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Notes on Corporate Restructuring, Mergers and Acquisitions’ –

LH-15, LH-16.-PGDM- IPE.

D R K Jagannath

Mergers and Acquisitions;

Introduction:

• The corporate world is undergoing a paradigm shift from expansion and

diversification to ever increasing mergers and acquisitions.
• Merger waves began as early as 1883, following depression that ended that
year.
• The first merger wave came due to the economic expansion and now they have
become a strategic tool that is effectively used to acquire established brands and
to expand to emerging and low cost markets.

Concept of Merger:

• The initial trend was dominated by a few mega deals involving corporate giants.
• M&As now help counter competition, acquirer new customers, get technology
edge, improve bottom lines etc.
• Mergers are normally carried out with mutual consent between the companies.
• A Merger is a strategy to increase their long term profitability by expanding their
operations.

Definition of Merger:

• The simplest definition is – a combination of two or more businesses onto one

business.
• Laws in India use the term amalgamation for merger.
• The IT Act,1961 defines amalgamation as the merger of one or more companies
with another or the merger of two or more companies to form a new company in
such a way that all assets and liabilities of the amalgamating companies become
the assets and liabilities of the amalgamated company.
• The company buying the other company is called the merged or surviving entity
and the one merging with it is called the merging entity.
• Once the merger happens, one company survives and the other loses its
corporate identity.
• The surviving company acquires all the assets and liabilities of the merging
company.

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Forms of Mergers:

• Merger through Absorption- is a combination of two or more companies into an

existing company. All companies except one lose their identity in such a merger.
Tata Fertilizers Ltd by Tata Chemicals Ltd. TCL survived.
• Merger through consolidation- is a combination of two or more companies into a
new company.
• In this all the companies are legally dissolved and a new entity is created.
• The principal idea behind MA is to create shareholders value that is over and
above the existing ones.

Genesis of Mergers:

• The movement started in US and every such movement was dominated by

mergers of a particular type.
• Key observations of the merger movements of the merger waves are-
• Merger movements occur when the economy experiences sustained high rate of
growth as a reflection of good business environment.
• The waves occur when firms respond to new investment and profit opportunities.
• The often result in efficient resource allocation, reallocation processes and
efficient resource utilization.

Merger Waves:

• Merger and acquit ions have become a global phenomenon and are no longer
restricted to US.
• In each of waves mistakes have been repeated and failures have been common.
• A new trend is being observed is the rise of acquirers from emerging markets.
.

First Wave (1897-1904):

• The first wave of mergers occurred after the Great Depression of 1883.
• This wave affected all major mining and manufacturing industries.
• The first wave saw predominantly horizontal mergers and industry consolidation
resulting in monopolistic structures.
• Several giants like JP Morgan, Standard Oil, General Electric, US Steel etc.

Second Wave (1916-1929):

• The second wave witnessed the consolidation of several industries.

• The second wave was characterized by the rise of oligopolistic industry structure.
• Several vertical mergers and oligopoly were produced in this wave.
• Large scale conglomerates with diverse and unrelated firms merged together.
• It saw mergers in primary metals, petroleum products , food products, chemicals
and transpiration.

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• Some of the prominent are General Motors, IBM, and Union Carbide etc.
• Radio became popular as a medium of entertainment and companies started
using it for advertising.
• The crash of 1929 led to severe economic and social turmoil.
• The 1940s- the trends in the market changed from getting big soon to small is
beautiful and governments encouraging small enterprises with incentives

Third Wave (1965-1969):

• This period is known as Conglomerate merger period saw intensive merger

activity backed by booming economies.
• Here smaller firms targeted larger companies for acquisition.
• Some prominent during the period ate Long-Temco-Vought(LTV), Litton
Industries and ITT.
• This period also led to anti-competitive and abuse of power.
• During the end of this wave the Conglomerates started becoming unpopular of
high prices of goods and wrong practices of the these companies.

Era of 1970s:

• The decade of 1970s known as the era of hostile takeovers saw a dramatic
decline of mergers.
• Some trend setter’s are- change in acceptable takeover behavior, beginning of
aggressive takeover support of investment banking and starting of consultancy
services by investment bankers in anti takeover defenses.

Fourth Wave (1984-1989).

This wave also known as the wave of mega mergers saw high numbers of hostile
takeovers and largest firms became targets of acquisition.
This period saw a lot of merger activity in the Oil and Gas , drugs, medical
equipment, banking and petroleum industries.
The leading mega mergers of this period include Chevron and Gulf Oil, Phillips
Morris and Kraft, Texaco and Getty Oil etc.
The fourth wave was characterized by the following
1. The concept of” corporate raider” make its appearance with hostility.
2. Investment bankers started playing aggressive role in pursuing M&A activity.
3. Offensive and defensive strategies became common.
4. Mega deals were financed with debt and leveraged buyouts.
5. Many deals were motivated by the non US companies who had a desire to
expand into the larger and more stable US markets.

Fifth Wave- 1992 onwards.

 This period saw a major economic transition in many economies paving the way
for increased aggregate demand.

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 It saw large mega mergers happening.

 Few hostile takeovers and more strategic mergers.
 Roll ups became popular, and fragmented industries were consolidated through
large scale acquisition of companies.
 Some of the prominent companies include Office Products USA, Flora USA the
Fortress group US Delivery Systems etc.
 The concept of emerging market bidders also evolved during this time.

Traditional and Modern Views on M&A.

 The traditional view focused on competition and often resulted in horizontal

mergers, creating a condition of monopolistic competition.
 Survival was the motive through growth.
 Self protection from takeover was the motto and selection was based on size and
quality.
 The weakness was that there was very little done on the front of due diligence
which resulted in delays and frictions and diminished be benefits of the
transaction.

 The modern view M &A as a vehicle to change the control of the firm’s assets
and were favored because they initiate a process of allocation and reallocation of
resources by firms in respect of changes in economic conditions and technology
and innovations.
 The modern view that M&A are tools for gaining competitive advantage and
strategic growth.
 The success rate is increasing due to better deal governance, better deal
selection, effective due diligence, and better focus on integration.
 The modern approach talks of achieving strategic interdependence through
resource sharing, functional and management skills transfer and combination
benefits.

Classification of Mergers:

Mergers may be in different forms. They may be classified as follows:

Horizontal Merger:

1. This is a strategy where in two companies that are in direct competition and
sharing the same product lines and markets make an effort to merge.
2. The merger is based on the fact, that there will be synergy and enhances cost
efficiencies.
3. It is presumed that the merger would give benefits of staff reduction and thereby
human costs.
4. It also benefits of economies of scale, opportunity to acquire technology unique
to the target company along with better market reach.
5. Some popular horizontal merger is Daimler-Benz Glaxo and Wellcome Plc etc.

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6. Horizontals mergers may create large entities which may cripple the economy if
closed, may become anti-competitive and may be unfair competitive advantage
over its competition.
7. Governments have observed some of the flip side of these type of mergers and
have over a period of time legislated various any competition laws and
regulations.

Vertical Mergers:

 Vertical mergers involve two firms in different stages of production or operation

mergers.
 Vertical mergers are usually mergers of non competing nature where in one
company mergers with another company having a product or component or
complement to the other.
 These are merger between companies which are engaged in different aspects of
production like, growing raw materials, manufacturing, transporting, marketing or
retailing etc.
 Such mergers achieve pro-competitive efficiency benefits and lower transactions
costs, lead to synergistic improvements in design, product, and distribution of
final output or product.

Vertical mergers may take the following forms:

1. Market extension merger- is a merger between two companies that sell the
same products but in different markets.
2. Product extension merger- is designed to increase the range of products that
a company sells in a particular market.
3. Vertical mergers may take the form of forward, backward and balanced
integration.
4. Forward integration- is involved in the next stage of production or operation.
Supplier of raw materials merges his firm with a regular procurer of the raw
material from him.
5. Backward integration- is involved in the previous staged of production or
operation. A manufacturer of a product merges his firm with the provider of
the raw materials.
6. Balanced integration- is a situation where the company sets up subsidiary
that both supply them with inputs and distribute their outputs.
7. The basic objective of a vertical merger is to eliminate cost of searching
vendors, contracting prices, payment collection, advertising and
communication and coordinating production.
8. Such mergers can have a very positive impact on production and inventory
since information flows efficiently within the organization.
9. Some examples are Usha Martin and Usha Beltron, Time Warner Inc and
Turner Corporation etc, Hindustan Lever and Tata Oil Mills etc

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10. Vertical mergers create barriers in the market by foreclosing rivals from
access to needed inputs in the market, raise the prices in the market or
reduce the quality of the product.

Conglomerate Merger:

1. A conglomerate merger is “one in which there is no economic

relationship between the acquiring and the acquired firm”
2. It is between companies which have no relationship with their products.
- FTC and Proctor Gamble.
3. Conglomerate mergers are mergers involving firms in different or
unrelated business activity.
4. Such mergers are preferred by firms that plan to increase their product
lines.
5. Companies opting for conglomerate mergers control a range of
activities in various industries that require different skills in specific
managerial functions such as research, applied engineering,
production, marketing etc.
6. Competitive edge is obtained in these functions which is not possible
through internal development.
7. Conglomerates are guided by two philosophies.
8. One by participating in a number of unrelated businesses, the parent
corporation is able to reduce costs by using fewer resources.
9. Two, by diversifying business interests, the risks inherent in operating
in a single market are mitigated.
10. The most common examples of conglomerate mergers are – News
Corporation, Sony, Time Warner, Walt Disney, Aditya Birla Group,
Tata Group, and General Motors etc.
11. The flip side of conglomerate mergers is that contributing to aggregate
increase in economic power, aggression in political power in many
cases.
12. These types of mergers are also called “Concentric mergers”.
13. Conglomerate mergers can be classified as Pure and Mixed mergers.
14. Pure conglomerate mergers involve firms that have nothing in
common.
15. Mixed conglomerate mergers involve firms that are looking for product
extensions or market extensions.

Financial Conglomerates:

1. These are active in providing funds to every segment of operation and in

exercising control. They are risk takers and only assume financial
responsibility and control.
2. Their focus is on improving risk return ration, reducing business related
risks, improving the quality of general and functional managerial
performance and an effective competitive process.

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Managerial conglomerates:

 They focus on providing managerial counseling and interacting on

decisions with the motive of increasing the potential for improving
performance.
 Such conglomerates come into play when two firms of unequal managerial
competence combine.

Concentric companies:

1. A merger is termed concentric when there is a carryover of specific

management functions or complementarities in relative strengths
between management functions.
2. The reasons to merge into a conglomerate are to increase market
share, synergy, and cross selling.
3. Companies’ merger to diversify and to reduce their risk exposure as a
strategy.

Accretive Merger:

 Accretion is natural growth in size or gradual external addition.

 It implies value creation and these occur when a company with a high
price –to-earning ration purchases a company with a low P/E.
 As a result the EPS of the acquiring company increases.
 This type of merger results in operational and financial synergies and
boosts the earnings of the acquiring company.
 Hewlett-Packard announced a merger with services company EDS in
2008.
 RIL with IPCL etc are examples.

Dilutive merger:

 A dilutive merger is one where the EPS of the acquiring company falls
after merger.
 Since the EPS declines, he acquiring company’s share price also
declines, as the market expects a decrease in the company’s future
earnings.
 The focus is synergies post merger.
 A dilutive merger occurs when the P/E ratio of the acquiring firm is less
than that of the target firm.

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Corporate Restructuring.

Introduction.

The global economies are undergoing major transitions and are dynamic in nature.
Change is inevitable and the magnitude and speed of change differs from time to time.
This has been affecting the corporate world also in a big way and in the process many
corporate giants of yesteryears are disappearing or in the process of massive
restructuring exercises. In the era of liberalization and globalization corporate compete
in unfamiliar markets. Protections of yester years are no more available and even the
trade barriers are no longer available.
Restructuring is the modern mantra for survival. This is an approved strategy to revive
the operations of an entity and make it profitable once again.
Mergers and acquisitions (A&As) are looked upon as instruments of successful
corporate restructuring and fulfillment of corporate goals.
Organizations need to adopt a result oriented approach that not only keeps the
organization on the move but also enables it to target a new destination or higher goals.
Hence restructuring is a continuous process driven by the corporate vision.

Concept of Corporate Restructuring.

Restructuring focuses of change.

Restructuring is a corporate management term that stands for the act of partially
dismantling or otherwise reorganizing a company to make it more efficient and
profitable.

Views of different authors on the concept of corporate restructuring.

Corporate restructuring refers to a broad array of activities that expand or contract firms
operations or substantially modify its financial structure or bring about a significant
change in its organizational structure or internal financing- Chandra.
Corporate restructuring is the reorganization of a company to attain greater efficiency
and to adapt to new markets. - Financial dictionary.
Corporate restructuring refers to liquidating projects in some areas and redirecting
assets to other existing or new areas. - Weston.

Reasons for restructuring.

The restructuring process brings to focus the following basic reasons that compel
companies to opt for restructuring.

1. Change in fiscal and government policies- to face new challenges and meet new
financial requirements due to deregulation, decontrol, withdrawal of government
patronage etc.
2. Due to liberalization, privatization and globalization- expanded markets and new
competitors’ and resultant impact.

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3. Information technology revolution- has become life line for all corporate resulting
in more investments in IT and related infrastructure and making people
familiarize in it.
4. Concept of customer delight- bringing to the fore a new concept of customer
delight which states that only those companies that can understand and fulfill the
needs and expectation of the customer shall survive.
5. Changing customer profile has intensified competition and companies have to
reshape their activities to survive in business.
6. Cost reduction- customers not only expect quality products but also at affordable
prices, hence necessary to make continuous efforts to reduce costs and improve
quality, cost reduction and cost control are the new mantras of success.
7. Divestment - is the process wherein companies either divisonalized their
operation into smaller businesses or have sold off units or divisions that do not
have a strategic fit with their business. It is way of releasing capital resources
that have been blocked in activities where the company does not enjoy
competitive advantage or core competency.
8. Improving bottom line- the basic business objective being maximizing profits,
restructuring becomes necessary to realize the full potential of the company.
9. Core competencies- is a specific factor that a business perceives to be central to
its functioning. This may be technical, functional, customer satisfaction or product
or human resources. Core competencies often provide impetus for many
companies to restructure.
10. Enhancing shareholder value- companies aim at enhancing shareholder value for
capital inflows. Unless adequate returns are given shareholders shy away from
such companies.
11. Incompatible company objectives - decline in demand, high competition
pressure, product line obsolescence signify incompatibility. when company
objectives are no longer compatible with the current portfolio, restructuring is
planned.
12. Evolving appropriate capital structure- sometimes companies are either over-
capitalized or undercapitalized and needs to be balanced which minimizes the
cost of capital and increase earnings.
13. Consistent growth and profitability- as customer is the king, to meet customers’
expectations and aspirations for demand of quality products at affordable prices.
14. Environmental changes- changes affect due decline in demand, increased
competitive pressures, quicker product obsolescence, increasing stakeholder
expectations, changed legal framework and increasing need for innovation.
15. Meeting investor’s expectations- need for inflow of capital of the investors as a
organizational objective may be necessary to pursue restructuring process.

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16. Resolving conflict- Companies often experience conflict between the

management and the shareholders perspective on the prevailing state of affairs
of the company. Both may not think in the same way.
17. Transferring corporate assets- companies often have assets that they are unable
to use efficiently and may choose to transfer to more efficient user.
18. Bifurcating business- It is a belief that the sum of returns of two businesses is
often greater than that of a single entity, and hence may aim at bifurcate the
company into two or more entities to achieve the objective of increased returns.

Implications of corporate restructuring:

The purpose of restructuring is to survive and thrive.

The success and failure of the measures initiated depend on the type and degree of
restructuring.
While strategic and operational changes address the fundamentals of the company,
financial restructuring addresses the financial issues.
Although restructuring is carried out for creating customer value it affects every
stakeholder and every aspect of the business.

Investors:

Investors represent individuals, institutions and companies that have a financial stake in
the company.
Investors are concerned about the immediate future and the long term returns of the
company.
It may create insecurity and uncertainty in the minds of the investors.
Management has to share the corporate vision so that the investors may feel confident
and remain invested in the company.

Customers:

Restructuring often results in change of focus on the business, leading to reallocation of

resources, introduction of new products or withdrawal of the existing products, changes
in the after sales policy of the company.
Post restructuring the management should focus on the needs and expectations of the
customer by providing quality products and reducing the lead time.

Management.

 Corporate restructuring results in changes in business processes, change in

systems and ensures of effective communication of all stakeholders.
 Release of financial resources blocked in unproductive assets and low returns
assets and business.
 Diversion of core competencies to core areas reducing the risk of failure.

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 Provision of an opportunity to the management to prove its ability to manage the

change.

Employees.

Employees represent the most affected stakeholders in the process of restructuring.

It impacts them psychologically, culturally, and financially, as they have a patterned
mindset.
It becomes difficult to adapt to the new set of challenges posed by the changed
environment, because they need to unlearn old skills and acquire new skills.
The management has to involve the employees in the process and make them
understand the benefits and synergies of the restructuring.

Other implications:

 Restructuring can also impact other stakeholders in the following manner.

 Reduction in competition as weak and inefficient players exist the market.
 Possibilities of seizing new opportunities to create new businesses.
 Contribution to the growth of national economy.
 Need for the government to provide resources and subsidies to companies which
imposes a burden on the national exchequer.

Conclusion.

Modern business environment reflects a radical shift in the manner the business is
being conducted.
The changes are capable of generating both positives and negative impact on the
business.
Managers need to critically appreciate the causes and consequences of corporate
restructuring.
Restructuring can prove beneficial; companies should avoid unnecessarily
experimenting with new ideas and tools in the name of restructuring.
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Corporate restructuring.
Meaning and definitions’:

1. Corporate restructuring deals with elements that can change the effectiveness
and performance of any company or entity.
The basic objective is to introduce path breaking changes in the structural and
performance parameters of the company so that the entity returns to the list of
profit making entities.

This provides the company with an opportunity to revitalize its activities and
progress on the recovery path.

Corporate restructuring is the act of partially dismantling or otherwise

reorganizing a company for the purpose of
a) Making it more efficient
b) More profitable,
c) To attain greater efficiency
d) To adapt to new markets
e) Liquidating projects obsolete and unviable in some areas,
f) Redirecting assets to other existing or new areas.

Acquisitions- mean and represent purchase of new entities to utilize the existing
strengths and capabilities or to exploit the untapped or underutilized markets. It is
done to grow in size and prevent possibilities of future takeover attempts.

Merger- this involves the coming together of two or more companies and poking
of resources for the purpose of achieving certain common objectives.

Joint Ventures- is generally understood as technical and financial collaboration

either in the form of Greenfield projects, takeovers or alliance with existing
companies.

Strategic alliances and collaborations- represent a long term agreement

between two or more entities to co-operate with each other in specific areas of
interest.
Such areas of common interest include access to new technology and product
rage, access to market etc.

Leverage buyouts- means when a company acquires another company using a

significant amount of borrowed funds like bond or loans to pay the cost of
acquisition, the transaction is termed a LBO or leveraged buyout.

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Reasons for Buying of Business:

The prime reasons for acquiring others business or companies include-

1. Pursuing a growth strategy, growth in turnover, market share and profits.
2. Defensive reasons, to avoid future takeovers, need for reorganization in the
industry, and eliminate over capacity.
3. Financial opportunities like undervalued companies to buy cheaply and in
view potential financial benefits in future.

Reasons for Selling A Business:

The reasons for which a company might be willing to sell some of its business can
be the following:
1. To raise money to pay off debts or for future cash requirements’ including
acquisitions,
2. An attractive offer price,
3. The desire to sell off an unprofitable part of business,
4. A wish to sell off non core activities that do not fit commercially or strategically
with the rest of the sellers businesses,
5. Opportunity for realizing a greater value to stockholders if the company is sold
rather than retained,
6. Lack of funds to invest in developing the business etc.

Distinction between Merger and Acquisitions:

Both are generally used to mean the same concept however the terms are
slightly different.
 When a company takes over another company and establishes itself as a
new entity, the process is called Acquisitions. Here the target company
ceases to exist while the buyer company continues.
 A merger on the other hand is a process where two entities agree to move
forward as a single entity as against remaining separately owned and
operated entities.
 Mergers are more expensive than acquisitions with the parties incurred
higher legal costs
 The stock of the acquiring company continues to be traded in an
acquisition, whereas in case of a merger, the stocks of both the entities
are surrendered and the stocks of the new company are issued in its
place.
 A merger does not require cash,
 A merger may be accomplished tax free for both parties,
 A merger lets the target company realize the appreciation potential of the
merged entity, instead of being limited to sale proceeds,

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 A merger allows the shareholders of smaller entities to own a smaller piee

of a larger company increasing their overall net worth.
 A merger of private held company into a publicly held company allows the
target company shareholders to receive a public company stock.
 A merger allows the acquirer to avoid many of the costly and time
consuming aspects of assets purchases, such as the assignment of
leases and bulk sale notifications,

TYPES OF CORPORATE RESTRUCTURING.

Restructuring is a strategic process that provides companies with the much needed
launching pad to improve their performance and profitability.
It gives companies direction and drive to perform. It can be carried out in many ways:

Financial restructuring.

This involves changes in the capital structure and capital mix.

 Focus is to minimize its cost of capital.
 It deals with infusion of financial resources to facilitate mergers, acquisitions, joint
ventures, strategic alliances, Leveraged Buy Outs and stock buybacks.
 Reasons:
 To generate cash for exploiting available investment opportunities.
 Ensure effective use of available financial resources.
 Change the existing financial structure to reduce the cost of capital.
 Prevent attempts at hostile takeovers.
 Leverage the firm.

Portfolio restructuring.

Portfolio restructuring involves divesting or acquiring a line of business perceived

peripheral to the long term business strategy of the company.
It is attempt to respond to market needs without losing its core competencies.
It involves-
1. Restructuring as a result of some strategic alliance
2. Responding to the shareholders desire to downsize and refocus the company’s
operations.
3. Responding to some outside board’s suggestion to restructure.
4. Responding to strategies adopted as a response to exercising call or put options.

Organizational restructuring.

