CHAPTER -1

CORPORATE RESTRUCTURING:

HISTORICAL BACKGROUND

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1. INTRODUCTION:

Corporate restructuring is a corporate action taken to significantly modify the

structure or the operations of a company. It can be driven by external factors requiring
change in the organizational structure or business model of a company, or it can be driven
by the necessity to make financial adjustments to its assets and liabilities. There are many
tools and strategies for carrying out Corporate Restructuring such as amalgamations,
mergers, demergers, reverse mergers, takeovers, acquisitions, joint ventures,
disinvestments, buy-back of shares, etc.

The speed of business dynamics demands the business organizations not only to
revamp their internal business strategies like effective market expansion, increased
customer base, product diversification and innovation etc., but also expects the corporate
to devise inorganic business strategies that results in faster pace of growth, effective
utilization of resources, fulfillment of increasing expectations of stakeholders. These
restructuring strategies may work positively for the businesses both during the business
prosperity and troubled times.

Corporate Restructuring is an expression that connotes a restructuring process

undertaken by business enterprise. It is the process of redesigning one or more aspects of
a company. Hence, Corporate Restructuring is a comprehensive process by which a
company can consolidate its business operations and strengthen its position for achieving
its short-term and long-term corporate objectives. A business may grow over time as the
utility of its products and services is recognized, but it is a long drawn process. It may
also grow through an inorganic process, symbolized by an instantaneous expansion in
work force, customers, infrastructure resources and thereby an overall increase in the
revenues and profits of the entity.

Restructuring as per Oxford dictionary means reorganization of a company with a

view to achieve greater efficiency and profit, or to adapt to a changing market. According
to Peter F Ducker, the management guru, the greatest change in corporate culture and the

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 way business is being conducted, is the strategic intervention and relationship based not
on ownership, but on partnership.1

During the past decade, corporate restructuring has increasingly become a staple
of business and a common phenomenon around the world. Unprecedented number of
companies across the world have reorganized their divisions, restructured their assets and
streamlined their operations in a bid to spur the company performance. The suppliers,
customers and competitors also have an equally profound impact while working with a
restructured company.

Corporate restructuring is the process of significantly changing a company's

business model, Management team or financial structure to address challenges and
increase shareholder value. Corporate restructuring is an inorganic growth
strategy.

1.1 HISTORICAL BACKGROUND

The development of mergers & acquisitions (M&A) is not an invention of recent

times. The first appearance of M&A in a high frequency evolved at the end of the 19th

WAVES PERIOD FACET

FIRST WAVE 1897-1904 Horizontal Megers
SECOND WAVE 1916-1929 Vertical Mergers
THIRD WAVE 1965-1969 Diversified Conglomerate Mergers
FOURTH WAVE 1984-1989 Co-generic ,Mergers, Hostile Take Over, Corporate
raiders
FIFTH WAVE 1992-2000 Cross Boarder, Mega Mergers
SIXTH WAVE 2003-2008 Globalization, Private Equity, Shareholder activism.
(Source: York University)

1
Bhattacharya, H.K: “Amalgamation and Takeovers”, Company News and Notes, 1988,

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 Century. Since then, cyclic waves are observed with different waves emerging
due to radical different strategic motivations. The following table draws out the timeline
of M&A development and clarifies strategic motivations underlying each wave.
The activity in mergers and acquisitions in the past century shows a clustering
pattern. The clustering pattern is characterized as a wave and they occur in burst
interspersed with relative inactivity. When we discuss these merger waves, economics
usually refer to 6 specific waves starting from 1890. The length and start of each wave is
not specific, but the end of each wave usually falls with a major war or the beginning of a
recession/crisis. Furthermore, the first and second wave was only relevant for the US
market, while the other waves had more geographical dispersion. Especially in wave five,
where besides US, UK and continental Europe, Asia also had a significantly increased
M&A market. A general conclusive theory about the M&A waves is not available yet,
although there seems to be industry-specific factors that trigger the waves because
different industries experience increased M&A activity at different times. The following
table shows the summary of the Mergers and Acquisitions waves.

The concept of merger and acquisition in India was not popular until the year
1988. During that period a very small percentage of businesses in the country used to
come together, mostly into a friendly acquisition with a negotiated deal. The key factor
contributing to fewer companies involved in the merger was the regulatory and
prohibitory provisions of MRTP Act, 1969. According to this Act, a company or a firm
has to follow a burdensome procedure to get approval for merger and acquisitions.

The year 1988 witnessed one of the oldest business acquisitions or company
mergers attempt in India. It is the well-known ineffective unfriendly takeover bid by
Swaraj Paul to overpower DCM Ltd. and Escorts Ltd. Further to that many other non-
resident Indians had put in their efforts to take control over various companies through
their stock exchange portfolio.

Before 1991 Indian economy was closed economy. Various licenses and
registration under various enactments were required to set-up an industry. Due to
restrictive government policies and rigid regulatory framework there existed very limited

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scope for restructuring. However, after 1991, the main thrust of Industrial Policy, 1991
was on relaxations in industrial licensing, foreign investments, and transfer of foreign
technology, etc. With the economic liberalization, globalization and opening-up of
economies, the Indian corporate sector started restructuring businesses to meet the
opportunities and challenges.

In the era of hyper competitive capitalism and technological change, industrialists

realized that restructuring perhaps is the best route to reach a size comparable to global
companies so as to effectively compete. Business combinations which may take forms of
merger, acquisitions, amalgamation and takeovers are important features of corporate
structural changes. They have played an important role in the financial and economic
growth of a firm.

1.2 CORPORATE RESTRUCTURING

Corporate restructuring refers to the changes in ownership, business mix, asset

mix & alliance with a view to enhance the shareholders‘ value. Hence, corporate
restructuring may involve ownership restructuring, business restructuring, asset
restructuring for the purpose of making it more efficient and more profitable. A
company can affect ownership restructuring through mergers & acquisitions, leveraged
buy outs, buy back of shares, spin-offs, joint venture & strategic alliance. Business
restructuring involves the reorganization of business units or divisions. It includes
diversification into new businesses, out sourcing, divestment, brand acquisitions etc.
Asset restructuring involves the acquisition or sale of asset & their ownership
structure.

E.g. Sale & lease back of assets, securitization of debts, receivable factoring, etc.

Purpose of Corporate Restructuring

The basic purpose is to enhance the shareholder value.

 The company should continuously evaluate its portfolio of businesses, capital mix
& ownership & assets arrangements to find opportunities to increase the share
holders‘ value.

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  It should focus on asset utilization & profitable investment opportunities, &
reorganize or divest less profitable or loss making businesses/products.
 The company can also enhance value through capital restructuring; it can innovate
securities that help to reduce cost of capital.

Significance

 Limit competition
 Utilize under-utilized market power
 Overcome the problem of slow growth and profitability in one‘s own industry
 Achieve diversification
 Gain economies of scale and increase income with proportionately less
investment
 Establish a transnational bridgehead without excessive start-up costs to gain
access to a foreign market
 Utilize under-utilized resources- human and physical and managerial skills
 Displace existing management
 Circumvent government regulations

1.3 FORMS OF RESTRUCTURING

There are various dimensions involved in restructuring which can be classified under
various heads. They are as follows:

Financial Restructuring

Financial restructuring deals with restructuring of capital base and raising

finance for new projects. Financial restructuring helps a firm to revive from the
situation of financial distress without going into liquidation.2

2
Foster G: “Financial Statement Analysis”, Prentice Hall of India, 1986

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Financial restructuring is done for various business reasons:

 Poor financial performance

 External competition
 Erosion or loss of market share
 Emerging market opportunities
It involves Equity Restructuring like buy-back, Alteration/Reduction of capital and
Debt Restructuring like restructuring of the secured long-term borrowing, long-term
unsecured borrowings, Short term borrowing which are explained in detail in further
later.

Market And Technological Restructuring

Market Restructuring involves decisions with respect to the product market

segments where the company plans to operate on its core competencies and
technological restructuring occurs when a new technology is developed that changes
the way an industry operates. This type of restructuring usually affects employees, and
tends to lead to new training initiatives, along with some layoffs as the company
improves efficiency. This type of restructuring also involves alliances with third
parties that have technical knowledge or resources.

Disney's global technology group, parks-and-resorts division is undergoing a

reorganization which results in some employees losing their jobs. It is eliminating
some positions and replacing them with others that help the company reach more long-
term technology goals.

Joint Venture, Strategic Alliances, Franchising are some of the examples of market
and technological restructuring which are explained in detail subsequently

Organizational Restructuring

Organizational Restructuring involves establishing internal structures and

procedures for improving the capability of the personnel in the organization to respond
to changes. These changes need to have the cooperation of all levels of employees.
Some companies shift organizational structure to expand and create new departments

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to serve growing markets. Other companies reorganize corporate structure to downsize
or eliminate departments to conserve overheads.

Other Forms Of Restructuring

Expansion: Merges, Diversification, Tender Offers & Joint Ventures.

i) MERGERS & ACQUISITIONS

Mergers are like a marriage in a emetic tradition. Usually there is a period of
courtship leading to the joining of two or more separate entities into one. Merger is a
combination of two or more companies into one company. One or more companies may
merge with an existing company or they may merge to form a new company. Laws in
India use the term amalgamation for merger. For example, Section 2(1A) of the Income
Tax Act, 1961 defines amalgamation as the merger of one or more companies with
another company or the merger of two or more companies (called amalgamating
company or companies) to form a new company (called amalgamated company) in such a
way that all assets and liabilities of the amalgamated company and shareholders holding
not less than nine-tenths in value of the shares in the amalgamating company or
companies become shareholders of the amalgamated company.

1.4 MERGER OR AMALGAMATION MAY TAKE TWO FORMS:

 Merger through absorption

 Merger through consolidation3

3
J. D. Agarwal: “Contemporary Issues in Corporate Restructuring in India in the
New Millennium”, Finance India, Vol. XIV No.1, March 2000, pp. 115-124.

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(Source: www.dreamstime.com)

Absorption:

In absorption, one company acquires another company. All companies except

one lose their identity in merger through absorption. The merger of Tata Oil Mills
Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL) is an example of absorption

Consolidation:

In a consolidation, two or more companies combine to form a new company. In

this form of merger, all companies are legally dissolved and a new entity is created. In
consolidation, the acquired company transfers its asset, liabilities and shares to the
acquiring company for cash or exchange of shares. . An example of consolidation is
the merger of Hindustan Computers Ltd., Hindustan Instruments Ltd., and Indian
Reprographics Ltd., to an entirely new company called HCL Ltd.

Acquisition:

A fundamental characteristic of merger (either through absorption or

consolidation) is that the acquiring company (existing or new) takes over the
ownership of other companies and combines their operations with its own operations.

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In an acquisition two or more companies may remain independent, separate legal
entity, but there may be change in control of companies. Hindustan lever limited
buying brands of Lakme is an example of asset acquisition.

Takeover:

A takeover may also define as obtaining of control over management of a

company by another. Under the Monopolies and Restrictive Trade Practices Act,
takeover means acquisition of not less than 25% of the voting power in a company. If
a company wants to invest in more than 10% of the subscribe capital of another
company, it has to be approved in the shareholders general meeting and also by the
central government. The investment in shares of other companies in excess of 10% of
the subscribed capital can result into their takeover.

Demerger:

It has been defined as a split or division. As the same suggests, it denotes a

situation opposite to that of merger. Demerger or spin-off, as called in US involves
splitting up of conglomerate (multi-division) of company into separate companies.

This occurs in cases where dissimilar business are carried on within the same
company, thus becoming unwieldy and cyclical almost resulting in a loss situation.
Corporate restructuring in such situation in the form of demerger becomes inevitable.
A part from core competencies being main reason for demerging companies
according to their nature of business, in some cases, restructuring in the form of
demerger was undertaken for splitting up the family owned large business empires
into smaller companies. The historical demerger of DCM group where it split into
four companies (DCM Ltd., DCM shriram industries Ltd., Shriram Industrial
Enterprise Ltd. and DCM shriram consolidated Ltd.) is one example of family units
splitting through demergers.

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 Reverse Merger:

Normally, a small company merges with large company or a sick company with
healthy company. However in some cases, reverse merger is done. When a healthy
company merges with a sick or a small company is called reverse merger. This may
be for various reasons. Some reasons for reverse merger are:

a) The transferee company is a sick company and has carry forward losses and
Transferor Company is profit making company. If Transferor Company merges with
the sick transferee company, it gets advantage of setting off carry forward losses
without any conditions. If sick company merges with healthy company, many
restrictions are applicable for allowing set off.

b) The transferee company may be listed company. In such case, if Transferor

Company merges with the listed company, it gets advantages of listed company,
without following strict norms of listing of stock exchanges.
For example Godrej soaps Ltd. (GSL) with pre merger turnover of 436.77 crores
entered into scheme of reverse merger with loss making Gujarat Godrej innovative
Chemicals Ltd. (GGICL) (with pre merger turnover of Rs. 60 crores) in 1994.

1.5 TYPES OF MERGER

There are four major types of mergers they can be explaining as follows:

1 Horizontal Merger:4

This is a combination of two or more firms in similar type of production, distribution or

area of business.

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Mergers, Acquisitions And Corporate Restructuring 14 MBA FM407

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2 Vertical Mergers:

This is a combination of two or more firms involved in different stages of

production or distribution. Vertical merger may take the form of forward or backward
merger.

a) Backward merger: When a company combines with the supplier of material, it is

called backward merger.

b) Forward merger: When it combines with the customer, it is known as forward

merger.

3. Conglomerate Merger:

This is a combination of firms engaged in unrelated lines of business activity.

Example is merging of different business like manufacturing of cement products,
fertilizers products, electronic products, insurance investment and advertising agencies.

4. Concentric Merger

Concentric merger are based on specific management functions where as the

conglomerate mergers are based on general management functions. If the activities of the
segments brought together are so related that there is carry over on specific management
functions such as marketing research, Marketing, financing, manufacturing and
personnel.

Advantages of Merger and Acquisitions

1 Maintaining or accelerating a company‘s growth.

2 Enhancing profitability, through cost reduction resulting from economies of scale.
3 Diversifying the risk of company, particularly when it acquires those businesses
whose income streams are not correlated.
4 Reducing tax liability because of the provision of setting-off accumulated losses
and unabsorbed depreciation of one company against the profits of another.

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 5 Limiting the severity of competition by increasing the company‘s market power.5
Acquisition:

Acquisition occurs when one entity takes ownership of another entity's stock, equity
interests or assets. It is the purchase by one company of controlling interest in the share
capital of another existing company. Even after the takeover, although there is a change
in the management of both the firms, companies retain their separate legal identity. The
companies remain independent and separate; there is only a change in control of the
companies. When an acquisition is ‗forced‘ or ‗unwilling‘, it is called a takeover.

Recent examples:

o Snapdeal and Freecharge ($400 million)

o Flipkart and Myntra ($300 to 330 million)
o Ola and Taxi For Sure ($200 million)
Difference between a Merger and an Acquisition:6

MERGER ACQUISITION
A merger occurs when two separate An acquisition refers to the purchase of one
entities, usually of comparable size, entity by another (usually, a smaller firm by a
combine forces to create a new, joint larger one)
organization in which both are equal
partners
Old company cease to exist and a new A new company does not emerge
company emerges
It requires two companies to consolidate It occurs when one company takes over all of the
into a new entity with a new ownership operational management decisions of another
and management structure
It the takeover is friendly, it is called If the takeover is hostile, it is called as an
merger acquisition

5
Chakravarthi Anand: “Corporate Restructuring the Ultimate Step to Survival”, ICFAI Reader, March
2006, pp.24– 30.
6
Vamsi Krishna: “Mergers and Acquisitions Corporate Consolidation”, The Chartered Accountant, May
1999, pp. 20-24.

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Tender Offer

Tender offer involves making a public offer for acquiring the shares of the target
company with a view to acquire management control in that company.

Ex: Flextronics International gave an open market offer at Rs. 548 for 20% paid-up
capital in Hughes Software systems.

Hostile Takeover and Tender Offer

Takeover refers to a change in the controlling interest of a company. Takeover can be

friendly or unfriendly.

In a friendly takeover the target company‘s management is receptive to the idea

and recommends approval by shareholders. The acquiring company has to offer a
premium to the current market price of the share to gain control. If the shareholders
approve, the transaction is finalized through purchase of the target company‘s shares for
cash, exchange of shares, debt or some combination of all three.

In an unfriendly or hostile takeover the target company‘s management does not

support the solicitation from a potential acquirer because of the inadequacy of purchase
price.

A Tender Offer is a formal offer to purchase a given number of a company‘s

shares at a specified price. The acquiring company asks the shareholders of the target
company to ‗tender‘ their shares in exchange for a specific price. The price is generally
quoted at a premium in order to induce the shareholders to tender their shares.

Tender offer can be used in 2 situations. First, the acquiring company may
directly approach the target company for its takeover. If the target company does not
agree, then the acquiring company may directly approach the shareholders by means of a
tender offer

. Second, the tender offer may be used without any negotiations, and it may be
equivalent to a hostile takeover. The shareholders are generally approached through
announcement in the financial press or through direct communication individually. They

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may or may not react to a tender offer. Their reaction exclusively depends upon their
attitude and sentiment and the difference between the market price and offer price. The
tender offer may or may not be acceptable to the management of the target company.

Asset acquisition

Asset acquisition involves buying the assets of another company. These assets may be
tangible assets like a manufacturing unit or intangible assets like brands. The acquirer
purchases only those parts which benefits or satisfies firm‘s needs.

 The acquisition of the cement division of TATA Steel by Laffarage of France.

Laffarage acquired only the 1.7 million tons cement plant and its related assets
from TATA Steel.Coca-Cola paid Rs.170 Crores to Parle to acquire its soft drinks
like Thums-Up, Limca and Gold Spot.

Joint Venture

 A joint venture is a business enterprise under-taken by two or more persons or

organizations to share the expense and profit of a particular business project.
Eg. Maruthi Suzuki, ING Vishya, Bajaj Allianz, Standard & Charted Bank.

 A Joint venture is a legal entity formed between two or more parties to under-take
economic activity together. The parties agree to create a new entity by both
contributing equity, and they then share in the revenues, expenses, and control of
the enterprise.
 The venture can be for one specific project only, or a continuing business
relationship such as the Sony Ericsson joint venture. This is in contrast to a
strategic alliance, which involves no equity stake by the participants, and is a
much less rigid arrangement.

Rational behind JV:

1. Pooling of complimentary resources

2. Access to raw-materials

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 3. Access to new markets
4. Diversification of risks
5. Economies of scale
6. Tax shelter
7. Cost reduction
8. Purchaser- supplier relationships
9. Joint manufacturing

Types of Joint Ventures

1. Equity based joint ventures benefit foreign and/or local private interests, groups
of interests, or members of the general public.
2. Under non-equity joint ventures (also known as cooperative agreements),
meanwhile, the parties seek technical service arrangements, franchise and brand
use agreements, management contracts, rental agreements, or one-time contracts,
e.g. for construction projects. Participants do not always furnish capital as part of
their joint venture commitments. They want to modernize operations or start new
production operations.
E.g. BIAL- Bangalore International Airport Ltd. is a joint venture between
Central Govt., State Govt. & Switzerland Airport Authority.

Strategic alliance:7


Is a flexible arrangement between firms whereby they agree to work together to
achieve a specific goal. Such arrangements are looser in nature than the JV and
can be disbanded easily.

A partnership with another business in which you combine efforts in a business
effort involving anything from getting a better price for goods by buying in
bulk together, to seeking business together, with each of you providing part of
the product. The basic idea behind alliances is to minimize risk while
maximizing the leverage.

7
Harish and Srividya “Rationale and Valuation Techniques for Mergers and Acquisitions” The
Chartered Accountant” May, 2004.

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 
Normally, a strategic alliance does not result in the creation of new entity
unlike a JV. The major advantage of a strategic alliance is that it can be created
easily as and when there is a need.

Types of Strategic Alliances:

Franchising: An agreement whereby someone with a good idea for

business (the franchiser) sells the rights to use the business‘s name and sell
a product/service to someone else (the franchisee).

1.
Licensing: A form of strategic alliance which involves the sale of a right to
use certain proprietary knowledge, i.e., intellectual property.
2.
Management Contracts
3.
Turnkey Projects
4.
Partnering with suppliers
5.
Pooled purchasing
6.
Partnering with distributors

Holding companies

Holding company controls the subsidiary company by acquiring substantial voting

powers by acquiring equity shares carrying voting rights. When it hold 100% shares of
subsidiary company, then it is called as wholly owned subsidiary Holding company is
also called as parent company. More than 50% of the shares of the subsidiary are held
by parent company either directly or indirectly.

Takeover by Reverse Bid

Normally a large company takeover a small company. But when a small company
acquires a big company in a takeover manner, such a situation is called as takeover by
reverse bid. It happens when substantial shares of big company are in the hands of a
small company. It is possible when small company is a cash rich company and big
company is a sick company.

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1.6 PORTFOLIO RESTRUCTURING:

This type of restructuring involves divesting some of the business lines which are
considered peripheral to the long-term strategy of the firm. This may involve divestiture
and acquisitions to have a new Configuration of the business lines.
Following forms can be categorized under Portfolio Restructuring:

Corporate Sell-Offs:

 A sell-off is a transaction between two independent companies. The divestor may

benefit from the cash proceeds, which could be put to more profitable use in the
businesses within the group, or used to mitigate financial distress.
 Sell-off may also add to the divestor by eliminating negative synergy, or by
realizing managerial resource preempted by the divested business.
Partial Sell-Off/ Slump Sale


A partial sell-off/slump sale, involves the sale of a business unit or plant of
one firm to another.

It is the mirror image of a purchase of a business unit or plant.

From the seller‘s perspective, it is a form of contraction;

From the buyer‘s point of view it is a form of expansion.
For example: When Coromandal Fertilizers Limited sold its cement division to India
Cement Limited, the size of Coromandal Fertilizers contracted whereas the size of India
Cements Limited expanded.

Corporate Spin-Offs
 In a corporate spin-off, a company floats off a subsidiary which may be small part
of the parent company. The newly floated company now has an independent
existence and is separately valued at the stock market.
 Shares in the spin-off company are distributed to the shareholders of the parent
company; they own shares in two companies rather than just one. The parent

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 company does not receive any proceeds from the demerger, as the demerged
company‘s shares are directly distributed to the parent company shareholders.
 A corporate spin-off divides a company into two or more independent firms, and
offers a firm an opportunity to improve managerial incentives with fresh
compensation packages.
 This is the reversal of mergers or acquisitions.
 Denotes a transaction in which a company distributes on a pro-rata basis, all the
shares of its own in a subsidiary to its own shareholders.
 EX: United Breweries (Flagship CO.) UB Holdings Ltd. For every 600 Shares
held 400 Shares are given.
 In the year 1997, PepsiCo spun-off KFC, Pizza Hut and Taco Bell into a separate
corporation Tricon Global Restaurants Inc. The company spun-off 100% of its
restaurant unit to stock holders who received shares in the new company. The
spin-off was aimed at better focus on its Pepsi beverage operations and Frito Lay
snack business.
Split off

A transaction in which some, but not all, parent company shareholders receive
shares in a subsidiary in return for relinquishing(surrendering) their parent company
shares. A split-off is a type of corporate reorganization whereby the stock of a subsidiary
is exchanged for shares in the parent company. Split-off is basically of two types. In the
first type, a corporation transfers part of its assets to a new corporation in exchange for
stock of the new corporation. The original corporation then distributes the same stock to
its shareholders, who, in turn, surrender part of their stock in the original corporation. In
the second type, a parent company transfers stock of a controlled corporation to its stock
holders in redemption of a similar portion of their stock. ―Control‖ refers to the
ownership of 80% or more of the corporation whose shares are being distributed.

Difference between Spin-off and Split-off

A split-off differs from spin-off in that the shareholders in a split-off must

relinquish (surrender) their shares of stock in the parent corporation in order to receive

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shares of the subsidiary corporation, whereas the shareholders in a spin-off need not do
so.

Split up

A transaction under which a company spins off all of its subsidiaries to its
shareholders and ceases to exist. In a split-up, the existing corporation transfers all its
assets to two or more new controlled subsidiaries, in exchange for subsidiary stock. The
parent distributes all stock of each subsidiary to existing shareholders in exchange for all
outstanding parent stock, and liquidates. In other words, a single company splits into 2 or
more separately run companies.

