Mergers & Acquisition

MISHA JAIN
 Merger/Amalgamation
A merger is combination of two or more companies
into one company.

 It may be in the form of one or more companies being

merged into an existing company or a new company may
be formed by merging two or more companies.
.
 Income tax act 1961 uses the term amalgamation for
merger.

An Acquisition is when both the acquiring and

acquired companies are still left standing as separate
entities at the end of transaction
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 Acquisitions
When one company take over another company and
clearly established itself as the new owner ,the
purchase is called an acquisition.
An acquisition is when both the acquiring and
acquired companies are still left standing as separate
entities at the end of transaction.
A purchase deal will also be called a merger when both
CEO’s agree that joining together is in the best interest
of both their companies , but when deal is unfriendly
and is hostile the target company doesn’t want to be
purchased then it is regarded as acquisition.
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 Merger forms
According to companies act 1956,the term
amalgamation includes absorption .Amalgamation is
state of thing under which either two companies are
joined so as to form third entity or one is absorbed
into or blended with another.
Amalgamation take any of the two forms:-
i) ii)Merger through Absorption: A combination of
two or more companies into existing company is
known as absorption . In merger through absorption
all companies except one goes into liquidation and
lose their separate identities.
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 Merger Forms
ii)Merger through consolidation:-A consolidation is
combination of two or more companies into a new
company. In this form of merger, all the existing
companies which combine ,go into liquidation and
form a new company with a different entity.

Here the acquired company transfer its assets,

liabilities and shares to the acquiring company for cash
or exchange of shares .

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 Horizontal Merger
Horizontal merger:- the two companies which have
merged are in the same industry or producing ideal
product combine together normally the market share of
the new consolidated company would be larger
 It is possible that it may move closer to being a
monopoly or a near monopoly to avoid competition.

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 Vertical Merger
Vertical merger:-this merger happens when two
companies that have buyer seller relation come
together.
Vertical merger may take the form of forward
integration and backward integration
When the company combines with supplier of material
,it is called backward merger.
When it combines with another firm which helps it in
coming close to the customer than it is called forward
integration.

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 Conglomerate Merger
Conglomerate merger:-such mergers involves firms
engaged in unrelated type of business operations. In
other words the business activities of acquirer and the
target are neither related to each other horizontally nor
vertically.

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 Congeneric Merger
It refers to combination of two firms which are related
to each other in terms of customer groups ,functions or
technology .

Reverse Merger
In this case ,the buyer merger into target and the
shareholders of the buyer get stock into the target.
This is treated as stock acquisition subsidiary which
merges into the target.

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 Motives for Merger
Synergies:- This is most important reason for merger.
it is expected that when two companies merge to form
form a new bigger company, the value of the new
entity will be more than the combined value of
separate entities.
2 types of synergies that are aimed for :-
i)cost synergies:-synergies that reduce cost through
economies of scale in various division of company,
research and development ,procurement ,sales and
marketing ,manufacturing , distribution and general
administration.
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 Motives for Merger
ii)Revenue Synergies:-synergies that increase overall
revenue through expanded markets,product cross selling
and an increase in prices.

Rapid Growth
Generally any company has two options to grow, viz
organic growth and external growth. organic growth is
achieved by increase in sales by making internal
investments.

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 Motives for Merger
External growth is achieved by an increase in sales by
buying external resources through mergers and
acquisition.
Often companies prefer to grow externally, especially
the ones in a mature industry as the industry offers
limited opportunity for growth. It is less risky to have
external growth.

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 Motives for Merger
Market power
A horizontal merger in a small industry will definitely
help in increasing the market share .
An increase market share will in turn give the power to
influence prices. In fact monopoly is an extreme
example of a horizontal merger.
A vertical merger can also increase market power by
reducing the dependence on external suppliers.

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 Motives for Merger
Unique capabilities
Not every company can have all the resources or
strength required for successful growth. There will come
time when the company want to acquire the
competencies and resources that it lacks.

This can easily be done through mergers and acquisition

in a very cost effective way as compared to developing
the capabilities internally.

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 Motives for Merger
Diversification
Diversification of company’s total cash flow is a reason
by managers for the merger. However shareholders are
not convinced as they can easily diversify their
investment themselves at portfolio level.

This is cheaper and less painful than company going

through the process of merging with another company to
achieve synergies created by diversification.

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 Motives for Merger
Bootstrapping EPS
A merger deal might have bootstrapping effect on
company EPS. This occurs when acquiring company’s
shares are trading at higher P/E ratio than the P/E of the
target company and the P/E doesn’t decrease even after
the merger.

