Project Finance-Merger and Acquisition

7/27/2019 Project Finance-Merger and Acquisition

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Merger and Acquisition 1

A Project report on Mergers & Acquisitions

(Project Report prepared under the XMBA- Programme of ITM Matunga Mumbai)

Submitted By: Under gu idance of :

Himmat S ingh Bisht Prof Nomita Agarwal

Student: Faculty F inance

ITM Inst i tute ITM Inst i tute

Matunga Campus Matunga Campus

Mumbai Mumbai

XMBA-42

Rol l Number: MAT2011XMBA52P006


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Merger and acquisition 2

Disclaimer

This project report/dissertation has been prepared by the author as an

XMBA-Programme for academic purposes only. The views expressed in the

report are personal to the intern and do not necessarily reflect the view of in

general or personnel. The project report on Merger and acquisition was

prepared purely for academic purpose.


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Acknowledgement

My first experience on the project of Merger and Acquisition has been

successfully done, thanks to the support of everyone. I would like to

acknowledge all the people who have helped us in this project. However, I

wish to make special mention of the following. First of all I am thankful to

our Prof. Nomita Agarwal under whose guideline I am able to complete my

project. Throughout my project she gave through instruction regarding the

project and different sources. And of curse my colleagues Mr. Uday Shetty

being a company mentor he provided me all the essential information, holds

the same space of honour. I am wholeheartedly thankful to them for giving

me their valuable time & attention and for providing me a systematic wayfor completing my project in time. I must make special mention of Mr.

Google, who gave me the secondary data and helped me a lot to complete

the project.


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DECLARATION

I, Mr. Himmat Singh Bisht, student of ITM-Mumbai, Matunga Campus,

hereby declare that this project report entitled Merger and Acquisition is

written and submitted by me under the guidance of Prof Nomita Agarwal.

The findings in this report are based on the data collected by me during the

course of the project. While preparing this project, I have not copied from

any other report. Finally, I am very thankful to Prof. Nomita Agarwal for his

valuable academic guidance in my project work.

Date: - Signature of Candidates

Himmat Singh Bisht


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Table of contents

Tittle Page number

Disclaimer 2

Acknowledgement 3Declaration 4

Executive Summary 6

Introduction of M & A 7

Understanding of M & A 9

Purpose of M & A 10

M & A as growth strategy 14

Type of Merger 16

Advantage of M & A 17

Consideration of merger & takeover 19

Reverse merger 23Procedure of M & A 27

Major area in M & A 29

Ways to succeeds in M & A 30

Improving odds in M & A 32

Six key rationales for M& A 34

Why to Regulate Mergers & Acquisitions 37

Major M&A in 21st century by the Indian

corporate

40

CASE STUDY 1 GlaxoSmithKline Pharmaceuticals

Limited, India (Merger Success)

41

CASE STUDY 2 Deutsche Dresdner Bank (Merger

Failure)

42

CASE STUDY 3 Standard Chartered Grindlays

(Acquisition Success)

43

Case Study 4 TATA TETLEY (Controversial Issue

over Success and Failure)

45

CASE STUDY 5 Daimler Chrysler (Failure) 47

Case Study 6 Tata Motors and JRL (Acquisition

success)

48

Conclusion 56Appendix 57


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Executive Summary

The basic concept of my project Merger and acquisition was to find out the type of merger and

acquisition, need for M&A and post M&A effect.

Mergers and acquisitions (M&A) are two broad types of restructuring through which managersseek economies of scale, enhanced market visibility, and other efficiencies.

A merger occurs when two companies decide to combine their assets and liabilities into oneentity, or when one company purchases another.

An acquisition describes one companys purchase of anotherfor example, the absorption of asmaller target firm into a larger acquiring firm.

The nature and scope of M&A activity has changed over time, with a growing trend to cross-border transactions.

M&As are motivated by the expectation of financially rewarding synergies in terms of reducedfixed costs, increased market share, cross-sales, economies of scale, lower taxes, and more

efficient resource distribution.

At the individual level, executives may pursue M&As because of psychological drivers such asempire-building, hubris, fear, and mimicry.

There are five broad types of strategic fit: overcapacity, geographic roll-up, product or marketextension, research and development, and industry convergence.

M&A execution can be hampered by incompatible corporate cultures, with failure to achievesynergies, high executive turnover, and too much focus on integration at the expense of

customers.

Before the deal, managers should formulate a clear and convincing strategy, pre assess the deal,undertake extensive due diligence, formulate a workable plan, and communicate to internal and

external stakeholders.

After the deal, managers should establish leadership, manage culture and respect employees,explore new growth opportunities, exploit early wins, and focus on the customer.


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Introduction

W e h a v e b e e n l e a r n i n g a b o u t t h e c o m p a n i e s c o m i n g t o g e t h e r t o f r o m

a n o t h e r company and companies taking over the existing companies to expand their business. With

recession taking toll of many Indian businesses and the feeling of insecurity surging over our

b u s i n e s s m e n , i t i s n o t s u r p r i s i n g w h e n w e h e a r a b o u t t h e i m m e n s e n u m b e r s o f corporate restructurings taking place, especially in the last couple of years. Several

companies have been taken over and several have undergone internal restructuring,

where a s cer t a i n c ompa ni es i n t h e s a m e f ie ld o f b us ines s ha ve found i t benef ic ia l

to merge together into one company. In this context, it would be essential for us to understand

what corporate restructuring and mergers and acquisitions are all about. All our daily newspapers

are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of

corporate restructuring. Thus important issues both for business decision and public policy

formulation have been raised. No firm is regarded safe from a takeover possibility. On the more

positive side Mergers & Acquisitions may be critical for the healthy expansion and growth of

the fi rm. Successful entry into new product and geographical markets may require Mergers &

Acquisitions at some stage in the firm's development. Successful competition in international markets

may depend on capabilities obtained in a timely and efficien t fashion through

Mergers & Acquisition's. Many have argued that mergers increase value and efficiency and move

resources to their highest and best uses, thereby increasing shareholder value.

M e r g e r s a n d a c q u i s i t i o n s a r e t w o b r o a d t y p e s o f r e s t r u c t u r i n g t h r o u g h w h i c h

m a n a g e r s s e e k e c o n o m i e s o f s c a l e , e n h a n c e d m a r k e t v i s i b i l i t y , a n d o t h e r

e f f i c i e n c i e s . A m e r g e r o c c u r s w h e n t w o c o m p a n i e s d e c i d e t o c o m b i n e t h e i r

a s s e t s a n d l i a b i l i t i e s i n t o o n e e n t i t y , o r w h e n o n e c o m p a n y p u r c h a s e s a n o t h e r .

T h e t e r m i s o f t e n u s e d t o d e s c r i b e a m e r g e r o f e q u a l s , s u c h a s t h a t o f D a i m l e r -

B e n z a n d C h r y s l e r , w h i c h w a s r e n a m e d D a i m l e r C h r y s l e r ( s e e c a s e s t u d y ) . T h e

t e r m a c q u i s i t i o n s i m p l y r e f e r s t o o n e c o m p a n y s p u r c h a s e o f a n o t h e r a s

w h e n a s m a l l e r t a r g e t f i r m i s b o u g h t a n d a b s o r b e d i n t o a l a r g e r a c q u i r i n g f i r m .

To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have

discussed almost all factors that the management may have to look into before going for merger.

Considerable amount of brainstorming would be required by the managements to reach a conclusion.

E.g. A due diligence report would clearly identify the status of the company in respect of the financial

position along with the net worth and pending legal matters and details about various contingentliabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the

impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax

implications including stamp duty and last but not the least also on the employees of the Transferor or

Transferee Company.