Organizational restructuring is a strategy designed to increase efficiency and

effectiveness of personnel through significant changes in the organizational structure.
It is a response to changes in the business and related environments.
It may take the form of divestiture and or acquisition.

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Strategies for restructuring.

As organizations differ in terms of work culture and value systems there can no single
standard restructuring strategy that will help all organizations.
However the following some general strategies.

1. Hardware restructuring-
When the existing structure is redefined, dismantled or modified then the
restructuring exercise is termed as hardware restructuring.
Here the focus is on-
 Identifying the core competencies of the business to pursue the growth
objectives.
 Initiating downsizing to reduce excess workforce so that the overheads can
be reduced.
 Flattening the management structure and its layers to improve organizational
responsiveness toward planned strategies,
 Creating self directed teams that do not wait for instructions and guidance
and proactive autonomy in functioning,
 Benchmarking against the toughest competitors so that the best practices are
adopted in the company.

Software restructuring:

Software restructuring involves cultural and process changes to establish a

collaborative environment that facilitates growth and restructuring.

It focuses on-

 Adopting an open and transparent communication mechanism, whereby the

strategy is communicated to all levels of the organization without any
difficulty,

 Building a culture of guidance and coaching,

 Building an environment of trust, so that individuals are assured of all support

in carrying out their tasks,

 Raising the aspiration levels of individuals,\

 Empowering peopled and encouraging decentralization and decision making,

 Helping individuals to develop foresight and to get ready for anticipated

changes,

 Training people to accept new ideas and challenging assignments.

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Strategic options in Corporate Restructuring:

Every reorganization/ restructuring process requires suitable strategies to reach its

desired corporate goals.
The strategies adopted are expected to lead to the following results:

 Improve operations,
 Alter the relative strength of the organization to face competition,
 Facilitate creation of competitive advantage,
 Prove better customer satisfaction,
 Generate profits in a free market economy,
 Help the organization differentiate itself from competitors,
 Ensure that it delivers value to the customers.

Some of the strategic options available to the organization to initiate the process of
restructuring are given below:

 Cost leadership options- thru Capacity Expansion, Takeovers, Mergers

and Hiving off.
 Product Excellence Options- this strategy focuses on improving the
profitability of the company by changing the product mix and product
quality, thru strategic alliances and collaborations, Joint Ventures.
 SWOT option strategy is to exploit the strengths and opportunities
prevalent in the market thru diversification, globalization, and splits.
 Assets reorganization strategy- this focuses on acquisitions, sell offs or
divestitures.
 New Ownership relationships strategy thru spin offs, split ups, Equity
carve outs, targeted stock.
 Reorganizing financial claims strategy - which involves bringing about
changes I financial claims of the stakeholders thru Exchange offers, Dual
class stock recapitalization, Leveraged Recapitalization, Financial
reorganization and Liquidation.
 Other options- include Cash Disgorgement, Employee Stock Options
Plans, Buyback offers, Forced sales, Leveraged Buyouts (LBO) etc.

Concept of acquisition:

 Acquisition is an attempt made by one firm to gain a majority interest in

another firm.
 The firm attempting to gain a majority interest is called the acquiring firm
and the other firm is called the Target firm.
 Once the acquisition is completed the acquiring firm becomes the legal
owner and controller of the business of the target firm.
 The acquiring firm pays for the net assets, goodwill and brand name of the
company benefit.

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 Acquisition is done for the following reasons:

 To achieve economies of scale,
 Increased efficiency,
 Enhanced market visibility.
 Some prominent acquisitions are- Google acquisition of DoubleClik an
adverting company,
 Mahindra & Mahindra acquisition of Schoneweiss a Germany company,
 Pricewaterhouse Cooper’s takeover of Ambit RSM.

Acquisitions may lead to the following in future:

1. A subsequent merger between the companies,
2. Establishment of a parent subsidiary relationship,
3. A strategy of breaking up the target firm and disposing off part or all its
assets,
4. Conversion of the target firm into a private firm.

Strategies of Acquisitions:

 Acquisitions involve a process of identifying the right target.

 Many a time’s companies identify wrong acquisition targets which may be due to
the following reasons:
 Too few targets,
 Inappropriate targets,
 Lack of creativity,
 Lack of forward planning
 To over the above companies have to adhere to the following:
 Increase the number of targets,
 Always explore alternatives available and not chase the one everyone else is
bidding for,
 Compare the targets concurrently in an attempt to choose the right and the best
target.
 Buy firms with assets that meet the current needs to build competitiveness,
 Provide adequate financial resources so that profitable projects would not be lost,
 Indentify targets that are more likely to lead to easy integration and building
synergies,
 Continue to invest in research and developments as a part of the firms overall
strategies.

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Types of acquisition:

In order to ensure that the right target is found a company may choose between various
forms and options.

1. Assets Purchase:

 Under this method the acquiring firm purchases specific identifiable assets
for the business.
 These assets are perceived as having potential to add value.
 It may assume specified liabilities also.
 It can save in reducing future capital gain tax upon a sale of assets, and
tax thereto.
 This method suffers from:
 Closing the deal is difficult and tedious task,
 Its requires purchase agreement to allocate purchase price among the
specified list of assets,
 The consent of the shareholders is required for each transfer,
 Problems in reemployment of employees become a problem.
 Instead the target company prefers selling the entire business, with
employees in place and without the need to wind down the business.

2. Sock Purchase :

 Under this method, the acquirer purchases the entire outstanding equity of
the target company with assets and liabilities of the business.
 Such purchase does not cause any disruption in the operations and can
continue as usual.
 This method is popular because- closings are simplified, fewer contract
consents and little paper work is required to transfer specified assets,
 All employees and employee benefits are transferred with the stock sale.
 If a company is widely held then transmittal letters have to circulate for
approval.
 This method does not give the choice of pick and choose of assets and
liabilities.
 It has to inherit everything including unknown liabilities.

Tools for Analysis:

Mergers, acquisitions and restructuring require adoption of appropriate strategies to

succeed.
Various strategic models have been evolved to help companies plan their activities and
operations.

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1. SWOT Analysis:

Mergers, acquisitions and corporate restructuring facilitate expansion and

diversification of entities, the perception is that it would generate competitive
advantage and help grown unabated.
However, no strategy generates only benefits and hence analyzing SWOT is
essential, to understand and evolve right strategies.

Strengths:

Represent elements that are capable of creating a positive impact on the entity
by creating competitive advantage which add to the earning and growth.
Strengths vary from product strength to strategic strength and elements are:
a) Increase market share.
b) Access to better technology,
c) Increased profits,
d) Acquisitions of stock at minimal price,
e) Reduction in debt,
f) Opportunity to acquire end to end solutions,
g) Competitive advantage,

Weakness:

Weaknesses are the elements that give a company its competitive disadvantage.
These elements include:
1. Style of management,
2. Aggressive trade unionism,
3. Creation of monopoly,
4. Integration difficulties,
5. Absence of skilled manpower,
6. Increasing costs,

Opportunities:

Opportunities represent external conditions that are favorable and help the company
attain its planned objectivities.
1. Expansion opportunities’,
2. Better ability to raise capital,
3. Self reliance,
4. Tax concessions,
5. Demographic shifts.

Threats:

Threats represent external conditions that could cause damage to the company
and create hurdles for pursuing its objectives. The common threats are

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a) Unfriendly legal framework,

b) Takeover threats,
c) Changes in technology,
d) Changes in customer tastes and preferences.

Conclusion:

SWOT analysis provides a clear insight into the challenges and issues that face a
merged or restructured entity.
However, critics feel that SWOT analysis is not suitable to diverse and dynamic markets
of the modern day because of:
It generates a long generic list of sub elements,
The toll is more descriptive and less analytical,
The sub elements are just listed and not prioritized,
The toll is used only as an instrument of planning and not implementation.

OTHER TOOLS:

1. BCG MATRIX- developed by Bruce Henderson of the Boston Consulting Group,

a portfolio planning model and named it as BCG matrix.
2. This model was based on the observation that a company’s business units can
be classified into four categories based on combinations of market growth, and
market share relative to the largest competitor. It is also known as “growth share
matrix”
3. The cells of the matrix are used to classify the businesses of the diversified entity
into categories such as Stars, Cash Cows, Question marks, and Dogs.
4. GE Matrix developed by General Electric also known as the GE Business
Screen.
5. Porters Five Forces Model, is a business strategy of an entity which is
determined to a large extent by the “nature of competition prevailing in the
industry”

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Mergers and Acquisitions’ in India- M&A activity:

 M&A played an important role in the transformation of the industrial sector in

since the Second World War.
 The economic and political conditions during the Second World War and post
war periods and after independence gave rise to a spate of M&A.
 The inflationary situation during the wartime enabled many Indian business men
to amass income by way of high profits and dividends and black money.
 Wholesale infiltration of business men in industry during the war period gave rise
to hectic activity in stock exchanges.

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 There was a craze to acquire control over industrial units in spite of swollen
prices of shares.

Post independence period:

 Large number of M&A occurred in industries like jute, cotton textiles, sugar,
insurance, banking, tea plantations etc.
 There were many conglomerate combinations.
 LIC, NTC were some of such combinations and acquisitions in India which were
essentially public sector in nature.
 Between 1951 and 1974 a series of Government regulations were introduced for
controlling the operations of large industrial organizations in the private sector.
 Some important regulations were- Industries Development and Regulations Act,
1951, Import control Order,1957-58, MRTP Act,1969, and FERA,1973.
 These regulations along with others influenced the pattern as well as pace of
diversification undertaken by different categories of companies in India.
 Due to existence of strict government regulations many Indian companies were
forced to look for new areas outside India also.

Post 1990:

 M&A scenario started changing after introduction of liberalization process in

1991.
 Government regulations were reduced.
 Dilicensing, dereservation, MRTP relaxations, liberalization of policy towards
foreign capital and technology led to structured transformation.
 It provided a launch pad for enterprises to grow and expand through M&A
strategy.
 Groups like Tata, Birla, RPG, and Vijay Mallay Ajay Piramal were aggressive in
this sector of consolidation and takeovers.
 Multinational like, HUL, Sterlite group, HCL Tech, Glaxo India, Sun Pharma are
some examples.

Recent trends’ and developments:

Post 2000 period there has been tremendous increase in Indian M&As.
Indian companies have been active players in M&A front.
Mega deals like Tata-Corus, Hindalco Industries, Dr Reddy Labs, Bennett Coleman,
and HCL Technologies’ targeted various companies during the period.
Indian M&A have seen tremendous momentum in 2005 when M&As having value of
US$22 billon was reported and 2007 543 deals worth US$ 30.4billions was reported.
There has been significant increase in 2010 where deals worth US$44 billion were
reported.
The sectors that have been seeing hectic activity include telecom, pharma, software,
steel, automotive, FMCG and chemicals.
Some of the largest mergers and acquisition deals in India Inc are:

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1. Tata Steel- Corus.

2. Vodafone- Hutchison Essar.
3. Hindalco-Novelis.
4. Ranbaxy-Daiichi Sankya.
5. ONGC-Imperial Energy.
6. HDFC Bank- Centurion Bank of Punjab.
7. Tata Motors- Jaguar Land Rover.
8. Sterlite-Asarco.
9. Suzlon-Repower.
10. RIL-RPL.

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MOTIVES BEHIND MERGERS AND ACQUISTIONS:

Some of the popular motives which inspire corporate to go behind mergers and
acquisitions are a desire to diversify and to achieve higher growth rates.
Some of the common identified reasons may be:

1. Synergy:

Synergy is the most essential component of mergers.

In mergers, synergy between the participating firms determines the increase
in value of the combined entity.
Synergy accrues in the form of revenue enhancement and cost savings.
Synergy can take the following forms:
a) Operating synergy- refers to cost savings that come through economies
of scale or increased sales and profits which leads to overall growth of the
firm.
b) Financial synergy-refers to availing the benefits of lower taxes, higher
debt capacity or better use of idle cash, claiming of accumulated losses or
unabsorbed deprecation of the combined profits etc.
Tata Tea with Tetley to leverage Tetley international marketing strengths.
Glaxo and Smithline Beecham gained market share and eliminated
competition amongst each other.
HUL and Lakme lead to enter cosmetics markets through an established
brand.
c) Acquiring new technology- refers to the need to constantly upgrade
technology and business applications for competitive edge in the market.
d) Improved profitability- refers to exploring the possibilities of a merger
when they anticipate that it will improve their profitability.
e) Acquiring a competency- refers to acquisition of a competency or
capability that they do not have and which would benefit both the
companies.
f) Entry into new markets- is looked upon as a tool for hassle free enty into
new markets. Normally it is difficult and costly to enter into new markets

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due to stiff competition from the existing companies. Merger is a route

adopted when a company can enter with ease and avoid the hassles of
normally entry. Orange, Hutch and Vodafone took place to achieve this
objective.
g) Access to funds- refers to a method to access funds which the company
is presently deprived of due to existing financial position.
h) Tax benefits- are a method adopted to reduce tax liabilities’. A loss
making entity merging with a high tax liability company can set off the
accumulated losses of the target company.

Identifying value drivers in mergers and acquisitions:

 A merger is a game of drawing synergy.
 An acquiring firm, which wants to optimize value gains attempts to increase
synergy and minimize the premium, which it has to pay to target company.
 Which means-
 Value created by Merger & Acquition= Increase in synergy-decrease in premium.

Increase in synergy:

Synergy is the result of increase in

1. Efficiency,
2. Improvements in styles of management which makes the company stronger,
3. Improvements’ in the financial restructuring of the capital to reduce cost and
efficient deployment of financial resources,
4. Improvements in operational efficiency to increase productivity, reducing or
eliminations rejections and wastages,
5. Change in the ability to control risk,
6. Reduction in inefficiencies existing before the merger,
7. Synergies can be exploited only when the value of the combined entity exceeds
the sum of its parts
8. The combined entity will be able to increase its revenue, reduce the volatility in
its earnings or even reduce its costs.

Decrease in Premium:

Paying a lower price to the target company is another way of increasing the net gain
from a deal.
Acquirer ascertains the appropriate amount payable for the target and avoids paying
high premium for the target thru identifying market imperfections while valuing.

Synergy can be attained by focusing on the following key variables:

1. Managerial skills.
Managerial skills are important inputs for every entity which may range from
industry specific skills or generic skills. An acquirer is influenced by the fact that
managerial skills and resources of the target company which is transferable.

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2. Boosting marginal revenue:

The revenue per unit can be improved if the acquiring entity is able to redirect the
available financial resources are more attractive and remunerative thus
improving ROI of the merged entity.
3. Lowering Total Costs:
The general view is that revenue improves if total cost declines and to achieve
this merged entity tries to reduce transaction costs and eliminate existing market
inefficiencies. Integration results in reducing the overall costs many times.
4. Reducing marginal costs through operation synergy:
A merger is driven by the notion that it will result in economies of scale and bring
down the marginal cost of operations, as production increases bringing down the
average cost of unit. This results from rationalization of production and increased
scale of operation.

5. Reducing Beta:

 Beta is the measure of the volatility or systematic risk of a security or a

portfolio in comparison to the market as a whole.
 Beta is calculated using regression analysis and reflects the tendency of
returns to respond to the swings in the market.
 A beta if 1 indicates- if the beta of the stock is 1.4 it is theoretically 40%
more volatile than the market and if a stocks beta is 0.75 than it is 25%
less volatile that the market.
 Based on Beta a company can increase its valuation by either increasing
it’s earning or reducing risk.
 Risks are classified as systematic risk and unsystematic risk.
 A systematic risk is the risk that cannot be reduced or predicted in any
manner- like increase in interest rates changes in Government legislations
etc. this is also called as un-diversifiable risk as it affects the entire
market.
 Un-systematic risk is the risk that is specific to an asset.
 It is company specific and can usually be eliminated through
diversification.
 Such risks include business, financial, liquidity, exchanger rate, country
and market risks.

Reasons for failure of Mergers and Acquisitions’:

Sometimes the end result of some mergers and acquisitions is not positive.
M&A quite often destroy rather than add value also to the acquirer business.
The most common reasons for failure are as follows:
1. Unrealistic price paid for the target company.
 As the process of M&A involves valuation of the target company and
paying a price for taking over the assets and liabilities of the company,
many a times the price paid to the target company is much more than the
real value and thus the acquirer has to carry the burden of overpriced
assets.

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 This dilutes the future earning of the acquiring company.

 This is called “Winners curse” which wipes out any gains made from the
acquisition.

2. Difficulties in Cultural Integration:

As merger involves combining of two or more different entities and reflect
different corporate cultures, styles, leadership, employee expectations and
functional differences and if not properly implemented may turn out to be a
disaster.
3. Overstated synergies:
Mergers which are considered instruments of creating synergies like cost
savings, increased revenues etc, sometimes these are overestimated and
hence there may be failures.
4. Integration difficulties:
Companies may also face integration difficulties as the combined entity may
fail to adapt to new set of challenges given the changed circumstances’. To
overcome this companies prepare plans to integrate the operations of the
combining entity after collection all necessary data on various issues related
to integration.
5. Inconsistent strategy:
Mergers that are driven by sound business strategies are the ones that
succeed, if however, entities fail to assess the strategic benefits of mergers
face failure and hence it is important to understand the strategic intent.
6. Poor business fit:
Mergers and acquisitions also fail when the products or services of the
merging entities do not naturally fit into the acquirers overall business plan,
this delay the efficient and effective integration and causes failure.
7. Inadequate due diligence:
Due diligence is a crucial component of the M&A process as it helps in
detecting financial and business risks that the acquirer inherits from the target
company. Inaccurate estimation of the related risk can result in failure of the
merger.
8. High leverage: One of the crucial elements of an effective acquisition
strategy is planning how one intends to finance the deal and the ideal capital
structure. If it is cash deal then borrowing will be high and cost will be high as
interest and may defeat the very purpose of the acquisitions as earnings will
be affected.
9. Boardroom split: Composition of the board is one of the important elements
of a merger planning strategy, if not, the existing managers or directors may
be suddenly deprived of the authority and may be bitter and may lead to
personality clashes, which may prevent or slow down the integration process.
10. Regulatory issues: The entire process of merger and acquisitions requires
legal approval and if one of the parties is not interested in the merger then
they might create legal obstacles and slow down the entire process. This
results, in regulatory delays and increases the risk of deterioration of the
business.

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11. HR issues: A merger or acquisition is identified with job losses, restructuring,

and the imposition of a new corporate culture and identity. This creates
uncertainty, anxiety and resentment among the company’s employees. If
these issues are not properly addressed, it may impact workers morale and
productivity and hence HR issues are crucial to the success of M&As.

BARRIERS OF RESTRUCTURING.

Companies opt for restructuring to attain various benefits like economies of

scale, reach out to new markets, cost savings etc, but many a times the process
is never a smooth ride. The process has many impediments which act as barriers
for restructuring.
1. Inadequate commitment from top management- the concept of “What is in
it for me” of the top management if often missing and the change process do
not get the support of the top management, thus the process often fails.
2. Resistance to change- the managerial mindset of resisting change is
another barrier to the process, because they are never taken into confidence
before initiating the process. This instills fear in the mind of the conseques of
changed work environment, unfamiliar technology, cost cutting measures
resulting in layoffs and stringent performance targets.
3. Poor communication- is another hurdle because the management fails to
communicate the reasons and objectives of the restructuring process,
resulting in prejudice and negativity among the employees.
4. Absence of requisite skills- the people who need to initiate the process of
restructuring should be familiar with the processes and mythology involved.
Many a times the companies do not hire the services of experts as they
consider it as a routine internal matter and all are capable of carrying out the
task and not handled in a professional manner.
5. Skepticism- people in the process show skepticism about the outcome of the
process and hence the process is never executed effectively and negativity
creeps in which spells disaster of the organization and the desired objectives
remain on paper only.
6. Failure to understand benefits of restructuring- the objects of restructuring
is often understood in reduction in work force, deadwood, etc and becomes a
barrier in the restructuring process.
7. Lack of resources- as the total process is time consuming and resource
intensive, companies do not earmark resources for the process. This creates
financial strains on the company and even invites legal proceeding at times.
8. Organizational workload-failure to anticipate the effects of restructuring on
organizational workload often acts as a barrier; labor leaders interpret it as a
case of workforce exploitation and hence instigate workers against
restructuring.
9. Non adherence to Time schedule- the restructuring process calls for strict
adherence to time schedules. Failure to adherence to time schedules results
in cost increase, increased legal hassles and failure to attain planned
objectives.

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Lack of clear and visible leadership- a strong and formidable leadership is of

prime importance to lead the process restructuring. Absence of clear and visible
leadership results in vague, ambiguous environment and misdirects the entire
process.

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TAKEOVERS - Concept:

 Corporate takeovers play in important role in the economy.

 A takeover is a process wherein an acquirer takes over control of the
target company.
 The acquirer may do so with or without the consent of the shareholders.
 An acquirer may also acquire a substantial quantity of shares or voting
rights of the target company which is termed as Substantial acquisition of
interest.
 The acquirer may be an individual, a company or any other legal entity or
persons acting in concert (PAC).
 The acquirer generally acquires shares through a public announcement
which is called an OPEN OFFER.

An open offer is declared generally based on the following parameters.

1. The negotiated price under the agreement.

2. The highest price paid by the acquirer or PAC- may be through public issues
or right issues during a framed period.
3. The average weekly high and low of the closing prices in the prescribed
period.
4. Where the target company is untraded then the company may use parameters
such as return on net worth of the company, book value per share, earning per
share (EPS) etc.

Forms of Takeovers:

A takeover can be of different types which are classified from the legal perspective or
the business perspective.

Legal perspective:

Corporate takeovers are governed by specific laws which protect the target company
and the shareholders. From the legal perspective, takeovers fall into three categories.

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Friendly takeover:

 Here, the acquirer acquires the shares of the target by informing the Board of
Directors their intention and if the Board feels that the offer is beneficial it accepts
and recommends to its shareholders.
 Here the acquirer may acquire the assets or purchase the stock/ shares of the
target company.
 The advantages of friendly takeover by purchase of assets are:
 The acquirer can purchase only those assets that it desires to purchase.
 The acquirer is not required to take over any contingent liabilities of the target
company.
 The acquirer can negotiate the price with the company.
 The advantages of takeover by purchase of stock are:
 The acquirer has to assume the liabilities of the target company.
 The target firm may continue to operate as a subsidiary of the acquirer.
 The approval of the shareholder of the target company is necessary.

