Mergers

OTHER FEE BASED MANAGEMENT INTRODUCTION:

Mergers and Acquisitions (M&A) as forms of business combination are increasingly being used for undertaking restructuring of corporate enterprises the world over. In fact, the corporate world is in the grip of merger-mania (mega mergers and hostile takeovers). The merger wave which began in the U.S. first occurred during the period between 1890 and 1904. Of late, mergers happen in all the sectors of the economy, the prime driving force being the accomplishment of synergetic effect for both the acquiring and the acquirer companies.

MERGERS

A type of business combination where two or more firms amalgamate into one single firm is known as a merger. In a merger, one or more companies may merge with an existing company or they may combine to form a new company. In India mergers and amalgamations are used interchangeably. In the wider sense, merger includes consolidation, amalgamation, absorption and takeover. It signifies the transfer of all assets and liabilities of one or more existing companies to another existing or new company.

Objectives The main purpose of merges is to achieve the advantage of fusion and synergy through expansion and diversification.

STEPS IN M & A Following are the steps involved in M&A:

1. Review of Objectives: The first and foremost step in M&A is that the merging companies must undertake the review of the purpose for which the proposal to merge is to be considered. Major objectives of merger include attaining faster growth, improving profitability, improving managerial effectiveness, gaining market power and leadership, achieving cost reduction, etc. The review of objectives is done to assess the strengths and weaknesses, and corporate goals of the merging enterprise. In addition, the need for elimination of inefficient operations, cost reduction and productivity improvement, etc. should also be considered. Such a move would help the acquiring company to decide as to the kind of business units that must be acquired.

2.  Data for analysis: After reviewing the relevant objective of acquisition the acquiring firm needs to collect detailed information pertaining to financial and other aspects of the firm and the industry. Industry-centric information will be needed to make an assessment of market growth, nature of competition, case of entry, capital and labor intensity, degree of regulation, etc. Similarly, firm-centric information will be needed to assess quality of management, market share, size, capital structure, profitability, production and marketing capabilities, etc. The data to be collected serves as the criteria for evaluation

3. Analysis of information: After collecting both industry-specific and firm-specific information, the acquiring firm undertakes analysis of data and the pros and cons are weighed. Data is to be analyzed with a view to determine the earnings and cash flows, areas of risk, the maximum price payable to the target company and the best way to finance the merger.

4.  Fixing price: Price to be paid for the company being acquired shall be fixed taking into consideration the current market value of share of the company being acquired. The price shall usually be above the current market price of the share. A merger may take place at a premium. In such a case, the firm would pay an offer pri market value. This would happen where the acquiring firm is of the firm opinion that such an option would augment operational results of the target firm owing to synergic effect.

5. Finding merger value: Value created by merger is to be found so that it is possible for the merging firms to determine their respective share. Merger value is equal to the excess of combined present value of the merged firms over and above the sum of their individual present values as separate entities. Any cost incurred towards the merging process is subtracted to arrive at the figure of net economic advantage of merger. This advantage is shared between the shareholders of the merging firms.

2 Take Over

Takeover is the case where one company obtains control over the management of another company. Under both acquisition and takeover, it is possible for a company to have effective control over another company even by holding minority ownership. For instance, the Monopolies and Restrictive Trade Practices (MRTP) Act prescribes that a minimum of 25 percent voting power must be acquired as to constitute a takeover. Similarly, section 372 of the Companies Act defines the limit of a company’s investment in the sh than 10 percent of the subscribed capital so as to constitute a takeover.

Distinction between Acquisition and Take Over

Where a distinction between acquisition and takeover is made, takeover usually takes the form of hostile or forced or unwilling acquisition and acquisition happens at the instance and the willingness of the company management and the shareholders. It is for this reason that willingness of the company management and the shareholders. It is for this reason that acquisition is generally referred to   as   ‘friendly“Acquisition”:takeover’Anexampleof. e.g. acquisition  is  Mahindra  and  Mahindra  Ltd.,  a  leading  manufacturer  of  jeeps  and  tractors, acquiring equity stake of Allwyn Nissan Ltd. “Hostile   takeovers”:The acquisition of Shaw e.g. Wallace, Dunlop, Mather and Platt and Hindustan Dorr Oliver by Chablis and Ashok Leyland by Hindujas, etc.

