MERGERS AND ACQUISITION

AN INTERNATIONAL PERSPECTIVE TO INORGANIC GROWTH

This Report Aims At Covering The Width And Breadth Of Corporate Restructuring
On An International Perspective. The Gargantuan Umbrella That Covers Mergers
And Acquisitions, The Issue Which Keeps The Entire Media Underneath Today. This
Report Is Aimed To Prove A Guide To Corporate Restructuring Leaving No Stones
Unturned.

Rahul Chandalia
08BS0002495

IBS -Mumbai

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 A REPORT ON

CORPORATE RESTRUCTURING

COVERING MERGERS & ACQUISITIONS

AND INTERNATIONAL TAKEOVERS

BY

RAHUL CHANDALIA (08BS0002495)

IN PARTIAL SUBMISSION FOR THE REQUIREMENTS

OF

MBA (FINANCE)-IBS-MUMBAI

UNDER GUIDANCE OF

Prof. VINOD. K. AGARWAL

ADJUNCT FACULTY (IBS-MUMBAI)

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 ACKNOWLEDGEMENT

I would like to take this opportunity to express my heartfelt gratitude

towards my faculty guide Prof. VINOD K. AGARWAL, who has been constant

resources of guidance and inspiration during the course of my entire project

work. From time to time he advised me and kept me focused towards the

fulfillment of my project objectives.

I would like to thank ICFAI University for availing me of such an enjoyable

experience in the industry practically with such kind or research papers.

A special vote of thanks to my faculty guide for providing me with his

valuable inputs and resources and coordinating brilliantly with me in making

my research more informative and useful.

In addition a special vote of thanks to the entire administration of IBS-

MUMBAI that had helped me and supported me in making my project here

informative and enjoyable. They have rendered full help and support to me

whenever I needed. I would like this support and warmth to be kept

continued with me not only till the end of the project but forever.

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 INDEX
Page No.
Abstract 08
1 Introduction 09
2 Difference between Merger and Acquisition 11
3 Mergers 12
a. Classification of Mergers

4 Acquisitions 14
a. Classification of Acquisitions

5 Motives Behind Acquisitions and Mergers 16

a. Economies of Scale
b. Synergy
c. Fast Growth
d. Tax Benefits
e. Diversification
f. Sales Enhancement
g. Improved Management
h. Information Effect
i. Wealth Transfer
j. Hubris Hypothesis
k. Resource Transfer
l. Management’s Personal Agenda
m. Manager’s Compensation
n. Vertical Integration
6 Financial Framework 21
a. Determining the Firm’s Value 21
i. Book Value
ii. Appraisal Value
iii. Market Value
iv. Earnings per Share
b. Financing Techniques in Merger 24
i. Cash
ii. Ordinary Share Financing
iii. Debt and Preference Share Financing
iv. Deferred Payment Plan
v. Tender Offer
c. Analysis of the Merger as a Capital Budgeting Decision 30
i. The DCF Approach 31
a. Determination of incremental projected Free Cash Flows
to the Firm(FCFF)
b. Determination of Terminal Value

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 c. Determination of appropriate Discount Rate

d. Determination of Present Value of FCFF

e. Determination of Cost of Acquisition
ii. The AVP Approach 33

7 Taxation Aspects 34
a. Tax Concessions to Amalgamated Company 34
i. Carry Forward and Set off of Business Losses And
Unabsorbed Depreciation
ii. Expenditure on Scientific Research
iii. Expenditure on Acquisition of Patent Rights or Copy Rights
iv. Expenditure on Know-how
v. Expenditure for Obtaining License to Operate
Telecommunication Services
vi. Preliminary Expenses
vii. Expenditure on Prospecting of Certain Minerals
viii. Capital Expenditure on Family Planning
ix. Bad Debts
b. Tax Concessions to Amalgamating Company 37
i. Free of Capital Gains Tax
ii. Free of Gift Tax
c. Tax Concessions to Shareholders of Amalgamating Company 37
8 Legal and Procedural Aspects 38
a. Scheme of Merger/Amalgamation 38
a. Essential Features of the Scheme of Amalgamation
b. Scheme of Acquisitions / Takeovers 38
i. The SEBI Substantial Acquisition of Shares and Take over Code
(SEBI Takeover Code) 42
1. Disclosure of Shareholding and Control in a Listed Company 42
a) Continual Disclosure
b)Power to call for Information
2. Substantial Acquisition of Shares/Voting Rights/Control Over a 44
Limited Company
a)Power to Remove Difficulties
b)Acquisition of 15% or more Shares/Voting Rights
c) Acquisition of Control
d)Appointment of Merchant Banker
e)Public Announcement of the Offer
f) Contents of the Public Announcement of the Offer
g)Submission of Letter of Offer to the SEBI
h)Offer Price
i) Offer Price under Creeping Acquisition
j) Competitive Bid
k)Upward Revision of Offer
l) Withdrawal of Offer
m) Provision of Escrow

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 3. Bail Out Takeovers 53
a)Manner of Acquisition of Shares
b)Manner of Evaluation of Bids
c) Person Acquiring Shares to Make an Offer and a Public
Announcement
d)Competitive Bid
e)Exemption
4. Investigation and Action by the SEBI 55
a)Obligations
b)Directions by the SEBI
c) Penalties for Non-compliance
ii. Strategies for Hostile Takeovers and Company Resistance 58
1. Takeover Strategies
2. Company Resistance and Defensive Strategies

9 Merger and Acquisition Marketplace Difficulties 60

10 Other Forms of Corporate Restructuring 62
a. Demergers/Divestitures 63
i. Reasons/Motives behind Demergers/Divestitures 63
ii. Financial Evaluation of Demergers 64
iii. Taxation Aspects 64
a) Tax Concessions to the Resulting Company
b) Tax Concessions To the Demerged Company
c) Tax Concessions to the Shareholders
iv. Methods of Demergers/Divestitures 66
a) Sell-Offs
b) Spin-Offs
c) Split-Ups
d) Equity Carve-Outs
b. Going Private and Buyouts 68
i. Motivations for Going Private
ii. Leveraged Buyouts
a) Characteristics of Desirable LBO Candidates
c. Leveraged Recapitalizations 71
i. Valuation Implications
d. Reverse Mergers 72
i. The Process
ii. Benefits
iii. Drawback
e. Financial Restructuring (Internal Reconstruction) 75
i. Restructuring Scheme
11 Some Cases of Corporate Restructurings From The Real World 77
a. The Great Merger Movement, 1895-1905 77
i. Short-Run Factors
ii. Long-Run Factors
b. Merger of Reliance Petrochemicals Ltd (RPL) With Reliance Industries 79
Ltd (RIL), 1992
c. Demerger of DCM Ltd, 1990 81
d. Acquisition of Ranbaxy Laboratories Ltd by Daiichi Sankyo, 2008 84
e. Bail Out Merger of ITC Classic Financial Ltd With ICICI Ltd, 1997-98 86
f. Acquisition of Corus by Tata Steel, 2007 89
g. Acquisition of Hutchinson Essar by Vodafone, 2007 92

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 h. Reverse Merger Of ICICI Ltd With ICICI Bank Ltd, 2002 94
i. Acquisition Of Jaguar And Land Rover By Tata Motors,2008 96
j. The Leveraged Buyout of Rayovac by Thomas H. Lee, 1996 100
Materials and Methods 103

Conclusion and Discussions 104

Future Prospects 105

Appendices 106

Appendix 1 – Accounting treatment of mergers, acquisitions or other forms of 106

Restructuring
Appendix 2 – Corporate Voting and Control 106

Appendix 3 – Distress Restructuring 107

Appendix 4 – Indirect References & Bibliography 108

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 Abstract
This project aims at analyzing the needs, forms, various aspects, effects,
advantages and disadvantages of corporate restructuring. Activities related
to expansion or contraction of a firm’s operations or changes in its assets or
financial or ownership structure are referred to as corporate reconstructing.
The most common form of corporate restructuring are
mergers/amalgamations, acquisitions/takeovers, financial restructuring,
divestitures/demergers and buyouts. Profitable growth constitutes one of the
prime objectives of most of the business firms. It can be achieved ‘internally’
by expanding/enlarging the capacity of existing product(s). Alternatively the
growth factor can be facilitated ‘externally’ by acquisitions of existing
business firms. The acquisitions may be in the form of mergers, acquisitions,
amalgamations, takeovers, absorption, and consolidation and so on.

Acquisitions/mergers obviates, in most of the situations, financing problem

as substantial/full payments are normally made in the form of shares of the
purchasing company. Further, it also expedites the pace of growth as the
acquired firm already has the facilities or products (acceptable to the
market) and therefore, obviously, saves the time otherwise required in
building up the new facilities from scratch in the case of internal expansion
program. Thus, a firm will opt for merger if it adds to the wealth of
shareholders, otherwise merger will not be financially viable proposition.
However, merger suffers from certain weaknesses. First a merger may not
turn out to be a financially profitable preposition in view of non-realization of
potential economies in terms of cost reduction. Second the management of
the two companies may not go along because of friction. Third, dissenting
minority shareholders may cause problems. Finally, it may attract
government antitrust action in terms of the Competition Act. There are also
some other marketplace difficulties which the companies face due to
restructuring processes.

We shall also discuss the Taxation, Legal, and Procedural aspects of

corporate restructurings. The other forms of corporate restructuring such as
demergers, buyouts and internal reconstructions are also practiced by
companies and these also tend to be successful depending on the goals of
the company and the existing business scenario. This discussion is
supported by some cases of domestic and international takeovers and
corporate restructuring from the real world, analyzing the effects and
impacts of restructuring in real terms. Well known cases like the merger of
Reliance Petroleum with Reliance Industries Limited, 1992, acquisition of

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Hutch by Vodafone, 2007, the global expansion of Tata in the past few years
support the case.

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 CORPORATE RESTUCTURING
The name “Corporate Restructuring” can be constructed as almost any
change in capital structure, in operations, or in ownership that is outside the
ordinary course of business. Corporate restructuring is a broad umbrella that
covers many things.

The most common thing is the mergers and takeovers. In addition to

mergers, takeovers, and contests for corporate control, there are other types
of corporate restructuring: divestitures, rearrangements, and ownership
reformulations.

In other words, corporate restructuring implies activities related to

expansion / contraction of a firm’s operations or changes in its assets or
financial or ownership structure.

Corporate restructuring transactions fall into broad categories of divestiture,

ownership restructuring, and distress restructuring.

Under this project, we shall discuss the various aspects of mergers and
acquisitions (M&A), divestitures, spin-offs, sell-offs, equity carve-outs,
leveraged buyouts and leveraged recapitalizations. Stock repurchase is also
often a part of an overall corporate restructuring plan.

The restructuring of a company in financial distress differs from the above.

Here the pressure is external, from creditors. There are defined legal
remedies, and in any restructuring these must be observed. Still
management often is able to influence the outcome, as we shall see.

A merger is a tool used by companies for the purpose of expanding their

operations often aiming at an increase of their long term profitability.

Usually mergers occur in a consensual (occurring by mutual consent) setting

where executives from the target company help those from the purchaser in
a due diligence process to ensure that the deal is beneficial to both parties.
Acquisitions can also happen through a hostile takeover by purchasing the
majority of outstanding shares of a company in the open market against the
wishes of the target's board.

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An acquisition, also known as a takeover, is the buying of one company
(the ‘target’) by another. An acquisition may be friendly or hostile. In the
former case, the companies cooperate in negotiations; in the latter case, the
takeover target is unwilling to be bought or the target's board has no prior
knowledge of the offer. Acquisition usually refers to a purchase of a smaller
firm by a larger one. Sometimes, however, a smaller firm will acquire
management control of a larger or longer established company and keep its
name for the combined entity. This is known as a reverse takeover.

In business or economics a merger is a combination of two companies into

one larger company. Such actions are commonly voluntary and involve stock
swap or cash payment to the target.

A merger can resemble a takeover but result in a new company name (often
combining the names of the original companies) and in new branding; in
some cases, terming the combination a "merger" rather than an acquisition
is done purely for political or marketing reasons.

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Difference between Merger and Acquisition
Although they are often uttered in the same breath and used as though they
were synonymous, the terms merger and acquisition mean slightly
different things.

When one company takes over another and clearly established itself as the
new owner, the purchase is called an acquisition. From a legal point of view,
the target company ceases to exist, the buyer "swallows" the business and
the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of
about the same size, agree to go forward as a single new company rather
than remain separately owned and operated. This kind of action is more
precisely referred to as a "merger of equals." Both companies' stocks are
surrendered and new company stock is issued in its place. For example, both
Daimler-Benz and Chrysler ceased to exist when the two firms merged, and
a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often.

Usually, one company will buy another and, as part of the deal's terms,
simply allow the acquired firm to proclaim that the action is a merger of
equals, even if it's technically an acquisition.

Being bought out often carries negative connotations, therefore, by

describing the deal as a merger, deal makers and top managers try to make
the takeover more palatable. A purchase deal will also be called a merger
when both CEOs agree that joining together is in the best interest of both of
their companies. But when the deal is unfriendly - that is, when the target
company does not want to be purchased - it is always regarded as an
acquisition.

Whether a purchase is considered a merger or an acquisition really

depends on whether the purchase is friendly or hostile and how it is
announced. In other words, the real difference lies in how the
purchase is communicated to and received by the target company's
board of directors, employees and shareholders. It is quite normal
though for M&A deal communications to take place in a so called’
confidentiality bubble' whereby information flows is restricted due to
confidentiality agreements (Harwood, 2006).

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MERGERS
A merger is a combination of two corporations in which only one survives.
The merged corporations go out of existence. Mostly the two corporations
merge together under a third name which is a combination of the two. For
example, the two automobile companies Maruti and Suzuki merged to form
Maruti Suzuki.

Classification of Mergers –
Notwithstanding terminological differences mergers can be usefully
distinguished into four types –

1. Horizontal Merger – A horizontal merger takes place when two or

more corporate firms dealing in similar lines of activity combine
together. Elimination or reduction in competition, putting an end to
price-cutting, economies of scale in production, research and
development, marketing and management are often motives
underlying such mergers. For example- the merger of Whirlpool and
Kelvinator of India (1996).

2. Vertical Merger – Vertical merger occurs when a firm acquires firms

upstream or downstream from it. Thus the combination involves two or
more stages of production or distribution that are usually separate.
Lower buying costs of materials, lower distribution costs, assured
supplies and market, increasing or creating barriers to entry for
potential competitors or placing them at a cost disadvantage are the
chief gains accruing from such mergers. For example- the merger of
America Online Inc. (AOL) and Time Warner (2000).

3. Conglomerate Merger – Conglomerate merger is a combination in

which a firm established in one industry combines with a firm from an
unrelated industry. In other words, firms engaged in two different or
unrelated economic/business activities combine together.
Diversification of risk constitutes the rationale for such mergers. For
example-the merger of Royal Dutch Petroleum Co. with Shell Transport
& Trading Co. (2004).

4. Congeneric Merger – A Congeneric merger occurs where two

merging firms are in the same general industry, but they have no
mutual buyer/customer or supplier relationship, such as a merger
between a bank and a leasing company. Diversification again becomes

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a rationale for such mergers. For example- Prudential’s acquisition of
Bache & Company.

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 5. Reverse Merger – A unique type of merger called a reverse merger is
used as a way of going public without the expense and time required
by an IPO. In this type of merger, a company merges with its own
subsidiary. Increasing market share, increased access to funds and
decreased cost of production or distribution may act as motives behind
such mergers. For example- the merger of ICICI Ltd. with ICICI Bank
Ltd.

Again, mergers may be classified on financial basis, i.e. on the basis of

increase or decrease in the Earnings per Share (EPS) of the companies –

1) Accretive mergers – Accretive mergers are those in which an

acquiring company's earnings per share (EPS) increase. An alternative
way of calculating this is if a company with a high price to earnings
ratio (P/E) acquires one with a low P/E.

2) Dilutive Mergers – Dilutive mergers are the opposite of above,

whereby a company's EPS decreases. The company will be one with a
low P/E acquiring one with a high P/E.

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ACQUISITIONS/TAKEOVERS
Takeover implies acquisition of controlling interest in a company by another
company. It does not lead to the dissolution of the company whose shares
are being acquired. In other words, an acquisition, also known as a takeover,
is the buying of one company (the’ target’) by another group.

Classification of Acquisitions –
On the basis of response of the Target Company, takeovers or acquisitions
can assume three forms –

1) Negotiated / Friendly Takeover – Such takeovers are organized by

the incumbent management with a view to parting with the control of
the management to another group, through negotiation. The terms
and conditions of the takeover are mutually settled by both the
groups.

2) Hostile / Open Market Takeover – Hostile takeovers are also

referred to as raid on the company. In order to take over the
management of, or acquire controlling interest in, the target company,
a person / group of persons acquire shares from the open
market/financial institutions/mutual funds/willing shareholders at a
price higher than the prevailing market price. Such takeovers are
hostile to the existing management.

3) Bail Out Takeover – When a profit earning company takes over a

financially sick company to bail it out, it is called a Bail out takeover.
Normally, such takeover are in pursuance of a scheme of rehabilitation
approved by public financial institutions/scheduled banks. The
takeover bids, in respect of purchase price, track record of the acquirer
and his financial position, are evaluated by a leading financial
institution

Again on the basis of the motive of the acquirer company, takeovers can be
classified into two –

1) Strategic Acquisitions – A strategic acquisition occurs when a

company acquires another as part of its overall strategy. Perhaps cost
advantages result, or it may be that the target company provides
revenue enhancement through product extension or market
dominance. The key is that there is a strategic reason for blending the
two companies together. Strategic acquisitions can either be with
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 stock, where a ratio of exchange occurs, denoting the relative value
weightings of the two companies with respect to earnings and to
market prices, or also with cash.

2) Financial Acquisition – A financial acquisition occurs when a

financial promoter, is the acquirer. The motivation is to sell off assets,
cut costs, and operate whatever remains more efficiently than before,
in the hope of producing value above what was paid. The acquisition is
not strategic, for the company acquired is operated as an independent
entity. Such an acquisition invariably involves cash, and payment to
the selling stockholders is funded importantly with debt.

Further again, on the basis of the way of acquisition, takeovers may be

classified as two –

1) The buyer buys the shares, and therefore control, of the target
company being purchased. Ownership control of the company in turn
conveys effective control over the assets of the company, but since
the company is acquired intact as a going business, this form of
transaction carries with it all of the liabilities accrued by that business
over its past and all of the risks that company faces in its commercial
environment.

2) The buyer buys the assets of the target company. The cash the target
receives from the sell-off is paid back to its shareholders by dividend
or through liquidation. This type of transaction leaves the target
company as an empty shell, if the buyer buys out the entire assets. A
buyer often structures the transaction as an asset purchase to "cherry-
pick" the assets that it wants and leave out the assets and liabilities
that it does not. This can be particularly important where foreseeable
liabilities may include future, unquantified damage awards such as
those that could arise from litigation over defective products,
employee benefits or terminations, or environmental damage. A
disadvantage of this structure is the tax that many jurisdictions,
particularly outside the United States, impose on transfers of the
individual assets, whereas stock transactions can frequently be
structured as like- kind exchanges or other arrangements that are tax-
free or tax-neutral, both to thebuyer and to the seller's shareholders.

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MOTIVES BEHIND ACQUISITIONS AND MERGERS
The basic purpose of a merger or takeover is creation of value. There are
some reasons why we can expect value to be created or rearranged due to a
merger/acquisition –

1) Economies of Scale – The operating cost advantage in terms of

economies of scale are considered to be primary motive for mergers,
especially horizontal and vertical mergers. They result in lower
average cost of production and sales due to a higher level of
operations. For instance, overhead costs can be substantially reduced
on account of sharing central services such as accounting and finance,
office, executive and top level management, legal, sales promotion
and advertisement, and so on.

Koutsoyiannis classifies these economies into two groups –

• Real economies – Economies which arise from a reduction in

the factor inputs per unit of output. In operational terms, real
economies may arise from –

a. The production activity of the firm

b. The research and development/technological activities

c. The synergy effects

d. Marketing and distribution activities

e. e. Transport, storage and inventories

f. Managerial economies

• Pecuniary economies – Economies which are realized from paying

lower prices for factor inputs due to bulk transactions.

Cheaper finance is the most vital ingredient of pecuniary economies. A post

merger large firm is likely to raise finance at cheaper rates than either of the
pre-merger firms could have. The reason is that the larger the firm, the more
secure the investors consider their funds. Besides, the floatation costs (in
making new issues) per unit decreases with the increase in the size of shares
and debentures.

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The idea is to concentrate a greater volume of activity into a given facility,
into a given number of people, into a given distribution system, and so forth.
In other words, increases in volume permit a more efficient utilization of
resources.

But, like anything else, it has limits. Beyond a point, increases in volume
may cause more problems than they remedy, and a company may actually
become less efficient. Economists describe this as an envelope curve with
economies of scale possible up to some optimal point, after which
diseconomies occur.