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Patterns

The worldwide M&A market topped US$4.3 trillion and over 40,000 deals in 2007. Figure 1 depicts the

growth of M&A activity, quarter by quarter, over the last five years.

The nature and scope of M&A activity has changed substantially over time. In the United States, the

Great Merger Movement (1895 to 1905) was characterized by mergers across small firms with little

market share, resulting in companies such as DuPont, Nabisco, and General Electric.

More recently, globalization has increased the market for cross-border M&As. In 2007 cross-border

transactions were worth US$2.1 trillion, up from US$256 billion in 1996. Transnational M&As have seen

annual increases of as much as 300% in China, 68% in India, 58% in Europe, and 21% in Japan.1 The

regional share of todays M&A market is shown in Figure 2.


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Understanding of Merger and acquisition?

What is Merger?

Merger is defined as combination of two or more companies into a single company where one survives

and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities ofthe merged company or companies. Generally, the surviving company is the buyer, which retains its

identity, and the extinguished company is the seller. Merger is also defined as amalgamation. Merger is

the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand

transferred to Transferee Company in consideration of payment in the form of:

Equity shares in the transferee company, Debentures in the transferee company Cash, or

A mix of the above modes.

What is acquisition?

Acquisition in general sense is acquiring the ownership in the property. In the context of business

combinations, an acquisition is the purchase by one company of a controlling interest in the share

capital of another existing company.

Methods of Acquisition:

An acquisition may be affected by a) Agreement with the persons holding majority interest in the

company management like members of the board or major shareholders commanding majority of

voting power; b) Purchase of shares in open market; c) To make takeover offer to the general body of

shareholders; d) Purchase of new shares by private treaty; e) Acquisition of share capital through the

following forms of considerations viz. Means of cash, issuance of loan capital, or insurance of

share capital.

Takeover:

A takeover is acquisition and both the terms are used interchangeably. Takeover differs from merger in

approach to business combinations i.e. The process of takeover, transaction involved in takeover,determination of share exchange or cash price and the fulfilment of goals of combination all are

different in takeovers than in mergers. For example, process of takeover is unilateral and the offer or

company decides about the maximum price. Time taken in completion of transaction is less in

takeover than in mergers, top management of the offeree company being more co-operative.

De-merger or corporate splits or division: De-merger or split or divisions of a company are the

synonymous terms signifying a movement in the company.


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Purpose of Mergers & Acquisitions

The purpose for an offer or company for acquiring another company shall be reflected in the

corporate objectives. It has to decide the specific objectives to beachieved through acquisition. The

basic purpose of merger or business combination is to achieve faster growth of the corporate business.

Faster growth may be had through product improvement and competitive position. Other possiblepurposes for acquisition are short listed below

Motives

Mergers and acquisitions are often motivated by company performance, but can also be linked to

executive decision-makers empire-building, hubris, fear, and tendency to copy other firms.

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial

performance through synergies that enhance revenues and lower costs. The two companies are

expected to achieve cost savings that offset any decline in revenues. Then Hewlett-Packard CEO CarlyFiorina justified the merger with Compaq at a launch effort on September 3, 2001: This is a decisive

move that accelerates our strategy and positions us to win by offering even greater value to our

customers and partners. In addition to the clear strategic benefits of combining two highly

complementary organizations and product families, we can create substantial shareowner value through

significant cost-structure improvements and access to new growth opportunities.

The formula for the minimum value of the synergies required to protect the acquiring firms stockholder

value (i.e. to avoid dilution in earnings per share) is:

(Pre-M&A value of both firms + Synergies) Post-M&A firm number of shares = Pre-M&A firm stock

price)Managers may be motivated by the potential for the following synergies:

Reduced fixed costs: Duplicate departments and operations are removed, staff often made redundant,

and typically the former CEO also leaves.

Increased market share: The new larger company has increased market share and, potentially, greater

market power to set prices.

Cross-sales: The new larger company will be able to cross-sell one firms products to the other firms

customers, and vice versa.

Greater economies of scale: Greater size enables better negotiations with suppliers over bulk buying.

Lower taxes: In some countries, a company that acquires a loss-making firm can use the targets loss to

reduce liability.

More efficient resource distribution: A larger company can pool scarce resources, or might distribute

the technological know-how of one company, reducing information asymmetries.

At the individual decision-making level, M&A activity is also linked to the following:


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Empire-building: M&As may result from glory-seeking, as managers believe bigger is better and seek to

create a large firm quickly via acquisition, rather than through the generally slower process of organic

growth. In some firms, executive compensation is linked to total profits rather than profit per share,

creating an incentive to merge/acquire to create a firm with higher total profits. Furthermore,

executives often receive bonuses for completing mergers and acquisitions, regardless of the resulting

impact on share price.

Hubris: Public awards and increasing praise may lead an executive to overestimate his or her ability to

add value to firms. CEOs who are publicly praised in the popular press tend to pay 4.8% more for target

firms. Hubris can also lead executives to fall in love with the deal, lose objectivity, and overestimate

expected synergies.

Fear: Managers fear of an uncertain environment, particularly in terms of globalization and

technological development, may lead them to believe they have little choice but to acquire if they are to

avoid being acquired.

Mimicry: If leading firms in their industry have merged or acquired others, executives may be more

likely to consider the strategy.

Executives may overpay for a target firm. Microsoft has acquired more than 128 companies, but

recently withdrew a US$44.6 billion offer of cash and stock for Yahoo. Microsoft CEO Steve Ballmer

commented on the logic of the decision: Despite our best efforts, including raising our bid by roughly

$5 billion, Yahoo! has not moved toward accepting our offer. After careful consideration, we believe the

economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft

stockholders, employees, and other stakeholders to withdraw our proposal

Strategic FIT: Regardless of their category or structure, all M&A share the common goal that the value

of the combined companies will be greater than the sum of the two parts. M&A success depends on the

ability to achieve strategic fit. Harvard Professor Joseph Bower identifies five broad types of strategic fit,

based on the relationship between the two companies and the synergies sought: overcapacity M&A,

geographic roll-up M&A, product or market extension M&A, M&A as R&D, and industry convergence

M&A.4

Overcapacity M&A: In this horizontal M&A, the two companies often competed directly, with similar

product lines and markets. The new combined entity is expected to leverage synergies related toovercapacity by rationalizing operations (for example, shutting factories). This often one-time M&A can

be especially difficult to execute as both companies management groups are inclined to fight for

control.

Geographic Roll-Up M&A: In a geographic roll-up the new entity seeks geographic expansion, but often

keeps operating units local. For example, Banc One purchased many local banks across the United States

in the 1980s. Banc One was, in turn, acquired by JPMorgan Chase & Co. in 2004.


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Product or Market Extension M&A: Market-based roll-up focuses on extending a product line or

international coverage. Often the two companies sell similar products but in different markets, or

different products in similar markets. Brands are often a key motivation. Philip Morris purchased Kraft

for US$12.9 billionfour times its book value. Philip Morris CEO Hamish Marshall justified the premium:

The future of consumer marketing belongs to companies with the strongest brands.

M&A as R&D: A fourth type of strategic fit is research and development. Companies may acquire or

merge with others to access technologies. Microsoft has aggressively pursued this strategy, acquiring

smaller, entrepreneurial firms such as Forethought, which had presentation software that would

eventually be known as PowerPoint.

Industry Convergence M&A: Finally, the new entity may be motivated by a bet that a new industry is

emerging and the desire to have a position in this industry. For example, Viacom purchased Paramount

and Blockbuster in the expectation that integrated media firms controlling both content and distribution

were the wave of the future.

Apart from above points, below are the important points for any

(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or intermediary product.2. To obtain economies of purchase in the form of discount, savings in transportation costs,

overhead costs in buying department, etc.

