Mba - Iii Sem Mergers & Acquisitions - MF0002 Set - 2
Mba - Iii Sem Mergers & Acquisitions - MF0002 Set - 2
Mba - Iii Sem Mergers & Acquisitions - MF0002 Set - 2
SET - 2
If company has demanded the premium with his call money from share holders, then
on the place share allotment account we must write share call account, all other
journal entry will be same.
According to Section 78, we will use this fund according to guidelines of law.
Meaning of Issue of shares at discount:-
It means that company demands less amount than face value of shares .This
less amount is called discount on issue of shares.
The Financial Accounting Standards Board (FASB) Statement #142, Goodwill and
Other Intangible Assets, addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in the acquiring
company's financial statements subsequent to their initial recognition. Under FAS
142, goodwill and certain intangible assets will no longer be amortized over a
specified, hypothetical, useful life. In addition, goodwill and other intangible assets
will no longer be amortized using straight line amortization meaning the amount of
amortization will probably not be the same each year.
Fundamentally, FAS 142 rejects the idea that all intangible assets are necessarily
"wasting" assets. Under FAS 142, goodwill and intangible assets that have indefinite
useful lives will not be amortized over a theoretical fixed lifetime. Instead, they will be
tested annually for impairment - with the exception of intangible assets that are
identified as having finite useful lives that will continue to be amortized, but without
the constraint of an arbitrary maximum useful life of forty years. Under FAS 142,
goodwill and other intangibles will still be recognized as assets. Impairment testing
will be done using a two-step process. The first step involves reviewing the assets in
question for impairment.
Assets Rs.20000
Liabilities Rs.5000
Owner’s equity Rs.15000
ABC owns land the historical cost of which is Rs.6000, but currently worth Rs.13000.
Market value of the land is Rs.7000 more than its book value.
PQR ltd. purchases the outstanding stock of ABC for Rs.32000, price based on the
market position and earnings performance of the company over the past few years.
Market value of acquired assets is calculated as follows:
Assets: Rs.20000 + Rs.7000 excess land value = Rs.27000
Market value of acquired liabilities Rs.5000
Market value of net assets Rs.22000
The firm sold all its assets and paid off its liabilities. Purchase price is
Rs.32000.hence PQR ltd. will record Rs.10000 as goodwill on the purchase. It must
be noted that Rs.7000 from the excess Rs.10000 is attributable to the excess of
market value of land over the book value.
Hence Rs.32000 purchase price can be divided into three amounts for accounting
purposes:
PQR ltd. capitalises goodwill and assumes a 10-year period as the economic life of
goodwill. The annual accounting entry for goodwill would be:
Journal entry:
1. you can pay arbitrage commission. For that you have to make agreement with
dealer to pay commission of sharing basis and TDS provisions for commission would
be applicable.
2. You can employ dealers and can pay salary to them. If you opt this treatment then
you have to pay them a fix basic salary and variable performance incentive to them.
In this case, TDS provisions for salary would be applicable.
3. If you are a main broker, you can share your profits. For that, you have to make
agreement for sharing of profits with dealers. In the agreement, you should made
provisions such as margin would be payable upfront by the dealer and if he fails to do
so, you would charge interest on your funding and you and dealer would share profit
with a fix ratio, etc. In this case, you are not required to deduct TDS.
Q2. Describe the techniques of raid and defenses against takeover bid.
Answer: Takeover implies acquisition of controlling interest in a company by another
company by taking over of the shares listed on any stock exchange. It does not lead
to the dissolution of the company whose shares are being or have been acquired. It
simply means a change of controlling interest in a company through the acquisition of
its shares by another group. The acquisition transactions in such shares are subject
to the conditions of listing agreement. When a profit earning company takes over a
financially sick company to bail it out, it is known as ‘bail out takeover’. Such
takeovers are in pursuance of a scheme of rehabilitation approved by public financial
institutions. Corporate takeovers in India are governed by the listing agreement with
stock exchanges and the SEBI Substantial Acquisition of Shares and Takeover
(SEBI Code) Code. The raid, bids and defences are the outcome of takeover.
Corporates can stall such takeover through strategic defensive steps.
Mergers and takeovers are motivated and negotiated under the dominance of
hostility and friendliness pressure and influences and are accordingly classified as
friendly mergers and hostile mergers. The raids, bids and defences are the outcome
of human moods. Corporate wars and offensive postures can be avoided and can be
stalled through defensive steps.