Hostile takeover:

A hostile takeover is one where the Board of Directors of the target company refuses
the offer of the acquirer to purchase the shares and acquirer pursues by making various
offers to the management.
Sometimes such deals are made without informing the target company also.

The acquirer has three options if he chooses to proceed with a hostile offer:

Tender Offer:

Tender offer is one made by the acquirer to buy the stock of the target company either
directly from the shareholders or through the secondary market.
This strategy is a costly option as prices increase due to higher anticipations of the
shareholders.

Proxy fight :

Here the acquirer approaches the shareholders of the target company with an objective
of obtaining the right to vote for their shares.
Here the acquirer hopes to secure enough proxies that would help them gain control
over the Board of Directors of the company.
Proxy fights are very expensive and difficult mode of takeover.

Creeping tender offer:

This method involves purchasing enough stock from the open market to bring about a
change in management.

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Most countries make it impossible to such creeping takeover dues to various regulations
in place by their Regulators lie SEBI in India and act as a defensive strategy.

Bailout takeover:

This involves the takeover of a financially sick company by a financially rich company as
per the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. The
objective of this take over is to bail out the sick units from losses.

Business Perspective:

 Takeovers under this category include the following types.

 Horizontal takeover:
 When a company takes over another from the same industry, the takeover is
referred to as a horizontal takeover.
 The basic objective behind this type of takeover is to attain economies of scale
and increase market share by entering into the segments of the company taken
over.
 Vertical takeover:
 When a company is taken over by any of its vendor or customers, it is referred to
as a vertical takeover.

Backward takeover:

When the business of the vendor is taken over it is called a Backward takeover.

Forward takeover:

 When the business of the customer is taken over then it termed as Forward
takeover.
 The main purpose of the backward takeover is to attain a reduction in costs and
in case of forward takeover the purpose to reach out the markets directly without
any intermediary.

Conglomerate takeover:

 When a company takes over another from a totally different industry, it is termed
a Conglomerate takeover.
 This type of takeover is pursued with the objective of attaining diversification.

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Reverse takeover:

 This is takeover strategy where a private company acquires a public company

and is planned to enable the private company to effectively float itself and at the
same time bypass the lengthy and complex process of going public by IPO.
 This strategy makes the company less susceptible to markets conditions and
trends.
 This is difficult and costly process also.

Benefits of Takeovers:

 A takeover is expected to generate the following benefits:

 It helps the acquired to attain increase in sales and revenue.
 The acquirer is able to venture into new business segments and markets with
ease.
 The overall profitability of the entities improves.
 It helps the acquirer in increasing its market share.
 It reduces competition from the perspective of the acquiring company.
 The industry can reduce over capacity by cutting down the scale of operations in
the new entity.
 It helps the acquirer to expand its brand portfolio.
 The new entity is able to attain the benefits of economies of scale.
 It helps attain increased efficiency as a result of corporate synergies.
 It helps in eliminating jobs that overlap in responsibilities’, thus helping reduction
of the operating costs.

Disadvantages of takeovers:

 A takeover results in the following disadvantages:

 It results in reduced competition and thus reduced choice for consumers.
 It results in job cuts, as the acquirer tries to reduce operating cost.
 The firms that merge may suffer from cultural differences that may lead to conflict
with the new management.
 The acquirer is often burdened with the hidden liabilities’ of the target entity.
 The employees of the target company work in an environment of fear and
uncertainty, which affects their motivational levels.

Takeover Code:

 The year 1992 marked the beginning of a new era in the history of Indian Capital
markets.
 This year saw the enactment of the Securities and Exchange Board of India
(SEBI) Act, 1992 under which SEBI was established as a regulatory body to
regulate and promote the developments of the securities market and to protect
the interest of investors.

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 To curb negative impact of takeovers, SEBI issued the Substantial Acquisition of

Shares and Takeovers Regulations in 1994.
 These regulations covered both friendly and hostile takeovers, which ensure that
the minority shareholders got fair treatment and in hostile takeovers companies
were protected from moves by unknown acquirers to the targets management.
 The regulations incorporated various provisions to promote transparency in the
takeover process etc.

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Takeover Defences:

Takeover defences are strategies adopted by the target company to prevent its
takeover by another company.
A takeover target company may resort to any one of the following takeover defences.

1. Bank Mail:
 A bank mail defence strategy is one where the bank of the target company
refuses financing options to the company that is keen on taking it over.
This is done with the objective of preventing an acquisition and:
 Depriving the merger through non availability of finance.
 Increasing the transaction costs of the acquirer.
 Delaying the takeover and permitting the target company to develop other
anti takeover strategies.
2. Greenmail:
 This is defence strategy where the target company purchases enough
shares of another publicly traded company that poses a threat of takeover.
 The threat forces the target company to buy those shares at a premium to
avoid or suspend the takeover.
 This buyback is referred to as the bon voyage bonus, as it enables the
target company to be left alone by the greenmailer.

3. Crown Jewel Defence:

 Crown jewel represents the most valuable unit or department of a
company as they are very profitable with good future prospects.
 Here the company creates anti-takeover clauses whereby it gets the right
to sell off the crown jewels in the event of a hostile takeover.
 Such a clause deters the acquirer from attempting the takeover of the
company.

4. Poison Pill/ Super Poison Put:

 Poison pill put is a strategy adopted to increase the likelihood of negative

results over positive ones for the company attempting a takeover.
 This term has been derived from warfare terminology.

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 Poison pills were pills laced with poison that spies used to carry and would
consume when captured, to avoid possibility of being interrogated for the
enemy’s gain.
 Here it represents a strategy wherein the current management team of the
target company threatens to quit en masse in the event of a successful
hostile takeover.

5. Flip-Over:
 This is a type of poison pill where the current shareholders of the target
company are given the option to purchase discounted shares after the
potential takeover.
 The strategy involves giving a dividend in the form of rights, so that the
existing shareholders can purchase equity or preference shares at a value
lower than the prevailing market price.
 Once the takeover is complete, the current shareholders can “flip over” the
rights, allowing them to purchase the acquirer shares at a discount.
 This strategy results in dilution and price devaluation of the shares held by
the acquirer, and defeats the very purpose of the takeover.

6. Grey Knight:
 A grey knight is an informal and ambiguous intervener in the takeover
battle that makes a counter bid for the shares of the target company.
 His bid causes confusion between the original acquirer and the target
company, as the intentions behind the counter bid is not clear.

7. Jonestown Defence/Suicide Pill:

 The Jonestown defense is another defence mechanism against hostile
takeovers.
 Here the target firm employs tactics that might threaten its own existence,
so as to thwart an imposing acquirer’s bid.
 Since the strategy threatens the very existence of the target and hence is
also called as a suicide pill and represents an extreme version of the
poison pill.

8. Killer Bees:
 Under this strategy, the target company employs firms or individuals to fen
off a takeover bid.
 The target company wants to avert the takeover attempt and either is
unable to do this on its own or does not want to be seen doing so.
 Hence, it employs others companies or individuals to do the job for it.

9. Leveraged Recapitalization:
 This is another strategy used to fend off a hostile acquisition.
 Here the target company either borrows significant additional debt that
facilitates repurchase of stocks through buyback programs or distributes
liberal dividends.

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 This leads to a sharp increase in the share price and makes the company
a less attractive takeover target.
 This strategy is also a form of poison pill by increasing the debt and
maintaining shareholders interest in averting takeover attempts.

10. Lock up provision:

 This is a strategy, wherein an option is granted by the seller to the buyer

to purchase a target company’s stock as a prelude to a takeover.
 Here the acquirer requires a lock up agreement before making a bid as it
facilitates the negotiations progress.
 As a result of this agreement, the major or controlling shareholder gets
effectively locked up and is not free to sell the stocks to a party other than
the potential buyer.
11. Nancy Reagan Defence:
This is a strategy in which one where the Board of Directors of the target
company say “No” to the formal bid made by the acquirer to the shareholders to
buy their shares.
The Board has the authority to resist a takeover attempt and the matter ends
there.
12. Non Voting stock:
Nonvoting stock comprises shares that provide the shareholders with very little
powers on issues such as election of the Board or mergers.
Such shares are issued to individuals who want to invest in the companies
profitability and success but are not interested in voting rights.
Such shares are like Preference shares and help in making the company a
closely held company and act as a takeover defence.
13. Pac-Man Defence:
This strategy is commonly used to prevent a hostile takeover.
Here the target company counters the takeover bid by trying to acquire the
bidders company by making a counter offer to purchase the business of the
acquiring company.
This diverts the attention of the acquirer, who becomes buy in preventing the
takeover bid of his own company.
14. Pension Parachute:
A pension parachute is a type of poison pill strategy that prevents the acquirer
from going ahead with a hostile takeover by utilizing the surplus cash in the
pension fund for financing the acquisition
15. People Pill:
This is another defensive strategy adopted to ward off a hostile takeover. Under
this strategy, the management of the target company threatens the acquirer that
in the event of takeover, the entire management team will resign.

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16. Lollipop defence:

This is a strategy wherein the target creates barriers outside its periphery to
protect the company from a takeover.
It is called lollipop defence as the company is compared to a lollipop, which has a
hard, crunchy exterior but a soft, chewy center.
The takeover is made difficult due to initial barriers, however, once the acquirer is
able to overcome these barriers, the target stands exposed and takeover is only
a matter of time.

17. Macaroni defence:

This is another takeover defence strategy wherein the company issues a large
number of bonds in the market, with a condition that if the company is taken over,
the bonds will have to be redeemed at a very high price, which acts as a
deterrent and thus the acquirer may be forced to give up its bid for takeover.

18. Shark repellent or Porcupine defence or provision:

This strategy is another measure, wherein the target company makes special
amendments to its bylaws that become active only when a takeover attempt is
announced.
The objective is to make the target company less attractive.
Shark repellent is a repellent applied in deep seas divers to prevent sharks from
attacking them.
19. Poison Put:
Poison put is also called event risk covenant and is a strategy where the
bondholders and stockholders are assigned a right whereby they can demand
redemption of stock before maturity at a value in excess of the par value or
purchase the company’s shares at a very attractive fixed price.
20. Safe harbour:
Safe harbour is a type of shark repellent that works as explained earlier. Here
the target company creates barriers making it difficult for the acquirer to succeed
in its takeover bid by keeping the target in safe harbour and out of reach of the
acquirer.
21. Showstopper:
This concept implies inserting a clause that imposes an additional financial
burden on the acquirer in the event of a takeover, that is, by fixing a time
schedule to pay their dues, if not, pay interest for delayed payment.
22. Scorched-earth defence:
The concept of scorched earth is a military strategy, wherein the target company
starts liquidating valuable and desired assets and assuming fresh liabilities so
that the proposed takeover becomes unattractive to the acquiring firm.
23. Staggered Board of Directors:
A staggered board of directors is a defence wherein a certain percentage of the
company’s directors is replaced every year, instead of the entire board being
replaced annually.

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This strategy makes it difficult for the acquirer to seize control over the target, as
the bidder has to win more than one proxy flight at successive shareholders
meetings to exercise control over the target.
24. Standstill agreement:
Here in this defence the bidder agrees to limit his holdings of the target and
repurchase again at a premium.
This strategy gives the target company some time to build up other takeover
defenses. It gives time for negotiation, due diligence to both the parties in a
potential acquisition.
25. Targeted Repurchase:
In this strategy, the target firm purchases back its own shares from the hostile
bidder at a price well above the market price, and regain control in the company
from other acquisitions latter.
26. Top-Up:
A top up is a type of stock repurchase program wherein shares are repurchased
from the existing shareholders of the company.
The buyback results in immediate reduction of the voting powers of the
shareholders.
This strategy provides the target company with time for enhancing and
strengthening its takeover defence mechanism.
27. Treasury stock:
This strategy is also known as reacquired stocks or buys back of stocks/shares
by the issuing company with the objective of reducing the amount of outstanding
stock in the open market.
This strategy is a tax efficient tool of giving cash to shareholders instead of
dividends.
The shares repurchased are either cancelled or held for reissue and such shares
are called as Treasury stock or shares.
28. White Knight:
This is a strategy wherein, another company makes a friendly takeover offer to
the target company to help the target successfully avoid the hostile takeover bid.
As there is save bid it is called as White Knight.
29. White Squire:
A white squire strategy is similar to white knight strategy; the only difference is
that a white squire exercises a significant minority stake as opposed to a majority
stake. In this strategy the company saving does not have any intention of getting
involved in the takeover battle, but serves as a figure head in defending the
target in a hostile takeover.
30. Voting Plan or Voting Rights Plan:
This is another poison pill strategy, wherein, there would be plan for shares that
carry superior voting rights compared to ordinary shares so that the acquirer
cannot exercise control because the stock carrying superior voting rights will help
the company to fight the hostile takeover bid.

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31. White mail:

White mail is another takeover defence strategy wherein the target company
issues, a large number of shares at a price quite below the market price to a
friendly party.
This forces the acquiring company to purchase these shares from the third party
to complete the takeover, and makes it difficult and expensive from the other
friend company.
Once the takeover bid is averted the target company may either buyback the
issued shares or leave them floating in the market.
32. Lobster trap:
A lobster trap is an anti takeover strategy whereby the target firm issues a
charter preventing individuals with more than 10% ownership of convertibles
securities in the shape of bonds, preference shares, warrants etc for transferring
these securities to voting stock.
This becomes a barrier for the acquirer as he cannot exist in case control is not
obtained over the target company latter.

Conclusion:
Takeovers are a direct outcome of the corporate desire to grow big and powerful
and corporate have to carefully evaluate each and every opportunity before
attempts of takeover bids are made.
---------------------------------------------xxxxx-------------------------------------------------------

DUE DILIGENCE:
Introduction:

 Mergers and acquisitions involve huge investments of financial resources.

 No company would like to lose money without a deal.
 It is necessary to evaluate the commercial viability of every deal.
 The process of evaluation is known as Due Diligence.
 Due diligence provides an assurance that the deal is apparently sound and good
one.

Concept of due diligence:

 The term is used in different contexts and meant is basically meant as “ an

activity involving either the performance of an investigation of a business, its
performance with a certain standard of care”
 Due diligence is also described as the process of investigation performed by
investors into the details of a potential investment.
 It involves examination of operations, management, verification of material facts,
prospective business opportunities, financial, legal and other material state of
affairs of the target company.
 Due diligence is legally defined as “ a measure of prudence, activity, or assiduity,
as is properly to be expected from, and ordinarily exercised by, a reasonable and

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prudent person under the particular circumstances, not measured by any

absolute standard but dependant on the relative facts of the special case”
 Thus the basic function of due diligence in mergers or acquisition is to assess the
potential risk of a proposed transaction by inquiring into all relevant aspects of
the past, present, and predicable future of the business to be purchased.

The activities include the following:

1. Financial statements- confirming the existence of assets, liabilities and equity in

the balance sheet and determines the financial health of the company based on
the income statement.
2. Management and operation review- it determines the quality and reliability of the
financial statements, and helps to gain a sense of contingencies beyond the
financial statements.
3. Legal compliance review- it checks for potential future legal problems stemming
from the targets past.
4. Document and transaction review- which ensures that the approach, paperwork
of the deal is in order and that the structure of the transaction is appropriate.

Need for due diligence:

 It is required due to the following reasons:
 Organizations’ today operate in a very uncertain business environment that is full
of risks.
 Companies have scare resources and there is a great element of risk.
 To understand the past and the future earning capabilities o the entity, one needs
to thoroughly analyze the industry and the environment in which it is expected to
operate.
 Due diligence enables the investor to know the strengths’ and weakness of the
business one is investing in.
 Due diligence gives a fair value of the investment to the potential investor.
 Due diligence helps in identifying, the hidden irregularities existing in the
business.
 Due diligence is an effective tool for ensuring that the prevailing system of
checks works.

What does due diligence involves:

 Due diligence is a very lengthy process of reviewing information.
 The information is about:
 Historical data.
 Current financial data.
 Forecasted financial information.
 Business plans.
 Minutes of directors meetings and management meetings.
 Audit paperwork files.
 Contracts with suppliers, customers and staff.

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 Confirmation from financiers, debtors etc.

 Due diligence should not be restricted to reviewing documentation alone,
discussion with staff, both formal and informal should be conducted along
with visits to target premises and branches must be made.

Role of Advisors in due diligence process:

Professional advisors such as Legal, Tax, Accounting, Management and

Operations experts are normally engaged as consultants to evaluate the target
company.
1. Legal professionals- are those experts in corporate management, tax, real
estate, employee benefits related, insurance and other kind legal specialists.
This is essentially to support the management to the complex modern
business environment. The support of internal staff is also utilized.
2. Financial professionals- as the modern company require huge financial
resources’ for their operations, companies hire the services of outside
auditors for the purpose of due diligence. In addition companies hire the
services of underwriters, registrars, investment bankers and commercial
banks to mange national an cross boarder public offerings.
3. Management consultants- to work on issues relating to corporate
integration, business fitness, management of human issues and cultural
integration.
4. Operational professionals-outside consultants along with key in house
operating personnel’s are engaged and instructed to scrutinize the targets
business and report their findings to the decision makers. Operational due
diligence includes investigating the targets intellectual property, it production,
sales and marketing efforts, human resources, and other operational issues.

Parties interested in due diligence:

Apart from individuals who are associated in carrying out the process of due
diligence, there are individuals who are interested in the outcome of the process.
They are-

Employees- due diligence is undertaken to address the fears of the employees

that post merger, they might be laid off or their salaries may be reduced. Due
diligence gives a fair idea about the motives of the buyer and what he proposes
to do once the merger is complete. It may be done through the process of
negotiation and the buyer can give them the assurance that the interests of the
employees would be taken care of.

Trade Unions-trade unions are associations that fight for the rights of the
employee’s en ensure that they are not unnecessarily exploited or harassed.
Trade unions ensure that the agreement of merger addresses the concerns of
the employees and assures them continuity in employment.

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Shareholders and Creditors- they have a financial stake in the business, due
diligence gives them a fair idea about the risks involved in the project and in turn
assures than their returns from the business.

Vendors- are the entities who supply various inputs such as raw materials, tools
and equipment to the business. Their fortune is related to the company and due
diligence gives them a clear idea on the direction in which the merger is moving
and about the future of their relationship with the new entity.

Customers-need that they requirements are fulfilled the same way in future and
they are interested to know about the future operational strategy of the business
and help them decide on their consumption patterns.

Government- is responsible for ensuring that the rights and privileges of all the
stakeholders are protected. Based on the projections and findings of the due
diligence process, the government can decide on the course of action it needs to
pursue to protect the interests of the stakeholders.
Society- provides resources for all types of activities and as they are limited and
scarce, it acts the role of a watch dog so that wastage of resources can be
curtailed. It is important for the society to understand the course of those events
are taking and ready itself for the appropriate action. Due diligence provides it
with the much needed feedback and basis for action.

Transactions requiring Due diligence:

Due diligence provides a deep insight into the activities of the business and also
prevailing business environment and the future prospects of the business.
Hence it has become indispensable and in particular in the following areas:

Mergers and acquisitions:

 In M&A the potential buyer carries out extensive due diligence to know more
about the target company.
 To get better value of the deal.
 The cost of due diligence is much less than bad acquisition.
 Sends a questionnaire and obtain full details of the business, financials, patents,
licenses and collaborations agreements, employment contracts etc.
 It also reviews regulatory and press clippings, media reports etc.
 Verifies, if there are any legal and regulatory issues, existing and pending
lawsuits, other litigations involving the entity pending.
 Undertakes, a detailed study to look for conflicts of interest and other problems
pending.

The analysis focus also on the following:

1. Personnel- people constitute the most important element of any organization. In
a merger the buyer has to absorb the human resources’ and it is imperative for
the buyer to review employee’s skills, experience, wages, payroll procedures and

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other relevant human resources issues of the target company. The acquirer
would also negotiate to get rid of dead wood in the target company.
2. Financial operations- the buying entity would try figure out the financial
implications of his deal and examine, the company’s books and records,
accounting methods, analyze cash flows both present and projected, accounts
receivables, debt and bank accounts, service/product pricing and its consistency
with industry standards.
3. Marketing- the buyer analyzes the marketing activities and its revenues and also
the future earning potentials with strategies of the company. The buyer shall also
examine the company’s advertisement campaigns programs, marketing and
sales strategies etc.
4. Property and equipment- the buyer would like to take over only the assets that
will prove beneficial to them, review all related leases and the deeds thereto,
conduct appraisals for all equipment and assets, consider depreciation in
property and equipment values. This enables the buyer to estimate the purchase
consideration of the deal which it finally pays for taking over the business of the
target company.
5. Business operations- here the buyer analyzes, location of the organization, its
branches and subsidiaries, adherence to inventory management techniques,
vendor management, overall administrative policies, receivables and customer
relationship management, safety management and insurance covers taken etc.
6. Due diligence in Joint Ventures and Collaborations is also crucial because two
companies join hands to work with each other in a defined structure, with a
motive to ensure that its investment is capable of yielding returns and the
combined strength’s can be best utilized for mutual gain.

Steps in Due Diligence:

The essence of any due diligence exercise is its ability to

 Reduce uncertainties,
 Confirm assumptions,
 Define scope,
 Prioritize issues,
 Understand the management and operations, technologies,
 Logistics, corporate strategies,
 Finance and
 Summarize the complex issues into concise and easily understandable terms.

Process of Due Diligence:

 Planning:
This is stage where all the initial planning relating to the conduct of due
diligence is done namely:
Defining the scope - by constituting a committee or team for carrying out the
entire exercise which defines the objectives to be attained, through the
exercise.

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Deciding focus areas namely, sustainability of business, financials,

competition, management team and organizational culture, potential liabilities,
technology, existing market and potential, business to business fit.
Finalizing team structure- with people having the required skills and
expertise
Defining responsibilities and expected outputs of the team so that they can
work collectively towards the common goal.
Defining the time schedules- for each step and the time frame which helps the
parties attain the desired goal without loss of time and energy.
Communication of information requirements which enhances the teams ability
to collect complete, accurate and timely information.
Finalizing templates and tools required- such as internet database search,
regulatory database search, questionnaires, worksheets and other
communication methods such as interviews and emails.