3. To share the benefits of suppliers economies by standardizing the materials.(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilities through more intensiveutilization of plant and resources.

2. To standardize product specifications, improvement of quality of product, expanding3. To Market and aiming at consumers satisfaction through strengthening after sale Services;4. To obtain improved production technology and know-how from the offeredcompany5. To reduce cost, improve quality and produce competitive products to retain and improve market

share.

(3) Market expansion and strategy:

1. To eliminate competition and protect existing market;2. To obtain a new market outlets in possession of the offeree;3. To obtain new product for diversification or substitution of existing products and to enhance the

product range;

4. Strengthening retain outlets and sale the goods to rationalize distribution;5. To reduce advertising cost and improve public image of the offeree company;6. Strategic control of patents and copyrights.

(4) Financial strength:


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1. To improve liquidity and have direct access to cash resource;2. To dispose of surplus and outdated assets for cash out of combined enterprise;3. To enhance gearing capacity, borrow on better strength and the greater assets backing;4. To avail tax benefits;5. To improve EPS (Earning Per Share).

(5) General gains:

1. To improve its own image and attract superior managerial talents to manage its affairs;2. To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offer or companys own developmental plans. A company

thinks in terms of acquiring the other company only when it has arrived at its own development plan to

expand its operation having examined its own internal strength where it might not have any problem of

taxation, accounting, valuation, etc. But might feel resource constraints, with limitation of funds and

lack of skill, managerial personnelss. It has to aim at suitable combination where it could have

opportunities to supplement its funds by issuance of securities; secure additional financial facilities

eliminate competition and strengthen its market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through alternative type of

combinations which may be horizontal, vertical, product expansion, market extensional or other

specified unrelated objectives depending upon the corporate strategies. Thus, various types ofcombinations distinct with each other in nature are adopted to pursue this objective like vertical or

horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite

competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of

collaborations sharing goodwill of each other to achieve performance heights through business

combinations. The combining corporate aim at circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the two

combining business houses. Such integration could be operational or financial. This gives birth

to conglomerate combinations. The purpose and the requirements of the offeror company go a long

way in selecting a suitable partner for merger or acquisition in business combinations.


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Mergers and Acquisitions as a Growth Strategy

As a business gets bigger, the growth will be organic or inorganic. Organic growth, also called internal

growth, occurs when the company grows from its own business activity using funds from one year to

expand the company the following year. While ploughing back profits into a business is a cheap source

of finance, it is also a slow way to expand and many firms want to grow faster. A company can do so byinorganic growth. Inorganic growth, or external growth, occurs when the company grows by merger or

acquisition of another business. Getting involved with another company in this way makes good

business sense as it can give a new source of fresh ideas and access to new markets. Most business

enterprises are constantly faced with the challenge of prospering and growing their businesses. Growth

is generally measured in terms of increased revenue, profits or assets. Businesses can choose to build

their in-house competencies, invest to create competitive advantages, differentiate and innovate in the

product or service line (Organic Growth) or leverage upon the market, products and revenues of other

Companies (In-organic Growth).

Apple Inc. is probably an excellent example of Organic Growth. Growth at Apple is driven by trend-

setting product innovation. Macintosh, iMac, iPod and the latest technological breakthrough pioneered

by Apple is the iPhone. Steve Jobs, Founder, Apple Inc. commented that -.Our belief was that if we kept

putting great products in front of customers, they would continue to open their wallets...

Microsoft, on the other hand is a clear case of In-Organic growth as it has successfully completed more

than 100 acquisitions since 1986. a. Classification of growth strategies: In finance literature the growth

strategies followed by companies can be broadly classified into organic and inorganic growth strategies.

Organic strategies refer to internal growth strategies that focus on growth by the process of asset

replication, exploitation of technology, better customer relationship, innovation of new technology and

products to fill gaps in the market Place. It is a gradual growth process spread over a few years (Bruner,

2004).

Inorganic growth strategies refer to external growth by takeovers, mergers and acquisitions. It is fast

and allows immediate utilization of acquired assets. Bruner (2004).


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Table no. 2: brief illustration of growth strategies


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Types of Mergers

Merger or acquisition depends upon the purpose of the offeror company it wants

toachieve. Based on the offerors objectives profile, combinations could be vertical, horizontal, circular

and conglomeratic as precisely described below with reference to the purpose in view of the

offeror company.

(A) Vertical combination: A company would like to take over another company or seek its merger with

that company to expand espousing backward integration to assimilate the resources of supply and

forward integration towards market outlets. The acquiring company through merger of another

unit attempts on reduction of inventories of raw material and finished goods, implements its production

plans as per the objectives and economizes on working capital investments. In other words, in vertical

combinations, the merging undertaking would be either a supplier or a buyer using its product as

intermediary material for final production. The following main benefits accrue from the vertical

combination to the acquirer company:-

1. It gains a strong position because of imperfect market of the intermediary products,

scarcity of resources and purchased products;

2. Has control over products specifications.

(B) Horizontal combination: It is a merger of two competing firms which are at the same stage of

industrial process. The acquiring firm belongs to the same industry as the target company. The

mail purpose of such mergers is to obtain economies of scale in production by eliminating duplication of

facilities and the operations and broadening the product line, reductionininvestment in working capital, elimination in competition concentration in product, reduction in

advertising costs, increase in market segments and exercise better control on market.

(C)Circular combination:

Companies producing distinct products seek amalgamation to share commondistribution and research f

acilities to obtain economies by elimination of cost onduplication and promoting market enlargement.

The acquiring company obtains benefits in the form of economies of resource sharing and

diversification.

(D) Conglomerate combination: It is amalgamation of two companies engaged in unrelated industries

like DCM and Modi Industries. The basic purpose of such amalgamations remains utilization

of financial resources and enlarges debt capacity through re-organizing their financialstructure so as to

service the shareholders by increased leveraging and EPS, lowering average cost of capital and thereby

raising present worth of the outstanding shares Merger enhances the overall stability of the acquirer

company and creates balance in the companys total portfolio of diverse products and production

processes.


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Advantages of Mergers

Mergers and takeovers are permanent form of combinations which vest inmanagement complete contr

ol and provide centralized administration which are notavailable in combinations of holding company and its partly owned subsidiary.Shareholders in the selling company gain from the merger and takeovers

as the premium offered to induce acceptance of the merger or takeover offers much more price than

the book value of shares. Shareholders in the buying company gain in the long run with the growth of

the company not only due to synergy but also due to boots trapping earnings.

Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholders, managers and promoters of the

combing companies. The factors, which motivate the shareholders and managers to lend support to

these combinations and the resultant consequences they have to bear, are briefly noted below based on

the research work by various scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to merger should enhance in value. The sale

of shares from one companys shareholders to another and holding investment in shares should give

rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from

merger in different ways viz. From the gains and achievements of the company i.e. through

(a)Realization of monopoly profits;

(b)Economies of scales;

(c)Diversification of product line;

(d)Acquisition of human assets and other resources not available otherwise;

(e)Better investment opportunity in combinations.

One or more features would generally be available in each merger where shareholders may have

attraction and favour merger.

(2) From the standpoint of managers

Managers are concerned with improving operations of the company; managing the affairs of the

company effectively for all round gains and growth of the company which will provide them better deals

in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed

outcome get support from the managers. At the same time, where managers have fear of displacement

at the hands of new management in amalgamated company and also resultant depreciation from the

merger then support from them becomes difficult.


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(3) Promoters gains

Mergers do offer to company promoters the advantage of increasing the size of their company and the

financial structure and strength. They can convert a closely held and private limited company into a

public company without contributing much wealth and without losing control.