One of the classical examples for split-up is the split-up of AT & T into four
separate units- AT & T Wireless, AT&T Broadband, AT & T Consumer, AT & T
Business. It could be termed as one of the biggest shake-ups in the US
Telecommunication industry since 1984.

1.7 FINANCIAL RESTRUCTURING:8

Financial restructuring means infusion of debts. This infusion may happen either due to
leveraged buyouts or buy-back stock from equity or onetime payments of dividends this
form of corporate restructuring enables the firm to generate more cash for further
investment in business. It tends to redefine the leverage ratio and the cost of acquiring the
capital from different source.
Following are some of the forms of financial restructuring:

8
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Equity Carve Out

 An equity carve out is the initial public offering (IPO) of the some portion of the
common stock of a wholly owned subsidiary. These are also referred to as ―split
off IPO‖.
 An IPO of the equity of a subsidiary resembles a seasoned equity offering of the
parent in that cash is received from a public sale of equity securities.
 An equity carve out is the sale of a minority or a majority voting control in a
subsidiary by its parent to outside investors.
 Equity carve out is similar to a spin-off in many ways.

They are often motivated by the need to:


Increases the focus of the firm

Improves the autonomy of the component businesses

Improve the managerial incentive structure by relating management performance
directly to the share holder value.

Enhance the visibility of the component businesses being divested.

Minimize the conglomerate discount through this enhanced visibility &
increased information.

Leveraged Buyout

 Acquisition of one company by another, typically with borrowed funds. Usually, the
acquired company‘s assets are used as collateral for the loans of the acquiring
company.
 The loans are paid back from the acquired company‘s cash flow. Another possible
form of leveraged buyout occurs when investors borrow from banks, using their own
assets as collateral to acquire the other company. Typically, public stockholders
receive an amount in excess of the current market value for their shares.

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Types of LBO

 Investment buyouts (IBO)

 Management buyouts (MBO)
 Management buy-in (MBI)
 Going private buyouts

Management Buyout

A management buyout (MBO) is a form of acquisition where a company‘s

existing managers buy or acquire a large part of the company.

 Purchase of all of a company‘s publicly held shares by the existing mgt., which takes
the company private. Usually, mgt. Will have to pay a premium over the current
market price to entire public shareholders to go along with the deal. If mgt. has to
borrow heavily to finance the transaction, it is called a Leveraged Buyout (LBO)
 Managers may want to buy their company for several reasons: They want to avoid
being taken over by a raider who would bring in new mgt., they no longer want the
scrutiny that comes with running a public company; or they believe they can make
more money for themselves in the long run by owning a larger share of the company,
and eventually reap substantial profits by going public again with a Reverse
Leveraged Buyout.

Management Buy-in

 A management buy-in (MBI) occurs when a manager or a management team from

outside the company raises the necessary finance, buys it and becomes the company‘s
new management.
 A management buy-in team often competes with other purchasers in the search for a
suitable business. Usually, the team will be led by a manager with significant
experience at managing director level.

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Difference between MBO and MBI

The difference to a management buy-out is in the position of the purchaser: In the case of
a buy-out, they are already working for the company. In the case of a buy-in, however,
the manager or management team is from another source.

Employee Stock Ownership Plan (Esop)

 An ESOP is a type of stock bonus plan which invests primarily in the securities
of the sponsoring employer firm.
 ESOPs are qualified, defined contribution, employee benefit (ERISA-employee
retirement income security act of 1974) plan designed to invest primarily in the
stock of the sponsoring employer.
 ESOPs are qualified in the sense that the ESOP‘s sponsoring company, the selling
shareholder and participants receive various tax benefits.
 ESOPs are often used as a corporate finance strategy and are also used to align
the interests of a company‘s employees with those of the company‘s shareholders.
 A parent company sells a portion of its equity in wholly owned subsidiary.

Buy Back Of Shares

The repurchase of outstanding shares (repurchase) by a company in order to

reduce the number of shares on the market. Companies will buy back shares either to
increase the value of shares still available (reducing supply), or to eliminate any threats
by shareholders who may be looking for a controlling stake. Buy-back of shares is a
method of financial engineering. It can be described as a procedure which enables a
company to go back to the holders of its shares and offer to purchase the shares held by
them.

Objectives of Buy Back: Shares may be bought back by the company on account of one
or more of the following reasons

i. To increase promoters holding

ii. Increase earnings per share

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iii. Rationalize the capital structure by writing off capital not represented by available
assets.

iv. Support share value

v. To thwart takeover bid

vi. To pay surplus cash not required by business

In fact the best strategy to maintain the share price in a bear run is to buy back the shares
from the open market at a premium over the prevailing market price.

1.8 LIQUIDATION

Liquidation is the last option available to the entity. It involves initiating

bankruptcy proceedings. Here, all the assets are discarded and all the liabilities are repaid,
after which the entity ceases to exist. Liquidation may be voluntary or involuntary.

Indian laws provide for a number of corporate restructuring mechanisms to

facilitate the acquisition of a company on the verge of bankruptcy. Some of these are a
result of legislations enacted by the Parliament and some by way of delegated legislations
created by SEBI and RBI.

These mechanisms are as follows:-

(A) Schemes of Compromise or Arrangement Under The Companies Act, 1956 9

Sections 390-394 of the Companies Act, 1956 also regulate schemes relating to
compromise or arrangement of companies on the verge of bankruptcy. These sections
permit the entering into of compromises/ settlement with creditors and amalgamations/
mergers with other companies, subject to the necessary court approvals. In a settlement
with creditors, the affected creditors are divided into appropriate classes and a meeting of
each class is conducted to obtain their consent to the scheme. The scheme must be
approved by majority in number and 75 per cent in value of creditors in each class

9
FICCI Evolving Dynamics in India’s M&A Landscape by J. Sagar Associates (JSA)

24 | P a g e
present and voting at the meeting. The court must approve the scheme after its approval
by each class of creditors. The approved scheme will also bind the dissenting creditors.
A scheme approved by the majority creditors will ordinarily be sanctioned by the
court unless it believes that such a scheme is unfair or detrimental to the interests of the
company. While sanctioning the scheme, the court may modify it or stipulate additional
conditions. However, it may not examine the commercial merits of the scheme. Although
it can be a time consuming process since the court would have to hear all objecting
creditors, it is effective in binding dissenting creditors once the majority has agreed and
court has approved.

(B) Bail Out Takeovers Under The Sebi (Substantial Acquisition Of Shares And
Takeover) Regulations, 2011 (Takeover Code)10

The Takeover Code has special provisions for the substantial acquisition of shares
in a financially weak company, not being a sick industrial company. A company which
has at the end of the previous financial year accumulated losses, resulting in the erosion
of more than 50 per cent but less than 100 per cent of its net worth as at the beginning of
the previous financial year, is a financially weak company. A scheme of rehabilitation
needs to be approved by a public financial institution or a scheduled bank (known as the
―lead institution‖) for such financially weak companies. The acquirer is selected by this
lead institution on the basis of bids received, and such acquirer acquires the shares in the
company. The provisions of the Takeover Code however, do not apply in cases of:-

(a) Acquisition of shares pursuant to a scheme framed under the Sick Industrial
Companies (Special Provisions) act, 1985.
(b) Acquisition of shares pursuant to a scheme of arrangement/ reconstruction under any
law, Indian or foreign.

10
FICCI Evolving Dynamics in India’s M&A Landscape by J. Sagar Associates (JSA)

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(C) Restructuring under The Sick Industrial Companies (Special Provisions) Act,
1985 (“SICA”)
The restructuring process under the SICA is facilitated by the Board for Industrial
& Financial Reconstruction (“BIFR”). According to the provisions of the SICA, if a
company with one or more industrial undertakings becomes sick, i.e. its accumulated
losses become equal to or exceed its net worth, the company‘s directors are obliged to
refer the company to the BIFR. If the BIFR is satisfied that restructuring is appropriate, it
will appoint an operating agency (usually the lead lender) to prepare a restructuring
scheme. The powers conferred on the BIFR by the SICA for restructuring a sick company
are very wide and once it sanctions a scheme, it is binding on all members and creditors
of the company.

The SICA provides for the revival/ rehabilitation of ―sick industrial companies‖. To fall
under the purview of a ―sick industrial company‖:-
(a) A company (being a company registered for not less than 5 years) should be engaged
in any scheduled industry,
i.e. any industry specified in the First Schedule to the Industries (Development and
Regulation) Act, 1951. Scheduled industries include metallurgical, telecommunication,
transportation, chemical and textile industries but not financial services and software
technology.
(b) The company should have accumulated losses equal to or exceeding its entire net
worth at the end of any financial year.

The BIFR may direct any ―operating agency‖ (a primarily public institution) to prepare a
scheme of rehabilitation for the company. The scheme may provide for:-

(a) The financial reconstruction of the company.

(b) The proper management of the company.
(c) The amalgamation of the company with another company.

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(D) Corporate Debt Restructuring Governed By the Reserve Bank Of India

Another mechanism for corporate restructuring is the Corporate Debt

Restructuring Scheme (“CDR”). This scheme applies to companies which have obtained
financing from several banks and have outstanding debts of more than Rs. 100 million
(US$ 2 million). The restructuring can be carried out by creditors within 90 days
(extendable to 180 days) of submitting the matter to the restructuring process. Once 75
per cent of the lenders by value and 60 per cent by numbers agree to the scheme, it
becomes binding on all creditors. However, the CDR guidelines also offer exit options to
any creditor who does not agree to the restructuring package. A dissenting creditor can
sell his/ her stake to any majority creditor at a price to be agreed, or to any other lender
who agrees to be bound by the terms of the restructuring. This system is purely
contractual and operates on the basis of a creditor-debtor agreement and inter-creditor
agreements. This system is outside the scope of the BIFR and other legal proceedings.
Accordingly, it is restricted to those creditors who have acceded to the relevant
contractual arrangements (as is generally the case with most Indian banks and financial
institutions). However, non-CDR signatories are allowed to join the CDR mechanism on
a case-by-case basis. It is imperative that the CDR signatories agree to not initiate legal
proceedings for debt recovery and enforcement of security while the process is pending.

E) Asset Reconstruction under The Securitizations And Reconstruction Of

Financial Assets And Enforcement Of Security Interest Act, 2002 (“SARFAESI
Act”)
The SARFAESI Act provides for the establishment of asset reconstruction
companies (“ARCs”), which manage non-performing loans acquired from creditors. The
SARFAESI Act grants certain special rights on ARCs, including the right to take over the
management of a company and appoint any number of people to the board of directors.
An advantage of this legislation is that it allows secured creditors (if 75 per cent by value
exercise any of the self-help remedies available) to decrease the number of matters
pending before the BIFR. Also, no reference may be made to the BIFR where secured
creditors have taken recourse to enforcement measures under the SARFAESI Act.

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 CHAPTER -2
PLANNING & STRATEGY OF ACQUISITION OF COMPANY/
BUSINESS

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2 REASONS FOR RESTRUCTURING
The entire debate on the corporate restructuring process brings to focus the following
basic reasons that compel companies to opt for restructuring.
i. Change in Fiscal and Government Policies
Changed fiscal and governmental policies such as deregulation/decontrol have led many
companies to tap new markets and customer segments. A few sectors have been hit hard
by the withdrawal of government patronage as they have to look after their own financial
requirements and at the same time face competition from powerful global giants. To
prepare themselves to survive in the changed business environment, companies have to
pursue restructuring so as to adapt their structure to the new challenges and meet their
financial requirements.

ii. Liberalization, Privatization, and Globalization

Liberalization, privatization, and globalization have changed the rules of the game. The
only way to survive in the changed business environment is to change the way business is
conducted. These three factors have compelled companies to restructure their operations
because only the most cost-effective producers can survive in the present global markets.
In addition, these three stimuli have given rise to a whole new set of laws and regulations.
Survival has become a function of adapting to these stimuli.

iii. Information Technology Revolution11

Information technology (IT) has become the lifeline of modern business enterprises. Most
of the business is carried out using modern tools of communication and IT. Information
technology drives corporate performance. Companies have to adopt and adapt to the
ever-changing IT environment, by tweaking their Organizational structure. In addition, a
lot of investment flows into creating an appropriate IT infrastructure, including
familiarizing people working in the organization with the tools of IT. This obviously calls
for a major restructuring in the operations of the enterprise.

11
https://www.lexology.com/library/detail.aspx?g=3286e269-f71e-48f5-85e3-c9878974cfea

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 iv. Concept of Customer Delight
The competitive global environment has brought to the fore the new concept of customer
delight‘, which states that only those companies that can understand and fulfil the needs
and expectations of the customer shall survive. Modern customers are knowledgeable,
clear about their needs and expectations, and are increasingly demanding and very often
unpredictable about their consumption habits. The changing customer profile has
intensified competition and companies have to reshape their activities to survive in
business. Many giants of yesteryears have been forced out of the market or have merged
with another
Company, for either they were reluctant, or very slow to change. Some companies have
undergone major restructuring processes to survive. For example, General Motors,
Lakme, Tata Oil Mills Company (TOMCO), Premier Automobiles, and Mahindra and
Mahindra have changed to satisfy the needs and expectations of the customers.

v. Cost Reduction
Customers not only expect quality products, but also affordable prices. Companies have
to make continuous efforts to reduce costs and improve quality. Quite often, companies
resort to downsizing—one of the tools of corporate restructuring—to become cost-
effective. In a perpetually changing competitive Environment, there is no place for
inflexibility, an obsession with activity rather than results, bureaucratic functioning, and
high overheads. Cost reduction and cost control are the new mantras of success.

vi. Divestment
Many companies have either divisionalzed their operations into smaller businesses, or
have sold off units or divisions that do not have a strategic fit with the business.
Divestment is often done to get out of activities that do not add value to the business, or
sometimes destroy value. It is also a way of releasing capital resources that have been
blocked in activities where the company does not enjoy core competency
or competitive advantage. For example, Larsen and Toubro‘s (L&T) sale of L&T
Cement, Tata‘s exit from Tata Oil Mills Co. (TOMCO), etc.

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vii. Improving Bottom Line
The basic business objective shall always be maximizing profits. It is the only way to
keep all the stakeholders happy. To achieve it, companies have to narrow down the gap
between the attainable and the attained. Restructuring becomes necessary to realize the
full potential of the company.

viii. Core Competencies

Prof. C.K. Prahalad‘s concept of core competency also results in restructuring. Core
competency is a specific factor that a business perceives to be central to its functioning. It
provides recurring consumer benefits, is not easy for competitors to imitate, and can be
leveraged widely across many products and markets. A core competency can be
technical—a reliable process, a close relationship with customers and suppliers, product
development and/or culture, such as employee dedication. The concept is integral to the
strategic vision of the company as it provides the fundamental basis for the provision of
added value.
Core competencies are the collective learning in organizations, involving coordination of
diverse production skills and integration of multiple streams of technologies. Core
competencies often provide impetus for many companies to restructure.

ix. Enhancing Shareholder Value

Every company aims at enhancing shareholder value. This is necessary for the capital
inflows to continue. Shareholders shy away from companies that do not provide adequate
returns. Such companies cannot execute their growth plans and stagnate, resulting in
further decline in returns and erosion of shareholder
value. When a company is not able to generate adequate returns, restructuring can bring
about effective allocation and use of resources.
x. Incompatible Company Objectives
When company objectives are no longer compatible with the current portfolio,
restructuring is planned. Decline in demand, high competitive pressures, and quicker

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product-line obsolescence signify such incompatibility. Such companies face a declining
revenue and market share, and difficulty to survive.
xi. Evolving Appropriate Capital Structure
Companies that are either over-capitalized or under-capitalized opt for restructuring. The
process helps the company to evolve a balanced capital mix. It not only minimizes the
cost of capital, but also increases earnings. When companies expand their operations, the
capital base grows and the capital mix changes. This also affects the cost of capital. The
capital requirements change during different stages of the organizational life cycle and
the capital mix often becomes inappropriate and unbalanced. Therefore, companies adopt
restructuring to evolve an appropriate financial structure and achieve reduction in the cost
of capital.

xii. Consistent Growth and Profitability

The expectations of customers have changed over the years. Today, they demand quality
at a reasonable price. They do not mind spending, but always look out for products that
offer value for money. This aspiration of the customers is not unwarranted, as customer is
the king. To meet customer expectations, companies have to adopt improved production
techniques and effective cost control measures. If a company is not ready for this change,
it should restructure its operations so that these objectives can be achieved.

xiii. Environmental Changes

The business environment in which companies operate is prone to changes. This, very
often, results in changes such as decline in demand, increased competitive pressures,
quicker product obsolescence, increasing stakeholder expectations, changed legal
framework, and increasing need for innovation. These changes are often drastic, and
more often than not render the company‘s present set of objectives incompatible with the
changed business environment, leading to failure to meet the stakeholders‘ expectations.
This forces the company to initiate restructuring, to attain compatibility between
company objectives and the environment.

xiv. Meeting Investors’ Expectations

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Every company requires regular and steady inflow of capital to pursue its organizational
objectives. Investors provide the required capital but expect safety of their investment
and ever-increasing returns. If the company fails to meet investors‘ expectations,
investors shy away from the company. Keeping this in
mind, companies need to take steps that will increase returns. This goal is often pursued
by restructuring the operations of the company.
xv. Resolving Confl ict
Companies often experience conflict between the management and the shareholders‘
perception of the prevailing state of affairs. The management often perceives that all is
well with the company, whereas shareholders think otherwise. To resolve this conflict,
companies often initiate restructuring.
xvi. Transferring Corporate Assets
Companies often have assets that they are unable to use efficiently. They choose
restructuring to transfer their assets to a more efficient user. The efficient user may be its
own division/segment or another company. This transfer benefits the company by making
the operations cost-effective and by increasing the company‘s returns.

xvii. Bifurcating Business

There is a common belief that the sum of returns of two businesses is often greater than
that of a single entity. This happens as bifurcation results in increased efficiency due to a
focused approach. Companies often opt for restructuring with the aim to bifurcate the
company into two or more entities so that it can achieve the objectives of increased
returns. While these arguments indicate that restructuring generates positive results, it
may not always be true. The success or failure of the process of restructuring depends on
factors such as management approach, core competencies present, prospect of the
existing line of business, prospects of the proposed line of business, coordination between
various functional heads, communication initiated, etc. Organizations should not let the
fear of failure prevent restructuring, for
death then becomes inevitable.

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2.1 MOTIVES BEHIND THE MERGER12

Motives of merger can be broadly discussed as follows:

1. Growth:

One of the fundamental motives that entice mergers is impulsive growth.

Organizations that intend to expand need to choose between organic growth and
acquisitions driven growth. Since the former is very slow, steady and relatively consumes
more time the latter is preferred by firms which are dynamic and ready to capitalize on
opportunities.

2. Synergy:

Synergy is a phenomenon where 2 + 2 =>5. This translates into the ability of a

business combination to be more profitable than the sum of the profits of the individual
firms that were combined. It may be in the form of revenue enhancement or cost
reduction.

3. Managerial Efficiency:

Some acquisitions are motivated by the belief that the acquires management can
better manage the target‘s resources. In such cases, the value of the target firm will rise
under the management control of the acquirer.

4. Strategic:

The strategic reasons could differ on a case-to-case basis and a deal to the other.
At times, if the two firms have complimentary business interests, mergers may result in
consolidating their position in the market.

5. Market entry:

Firms that are cash rich use acquisition as a strategy to enter into new market or
new territory on which they can build their platform.

12
http: //business.gov.in/growing_business/mergers_acq.php

34 | P a g e
6. Tax shields:

This plays a significant role in acquisition if the distressed firm has accumulated
losses and unclaimed depreciation benefits on their books. Such acquisitions can
eliminate the acquiring firm‘s liability by benefiting from a merger with these firms.

7. 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.

8. Vertical integration:

Vertical Integration occurs when an upstream and downstream firm merges (or
one acquires the other). There are several reasons for this to occur. One reason is to
internalize an externality problem. A common example is of such an externality is double
marginalization. Double marginalization occurs when both the upstream and downstream
firms have monopoly power; each firm reduces output from the competitive level to the
monopoly level, creating two deadweight losses. By merging the vertically integrated
firm can collect one deadweight loss by setting the upstream firm's output to the
competitive level. This increases profits and consumer surplus. A merger that creates a
vertically integrated firm can be profitable.

2.2 MERGERS AND ACQUISITIONS – PRIMARY FACTORS TO BE

CONSIDERED13

Merger or amalgamation is undertaken for acquiring cash resources, eliminating

competition, saving on taxes or influencing the economies of large-scale operations.
Therefore, there are host of factors, which requires consideration before initiating a
merger or amalgamation exercise. A detailed list of the primary factors requiring

13
Diversification, Mergers and their Effect on Firm Performance:

35 | P a g e
consideration before initiating a merger or amalgamation from the economic, commercial
and legal perspective is explained as follows:

(i) Identification of Parties

Will one or more businesses be transferred to an existing firm or a newly formed
entity? Consider drafting heads of terms, do you require a confidentiality agreement? Do
you require an exclusivity agreement? Review financial liability of the parties - undertake
appropriate searches.

(ii) Due Diligence

Carry out legal, commercial, tax and financial due diligence on the parties
entering into the transaction. This will help in identifying risk areas along with any
necessary consent you will need to obtain.

(iii) Any third-party consents required?

Ascertain if any third-party consents would be required such as from banks,
business contracts, partner / shareholder consents. These should emerge from due
diligence. Consider also regulatory consents / licences that may be required.

(iv) Taxation
It will be necessary to ascertain the most suitable tax structure for the transaction
and, in particular, the way in which the consideration should be structured, at an early
stage, therefore considers consulting tax advisors.

(v) Risk
Sharing of risk – What kind of indemnities / warranties be considered? Should
there be a cap on such indemnities and warranties?

(vi) Will the transaction impact on existing loan/finance arrangements?

Check loan documents and constitution documents to see whether any proposed
borrowing would be a breach of any existing funding. What will happen in relation to

36 | P a g e
third party funding of the Seller business? onfirm that there are no restrictions on the
disposal of the target business or any of its assets. How will the merged business be
funded?

(vii) Existing Charges / Modifications over the assets to be acquired

Are there any mortgages, charges or debentures over any of the business assets? If
yes, obtain copies and consider how they are to be discharged. If there are floating
charges, obtain certificates of non-crystallization/ release. Obtain a Search Report from a
Practicing Company Secretary.

(viii) Guarantees and indemnities (bank or other)

Has the Seller given or received any guarantees or indemnities in relation to the
business? If yes, then obtain copies (including details of arrangements) and consider in
particular, how to ensure the business continues to have the benefit of relevant
guarantees.

(ix) Licences
Will the Buyer have all other licences which it needs to operate the business?

(x) Supply contracts

Will supply contracts be transferred or need to be terminated? How will this be
done?

(xi) What IP is used in the business?

Obtain a full list of trademarks, service marks, patents, designs, and domain
names, copyright and other registered and unregistered intellectual property used in the
business. Carry out trade mark and patent searches as may be appropriate through an IPR
Attorneys.

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2.3 FIVE STAGES OF MERGERS AND ACQUISITIONS14

Stage -1-
lanning &
Corporate
Strategy

Stage -5
Stage -2
Post
Due
Acquisiton
Audit Five Diligence

Stages
of M&A

Stage -4 Stage -3
Post Deal
Acquisiton Structuring
Integration & Execution

Steps of Merger and Acquisitions

There are three important steps involved in the analysis of merger and acquisitions can
be explained as follows:

Stage -1 Planning & Corporate Strategy:

Corporate strategy valuation or assessment is the first step of merger and

acquisition. This step includes examination and evaluation of both the present and future
market value of the target company. A thorough research is done on the history of the
company with regards to capital gains, organizational structure, market share, distribution
channel, corporate culture, specific business strengths, and credibility in the market.

14
The impact of mergers and acquisitions on corporate performance in India", Management Decision, Vol.
46 Iss: 10, pp.1531 – 1543

38 | P a g e
There are many other aspects that should be considered to ensure if a proposed company
is right or not for a successful merger.
Stage -2 Due Diligences:

It refers to the investigating effort made to gather all relevant facts and
information that can influence a decision to enter into a transaction or not. Exercising due
diligence is not a privilege but an unsaid duty of every party to the transaction. For
instance, while purchasing a food item, a buyer must act with due diligence by checking
the expiry date, the price, the packaging condition, etc. before paying for the product. It is
not the duty of the seller to ask every buyer every time to check the necessary details.
M&A due diligence helps individuals avoid legal hassles due to insufficient knowledge
of important details.