2) Synergy – Synergy means that the combined value of the merged

firm will be greater than the sum of the values of the individual pre-
merger firms (or units). It results from complimentary activities. For
instance, one firm may have a substantial amount of financial
resources while the other has profitable investment opportunities.
Similarly, one firm may have well established brand of its products but
lacks marketing organization and the other firm may have a very
strong marketing organization. Likewise, one firm may have a strong
research and development (R&D) team whereas the other firm may
have a very efficiently organized production department. The merged
business unit in all these cases will be more efficient than the
individual firms. Symbolically,

Combined Value = Stand alone value of acquiring firm, VA + Stand alone

value of acquiring firm, VT + Value of Synergy, ΔVAT

Normally, the value of synergy is positive and this constitutes the rationale
for merger. In valuing synergy, costs attached with acquisitions should also
be taken into account. These costs primarily consist of costs of integration
and payment made for acquisition of the target firm, in excess of its value,
VT. Therefore, the net gain from the merger is equal to the difference
between the value of synergy and costs.

Net Gain = Value of Synergy, ΔVAT – Costs

3) Fast Growth – A merger often enables the amalgamating firm to grow

at a rate faster than is possible under the internal expansion route,
because the acquiring company enters a new market quickly, avoiding
the delay associated with building a new plant and establishing a new
line of products. Internal growth is time consuming, requiring research
and development, organization of the product, market penetration,
and in general, a smoothly working organization. Above all, there may
sometimes be an added problem of raising adequate funds to execute

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the required capital budgeting projects. A merger obliviates all these
obstacles and, thus, steps up the pace of corporate growth

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4) Tax Benefits – A motivation in some mergers is tax. These conditions
relate to the tax laws allowing set off and carry forward of losses. In
the case of a tax-loss carry forward, a company with cumulative tax-
losses may have little prospect of earning enough in the future to
utilize fully its tax-loss carry forward. By merging with a profitable
company, it may be possible for the surviving company to utilize the
carry forward more effectively. The argument is that this tax-loss carry
forward will reduce the taxable income of the newly merged firm, with
its obvious impact on the reduction of tax liability. In operational
terms, the losses of the target firm will be allowed to be set off against
the profits of the acquiring firm.

However, there are restrictions that limit its utilization to a percentage

of the fair market value of the acquired company. Still, there can be an
economic gain, at the expense of the government, that cannot be
realized by either company separately. The Tax Reform Act, 1986,
sharply reduced tax-motivated mergers. The technical tax advantages
that remain provide little in the way of value.

5) Diversification – Diversification is yet another major advantage,

especially in a conglomerate merger. The argument is that a merger
between two unrelated firms would tend to reduce business risk, and,
thus, increase the market value. Also, by acquiring a firm in different
line of business, a company may be able to reduce cyclical instability
in earnings. In other words, such mergers help stabilize or smoothen
overall corporate income, which would otherwise fluctuate due to
seasonal or economic cycles. In operational terms, the greater the
combination of statistically independent, or negatively correlated
income streams of the merged companies, the higher will be the
reduction in the business risk factor and the greater will be the benefit
of diversification or vice versa.

However, such diversification can also be attained by individual

shareholders by diversifying their individual investment portfolio.
Therefore, the financial managers should ensure that the merger
should not be at a cost higher than the one at which shareholders
would have attained on their own; corporate diversification should be
less expensive than personal diversification.

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6) Sales Enhancement – An important reason for some acquisitions is
the enhancement of sales. By gaining market share, ever-increasing
sales may be possible through market dominance. Or it may be that it
will fill a gap in the product line, thereby enhancing sales throughout.
To be a thing of value, such sales enhancements must be cost
effective.

7) Improved Management – Some companies are inefficiently

managed with the result the profitability is lower than it might be. To
the extent the acquirer can provide better management an acquisition
may make sense for this reason alone. While a company can change
management itself, the practical realities of entrenchment may be
such that an external acquisition is required for anything to happen.
The idea is that the external financial markets discipline management.

8) Information Effect – Value also could occur if new information is

conveyed as a result of the merger negotiation or takeover attempt.
This notion implies asymmetric information between management (or
the acquiring firm) and the general market for the stock. To the extent
of stock is believed to be undervalued a positive signal may occur via
the merger announcement which causes share price to rise. The idea
is that the merger/takeover provides information on underlying
profitability that otherwise cannot be convincingly conveyed. In a
nutshell, it is that specific actions speak louder than words.

9) Wealth Transfer – However, there may be wealth transfer from

equity holders to debt holders, via diversification, when a merger
occurs. To the extent the combination lowers the relative variability of
cash flows, debt-holders benefit from having a more creditworthy
claim. As a result the market value of their claim should increase, all
other things remaining the same. In effect, it is a zero-sum game, and
one party can gain only at the expense of the other.

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10) Hubris Hypothesis – Roll argues that takeovers are motivated
by bidders who get caught up in believing they can do no wrong and
that their foresight is perfect Hubris refers to an animal like spirit of
arrogant pride and self confidence. Such individuals are said not to
have the rational behavior necessary to refrain from bidding. As a
result, they bid too much for their targets. In other words, manager's
overconfidence about expected synergies from M&A, which results in
overpayment for the target company. The hubris hypothesis suggests
that the excess premium paid for the target company benefits those
stockholders, but that stockholders of the acquiring company suffer a
diminution in wealth.

11) Resource Transfer – Resources are unevenly distributed across

firms (Barney, 1991) and the interaction of target and acquiring firm
resources can create value through either overcoming information
asymmetry or by combining scarce resources.

12) Management’s Personal Agenda – Rather than hubris, it may

be that the acquiring company overpays because management
pursues personal as opposed to corporate wealth maximizing goals.
Sometimes, management chases growth. Being larger may bring
prestige, in whose glow management basks. Managers have larger
companies to manage and hence more power. The goal may be
diversification, because with unrelated businesses and risk spread out,
management jobs may be more secure.

13) Manager’s Compensation – In the past, certain executive

management teams had their payout based on the total amount of
profit of the company, instead of the profit per share, which would give
the team a perverse incentive to buy companies to increase the total
profit while decreasing the profit per share (which hurts the owners of
the company, the shareholders); although some empirical studies
show that compensation is linked to profitability rather than mere
profits of the company.

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14) Vertical integration – Companies acquire part of a supply
chain and benefit from the resources. However, this does not add any
value since although one end of the supply chain may receive a
product at a cheaper cost; the other end now has lower revenue. In
addition, the supplier may find more difficulty in supplying to
competitors of its acquirer because the competition would not want to
support the new conglomerate.

24
FINANCIAL FRAMEWORK
Under this section, we will discuss the financial framework of a merger
decision. It covers three inter-related aspects –

1) Determining the firm’s value

2) Financing techniques in merger, and

3) Analysis of the merger as a capital budgeting decision

1) Determining the firm’s value – The first step towards analyzing a

potential merger involves determining the value of the acquired firm.
The value of a firm depends not only upon its earnings but also upon
the operating and financial characteristics of the acquiring firm.
Therefore, a single value cannot be placed for the acquired firm.
Hence, a range of values is determined and the final value, within this
range, is negotiated by the two firms. However, placing a value on
qualitative factors, such as managerial talent, strong sales
department, and so on is difficult. Therefore, more emphasis is given
on quantitative factors – the value of the assets, and the earnings of
the firm. Based on these factors, the quantitative variables include –

a) Book Value – The book value of a firm is based on the balance sheet
value of owner’s equity. It is determined by dividing net worth by the
number of equity shares outstanding.

However, the book value, as a basis of determining a firm’s value, suffers

from a limitation that it is based on the historical costs of the assets of the
firm. Nevertheless, it is relevant to the determination of a firm’s value due to
the following reasons –

i. It can be used as a starting point to be compared and complemented

by other analyses

ii. In industries where the ability to generate earnings requires large

investments in fixed assets, the book value could be a critical factor
where especially plant and equipment are relatively new.

25
iii. A study of the firm’s working capital is particularly appropriate and
necessary in mergers involving businesses consisting primarily of
liquid assets, like financial institutions.

26
 b) Appraisal Value – The appraisal value of a firm is acquired from an
independent appraisal agency. This value is normally based on the
replacement cost of assets. The merits of the appraisal value are –

i) It is an important factor in special situations such as in financial

companies, natural resource enterprises or organizations that have
been operating at a loss.

ii) Appraisal by independent appraisers may permit reduction in

accounting goodwill by increasing the recognized worth of specific
assets.

iii)Appraisal by an independent agency provides a test of reasonableness

of result obtained through methods based upon the going concern
concept.

iv) The appraiser may identify strengths and weaknesses that otherwise
may not be recognizable. For example in valuation of patents and
partially completed research and development expenditure

On the other hand, this method of determination of a firm’s value is not

adequate by itself as individual values of assets may have little relation to
the firm’s overall ability to generate earnings, and thus, the going concern
value of the firm. In brief, the appraisal value procedure is useful if carried
out in conjunction with other evaluation processes.

c) Market Value – The market value, as reflected in stock market

operations, comprises yet another approach for estimating the value of
a business. It is the most widely used approach in determining value
especially of large listed firms. The market value of a firm is
determined by investment as well as speculative factors. This value
can change abruptly as a result of change not only in analytical factors
but also due to purely speculative influences and is subject to market
sentiments and personal decisions. In actual practice, a certain
percentage premium above the market price is often offered as an
inducement for the current owners to sell their shares.

Operationally, a ratio of exchange occurs for the shareholders of the

acquired company.

For example, if the market price of the shares of the acquiring company is
Rs.60 per share and that of acquired company is Rs. 30 per share, and the

27
acquiring offers a half share of its stock for each share of the acquired
company.

However, the company being acquired finds a little enticement to accept a

one to one market value ratio of exchange. The acquiring company must
offer a price in excess of current market price per share of the company it
wishes to acquire. Acquiring company may have to offer 0.667 shares, or Rs.
40 a share in current market value.

Bootstrapping Earnings per Share – In the absence of synergism,

improved management, or the under-pricing of bought company’s stock in
an inefficient market, it is not in the interest of the acquiring stockholders to
offer a price in excess of the bought company’s current market price.
Acquiring stockholders could be better off if their company’s price/earnings
ratio were higher than the bought company’s and if somehow the surviving
company were able to keep that same higher price/earnings ratio after the
merger. Assume the following financial information –

Company A Company B

Present Earnings Rs 20000000 Rs 6000000

No. of Shares 6000000 2000000

Market price per Rs 3.33 Rs3.00

Share
Price/Earnings Ratio 18x 10x

With an offer of 0.667 share of Acquiring Company for each share of bought
company, or Rs 40 a share in value.

Obviously, the stockholders of the acquired company are benefited as they

are being offered more than their stock is worth.

Stockholders of acquiring company also stand to benefit, if the

price/earnings ratio of the surviving company stays at 18. The market price
per share of the surviving company, after the acquisition, all other things
held constant would be the reason for increase in the market price per share
whereby the stockholders of both companies benefit is the difference in the
price/earnings ratios.

28
However, in reasonably efficient capital markets, it is unlikely that the
Surviving Company
Total Earnings Rs 26000000
No. of Shares 7333333
Earnings per Share Rs 3.55
Price/Earnings Ratio 18x
Market Price Per Share Rs 63.90
market will hold constant the price/earnings ratio of a company that cannot
demonstrate growth potential in ways other than acquiring companies with
lower price/earnings ratios.

Thus, the acquiring company must allow for the price/earnings ratio
changing with an acquisition. If the market is relatively free from
imperfection and if synergism and/or improved management are not
expected, the price/earnings ratio of the surviving firm is expected to
approach a weighted average of the two previous price/earnings ratios.

d) Earnings per Share – According to this approach, the value of a

prospective acquisition is considered to be a function of the impact of
the merger on the earnings per share (EPS). In other words, the
analysis could focus on whether the acquisition will have a positive
impact on the EPS after the merger (Accretive merger) or if it will have
the effect of diluting the EPS (Dilutive merger). The future EPS will
affect the firm’s share prices, which is a function of price/earnings (P/E)
ratio and EPS.

Thus, when the share exchange ratio is in proportion to the EPS, there is no
effect on the EPS of the acquiring/surviving company as well as on the
acquired firm. But when the share exchange ratio is different, it may cause
accretion in the EPS of the acquired firm and dilution in the EPS of the
surviving firm, or vice-versa.

For management of a firm considering acquiring another firm, a merger that

results in dilution in EPS should be avoided. However, the fact that the
merger immediately dilutes a firm’s current EPS need not necessarily make
the transaction undesirable. Such a criterion places undue emphasis upon
the immediate effect of the prospective merger on the EPS. In examining the
consequences of the merger upon the surviving concern’s EPS, the analysis
should be extended into future periods and the effect of the future growth
rate in earnings should also be included in the analysis.

29
Accurate business valuation is one of the most important aspects of M&A as
valuations like these will have a major impact on the price that a business
will be sold for. Most often this information is expressed in a Letter of
Opinion of Value (LOV) when the business is being evaluated for interest's
sake. There are other, more detailed ways of expressing the value of a
business. These reports generally get more detailed and expensive as the
size of a company increases; however, this is not always the case as there
are many complicated industries which require more attention to detail,
regardless of size.

2) Financing techniques in merger – After the value of the firm has

been determined, the next step is the choice of the method of
payment of the acquired firm. The choice of financial instruments and
techniques of acquiring a firm usually have an effect on the purchasing
agreement. The payment may take the form of either cash or
securities, that is, ordinary shares, convertible securities, deferred
payment plans and tender offers. Mergers are generally differentiated
from acquisitions partly by the way in which they are financed and
partly by the relative size of the companies.

a) Cash – Here payment is made by cash. Such transactions are

usually termed acquisitions rather than mergers because the
shareholders of the target company are removed from the picture
and the target comes under the (indirect) control of the bidder's
shareholders alone. A cash deal would make more sense during a
downward trend in the interest rates. Another advantage of using
cash for an acquisition is that there tends to lesser chances of
EPS dilution for the acquiring company. But a caution in using
cash is that it places constraints on the cash flow of the company.

b) Ordinary Share Financing – When a company is considering

the use of common (ordinary) shares to finance a merger, the
relative price/earnings ratio (P/E) ratios of the two firms is an
important consideration. For instance, for a firm with high P/E
ratio, ordinary shares represent an ideal method for financing
mergers and acquisitions. Similarly, ordinary shares are more
advantageous for both companies when the firm to be acquired
has a low P/E ratio. This is illustrated in the table below –

30
 a) Premerger Situation
Firm A Firm B
i. Earnings After Tax 500000 250000
ii. Number of Shares Outstanding 100000 50000
iii. EPS (i+ii) (Rs) 5 5
iv. P/E Ratio 10x 4x
v. MPS (iii*iv) (Rs) 50 20
Total Market Value (ii*v) 5000000 1000000

c) Post Merger Situation-

Assuming Share exchange ratio as
1:2.5 1:1
i. EAT (Rs) 750000 750000
ii. No. of outstanding Shares 120000 150000
iii. EPS of combined firm (i+ii) 6.25 5.00
(Rs)
iv. P/E Ratio of Combines firm 10 10
v. MPS per Share of combined 62.5 50
firm
Total Market Value of the Firm 7500000 7500000
(ii*v)

The exchange ratio 1:2.5 is based on the current market prices of the shares
of the two firms (20:50). This ratio implies that Firm A will issue 1 share for
every2.5 shares of B.The final exchange ratio is determined by negotiation
between the two firms on the basis of accrual of the merger gains to the
stockholders of each company. It would depend on the relative bargaining
process of the two firms and the market reaction of the merger move.

31
 c) Debt And Preference Shares Financing – When some firms have a
relatively lower P/E ratio, as also the requirement of some investors
might be different, the use of ordinary shares only for financing may
not be advantageous. In such cases, other types of securities, in
conjunction with or in lieu of equity shares, may be used for the
purpose. The fixed income securities are compatible with the needs
and purposes of mergers and acquisitions. The need for changing the
financing leverage and the need for a variety of securities is partly
resolved by the use of senior securities.

In an attempt to shape a security to the requirements of investors who seek

dividend / interest income in contrast to capital appreciation, convertible
debentures and preference shares might be used to finance mergers. The
use of such sources of financing has several advantages –

i. Potential earning dilution may be partially minimized by

issuing a convertible security. Such an issue, if not restored to
in place of equity shares, could ultimately result in reducing the
dilution in the EPS.

ii. A convertible issue might serve the income objectives of

the shareholders of the target firm without changing the
dividend policy of the acquiring firm.

iii. Convertible security represents a possible way of lowering

the voting power of the target company.

iv. Convertible security may appear more attractive to the

acquired firm as it combines the protection of fixed security
with the growth potential of ordinary shares

d) Deferred Payment Plan – Under this method, the acquiring firm,

besides making an initial payment, also undertakes to make additional
payments in the future years to the target firm in the event of the
former being able to increase earnings consequent to the merger. As
the future payment is linked to the earnings of the firm, this plan is
also known as earn-out plan. The deferred plan technique provides a
useful means by which the acquiring firm can eliminate part of the
guesswork involved in purchasing a firm.

32
Adopting such a plan gives several advantages to the acquiring firm –

i. It emerges to be an appropriate outlet for adjusting the

differences between the value of shares the acquiring firm is
willing to issue and the amount the target firm is agreeable to
accept for the business.

ii. The acquiring firm will be able to show a high post-merger EPS
immediately as a fewer number of shares are to be issued at the
time of the merger.

iii. There is a built in protection to the acquiring firm as the total

payment is not made at the time of acquisition. In other words, it
gives the management of the acquiring company the privilege of
hindsight.

But at the same time, there are certain problems in this mode of payment –

i. The target firm must be capable of being operated as an

autonomous business entity so that its contribution to the total
projects may be determined.

ii. There must be freedom of operation to the management of the

acquired firm.

iii. On the part of the management of the acquiring form, there

must be willing cooperation to work towards the success and
growth of the target firm, realizing that only by this way the two
firms can gain from the merger.

There can be various types of deferred payment plans. The arrangement

eventually agreed upon the managements of the two firms.

The most common arrangement is called the base period earn-out. Under
this plan, the shareholders of the target firm are to receive additional shares
for a fixed number of years if the firm is able to improve its earnings with
respect to the earnings of the base period (i.e. the year before the
acquisition).

e) Tender Offer – A tender offer, as a method of acquiring a firm,

involves a bid by the acquiring for controlling interest in the acquired
firm. The essence of this approach is that the purchaser approaches
the shareholders of the firm rather than the management to

33
encourage them to sell their shares generally at a premium over the
market price.

34
Since the tender offer is a direct appeal to the shareholders, prior approval
of the management of the target firm is not required. The use of tender offer
allows the acquiring company to bypass the management of the company it
wishes to acquire and, therefore, serves as a threat in any negotiations with
that management.

The tender offer can be used also when there are no negotiations but when
one company simply wants to acquire another. It is not possible to surprise
another company, because the Securities and Exchange Commission
requires rather extensive disclosures. The primary selling tool is the
premium that is offered over the existing market price of the stock. In
addition, brokers are often given attractive commissions for shares tendered
through them. The tender offer itself is usually communicated through
financial newspapers. Direct mailings are made to the stockholders of the
company being bid for, if the bidder is able to obtain a list of stockholders.
Although, a company is legally obligated to provide such a list, it is usually
able to delay delivery long enough to frustrate the bidder.

As a form of acquiring firms, the tender offer has certain advantages and
disadvantages.

The disadvantages are –

i. If the target firm’s management attempts to block it, the cost of

executing the offer may increase substantially.

ii. The purchasing company may fail to acquire a sufficient number

of shares to meet the objective of controlling the firm.

The advantages are –

i. If the offer is not blocked, say in a friendly takeover, it may be

less expensive than the normal route of acquiring a company.
This is so because it permits control by purchasing a smaller
proportion of the firm’s shares.

ii. The fairness of the purchase price is not questionable as each

shareholder individually agrees to part with his shares at the
negotiated price.

35
 3) Analysis of the Merger as a Capital Budgeting Decision – As a
normative financial framework, the merger should be evaluated as a
capital budgeting decision. The target firm should be valued in terms
of its potential to generate incremental future cash inflows. Such cash
flows should be incremental future free cash flows likely to accrue due
to the acquisition of the target firm.

The Direct Cash Flows (DCF) Approach – Free cash flows, in the
context of a merger, are equal to after tax operating earnings (expected
from acquisition) plus non-cash expenses, such as depreciation and
amortization (applicable to the target firm), less additional investments
expected to be made in the long term assets and working capital of the
acquired firm. These cash flows are then to be discounted at an appropriate
rate that reflects the riskiness of the target firm’s business.

Like the capital budgeting decisions, the present value of the expected
benefits from the merger to be compared with the cost of the acquisition of
the target firm. Acquisition costs include the payment made to the target
firm’s shareholders and debenture holders, the payment to discharge the
external liabilities, estimated value of the obligations assumed, liquidation
expenses to be met by the acquiring firm and so on, less cash proceeds
expected to be released by the acquiring firm from the sale of certain assets
of the target firm (not intended to be used in business subsequent to
merger).