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of benefits and costs to:

(a)Consumer of the product or services;

The economic gains realized from mergers are passed on to consumers in the form of lower prices and

better quality of the product which directly raise their standard of living and quality of life. The balance

of benefits in favour of consumers will depend upon the fact whether or not the mergers increase or

decrease competitive economic and productive activity which directly affects the degree of welfare of

the consumers through changes in price level, quality of products, after sales service, etc.

(b)Workers of the companies under combination;

The merger or acquisition of a company by a conglomerate or other acquiring company may have the

effect on both the sides of increasing the welfare in the form of purchasing power and other miseries of

life. Two sides of the impact as discussed by the researchers and academicians are:

Firstly, Mergers with cash payment to shareholders provide opportunities for them to invest this money

in other companies which will generate further employment and growth to uplift of the economy in

general.

Secondly, Any restrictions placed on such mergers will decrease the growth and investment activity with

corresponding decrease in employment. Both workers and communities will suffer on lessening job

Opportunities, preventing the distribution of benefits resulting from diversification of production

activity.

(c)General public affected in general having not been user or consumer or the worker in

the companies under merger plan.

Mergers result into centralized concentration of power. Economic power is to be understood as theability to control prices and industries output as monopolists. Such monopolists affect social and

political environment to tilt everything in their favour to maintain their power ad expand their business

empire. These advances result into economic exploitation. But in a free economy a monopolist does not

stay for a longer period as other companies enter into the field to reap the benefits of higher prices set

in by the monopolist. This enforces competition in the

marketas consumers are free to substitute the alternative products. Therefore, it is difficult to

generalize that mergers affect the welfare of general public adversely or favourably. Every merger of

two or more companies has to be viewed from different angles in the business practices which protects

the interest of the shareholders in the merging company and also serves the national purpose to add to


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the welfare of the employees, consumers and does not create hindrance in administration of the

Government policies.

Consideration of Merger and Takeover

Mergers and takeovers are two different approaches to business combinations. Mergers are pursuedunder the Companies Act, 1956 vide sections 391/394 thereof or may be envisaged under the provisions

of Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial Companies Act, 1985

whereas, takeovers fall solely under the regulatory framework of the SEBI Regulations, 1997.

Minority shareholders rights

SEBI regulations do not provide insight in the event of minority shareholders not agreeing to the

takeover offer. However section 395 of the Companies Act, 1956 provides for the acquisition of shares

of the shareholders. According to section 395 of the Companies Act, if the offeror has acquired at least

90% in value of those shares may give notice to the non-accepting shareholders of the intention of

buying their shares. The 90% acceptance level shall not include the share held by the offeror or its

associates. The procedure laid down in this section is briefly noted below.

1. In order to buy the shares of non-accepting shareholders the offeror must have reached the 90%acceptance level within 4 months of the date of the offer, and notice must have been served on

those shareholders within 2 months of reaching the 90% level.

2. The notice to the non-accepting shareholders must be in a prescribed manner. A copy of a noticeand a statutory declaration by the offeror (or, if the offeror is a company, by a director) in the

prescribed form confirming that the conditions for giving the notice have been satisfied must be

sent to the target.

3. Once the notice has been given, the offeror is entitled and bound to acquire the outstandingshares on the terms of the offer.

4. If the terms of the offer give the shareholders a choice of consideration, the notice must giveparticulars of options available and inform the shareholders that he has six weeks from the date

of the notice to indicate his choice of consideration in writing.5. At the end of the six weeks from the date of the notice to the non-accepting shareholders the

offeror must immediately send a copy of notice to the target and pay or transfer to the target

the consideration for all the shares to which the notice relates. Stock transfer forms executed on

behalf of the non-accepting shareholders by a person appointed by the offeror must also be

sent. Once the company has received stock transfer forms it must register the offeror as the

holder of the shares.

6. The consideration money, which is received by the target, should be held on trust for the personentitled to shares in respect of which the sum was received.


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7. Alternatively, if the offeror does not wish to buy the non-accepting shareholders shares, it muststill within one month of company reaching the 90% acceptance level give such shareholders

notice in the prescribed manner of the rights that are exercisable by them to require the offeror

to acquire their shares. The notice must state that the offer is still open for acceptance and

specify a date after which the right may not be exercised, which may not be less than 3 months

from the end of the time within which the offer can be accepted. If the offeror fails to send such

notice it (and its officers who are in default) are liable to a fine unless it or they took all

reasonable steps to secure compliance.

8. If the shareholder exercises his rights to require the offeror to purchase his shares the offeror isentitled and bound to do so on the terms of the offer or on such other terms as may be agreed.

If a choice of consideration was originally offered, the shareholder may indicate his choice when

requiring the offeror to acquire his shares. The notice given to shareholder will specify the choice

of consideration and which consideration should apply in default of an election.

9. On application made by an happy shareholder within six weeks from the date on which theoriginal notice was given, the court may make an order preventing the offeror from acquiring the

shares or an order specifying terms of acquisition differing from those of the offer or make an

order setting out the terms on which the shares must be acquired.

In certain circumstances, where the takeover offer has not been accepted by the required 90% in value

of the share to which offer relates the court may, on application of the offeror, make an order

authorizing it to give notice under the Companies Act, 1985, section 429. It will do this if it is satisfiedthat:

a. the offeror has after reasonable enquiry been unable to trace one or more shareholders towhom the offer relates;

b. the shares which the offeror has acquired or contracted to acquire by virtue of acceptance of theofferor, together with the shares held by untraceable shareholders, amount to not less than 90%

in value of the shares subject to the offer; and

c. the consideration offered is fair and reasonable.The court will not make such an order unless it considers that it is just and equitable to do so, having

regarded, in particular, to the number of shareholder who has been traced who did accept the offer.

Alternative modes of acquisition

The terms used in business combinations carry generally synonymous connotations and can be used

interchangeably. All the different terms carry one single meaning of merger but each term cannot be

given equal treatment in the discussion because law has created a dividing line between take-over and

acquisitions by way of merger, amalgamation or reconstruction. Particularly the takeover Regulations

for substantial acquisition of shares and takeovers known as SEBI (Substantial Acquisition of Shares and

Takeovers) Regulations, 1997 vide section 3 excludes any attempt of merger done by way of any one or

more of the following modes:


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(a) by allotment in pursuant of an application made by the shareholders for right issue andunder a public issue;

(b)preferential allotment made in pursuance of a resolution passed under section 81(1A) of theCompanies Act, 1956;

(c) allotment to the underwriters pursuant to underwriters agreements;(d) inter-se-transfer of shares amongst group, companies, relatives, Indian promoters and

Foreign collaborators who are shareholders/promoters;

(e) acquisition of shares in the ordinary course of business, by registered stock brokers, publicfinancial institutions and banks on own account or as pledges;

(f) acquisition of shares by way of transmission on succession or inheritance;(g) acquisition of shares by government companies and statutory corporations;(h)transfer of shares from state level financial institutions to co-promoters in pursuance to

agreements between them;

(i) acquisition of shares in pursuance to rehabilitation schemes under Sick Industrial Companies(Special Provisions) Act, 1985 or schemes of arrangements, mergers, amalgamation, De-

merger, etc. under the Companies Act, 1956 or any other law or regulation, Indian or

Foreign;

(j) Acquisition of shares of company whose shares are not listed on any stock exchange.However, this exemption in not available if the said acquisition results into control of a listed

company;

(k) Such other cases as may be exempted from the applicability of Chapter III of SEBI regulationsby SEBI.

The basic logic behind substantial disclosure of takeover of a company through acquisition of shares is

that the common investors and shareholders should be made aware of the larger financial stake in the

company of the person who is acquiring such companys shares. The main objective of these Regulations

is to provide greater transparency in the acquisition of shares and the takeovers of companies through a

system of disclosure of information.