Stage -3 Deal Structuring & Execution:

After finalizing the merger and the exit plans, the new entity or the take-over
company has to take initiatives for marketing and creating innovative strategies to
enhance business and its credibility. The entire phase emphasize on structuring of the
business deal.

a) Screening and investigation of merger proposal

When there is an intention of acquisition or merger, the primary step is that of screening.
The motives and the needs are to be adjudged against three strategic criteria i.e. business
fit management and financial strength. If the proposal is viable after thorough analysis
from all angles, then the matter will be carried further.
b) Negotiation stage
In this stage the bargain is made in order to secure the highest price by the seller and the
acquirer keen to limit the price of the bid. The seller needs to decide the minimum price
acceptable and the buyer needs to decide the maximum he is prepared to pay. After the
consideration is decided then the payment terms and exchange ratio of shares between the
companies will be decided. The exchange ratio is an important factor in the process of
amalgamation.

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  Approval of proposal by Board of Directors
Deciding upon the consideration of the deal and terms of payments, then the
proposal will be put for the Board of Director‘s approval.
 Approval of shareholders
As per the provisions of the Companies Act 1956, the shareholders of both seller
and acquirer companies hold meeting under the directions of the National
Company Law Tribunal and they consider the scheme of amalgamation. A
separate meeting for both preference and equity shareholders is convened for this
purpose.
 Approval of creditors/financial institutions/banks
Approvals from the constituents for the scheme of merger and acquisition are
required to be sought for as per the respective agreement with each of them and
their interest is considered in drawing up the scheme of merger.
 Tribunal’s approval
The tribunal shall issue orders for winding up of the amalgamating company
without dissolution on receipt of the reports from the Official Liquidator and the
Regional Director that the affairs of the amalgamating company have not been
conducted in a manner prejudicial to the interest of its members or to public
interest.
 Approval of central government
It is required to obtain declaration of the Central Government on the
recommendation made by the Specified Authority under section 72 A of the
Income Tax Act, if applicable.

Financial Evaluation:

Financial evaluation of a merger is needed to determine the earnings and cash

flows, area of risk, the maximum price payable to the target company and the best way to
finance the merger. The acquiring firm must pay a fair consideration to the target firm for
acquiring its business. In a competitive market situation with capital market efficiency,
the current market value is the current market value of its share of the target firm.

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The target firm will not accept any offer below the current market value of its share. The
target firm in fact, expects that merger benefits will accrue to the acquiring firm.

A merger is said to be at a premium when the offer price is higher than the
target firm‘s pre merger market price. The acquiring firm may pay the premium if it
thinks that it can increase the target firm‘s after merger by improving its operations and
due to synergy. It may have to pay premium as an incentive to the target firm‘s
shareholders to induce them to sell their shares so that the acquiring firm is enabled to
obtain the control of the target firm.

Stage -4 Post Acquisition Integration stage:

This stage includes the realization synergies. Synergy capture can broadly be
divided into four phases: identification, validation, planning and delivery & tracking, and
a simple four-step framework for synergy realization. Synergy item identification and
validation typically takes, and should take, place in pre-transaction phase part of the due
diligence process. This assessment of synergies, or so-called ―synergy case‖, is developed
by conducting detailed commercial and operational value driver analyses across all key
functional areas of the merging entities. Synergy planning and delivery typically takes,
and should take, place in Post Acquisition Integration stage as part of Integration process.

Stage -5 Post Acquisition Audit:

In regards to synergies, a successful M&A integration is first and last for realization and
in the end for a successful M&A. An ill conducted integration results in defaulted
synergies. If an elaborated work with careful analysis of synergies and plans for
implementation of these are conducted it increases the likelihood for sought results. The
Post acquisition phases of M&A as are often said to be the most intense parts where all
involved people and management have little energy left after integration efforts.

The actions of the First 100 Days will have huge consequences on the value
created by an M&A deal. Management of this sensitive time is a fundamental factor of
deal success or failure. The First 100 Days is a time of anxiety and uncertainty for Buyer

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and Target alike. It is a time of change and provides management with the opportunity to
create the right first impression, capture synergies, maximize deal value and establish the
direction for the future. It is also the time of greatest potential loss of value.

2.4 MERGERS AND ACQUISITION- PLANNING & STRATEGY15

M & A – A Strategic Perspective

Mergers and Acquisition activities should take place within the framework of long
range planning by business firms. M&A are the most popular means of corporate
restructuring or business combinations. It is believed that mergers and acquisitions are
strategic decisions leading to the maximization of the company‘s growth by enhancing its
production and marketing operations. The reasons why M&A activities are considered to
strategic in decision are:
 It includes huge amount of investment and the benefits are long term in nature.

 Maintaining or accelerating a company‘s growth, particularly when the internal

growth is considered due to scarcity of resources.

 Enhancing profitability, through cost reduction resulting from economies of scale,

operating efficiency and synergy.

 Diversifying the risk of the company, particularly when it acquires those

businesses whose income streams are not correlated.

 Limiting the severity of competition by increasing the company‘s market power.

 Reducing tax liability because of the provision of setting off accumulated losses
and unabsorbed depreciation of one company against the profits of another.

Strategy formulation is a sequential process which consists of strategic situation analysis

by which is meant a company's analysis of the present scenario, its strengths and
weaknesses and how they match with the opportunities and threats that the market

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analysis throws up. Strategic choice analysis involves a forward looking scenario
building analysis by the company as to where does it see itself in the future, what kind of
capability it must build to reach that position it sees for itself and most importantly how
should it go about building these capabilities.

After the company has identified segments of the market to invest in, the next part of the
strategy is market entry. The different entry level strategies available are:
 Organic growth

 Acquisitions or strategic alliances

The choice of entry strategy depends upon the market scenario and the industry life cycle
which are governed by:

 Level of competition and growth

 Start-up and maturity risks

 Availability of organizational resource for organic growth and

 Advantage of speed of entry and exit

2.5 STRATEGIC APPROACHES TO M&A 16

Mergers and acquisitions specialists assist businesses which are considering
making changes to their corporate structure by joining forces with another company in
some way. By combining expertise in corporate finance, corporate strategy and business
management, M&A experts provide companies with expert advice regarding company
restructure and the potential impact of a merger or acquisition.
Although the terms ‗merger‘ and ‗acquisition‘ are often used synonymously, they are in
fact very different. A merger involves two companies joining together to become one
company, whilst an acquisition generally involves one company buying out or taking

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over another company. The company which has been taken over or ‗acquired‘ then ceases
to exist. There are various strategic reasons for companies to consider making an
acquisition and a successful takeover can help companies achieve their strategic
objectives as well as increase cost effectiveness within the business.
Strategies for Restructuring
Organizations differ in terms of work culture and value systems. There can be no single
standardized restructuring strategy that will help all organizations attain their
restructuring objectives. In view of this fact, the following restructuring strategies have
been evolved.

1. Hardware Restructuring
When the structure of the organization is redefined, dismantled, or modified, the
restructuring is termed hardware restructuring. The focus of hardware restructuring is on
the following elements:

 Identifying the core competencies of the business to pursue the growth objectives
 Flattening the organizational layers to improve organizational responsiveness
towards planned strategies
 Initiating downsizing to reduce excess workforce, so that overheads can be
reduced
 Creating self-directed teams that do not wait for instructions and guidance, and
practice autonomy in functioning
 Benchmarking against the toughest competitors so that best practices are adopted

2 Software Restructuring
Software restructuring involves cultural and process changes to establish a collaborative
environment that facilitates growth and restructuring.
Software restructuring focuses on the following:
 Adopting an open and transparent communication mechanism, whereby the
strategy is communicated to all levels of the organization without any difficulty
 Building a culture of guidance and coaching

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  Building an environment of trust, so that individuals are assured of all support in
carrying out their tasks
 Raising the aspiration levels of individuals, commonly referred to as ‗stretch‘ in
management terminology
 Empowering people and encouraging decentralized decision making
 Helping individuals develop foresight, that is, understanding changes and getting
ready for the anticipated changes
 Training people to accept new ideas and challenging assignments

2.6 STRATEGIC OPTIONS IN CORPORATE RESTRUCTURING

An organization that is passing through a bad patch needs to restructure its operations
to get rid of the existing inefficiencies. The restructuring process requires certain
strategies. The strategies adopted are expected to lead to the following results:
 Improve operations
 Alter the relative strength of the organization to face competition
 Facilitate creation of competitive advantage
 Provide better customer satisfaction
 Generate profits in a free market economy
 Help the organization differentiate itself from competitors
 Ensure that it delivers value to the customers

2.7 SWOT ANALYSIS 17

Identifying Strengths, Weaknesses, Opportunities and Threats would appear to be
easily accomplished. However much subjectivity is involved. While opportunities may
exist, the difference in cost may require careful balancing of consideration. On balance,
this approach may provide a useful starting point developing a strategic planning process
and to stimulate strategic thinking in an organization.

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The Key Distinction - Internal and External Issues

Strengths and weaknesses are internal factors. For example, strength could be
your specialist marketing expertise. A weakness could be the lack of a new product.
Opportunities and threats are external factors. For example, an opportunity could be a
developing distribution channel such as the Internet, or changing consumer lifestyles that
potentially increase demand for a company's products. A threat could be a new
competitor in an important existing market or a technological change that makes existing
products potentially obsolete. It is worth pointing out that SWOT analysis can be very
subjective - two people rarely come-up with the same version of a SWOT analysis even
when given the same information about the same business and its environment.
Accordingly, SWOT analysis is best used as a guide and not a prescription. Adding and
weighting criteria to each factor increases the validity of the analysis.
Areas to Consider
Some of the key areas to consider when identifying and evaluating Strengths,
Weaknesses, Opportunities and Threats are listed in the example SWOT analysis below:

strengths Weakness
•Leading Brand •Customer Loyality
•Technical Skills •Poor Access to Distribution
•Customer Loyality •Low Customer Retention
•Production Quality •Sub Scale
•Scale •WeeK Brands
•Management •Unrealiable Products

SWOT Analysis

Opportunities Threats
•Changing Customer Tastes •Changing Customer Taste
•Liberalaisation of geographic markets •Closing of Geographic Markets
•Technological Advances •Technological Advances
•Lower Personal Taxes •Tax Increases
•New Dsitribution Channels •Change in Government Polices

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Tata Steel-Corus: $12.2 billion

On January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at
608 pence per share in an all cash deal, cumulatively valued at $12.2 billion.

The deal is the largest Indian takeover of a foreign company till date and made Tata Steel
the world's fifth-largest steel group.

Tata Steel Background

 Tata Steel a part of Tata group, one of the largest diversified business conglomerates
in India.
 In the mid-1990s, Tata Steel emerged as Asia‘s first and India‘s largest integrated
steel producer in the private sector.
 In February 2005, Tata Steel acquiesced the Singapore based steel manufacturer
NatSteel; let the company gaining access to major Asian Markets and Australia.
 Tata Steel acquired the Thailand based Millennium Steel in December 2005.
 Tata Steel generated net sales of Rs.5 billion in the financial year 2006-07.

Tata Steel SWOT Analysis18

Strengths:

 Tata is one of the lowest cost producer in the world

 Tata group has successfully acquired some companies in past
Weakness:

 Corus was triple size of Tata Steel in terms of production

Opportunities:

 Tata steels may have Exposure to global steel market through various mergers &
acquisitions.

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  Consolidation trend in steel industry

Threats:

 There are various Russian bidders who are ready to grab the opportunity.
 There is absence of any committed financers to support the conglomerate

Corus Background

 Hoogovens had good access to the sea for the raw materials and export of finished
goods.
 The company was established at Ijmuiden, a town on the sea coast with good
access inland via the North Sea canal.
 On October 6th, 1999, Hoogovens (38.3%) merged with British Steel Plc(61.7%)
to form Corus Group Plc.
 Philippe Varin (CEO) and Jim Leng (Chairman) of Corus, both worked to revive
the company‘s business.

SWOT ANALYSIS

Strengths:

 Corus group is World‘s 9th largest & Europe‘s 2nd largest producer of steel
 Corus group had Wide range of products
 Operating facilities of Corus group is spread in the whole Europe

Weakness:

 Corus was in bad shape because of high operational cost.

 Liabilities on Corus group was increasing day by day
Opportunities:

 There was a trend of consolidation in Steel Industry

 It should try to get right price at a time when market is volatile

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 Threats:

 Huge pension liability might have led to collapse of the deal

 Disagreement of Labour and Government reasons behind acquiring Corus by Tata
group
Implication on Corus acquisition:

 The acquisition made the Tata-Corus into the world steel‘s Big-Five status( by
revenue).
 It is notable not only for creating a steel giant, but also this deal was a private sector
venture far from Indian Govt. influence.
 TCL was to supplement the customer front-end in the developed markets, with a
lower-cost back-end in an emerging market.
 It gave Tata the huge west market came into its hand.
 With this venture to an extent, the India‘s greater command to the worlds lingua
franca will lubricate the inevitably-difficult integration process.

Swot of Tata Corus after merger

Strengths:

 Corus takeover catapults Tata Steel from its current 65th place to no.5 spot, with a
combined capacity of 23.5 million
 Cost advantage of operating from India can be leveraged in Western markets and
differentiation based on better technology from Corus can support Tata Steel
Weakness:

 Corus EBITDA at 8% was much lower than that of Tata Steel which was 30% in
the financial year 2006-07
 The merger requires high level of integration for technology transfer and
coordinating

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 Opportunities:
 Chinese steel plants dependence on imported raw material limit their pricing
power
 Corus strong R&D and technology would add to the competitive strength for Tata
Steel
Threats:

 Capacity additions by China, Russia and Brazil may outrun the demand growth
and lead to the subdued steel prices
 If the business performance of Corus declines, the companies cash flows would
also decline.

2.8 THE MCKINSEY 7S MODEL19

The 7S model can be used in a wide variety of situations where an alignment

Perspective is useful:
 Improving the performance of a company
 Examining the likely effects of future changes within a company
 Aligning departments and processes during a merger or acquisition
 Determining how best to implement a proposed strategy

The McKinsey 7S model involves seven interdependent factors, which are categorized as
either ‗hard‘ or ‗soft‘ elements. ‗Hard‘ elements are easier to define or identify and the
management can directly influence them. These are strategy statements, organization
charts, reporting lines, formal processes, and IT systems. They include strategy, structure,
and systems. ‗Soft‘ elements, on the other hand, are more difficult to describe, less
tangible, and often more influenced by culture. However, the soft elements are as
important as the hard elements for the organization to succeed. The soft elements include
shared values, skills, style, and staff.

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Figure depicts the interdependency of the elements and indicates how change in one
affects all the others.

Structure

Style System

shared
Vision
Stratergy Staff

Skill

1. Strategy: Every entity wants to be ‗one up‘ on its competitors. It has to evolve
plans that will help to attain its newly-defined objectives and help to maintain and
build competitive advantage in the markets that are getting increasingly
competitive.
2. Structure: Structure represents the way an organization is structured, and depicts
the reporting relationships. Effective functioning requires an appropriate
organizational structure that would have clearly defined relationships. A good
structure is one that facilitates smooth flow of information across levels.
3. Systems: While goals are the guiding light in an entity, they need to be pursued in
an effective and efficient manner. It is important that every individual knows the
daily activities to be performed. Thus, systems represent the activities and
procedures that employees across hierarchies should engage in to get the job
done.
4. Shared values: Every entity has/propagates certain values and culture that are
effectively built into the system. These get reflected in the corporate culture and
the general work ethics of individuals. Also known as ‗superordinate goals‘, these

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 are the core values of the company and are evidenced in the way the entity
responds to environmental changes and ethical dilemmas.
5. Style: This deals with the style of leadership adopted by the leader of the team.
To a great extent, the success of an entity depends on the quality of leadership. An
organization where the leader ‗walks the talk‘ attains its objectives with greater
ease, for a leader successfully inspires his team and allows the work culture and
values to percolate to all the strata in the organization.
6. Staff: While inspiring leadership is a key to success, the ultimate attainment of
goals and objectives depends on the employees and their general capabilities.
Every organization recruits the best available human resource. Recruitment is not
just about hiring the right employees. An important mantra for success is the
ability to retain and groom human resource, to enable them to adapt to the
changes with ease and remain focused. Thus, a successful HR policy calls for the
following:
 Right person for the right job
 Right policies to retain talented and skilled employees
 Right and regular training and grooming
 Right strategy for getting rid of deadwood
7. Skills This deals with the actual skills and competencies of the employees
working for the company. Very often, this is misinterpreted as skills possessed by
employees at the time of recruitment. While skills are critical to performance,
regular and continuous upgradation is necessary to ensure that they are in tune
with the prevailing practices and meet the requirements of the environment. One
could consider some sample questions pertaining to each element. These
questions need to be supplemented with special situational questions based on
circumstances and accumulated organizational wisdom. Some of the sample
questions for each element are as follows:
A) Strategy
 What is our strategy?
 How do we intend to achieve our objectives?
 How do we deal with changes in customer demands?

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 How do we deal with competitive pressure?
 How do we adjust strategy for environmental issues?

B) Structure
 What is the hierarchy?
 How is the company/team divided?
 How do different departments coordinate their activities?
 How do the team members organize and align themselves?
 Where are the lines of communication—explicit and implicit?
 Is decision making and controlling centralized or decentralized? Is this as it
should be, given what we are doing?

C) Systems
 What are the main systems that run the organization? (Consider financial and HR
systems as well as communication and document storage.)
 Where are the controls and how are they monitored and evaluated?
 What are the internal rules and processes used by the team to stay on track?

D) Shared values
 What are the fundamental values that the company/team has been built on?
 What are the core values?
 How strong are the values?
 What is the corporate/team culture?

E) Style
 How participative is the management/leadership style?
 How effective is the leadership?
 Do employees/team members tend to be competitive or cooperative?
 Are there real teams functioning within the organization or are they just nominal
groups?

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 F) Staff
 What are the positions or specializations represented within the team?
 What are the positions that need to be filled?
 Are there gaps in the required competencies?

G) Skills
 What are the strongest skills represented in the company/team?
 How are skills monitored and assessed?
 Are there any skill gaps?
 What is the company/team known for doing well?
 Do the current employees/team members have the ability to do the job?

Once these questions have been listed, the organization evolves a matrix to ascertain
whether the elements are in alignment with one another.
 The organization can start with shared values and ascertain whether they are
consistent with the structure, strategy, and systems.
 If they are not, what needs to change so that the organization can reach the desired
objectives?
 Next, the organization needs to look at the hard elements to ascertain whether
these support each other.
 If they are not mutually supportive, changes needed are to be identified.
 Finally, the organization can analyse the soft elements to determine whether these
support the desired hard elements or not.
 If they do not support the hard elements, the organization needs to identify the
changes required.
 After adjusting and aligning the 7S, one needs to constantly re-analyse the
elements to understand how a change in one element impacts the other elements
and what further adjustments are needed to align them. As this process continues,
deficiencies get highlighted and performance improves.

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 CHAPTER -3
DUE DILIGENCE OF M&A TRANSACTIONS

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3. DUE DILIGENCE INTRODUCTION

Due diligence is a systematic process of acquiring and analyzing information,

which helps a buyer or a seller determine whether to proceed with the transaction or not.
The information obtained relates to all aspects of the business to be purchased.

It includes assimilating and processing quantitative information like sales, cash

flows and other financial data, and qualitative information like location, quality of
management, internal control systems and so on.20

Due Diligence Due Diligence in Mergers and Acquisitions is the process of

evaluating and investigating a prospective business decision by getting information about
the financial, legal, intellectual and other material information from the other party. The
ultimate goal of such activities is to make sure that there are no hidden drawbacks or
traps associated with the business transaction under consideration. By performing due
diligence, a perfect strategy can be evolved to carry out the merger or acquisition.

Failure to exercise due diligence prior to entering into a transaction of enormous

proportions such as a merger or acquisition may lead to a precarious situation where the
asset acquired, may be marred by encumbrances, charges and other liabilities which get
automatically transferred to the acquirer as a result of such acquisition. While the cost
involved in performing a due diligence is on the higher side, as it usually involves the
services of a CA and an attorney, the importance of conducting a thorough due diligence
before undertaking a transaction cannot be undermined under any circumstances. To any
company involved in merger or acquisition, the due diligence investigation will attempt
to reveal all material facts and potential liabilities relating to the target
company/unit/business.

The purpose of due diligence is to confirm that the business actually is what it
appears to be. While gaining information about the business, the company conducting the
due diligence can definitely identify deal killers and eradicate them. Further, information

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for valuing assets, defining representations and warranties, and/or negotiating price
concessions can also be obtained vide due diligence. The information learned while
conducting due diligence will further help in drafting and negotiating the transaction
agreement and related ancillary agreements. This information will also be helpful in
allocating risks in regards to representations and warranties, pre-closing assurances and
post-closing indemnification rights of the acquirer, organizational documents to
determine the stockholder and other approvals required to complete the transaction,
contracts, including assignment clauses, and permits and licenses, to determine whether
the transaction is contractually prohibited or whether specific consents are required,
regulatory requirements, to determine if any governmental approvals are required, and
debt instruments and capital infusions, to determine repayment requirements.

Why Due Diligence?

Mergers and Acquisitions revolve around certain specific steps and due diligence is the
first step to make the end business successful. Due diligence helps in understanding the
following about the company:

 Capital structure including shareholding pattern

 .Composition of board of directors.
 Shareholders‘ agreement or restrictions on the shares, for example, on voting
rights or the right to transfer the shares. Level of indebtedness.
 Whether any of its assets have been offered as security for raising any debt
 .Any significant contracts executed by it.
 The status of any statutory approvals, consents or filings with statutory
authorities.
 Employee details
 Significant litigation, show cause notices and so on relating to the target and/or
its areas of business.
 Intellectual Property of the Company
 Any other liability, existing or potential

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 3.1 CONDUCTING DUE DILIGENCE: By conducting due diligence before
finalizing any merger or acquisition helps in evaluating and structuring the
transaction and identify legal or contractual impediments that might impact the end
result. It also helps to validate the business plan and mitigate any risks that seem
imminent and formulate solutions to deal with various issues.

The first step in conducting due diligence is to plan the due diligence so that the business
transaction can undergo smoothly. Liaisons with Regional Legal Advisor/General
Counsel, Contracting Officer, Program Office, or other office to plan an efficient
approach toward conducting the due diligence should be conducted to determine and plan
the due diligence memo.

Secondly, information should be gathered about the company from public domains such
as news articles, company reports and subscription-only resources. Constitutional
documents of the Company, annual reports and annual returns filed with statutory
authorities, giving information on shareholdings, directors should also be analyzed
including quarterly and half-yearly reports, in the case of listed companies (in accordance
with the standard listing agreement prescribed by the SEBI).

Government resources should be checked to see if there are particular issues

concerning the business, relationship with a particular country, government, or client, or
other policy concern. The top managers or board members of the company can also be
scrutinized by conducting a search involving sensitive information to determine if the
company individual is eligible for a visa to the US, which is one way to identify risks to
the agency. By conducting web searches about the company untapped information about
the company may also become evident which would be helpful in furthering the business
transaction. Local searches should also be conducted to gather information about the
company‘s current customers, suppliers, and/or private sector or government partners,
relevant local associations and to assess the overall reputation of the company.

Thirdly, after all the information about the company has been obtained, the same must
be analyzed to understand the business operation and the key strengths and weakness of
entering into any scheme of merger or acquisition with such company.

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Fourthly, the stock exchanges where merging and merged companies are listed should
be informed about the merger proposal. From time to time, copies of all notices,
resolutions, and orders should be mailed to the concerned stock exchanges.

Fifthly, the due diligence memo must be prepared and discussions held with the
company to bring out the true nature of the transaction process and finalize the
transaction. The Memorandum of Understanding (MOU) must be drafted thereafter and
reviewed by the Agency deciding official well before serious alliance discussions begin
with the potential partner. The Board of Directors of each company must approve the
draft merger proposal and pass a resolution authorizing its directors/executives to pursue
the matter further. Although it might seem that due diligence has come to an end after the
draft merger proposal has been approved by both the companies, however, due diligence
is an ongoing process and may continue right throughout the existence of the
amalgamated or merged company to evaluate any risk that may crop up at any point of
time during the alliance.