The decision criterion is to proceed with the merger if the Net Present Value,
NPV, is positive; the decision would be against the merger in the event of the
NPV being negative.

36
 The following steps are used to evaluate the merger decision as per the
capital budgeting approach –

a) Determination of incremental projected Free Cash Flows to the Firm

(FCFF) – These FCFF should be attributable to the acquisition of the business

of the target firm. The constituents of these cash flows are –

After tax Operating Earnings

(+) Non-Cash expenses such as Depreciation and
Amortization
(-) Investment in Long Term Assets
(-) Investments in Net Working Capital

All the financial inputs should be on incremental basis.

b) Determination of Terminal Value – The firm is normally

acquired as a going concern. The projected FCFF in such situations
are made in two segments, namely, during the explicit forecast
period and after the forecast period.

Terminal Value, TV, is the present value of FCFF, after the forecast period.
Its value can be determined as per the following equations –

i. When FCFF are likely to be constant till infinity –TV =

FCFFT+1 / K0

Where, FCFFT+1 refer to the expected FCFF in the first year after
the explicit forecast period.

ii. When CFF are likely to grow (g) at a constant rate – TV = FCFFT
(1 + g) / (K0 – g)

iii. When FCFF are likely to decline at a constant rate –TV = FCFFT
(1 – g) / (K0 + g)

37
 c) Determination of appropriate Discount Rate or Cost of
Capital – In the event of the risk complexion of the target firm
matching with the acquired firm (for example, in the case of
horizontal merger and firms having virtually identical debt-equity
ratio), the acquiring firm can use its own weighted average cost of
capital (k0) as discount rate. In case the risk complexion of the
acquired firm is different, the appropriate discount rate is to be
computing reflecting the riskiness of the projected FCFF of the
target firm.

d) Determination of Present Value of FCFF – The present value of

FCFF during the explicit forecast period [as per step (a)] and of
terminal value [as per step (b)] is determined by using the
appropriate discount rate [as per step (c)].

e) Determination of cost of acquisition – The cost of acquisition is

determined as follows –

Payment to equity shareholders (Number of equity shares issued in

acquiring company X Market price of Equity Share)
(+) Payment to preference shareholders
(+) Payment to debenture holders
(+) Payment to other external liabilities
(+) Obligations assumed to be paid in future
(+) Dissolution Expenses (to be paid by acquiring firm)
(+) Unrecorded/Contingent Liability
(-) Cash proceeds from sale of assets of target firm (not be used in
business after acquisition)

38
The Adjusted Present Value (APV) Approach – The APV
approach is a variant of the DCF approach used to value the target firm. This
approach is very appropriate for valuing companies with changing capital
structures and for valuing target companies which are having capital
structures substantially different from those of acquiring companies.

The approach values FCFF of target firm in two components –

i) The value of the target firm if it were entirely equity financed

ii) Value the impact of debt financing both in terms of the tax benefit and

The APV based valuation has its genesis in the Modigliani-Miller (MM)
propositions on capital structure, according to which in a world of no taxes,
the valuation of the firm (equity + debt) is independent of capital structure
(change in debt/equity proportion). In other words, the capital structure can
affect the valuation only through taxes and other market imperfections and
distortions.

The APV approach uses these concepts of MM to show the impact of debt
financing in terms of tax shield on valuation.

The approach first values the company as if it were wholly equity financed
by discounting future FCFF at a discount rate referred to as unlevered cost of
equity. Since interest is a deductible item of expense to determine taxable
income, it provides tax savings (assuming the firm has taxable income). The
values of these tax savings are then added. Finally, to have the full impact of
debt financing reflected in the valuation of the target, adjustment is required
to be made for incremental bankruptcy costs; the adjustment value may be
determined subjectively or may be based on some suitable financial
surrogate. The discount rate to value the tax shield will depend on the
circumstances of each case.

When the firm has a low target debt ratio and business prospects are very
promising, there is a greater probability of realizing tax shields in the future.
Therefore, in such a situation, the cost of debt can be used as the discount
rate.

On the other hand, if the target debt ratio of the firm as well as its business
risk is high, there is obviously a greater uncertainty in realizing potential tax
shields and, hence, they should be subject to a higher discount rate.

39
Finally, the finance manager may also consider a discount rate lying
somewhere between the cost of debt and the weighted average cost of
capital or unlevered cost of equity.

40
 TAXATION ASPECTS
This section summarizes the relevant and important tax provisions
applicable to amalgamations, mergers and acquisitions.

Amalgamation for the purposes of income tax is recognized only if the

conditions given under Section 2 (1B) of the Income Tax Act, 1961 (ITA) are
fulfilled. According to Section2 (1B) ‘amalgamation’, in relation to
companies, means the merger of one or more companies with another
company or the merger of two or more companies to form one company (the
company or companies that so merge are referred to as the amalgamating
company or companies and the company with which they merge or which is
formed as a result of the merger is the amalgamated company) in such a
manner that –

1) All the property/liabilities of the amalgamating company immediately

before the amalgamation, becomes the property/liabilities of the
amalgamated company by virtue of the amalgamation.

2) Shareholders holding not less than three-fourths (in value) of the

shares in the amalgamating company become shareholders of the
amalgamated company by virtue of the amalgamation.

Tax concessions to the Amalgamated Company –

The amalgamated company enjoys the following tax benefits –

1. Carry Forward and Set off of Business Losses and Unabsorbed

Depreciation

– According to Section 72 A, the amalgamated company is entitled to carry

forward accumulated losses as well as unabsorbed depreciation of the
amalgamating company, provided the following conditions are fulfilled –

a. The amalgamated company continuously holds, for a minimum period

of 5 years, from the amalgamation at least three fourths of the above
value of fixed assets of the amalgamating company, acquired in the
scheme of amalgamation.

b. The amalgamated company continues the business of the

amalgamating company for a minimum period of 5 years from the date
of amalgamation.

c. The amalgamated company fulfils such other conditions as may be

prescribed to ensure the revival of the business of the amalgamating

41
company or to ensure that the amalgamation is for genuine business
purposes.

42
 d. The amalgamation should be of a company owning an industrial
undertaking or ship. Industrial undertaking, in the context, means an
undertaking that is engaged in –

i) The manufacture or processing of goods; or

ii) The manufacture of computer software; or

iii) The business of generation or distribution of electricity or any other form

of power; or

iv) The business of providing telecommunication services, whether basic or

cellular, including radio paging, domestic satellite service, network of
trunking, broadband network and Internet services; or

v) Mining; or

vi) The construction of ships, aircrafts or rail systems.

In case where any of these conditions are not complied with, the set off of
loss or allowance of depreciation made in any previous years of books of the
amalgamated company would be deemed to be the income of the
amalgamated company and chargeable to tax for the year in which such
conditions are not complied with.

2) Expenditure on Scientific Research – Where an amalgamating

company transfers any asset represented by capital expenditure on scientific
research to the amalgamated Indian company, unabsorbed capital
expenditure in the books of the amalgamating company would be eligible to
be carried forward and set off in the hands of the amalgamated company.

3) Expenditure on Acquisition of Patent Rights or Copy Rights – The

expenditure on patents and copyrights not yet written off in the books of
amalgamating company would be allowed to be written off by the
amalgamated company in the same number of balance installments. Where
such rights are later sold off by the amalgamated company, the profit/loss
on such sales would be treated in the hands of amalgamated company, in
the same manner as it would have been allowed to be treated by the
amalgamating company.

4) Expenditure on Know-how – Regarding the expenditure incurred on

know-how, the amalgamated company would be entitled to claim deduction
with respect to the transferred undertaking, to the same extent and for the

43
same residual period as otherwise would have been allowed to the
amalgamating company, had such an amalgamation not taken place.

5) Expenditure for Obtaining License to Operate Telecommunication

Services – When an amalgamating company transfers license to the Indian
amalgamated company, the expenditure on acquisition of license, not yet
written off, is allowed to the amalgamated company in the same number of
balance installments. When such license is sold by the amalgamated
company, the surplus/deficiency would be the same as would have been in
the case of the amalgamating company.

6) Preliminary expenses – Deduction of preliminary expenses (to the

extent not amortized) would be made in the books of the amalgamated
company in the same company as would have been allowed to the
amalgamating company.

7) Expenditure on Prospecting of Certain Minerals – Where an

amalgamating company mergers with the amalgamated company, the
amount of expenditure on prospecting, etc., of certain minerals of the
amalgamating company that are not yet written off, would be allowed in the
same manner as would have been allowed to the amalgamating company.

8) Capital Expenditure on Family Planning – The capital expenditure on

family planning not yet written off would be allowed to the amalgamated
company in the same number of balance installments.

9) Bad Debts – When the debts of amalgamating company have been taken
over by the amalgamated company and subsequently such debt or part
becomes bad, they would be allowed as a deduction to the amalgamated
company in the same manner as would have been allowed to the
amalgamating company.

In short, the Income Tax Act for all types of business reorganizations /
amalgamations / mergers has become fully tax neutral. Virtually, all fiscal
concessions / incentives / deductions that would otherwise have been
available to the amalgamating company are made available to the
amalgamated company as well. In other words, the unwritten off amount,
with respect to all these items, is treated in the hands of the amalgamated
company in the same manner as would have been treated in the hands of
the amalgamating company. Thus, the amalgamated company is not put to
any disadvantage as far as the income tax concessions and incentives are
concerned. The present generous/favorable fiscal provisions are indicative /
reflective of Government policy to facilitate, promote and create
opportunities for more amalgamations and mergers.

44
Tax concessions to the Amalgamating Company –

1) Free of Capital Gains Tax – According to Section 47(vi), where there is

a transfer of any capital asset by an amalgamating company to any Indian
amalgamated company, such transfer will not be considered as a transfer for
the purpose of capital gain.

2) Free of Gift Tax – According to Section 45(b) of the Gift Tax Act, where
there is a transfer of any asset by an Indian amalgamating company, gift tax
will not be attracted.

Tax concessions to the Shareholders of the Amalgamating Company

–

According to Section 47(vii), where a shareholder of an Indian Amalgamating

company transfers his shares, such transaction will be disregarded for
capital gain purposes, provided the transfer of shares is made in
consideration of the allotment of any share to him or shares in the
amalgamated company.

Further, for computing the period of holding of such shares, the period for
which such shares were held in the amalgamating company would also be
included so that the shareholders of the amalgamating company are not put
to disadvantage.

45
 LEGAL AND PROCEDURAL ASPECTS

After the economic reforms in India in the post-1991 period, there is an

apparent trend among promoters and established corporate groups towards
consolidation of market share and diversification into new areas through
acquisitions of companies, and in a more pronounced manner through
mergers or amalgamation. Although the financial evaluation and the
economic considerations, in terms of motive and effect, of the above
mentioned are similar, the legal and procedures involved are different.

The merger and amalgamation of corporate constitutes the subject matter of

the Companies Act, the courts and law and there are well laid down
procedures for valuation of shares and rights of investors. The
acquisition/takeover bids fall under the purview of the SEBI.

Scheme of Merger / Amalgamation

Whenever two or more companies agree to merge with each other, they
have to prepare a scheme of amalgamation. The acquiring company should
prepare the scheme in consultation with its merchant banker(s) / financial
consultants

The main contents of a model scheme, inter-alia, are listed below –

a) Description of the transfer, the transferee company and the business of

the transferor.

b) Their authorized, issued and subscribed and paid-up capital.

c) Basis of the scheme – Main terms of the scheme, in self-contained

paragraphs, on the recommendations of the valuation report, covering
transfer of assets and liabilities, transfer date, reduction or consolidation of
capital, application to financial institution for permission and so on.

d) Change of name, object clause and accounting year.

e) Protection of employment.

f) Dividend position and prospects.

g) Management – Board of directors, their number and participation of the

transferee company’s directors on the board.

h) Application under sections 391 and 394 of the Companies Act, 1956 to
obtain High Court approval.

46
i) Expenses of amalgamation.

J) Conditions of the scheme to become effective and operative, effective

date of amalgamation.

The basis of merger/amalgamation in the scheme should be the reports of

the values of assets of both the merger partner companies. The scheme
should be prepares on the basis of the valuer’s report, report of chartered
accountants engaged for financial analysis and fixation of exchange ratio
and the report of the auditors and audited accounts of both the companies
prepared up to the appointed date. It should be ensured that the scheme is
just and equitable to the shareholders and employees of each of the
amalgamating company and to the public.

Approvals for the scheme –The scheme of merger are governed by the
provisions of Sections 391-394 of the Companies Act. The legal process
requires approval to the schemes, as listed below –

1) Approval from Shareholders – In terms of Section 391, shareholders of

both the companies should hold their respective meetings under the
directions of the respective high courts and consider the scheme of
amalgamation. A separate meeting of both preference and equity
shareholders should be convened for this purpose. Further, in terms of
Section 81(1A), the shareholders of the amalgamated company are required
to pass a special resolution for the issue of shares to the shareholders of the
amalgamating company.

2) Approval from Creditors / Financial Institutions / Banks – Approvals

are required from the creditors, banks and financial institutions to the
scheme of amalgamation in terms of their respective
agreements/arrangements with each of the amalgamating and the
amalgamated companies as also u/s 391.

3) Approvals from respective High Courts – Approval of the respective

high courts scheme are required to confirm the amalgamation. The courts
issues orders for dissolving the amalgamating company, without winding up,
on receipt of reports from the official liquidator and the regional director,
Company Law Board, stating that the affairs of the amalgamating company
have not been conducted in a manner prejudicial to interests of its members
or to public interests.

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Essential Features of the Scheme of Amalgamation –

1) Determination of Transfer Date (Appointed Date) – This involves

fixing of the cut-off date from which all properties, movable as well as
immovable, and rights attached thereto, are sought to be transferred from
the amalgamating company to the amalgamated company. This date is
known as the transfer date or the appointed date and is normally the first
day of the financial year preceding the financial year for which the audited
accounts are available with the company.

2) Determination of Effective Date – The effective date is the date when

all the required approvals under various statues, viz., the Companies Act,
Companies (Courts) Rules and Income Tax Act, 1961, would be obtained and
the transfer and undertaking of the amalgamating company with the
amalgamated company would take effect. A scheme of amalgamation should
also normally contain conditions to be satisfied for the scheme to become
effective. The effective date is important for income tax purposes. The effect
of the requirement is that a mere order for the transfer of the
properties/assets and liabilities to the transferee company would cause the
vesting only from the date of that order. For tax considerations, a mention of
the date of vesting in the order is of material consequence.

3) The scheme should clearly state the arrangements with secured and
unsecured creditors, including the debenture holders.

4) It should also state the exchange ratio at which the shareholders of the
amalgamating company would be offered shares in the amalgamated
company. The ratio has to be worked out based on the valuation of shares of
the respective companies as per the accepted methods of valuation,
guidelines and the audited accounts of the company.

5) In cases where the shares of the amalgamating company are held by the
amalgamated company or its subsidiaries, the scheme must provide for the
reduction in the share capital to that extent and the manner in which the
compensation for shares held in the amalgamating company should be
given.

6) The scheme should also provide for transfer of the whole or part of the
undertaking to the amalgamated company, continuation of level proceedings
between the amalgamating and amalgamated companies, absorption of
employees of the amalgamating company, obtaining the consent of
dissenting shareholders and so on.

48
Scheme of Acquisitions/Takeovers

Corporate takeovers in the country are governed by the listing agreement

with stock exchanges and the SEBI Substantial Acquisition of Shares and
Takeover Code (SEBI Code).The main elements of the regulatory framework
for takeovers are –

Listing Agreement – The takeover of companies listed on the stock

exchanges is regulated by Clause 40-A and 40-B of the listing agreement.
While Clause 40-A deals with minimum level of public shareholding, Clause
40-B contains the requirements to be met when a takeover offer is made.

1) Minimum Level of Public Shareholding – In order to ensure availability

offloading stock, every listed company should maintain, on a continuous
basis, public shareholding of at least 25 percent of the total number of
issued shares of a class/kind of its listed shares. Public shareholding
excludes shares held by –

a) Promoters / promoter group

b) Custodians against which depository receipts are issued

overseas.

The minimum level of public shareholding in a company which,

a) Offers / had offered in the past a particular class / kind of shares to the
public under Rule 19(2) (b) of the Securities Contracts (Regulation)
Rules, or

b) Has at least two crore shares outstanding with a market capitalization

of at least Rs. 1000 crore, Should be at least 10 percent of the total
number of shares issued.

2) Takeover Offer – The Company also agrees that it is a condition for

continuous listing that whenever the takeover offer is made or there is any
change in control of management of the company, the person who secures
the control and the company whose shares have been acquired would
comply with the relevant provisions of the SEBI Takeover Code.

49
The SEBI Substantial Acquisition of Shares and Takeover Code (SEBI
Takeover Code)

A takeover bid is generally understood to imply the acquisition of shares

carrying voting rights in a company, in a direct or indirect manner, with a
view to gaining control over the management of the company. Such
takeovers could take place through a process of friendly negotiation or in a
hostile manner. Both the substantial acquisition of shares and change in
control of a listed company are covered by takeover bids.

The main elements of SEBI Code are –

1) Disclosure of Shareholding and Control in a Listed Company

2) Substantial Acquisition of Shares / Voting Rights / Control

3) Bail out Takeovers

4) Investigation / Action by the SEBI

1) Disclosure of Shareholding and Control in a Listed Company – An

acquirer of shares/voting rights with a total of existing holdings in excess of
5% / 10% / 14% /54% / 74% in a company, in any manner, is required to
disclose at every stage, to the concerned company, the aggregate of its
shareholding/voting rights, within two working days of the receipt of
intimation of allotment/acquisition of shares/voting rights.

Similarly, an acquirer who acquires shares/voting rights of a company under

the provisions relating to the consolidation of holdings should disclose
purchases/sales aggregating 2 per cent or more of the share capital of the
target company to the target company and the concerned stock exchanges,
within two days, along with the aggregate shareholding after such
acquisition / sale.

The stock exchange should immediately display the information on the

trading screen / notice board / its website.

The term control includes the right to appoint a majority of the directors or
to control the management or policy decisions exercisable by a person
acting individually or in concert, directly or indirectly, including by virtue of
their shareholding or management rights or shareholders/voting agreements
or in any other manner.

50
Persons Acting in Concert comprises persons who, pursuant for an
agreement / understanding (formal/informal), directly / indirectly, cooperate
for a common objective / purpose of substantial acquisition of shares / voting
rights / gaining control over the target company.

Unless the contrary is established, the following are deemed to be persons

acting in concert with other persons in the same category –

a) A company, its holding/subsidiary company, company under the

same management, either individually or together with each
other;

b) A company with any of its directors/ any person entrusted with the
management of the funds of the company;

c) Directors and their associates [i.e., any relative / family trusts and
Hindu Undivided Families (HUFs)];

d) Mutual funds with sponsors and/or trustee and/or asset

Management Company;

e) FIIs with sub-accounts;

f) Merchant bankers with their client(s) as acquirer;

g) Portfolio managers with their client(s) as acquirer;

h) Venture capital funds with sponsors;

i) Banks with financial advisors, stock brokers of the acquirer or any

holding /subsidiary / relative of the acquirer;

j) Any investment company, in cases where such companies are

used as vehicles to make substantial acquisition of shares / voting
rights in a company, with any person who has an interest as
director / fund manager / trustee / shareholder, having not less
than 2% of the paid up capital of the company.

Continual Disclosure – All persons holding more than 15% shares/voting

rights have to disclose within 21 days form the end of each financial year,
with respect to their holdings, as on March 31, to the company concerned.
Within 30 days from the end of the financial year ending March 31 as well as
the record date of the company, for the purpose of declaration of dividend,

51
all listed companies have to make yearly disclosures of changes in respect of
the holdings of such persons/promoters to the concerned stock exchange.

52
Every listed company should maintain a register in the specified format to
record information received from:-

1. Persons acquiring more than or equal to 5% shares/voting rights,

and

2. Promoters / any person having control over a company

Power to call for information – The stock exchange and the concerned
companies would have to furnish information regarding disclosure of
shareholding and control as and when required to the SEBI.

2) Substantial Acquisition of Shares / Voting Rights / Control over a

Limited Company – The SEBI Code is applicable to –

a) Acquisition of 15% of shares/voting rights of any company

b) Consolidation of holdings

c) Acquisition of control over a company.

However, the code is inapplicable in the following cases –

a) Allotment in a public issue. Firm allotment in a public issue would be

exempt only if full disclosure about the identity of the acquirer acquiring
shares, the purpose of acquisition, consequential changes in the Board of
directors of the company or change in control over the company / voting
rights and shareholding pattern of the company, are given in the prospectus.

b) Allotment in rights issues

(i) to the extent of shareholder entitlement and

(ii) Additional allotment within the limit of the acquisition permitted by the
regulations, in any period of 12 months, for consolidation of
holdings.

