Mergers & Acquisitions

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 Concepts of Mergers and Acquisitions (M&A)

• The terms corporate restructuring, mergers, acquisitions, take-

overs, business combinations, amalgamations, strategic
alliance, disinvestment, joint venture, etc. are sometimes used
interchangeably although they represent different concepts in
different situations.
• Mergers and Acquisitions (M&A) may be classified according
to:
 Structure

 Economic relation

 Approach

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 Structure-wise Classification
• Corporate Restructuring: Any change in the capital structure,
operations or ownership.
• Merger: When a firm purchases or acquires another firm.
Acquiring firm continues to survive but the acquired (or target)
firm loses its identity.
• Amalgamation or Consolidation: All the combining firms lose
their separate identity and a new firm comes into being.
• Acquisition: When both acquiring and acquired firms retain their
identity, the former is generally known as the holding company
and the latter, subsidiary. Flexibility in re-conversion in that the
acquiring company can de-combine by selling its equity holding
in subsidiary. In merger and amalgamation, the reverse process is
difficult.
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 Structure-wise Classification
• Takeover: Acquisition leading to management
control or consolidation of existing control. Both
buyer and seller continue to exist.
• Strategic alliance: Agreement to cooperate to
achieve some specific commercial objectives.
• Disinvestment: Selling off shares to the public.
• Joint venture: Firms joining together to perform a
specific job or product sharing profits and losses as
per agreement.

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 Economic Relation-wise Classification

• Horizontal merger: When firms engaged in

similar lines of activity merger together, it is
called horizontal merger (e.g. Maruti-Suzuki
Ltd., Tata Steel-Corus, Exxon and Mobile,
etc.).
• The objective is to gain greater market share
through economies of scale.

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 Economic Relation-wise Classification
• Vertical merger: When firms involved in
different stages of production or service (value
chain) combine to gain competitive advantage.
• Vertical mergers take place along the value
chain to reduce the overall cost of the product
or service (e.g. a manufacturing company
merging with a raw materials supply company;
an oil exploration company combining with a
refinery).
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 Economic Relation-wise Classification

• Conglomerate: When firms involved in unrelated

activities or different industries combine generally
to smooth out wide fluctuations in earnings to
achieve sustainable growth. For example, firms in
mature industries having poor prospects of
growth, diversify through M&A.
• Conglomerates may be of several types, viz.
product related, market related or pure.

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 Approach-wise Classification
• Friendly takeover: Everything (purchase
consideration, mode of payment, etc.) results
based on negotiations between two or more
companies in the process.
• Hostile takeover or tender offers: Acquiring
company making the offer/bid directly to the
shareholders of the acquired company.
• Leverage buyout (LBO): The buyer borrowing
funds to the extent of a major share of the
purchase price and pledges the bought assets as
collateral security for the loan.
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 M&A in India
• In India, as in China, M&A generally take place
through FDI inflows. During 1997–1999, about 40
per cent of FDI inflows in India accounted for M&A.
• Industry wise, the largest number of mergers have
taken place in the banking and finance sector. Other
sectors which witnessed substantial number of
M&A are chemicals, textiles, electrical, electronic,
hotels, pharmaceuticals and automobiles.

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 M&A: Synergies
• M&A are justified by the synergies they create.
Synergies exist when assets are worth more when
used in conjunction with each other than separately.
• There are five components of synergy.
– Economies of scale (mass production)
– Economies of scope (diversified products)
– Economies due to competitive positioning
– Economies due to corporate positioning
– Economies due to financial strategy

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 Purchase Consideration
and its Payment
• It may a lump sum amount or value of net assets.
• How is the lumpsum amount determined?
Determinants: Expected cash flows, market
share, assets and liabilities to be taken over, and
many more financial and non-financial factors.
• The consideration may be paid by (i) cash,
(ii) partly in cash and partly in shares, and
(iii) entirely by securities.

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 Regulations of M&A in India
Section Area covered
390 Interpretation of sections 391 and 393.
391 Power to compromise or make arrangements with creditors and members.
392 Power of High Court to enforce compromises and arrangements.
393 Information as to compromises or arrangements with creditors and members.
394 Provisions for facilitating reconstruction and amalgamation of companies.
394A Notice to be given to Central Government for applications under Sections 391
and 394.
395 Power and duty to acquire shares of shareholders dissenting from scheme or
contract approved by majority.
396 Power of Central Government to provide for amalgamation of companies in
national interest.
396A Preservation of books and papers of amalgamated company.
Source: Companies Act, 1956.

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 Regulations of M&A in India
• SEBI’s regulations cover both friendly and hostile takeovers
(Clauses 40A and 40B of the Listing Agreement).
• They are intended to make sure that, in a friendly takeover,
all shareholders, especially the minority shareholders, get a
fair treatment. Accordingly, a great deal of transparency is to
be built into the Takeover Code.
• In hostile takeover, regulations cover both negotiated and
open-market takeovers, competitive bids, revision of offer,
withdrawal of an offer under certain circumstances, and
restraining a second offer within six months.
• Violation of regulations attract several penalties.

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 Valuation Methods

• Valuation of business is a critical issue that

forms part of M&A agreement.
• Some of the important methods are:
(i) Capitalization of net cash flows,
(ii) Capitalization of earnings, (iii) net assets
value, (iv) fair value, (v) market
capitalization, (vi) Net Present Value,
(vii) capital asset pricing model.

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 Accounting for M&A
• Accounting Standard 14 in India suggests two methods:
(i) Purchase method
(ii) Pooling of interests method and prescribes general disclosure and
specific disclosures.

• Purchase method: Acquisition is considered as an investment. Assets

and liabilities are combined based on their fair values. Goodwill is
also recorded and amortized against future profits.

• Pooling of interests method: Acquisition is recognized by the

exchange of voting of equity shares and not by disturbing the
resources of the constituent companies. Hence, assets, liabilities
and retained earnings of each company are carried forward at their
previous carrying amounts.

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 Managing M&A
• Post-mergers failures are not rare phenomenon.
• M&A are strategic corporate decisions. All aspects of the matter —legal, economic,
organizational, cultural, social, etc. —should be duly considered.
• The process of M&A generally involves detailed analysis in respect of the following:
· Size, position and competence of the target company.
· Asset composition, solvency and profitability.
· Due diligence.
• Companies generally form a team of experts drawing them from marketing,
engineering, HR, finance, accounting, legal and taxation departments. The team
evaluates the entire process before giving its considered opinion on the proposed
deal.

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