 Data Collection phase:

This stage involves collecting existing business process data. The sources of
information that can be tapped include the internet, regulatory organizations
and their databases, competitor’s information, vendors, customers, industry
associations etc. The research can be qualitative and quantitative which may
include surveys, samples etc.
 Data analysis phase:
This stage involves analyzing the collected data and drawing conclusions
from the same. The process would be to focus on the organizations’ financial
health, its capacity to deliver in future, its reputation and approach to working.
 Report finalizations phase:
After the completion of data collection and analysis, the due diligence team
prepares the final report and submits the same to the investors. The
conclusions so presented in the report become an integral part of the decision
making and negotiation process.
 Due diligence reporting:
o The due diligence report contains the key finding of the process. The
key features of due diligence reports are:
o Reflect a fair and independent analysis and evaluation of financials
and commercial information.
o Contain collection, analysis, interpretation of financial, commercial and
tax information in detail.
o Report properly reviewed and analyzed financial information to bidders
and various stakeholders.
o Provide feedback on auditing of the special purpose accounts.
Types of Due Diligence:
Due diligence provides valuable information to the buying company and helps in
identifying the right target.
Different types of due diligence is as follows:

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o Financial due diligence.

o Legal due diligence.
o Operational due diligence.
o IP due diligence.
o IT due diligence.
o Human resource due diligence.

Financial due diligence:

 Financial due diligence analyses the financial performance of the entity both
qualitatively and quantitatively.
 Getting, a sense of earnings on a normalized basis.
 Evaluates company’s historical, current and prospective operating results.
 Establish trends in revenue and profits.
 In-depth analysis of the balance sheet, cash, and marketable securities,
receivable’s, inventory, prepaid expenses and other current assets and fixed
assets. On the liability side it covers accounts payable, taxes and debt
obligations and also analysis of contingent liabilities.
 Analysis the assets and liabilities to be acquired in future.
 Look into federal and state taxes paid and returns filed etc.

Legal due diligence:

Legal due diligence consists of a scrutiny of all, or specific parts, of the legal
affairs of the target company with a view of uncovering any legal risks and
provide the buyer with an extensive insight into the company’s legal matters.
The objectives of legal due diligences are:
 Gathering information from the target company.
 Uncovering the target company’s strong and weak sides, relevant risks,
and advantages in connection with the transactions.
 Minimizing the risk of unexpected situations.
 Improving the sellers bargaining position.
 Indentifying areas where representations and warranties from the seller
should be obtained in the acquisition agreement.
 Verifying all IT ,IP, Patents, Copyrights and documents relating to
company law, finance, consumer protection laws etc.

Operational Due Diligence:

 Operational due diligence is integral to a buyers ability to properly evaluate a

business for a potential acquisition.
 It involves an onsite analysis of daily process, evaluation of key employees,
managers, independent contractors, suppliers, and other factors that are
necessary for the business to conduct normal operations.
 It also extends to conducting investigation outside the business operations.
 It includes examining work centers, material flow, scarp generation, inventory
levels, operational inefficiencies and gathering information on:

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 New product or service creation, strategies on product development and new

product development, product life cycle, R&D efforts, IP rights, patents etc.
 Markets, target markets, customers and segmentation, factors affecting demand,
seasonality etc.
 Competition and competitors, market share, understanding marketing
strategies, price of products, services to customers, quality of products and
product range and expertise in the markets.

 Sales and sales force, their salary, compensation patterns etc.

 People/Organizational matters relating to training of workforce, skills etc.
Intellectual Property due diligence:
 Intellectual property due diligence is essential for investment in virtually every
type of target company.
 This has become because companies are becoming increasingly technology
driven.
 In particular, for products and services, involved in the technology sector of
industry.
 The goals of IP due diligence is protecting the company and its investors and
this is best accomplished by focusing on the following steps.
 Indentify and located IP assets, like trademarks, patents, domain names,
trade secrets, mask works, inventions, work of authorship, hardware and
devices etc.
 Ascertain nature and scope of targets claimed rights in IP assets.
 Evaluate validity of targets rights on IP assets.
 Evaluate any potential IP infringement claims.
 Analyze any grant of IP rights made by target.
 Conducting IP due diligence effectively with the right team and information.

Information Technology due diligence:

 In modern times, IT has become a top priority area in all M&A deals
because of heavy reliance on IT for business operations, management
information and financial reporting.
 The steps in IT due diligence is:
 Sending, an IT request to the target company.
 Compiling, an onsite discovery process outline.
 Conducting, a review of the requested materials.
 Scheduling, and coordinating the onsite visit.

Human Resource Due Diligence:

 Human resource due diligence is a process that aims at assessing the

contribution of the HR functions to the success of the business in a
purchasing, outsourcing or market testing environment.

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 It involves the contribution of HR, and reviews an in depth approach to

meeting specific objectives and terms of reference to increase the strategic
alignment, effectiveness and efficiency of HR function.
 HR audit is a review to identify any major areas of improvement in the HR
function.
 HR due diligence also looks into organizational culture, executive
compensation, collective bargaining, post retirement benefits, health and
welfare insurance structure and reserves, etc.

Reasons for failure of due diligence:

 Due diligence is a challenging task, and quite often the tam handling the task
goes off the track, leading to disastrous results.
 This may be due the following three main causes.
 Failure to focus on key issues- collecting irrelevant information, bad team
constitution without focus, teams often focus on finding new methods of analysis.
 Teams are also found guilty of being reluctant to share information among the
team members.
 Failure to identity new opportunities and risks.
 Failure to allocate adequate/ right resources.

Conclusion:
The due diligence process is critical in every M&A exercise.
It is only way of ensuring that the buyer is getting the best value for the money he
proposes to invest in the purchase.
Due diligence helps to avoid surprises after the documents have been signed and
protected against unwanted surprised down the road.
-----------------------------------------------------xxxxxxx-----------------------------------------------

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TOP MERGER & ACQUISITION DEALS IN INDIA

1. TATA STEEL-CORUS: Tata Steel is one of the biggest ever Indian’s steel
company and the Corus is Europe’s second largest steel company. In 2007, Tata
Steel’s takeover European steel major Corus for the price of $12.02 billion,
making the Indian company, the world’s fifth-largest steel producer. Tata Sponge
iron, which was a low-cost steel producer in the fast developing region of the
world and Corus, which was a high-value product manufacturer in the region of
the world demanding value products. The acquisition was intended to give Tata
steel access to the European markets and to achieve potential synergies in the
areas of manufacturing, procurement, R&D, logistics, and back office operations.
2. VODAFONE-HUTCHISON ESSAR: Vodafone India Ltd. is the second largest
mobile network operator in India by subscriber base, after Airtel. Hutchison Essar
Ltd (HEL) was one of the leading mobile operators in India. In the year 2007, the
world’s largest telecom company in terms of revenue, Vodafone made a major
foray into the Indian telecom market by acquiring a 52 percent stake in Hutchison
Essat Ltd, a deal with the Hong Kong based Hutchison Telecommunication
International Ltd. Vodafone main motive in going in for the deal was its strategy of
expanding into emerging and high growth markets like India. Vodafone’s
purchase of 52% stake in Hutch Essar for about $10 billion. Essar group still
holds 32% in the Joint venture.
3. HINDALCO-NOVELIS: The Hindalco Novelis merger marks one of the biggest
mergers in the aluminum industry. Hindalco industries Ltd. is an aluminum
manufacturing company and is a subsidiary of the Aditya Birla Group and Novelis
is the world leader in aluminum rolling, producing an estimated 19percent of the
world’s flat-rolled aluminum products. The Hindalco Company entered into an
agreement to acquire the Canadian company Novelis for $6 billion, making the
combined entity the world’s largest rolled-aluminum Novelis operates as a
subsidiary of Hindalco.
4. RANBAXY-DAIICHI SANKYO: Ranbaxy Laboratories Limited is an Indian
multinational pharmaceutical company that was incorporated in India in 1961 and
Daiichi Sankyo is a global pharmaceutical company, the second largest
pharmaceutical company in Japan. In 2008, Daiichi Sankyo Co. Ltd., signed an

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agreement to acquire the entire shareholders of the promoters of Ranbaxy

Laboratories Ltd, the largest pharmaceutical company in India. Ranbaxy’s sale to
Japan’s Daiichi at the price of $4.5 billion.
5. ONGC-IMPERIAL ENERGY: Oil and Natural Gas Corporation Limited (ONGC),
national oil company of India. Imperial Energy Group is part of the India National
Gas Company, ONGC Videsh Ltd (OVL). Imperial Energy includes 5 independent
enterprises operating in the territory of Tomsk region, including 2 oil and gas
producing enterprises. Oil and Natural Gas Corp. Ltd (ONGC) took control of
Imperial Energy UK Based firm operating in Russia for the price of $1.9 billion in
early 2009. This acquisition was the second largest investment made by ONGC in
Russia.
6. MAHINDRA & MAHINDRA- SCHONEWEISS: Mahindra & Mahindra Limited is
an Indian multinational automobile manufacturing corporation headquarters in
Mumbai, India. It is one of the largest vehicles manufacturer by production in
India. Mahindra & Mahindra acquired 90 percent of Schoneweiss, a leading
company in the forging sector in Germany. The deal took place in 2007, and
consolidated Mahindra’s position in the global market.
7. STERLITE- ASARCO: Sterlite is India’s largest non-ferrous metals and mining
company with interests and operations in aluminum, copper and zinc and lead.
Sterlite has a world class copper smelter and refinery operations in India. Asarco,
formerly known as American Smelting and Refining Company, is currently the
third largest copper producer in the United States of America. In the year 2009,
Sterlite Industries, a part of the Vedanta Group signed an agreement regarding
the acquisition of copper mining company Asarco for the price of $ 2.6 billion. The
deal surpassed Tata’s $2.3 billion deal of acquiring Land Rover and Jaguar. After
the finalization of the deal Sterlite would become third largest copper mining
company in the world.
8. TATA MOTORS-JAGUAR LAND ROVER: Tata Motors Limited (TELCO), is an
Indian multinational automotive manufacturing company headquartered in
Mumbai, India and a subsidiary of the Tata Group and the Jaguar Land Rover
Automotive PLC is a British multinational automotive company headquarters in
Whitley, Coventry, United Kingdom, and now a subsidiary of Indian automaker
Tata Motors. Tata Motors acquisition of luxury car maker Jaguar Land

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Rover was for the price of $2.3 billion. This could probably the most ambitious
deal after the Ranbaxy won. It certainly landed Tata Motors in a lot of troubles.
9. SUZLON-REPOWER: Suzlon Energy Limited is a wind turbine supplier based in
Pune, India and RePower systems SE (now Senvion SE) is a German wind
turbine company founded in 2001, owned by Centerbridge Partners. Wind Energy
premier Suzlon Energy’s acquisition of RePower for $1.7 billion.
10. RIL-RPL MERGER: Reliance Industries Limited (RIL) is an Indian Conglomerate
holding company headquartered in Mumbai, India. Reliance is the most profitable
company in India, the second-largest publicly traded company in India by market
capitalization. Reliance Petroleum Limited was set up by Reliance Industries
Limited (RIL), one of India’s largest private sector companies based in
Ahmedabad. Currently, Reliance Industries taking over Reliance Petroleum
Limited (RPL) for the price of 8500 crores or $1.6 billion.

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Case study - Flipkart and Myantra merger.

Flipkart – ‘The Multi- Category Virtual Store’ Flipkart is an Indian e-commerce company and
headquartered in Bangalore, Karnataka was started in year 2007 by Sachin Bansal and Binny Bansal IIT
–Delhi alumni, who had jobs with Amazon before starting Flipkart.

2 The founders had spent 400,000 to set up the business. It is considered as the e-commerce company
that made online shopping popular in India. The business was formally incorporated as a company in
October 2008 as Flipkart Online Services Pvt. Ltd. During its initial years, Flipkart focused only on books,
and soon as it expanded, it started offering other products like electronic goods, air conditioners, air
coolers, stationery supplies and life style products and e-books. Flipkart's offering of products on cash on
delivery is considered to be one of the main reasons behind its success. Flipkart also allows other
payment methods - credit or debit card transactions, net banking, e-gift voucher and card swipe on
delivery. Flipkart now employs more than 4,500 people.

3. Initially, the founders had spent 400,000 to set up the business.

4. Flipkart has later raised funding from venture capital funds Accel India (US$1 million in 2009) and Tiger
Global (US$10 million in 2010 and US$20 million in June 2011). In August‘, 2012, Flipkart announced the
completion of its 4th round of $150 million funding from MIH (part of Naspers Group) and ICONIQ Capital.
The company announced, on 10 July 2013, that it has raised an additional $200 million from existing
investors including Tiger Global, Naspers, Accel Partners and Iconiq Capital. In July 2013, Flipkart raised
USD 160 million from private equity investors, taking the total to USD 360 million in its recent fund raising
drive to build and strengthen technology and bolster its supply chain.

5. In October 2013, Flipkart raised an additional $160 million from new investors Dragoneer Investment
Group, Morgan Stanley Wealth Management, Sofina SA and Vulcan Inc. with participation from existing
investor Tiger Global.

6. With this, the company raised a total of $360 million in its fifth round of funding, the largest investment
rose by an Internet company in India.

7. The company valued at approx. 99 billion (US$1.7 billion) (Nov 2013).

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8. And plans to use the capital raised to improve its technology and supply chain capabilities, enhance its
end user experience and for hiring. Some interesting facts: Flipkart's website is one of the top 10 Indian
websites. Flipkart has launched its own product range under the name "DigiFlip", offering camera bags,
pendrives, headphones, computer accessories, etc. The first product sold was the book Leaving
Microsoft To Change The World, bought by VVK Chandra from Andhra Pradesh.

9. In November‘2012, Flipkart became one of the companies being probed for alleged violations of FDI
regulations of the Foreign Exchange Management Act, 1999. On average, Flipkart sells nearly 20
products per minute.

10. Flipkart had always used acquisition as a strategy for growth and consolidation. Before acquiring
Myntra in May‘2014, it had acquired the following small players in e-commerce. 2010: WeRead, a social
book discovery tool 2011: Mime360, a digital content platform company 2011: Chakpak.com, a
Bollywood news site that offers up dates, news, photos and videos. Flipkart acquired the rights to
Chakpak's digital catalogue which includes 40,000 filmographies, 10,000 movies and close to 50,000
ratings. Flipkart is not be involved with the original site and does not use the brand name. 2012:
Letsbuy.com, an Indian e-retailer in electronics.

11. Flipkart has bought the company for an estimated US$25 million. Letsbuy.com was closed down and
all traffic to Letsbuy has been diverted to Flipkart. 2014: Acquired Myntra.com Marking the biggest
consolidation in the e-commerce space in India, homegrown e-retailer Flipkart acquired online fashion
retail.

Myntra – ‘The Fashion Hub’ Myntra.com is an Indian online shopping retailer of fashion and casual
lifestyle products, headquartered in Bangalore, Karnataka. Myntra, was founded in 2007 by Mukesh
Bansal and along with Ashutosh Lawania and Vineet Saxena.

12. The lifestyle and fashion online retailer has a run rate of $100 million a year, growing at 20 per cent
annually. From 2007 to December 2010, Myntra.com was in the business of personalization of products
online. The products ranged from T-shirts, mugs, greeting cards, calendars, key chains, diaries etc.
However, in 2010, the company expanded its catalogue to retail fashion and lifestyle products.
Myntra.com currently offers close to 70,000 products from more than 700 leading Indian, international and
designer brands. The portal receives over 50 million hits every month and services over 9,000 pin codes
across the country.

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13. In 2013, Myntra acquired San-Francisco-based Fitiquette, a developer of virtual fitting room
technology.22 In November 2013, Bollywood star Hrithik Roshan joined forces with online shopping portal
Myntra.com to exclusively launch and manufacture his active lifestyle apparel and casual wear brand
HRX. Myntra launched a brand campaign with its first TVC in July 2011. The commercial 'juxtaposes
new-age fashion with old-world grit' and positions Myntra as a 'fashionable new age' brand. Myntra's
second campaign, with the tagline "Ramp It Up", was launched in October 2011 with a TVC. The new ad
scored high on fashion quotient and the core message was to communicate the launch of the Autumn
Winter 2011 collection on Myntra.com. In February 2012, Myntra also rolled out an OOH (out of home)
campaign across Tier 2 cities, to build brand awareness and promote online shopping. In June 2012,
Myntra launched its third campaign.

14. Created by Taproot, the communication emphasizes the benefits of buying online, and is titled 'Real
life mein aisa hota hai kya'.in which they offer free shipping, cash on delivery,30 day return & 24 hours
dispatch. Myntra continued the 'Real life mein aisa hota hai kya' theme in its next campaign in October
2012 and extended it to showcase its wide catalog and hassle-free Returns Policy. In February 2014,
Myntra raised additional $50 Million Funding from Premji Invest and few other Private Investors

15. Myntra.com is an aggregator of many brands. Its business model is based on procuring current
season merchandise from various brands and making them available on the portal at the same time as in
respective retail brand outlets. All these products are offered to customers on MRP. It ships 20,000 items
a day across 400 cities, with an average order of Rs 1,600. Myntra focused exclusively on lifestyle and
fashion products, which have a margin as high as 40 per cent; its strategy to charge for shipping products
below a certain price range adds to profitability and reduces returns. Though the

16. Company doesn‘t follow a marketplace model but the relatively more expensive inventory-based
model to ensure quality and timely delivery, it returns the unsold inventory. Industry experts felt that the
company Myntra is different from others such as Flipkart, as it isn‘t a horizontal player and the focus is
only on a few categories such as apparel. Also, the addition on private labels is also leading to higher
margins for them. However, Myntra‘s problem is the same as those of its peers — profitability. Armed with
an understanding of start-ups, the team is trying to build a ―Google-like work culture‖, while ensuring
Myntra remains hawk-eyed on its focus areas and market potential.

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17. Some interesting facts before M & A:

Myntra Moved from offering personalized products to fashion and lifestyle retailing by the last quarter of
2010,

Myntra received a total of $75 million investment by 2013 over multiple rounds,

Major investors: Accel Partners, Tiger Global, Kalaari Capital and IDG Ventures

Run rate of $100 million a year, growing at 20%year-on-year24 Gets 12,000 orders that roughly translate
into shipping 20,000 items daily across 400 cities with an average order of Rs 1,600.

Competes with Flipkart, Jabong, Fashionandyou, etc

Myntra.com was announced as a winner of the Red Herring Global 100 award*. (* Red Herring
announced its Global 100 awards in recognition of leading private companies from North America,
Europe, and Asia, celebrating these startups' innovations and technologies across their respective
industries)

CNBC - TV18 awarded Myntra.com as one of the Hottest Internet Companies of the Year (2012) at the
Mercedes - Benz CNBC - TV18 Young Turks Awards.

Myntra.com won IAMAI's Best Ecommerce Website of the year award for 2012 at the 7th India Digital
Summit, 2013.

5. Flipkart - Myntra: The Big Giant of India’s E-Commerce Industry.

18. (On 22nd May 2014 Flipkart acquired Myntra in a deal estimated to be around $300 Mn) ―Both
companies are running at a very fast speed and winning on the competitive landscape, so we don‘t want
to change that at all‖ - Sachin Bansal (Co-Founder FlipKart.com).

19. From a start-up with an investment of just four lakhs rupees, Flipkart has grown into a $100 million-
revenue online retail giant in just five years. The combined entity has annualized sales of $1.5 billion,
which brings them within touching distance of much older offline ventures like the Future Group (Big
Bazaar), Reliance and Aditya Birla Group.

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20. Some Facts in a Nut Shell.

Flipkart Myntra Flipkart+Myntra= Registered Users 18 m+ 8m= 26m*

Daily Visits 3.5m+ 1.7 m =5.2 m

Sellers on Platform 3,000 +100= 3,100*

Team Strength 10,000 +2,000= 12,000

Investors Tiger Global, Accel Partner +Tiger Global, Accel Partner=Tiger Global, Accel Partner

Valuation & Deal $2+ Billion+ $ 330Million= $2,200 * Includes some amount of overlap

Some important points:

1. Flipkart and Myntra would retain their separate identities and brands as of now.

2. The management structure for both the organizations would remain the same.

3. Mukesh Bansal co-founder of Myntra would move to Flipkart‘s board

4. The employee base would remain the same.

5. People holding Myntra stock options will now hold the same in Flipkart.

21. Post-merger the team is very clear that the businesses have to be executed independently and
preserve a different culture. Independently, Myntra and Flipkart's fashion category as billion dollar
businesses each in two-three years. While Myntra's fashion offering continues to be more on the premium
side. Flipkart offers an array of discounted fashion brands. The goal at Flipkart is to win the horizontal
battle while at Myntra is striving to win the vertical battle. Teams will remain different for both. Flipkart,
India's biggest e-commerce player, in first week of August‘2014 announced it has raised $1 billion or Rs
6,000 crore ($1 = Rs 60) in fresh funding, the biggest ever by an Indian internet company in a single
round. And it is aiming much higher.

22. Flipkart is now expected to be valued at $5 billion (Rs 30,000 crore), according to some estimates.
The company has seen a turbo-charged growth, hitting an annualized sales mark of $1 billion (Rs 6,000

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crore) in 2014 - a year ahead of its target. Besides looking at fresh acquisitions, Flipkart could use the
fresh funding for expanding its operations

23. Acquisition will be an important part of our growth strategy. For Flipkart, the competition is also hotting
up.27 Besides Amazon's expanding presence in India, world's largest retailer Wal-Mart too has begun
online sales in the cash-and-carry segment in some cities. Reliance Retail, India's largest retailer by
revenues, is also expected to significantly increase its online presence.

