth. Explanation 2 for computing the " net worth", the aggregate value of total assets shall be.(a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in subitem (C) of item (i) of sub-clause (c) of clause (6) of section 43; and (b) in the case of other assets, the book value of such assets.
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Section 72A- Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation or demerger,etc. Section 72A has been substituted by a new section 72A by the Finance Act, 1999 with effect from 1-4-2000(i.e. for Assessment year2000-01 and subsequent years) . The new Section is more liberal and additionally covers cases of demergers as well. The old section required Central Govt. to satisfy itself on the recommendation of the specified authority that the following conditions are fulfilled (a) company was not financially viable by reason of its losses, liabilities and other relevant factors (b) the amalgamation was in public interest and(c) that other conditions as may be specified by Central government to ensure that the benefit under this section is restricted to facilitate rehabilitation or revival of the business of the amalgamating company, have been fulfilled. Thereafter Central Govt. may make a declaration to the above effect and then accumulated losses and unabsorbed depreciation of the amalgamatiing company shall be deemed to be the loss or, as the case may be allowance for depreciation of the amalgamated company for the previous Year in which amalgamation was effected and other provisions of this Act relating to carry forward of loss and allowance of depreciation shall apply accordingly. Besides there were other conditions like carrying on the business without any modification or reorganisation and certificate from specified authority that adequate steps have been taken for revival. New section 72A (1)Where there has been notwithstanding anything contained in any other provision of this Act accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be allowance for depreciation of the amalgamated company for the previous Year in which amalgamation was effected and other provisions of this Act relating to carry forward of loss and allowance of depreciation shall apply accordingly.
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(2)not allowed unless the amalgamated companyi. holds continuously for a minimum period of 5 years from the date of amalgamation at least 3/4th in value of assets of the amalgamating co. acquired in a scheme of amalgamation. ii. iii. Continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation Fulfills other conditions prescribed to ensure revival of the business of amalgamating Company or to ensure amalgamation is for genuine business purpose. (3)where conditions in (2) not complied setoff of loss or allowance of depreciation made in any previous year to amalgamated company shall be deemed to be income chargeable for the year in which not complied. (4) Notwithstanding the Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged co. shall(a) where such loss/unabsorbed depreciation is directly relatable to the undertaking. transferred to resulting company, be allowed to be carried forward and setoff in the hands of the resulting company (b)where such loss or unabsorbed Depreciation is not directly relatable to undertaking transferred to resulting company, be apportioned between Demerged and resulting company in the same proportion in which the assets of the undertakings have been retained by demerged company and transferred to resulting company and be allowed to be carried forwad and setoff in the hands of the demerged or the resulting company as the case may be.[[assets will include current assets also here no conditions for holding assets or continuing business----also losses will not be for the previous year in which demeger was effected so appears only balance period left will be allowed losses.???]] (5)Central Government may specify conditions for genuine business purpose.
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(6) Where there has been firm or a proprietory concern is succeeded by a company and fulfilling conditions of 47(xiii) or (xiv)then notwithstanding anything contained in any other provision of this Act accumulated loss and unabsorbed depreciation of the predecessor firm or proprietory concern shall be deemed to be the loss or, as the case may be allowance for depreciation of the amalgamated company for the purposes of previous Year in which business Reorganisation was effected and other provision of this Act relating to carry forward of loss and allowance of depreciation shall apply accordingly . Provided if conditions of section 47(xiii) or (xiv) not fulfilled, the setoff of loss or allowance of depreciation made in any previous Year in the hands of Successor Company shall be deemed to be the income of the company in the year in which conditions not complied. (7) Defines accumulated loss and unabsorbed depreciation.
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Chapter 4 Financing Techniques in Mergers and Acquisitions

Financing Techniques Defensive Tactics Why Mergers Fail?
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The choice of financial instruments and techniques in acquiring a firm usually has an effect on the purchasing agreement. The payment may take the form of either cash or securities i.e. ordinary shares, convertible securities, deferred payment plan and tender offers. There are various types of financing A merger can be financed through cash or exchange of shares or a combination of cash shares and debt. The means of financing would change the debt equity mix of the acquiring firm after the merger. When a larger merger takes place the desired capital structure is difficult to be maintained and it makes the calculation of the cost of capital a formidable task. Thus the choice of means of financing a merger may be influenced by its impact on the acquiring firms capital structure. 1. Cash offer A cash offer is a straightforward means of financing a merger. It does not cause any dilution in the earnings per share and the ownership of the existing shareholders of the acquiring company. It is also unlikely to cause wide fluctuations in the share prices of the merging companies. One disadvantage of cash offer is that the shareholders would have to pay tax at ordinary tax rate.
2. Share exchange
A share exchange offer will result into the sharing of ownership of the acquiring company between its existing shareholders and new shareholders (existing shareholders of the acquired company).The earnings and benefits would also be shared between these two groups of shareholders. The precise extent of net benefits that accrue to each group of shareholders depends on the exchange ratio in terms of the market prices of the shares of the acquired and the acquiring companies. In an exchange of shares the receiving shareholders would not pay and ordinary income tax immediately. They would pay capital gains tax when they sell their shares after holding them for the required period.
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3. Leveraged Buyout A leveraged buyout (LBO) is an acquisition of a company in which the acquisition is substantially financed through debt. Debt typically forms 70% - 90% of the purchase price and it may have a lower credit rating. In the US the LBOs shares are not bought and sold in the stock market and the equity is concentrated in the hands of a few shareholders. Debt is obtained on the basis of the future earnings potential . LBOs generally involve payment by cash to the seller. Which companies are targets for LBOs? In LBOs the buyer generally looks for a company which is operating in a high growth market with a high market share. It should have a high potential to grow fast and be capable to earning superior profits. The demand for companys product should be known so that its earnings can be easily forecasted. A typical company for a leveraged buyout would be one, which has high profit potential, high liquidity, and low or no debt.
4. Tender Offer
A tender offer is a formal offer to purchase a given number of companys shares at a specific price. The acquiring company asks the shareholders of the target company to tender their shares in exchange for a specific price. The price is generally quoted at a premium to induce the shareholders of the target company to tender their shares.
Defensive Tactics
A target company in practice adopts a number of tactics to defend itself from hostile take-over through a tender offer. These tactics are as follows.
1. Divestiture
In a divestiture the target company divests or spins off some of its businesses in the form of an independent, subsidiary company. Thus it reduces the attractiveness of the existing business to the acquirer.
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2. Crown Jewels
The most valuable unit(s) of a corporation, as defined by characteristics such as profitability, asset value and future prospects. The origins of this term are derived from the most valuable and important treasures that sovereigns possessed. Despite the fact that crown jewels are often the most valuable part of a company, some companies opt to use their crown jewels as part of a takeover defense. A company can employ this crown jewels defense by creating anti-takeover clauses which compels the sale of their crown jewels if a hostile takeover occurs. This deters would be acquirers from attempting to take the firm over.
3. Golden Parachute
Lucrative benefits given to top executives in the event that a company is taken over by another firm, resulting in the loss of their job. Benefits include items such as stock options, bonuses, severance pay, etc A golden parachute can be used as a measure to discourage an unwanted takeover attempt.
4. White knight
A target company is said to use a white knight when its management offers to be acquired by a friendly company to escape a hostile take-over. The possible motive for the management of the target company to do so is not to lose the management of the company. The hostile acquirer may replace the management
5. Poison pill
Poison pills refer to securities that are created by a firm to safeguard itself from hostile takeover bids. These securities take time to provide exercisable rights to their holders, thereby making it costly and difficult to gain control of a firm. If an acquirer still manages to takeover, then the securities will be akin to economic poison for them.
