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Today Mergers, Acquisitions and Other Types of Strategic Alliances Are on the Agenda of Most Industrial Groups Intending to Have an Edge Over Competitors

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Today Mergers, Acquisitions and Other Types of Strategic Alliances Are on the Agenda of Most Industrial Groups Intending to Have an Edge Over Competitors CHAPTER-1 MERGER AND ACQUISITION: CONCEPTUAL FRAMEWORK The present chapter discusses the conceptual framework of mergers and acquisitions. It focuses on demarcations between various terms like mergers, acquisitions, takeovers, consolidations, reverse mergers, management buyouts etc. The concept of demerger is also introduced. Various Indian laws and statutes having a bearing on merger process have been outlined and trends traced. Few other related procedural issues are also covered. “The decision to invest in a new asset would mean internal expansion for the firm. The new asset would generate returns raising the value of the corporation. Mergers offer an additional means of expansion, which is external, i.e. the productive operation is not within the corporation itself. For firms with limited investment opportunities, mergers can provide new areas for expansion. In addition to this benefit, the combination of two or more firms can offer several other advantages to each of the corporations such as operating economies, risk reduction and tax advantage1.” Today mergers, acquisitions and other types of strategic alliances are on the agenda of most industrial groups intending to have an edge over competitors. Stress is now being made on the larger and bigger conglomerates to avail the economies of scale and diversification. Different companies in India are expanding by merger etc. In fact, there has emerged a phenomenon called merger wave. The terms merger, amalgamations, take-over and acquisitions are often used interchangeably to refer to a situation where two or more firms come together and combine into one to avail the benefits of such combinations and re-structuring in the form of merger etc., have been attempted to face the challenge of increasing competition and to achieve synergy in business operations. 1.1 Corporate Restructuring Restructuring of business is an integral part of the new economic paradigm. As controls and restrictions give way to competition and free trade, restructuring and reorganization become essential. Restructuring usually involves major organizational change such as shift in corporate strategies to meet increased competition or changed market conditions. 1 Schall, L.D. and Hally C.W., Introduction to financial Management, McGraw Hill Book Company, New York, P.682. Mergers & Acquisitions Page 1 of 93 This activity can take place internally in the form of new investments in plant and machinery, research and development at product and process levels. It can also take place externally through mergers and acquisitions (M&A) by which a firm may acquire another firm or by which joint venture with other firms. This restructuring process has been mergers, acquisitions, takeovers, collaborations, consolidation, diversification etc. Domestic firms have taken steps to consolidate their position to face increasing competitive pressures and MNC’s have taken this opportunity to enter Indian corporate sector. The different forms of corporate restructuring are summarized as follows: Corporate Restructuring Expansion Contraction Corporate Control • Amalgamation • Demerger • Going Private • Absorption + Spin off • Equity Buyback • Tender offer + Equity carve out • Anti Takeover • Asset + Split off • Leveraged acquisition + Split up Buyouts + Divestitures • Joint Venture • Asset value Expansion • Amalgamation: This involves fusion of one or more companies where the companies lose their individual identity and a new company comes into existence to take over the business of companies being liquidated. The merger of Brooke Bond India Ltd. And Lipton India Ltd. Resulted in formation of a new company Brooke Bond Lipton India Ltd. • Absorption: This involves fusion of a small company with a large company where the smaller company ceases to exist after the merger. The merger of Tata Oil Mills Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL) is an example of absorption. • Tender offer: This involves making a public offer for acquiring the shares of a target company with a view to acquire management control in that company. Takeover by Tata Tea of consolidated coffee Ltd. (CCL) is an example of tender offer where more than 50% of shareholders of CCL sold their holding to Tata Tea at the offered price which was more than the investment price. Mergers & Acquisitions Page 2 of 93 • Asset acquisition: This involves buying assets of another company. The assets may be tangible assets like manufacturing units or intangible like brands. Hindustan lever limited buying brands of Lakme is an example of asset acquisition. • Joint venture: This involves two companies coming whose ownership is changed. DCM group