3.2 THE DIFFERENT TYPES OF DUE DILIGENCE:

Legal Due Diligence: Legal Due Diligence is used to ensure that there are no legal issues
in buying a business or investing in it. In this, the solicitors will review the important
legal documents of the target firm such as employment contracts, board meeting minutes,
articles and memorandum of association and patents and copyrights or any other property
related documents.
Tax Due Diligence: This is aimed at ensuring that there are no past tax liabilities in the
seller firm that might have materialized due to mistakes or deception and could hold the
acquirer liable for it.
Operational Due Diligence: Operational due diligence (ODD) is the process by which a
potential purchaser reviews the operational aspects of a target company during mergers
and acquisitions. The ODD review looks at the main operations of the target company
and attempts to confirm (or not) that the business plan that has been provided is
achievable with the existing operational facilities plus the capital expenditure that is
outlined in the business plan.

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IP Due Diligence: IP due diligence is focused on establishing what rights the company
may have in various intellectual property and where it might rely on the intellectual
property of another entity. Typical areas of interest are patent, copyright and trademark
filings; descriptions of the company‘s IP protection processes; licensing agreements.
The increased profile, frequency, and value of intellectual property related
transactions have elevated the need for all legal and financial professionals and
Intellectual Property (IP) owner to have thorough understanding of the assessment and
the valuation of these assets, and their role in commercial transaction. A detailed
assessment of intellectual property asset is becoming an increasingly integrated part of
commercial transaction.
Commercial Due Diligence: This aims at understanding the market the target business is
operating in. This looks at the forecast of the market growth in future and the target‘s
position in the market with relation to its competitors. This also involves interaction with
the customers of the business to understand their opinion about the business.
IT Due Diligence: This aims at identifying if there are any IT issues in the target
business. This looks into matters such as scalability of systems, robustness of the
processes, the level of documentation of processes, compliance with the legislation and
ability to integrate various systems.
HR Due Diligence: This aims at understanding the impact of human capital on the
proposed deal. This looks at employment records, compensation schemes, HR processes,
ongoing HR litigations, effectiveness of the sales force and cultural factors.

3.3 MANAGING THE DUE DILIGENCE PROCESS21

Some important steps that may be of immense help may need to be taken by the acquiring
company before they are ready to finalize an offer. During the due diligence process the
following points are worth consideration:
 Constitute a due diligence team comprising of technical, legal, financial and
taxation experts, etc.

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  Assign the task to each of the member and the co-ordination among the members
be supervised by a senior level officer.
 Collect the data of the target company with reference to the:
 corporate records
 promoter‘s holding
 stockholder information
 IP contracts
 history of litigation
 insurance information
 financials and leases.
 Analyse the above information/ statistics, assess the future prospects and the
benefit in acquiring with reference to the market size and cutting of the
competition.
 If the proposal, found feasible, follow the regulatory requirements as mentioned
in the Companies Act, 2013 and the SEBI Regulations.
 • It involves analysis of public and proprietary information related to the assets
and liabilities of the company being purchased.
 The information encompasses legal, tax and financial matters.
 It provides the buyer an opportunity to verify the accuracy of the information
furnished by the seller.
 The process helps to determine whether there are potential concerns like
questionable asset quality, title of assets, govt. approvals and so on.

3.4 DUE DILIGENCE - EXAMPLE

 One of the fiercest takeover battles in Europe was fought between Nestle and the
Agnellis over the control of Perrier, a French mineral water company.
 Nestle ultimately won the battle but, to its dismay, discovered that at least one of
the springs, which it thought was part of its purchase, was not owned by Perrier,
to begin with (it was leased from the town).
 When queried, Perrier officials noted that they did not hide the fact, it was just
that Nestle had not asked for it.

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3.5 THE CONTENTS OF A DUE DILIGENCE REPORT22

The contents of a due diligence report should more or less include certain points which
would draw the attention of the intending buyer, viz:
• Comments on the management and organization,
• Details of key managerial/ technical personnel,
• Details of marketing efforts undertaken,
• Details of financial liabilities and commitments that the intending buyer would have to
meet after takeover and which are not disclosed in the audited accounts,
• Deviations from the generally accepted accounting policies/ practices,
• Analysis of major expenditure/costs, details of major/critical customers and suppliers,
• Compliance of taxation and other statutory laws as well as status and impact of all
litigation in this respect,
• Benefits enjoyed by the intending seller which the intending buyer may lose on
takeover and vice versa,
• List of adjustments to the latest financial statements compiled on the basis of all
findings, which have an impact on the "price" of the target acquisition to be considered
by the intending buyer.

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 3.6 DUE DILIGENCE PROCESS

• Breif from advisers/Clients

• Identification of appropriately Skilled Team
Understanding • Understanding of key strategic drivers for the acquistion
the tranaction

• In collaboration with key Stakeholders, identify key areas of

risk of target
Risk Assessment • Determine appropriate scope of due diligence procedures
and Scoping

• Intial review of available due diligence information data room

visits.
Data Review and • Identification of any further information required to complete
request scope.

• Business Overview
• Accounting and Information systems
DD Field Work • Revenue and Expenses
(Area of review) • Assets and Liabilities

• Regular status meetings to discuss any issues arising or area

for further investigation
Discussion of • Discussion of any issues identified with legal Advisers (where
Work Progress applicable)

• Summary report highlighting key issues, recommendations for

resolution, key trends and result from analysis
Presentation of • Report prepared to support debt financier requirements.
Results

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3.7 ROLES OF DIFFERENT PERSONS IN THE MERGER AND ACQUISITION
PROCESS23

To conduct due diligence, companies typically form a team comprising of personnel from
finance, sales and marketing, human resources and tax/legal departments. The
personnel review and revise the due diligence checklist before sending it to the seller.
The seller‘s team conducts an in-house review of all available information and lets the
buyer know when, what and how any information will be provided.

1. Investment Committee: It includes the CEO and senior-level executive and

the failure and success of any transaction depend upon them.

The role of the investment committee is:

 Ensure that the right person is in the right place and right team.
 To maintain teamwork and discipline.
 Maintaining long term goals of the organization.
 Bringing objectivity and also that deal is done for good reason.
 This group should involve the strategic process itself.

2. Business Unit Leadership: Its role is critical but it is important to bring them.
The role of this group includes:

 Tracking competitors‘ actions.

 Effective leadership to ensure that due diligence process and integration
process.
 In smaller companies having an effective business, the unit can play an
important role and this is because fewer employees having more workloads
and different roles.

3. Corporate Development: The role of corporate development is very crucial in

whole transaction. The role of this group includes:

23
IBA Corporate and M&A Law Committee Legal Due Diligence Guidelines

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 Maintaining the pipeline of merger and acquisition transactions.
 Monitoring of targets
 Preparing for negotiating and bidding.
 Ensure that right capital available at the right time.

4. Transaction Lead: The role of this group will be at stage of integration and
execution and at documentation stage. The Role of This group includes:

 Finding out risk and challenges in transaction and in transaction lead risk and
challenges as well as opportunities can be better understood.

5. External Advisor: Advisor role includes:

 Augmentation of company‘s current capabilities.

 Providing needs as needed throughout the Merger and acquisition process.
 Providing assistance .during targets.
 Supporting negotiation, execution and due diligence.
 Some companies prefer to have an external advisor on a case to case basis and
some may prefer advisor from the start of the transaction.

6. Role of Investment Banker: With increasing competition and expanding of

merger and acquisition due to globalization, the role of an investment bank has
become important. The company will need this because of advice on potential
targets.

The main role of investment banker includes:

 Establishing fair value of companies involved in the transaction.

 Analyzing potential future of the company.
 Determining the value of the share of the company with reference to the
market.
 They also represent potential acquirer.
 Writing of selling memorandum.

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  The role of the investment bank ends as soon as the buyer purchases.
 Provision of financing to purchase the business it will require money whether
the money has to be financed through debt or offering a share to the
shareholder.

7. The process ends with the disclosure of the deal.

Prior to acquisition, the acquirer does a due diligence. The financial due diligence is
normally conducted by an independent agency such as a consultant or chartered
accountant. The legal due diligence is conducted by an attorney or solicitor firm. As part
of the due diligence, the following are checked:

 Financial statements, especially focusing on qualifications by the auditors and

notes to the accounts.
 Income tax returns, VAT / Central Excise / Sales Tax Returns, Service Tax
Returns,
 Tax deducted at source (TDS) returns and position on various assessments by
these authorities including demands, if any Bank accounts and discussions with
the bankers
 Position on provident fund, super-annuation fund, gratuity fund, Employees‘ State
 Insurance Corporation and any other statutory dues and claims
 Balance confi rmations with various parties
 Contracts and dealings with key buyers, sellers and other trade parties
 Contracts and dealings with lenders and investors
 Other material contracts, including with key personnel
 Labour disputes and wage settlements
 Memorandum of Association and Articles of Association of the company
 Resolutions passed by the board or share-holders
 Changes in share-holding structure of the company since inception
 Any disputes between any key share-holders and the company, and in the case of
listed companies, the investor servicing track record and complaints pending
 Listing agreement and discussions with the stock exchange

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  ROC filings including registration of charges
 Various licenses for the company to do business, such as the licenses under Shops
&Establishments Act and Factories Act, including those that the company may
not have acquired or those that may have expired
 Title deeds for the property owned by the company Brands, trade-marks,
copyrights, technology and other intellectual property rights including digital
assets
 Claims and pending litigation where the company is either a plaintiff or a
defendant
 Powers of Attorney executed by or in favour of the company or its directors

At times, the due diligence is split into two stages – preliminary and final. The final
due diligence is initiated only after discussions based on the preliminary indicate the
possibility of a deal, or a term sheet for the deal is signed.

3.8 SYNERGY

Synergy is derived from a Greek word ―synergos‖, which means working together,
synergy ―refers to the ability of two or more units or companies to generate greater value
working together than they could working apart‖.

Synergy May be defined as follows:

V (AB) >V(A) + V (B). The ability to make 2 + 2 = 5 instead of 4.

In other words the combined value of two firms or companies shall be more than their
individual value Synergy is the increase in performance of the combined firm over what
the two firms are already expected or required to accomplish as independent firms (Mark
L Sirower of Boston Consulting Group, in his book ―The Synergy Trap‖). This may be
result of complimentary services economics of scale or both. A good example of
complimentary activities can a company may have a good networking of branches and
other company may have efficient production system. Thus, the merged companies will

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be more efficient than individual companies. On similar lines, economies of large scale
are also one of the reasons for synergy benefits. The main reason is that, the large-scale
production results in lower average cost of production e.g. reduction in overhead costs on
account of sharing of central services such as accounting and finances, office executives,
top level management, legal, sales promotion and advertisement etc.

Typically synergy is thought to yield gains to the acquiring firm through two sources
1) Improved operating efficiency based on economies of scale or scope
2) Sharing of one or more skills.

For managers synergy is when the combined firm creates more value than the
independent entity. But for shareholders synergy is when they acquire gains that they
could not obtain through their own portfolio diversification decisions. However this is
difficult to achieve since shareholders can diversify their ownership positions more
cheaply.

For both the companies and individual shareholders the value of synergy must be
examined in relation to value that could be created through other strategic options like
alliances etc. Synergy is difficult to achieve, even in the relatively unusual instance that
the company does not pay a premium. However, when a premium is paid the challenge is
more significant. The reason for this is that the payment of premium requires the creation
of greater synergy to generate economic value. The actual creation of synergy is an
outcome that is expected from the managers‘ work. Achieving this outcome demands
effective integration of combined units‘ assets, operations and personnel. History shows
that at the very least, creating synergy ―requires a great deal of work on the part of the
managers at the corporate and business levels‖.

The activities that create synergy include

1) Combining similar processes
2) Co-coordinating business units that share common resources
3) Centralizing support activities that apply to multiple units

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4) Resolving conflict among business units

These economies can be ―real‖ arising out of reduction in factor input per unit of output,
whereas pecuniary economics are realized from paying lower prices for factor inputs for
bulk transactions. Other factors for synergy are as follows:

3.9 The Types of Synergy

1. COST SYNERGIES – synergies decreasing the costs. Often related to economies of

scale, such as administrative costs and overhead costs Resources and competences that do
not use its full capacity (100 %) or do not work effectively can be better utilized if
combined with new, additional or related activities that ex- tend the usage thanks to
decreased average costs .

2. REVENUE SYNERGIES – synergies increasing the revenues. Often related to

economies of scope, for example extensions of customers and products, and cross selling
or bundling.

3. FINANCIAL SYNERGIES – synergies related to decreased costs of capital through

lowered risks better cash flows and increased financial margins.

4. MARKET SYNERGIES – synergies related to higher margins achieved through

increased negotiation capabilities towards suppliers and customers Synergy is created
when the firm successfully links various marketing-related activities including those
related to sharing of brand names as well as distribution channels and advertising and
promotion campaigns.

5. MANAGEMENT & OPERATIONS SYNERGY -This is obtained through

integrating functional activities. It can be created through economies of scale / or scope.
These synergies are typically gained when competitively relevant skills that were

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possessed by managers in the formerly independent companies or business units can be
transferred successfully between units within the newly formed firm.

6. TECHNOLOGY SYNERGY - To create synergies through this, firms seek to link

activities associated with research and development processes. The sharing of R&D
programs, the transfer of technologies across units, products and programs, and the
development of new core business through access to private innovative capabilities are
examples of activities of firms trying to create synergies

7. PRIVATE SYNERGY -This can be created when the acquiring firm has knowledge
about the complementary nature of its resources with those of the target firm that is not
known to others.

3.10 SYNERGY IDENTIFICATION, CALCULATION AND VALIDATION

Majority of the survey focused on synergies and several questions regarding the
identification, calculation and validation of the synergies were presented to the
respondents. Based on the results the synergies were identified either by an assigned
group (external party i.e. M&A advisor, bank and/or consultants or by an assigned
synergy team) in the due diligence process or by using a systematic approach to check the
potential synergy areas along the value chain.

Using external experts such as M&A advisors in transactions is very common and
often the synergy identification and calculation is part of the advisors‘ work. Advisors
most definitely use a systematic approach, do multiple iterations and have assigned
people to work on the synergy-related topics, but that is something that the survey results
do not explicitly point out.

In the transaction in which the synergies were identified by the CEO based on a
feeling, both the acquirer and the target were below 50MUSD in revenue and the
acquiring company was not active in the field of M&A. This finding is rather consistent

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with the general assumption that smaller companies with little M&A experience and
activity do not use systematic approaches and processes not only when it comes to
synergies but to the transaction in general. This is due to the fact the smaller companies
do not have the resources or previous transaction experience like larger corporations do
typically have.

All respondents said that the synergies were identified in pre-signing phase, which
is very much in line with the presented theory that indicates that synergies are often
identified, and also validated, before signing the deal as in many cases the synergies have
a major role in the transaction and as the results of the survey show, are an important
factor in regards to the go-ahead decision of the deal. According to the survey results, the
synergies targeted to achieve from transaction were calculated either relying on previous
deal experience (44%) or by building a detailed bottom-up model for calculating and
quantifying the potential synergy items (56%). No respondent said that they primarily
relied only on third-party inputs, when it comes to calculating synergies.

1. How do corporations find potential synergies and conduct synergy analyses

before transactions?

Acquirer companies utilize multiple different methods to find the potential

synergy items to be pursued in the transaction. Typically the synergy items are found in
the pre-transaction due diligence processes by conducting detailed value driver analysis
across functional areas of the company. In addition, synergies are often identified with
the help of an external party (i.e. M&A advisor, investment bank or other financial
advisor) who are responsible of running the due diligence process and often deploy a
systematic approach for identifying potential synergies along the value chain and
operations. In larger or more strategically important transactions which hold significant
synergistic opportunities, an assigned synergy team can be established while in smaller
deals the synergy identification may be more feeling based. Exploiting industry know-
how, competitive intelligence and other data sources such as industry benchmarks is one

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way to ensure that all stones have been turned and all noteworthy synergy items are taken
into account.
The most transparent and self-evident synergy items like overlapping group functions
such as HR are typically easily identified but some more undiscovered areas of potential
synergies present a major challenge for the acquirer. Synergy potential in general is
dependent on the level of integration, and thus without thoroughly and searching on
different levels of integration, major synergies or dis-synergies may go unnoticed causing
value leakage or additional stress on the integration process itself.

2. How are the identified synergies validated and how the projected synergy benefits
have realized compared to the planned?

As the potential synergy items have been identified and quantified, they should
also be validated in order to guarantee that appropriate and adequate implications take
place. According to the findings of the literature review and responses of the survey,
validated synergies are important for the go-ahead decision of the transaction and also
have an impact on the design of the integration strategy: if pursued synergies are a
fundamental deal driver, a special emphasis needs to be put on the overall synergy
capture process to be able to deliver all projected synergies. Synergies may also have a
significant impact on the buyer valuation of the target, and thus validating the synergy
items ensures that the right price is paid.

Depending for example on the available resources, M&A experience and the
significance of the deal and synergies, validation can be done in many ways. Synergy
validation can, and should be based on fact based investigations such as exploiting
industry deal data or reviewing possible synergy cases by challenging financial and
operating model assumptions and other data sets. Companies also validate the identified
synergies solely based on previous experience and by conducting management or expert
interviews. Synergy validation should employ an iterative, fact based approach for more
accurate synergy estimates and targets. Creating a holistic view on synergies and
challenging current and future operating models potentially allows the acquirer to

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identify areas for improvement, reveal interdependencies and help in the overall
transaction process.
Based on the literature review and management survey responses, companies
have generally speaking been able to realize a majority of the pursued cost and revenue
synergies. Acquirers using a specific tool or measurement system for synergies are able
to track the synergy realization progress more precisely. Cost synergies are more
straightforward to model, quantify and capture and hence easier to realize, but revenue
synergies have not been achieved with the same precision: revenue-based synergy items
are more difficult to identify, measure and capture as they are highly dependent on third
parties and overall market development. Also, differentiating which part of the revenue
growth is a result of the transaction and which by normal sales efforts is considerably
difficult.

3. How much does the pre-merger synergy assessment contribute to the buyer
valuation of the target company?24

Valuation the target company and the acquisition price is multifaceted matter
comprising of numerous interlinked parts. Even though there is no common view on to
what extent does the synergy assessment contribute to the final acquisition price of the
target, the pre-transaction synergy assessment has a significant impact of the buyer
valuation of the target company. Survey findings indicate that in transactions in which the
synergies were an important deal driver, the assessment contributed more than 5 or even
over 10 percent to the final buyer valuation. The relative amount of contribution is
dependent on factors like deal size, deal type, industry and state in which the target and
the acquirer company is. For example in merger of equals with considerable overlapping
assets and operations the pre-transaction synergy assessment has larger contribution to
the valuation compared to smaller bolt-on acquisitions.

24
Leading Practices For Value Capture And Synergy Realization (Aiden & Nappi, 2013).

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3.11 LEADING PRACTICES FOR VALUE CAPTURE AND SYNERGY REALIZATION

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The Realization of Synergies
Companies should be particularly aware about the aforementioned threats that may
compromise the achievements of those gains claimed during the pre-merger phase.
Avoiding failures in capturing synergies value is possible, but it requires a new and
different approach of looking at and thinking about synergy: executives are
requested to adopt a more skeptical and cautious attitude, starting from casting the real
existence of the beneficial gains that can be achieved through the deal. They need to
collect information and data in order to subject their assumptions and deal-sensitive
hypothesis to a rigorous evaluation process: such approach will prevent managers
to waste precious resources on synergy programs that are unlikely to succeed even
before the starting of the negotiation process. This methodology will have also the
positive effect of giving evidence to the company of its synergy opportunities and
resources needed to implement them, thus increasing its awareness concerning the
organization potentials and the characteristics of potential partners and target
companies for future deals. Many advisor companies and consultancy firms have
large investigated on the steps and methodologies that need to be undertaken by
companies in order to increase the deal value through synergies and to deliver wealth
through a successful transaction: as a matter of fact, synergies should be
scrutinized assuming an analytical but at the same time holistic approach, which
considers their entire life-cycle framework, from the first identification to their
monitoring and post-deal measurement of how they contributed to the increase in the
shareholders‘ value. It is possible to identify three main consecutive phases which
allow the full realization of synergies: the modeling phase (i.e. the analysis of the
value drivers and the valuation of their realization probability and timing), the
execution phase (i.e. the design of a detailed work plan with dedicated resources and
integration procedures) and finally the monitoring phase (i.e. the system of reporting
procedures and indicators which help to the tracking of synergies achievements).

1. Synergies Modeling
The process of modeling synergies starts from their correct identification and the
figure in charge for carrying out this task is the finance and corporate development team.

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This team starts to collect information and data concerning the company to be
acquired: as stated by Price Waterhouse Coopers in its Transaction Services
Roundtable (2010), typical inputs for assessing these information are discussions
with the target, the analysis of target-provided information during the due diligence
procedures, quarterly and annual reports, general industry knowledge and researches
and analyst reports. These sources are mainly utilized as a control benchmark to
avoid assumptions that may result too optimistic. Moreover, bidder dealmakers
should present a complete checklist of common market-based synergy
achievements before evaluating untapped potentials that stands from target specific
on-going contracts and market position. An accurate due diligence of the to-be-acquired
company should also be performed, with a peculiar focus on value drivers and risks areas
that may be relevant for the success or failure of the deal: this will help to prioritize
information and to avoid being overwhelmed by the complexity of different valuation
issues. Due diligence team first needs to analyze the historical financial results to
determine projections about the company future performance on a stand-alone
basis; secondly it should identify the possible gains and benefits coming from the
merger or the acquisition, included their probability and timing of realization and
the cost connected with their achievement; finally, the team should classify all the
possible risks, deal killers and risk mitigating sources. The identified synergies are later
validated by functional units which are responsible for the implementation of those
strategies that are functional to reach the expected results. Functional units must have a
good understanding of business processes, both in case of cost and revenues synergies:
it results that, on average, ―focused‖ transactions (i.e. deals between companies that
operates in the same core business and which may even be competitors) have higher
probabilities to successfully identify and realize synergies. This pre-merger planning
which involves functional units gives a great contribution to the decision-making
process in the phase that precedes the closing of the deal as well as it will help to
effectively capture synergies, once the deal will close. Moreover, functional
managers who will not take part in the definition of synergies goals, will
experience a considerable drop of motivation ad will probably fail in achieving
them: therefore, carefully assigning roles and responsibilities for synergies execution

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is a critical step that has to be performed unquestionably before the deal closing.
Finally, another area in which executives should be very cautious about concerns the set
of additional costs and negative effects, included under the name of ―negative synergies‖.
Negative effects due to a misalignment of accounting policies, additional expenses for
sales and marketing investments, increased employee benefits, customers
unwillingness to continue relationships with the new entity and regulatory costs are
just some of the negative synergies pointed out by advisor companies, which insist in
reminding companies the importance of including these measures in their valuation
models, in order to reach more fair estimates and avoid losing money and resources in
unsuccessful deals.

2. Synergies Execution
Clear ownership and accountability are also crucial in the stage of realizing the
previous identified synergies: managers and other professionals responsible for
achieving synergies should be subject to a transparent reporting system that will
both present the execution progress of synergies realization strategies and will help
them in maintaining a focused approach on the results to be achieved. Transparency will
also improve relationships with stakeholders, allowing them to monitor the reaching of
pre-determined financial targets and strategic goals. Before the execution of the
integration process, a detailed project plan must be presented: this plan works with a
―business case‖ mode, i.e. each value driver should have a detailed description of
resources, risks and dependencies and for the most valuable business cases this raw
description is further concretized into a work plan that includes dates, deliveries
and concrete measures to be implemented. Work plans and initiatives must be prioritized
and then the effective execution phase can be put into practice: there are also some
peculiar factors that may affect the realization of synergies and are specific to the
type of synergies targeted. For cost synergies, executive management‘s tone and
commitment are proved to be crucial, while revenue synergies rely on execution by the
sales and product/engineering teams, which align their efforts through a
combination of technologies that may then be sold through new distribution channels.
The execution of synergies in a business combination is not free of possible challenges

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and problems that may increase the complexity of the integration process and
considerably lower the total value created for the stockholders: a survey conducted
by Price Waterhouse Coopers showed that the most common sources of these challenges
refer to delays in implementing planned actions, an underestimation of integration
costs, the overestimation of potential synergies, some cultural and communication
issues and mistakes made by managers in defining and properly execute the
integration plan. Another report provided by Accenture warns against the ―one-size-
fits-all‖ approach to conduct the post-merger integration: it has been reported that many
companies adopt methodologies reported by the literature or by the other best-
practice cases to define their integration plan. By contrast, the realization of
synergies must follow a process that should be highly customized according to the
firm specific complexities, regulatory framework, market momentum, the degree of
overlap in geography and business practices. Moreover, Accenture professionals
have observed that companies usually create teams around functions and cost areas:
however, even for cost synergies, it is also essential to continue improving
processes such as product design and sales & marketing functions, in order not to
lose the focus on the new entity value proposition.