The limit specified in (ii) does not apply to any person presently in control of
the company and who has, in the rights letter of offer, made disclosures that
they intend to acquire additional shares, beyond entitlement, if the issue is
undersubscribed. However, this exemption would not be available in case
the acquisition results in the change of control of management.

c) Allotment to underwriters in pursuance of any underwriting

arrangement.

53
d) Inter se transfer of shares amongst –

1. Group companies, within the definition of a group in the MRTP Act,

where persons constituting such groups have been shown as group in
the last published annual report of the target company;

2. Relatives;

3. Qualifying promoters –

i. Qualifying Indian promoters and foreign collaborators who are

shareholders, and

ii. Qualifying promoters, provided the transferor(s) as well as the

transferee(s) have been holding less shares in the target
company for a period of at least 3 years prior to the proposed
acquisition.

4. The acquirer / person acting in concert with him where such transfer of
shares takes place three years after the closure of public offer by them
under these regulations.

The exemption under iii) and iv) would not be available if the inter se
transfer of shares is at a price higher than 25% of the price as determined in
terms of the regulation relating to the offer price.

e) Acquisition of shares in the ordinary course of business by –

i. A registered stockbroker, on behalf of his clients;

ii. A registered market maker, during the course of market making;

iii. A public financial institution, on its own account;

iv. Banks and public financial institution, as pledges;

v. The International Finance Corporation, Asian Development Bank,

IBRD, Commonwealth Development Corporation and other
international financial institutions;

vi. A merchant banker / promoter of a target company, pursuant to a

safety net scheme under the provision of SEBI DIP Guidelines, in
excess of the limit specified for consolidation of holdings.

f) Acquisition by a person in exchange of shares received under a public

offer made under these regulations.

g) Acquisition of shares by way of transmission on succession or inheritance.

54
h) Acquisition of shares by government companies and statutory
corporations. The exemption is not applicable if a government company
acquires shares / voting rights / control of PSUs through the competitive
bidding process of the Central / state government meant for the purpose of
disinvestment.

i) Transfer of shares from state level financial institutions, including their

subsidiaries, to a co-promoter of the company or his successor / assignee or
an acquirer who had substituted an erstwhile promoter, pursuant to an
agreement between them.

i. Transfer of shares from the SEBI registered VCFs / FVCIs to promoters

of an unlisted VCU, which subsequently got listed, pursuant to an
agreement between them

J) Pursuant to a scheme (i)Framed under Sick Industrial Companies Act, (ii)Of

arrangement / amalgamation / merger / demerger under any law /
regulation, Indian or foreign.

i. Change in control by takeover of management or by the restoration of

management of the borrower target company by the secure creditors
in terms of Securitization and Reconstruction of Financial Assets and
Enforcements of Security Interest Act.

k) Acquisition of shares in unlisted companies provided such acquisition /

change of control of an unlisted company, whether in India or abroad, would
not result in the acquisition of shares / voting rights / control over a listed
company.

i. Acquisition of shares in terms of guidelines / regulations regarding

delisting of securities specified / framed by SEBI.

L) Other cases as may be exempted by the SEBI. The acquirer would have to
apply supported by a duly sworn affidavit together with a fee of Rs.25000
detailing the proposed acquisition and the grounds for seeking exemption.
Within five days of the receipt of the application, the SEBI would refer it to a
Takeover Panel constituted for the purpose, consisting of its own officers and
majority representation of independent persons. The panel would make
recommendations, within 15 days, on the basis of which the SEBI would pass
an appropriate order within 30 days.

55
Power to remove difficulties – In order to remove any difficulties in the
interpretation / application of the provisions of the SEBI Code, the SEBI has
the power to issue directions through guidance notes / circulars, which would
be binding on the acquirers, target companies, shareholders, and merchant
bankers.

Acquisition of 15% or more Shares / Voting Rights –An acquirer acquiring

shares / voting rights that, together with existing holdings by him / person
working in concert with him entitle him, to exercise 15% or more of the
voting rights in a company, has to make a public announcement to that
effect.

Acquisition of Control –No person can acquire control over the target
company without making a public announcement, irrespective of whether or
not there has been any acquisition of shares / voting rights. A change in
control in pursuance to a special resolution of the shareholders passed in the
general meeting is exempt from this requirement. For passing the special
resolution, the facility of voting through a ballot box should also be provided.
Acquisition would include direct / indirect acquisition of control of the target
company by virtue of acquisition of companies, whether listed /unlisted and
whether in India or abroad.

Appointment of a Merchant Banker – Before making any public

announcement of the offer, the acquirer has to appoint a Category I
merchant banker registered with the SEBI, who is not a group company /
associate of the acquirer or the target company.

Public Announcement of the Offer – The merchant banker should

announce the offer publicly not later than four working days of the
agreement or the decision to acquire shares / voting rights in excess of the
specified percentages.

The public announcement should be made in all editions of one English

national daily with wide circulation, one Hindi national daily with wide
circulation and a regional language daily having circulation at the place of
the registered office of the target company and the stock exchange where
the shares are most frequently traded. Simultaneously, a copy should be –

i. submitted to the SEBI through the merchant banker

i. Sent to all stock exchanges on which the shares are listed for being
notified on the notice board

56
ii. Sent to the target company for being placed before its Board of
Directors.

57
Contents of the Public Announcement Offer –

The public announcement offer should contain the following –

a. The paid-up share capital of the target company, the number of

fully paid up and partly paid-up shares;

b. The total number and percentage of shares proposed to be

acquired from the public, subject to the specified minimum;

c. The minimum offer price for each fully paid-up or partly paid-up
share;

d. Mode of payment of consideration;

e. The identity of the acquirer(s), and in case the acquirer is a

company or companies, the identity of the promoters and or the
persons having control over such company(ies) and the group, if
any, to which the company(ies) belong;

f. The existing holding, if any, of the acquirer in the shares of the

target company, including holdings of persons acting concert with
him;

i. Existing shareholding, if any, of the merchant banker in the

target company;

g. Salient features of the agreement, if any, such as the date, the

name of the seller, the price at which the shares are being
acquired, the manner of payment of the consideration, and the
number and percentage of shares in respect of which the acquirer
has entered into agreement to acquire the shares or the
consideration, monetary or otherwise, for the acquisition of control
over the target company, as the case may be;

h. The highest and average price paid by the acquirer or the persons
acting in concert with him, for acquisition, if any, of shares of the
target company made by him during the 12 months period prior to
the date of public announcement;

i. Object and purpose of acquisition of the shares; the future plans of

acquirer, if any, for the target company, including the disclosure
whether he proposes to dispose off or otherwise encumber any of

58
 the assets of the target company in the succeeding two years,
except in the ordinary course of business of the target company;

i. An undertaking that the acquirer would not call / dispose off /

otherwise encumber any substantial asset of the target
company without the prior approval of shareholders;

j. The specified date;

k. The date by which individual letters of offer would be posted to the

shareholders;

l. The date of opening and closure of the offer and the manner in
which and the date by which the acceptance or rejection of the
offer should be communicated to the shareholders;

m. The date by which the shares, in respect of which the offer is

accepted, would be acquired against payment of consideration;

n. Disclosure to the effect that a firm arrangement for the financial

resources required to implement the offer is already in place,
including the details regarding the source of funds – whether
domestic or foreign;

o. Provision for acceptance of the offer by person(s) who own the

shares but are not the registered holders of such shares;

p. The statutory approvals, if any, required to be obtained for the

purpose of acquiring the shares under the Companies Act, the
Monopolies and Restrictive Trade Practices Act, 1969, the Foreign
Exchange Management Act (FEMA) and/or any other applicable
laws;

q. Approval of banks, and financial institutions required, if any;

r. Whether the offer is subject to a minimum level of acceptance from

shareholders;

s. Such other information as is essential for the shareholders to make

an informed decision with regard to the offer.

59
Submission of Letter of Offer to the SEBI – The acquirer should through
its merchant banker file with the SEBI send a draft of the letter of offer
containing the SEBI specified disclosures together with a fee of Rs. 50000,
within 14days from the date of public announcement.

Offer Price – The offer should be payable in following ways –

a. In cash;

b. By issue / exchange / transfer of shares of Acquirer Company if the

acquirer is a listed body corporate;

c. By issue / exchange / transfer of secured instruments of the acquirer

company with a minimum a grade rating from SEBI registered rating
agency;

d. A combination of the three.

The offer price should be the highest of –

a. The negotiated price under the agreement;

b. Price paid by the acquirer / person(s) acting in concert with him for
acquisition, if any, including by way of allotment in public / rights /
preferential issue during the 26 weeks prior to the date of
announcement, whichever is higher;

c. The average of weekly high and low of the closing prices of shares of
the target company, as quoted in the stock exchange where they
are most frequently traded during the 26 weeks, or, the average of
the daily high and low of the closing prices of shares of the target
company, as quoted in the stock exchange where they are most
frequently traded during the two weeks preceding the date of
announcement, whichever is higher.

Offer Price under Creeping Acquisition – An acquirer making a public

offer and seeking to acquire further shares for consolidation of holdings
cannot acquire them during the period of six months from the date of
closure of the public offer, at a price higher than the offer price. However,
these restrictions would not be applicable to acquisitions made through the
stock exchange(s).

Competitive Bid – Any person (other than the acquirer, making the first
public announcement) who is desirous of making any offer, should, make a

60
public announcement of his offer for the acquisition of the shares of the
same target company, within a period of 21 days of the public
announcement of the first offer. Such an offer is deemed to be a
Competitive Bid.

61
Any competitive bid/offer should be for such number of shares that when
taken together with the shares already held by he / person acting in concert
with him would at least equal the holding of the first bidder, including the
number of shares for which the present offer by the first bidder has been
made.

Where there is a competitive bid, the date of closure of the original bid, as
well as of all the competitive bids, would be the date of closure of the public
offer under the last subsisting competitive bid and the public offer under all
the subsisting bids would close on the same date. The option of making an
upward revision of the offer, with respect to the price and number of shares
to be acquired, is available to the bidders of the original bid as well as that of
all the subsequent competitive bids, is available at any time up to 7 working
days prior to the date of closure of the offer. However, the acquirer would
not have the option to change any other terms and conditions of their offer
except the mode of payment, following an upward revision in the offer.

Upward Revision of Offer – Irrespective of whether or not there is a

competitive bid, the acquirer who has made the public announcement of the
offer, may make an upward revision of the offer, with respect to the price
and number of shares to be acquired any time up to 7 working days prior to
the date of closure of the offer. But any such upward revision of offer can be
made only upon the acquirer –

a. Making a public announcement with respect to such changes or

amendments in all the newspapers in which the original public
announcement was made;

b. Simultaneously with the issue of such public announcement, informing

the SEBI, all stock exchanges on which the shares of the company
are listed, and the target company, at its registered office;

c. Increasing the value of escrow account.

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Withdrawal of Offer – A public offer, once made, can be withdrawn only
under the following circumstances –

a. The statutory approval(s) required have been refused

b. The sole acquirer, being a natural person, has died;

c. Such circumstances as any in the opinion of the SEBI, merit

withdrawal.

In the event of withdrawal, the merchant banker has to –

a. Make a public announcement in the same newspapers in which

the public announcement of the offer was published, stating the
reasons for withdrawal of the offer;

b. Simultaneously with the issue of such public announcement,

inform the SEBI, all stock exchanges on which the shares of the
company are listed, and the target company, at its registered office.

Provision of Escrow – The acquirer should as and by way of security of

performance of his obligations deposit at least 25 percent of the total
consideration payable in the public offer up to and including Rs 100 crore
and10 percent of the consideration in excess of Rs 100 crore in an escrow
account. The total consideration payable under the public offer should be
calculated assuming full acceptances and at the highest price if the offer is
subject to differential pricing, irrespective of whether the consideration for
the offer is payable in cash or otherwise. The escrow account should consist
of –

a. Cash deposit with a scheduled commercial bank;

b. Bank guarantee in favor of the merchant banker;

c. Deposit of acceptable securities with appropriate margin, with

the merchant banker

The acquirer should empower the merchant banker, whilst opening the
account, to operate the account and issue payments or realize the securities,
for at least a period up to 20 days after the closure of the offer. In case of
non-fulfillment of the obligations by the acquirer, the SEBI has the power to
forfeit the escrow account, either in full or in part. In case of failure by the
acquirer to obtain the approval of the shareholders for issue of securities as

63
consideration within 21 days from date of closure of the offer, the amount in
the escrow account may also be forfeited.

64
3) Bail Out Takeovers – A substantial acquisition of shares in a financially
weak company, not being a sick industrial company, in pursuance to a
scheme of rehabilitation approved by a public financial institution or a
scheduled bank (lead institution), is referred to as a Bail out Takeover.

A financially weak company means a company that has at the end of the
previous financial year accumulated losses, which have resulted in the
erosion of more than 50% but less than 100% of its net worth at the
beginning of the previous financial year.

The lead institution would be responsible for ensuring compliance with the
SEBI Takeover Code. It would appraise the financially weak company, taking
into account the financial viability and assess the requirement of funds for
revival and then draw up the rehabilitation package on the principle of
protection of the interests of the minority shareholders, good management,
effective revival and transparency. The rehabilitation scheme has also to
specify the details of any change in management.

Manner of Acquisition of Shares – Before giving effect to any scheme of

rehabilitation, the lead institution should invite offers for the acquisition of
shares from at least three parties. The lead institution would provide the
necessary information, to any person intending to make an offer to acquire
shares, about the financially weak company and particularly in relation to its
present management, technology, range of products manufactured,
shareholding pattern, financial holding and performance and assets and
liabilities of such a company for a period covering five years from the date of
the offer.

Manner of Evaluation of Bids – The lead institution should evaluate the

bids received with respect to the purchase price or exchange of shares, track
record, financial resources, the management reputation of the person
acquiring the shares, and ensure fairness and transparency in the process.
Based on the evaluation, the offers received should be ranked in order of
preference and after consultation with the management of the financially
weak company; one of the bids should be accepted.

Person Acquiring Shares to Make an Offer and a Public

Announcement – The person acquiring shares identified by the lead
institution should on receipt of a communication in this behalf from the lead
institution, make a formal offer to acquire shares from the promoters of the

65
financially weak company, financial institutions and also other shareholders
of the company, at a price determined by mutual negotiation between the
acquirer and the lead institution.

The person acquiring shares from the promoters of the financially weak
company must also make a public announcement of his intention to acquire
shares from the shareholders of the company, containing all relevant details
and particulars as may be required by the SEBI.

If the above offer results in the public shareholding being reduced to 10% or
below of the voting capital of the company, the acquirer should –

a. Within a period of three months from the date of closure of the

public offer, make an offer to buy out the outstanding shares
remaining with the shareholders at the same offer price, which may
have the effect of delisting the target company; or

b. Undertake to disinvest through an offer for sale or by a fresh

issue of capital to the public – which would open within a period of six
months from the date of closure of the public offer – create such
number of shares as would bring the public shareholding to a
minimum of 25% or more of the voting capital of the target company
so as to satisfy the listing requirements.

Competitive Bid – A person is not allowed to make a competitive bid for

acquisition of shares of a financially weak company, once the lead institution
has evaluated and accepted the bid of the acquirer who has made the public
announcement of offer for acquisition of shares from shareholders other than
the promoters of the said company.

Exemption – Offers made in pursuance of bail out takeovers can be

exempted by the SEBI from the provisions of substantial acquisition of
shares. But the lead institution or the acquirer, as far as may be possible,
should adhere to the time limits specified for various activities of public
offers in case of substantial acquisition of shares.

66
4) Investigation and Action by the SEBI – The SEBI may appoint one or
more persons as investigating officer to undertake investigation for any of
the following purposes –

a. Complaints received from the investors, the intermediates or any

other person or any matter having a bearing on the allegations of
substantial acquisition of shares and takeovers;

b. To investigate suo-moto upon its own knowledge or information, in

the interest of securities market or investors interests, for any
breach of the regulations;

c. To ascertain whether the provisions of the SEBI Act and the

regulations are being complied with or for any breach of these
regulations

Before ordering such an investigation, it has to give not less than 10 days
notice to the acquirer, the seller, the target company, or the merchant
banker, as the case may be. However, if it is satisfied that in the interest of
the investors, no such notice should be given, it may, by written order direct
that such an investigation be taken up without notice.

Obligations – it would be the duty of the acquirer, the seller, the target
company, or the merchant banker, whose affairs are being investigated, and
of every director, officer and employee to produce such books, securities,
accounts, records and other documents in its custody or control, to the
investigating office, and furnish him with such statements and information,
related to its activities, related to his activities, allow him reasonable access
to premises occupied by them or person(s) acting in concert with them, as
the investigating officer may require.

The investigating officer, on completion of the investigation, would submit a

report to the SEBI. After consideration of the investigation report, the SEBI
would communicate the findings of the investigating officer to the acquirer,
the seller, the target company, or the merchant banker, as the case may be,
and give him a chance of being heard.

On receipt of the reply, if any, it may call upon them to take such measures
as it may deem fit in the interest of the securities market and for due
compliance with the provisions of the SEBI Act and regulations.

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Directions by the SEBI – In the interest of securities market or protection
of the investor interest, in addition to its right to initiate action including
criminal prosecution under Chapter VI-A and section 24 of the SEBI Act, the
SEBI can issue such directions, as it deems fit, including –

a. Appointment of a merchant banker for the purpose of causing

disinvestment of shares acquired in breach of regulations
relating to –

i. Acquisition of 15% or more shares/voting rights of any

company;

ii. Consolidation of holdings;

iii. Acquisition of control over a company, either through a

public auction or market mechanism, in its entirety / in
small lots, or through an offer for sale;

b. Transfer of any proceeds/securities to the Investors Protection

Fund of a recognized stock exchange;

c. Cancellation of shares by the target company / depository where

an acquisition of shares, pursuant to an allotment, is in breach of
regulation in (a) above;

d. Target company / depository not to give effect to transfer /

further freeze the transfer of any such shares and not to permit
the acquirer / any nominee / any proxy to exercise any voting
rights attached to shares acquired in violation of regulations as
seen in (a) above;

e. Debar any person concerned from accessing the capital

market /dealing in securities for such period as may be
determined by it;

f. The person concerned to make a public offer to the shareholders

of the target company, to acquire such no. of shares, at such
offer price as determined by it;

g. Disinvestment of such shares as are in excess of the

percentage of the shareholding / voting rights specified for
disclosure requirements under the regulations relating to –

i. Holding / acquisition of 5% and more shares / voting rights;

68
 ii. Continual disclosures;

h. The person concerned should not dispose off assets of the

target company contrary to the undertaking given in the letter of
offer;

i. The person concerned, who has failed to make / delayed a public

offer has to pay the shareholders, whose shares have been
accepted I the public offer made after the delay, the
consideration amount along with interest at rates not less than
the applicable rate payable by banks on fixed deposits.

Penalties for Non-Compliance – Any person failing to make disclosures,

as required, would be liable to action in as per terms of the regulations and
the SEBI Act.

a. Failure to carry out the obligations, under the regulations, by the

acquirer or any person(s) acting in concert with him would lead
to forfeiture of the entire or a part of the sum deposited with the
bank in the escrow account and also action as per the terms of
the regulations and the SEBI Act.

b. In case the Board of Directors of the target company fail to carry

out their obligations they would be liable for penal action.

c. In case of failure in carrying out the requirements of the

regulations by an intermediary, the SEBI may initiate action for
suspension or cancellation of his registration, according to the
procedure specified in the regulations applicable to such
intermediary.

d. For any misstatement / concealment of material information to

be disclosed to the shareholders / directors, where the acquirer
is a body corporate / directors of the target company, the
merchant banker to the public offer and the merchant banker
engaged by the target company for independent advice would
be liable for penal action. The penalties may include –

i. Criminal prosecution,

ii. Monetary penalties,

iii. Directions under the SEBI Act,

iv. Cease and desist order in proceedings, and

69
 v. Adjudication proceedings.

Any person aggrieved by any order of the SEBI may opt to appeal to the
Securities Appellate Tribunal (SAT)

70
Strategies for Hostile Takeovers and Company Resistance Takeover
Strategies –

The acquirer company can use any of the following techniques aimed at
taking over the target company –

a. Street Sweep – This technique requires that the acquirer

should accumulate large amounts of stock in a company before
making an open offer. The advantage is that the target firm is
left with no choice but to give in.

b. Bear Hug – In this case, the acquirer puts pressure on the

management of the target company by threatening to make an
open offer. The board capitulates straightaway and agrees to a
settlement with the acquirer for change of control.

c. Strategic Alliance – This strategy involves disarming the

opposing by offering a partnership rather than a buyout. The
acquirer should assert control from within and takeover the
target company.

d. Brand Power – This implies entering into an alliance with

powerful brands to displace the partner’s brand and, as a result,
buy out the weakened company.