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The Board of directors generally adopts poison pills without the approval of shareholders. The rights that are provided by a poison pill plan can be changed by the Board or redeemed by the firm when required. These provisions force the acquirer to negotiate directly with the Board, thus enhancing its bargaining power for a fair price. The first poison pills plan was introduced in late 1982. There are five main types of poison pill plans: (1) Preferred stock plans Poison pill plans used prior to 1984 were also known as original plans. Under this plan, a firm issues a dividend of convertible preferred stock to its common shareholders. Here, the holders are entitled to one vote per share, and a higher dividend amount than that given to common stock holders. The holders of the preferred stock can exercise special rights, when an outside party acquires a large block of the firms voting stock. First, preferred stock holders (apart from the large block holder) can redeem the preferred stock for cash at the highest price paid during the past year, by the large block holder for the firms common or preferred stock. Second, in case of a merger the preferred stock can be converted into voting securities of the acquirer, with a total market value no less than the redemption value in the first case. Thus this plan was designed to avoid dilution that could be effected by the majority shareholder (2) Flip-over rights plans The most popular poison pill plan, it was introduced in late 1984 and was adopted by many firms. In this plan, shareholders receive a common stock dividend in the form of rights to acquire the firms common stock or preferred stock, at an exercise price well above the current market price. In case of a merger, the rights would flip over to permit the holders to purchase the acquirers shares, at a substantial discount. The flip-over plan does not prevent an acquirer from obtaining a controlling interest in the target, though it
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does make takeovers expensive, for the acquirer must obtain most of the rights. This is not easy, since most shareholders will prefer to hold on to their rights, which are more valuable than any premium that the acquirer may offer. (3) Ownership flip-in plans Under this plan, holders of rights are allowed to purchase the shares of the targeted firm (i.e. targeted for acquisition) at a large discount. If an acquirer accumulates target shares in excess of a threshold or kick-in point (i.e. 25 50%),his rights will become void. In most cases, the ownership flip-in plans deter acquisition of a substantial equity position. If the acquirer makes a cash tender offer for all outstanding shares, the flip-in provision is waived. (4) Back-end rights plans In this plan, shareholders receive a rights dividend. If an acquirer obtains shares of a firm in excess of a limit, holders (excluding the acquirer ) can exchange a right and a share of the stock for senior securities or cash equal in value to a back-end price set by the board of directors of the targeted firm. As the back-end price is higher than the stocks market price, it acts as a minimum takeover price, which deters acquisition of a controlling interest. (5) Voting plans Voting plan is an anti-takeover defence plan. These plans are implemented by issuing a dividend of preferred stock with voting rights. Here, if an investor acquires a substantial block of a firms voting stock, preferred holders (other than the large block holder) become entitled to super voting privileges. Hence, it is difficult for the block holder to obtain voting control.
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Why Mergers Fail

1. Integration difficulties
These include combining two disparate corporate cultures, linking financial and control systems, building effective working relationships (particularly when management styles differ) and resolving issues concerning the status of the newly acquired firms executives. An American manager, having learned that a friendly pat on the arm or back would make workers feel good, took every chance to touch his subordinates in a newly firm. His Asian employees hated being touched and thus started avoiding him, and several asked for transfers.
2. Inadequate evaluation of target

The failure to complete an effective due-diligence process (through evaluation of the target firm) often results in the acquiring firm paying an excessive premium (disproportionate to the performance gains). 3. Large debt burden Firms are often encouraged to utilize significant leverage to finance acquisitions. The large debt burden may put the firm in a messy situation, especially when the returns are poor (e.g., India Cements acquisition of Raasi Cements, CCI, and Visaka Cements in quick succession, increasing its debt burden to over Rs.1800 crores. It was forced to sell all its prized acquisitions to stay in the business). It also prevents the firm from investing in R&D activities.
4. Inability to achieve synergy

The acquisitions often fail to achieve the intended synergy because of various reasons (managerial failures, non-cooperation from employees, skepticism, emotional doubts, etc).
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5. Too much diversification

As noted earlier, over- diversification may be counter-productive. The merger mania that gripped the 1980s did not yield any concrete gains to conglomerates. In fact, excessive diversification forced many of these firms to divest the under-performing units after some time. 6. Managers overly focused on acquisitions Managers have to spend a great deal of time and energy in (a) searching viable acquisition candidates (b) completing the due-diligence process, and ( c) preparing for negotiations. Meanwhile, the operations in the target firm also comes to a standstill. Most of the target firms executives are hesitant to take risky (but rewarding) decisions choosing to postpone everything till the negotiations are over.
7. Too large
Increased size has its own inherent limitations. Achieving consistency in terms of decisions and actions may be difficult. Formalized rules and policies may come in the way of flexibility and innovation.
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Chapter 5 Human Resource Issues Related to Mergers
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HR Issue related to Mergers

Although the merging entities give a great deal of importance to financial matters and the outcomes, HR issues are the most neglected ones. Ironically studies show that most of the mergers fail to bring out the desired outcomes due to people related issues. The uncertainty brought out by poorly managed HR issues in mergers and acquisitions have been the major reason for these failures The human resource issues in the mergers and acquisitions (M&A) can be classified in two phases the pre-merger phase and the post merger phase. Literature provides ample evidence of difference in between the human resource activities in the two stages: the pre-acquisition and post acquisition period. Due diligence is important in the first phase while integration issues take the front seat in the later. The pre acquisition period involves an assessment of the cultural and organizational differences, which will include the organizational cultures, role of leaders in the organization, life cycle of the organization, and the management styles. The mergers often prove to be traumatic for the employees of acquired firms; the impact can range from anger to depression. The usual impact is high turnover, decrease in the morale, motivation, productivity leading to merger failure. The other issues in the M&A activity are the changes in the HR policies, downsizing, layoffs, survivor syndromes, stress on the workers, information system issues etc. The human resource system issues that become important in M&A activity are human resource planning, compensation selection and turnover, performance appraisal system, employee development and employee relations. M&A activity presents a different set of challenge for the human resource managers in both acquiring and acquired organizations. The M&A activity is found to have serious impact on the performance of the employees during the period of transition. The M&A leads to stress on the employee, which is caused by the differences in human resource practices, uncertainty in the environment, cultural differences, and differences in organizational structure and changes in the managerial styles. The organizational culture plays an important role during mergers and acquisitions as the organizational practices, managerial styles and structures to a large extent are determined
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by the organizational culture. Each organization has a different set of beliefs and value systems, which may clash owing to the M&A activity. The exposure to a new culture during the M&A leads to a psychological state called culture shock. The employees not only need to abandon their own culture, values and belief but also have to accept an entirely different culture. This exposure challenges the old organizational value system and practices leading to stress among the employees. Research has found that dissimilar cultures can produce feeling of hostility and significant discomfort which can lower the commitment and cooperation on the part of the employees. In case of cultural clash, one of the cultures that is dominant culture may get preference in the organization causing frustration and feelings of loss for the other set of employees. The employees of nondominating culture may also get feelings of loss of identity associated with the acquired firm. In certain cases like acquisition of a lesser known or less profitable organization by a better one can lead to feelings of superiority complex among the employees of the acquiring organization. In case of hostility in the environment the employees of two organizations may develop us versus them attitude which may be detrimental to the organizational growth. The uncertainty during the M&A activity divert the focus of employees from productive work to issues like job security, changes in designation, career path, working in new departments and fear of working with new teams. The M&A activity leads to duplication of certain departments, hence the excess manpower at times needs to be downsized hence the first set of thoughts that occur in the minds of employees are related to security of their jobs. The M&A activity also causes changes in their well defined career paths and future opportunities in the organization. Some employees also have to be relocated or assigned new jobs; hence the employees find themselves in a completely different situation with changes in job profiles and work teams. This may have an impact on the performance of the employees. Research has found that at least two hours of productive work per employee per man day is lost during the M&A activity in the organizations. The increased political processes that may be underway in the organizations to sustain the importance of the various individuals and departments will add to the confusion.
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The human resource systems vary across organizations owing to the differences in the organizational culture, sectoral differences and national cultural differences. For example if the compensation in the acquired firm is lesser compared to the acquiring firm, the acquisition will raise employee expectations (for the employees of acquired firm) of a possible hike in compensation which may not be realistic. On the other hand if the compensation level of employees in acquiring firm is lower the employees may press to have equal compensation across all the divisions of the firm. The pay differential can act as a de-motivator for the employees of acquiring firm and may have long term consequences. The compensation issues may also involve legal angle
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Chapter 6 Case Study

Vodafone Hutch Jet Sahara Merger
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Vodafone Hutch Case Study

Indian Telecom Industry: One of the fastest growing sectors in the country, telecommunications has been zooming up the growth curve at a feverish pace in the past few years. The year 2007 saw India achieve the distinction of having the world's lowest call rates (2-3 US cents), the fastest growth in the number of subscribers (15.31 million in 4 months), the fastest sale of a million mobile phones (1 week), the world's cheapest mobile handset (US$ 17.2) and the world's most affordable colour phone (US$ 27.42). Trends
Indian telecommunication firms added 5.19 million new subscribers in April 2007, taking the total user base above 212.02 million. Wireless service providers continued to dominate user growth by adding 5.15 million subscribers in April, while 40,000 new fixed-line users signed up. At 500 minutes a month, India has the highest monthly 'minutes of usage' (MOU) per subscriber in the Asia-Pacific region. India is emerging as a forerunner in using the cell phone as a tool to access the Internet, with one in every 11 people logging on to the web across the world through mobiles turning out to be an Indian.
The country's telecom sector will see investments up to US$ 25 billion over the next five years, projects global consultancy firm Ernst & Young. India is expected to register handset production of over 51 million units in 2007 to record the highest growth in the Asia-Pacific region, according to technology research firm Gartner.
India produced nearly 31 million mobile phones in 2006 worth about US$ 5 billion. The production of handsets is set to increase by 68 per cent in units and 65 per cent in value terms in 2007. By 2011, production volumes are expected to reach nearly 95 million units at a compound annual growth rate (CAGR) of 25 per cent.