3. Synergies Monitoring
Finally, it is relevant to design good framework for the tracking of synergies
achievements: this phase is critical both for evaluating the job carried out by those
responsible for the realization of the integration process and also for assessing the
success of the transaction. The monitoring procedures should include financial and
non-financial metrics, such as employees retention, product bundling, integration
milestone. Some of the common metrics used for assessing the real realization of
synergies focus both on revenues growth an cost reduction. On the revenue growth side
we can find:
 The entering in a new market
 Selling of complementary product
 Volume discounts
 Reduced competition

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On the cost reduction side some of the metrics analyzed are:
 Elimination of surplus structures
 Reduction of production overheads
 Personnel and non-personnel cost reduction
 Increased product standardization
 Increased purchasing power
The process of controlling for synergies achievements should be conducted at a
central level, in order to give appropriate feedbacks and acknowledgements to each
business units; in addition, the monitoring and transparent reporting system is also
necessary for improving the communication process with the market and the financial
community and increasing the company‘s reliability and reputation. It has been
observed that many companies claim for synergies in order to justify the offer
price they propose in an M&A deal: however, both valuation and delivery plan
need to be effectively carried out in order to give reasons for the premium paid
by the acquirer. They also require a successful communication process given the high
skepticism of the market towards their possible overvaluation. The next chapter will
present an empirical analysis on synergies disclosure policies and practices, their effect
on the deal completion and on companies stock returns in order to understand how firms
may capitalize on their voluntary disclosure for creating value.

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.FOUR STEPS SYNERGY REALIZATION FRAMEWORK

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3.12 AGREEMENTS & DOCUMENTS IN M&A TRANSACTION

A typical M&A transaction involves the preparation of a number of agreements and

documents between/by the buyers and the seller. The most prominent being:

1. Non-disclosure agreement

2. Letter of intent

3. Due diligence

• Non-disclosure agreement spells out the definition of ‗evaluation material‘ (any

material or information furnished to the recipient) and the use of such material.

• The agreement prevents the buyer from using that information in an appropriate manner
like public disclosure of the information (even the fact that an agreement has been
signed), and it provides for the return of all the materials to the seller upon request.

Preliminary agreements usually include:

 a term sheet, a memorandum of understanding or a letter of intent (containing

the terms of the hand-shake agreement or outlining the preliminary
commercial understanding of the proposed transaction);
 a confidentiality or non-disclosure agreement (to safeguard the information
provided by the target to the acquirer for due diligence purposes); and
 an exclusivity agreement (requiring the parties, or generally the target, not to
solicit competing bids for a specified period); this can form part of the
aforesaid agreements25

25
https://www.lexology.com/library/detail.aspx?g=70f656ac-445e-4474-a9a6-0153903daea8

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 CHAPTER -4
PROCESS OF M&A TRANSACTIONS

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 4 .PROCESS OF MERGERS & ACQUISITIONS

STRATERGIC PLANNING
•Frims Adjust stargeries to fit their
business life cycles, generating demand
for M&A
•Prospective buyers search for M&A
target Options
•Sell Side Develops disposal Stratergyand
investor criteria

P
R
VALUATION E
•Two sides sign confidentialy agreement CA and
non_ binding Letter of Intent D
•Buy Side Carries out target valuation
•Sell side Provides materilas to buy side for
E
related Duediligence A
L

NEGOTIATION
•Parties negotiate M&A terms and conditions
•parties sign buidling SPA
•verify important documents
•sign financing contact
•apply to governing authority fpr approval

P
O
S CONTRACT PERFORMANCE &
T INTEGRATION
•Tranasaction closed buyer makes payment
D •seller Completes handover
E •Post deal Intergration plan implement
•peronal redeployment
A •system process integration corporate culture
L Integration.

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Source: PwC Taiwan publication; 2011; “M&A strategies and best practices”;

2011; Xue Mingling

4.1. STRATEGIC PLANNING MERGER AND ACQUISITIONS

Strategies play an integral role when it comes to merger and acquisition. A sound
strategic decision and procedure is very important to ensure success and fulfilling of
expected desires. Every company has different cultures and follows different strategies to
define their merger. There are various strategic reasons for companies to consider making
an acquisition and a successful takeover can help companies achieve their strategic
objectives as well as increase cost effectiveness within the business.

The process of merging with another company or acquiring a company is

complex. In addition to the legal ramifications, companies must be aware of the potential
tax implications as well as ensuring the terms of the deal benefit both parties. Often
companies rely on lawyers and professionals to negotiate on their behalf in order to
obtain the best possible deal.

Although many companies consider mergers and acquisitions as opportunities for

growth, they can provide a viable business solution for companies attempting to
downsize or companies which are looking for an effective exit strategy. By divesting
company assets, the company can reduce costs and streamline its operation leading to an
increase in profitability. If companies have an underperforming subsidiary, they can rely
on mergers and acquisitions to dispose of the asset effectively and in accordance with
their overall business strategy.

Strategic assessments of companies, industry expertise, due diligence, merger

integration, and operational improvements represent areas where knowledge and skills
are required for the success of a merger or acquisition.

The Indian business environment is undergoing massive change with almost all
relevant corporate laws/regulations in India have been revamped in the last few years, be
it the Takeover Code, delisting guidelines, Companies Act, Accounting, Competition
Law, Tax laws, Foreign Exchange Management Act (FEMA) regulations, impacting both
inbound and outbound investments.

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 With the opening up of the economy and the government‘s thrust on various
initiatives, such as Make in India and Digital India, inbound M&A activity is only going
to be on the rise. Further global outlook towards India has become positive than ever
before with an improved ranking in World Bank‘s Doing Business 2016 ranking and in
the World Economic Forum‘s Global Competitiveness Index.

2. VALUATION
Valuation is the second of the four major stages according to the given typology.
A suitable target for the deal has been selected with the help of the screening criteria and
the other company is informed about the intentions of the buyer. Entering this stage a
non-disclosure agreement is usually signed, so that the necessary information for
developing an accurate valuation could be transferred between the sides of the future
deal. Sometimes if the target company is well known in the industry or in the case when
we are talking about hostile takeovers, such agreement might not be signed and the
initiator side directly steps forward with a an offer.
In all cases the buyer side carries on a valuation of its target along with the help of
external or internal staff of investor bankers and financial advisors. This will help the
buyer side to establish a price that it is willing to pay for the target. A wide area of
knowledge is needed and a team of experts from different fields are assembled from both
the side of the buyer and the seller. If this step is neglected, it might result in agreeing to
a final price which is not favorable to one of the sides. Purchase or sale of assets and
share and a payment in the form of shares, cash or combination, they all have an effect on
the price and should be negotiated during this stage. Therefore, it is also true that
the price of the deal is not equal to the price of the company since the condition and the
terms of the transaction vary.
If a consensus is reached during these negotiations, both sides can go forward to
signing a letter of intent and star detailed due diligence work. The letter of intent consists
of the suggested price and terms of payments, along with the proposed structure and
outlines the general conditions of the transaction. Due diligence, on the other hand, refers
to the throughout investigation that takes place before the transaction is made. In this
process, mainly the buyer investigates the seller to determine if their records, book and

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everything else that have provided are true. It is also common for the seller to examine
the buyer to analyse if he has the ability to purchase the entity and if he is suitable. Even
though due diligence often focuses mainly on the other‘s company assets, liabilities and
financial health in general, the process also should involve examining the corporate
culture, the human resources. Pension due diligence can also be performed along with
insurance and even environmental due diligence for M&As in some specific industries.

3. NEGOTIATION STAGE

This stage comes right after most of the valuations have been completed. Even
though according to this classification, only stage three is called ―negotiations‖, it is
important to understand that negotiations, in the sense of discussion between the sides of
the deal aimed of reaching an agreement on certain issues, are also carried in stage two.
Negotiations take place ever since the intentions for engaging into a merger or acquisition
deal are revealed for the concerned parties.
Firstly, the companies negotiate the approximate prices and general terms of the
transaction. If an agreement on the valuation stage is not reached they cannot sign a letter
of intent (which even though it is not necessary for all deals, it is rational to have it for
deals with big businesses) and cannot continue forward with discussing the details on the
terms and conditions of the future deal, which take place in stage three. Therefore, for
convenience, when we later on talk about negotiations in this paper, we will refer to both
stages two and three from this classification.
However, the negotiations that take place after the due diligence step are the more
important ones, because usually these negotiations are aimed at determining the final
price for the deal and structuring the transaction with its legal form and tax planning, etc.
It is expected that the sides of the M&A deal have cleared the concerning points or
reached a consensus on most of the problematic points that fit the interest of both sides.
Only after that point, a sales and purchase agreement (SPA) could be signed and the firms
could work out the details of the transaction. A meeting with the shareholders is
organized after the SPA agreement is signed in order to see if any and how many of them
are opposed to making the deal happen as their approval is of key importance. It is
important to note that the firms cannot move on to this last stage of closing the deal if the

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merger or acquisition deal has not received an approval from the government of the given
country. The regulations and legislations that apply for the given transaction must be
followed.

4. CONTRACT PERFORMANCE & INTEGRATION

With the approval at hand, the firms can wrap up the deal and close the
transaction by entering the consolidation stage. This is said to be the last part of the M&A
process. At this point an agreement on the deal is signed and the buyer makes the
payment while the seller completes the handover. The unfamiliar observer might think
that the deal is done and the M&A process is over, but that is far from the truth. In fact,
the future relationships determine whether the originally set goals that were the
motivations for the deal will be achieved or not. On the post-acquisition stage, every
merger or acquisition more or less faces the challenges of cultural integration, processes
and organization integration, the issues between leaders or loss of key people, the danger
of missing the financial synergies and other challenges that have been a subject of
extensive researches.

4.2 LEGAL PROCEDURE FOR BRINGING ABOUT MERGER OF

COMPANIES26

(1) Examination of object clauses:

The MOA of both the companies should be examined to check the power to
amalgamate is available. Further, the object clause of the merging company should
permit it to carry on the business of the merged company. If such clauses do not exist,
necessary approvals of the shareholders, board of directors, and company law board
are required.

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(2) Intimation to stock exchanges:
The stock exchanges where merging and merged companies are listed should be
informed about the merger proposal. From time to time, copies of all notices,
resolutions, and orders should be mailed to the concerned stock exchanges.

(3) Approval of the draft merger proposal by the respective boards:

The draft merger proposal should be approved by the respective BOD‘s. The
board of each company should pass a resolution authorizing its directors/executives to
pursue the matter further.

(4) Application to high courts:

Once the drafts of merger proposal is approved by the respective boards, each
company should make an application to the high court of the state where its registered
office is situated so that it can convene the meetings of shareholders and creditors for
passing the merger proposal.

(5) Dispatch of notice to shareholders and creditors:

In order to convene the meetings of shareholders and creditors, a notice and an
explanatory statement of the meeting, as approved by the high court, should be
dispatched by each company to its shareholders and creditors so that they get 21 days
advance intimation. The notice of the meetings should also be published in two
newspapers.

(6) Holding of meetings of shareholders and creditors:

A meeting of shareholders should be held by each company for passing the
scheme of mergers at least 75% of shareholders who vote either in person or by proxy
must approve the scheme of merger. Same applies to creditors also.

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 (7) Petition to High Court for confirmation and passing of HC orders:
Once the mergers scheme is passed by the shareholders and creditors, the
companies involved in the merger should present a petition to the HC for confirming
the scheme of merger. A notice about the same has to be published in 2 newspapers.

(8) Filing the order with the registrar:

Certified true copies of the high court order must be filed with the registrar of
companies within the time limit specified by the court.

(9) Transfer of assets and liabilities:

After the final orders have been passed by both the HC‘s, all the assets and
liabilities of the merged company will have to be transferred to the merging company.

(10) Issue of shares and debentures:

The merging company, after fulfilling the provisions of the law, should issue shares
and debentures of the merging company. The new shares and debentures so issued
will then be listed on the stock exchange.

4.3 LEGAL FRAMEWORK OF CORPORATE RESTRUCTURING27

Corporate Restructuring in India is governed by the following Acts, Rules, etc.:Chapter

XV of The Companies Act, 2013 (the Act),Companies (Compromises, Arrangements,
and Amalgamations) Rules, 2016,Income Tax Act, 1961,Accounting Standards, Foreign
Exchange Management Act,1999,Competition Act, 2002,Intellectual Property Rights,
Indian Stamp Act, 1899,State Stamp Acts, Insolvency and Bankruptcy Code, 2016

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LAWS REGULATING MERGER
Following are the laws that regulate the merger of the company:-

Companies
Act 1956

Competition
NCLT
Act 2002

M&A
Regulatory
Foreign Framework SEBI (SAS &T
Exchange
)Regulations
Managemen 1997
t 1999

Reserve
Income tax
Bank of
Act 1961
India RBI

(1) THE COMPANIES ACT , 1956

Section 390 to 395 of Companies Act, 1956 deal with arrangements,

amalgamations, mergers and the procedure to be followed for getting the arrangement,
compromise or the scheme of amalgamation approved. Though, section 391 deals with
the issue of compromise or arrangement which is different from the issue of
amalgamation as deal with under section 394, as section 394 too refers to the procedure
under section 391 etc., all the section are to be seen together while understanding the
procedure of getting the scheme of amalgamation approved. Again, it is true that while
the procedure to be followed in case of amalgamation of two companies is wider than the
Scheme of compromise or arrangement though there exist substantial overlapping.

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The procedure to be followed while getting the scheme of amalgamation and the
Important points are as follows:-

(1) Any company, creditors of the company, class of them, members or the class of
members can file an application under section 391 seeking sanction of any
scheme of compromise or arrangement. However, by its very nature it can be
understood that the scheme of amalgamation is normally presented by the
company. While filing an application either under section 391 or section 394, the
applicant is supposed to disclose all material particulars in accordance with the
provisions of the Act.

(2) Upon satisfying that the scheme is prima facie workable and fair, the Tribunal
order for the meeting of the members, class of members, creditors or the class of
creditors. Rather, passing an order calling for meeting, if the requirements of
holding meetings with class of shareholders or the members, are specifically dealt
with in the order calling meeting, then, there won‘t be any subsequent litigation.
The scope of conduct of meeting with such class of members or the shareholders
is wider in case of amalgamation than where a scheme of compromise or
arrangement is sought for under section 391

(3) The scheme must get approved by the majority of the stake holders viz., the
members, class of members, creditors or such class of creditors. The scope of
conduct of meeting with the members, class of members, creditors or such class
of creditors will be restrictive somewhat in an application seeking compromise or
arrangement.

(4) There should be due notice disclosing all material particulars and annexing the
copy of the scheme as the case may be while calling the meeting.

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 (5) In a case where amalgamation of two companies is sought for, before approving
the scheme of amalgamation, a report is to be received form the registrar of
companies that the approval of scheme will not prejudice the interests of the
shareholders.

(6) The Central Government is also required to file its report in an application
seeking approval of compromise, arrangement or the amalgamation as the case
may be under section 394A.

(7) After complying with all the requirements, if the scheme is approved, then, the
certified copy of the order is to be filed with the concerned authorities.

(2) THE COMPETITION ACT ,200228

Following provisions of the Competition Act, 2002 deals with mergers of the
company:-

(1) Section 5 of the Competition Act, 2002 deals with ―Combinations‖ which defines
combination by reference to assets and turnover

(a) Exclusively in India and

(b) In India and outside India.

For example, an Indian company with turnover of Rs. 3000 crores cannot acquire
another Indian company without prior notification and approval of the Competition
Commission. On the other hand, a foreign company with turnover outside India of
more than USD 1.5 billion (or in excess of Rs. 4500 crores) may acquire a company
in India with sales just short of Rs. 1500 crores without any notification to (or
approval of)the Competition Commission being required.

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 (2) Section 6 of the Competition Act, 2002 states that, no person or enterprise shall
enter into a combination which causes or is likely to cause an appreciable adverse
effect on competition within the relevant market in India and such a combination
shall be void. All types of intra-group combinations, mergers, demergers,
reorganizations and other similar transactions should be specifically exempted
from the notification procedure and appropriate clauses should be incorporated in
sub-regulation 5(2) of the Regulations. These transactions do not have any
competitive impact on the market for assessment under the Competition Act,
Section 6.

(3) FOREIGN EXCHANGE MANAGEMENT ACT,1999

The foreign exchange laws relating to issuance and allotment of shares to foreign
entities are contained in The Foreign Exchange Management (Transfer or Issue of
Security by a person residing out of India) Regulation, 2000 issued by RBI vide GSR
no. 406(E) dated 3rd May, 2000. These regulations provide general guidelines on
issuance of shares or securities by an Indian entity to a person residing outside India
or recording in its books any transfer of security from or to such person. RBI has
issued detailed guidelines on foreign investment in India vide ―Foreign Direct
Investment Scheme‖ contained in Schedule 1 of said regulation.

(4) SEBI Takeover Code 199429

SEBI Takeover Regulations permit consolidation of shares or voting rights

beyond 15% up to 55%, provided the acquirer does not acquire more than 5% of
shares or voting rights of the target company in any financial year. [Regulation 11(1)
of the SEBI Takeover Regulations] However, acquisition of shares or voting rights
beyond 26% would apparently attract the notification procedure under the Act. It

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Hoag, 4/e, Pearson Education

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should be clarified that notification to CCI will not be required for consolidation of
shares or voting rights permitted under the SEBI Takeover Regulations. Similarly the
acquirer who has already acquired control of a company (say a listed company), after
adhering to all requirements of SEBI Takeover Regulations and also the Act, should
be exempted from the Act for further acquisition of shares or voting rights in the
same company.

(5) THE INDIAN INCOME TAX ACT (ITA), 1961

Merger has not been defined under the ITA but has been covered under the term
'amalgamation' as defined in section 2(1B) of the Act. To encourage restructuring,
merger and demerger has been given a special treatment in the Income-tax Act since
the beginning. The Finance Act, 1999 clarified many issues relating to Business
Reorganizations thereby facilitating and making business restructuring tax neutral. As
per Finance Minister this has been done to accelerate internal liberalization. Certain
provisions applicable to mergers/demergers are as under: Definition of
Amalgamation/Merger — Section 2(1B).

Amalgamation means merger of either one or more companies with another

company or merger of two or more companies to form one company in such a manner
that:

(1) All the properties and liabilities of the transferor company/companies become the
properties and liabilities of Transferee Company.

(2) Shareholders holding not less than 75% of the value of shares in the transferor
company (other than shares which are held by, or by a nominee for, the transferee
company or its subsidiaries) become shareholders of the transferee company.

The following provisions would be applicable to merger only if the conditions laid
down in section 2(1B) relating to merger are fulfilled:

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 (1) Taxability in the hands of Transferee Company — Section 47(vi) & section 47

(a) The transfer of shares by the shareholders of the transferor company in lieu of
shares of the transferee company on merger is not regarded as transfer and hence
gains arising from the same are not chargeable to tax in the hands of the
shareholders of the transferee company. [Section 47(vii)]
(b) In case of merger, cost of acquisition of shares of the transferee company, which
were acquired in pursuant to merger will be the cost incurred for acquiring the
shares of the transferor company. [Section 49(2)]

(6) REGULATORY APPROVALS FROM RBI

Master Direction – Amalgamation of Private Sector Banks, Directions, 2016

The RBI vide its circular No. RBI/DBR/2015-16/22 Master Direction DBR.
PSBD.No. 96/16.13.100/2015-16, dated April 21, 2016 has issued the Master
Direction relating to the amalgamation of Private Sector Banks, Directions, 2016.
RBI‘s Guidelines: As mentioned in the proviso to section 234 that Central
Government may make rules, in consultation with the Reserve Bank of India, in
connection with mergers and amalgamations, the RBI vide its Press Release dated
20th March, 2018 placed on its website the regulations on cross border merger
transactions pursuant to the Rules notified by Ministry of Corporate Affairs through
Companies (Compromises, Arrangements and Amalgamations) Amendment Rules,
2017 on April 13, 2017.

(7) REGULATORY APPROVALS FROM RD / ROC/ OL30

Section 233 deals with the merger or amalgamation of certain companies. It

provides as under:
(1) Notwithstanding the provisions of section 230 and section 232, a scheme of
merger or amalgamation may be entered into between two or more small companies

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or between a holding company and it‘s wholly owned subsidiary company or such
other class or classes of companies as may be prescribed, subject to the following,
namely:

(a) a notice of the proposed scheme inviting objections or suggestions, if any, from
the Registrar and Official Liquidator where registered office of the respective
companies are situated or persons affected by the scheme within thirty days is issued
by the transferor company or companies and the transferee company
(b) the objections and suggestions received are considered by the companies in their
respective general meetings and the scheme is approved by the respective members or
class of members at a general meeting holding at least ninety per cent of the total
number of shares;
(c) each of the companies involved in the merger files a declaration of solvency, in
the prescribed form, with the Registrar of the place where the registered office of the
company is situated; and
(d) the scheme is approved by majority representing nine-tenths in value of the
creditors or class of creditors of respective companies indicated in a meeting
convened by the company by giving a notice of twenty-one days along with the
scheme to its creditors for the purpose or otherwise approved in writing.

(2) The transferee company shall file a copy of the scheme so approved in the
manner as may be prescribed, with the Central Government Registrar and the Official
Liquidator where the registered office of the company is situated.
(3) On the receipt of the scheme, if the Registrar or the Official Liquidator has no
objections or suggestions to the scheme, the Central Government shall register the
same and issue a confirmation thereof to the companies.
(4) If the Registrar or Official Liquidator has any objections or suggestions, he may
communicate the same in writing to the Central Government within a period of thirty
days:
Provided that if no such communication is made, it shall be presumed that he has no
objection to the scheme.

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(5) If the Central Government after receiving the objections or suggestions or for any
reason is of the opinion that such a scheme is not in public interest or in the interest of
the creditors, it may file an application before the Tribunal within a period of sixty
days of the receipt of the scheme under sub-section (2) stating its objections and
requesting that the Tribunal may consider the scheme under section 232.
(6) On receipt of an application from the Central Government3 or from any person, if
the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme
should be considered as per the procedure laid down in section 232, the Tribunal may
direct accordingly or it may confirm the scheme by passing such order as it deems fit:
Provided that if the Central Government does not have any objection to the scheme or
it does not file any application under this section before the Tribunal, it shall be
deemed that it has no objection to the scheme.

(7) A copy of the order under sub-section (6) confirming the scheme shall be
communicated to the Registrar having jurisdiction over the transferee company and
the persons concerned and the Registrar shall register the scheme and issue a
confirmation thereof to the companies and such confirmation shall be communicated
to the Registrars where transferor company or companies were situated.

(8) The registration of the scheme under sub-section (3) or sub-section (7) shall be
deemed to have the effect of dissolution of the transferor company without process of
winding up.

(9) The registration of the scheme shall have the following effects, namely:—
 transfer of property or liabilities of the transferor company to the transferee
company so that the property becomes the property of the transferee
company and the liabilities become the liabilities of the transferee company;
 the charges, if any, on the property of the transferor company shall be
applicable and enforceable as if the charges were on the property of the
transferee company;

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  legal proceedings by or against the transferor company pending before any
court of law shall be continued by or against the transferee company; and
 where the scheme provides for purchase of shares held by the dissenting
shareholders or
 Settlement of debt due to dissenting creditors, such amount, to the extent it
is unpaid, shall become the liability of the transferee company.

