Mergers and Acqistions


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MERGERS AND ACQISTIONS Introduction 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
  MERGERS AND ACQISTIONS Introduction  The Indian economy has been growing with a rapid pace and has been emerging at thetop, be it IT, R&D, pharmaceutical, infrastructure, energy, consumer retail, telecom,financial services, media, and hospitality etc. It is second fastest growing economy inthe world with GDP touching 9.3 % last year. This growth momentum was supported bythe double digit growth of the services sector at 10.6% and industry at 9.7% in the firstquarter of 2006-07. Investors, big companies, industrial houses view Indian market in agrowing and proliferating phase, whereby returns on capital and the shareholderreturns are high. Both the inbound and outbound mergers and acquisitions haveincreased dramatically. According to Investment bankers, Merger & Acquisition (M&A)deals in India will cross $100 billion this year, which is double last year’s level andquadruple of 2005.In the first two months of 2007, corporate India witnessed deals worth close to $40billion. One of the first overseas acquisitions by an Indian company in 2007 wasMahindra & Mahindra’s takeover of 90 percent stake in Schoneweiss, a family-ownedGerman company with over 140 years of experience in forging business. What hit theheadlines early this year was Tata’s takeover of Corus for slightly over $10 billion. Onthe heels of that deal, Hutchison Whampoa of Hong Kong sold their controlling stake inHutchison-Essar to Vodafone for a whopping $11.1 billion. Bangalore-based MTR’spackaged food division found a buyer in Orkala, a Norwegian company for $100million. Service companies have also joined the M&A game. The taxation practice of Mumbai-based RSM Ambit was acquired byPricewaterhouseCoopers. There are many other bids in the pipeline. On an average, inthe last four years corporate earnings of companies in India have been increasing by20-25 percent, contributing to enhanced profitability and healthy balance sheets. Forsuch companies, M&As are an effective strategy to expand their businesses andacquire global footprint.Mergers or amalgamation, result in the combination of two or more companies intoone, wherein the merging entities lose their identities. No fresh investment is madethrough this process. However, an exchange of shares takes place between the entitiesinvolved in such a process. Generally, the company that survives is the buyer whichretains its identity and the seller company is extinguished. Definitions: Mergers, acquisitions and takeovers have been a part of the business world forcenturies. In today's dynamic economic environment, companies are often faced withdecisions concerning these actions - after all, the job of management is to maximizeshareholder value. Through mergers and acquisitions, a company can (at least intheory) develop a competitive advantage and ultimately increase shareholder value. The said terms to a layman may seem alike but in legal/ corporate terminology, theycan be distinguished from each other:#Merger:A full joining together of two previously separate corporations. A truemerger in the legal sense occurs when both businesses dissolve and fold their assetsand liabilities into a newly created third entity. This entails the creation of a newcorporation.  #Acquisition: Taking possession of another business. Also called a takeover or buyout.It may be share purchase (the buyer buys the shares of the target company from theshareholders of the target company. The buyer will take on the company with all itsassets and liabilities. ) or asset purchase (buyer buys the assets of the target companyfrom the target company)In simple terms, A merger involves the mutual decision of two companies to combineand become one entity; it can be seen as a decision made by two equals , whereas anacquisition or takeover on the other hand, is characterized the purchase of a smallercompany by a much larger one. This combination of unequals can produce the samebenefits as a merger, but it does not necessarily have to be a mutual decision. Atypical merger, in other words, involves two relatively equal companies, which combineto become one legal entity with the goal of producing a company that is worth morethan the sum of its parts. In a merger of two corporations, the shareholders usuallyhave their shares in the old company exchanged for an equal number of shares in themerged entity. In an acquisition, the acquiring firm usually offers a cash price pershare to the target firm’s shareholders or the acquiring firm's share's to theshareholders of the target firm according to a specified conversion ratio. Either way,the purchasing company essentially finances the purchase of the target company,buying it outright for its shareholders# Joint Venture:Two or more businesses joining together under a contractualagreement to conduct a specific business enterprise with both parties sharing profitsand losses. The venture is for one specific project only, rather than for a continuingbusiness relationship as in a strategic alliance.#Strategic Alliance:A partnership with another business in which you combine effortsin a business effort involving anything from getting a better price for goods by buyingin bulk together to seeking business together with each of you providing part of theproduct. The basic idea behind alliances is to minimize risk while maximizing yourleverage.#Partnership:A business in which two or more individuals who carry on a continuingbusiness for profit as co-owners. Legally, a partnership is regarded as a group of individuals rather than as a single entity, although each of the partners file their shareof the profits on their individual tax returns.Many mergers are in truth acquisitions. One business actually buys another andincorporates it into its own business model. Because of this misuse of the term merger,many statistics on mergers are presented for the combined mergers and acquisitions(M&A) that are occurring. This gives a broader and more accurate view of the mergermarket . Types of Mergers:From the perception of business organizations, there is a whole host of differentmergers. However, from an economist point of view i.e. based on the relationshipbetween the two merging companies, mergers are classified into following:#Horizontal merger-Two companies that are in direct competition and share the sameproduct lines and markets i.e. it results in the consolidation of firms that are directrivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce andLamborghini  #Vertical merger-A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship eg. Ford- Bendix, TimeWarner-TBS.