Mergers andAcquisitions

Mergers and acquisitions (M&A) is a general term that refers to the consolidation
of companies or assets. M&A can include a number of different transactions, such
as mergers, acquisitions, consolidations, tender offers, purchase of assets and
management acquisitions. In all cases, two companies are involved. The term
M&A also refers to the department at financial institutions that deals with mergers
and acquisitions
Mergers and acquisitions are used as instruments of momentous growth and are
increasingly getting accepted by Indian businesses as a critical tool of business
strategy. They are widely used in a wide array of fields such as information
technology, telecommunications, and business process outsourcing as well as in
traditional business to gain strength, expand the customer base, cut competition or
enter into a new market or product segment. Mergers and acquisitions may be
undertaken to access the market through an established brand, to get a market
share, to eliminate competition, to reduce tax liabilities or to acquire competence
or to set off accumulated losses of one entity against the profits of other entity.

Mergers and acquisitions are among the most effective ways to expedite the
implementation of a plan to grow rapidly. Companies in all industries have grown
at lightning speed, in part because of an aggressive merger and acquisition
strategy. The impact of technology and the Internet has only further increased the
pace and size of deals. Buyers of all shapes and sizes have many of the same
strategic objectives to build long-term shareholder value and take advantage of the
synergies that the combined firms will create but each industry has its own specific
objectives.
The researcher will also try and look into the single window for Acquisition, as the
law should provide for a single forum which would approve the scheme of mergers
and acquisition in an effective time bound manner. The law should also provide for
mandatory intimation to regulators in respect of a specified class of companies.
The concept of ‘deemed approval’ should be provided for in cases where the
regulators do not intimate/inform their comments within a specified time period to
the Court/Tribunal before which the scheme of merger/amalgamation is submitted
for approval. This need has arisen because of deals being caught in a cross-
regulatory web, Therefore we need to have single window clearance.
Aviation sector is one of the least researched sectors in India as it has limited
number of players. However, as the sector is growing rapidly, it becomes essential
to have knowledge about the sector and the activities which are taking place in the
sector. The dynamic growth and potential in the Indian aviation sector can be
gauged from the statement of the civil aviation minister of India, Mr. Praful Patel -
“India’s civil aviation industry will attract investments worth more than US$150
billion in the next 10 years.” The aviation market and scenario in India has seen
major developments in the last 5 years. Not merely has the market grown very
rapidly, but the industry has seen, M&A, the entry of a number of new carriers
with aggressive pricing policies and significant additions of capacity leading to
cut-throat competition.
Distinction between mergers and acquisitions

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 establishes 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 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".
The firms are often of about the same size. Both companies' stocks are surrendered
and new company stock is issued in its place. For example, in the 1999 merger of
Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they
merged, and a new company, GlaxoSmithKline, 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 is
technically an acquisition. Being bought out often carries negative connotations,
therefore, by describing the deal euphemistically as a merger, deal makers and top
managers try to make the takeover more palatable. An example of this would be
the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to in
the time.

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 are restricted due to confidentiality agreements
(Harwood, 2005).

A Brief Overview

A merger is a combination of two or more businesses into one business. Laws in

India use the term 'amalgamation' for merger. Under section 2(1B) of the Income
Tax Act, 1961 amalgamation is defined as mixing up or uniting together. It is a
process where one company blends with another company (both being existing
companies and carrying on business). Provided that following conditions are met
with:-

1. All properties are transferred to the amalgamated company.

2. All liabilities are transferred to the amalgamated company.
3. Shareholders holding at least 3/4th in the value of shares of the amalgamating
company become shareholders of the amalgamated company.
Various Act Involved in Merger and Acquisitions in India

a) Companies Act, 1956.

b) Companies Court Rules, 1959.
c) Income Tax Act, 1961.
d) Central Sale Tax Act, 1956.
e) Indian Stamp Act, 1899
f) Competition Act, 2002 (It has been enacted but is not yet fully
enforced)

2. M&A transactions involving listed companies

a) The Securities and Exchange Board of India (SEBI) Regulations

· The SEBI (Substantial Acquisition of Shares and Takeovers)

Regulations, 1997

· The SEBI (Issue of Capital and Disclosure Requirements) Regulations,

2009

b) Listing Agreements

3. International M&A Transactions

a) Foreign Exchange Management Act, 1999

Airline M&A are on the rise across the globe. These M&A are highly strategic
involving several considerations. Airline M&A bear serious implications for
travelers as well as airline employees.