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Escrow account

To ensure that the acquirer shall pay the shareholders the agreed amount in redemption of his promise

to acquire their shares, it is a mandatory requirement to open escrow account and deposit therein the

required amount, which will serve as security for performance of obligation.

The Escrow amount shall be calculated as per the manner laid down in regulation 28(2). Accordingly:

For offers which are subject to a minimum level of acceptance, and the acquirer does want to acquire a

minimum of 20%, then 50% of the consideration payable under the public offer in cash shall be

deposited in the Escrow account.

Payment of consideration

Consideration may be payable in cash or by exchange of securities. Where it is payable in cash the

acquirer is required to pay the amount of consideration within 21 days from the date of closure of theoffer. For this purpose he is required to open special account with the bankers to an issue (registered

with SEBI) and deposit therein 90% of the amount lying in the Escrow Account, if any. He should make

the entire amount due and payable to shareholders as consideration. He can transfer the funds from

Escrow account for such payment. Where the consideration is payable in exchange of securities, the

acquirer shall ensure that securities are actually issued and dispatched to shareholders in terms of

regulation 29 of SEBI Takeover Regulations.


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Reverse Merger

Generally, a company with the track record should have a less profit earning or loss making but viable

company amalgamated with it to have benefits of economies of scale of production and marketing

network, etc. As a consequence of this merger the profit earning company survives and the loss making

company extinguishes its existence. But in many cases, the sick companys survival becomes more

important for many strategic reasons and to conserve community interest. The law provides

encouragement through tax relief for the companies that are profitable but get merged with the loss

making companies. Infact this type of merger is not a normal or a routine merger. It is, therefore, called

as a Reverse Merger.

The allurement for such mergers is the tax savings under the Income-tax Act, 1961. Section 72A of the

Act ensures the tax relief which becomes attractive for amalgamations of sick company with a healthy

and profitable company to take the advantage of carry forward losses. Taking advantage of the

provisions of section 72A through merger or amalgamation is known as reverse merger, which gives

survival to the sick unit by merging it with the healthy unit. The healthy unit extinct losing its name and

the surviving sick company retains its name. Companies to take advantage of the section follow this

route but after a year or so change their names to the one of the healthy company as were done

amongst others by Kirloskar Pneumatics Ltd. The company merged with Kirloskar Tractors Ltd, a sick unit

and initially lost its name but after one year it changed its name as was prior to merger.

Reverse Merger under Tax Laws

Section 72A of the Income-tax Act, 1961 is meant to facilitate rejuvenation of sick industrial undertaking

by merging with healthier industrial companies having incentive in the form of tax savings designed with

the sole intention to benefit the general public through continued productive activity, increased

employment avenues and generation of revenue.

(1) BackgroundUnder the existing provisions of the Income-tax Act, so much of the business loss of a year as cannot be

set off by him against the profits of the following year from any business carried on by him. If the loss

cannot be so wholly set off, the amount not so set off can be carried forward to the next following year

and so on, up to a maximum of eight assessment years immediately succeeding the assessment year for

which the loss was first computed. The benefit of carry forward and set off of business loss is, however,

not available unless the business in which the loss was originally sustained is continued to be carried on

by the assessee. Further, only the assessee who incurred the loss by his predecessor. Similarly, if a

business carried on one assessee is taken over by another, the unabsorbed depreciation allowance due

to the predecessor in business and set off against his profits in subsequent years. In view of these

provisions, the accumulated business loss and unabsorbed depreciation allowance of a company which


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merges with another company under a scheme of amalgamation cannot be carried forward and set off

by the latter company against its profits.

The very purpose of section 72A is to revive the business of an undertaking, which is financially non-

viable and to bring it back to health. Sickness among industrial undertakings is a matter of grave national

concern. Experience has shown that taking over of such units by Government is not always the mostsatisfactory or the most economical solution. The more effective course suggested was to facilitate the

amalgamation of sick industrial units with sound ones by providing incentives and removing

impediments in the way of such amalgamation. To save the Government from social costs in terms of

loss of production and employment and to relieve the Government of the uneconomical burden of

taking over and running sick industrial units is one of the motivating factors in introducing section 72A.

To achieve this objective so as to facilitate the merger of sick industrial units with sound one, the

general rule of carry forward and set off of accumulated losses and unabsorbed depreciation allowance

of amalgamating company by the amalgamated company was statutorily related. By a deeming fiction,

the accumulated loss or the unabsorbed depreciation of the amalgamating is treated to be the loss or,

as the case may be, allowance for depreciation of the amalgamated company for the previous year in

which amalgamation was affected.

There are three statutory conditions which are to be fulfilled under section 72A(1) for the benefits

prescribed therein to be available to the amalgamated company, namely

(i) The amalgamating company was, immediately before such amalgamation, financially non-viableby reason of its liabilities, losses and other relevant factors;

(ii) The amalgamation is in the public interest;(iii) Such other conditions as the Central Government may by notification in the Official Gazette,

specify, to ensure that the benefit under this section is restricted to amalgamation, which would

facilitate the rehabilitation or revival of the business of amalgamating company.

(2)Reverse mergerAs it can be now understood, a reverse merger is a method adopted to avoid the stringent provisions of

Section 72A but still be able to claim all the losses of the sick unit. For doing so, in case of a reverse

merger, instead of a healthy unit taking over a sick unit, the sick unit takes over/ amalgamates with the

healthy unit.

High Court discussed 3 tests for reverse merger:

a. Assets of transferor company being greater than transferee company;b. equity capital to be issued by the transferee company pursuant to the acquisition

exceeding its original issued capital, and

c. The change of control in the transferee company clearly indicated that the presentarrangement was an arrangement, which was a typical illustration of takeover by reverse

bid.


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Court held that prime facie the scheme of merging a prosperous unit with a sick unit could not be said to

be offending the provisions of section 72A of the Income Tax Act, 1961 since the object underlying this

provision was to facilitate the merger of sick industrial unit with a sound one.

(3)Salient features of reverse merger under section 72A1. Amalgamation should be between companies and none of them should be a firm of partners

or sole-proprietor. In other words, partnership firm or sole-proprietary concerns cannot get

the benefit of tax relief under section 72A merger.

2. The companies entering into amalgamation should be engaged in either industrial activity orshipping business. In other words, the tax relief under section 72A would not be made

available to companies engaged in trading activities or services.3. After amalgamation the sick or financially unviable company shall survive and other

income generating company shall extinct. In other words essential condition to be fulfilled is

that the acquiring company will be able to revive or rehabilitate having consumed the healthy

company.

4. One of the merger partner should be financially unviable and have accumulated losses toqualify for the merger and the other merger partner should be profit earning so that tax relief

to the maximum extent could be had. In other words the company which is financially unviable

should be technically sound and feasible, commercially and economically viable but financiallyweak because of financial stringency or lack of financial recourses or its liabilities have

exceeded its assets and is on the brink of insolvency. The second requisite qualification

associated with financial unavailability is the accumulation of losses for past few years.

5. Amalgamation should be in the public interest i.e. it should not be against public policy, shouldnot defeat basic tenets of law, and must safeguard the interest of employees, consumers,

creditors, customers and shareholders apart from promoters of company through the revival

of the company.

6. The merger must result into following benefit to the amalgamated company i.e. (a) carryforward of accumulated business loses of the amalgamated company; (b) carry forward of

unabsorbed depreciation of the amalgamating company and (c) accumulated loss would be

allowed to be carried forward set of for eight subsequent years.

7. Accumulated loss should arise from Profits and Gains from business or profession and not beloss under the head Capital Gains or Speculation.

8. For qualifying carry forward loss, the provisions of section 72 should have not beencontravened.


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9. Similarly for carry forward of unabsorbed depreciation the conditions of section 32 should nothave been violated.