Company Resistance and Defensive Strategies – The Company being

bid for can use a number of defensive tactics. Management may try to
persuade stockholders that the offer is not in their best interests. Usually,
the argument is that the bid is too low in relation to the true, long run value
of the firm. The target company can also use one of the following strategies
to defend itself against the attack mounted by the acquiring company in its
bid for open market takeover –

1. Poison Pill – This strategy involves issue of low price

preferential shares to existing shareholders to enlarge the
capital base. This would make hostile takeover too expensive.
The distribution of rights to existing shareholders allows them to
purchase a new security, often a convertible preferred stock, on
favorable terms. By favorable terms, the subscription price might
be 40% of the true market value. However, the security offering
is triggered only if an outside party acquires some percentage,
frequently 20%, of the company’s stock. This trigger is known as
the flip-in feature. The idea is to have available a security

71
 offering that is unpalatable to the acquirer. This can be respect
to a bargain subscription price, or it can be with respect to voting
rights or with respect to precluding a change in control unless a
substantial premium is paid.

2. Poison Put –In this case, the target company can issue bonds
that encourage holders to cash in at high prices. The resultant
cash drainage would make the target unattractive.

3. Greenmail – In this strategy, the target company should

repurchase the shares cornered by the raider. The profits made
by the raider are after all akin to blackmail and this would keep
the raider at a distance from the target.

4. Pac-man Defense – This strategy aims at the target company

making a counter bid for the raider’s company. This would force
the raider to defend him-self and consequently call off his raid.

5. White Knight – In order to repel the move of the raider, the

target company can make an appeal to a friendly company to
buy the whole, or part, of the company. The understanding is
that the friendly buyer promises not to dislodge the
management of the target company.

6. White Squire – The strategy is essentially the same as White

Knight and involves sell out of the shares to a company that is
not interested in the takeover. As a consequence, the
management of the target company retains control over the
company.

For completed acquisitions, Robert Comment and G. William Schwartz found

that the premium paid is high when a poison pill or other anti-takeover
device is in place. Where a takeover attempt fails, management of the
targeted company often undertakes actions that increase efficiency and
shareholder wealth. Assem Safieddine and Sheridan Titman found that the
targeted companies that leverage discipline themselves to make
improvements. Efficiencies involved include cutting some capital
expenditures, selling assets, reducing employment, and increasing focus. As
a result, cash flows and share price performance are better on average than
benchmarks in about 5 years following the failed takeover attempt.

72
MERGER AND ACQUISITION MARKETPLACE DIFFICULTIES

No marketplace currently exists for the mergers and acquisitions of privately

owned small to mid-sized companies. Market participants often wish to
maintain a level of secrecy about their efforts to buy or sell such companies.
Their concern for secrecy usually arises from the possible negative reactions
a company's employees, bankers, suppliers, customers and others might
have if the effort or interest to seek a transaction were to become known.
This need for secrecy has thus far thwarted the emergence of a public forum
or marketplace to serve as a clearinghouse for this large volume of business.
At present, the process by which a company is bought or sold can prove
difficult, slow and expensive. A transaction typically requires six to nine
months and involves many steps. Locating parties with whom to conduct a
transaction forms one step in the overall process and perhaps the most
difficult one. Qualified and interested buyers of multimillion dollar
corporations are hard to find. Even more difficulties attend bringing a
number of potential buyers forward simultaneously during negotiations.
Potential acquirers in an industry simply cannot effectively "monitor" the
economy at large for acquisition opportunities even though some may fit
well within their company's operations or plans. An industry of professional
"middlemen" (known variously as intermediaries, business brokers, and
investment bankers) exists to facilitate M&A transactions. These
professionals do not provide their services cheaply and generally resort to
previously- established personal contacts, direct-calling campaigns, and
placing advertisements in various media. In servicing their clients they
attempt to create a one-time market for a one-time transaction. Certain
types of merger and acquisitions transactions involve securities and may
require that these "middlemen" be securities licensed in order to be
compensated. Many, but not all, transactions use intermediaries on one or
both sides. Despite best intentions, intermediaries can operate inefficiently
because of the slow and limiting nature of having to rely heavily on
telephone communications. Many phone calls fail to contact with the
intended party. Busy executives tend to be impatient when dealing with
sales calls concerning opportunities in which they have no interest. These
marketing problems typify any private negotiated markets. Due to these
problems and other problems like these, brokers who deal with small to mid-
sized companies often deal with much more strenuous conditions than other
business brokers. Mid-sized business brokers have an average life-span of
only 12-18 months and usually never grow beyond 1 or 2 employees.
Exceptions to this are few and far between. Some of these exceptions
include:-
73
The Sundial Group, Geneva Business Services and Robbinex.

The market inefficiencies can prove detrimental for this important sector of
the economy. Beyond the intermediaries' high fees, the current process for
mergers and acquisitions has the effect of causing private companies to
initially sell their shares at a significant discount relative to what the same
company might sell for where it already publicly traded. An important and
large sector of the entire economy is held back by the difficulty in
conducting corporate M&A (and also in raising equity or debt capital).
Furthermore, it is likely that since privately held companies are so difficult to
sell they are not sold as often as they might or should be.

Previous attempts to streamline the M&A process through computers have

failed to succeed on a large scale because they have provided mere "bulletin
boards" – static information that advertises one firm's opportunities. Users
must still seek other sources for opportunities just as if the bulletin board
was not electronic. A multiple listings service concept was previously not
used due to the need for confidentiality but there are currently several
listings in operation. The most significant of these are run by the California
Association of Business Brokers (CABB) and the International Business
Brokers Association (IBBA) these organizations have effectively created a
type of virtual market without compromising the confidentiality of parties
involved and without the unauthorized release of information.

One part of the M&A process which can be improved significantly using
networked computers is the improved access to "data rooms" during the due
diligence process however only for larger transactions. For the purposes of
small-medium sized business, these data rooms serve no purpose and are
generally not used.

74
OTHER FORMS OF CORPORATE RESTRUCTURING DEMERGERS /
DIVESTITURES

A divestiture / demerger involves, unlike a merger or amalgamation in which

all assets are sold, selling of some of the assets. These assets may be in the
form of a plant, division, product line, subsidiary and so on. Divestitures can
be involuntary or voluntary.

An involuntary divestiture usually is the result of an antitrust ruling by the

government.

A voluntary divestiture is a willful decision by management to divest.

Pursuant to a scheme of arrangement under Sections 391 to 394 of the

Companies Act, a demerger means the transfer, by the demerged company,
of one or more of its undertakings to any resulting company in such manner
that –

1. All the property / liabilities of the undertaking, being transferred

by the demerged company, immediately before the demerger
becomes the property / liabilities of the resulting company by the
virtue of the demerger;

2. The property / liabilities of the undertaking, being transferred by

the demerged company, immediately before the demergers are
transferred at values appearing in its books of account;

3. The resulting company issues, in consideration of the demerger,

its shares on a proportionate basis to the shareholders of the
demerged company;

4. Shareholders holding not less than three-fourths in value of the

shares in the demerged company (other than shares already held
therein immediately before the demerger, or by a nominee for the
resulting company or, its subsidiary) become shareholders of the
resulting company or companies by the virtue of the demerger;

5. The transfer of the undertaking is on a going concern basis;

6. The demerger is in accordance with the conditions, if any,

notified in this behalf under section 72 A (5) by the Central
Government.

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Reasons / motives behind Divestitures / Demergers

1) Efficiency Gains and Refocus – Although divestiture or demerger

causes contraction from the viewpoint of the selling firm, it may not,
however, entail decrease in its profits. On the contrary, it is believed by the
selling firm that its value will be enhanced by parting / divesting / demerging
some of its assets / divisions / operating units. By selling such
unproductive/underperforming assets and utilizing cash proceeds in
expanding / rejuvenating other leftover assets / operating units, the firm is
likely to augment the profits of the demerged firm.

As Gitman aptly states, the motives for divestiture is to generate cash for
the other product lines, to get rid of a poorly performing operation, to
streamline the corporate form, or to restructure the company’s business
consistent with its strategic goals. In other words, it implies that the
operating units are worth much more to other firms than to the firm itself. In
technical terms, it is referred to as reverse synergy,

i.e. 4 – 2 = 3.

2) Information Effect – Another reason for divestiture involves the

information it conveys to investors. If there is asymmetric information not
known by investors, the announcement of a divestiture may be interpreted
as a change in the investment strategy or in operating efficiency.

3) Wealth Transfers – If a company divests apportion of the enterprise and

distributes the proceeds to stockholders, there will be a wealth transfer from
debt holders to stockholders. The transaction reduces the probability that
debt will be paid, and it will have a lesser value, all other things the same.

4) Tax Reasons – As in mergers, sometimes tax reasons enter into a reason

to divest. If a company loses money and is unable to use a tax-loss carry-
forward, divestiture in whole or in part may be the only way to realize the
tax benefit. Under some circumstances, an Employee Stock Ownership Plan
(ESOP) is tax advantageous. Other, more technical tax issues also come into
play.

Financial Evaluation of Divestitures

For the purpose of financial evaluation, the divestiture / demerger decision

can be considered akin to

reverse capital budgeting decision in that the selling firm receives cash by
divesting an asset, say a division of the firm, and these cash inflows received

76
are then compared with the present value of the CFAT (cash Inflows After
Taxes) sacrificed on account of parting of a division / asset. Given the basic
conceptual framework of capital budgeting, the following format contains the
steps involved in assessing whether the divestiture decision is profitable for
the selling firm or not.

a) Decrease in CFAT due to sale of division (for years 1, 2, n…)

b) Multiply by appropriate cost of capital relevant to division (given
its risk level)
c) Decrease in present value of the selling firm (a X b)
d) ( Present value of obligations related to the liabilities of the
decision
e) Present value lost due to sale of division (c – d)

Taxation Aspects

Just like in mergers, in demerger also, the associated parties enjoy some tax
benefits. They can be listed as below –

Tax Concessions to Resulting Company – The resulting company is

entitled virtually to all the tax concessions as are available to the
amalgamated company. These are –

1. Carry forward and Set off of Business Losses and Unabsorbed

Depreciation of the Demerged Company – The accumulated losses and
unabsorbed depreciation ‘in a demerger’ should be allowed to be
carried forward by the resulting company, if these are directly related
to the undertaking proposed to be transferred. Where it is not plausible
to relate these to the undertaking, such loss and depreciation would be
apportioned between the demerged company and the resulting
company in proportion of the assets coming to the share of each as a
result of the demerger.

2. Expenditure on Acquisition of Patent Rights or Copyrights –

Where the patent or copyrights acquired by the demerged company is
transferred to the resulting Indian company, the expenditure on patents
or copyrights not written off would be allowed to be written off in the
hands of the resulting company in the same number of balance
installments. On their subsequent sales, the treatment of deficiency /
surplus in the resulting company would be the same as would have
been in the case of the demerged company.

3. Expenditure on Know How

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 4. Expenditure for Obtaining License to Operate
Telecommunication Services

5. Expenditure on Prospecting, etc of Certain Minerals – Where

there is a transfer of items listed (3 to 5) above by the demerged
company to the resulting Indian company, the amount of expenditure
not yet written off would be allowed to be written off in the hands of the
resulting company in the same number of balance installments. On
their subsequent sales, the treatment of deficiency / surplus in the
resulting company would be the same as would have been in the case
of the demerged company.

6. Preliminary Expenses – Where the undertaking of an Indian

company is transferred before the expiry of 10/5 years, to another
company, the preliminary expenses of such an undertaking that are not
yet written off would be allowed as deduction in the same manner as
would have been allowed to the demerged company.

7. Bad Debts – Where due to demerger, the debts of the demerged

company have been taken over by the resulting company and
subsequently such debt or part thereof becomes bad, such bad debts
would be allowed as a deduction to the resulting company.

8. Expenditure Related to Demerger – In the case of expenditures

that are incurred after the April 1, 1999, wholly and exclusively for the
purpose of the demerger of an undertaking, the resulting Indian
company incurring such an expenditure would be allowed a deduction
of an amount equal to one-fifth of such expenditure for five successive
previous years beginning with the previous year in which the demerger
takes place.

Tax Concessions to Demerged Company – The concession for the

demerged company are –

1. Free of Capital Gains Tax – Where there is a transfer of any

capital asset in a demerger, such transfer would not be regarded
as a transfer for the purpose of capital gain.

2. Reserves for Shipping Business – Where a ship acquired out of

the reserve is transferred even within the period of eight years of
acquisition, there would be no deemed profits to the demerged
company.

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Tax Concessions to the Shareholders –

Any transfer or issue of shares by the resulting company to the shareholders

of the demerged company would not be regarded as transfer if the transfer
or issue is made in consideration of the demerger of the undertaking. In case
of demerger, the existing shareholders of the demerged company would
hold shares in the resulting company as well as shares in the demerged
company. Further, for computing the period of holding of such shares in the
resulting company, the period for which such shares were held in the
demerged company would also be included.

Methods of Demergers / Divestitures

A demerger can be carried out in several ways. The most common of them
are –

1) Sell Offs – The sale of assets can consist of the entire company or of
some business unit, such as a subsidiary, a smaller business unit, or a
product line.

a. Liquidating the Overall Firm – The decision to sell a firm in its entirety
should be rooted in value creation for the stockholders. Assuming the
situation does not involve financial failure, the idea is that the assets
may have a higher value in liquidation than the present value of the
expected cash flow stream emanating from them. With a complete
liquidation, the debt of the company must be paid off at its face value.
If the market value of the debt was previously below this, debt holders
realize a wealth gain, which ultimately is at the expense of the equity
holders.

b. Partial Sell offs – In the case of a sell-off, only part of the company is
sold. When a business unit is sold, payment generally is in the form of
cash or securities. The decision should result in some positive net
present value to the selling company. The key is whether the value
received is more than the present value of the stream of expected
future cash flows if the operation were to be continued.

2) Spin Offs – A spin off involves a decision to divest a business unit such as
a standalone subsidiary or division. In a spin-off, the business unit is not sold
for cash or securities. Rather, common stock in the unit is distributed to the
stockholders of the company on a pro rata basis, after which the operation
becomes a completely separate company with its own traded stock. Such a
distribution enables the existing shareholders to maintain the same

79
proportion of ownership in the newly created firm as they had in the original
firm. The newly created entity becomes an independent company, taking its
own decisions and developing its own policies and strategies which need not
necessarily be the same as those of the parent company. However, spin-off,
like a sell-off, does not bring any cash to the parent company.

Motives for a spin-off –

a. A motive for a spin off may reduce information asymmetry about a

company’s individual business units. This may argue for highly
diversified firms engaging in more spin-offs than less diversified
firms.

b. It may be possible with a spin-off to obtain greater flexibility in

contracting things such as labor, debt, taxes and regulations. Greater
contracting flexibility, in turn, should lead to improved productivity.

c. Finally, the spin-off may make the financial markets more complete.
With a publicly traded stock, the opportunity set of securities
available to investors is expanded.

3) Split Ups – A variation of spin-off is the split up. In broad terms, the split
up involves the breaking up of the entire firm in a series of spin-offs (in
terms of newly created separate legal entities) so that the parent firm no
longer exists and only the new offspring survive. Since demerged units are
relatively smaller in size, they are logistically more conveniently managed.
Therefore, it is expected that split-ups and spin-offs are likely to enhance
efficiency and may prove instrumental in achieving better performance.

4) Equity Carve Outs – An equity carve-out is similar in some ways to the

two previous forms of divestiture. However, common stock in the business
unit is sold to the public. The initial public offering of the subsidiary’s stock
usually involves only a small part of it. Typically, the parent continues to
have an equity stake in the subsidiary and does not relinquish immediate
control. A minority interest, usually less than 20%, is sold in an IPO.

The difference between the equity carve-out and the parent selling stock
under its own name is that the claim is on the subsidiary’s cash flows and
assets. For the first time, the value of the subsidiary becomes observable in
the marketplace. Some equity carve-outs are later followed by a spin-off of
the remaining shares to the parent’s stockholders.

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Motives for a Carve-out –

a. One motivation for an equity carve-out is that with a separate stock

price and public trading, managers may have more incentive to
perform well. For one thing, the size of operations is such that their
efforts will not go unnoticed, as they sometimes do in a multi-business
company.

b. With separate stock options, it may be possible to attract and retain

better managers and to motivate them

c. An equity carve-out is also a favorable means for financing growth.

When the subsidiary is in leading-edge technology but not particularly
profitable, the equity carve-out may be a more effective vehicle for
financing than financing through the parent.

d. Another motivation may be a belief by management that though the

parent’s stock is undervalued, a subsidiary would not be undervalued
and may be even overvalued by the market.

e. Also, with a separately traded subsidiary, the market may become

more complete because investors are able to obtain a ‘pure-play’
investment.

GOING PRIVATE AND BUYOUTS

Going private simply means transforming a company whose stock is publicly

held into a private one. The privately held stock is owned by a small group of
investors, with incumbent management usually having a large equity stake.
In this ownership reorganization, a variety of vehicles are used to buy out
the public stockholders. Such a buyout is generally known as a Management
Buyout (MBO). In the corporate world, MBOs are the more usual modes of
acquisition. The management to which the firm is sold need not necessarily
be from the same firm. The management may be from the same firm or may
be form outside (entrepreneurs) or may assume a hybrid form (i.e. the
management may be of the existing firm as well as from outside).

The most common way of going private is cashing the stockholders out and
merging the company into a shell corporation owned solely by the private
investor / management group. Rather than a merger, the transaction may be
treated as an asset sale to the private group. The result is that the company
ceases to exist as a publicly held entity and the stockholders receive a

81
valuable consideration for their shares. Though most transactions involve
cash, sometimes non-cash compensations, such as notes, are employed. The
stockholders must agree to a company going private, and the incentive paid
to them is the premium in price paid. Even when the majority vote is in
favor, other stockholders can sue, claiming the price is not high enough.

Motivations for Going Private

There are a number of factors that may motivate the management to take a
company private. Some of them are –

a. There are costs to being a publicly held company. The stock must be
registered, stockholders must be serviced, there are administrative
expenses in paying dividends and sending out materials, and there are
legal and administrative expenses in filing reports with the Securities
and Exchange Commission and other regulators. In addition, there are
annual meetings and meetings with security analysts leading to
embarrassing questions that most CEOs would rather do without. All
these can be avoided by being a private company.

b. With a publicly held company, some feel there is a fixation on

quarterly accounting earnings as opposed to long-run economic
earnings. To the extent these decisions are directed more toward
building economic value, going private may improve resource
allocation decisions and thereby enhance value.

c. Another motivation is to realign and improve management incentives.

With increase equity ownership by management, there may be an
incentive to work more efficiently and longer. The rewards are linked
more closely to their decisions. The greater the performance and
profitability, the greater the reward. In a publicly held company, the
compensation level is not so directly linked, particularly for decisions
that produce high profitability. When compensation is high in a publicly
held company, there are always questions from security analysts,
stockholders and the press.

LEVERAGED BUYOUTS

Going private can be a straight transaction or it can be a leveraged buyout

(LBO), where there are third- or sometimes fourth-party investors. In
general, when the potential acquiring management may not / does not have
adequate financial resources of its own to pay the acquisition price, it seeks
financial support from other sources, say, investors, venture funds, banks

82
and so on. When finance is arranged by outside investors, it is normal for
them to secure representation on the board of the corporate.

According to Emery and Finnerty, a leveraged buyout is an acquisition that is

financed principally, sometimes more than 90 percent, by borrowing on a
secured basis. Sometimes called asset-based financing, the debt is secured
by the assets of the enterprise involved. Another distinctive feature is that
leveraged buyouts are cash purchases, as opposed to stock purchases. Also,
the business unit involved invariably becomes a privately held, as opposed
to a publicly held company.

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Characteristics of Desirable LBO Candidates

a. Since LBOs cause substantial financial risk, it is desired that LBO

acquisitions / firms should have a relatively low degree of operating /
business risk. LBOs will not be a suitable form of corporate restructuring
if the acquired firm already has a high degree of business risk.

b. Frequently, the company has a several-year window of opportunity

where major expenditures can be deferred. Often, it is a company that
has gone through a heavy capital expenditures program, and whose
plant is modern. Companies with high R&D requirements, like drug
companies, are not good LBO candidates. For the first several years,
cash flows must be dedicated to debt service. Capital expenditures,
advertising, R&D, and personnel development take a back seat. If the
company has subsidiary assets that can be sold without adversely
impacting the core business, this may be attractive. Such asset sales
provide cash for debt service in the early years.

c. Stable, predictable operating cash flows are prized. In this regard,

consumer- branded products dominate “commodity type businesses.
Proven historical performance with an established market position
means a lot. Also, the less cyclical the business, the better it is.

d. As a rule, the assets must be physical assets or brand names.

Management, however, is important. The experience and quality of
senior management are critical to success. When such management is
not in place, outsiders must be brought in.

e. Finally, the absence of pre-existing leverage is desirable.