Raid Techniques
Techniques used in raids are such as Techniques of raid takeover bid and tender
offer. The procedure for organizing takeovers includes collection of relevant
information and its analysis, examine shareholders' profile, investigation of title and
searches into indebtedness, examining of articles of association etc,. Defence
against takeover bid may be in the form of advance preventive measures for defence
such as - joint holdings or joint voting agreement, interlocking shareholdings or cross
shareholdings, issue of block of shares to friends and associates, defensive merger
apart from other things. Tactical defence' strategies include friendly purchase of
shares, emotional attachment, loyalty and patriotism, recourse to legal action,
operation ‘White Knights', "Golden Parachutes" etc,.
Four basic tactics or schemes can be carved out when we study the practice of
corporate raiding which are bankruptcy, corporate, litigation, and land schemes to be
the most widespread apart from the other supplementary tactics such as the creation
and presentation of false evidence in civil litigation. At least three causes can be
identified, first is the general uncertainty of property rights resulting from the
privatization of state assets, second cause is poor corporate governance and final
cause of raiding is the fact that the legal system is simply not yet equipped to deal
with this novel form of crime. The court structure, the inadequacy of criminal law, the
flaws in criminal investigation, the problems of good faith purchaser and the
verification of corporate documents are also among the loopholes that can be
identified. In order to address this problem, a new bankruptcy law must be imposed
with more stringent screening and ethical requirements for trustees, expanding the
time for judges to consider and take decisions, and also expand debtors' rights to
contest creditors' petitions.
The corrupt acquisition of control over the target company usually by falsifying
internal corporate documents and/or corruptly obtaining control over a significant
portion of the voting stock or the board of directors of the target company is common
in nature. The raider may create a false power of attorney or other document
authorizing him or a co-conspirator to enter into transactions on behalf of the target
company and then transfer the target's assets to himself or affiliated companies or
the raider bribes officials at state registration agencies to alter the target company's
registration documents to give him and/or his confederates faux control over the
target company. He then uses this control to drain off the target's assets.
Another important tactic that may be used by raider is the creation and presentation
of false evidence in civil litigation. For example, in answering claims by victims,
raiders typically offer false evidence, such as fabricated contracts and corporate
resolutions, to "prove" the alleged legitimacy of their acquisitions. There are certain
measures that businesses can take to protect themselves. These measures include
retaining qualified legal counsel to draft and review all incorporation documents and
contracts, retaining corporate investigation firms to investigate partners and major
customers, and, above always complying with all relevant laws and regulations.
The term ‘takeover' is nowhere defined in the Companies Act 1956 (Act) or in
Securities and Exchange Board of India Act, 1992 (SEBI Act), or in SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Code). In the
absence of a legal definition, the term takeover has to be understood from its
commercial usage. In commercial parlance, the term takeover denotes the act of a
person or group of persons (acquirer) acquiring shares or acquiring voting rights or
both of a company (target company), from its shareholders, either through private
negotiations with majority shareholders, or by a public offer in the open market with
an intention to gain control over its management. A takeover is considered ‘hostile'
when the management of the target company resists the attempted takeover.
The basic principle is that when acquisition becomes a takeover, the Takeover Code
becomes applicable besides other provisions of the Act. In other words, in case of a
takeover, compliance of both the Takeover Code as well as that of the Act is
necessary, while in case of acquisition, compliance of only the Act is required.
Further, if an acquisition results in a ‘combination', then the provisions of the
Competition Act 2002 also become applicable, and the approval of the Competition
Commission of India is required. If the acquisition results in either inflow or outflow of
funds, to or from India, then the provisions of the Foreign Exchange Management Act
1999 would become applicable and in such a case, the permission from either the
Reserve Bank of India or the Central Government may be required.
The objective behind the Takeover Code is to bring transparency in takeover and
acquisition transactions in public listed companies and to ensure that if minority
shareholders are not given a raw deal through price fixation. The Takeover Code lays
down the mandatory and compulsory disclosure of an acquisition if the acquirer
intends to do. The procedure in case an investor wants to takeover has been clearly
laid down in the Companies Act, 1956, the Takeover Code etc,. These regulatory
mechanisms also lays down the offences, penalties in case of any violation,
obligations and restrictions upon the merchant bankers, acquirers, the company itself
etc,. Acquisition for the purpose of combination is not only the acquisition of shares
or voting rights or control of management, but also acquisition of or control of assets
of the target company. Thus, for the purposes of Competition Act, 2002, acquisition
of shares, voting rights, assets and control of management have to be considered. In
Any combination that would result in appreciable adverse effect on competition,
within the relevant market in India, would be declared null and void and such an
effect is to be enquired by the CCI for which the powers and the procedure is laid
down under the Competition Act, 2002.