(10) A transferee company shall not on merger or amalgamation, hold any shares in
its own name or in the name of any trust either on its behalf or on behalf of any of its
subsidiary or associate company and all such shares shall be cancelled or
extinguished on the merger or amalgamation.
(11) The transferee company shall file an application with the Registrar along with
the scheme registered, indicating the revised authorised capital and pay the prescribed
fees due on revised capital:

Provided that the fee, if any, paid by the transferor company on its authorized
capital prior to its merger or amalgamation with the transferee company shall be set-
off against the fees payable by the transferee company on its authorized capital
enhanced by the merger or amalgamation.
(12) The provisions of this section shall mutatis mutandis apply to a company or
companies specified in subsection (1) in respect of a scheme of compromise or
arrangement referred to in section 230 or division or transfer of a company referred to
clause (b) of sub-section (1) of section 232.
(13) The Central Government may provide for the merger or amalgamation of
companies in such manner as may be prescribed.
(14) A company covered under this section may use the provisions of section 232 for
the approval of any scheme for merger or amalgamation.

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 (8) MANDATORY PERMISSION BY THE COURTS31

Any scheme for mergers has to be sanctioned by the courts of the country. The
company act provides that the high court of the respective states where the transferor
and the transferee companies have their respective registered offices have the
necessary jurisdiction to direct the winding up or regulate the merger of the
companies registered in or outside India.

The high courts can also supervise any arrangements or modifications in the
arrangements after having sanctioned the scheme of mergers as per the section 392 of
the Company Act. Thereafter the courts would issue the necessary sanctions for the
scheme of mergers after dealing with the application for the merger if they are
convinced that the impending merger is ―fair and reasonable‖.
The courts also have a certain limit to their powers to exercise their jurisdiction
which have essentially evolved from their own rulings. For example, the courts will
not allow the merger to come through the intervention of the courts, if the same can
be effected through some other provisions of the Companies Act; further, the courts
cannot allow for the merger to proceed if there was something that the parties
themselves could not agree to; also, if the merger, if allowed, would be in
contravention of certain conditions laid down by the law, such a merger also cannot
be permitted. The courts have no special jurisdiction with regard to the issuance of
writs to entertain an appeal over a matter that is otherwise ―final, conclusive and
binding‖ as per the section 391 of the Company act.

(9) STAMP DUTY32

Stamp act varies from state to State. As per Bombay Stamp Act, conveyance
includes an order in respect of amalgamation; by which property is transferred to or
vested in any other person. As per this Act, rate of stamp duty is 10 per cent.

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4.4 NCLT’S POWER FOR FACILITATING RECONSTRUCTION OR
AMALGAMATION

This is covered by section 394. Where any person entitled to apply to NCLT,
demonstrates to the NCLT:
 That the compromise or arrangement has been proposed for the purposes of, or in
connection with, a scheme for the re-construction of any company or companies,
or the amalgamation of any two or more companies; and
 That under the scheme, the whole or part of any part of the undertaking, property
or liabilities of any company concerned in the scheme (the transferor company) is
to be transferred to another company (the transferee company);
 the NCLT may, while sanctioning the scheme or later, provide for the following
matters:
 The transfer to the transferee company of the whole or any part of the
undertaking, property or liabilities of any transferor company;
 The allotment or appropriation by the transferee company of any shares,
debentures, policies, or other like interests in that company which, under the
compromise or arrangement, are to be allotted or appropriated by that company to
or for any person;
 The continuation by or against the transferee company of any legal proceedings
pending by or against any transferor company;
 The dissolution without winding up of any transferor company;
 Provision to be made for any persons who, within such time and in such manner
as the
 NCLT directs, dissent from the compromise or arrangement; and Other incidental,
consequential and supplemental matters that are necessary to secure that the
reconstruction or amalgamation is fully and effectively carried out.
 In the case of amalgamation of a company that is being wound up, NCLT can
sanction the scheme only after receiving a report from the registrar that the affairs

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 of the company have not been conducted in a manner prejudicial to the interests
of its members or to public interest.

Similarly, no order for dissolution of a transferor company can be made by the

NCLT, unless a report is received from the Official Liquidator, on scrutiny of the
books and papers of the company, that the affairs of the company have not been
conducted in a manner prejudicial to the interests of its members or to public interest.
Within 30 days of the order, the company is bound to file it with the RoC.

4.5 DISSENTING SHARE-HOLDERS

Section 395 covers situations where

 The scheme or contract involves transfer of shares or any class of shares in a

transferor company to a transferee company; and

 The scheme is approved by holders of not less than nine-tenths in value of the
shares whose transfer is involved (excluding shares already held on the date of the
offer by the transferee company or its subsidiary or nominee) within four months
of the offer made by the transferee company.

 Where the two conditions are fulfilled, the transferee company can give notice to
the dissenting share-holders to acquire their shares, within two months of the
expiry of the four month period. The transferee company is entitled and bound to
acquire the shares of these dissenting share-holders on the same terms as the
shares of the approving shareholders are being transferred to the transferee
company. A dissenting share-holder can however approach NCLT, within one
month of the notice, requesting for an order against such acquisition.

One month after notice has been served on the dissenting share-holders, or if the
share-holder has approached NCLT, then on disposal of the matter by the NCLT, the

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transferee company has to send a copy of the notice to the transferor company. Along
with the notice, it has to:

 Send transfer deed, duly executed on behalf of the investor by any person
appointed by the transferee company, and executed on its own behalf by the
transferee company;

 Pay or transfer to the transferor company, the consideration payable to the

investors for the shares that the transferee company is entitled to receive.

On receipt of the above, the transferor company has to register the transferee
company as the holder of those shares. Within one month thereafter, it has to inform
the investor about the registration of transfer and receipt of money. The amounts
received by the transferor company in this manner, are to be held in a separate
account to be held in trust for the benefit of the concerned investors. In case the
transferee company or its subsidiaries or nominees already hold more than one tenth
in value of the shares of the same class as the shares whose transfer is involved, the
above provision regarding acquisition of shares from dissenting share-holders is
applicable only if 20

 the transferee company offers the same terms to all holders of the shares of that
class other than those held by the transferee or its subsidiaries or nominees; and •
the holders who approve the scheme or contract should not only represent nine-
tenths in value of the shares whose transfer is involved, but also represent three-
fourths in number of the holders of those shares.

Where after the transfer, the transferee company or its subsidiaries or nominees
hold more than nine-tenths in value of the shares or shares of that class, of the
transferor company-

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 o The transferee company has to give notice to other share-holders within
one month; and
o Any such holder, within three months of the notice, can require the
transferee company to acquire his shares.

In that case, the transferee company is entitled and bound to acquire those shares
on the same terms as the shares of the approving share-holders, or on terms mutually
agreed, or on terms set by the NCLT on application by the transferee company or the
dissenting share-holder.

4.6 AMALGAMATION IN NATIONAL INTEREST BY CENTRAL

GOVERNMENT33

Where the Central Government is satisfied that it is in public interest that two or
more companies should amalgamate, it can by order notified in the Official Gazette,
provide for their amalgamation into a single company. The company‘s constitution,
property, power, rights, interests, authorities and privileges, liabilities, duties and
obligations will be as specified in the order. Every member or creditor, including
debenture holder will have the same interest in or rights against the amalgamated
company, as they had in or against the original amalgamating company. In case of a
reduction in their interest or rights, they shall be entitled to compensation to be
decided by such authority as may be mentioned in the order. The compensation will
be paid by the amalgamated company.

4.7 WAITING PERIOD IN MERGER

International experience shows that 80-85% of mergers and acquisitions do not

raise competitive concerns and are generally approved between 30-60 days. The rest
tend to take longer time and, therefore, laws permit sufficient time for looking into
complex cases. The International Competition Network, an association of global

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competition authorities, had recommended that the straight forward cases should be
dealt with within six weeks and complex cases within six months. The Indian
competition law prescribes a maximum of 210 days for determination of combination,
which includes mergers, amalgamations, acquisitions etc. This however should not be
read as the minimum period of compulsory wait for parties who will notify the
Competition Commission.

In fact, the law clearly states that the compulsory wait period is either 210 days
from the filing of the notice or the order of the Commission, whichever is earlier. In
the event the Commission approves a proposed combination on the 30th day, it can
take effect on the 31st day. The internal time limits within the overall gap of 210 days
are proposed to be built in the regulations that the Commission will be drafting, so
that the over whelming proportion of mergers would receive approval within a much
shorter period.

The time lines prescribed under the Act and the Regulations do not take
cognizance of the compliances to be observed under other statutory provisions like
the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
(‗SEBI Takeover Regulations‘). SEBI Takeover Regulations require the acquirer to
complete all procedures relating to the public offer including payment of
consideration to the shareholders who have accepted the offer, within 90 days from
the date of public announcement. Similarly, mergers and amalgamations get
completed generally in 3-4 months‘ time. Failure to make payments to the
shareholders in the public offer within the time stipulated in the SEBI Takeover
Regulations entails payment of interest by the acquirer at a rate as may be specified
by SEBI. [Regulation 22(12) of the SEBI Takeover Regulations] It would therefore
be essential that the maximum turnaround time for CCI should be reduced from 210
days to 90 days.

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4.8 APPLICATION FOR DIRECTION

If necessary, an application for direction of the court to provide for all or any
matters indicated in Section 394(1). These are:

i. The transfer to the transferee company of the whole or any part of the undertaking,
property or liabilities of any transferor company;
ii. The allotment or appropriation by the transferee company of any shares, debentures,
policies, or other like interests in that company which, under the compromise or
agreement, are to be allotted or appropriated by that company to or for any person;
iii. The continuation by or against the transferee company of any legal proceedings
pending by or against any transferor company;
iv. The dissolution, without winding-up, of any transferor company;
v. The provision to be made for any persons who, within such time and in such manner as
the court directs, dissents from the compromise or arrangement; and
vi. Such incidental, consequential and supplemental matters as are necessary to secure
that the reconstruction or amalgamation would be fully and effectively carried out.

The court would pass an order. Alternatively, by adding a suitable prayer in the
main application, the court could be requested to give direction in regard to the above. In
fact, such a course would provide for expeditious completion of amalgamation
formalities.

Certificate
A certified copy of the order of the court dissolving the amalgamating company
or giving approval to the scheme of merger, should be filed with the Registrar of
Companies concerned within 30 days of the date of the court‘s order.

Court Order
A copy of the order of the court should be to attached to the memorandum and
articles of association of the transferee company [Section 39 391(4)]. As soon as the

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scheme of amalgamation has become effective, the members should be intimated through
the press. Government authorities, banks, creditors, customers and others should also be
informed.

4.9 PROCEDURE FOR MERGER AND ACQUISITION LAID DOWN IN THE

COMPANY’S ACT 1956 34

1. Permission for merger: Two or more companies can amalgamate only when
amalgamation is permitted under their memorandum of association. Also the acquiring
company should have the permission in its object clause to carry on the business of the
acquired company. In the absence of these provisions in the mergers and acquisitions, it
is necessary to seek the permission of the shareholders, board of directors and the
company law board before affecting the merger.

2. Information to the stock exchange: The acquiring and the acquired companies
should inform the stock exchanges where they are listed about the merger.

3. Preparation and approval of the draft scheme by BOD of each company: The
BOD of the individual companies should approve the draft proposal for amalgamation
and authorize the managements of companies to further pursue the proposal.

4. Application to the high court: An application for approving the draft amalgamation
proposal duly approved by the BOD of the individual companies should be made to the
high court.
5. 21 days’ notice for general meeting: To send notice for general meeting to every
member along with a statement setting forth the terms of the compromise or arrangement
and explaining its effect and particularly stating any material interests of the directors,
managing director or manager.
6. Shareholders and creditors meeting: The individual companies should hold separate
meetings of their shareholders and creditors for approving the amalgamation scheme. At

34
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least 75% of shareholders and creditors in separate meeting, voting in person or by proxy,
must accord their approval to the scheme.

The provisions of Company’s Act 1956 related to merger and acquisition

 Sec. 376: condition prohibiting reconstruction or amalgamation of company

 Sec. 391:Power to compromise or make arrangements with creditors and

members

 Sec. 392: Power of NLCT to enforce compromises and arrangements.

 Sec.393: deals with the information as to compromise or arrangement with

creditors and members.

 Sec.394: deals with the provisions for facilitating reconstruction and

amalgamation of companies.

 Sec.394A: relates to notice to be given to central government for application

under sec. 391 and sec. 394.

 Sec.395: deals with the powers and duties to acquire shares of share holders
dissenting from scheme or contract approved by majority.

 Sec.396: deals with the power of central govt. to provide for amalgamation of
companies in national interest.

 Sec. 396A: relates to preservation of books and papers of amalgamated company.

4.10 SEBI TAKEOVER CODE

As per recommendations of Justice P N Bhagwati committee and was incorporated in the
SEBI Regulation Act, 1977.

It is a set of guidelines given by SEBI relating to regulations of mergers and takeovers.

The salient features of the takeover code are as explained as under:
 Disclosure of holdings.

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  Public announcement and open offer.

 Offer price.

 Disclosure.

 Content of the offer document.

1. SEBI Takeover Code – Disclosure of holdings

 If an acquirer holding 5%-14% wants to acquire share in a target company, he is

bound to disclose such holding to target company or stock exchange within 2 days
of acquisition.

 If he is holding 15%-75% wants to purchase/sell share aggregating to 2% or more,

he is bound to disclose such holdings to target company within 2 days of such
acquisition.

 If he is holding more than 15% shares and a promoter and person having control
shall disclose his aggregate shareholding within 21 days before, 31st March to the
target company.

2. Public announcement and open offer:

 Any acquirer intending to hold shares (other than promoters holding) which
entitle 15% voting power can acquire such shares only after making public
announcement to acquire at least 20% voting power from shareholders through an
open offer.

 Acquirer holding more than 15% (other than promoters holding) but less than
75% of voting rights which entitles 5% voting rights in any financial year can do
so only after making public announcement to acquire at least 20% shares of target
company from shareholders through an open offer.

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  Any acquirer holding more than 75% shares (other than promoters holding) can
acquire further share only after public announcement to acquire at least 20%
shares from shareholders through an open offer.

3. SEBI Takeover Code – Offer Price

In determining the offer price it has to be ensured that all relevant parameters as
listed below are taken into account:
 Negotiated price under the agreement.

 Price paid for acquisition

 Average high and low prices of scripts of the acquiring company during the
period needs to be disclosed to the target company.

4. SEBI Takeover Code – Disclosure

 The offer document for such takeover has to disclose the following details in a
clear manner
 Detailed terms of the offer.

 Identity of the offer.

 Details of offerors existing holdings in Target Company.

5.SEBI Takeover Code – Contents of the offer document

As per the law the offer document has to contain the following:
 Offer‘s financial info.

 Intention to continue offeree‘s business and to make major long term change and
long term commercial justification of the offer.
6. Salient features of SEBI takeover code
i. Notification of takeover:-

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 If an individual or company acquires 5% or more of the voting capital of a
company, the target company and the stock exchange shall be notified
immediately.

ii. Limit to share acquisition:-

An individual or a company can continue acquiring the shares of another
company without making any offer to other shareholders until the individual or
the company acquires 15% of the voting capital.

iii. Public offer:

If the holding of the acquiring company exceeds 15%, a public offer to purchase a
minimum of 20% of the shares shall be made to the remaining shareholders through a
public announcement

iv. Offer price:

Once the offer is made to the remaining shareholders, the minimum offer price
shall not be less than the average of the weekly high and low of the closing prices
during the last 6 months preceding the date of announcement.

v. Disclosure:
The offer should disclose the detailed terms of the offer, identity of the offer
details of the officer‘s existing holdings in the offeree company etc., and the
information should be made available to the entire shareholder‘s at the same time
and in the same manner.

vi. Offer document:

This offer document should contain the offerer‘s financial information, it‘s intensions
to continue the offeree company‘s business and to make major change and long term
commercial justification for the offer.

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Merger or amalgamation of companies involves various issues and compliance not
even of the Companies Act,2013, but from the Regulators also depending upon the
nature of business of the company and sector under which it is operating. These may
include SEBI, RBI, CCI, Stock Exchanges, IRDAI, TRAI, etc.
• Section 5 of the Competition Act 2002 deals with the Combination and section 6
with the Regulation of combinations. The Competition Commission of India
(Procedure in regard to the transaction of business relating to combinations)
Regulations, 2011 prescribes the procedure and relevant forms for taking approvals in
case of such combinations.
• To encourage restructuring, merger and demerger, it has been given a special
treatment in the Income-tax Act, 1961 since the beginning. The Finance Act, 1999
clarified many issues relating to Business Reorganizations thereby facilitating and
making business restructuring tax neutral. Section 47 of the Income Tax Act, 1961
deals with the transactions which are not regarded as transfer.
• The unlisted companies are to follow the provisions of the Companies Act, 2013.
Whereas a listed company has to comply with the guidelines contained in the
Securities and Exchange Board of India (Listing Obligations and Disclosure
Requirements) Regulations, 2015 in addition to the Companies Act, 2013.
• Regulatory approval of the RBI is required for the merger /amalgamation of the
Banking companies. The Master Direction on amalgamation of Private Sector Banks,
Directions, 2016 issued by the RBI vide its Circular No. RBI/DBR/2015-16/22
Master Direction DBR.PSBD.No. 96/16.13.100/2015-16, dated April 21, 2016
provides the detailed issues relating to the amalgamation of Private Sector Banks. The
provisions of these Directions shall apply to all private sector banks licensed to
operate in India by the RBI and to the Non-Banking Financial Companies (NBFC)
registered with the RBI. The principles underlying these Directions would be
applicable, as appropriate, to public sector banks.
• Similarly the merger and amalgamation of the insurance companies requires the
regulatory approvals from the IRDA and the telecom companies require approval
from TRAI.

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 4.11 FLOW CHART OF MERGER PROCESS UNDER COMPANIES ACT, 2013

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113 | P a g e
 CHAPTER -5
VALUATION OF BUSINESS
AND
DATA FINDING AND ANALYSIS

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5. MERGERS AND ACQUISITIONS: VALUATION

Investors in a company that is aiming to take over another one must determine
whether the purchase will be beneficial to them. In order to do so, they must ask
themselves how much the Company being acquired is really worth.

Naturally, both sides of an M&A deal will have different ideas about the worth of a target
company: its seller will tend to value the company at as high of a price as possible, while
the buyer will try to get the lowest price that he can. There are, however, many legitimate
ways to value companies. The most common method is to look at comparable companies
in an industry, but deal makers employ a variety of other methods and tools when
assessing a target company. Here are just a few of them:

Comparative Ratios - The following are two examples of the many comparative metrics
on which acquiring companies may base their offers:

Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company
makes an offer that is a multiple of the earnings of the target company. Looking at the
P/E for all the stocks within the same industry group will give the acquiring company
good guidance for what the target's P/E multiple should be.

Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company

makes an offer as a multiple of the revenues, again, while being aware of the price-to-
sales ratio of other companies in the industry.

Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the
target company. For simplicity's sake, suppose the value of a company is simply the sum
of all its equipment and staffing costs. The acquiring company can literally order the
target to sell at that price, or it will create a competitor for the same cost. Naturally, it
takes a long time to assemble good management, acquire property and get the right

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equipment. This method of establishing a price certainly wouldn't make much sense in a
service industry where the key assets - people and ideas - are hard to value and develop

Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow
analysis determines a company's current value according to its estimated future cash
flows. Forecasted free cash flows (operating profit + depreciation + amortization of
goodwill – capital expenditures – cash taxes - change in working capital) are discounted
to a present value using the company's weighted average costs of capital (WACC).
Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.

5.1 PROCESS OF FUNDING

The process of funding in the case of mergers and takeovers may be arranged by a
company in a number of ways. It may be from its own funds, consisting of further issue
of equity and preference share capital, through rising of borrowed funds by way of
issuing various financial instruments. A company may borrow funds through the issue of
debentures, bonds, external commercial borrowings, issue of securities, loans from
Central or State financial institutions, banks, etc. Broadly we can divide them into three
categories as described below:

INTERNAL ACCRUALS: The retained earnings accumulated over a period of time by

well-managed companies may be utilized for the purpose of restructuring.

BORROWINGS: The required funds could be raised from banks and financial
institutions or through external commercial borrowings or by issue of debentures.

ISSUE OF SECURITIES: Funds may also be raised through issue of equity shares,
preference shares and other securities, depending upon the quantum and urgency.

FUNDING THROUGH VARIOUS TYPES OF FINANCIAL INSTRUMENTS

Funding may be made through various types of financial instruments. Funding may be
done through any of the following modes:

 Funding through Equity Shares

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  Preferential Allotment of Shares
 Funding through Preferential Shares
 Funding through Options or Securities with Differential Rights
 Funding though Swaps or Stock to Stock Mergers
 Funding through External Commercial Borrowings (ECBs) and Depository
Receipts (DRs)
 Funding through Financial Institutions and Banks
 Funding through Rehabilitation Finance
 Funding through Leveraged Buyouts

5.2 MERGERS AS A CAPITAL BUDGETING DECISION35

Like capital budgeting decision, merger deci-sion requires comparison between the
expected benefits [measured in terms of the present value of expected benefits/cash
inflows (CFAT) from the merger] with the cost of the acquisition of the target firm. The
acquisition costs include the payment made to the target firm‘s shareholders, payment to
discharge the external liabilities of the acquired firm less cash proceeds expected to be
realised by the acquiring firm from the sale of certain asset(s) of the target firm. The
decision criterion is ‗to go for the merger‘ if net present value (NPV) is positive; the
decision would be ‗against the merger‘ in the event of the NPV being negative.

 Determination of Incremental Projected free cash flow to the firm(FCFF)

 Determination of Terminal value

 Determination of appropriate discount rate or cost of capital

 Determination of Present value of FCFF

 Determination of cost of acquisition

35
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5.3 SHARE EXCHANGE RATIO

The relative number of new shares that will be given to existing shareholders of a
company that has been acquired or merged with another. After their old company shares
have been delivered, the exchange ratio is used to give shareholders the same relative
value in new shares of the merged entity.
An exchange ratio is designed to give shareholders an asset with the same relative value
of the asset they delivered upon the acquisition of the acquired company. Relative value
does not mean, however, that the shareholder receives the same number of shares or same
dollar value based on current prices. Instead, the intrinsic value of the shares and the
underlying value of the company will also be considered when coming up with an
exchange ratio.

Accounting for amalgamation –amalgamation in the nature of merger and

amalgamation in the nature of purchase- pooling of interest method, purchase
method
Amalgamation
Definition:
Halsubury‘s Law of England describe amalgamation as ―blending of two or more existing
undertaking into one undertaking, the shareholders of each blending company becoming
substantially the shareholders in the company which is to carry on the blended
undertaking. There may be amalgamation either by transfer of two or more undertakings
to a new company or by the transfer of one or more undertakings to an existing company.

5.4 DISTINCTION BETWEEN MERGER AND PURCHASE

In an amalgamation which is in the nature of merger, there is a genuine pooling not
merely of the assets and liabilities of the amalgamating companies but also of the
shareholders‘ interest and of the business of these companies. The accounting treatment
of such an amalgamation should ensure that the resultant figures of assets, liabilities,
capital and reserves more or less represent the sum of the relevant figures of the
amalgamating companies.

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An amalgamation in the nature of purchase is in effect a mode by which one company
acquires another company. As a consequence, the shareholders of the transferor
(acquired) company normally do not continue to have a proportionate share in the equity
of the transferee (acquiring) company. Actually it may not be intended to continue the
business of the transferor company.
Methods of Accounting for Amalgamation

There are two methods of accounting for amalgamations, namely

(i) The pooling of interests method and (ii) the purchase method.