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LEVERAGED RECAPITALIZATIONS

The LBO must be distinguished from a Leveraged Recapitalization, or

Leveraged Recap as it is known. With a LBO, public stockholders are bought
out and the company or the business unit becomes private. With a leveraged
recap, a publicly traded company raises cash through increased leverage,
usually massive leverage. The cash then is distributed to stockholders, often
by means of a huge dividend. In contrast to a LBO, the stockholders continue
to hold shares in the company. The firm remains a public corporation with a
traded stock.

These shares are known as “stub” shares. Obviously, they are worth a lot
less per share, owing to the huge cash payout. While a cash payout is more
common, stockholders could receive debt securities or even preferred stock.
In the transaction, management and other insiders do not participate in the
payout but take additional shares instead. As a result, their proportional
ownership of the corporation increases considerably. Thus, management
obtains a large equity stake in the company, but unlike an LBO, this stake is
represented by publicly traded stock. The leveraged recap does not lend
itself to a business unit, as does an LBO; it must involve the company as a
whole.

Often, leveraged recaps occur in response to a hostile takeover threat or to

management’s perception that the company is vulnerable though not
directly under attack.

A leveraged recap can occur without putting the company up for sale, as is
required by a LBO.

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Valuation Implications

Though the leveraged recap is a defensive tactic and such devices usually
work to the disadvantage of stockholders, this is different.

a. As a case, leverage and increased equity stake may give management

more incentive to manage efficiently and to reduce wasteful
expenditures.

b. There is also the tax shield that accompanies the use of debt.

c. By the virtue of absorbing free cash flows, leverage may have a

productive effect on management efficiency.

d. Also, under the discipline of debt, internal organization changes may

now be possible that lead to improvements in operating performance.

Though there are other darker sides to this too –

a. With the high degree of leverage, there is little margin for error. Not
surprisingly, a number of leveraged recaps do not make it.

b. Operating difficulties, often due to industry wide problems, beyond the

control of the company, are magnified by the financial leverage.

c. Another disadvantage, relative to an LBO, is that as a public company,

shareholder servicing costs and security regulations and disclosures
remain.

REVERSE MERGERS

One of the options available to small- to medium-sized privately held

companies that are looking to raise additional capital or to make acquisitions
is the reverse merger.

A reverse takeover occurs when a publicly-traded smaller company acquires

ownership of a larger company. It typically requires reorganization of
capitalization of the acquiring company.

In the event the larger company is not publicly traded, the reverse takeover
results in a privately held company becoming a publicly held company by
circumventing the traditional process of filing a prospectus and undertaking
an initial public offering (IPO). It is accomplished by the shareholders of the
private company selling their shares in the private company to the public
company in exchange for shares of the public company.

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Reverse merger financial transactions are becoming increasingly popular
and accepted. It is an alternative means for private companies to go public.

The reverse merger originated as an alternative to the traditional initial

public offering (IPO) process for companies that want the benefits of being a
public company without the expense and complexities of the traditional IPO.
The reverse merger is often suggested as the best option to provide greater
access to the capital markets, increase the company’s visibility in the
investment community, and offer the opportunity to utilize its stock to make
acquisitions.

The traditional IPO process is difficult for a reason. It is part of the vetting
process for keeping companies that are not ready for the harsh spotlight of
the public markets out of the public markets. A study of companies choosing
the reverse merger route over the past two years indicates that the majority
of them end up becoming effectively “publicly traded private companies”
with small market capitalizations, single digit (or lower) stock prices, and
little to no visibility in the investment community.

The Process

In a reverse merger a private company merges with a publicly listed

company that doesn’t have any assets or liabilities. The publicly traded
corporation is called a “shell” since all that remains of the original company
is the corporate shell structure. By merging into such an entity the private
company becomes public.

After the private company obtains a majority of the public company’s stock
and completes the merger, it appoints new management and elects a new
Board of Directors.

Shell companies used in reverse mergers are generally one of two types. The
first is a failed public company that remains to be sold in order to recoup
some of the costs of the failed business. These shells have the potential for
unknown liabilities, lawsuits, dissatisfied shareholders, and other potential
“skeletons in the closet.”The second are created for the specific purpose of
being sold as a shell in a reverse merger transaction. These typically carry
less risk of having unknown liabilities.

Benefits –

a. The advantages of public trading status include the possibility of

commanding a higher price for a later offering of the company's
securities. Going public through a reverse takeover allows a
privately held company to become publicly held at a lesser cost,

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 and with less stock dilution than through an initial public offering
(IPO). While the process of going public and raising capital is
combined in an IPO, in a reverse takeover, these two functions
are separate. A company can go public without raising additional
capital. Separating these two functions greatly simplifies the
process.

b. In addition, a reverse takeover is less susceptible to market

conditions. Conventional IPOs are risky for companies to
undertake because the deal relies on market conditions, over
which senior management has little control. If the market is off,
the underwriter may pull the offering. The market also does not
need to plunge wholesale. If a company in registration
participates in an industry that's making unfavorable headlines,
investors may shy away from the deal. In a reverse takeover,
since the deal rests solely between those controlling the public
and private companies, market conditions have little bearing on
the situation.

c. The process for a conventional IPO can last for a year or more.
When a company transitions from an entrepreneurial venture to
a public company fit for outside ownership, how time is spent by
strategic managers can be beneficial or detrimental. Time spent
in meetings and drafting sessions related to an IPO can have a
disastrous effect on the growth upon which the offering is
predicated, and

d. Additionally, many shell companies carry forward what is known

as a tax-loss. This means that a loss incurred in previous years
can be applied to income in future years. This shelters future
income from income taxes. Since most active public companies
become dormant public companies after a string of losses, or at
least one large one, it is more likely that a shell company will
offer this tax shelter.

e. It is highly unusual to preserve any benefit from the tax loss

carry forward in a shell company. The tax regulations normally
reduce the loss carry forward by the percentage of the change in
control. In a well structured reverse merger, the private
company should end up with 95% or more of the stock after the
merger, thus reducing the tax loss carry-forward by this amount.

Drawbacks –

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a. These have an illiquid, low priced stock, a low valuation, and little to no
institutional following. The newly public company is effectively worse
off after completing the reverse merger than it was prior to leaving the
private domain.

b. Other problems awaiting companies that emerge from the private

arena include issues surrounding the disclosures required by a public
firm and the regulatory requirements that the SEC demands. Public
companies are required to file regular quarterly and annual reports,
meet stringent accounting standards, and make them available to
their public investors. Small to medium size private companies often
lack the infrastructure and back office capabilities to support the
requirements of a public company. This requires additional capital
expenditures in order to meet the regulatory and financial burdens of a
publicly traded company.

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FINANCIAL RESTRUCTURING (INTERNAL RECONSTRUCTION)

Financial restructuring is carried out internally in the firm with the consent of
its various stakeholders. This form of reconstruction is relatively easier to put
to ground.

Financial restructuring is a suitable mode of restructuring of corporate firms

that have incurred accumulated sizable losses over a number of years. As a
result, the share capital of such firms, in many cases, gets substantially lost /
eroded. In fact, in some cases, the accumulated losses may even be higher
than the share capital, causing negative net worth.

Given such dismal state of financial affairs, such firms are likely to have a
dubious potential for liquidation.

Financial restructuring or internal reconstruction is one measure of revival of

only those firms that hold promise / prospects for better financial
performance in the future years. To achieve the desired objective, such firms
warrant / merit a restart with a fresh balance sheet, which does not contain
the past accumulated losses and fictitious assets and shows share capital at
its real worth.

Restructuring Scheme

Financial restructuring is achieved by formulating an appropriate

restructuring scheme involving a number of legal formalities, including
consent of the court and the consent of the affected stakeholders, say,
creditors, lenders, and shareholders.

It is normal for equity shareholders to make the maximum sacrifice, followed

by preference shareholders and debenture holders, lenders and creditors
respectively.

The sacrifice may be –

a. In terms of waiver of a part of the sum payable to various liability

holders;

b. In terms of acceptance of new securities with a lower coupon rate, with

a view to reduce the future financial burden on the firm;

c. The arrangement may also take the form of conversion of debt into
equity; sometimes, creditors, apart from reducing their claim, may
also agree to convert their dues in to securities to avert pressure of
payment.

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As a result of all these measures, the firm may have better liquidity to work
with. Thus financial restructuring implies a significant change in the
financial / capital structure of firms, leading to a change in the payment of
fixed financial charges and change in the pattern of ownership and control.

In other words, financial restructuring, or internal reconstruction, aims at

reducing the debt/ payment burden of the firm.

The aggregate sum resulting from –

a. The reduction / waiver in the claims from various liability holders,

and

b. Profit accruing from the appreciation of assets such as land and

buildings,

Is then utilized to write off accumulated losses and fictitious assets, such as
preliminary expenses, and create provision for bad and doubtful debts and
downward revaluation of certain assets, such as plant and machinery, if they
are overvalued.

In practice, the restructuring scheme is drawn in such a way so that all the
above requirements of write off are duly met. In brief, financial restructuring
is unique in nature and is company specific. It is carried out, in practice,
when all the stakeholders are prepared to sacrifice and are convinced that
the restructured firm, reflecting true value of assets, capital and other
significant financial parameters, can now be put back on the profit track.

This type of restructuring helps in the revival of firms that otherwise would
have faced closure or liquidation.

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SOME CASES OF CORPORATE RESTRUCTURINGS FROM THE REAL
WORLD

In the United States, the first merger wave occurred between 1890 and 1904
and the second began at the end of World War I and continued through the
1920s. The third merger wave commenced in the latter part of World War II
and continues to the present day. About two-thirds of the large public
corporations in the USA have merger or amalgamations in their history. In
India, about 1180 proposals for amalgamation of corporate bodies involving
about 2400 companies were filed with the High Court’s during1976-1986.
These formed 6 % of the 40600 companies at work at the beginning of 1976.
Mergers and acquisitions, the way in which they are understood in the
western countries have started taking place in India in the recent years. A
number of mega mergers and hostile takeovers could be witnessed in India
now.

THE GREAT MERGER MOVEMENT (1895-1905)

The Great Merger Movement was a predominantly U.S. business

phenomenon that happened from 1895 to 1905. During this time, small firms
with little market share consolidated with similar firms to form large,
powerful institutions that dominated their markets. It is estimated that more
than 1,800 of these firms disappeared into consolidations, many of which
acquired substantial shares of the markets in which they operated. The
vehicles used were so-called trusts. To truly understand how large this
movement was—in 1900 the value of firms acquired in mergers was 20% of
GDP. In1990 the value was only 3% and from 1998–2000 was around 10–
11% of GDP. Organizations that commanded the greatest share of the
market in 1905 saw that command disintegrate by 1929 as smaller
competitors joined forces with each other. However, there were companies
that merged during this time such as DuPont, Nabisco, US Steel, and General
Electric that have been able to keep their dominance in their respected
sectors today due to growing technological advances of their products,
patents, and brand recognition by their customers. These companies that
merged were consistently mass producers of homogeneous goods that could
exploit the efficiencies of large volume production. The companies which had
specific fine products, such as fine writing paper, took no part in the Great

92
Merger Movement as they earned their profits on high margin rather than
volume.

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Short run Factors

One of the major short run factors that sparked in The Great Merger
Movement was the desire to keep prices high. That is, with many firms in a
market, supply of the product remains high. During the panic of 1893, the
demand declined. When demand for the good falls, as illustrated by the
classic supply and demand model, prices are driven down. To avoid this
decline in prices, firms found it profitable to collude and manipulate supply
to counter any changes in demand for the good. This type of cooperation led
to widespread horizontal integration amongst firms of the era. Focusing on
mass production allowed firms to reduce unit costs to a much lower rate.
These firms usually were capital-intensive and had high fixed costs. Due to
the fact that new machines were mostly financed through bonds, interest
payments on bonds were high followed by the panic of 1893, yet no firm was
willing to accept quantity reduction during this period.

Long run Factors

In the long run, due to the desire to keep costs low, it was advantageous for
firms to merge and reduce their transportation costs thus producing and
transporting from one location rather than various sites of different
companies as in the past. This resulted in shipment directly to market from
this one location. In addition, technological changes prior to the merger
movement within companies increased the efficient size of plants with
capital intensive assembly lines allowing for economies of scale. Thus
improved technology and transportation were forerunners to the Great
Merger Movement. In part due to competitors as mentioned above, and in
part due to the government, however, many of these initially successful
mergers were eventually dismantled. The U.S. government passed the
Sherman Act in 1890, setting rules against price fixing and monopolies.
Starting in the 1890s with such cases as U.S. versus Addyston Pipe and Steel
Co., the courts attacked large companies for strategizing with others or
within their own companies to maximize profits. Price fixing with competitors
created a greater incentive for companies to unite and merge under a single
name so that they were not competitors anymore and technically not price
fixing.

94
MERGER OF RELIANCE PETROCHEMICALS LTD (RPL) WITH RELIANCE
INDUSTRIES LTD (RIL), 1992

The merger of RPL with RIL in March 1992 was the biggest merger till date
and resulted in the creation of the largest Indian corporate.

RIL was engaged in the manufacture and sale of textile, fiber and fiber
intermediates and petrochemicals. In particular, it was engaged in the
manufacture of polyester staple fiber (PSF), polyester teraphtalic acid (PTA),
linear alkyl benzene (LAB) and other products. Its paid up capital (Rs 157.94
crore) consisted of –

i. Equity share capital, Rs 152.14 crore (15.21 crore shares of Rs 10

each),

ii. 11 percent cumulative redeemable preference shares of Rs 100 each,

Rs 30 lakhs,

iii. 15 percent cumulative redeemable preference shares of Rs 100 each,

Rs 5.5 crore.

The RPL was incorporated in November 1988 with the main objective of
manufacturing poly-vinyl chloride (PVC), mono ethylene glycol (MEG) and
high density poly ethylene (HDPE). It’s paid up capital stood at Rs 749.30
crore consisting of 74.93 crore shares of Rs 10 each.

In terms of a scheme of amalgamation approved by the shareholders of the

two companies and the Mumbai and Gujarat High Courts in July/August 1992,
the RPL was merged with RIL w.e.f. March 2, 1992. The merger was aimed to
enhance shareholders’ value by realizing significant synergies of both the
companies. Liberalization of government policy and the accompanying
economic reforms created this opportunity for the shareholders of RIL.

As per the scheme of amalgamation, the expected benefits of merger to the

amalgamated entity, inter-alia, were –

i. Benefit from diversification as the risks involved in the operation of

different units would be minimized

ii. Business synergy due to economies of scale and integrated operations

iii. Higher retained earnings leading to enhanced intrinsic values of

shareholding to investors. The capital requirement would also be at
manageable levels

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iv. Strong fundamentals which would enhance its credit rating and
resource raising ability in financial markets, both national and
international

96
The exchange ratio was one equity share of Rs 10 each in RIL for every 10
equity shares of RPL with a par value of Rs 10 each. The exchange ratio was
based on the expert valuation made by three reputed firms of chartered
accountants, namely, S.B. Billimoria & Co, Choksi & Co, and Heribhakthi &
Co. Pursuant to the above, 74926428 equity shares of Rs 10 each were
issued as fully paid up to the shareholders of RIL without payment being
received in cash.

All assets, liabilities and obligations of RPL were taken over by the merged
entity – RIL. The excess of assets over liabilities taken over by RIL
consequent on the amalgamation less the face value of the equity shares
issued to the shareholders of the RPL represented amalgamation reserve. All
the employees of RPL on the date immediately preceding the effective date
became the employees of the RIL.

The post merger scenario of the RIL is reflected in the increase in its capital,
turnover, net profit and equity dividend. Compared to the pre-merger capital
of 157.94 crore, the post-merger capital rose to 358.74 crore. The turnover
increased from Rs 2298 crore in1991-92 to Rs 7019 crore in 1994-95. Net
profit of RIL stood at Rs 10651 crore in 1994-95 compared to Rs 163 crore in
1991-92. The equity dividend rose phenomenally to 55 percent in 1994-95
from 30 percent in 1991-92. The RIL emerged post-merger as a mega
corporation and became a global player. Its foreign earnings in 1994-95
aggregated Rs 174 crore.

97
DEMERGER OF DCM LTD, 1990

DCM Ltd, promoted by Late Shri Ram in 1889 became a conglomerate of 13

units with multifarious manufacturing activities in sugar, textile, chemicals,
rayon tyre cord, fertilizers, and so on. These units on their own being of the
size of independent companies, the directors felt that greater focus on the
operation of the various units of the company would result in substantial
improvement in the results of their operations.

The post-reorganization slogan was – “The Trimmer we are, the Faster we

are”

.To achieve the objective of carrying the business of DCM Ltd more smoothly
and profitably, DCM Ltd was reorganized by dividing its business among four
companies having shareholders with the same interest inter-se in DCM but to
be managed and operated independently.

The companies resulting from this division were –

1) DCM Ltd – comprising DCM Mills (DCM Estate), DCM Engineering

Products, DCM Data Products, Hissar Textile Mills, Shri Ram
Fibers Ltd, and DCM Toyota Ltd.

2) DCM Shri Ram Industries Ltd – comprising Shri Ram Rayon’s,

Daurala Sugar Works, and Hindon River Mills.

3) DCM Shri Ram Industries Ltd – comprising Shri Ram Fertilizers

and Chemicals Industries Ltd, Shri Ram Cement Works Ltd,
Swatantra Bharat Mills Ltd, and DCM Silk Mills Ltd.

4) Shri Ram Industrial Enterprises Ltd – comprising Shri Ram Food

and Fertilizers Ltd, and Mawana Sugar Works Ltd.

The division of DCM Ltd took place through the scheme of arrangement
approved by the Delhi High Court on April 16, 1990 according to which three
new companies were formed. The scheme of arrangement became effective
from April 1, 1990. The four companies thereafter started operating
independently, each with their respective Board of Directors.

i) The total paid-up capital of Rs 23 crore was divided equally.

ii) The allocation of various assets and liabilities among them was done as
under –

98
 iii) Though the liability of for debentures was divided, the debentures were
physically retained in DCM Ltd. The mortgage of assets of various units
already created with the trustees for debenture-holders were modified to the
effect that each group’s assets would stand charged only for the liability
allocated to it.

Some of the notable features of the scheme of reorganization of the

erstwhile DCM Ltd in to the four companies were –

DCM Shri Ram DCM Shri Ram Shri Ram DCM Ltd
Industries Ltd Consolidated Industrial
Ltd Enterprises
Ltd
Fixed Deposits 16% 33% 36% 15%

Debentures 16% 12% 36% 36%

Common 16.66% 16.66% 33.333% 33.33%

assets /
liabilities
/income /
benefit
Expenses and 16.66% 16.66% 33.33% 33.33%
cost of
arrangement
Specific Assets (All at book value as on 1.4.1990 unit-
wise)

iv) For payment of interest and principal amount to debenture holders,

Indian Bank, which was the debenture trustees was appointed a Registrar by
all the four companies and they remitted their share of liabilities to the
Registrar on due dates for onward payment to debenture-holders. The cost
of Registrar would be shared by all the companies.

v) The fixed deposit receipts were split into four new receipts in the
proportion in which the fixed deposits appeared in the books of account as
on the effective date.

vi) Upon transfer of undertakings to them, the new companies allotted one
equity share each to the holders of four equity shares in DCM Ltd. The paid-
up value of DCM equity was reduced thereupon fro Rs 10 per share to Rs 2.5
per share. Thereafter, the DCM equity shares were consolidated into equity

99
shares of the face value of Rs 10 each. Any fraction arising on allotment /
consolidation of shares was disposed off and sales proceeds distributed pro
rata to the eligible shareholders.

vii) The equity shares of the four companies were subsequently listed in the
stock exchanges.

viii) Disputes with respect to the provisions of the scheme of arrangement

were to be settled by two arbitrators and an umpire appointed by the
arbitrators.

Thus, the demerger of DCM Ltd was completed with lots of innovation and
practical solutions to the complex problem of reorganizing a century-old
company. After the demerger, all the DCM Group companies have grown
tremendously. From a non-dividend position prior to the demerger, all the
companies have grown manifold adding value both to the shares as well as
to the new entities.

100
ACQUISITION OF RANBAXY LABORATORIES LTD BY DAIICHI SANKYO,
2008

Ranbaxy Laboratories Limited, India's largest pharmaceutical company, is an

integrated, research based, international pharmaceutical company,
producing a wide range of quality, affordable generic medicines, trusted by
healthcare professionals and patients across geographies. The Company is
ranked amongst the top ten global generic companies and has a presence in
23 of the top 25 pharmacy markets of the world.

Ranbaxy was incorporated in 1961 and went public in 1973. For the year
2007, the Company's Global Sales at US$ 1,619 million reflected a growth of
21%. The company has a total paid up capital of Rs 28,022.12 million and
also has a substantial amount of reserves and surplus.