However, the era of the corporate raider appears to be largely over. In the later
1980s the famous raiders suffered from a number of bad purchases that lost money
(for their backers, primarily) and the credit lines dried up. In addition, corporations
became more adept at fighting hostile takeovers through mechanisms such as the
poison pill. Finally the overall price of the stock market increased, which reduced the
number of situations in which a company's share price was low with respect to the
assets that it controlled...
The following Defensive method measures can be adopted to face takeover bids:
Advance preventive measures for Defenses:- The target company should take
precautions when it feels that takeover bid is imminent through market reports or
available information. Some of the advance measures are discussed below:
1. Maintaining a fraction of share capital uncalled, which can be called up during any
emergency like takeover bid or liquidation threat. Such strategy is known as “Rainy
day call”.
2. Companies may form group or cartel to fight against any future bid of takeover by
way of pooling funds to use it to counter the takeover bids.
A company is supposed to take defensive steps when it comes to know that some
corporate raider has been making efforts for takeover. For defense against takeover
bid, two types of strategies could be as below:
1. Commercial Strategies
2. Step up dividend and update share price record (i.e. pushing up share price)
3. To revalue the fixed assets periodically and incorporate them in the balance sheet
6. Trace out the various discouraging commercial features of the functioning of the
acquiring company (e.g. Pending cases in labour/consumer/tax tribunal)
1. The directors of the company may persuade their friends and relatives to purchase
the shares of the offeree company
2. The board may make attempt to win over the shareholders through raising their
emotional attachment, loyalty and patriotism etc.
In order to defuse situation of hostile takeover attempts, companies have been given
power to refuse to register the transfer of shares under relevant sections of
Companies Act 1956. If this is done, a company must inform the transferee and the
transferor within 60 days. It is the responsibility of the directors to accept a takeover
bid.
4. Operation “White Knights”:- The white knight defense involves choosing another
company with which the target prefers to be combined. A target company is said to
5. White Square:- The white square is a modified form of a white knight. The
difference being that the white square does not acquire control of the target. In a
white square transaction, the target sells a block of its stock to a third party it
considers to be friendly. The white square sometimes is required to vote its shares
with the target management. These transactions often are accompanied by a stand-
still agreement that limits the amount of additional target stock the white square can
purchase for a specified period of time and restricts the sale of its target stock,
usually giving the right of first refusal to the target. In return, the white square often
receives a seat on the target board, generous dividends, and/or a discount on the
target shares. Preferred stock enables the board to tailor the characteristics of that
stock to fit the transaction and so usually is used in white square transaction.
7. ‘Pac-Man’ strategy:- It is making counter bid for the bidder. The Pac-Man defense
is essence involves the target counter offering for the bidder. Under this strategy the
target company attempts to take over the hostile raider. This happens when the
target company is quite larger than predator. This severe defense is rarely used and
in fact usually is designed not to be used. If the Pac Man defense is used, it is
extremely costly and could have devastating financial effects for both firms involved.
There is a risk that under state law, should both firms buy substantial stakes in each
other, each would be ruled as subsidiaries of the other and be unable to vote its
shares against the corporate parent. The severity of the defense may lead the bidder
to disbelieve that the target actually will employ the defense.
9. “Shark Repellent” character:- The companies change and amend their bylaws
and regulations to be less attractive for the corporate raider company. Such features
in the bylaws are called “Shark Repellent” character. Companies adopt this tactic as
precautionary measure against prospective bids. Eg: Share holder’s approvals for
approving combination proposal are fixed at minimum by 80-95% of the shareholders
meeting.
10. Swallowing “Poison Pills” strategy:- Poison pills represent the creation of
securities carrying special rights exercisable by a triggering event. The triggering
event could be the accumulation of a specified percentage of target shares or the
announcement of a tender offer. The special rights take many forms but they all
make it costlier to acquire control of the target firm. As a tactical strategy, the target
company might issue convertible securities, which are converted into equity to deter
the efforts of the offer, or because such conversion dilutes the bidders shares and
discourages acquisition. Another example, Target Company might rise borrowing
distorting normal Debt to Equity ratio. Poison pills can be adopted by the board of
directors without shareholder approval. Although not required, directors often will
submit poison pill adoptions to shareholders for ratification.