Such an effect decrease the current EPS of the company

at the expense of decreased future EPS and decrease
growth prospects.

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 Tax Issues
A company with large taxable income will look at
merging with a company with large carry forwards tax
losses.by doing so, the acquiring company can lower
tax liability.
A merger purely for reducing tax liabilities will not be
approved by regulators, However company can hide
this reason under strong motivations to merge.

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 Unlocking Hidden Value
A struggling company may be bought by an acquirer to
unlock its hidden value. The acquiring company can
believe that by making some improvements in
management and organizational structure and adding
more resources, it can make the company perform
better.
The acquirer will pay a lower price than the market
price.

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 Motives for Merger
International Goals
International mergers and acquisitions have become
more common and important in today’s business world.

Like with mergers in one’s own country,These

interantioanl deals are also motivated by the above
mentioned reasons.

Several reasons for international merger as follows:-

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 Motives for Merger
International Goals
Several reasons for international merger as follows:-
i) Unique products can be marketed in new markets.
ii)Transfer of technology to new markets.
iii)Exploiting market efficiencies.
iv)Overcoming disadvantageous policies to the
government.
v)Continued support to international clients.

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 Legal Aspects Of
Mergers/Amalgamation & Acquisition

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 Legal Aspects Of Mergers/Amalgamation &
Acquisition
In India there are various law which directly or
indirectly related to merger & acquisition.
i)Companies act ,1956 and company court rules ,1959
provide legal procedures to effect merger & acquisition.
ii)Competition Act 2002,requiring regulation of
monopolistic power arising out of merger & acquisition.
iii)Income tax Act,1961 specifying various taxable
deductions or tax benefit to various parties associated
with the merger & acquisition.
iv)SEBI(Substantial Acquisition of shares & takeovers)
regulations ,1997 which govern takeovers of listed
companies.
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 Legal Aspects of Merger &
Acquisition
Companies act 1956 is the legislation that facilitates
amalgamation of two or more companies. For
companies act merger & acquisition are similar.
Companies court rule 1959 lay down procedure for
carrying out amalgamation. In undertaking comprising
company property ,assets or liabilities or one company
are absorbed by & transferred to an existing company
or a new company.
Transfer company merges into or integrates with the
transferee company.

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 Legal Aspects of Merger &
Acquisition
Transfer of asset to transferee company pursuant to
scheme of amalgamation is not a transfer and doesn’t
attract capital gain tax under section 47(vi) of the
income tax 1961.
Likewise share allotted to share holders of the
transferor company is not a transfer attracting capital
gain tax under section 47 (vi) of the income tax 1961.

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 Legal Aspects of Merger &
Acquisition
No company involved in amalgamation need be
financially unsound or under winding up as per
section 390(a).For purpose of section 391 “ a company
means any company liable to be wound up”. It doesn’t
debar amalgamation of financially unsound
companies.
Section 390(a) is applicable to company outside India.
If court has jurisdiction to windup such a company on
any grounds specified in the act ,it also has Jurisdiction
to sanction scheme of amalgamation if the company
outside India is a transferor company.
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 Legal Aspects of Merger & Acquisition
 There is no restriction to company amalgamating with 15
day old company having no assets and business.
Amalgamation calls for compliance with both section 391
& 394.
 An amalgamation involving a sick industrial company as a
transferor or transferee company is outside the purview of
companies act,1956.It is governed by sick industrial
companies act,1985 (SICA).
 Amalgamation of company licensed under section 25 of the
companies act with manufacturing, commercial or trading
company could be sanctioned under section 391 & 394.
 There is nothing in law to prevent company carrying out
shares from amalgamating with one engaged in transport.
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 Relevant Provisions of companies act
1956
Section 391:It deals with compromises, arrangements
& reconstruction and other related issues through
scheme of arrangement approved by High court.
Amendments in company Act 1956 in the year 2002
gave owners to company law tribunal to review and to
allow any compromise or arrangement. Which is
proposed between a company & its creditor or any
class of them.
 However because of non formation of national
company law tribunal ,These power still lie with high
court and the parties concerned.
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 Provisions of company act 1956
If creditors, member present at general meeting
representing three fourth of total number agree to any
compromise or arrangement, it becomes binding on the
rest of the member or creditors provided the tribunal
sanction the compromise or arrangement.
Court’s power under this are very wide and has
discretion to allow any sort of arrangement between
company & members.

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 Provisions of company act 1956
Scope & ambit of jurisdiction of court are:
i)Sanctioning court has to see that all the requisite
statutory procedure for supporting any scheme has been
compiled.
ii)That the scheme put by sanction court is backed by the
requisite majority vote.
iii)That the concerned meeting of the creditors or the
members or any class of them had relevant material to
enable the voters to arrive at an informed decision.
iv)That the proposed scheme is not found to be violative
of any provision of law.

