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.
Related Topics
Privacy Policy, Terms and Conditions, DMCA Policy and Compliant
Copyright © 2018-2026 BrainKart.com; All Rights Reserved. Developed by Therithal info, Chennai.