10.Specified authority has to be satisfied of the eligibility of the company for the relief undersection 72 of the Income Tax Act. It is only on the recommendations of the specified authoritythat Central Government may allow the relief.

11.The company should make an application to a specified authority for requisiterecommendation of the case to the Central Government for granting or allowing the relief.

Procedure for merger or amalgamation to be followed in such cases is same as in any other cases.

Specified Authority makes recommendation after taking into consideration the courts direction on

scheme of amalgamation.


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Procedure of Mergers & Acquisitions

Public announcement:

To make a public announcement an acquirer shall follow the following procedure:

1. Appointment of merchant banker:The acquirer shall appoint a merchant banker registered as category I with SEBI to advise him on the

acquisition and to make a public announcement of offer on his behalf.

2. Use of media for announcement:Public announcement shall be made at least in one national English daily one Hindi daily and one

regional language daily newspaper of that place where the shares of that company are listed and

traded.

3. Timings of announcement:Public announcement should be made within four days of finalization of negotiations or entering into

any agreement or memorandum of understanding to acquire the shares or the voting rights.

4. Contents of announcement:Public announcement of offer is mandatory as required under the SEBI Regulations. Therefore, it is

required that it should be prepared showing therein the following information:

1. Paid up share capital of the target company, the number of fully paid up and partially paid upshares.

2. Total number and percentage of shares proposed to be acquired from public subject to minimumas specified in the sub-regulation (1) of Regulation 21 that is:

a. The public offer of minimum 20% of voting capital of the company to the shareholders;b. The public offer by a raider shall not be less than 10% but more than 51% of shares of

voting rights. Additional shares can be had @ 2% of voting rights in any year.

3. The minimum offer price for each fully paid up or partly paid up share;4. Mode of payment of consideration;5. The identity of the acquirer and in case the acquirer is a company, the identity of the promoters

and, or the persons having control over such company and the group, if any, to which the

company belong;

6. The existing holding, if any, of the acquirer in the shares of the target company, including holdingof persons acting in concert with him;

7. Salient features of the agreement, if any, such as the date, the name of the seller, the price atwhich the shares are being acquired, the manner of payment of the consideration and the

number and percentage of shares in respect of which the acquirer has entered into the


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agreement to acquirer the shares or the consideration, monetary or otherwise, for the

acquisition of control over the target company, as the case may be;

8. The highest and the average paid by the acquirer or persons acting in concert with him foracquisition, if any, of shares of the target company made by him during the twelve month period

prior to the date of the public announcement;

9. Objects and purpose of the acquisition of the shares and the future plans of the acquirer for thetarget company, including disclosers whether the acquirer proposes to dispose of or otherwise

encumber any assets of the target company: Provided that where the future plans are set out,

the public announcement shall also set out how the acquirers propose to implement such

future plans;

10.The specified date as mentioned in regulation 19;11.The date by which individual letters of offer would be posted to each of the shareholders;12.The date of opening and closure of the offer and the manner in which and the date by which the

acceptance or rejection of the offer would be communicated to the shareholders;

13.The date by which the payment of consideration would be made for the shares in respect ofwhich the offer has been accepted;

14.Disclosure to the effect that firm arrangement for financial resources required to implement theoffer is already in place, including the details regarding the sources of the funds whether

domestic i.e. from banks, financial institutions, or otherwise or foreign i.e. from Non-resident

Indians or otherwise;

15.Provision for acceptance of the offer by person who own the shares but are not the registeredholders of such shares;

16.Statutory approvals required to obtained for the purpose of acquiring the shares under theCompanies Act, 1956, the Monopolies and Restrictive Trade Practices Act, 1973, and/or any

other applicable laws;

17.Approvals of banks or financial institutions required, if any;18.Whether the offer is subject to a minimum level of acceptances from the shareholders; and19.Such other information as is essential fort the shareholders to make an informed design in

regard to the offer.


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Major Points in Merger & Acquisitions

1. Merger is the combination of two or more firms through direct acquisition of assets by one ofother or others.

2. Merger could be horizontal or vertical or conglomerate.3. Horizontalmerger is the combination of two or -+more firms in th-+e same stage of production /

distribution / area of business.

4. Vertical integration is combination of two or more firms involved in different stages ofproduction or distribution.

5. Conglomeratemerger is the combination of firms -+engaged in unrelated lines of business.6. Acquisition or takeover means a combination in which the acquiring company acquires all or

part of assets shares of the target company.

7. In acquisitions there exists willingness of the management of the target company to be acquiredwhile this may not be so under takeover.

8. Amerger results into an economics advantages when the combined firms are worth togetherthan as separate entities. Merger benefits may results from economies of scale, economies of

vertical integration, increased efficiency tax shields or shared resources.

Merger should be undertaken when the acquiring company s gain exceeds the cost. Cost is the

premium that the buyer acquiring company pays for the selling company target company} over

its value as a separate entity. Discounted cash flow technique can be used to determine the

value of the target company to the acquiring company. However the mechanics of buying acompany is very complex than those of buying an equipment or machine. Integrating an acquired

company successfully to the buying company operation is quite difficult and challenging task.

In a leveraged buyout (LBO) a company is brought by raising most funds through borrowings.

When its own managers buy out the company, it is called management buyout (MBO). After

acquisition the LBO generates lot of profit and creates high value. Lenders get high return by

converting their loans into equity or using warrants buying the company shares.

Merger and acquisition activities are regulated under various laws in India. The objectives of the

laws as well as the stock exchange requirements are to make merger deals trans parent and

protect the interest of all shareholders. The assets and liabilities of the post-merger firm can be

combined later using either the pooling of interest method or the purchase method. In the

pooling of interest method assets and liabilities are combined at book values. In the purchase

method, the assets and liabilities are re-valued and then combined. The difference between

book values of assets and liabilities and their revaluation is shown as good will or capital reserve.


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Way to succeeds in Merger & Acquisition

Despite the grim statistics, several companies are skilled M&A executors. For example, General Electric

has integrated as many as 534 companies over a six-year period, and Kelloggs delivered a 25% return to

stockholders after purchasing Keebler. The following are key steps to facilitating a successful process

before and after a merger:

Before the Merger

1. Begin by formulating a clear and convincing strategy. Strategists must first develop a compellingand sustainable strategy. Key questions include: What is your firms strategy? What role does the

M&A play in this strategy? What is the vision of the strategy of the new entity?

2. Preassess the deal. Prior to signing a memo of understanding, managers should examineoperational and management issues and risks. Seek answers to the following questions: Is this

the right target? What is the compelling logic behind this deal? What is the value? How would

we communicate this value to the board of directors and other key stakeholders? What will our

strategy be for bidding and negotiations? How much are we willing to spend? If we are

successful, how can we accelerate integration?

3. Do your due diligence. Executives must acquire and analyze as much information as possibleabout potential synergies. In addition to managers across key functional areas in the firm,

outside experts can be brought in to help appraise answers in the pre-assessment, and especially

to challenge assumptions, by asking questions such as: Are our estimates of future growth and

profitability rates reliable? Are there aspects of the company history/culture or of the

environment (for example, legal, cultural, political, economic) that should be taken into account?

4. Devise a workable plan. Formulate plans that take into account some of the following: What isour new entitys organizational structure? Who is in charge? What products will be taken

forward? How will we manage company accounts? What IT systems will we use?

5. Communicate. M&A transactions tend to be viewed favourably when executives canconvincingly discuss integration plans, both internally and externally. Managers should be

prepared to answer the questions identified above, as well as: How can we prepare our people

psychologically for the deal? What value will be created? What are the priorities for integration?

What are the primary risks? How will progress be measured? How will we address any surprises?