(i) The pooling of interests method

This method is followed in case of an amalgamation in the nature of merger. Under this
method, the assets, liabilities and reserves of the transferor company are recorded by the
transferee company at their existing carrying amounts and in the same form as at the date
of amalgamation. The difference between the amount recorded as share capital issued
plus any additional consideration in the form of cash or other assets on the one hand and
the amount of share capital of the transferor company on the other hand is adjusted in
reserves.
(ii) The purchase Method
This method is followed in case of an amalgamation in the nature of purchase. Under this
method, the transferee company accounts for the amalgamation either by incorporating
the assets and liabilities of the transferor company at their existing carrying amounts or
by allocating the consideration to individual identifiable assets and liabilities of the
transferor company on the basis of their fair values at the date of amalgamation.
The reserves of the transferor company, other than the statutory reserves, are not included
in the financial statements of the transferee company. Any excess of the amount of the
consideration over the value of the net assets of the transferor company acquired by the
transferee company is recognized in the transferee company‘s books of account as
goodwill arising on amalgamation. If the amount of the consideration is lower than the
value of net assets acquired, the difference is credited to capital reserve
Consideration

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For the purpose of accounting for amalgamation, Accounting Standard 14 (AS-14)
defines the term ‗consideration‘ as ―aggregate of the shares and other securities issued
and payment made in the form of cash or other assets by the transferee company to the
shareholders of the transferor company‖. The amount depends on the terms of the
contract between the transferor company and the transferee company.
Methods of Consideration
•Lump-sum Method

•Net Assets Method

•Net Payment Method

•Intrinsic Worth Method

Methods of Consideration
•Lump-sum Method
It is the simplest method. In it, the consideration is stated as a lump-sum. For example, it
may be stated that P Ltd. takes over the business of S Ltd. for Rs.50, 00,000. Here, the
sum of Rs.50,00,000 is the consideration.

•Net Assets Method

Under this method, the consideration is arrived at by adding the agreed values of all the
assets taken over by the transferee company and deducting there from the agreed values
of the liabilities taken over by the transferee company. The agreed value means the
amount at which the transferor company has agreed to sell and the transferee company
has agreed to take over a particular asset or a liability.

•Net Payment Method

Under this method, consideration is ascertained by adding up the cash paid, agreed value
of assets given and the agreed values of the securities allotted by the transferee company
to the transferor company in discharge of consideration. Suppose P Ltd. for business
taken over from S Ltd. agrees to pay Rs.5,00,000 in cash and allot to S Ltd. 4,00,000

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equity shares of Rs.10 each fully paid at an agreed value of Rs.15 per share. In this case,
the consideration will be Rs.65,00,000(5,00,000 + 60,00,000).

•Intrinsic Worth Method

Consideration may have to be calculated on the basis of the agreed value of shares of the
transferor company. That consideration amount will be discharged through allotting
shares of Transferee Company to the transferor company. Suppose P Ltd. takes over the
business of S Ltd. and it is agreed between S Ltd. and P Ltd. that the value of one share
of S Ltd. is Rs.13( paid up value is Rs.10 per share for 60,000 shares). Then, the
consideration is Rs.13*60,000=Rs.78,00,000. This amount will be discharged through
allotting shares of P Ltd. to S Ltd. One share value of P Ltd.
Is Rs.25 (paid up value is Rs.10 per share). So, P Ltd. will allot
Rs.78,00,000/25=3,12,000 shares to S Ltd. This is called intrinsic worth method.

Accounting for amalgamation -procedure laid down under Indian companies act of
1956
Laws Regulating Merger
Following are the laws that regulate the merger of the company:- (I) The Companies Act ,
1956 Section 390 to 395 of Companies Act, 1956 deal with arrangements,
amalgamations, mergers and the procedure to be followed for getting the arrangement,
compromise or the scheme of amalgamation approved. Though, section 391 deals with
the issue of compromise or arrangement which is different from the issue of
amalgamation as deal with under section 394, as section 394 too refers to the procedure
under section 391 etc., all the section are to be seen together while understanding the
procedure of getting the scheme of amalgamation approved. Again, it is true that while
the procedure to be followed in case of amalgamation of two companies is wider than the
scheme of compromise or arrangement though there exist substantial overlapping.

The procedure to be followed while getting the scheme of amalgamation and the
important points, are as follows:-

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(1) Any company, creditors of the company, class of them, members or the class of
members can file an application under section 391 seeking sanction of any scheme of
compromise or arrangement. However, by its very nature it can be understood that the
scheme of amalgamation is normally presented by the company. While filing an
application either under section 391 or section 394, the applicant is supposed to disclose
all material particulars in accordance with the provisions of the Act.
(2) Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order
for the meeting of the members, class of members, creditors or the class of creditors.
Rather, passing an order calling for meeting, if the requirements of holding meetings with
class of shareholders or the members, are specifically dealt with in the order calling
meeting, then, there won‘t be any subsequent litigation. The scope of conduct of meeting
with such class of members or the shareholders is wider in case of amalgamation than
where a scheme of compromise or arrangement is sought for under section 391
(3) The scheme must get approved by the majority of the stake holders viz., the members,
class of members, creditors or such class of creditors. The scope of conduct of meeting
with the members, class of members, creditors or such class of creditors will be
restrictive some what in an application seeking compromise or arrangement.
(4) There should be due notice disclosing all material particulars and annexing the copy
of the scheme as the case may be while calling the meeting.
(5) In a case where amalgamation of two companies is sought for, before approving the
scheme of amalgamation, a report is to be received form the registrar of companies that
the approval of scheme will not prejudice the interests of the shareholders.
(6) The Central Government is also required to file its report in an application seeking
approval of compromise, arrangement or the amalgamation as the case may be under
section 394A. (7) After complying with all the requirements, if the scheme is approved,
then, the certified copy of the order is to be filed with the concerned authorities.

Carry forward and set off of business losses and unabsorbed depreciation (sec.72A):
According to sec 72A, 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:-

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 (i) Amalgamated company continuously holds, for a minimum of 5 years 3/4th of
value of fixed assets of the amalgamating company acquired in the scheme of
amalgamation.
(ii) Continues the business of the amalgamating company for a minimum of 5
years.
(iii) The amalgamated company fulfils such other conditions as may be prescribed
to ensure the revival of the business of the amalgamating company or to
ensure that the amalgamation is for genuine business purposes.
(iv) The amalgamation should be of a company owning an industrial undertaking
or a ship or a hotel with another company or an amalgamation of a banking
company.

2. Expenditure on scientific research:

Where an amalgamating company transfers any asset represented by capital expenditure
on scientific research to the amalgamated Indian company, in a scheme of amalgamation,
unabsorbed capital expenditure in the books of the amalgamating company will 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 shall be allowed to be written off by the amalgamated company
in the same number of balance installments.

4. Expenditure on Know-how:
Regarding the expenditure incurred on know-how, the amalgamated company shall be
entitled to claim deduction with respect to the transferred undertaking, to the same extent
and for the same residual period as otherwise would have been allowed to the
amalgamating company, had such an amalgamation not taken place.

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5. Expenditure for obtaining license to operate telecommunication services:
When the amalgamating company transfers license to the Indian amalgamated company,
in an amalgamation scheme, the expenditure on acquisition of license, not yet written off,
is allowed to the amalgamated company in the same number of balance installments.

6. Preliminary expenses:
Deduction of preliminary expenses will be made in the books of the amalgamated
company in the same manner as would have been allowed to the amalgamating company.

7. Expenditure on prospecting, etc of certain minerals:

The amount of expenditure on prospecting, etc. of certain minerals of the amalgamating
company that are not yet written off, shall be allowed as deduction to the amalgamating
company.

8. Capital expenditure on family planning:

The capital expenditure on family planning not yet written off shall be allowed to the
amalgamated company in the same number of balance installments.

9. Bad debts:
When in the scheme of amalgamation, the debts of amalgamating company have been
taken over by the amalgamated company and subsequently such debt will be allowed as a
deduction to the amalgamated company in the same manner as would have been allowed
to the amalgamating company.

5.5 DATA FINDINGS AND ANALYSIS

This section would cover the analysis for the sample companies under the research.
Each and every sector would be analyzed with its synergy and financial operations
post-merger and pre-merger. The section would be able to generate the analysis and
impact of mergers and acquisitions on the shareholders wealth.

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 Jet Airways and Air Sahara merger36

Jet Airways started its business operations in 1993 and is now the largest company in
the airline industry in terms of market share. The company has a fleet size of 88
aircraft and flies to over 60 destinations worldwide with over 360 flights scheduled for
a single day.

Synergy
Fleet Jet Air Sahara Merged entity
Airways
B737-300 - 2 2
B737-400 6 3 9
B737-700 13 7 20
B737-800 28 7 35
B737-900 2 2
CRJ-200 7 7
ATR-72 8 - 8
A330-200 2 - 2
A340-300 3 - 3
Total 62 26 88

Table: Fleet Size of Jet Airways and Air Sahara Source: Centre for Asia Pacific
Aviation, 2007. The major efficiency and synergy comes because both the companies
use B737 as their domestic fleet efficiencies. Air Sahara has B737s which are more
than 10 years old and CRJ-200 which were taken on lease for higher rentals. Jet
Airways will have to rationalize the cost aspect of operating and maintaining the fleet
size. Since Jet Airways does not have a proper mix of aircrafts this would lead to
higher maintenance cost for the merged entity (Centre for Asia Pacific Aviation, 2007).

Financial Analysis37

The acquisition between Jet Airways and Air Sahara took place in the year 2006.

36
Data on M&As is extracted largely from monthly review of Indian economy, (a publication of
CMIE, Bombay). It provides information on M&As regularly from 1995.
37
4. Websites of BSE and NSE also give the names of acquirer and target companies and not
the year of merger. The list is not exhaustive

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 Hence below analysis has been done two years prior to the merger i.e. during 2004-05
and 2005-06 and two years after the merger i.e. 2007-08 and 2008-09 respectively.
JET AIRWAYS 2004-05 2005- 2006-07 2007-08 2008-09
06
Operating Profit Margin 33.20% 24.80% 14.70% 8.60% 5.20%

Gross Operating Margin 24.00% 19.80% 6.60% 4.10% -6.40%

Net Profit Margin 9.00% 7.90% 0.40% -2.90% -3.50%

Return on Capital 31.60% 21.20% 13.80% 6.30% 4.00%

Employed

Return on Net Worth 22.40% 21.10% 1.30% -13.70% -31.10%

Debt-Equity Ratio 1.7 2.3 2.9 6.5 12.6

EPS 45.4 52.4 3.2 -29.3 -46.6

PE 27.6 18.5 195.8 -17.7 -3.3

(Appendix 2)

On carefully looking at the above figures it can be seen that the operating margins of
Jet Airways were very strong in the year 2004-05. Later the operating margins started
slowing down in the coming years. Post-merger the operating margins of Jet Airways
had gone down to 5.2% from an earlier five year high of 33.2%. Gross Profit margin
was at a very strong 24% in 2004-05 however post-merger it has moved into a negative
territory of (6.4%). Return on capital employed proves the efficiency with which the
business is maintained. Looking at the post-merger results the shareholders who act as
owners would surely be disappointed with only 4% return compared to 31.6% in 2004-
05. Similarly the Return on Net worth for the company has also gone negative and

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post-merger it has not added any significant value for the shareholders. The debt equity
ratio of the firm at current level is around 10 times higher than in the year 2004-05
which shows the level of leverage which the company wants to drive on. The EPS
which is the crude factor for any shareholder has seen a dip of -46.6%. Looking at the
P/E ratio clearly shows that the stock has been highly undervalued and shareholders
wealth has been deteriorated.

Overall it can be seen that Jet Airways has been able to post positive operating margins
post merger however Kingfisher Airlines have failed to do that. Kingfisher Airlines
also has a negative return on capital employed compared to Jet Airways. But on the
other parameters like Earnings per share, Return on Net Worth and Net Profit Margin
have been negative for both the companies. It can thus be inferred that mergers and
acquisitions have not created enough shareholder wealth post merger.

OIL AND GAS SECTOR OVERVIEW

Oil and gas is a industry of great importance for a developing country like India. The
industry supports many industries together like transportation, aviation, manufacturing
and other ancillary sectors which collectively account for 15% of the GDP. Domestic
crude oil production fell marginally from 34 million tones in 2007- 2008 to 33.5
million tons in 2008-2009. In the same time, production of natural gas went up from
32.4 billion cubic meters in 2007-08 to 32.8 billion cubic meters in 2008-09. India is
slowly emerging as one of the hubs for refining oil products because of the cost
advantage compared to other Asian countries. India is the fifth largest in the world
with refining capacity and holds close to three percent of the global oil refining
capacity. The government of India has taken several initiatives in this sector. It has
allowed 100% foreign direct investment in all the private refineries and 26% in all the
government owned refineries across the country through the automatic approval route.

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 Indian Oil Corporation Limited and IBP Merger

IOC (Indian Oil Corporation) came into being in the year 1959. IOC operates mainly
in the downstream segment which involves refining and marketing of oil and petrol
based products. It operates into aviation turbine fuel, petrol spirit, high speed diesel
and liquefied petroleum gas. It also has three subsidiaries CPCL, BRPL and IOBL
(www.iocl.com)

IBP is one of the oldest companies in the oil and gas sector in India which was
established in the year 1909. The company is Indo-Burma Petroleum based company
operating in India. Indian Oil Corporation and IBP Merger took place in 2007 with a
share swap ratio of 1.25: 1. This means that for every IOC shareholders would get 125
shares for every 100 IBP shares held (Hindu Business Line, 2007).

Synergy

IOC would get synergies in the form of tax savings to the tune of Rs 45 crores. IBP is
an oil marketing company which has a very strong presence in marketing and
distribution of oil products mainly in northern India. IBP also has close to 1,295 retail
outlets which would add to the benefits for distribution of IOC. IBP also serves other
segments like industrial explosives and cryogenics. IOC on the other hand is the largest
downstream operator of oil and gas in India. IOC is also the largest refining company
in the country. IOC has over 22,000 retail outlets across India. Stronger Distribution
would be one of the key for IOC from this merger. This would give better visibility
and brand power to IOC (Venkiteswaran, 2008).

Secondly IBP has engineering expertise of manufacturing cryogenic containers and

transporting gas. IOC would get the same expertise from this merger and as a result of
this the company has now launched a branded gas in the market which has a
leadership. Its gas based products are launched under the brand name ‗Indane‘
(Financial Express, 2004).

IOCs share in the diesel segment would grow to 50% from the present 40%. IBP also

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 has 2500 petrol pumps across the country and IOC has 8,200 petrol pumps across the
country. The integration with petrol pumps would lead to rise in market share from
petrol based products to 60% from 55%.

Interview was conducted with Mr Sunil Rode of IOC who is the head of Logistics and
Transportation at IOC. According to him in a business like oil and gas where prices are
regulated by the government it becomes very important to fight on costs and gain
market share. The rationale and logic behind the merger was that both the businesses
have identical storage, distribution and marketing infrastructure. Merger with IBP
would lead to doing away with existing IBP and IOC overlap infrastructure which
would help in saving of substantial costs. Several petrol pumps and outlets which are
closely located to each other would be dismantled for better fuel station rationalization.
However in the entire merger the main challenge would be with respect to the
employee unions and associations which IBP has. Managing smooth integration of
employees was the main challenge in the entire process.

Below is the Integration Model which was shared by Mr Sunil Rode

S No IBP Value Chain Integration Rationale point for Merger

activities Pattern
1 Cryogenics Main Business Benefit for IOC (Access to technology
Containers and expertise in business)
2 Explosives Main Business Benefit for IOC
3 Petrol Retail High High level of synergies for IOC
Integration
possibility
4 Liquified High High level of synergies for IOC
Petroleum Gas Integration
5 Lube High IBP ‗Red‘ is a weak brand compared to
Integration IOC‘s SERVO brand. However
with existing infrastructure would help
IOC build from current level
6 Finance High Would add to the balance sheet and the
Integration size of the books for IOC

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 Financial Analysis

The acquisition between Indian Oil Corporation and IBP took place in the year 2006.
Hence below analysis has been done two years prior to the merger i.e. during 2004-05
and 2005-06 and two years after the merger i.e. 2007-08 and 2008-09 respectively.

IOCL 2004-05 2005-06 2006-07 2007-08 2008-09

Operating Profit 5.30% 4.50% 5.00% 4.60% 4.40%
Margin

Gross Operating 5.80% 5.10% 5.20% 5.20% 2.30%

Margin

Net Profit Margin 3.50% 2.80% 3.50% 2.80% 1.00%

Return on Capital 19.70% 16.60% 20.30% 17.90% 18.20%

Employed

Return on Net 18.80% 16.80% 21.50% 16.90% 6.70%

Worth

Debt-Equity Ratio 0.67 0.9 0.78 0.86 1.02

EPS 42.17 42.37 64.65 58.51 24.79

PE 10.39 13.78 6.19 7.61 15.61

(Appendix 6)
Indian Oil Corporation with its merger with IBP has seen deterioration in the overall
shareholder wealth for the company. The operating margin pre merger for the company
was at 5.3% which dropped to 4.4% after the merger. Similarly gross profit margins
for the company went down half from 5.8% in 2004-05 to 2.3% in 2008-09. Return on
Capital employed and Return on net worth has also dropped significantly post merger.
The net profit margin for the company has dropped from 3.5% to 1% in 2008-09 (post

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 merger). EPS which is the indicator of shareholders wealth has also dropped from Rs
42 to Rs 24 in 2008-09. The valuations of the company had reduced in the first year
post merger however the valuations started increasing on the P/E multiple and it is
close to 16 times its net earnings. Overall the merger of IOCL and IBP has not been
able to create enough wealth for its shareholders.

THE DAIMLERCHRYSLER MERGER

Summary
In the mid-1990s, Chrysler Corporation was the most profitable automotive producer in
the world. Buoyed by record light truck, van, and large sedan sales, revenues were at an
all-time high. Chrysler had taken a risk in producing vehicles that captured the bold and
pioneering American spirit when imports dominated the market – the Dodge Ram, the
Jeep Grand Cherokee and the LH Sedan Series. In these vehicles Chrysler found an
instant mass appeal, and its U.S. market share climbed to 23% in 1997. As revenues and
market share rose, product development costs shrank to 2.8% of revenues - compared
with 6% at Ford and 8% at General Motors1.Chrysler's integrated design teams and
noncompetitive relationships with suppliers kept costs down, while its marketing
department scored success after success in gauging consumer tastes. Chrysler had always
fashioned itself the bold and risk-taking underdog. It had brought itself back from the
brink of bankruptcy four times since the Second World War, and its boom bust revenue
flow pattern had earned it a "comeback kid" reputation. With $7.5 billion in cash on hand
and a full range of best-selling products, Chrysler finally seemed ready in 1997 to
weather the volatile American automotive business cycle on its own – without
government bailouts or large-scale R&D cutbacks2. Its wealth did not go unnoticed:
Investor Kirk Kerkorian, a 13% shareholder, threatened to mount a takeover -- citing "the
management's practice of cash hoarding" as his reason. In 2001, three years after a
"merger of equals" with Daimler-Benz, the outlook is much bleaker. The financial data is
sobering: Chrysler Group is on track to hemorrhage $3 billion this year, its U.S. market
share has sunk to 14%, earnings have slid by 20%, and the once independent company
has been fully subordinated to Stuttgart4. Its key revenue generators – the minivan, the
Jeep SUV, and the supercharged pickup truck – have all come under heavy competition

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from Toyota, Honda, General Motors and Ford. Chrysler continues to make few
passenger cars of note, save the Neon and limited-release Viper and Prowler. In the
words of DaimlerChrysler CEO Jürgen Schrempp, "What happened to the dynamic, can-
do cowboy culture I bought?"

The Rationale for a "Merger of Equals"

On July 17, 1997, Chrysler CEO Bob Eaton walked into the auditorium at company
headquarters in Auburn Hills, Michigan, and gave the speech of his life. Instead of
reveling in four years of rapid growth, he warned of trouble brewing on the horizon. His
urgent oratory, adapted from the nonfiction bestseller The Perfect Storm, a tale of three
fishermen caught at the confluence of three potent storms off the Canadian coast, warned
that a triad of similar factors threatened to sink Chrysler in the coming decade. "I think,"
Eaton said, "there may be a perfect storm brewing around the industry today. I see a cold
front, a nor'easter, and a hurricane converging on us all at once.6" The cold front was
chronic overcapacity, the nor'easter was a retail revolution that empowered buyers, and
the hurricane was a wave of environmental concerns that threatened the very existence of
the internal combustion engine. "Read The Perfect Storm, and you will learn," Eaton
implored the assembled executives, "that when a seventy-two foot boat tries to climb a
hundred-foot wave and doesn't make it, it slides back down the face of the wave, out of
control and plunges into the trough, stern first. Sometimes the boat bobs back up.
Sometimes it doesn't.7‖ "In the book, the lesson was that there's only one way to survive
the perfect storm. Don't go there. Be somewhere else" Eaton said. "And don't do it alone"
Daimler- Benz, meanwhile, was looking for a soul-mate. Despite a booming U.S.
economy, its luxury vehicles had captured less than 1% of the American market9. Its
vehicle production method was particularly labor intensive - requiring nearly twice as
many workers per unit produced over Toyota's Lexus division. It recognized that it could
benefit from an economy of scale in this capital-intensive industry. With $2.8 billion in
annual profits, remarkable efficiency, low design costs, and an extensive American
dealership network,Chrysler appeared to be the perfect match. On May 7th, 1998, Eaton
announced that Chrysler would merge with Daimler-Benz. Thanks to a $37 billion stock-
swap deal, the largest trans-Atlantic merger ever, Chrysler would not "do it alone" any

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longer10. Daimler-Benz CEO Jürgen Schrempp hailed the union as "a merger of equals, a
merger of growth, and a merger of unprecedented strength". The new company, with
442,000 employees and a market capitalization approaching $100 billion, would take
advantage of synergy savings in retail sales, purchasing, distribution, product design, and
research and development. When he rang the bell at the New York Stock Exchange to
inaugurate trading of the new stock, DCX, Eaton predicted, "Within five years, we'll be
among the Big Three automotive companies in the world". Three years later
DaimlerChrysler's market capitalization stands at $44 billion, roughly equal to the value
of Daimler-Benz before the merger13. Its stock has been banished from the S&P 500, and
Chrysler Group's share value has declined by onethird relative to pre-merger values.
Unlike the Mercedes-Benz and Smart Car Division, which posted an operating profit of
EUR 830 million in Q3 2000, the Chrysler Group has been losing money at an alarming
rate. In the same quarter, it lost $512 million14.

WHY THE MERGER FAILED

Culture Clash:
To the principals involved in the deal, there was no clash of cultures. ―There was a
remarkable meeting of the minds at the senior management level. They look like us, they
talk like us, they‘re focused on the same things, and their command of English is
impeccable. There was definitely no culture clash there.‖. Although DaimlerChrysler's
Post-Merger Integration Team spent several million dollars on cultural sensitivity
workshops for its employees on topics such as "Sexual Harassment in the American
Workplace" and "German Dining Etiquette," the larger rifts in business practice and
management sentiment remain unchanged. James Holden, Chrysler president from
September 1999 through November 2000, described what he saw as the "marrying up,
marrying down" phenomenon. "Mercedes was universally perceived as the fancy, special
brand, while Chrysler, Dodge, Plymouth and Jeep [were] the poorer, blue collar
relations". This fueled an undercurrent of tension, which was amplified by the fact that
American workers earned appreciably more than their German counterparts, sometimes
four times as much. The dislike and distrust ran deep, with some Daimler-Benz

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executives publicly declaring that they "would never drive a Chrysler". "My mother
drove a Plymouth, and it barely lasted two-and-half years," commented Mercedes-Benz
division chief Jürgen Hubbert to the then Chrysler vice chairman, pointed out to the
Detroit Free Press that "The Jeep Grand Cherokee earned much higher consumer
satisfaction ratings than the Mercedes M-Class". With such words flying across public
news channels, it seemed quite apparent that culture clash has been eroding the
anticipated synergy savings. Much of this clash was intrinsic to a union between two
companies which had such different wage structures, corporate hierarchies and values. At
a deeper level, the problem was specific to this union: Chrysler and Daimler- Benz's
brand images were founded upon diametrically opposite premises. Chrysler's image was
one of American excess, and its brand value lay in its assertiveness and risk-taking
cowboy aura, all produced within a cost controlled atmosphere. Mercedes-Benz, in
contrast, exuded disciplined German engineering coupled with uncompromising quality.
These two sets of brands, were they ever to share platforms or features, would have lost
their intrinsic value. Thus the culture clash seemed to exist as much between products as
it did among employees. Distribution and retail sales systems had largely remained
separate as well, owing generally to brand bias. Mercedes-Benz dealers, in particular, had
proven averse to including Chrysler vehicles in their retail product offerings. The logic
had been to protect the sanctity of the Mercedes brand as a hallmark of uncompromising
quality. This had certainly hindered the Chrysler Group's market penetration in Europe,
where market share remained stagnant at 2%19. Potentially profitable vehicles such as
the Dodge Neon and the Jeep Grand Cherokee had been sidelined in favor of the less-
cost-effective and troubled Mercedes A-Class compact and M-Class SUV, respectively.
The A-Class, a 95 hp, 12 foot long compact with an MSRP of approximately $20,000,
competed in Europe against similar vehicles sold by Opel, Volkswagen, Renault and Fiat
for approximately $9,000-$16,000. Consumers who ordinarily would have paid a
premium for Mercedes' engineering and safety record had been disappointed by the A-
Class – which failed an emergency maneuver test conducted by a Swedish television
station in 199920. The A-Class appeared both overpriced and under engineered for the
highly competitive European compact market. The Dodge Neon, in contrast, could have
competed more effectively in this segment with an approximate price of $13,000, similar

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mechanical specifications, and a record of reliability. Brand bias, however, had prevented
this scenario from becoming reality. Differing product development philosophies
continued to hamper joint purchasing and manufacturing efforts as well. Daimler-Benz
remained committed to its founding credo of "quality at any cost", while Chrysler aimed
to produce price-targeted vehicles. This resulted in a fundamental disconnect in supply-
procurement tactics and factory staffing requirements. Upon visiting the Jeep factory in
Graz, Austria, Hubbert proclaimed: "If we are to produce the M-Class here as well, we
will need to create a separate quality control section and double the number of line
workers. It simply can't be built to the same specifications as a Jeep21".