11. Green Mail:- It refers to an incentive offered by the management of the target
company to the potential bidder for not pursuing the takeover. The management of
the target company may offer the acquirer for its shares a price higher than the
market price. A large block of shares is held by an unfriendly company which forces
the target company to repurchase the stock at a substantial premium to prevent the
takeover. The purpose of the premium buyback presumably is to end a hostile
takeover threat by the large block holder or green mailer. This is an expensive
defense mechanism. The large block investors involved in greenmail help bring about
management changes either changes in corporate personnel, or changes in
corporate policy, or have superior skills at evaluation potential takeover targets.
12. Poison Put:- A covenant allowing the bondholder to demand repayment in the
event of a hostile takeover. This poison put feature seeks to protect against risk of
takeover-related deterioration of target bonds, at the same time placing a potentially
large cash demand on the new owner, thus raising the cost of an acquisition. Merger
and acquisition activity in general has had negative impacts on bondholders’ wealth.
This was particularly true when leverage increases where substantial.
13. “Grey Knight”:- A friendly party of the target company who seeks to takeover
the predator. The target company may adopt a combination of various strategies for
successfully averting the acquisition bid.
All the above strategies are experience based and have been successfully used in
developed nations and some of them have been tested by Indian companies also.
The firm could become a takeover target of another firm seeking to benefit
from an association with highly efficient firm in terms of:
Divest subsidiaries
a. Golden Parachutes:-
A golden parachute is an agreement between a company and an
employee (usually upper executive) specifying that the employee will receive
certain significant benefits if employment is terminated. Sometimes, certain
conditions, typically a change in company ownership, must be met, but often the
cause of termination is unspecified. These benefits may include severance pay,
cash bonuses, stock options, or other benefits. They are designed to reduce
perverse incentives—paradoxically (and ironically) they may create them.
Proponents of golden parachutes argue that they provide three main benefits:
2. They help an executive to remain objective about the company during the
takeover process.
3. Golden parachute costs are a very small percentage of a takeover's costs and
do not affect the outcome.
concern following the stock market declines of 2008 and 2009 and the negative
populist sentiment that ensued afterwards.
The first known use of the term "golden parachute" dates back to when
creditors sought to oust Howard Hughes from control of TWA airlines. The
creditors provided Charles C. Tillinghast Jr. an employment contract—dubbed a
golden parachute in likely[original research?] reference to the protection a
parachute offered—with protection against the almost definite[according to
whom?] job loss Tillinghast would have faced if famed aviator Howard Hughes
had successfully maintained control of TWA.
The use of the term "golden parachute" has significantly increased in
2008 because of the global economic recession, especially being used by news
media and in the 2008 Presidential Debates.
The use of golden parachutes expanded greatly in the early 1980s in
response to the large increase in the number of takeovers and mergers.
According to a 2006 study by the Hay Group human resource
management firm, the French executives' golden parachutes are the highest in
Europe, and equivalent to the funds received by 50% of the American
executives. In contrast, the French standard revenues for executives located
themselves in the European average. French executives receive roughly the
double of their salary and bonus in their golden parachute
b. Shark Repellent:-
Any corporate activity that is undertaken to discourage a hostile takeover,
such as a golden parachute, scorched earth policy or poison pill.
The companies amend their Bye-Laws and regulations to be less attractive for
the raider company. Such features are called Shark Repellents. The company
may issue that 80-95% of the shareholders should approve for the takeover and
75% of the Board of Directors consent.
There are instances when a target company, which is being aimed at for a
takeover resists the same. The target firm may do so by adopting different
means. Some of the ways include manipulating shares as well as stocks and
their values. All these attempts of the target firm resisting its acquisition or
takeover are known as shark repellent.
Slang term for any one of a number of measures taken by a company
to fend off an unwanted or hostile takeover attempt. In many cases, a company
will make special amendments to its charter or bylaws that become active only
when a takeover attempt is announced or presented to shareholders with the
goal of making the takeover less attractive or profitable to the acquisitive firm.