After the Deal

1. Establish leadership. The new entity will require the quick identification and buy-in of managers,especially at top and middle levels. Ask: Who will lead the new entity? Do we have buy-in and

support from the right people?

2. Manage the culture and respect the employees of the merged/acquired company. Anatmosphere of respect and tolerance can aid the speed and ease of integration. Executives

should formulate plans that address the following concerns: How can we encourage the best and

brightest employees to stay on in the new entity? How can we build loyalty and buy-in?


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3. Explore new growth opportunities. Long-run performance is linked to identifying and acting onboth internal and external growth opportunities. Managers should seek out any untapped

growth opportunities in the new entity.

4. Exploit early wins. To build momentum, the new entity should actively seek early wins andcommunicate these. To identify them, consider whether there early wins in sales, knowledge

management, or the work environment.5. Focus on the customer. To survive, firms must create value for customers. Managers must

continue to ask: Are we at risk of losing customers? Are our salespeople informed about the new

entity? Can our salespeople get our customers excited about the new entity?


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Improving the odds in Merger & Acquisition

Six rationales to anchor merger success

General Electric wrestled Honeywell from the arms of United Technologies in October 2000. And AOL

and Time Warner.s merger process captured headlines throughout that same year. Both events

underscore an important shift: Old-fashioned mergers and acquisitions may have surpassed the Internet

on chief executives agendas. Indeed, TheStreet.com.s Internet index fell 78% last year, while the total

market cap of the top 10 mergers closed rose 50%. Moreover, the top 10 new deals announced in 2000,

totalling $600 billion, include prominent plays at industry redefinition, such as GE.s and AOLs. Clearly,

mergers have both resurged and re-emerged as a master tool of strategy.

Mergers today are altering the nature of competition in industries, harking back to Transactions in the

early 1900s never that boldly created the likes of DuPont and General Motors.

This contrasts with the more recent history of mergers and acquisitions, which includes a corporate

craze for diversification in the 60s and 70s and leveraged buyouts fuelled by high-risk, high-yield debt inthe 80s. More often than not leveraged buyout transactions such as Kohlberg Kravis Robertss takeover

of RJR Nabisco, amounted to corporate restructuring or active investing-an effort to squeeze value out

of an underperforming business. Such deals, while significant, did not change the rules of competition.

Shift to strategy

But the late 90s saw both an increase in mergers and acquisitions and a fundamental shift in their

motivation. None of the largest acquisitions were merely about swapping assets. Each had a stated

strategic rationale. Some were conceived to improve competit ive positioning, as in Pfizers takeover of

pharmaceuticals competitor Warner-Lambert. Others let acquirers push into highly related businesses.

Cable powerhouse Viacoms acquisition of broadcast mainstay CBS has allowed Viacom to deploy CBS.s


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assets to promote its cable offerings, and vice versa. Still other deals were geared to redefine a business

model. For instance, new-media force AOL.s deal with old-media empire Time Warner, announced in

January-2000, yet succeeding at mergers and acquisitions has never been easy. Several well-structured

studies calculate 50 to 75% of acquisitions actually destroy shareholder value instead of achieving cost

and/or revenue benefits. There are five root causes of failure:

Poor strategic rationale, or a poor understanding of the strategic levers

Overpayment for the acquisition, based on overestimated value

Inadequate integration planning and execution

A void in executive leadership and strategic communications

A severe cultural mismatch

Of the five, getting strategic rationale right is crucial. Being clear on the nature of the strategic levers iscritical both for pre- and post-merger activities. Indeed, failure to do so can trigger the four other causes

of failure. The following rationales lie on a continuum, from deals that play by the rules of merger

transactions and integration, to those that transform the rules. (See Figure 1: Strategic rationales for

M&A)

Figure 1: Strategic rationales for M&A


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Six key rationales for M& A

1. Active investingLeveraged buyout companies and private equity firms engage in active investing acquiring a company

and running it more efficiently and profitably as a stand-alone firm. Typically these transactions improveperformance through financial engineering, incentive compensation, management changes, and

stripping out costs. Private equity player Bain Capitals purchase and restructuring of Gartner Group

illustrates the power of active investing or squeezing the lemon. With honed operations, Gartner

became a premier broker of computer information, its margins expanding from 10% to 30%. Active

investing can, and often does, add value. However, active investing is truly the domain of leveraged

buyout and private equity firms such as Bain Capital, a company independent of Bain & Company. For

corporations, a more strategic rationale is needed.

2. Growing scaleMergers most often aim to grow scale, which doesn t mean simply getting larger. Rather, success

requires gaining scale in specific elements of a business and using these elements to become more

competitive overall. For instance, if materials cost drives profit, then purchasing scale will be key. If

customer acquisition is more important, then channel scale will be critical. Getting scale-based

initiatives right requires the correct business definition and the correct market definition. This can be

difficult since, over time, the definition of scale in an industry can change dramatically. For example, a

sea change in the economics of pharmaceuticals led to the mergers of Pfizer with Warner-Lambert, andof SmithKline Beecham (SKB) with Glaxo Wellcome. For decades, pharmaceuticals were a national or

regional business. Regulatory processes were unique to each country, and barriers existed that made

drug introduction to foreign markets difficult. Distribution and regulatory costs needed to be spread

over the maximum proportion of local markets. Today, many of those barriers have diminished, while

the costs per successful drug development have risen exponentially. Research and development can and

should be spread across the entire global market, covering more countries, more products, and more

types of diseases. In the June 2000 Harvard Business Review, Jan Leschly, recently retired CEO of SKB,

remarked candidly: What really drives revenues in the drug business is R&D.

3. Building adjacenciesThe next most common impetus for mergers and acquisitions is to expand into highly related or

adjacent businesses, as in the Viacom example. This can mean expanding business to new locations,

new products, higher growth markets, or new customers. But most importantly, the additions should be

closely related to a companys existing business. Chris Zook, in Profit from the Core: Growth Strategy in

an Era of Turbulence, provides empirical evidence that expanding into closely related businesses

through acquisitions drove some of the most dramatic stories of sustained, profitable growth in the 90s:

Emerson, GE, Enron, Charles Schwab, and Reuters, to name a few.2 When Travelers Insurance acquired

Citicorp bank, the merger gave the two companies a complete range of financial services products to

cross-sell to their combined customers across a broad range of global markets.


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4. Broadening scopeIn mergers geared to broaden the scope of products or technologies, a serial acquirer systematically

buys specific expertise to either accelerate or substitute for a traditional new-business development or

technology R&D function. A serial/scope acquisition model has been successfully executed in a number

of industries, such as financial services (e.g., GE Capital), Internet hardware (e.g., Cisco), and chip

manufacturing (e.g., Intel). For these firms, major ongoing investment to scan for new product concepts

or technologies is an integral part of their growth strategy. For most of these firms, organic

development would be too expensive, too slow, and/or would dilute focus on their existing businesses.

5. Redefining businessDeployed strategically, mergers and acquisitions can redefine a business. This is an appropriate strategic

rationale when an organizations capabilities and resources grow stale very suddenly due to, for

example, a major technological change. In such cases, a firm cannot quickly refresh its technology or

knowledge by making internal investments and incremental adjustments. When telecommunicationsequipment provider Nortel embarked on a strategic shift toward Internet provider-based working

infrastructure, Nortel transformed its business model through a series of acquisitions. Since January

1998, the company has acquired 21 businesses, including Cisco.s competitor, Bay Networks, to refocus

from supplying switches for traditional voice communication networks to supplying technology for the

Internet. Nortel utilized mergers and acquisitions strategically to make what CEO John Roth calls the

companys right-angle turn. While hit hard in 2001 by a downturn in fiber optics, Nortel has nevertheless

become Cisco.s chief rival.

