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1.Executive Summary Merger - It's the most talked about term today creating lot of excitement and speculative activity in the markets. But before Mergers & Acquisitions (M&A) activity speeds up, it has to actually pass through a long chain of procedures (both legal and financial), which at times delays the deal. With the liberalization of the Indian economy in 1991, restrictions on Mergers and Acquisitions have been lowered. The numbers of Mergers and Acquisitions have increased many times in the last decade compared to the slack period of 1970-80s when legal hurdles trimmed the M&A growth. To put things in perspective, from 15 mergers in 1998, the number crossed to over 280 in FY01. With a downturn in the capital markets, valuations have come down to historic lows. It's high time that the consolidation game speeds up. In simple terms, a merger means blending of two or more existing undertakings into one, consequent to which each undertaking would lose their separate identity. The most common reasons for mergers are, operating synergies, market expansion, diversification, growth, consolidation of production capacities and tax savings. However, these are just some of the illustrations and not the exhaustive benefits. However, before the idea of Merger and Acquisition crystallizes, the firm needs to understand its own capabilities and industry position. It also needs to know the same about the other firms it seeks to tie up with, to get a real benefit from a merger. Globalization has increased the competitive pressure in the markets. In a highly challenging environment a strong reason for merger and acquisition is a desire 1 to survive. Thus apart from growth, the survival factor has off late, spurred the merger and acquisition activity worldwide. Take retail finance for instance. With corporate banking becoming an unprofitable business for banks due to high risk of asset quality, banks including financial institutions are tapping the retail finance segment. ICICI's acquisition of Anagram Finance from Lalbhai group, HDFC Bank's merger with Times Bank and ICICI Bank's merger with Bank of Madura are some of the latest examples of consolidation in the banking sector. We could see the similar trend perking up in other sectors. The present study gives some insight as to why the banks are going foe merger and acquisition and what are the legal, tax and financial aspects governing them. The study also deals with other aspects such as types of merger, motives, reasons, bank too much on merger, and successful consolidation in merger, recent trend in merger and acquisition activity. Lastly a case study involving the merger of ICICI with ICICI Bank has been taken. Objective of study: • To discuss the form of mergers and acquisitions. • To highlight the real motives of merger and acquisitions. • To focus on the considerations that are important in the mergers and acquisitions negotiations. • To find out reason for merger in the banking sector. • To understand the implications and evaluation. 2 2. Mergers and Acquisition Introdction: Business combinations which may take forms of merger, acquisitions, amalgamation and takeovers are important features of corporate structural changes. They have played an important role in the financial and economic growth of a firm. Merger is a combination of two or more companies into one company. One or more companies may merge with an existing company or they may merge to form a new company. Laws in India use the term amalgamation for merger. For example, Section 2(1A) of the Income Tax Act, 1961 defines amalgamation as the merger of one or more companies with another company or the merger of two or more companies (called amalgamating company or companies) to form a new company (called amalgamated company) in such a way that all assets and liabilities of the amalgamated company and shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. Merger or amalgamation may take two forms: • Merger through absorption • Merger through consolidation Absorption: In absorption, one company acquires another company. All companies except one lose their identity in merger through absorption. 3 Consolidation: In a consolidation, two or more companies combine to form a new company. In this form of merger, all companies are legally dissolved and a new entity is created. In consolidation, the acquired company transfers its asset, liabilities and shares to the acquiring company for cash or exchange of shares. Acquisition: A fundamental charectaristic of merger (either through absorption or consolidation) is that the acquiring company (existing or new) takes over the ownership of other companies and combine their operations with its own operations. In an acquisition two or more companies may remain independent, separate legal entity, but there may be change in control of companies. Takeover: A takeover may also define as obtaining of control over management of a company by another. Under the Monopolies and Restrictive Trade Practices Act, takeover means acquisition of not less than 25% of the voting power in a company. If a company wants to invest in more than 10% of the subscribe capital of another company, it has to be approved in the shareholders general meeting and also by the central government. The investment in shares of another companies in excess of 10% of the subscribed capital can result into their takeover. 4 Types of Merger There are three major types of mergers they can be explain as follows: 1 Horizontal Merger : This is a combination of two or more firms in similar type of production, distribution or area of business. 2 Vertical Merger : This is a combination of two or more firms involved in different stages of production or distribution. Vertical merger may take the form of forward or backward merger. Backward merger: When a company combines with the supplier of material, it is called backward merger. Forward merger: When it combines with the customer, it is known as forward merger. 3 Conglomerate Merger : This is a combination of firms engaged in unrelated lines of business activity. Example is merging of different business like manufacturing of cement products, fertilizers products, electronic products, insurance investment and advertising agencies. 5 Advantages of Merger and Acquisitions 1 Maintaining or accelerating a company’s growth. 2 Enhancing profitability, through cost reduction resulting from economies of scale. 3 Diversifying the risk of company, particularly when it acquires those business whose income streams are not correlated. 4 Reducing tax liability because of the provision of setting-off accumulated losses and unabsorbed depreciation of one company against the profits of another. 5 Limiting the severity of competition by increasing the company’s market power. 6 3. Motives behind the Merger Motives of merger can be broadly discussed as follows: 1 Growth: One of the fundamental motives that entice mergers is impulsive growth. Organizations that intend to expand need to choose between organic growth or acquisitions driven growth. Since the former is very slow, steady and relatively consumes more time the latter is preferred by firms which are dynamic and ready to capitalize on opportunities. 2 Synergy: Synergy is a phenomenon where 2 + 2 =>5. This translates into the ability of a business combination to be more profitable than the sum of the profits of the individual firms that were combined. It may be in the form of revenue enhancement or cost reduction. 3 Managerial Efficiency: Some acquisitions are motivated by the belief that the acquires management can better manage the target’s resources. In such cases, the value of the target firm will rise under the management control of the acquirer. 7 4 Strategic: The strategic reasons could differ on a case-to-case basis and a deal to the other. At times, if the two firms have complimentary business interests, mergers may result in consolidating their position in the market. 5 Market entry: Firms that are cash rich use acquisition as a strategy to enter into new market or new territory on which they can build their platform. 6 Tax shields: This plays a significant role in acquisition if the distressed firm has accumulated losses and unclaimed depreciation benefits on their books. Such acquisitions can eliminate the acquiring firm’s liability by benefiting from a merger with these firms. Benefits of Mergers 1 Limit competition 2 Utilise under-utilised market power 3 Overcome the problem of slow growth and profitability in one’s own industry 4 Achieve diversification 5 Gain economies of scale and increase income with proportionately less investment 6 Establish a transnational bridgehead without excessive start-up costs to gain access to a foreign market. 7 utilize under-utilized resources- human and physical and managerial skills. 8 Displace existing management. 8 9 Circum government regulations. 10 Reap speculative gains attendant upon new security issue or change in P/E ratio. 11 Create an image of aggressiveness and strategic opportunism, empire building and to amass vast economic power of the company. 4. Steps of Merger and Acquisitions There are three important steps involved in the analysis of merger and acquisitions can be explained as follows: 1 Planning: The most important step in merger and acquisition is planning. The planning of acquisition will require the analysis of industry specific and the firm specific information. The acquiring firm will need industry data on market growth, nature of competition, capital and labour intensity, degree of regulation etc. About the target firm the information needed will include the quality of management, market share, size, capital structure, profit ability, production and marketing capabilities etc, 2 Search and Screening : Search focuses on how and where to look for suitable candidates for acquisition. Screening process short lists a few candidates from many available.

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