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 Provisions of company act 1956
Section 392:Under this court has power to supervise
the carrying out of the compromise or arrangement. Or
may at time of making such order or any time
thereafter give such directions in regard to any matter.
If the court is of the view that a
compromise/arrangement sanctioned under section 391
cannot work satisfactorily with or without
modifications. It may on its own or on basis of
application made by an interested party may order
winding up of the company,under section 433 of the
act.
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 Provisions of company act 1956
Section 393:It prescribes the procedure required for
convening the meeting of the members or creditors
called under section 391.The notice for meeting should
be sent along with the statement, setting forth the
terms of compromise and or arrangement or explaining
its effect.
It should state all material interest of all director,
managing director whether in capacity as such or as
member or creditor of the company or otherwise.
Any default in compliance with the requirement under
this section may lead to fine of Rs 50,000 against
concerned official.
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 Provisions of company act 1956
Section 394:In this court is of view that the proposed
arrangement scheme is of nature that
i)It is for reconstruction of any company or
amalgamation of two or more companies.
ii)Under this scheme whole or any part of undertaking
property or liability of any concerned company is to be
transferred to another company.
iii)The dissolution without winding up of any transferor
company.
iv)The provision for any dissenting person who are
opposing such scheme or any matter, which the court
deems fit.
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 Scheme of Amalgamation
Procedure to be followed by the transferee
(acquirer)company:
Check whether memorandum of association contain
power to amalgamate, If not first carry out the
proceedings to alter the same with company Law
board’s confirmation.
Prepare the draft scheme of amalgamation and
consider the same by convening a board meeting for
the purpose.
Apply to court for directions to convene the general
meeting by way of judge summon supported by an
affidavit in form no 34.
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 Scheme of Amalgamation
The court having jurisdiction shall be the high court
having jurisdiction in relation to the place at which
registered office of company concerned is situated ,
except to the extent to which jurisdiction has been
conferred on an district court.
Send a copy of the application made to the concerned
high court to the central government , department of
company affairs , New Delhi.
The summon should be accompanied by following
documents : MOA of both companies and copy of P &
L , balance sheet.
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 Scheme of Amalgamation
Draw the affidavit in the first person and state the full
name, age , occupation , place of age of deponent.
The concerned high court shall give the directions in
respect of matter set out in rule 69 of companies court
rules.
Send notice of general meeting to every member with
a statement setting forth the terms of the compromise
or arrangement or explaining its effect.
Where a notice is given by advertisement see that a
statement as aforesaid is included or member may
obtain copy of it.
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 Scheme of Amalgamation
Where a notice given by advertisement includes a
notification that copies of a statement setting forth the
terms of compromise or arrangement is obtained by
creditors.
Hold the general meeting and pass the resolution as
follows
All the decision of the meeting shall be ascertained
only by taking a poll.
Forward promptly to the stock exchange with which
company is enlisted , three copies of the notice and
copy of proceedings of general meeting.
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 Scheme of Amalgamation
Fill the resolution mentioned in items 14
Chairman reports the result of meeting to the in form
39 within the time fixed by the judge.
Move to the concerned high court for approval by
presenting a petition in form no 40.
The aforesaid petition should be accompanied by
affidavit in form no 3.
On receipt of concerned high court order,file the
certified true copy thereof with concerned registrar of
companies within 30 days of obtaining the copy of the
order in form no 21.after paying requisite fee
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 Scheme of Amalgamation
Copy of every such order shall be annexed to every
copy of memorandum of association of the company
issued after the certified copy of the order has been
filed.
Proceed on affecting the scheme of amalgamation as
per the scheme approved and directions given by the
concerned high court.by issuing suitable notice to
shareholders.

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 Theories of M & A
Differential Efficiency Theory: This theory says that
more efficient firm will acquire less efficient firm and
realizes gain by improving their efficiency.

This implies excess managerial capabilities in the

acquiring firm. Differential efficiency would be most
likely to be a factor in mergers between firms related
industries where the need for improvement could be
more easily identified.

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 Theories of M & A
Inefficient Management Theory: The inefficient
theory suggest that target market is so inept that
virtually any management could do better, and thus
could be an explanation for merger between firms
related in unrelated activities.

The main limitation of this theory is that agency cost

are so high that shareholders have no way to discipline
mangers short of costly merger.