Also known as a "porcupine provision". Most companies want to
decide their own fates in the marketplace, so when the sharks attack, shark
repellent can send the predator off to look for a less feisty target.
While the concept is a noble one, many shark repellent measures are
not in the best interests of shareholders, as the actions may damage the
company's financial position and interfere with management's ability to focus on
critical business objectives. Some examples of shark repellents are poison pills,
scorched earth policies, golden parachutes and safe harbour strategies.
c. Green Mail:-
Tactic:-
Corporate raids aim to generate large amounts of money by hostile takeovers of
large, often undervalued or inefficient (i.e. non-profit-maximizing) companies, by
either asset stripping and / or replacing management and employees. However,
once having secured a large share of a target company, instead of completing
the hostile takeover, the green mailer offers to end the threat to the victim
company by selling his share back to it, but at a substantial premium to the fair
market stock price.
From the viewpoint of the target, the ransom payment may be referred to as a
goodbye kiss. The origin of the term as a business metaphor is unclear, although
it will certainly be understood in context as kissing the green mailer and,
certainly, millions of dollars goodbye. A company which agrees to buy back the
bidder's stockholding in the target avoids being taken over. In return, the bidder
agrees to abandon the takeover attempt and may sign a confidential agreement
with the green mailer who will agree not to resume the maneuver for a period of
time.
While benefiting the predator, the company and its shareholders lose money.
Greenmail also perpetuates the company's existing management and
employees, which would have most certainly seen their ranks reduced or
eliminated had the hostile takeover successfully gone through.
Examples:-
Greenmail proved lucrative for investors such as T. Boone Pickens and Sir
James Goldsmith during the 1980s. In the latter example, Goldsmith made $90
million from the Goodyear Tire and Rubber Company in the 1980s in this
manner. Occidental Petroleum paid greenmail to David Murdoch in 1984.
The St. Regis Paper Company provides an example of greenmail.
When an investor group led by Sir James Goldsmith acquired 8.6% stake in St.
Regis and expressed interest in taking over the paper concern, the company
agreed to repurchase the shares at a premium. Goldsmith's group acquired the
shares for an average price of $35.50 per share, a total of $109 million. It sold its
stake at $52 per share, netting a profit of $51 million. Shortly after the payoff in
March 1984, St. Regis became the target of publisher Rupert Murdoch. St Regis
turned to Champion International and agreed to a $1.84 billion takeover.
Murdoch tendered his 5.6% stake in St. Regis to the Champion offer for a profit.
Prevention:-
Changes in the details of corporate ownership structure, in the investment
markets generally, and the legal requirement in some jurisdictions for companies
to impose limits for launching formal bids, or obligations to seek shareholder
approval for the buyback of its own shares, and in Federal tax treatment of
greenmail gains (a 50% excise tax) have all made greenmail far less common
since the early 1990s.
d. Poison Put:-
A covenant allowing the bond holder to demand repayment in the event of a hostile
takeover. This poison put feature seeks to protect against risk of takeover-related
deterioration of target bonds, at the same time placing a potentially large cash
demand on the new owner, thus raising the cost of an acquisition. Merger and
acquisition activity in general has had negative impacts on bondholders’ wealth. This
was particularly true when leverage increases where substantial.
In bond trading, a bond indenture that gives the bondholder the right to demand
redemption before maturity at its high par value in case certain event happen. Such
pre-designated events include restructuring of the bond issuing company, excessive
dividend distribution to its stockholders, a leveraged buyout, or a hostile takeover
attempt. A poison put helps the management of the target company to deter the
takeover attempt by making it very costly for the bidder. In times of low liquidity,
however, this put works against the management as the bond holders can pressure
the company into a reorganization or to increase its borrowing costs.
In stocks trading, the rights assigned to common stockholders that sharply escalates
the price of their stockholding, or allows them to purchase the company's shares at a
very attractive fixed price, in case of a hostile takeover attempt. also called event risk
covenant. A covenant allowing the bond holder to demand repayment in the event of
a hostile takeover.
A bond that allows bondholders to redeem before maturity at a high
price should certain, named events take place. These events commonly include
restructuring, a leveraged buyout, an attempted hostile takeover, or paying dividends
in excess of a certain amount or percentage. Poison-put bonds can act as an anti-
takeover measure; they help management discourage takeovers by raising their
expense. On the other hand, when the company is going through a difficult time,
poison-put bonds can limit management's restructuring options for the same reason.