The retail market for mobile phones -- handsets, accessories and airtime -- is over US$ 15.6 billion and growing at the rate of 15-20 per cent.
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Massive infrastructure needs in India might provide a potential private equity role. A recent study by telecom regulator Telecom Regulatory Authority of India (TRAI) has estimated that the country will need about 350,000 telecom towers by 2010, as against 125,000 in 2007.
With a CAGR of 46 per cent, India has emerged as the fastest growing market in the data centre-structured cabling market in the Asia Pacific region, according to Access Markets International (AMI) Partners, a US-based consultancy agency. The data centre structured cabling market is expected to grow from US$ 19 million in 2005 to US$ 125 million in 2010. The overall structure cabling market is expected to grow from US$ 127 million in 2005 to US$ 345 million by 2010 at a CAGR of 22 per cent. .
In May 2007, Indian GSM mobile phone service providers signed up 5.1 million customers, taking total users to 130.6 million, the Cellular Operators' Association of India said.
The combined revenue of all operators from their mobile businesses would more than double to US$ 33.1 billion by 2010, from about US$ 12.8 billion in 2006. The total revenue of all telecom operators is also set to nearly double to US$ 43.6 billion in four years, from US$ 22.5 billion in 2006. The revenue share of mobile business would rise to 76 per cent in the same period, from 57 per cent currently. India, which is adding over six million mobile subscribers every month, has surpassed Russia to become the third largest mobile market in the world after China and the US. The total mobile subscriber base in the country is likely to reach 425 million by March 2010 with Bharti Airtel (GSM) and Reliance (CDMA and GSM) emerging as the top two mobile operators in terms of number of subscribers.
The mobile industry should continue its strong growth. The countrys telecom regulator, the TRAI, says that the rate of market expansion would increase with further regulatory and structural reform. The adoption of Unified Licensing, a change in the Access Deficit Charge regime, increased sharing of infrastructure and coverage of new areas by operators will contribute to ongoing growth.
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A very large market with significant growth potential India is the worlds 2nd most populated country
Population (Dec-06)
1400 1200 1000 (m) 800 600 400 200 0
In d Eu ia ro pe S ra z R il us si a Ja pa n C hi na U B
.. where the mobile penetration remains low

Mobile Penetration (% as of Dec06)
120 108 107 100 80 78 77 54 41 13
1318 1116
494 300 189
(%) 143
60 40
127
20 0
Eu ro p R e us si a Ja pa n U S Br az il C hi na In di a
Penetration expected to exceed 40% by FY2012 and exceed 50% in the longer term Source: Informa, Analyst consensus. The Indian telecom industry has lots of scope as only 13% of the mobile market is penetrated and it still has a vast potential which is untapped. When this untapped mobile market is compared with the growing population the scope further widens as India is the 2nd most populous country in the world.
1.1 Indian Mobile Market Circle by- Circle Breakdown

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Key Facts
India is divided into 23 license territories or CIRCLES for the purpose of mobile service. Circles are categorized as follows Metros ( 4 largest cities ) A circles (state with highest earning power) B Circles C Circles (state with least earning ) Each Operators. Private GSM Operators on 900MHz. 1 Government Owned GSM Operator (BSNL/MTNL) 1 active private GSM operator on 1800MHz 1-2 CDMA operators on 800MHz. Circle typically has 5-6
Source: COAI, AUSPI
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2. History of Hutch Hutchison Telecom is a global provider of telecommunications services. It has significant presence in nine countries and territories, and are market leaders in many of them. Hutch currently offer mobile and fixed-line telecommunication services in Hong Kong, and operate or are rolling out mobile telecommunication services in Macau, India, Israel, Thailand, Sri Lanka, Ghana, Indonesia and Vietnam. Hutch was the first provider of 3G mobile services in Hong Kong and Israel and operates brands including Hutch, 3 and Orange. Overall, the offer encompasses voice services (including a range of enhanced calling features), broadband data and multimedia services, mobile and fixed-line Internet and intranet services, IDD and international roaming services, bandwidth services and data centre services. Together with its regional partners, Hutchison Telecom is a key player in the multi-market telecommunications industry, with a growing customer base of about 30 million as of 31 December 2006 2.1 Strategies of Hutch The guiding strategy of Hutch is to focus on mobile telecommunications services markets which offer the best growth potential. Hutch enters these markets either through greenfield developments or by acquisition, and brings our strengths in network and product development, branding and customer service to create market leaders. Hutch believes that a combination of strong economic growth and favorable demographic profiles in these markets will result in sustained growth in demand for our services. Many of its markets are still significantly under-penetrated, and offer
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tremendous scope for future growth. For example, in India the combination of vast population and a very low penetration rate creates an enormous growth opportunity for accessible and affordable mobile services. Elsewhere - most notably in Hong Kong and Israel - the penetration of mobile services has reached higher levels. As an early developer and market leader in 3G technology, Hutch is ideally positioned to benefit from these trends. The companies that comprise Hutchison Telecom enjoy a leading position in many of the markets in which Hutch operate. In all its markets, Hutch will leverage its experienced management team and our track-record of successfully developing and operating mobile telecommunications businesses to continue to grow and diversify our turnover and profits. In addition, Hutch will continue to selectively acquire or invest in new businesses, in new markets as well as in countries where Hutch is already present.
2.2 The Evolution of Hutch Essar 1992 : Hutchison entered India in partnership with Max 1994: C. Sivasankaran sells 51% stake in Delhis sterling cellular to Essar Group 1995: Hutchison max mobile goes live in Mumbai; Essar Cellphone Starts Service in Delhi 1996:Swisscom sells 49% stake in Essar cell phone to Hutchison 1998: Max Analjit Singh sells 41% stake in Hutchison Hong Kong 2000: Hutchison acquires 49% stake in sterling cellular buys Kolkatas Usha Martin Telecom 2001: Hutchison Buys 49% stake in Gujarats Fascel gets license for Karnataka & Chennai 2003: Aircell Digling becomes part of hutch 2004: Essar picks France Telecom 9.9% Stake in BPCL Communication
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2005: Hutchison Essar signed an agreement to acquire BPL for Rs.4400 crores and Essar Spacetel, paving the way for nationwide coverage in India. Essar Telecommunication holdings buys Max Telecom ventures 3.16% stake in Hutchison Essar for Rs 657crore. Orascom Telecom became a shareholder in Hutchison Telecom
2006: Hutchison Essar received licences to operate in six new licence areas, positioning it for pan-India coverage.Kotak sells 8.3% stake to Analjit Singh for Rs 1019crore. Hinduja sells 5.11% stake to Hutch for $450 million. Hutchison wants to exit.
2. 3 Why is Hutch ready to sell? Hutch is ready to sell its stake in Hutch Essar, India due to the following reasons: To help recoup its investment in 3G in mature markets - Hong Kong and Israel Tussle between Essar and Hutchison:There were also differences between Hutchison and Essar over the merger of BPL Mobile with Hutch. The Essar Group acquired BPL Mobile and merged it with Hutch Essar to raise its stake in the latter to 33 per cent. Some differences over valuations and sorting out regulatory hurdles in the key Mumbai telecom circle are believed to have contributed to the dispute. Enterprise Value is 22-24 times is EBIDTA in as compared to its investment initially. 3. Potential Suitors for the Bid Suitor # 01: Vodafone Arun Sarin, CEO Background: Largest mobile company - 29 billion Financial Health: Huge revenues - 29.35 billion in 2006, Net Loss of over 21.8 billion - under fire from shareholders Presence: Across 26 countries. Partner networks 34 countries,
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Subscriber base of 190 million Why is Hutch-Essar important: Limited presence in Asia: 3.3% in China, Other markets like the UK, Germany and Australia saturated. Suitor # 02: Reliance Communication Anil Ambani, Chairman Background: Hutchison Essar fit well , commitments from large banks, teaming with Carlyle Group. Financial Health: Third Quarter 2006-07 revenues of Rs. 3.525 crore, PAT 702 cr. Presence: CDMA -21 circles, 25 million subscriber base. GSM 3.5 million subscriber in 8 circles. Why is Hutch-Essar important: Undisputed leader in India 50 million subscribers. Save $ 5 billion on capex and opex 5 years Suitor # 03: Ruia Ravi Ruia, Vice Chairman Background: Flagship business is steel, refinery, just started operations early entrant into cellular telephony, decade experience. 33% stake in HEL. Financial Health: Steel and refining expected to generate Rs 45000-50000 cr Presence: 16 circles vis HEL. Why is Hutch-Essar important: Headstart with 33% holding, secure best valuation Suitor # 04: Maxis Jamaludin Ibrahim, CEO Background: Malaysia's largest operator 7 million subscribers, $ 13.5 billion 100% Hutch-Essar buyout said to have dropped out of the race. Financial Health: 2004-05, revenues stood (Rs. 8,060 cr) PAT (Rs. 2,164 cr) Presence: Malaysia, Indonesia and in India via Aircel 74% stake Why is Hutch-Essar important: Indian operation 7 circles, subscriber base 4.2 million. Suitor # 05: Hinduja Ashok Hinduja, Executive Chairman
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Background: Held 5.11% stake in Hutch-Essar, sold in mid 2005-06 for $ 450 million Financial Health: Revenues of $ 11 bn, raising cash is no problem Presence: No global presence, 5.11% stake was a courtesy the Hindujas presence in Gujrat circle.