24. Conclusion

Experts say that investors will have a tough time justifying deploying fresh capital into the other players—
besides Flipkart and Snapdeal—as the gap between the three leaders and the rest is increasing
tremendously. Backing these players will be very difficult going forward. Amazon may look to grow here
through acquisitions, a strategy it has implemented in its home market US. China boasts of big e-
commerce players like Alibaba and Tencent while the US is a two way fight between Amazon and Ebay.
Two other Bangalore based e-commerce companies Mu-Sigma and InMobi, have been eyeing similar
valuations as they explore fresh fund raising or listing plans in the near future. These advancements in
span of less than three months had proved that mergers and acquisitions can be best tool for growth in
this competitive and dynamic business environment. The implementation of M&A needs to be done
properly and in a well planned manner, in order to attain the aim. Hence, we can safely conclude that
M&A had always been and will be the most commonly used growth strategy in future too.

Points for discussion:

1. Do you think this was a useful acquisition for Flipkart?
2. Will Flipkart fight Amazon with all its present resources and strengths’?
3. What are you views on this merger by Flipkart?
4. Have the objectives of- Value add, cost savings and reach out new markets been achieved
by this acquisition by Flipkart.
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CONCEPTS IN CORPORATE RESTRUCTURING AND MERGERS AND

ACQUISTIONS.
Equity carve-outs.
Equity carve out is the process where an IPO of a portion of the common stock of a
wholly owned subsidiary is offered to raise resources. Equity carve outs are also known
as split off IPOs. This process initiates trading in a new and distinct set of equity claims
on the assets of the subsidiary.
Cash disgorgement:
Cash disgorgement is the principle where accumulated cash resources of business are
spent or reinvested effectively.
Corporate restructuring:
Restructuring is the act of partially dismantling or otherwise reorganizing a company for
the purpose of making it more efficient and therefore more profitable. It involves the
reorganization of a company to attain greater efficiency and to adapt to new markets. It
also implies liquidating projects in some areas and redirecting assets to other existing or
new areas.
Acquisitions:
Acquisitions represent purchase of new entities to utilize the existing strength and
capabilities or to exploit the untapped or underutilized markets. They are also carried
out to grow in size and prevent possibilities of future takeover.
Spin-offs:
In a spin off, a company creates a subsidiary whose shares are distributed on a pro-rata
basis to the shareholders of the parent company. This strategy is adopted when the
company feels that it would generate positive returns.
Splits:
Splits involve breaking up the business into independent entities to exploit opportunities
of growth, raise capital, achieve efficiency, and derive taxation benefits. Spits also
provide benefits of synergy, competence and revival.
Spits-ups:
Split ups represent a restructuring process where companies split themselves into two
or more parts.
Leveraged buyouts:
When a company acquires another company using a significant amount of borrowed
funds like bonds or loans to pay the cost of acquisition, the transaction is termed a
leveraged buyout. (LBO)
Sponsored leveraged buyouts:
Under sponsored LBOs, the private equity firms offer to buy a controlling stake in a
company using leverage obtained from banks based on the financials of the company.
Sell-off or divestitures:
Sell offs or divestitures are attempts to come out of a product segment or sector to
adjust the operations to the changing economic and political environments. They involve
voluntary decisions implemented to attain the objective of shareholders wealth
maximization.
Mergers:
Mergers involve the coming together of two or more companies and pooling of
resources for the purpose of achieving certain common objectives.

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Hiving off:
Hiving off is a process wherein an existing company sells a particular division to reduce
unproductive expenditure and slim the organization. It also helps an entity to reap the
benefits of core competencies, competitive advantage, and emergence of high capacity.
Buyback of shares/tender offers:
A tender offer is a public offer made by a potential acquirer to purchase some or all of
the shareholders shares in a company. The offer price is higher than the current market
value of the shares. It is assumed that the premium would induce the shareholders to
sell their holdings.
Dual class stock recapitalization:
Under this head, the entity creates a second class of common stock that carries limited
voting rights and usually preferential claim to the entity’s cash flows. This is done by
distributing limited voting shares on pro-rata basis to the existing shareholders. Such
stocks usually carry higher rate of dividends.

Consolidation:
Consolidation is a merger of two or more companies into a new company. In this form of
merger, all companies are legally dissolved and a new entity is created. Here, the
acquired company transfers its assets, liabilities and share to the acquiring company for
cash or exchange of shares.
Earn outs:
Earn outs are an arrangement whereby a part of the purchase price is calculated by
reference to the future performance of the target company. The deal describes a
payment to shareholders selling their shares in the target company and the payment
made by the acquirer’s based on the company’s profits in a specified period, usually
after the closing of the sale.
Reverse merger:
Reverse merger is the acquisition of a public company by a private company, allowing
the private company to bypass the usually lengthy and complex process of going public.
The publicly traded corporation is known as a “shell company” because it has little or no
assets. The private company obtains the shell company by purchasing controlling
interest through a new issue of stock.
Takeover code:
Takeover code is a set of statutory provisions that helps provide the target company
and its shareholders with necessary protection from takeover attempts.
Takeover defences:
Takeover defences are strategies adopted by the target company to prevent the
takeover another company.
Forced sales:
The capital structure of a company includes both equity and debt. When debt exceeds
equity, the entity becomes high leveraged and often finds the debt load intolerable. To
manage the situation, the company often decides to sell unrelated and underperforming
assets and businesses. This is called Forced sales.

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ESOPs:
Employee stock option plans are contracts between a company and its employees that
give employees the right to buy a specific number of the company’s shares at a fixed
price within a specified period of time.

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Valuation and Accounting Issues:

 Valuation and the term Value are highly subjective.

 It varies from person to persons and changes in externalities and internalities
over a period of time.
 It is difficult to assign value to an entity to a corporate as corporate can be
controlled even by partially owning them.
 In M&A the financial value is very important and hence valuation is an important
concept which has to be understood in proper perspective.
 Valuation is an exercise based on certain assumptions and may lead to
overestimation and payment of more value and on the other may lead to
underestimation and loose a important opportunity of acquisition or merger.

Concept of Valuation:
 Valuation is based on the true worth of an asset.
 Valuation is driven by not only financial considerations but also by aesthetic and
emotional considerations.
 The value of a target company is determined by a function of business logic that
drives the decision merger and acquisition and takeover that is, cash flows
expected after the deal is over and also the bargaining power of the acquirer and
the target company.
 Since business is based on dynamic considerations, valuation also becomes a
dynamic process.
 Due to this, the same deal would be valued differently by the same player at
different times or by different players at the same time.
 Valuation of a business entity centre’s around three fundamental concepts
namely:
1. Going concern Value,
2. Liquidation value,
3. Market value.

Going Concern Value:

 Going concern value assumes that a business entity has infinite life and shall
continue to exist irrespective of the life of the promoter.

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 Every business is an entity and separate from its owner/promoters and in the
eyes of law has it will survive for a continuous period and will keep generating
earnings or revenues for ever.
 This concept it is argued will increase the value of the business, with time and
finally becomes a perpetual annuity.

Liquidation Value:
 In this concept, the value that the entity shall realize on liquidation after
incurring all incidental costs once it ceases to exist.
 The liquidation value moves along with the replacement cost of the assets.
 The Value of a business according to the liquidation concept depends more
on realizable or replacement value of its underlying assets rather than the
earning potential of the business.

Market Value:
 This concept is more relevant to listed companies and that is the market price
of the shares of the entity.
 It represents the price at which the corporate ownership or the resources are
available.
 Here the fundamentals are not more important but is governed by market
sentiments and the forces of demand and supply.
 Under this method of valuation, the value of the company largely depends
upon non quantitative personal and strategic considerations.

Conclusion:
 From the above broad methods of valuation, it can be understood that the
valuation exercise is a complex interaction of quantitative and non-
quantitative considerations.
 As very many issues or elements are involved during the valuation exercise,
the process of valuation becomes a highly complex, time consuming and
lengthy task.
 For M&A professionals, models and tools of valuation are applied which may
result only in an “arithmetic price”, which may not always give the true picture.

Factors to be considered for valuation:

As valuation is a very complex process, the company has to keep in mind the
needs the purpose of valuation in mind.
The main factors are:
1. Valuation process to sell the business,
2. To determine objectively a fair market value,
3. Fair market value to be suitably adjusted, for the expected synergies and
fit that the target may generate for the acquirer.

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4. The nature of the business and its operating history.

5. The industry and sector dynamics.
6. The economic outlook and market sentiments.
7. The book value and financials of the entity.
8. The stage of evolution of the target company.
9. The entity earnings and dividend paying capacity.
10. Market value of other entities engaged in similar business.
11. Potential liabilities of the company, such as environmental claims, tax
demands, and off balance sheet liabilities.

These factors provide an insight into elements that may not necessarily feature
the balance sheet of the company but have the potential to create or destroy the
future value of the business.
Methods of Valuation:
 There are several methods that professionals use to value business.
 Each method has its own relevance, merits and demerits.
 The final valuation of the target is arrived at by using the appropriate blend
of the results available using more than one method.
 They are all based on the assumption that analysis regarding strategic fit,
financial logic and industry and economy analysis have already been
carried out and have been found to be favorable
 Broadly there would be two major estimates of values:
 Standalone value and restructured value.
 In standalone method, the value of the target is determined on a
standalone basis without considering any internal, external or financial
restructuring improvements.
 In restructured valuation method, all improvements and estimates
pertaining to the company’s restructured value are incorporated.

There are three basic method of valuation:

1. Asset based valuation.
2. Earning based valuation.
3. Market based valuation.

In addition to the above other variants of these methods:

1. Book value approach.
2. Stock and debt approach.
3. Direct comparison approach.
4. Discounted cash flow method.
5. Cash flow forecast during the explicit forecast period.
6. Cost of capital.
7. Continuing value.

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Asset Based Valuation:

 Asset based valuation involves estimation of the value of the corporate
assets, as if they have been with the bidder.
 The assets that are included are fixed assets, intangible assets,
investments, current assets and third party liabilities.
 In this valuation, each sub-class is considered and the value of all the
individual assets like, real estate property, plant and machinery, furniture
and fixtures etc.
 Current assets like stock and receivables are estimated at their realizable
values.
 Finally, third party liabilities are valued and deducted from the total assets
to arrive at the value of the target.
 Liabilities’ include, short term borrowings, creditors, contingent liabilities,
etc.
 The entire valuation exercise is carried out by valuing all the assets and
liabilities at their realizable value or current yield.

Calculation of net assets value means:

 Net fixed assets + current assets+investments+intangibles
 Minus
 long term debts + short term debts+ contingent liabilities+ accumulated
losses and misc expenditure,
 = Net assets
 Minus
 Preference share capital= Net assets for equity shareholders.
 Divided by No of equity shares= Net assets value per share (NAV).

Earning based valuation:

 In this method, the future maintainable earnings (FME) of the target
company is estimated after adjusting the extraordinary items such as
seasonal fluctuations , contingent payments or receipts, concessions or
penalty in past years or any recurring items such as profit/ loss on sale of
assets etc.
 This method assumes:
 That FME will continue till its survival based on going concern principle.
 The value of the target is determined using the formula- FME/r
 R is an appropriate discount rate which represents the opportunity cost of
funds used by the acquiring entity, which depends based on the
company’s experience and its growth rate over a period of time.
 g is the growth rate of the Future maintainable earnings

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 the equation is FME/r-g.

 This formula has two elements- value of entity under consideration and
capitalization rate which is normally the shareholders expected rate of
return for their investments in the company. Which is (I-tax).
 This method focuses on the value of the company a determined in the
market based on the earnings of the company.
 It also focuses on profit earning capacity value of the share as the returns
are valued after taxes are deducted from PBIT.
 Market based earnings:
 This method of valuation involves comparison of the target company’s
market variables and other comparables with that of the industry.
 The value thus arrived is called as market based valuation.
 Most commonly used variables in this valuation are:
 Price/earrings.
 Price/sales.
 Price/assets
 Any other quantifiable variable in relation with market price per share,
 Variables are selected for different periods of times and fundamental
factors such as earnings, assets, or capital employed is selected
appropriately.
 Under this method, once the variables have been calculated, appropriate
weightage is assigned to each variable to arrive at the weighted average
multiplier, for calculating the market capitalization of the target company.
 The resultant figure is divided by the number of shares outstanding to
arrive at the value per share.

Book value approach:

 In this method, the values of all assets are estimated at book values and
arrived at the value of the target company. However if the difference
between the book value and market value is wide, then the value of the
company becomes unrealistic and vice versa.
 Some of the factors that result in the difference are:
 Inflation- becomes important since book value is calculated using the
historical cost of the asset less depreciation. However, the market value
has impact of inflation on the value of the asset.
 Technological changes- may render certain assets obsolete and worthless
well before they are fully depreciated in the books of the accounts. There
may be value in the books of accounts but the asset may be worthless
and useless.

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 Organizational capital- this is never gets reflected in the balance sheet,

but this value get created as the stakeholders like employees, customers,
suppliers and managers have become mutually beneficial and productive
relationship and collective contribute towards the attainment of corporate
objectives.
 It is to be noted that the assets earning power is not always related to its
book value.

Stock and debt approach:

 This method is followed when the securities of the company are listed and
publicly traded.
 The value is obtained by adding the market value of all its outstanding
securities.
 This method is straight forward based on a price on a date.
 In cases where is volatility in prices ascertaining the date becomes difficult, then
average of particular selected period becomes the starting factor.
 Direct comparison approach:
 This method is based on the assumption that similar assets sell at similar
prices.
 The value of the asset is determined by checking the price of a
comparable asset in the market.
 This principle is commonly applied while dealing with assets such as land
and building.

Step on which this method is based:

1. Economy analysis- involves assessing the prospects of various industries or
sectors in an economy and aims at ascertaining the GDP, annual industrial
production, annual agricultural output, inflation rate interest rates, balance of
payments, exchange rates etc.
2. Industry analysis- focuses on elements such as the relationship of the industry
with the economy as a whole, life cycle, profit potential of the industry,
regulations on the industry, competition, procurement of raw materials,
production costs, marketing and distribution etc.
3. Company analysis-this focuses on all aspects of the company and its business
such as its product portfolio and market segments, availability and cost of inputs
etc. The analysis serves the purpose only when efforts are made to look carefully
at 15-20 companies in the same industry and select finally 1-2 companies
closely.
4. Apply ratios or multiples- this provides a very reliable and sound basis for
decision making. The ratios commonly used are firms value to sales, firm value
to book value of assets, firm value to profit before interest, depreciation and tax
(PBIDT), equity value to net worth etc.

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5. Select comparable companies- involve deciding where the target company fits
in relation to the comparable companies.
6. Value the company- applies the appropriate multiples to the financial numbers
of the company so that the value of the target company is determined.
 This approach is popular because it relies on multiples that are easy to
relate to and can be obtained quickly and without any difficulty and is
useful when several comparable companies are traded and the market
prices them correctly.
 The biggest drawback of this approach is that it relies on multiples that are
subjective and hence can be easily misused and manipulated, and same gets
reflected through valuation errors, in terms of overvaluation and undervaluation
of the market.

Discounted cash flow method (DCF):

 This method represents the present value of the expected cash flows
generated through an asset, which are discounted at a discount rate® that
reflects the risk involved n earning these cash flows.
 It is most preferred and accepted method of valuation at present.
 It is based on fundamentals of time value of money and gives weight age
to future prospects of the business rather than on it historical performance.
 It considers two important aspects like- the predictability of cash flows,
and the quantum of cash flows.
 This means that “assets with more predictable and higher cash flows
would command a higher value and vice versa”
 The equation for this DCF technique is
 Value of an asset or entity=𝐸𝐶𝐹1 ÷ (1 + 𝑅) + 𝐸𝐶𝐹2 ÷ (1 + 𝑅)2+ECF3÷
(1 + 𝑟)3.
 Where ECF1 ECF2, ECF3 represent expected cash flows over a period of
n years,
 r represents the discount rate that incorporates the risk involved in the
investment,
 And n represents the useful life of the investment which the investment
would generate cash flows.
 Thus DCF valuation involves three basic components- expected cash
flows, discount rate, and ascertaining the DCF.
 Excepted cash flows may be:
 Free cash flows to the firm- means after tax-earnings of the company,
represent cash flows generated for all claim holders in the firm and are the
pre-debt cash flows.
 Free cash flows to equity- are ascertained after deducting the cash flows o
account of all types of debt are termed as free cash flow to equity, means

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that cash flows available for distribution among equity holders of the
company.
 Nominal cash flows- that incorporate expected inflation in the economy.
 Real cash flows- cash flows that do not incorporate the inflation
component.
 Pre-tax cash flows- are cash flows that are pre tax payable by the
investors.
 Post-tax cash flows- are arrived at after deducting the tax payable by the
investors. This is because all types of investors have to pay tax on their
income which includes the aforesaid taxes.

Discount rate:
 This rate is based on risks associated with earning that year’s cash flow
including cyclical movements, inflations, exchange rates and market
trends.
 All the above affect the discount rate that keeps changing.
 The changing variable creates problems and complexities.
 Firms as a substitute choose a discount rate that is higher than the normal
discounting rate as a standard rate for the entire analysis.
 The rate of discount rate is ascertained on the following basis:
 The discount rate is generally used which is equivalent to the cost of
equity, which represent the expected rate of returns by the investors.
 Another way is cost of equity applied to historical returns and risk premium
based on degree of volatility of stock returns with risk premium.
 Another method, the discount rate is taken as the weighted average cost
of capital and weighted yield to market.

Ascertaining the DCF:

 Discounted cash flows involve calculating the free cash flows to the equity.
 The process involves a detailed analysis of future cash flows of the
company for n of year.
 The analysis includes the industry and its prospects, projected growth,
existing and expected market share, analysis of operations of business
and their sensitivity to value, scanning the external environment including
regulatory framework, competition, etc.
 Factors like expected rate of inflation, exchange rate fluctuations and
movement of interest rates.

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Example no: 1.
MERGER BETWEEN RANBAXY LABS (RLL) AND CROSS RESEARCH LABS
(CRL).
RLL has used the following swap ratio.
i) Net asset value method:
Total assets=Rs 14,653 million.
Less loan funds=Rs 4828 million.
Less current liabilities and provision= Rs 1669 million.
Net asset value= Rs 8156 million.
Total number of equity shares outstanding= 44.373 million.
Net asset value per shareholder= Rs 8156 million/44.373 million=Rs 184 per
share.
ii) Price –earning (P/E) method.
P/E ratio considered=19.67
EPS = Rs 30.50.
Intrinsic value =19.67xRs 30.50= Rs 600 per share.
iii) Market price =19.67x Rs 30.50= Rs 600 per share.
Valuation methods Weights Value (Rs per share).
Net asset method 1 184
P/E method 1 600
Market method 1 600.
Hence, weighted average value per share= Rs 461.

CRL: The following methods were used.

iv) Net asset value method:
Total assets=Rs 656 million
Less loan funds=Rs 163 million.
Net asset value= Rs 493 million.
Total number of equity shares outstanding= 3.718 million.
Net asset value per shareholder= Rs 163 million/3.718 million=Rs 132 per
share.
v) Price earning method.
P/E ratio considered =7.18
EPS considered =Rs 32.
Intrinsic value = (7.18x Rs 32)= Rs 230.

vi) Market value = 7.18x Rs 32= Rs 230.

Valuation methods. Weights Value ( Rs per share).

Net asset method 1 132.
P/E method 1 230
Market price 1 230.
Hence, weighted average values per share= Rs 197.
The swap ratio= Weighted average value per share of RLL/ weighted average
value per share of CRL. That is Rs 461/Rs 197= 7.3.
This means that for 7 shares of Crosland, 3 shares of Ranbaxy were given.

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Example: 2
Company X is contemplating to acquire company Y and the desired financial
data is given below:
Company X Company Y
Market price per share Rs 75 Rs 30
Number of shares 1000 500
Market value Rs 75,000 Rs 15,000
The acquisition of the company Y is expected to bring benefits of which the Net
Present Value (NPV) is estimated at Rs 15000. Company X offers 250 shares to
the shareholders of the company Y for the acquisition. Find out i) the NPV of
merger decision and ii) how the synergistic benefits will be shared by the existing
shareholders of the company X and Y.

Solution:
i) From capital budgeting decision, we know that the NPV of a decision is
the difference between the present value of benefits and costs.
In the above case of the company X and Y, the present worth of benefits
is given at RS 15000 and the costs to company X, which is the excess of
price paid over the value of the company Y, may be calculated as follows:
Cost = Merger price- Value of Y company
= (250xRs 75) - Rs 15000. = Rs 3750.
And the NPV of the proposal is
NPV= Benefit-costs. Which is equal to Rs 15000- Rs 3750= Rs 11,250.
ii) The total merger benefits of Rs 15000 would be shared by the existing
shareholders of the company X and Y depending upon the proportion of
their shareholding in the new company and the value in the old company
as follows:
Post merger, Net worth of the company X is Rs 75,000+ Rs 15000+ Rs
15000= Rs 105,000.
The total number of shares is 1000+250= 1250.
Position of shareholders of Company Y.
Existing worth =Rs 15000.
Net worth = Rs 105,000x 250/1250=Rs21, 000.
Gain to shareholders = Rs 21,000- Rs 15000= Rs 6000.

Position of shareholders of Company X.

Existing worth = Rs 75000.

Net worth = Rs 105,000x 1000/1250= Rs 84000.

Gain to shareholders = Rs 84000- Rs 75000= Rs 9000.

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Thus, the total merger benefits of Rs 15,000 will be shared by the existing
shareholders of company X and Y to the extent of Rs 9000 and Rs 6000
respectively.

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Example:3.
Big Ltd a big manufacturer of Tyres is contemplating acquisition of Small Ltd, a
rubber manufacturing company for Rs 60000. Big Ltd has a high rate of financial
leverage, which reflects in its 13% cost of capital. In the post acquisition scenario, Big
expects an overall cost of capital of 10% due to low financial leverage of Small
Company. Further, as the effect of the less risky capital structure cannot be reflected in
the expected cash flows, the post acquisition cost of capital (10%) must be used to
analyze the cash flows that are expected from the acquisition. The post acquisition cash
flows attributable to the target company which is expected to spread over a period of 20
years is Rs 7500. The present value interest factor for a Rupee Annuity Discounted at
10% for 20 years is 8.514.
Now we have to analyze whether the acquisition is acceptable or not.
Solution: The computation of expected cash inflows and the NPV is given
below.
The computation of NPV of the acquisition of Small Company.
Years Cash Inflows PV at 10% PV
1-20 years Rs 7500 8.514 Rs 63,855.
PV of inflows Rs 63,855
Less price offered Rs 60,000
NPV Rs 3,855.