Daiichi Sankyo Co., Ltd. was created through the merger of two of Japan’s
oldest pharmaceutical companies – Sankyo Co., Ltd. and Daiichi
Pharmaceutical Co., Ltd. Its manufacturing operations in Japan, where it has
nine factories, are handled primarily by Daiichi Sankyo Propharma Co, Ltd.
There are five major plants overseas – one each in Europe, Taiwan and Brazil
and two in China. Together, these facilities form a global supply chain
network. All have established quality assurance systems based on and
compliant with the Good Manufacturing Practice (GMP), which defines
manufacturing and quality management requirements for pharmaceuticals.
Daiichi Sankyo’s net sales, although affected by the spin-off of non-
pharmaceutical businesses from the Group, increased by 0.4% year on year
to ¥ 929.5 billion. It has a paid up share capital of US $ 1,524,237,000.

The Japanese drug maker, Daiichi Sankyo recently announced the acquisition
of an Indian pharmaceutical company, agreeing to buy out the promoters in
a deal totally valued at $3.4-4.6 billion.

Daiichi Sankyo’s open offer for up to 20 per cent stake in Ranbaxy

Laboratories will open on August 8, as announced in the public
announcement made on June 16, 2008. The Japanese company has agreed
to acquire 34.81 per cent of the stake of the company from the promoters
Mr. Malvinder Singh and family. The open offer for up to20 per cent at Rs
737 a share would increase Daiichi Sankyo’s stake in the company to a
maximum of 58.09 per cent.

The purchase price of Rs 737 by Daiichi Sankyo represents a premium of

53.5 per cent to Ranbaxy’s average daily closing price on NSE for the three

101
months ending June 10, 2008. The letter of open offer will be sent to those
who are the company’s shareholders as on as on June 27, Daiichi Sankyo
said in the public announcement.

The closing date of the offer is August 27, 2008. The last date for a
competitive bid (if anybody wants to make a counter bid to that of Daiichi
Sankyo) for Ranbaxy is July 7, as stated in the public announcement.

Once the deal is completed, the Singh family will cease to have any stake in
the company though Mr. Malvinder Singh will continue to lead the
pharmaceutical major as its Chief Executive Officer and Managing Director.

Post acquisition, Ranbaxy would become a debt-free firm. The two firms said
they plan to keep Ranbaxy a listed entity in India even as it retained the
identity and brand.

The combined market capitalization of both companies would be around $30

billion making it the world’s 15th largest pharmaceutical company.

The transaction is expected to be completed by the end of March 2009. The

company has also decided not to pursue the proposed demerger of its New
Drug Discovery Research (NDDR) in a bid to synergize the R&D unit with
Daiichi Sankyo’s research capabilities.

102
BAIL OUT MERGER OF ITC CLASSIC FINANCIAL LTD WITH ICICI LTD,
1997-98

The Classic Leasing and Financial Services Ltd was merged into The Sage
Investments, Summit Investments and Pinnacle Investments of the ITC group
and renamed as ITC Classic Financial Ltd in 1986. Its main business was
leasing, hire- purchase, capital market operations, investments and
merchant banking. The company suffered a loss of Rs 285 crore in 1996-97
and Rs 74 crore during the first half of1997-98.

The ITC Classic was amalgamated with the ICICI Ltd on and from April 21,
1998 with effect from April 1, 1997 in terms of the scheme of the scheme of
merger sanctioned by the Mumbai and Kolkata High Courts. Accordingly, the
undertaking and the entire business, all the properties, assets, rights and
powers of ITC were transferred to and vested in, the ICICI Ltd. All the debts,
liabilities and obligations were also transferred. The merger resulted in the
transfer of assets, liabilities and reserves and the issue of shares as
consideration therefore of the following summarized values –

Particulars Amount(in
Rs Crore)
Assets 1319
Liabilities 1325
R&S (41)
Consideration for amalgamation (exchange ratio)- 3
1 equity share of Rs 10 each in ICICI Ltd for every 15 equity
shares in ITC of Rs 10 each
Adjustment of cancellation of ICICI’s holdings in ITC – 33
Amalgamation reserves arising out of merger

The benefits of merger of ITC Classic envisaged by the ICICI were –

i. Its plan to expand retail by tapping ITC Classic’s fixed deposit base

ii. The retail distribution infrastructure of ITC Classic consisting of 10

branches and12 franchises

iii. Existing retail investors base of ITC Classic of over 700000

iv. Additional capital infusion in the form of preference capital by ITC to

help in leveraging the operations.

The terms of the scheme of merger, preference shares of the aggregate

value of Rs350 crore were issued on the effective date by adjustment of

103
advance of Rs 350 crore received towards the issue. The ITC subscribed Rs
350 crore by way of preference shares in ICICI Ltd. These shares has a face
value of Rs 1 crore each, with dividend of Rs 100 per annual per share
redeemable at par after 20 years from the effective date of allotment. The
14% cumulative redeemable preference shares of Rs 100 each of the ITC
Classic aggregating Rs 21.8 crore were repaid by the ICICI Ltd after the
effective date of merger.

The tax set-off and the low cost of funds were the major benefits of the
merger of the ITC Classic with the ICICI Ltd. For instance, the ICICI Ltd made
total provisions of Rs 495 crore against bad and doubtful debts (Rs 311
crore) and against substandard assets (Rs 184 crore) on account of the ITC
Classic. Provision against bad and doubtful debts of Rs 311 crore included Rs
264 crore being provision and write off made against assets vested upon
merger of the ITC Classic. The assets provided against include those which
would have been classified as a non-performing asset based on guidelines
applicable to financial institutions and assets that were expected by the
management to carry limited possibility for realization of amounts lent and
the balance principal value of the leased assets and stock on hire. These
provisions were made by the appropriations of –

i. Rs 5 crore from Reserves for loan loss

ii. Rs 21 crore from allocation in terms of Section 36(1) (vii-a) of the

Income Tax Act

iii. Rs 189 crore from Special Reserves in terms of Section 36(1)

(viii) of the Income Tax Act

iv. Rs 280 crore transferred to General Reserves out of Special

Reserves created in terms of Section 36(1) (viii) of the Income Tax
Act.

As a result of the provisioning for NPA / withdrawal from reserves to availing

of tax deductions for bad debts, the effective tax rate of ICICI Ltd declined to
8.4% in 1997-98 from 12.14% in 1996-97.

104
The merger scheme was specifically conditional upon and subject to –

a. Infusion of funds by ITC itself or through affiliates. Rs 350 crore as

interest free advance before November-December 1997;

b. The discharge before the agreed sales of all secured creditors and
release of all charges;

c. Satisfying the ICICI that there were no charges;

d. The purchase by ITC Group of all outside investments held by ITC

Classic for an aggregate consideration of Rs 241 crore;

e. The transfer to ITC Classic, of Rs 7.12 crore in discharge of obligations

by another company;

f. The purchase by ITC Group of assets leased by ITC Classic at a net

value of Rs31.1 crore;

g. Redemption of shares of ITC Classic;

h. Discharge of intercorporate debt of ITC of Rs 88 crore;

i. Ensuring vacant, lawful possession of all immovable properties of ITC

Classic;

j. Making of cash contribution of ITC of losses in excess of Rs 30 crore;

k. Payment of commitment charges by ITC to ITC Classic of Rs 15 crore.

105
ACQUISITION OF CORUS BY TATA STEEL, 2007

The London-based Corus Group is one of the world's largest producers of

steel and aluminum. Corus was formed in 1999 following the merger of
Dutch group Koninklijke Hoogovens N.V. with the UK's British Steel Plc on
October 6, 1999. It employs 47,300 people worldwide and 24,000 people in
the United Kingdom. It is listed on the London Stock Exchange, Euro next
Amsterdam and the New York Stock Exchange.

Corus has four divisions – strip products division, long products division,
distribution and building systems division, and aluminum division. Corus has
an annual turnover of$18 billion. Corus is a customer focused, innovative
value-driven company, which manufactures processes and distributes steel
products and services to customers worldwide.

Corus is Europe's second largest steel producer with annual revenues of

around £12 billion and a crude steel production of over 20 million tones.
Corus supplies a variety of innovative solutions to a broad range of markets
including automotive, construction, Energy and Power, Rail, Engineering and
business services, consumer products etc.

Founded in the mid-19th century, the Tata Group now has 96 companies in
sectors ranging from services to energy to consumer products. The Group,
which last year saw revenues of $21.9 billion, employs around 202,700
people. It has a market capitalization of $49.2 billion.

Tata has plenty of experience in M&As. In 2002, its tea division bought a
controlling stake in U.K. firm Tetley for$407 million. In 2004, Tata Steel
acquired Singaporean firm NatSteel for $486 million. In 2005, Videsh
Sanchar Nigam Limited acquired U.S. firm Teleglobe, a provider of voice,
data and mobile signaling services, for $239 million. This year, Tata Tea
bought a stake in the U.S. water manufacturer Glaceau for $677 million, and
Tata Coffee acquired Eight O’clock Coffee of the U.S. for $220 million. Tata
Steel, which was set up in 1907, prides itself on being one of the lowest cost
producers of steel in the world. Company CEO B. Muthuraman said the
company produces steel at $160 a ton. Corus makes it at $540 a ton, mainly
because of high raw material costs. In 2005, Tata Steel was only the world's
56th biggest steel producer and its takeover of Corus represents its first
expansion outside Asia. After the takeover, the firm will become the world’s
5th largest producer of steel.

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Initially, Tata Steel made an offer for Corus at 455 pence per share, valuing
the firm at about US$ 7.6 billion. Then after a competitive bid by Companhia
Siderurgica Nacional ("CSN") of 603 pence in cash per Corus Share, it revised
it offer at 608 pence per share valuing it about 12.16 billion dollars or
approximately £ 6.2 billion.

Terms of the Revised Acquisition

Under the terms of the Revised Acquisition, Corus Shareholders were

entitled to receive 608 pence in cash for each Corus Share (the "Revised
Price"). This represents a price of 1216 pence in cash for each Corus ADS.

The terms of the Revised Acquisition value the entire existing issued and to
be issued share capital of Corus at approximately £6.2 billion and the
Revised Price represents –

i. An increase of approximately 33.6 per cent. Compared to 455 pence,

being the Price under the original terms of the Acquisition;

ii. On an enterprise value basis, a multiple of approximately 7.0 times

EBITDA from continuing operations for the year ended 31 December
2005 and a multiple of approximately 9.0 times EBITDA from
continuing operations for the twelve months to 30 September 2006
(excluding the non-recurring pension credit of£96 million);

iii. A premium of approximately 68.7 per cent. To the average closing

mid-market price of 360.5 pence per Corus Share for the twelve
months ended 4 October2006, being the last Business Day prior to the
announcement by Tata Steel that it was evaluating various
opportunities including Corus;

iv. A premium of approximately 49.2 per cent. to the closing mid-market

price of407.5 pence per Corus Share on 4 October 2006, being the last
Business Day prior to the announcement by Tata Steel that it was
evaluating various opportunities including Corus; and

v. A premium of approximately 21.6 per cent to the revised acquisition

announced by Tata Steel on 10 December 2006 at a price of 500
pence per Corus Share.

Financing –The additional finance required under the proposed terms of the
Revised Acquisition was funded by way of a combination of additional credit
facilities and a cash contribution by Tata Steel to Tata Steel UK.

ABN AMRO and Deutsche Bank, as joint financial advisers to Tata Steel and
Tata Steel UK, ensured the availability of sufficient resources to satisfy in full

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the consideration payable to Corus Shareholders under the proposed terms
of the Revised Acquisition.

The acquisition was completed on January 31, 2007.

The post-takeover result of the steel giant has been astounding. The
company made a net profit of Rs 12,321.76 crore for the year ended March
31, 2008 as compared to Rs4, 165.61 crore in financial year 2007.
Consolidated total income increased from Rs 25,650.45 crore for the year
ended March 31, 2007 to Rs 132110.09 crore for fiscal2008.The full-year
profit, excluding contributions from Corus Group Plc, rose 11%, aided by
higher product prices. Net profit rose to Rs 4,687 crore in the year ended
March 31, compared with Rs 4,222 crore a year ago. Net sales rose 12% to
Rs 19,690 crore from a year earlier. The Tata Steel stock was up 1.90% to
close at Rs 757.10 on the Bombay Stock Exchange. The stock is down 19%
this year compared with a 29% drop in India’s benchmark sensitive index. A
global shortage of steel helped Tata increase product prices for builders and
auto companies, more than covering record raw material costs.

Today, Tata Steel sells more than two-third of its output in Europe.

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ACQUISITION OF HUTCHINSON ESSAR BY VODAFONE, 2007

Vodafone Group Plc is the world's leading mobile telecommunications

company, with a significant presence in Europe, the Middle East, Africa, Asia
Pacific and the United States through the Company's subsidiary
undertakings, joint ventures, associated undertakings and investments.

The Group's mobile subsidiaries operate under the brand name 'Vodafone'.
In the United States the Group's associated undertaking operates as Verizon
Wireless. During the last two financial years, the Group has also entered into
arrangements with network operators in countries where the Group does not
hold an equity stake. Under the terms of these Partner Network Agreements,
the Group and its partner networks co-operate in the development and
marketing of global services under dual brand logos.

At 31st March 2008, based on the registered customers of mobile

telecommunications ventures in which it had ownership interests at that
date, the Group had 260 million customers, excluding paging customers,
calculated on a proportionate basis in accordance with the Company's
percentage interest in these ventures.

The Company's ordinary shares are listed on the London Stock Exchange and
the Company's American Depositary Shares ('ADSs') are listed on the New
York Stock Exchange. The Company had a total market capitalization of
approximately £99 billion at 31 December 2007.Vodafone Group Plc is a
public limited company incorporated in England under registered number
1833679. Its registered office is Vodafone House, The Connection, Newbury,
and Berkshire, RG14 2FN, England.

Hutch or Hutchison Essar is a leading telecom operator in India, controlled by

the Hutchinson-Essar Group, consisting of Hutchison Telecom International
and Essar. It provides prepaid and postpaid cellular services in about 75% of
the total geographical Indian expanse. The company has a total of about 1.2
million subscribers all over India and has recently been one of the most
successful mobile operators in the Indian subcontinent.

In the race of acquiring Hutch, Vodafone has beaten players like Reliance
Communications, the Hindujas (along with Russia’s Altimo and Qatar
Telecom), and Essar itself.

Vodafone has acquired the 67 per cent stake of Hutchison Telecom

International in Indian mobile company Hutchison Essar. The enterprise
value of Hutch Essar was valued at $18.8 billion. So Vodafone paid $11.1

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billion to HTIL for the 67 per cent stake. Vodafone assumed net debt of
approximately $2.0 billion. As of now, it looks like Essar will remain the
minority partner with 33 per cent. Vodafone, however, said that it would
make an offer to buy Essar’s stake at the equivalent price per share it has
agreed with HTIL.

Vodafone also said in a statement that it will sell 5.6 per cent stake in Indian
Telco Bharti Airtel back to promoters for $1.6 billion. It will retain the
remaining 4.4 per cent stake as financial investment. More importantly,
Vodafone and Bharti have reached an infrastructure sharing agreement.

The transaction closed in the second quarter of calendar year 2007.After the
acquisition; Vodafone has renamed Hutch as under the Brand name of
Vodafone and has also shown reasonable growth by providing attractive
services to customers. Vodafone has got access to a greater market with
increasing potentials and strives to compete in the growing competition.

110
REVERSE MERGER OF ICICI LTD WITH ICICI BANK LTD, 2002

The ICICI Ltd was one of the leading development / public financial
institutions (D/P FIs). It had sponsored a large number of subsidiaries
including ICICI Bank Ltd. In 2002, the RBI permitted D/P FIs to transform
themselves into banks. As a bank, ICICI Ltd would have access to low-cost
(demand) deposits and could offer a wide range of products and services
and greater opportunities for earning non-fund based income in the form of
fee / commission.

The ICICI Bank Ltd also considered various strategic alternatives in the
context of emerging competitive scenario in Indian banking. It identified a
large capital base and size and scale of operations as key success factors.
The ICICI Ltd and its two other subsidiaries, namely, ICICI Capital Services
Ltd (ICICI Capital) and ICICI Personal Financial Services Ltd (ICICI PFs)
amalgamated in reverse merger with the ICICI Bank in view of its significant
shareholding and the strong business synergies between them.

As a financial institution, ICICI Ltd was offering a wide range of products and
services to corporate and retail customers in India through a number of
business operations, subsidiaries and affiliates. The ICICI PFs, a subsidiary of
ICICI, was acting as a focal point for marketing, distribution and servicing the
retail product portfolio of ICICI including auto/commercial vehicle loans,
credit cards, consumer loans and so on. The ICICI Capital was engaged in
sale and distribution of various financial and investment products like bonds,
fixed deposits, Demat services, mutual funds and so on.

The appointed dare for the merger was March 30, 2002. The effective date
was May 3, 2002.

The (reverse) merger of ICICI Ltd and two of its subsidiaries with ICICI Bank
has combined two organizations with complementary strengths and products
and similar processes and operating structure. The merger has combined the
large capital base of ICICI Ltd with strong deposit raising capacity of ICICI
Bank, giving ICICI Bank improved ability to increase its market share in
banking fee and commission while lowering the overall cost of funding
through access to lower-cost retail deposits. The ICICI Bank would now be
able to fully leverage the strong corporate relationship that ICICI has built
seamlessly, providing the whole range of financial products and services to
corporate clients. The merger has also resulted in the integration of the retail
financial operations of the ICICI and its two merging subsidiaries and ICICI
Banks into one entity, creating an optimum structure for the retail business

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and allowing the full range of assets and liability products to be offered to
retail customers.

As per the scheme of amalgamation (reverse merger) approved by the High

Court of Gujarat and High Court of Mumbai in March / April 2002, the
exchange ratio (consideration) of the merger was one fully paid up equity
share of Rs 10 of ICICI Bank for 2 fully paid up equity shares of the ICICI Ltd
of the face value of Rs 10 each. No shares were issued pursuant to the
amalgamation of ICICI PFs and ICICI Capital. The exchange ratio was
determined on the basis of a comprehensive evaluation process
incorporating international best practices, carried out by two separate
financial advisors (JM Morgan Stanley and DSP Merrill Lynch) and an
independent accounting firm (Deloite, Haskins and Sells).

The equity shares of the ICICI Bank held by ICICI Ltd were transferred to a
trust, to be divested by appropriate placement. The proceeds of such
divestment would accrue to the merged entity. The ICICI Bank has issued to
the holders of preference shares of Rs 1 crore each of ICICI, one preference
share of Rs 1 crore fully paid up on the same terms and conditions.

As both ICICI Ltd and ICICI Bank were listed in India and U.S. markets,
effective communication to a wide range of investors was a critical part of
the merger process. It was equally important to communicate the rationale
of the merger to domestic and international institutional lenders and to
rating industries. The merger process was required to satisfy legal and
regulatory procedures in India, as well as to comply with the U.S. Securities
and Exchange Commission requirements under U.S. security laws.

The merger also involved significant accounting complexities. In accordance

with the best practices in accounting, the merger has been accounted for
under the purchase method of accounting under the Indian GAAPs.
Consequently, ICICI’s assets have been fair-valued for their incorporation in
the books of accounts. The fair value of ICICI’s loan portfolio was determined
by an independent valuer’s while its equity and related investment portfolio
was fair-valued by determining its mark-to-market value. The total additional
provisions and write-offs required to reflect the fair value of the ICICI’s assets
have de-risked the loan and investment portfolios and created a significant
cushion in the balance sheet while maintaining healthy levels of capital
adequacy.

The merger was approved by the shareholders of both companies in January

2002 and by the Gujarat and Mumbai High Courts in March / April 2002.

112
ACQUISITION OF JAGUAR AND LAND ROVER BY TATA MOTORS, 2008

Jaguar is a brand that has epitomized luxury in British cars, just as British
racing has been identified with Aston Martin. The brand's "Britishness" can
be determined from the interesting fact that it is one of the few trademarks
to hold Royal Warrants of Appointment from both Queen Elizabeth and
Prince Charles. Such warrants have been issued for centuries to those who
supply goods to the British royal family, and enable the suppliers to
advertise this fact, lending them an air of prestige and exclusivity.

This illustrious brand had its humble beginnings in 1922 as the Swallow
Sidecar Company founded by two motorcycle enthusiasts, William Lyons and
William Walmsley. The company was originally located in Black pool but
moved to Coventry in1928 when demand for the popular Austin Swallow
overshot the factory's capacity. Today, Jaguars are assembled at Castle
Bromwich in Birmingham and Hale wood in Liverpool after the historic
Browns Lane plant closed in 2005.The Jaguar name first appeared in one of
the company's products in 1935 - a 2.5L sedan named the SS Jaguar, where
"SS" stood for "Swallow Sidecar". After World War II, the company was force
to abandon the "SS" name because of the unfortunate connotation with the
Nazi secret police, the Schutzstaffel. Hence, it adopted the "Jaguar" name in
1945.

Jaguar went through a lot of mergers and de-mergers over the next few
decades. It bought the Daimler Motor Company, which had acquired the
right to use the "Daimler" name in Great Britain from Gottlieb Daimler
himself, in 1960. This company was different from the more-famous Daimler-
Benz of Germany, and was a part of Birmingham Small Arms Company from
1910 until its acquisition by Jaguar, who then used the brand for its premium
models.