Why is Hutch-Essar important: Looking at (finally) expanding in India, biggest opportunity in Indian Telecom Suitor # 06: Verizon Wireless Ivan Seidenberg, Chairman and CEO Background: USs Second Largest cellular operator, CDMA technology, 57 million customers, 44% JV with Vodafone . Financial Health: Revenues of $ 32.3 billion, Operating income of $ 7.38 billion. Presence: Restricted to US. Why is Hutch-Essar important: Any presence outside a saturated US market is welcome
4. Vodafone Details The beginnings of Vodafone can be traced to a small UK company called Racal Electronics that was founded in 1985. The chronological history of Vodafone can be inferred as under: It is the largest mobile operator in the world with barely any presence in India. If Vodafone needs to maintain its competitive edge it was very clear that they Buying Hutch Essar gives Vodafone instant access to about 23 million mobile Building such a big user base would have taken Vodafone a long time to build. As one analyst said that Vodafone paid a high price for the strategic value of Vodafones presence was via a minority stake in Indias Bharti Airtel. needed to have a clear and identifiable India strategy. users in India.
Hutch Essar and that is the key to understanding Vodafones India strategy.
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Vodafone can now bring its expertise and services from other countries to India. Over the past couple of years Vodafone has sold its stake in Europe and Japan and refocused its energy in countries where mobile and telecom services are on a huge growth curve. These countries include Turkey, Egypt, South Africa and that trend clearly shows that Arun Sarin, a seasoned telecom expert knows where the future revenue streams for his company is located.In order for Vodafone to scale it needs to resolve and come up with solutions for the infrastructure bottlenecks in India. Bharti Airtel and Vodafone are reportedly going to share their network infrastructure. This sharing of network will help Airtel and Vodafone penetrate into the rural areas, where Bharti Airtel is spending about a couple of billion dollars this year.
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Why India?
19% CAGR
2006-2015 real GDP grow th 8 7.3 6.9 7 6 5 4 3 2 1 0
U Eu S ro pe Ja pa n ia us si a B ra zi l hi na C In d
$43.6 Bn
4
4.3 3.4 2.8 2 1.1
$22.5 Bn 3
33
11 20
7
50
2006-2015 real GDP grow th (%)
65
CY2006 Data
CY 2010
Mobile Voice, Mobile Data, Fixed Voice, Fixed
India being the second largest growing economy and also the telecom markets are growing at a faster pace. The sustained economic and telecom market are the major drives for Vodafone to enter the Indian Emerging Market. 4. 2 If India, then why eyeing ONLY Hutch? PLATFORM FOR FUTURE GROWTH
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Customers
32,466
29,980 21.1 23/23 CDMA/GSM
25,551 18.0 23/23 GSM
23,308 16.4 22/23 GSM
12,442 8.8 13/23 GSM
10249 7.2 20/23 CDMA
4,513 3.2 2/23 GSM
000s Market share 22.8 (%) No Circles/total Technology of 23/23 GSM
Vodafone eyed Hutch for the following reasons: The 2nd Largest customer base i.e. following BSNL (PSU) It decent market share, though not in the top three. But acquiring the top three market share leaders was just not possible. No. of circles covered by Hutch also made a lot of difference as the penetration level in the mobile market is an important criteria for any telecom company in todays competitive scenario. This means there was not immediate necessity to spend on the infrastructure requirements. The technology under Hutch purview was GSM, which was a perfect fit for Vodafone. The other reason for Hutch being targeted by Vodafone is as under: Subscribers 22. 27 million 16.39% of mobile market; biggest New Subscribers ARPUs* Circles 1 million every month Rs. 374 16 private GSM operator after Bharti Just behind market leader Bharti Just behind market leader Bharti 11.65 % over national GSM average Present in all top circles
Revenues Rs. 5,800 cr * ARPUs Average revenues per user

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5. Hutch Vodafone Synergy Hutch-Essar has a strong presence in India so Vodafone would have a strong base. These are the following ways Vodafone will capitalize on the Hutch-Essar position: 5.1 Distribution: They have very big advantage in terms of distribution as they have 1800 branded shops all over India & still the previous owners of HTIL was aggressively expanding the distribution network. The model of hutch consists of 1000 exclusive dealers for contract & 300,000 retail outlets for prepaid. Now Vodafone will capitalized more on these aggressive strategy by investing more on the existing model develop by hutch. Accelerate distribution rollout in line with network roll out plans Proven retail experience in over 7000 retail stores globally Vodafone is a world class brand & the brand name will help Vodafone. 5.2 Network: Overall coverage of Indian population below 40% today Network performance comparable to major competitors in Hutch Essar 16 circlesBPL 3 circles: continued aggressive roll out of network Spacetel 6 circles: secure spectrum, build network and launch service Complete nationwide fibre backbone 27,000 km today Hutch Essar network fully EDGE enabled
5.3 Infrastructure: Infrastructure sharing MOU with Bharti to enable industry leading cost structure for sites. MOU outlines a process for achieving a more extensive level of site sharing sharing of tower, shelters, civil works, back-up diesel generators, power supply and air conditioners separate electronics, spectrum and backhaul transmission benefits expected to commence during 2007 MOU covers both new and existing sites
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Around 1/3 of current Hutch Essar sites shared with other Indian mobile operators Longer term anticipated to result in approximately 2/3 of total sites shared Significant capex and opex savings achievable for Hutch Essar US$1bn opex and capex savings over first 5 years opex saving improves EBITDA margin by c.1.5% 5.4 Targeted sharing of active infrastructure: Current regulatory consultation on broader infrastructure sharing to support rural areas and teledensity target MOU with Bharti envisages the scope to include active infrastructure sharing potential to extend agreement to sharing of radio access network and access transmission Potential significant additional savings on capex and opex 5.5 Brand: The Hutch brand is across 16 circles: Strong consumer focus Recognized major business brand
6. Operational Plan for Hutch Essar Vodafone will execute an operational plan to build on the strengths of Hutch Essar in order to capture the Indian telecom growth opportunity. 6.1 Key strategic objectives In the context of penetration that is expected to exceed 40% by FY2012, Vodafone is targeting a 20-25% market share within the same timeframe. The operational plan focuses on the following objectives: Expanding distribution and network coverage Lowering the total cost of network ownership, Growing market share, Driving a customer focused approach
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6.2 Site sharing The MOU outlines a process for achieving a more extensive level of site sharing and covers both new and existing sites. Around one third of Hutch Essar's current sites are already shared with other Indian mobile operators and Vodafone is planning that around two thirds of total sites will be shared in the longer term. The MOU recognises the potential for achieving further efficiencies by sharing infrastructure with other mobile operators in India. The MOU envisages the potential, subject to regulatory approval and commercial development, to extend the agreement to sharing of active infrastructure such as radio access network and access transmission. 6.3 Customer Focused Approach Hutch Essar Management Team that build the business Highly customer management team Senior Team Good Cultural fit Strong Challenger mentality experienced and focused Vodafone Value Add Proven expertise integrating with teams Proven best practice and benchmarking to accelerate change Potential for specific skills Recognized industry leader Comprehensive internet, systems Industry leading process on improvement IT based and approach across call centres, retail, Customer Service injection e.g. CRM/Data Invest and innovate to maintain industry leading capabilities customer expertise management local and in
working
management
automated Introduce proven CRM and
extensive customer research First stage nationwide Customer insight systems consolidation complete for 16 Purchasing scale benefits circles
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Single billing system in 2007 Capacity upgrades for all key systems incl. data warehouses. CRM and billinl 6.4 Financial assumptions As part of the operational plan, Vodafone expects to increase capital investment, particularly in the first two to three years, with capex as a percentage of revenues reducing to the low teens by FY2012. The operational plan results in an FY2007-12 EBITDA CAGR percentage around the mid-30s. Cash tax rates of 11-14% for FY200812 are expected due to various tax incentives and will trend towards approximately 3034% in the long term. As a result of this operational plan, the transaction meets Vodafone's stated financial investment criteria, with a ROIC exceeding the local risk adjusted cost of capital in the fifth year and an IRR of around 14%. 6.5 Financial impact on Vodafone The transaction enhances Vodafone's growth profile on a pro forma statutory basis, with Vodafone's revenue and EBITDA CAGR increasing by around one and a half % points over the three year period to 31 March 2010. The transaction is expected to be broadly neutral to adjusted earnings per share in the first year post acquisition and accretive thereafter excluding the impact of intangible asset amortization for the transaction. Including this impact, the transaction is expected to be approximately seven percent dilutive to adjusted earnings per share in the first year post acquisition and neutral by the fifth year. The Board remains committed to its longer term targeted dividend payout of 60% of adjusted earnings per share. Furthermore, the Board expects the dividend per share to be at least maintained in the short term. The acquisition of HTIL's controlling interest in Hutch Essar will be financed through debt and existing cash reserves and Vodafone
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expects pro forma net debt of around 22.8-23.3 billion3 at 31 March 2007 as a result of this transaction. 6.6 Further transaction details HTIL's existing partners, who between them hold a 15% interest in Hutch Essar, will retain their holdings and become partners with Vodafone. Vodafone's interest will be 52% following completion and Vodafone will exercise full operational control over the business. Essars acceptance to Vodafones offer, these local minority partners between them will increase their combined interest in Hutch Essar to 26%. In the event that the Bharti group company exercises its option over Vodafone's 5.6% direct interest in Bharti, consideration will be received up to 18 months after completion of the Hutch Essar acquisition. Vodafone will continue to hold its 26% interest in Bharti Infotel Private Limited ('BIPL'), which is equivalent to an indirect 4.4% economic interest in Bharti. Vodafone will now account for its entire interest as an investment. UBS Investment Bank acted as financial adviser to Vodafone.