Here, the acquisition is acceptable as the NPV of Rs 3855 is greater than Zero.
Suppose we do not consider the effect of changed capital structure on cost of capital,
then we have to use the discount rate of 13%.
The present value interest factor of an Annuity Discounted at 13% for 20 years is 7.025.
By applying this discount rate, the NPV is:
Years Cash Inflows PV at 13% PV
1-20 years Rs 7500 7.025 Rs 52,687
PV if inflows Rs 52,687
Less price offered Rs 60,000
NPV (-) Rs 7313

Thus in the above case the acquisition is found to be not acceptable.

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MINI CASE STUDIES:

SUZUKI’S Successful Alliance:

Suzuki Motor Corporation first entered the Indian market in 1982. When it started a joint
venture with Maruthi Udyog Ltd, an Indian state owned firm. Despite many ups and
downs and fierce competition from other major automobile manufacturers, including the
Indian giant Tata Motors Ltd, Suzuki succeeded in establishing its brand as India’s
People Car.
The reason why Suzuki entered the Indian market is clear. Suzuki chose an untapped
market while Japans bigger automakers, Toyota, Nissan and Honda engaged in fierce
competition amongst themselves in Japan. Osamu Suzuki, CEO and COO of the
company, is a creative decision maker and maverick. When he took the decision to
diversify and focus on India many criticized him as reckless, because India was so
unfamiliar to Japanese companies. The critics indeed forget the fact that India and
Japan are natural allies. Their strategic interests are perfectly aligned and each shares
a desire to stabilize and preserve Asia’s balance of power. So it is no surprise that
Japan is pushing to develop closer economic and strategic ties with India. Suzuki’s
decision to enter the Indian market termed out to be a resoundingly wise choice.
Japan’s population peaked in 2004 and is now falling, while its younger generations
show diminishing interest in automobiles. India’s population, on the other hand is
increasing dramatically in the absence of a one child policy. It makes a sense, then, that
Japanese companies should head to the expanding Indian market.

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VALUATION OF SYNERGIES IN MERGERS AND ACQUISTIONS:

Introduction:
o Synergy is the increase in value that is generated by combining two
entities to create a new and more valuable entity,
o Synergy is the additional value that is generated by combining two firms,
creating
o Opportunities that would not been available to these firms operating
independently.

The potential sources of synergy can be categorized into two groups.

1. Operating synergies affect the operations of the combined firm and include
economies of scale, increasing pricing power and higher growth potential.
They generally show up as higher expected cash flows.

2. Financial synergies, on the other hand, are more focused and include tax
benefits, diversification, a higher debt capacity and uses for excess cash.
They sometimes show up as higher cash flows and sometimes take the form
of lower discount rates.

Operating Synergy:

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Operating synergies are those synergies that allow firms to increase their operating
income from existing assets, increase growth or both.

It is categorized into four types.

1. Economies of scale that may arise from the merger, allowing the combined firm to
become more cost-efficient and profitable. In general, we would expect to see
economies of scales in mergers of firms in the same business (horizontal mergers) –
two banks coming together to create a larger bank or two steel companies combining
to create a bigger steel company.

2. Greater pricing power from reduced competition and higher market share, which
should result in higher margins and operating income. This synergy is also more
likely to show up in mergers of firms in the same business and should be more likely
to yield benefits when there are relatively few firms in the business to begin with.
Thus, combining two firms is far more likely to create an oligopoly with pricing power.
3.Combination of different functional strengths, as would be the case when a firm with
strong marketing skills acquires a firm with a good product line. This can apply to
wide variety of mergers since functional strengths can be transferable across
businesses.

4. Higher growth in new or existing markets, arising from the combination of the two
firms. This would be case, for instance, when a US consumer products firm acquires
an emerging market firm, with an established distribution network and brand name
recognition, and uses these strengths to increase sales of its products.
Operating synergies can affect margins, returns and growth, and through these the
value of the firms involved in the merger or acquisition.

Financial Synergy:

With financial synergies, the payoff can take the form of either higher cash flows
or a lower cost of capital (discount rate) or both. Included in financial synergies
are the following:

1. A combination of a firm with excess cash, or cash slack, (and limited project
opportunities) and a firm with high-return projects (and limited cash) can yield a
payoff in terms of higher value for the combined firm. The increase in value comes
from the projects that can be taken with the excess cash that otherwise would not
have been taken. This synergy is likely to show up most often when large firms
acquire smaller firms, or when publicly traded firms acquire private businesses.

Debt capacity can increase, because when two firms combine, their earnings and
cash flows may become more stable and predictable. This, in turn, allows them to
borrow more than they could have as individual entities, which creates a tax benefit for
the combined firm. This tax benefit usually manifests itself as a lower cost of capital for
the combined firm.

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Tax benefits can arise either from the acquisition taking advantage of tax laws to write
up the target company’s assets or from the use of net operating losses to shelter
income. Thus, a profitable firm that acquires a money-losing firm may be able to use
the net operating losses of the latter to reduce its tax burden. Alternatively, a firm that
is able to increase its depreciation charges after an acquisition will save in taxes and
increase its value.

Diversification is the most controversial source of financial synergy. In most publicly

traded firms, investors can diversify at far lower cost and with more ease than the
firm itself. For private businesses or closely held firms, there can be potential benefits
from diversification.

Clearly, there is potential for synergy in many mergers. The more important issues
relate to valuing this synergy and determining how much to pay for the synergy.

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Valuing Synergy:

The key question about synergy is not whether it can be valued but how it should
be valued. After all, firms that are willing to pay billions in dollars for synergy have to be
able to estimate a value for that synergy. In this section, we will consider how best to
value different types of synergy and the sensitivity of this value to various assumptions

Valuing Operating Synergies:

There is a potential for operating synergy, in one form or the other, in many
takeovers. Some disagreement exists, however, over whether synergy can be valued
and, if so, what that value should be. One school of thought argues that synergy is too
nebulous to be valued and that any systematic attempt to do so requires so many
assumptions that it is pointless. If this is true, a firm should not be willing to pay large
premiums for synergy if it cannot attach a value to it. The other school of thought is that
we have to make our best estimate of how much value synergy will create in any
acquisition before we decide how much to pay for it, even though it requires
assumptions about an uncertain future. We come down firmly on the side of the second
school.

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While valuing synergy requires us to make assumptions about future cash flows
and growth, the lack of precision in the process does not mean, we cannot obtain an
unbiased estimate of value.

Thus we maintain that synergy can be valued by answering two fundamental questions.

(1) What form is the synergy expected to take? Will it reduce costs as a percentage of
sales and increase profit margins (e.g., when there are economies of scale)?

Will it increase future growth (e.g., when there is increased market power) or the length
of the growth period?

Synergy, to have an effect on value, has to influence one of the four inputs into the
valuation process – higher cash flows from existing assets (cost savings and economies
of scale), higher expected growth rates (market power, higher growth potential), a
longer growth period (from increased competitive advantages), or a lower cost of capital
(higher debt capacity).

When will the synergy start affecting cash flows? ––

Synergies seldom show up instantaneously, but they are more likely to show up over
time. Since the value of synergy is the present value of the cash flows created by it, the
longer it takes for it to show up, the lesser its value.

Steps in Valuing Operating Synergy:

Once we answer these questions, we can estimate the value of synergy in three
steps:

First, we value the firms involved in the merger independently, by discounting

expected cash flows to each firm at the weighted average cost of capital for that
firm.

Second, we estimate the value of the combined firm, with no synergy, by adding
the values obtained for each firm in the first step.

Third, we build in the effects of synergy into expected growth rates and cash
flows and we revalue the combined firm with synergy. The difference between
the value of the combined firm with synergy and the value of the combined firm
without synergy provides a value for synergy.

It is important at this stage, that we keep the value of synergy apart from the value of
control, which is the other widely cited reason for acquisitions. The value of control is
the incremental value that an acquirer believes can be created by running a target firm
more efficiently. To value control, we just revalue the target firm with a different and

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presumably better management in place and compare this value to the one we obtain
with the status quo – existing management in place.

Operating synergies can be categorized into

1. Cost synergies
2. Growth synergies.

Cost synergies are the operating synergies that are easiest to model.

One-time cost savings will increase the cash flow in the period of the savings, and thus
increase the firm value by the present value of the savings. Continuing cost savings will
have a much bigger impact on value by affecting operating margins (and income) over
the long term. The value will increase by the present value of the resulting higher
income (and cash flows) over time.

Growth synergies are more complicated because, they can manifest themselves in so
many different ways.
There are at least three different types of growth synergies:
a) The combined firm may be able to earn higher returns on its investments than
the firms were able to generate independently, thus increasing the growth rate.
b) The combined firm may be able to find more investments than the firms were
able to invest in independently. The resulting higher reinvestment rates will increase the
growth rate.
c) The combined firm may be in a much more powerful competitive position
than the individual firms were, relative to their peer group. The payoff will be
that the combined firm will be able to maintain excess returns and growth for
a longer time period.

Both cost and growth synergies manifest themselves as higher expected cash flows in
the future.
Cost synergies, by their very nature, tend to be bounded – there is after all only so
much cost that you can cut.
Growth synergies, on the other hand, are often unbounded and are constrained only by
your skepticism about their being delivered.

Valuing Financial Synergies

Synergy can also be created from purely financial factors. We will consider three
legitimate sources of financial synergy - a greater “tax benefit” from accumulated losses
or higher tax deductions, an increase in debt capacity and therefore firm value and
better use for “excess” cash or cash slack. We will begin the discussion, however, with
diversification, which though a widely used rationale for mergers, is not a source of
increased value by itself, at least for publicly traded firms with diversified investors.

Diversification
A takeover motivated only by diversification considerations should, but by itself,

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have no effect on the combined value of the two firms involved in the takeover, when
the two firms are both publicly traded and when the investors in the firms can diversify
on their own.

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CROSS BORDER ACQUISITIONS.

INTRODUCTION:

 Globalized business environment has encouraged companies to search for

competitive advantage that is also global in scale.
 Companies are quick to respond and have started spreading their wings across
continents.
 Cross border acquisitions are becoming very popular due to their capacity to
generate additional revenues.
 Globalization and liberalization have made business environment more
conducive and has changed the rules of the game and managers across the
globe have gained confidence to compete globally.
 CBAs have supplemented by the availability of human resources and
willingness to explore business opportunities beyond national boundaries.

Concept of cross border acquisitions:

Cross border acquisitions (CBA) is the merger of companies that have headquarters in
two different countries. Such acquisitions are treated differently from local acquisitions
as they are governed by a different set of laws of the countries concerned.

Need for cross border acquisitions:

 The increasing number of CBAs indicated the need and relevance of CBAs.
 Globalization and deregulation have lead to increased CBAs.
 Every CBA involves two imperatives.
 First every merger should create value that is value creation through synergy
that cut costs and facilitates competitive strategy, repositioning to attain growth
and increase revenues.
 Second, the synergy realization and competitive strategy goals cannot be
achieved without focusing attention on issues relating to acquisition and
integration.

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Benefits of cross border acquisitions:

CBA is beneficial both to the acquiring company and the target company.
1. Expansion of markets – benefits opens to new foreign markets and diversify to
new areas.
2. Possibility of raising funds abroad- can tap foreign capital and obtain resources.
3. Synergistic benefits- such as effective use of available resources, cost
reduction and reduction of labor force and synergy in increasing revenues and
profitability.
4. Technology transfer- facilitates easy transfer of technology from one country to
another and can improve productivity, generation of new products and
improvement of production technology.
5. Tax Planning and benefits- can result in tax benefits as the acquirer can invest
the profits in acquiring another entity, because capital investments in a foreign
land may generate tax benefits.
6. Foreign exchange earnings- open new vistas of earning foreign exchange from
foreign markets and help in further acquisitions and avoid raising fresh capital.
7. Countering Recessionary Pressures- prove beneficial during recessionary
times, since the impact of recession is not the same globally and thus
supplement the decline in their earnings in one country by the earning from
other markets in other country.
8. Greenfield investments- many countries encourage inflows of Greenfield FDI
and create positive impact for both the companies and nations.

Difficulties in Cross Border acquisitions:

The main problems, encountered in CBAs are:

1. Legal problems- as the entities operate in different countries and under different
frame works fulfillment of obligation is tedious and costly.
2. Accounting issues- it is often found that the merging entities do not have similar
levels and scales of internal control, which results in financial mismanagement.
Accounting standards also differ and difficulties arise.
3. Work understanding of fundamentals of acquired business- many a times it is
seen that the acquirer possess a very vague understanding of the fundamentals
of the acquired business, which drives out the anticipated synergistic benefits
from the merger, which results in non-alignment in their visions and hence the
attempts failed.
4. Technological differences- the technological differences make integration
difficult and complex and challenging.
5. Strategic issues- in deciding which products and services to offer, responsibility
sharing activities leading increased costs and unresolved issues and conflict in
management of both entities.
6. Fundamental differences across countries- arising of different cultures, value
systems, operating styles due differences in their backgrounds, external
environments etc.

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7. Tendency to overpay- many a times a acquisitions goes awry because the

acquirer overpays for the target company and when the anticipated synergies
do not materialize or get delayed the acquirer feels the heat and repents on the
decision.
8. Failure to integrate- many a times the integration process fails which happens
due to poor interaction and coordination between merging entities.
9. HR issues- employee stress and uncertainty is a major issue in CBA, which
lead to resignations of important talent, feeling of mistrust, stress, perceived
restrictions in career plans, change in organizational culture etc.

Integrating cross border acquisitions:

Achieving integration is the key to the success of CBAs.

Integration is all about realizing the perceived benefits of a merger and putting the
merged entity on the path of growth.

Integration means effective interaction and coordination between the merging

entities and special attention to the HR concerns.

Good management of integration needs focus on:

 Value creation after the deal is done,
 Careful planning of integration with appropriate action plan and allocate
responsibilities of various elements of the integration process to suitable
persons.
 Training to the executives of the both entities, in important areas of
corporate activity.
 Develop a clear communication plan and keep the communication channels
open.
 Address the stakeholders concerns in a proactive manner.

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ALTERNATIVES TO MERGERS AND ACQUISTIONS:

INTRODUCTION:
 Corporate consistently look for ways to add value to shareholders wealth.
 This is achieved either through expansion or contraction of operations.
 MA tend to focus on expand but companies are sometimes forced to contract or
downsize their operations.
 Corporate have three different alternatives to M&As.
 These are divestitures, strategic alliances and internal developments.
 It is commonly assumed that contraction or divestiture has a positive impact on
stock prices as it helps the company to get rid of divisions that are not adding
value or reducing the profits of the company.
 Alliances help the company to diversify into segments and markets that seem
lucrative and thus have the potential to add to the profitability of the company.
 Internal development is expected to add value to the operation also.

Concept of Divestitures:
 The sale of a part of a firm to another company is referred to as a divestiture,
which may be in cash, marketable securities or a combination of both.
Divestitures are simple exit routes and do not result in creation of a new entity.
 The primary reason for adoption of divestitures is.
 Certain assets do not contribute to the firm’s profits or pull down the profits and
profitability.
 Divesting the excess assets can help the company to focus on remaining assets
thereby increasing the efficiency and profitability.
 Divestitures can be a good alternative to deal with declining demand, the need
for raising funds and the need to improve cash flows.

 Types of Divestitures:

 Divestitures are classified into two types- Voluntary and involuntary.

 Voluntary Divestitures:
 This is a process wherein the selling entity feels that a certain division is not
adding to its profitability and reducing profits. To refocus its attention on its
profitable divisions the company may decide to divest the unprofitable divisions.
 This results in increased cash flows and expansion of profitable divisions, better
distribution among shareholders and repaying outstanding debt.

 Involuntary Divestitures:

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 When a company is compelled to divest itself off a particular asset as a result of

a legal dispute it is referred as involuntary divestiture.

Reasons for Divestiture:

Divestitures are motivated by a variety of reasons:

1. Unprofitable division.
2. Bad fit.
3. Reverse synergy.
4. Failure to generate hurdle rate of return.
5. Capital market factors.
6. Generation of cash flows.
7. Abandoning core business.

Benefits of divestitures:

All corporate restructuring strategies are carried out with the sole objective of creating
value and attaining a competitive advantage. Divestment is no different.
1. Companies go for divestiture where justification lies in increased economies of
scale and economics of scope.
2. Divestiture is also resorted to when companies fail to attain anticipated
synergies.
3. Divestiture is very advantageous where business cycles are involved.
4. A company may also choose to divest unrelated divisions if the management
believes that it can no longer administer the entity being placed on the block
efficiently.
5. Companies also look at divestment as an invaluable strategy of discovering
unanticipated economies and synergies through trial and error.

STRATEGIC ALLIANCES:

Strategic alliances refer to arrangement in which business entities join forces to form
cooperative partnerships.
They are also called as Joint Ventures and can provide companies with meaningful
ways of achieving growth through cooperation.
These types of arrangements are growing at a very rapid pace.
Why do companies enter into strategic alliances?
Strategic alliances help in offsetting the weaknesses of one entity with the strengths
of the other.
They can classify into three categories:
1. Internal.
2. Competitive.

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3. Strategic reasons.

Internal reasons:

 Companies may enter into strategic alliances for the following internal reasons:
 To spread cost and risks.
 To safeguard resources, which cannot be obtained through the market.
 To improve access to financial resources.
 To derive benefits of economies of scale.
 To gain access to new technologies, customers and innovative managerial
practices.

Competitive goals:

 The following competitive goals motivate companies to enter into strategic

alliances:
 To pre-empt competitors.
 To create stronger competitive units.
 To influence the structural evolution of the industry.
 To respond defensively to blurring industry boundaries and globalization.

Strategic reasons:

 Companies may enter into strategic alliances for the following strategic reasons:
 To create and exploit synergies.
 To transfer technologies and skills.
 To diversify and derive related benefits.

TYPES OF STRATEGIC ALLIANCES:

 Strategic alliances can be structured in a number of ways.

 Each structure generates benefits and synergies, poses challenges and leads to
conflicts.
 Various elements need to be monitored and managed during the course of
implementation of the alliance.
 Six types of alliances, those differ from one another in terms of the relationships
between partners and the strategic focus of the alliance.

1. Complementary alliance- here the partners combine their technologies to

diversify their existing products, markets portfolios.
2. Market alliance- this alliance aims at combining the market knowledge of one
partner with the production or product know-how of the other.

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3. Sales alliance- here the producer and a local partner cooperate in an

arrangement that is a mixture of independent representation and own branch.
4. Concentration alliance- here competing partners cooperate to form larger and
more economical units.
5. Research and development alliance- in this alliance, the partners aim to create
synergy by making joint use of R&D facilities, exploiting opportunities to
specialize, standardizing combined know-how, and sharing risks.
6. Supply alliance- in this the competitors who need similar inputs need to
cooperate with one another to safeguard supplies, reduce procurement costs, or
to prevent the entry of new competitors.

IMPLICATIONS OF STRATEGIC ALLIANCES:

A strategic alliance can have serious and far reaching implication on the very
continuance of the alliance, if mismanaged.
The partners can have misunderstanding and conflicts on account of various factors
namely:
1. Formal structure of relationships between partners.
Partners in a strategic alliance enter into a formal and well defined relationship
that can be horizontal, vertical and or neutral in nature.
A horizontal relationship is one where the partners are competitors outside the
area of the proposed alliance and can have conflicts on areas such as influence
of the partners on the alliance strategy, basis of profit sharing, contribution or
sacrifice made by partners and how other view it etc.
A vertical relationship is one where the partners share a supplier –customer
relationship and here the conflict include purchase and supply obligations of each
partner and legal obligations of the partner’s dependence of the partners on the
alliance.
A neutral relationship is one where the partners come from different business
areas and the areas of conflict include strategic orientations of the alliance and
strategy for handling the situation when the markets converge.
In all the above situations, partners need to ensure that these areas of conflict
are known and proper corrective measures taken at the very beginning to avoid
future misunderstandings.
2. Internationality of alliance.
The alliance faces a different set of challenges and issues when the partners
come from different countries because of the prevailing cultural and business
differences, differences in languages, customer’s needs and consumption
patterns etc. These also can have a very serious impact on the alliance.
3. Value added chains.
A strategic alliance also has to deal with the challenges and conflicts that emerge
as a result of its position in the value added chain; this position affects the
autonomy and control relationships within the alliance.
4. Profit/Ownership related issues.
These issues affect the performance and responsibilities of the partners and
determine how the alliance would grow in the future. This includes elements such

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as structure of the contracts, profit sharing, and authority assigned dominance of

a partner in the alliance.
5. Orientation of the alliance.
This element gives rise to issues and problems related to the daily operation of
the alliance. The possible areas of differences between the partners include
autonomy, coordination, adaptability and responsibility-sharing among partners.

Benefits of Strategic alliances:

Strategic alliances generate the following benefits.

1. The partners can share the burden of investment in the alliance.
2. The alliance is able to attract funds easily as it is backed by entities that are
willing to contribute in all possible ways to make the alliance successful.
3. Alliances are very beneficial to small firms that may not have the required
competencies in all areas.

WEAKMESSES OF STRATEGIC ALLIANCES.

Strategic alliances generally suffer from strategic issues that affect overall performance
of the partners and common weaknesses include are.
1. Harmony related issues- as expectations differ, problems arise and harmony gets
affected and results in an atmosphere of mistrust and absence of commitment.
2. Implementation issues- as it difficult to translating a planned strategy into reality
which makes implementation complicated and particularly so when partners are
form an unfamiliar industry and lack the experience to develop a realistic industry
based strategy.
3. Problems of Coherence- this arises between partners who often confront with
additional expectations which are left unexpressed and may undergo significant
changes. This affects the trust and commitment of the partners and leads to
destabilization and weakening of the alliance.
4. Changes in Business Environment.
There is always a time lag between entering into an alliance and making it
operational. During this period the business environment could change, leading
to new developments, new challenges, new expectations as well as new
opportunities. This may conflict with the original goals and objectives of the
alliance resulting in a re-evaluation, re-negotiation and redefining of the alliance
and may strain the relationship between the partners.