#Conglomerate merger-generally a merger between companies which do not haveany common business areas or no common relationship of any kind. Consolidated firmamay sell related products or share marketing and distribution channels or productionprocesses. Such kind of merger may be broadly classified into following:#Product-extension merger- Conglomerate mergers which involves companies sellingdifferent but related products in the same market or sell non-competing products anduse same marketing channels of production process. E.g. Phillip Morris-Kraft, Pepsico-Pizza Hut, Proctor and Gamble and Clorox#Market-extension merger- Conglomerate mergers wherein companies that sell thesame products in different markets/ geographic markets. E.g. Morrison supermarketsand Safeway, Time Warner-TCI.#Pure Conglomerate merger- two companies which merge have no obviousrelationship of any kind. E.g. BankCorp of America- Hughes Electronics.On a general analysis, it can be concluded that Horizontal mergers eliminate sellersand hence reshape the market structure i.e. they have direct impact on sellerconcentration whereas vertical and conglomerate mergers do not affect marketstructures e.g. the seller concentration directly. They do not have anticompetitiveconsequences. The circumstances and reasons for every merger are different and thesecircumstances impact the way the deal is dealt, approached, managed andexecuted. .However, the success of mergers depends on how well the deal makers canintegrate two companies while maintaining day-to-day operations. Each deal has itsown flips which are influenced by various extraneous factors such as human capitalcomponent and the leadership. Much of it depends on the company’s leadership andthe ability to retain people who are key to company’s on going success. It is important,that both the parties should be clear in their mind as to the motive of such acquisitioni.e. there should be census- ad- idiom. Profits, intellectual property, costumer base areperipheral or central to the acquiring company, the motive will determine the riskprofile of such M&A. Generally before the onset of any deal, due diligence is conductedso as to gauze the risks involved, the quantum of assets and liabilities that areacquired etc. Legal Procedures for Merger, Amalgamations and Take-overs  The basis law related to mergers is codified in the Indian Companies Act, 1956 whichworks in tandem with various regulatory policies. The general law relating to mergers,amalgamations and reconstruction is embodied in sections 391 to 396 of theCompanies Act, 1956 which jointly deal with the compromise and arrangement withcreditors and members of a company needed for a merger. Section 391 gives the Tribunal the power to sanction a compromise or arrangement between a company andits creditors/ members subject to certain conditions. Section 392 gives the power to the Tribunal to enforce and/ or supervise such compromises or arrangements withcreditors and members. Section 393 provides for the availability of the informationrequired by the creditors and members of the concerned company when acceding tosuch an arrangement. Section 394 makes provisions for facilitating reconstruction andamalgamation of companies, by making an appropriate application to the Tribunal.  Section 395 gives power and duty to acquire the shares of shareholders dissentingfrom the scheme or contract approved by the majority.And Section 396 deals with the power of the central government to provide for anamalgamation of companies in the national interest. In any scheme of amalgamation,both the amalgamating company or companies and the amalgamated company shouldcomply with the requirements specified in sections 391 to 394 and submit details of allthe formalities for consideration of the Tribunal. It is not enough if one of thecompanies alone fulfils the necessary formalities. Sections 394, 394A of the CompaniesAct deal with the procedures and the requirements to be followed in order to effectamalgamations of companies coupled with the provisions relating to the powers of the Tribunal and the central government in the matter of bringing about amalgamations of companies.After the application is filed, the Tribunal would pass orders with regard to the fixationof the dates of the hearing, and the provision of a copy of the application to theRegistrar of Companies and the Regional Director of the Company Law Board inaccordance with section 394A and to the Official Liquidator for the report confirmingthat the affairs of the company have not been conducted in a manner prejudicial to theinterest of the shareholders or the public. Before sanctioning the scheme of amalgamation, the Tribunal has also to give notice of every application made to itunder section 391 to 394 to the central government and the Tribunal should take intoconsideration the representations, if any, made to it by the government before passingany order granting or rejecting the scheme of amalgamation. Thus the centralgovernment is provided with an opportunity to have a say in the matter of amalgamations of companies before the scheme of amalgamation is approved orrejected by the Tribunal. The powers and functions of the central government in this regard are exercised by theCompany Law Board through its Regional Directors. While hearing the petitions of thecompanies in connection with the scheme of amalgamation, the Tribunal would givethe petitioner company an opportunity to meet all the objections which may be raisedby shareholders, creditors, the government and others. It is, therefore, necessary forthe company to keep itself ready to face the various arguments and challenges. Thusby the order of the Tribunal, the properties or liabilities of the amalgamating companyget transferred to the amalgamated company. Under section 394, the Tribunal hasbeen specifically empowered to make specific provisions in its order sanctioning anamalgamation for the transfer to the amalgamated company of the whole or any partsof the properties, liabilities, etc. of the amalgamated company. The rights and liabilitiesof the employees of the amalgamating company would stand transferred to theamalgamated company only in those cases where the Tribunal specifically directs so inits order. The assets and liabilities of the amalgamating company automatically gets vested inthe amalgamated company by virtue of the order of the Tribunal granting a scheme of amalgamation. The Tribunal also make provisions for the means of payment to theshareholders of the transferor companies, continuation by or against the transfereecompany of any legal proceedings pending by or against any transferor company, thedissolution (without winding up) of any transferor company, the provision to be madefor any person who dissents from the compromise or arrangement, and any otherincidental consequential and supplementary matters to secure the amalgamationprocess if it is necessary. The order of the Tribunal granting sanction to the scheme of amalgamation must be submitted by every company to which the order applies (i.e.,the amalgamating company and the amalgamated company) to the Registrar of Companies for registration within thirty days.
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