6.7 Future Expectations
M et ro
Es De t b C ve irc lo le pi s ng Ci ...
irc le s C irc le s B C irc le s C C irc le s
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BP L Sp ac et el
Penetration by circle category (Dec-06) 60 50 40 30 20 10 0

(%)
MARKET SHARE BY CIRCLES 30 25 20 15 10 5 0
Avg Mkt Share (%)
Nationwide penetration is currently at 13%, which is expected to exceed 50% in longer term. Also the market share of Hutch has spread across quite consistently which has a 20-25% market share.
7. How Vodafone Acquired HUTCH: 7.1 : 20th Dec 2006 : Vodafone decides to go for Hutch: Vodafone has also emerged as an interested party, along with the Ambanis, the Mittals of Bharti Airtel, the Ruias, and Maxis for the acquisition of Hutchison's 67-per cent stake reports CNBC-TV18.Sources indicate that Vodafone wants a larger play in India.However, it hasn't found it easy to increase its stake in Bharti and therefore, Vodafone may turn to Hutch. At present, Vodafone holds 10-per cent stake in Bharti. It is also believed that Essar cannot have the first right of refusal when it comes to a foreign entity hence Vodafone may not have to go through the rigour of getting Essar's apporoval. 7.2 : 22nd Dec 2006 : Vodafone Announces Interest in Hutch Essar : Vodafone, the largest telecom company globally in revenue terms, today formally announced its interest in acquiring a controlling interest in Hutchison Essar Limited, India's third largest GSM mobile telecom operator. The Vodafone board had met yesterday in London to consider a bid and has reportedly authorised CEO Arun Sarin to pursue the deal. 7.3: 28th Dec 2006 : British telecom firm Vodafone has submitted its bid for cellular services operator Hutchison Essar. The report, quoting sources said to be involved in the negotiations, says Vodafone's bid puts a value of "at least $17 billion" on Hutchison Essar.
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Essar Offer : Essar, which holds a third of Hutchison Essar, has offered to buy Hutchison's 55-per cent stake at a similar price. Verizon and Hindujas join the race. 7.4: 8th Jan 2007 : Vodafone appoints Ernst and Young to conduct Due Diligence , while Essar is busy moving court for its First Right of Refusal. 7.5 : 9th Jan 2007 : Essar joins the race. Essar, which has a 33-per cent stake in Hutch Essar Ltd (HEL) has three directors on the JV company's board and thus access to all the operational, infrastructural and financial information about the joint venture, said it did not need to study the books. Appoints Citibank, Morgan Stanley, Standard Chartered, Merrill Lynch and Lehman Brothers - for the deal. 7.6 : 9th Feb 2007: Deadline set for submitting the Bid. 7.7 : 12th Feb 2007 : Finally, Vodafone is all set to establish a major presence in the world's fastest growing and the most promising telecom market. Vodafone emerged as the highest bidder for Hutchison Essar in the bidding process, which concluded last Friday. The telecom major has agreed to acquire the stake held by Hong Kong-based Hutchison Telecom International (HTIL) and its associates in Hutch-Essar. The deal was finalised by the HTIL board on Sunday and an agreement has been signed, bringing the deal close to completion after nearly three months since HTIL announced its decision to exit Hutch-Essar. Vodafone would buy out HTIL and its associates, who hold a combined 67- per cent stake, in Hutch-Essar for $11.1 billion in cash. It would also assume Hutch-Essar's net debt of $2 billion, taking the enterprise value to $18.8 billion. The final deal size is smaller than $21 billion the amount speculated to have been set by HTIL as the minimum enterprise value. Vodafone expects the acquisition to be earnings accretive after five years.
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7.8 : 16th Feb2007 : Offer to Essar to sell off its stake in Hutchison-Essar on same terms it offered Hutchison Telecom. 7.9 : 13th March 2007 : DoT clears Vodafone-Hutchison deal The communication and IT ministry is believed to have informed the Foreign Investments Promotion Board (FIPB) that it had no objection to Vodafone's acquisition of equity in Hutch-Essar and feels. It also says that it is the finance ministry that is better equipped to look into FDI aspects in the deal.DoT officials say that from their view was that the deal was FDI compliant 7.10 :13th march 2007: Vodafone Essar deal. 7.11 : 27th April 2007 : Maran gives clean chit to Hutch-Vodafone ahead of FIPB meeting. Communication and IT minister Dayanidhi Maran has given a clean chit to the Hutch-Vodafone deal, saying there was nothing wrong with the transaction, even as the foreign investment promotion board is due to meet on April 27 to finalise the licensing conditions. FIPB is currently looking into the alleged violation in FDI limit in the HutchVodafone deal, a senior government official said. 7.12 : 4th May2007 : British telecom giant Vodafone's acquisition of a majority stake in Hutch-Essar cleared the last hurdle with finance minister P Chidambaram giving his nod for the deal, hardly a week after the foreign investment promotion board (FIPB) gave its green signal.
7.13 : 9th May2007 : Vodafone pays Hutch. Europe's largest telecom operator, Vodafone Plc, has paid a discounted price of $10.9 billion in cash for mobile firm Hutch-Essar to complete its acquisition of Hutchison Telecom International Ltd's (HTIL) majority stake that gives it access to the rapidly growing Indian market to counter saturation in European markets. The final price is a reduction of $180 million from the originally agreed price of $11.08 billion, which reflects retention and closing adjustments as agreed with Hutchison. The adjusted price includes provisions for a previously announced settlement pact with Indian partner Essar.
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It also includes $352 million retention by Vodafone toward cost and expenses associated with the transactions. The net cash inflow to HTIL before payment of the settlement amount is about $10.83 billion. HTIL is expected to have an estimated pre-tax gain from the stake sale to be approximately $9 billion. HTIL is expected to declare a special dividend of $HK6.75 per share following the completion of the transaction. 7.14 : 19th September2007 : It's a dog's life: Hutch's pug survives, the brand goes Finally, Hutch is now, officially, Vodafone-Essar. The brand migration from Hutch to Vodafone was completed on Wednesday, with the pug that endeared the mobile company to the hearts of its consumer, having survived the re-branding exercise as its brand ambassador. The re-branding marks one of the final steps in the completion of the acquisition that took place in May 2007. In July 2007, the company was renamed Vodafone- Essar. India is now the 26th country where Vodafone has operations. Vodafone operates across five continents, with 40 partner networks, serving over 200 million customers worldwide.