Jaguar merged with the British Motor Corporation (BMC) to form British Motor
Holdings (BMH) in 1966. BMC had earlier been created by the merger of the
Austin Motor Company and the Nuffield Organization (parent of the Morris
car company, MG, Riley and Wolseley) in 1952. Then was the merger with
Leyland in 1968, which had already acquired Rover and Standard Triumph.
The resultant entity was named the British Leyland Motor Corporation
(BLMC).

However, BLMC came under severe financial difficulties, which resulted in

the Ryder Report of the UK's National Enterprise Board recommending

113
government support, and effective nationalization in 1975 when the
company was renamed as British Leyland Ltd (later simply BL plc).

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In the 1970s the Jaguar and Daimler Marques formed part of BL's specialist
car division or Jaguar Rover Triumph Ltd until a restructuring in the early
1980's saw most of the car manufacturing side of BL becoming the Austin
Rover Group from which Jaguar and Daimler were excluded.

Jaguar was floated on the London Stock Exchange in 1984 by the Thatcher
government and subsequently purchased by the Ford Motor Company in
1990 for $2.5 billion. In 1999 it became part of Ford's new Premier
Automotive Group of foreign automakers, along with Aston Martin, Volvo
Cars and, from 2000, Land Rover; Aston Martin was subsequently sold off in
2007.Jaguar was one of the first entrants to the then-nascent world of
competitive racing, and registered victories throughout the 1950s in the
grueling Le Mans 24 Hours endurance race. Jaguar dropped out of the event
after these initial successes but returned triumphantly in the 1980s as an
engine manufacturer for the Tom Walkinshaw Racing team.

Over the years, Ford spent close to a total of $10 billion on the brand but
failed to return a profit. After incurring heavy losses for two consecutive
years in 2006 and2007, Ford decided to cut its losses and finally sold off the
brand in March 2008.The story of the Land Rover began with the launch of a
pioneering civilian all-terrain utility vehicle at the Amsterdam Motor Show on
30 April 1948. Now, the name is a common brand for several distinct models,
all four- wheel drive. It has had a succession of owners over the last six
decades, starting from its parent Rover, to British Leyland, British Aerospace,
BMW and Ford. Now, it forms part of Tata Motors who acquired this brand
along with its sister marque Jaguar from Ford Motors.

Long before the Mitsubishi Pajeros and the Toyota Land Cruisers and the
Humvees, sports utility vehicles (SUV) and all-terrain vehicles (ATV) meant
only two names - Jeep and Land Rover. In fact, Jeep and Land Rover are the
two oldest SUV names in automotive history.

The first Land Rover was designed in 1947 when it was still part of the Rover
group. The latter became part of the Leyland Motor Corporation (LMC) in
1967, which was subsequently merged with British Motor Holdings (BMH)
next year to become British Leyland Motor Corporation (BLMC). This is where
the fates of Jaguar and Land Rover converged, as the former was already
part of BMH.BLMC, renamed as British Leyland Ltd (later simply BL plc),
underwent a major restructuring in the late 1970s and early 1980s where
the mass-market car section was hived off as the Austin Rover Group in
1982. Jaguar and Daimler were not part of this group. This was after
nationalization in 1975 and a major cross-holding arrangement with Honda

115
in 1979.The Austin Rover Group was taken over by German automobile
major BMW in 1994, who sold off the company in 2000 after splitting it into
three parts. The Mini marque was retained by BMW; Land Rover was sold to
Ford Motors for an estimated sum of $3 billion (although BMW retained the
Rover trademark). Ford Motors had already bought Jaguar in 1999, leading to
a common home for the Jaguar and Land Rover brands

.As we have said earlier, the first Land Rover was designed in 1947 and
unveiled in1948. The early inspiration was the iconic Jeep of World War II. A
distinctive feature was their bodies, constructed of a lightweight rustproof
proprietary alloy of aluminum and magnesium called Birmabright. This was
born out of necessity owing to the shortage of steel after war and abundance
of aircraft aluminum.

This corrosion-resistant metal alloy helped build the Land Rover's legendary
reputation of toughness and durability. This especially endeared Land Rover
vehicles to the British Army and the farming community. Although it did lose
some ground to Japanese imports in the 1970s and 1980s, it regained its
standing with improvements in engine and chassis.

In 1970, Land Rover had introduced the luxury SUV Range Rover that has
enjoyed considerable popularity over the years. In its latest avatar as the
Range Rover Sport since 2005, it is of the most off-road capable vehicle on
the road today. In fact, in the acclaimed motoring show Top Gear on BBC,
host Jeremy Clarkson had pitted it against a Challenger tank. Land Rover's
Wolf is also famous for being the primary utility vehicle of the British Army.
The 75th Ranger Regiment of the United States Army also adapted twelve
versions of the Land Rover that were officially designated the RSOV (Ranger
Special Operations Vehicle).Both Land Rover and out-of-house contractors
have offered a huge range of conversions and adaptations to the basic
vehicle, such as fire engines, excavators,’ cherry picker' hydraulic platforms,
ambulances, snow ploughs, and 6-wheel drive versions, as well as one-off
special builds including amphibious Land Rovers and vehicles fitted with
tracks instead of wheels.

Tata Motors is India's largest automobile company, with revenues of US$ 8.8
billion in 2007-08. With over 4 million Tata vehicles plying in India, it is the
leader in commercial vehicles and among the top three in passenger
vehicles. It is also the world's fourth largest truck manufacturer and the
second largest bus manufacturer. Tata cars, buses and trucks are being
marketed in several countries in Europe, Africa, the Middle East, South Asia,
South East Asia and South America. Through subsidiaries and associate

116
companies, Tata Motors has operations in South Korea, Thailand and Spain.
It also has a strategic alliance with Fiat.

Tata Motors acquired the Jaguar Land Rover businesses from Ford Motor
Company for a net consideration of US $2.3 billion, as announced on March
26, in an all-cash transaction on June 2, 2008. Ford has contributed about US
$600 million to the Jaguar Land Rover pension plans.

Mr. David Smith, the acting Chief Executive Officer of Jaguar Land Rover,
would be the new CEO of the business. Mr. Smith has 25 years of experience
with Jaguar Land Rover and Ford. Before recently returning to Jaguar Land
Rover as its Chief Financial Officer, he was Director Finance and Business
Strategy for PAG and Ford of Europe.

Jaguar Land Rover has been acquired at a cost of US$ 2.3 billion on a cash
free, debt- free basis. The purchase consideration includes the ownership by
Jaguar and Land Rover or perpetual royalty-free licenses of all necessary
Intellectual Property Rights, manufacturing plants, two advanced design
centers in the UK, and worldwide network of National Sales Companies.

Long term agreements have been entered into for supply of engines,
stampings and other components to Jaguar Land Rover. Other areas of
transition support from Ford include IT, accounting and access to test
facilities. The two companies will continue to cooperate in areas such as
design and development through sharing of platforms and joint development
of hybrid technologies and power train engineering. The Ford Motor Credit
Company will continue to provide financing for Jaguar Land Rover dealers
and customers for a transition period. Tata Motors is in an advanced stage of
negotiations with leading auto finance providers to support the Jaguar Land
Rover business in the UK, Europe and the US, and is expected to select
financial services partners shortly. The cash purchase, part of plans by
India's top vehicle maker to expand its reach beyond Asia, capped months of
talks with Ford Motor Co., which is selling the prestige brands to focus on
turning around its North American operations after losing 15.3billion dollars
over the past two years.

Tata Motors plans to acquire the brands through a mix of existing cash
reserves and new debt. It recently announced plans to raise up to one billion
dollars to fund its domestic and global expansion. It is reportedly planning to
launch an additional three-billion-dollar syndicated loan, much of it bridge
financing, to cover its working capital needs for the purchase.

The deal is expected to close by the end of the June quarter, subject to
regulatory approvals, the companies said. With the purchase, Tata Motors is

117
in the unusual position of making the cheapest car in the world as well as
some of the costliest, with the sleek Jaguar XK selling for around80000
dollars. Tata showcased its 1-lakh (about 2500 dollars) car in the 2008 New
Delhi Auto Expo this January and is all ready to roll out the Nano’s in Indian
showrooms.

118
THE LEVERAGED BUYOUT OF RAYOVAC BY THOMAS H. LEE, 1996

Founded in 1906 as the French Battery Company, Rayovac is the third

largest manufacturer and marketer of batteries in the United States. The
company is headquartered in Madison, Wisconsin, and as of July 1996,
Rayovac employed 2480 employees. In 1996, Thomas Pyle, chairman and
CEO of the company, together with his family, owned 91.3% of the
Rayovac’s capital stock. The remainder was owned by the officers of the
company.

Within the general battery market, the company is the leader in a number of
areas, including –

1) The household rechargeable and heavy duty battery segments,

2) Hearing aid batteries,

3) Lantern batteries, and

4) Lithium batteries for personal computer memory backup.

In addition, Rayovac is one of the leading marketers of flashlights and other

battery- powered lighting products in the U.S. market. The company markets
and sells its products in the United States, Europe, Canada and Far East
through a variety of distribution channels, including retail, industrial,
professional, and OEMs. By positioning its products as a value brand in the
early 1980s, the company became the leader in the mass merchandise retail
channel, a rapidly growing retail segment in the United States and Canada.
Rayovac offers batteries of substantially the same quality and performance,
but at a lower price than those of its competitors. Rayovac’s financial
performance depends on a number of factors, including general retailing
trends, the company’s product mix, and the company’s relative market
position, which is affected by the behavior of its competitors. At the end of
financial year 1995-96, the company had a net profit of $ 14.3 million.

In late 1995, Rayovac’s principal owner and CEO, Thomas Pyle, contacted
Merrill Lynch to discuss the company’s strategic alternatives. As Mr. Pyle
edged closer to retirement, he wished to consider the possibility of
liquidating all or part of his investment in the company. They narrowed their
search to two alternatives – a private sale to financial buyer or a sale to a
competitor, such as Duracell or energizer.

As the Merrill Lynch descriptive memorandum made its way into the hands
of a number of potential suitors, few bids were offered. Despite the fact that
the deal had begun to seem ‘excessively shopped’, Thomas H. Lee (THL)

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decided it was worth careful consideration. THL’s interest was driven by a
number of factors –

a. The overall growth of the battery market had grown at an

average of 5% over the past 5 years and was expected to continue to
grow at or above this rate over the short term.

b. Rayovac had superior positions in hearing aid, rechargeable, and

lithium battery markets over its competitors.

c. Rayovac had invested considerably over the past 3 years to

modernize its production facilities.

d. The existing management team offered strong experience in the

battery market.

e. The company generated strong and steady cash flow.

f.There was potential for significant cost savings.THL also had a number
of concerns. The business had declined during the time the company
was up for sale. In addition, Mr. Pyle had it clear that he planned to step
aside under any deal scenario. As a result the top priority for THL was
finding the right management team to take over in event they were
successful in the bid.

THL recruited Mr. David Jones to manage the company. Prior to the Rayovac
opportunity, Jones was COO, CEO and chairman of Thermoscan Inc., a
manufacturer and marketer of infrared ear thermometers, also controlled by
THL. Jones had over 25 years of work experience, involving positions in
operations, manufacturing and marketing. Merlin Tomlin and Randall
Steward were also invited to leave Thermoscan and join Jones as senior vice
president of sales and senior vice president and CFO, respectively.

On September 12, 1996, THL came to terms with Mr. Pyle on a deal to buy a
majority of Rayovac’s common stock. The transaction valued Rayovac at $
326 million or approximately 7.5x trailing 12 months EBITDA, a sharp
discount to the 15.0x multiple Gillette had paid for Duracell just weeks
earlier. In addition, it represented a deep discount from the $ 500 million
valuation that Rayovac and Merrill Lynch had considered at the start of the
process.

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Simultaneous with the acquisition of the company, THL recapitalized
Rayovac. As a result of recapitalization, THL, together with David Jones,
owned 80.2%; Pyle owned9.9% and existing management 9.9% of Rayovac’s
common stock. The sources and uses of funds in connection with the
recapitalization are given below –

SOURCES

Revolving Credit Facility $ 26.0

Term Loan Facility 105.0
Bridge Notes 100.0
Equity Investment by THL 72.0
Continuing Shareholders’ Equity Investment 18.0
Foreign Debt and Capital Leases 5.5
Total sources $ 326.5
Retirement of Rayovac Common Stock $127.4
Purchase of Newly Issued Common Stock by THL 72.0
Continuing Shareholders’ Equity Investment 18.0
Repayment of Existing Debt 85.2
Fees and Expenses Related to the Recapitalization 18.4
Foreign Debt and Capital Leases 5.5
Total Uses $326.5

After the leveraged buyout, the new management team immediately went to
work implementing the plan to reduce costs and grow revenues formulated
during the diligence period. The plan focused on the following –

a. Reinvigorating the Rayovac brand name through increased

advertizing;

b. Growing market share by expanding Rayovac’s presence in

underrepresented retail channels, such as food stores, drug
stores, and warehouses;

c. Reducing costs by rationalizing manufacturing and distribution,

improving plant utilization, and reducing overheads; and

d. Increasing worker productivity through installation of new

information systems and training.

In total, Jones’s near-term targets were 10% top line growth and 20% EBIT
growth per annum. Jones and his management team worked hard to push
decision making lower into the organization and expected employees to
accept responsibility. This initiative was aided by the introduction of a new

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incentive structure that encouraged communication across divisions, risk
taking, and continuous improvement. Although many Rayovac employees
prospered in the new performance-based environment, the company lost 30
to 40 percent of its corporate staff in the first year after the buyout.

At an early stage, the plan began to show results. The cost reduction plan
resulted in cash cost savings of $ 6.3 million for fiscal 1997 and was
projected to yield $ 8.6 million in savings on an ongoing basis. Rayovac’s
gross margins increased from 43.1% in1996 to 45.8% in 1997, reflecting not
only its cost reduction but also its marketing efforts and greater focus on
high margin products. In terms of market share, Rayovac continued its
domination of the rechargeable and hearing aid battery segments, in
addition to achieving gains in the alkaline battery sales.

Materials and Methods –

The report is based solely on secondary data and information, gathered from
the internet as well as books on the topic. The information gathered about
companies has been taken from their respective official websites or
publications to ensure reliable and valid data or information, as the case
may be.

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Conclusions and Discussions –

Thus we see that the market for corporate control is one where various
management teams compete to gain control of corporate resources, hoping
to put them to more productive uses. Though there are several difficulties
and barriers to the success of a restructuring scheme, the market for the
same is constantly increasing. On an average about eight to ten
restructurings are proposed every working day all over the world. Though
most of them are successful, some fail. Mergers and acquisition remain the
most popular form of restructuring and constitute more than 80 percent of
the total proposed restructurings. The successful restructurings, as
discussed in the case studies, came out to be very advantageous for the
concerned parties. If the proposed restructuring scheme is analyzed keeping
in view the circumstances, the various aspects and the possible outcomes,
then the restructuring is sure to be beneficial for the companies involved,
create value for them and enhance shareholder wealth. Now a days,
companies’ expansion plans comprise essentially and mostly of propositions
of acquisitions and mergers, within the country or cross-border. The most
famous example for this is the TATA group, headed by Ratan Tata. The
company has acquired numerous companies from all over the world under
its expansion scheme over the last few years including 17 in 2005, 8 in
2006, 8 in 2007 (including the euro steel giant Corus), and 5 in 2008 (till
April10th). All these expansions have helped Tata to enhance its
shareholder’s value considerably and have shown magnificent financial
results over the past years. However, in pursuing these acquisitions, the
company has also raised significant amount of leverage. This may a point of
concern for the management. Thus the tool of acquisitions and mergers, if
applied carefully, presents a unique and very attractive way of expansion as
well as other benefits like tax benefits, market domination etc. as discussed
earlier.

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Future Prospects –

This project has a lot of potential for further research works. Further
research can be based solely on any of the forms of corporate restructuring
like mergers, acquisitions, demergers, buyouts, recapitalizations, or internal
restructuring. Researches or studies can also be based on the various
aspects of the restructuring process like taxation, legal, procedural, etc.
Projects based on functions or actions of the SEBI can also take part of this
project as an input. The project can also act as an input for various event
studies related to the various forms of restructurings, supplying information
for them to establish empirically. The project can act as a guide to event
analyses or studies based on corporate restructuring.

Bibliography –

References from-

• www.mcagov.in

• www.sebi.gov.in

• www.icai.org

• www.icsi.edu

• www.google.com

• www.investopedia.com

• www.scribd.com

• www.wikipedia.com

• www.financialtimes.com

• Newspapers and Periodicals

• Mergers and Acquisitions A to Z, by Andrew J. Sherman and Milledge A.

Hart.

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 Appendices –

Appendix 1 – Accounting treatment of mergers, acquisitions or other forms

of restructuring

Earlier, there were two methods of accounting for acquisitions – purchase or

pooling- of-interests – governed by something called APB 16. During the late
1980s and throughout the 1990s, the American accounting profession had
lengthy and spirited discussions on the issue of accounting for business
combinations. As a result of those discussions, the Financial Accounting
Standards Board (FASB) issued FAS 141- Business Combinations, and FAS
142 - Goodwill and Other Intangible Assets. Under FAS 141, all business
combinations are accounted for under rules called "the acquisition method."

Recently the FASB has issued a 236 page exposure draft of a new statement
as part of a joint effort with the International Accounting Standards Board
(IASB) "to improve financial reporting while promoting the international
convergence of accounting standards". The new statement would replace
FAS 141. While proposed statement makes a number of changes, the result
is still that all business combinations are accounted for under the acquisition
method.

Appendix 2 – Corporate Voting and Control

In as much as the common stockholders of a company are its owners, they

are entitled to elect a board of directors. The board in turn selects the
management which actually controls the operations of the company.

Depending upon the corporate character, the board of directors is elected

either under a majority voting system, in which each shareholder casts one
vote per share held for each director position open, or under a cumulative
voting system, under which a shareholder is able to accumulate votes and
cast them for less than the total number of directors being elected. The total
number of votes is the number of shares held times the number of directors
being elected.

Proxies and Proxy Contests –

Voting may be either in person at the stockholder’s annual meeting or by

proxy. A proxy is a form a stockholder signs giving his or her right to vote to
another person or persons. The Securities and Exchange Commission (SEC)
regulates the solicitation of proxies and also requires companies to

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disseminate information to its stockholders through proxy mailings. Because
of the fact that management is able to mail information to stockholders at
the company’s expense and the proxy system, the management has a
distinct advantage in the voting process. But outsiders can also seize control
of a company through a

Proxy contest.

When an outsider undertakes a proxy raid, it is required to register its proxy

statement with the SEC to prevent the presentation of misleading or false
information. In a proxy contest, the odds favor the management to win as it
has both the organization and the use of company’s resources to carry on
the proxy fight.

Appendix 3 – Distress Restructuring

Companies experiencing financial difficulty are often restructured. While

some of the corporate restructuring devices illustrated in this project may be
applicable, this usually is not the case. Instead different strategies are in
order for management, for equity holders, and for creditors. As what can be
done is rooted in bankruptcy law, there are some remedies available to a
failing company. These vary in harshness according to the degree of
financial difficulty.

These remedies include –

Voluntary settlements and workouts where the company negotiates

with its lenders or creditors for an extension of maturity period or pro rata
settlement in cash and/or promissory notes, informally, out of the courts. ,
though lawyers may be involved.

Voluntary liquidation represents an orderly private liquidation of a

company apart from the bankruptcy courts. It is likely to be more efficient
and the creditors also receive a higher settlement as many of the costs of
bankruptcy are avoided.

Liquidation -If there is no hope for the successful operation of the

company, liquidation under the bankruptcy law is the only feasible
alternative. Upon petition of bankruptcy, the debtor obtains temporary relief
from creditors until a decision is reached by the bankruptcy court. The court
appoints an interim trustee to take over the operation of the company, with
the responsibility of liquidating the property of the company and distributing
liquidating dividends to creditors.

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Reorganization -Conceptually, a firm should be reorganized if it’s
reorganized worth as an operating entity is greater than its liquidating value.
Reorganization is an effort to keep a company alive by changing its capital
structure. As long as the corporation has some option value, they may
benefit in the future, whereas with liquidation they usually receive nothing.
The fact that a high proportion of companies that reorganize later must be
liquidated, calls into question the tendency to preserve companies.

Prepackaged bankruptcy -Sometimes, management will arrange a

prepackaged bankruptcy, which falls somewhere between a workout and a
formal, extended bankruptcy. At the time of filing a bankruptcy petition, the
distressed company also files a reorganization plan. Management has
previously struck an agreement with most creditors as to the terms of the
plan. The advantage of prepackaged bankruptcy is that it reduces the time
in reorganization and the costs. Also, as opposed to an informal workout,
permits more flexible use of net operating loss carry-forwards for tax
purposes. This is a cash flow advantage to the firm.

‐‐‐‐ End of Report ‐‐‐‐

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