The airlines industry is abuzz with news of M&A. In the last few years airline
M&A have been a growing trend in several countries across the globe. However,
M&A in the aviation industry are highly strategic in nature and are undertaken
after taking into consideration several important factors.
Types of Mergers
 1. Horizontal Mergers
2. Vertical Mergers
3. Conglomerate Mergers

Horizontal Mergers
A Horizontal Mergers occurs when one firm combines with the other in the same
line of business. This kind of merger takes place between entities engaged in
competing businesses which are at the same stage of the industrial process .

Vertical mergers
Vertical mergers refer to the combination of two entities at different stages of the
industrial or production process. For example, the merger of a company engaged in
the construction business with a company engaged in production of brick or steel
would lead to vertical integration.

Conglomerate Mergers

a conglomerate merger occurs when unrelated enterprises combine. The principal

reason for a conglomerate merger is utilization of financial resources, enlargement
of debt capacity, and increase in the value of outstanding shares by increased
leverage and earnings per share, and by lowering the average cost of capital.

An acquisition or takeover is the purchase by one company of controlling interest

in the share capital, or all or substantially all of the assets and/or liabilities, of
another company. A takeover may be friendly or hostile.

Before going into the issues pertaining to M&A of airlines, we will first have a
look at the current policy framework for M&A in India. Regulations governing
M&A in India may be divided in to the following categories:

 Some of the important factors considered by airlines in taking merger

and acquisition decisions are :-
The coverage area of the other airline. Strategically an airline would like to merge
with or acquire an airline that operates in routes different from its own. This helps
in expanding service coverage and avoiding overlapping of flight schedules.
· The quality of service and brand image of the other airline.

· If the other airline has any partnership with a rival group of airlines.

From the point of view of customers M&A may lead to increased airfares. This is
because M&A reduce the number of operators thereby reducing competition and
pushing up prices in the aviation industry. Airline M&A also have important
impacts on the employees of the participating airlines.

 Some of the major concerns that airline employees face in case of

M&Aare:-

· Layoffs – M&A in most cases are accompanied by layoffs.

· New job rules.

· Salary concerns - The new acquiring airline or the new group arising out of a
merger may not pay the old salaries.

· Pensions and other benefits.

· Seniority - A senior employee of an airline that is acquired may find himself to be

not considered senior by the new employer.

· Time - Airline M&A take much longer time to materialize than in other
industries. This is due to the fact that a lot of considerations are involved from
costs to operational issues which are generally large in magnitude and complex in
nature.

· Approvals - Approvals are required from governments, often from different

levels and different authorities to establish airline M&A.

· Efficiency- Airline M&A can lead to cost efficiency of the operators by the
elimination of overlapping routes. For the travelers however, this often leads to
lesser frequency of flights.

· Competition – M&A in the airline industry help to reduce competition

significantly. This helps airlines to achieve higher operating margins. On the other
hand, passengers may face higher airfares.
· Passenger Benefits -Passengers, who are enlisted for frequent-travel schemes will
have higher mileage pints.

· Strife - Airline M&A are often accompanied by strife related to seniority issues,
new work rules, etc.

 MAJOR MERGERS IN INDIAN AVIATION SECTOR

i. Air India and Indian Airline

ii. Jet Airways and Sahara Airlines
iii. Kingfisher Airlines-Air Deccan

Air India-Indian Airline Merger:-

The merger between Air India and Indian Airlines made perfect sense on paper for
over a decade. Their complementary networks, common ownership and need to
generate greater efficiencies all pointed to the benefits of a merged entity. As it
was, the merger coincided with a flurry of increased domestic and international
competition, placing great pressure on management.