8. Vodafone Essar Deal: British mobile carrier Vodafone Group PLC and the Essar Group have reached an agreement to jointly manage mobile phone company Hutch-Essar and rename it Vodafone Essar. Vodafone chief executive Arun Sarin and Essar vice chairman Ravi Ruia signed the partnership deal in New Delhi. The two would announce the partnership at a joint press conference.Under the terms of the partnership agreement, Vodafone would have operational control of Vodafone Essar and Ruias would have rights, such as board representation, in accordance with their 33 per cent equity. Ravi Ruia is likely to be appointed chairman of Vodafone Essar board, while Sarin would be named vice
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chairman. Seven of the 12 directors would be Vodafone nominees, while Essar would have four. Analjit Singh, who along with Hutch-Essar CEO Asim Ghosh owns a 15-per cent stake, would also be on the board. Singh had started the company as Hutchison Max, before selling out to Hutchison Whampoa's HTIL.Vodafone, the world's largest mobile phone company, last month won a $11.1-billion bid to buy a controlling 67-per cent stake in Hutchison Essar, a joint venture between Hong Kong-based Hutchison Telecommunications International Ltd. and the Essar group. Vodafone is buying for cash the 52 per cent equity held by Hutchison Telecom and a combined 15 per cent stake owned by Singh and Ghosh. HTIL's existing Indian partners Asim Ghosh, Analjit Singh and Infrastructure Development Finance Company Ltd (IDFC) have agreed to remain minority partners with their collective 15.03 per cent stake. Hutchison Telecommunications International Ltd. said it would pay the Essar group $373.5 million at the close of the transaction to sell its stake in its Indian joint venture to Vodafone. 9. Pre Acquisition Scenario Hutch Essar, India's second largest mobile phone services provider, which currently has 22.3 million subscribers and Rs. 5,800 crore in revenues ($1.3 billion). Active bidders included the world's largest mobile telecommunications company Vodafone, the Anil Ambani-led Reliance Communications and the Hinduja Group. Verizon Wireless of the U.S. is also in the kicking the tires of a potential deal. Others in the fray were Japan's NTT DoComo, Egyptian telecom operator Orascom and other big-name investment banks, including Goldman Sachs, Blackstone and Texas Pacific. Hutch Essar's valuation has doubled to $20 billion -- the enterprise value that Hong Kong parent Hutchison Whampoa likes for its 67% stake with partners. The other 33% is owned by the Ruias of the Mumbai-based Essar group, who seem open to either running the entire company themselves or in partnership with others.At first sight, it seems obvious why Hutch Essar's valuations climbed so rapidly to such high levels.
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India's current high economic growth makes it an attractive market for foreign investors. Also, it is not every day that one gets to control a big player in a tightly-regulated policy environment where entry barriers are high.What's more, the country's mobile phone subscriber base is adding six million new subscribers each month and fast approaching 200 million, or a tenth of the world's subscribers. At least two theories are floating around as to why Hutchison Whampoa wants to sell its stake in Hutch Essar. One is that the company badly needs the cash since it has committed up to $30 billion in investments across Europe. The other is that Li Ka-Shing, the Hong Kong-based shipping and real estate baron who controls Hutchison, wants to cash out. He is a fairly astute entrepreneur and, in the past, he has been known to sell when he thinks valuations have maxed out. Fresh problems arose over Vodafone's deal to acquire Hutchison-Essar, India's fourthlargest mobile service provider, from Hong-Kong-based Hutchison Telecom International, with the Department of Telecommunications raising questions about the indirect shareholdings by Asim Ghosh and Analjit Singh. The DoT has said Ghosh and Singh's 12.26 per cent shareholding in Hutchison-Essar may have to be included as foreign direct investment if it is held by offshore entities.Thus DoT's views suggest that Hutchison-Essar's shareholding pattern could violate the FDI cap of 74 per cent for telecom service companies. The department's view is also in line with that of the Joint Intelligence Committee in the National Security Council Secretariat, which has said that Hong Kong was a "country of concern" in terms of national security and the deal needed fresh scrutiny since the company's former major shareholder was based in Chinese territory. In view of the JIC's comment, the DoT has suggested that Vodafone Plc should be asked to make full disclosures of its projects, joint ventures, branches, business interests and collaborations in all other countries, to help the process of security vetting ahead of an FIPB approval.The DoT's objections come soon after the Reserve Bank of India said that HTIL's deal with Ghosh and Singh violated provisions of the Foreign Exchange Management Act, a view that has been strongly contested by the two shareholders. The
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deal has been referred to the law ministry.The department conveyed its opinion on March 28 to the Foreign Investment Promotion Board, which is scrutinising an application of February 23 by UK-based Vodafone, the world's largest telecom company, to acquire a direct and indirect interest in Hutchison-Essar from HTIL. HTIL controlled a 52 per cent interest, which was recently bought by Vodafone, and claimed an indirect interest through Ghosh and Singh's shareholding, taking its interest to a little over 67 per cent (this includes a 2.7 per cent stake held by IDFC). Hutch used its credit facilities of $124.5 million and $200 million for arranging two loans of Rs 489 crore (Rs 4.89 billion) and Rs 792 crore (Rs 7.92 billion), respectively, for Ghosh and Singh to buy the entire stake of Kotak group. While Ghosh brought 4.68 per cent, Analjit Singh purchased 7.58 per cent stake. The RBI will examine whether these loan agreements between HTIL and Ghosh-Singh duo violated any FEMA or ECB guidelines, and the FIPB would look into whether the stake purchase by Singh and Ghosh violated FDI cap of 74 per cent in telecom sector, the official said. Complications have arisen because Hutchison-Essar's Indian partner, the Essar group, has 22 per cent of its 33 per cent stake in the company through overseas entities. Therefore, if Ghosh and Singh's shareholding were counted as foreign shareholding, the total FDI in the company would be 89 per cent. The DoT's objections follow questions raised last month by the FIPB and the Reserve Bank of India over the shares held by Ghosh, Hutchison-Essar managing director, and Singh, promoter of healthcare and insurance conglomerate Max India, on behalf of HTIL (and now Vodafone) through a complex pattern of offshore companies. FIPB clears Vodafone-Hutch deal: After deferring its decision thrice, the Foreign Investment Promotion Board (FIPB) has finally given a clean chit to the $11.1 billion Vodafone's takeover bid of Hutchison-Essar paving the way for the British telecom giant to mark its entry to the world's fourth largest
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and Asia's second fastest growing mobile market. The approval, April 27, however, has come with a condition: the minority shareholders in the new venture can only sell their stakes to Indian residents. The decision is expected to have a long-term impact not only in the telecom sector, which will witness the entry of the world's largest mobile operator, Vodafone, into India, but also in other sectors where the government has imposed limits on foreign direct investments, such as insurance. "The approval will help in getting world-class services into Indian mobile telephony. Vodafone, the world leader in mobile telephony in terms of quality of service and new-generation technology, will bring them to India," said Analjit Singh, chairman of the Max group who also owns 7.26 percent in Hutch-Essar, India's fourth largest mobile company. "It's cleared. We are fully satisfied with the compliance level. They (Vodafone) have to comply with the new guidelines laid out Press Note 3 pertaining to FDI in the telecom sector. The minority shareholders will have to inform the government before they sell their stakes," said Ajay Dua, secretary, department of industrial policy and promotion, after the Friday meeting of the FIPB. In February, Vodafone had acquired Hutchison Telecommunications International Limited's (HTIL) 52 percent holding in the Indian company Hutchison-Essar, in which the Ruia-controlled Essar group is the junior partner with a 33 percent stake, 22 percent through a foreign holding firm. Following concerns expressed by some individuals that the transaction might violate FDI guidelines for the sector, the FIPB decided to examine the remaining 15 percent stake held in Hutch-Essar by development financial institution IDFC, Hutch-Essar Managing Director Asim Ghosh, and Max India Chairman Analjit Singh. The FIPB had also sought the opinion of the Reserve Bank of India (RBI) and the Law Ministry on the issue of the complex shareholding pattern of Hutch-Essar and also sought clarifications about the options enjoyed by HTIL on the minority shareholdings. On Friday, FIPB announced that share holding of Asim Ghosh and Analjit Singh is Indian and that they cannot sell their existing shares to any foreign entity without
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government approval. According to a government aide, the FIPB was of the opinion that 15 percent of the total holding in Hutch should remain with the Indians. A government aide said that the FIPB is satisfied with Vodafone's holding in the joint venture with Essar, which is at only 52 percent. The government aide further said that the Vodafone-Essar deal would be sent for the Finance Minister's approval. Further, the FIPB has asked the government to review the FDI norms across sectors. Indian rules allow foreign ownership of up to 74 percent in a domestic telecom firm. Reacting to the FIPB's decision, Asim Ghosh said that he was delighted with the FIPB's decision, but was awaiting written clearance of the same. He went on to say that he never doubted whether the shareholding in the company was his. Analjit Singh also said that he was relieved and delighted, but would like to see the decision in black and white before celebrating. He added that he was comfortable with the government's condition not to sell 15 percent stake to foreign companies. "It looks as though the panel has recommended approval for our application to the finance minister and that is clearly welcome," said a Vodafone spokesman. "However we understand that it is for the finance minister to approve FDI (foreign direct investment approvals) and we will await his decision," he told AFP. Officials close to the deal said Finance Minister P. Chidambaram's approval was considered a formality. Vodafone plans to swap the Hutch brand in India with its own in due course, and aims to accelerate capital expenditure, promote low-cost handsets and introduce new services suited to India such as money transfers over mobile phones. According to market analysts, the takeover deal was central to Vodafone's strategy of seeking new markets away from saturated developed countries. The British firm also owns a 10 percent stake in Hutch rival Bharti, but plans to sell 5.6 percent back to Bharti in a parallel deal to the Hutchison Essar transaction. The group will continue to own a 4.4
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percent stake in an unlisted Bharti holding company. It was earlier decided that Essar's vice chairman Ravi Ruia will be chairman of the new joint venture, while Vodafone's India-born chief executive Arun Sarin will be appointed vice-chairman. Vodafone said it would invest $2 billion within two years in the HutchEssar mobile telecom venture to tap rural market, expand infrastructure and improve teledensity. 10. Present Scenario : Vodafone Essar moves behind Bharti Airtel, pushes BSNL to third spot Bharat Sanchar Nigam Ltd (BSNL), the country's top telecom PSU, has been pushed to No 3 slot in the global systems for mobile communications (GSM) subscriber base with Vodafone Essar taking the second spot behind top telco Bharti Airtel. While BSNL added only 1.55 million subscribers from the end of March to the end of July 2007, market leader Bharti has grown by 7.6 million and Vodafone Essar (earlier Hutch) by 6 million, according to the Cellular Operators Association of India (COAI). Idea Cellular and Aircel have added 2.99 million and 1.65 million users, respectively. Bharti's GSM market share has grown to 31.58 per cent in July-end from 30.59 per cent in March-end.Vodafone has grown to 22.88 per cent from the 21.78 per cent earlier; BSNL to 22.59 per cent from 20.44 per cent; Idea to 12 per cent from 11.54 per cent; Aircel to 5.05 per cent from 4.54 per cent; and Spice to 2.32 per cent from 2.25 per cent. The market share of Mahanagar Telephone Nigam Ltd (MTNL) and BPL Mumbai have dropped from 2.26 per cent to 1.88 per cent and 0.88 per cent to 0.77 per cent, respectively.While BSNL operates in 21 out of the 23 circles in the country, Bharti operates in all 23 circles and Vodafone in 16. Idea is present only in 11 and Aircel in nine. BSNL was unable to add capacity for the past few months as its mega GSM tender got delayed. BSNL, however, recorded the second-highest month-on-month growth rate, after
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Aircel, in March, at 7.8 per cent. But, thereafter, the PSU slipped to the seventh position and has been there ever since. There are 141.74 million GSM subscribers in the country as of July end, up from 121.43 million at end-March.