STRATEGIC MANAGEMENT OF ALLIANCES.

Achieving close coordination between the partners of a strategic alliance is the biggest
challenge
The alliance can grow unabated provided the existing differences and incompatibilities
are resolved effectively.

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1. Clear understanding between the partners on all the aspects of the partnership
so that conflicts are avoided with clearly defined roles and responsibilities, action
plan and procedures for resolving issues and differences of the alliance.
2. Avoiding excessive stress on legal contract- this can be achieved by clearly
stating the terms and conditions of the alliances and the methods to resolve the
issues arise out of such alliance.
3. Avoiding greed- this can be achieved by all partners contributing sincerely
towards attainment of the objectives of the mission. There should not be any
room for greed in an alliance.

INTERNAL DEVELOPMENT:

Internal development is a strategy of building new businesses in house, more or less

from scratch.
Internal development is also known as corporate entrepreneurship.
It can be pursued in four different ways.
1. Venture capitalists.
In this strategy, the company acts as a venture capitalist and provides funds for
the new project, generally in a new sector and structures its growth.
2. New Venture Incubator.
Under this strategy, the company provides not only funds for the proposed
venture but also provides low cost space, equipment, managerial support.
3. Idea generation and transfer program.
This strategy involves executing new business deals and once the idea starts
giving results, the new entity is transferred to an established company for further
development and management.
4. Intrepreneurship.
This strategy involves encouraging in-house entrepreneurial individuals or teams
working to develop new ideas for the company.
Thus all the above strategies, can have a lasting impact on the corporate culture,
diversification and financial performance of the company concerned.

CONCLUSION.

While M&A are important means for attaining corporate growth, they may not be
always feasible and possible for a company. In all such cases alternatives have
to be explored and with strategies discussed above can certainly improve the
profitability of the company.

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METHODS OF PAYMENTS FOR MERGERS AND ACQUISITIONS.

INTRODUCTION:

 In M&A deals, the buyer makes either cash offer or all –share exchange offer or
a combination of both cash and shares (also called as Paper) or any other
alternative methods of payments.
 The method of payment is depended upon the motives, strategies, nature of the
bid, regulations and circumstances.
 Payment is also determined by the number of shares purchased by the bidder
prior to the M&A deal.
 The choice of accounting methods- pooling or purchase dictates the payment
method.
 The choice is also a matter of negotiation between the target and the acquiring
company.
 Many innovations are taking place in acquisition financing like differed
consideration, equity derivatives essentially to neutralize valuation errors.
 Different payment methods have different advantages and disadvantages.
 The two fundamental methods of paying for M&A deals are based on the
concepts of “assets purchase” and “share purchase” of the target company.
 Both the methods are based on the concepts that in an M&A deal either a
company’s net assets are purchased by another company
 Or
 The company as a whole is purchased by another company by converting the
existing shareholders of the target company into the shareholders of the
acquiring company.

METHODS OF PAYMENT FOR ACQUISITIONS.

1. Cash method- cash is paid to the shareholders of the acquired company in

exchange of the shares held by them.
2. Share exchange (all paper offer)- a specified number of the acquirers shares are
issued to the shareholders of the acquired company(target) in exchange of the
shares held by them as per the agreed share-swap ratio.
3. Loan stock- a loan stock/debenture is issued to the shareholders of the acquired
company in exchange of the shares held by them as per the agreed valuation-
share-debenture swap ratio.
4. Convertible loan or preference shares- a convertible debenture or convertible
preference share is issued at a pre determined rate to the shareholders of the
acquired company in exchange of the shares held by them as per the agreed
exchange ratio.
5. Deferred payment- sometimes, a part of the purchase consideration is paid after
the specified period, subject to performance criteria or other conditions.

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From the 1990s, there has been a paradigm shift in the methods of payment in M&A
deals throughout the world.
Today majority of deals are paid through stocks rather than in cash.

FACTORS AFFECTING CHOICE OF FINANCING METHOD FOR M&A DEALS.

1. The financing arrangement is a major concern for bidders for clinching the
deals with speed and good price.
2. Minimizing the tax liability to both the company is another relevant factor.
3. Information asymmetry and valuation risk are the important determinants of
the choice between cash and share exchange offers.
4. Acquirer’s liquidity position, in terms of free cash flows, surplus cash and
other liquid securities play an important role.
5. Acquirer’s recent stock price performance makes the bidders shares
attractive.
6. The nature of the business being acquired also counts.
7. Ownership and corporate control structure of the bidder are also important
factors.

STOCK DEAL.

 The choice between cash and stock should never be made without full and
careful consideration of the potential consequences.
 The acquiring company pays for the acquisition of the target company by
using common stock by exchanging its shares for shares of the target
company as per agreed ratios.
 The acquiring company needs to have sufficient share available to complete
the transaction.
 It generally offers more for each share than the current market rate.
 In this method capital tax is deferred.
 The target company shareholders will have interest in the fortunes of new
company.
 A share for share exchanges to the bidding company is that the initial cost of
this method from the point of view of cash flow, as no money passes on the
shareholders immediately.


Example:

X Ltd a telecom company, whose stock is currently traded for Rs 100 per share is
interested in acquiring Y Ltd, a net telecom company. To prepare for the
acquisitions, X Ltd has been repurchasing its own shares over the past 3 years. Y
stock is currently traded for Rs 50 per share. But in the merger and acquisition
negotiation process X Ltd has found it necessary to offer Y Ltd Rs 120 per share.
Further X Ltd does not have sufficient financial resources to purchase the company

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for cash and does not wish have sufficient financial resources to purchase the
company for cash and does not wish to receive these funds, Y Ltd has agreed to
accept X offer in exchange of its shares. As stated, X Ltd stock is currently selling at
Rs 100 per share and it must pay Rs 120 per share for Y Ltd stock. Therefore, the
ration of exchange is 1.2:1(Rs 120/100). This means that X Ltd must exchange 1.2
shares of its stock for each share of Y Ltd stock.

CASH DEAL.
 This is a simple transfer of ownership of the company for cash.
 Here the acquiring company, need to pay cash for the value of shares
acquired from the shareholders of the target company. This process does not
affect the ownership pattern of the acquiring company but requires the
availability of sufficient liquidity with the company.
 This transaction is governed by IT regulations.
 In this type of deal the acquiring shareholders take on the entire risk, if the
synergies do not materialize.
 A cash offer to a share exchange offer is more certain than share offer.
 There is no need for complex valuation.

Loan stock/ financing through Issue of debentures:

 This method may be used by the acquiring company to meet the cost of
proposed M&A.
 This type of financing involves the burden of interest payments as per the terms
of issue.
 Issue of non-convertible debentures or bonds as consideration to target company
is most suitable form of payment in big transaction where financing is a problem.
 This method is used in case of friendly or negotiated deals.

Issue of Preference shares:

 This is a typed of financing M&A by issuing preference shares.

 Issue of preference capital involves the payment of fixed preference dividend like
interest on debentures or bonds or a fixed rate of dividend.
 Before deciding to raise funds by using this method, the Board of the acquiring
company has to make sure that in the post merger scenario, the company would
be able to yield sufficient profits with respect to payment of preference dividend.

Other financing options include;

1. Financing through External Commercial borrowing (ECB).
2. Financing through Public Deposits.
3. Financing through GDRs/ADRs.
4. Financing through Domestic borrowings.
5. Financing through Rehabilitation Finance.

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Assets Deal versus Stock Deal in Mergers and Acquisitions:

While contemplating an M&A deal, both the buyer and the seller strategize whether the
transaction would be an asset transaction or a stock transaction. The buyer may try to
buy the assets because he avoids legal and other inherent liabilities associated with a
company and also to take benefits of taxes. The seller would prefer stock sale as he
may face tax liability for sale of assets. The advantages and disadvantages of both the
methods are stated below both from the standpoint of buyer and seller.

Assets Purchase- Buyer Position;

Advantages:

1. Step up basis of assets acquired to purchase price, allows higher depreciation

amortization and deduction.
2. Recapture tax on presale depreciation and investment tax credit paid by seller.
3. Buyer can pick and choose assets to buy and liabilities to assume.
4. Buyer is generally free of any undisclosed or contingent liabilities.
5. Normally results in termination of labor union collective bargaining contracts.
6. Employee benefit plans may be maintained or terminated.
7. Buyer permitted to change state of incorporation.

Disadvantages:

1. No carryover of seller tax attributes.

2. Nontransferable rights or asset. Cannot be transferred to buyer.
3. Transaction is more complex and costly in terms of transferring specific assets or
liabilities.
4. Lenders consent may be required to assume liabilities.
5. May lose right to use corporation’s name.
6. Loss of corporation’s liability, unemployment, or workers compensation insurance
rating.

Assets Purchase- Seller position:

Advantages:

1. Seller maintains corporate existence.

2. Maintain ownership of nor transferable assets or rights.
3. Maintains corporate name.

Disadvantages:

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1. Taxation occurs at the corporate level upon liquidation.

2. Generates various kinds of gains or losses to the seller based on the
classification of each asset as capital or ordinary.
3. Transactions may be more complex and costly in terms of transferring specific
assets/liabilities.
4. Lender’s consent required to assume liabilities.

Stock Purchase: Buyer position.

Advantages:
1. Tax attributes carry over to the buyer.
2. Translations are less complex.
3. Avoids restrictions’ imposed on sales of assets in loan agreement and potential
sales tax.
4. Preserves the right of the buyer to use corporation’s name.
5. No changes in corporation’s liability, unemployment or workers compensation
insurance ratings.

Disadvantages:

1. No set-up in basis unless buyer elects and incurs additional tax cost.
2. All assets and obligations are transferred to the buyer.
3. Recapture tax on presale depreciation and investment tax credits falls on buyer.
4. Normally does not terminate existing labor union collective bargaining contracts.
5. Generally results in the continuation of employee benefit plans.
6. State of incorporation remains the same.
7. Dissenting shareholders right of appraisal of the value of their shares with the
rights to be paid appraised value or remain a minority shareholder.

Stock Purchase: Seller Position.

Advantages.

1. Avoids taxation at the corporate and shareholder level.

2. All obligations and nontransferable rights can be transferred to the buyer.
3. Generally provides capital gain or losses so that there is no need to calculate
gain or loss type.
4. Generally avoids ordinary gain.

Disadvantages.

1. Seller cannot pick and choose assets to be retained.

2. Ownership of nontransferable rights or assets is lost.
3. Requires selling corporation’s shareholder approval.
_______________________________xxxxx----------------------------------------------------

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TAX IMPLICATIONS IN MERGERS AND ACQUISTIONS.

 One of the motives of M&A is the tax savings under the Income Tax Act, 1961.
 Income tax aspects are one of the most important considerations for experts and
consultants engaged in M&A deals, as it involves far reaching implications.
 The magnitude and complexity of deals further make the task difficult as is
evident from various deals both in India and abroad.
 The IT Act defined amalgamation under section 2(1B) but no definition, of merger
in the act.
 However, the benefits and concessions under the act shall be available to both
amalgamating and amalgamated companies subject to fulfillment of all the
conditions.

Tax concessions/Incentives for Amalgamations:

If any amalgamation takes place within the meaning of section 2(!B) of the IT act, then
the following tax concessions shall be available.
1. Tax concession to amalgamating companies.
2. Tax concession to shareholders of the amalgamating company.
3. Tax concession to amalgamated company.

Tax concessions to amalgamating company.

1. Capital gains tax is not attracted in respect of assets under the scheme of
amalgamation.
2. Tax concession to a foreign amalgamating company (section via). - Where
company holds any shares in an Indian company and transfers the same in the
scheme of amalgamation to another foreign company such transaction will not be
regarded as transfer for the purpose of capital gain.

Tax concession to the shareholders of Amalgamating company( Section 47(vii);

Where a shareholder of an amalgamating company transfers his shares, in a

scheme of amalgamation, such transaction will not be regarded as a transfer for
capital gain purposed subject to the condition that the transfer of shares is made in
consideration of the allotment to him of any share or shares in the amalgamated
company and the amalgamated company is an Indian company.

Tax concessions to the amalgamated company:

The amalgamated company shall be eligible for tax concessions subject to fulfillment of
the two conditions below are satisfied namely:

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1. The amalgamation satisfies all the three conditions laid down in section 2(!B)
they are:
a) All the property of the amalgamating company becomes the property of the
amalgamated company by virtue of amalgamation,
b) All the liabilities of the amalgamating company become the liabilities of the
amalgamated company,
c) Shareholders holding not less than 3/4th in value of the shares of in
amalgamating company become shareholder of the amalgamated company.
2. The amalgamated company is an Indian Company.

If the above conditions are satisfied, the amalgamated company shall be eligible for
the following tax concessions:

1. Expenditure on scientific research- Section 35(5).

2. Expenditure on acquisition of patent rights or copyrights-Section 35A (!).
3. Expenditure for obtaining to operate telecommunication-Section 35ABB
4. Treatment of preliminary expenses-35D(5)
5. Amortization of expenditure in case of amalgamation-Section 35DD.
6. Treatment of expenditure on prospecting etc of certain minerals- Section 35E.
7. Treatment of capital expenditure on family planning-Section 36(1)(ix).
8. Treatment of bad debts-section 3(1)(vii).
9. Deduction available under section 80-IAB, 80-IC or 80-IE.
10. Carry forward and set off of business losses and unabsorbed depreciation of the
amalgamating company(Section 72A)

IMPLICATIONS FOR SLUMP SALE.

Under section 2(42C), Slump sale means the transfer of one or more undertaking
as a result of the sale for a Lump sum consideration without values being
assigned to the individual assets and liabilities in such sales.

 It means, it is a sale where the assessee transfers one or more undertakings

as a whole including all the assets and liabilities as a going concern. The
consideration is fixed for the whole undertaking and received by the
transferor.
 It is not fixed for each of the asset of the undertaking.
 The assessee may also transfer a division instead of the undertaking as a
whole by way of such sale. Thus it may be noted that the undertaking as a
whole or the division transferred shall be capital asset.
 In case of slump sale, if the business is transferred as a going concern and
the consideration in lump sum is not apportionable and then capital gain shall
be computed according to section 50B otherwise each asset is independently
chargeable to tax under section 48 or section 50 of the Act.
 Net worth for the purposes of slump sale shall be aggregate value of total
assets of the undertaking or division as reduced by the value of liabilities of
such undertaking or division as appearing in its book of accounts.

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 However, any change in the value of assets on account of revaluation of

assets shall be ignored for the purposes of computing the net worth.

Tax benefits consequent to DEMERGER:

The tax benefits could be discussed under the following three broad heads:
1. Benefits to demerged company,
2. Benefits to resultant company, and
3. Benefits to shareholders of demerged company.
Benefits provided in cases of demerger are almost on the same lines as in the cases
of amalgamations. However some benefits which are available in the cases of
amalgamations are not available in situations of demergers. Some examples are,
i) Deduction of expenditure on scientific research,
ii) Exemption from capital gain in some situations of amalgamations etc.

The Regulatory Framework of Mergers and Amalgamations covers

1. The Companies Act, 2013

2. National Company Law Tribunal Rules, 2016.
3. Companies (Compromise, Arrangements and Amalgamations) Rules, 2016
4. Income Tax Act, 1961
5. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
6. Competition Act, 2002.

1. Companies Act, 2013.

Chapter XV of Companies Act, 2013 comprising Sections 230 to 240 contains

provisions on compromises, Arrangements and Amalgamations’. The scheme of
Chapter XV goes as follows.

1) Section 230-231 deals with compromise or arrangements with creditors and

members and power of the Tribunal to enforce such a comprise or arrangement.
2) Section 232 deals with mergers and amalgamation including demergers.
3) Section 233 is relating to the merger or amalgamation of small companies or
between the holding company and its wholly owned subsidiary (also called fast
track mergers).
4) Section 234 deals with amalgamation with foreign company (also called cross
border mergers).
5) Section 235 deals with acquisition of shares of dissenting shareholders.
6) Section 236 deals with purchase of minority shareholding
7) Section 237 contains provisions as to the power of the central government to
provide for amalgamation of companies in public interest.
8) Section 238 deals with registration of offer of schemes involving transfer of
shares.
9) Section 239 deals with preservation of books and papers of amalgamated
companies.

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10) Section 240 deals with liability of officers in respect of offences committed prior to
merger, amalgamation etc.

2. Companies (Compromises, Arrangements and Amalgamations) Rules, 2016

(read with National Company Law Tribunal Rules, 2016).

Rules 3 to Rule 29 contain provisions dealing with the procedure for carrying out a
scheme of compromise or arrangement including amalgamation or reconstruction.

1. Under the Income Tax Act, 1961.

The Income Tax Act, 1961 covers aspects such as tax reliefs to
amalgamating/amalgamated companies, carry forward of losses, exemptions from
capital gains tax etc. For example, when a scheme of merger or demerger involves the
merger of a loss making company or a hiving off of a loss making division, it is
necessary to check the relevant provisions of the Income Tax Act and the Rules for the
purpose of ensuring, inter alia, the availability of the benefit of carrying forward the
accumulated losses and setting of such losses against the profits of the Transferor
Company.

4. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

SEBI has notified SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015 (Listing Regulations) on September 2, 2015. A time period of ninety days has
been given for implementing the Regulations. However, two provisions of the
regulations, which are facilitating in nature, are applicable with immediate effect. These
pertain to:
(i) Passing of ordinary resolution instead of special resolution in case of all material
related party transactions subject to related parties abstaining from voting on such
resolutions, in line with the provisions of the Companies Act, 2013, and
(ii) Re-classification of promoters as public shareholders under various circumstances.
The relevant Regulations relating to Corporate Restructuring are as follows.

Scheme of Arrangement.

Regulation 11.

The listed entity shall ensure that any scheme of arrangement /amalgamation/merger
/reconstruction/reduction of capital etc. to be presented to any Tribunal does not in any
way violate, override or limit the provisions of securities laws or requirements of the
stock exchange(s): Provided that this regulation shall not be applicable for the units
issued by Mutual Fund which are listed on a recognized stock exchange(s).

Draft Scheme of Arrangement & Scheme of Arrangement.

Regulation 37.

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(1) Without prejudice to provisions of regulation 11, the listed entity desirous of
undertaking a scheme of arrangement or involved in a scheme of arrangement, shall file
the draft scheme of arrangement, proposed to be filed before any Tribunal under
Sections 230-234 and Section 66 of Companies Act, 2013, whichever applicable, with
the stock exchange(s) for obtaining Observation Letter or No-objection letter, before
filing such scheme with any Tribunal, in terms of requirements specified by the Board or
stock exchange(s) from time to time.

(2) The listed entity shall not file any scheme of arrangement under sections 230-234
and Section 66 of Companies Act, 2013, with Tribunal unless it has obtained
observation letter or No-objection letter from the stock exchange(s).
(3) The listed entity shall place the Observation letter or No-objection letter of the stock
exchange(s) before the Tribunal at the time of seeking approval of the scheme of
arrangement: Provided that the validity of the ‘Observation Letter’ or No-objection letter
of stock exchanges shall be six months from the date of issuance, within which the draft
scheme of arrangement shall be submitted to the Tribunal.
(4) The listed entity shall ensure compliance with the other requirements as may be
prescribed by the Board from time to time.
(5) Upon sanction of the Scheme by the Tribunal, the listed entity shall submit the
documents, to the stock exchange, as prescribed by the Board and/or stock
exchange(s) from time to time.

Minimum Public Shareholding.

Regulation 38.

The listed entity shall comply with the minimum public shareholding requirements
specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules,
1957 in the PP-CRVI 16 manner as specified by the Board from time to time: Provided
that provisions of this regulation shall not apply to entities listed on institutional trading
platform without making a public issue.

5. Under the Indian Stamp Act.

It is necessary to refer to the Stamp Act to check the stamp duty payable on transfer of
undertaking through a merger or demerger.

6. Competition Act, 2002.

The provisions of Competition Act and the Competition Commission of India (Procedure
in regard to the transaction of Business relating to Combinations) Regulations, 2011 are
to be complied with.

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ACCOUNTING ISSUES AND ASPECTS IN MERGERS & ACQUISTIONS.

 There are several accounting issues involved in M&As.

 They include the method of merger/acquisition acquisition accounting by the
acquirer, treatment of goodwill and reserves, treatment of goodwill and capital
reserve arising out of the merger and the choice of method of accounting.
 The merger/acquisition accounting refers to the “Pooling or Uniting” of interest
of both the companies-also called as Pooling of interest method.
 Or purchase of the net assets of liabilities of one company by the other-
Purchase method.
 There are several accounting standards and practices to be followed while
preparing the first balance sheet after the merger or business acquisition.
 The Institute of Chartered Accountants of India (ICSI) has formulated various
Accounting Standards (Ind AS) 103 for accounting and disclosure
requirements of Business combination.
 When mergers happen, the consolidation into a new company is carried out
using the set of accounting rules and also upon the nature and philosophy of
the combination depending upon whether it is a pooling of interest or
purchase method of net assets of liabilities etc.
 Under the pooling of interests method, the balance sheet of both the entities
are simply added together.
 In other cases, where the acquirer pays more than the worth of the target
company and fair accounting has to determined for valuing the purchase
consideration.

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AMALAGAMATION AND AS-14:

Accounting Standard (AS) recognizes two types of amalgamation.

1. Amalgamation in the nature of merger.
2. Amalgamation in the nature of purchase.

Amalgamation is considered to be an amalgamation in the nature of merger if:

1. All the assets and liabilities of the transferor company become the assets and
liabilities of the transferee company.
2. Shareholders holding not less than 90% of the face value of the equity share of
the transferor company become equity shareholders of the transferee company
by amalgamation.
3. The consideration payable to the equity shareholders of the transferor company
is discharged by the transferee company by issue of equity shares except for
cash for fractional shares.
4. The business of the transferor company is intended to be carried on, after the
amalgamation by the transferee company.
5. No adjustment is intended to be made to the book value of the assets and
liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of accounting
policies.
An amalgamation will be considered to be an amalgamation in the nature of
purchase, when any one or more of the conditions specified above is not satisfied.