Successful implementation required robust guidance and a capable execution team

to handle such a complex undertaking. Instead, the process moved ahead without
first strengthening the management and organisation structure. More attention was
devoted to discussion around non-core issues such as long term fleet acquisitions
and establishing subsidiaries for ground handling and maintenance, than to
addressing the state of the flying business.

Air India has continued to see its domestic market share decline. The situation was
compounded by the cultural chasm between Air India and Indian Airlines, leading
to an increase in internal politics, a potentially messy situation in an entity with
35,000 employees. A bloated workforce, unproductive work practices and political
impediments to shedding staff made the creation of a viable business model
extremely challenging.
The situation calls for a depth of leadership across the organisation which still does
not exist. There appears to be no clear business plan to revive the carrier and
effecting a turnaround now appears to be a herculean task.

Jet Airways and Sahara Airlines

The two carriers share the same history; both began their operations as air taxi
operators and later became full service carriers. Jet and Sahara both used to
compete on international routes prior to merger.

Jet Airways, which commenced operations on May 5, 1993, has within a short
span of 14 years established its position as a market leader. The airline has had the
distinction of being repeatedly adjudged India's 'Best Domestic Airline' and has
won several national and international awards.
Jet Airways and the Shareholders of Sahara Airlines Limited had concluded a
Share Purchase Agreement on January 18, 2006 whereby Jet Airways was to
acquire the 100% shares of Sahara Airlines Limited for a Total Consideration of
Rs. 2,000 crores. The original 65 day Term of the Agreement expired in March
2006. This was mutually extended to 21st June 2006, at which time Jet Airways
also paid an advance of Rs. 500 Crores.

At the expiry of the extended period, disputes arose between the parties as to
whether or not the agreement had terminated (for non-fulfillment of some
conditions). These disputes were referred for hearing to an Arbitral Tribunal.
However, before the commencement of Arbitral Proceedings, the two parties
successfully resolved their disputes and were able to draw up a Settlement
Agreement and the Arbitral Proceedings were disposed off in terms of the same
agreement.

On 20th April, 2007, Jet acquired 100% stake in Air Sahara 15 months after
signing the original purchase agreement. Jet purchased its arch rival for 1,450
crores which was 35 % less than the price agreed in 2006. Jet rebranded Sahara as
“Jetlite” and announced that the new entity would offer reduced frills but would be
over and above low cost carrier (LCC) in terms of service. The private sector Jet-
Sahara combine ended the dominating role of the public sector with the new
corporate commanding as much as 32% of the domestic market space.
Benefits

Jet Airways firmly believed that the acquisition of Sahara Airlines Limited would
enable it to
derive significant commercial and economic benefits keeping in view the then state
of the domestic aviation industry.

Kingfisher Airlines-Air Deccan

In 2007, Kingfisher Airlines acquired a 26% equity stake in Air Deccan and
became the largest single shareholder in Deccan Aviation Ltd. It was agreed that
Kingfisher would continue to serve the corporate and business travel while Air
Deccan would focus on serving the low fare segment but with improved financial
prospects for both carriers.

Kingfisher later increased its stake to 46%, and took control of the management of
Air Deccan, upgrading it to a value-based airline with higher airfare and
repositioned it as 'Simplifly Deccan'.

Air Deccan airlines merged with Kingfisher Airlines and decided to operate as a
single entity from April, 2008. Following the merger of Deccan with Kingfisher, in
August 2008, Kingfisher renamed Deccan as Kingfisher Red. After the merger, the
company has a combined fleet of 71 aircrafts, connects 70 destinations and
operates 550 flights in a day. The combined entity has a market share of 33%.