Vodafone to pay tax on Hutch Deal: Contesting Vodafone's view that it had no obligation to pay tax on its deal to buy stake in Hutch-Essar, a senior government official today said the British firm was responsible to submit tax to the government. "Vodafone is payer in this case. So, it has a liability of payer," G C Srivastava, Director General (International Tax) in the Ministry of Finance, told reporters on the sidelines of an Assocham seminar here. Liability of payer and payee is different. Vodafone has a liability of payer, Srivastava said, indicating that Vodafone should have deducted tax at source before making payment to Hutchison and deposited it in the kitty of the government. The Income Tax deparment has sent a notice to Vodafone, seeking around 1.7 billion dollars in capital gains tax related to the sale of Hutchison Telecom International Ltd's 67 per cent stake in Hutch-Essar, now renamed Vodafone-Essar. However, the company has contested this notice and approached the Bombay High Court. Last week, Vodafone CEO Arun Sarin, who is also Vice-Chairman of Vodafone-Essar, had said the company was not liable to pay tax. "We are working with the Income Tax Department to sort this issue. Neither the Essar Group, nor Vodafone, nor Vodafone Essar is liable to pay taxes. It is the seller whoshould be taxed; and the seller is not one of the parties represented here," Sarin had said. In May, Vodafone Group Plc had paid 11.2 billion dollars to HTIL for acquiring controlling stake in Hutchison Essar. 11. Post Merger Scenario
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11.1 Heavy investment in capital expenditure Circle Has A huge potential n hutch doesnt have any presence in the C circles the potential of the C circles can be supported with fact that growth in C circles have increased from 111% from 72.27% - in 12 month. With the smaller circles having a huge potential and Vodafones goal to become the no.1 mobile subscriber in India Vodafone has to incur huge capital expenditure to develop infrastructure to tap these circles. 11.2 3 G License It will have to invest in huge amount in acquiring the 3G license and also that it may be a little slow mover in acquiring it as it would have recently funded the acquisition. Comment on the Transation: Arun Sarin, Chief Executive of Vodafone We are delighted to be deepening our involvement in the Indian mobile market with the full range of Vodafone's products, services and brand. This announcement is clear evidence of how we are executing our strategy of developing our presence in emerging markets. We have concluded this transaction within our stated financial investment criteria and we are confident that this will prove to be an excellent investment for our shareholders. Hutch Essar is an impressive, well run company that will fit well into the Vodafone Group.
Sir John Bond, Chairman of Vodafone India is destined to become one of the largest and most important mobile markets in the world and this acquisition will enable our shareholders to benefit from our increased investment in this market. We also look forward to playing our part in delivering the significant economic and social benefits which mobile telephony can bring to the people of India.
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12. How will India Benefit Vodafones entry 12. 1 Only operator in India integrated into an international mobile company International voice and data roaming Unique offers for multinational corporate accounts Access to proven product portfolio Mobile office expertise 12.2 Senior Management Team that built the business Highly experienced and customer focused management team Good cultural fit Strong challenger mentality Proven expertise in integrating and working with local management teams Proven best practice and benchmarking to accelerate change Potential for specific skills injection e.g. CRM/Data 12.3 Customer service Recognised industry leader Comprehensive approach across call centres, retail, internet, and automated systems Industry leading process improvement based on extensive customer research
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Jet - Sahara Merger

Company Profile:
Jet Airways:
Jet Airways was incorporated in the year 1993. The company is well known for its high quality service, reliability, comfort and efficient operations. The company holds around 279 aircrafts till early 2007. The airline operates over 340 flights daily across 44 destinations within India and also operates flights to Nepal, Sri Lanka, Singapore, Malaysia, United Kingdom, Thailand, Belgium, United States of America & Canada. It is one of the youngest and best maintained fleets. Jet Airways plans to extend its international operations further in North America, Europe, Africa & Asia in the coming years with the introduction of wide-body aircraft into its fleet.
Aircraft
Number
ATR 72-500
Boeing 737-800
07
17
Boeing 737-900
Boeing 737-400
02
04
Jet airways ahs been awarded the 3rd year on year The Freddie Award. It has been a vibrantly active player in terms of new activity programs. It is one first of its kind to start airline suite in sky giving privacy & luxury. Jet members are given the Jet Privilege cards and are entitled to a range of special benefits and privileges. The company went for a successful I.P.O. and got listed on
Boeing 737-800
Airbus 330-200
02
04
Boeing 737-800
Boeing 737-700
03
14
Boeing 777-300E
Boeing 737-800 Total
06
07 66
B.S.E. & N.S.E. on March 14, 2005. It had outperformed the market initially but due to the rising competition the company started losing market share and thus the share
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price started to fall. The international operations of the company were at a nascent stage when the company got listed and also due to the entry of LCCs in the market the companys cash flows and bottom line were highly impacted. The company was dominating the sky with the market share of nearly 47%. The company is currently trading at Rs760. Naresh Goyal the chairman of the company has used a strategy to protect the company from hostile takeover ever in the future years to come. The Brand of the company is under the ownership of Jetair, the company owned by Naresh Goyal. Jet Airways pays a regular royalty to Jetair for the use of the brand name. If ever in the coming years the company has to face a hostile takeover it will be able to keep the ownership of the brand name. In the current situation where the aviation sector on the whole is facing high consolidation such a strategy will protect the company from facing such challenges. Jet Airways is a highly efficiently managed company. The only way the company could protect itself from falling market share was either acquisition of a LCCs or infusing more funds for growth and expansion.
Air Sahara:
The company began operations on December 3, 1993. It was headed by Mr Subroto Roy and the staff was called the Sahara Parivar as the atmosphere for the employees was like a family. Air Sahara was offering 119 flights with 11800 seats on a daily basis was a vibrant domestic player in the Indian sub-continent catering to various destinations in India. Fleet review & route were focus points of its strategy, (Rational Approach).the company was the first to introduce the Steal a seat flexi fare options. It helped the company attract many customers. The company has won the 'The Pacific Asia Travel Association' (PATA) award for the year 2003. However the company was in huge financial mess. It was not making profits and showed negative cash flows. The company was highly leveraged and burdened with debt. Also the market share of the company kept declining and came into 1 digit from 2 digit figures. The companys fleet size was around 27 aircrafts. Air Sahara, a company had been in trouble for a long time till the time of the deal. As low cost players and new entrants created havoc in the aviation market, Saharas revenue and profit started falling. It is estimated that Sahara has accumulated a
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baggage of Rs 125 crore worth of losses already before offering for merger. Its plan to raise money from the capital market by issuing shares remained grounded because the company was not attractive enough for the investors. So Sahara was looking out for suitors. The first groom was SpiceJet and the second was Kingfisher Airlines. Both backed out saying Saharas valuation of the company between $750 million and $ 1 billion was too high. Mallya was prepared to part with only $400 million, half of it in cash. Sahara refusing to budge, Mallya pulled out. Sahara wanted to exit the airline business because of infrastructure bottlenecks, mismatch between demand and supply, high fuel (ATF) prices, cited as some of the problems behind the exit. Also selling the company would allow Sahara to focus on its core business of media. Air Saharas executive vice president: It is true that air traffic is booming but capacity will soon catch up. The company was a drag on the profitability despite vast sums of money was being pumped in. Jet being a much more efficiently managed airline, expects to exploit the synergies of the two companies to the maximum. The company after making much news in the market has now been acquired by Jet Airways and named Jetlite.