Hosile Takeovers Where in a merger one firm acquires another firm without the knowledge and consent of the management of the target firm, it takes the form of a ‘hostile takeov acquiring firm makes a unilateral attempt to gain a controlling interest in the target firm, by purchasing shares of the later firm directly in the open (stock) market.

An example of hostile takeover was the takeover of TMBL by Sivasankaran of the Sterling Group. Since this type of takeover is generally prejudicial to the interest of the stakeholders, SEBI has come out with relevant code of conduct for the purpose of regulating the takeover practice in India.

Distinction between Mergers vs. Takeovers

The following are the differences between Mergers and Takeover:

Distinction Mergers  Vs Takeover

1.Definition

Mergers: Defined  as  an  arrangement  whereby  the  assets of two companies become vested in,  or  under  the  control  of,  one  company (which  may  or  may  not  be  one  of  the  original two companies), which has as its  shareholders  all,  or  substantially  all,  the  shareholders of the two companies.

Takeover: Defined as a transaction or series of transactions whereby a   person (individual, group of individuals or company) acquires control over the assets of a company, either directly by  becoming  the  owner  of  those assets  or  indirectly  by  obtaining control  of  the  management  of  the company    

2. Mode 

Mergers: Effected by the shareholders of one or both  of the merging companies exchanging their  shares (either voluntarily or as the result of  a legal operation) for shares in the other or a  third  company,  the  arrangement  being  frequently effected by means of a takeover  bid by one of the companies for the shares  of the other, or of a takeover bid by a third  company for the shares of both 

Takeover: Effected  by  agreement  with  the holders of the whole  of the share capital   of   the   company   being acquired, where the shares are held by the public generally, the takeover may  be  effected  by  agreement between   the   acquirer   and   the controllers of the acquired company, or by purchases of shares on the Stock Exchange, or by means of   a   ―takeover

3.   Control over assets

Mergers: Shareholding  in  the  combined  enterprise  will be spread between the shareholders of  the two companies

Takeover: Direct or indirect control over the assets  of  the  acquired  company passes to the acquirer

4. Bid 

Mergers: Bid  is  generally  by  the  consent  of  the management of both companies

Takeover: Bid is frequently against the wishes of  the  management  of  the  offeree company.

Major Issues of M&A in India

Business combinations and re-structuring in the form of merger, etc. have been attempted to face the challenge of increasing competition and to achieve synergy in business operations. The major issues of M&A are as follows:

Depreciation The acquiring firm claims depreciation in respect of fixed assets transferred to it by the target firm. The depreciation allowance is available on the written down value of fixed assets. Further, the depreciation charge is based on the consideration paid and without any revaluation.

R&D Expenditure It is possible for the acquiring firm to claim the benefit of tax deduction under section 35 of the Income Tax Act, 1961 in respect of transfer of any asset representing capital expenditure on R&D.

Tax Exemption The fixed assets transferred to the acquiring firm by the target firm are exempt from capital gains tax. This is however subject to the condition that the acquiring firm is an Indian Company and that shares are swapped for shares in the target firm. Further, as the swap of shares is not considered as sale by the shareholders, profit or loss on such swap is not taxable in the hands of the shareholders of the amalgamated company.

Carry Forward Losses The Indian Income Tax Act, 1961 contains highly favorable provision with regard to merger of a sick company with a healthy company. For instance, section 72A (1) of the Act gives the advantage of carry forward of losses of the target firm. The benefit is however available only:

• Where the acquiring from is an Indian Company;

• Where the target firm is not financially viable;

• Where the merger is in public interest,

• Where the merger facilities the revival of the business of the target firm; and

• Where the scheme of amalgamation is approved by a specified authority.