Benefits

The key benefits to Kingfisher Airlines and Air Deccan on account of this were as
under:

· Legally, if an airline wants to operate overseas it must have a domestic status of

having operated for 5 yrs. and therefore in case of kingfisher operating overseas
became easier.
· Besides, operational synergies (engineering, inventory management and ground
handling services, maintenance and overhaul), the management and staff of both
the airlines would be integrated. They would be stronger vis-a-vis lessors, aircraft
manufacturers, and will also spend less on training and employees. Costs would
also reduce which is associated with maintenance of aircraft. The savings in cost
would be lower by about 4-5% (Rs 300 crores).

· The merger would create a more competitive business in scale and there would be
scope to emerge as market leader.
 Need of a Single window
With many merger and acquisition (M&A) deals getting caught in a cross-
regulatory web, there is a call for single-window clearance. Delay in such
approvals is said to have hit several such deals in the recent past. When it involves
listed companies, this would hit the interest of minority shareholders. Sources say
the Securities and Exchange Board of India (Sebi) is among those suggesting an
umbrella body for (M&A) clearance. The aim is to smoothen the process, making
it time-bound. The law should provide for a single forum which would approve the
scheme of mergers and acquisition in an effective time bound manner. The law
should also provide for mandatory intimation to regulators in respect of specified
class of companies. The concept of ‘deemed approval’ should be provided for in
cases where the regulators do not intimate/inform their comments within a
specified time period to the Court/Tribunal before which the scheme of
merger/amalgamation is submitted for approval. The second half of 2016
witnessed an iconic change in relation to corporate re-structuring in India. The
National Company Law Tribunal (“NCLT”) and National Company Law
Appellate Tribunal (“NCLAT”) have been constituted under the new 2013 Act to
provide for a single-window clearance mechanism for corporate restructuring
activities. In relation to this, with effect from 15th December 2016, the MCA
transferred all the proceedings relating to the compromise arrangements and
reconstruction of companies under the 1956 Act, pending with the State High
Courts of the country, to the jurisdictional NCLTs. The NCLT/NCLAT has now
taken over the powers of the State High Courts for corporate restructuring.
Conclusion
The Indian Airlines-Air India merger, the Kingfisher-Deccan merger and the
acquisition of Air Sahara by Jet airways has set the ball rolling for further M&A
activities in this sector. LCCs such as IndiGo and SpiceJet have significant capital
requirements and will need further flows of funding. The next round of
consolidation is therefore most likely to occur in the LCC sector, especially as the
full service carriers do not have the balance sheets to engage in further
acquisitions.
The aviation industry in India is growing at 20 per cent per annum, making it one
of thelargest in the world. Six major Indian carriers with around 400 aircraft
catered to 143 million passengers, including 38 million international, in 2010-11.
Out of the 38 million international passengers, Indian carriers flew 35 per cent of
them in 2010-11. Attempts by full-service carriers to run two different kinds of
services (both full service and low cost) within the same airline also created serious
problems, as there is a lot of difference in the costs, the turnaround time of aircraft,
the training modules and the distribution models. But this consolidation, aimed at
creating a more viable business model, took place against the background of an
industry that was beginning to exhibit the first signs of distress. With many
merger and acquisition (M&A) deals getting caught in a cross-regulatory web,
there is a call for single-window clearance. Delay in such approvals is said to have
hit several such deals in the recent past. When it involves listed companies, this
would hit the interest of minority shareholders. Sources say the Securities and
Exchange Board of India (Sebi) is among those suggesting an umbrella body for
(M&A) clearance. The aim is to smoothen the process, making it time-bound. The
law should provide for a single forum which would approve the scheme of mergers
and acquisition in an effective time bound manner. The law should also provide for
mandatory intimation to regulators in respect of specified class of companies. The
concept of ‘deemed approval’ should be provided for in cases where the regulators
do not intimate/inform their comments within a specified time period to the
Court/Tribunal before which the scheme of merger/amalgamation is submitted for
approval.