ACCOUNTING PRACTICES FOR AMALGAMATION:

There are two main method of accounting followed for amalgamation.

1. The pooling of interest method, and
2. The purchase method.
The pooling of interest method is used in case of amalgamation in the nature of
merger.
The purchase method is used in accounting for amalgamation in the nature of
purchase.

The Pooling of Interest Method:

 Since merger is a combination of two or more entities there is not reason to

recast carrying amounts of assets and liabilities.
 Minimal changes are made in aggregating the individual financial statements
of the companies.
 Every item in both the companies should be aggregated with the
corresponding balance of the transferee company.
 If at the time of amalgamation both companies have conflicting accounting
policies, then a uniform set of accounting policies should be adopted following
the amalgamation.
 Such effects thereto, should be reported in accordance to the AS-5.

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Purchase Method:

 In preparing the transferee company’s financial statements, the assets and

liabilities of the transferor company should be incorporated at their existing
carrying amounts or alternatively, the consideration should be allocated to
individual identifiable assets and liabilities on the basis of their fair values at
the date of amalgamation..
 The reserves of whatever nature (capital or revenue) should not be included in
the financial statements of the transferee company except as in case of
statutory reserve.
 Any excess amount paid as consideration over the value of net assets shall be
recognized as goodwill and amortized accordingly.
 If the amount is less the difference shall be treated as Capital reserve.

Particulars Pooling of Interest Purchase Method

Applicable
Impact on assets/Liabilities
Time perspective
Transfer of shareholding
Impact of transactions’
To mergers
Both are taken over
including reserves
Backward looking as all
taken at book values
90% of shareholders
become shareholders
The difference between the
purchase consideration and
share capital is adjusted in
capital reserve or revenue
reserve account
Is used in acquisitions.
Assets and Liabilities are
only taken over.
Are taken at current or fair
value- goodwill may arise
also.
May not become
shareholders of transferee
The difference between net
assets and purchase
consideration is adjusted in
goodwill/capital reserve as
the case may be.

Purchase Consideration for Amalgamation:

 Purchase consideration in amalgamation, means the aggregate of the shares

and other securities issued and the payments made in the form of cash or other
assets by the transferee company to the shareholders of the transferor company.
 In determining the value of the consideration, assessment is made of the fair
value of its various elements.
 The consideration should include any non-cash element at fair value.
 The fair value may be determined by a number of methods.

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Goodwill on amalgamation:

 Goodwill arising on amalgamation represents payments made in anticipation of

future income and it is appropriate to treat it as a asset, to be amortized to
income on a systematic basis over its useful life.
 Estimation though difficult is done on a prudent basis and may be amortized over
a period not exceeding five years, unless a longer period can be justified.

Reserves:

Where the treatment to be given to the reserves of the transferor company after its
amalgamation is specified in a scheme of amalgamation sanctioned under the
provisions of the Companies Act, 2013 or any other statue, the same is to be
followed.

Disclosure requirements:

a) For amalgamations of every type, the following disclosures should be made

i) Names and general nature of business of the amalgamating companies,
ii) Effective date of amalgamation for accounting purposes.
iii) The method of accounting used to reflect the amalgamation and,
iv) Particulars of the scheme sanctioned under a statue.
b) In case of amalgamations accounted for under the pooling of interests method,
the following additional disclosures are required to be made in the first financial
statements following the amalgamation namely,
i) Description and number of shares issued, together with the percentage of
each company’s equity shares exchanged to effect the amalgamation,
ii) The amount of any difference between the consideration and the value of
net identifiable assets acquired, and the treatment thereof.
c) In case of amalgamation accounted for under the purchase method the following
additional disclosures are required to be made in the first financial statements
following the amalgamations:
i) Consideration for the amalgamation and a description of the consideration
paid or contingently payable, and
ii) The amount of any difference between the consideration and the value of
net identifiable assets required and the treatment thereof including the
period of amortization of any goodwill arising on amalgamation.

Common Procedures:

1. Non cash items included in the considerations should be based on fair value.
2. For issuing securities the value fixed under statutory authorities should be
taken as fair value.

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3. In case of other assets, the fair value may be based on the reference of market
value.
4. Further, where the scheme of amalgamation provides for an adjustment to the
purchase consideration, contingent or others, the amount of the additional
payment should be included in the consideration.
5. If probable, then a reasonable estimate of the amount can be made.
6. For other cases, the adjustments should be made when the amount is
determinable as per and events occurring after the balance sheet date.

Amalgamation after the balance sheet date:

 While an amalgamation is effected after the balance sheet date, but before the
issuance of the financial statements of either party to the amalgamation,
disclosures should be made as per the provisions of Ind AS-10.
 Events after the Reporting period, but the amalgamation should not be
incorporated in those financial statements.
 In certain circumstances, the amalgamation may also provide additional
information affecting the financial statements themselves, for instance, by
allowing the going concern assumption to be maintained.

Recent developments in M&A accounting:

In June,2001 the US Financial Accounting standards Board(FASB) adopted two new

accounting standards, SFAS 141”Business combinations” and SFAS 142 “ goodwill
and other intangibles” which were applicable for business combinations from 1 st July
2001.
These developments introduced the following changes in US accounting.
1. The statements of Financial Accounting Standards (SFAS) no 141 eliminated
pooling of interests methods of accounting and requires all acquisitions initiated
after July 2001 must be recognized as purchases.
2. SFAS no 142 calls for non amortization of goodwill and in most cases, annual
testing for goodwill impairment testing rather than amortization for acquired
intangible assets with indefinite lines.
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TYPTYPES OF AMALGAMATION

TYPES OF AMALGAMATIONS (Accounting treatment and methods):

Accounting Standard (AS)-14 recognizes two types of amalgamation:

a) Amalgamation in the nature of merger.

b) Amalgamation in the nature of purchase.

An amalgamation should be considered to be an amalgamation in the nature of merger

when all the following conditions are satisfied:

(i) All the assets and liabilities of the transferor company become, after amalgamation,
the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately
before the amalgamation, by the transferee company or its subsidiaries or their
nominees) become equity shareholders of the transferee company by virtue of the
amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee
company is discharged by the transferee company wholly by the issue of equity shares
in the transferee company, except that cash may be paid in respect of any fractional
shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities
of the transferor company when they are incorporated in the financial statements of the
transferee company except to ensure uniformity of accounting policies.

An amalgamation should be considered to be an amalgamation in the nature of

purchase, when any one or more of the conditions specified above is not satisfied.

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These amalgamations are in effect a mode by which one company acquires another
company and hence, the equity shareholders of the combining entities do not continue
to have a proportionate share in the equity of the combined entity or the business of the
acquired company is not intended to be continued after amalgamation.
METHODS OF ACCOUNTING FOR AMALGAMATION
METHODS OF ACCOUNTING:

There are two main methods of accounting for amalgamations:

(a) The pooling of interests method; and
(b) The purchase method.

The pooling of interests method is used in case of amalgamation in the nature of

merger. The purchase method is used in accounting for amalgamations in the nature of
purchase.

The Pooling of Interest Method

1. Since merger is a combination of two or more separate business, there is no

reason to restate carrying amounts of assets and liabilities. Accordingly, only
minimal changes are made in aggregating the individual financial statements of
the amalgamating companies.

2. In preparing the transferee company’s financial statements, the assets, liabilities

and reserves (whether capital or revenue or arising on revaluation) of the
transferor company should be recorded at their existing carrying amounts and in
the same form as at the date of the amalgamation.

3. The balance of the Profit and Loss Account of the transferor company should be
aggregated with the corresponding balance of the transferee company or
transferred to the General Reserve, if any.

4. If, at the time of the amalgamation, the transferor and the transferee company
have conflicting accounting policies, a uniform set of accounting policies should
be adopted following the amalgamation.

5. The effects on the financial statements of any changes in accounting policies

should be reported in accordance with Accounting Standard (AS-5), Net Profit or
Loss for the Period ‘Prior Period Items and Changes in Accounting Policies’.

6. The difference between the amount recorded as share capital issued (plus any
additional consideration in the form of cash or other assets) and the amount of
share capital of the transferor company should be adjusted in reserves.

7. It has been clarified that the difference between the issued share capital of the
transferee company and share capital of the transferor company should be

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treated as capital reserve. The reason given is that this difference is akin to share
premium.

8. Furthermore, reserve created on amalgamation is not available for the purpose of

distribution to shareholders as dividend and/or bonus shares. It means that if
consideration exceeds the share capital of the Transferor Company (or
companies), the unadjusted amount is a capital loss and adjustment must be
made, first of all in the capital reserves and in case capital reserves are
insufficient, in the revenue reserves.

9. However, if capital reserves and revenue reserves are insufficient the unadjusted
difference may be adjusted against revenue reserves by making addition thereto
by appropriation from profit and loss account.

10. There should not be direct debit to the profit and loss account. If there is
insufficient balance in the profit and loss account also, the difference should be
reflected on the assets side of the balance sheet in a separate heading.

The Purchase Method

1. In preparing the transferee company’s financial statements, the assets and

liabilities of the transferor company should be incorporated at their existing
carrying amounts or, alternatively, the consideration should be allocated to
individual identifiable assets and liabilities on the basis of their fair values at the
date of amalgamation.

2. The reserves (whether capital or revenue or arising on revaluation) of the

transferor company, other than the statutory reserves, should not be included in
the financial statements of the transferee company except as in case of statutory
reserve.

3. Any excess of the amount of the consideration over the value of the net assets of
the transferor company acquired by the transferee company should be
recognized in the transferee company’s financial statements as goodwill arising
on amalgamation.
4. If the amount of the consideration is lower than the value of the net assets
acquired, the difference should be treated as Capital Reserve.

5. The goodwill arising on amalgamation should be amortized to income on a

systematic basis over its useful life. The amortization period should not exceed
five years unless a somewhat longer period can be justified.

6. The reserves of the transferor company, other than statutory reserve should not
be included in the financial

NOTE:

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The statutory reserves refer to those reserves which are required to be maintained for
legal compliance. The statute under which a statutory reserve is created may require
the identity of such reserve to be maintained for a specific period. Where the
requirements of the relevant statute for recording the statutory reserves in the books of
the transferee company are complied with, such statutory reserves of the transferor
company should be recorded in the financial statements of the transferee company by
crediting the relevant statutory reserve account. The corresponding debit should be
given to a suitable account head (e.g., ’Amalgamation Adjustment Account’) which
should be disclosed as a part of “miscellaneous expenditure” or other similar category in
the balance sheet. When the identify the statutory reserves is no longer required to be
maintained, both the reserves and the aforesaid account should be reversed.

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Notes on Deal Valuation and Evaluation:

Factors affecting valuation:

 Determining the realistic value of a target firm is a complex process.

 Normally, the market price of share reflects not only the current earnings of
the firm, but also the investor’s expectation about future growth of the firm.
 Many a times the market price of the share also cannot be relied in many
cases or may not be available at all.
 Hence the process of concluding the process should include a detailed and
comprehensive analysis which takes into account a range of factors including
the past, present and most importantly the future earnings prospects of the
company, an analysis of its mix of physical and intangible assets and the
general economic and industry conditions.

The tools of valuation can be broadly be classified into the following types:

1. Asset based valuation- wherein the book value of the assets/liabilities or the net
adjusted values (revalued net assets are considered.
2. Market based valuation- which is based on the principle that market valuation of
the company’s equity and debt reflect the true value. General comparison
practices include market capitalization and enterprise value multiples revenues of
and cash flows plus measures of price to earnings and price to earnings to
growth rate ratios.
3. Dividend based valuation-The valuation is based on the principle that value of
a stock is the present value of expected dividends on it.
4. Earnings based valuation- Earnings and cash flows based valuation(DCF being
the most common technique) takes into consideration the future earnings of the
business and hence the appropriate value depends on projected revenues and
costs in future, expected capital out flows, number of years of projection,
discounting rate and terminal value of business.

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 In addition to the above broad methods, other concepts like premiums and
discounts are typically attached to a business valuation based on the
situations.
 The premiums or discounts are the form of market share premium, controlling
stake premium, brand value premium and small player discount or unlisted
company discount.
 Further timing of sale is very important in valuation which considers economic
cycles, stock market situation and global considerations etc.

Formula for Asset Based approach;

1) Book value approach- BV=TA—EL / NO OF EQUITY SHARES

In this approach the value of the assets are ascertained from the latest balance
sheet of the target company, minus the amount of external liabilities’ and net
worth is arrived at.
2) Realizable value/replacement value approach- realizable or replacement
value of all the tangible and intangible assets of the firms are estimated and from
this value, the expected external liabilities’ are deducted to find the value of the
firm.
3) Tobin’s Q approach- is based on the relationship between the assets of a firm
and its market value.
Tobin’s Q= Market value of a firm / Replacement cost of its assets (cost of
acquiring an assets of identical characteristics etc). Thus
Value of enterprise=Replacement cost of assets+ Value of growth opportunities

Dividend based approach:

 In this approach two kinds of cash flows are estimated:

 Dividends during the period, they hold the stock, and
 An expected price at the end of the holding stock.

D1, D2, D3 =Value of the stream of dividends over the lifetime n of the company
Ke= cost of equity of the company,
Pn= Value of the share as and when sold in the future year n.

𝐷1 𝐷2 𝐷3
𝑃= + + 𝑒𝑡𝑐
(1 + 𝐾𝑒)𝑛 (1 + 𝐾𝑒)𝑛 (1 + 𝐾𝑒)𝑛
The rationale for the model lies in the present value concept i.e. the value of any
asset is the present value of expected future cash flows, discounted at a rate
appropriate to the riskiness of the cash flows being discounted.

Earnings based approach:

Valuation based on the earnings approach takes into account the rate of return (ROR)
on capital employed.
Alternately, Price Earnings Ratio (P/E) is used instead of the Rate of Return (ROR).

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This expresses a relationship between firm’s earnings for equity and its equity market
capitalization.
PER=P/EPS
P=MARKET PRICE, EPS=EARNINGS PER SHARE, P=P/E+EPS.

CASH FLOW APPROACH (DCF):

This method of valuation takes into account future cash flows.

These cash flows are then discounted at an appropriate rate to find out the present
value of the firm.

Terminal Value:

The terminal value is the value of the company’s expected cash flows beyond the
explicit forecast period. An accurate estimation of terminal value is critical because it
accounts for a large of percentage of the total value of the company in a discounted
cash flow valuation.
There are three ways to estimate terminal value.

1. Stable perpetuity:
Terminal Value= Free cash flows/ Weighted average cost of capital.

2. Growing perpetuity:
Terminal value= FCF (1+g) / k-g,
Where FCF= Free cash flow, g= growth rate, k= weighted average cost of capital.

3. Multiple approach:
a) Multiple of earning approach is Terminal Value=FCF1+1+1 x P/E multiple of
industry or comparable.
b) Multiple of Book Value approach
Terminal value= Book value of capital x M/B rates, where M/B is the market to
book ratio. Normally, the current market to book ratio is taken as proxy for the
future.

Systematic steps for DCF Valuation:

1. Determine Free Cash flows (FCF).

2. Estimate suitable discount rate for acquisition.
3. Calculate the present value of cash flows.
4. Estimate the terminal value.
5. Add present value of terminal value.
6. Deduct the value of debt and other obligations assumed by the acquirer.

Sensitivity analysis:

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A sensitivity analysis may be conducted for pessimistic and optimistic values of key
financial variables like sales growth rate, profit margin, working capital investment,
capital expenditure, period of high growth etc.
The end product of such an analysis is a range of prices within which, the acquisition
price may lie.
The acquirer would want to lower the price and the opposite is true for the target.

Valuation of Brands:

There is always a premium price for buying branded goods and same is the case for
buying popular target companies.

Various methods are employed to value brands.

1. Cost price method: Here the value is the aggregate of costs (historical) and
assumed that the capital expenditure is effective towards creating a brand value.
2. Premium price: Here the brand value is taken as the difference between the
prices of the branded and non-branded products, multiplied by the volume of
sales of branded products for a finite period.
3. Market price: This is based on similar brands available in the market with an
assumption that brands are frequently brought and sold and can be compared.
The concept of Market to Book Value (MBT) shows the proportion of market
value of the firm vis-a- vis the historical book value.
4. Replacement cost: Here it is based on the possible identical substitute brands
available and is equal to the estimated replacement cost of the brand.
5. Discounted cash flow: DCF technique plays an important role in valuation of
brands as it takes into account the future cash flows of the company, where in
the stream of cash flows are estimated and an appropriate discount rate with
inflation and other risks and applied to find the present value of such cash flows.

The process of Deal making:

1. Deal making starts with the selection of potential targets.

2. Negotiation process is an integral part of the deal making exercise.
3. The negotiating teams generally comprises of investment banker, lawyers
and legal consultants, accountants and senior executives of the firms.
4. The negotiating team facilitates the deal making process.
5. Due diligence refers to the detailed investigation process by an investor or his
associates to assess the strengths and weaknesses of a proposed acquisition
by enquiring all the relevant aspects of the past, present and the predictable
future prospects of the company to be acquired
6. The investigation process included financial, operational and legal due
diligence.
7. Completion of due diligence process takes forward towards closure of the
deal.

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8. Finally, M&A deal closure depends on what internal and external approvals
are needed, compliance and filing required, financing that may be raised and
any other condition to closing the deal that were part of the agreement.

CHALLENGES OF DEAL MAKING IN INDIA.

While evaluating an acquisition in India, several regulatory matters need to be evaluated

in the recent rapidly evolving regulatory environment. These regulations include -
Matters relating to FDI policies, foreign exchange regulations, securities and corporate
law, various direct and indirect tax laws and environmental and labor laws. Other
important regulations like Direct Tax Code (DTC) and Goods and Services Tax (GST)
will affect the businesses that they are acquiring. As the Indian economy, is undergoing
further liberalization, regulatory environment is expected to further liberal in the years to
come and M&A have bright future in India.

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CONCEPTS IN CORPORATE RESTRUCTURING AND MERGERS AND

ACQUISTIONS.
Equity carve-outs.
Equity carve out is the process where an IPO of a portion of the common stock of a
wholly owned subsidiary is offered to raise resources. Equity carve outs are also known
as split off IPOs. This process initiates trading in a new and distinct set of equity claims
on the assets of the subsidiary.
Cash disgorgement:
Cash disgorgement is the principle where accumulated cash resources of business are
spent or reinvested effectively.
Corporate restructuring:
Restructuring is the act of partially dismantling or otherwise reorganizing a company for
the purpose of making it more efficient and therefore more profitable. It involves the
reorganization of a company to attain greater efficiency and to adapt to new markets. It
also implies liquidating projects in some areas and redirecting assets to other existing or
new areas.
Acquisitions:
Acquisitions represent purchase of new entities to utilize the existing strength and
capabilities or to exploit the untapped or underutilized markets. They are also carried
out to grow in size and prevent possibilities of future takeover.
Spin-offs:
In a spin off, a company creates a subsidiary whose shares are distributed on a pro-rata
basis to the shareholders of the parent company. This strategy is adopted when the
company feels that it would generate positive returns.
Splits:
Splits involve breaking up the business into independent entities to exploit opportunities
of growth, raise capital, achieve efficiency, and derive taxation benefits. Spits also
provide benefits of synergy, competence and revival.
Spits-ups:
Split ups represent a restructuring process where companies split themselves into two
or more parts.
Leveraged buyouts:
When a company acquires another company using a significant amount of borrowed
funds like bonds or loans to pay the cost of acquisition, the transaction is termed a
leveraged buyout. (LBO)
Sponsored leveraged buyouts:
Under sponsored LBOs, the private equity firms offer to buy a controlling stake in a
company using leverage obtained from banks based on the financials of the company.
Sell-off or divestitures:
Sell offs or divestitures are attempts to come out of a product segment or sector to
adjust the operations to the changing economic and political environments. They involve
voluntary decisions implemented to attain the objective of shareholders wealth
maximization.
Mergers:

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Mergers involve the coming together of two or more companies and pooling of
resources for the purpose of achieving certain common objectives.
Hiving off:
Hiving off is a process wherein an existing company sells a particular division to reduce
unproductive expenditure and slim the organization. It also helps an entity to reap the
benefits of core competencies, competitive advantage, and emergence of high capacity.
Buyback of shares/tender offers:
A tender offer is a public offer made by a potential acquirer to purchase some or all of
the shareholders shares in a company. The offer price is higher than the current market
value of the shares. It is assumed that the premium would induce the shareholders to
sell their holdings.
Dual class stock recapitalization:
Under this head, the entity creates a second class of common stock that carries limited
voting rights and usually preferential claim to the entity’s cash flows. This is done by
distributing limited voting shares on pro-rata basis to the existing shareholders. Such
stocks usually carry higher rate of dividends.

Consolidation:
Consolidation is a merger of two or more companies into a new company. In this form of
merger, all companies are legally dissolved and a new entity is created. Here, the
acquired company transfers its assets, liabilities and share to the acquiring company for
cash or exchange of shares.
Earn outs:
Earn outs are an arrangement whereby a part of the purchase price is calculated by
reference to the future performance of the target company. The deal describes a
payment to shareholders selling their shares in the target company and the payment
made by the acquirer’s based on the company’s profits in a specified period, usually
after the closing of the sale.
Reverse merger:
Reverse merger is the acquisition of a public company by a private company, allowing
the private company to bypass the usually lengthy and complex process of going public.
The publicly traded corporation is known as a “shell company” because it has little or no
assets. The private company obtains the shell company by purchasing controlling
interest through a new issue of stock.
Takeover code:
Takeover code is a set of statutory provisions that helps provide the target company
and its shareholders with necessary protection from takeover attempts.
Takeover defences:
Takeover defences are strategies adopted by the target company to prevent the
takeover another company.
Forced sales:
The capital structure of a company includes both equity and debt. When debt exceeds
equity, the entity becomes high leveraged and often finds the debt load intolerable. To
manage the situation, the company often decides to sell unrelated and underperforming
assets and businesses. This is called Forced sales.

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ESOPs:
Employee stock option plans are contracts between a company and its employees that
give employees the right to buy a specific number of the company’s shares at a fixed
price within a specified period of time.

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