The Merger Rationale: Why Jet Airways wanted to Buyout: At the time when the deal was signed i.e on January 18, 2006 the market share of Jet Airways was falling steeply due to increased competition on account of entry of LCCs and falling air traffic. Due to the falling market share the company was losing its premier market. The cost of travelling in Jet was very high as compared to other no frills airlines. However the reliability and the quality of Jet has always remained high. To tap the international market Jet needed more fleets and being a single entity it could not make optimum utilization of the government approval to cater to
FM II 146
international clients. Jet airways has recently obtained the permission from the government to cater internationally only recently and it has to make the most of the opportunity before the permission is granted to other players like Kingfisher. Due to the falling market share and also slow growth of the aviation sector which led to falling investors attraction towards the sector are the main reason why Jet Airways had to find new ways for expansion and restructuring itself. The two ways available to Jet were either acquiring an already established LCC to increase the market share and to cover the area covered by LCC or it could finance its growth by raising further capital. However the latter solution was not highly feasible for Jet as it had already raised a significant amount of money to fund its previous growth needs, so the market would not lend more money and also setting up a new airline was highly costly and would take a lot of time to setup. Hence the best option available to Jet was acquiring an already developed and existing LCC airline. Why Air Sahara wanted to sell off: Air Sahara since the time of inception has never outperformed. The main reason being informal management of the company. The company has never been professionally and efficiently managed. The work culture being so informal was a drawback for the company. The work was not taken seriously hence the flights were always delayed, the services for the planes remained pending for days and also the method of operation that they followed was highly out dated. Air Sahara was a huge drag on the profits of the company even though huge amount of funds were being pumped into the company. Due to poor performance of the company the investors found the company highly unattractive and hence the companys market share started falling significantly. The companys accounts showed huge losses and the company was under a huge financial mess. Selling off the airline would help company focus on its core business of media, real estate and banking. The company followed the strategy of aggressive pricing and hence due to low cost of fares the margins were kept low by the company which highly added the companys accumulated losses. Thus selling off
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would help the company free its cash flows and thus enhance the financial flexibility and support future growth opportunities.
The Merger Process:
Air Sahara decided to sell off the company but the value given by E&Y for Air Sahara was around $750mn to $ 1 bn. But players like spice jet and Kingfisher found this value too high for the company especially due to the mounting debt and losses. So the company lowered the price to $ 500 mn i.e (Rs.2300 crore) and called for bidders. Jet agreed to take the offer and decided to finance the deal completely with cash and also paid a Rs 500 crore as advance. Hence the biggest deal in the aviation sector was thus decided to be taken forward and the amount equal to $ 330mn was put side by Jet in an Escrow account opened with ICICI. One of the preconditions of the deal was Naresh Goyal, chairman of Jet Airways should be on the Board of Air Sahara after regulatory clearances. Jet Airways, which commands more than a third of the worlds fastest-growing airline market, saw its share price plummet 40 percent since the deal was announced in January amid concerns over price. The deal would get Jet the ownership to control operations and also the assets of the company including real estate. However the signing of the deal got delayed. The reason given by Jet for the delay was due to delay in getting government approvals that were conditions precedent to the deal and also the DGCA (Directorate General of Civil Aviation) did not appoint Naresh Goyal on the board of Sahara. However the reasoning given by Air Sahara was that due to steep increase in the accumulation of losses and debt of the company Jet now regretted the deal and was trying to back out. Reportedly Air Sahara had accumulated losses of around 226 crores in two months since the talks on the deal. Industry sources said the company was losing nearly 100 crore every month. But Jet denied any such intentions. Jet offered Sahara for a rate cut by 10-20% but Sahara refused any cut and instead offered to increase the days for signing of the deal. But both the conditions did not work. Finally the companies went to the court and sued each other for damages. The deal was off and court barred Jet
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from
selling
Saharas
shares.
Thus
shareholders
were
also
hit.
Jet would have to face a huge cost of capital-intensive route for growing its business organically, rather than expanding via acquisition. The aborted deal left Air Sahara vulnerable, with only a 9.7% share of a highly competitive market and the difficult prospect of rebuilding its airline (12 aircraft are currently grounded) and organization structure quickly. The carrier, then, aimed to hire about 700 employees mainly pilots and cabin crew in the next six months to meet its immediate needs, but this would have come at significant cost in a tight labour market. Fresh management and restructuring expertise were highly critical to the airlines survival. Both Jet and Air Sahara were left with the immediate prospect of urgently needing fresh funds, but they had fewer options at their disposal following the Indian stock market tumble in May and June 2006. Jet Airways reportedly was in talks with local Indian banks to raise $400 million in short-term loans to finance aircraft pre-delivery payments, following the delay in its proposed issue of $500 million in foreign currency convertible bonds at that time. The only way Air Sahara could raise funds for meeting its capital needs was through Debt. The fight further intensified with Air Sahara moving to the Lucknow court and filing a petition to restrain Jet Airways from operating the Escrow account that was opened with ICICI bank. Simultaneously Jet moved to Mumbai High court to stop Sahara and its 7 directors from withdrawing any money from the Escrow account. Thus the order was passed to freeze the Escrow account. A few days later Jet filed a case with Mumbai High court against Sahara Chief Subrata Roy for the recovery of Rs 500 crore that was paid as advance to Air Sahara. However at the end the advance money was not recovered by Jet Airways. Jet had already spent Rs 2bn on Saharas operations and paid Rs 5bn as consideration to Saharas promoters beside keeping aside Rs 15bn in the escrow account. Out of Court Settlement: Since the court was taking time to settle the deal both the companies being in urgent need of financials decided to go ahead with an out of court settlement in June 2006
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over the money locked in the Escrow account. Finally in July both the companies started operating individually and the operations of Sahara that were under the control of Jet for about 3 months were given back to Jet. Back with a Bang: Again on 12th April 2007 both the companies were in news again. This time with positive news. The news was about the companies merging finally. The long awaited deal that had seen so many twists and turns came true above everyones expectations. The deal was finally signed and benefited both the companies the way it was expected. The merged company was named Jetlite by Jet Airways. The company decided to change the entire business model and thus make the company profitable by Oct 2007. The final deal was signed at 40% lower the original deal price with at 1551 crores with 500 crore already paid, 450 crore was to be paid by 20th April and the remaining in installments.
Synergies to Jet Airways: Jet Airways has been benefited significantly from the deal. The deal has helped Jet in many ways to regain its position as the market leader inspite of the competition and consolidation in the sector. By closing the deal Jet has seen increasing market share, and also increased interest among shareholders that has led to better performance of the share over the exchange as compared to the prices in 2006. The deal brought Jet with market share of 32% along with: 50% of all parking bays in Mumbai and Delhi (50% of the countrys air traffic). Parking bays Mumbai Delhi Sahara 7 9 Jet 19
FM II 14 150
Sahara + jet 26 23
Total 49 46
10 new destinations for flying. Flying rights to Gulf and Africa where Jet did not have access to earlier. 499 engineers and 269 pilots which are short in supply. 27 additional fleets. Landing rights at Heathrow, Mumbai and Delhi airports. Tax Sheild of 225 crores. Economies of scale relating to MRO services, personnel costs and Bargaining power Pricing power in the metros. 3 hangers 5 major hubs including the Hyderabad Hub which is the most important right now as it helps to reduce the operating time thus improving the efficiency. By gaining Hangers and access to 5 hubs Jet has saved a cost of nearly 750 crores. However the company will have to face a few challenges: Like it has reduced the staff by half. Hence HR issues are sensitive even now in the company as they are not sure if the remaining are permanent or not. The culture of working has changed after Jet has taken over the management. The reason being Jet is a highly professional and efficiently managed company. The infrastructure of Sahara is not best utilized. Hence the need to work more upon the betterment. Also the technical constraint is a major issue. The planes were not well serviced and the method of operating was highly out dated. The need to make a turn around for efficiency.
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Share price of Jet v/s Sensex Post merger:
Aviation Industry of India:
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S E R V I C E S
JET LITE
PRICE
Conclusion: Thus the biggest deal in the Aviation industry finally was on the dotted lines proving again that mergers can face many twists and turns, it can take you to courts but if successful can prove as a turn around.
Bibliography: http://www.airlines.org.in/airline/air-sahara/page/4/
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