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 Theories of M & A
Operational synergy Theory: This theory postulates
economies of scale or of scope and those merger help
achieve level of activities at which they can be
obtained.one firm strong in marketing but weak in R&
D but weak in marketing department could benefit
from this merger.
Financial Synergy Theory: The financial theory
hypothesis complementarities between merging firms,
not in management capabilities but the availability of
investment opportunities an internal cash flow. A firm
in a declining industry will produce large cash flows
since there are few attractive investment opportunities.
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 Theories of M & A
Pure diversification theory:-Pure diversification as a
theory of merger differ from shareholder portfolio
diversification shareholders can efficiently spread their
risk among industries, so there is no need for firm to
diversify for sake of share holders.
Managers and other employees are at greater risk if the
single industry in which the firm operates would fail
their firm specific human capital is not transferrable.
Therefore firm must diversify to encourage firm
specific human capital which employees more
valuable and productive.
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 Theories of M & A
Strategic Alignment: This theory states that merger
takes place in response to the environmental changes.
External Acquisition of needed capabilities allow firm
to adapt more quickly and with less risk than
developing capability internally.

Undervaluation Theory: This theory states that

merger occurs when the market value of target firm
stock for some reason does not reflect it true potential
value or its value in the hands of alternative
management.
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 Theories of M & A
The q ratio is also related to undervaluation theory.
firm can acquire for expanding more cheaply by
buying the stock of existing firm or building the asset
when the target stock price is below the replacement
cost.
Signalling Theory: This theories offer that efficiency
include information and signalling agency problem
and managerialism, free cash flow ,market power,
taxes and redistribution. the signalling theory attempts
to explain why target shares seems to be permanently
revalued upward in tender offer whether or not it is
successful.
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 Theories of M & A
Hubris Theory: the hubris theory is another theory on
the agency cost theory ,it implies acquiring firm
managers commit errors of over optimism in bidding
for targets.

Agency Theory: It results from conflict of interest

between manager and share holders over the payout of
free cash flow . The hypothesis postulates that free
cash flow should be paid out to shareholders reducing
power of management and subjecting managers to
scrutiny of public capital.
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 Court Approval
After the consent of the creditors and members has
been obtained the company is required to file petition
with high court seeking its approval of the
arrangement/scheme.
The high court may sanction the petition and the
scheme of amalgamation or demerger contained
therein only after satisfying itself that the applicant has
disclosed to the high court ,all material facts related to
the company such as the latest financial position of
company ,the latest auditor’s report , pendency of any
investigation proceedings against the company.
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 SEBI Regulations 1997 and takeover
code
SEBI(Substantial Acquisition of shares and takeover)
Regulations 1994 .It lays down procedure to be
followed by an acquirer for acquiring the majority of
shares or controlling in another company.so that
process is carried out in fair and transparent way.
SEBI 1997 is has replaced SEBI regulation 1994.
To ensure that takeover has been carried to benefit all
the share holders , various law has been enacted.
One of them is SEBI 1997

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 SEBI Regulations 1997 and takeover
code
Before this we need to understand concept of
substantial acquisition of shares.
Concept of substantial acquisition of shares.
Takeover is a process whereby acquirer take control
over the target company .However , when an acquirer
acquires substantial quantity of shares or voting rights
of the target company ,it is treated as substantial
acquisition of shares.
In this context Person acting in concert are
individual/companies/any other legal entities who act
together with objective of acquiring substantial shares.
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 SEBI Regulations 1997 and takeover
code
Threshold of disclosure to be made by acquirer:
5 % or more but less than 15% shares or voting rights
More than 15 % shares or voting rights
Trigger point for making open offer by acquirer
15 % shares or voting rights
Creeping Acquisition limit
Consolidation of holding
Procedure for substantial acquisition of shares
i)Making Public Announcement

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 SEBI Regulations 1997 and takeover
code
Offer price
Number of shares to be acquired from the public
Identity of the acquirer
Purpose of acquisition
Future plans of acquirer
ii)Issuing letter of credit
Target company
Disclosure of the acquirer acting peron in concert
Financial of the acquirer
The offer price
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 SEBI Regulations 1997 and takeover
code
iii)Determining Offer price
Negotiating price under the agreement which triggered
the open offer.
Average of weekly high and low of the closing price of
shares.
iv)Determining duration of offer
v)Discharging dues of shareholders

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 SEBI Regulations 1997 and takeover
code
Other provisions of the act
Pay a fee by bankers cheque or demand draft drawn in
favour of security and exchange board of India and
payable at Mumbai.
A promoter or every person forming part of the
promoter group of a company shall ,within seven days
from date of creation on pledge on shares.
The company is required to disclose information
within seven days of receipt of information to all stock
exchange.

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 Thanks

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