and DAEWOO MOTORS entered into a joint venture to form DAEWOO Ltd. to manufacturing automobiles in India. There are generally the following types of DEMERGER: Spinoff: This type of demerger involves division of company into wholly owned subsidiary of parent company by distribution of all its shares of subsidiary company on Pro-rata basis. By this way, both the companies i.e. holding as well as subsidiary company exist and carry on business. For example Kotak, Mahindra finance Ltd. formed a subsidiary called Kotak Mahindra Capital Corporation, by spinning off its investment banking division. Split ups: This type of demerger involves the division of parent company into two or more separate companies where parent company ceases to exist after the demerger. Equity carve out: This is similar to spin offs, except that same part of shareholding of this subsidiary company is offered to public through a public issue and the parent company continues to enjoy control over the subsidiary company by holding controlling interest in it. Divestitures: These are sale of segment of a company for cash or for securities to an outside party. Divestitures, involve some kind of contraction. It is based on the principle if “anergy” which says 5-3=3! • Asset sale: This involves sale of tangible or intangible assets of a company to generate cash. A partial sell off, also called slump sale, involves the sale of a business unit or plant of one firm to another. It is the mirror image of a purchase of a business unit or plant. From the seller’s perspective, it is a form of contraction: from the buyer’s point of view it is a form of expansion. For example, When Coromandal Fertilizers Limited sold its cement division to India Cement limited, the size of Coromandal Fertilizers contracted whereas the size of India Cements Limited expanded. Corporate controls • Going private: This involves converting a listed company into a private company by buying back all the outstanding shares from the markets. Several companies like Castrol India and Phillips India have done this in recent years. A well known example from the U.S. is that of Levi Strauss & company. Mergers & Acquisitions Page 3 of 93 • Equity buyback: This involves the company buying its own shares back from the market. This results in reduction in the equity capital of the company. This strengthens the promoter’s position by increasing his stake in the equity of the company. • Anti takeover defenses: With a high value of hostile takeover activity in recent years, takeover defenses both premature and reactive have been restored to by the companies. • Leveraged buyouts: This involves raising of capital from the market or institutions by the management to acquire a company on the strength of its assets. Merger is a marriage between two companies of roughly same size. It is thus a combination of two or more companies in which one company survives in its own name and the other ceases to exist as a legal entity. The survivor company acquires assets and liabilities of merged companies. Generally the company which survives is the buyers which retiring its identity and seller company is extinguished2. Amalgamation Amalgamation is an arrangement or reconstruction. It is a legal process by which two or more companies are to be absorbed or blended with another. As a result, the amalgamating company loses its existence and its shareholders become shareholders of new company or the amalgamated company. In case of amalgamation a new company may came into existence or an old company may survive while amalgamating company may lose its existence. According to Halsbury’s law of England amalgamation is the blending of two or more existing companies into one undertaking, the shareholder of each blending companies becoming substantially the shareholders of company which will carry on blended undertaking. There may be amalgamation by transfer of one or more undertaking to a new company or transfer of one or more undertaking to an existing company. Amalgamation signifies the transfers of all are some part of assets and liabilities of one or more than one existing company or two or more companies to a new company. The Accounting Standard, AS-14, issued by the Institute of Chartered Accountants of India has defined the term amalgamation by classifying (i) Amalgamation in the nature of merger, and (ii) Amalgamation in the nature of purchase. 2 M.A.Weinberg, takeover and Amalgamations (London: Sweet and Maxwell Publishers, 1967) Mergers & Acquisitions Page 4 of 93 1. Amalgamation in the nature of merger: As per AS-14, an amalgamation is called in the nature of merger if it satisfies all the following condition: • All the assets and liabilities of the transferor company should become, after amalgamation; the assets and liabilities of the other company. • 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. • 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 share in the transferee company, except that cash may be paid in respect of any fractional shares.
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