6.

Redefining industry

Sometimes a bold, strategic acquisition can redefine an entire industry, changing the boundaries of

competition and forcing rivals to re-evaluate their business models. For example, the AOL/Time Warner

merger could potentially rewrite the rules for communication and entertainment. Beyond creating new

distribution channels for content and new content for the Internet, the merger could allow the new

company to choose to take profit in either content or distribution, depending on customers preferences.

No other traditional content or distribution competitors have this choice. Similarly, several analysts

believe GE.s intended acquisition of Honeywell would fundamentally alter relationships in the aircraft

industry, among operators, maintenance providers, leasing companies, manufacturers, and parts

suppliers. In the words of an analyst quoted in the New York Times: .I think GE just bought Boeing and

Boeing doesn.t know it yet.

Foundation for success

A clear, strategic rationale for an acquisition is critical, but not enough to guarantee a successful deal

and merger integration. The rationale helps to identify the right target and set boundaries for

negotiations, but the hard work remains of bringing two companies together effectively. The right

strategic rationale will inform the preparation and valuation of the merger. The strategic rationale

should also inform what leadership and communication style to adopt and how to plan for post-merger


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integration, including cultural integration. In acquisitions seeking to gain scale, pre-merger planning can

be done .by the numbers. One can, in advance, calculate goals for combined market share and cost

reduction, plan steps to achieve them, and create measures of performance improvement. This type of

merger places great demands on a chief executives ability as a manager to cope with complexity. The

task may not be easy, but at least the leader can craft a plan before the transaction and execute it after

the merger. But in bolder mergers, where parties seek to redefine their industries, the numbers may notbe as precise. The companies involved will have a post-merger model for operations. However, that

model will change as industry rules change and as competitors react. In such a profoundly uncertain

environment, vision is critical and must come from the top of the organization. A strong leader must

cope with flux by confidently and effectively communicating the strategy and vision. The post-merger

integration plan will have to be much less detailed and much more flexible than that of a scale

transaction, leaving room for leadership to adapt its message to a rapidly evolving competitive

environment. In short, a transactions strategic rationale is ground zero for planning and your

foundation for capturing the value that spurred your acquisition.


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Why to Regulate Mergers & Acquisitions

When two companies are merged or combined, they must have some objectives behind this merger.

One motive is of merger may be to realize economies of scale, improving operative performance or

expanding the business in order to gain more assets. However, on the other the motive may be to

create anti-competitive effects like to reduce the numbers of competitors or to create dominance in themarket. This can be explained by Porters five sector model, as below:

The Michael Porter provided a framework that models an industry as being influenced by five forces.

The strategic business manager seeking to develop an edge over rival firms can use this model to better

understand the industry context in which the firm operates. Firms in order to gain advantage over its

rival firm may merger and eliminate the threats as explained in the model above. According to Fairburn

and Kay (1989), from the past it is evident that mergers may cause more harm than bring the

advantages to the merging firms. The merger and acquisition activities have increased in the past and

firms merge because they think by doing so various advantages will be realized and therefore increase

the profits of the firm.


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This basically happens more in horizontal merger as they create more anti-competitive effects in the

market. Similarly vertical mergers can also have the same potential effects; on one side it may be

combined with substantial market power and on the level it may permit the extension of that market

power. For example, if a firm has a monopoly over the supply of a particular input and it integrates

downstream into processing of the input into finished products. An anti-competitive effect may arise if

the firm charges a high price for the input supplies and a low price for the finished products. Thisdifferential price jeopardizes the economic viability of all the other firms in the downstream finished

product market. This practice is mainly prevailed in the steel industry, where integrated steel

manufacturers follow differential pricing in hot-rolled coils to harm the interest of cold-rolled steel

manufacturers, the downstream players. But in case of conglomerate merger, such anti-competitive

effect is not shown so much as it is perceived in case of horizontal and vertical mergers. Such

Conglomerate merger is generally beyond the purview of law on merger.

Effects of merger

a) Unilateral effect: The merged entity may also have a unilateral incentive to increase the price of one

or more of the products sold by the merging firms if a significant proportion of consumers view the two

merging firms as their first and second choices. In the pre-merger equilibrium, firms have chosen their

prices to maximize profits, taking into account their perceptions about consumerswillingness to switch

to other products. Thus, a firm would not have an incentive to increase its price independently prior to

the merger because it has already determined that the benefit of a higher price would be outweighed by

the cost of lost sales to competitors. However, if a large enough proportion of the lost sales by one

merging firm would be captured by the other merging firm, then a price increase could be profitable

after the merger.

b) Coordinated effects: It occurs when a merger increases the likelihood that competitors will

coordinate -either tacitly or expressly -to rise prices. A merger may enhance the ability to coordinate by

reducing the number of independent competitors. This is more likely to occur if the existing number of

competitors is already relatively small. Many other factors also affect the ability to coordinate. For

example, all other things equal, it is easier for competitors to reach and monitor agreements if the

products are relatively homogeneous and the pricing by individual competitors is relatively transparent.

Remedies

Successful merger enforcement is defined by obtaining effective remedies, whether that means blocking

a transaction or settling under terms that avoid or resolve a contested litigation while protecting

consumer welfare. In situations where a merger remedy can protect consumers while otherwise

allowing the merger to proceed, appropriate remedies may include a divestiture of assets (to limit the

merged firms ability to use the combined assets to harm competition) or limitations on the firms

conduct (to ensure that consumers will not be harmed by anticompetitive behavior).

In India, till date all M&A transaction has been approved, thus in order to study remedies in mergers we

have to study the practices used by different antitrust authorities. Although in different parts of the

world different remedies are used by respective antitrust authority, but the below are some of most

widely used remedies.


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a) Structural Remedies:

Structural remedies modify the allocation of property rights; they include divestiture of an on-going

business, either fully or partially. The goal of a divestiture is to ensure that the purchaser possesses both

the means and the incentive to effectively preserve competition. In divestitures tangible or intangible

assets from the merging firms are sold to the third-party purchaser.

b) Behavioural or Conduct Remedies :

The most common forms of Behavioural or conduct relief are firewall, non-discrimination, mandatory

licensing, transparency, and anti-retaliation provisions, as well as prohibitions on certain contracting

practices.


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Major M&A in 21st

century by the Indian corporate

1. Tata Steel's acquisition of European steel major Corus for $12.2 billion.2. Vodafone's purchase of 52% stake in Hutch Essar for about $10 billion. Essar group still

holds 32% in the Joint venture.

3. Hindalcos (Aditya Birla group) acquisition of Novellis for $6 billion.4. Ranbaxy's acquisition by Japan's Daiichi for $4.5 billion.5. ONGCs acquisition of Russia based Imperial Energy for $2.8 billion.6. NTT DoCoMo-Tata Tele services deal for $2.7 billion.7. HDFC Banks acquisition of Centurion Bank of Punjab for $2.4 billion.8. Tata Motorss acquisition of luxury car maker Jaguar Land Rover for $2.3 billion.9. Suzlon Energy's acquisition of RePower for $1.7 billion.10.Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8,500 crore or

$1.6billion.


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Case Study

CASE STUDY 1

GlaxoSmithKline Pharmaceuticals Limited, India (Merger Success).

Mumbai-- Glaxo India Limited and SmithKline Beecham Pharmaceuticals (India) Limited have legallymerged to form GlaxoSmithKline Pharmaceuticals Limited in India (GSK). It may be recalled here that the

global merger of the two companies came into effect in December 2000.

Commenting on the prospects of GSK in India, Vice Chairman and Managing Director, GlaxoSmithKline

Pharmaceuticals Limited, India, Mr. V Thyagarajan said, The two companies that have

Documents

Project Finance-Merger and Acquisition