Mismanagement:
In autumn 2000, DaimlerChrysler CEO Jürgen Schrempp let it be known to the world –
via the German financial daily Handelsblatt - that he had always intended Chrysler
Group to be a mere subsidiary of DaimlerChrysler. "The Merger of Equals statement was
necessary in order to earn the support of Chrysler's workers and the American public, but
it was never reality"22. This statement was relayed to the English-speaking world by the
Financial Times the day after the original news broke in Germany. To be sure, it was
apparent from Day One that Daimler-Benz was the majority shareholder in the
conglomerate. It controlled the majority of seats on the Supervisory Board; yet the
DaimlerChrysler name and two parallel management structures under
co-CEOs at separate headquarters lent credence to the "merger of equals" notion. This
much,however, is clear: Jürgen Schrempp and Bob Eaton did not follow a coordinated
course of action in determining Chrysler's fate. During 1998-2001, Chrysler was neither
taken over nor granted equal status. It floated in a no man's land in between. The
managers who had built Chrysler's "cowboy bravado" were no more. Some remained on
staff, feeling withdrawn, ineffective and eclipsed by the Germans in Stuttgart. Others left
for a more promising future at G.M. or Ford. The American dynamism faded under subtle
German pressure, but the Germans were not strong enough to impose their own
managers. According to a Daimler-Benz executive, "Eaton went weeks without speaking
with Jürgen Schrempp. He preferred to maintain lower-level contact. .Jürgen, meanwhile,
was afraid of being labeled a takeover artist. He left Chrysler alone for too long". Why?
According to one well-placed senior executive at Chrysler, ―Jurgen Schremp looked at

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Chrysler‘s past success and told himself there is no point in trying to smash these two
companies together. Some stuff was pulled together but they said operationally let‘s let
the Chrysler guys continue to run it because they have done a great job in the past. What
they didn‘t take into account was that immediately prior to the consummation of the
merger or shortly thereafter, enough of the key members of that former Chrysler
management team left. They saw the forest but they didn‘t realize that removing four or
five key trees was going to radically change the eco system in that forest. It was a
misjudgment. As a result, Chrysler sat in apathy, waiting for Daimler's next move - a
move which came too late – eleven months after Eaton's retirement -- when Schrempp
installed a German management team on November 17, 2000. During that interval,
Chrysler bled cash. After the merger, many people in Auburn Hills observed that co-
CEO Bob Eaton appeared withdrawn, detached, and somewhat dispassionate about the
company he continued to run. Even Schrempp encouraged him to "act like a co-chairman
and step up to the podium…" to no avail. Two valuable vice-presidents, engineer Chris
Theodore and manufacturing specialist Shamel Rushwin, left for jobs at Ford24.
According to then-president Peter Stallkamp, Eaton "had really checked-out about a year
before he left. . .The managers feared for their careers, and in the absence of assurance,
they assumed the worst. There were a good eighteen months when we were being
hollowed out from the core by the Germans' inaction and our own paralysis". During the
period 1998-2000, the Honda Odyssey came to rival the Dodge Caravan, the Toyota
Tundra threatened the Dodge Ram, and SUVs from GM, Ford, Nissan and Toyota
attacked Jeep's market share. Chrysler responded with little innovations, and competitive
price reductions only began in Q2 2001. Its traditional dominance in the SUV and light
truck market had been challenged, and it had not adequately responded. While Chrysler's
management languished, the market continued to function, and the industry left Chrysler
in the dust. Synergy savings are only achieved when two companies can produce and
distribute their wares more efficiently than when they were apart. Owing to culture clash
and a poorly integrated management structure, DaimlerChrysler is unable to accomplish
what its forbears took for granted three years ago: profitable automotive production.38

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 CHAPTER -6
POST TRANSACTION INTEGRATION-
RISKS AND REALIZATIONS OF SYNERGIES:

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6. POST-INTEGRATION MATTERS

Once the integration steps are completed in a particular jurisdiction, the process
will begin of completing the relevant accounting entries to reflect the various transactions
both at a group and local statutory level, updating legal books and records, making any
post-integration legal filings as required, and, for example, making any applications to
obtain relief from stamp taxes. In order to keep a clear paper trail of the steps and the
decisions taken, comprehensive ―closing binders‖ of the legal documents should be
compiled (most often now in electronic form).This will prove invaluable in the event that
the impact of a particular transaction is challenged by any authority in the future.

6.1 100 DAYS PLAN:39 The integration strategy must be transferred into an
actionable master plan outlining how the integration will be implemented. Thus, a plan
for the first few days as well as the first 100 days following the acquisition needs to be
developed. Day one preparation includes developing the overall target picture and target
organization structure. A communication and change management plan needs to be
designed to ensure effective communication of the shared vision and mobilization of all
relevant stakeholders. It is imperative to communicate goals, achievements and next steps
often and throughout the entire integration process in order to avoid uncertainty or
frustration among employees. The plan for the first hundred days outlines all major
actions, milestones, and responsibilities. This plan is typically divided into three stages:
analyzing the current state of the company, establishing the to-be-design of the newly
integrated entity, and finalizing the integration execution plan. As with the integration
levels, it is reasonable to differentiate between integration areas such as Sales, HR or IT
and to develop work streams accordingly. Ultimately, the first hundred days should result
in a comprehensive as-is analysis of both companies, a detailed to-be-design regarding
processes, functional areas and systems as well as a precise plan how to implement the
to-be-design and therefore execute the integration.

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Communication plan40
Communication plays a critical role in the development and implementation of a
robust integration plan and is a key thread underpinning and supporting many of the legal
and tax issues to be considered and addressed. All integrations should have a well-
developed communication plan which runs through the life of the project, though clearly
more activity might be expected in the initial stages of the process. The communication
plan should address internal communications to all staff, legally required
communications to works councils, unions and employee representatives, as well as
external communications, which can include government authorities, suppliers,
customers and joint venture partners. Given the structured plan is a valuable resource and
important element of an effective integration process.

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6.2 INTEGRATION METHOD

The information gathered through due diligence will allow planning to commence in
respect of the appropriate local integration method(s).
Identify which entity should be the surviving entity in each jurisdiction, after careful

Consideration of all relevant factors, for example:

• Preservation of tax attributes
• Liabilities of each entity
• Impact on employees and employee representative bodies
• Third-party contracts of each entity
• Internal operational and ―political‖ considerations

Identify local integration method:

• Does local law provide for a statutory merger?
• Will the integration have to be accomplished by means of a business/ asset transfer with
subsequent dissolution and liquidation of the transferring entity?
• Which method of integration is the most tax efficient?

Should the entities pre-integration be structured as:

• Brother/sister
• Parent/subsidiary

What documentation is required to effect the proposed integration?

Documents may include:
• Asset transfer agreements
• Corporate resolutions
• Notarial deeds
• Registrations with the local commercial registry

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Will the chosen integration method require the establishment of new entities?

If so, consider the impact on timing. In some jurisdictions the establishment of a new
entity may take several months and may also require new tax registrations, bank
accounts, easehold/freehold premises, etc.
Will the chosen integration method require the registration of new branches?

Branches of the merging entity may not automatically transfer to the surviving
entity in a merger. If new branches are required, consider the timing. For example, in
China, the establishment of a branch may take between two to three months in total and if
the branch carries out manufacturing activities, the branch may also need to apply for an
environmental impact assessment which can take up to six to eight weeks. Further, a
branch may require additional preapprovals if operating in certain industries, for
example, retail or logistics.

What is the approximate timeline for the chosen integration method, from the
Initial instructions or from the date on which all information (including financial
statements) becomes available, to the effective date of the integration?

If the integration method is a merger, can the merger be made effective’

retrospectively for tax and accounting purposes? If so, what is the deadline for filing
the merger application, for example, in Germany, the filing must be made within eight
months of the date of the merger accounts?

6.3 CHALLENGES IN POST-ACQUISITION INTEGRATION 41

The post-acquisition integration stage is intended to implement the acquisition‘s
strategic and financial goals. In practice, there may be a ‗disconnect‘ between the
previous stages and this stage because there is a lack of continuity between the A team
that developed the acquisitions strategy and guided the negotiation on the one hand and
the integration teams mainly involving operations managers on the other. The disconnect

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Guide to Post-Merger Integration

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may also arise from poor articulation of the strategic goals and how organizational
transformation would achieve them. There may also be lack of clarity about the new
organizational structure and how the merging organization would fit into that new
structure. These may give rise to fragmented perspectives and expectation ambiguity.

Merger integration may be regarded as a change process and needs to be managed

by drawing upon the principles and practice of change management. Organizational
change involves changes in policies of the merging organizations as well as their culture.
Changing the culture of the merging firms may be necessary for the acquisitions strategic
objectives. Strategy, organizational structure and organizational culture must be aligned
during the integration process to deliver sustainable value creation. The integration
process is fraught with uncertainty, fear and anxiety among target company staff, which
may lead to withdrawal of their commitment and lack of moral.
The acquirer‘s implementation team must handle these concerns with tact,
sympathy and understanding in order to instill confidence and trust between the two
companies personnel.
The scope of integration must be carefully defined to include all important organizational
functions and activities. (Such as IT systems, HR, Remuneration package, Operations &
Production) Integration may be managed as a project to integrate structure, culture,
systems, processes and procedures. Task forces, transition teams and project teams may
be set up to manage integration of these. Lack of project management approach to
integration may result in the goals of the acquisition not being achieved, costly errors that
are not spotted and corrected in good time or in costly delays.

6.4 CHALLENGES IN POST-ACQUISITION AUDIT AND ORGANIZATIONAL

LEARNING
The audit may, if carried out, provide inadequate assessment of performance due
to poor performance metrics or over-ambitious timescale for delivery of performance. As
a result, there may be no clear identification of reasons for success or failure. The post
acquisition audit process may also be characterized by lack of effective communication
strategies to communicate the lessons from acquisitions to managers not only of business

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units concerned but also managers and directors concerned with acquisitions and
corporate strategy.
The audit process is often regarded as a fault-finding exercised rather than as an
opportunity for learning. These attitudes depend upon the culture of the organization, its
openness to learning, how harsh the attitude of top management to failure is etc.

The scope of the audit often defines its quality. Some of the important issues that arise
are as follows
a. Have the deals been audited for delivering their promises?

b. Separate acquisition audit or part of normal internal audit?

c. Does the audit ensure appropriate bench marks for type of acquisition made?

d. Does the audit create a well-calibrated feedback mechanism for organization learning?

e. Are lesson from both successes and failures in acquisitions communicated effectively
so they become embedded in organizational procedures, systems, cultures and routines?

6.5 IMPACT OF MERGERS AND ACQUISITIONS

Just as mergers and acquisitions may be fruitful in some cases, the impact of
mergers and acquisitions on various sects of the company may differ. In the article below,
details of how the shareholders, employees and the management people are affected has
been briefed. Mergers and acquisitions are aimed at improving profits and productivity of
a company. Simultaneously, the objective is also to reduce expenses of the firm.
However, mergers and acquisitions are not always successful. At times, the main goal for
which the process has taken place loses focus. The success of mergers, acquisitions or
takeovers is determined by a number of factors. Those mergers and acquisitions, which
are resisted not only affects the entire work force in that organization but also harm the
credibility of the company. In the process, in addition to deviating from the actual aim,
psychological impacts are also many. Studies have suggested that mergers and
acquisitions affect the senior executives, labor force and the shareholders.

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6.6 IMPACT OF MERGERS AND ACQUISITIONS ON WORKERS OR
EMPLOYEES
Aftermath of mergers and acquisitions impact the employees or the workers the
most. It is a well-known fact that whenever there is a merger or an acquisition, there are
bound to be layoffs. In the event when a new resulting company is efficient business
wise, it would require less number of people to perform the same task. Under such
circumstances, the company would attempt to downsize the labor force. If the employees
who have been laid off possess sufficient skills, they may in fact benefit from the lay off
and move on for greener pastures. But it is usually seen that the employees those who are
laid off would not have played a significant role under the new organizational set up. This
accounts for their removal from the new organization set up. These workers in turn would
look for re-employment and may have to be satisfied with a much lesser
pay package than the previous one. Even though this may not lead to drastic
unemployment levels, nevertheless, the workers will have to compromise for the same. If
not drastically, the mild undulations created in the local economy cannot be ignored fully.

6.7 IMPACT OF MERGERS AND ACQUISITIONS ON TOP LEVEL

MANAGEMENT

Impact of mergers and acquisitions on top level management may actually

involve a "clash of the egos". There might be variations in the cultures of the two
organizations. Under the new set up the manager may be asked to implement such
policies or strategies, which may not be quite approved by him. When such a situation
arises, the main focus of the organization gets diverted and executives become busy
either settling matters among themselves or moving on. If however, the manager is well
equipped with a degree or has sufficient qualification, the migration to another company
may not be troublesome at all.

6.8 IMPACT OF MERGERS AND ACQUISITIONS ON SHAREHOLDERS

We can further categorize the shareholders into two parts:

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Shareholders of the acquired firm
The shareholders of the acquired company benefit the most. The reason being, it
is seen in majority of the cases that the acquiring company usually pays a little excess
than it what should. Unless a man lives in a house he has recently bought, he will not be
able to know its drawbacks. So that the shareholders forgo their shares, the company has
to offer an amount more than the actual price, which is prevailing in the market. Buying a
company at a higher price can actually prove to be beneficial for the local economy.

Shareholders of the acquiring firm

They are most affected. If we measure the benefits enjoyed by the shareholders of
the acquired company in degrees, the degree to which they were benefited, by the same
degree, these shareholders are harmed. This can be attributed to debt load, which
accompanies an acquisition.

6.9 CHALLENGES TO MERGERS AND ACQUISITIONS IN INDIA

With the increase in number of M&A deals in India, the legal environment is
increasingly becoming more and more refined. M&A forms a major part of the economic
transactions that take place in the Indian economy. There are a few challenges with
mergers and acquisitions in India which have been discussed below;

Regulatory Ambiguity: M&A laws and regulations are still developing and trying to
catch up with the global M&A scenario. However because of these reasons the
interpretation of these laws sometimes goes for a toss since there is ambiguity in
understanding them. Several regulators interpreting the same concept differently increase
confusion in the minds of foreign investors. This adversely affects the deal certainty
which needs to be resolved if the Indian system wants to attract investments from foreign
economies.

Legal Developments: There have been consistently new legal developments such as the
Competition Act, 2002, the restored SEBI Takeover Regulations in 2011 and also the

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notification of limited sections of the new Companies Act, 2013, has led to issues in India
relating to their interpretations and effect on the deals valuations and process.

Shareholder Involvement: Institutional investors in the minority position have become

active in observing the investee companies. Proxy advisory companies are closely
scrutinizing the related party transactions, appointment of several executives and their
remuneration. There are cases where the approval of minority shareholders is required.
The powers to the minority shareholders have been revamped, one of them includes to
sue company against oppression and mismanagement.
These are some of the issues that pose a challenge towards the growth of mergers
and acquisitions in India which need considerate attention from the government to make
our market attractive for foreign investment. On a positive note Confederation of Indian
Industry (CII), the Reserve Bank of India (RBI) and the Securities and Exchange Board
of India (SEBI) – the three
main regulators of the mergers and acquisition activities – have been striving hard to
further liberalize the norms that have been one of the biggest contributors to the country‘s
industrial expansion.

6.10 DEFENCE STRATEGIES AGAINST MERGERS AND ACUISITIONS

Companies can also adopt strategies and take precautionary actions to avoid
hostile takeover. This is very necessary in present day industrial rivalry where a small
lack in precaution can result in huge loss to the stakeholders of the firm. Some of the
defenses strategies against takeover are:

DEFENSIVE MEASURES IN HOSTILE TAKEOVER BIDS

The defensive strategies used against anti-takeover bids are classified into-
1. Preventive measures

2. Active measures

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Preventive anti-takeover measures:
The presence of certain characteristics like the strong and stable cash flows, low
levels of debt in the capital structure, low stock price compared to the value of the firms
assets, etc., make a firm vulnerable to a takeover. Hence some preventive measures are
adopted to adjust to these characteristics of the firm, so that the financial motivation of a
bidder to acquire the target firm is reduced to a large extent. Through these measures the
pace of the takeover attempt can be slowed down and the acquisition becomes more
expensive for the bidder. The following are some anti-takeover defenses.

i. Poison Pills-

The poison pills are often securities issued by the target firm in the form of rights
offerings to its Shareholders to make the firm less valuable in the eyes of a hostile bidder.
These shares have no value till the happening of a triggering event(acquisition of certain
percentage of the firm‘s voting stock by the bidder.). These allow the holders to buy
stock in the acquiring firm at a low price. They would be distributed after triggering event
such as the acquisition of 20% of the stock of the target from by any individual
partnership or corporation. The strategy involves issue of low price preferential shares to
enlarge the capital base; this would make the hostile takeover too expensive.
Example: Long term contracts, provisions for withdrawing from contracts if control
shifts.

ii. Poison puts

In this case the target company can issue bonds that encourage holders to cash in
at higher prices. The bonds issued contain put option which allows the holders to exercise
in the event of a hostile takeover. This allows the bond holders to demand repayment of
the amount in the event of hostile takeover. The resultant cash drainage would make the
target unattractive.

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iii. People pill

Under some circumstances of hostile takeover, the people pill is used to prevent
the takeover. The entire management team gives a threat to put in their papers if the
takeover takes place. Using this strategy will work out provided the management team is
very efficient and can take the company to new heights. On the other hand, if the
management team is not efficient, it would not matter to the acquiring company if the
existing management team resigns. So, the success of this strategy is quite questionable.

Vi .Shark Repellent

Among shark repellent instruments there are: golden parachute, poison pills,
greenmail, white knight, etc The shark repellents are designed to make the target firm so
unpleasant that it is attack-proof. They could include super majority provisions, i.e.80%
approval required for a merger, staggered board elections, fair price provisions to
determine the price of minority shareholders stock and dual capitalization, whereby the
equity is restricted into two classes with different voting rights. In extreme cases,
amendments have provided as high as 95% of the votes for merger approval.

v. Dual capitalization

Here the Board of Directors creates a new class of securities with special voting
rights. This voting power is given to a group of stockholders who are friendly to the
management. A typical dual capitalization involves the issuance of another stock that has
superior voting rights to all the current outstanding stock holders. The stockholders are
given the right to exchange this stock for ordinary stock. The stockholders prefer to
exchange the super voting stock to the ordinary stock because the former usually lack
marketability and also fetch low dividends. Management retains the special voting stock.
This result in the management increasing its voting control of the corporation.

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vi. Golden Parachutes

These are unacceptably high compensation packages that must be paid to

managers if they are forced to leave the firm. The term ‗golden‘ is used because of the
attractive compensation that executives covered by these agreements receive. Managers
have five or ten-year contracts with provisions for full payments up-front if they are
forced to leave. A golden parachute agreement provides for lump sum payments to
certain senior management either voluntary or involuntary termination of their
employment. This agreement is usually effective if termination occurs within one year
after the change in control.

vii. Silver Parachutes

This is just like golden parachute but given to lower level managers. It is also
compensation payable to an employee when he is terminated but it is small amount.

viii. Staggered or Classified Board

The directors of a firm are divided into a number of different classes. Only one
class is up for re-election each year. These leads to delay in the effective transfer of
control in takeover.
For ex: Board of Directors consisting of 12 members can be divided into 3 groups, with
only one group up for election in a particular year. Hence, the hostile bidder has to wait
for 2 or more annual general meetings to gain control of the board in spite of holding the
majority of the stock. The size of the board is also limited to prevent the stockholders
from simply adding the board seats to take control of the board.

viii Stock option workout

Poison Pill may have the same structure of stock options used for payouts. Under
these Agreements, once the triggering fact happens, investor have the right to turnkey

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some right. In poison pill event, most common is an option to buy more shares, with
some advantages. Priced with better conditions, lower than what bidders does for the
corporation it serves for the specific purpose of protecting the corporation current
shareholders.
The usual stock option is made to situations of high priced stocks. That usually
happens under takeover operations. A takeover hard to be defended usually will have a
bid offer with a compatible price, at that moment which is higher than usual for
shareholders, with conditions to
be accepted by stockholders.

ix Fair price amendment

A provision in the bylaws of some publicly-traded companies stating that a

company seeking to acquire it must pay a fair price to targeted shareholders.
Additionally, the fair price provision mandates that the acquiring company must pay all
shareholders the same amount per share in multi-tiered shares. The fair price provision
exists both to protect shareholders and to
discourage hostile acquisitions by making them more expensive.

X Authorization of preferred stock

The board of directors is authorized to create a new class of securities with special
voting rights. This security, typically preferred stock, may be issued to friendly voting
rights. The security preferred stock may be issued to friendly in a control contest. Thus,
this device is a defense takeover bid, although historically it was used to provide the
board of directors with flexibility in financing under changing economic conditions.
Creation of a poison pill security could be included in his category but generally it's
excluded from and treated as a different defensive device.

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6.11 ACTIVE ANTI-TAKEOVER MEASURES:

I White Knight

Another fortune way to handle a hostile takeover is through White Knight

bidders. Usually players of some specific market know each ones history, strategy,
strength, advantages, clients, bankers and legal supporters. Meaning beyond similarities
or not, there're communities around these companies. In this a strategic partner merges
with the target company to add value and increase market capitalization. Such a merger
can not only deter the raider, but can also benefit shareholders in the short term, if the
terms are favorable, as well as in the long term if the merger is a good strategic fit.

II White Squire

To avoid takeovers bids, some shareholder may detain a large stake of one
company shares. A white squire is similar to a white knight, except that it only exercises
a significant minority stake, as opposed to a majority stake. A white squire doesn't have
the intention, but rather serves as a figurehead in defense of a hostile takeover. The white
squire may often also get special voting rights for their equity stake. With friendly
players holding relevant positions of shares, the protected company may feel more
comfortable to face an unsolicited offer.

A White Squire is a shareholder than itself can make a tender offer. Otherwise it
has so much relevance over the company stock composition, that can make raiders
takeover more difficult or somewhat expensive. Real White Squire does not take over the
target company, and only plays as a defense strategy. In order to defend these companies,
some bankers organize funds for that specific purpose. A White Squire fund is designed
to increase share participation in companies under stress.

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III. Green Mail

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 company. Greenmail refers to the buying back of
shares at a substantial premium from the stockholders holding a significant majority
shares in return for an agreement that he will not initiate bid for control of the company.
Greenmail refers to an incentive offered by management of the target company to the
potential bidder for not pursuing the takeover. The management of the target company
may offer the acquirer for its shares a price higher than the market price. The potential
acquirer is required to sign an agreement called standstill agreement whereby he
undertakes not to begin a bid for control of the company.

IV. Standstill Agreement

It occurs when the target firm reaches a contractual agreement with the potential
bidder that he will not increase his holdings in the target firm for a particular period. The
agreement can take many forms, including the right first refusal to the target firm if the
bidder sells his shares and a commitment by the bidder not to increase his holdings
beyond a certain percentage in return for a fee. Stand still agreements are frequently
accompanied by greenmail.

V. Pac man Defense

This strategy aims at the target company making a counter bid or tender offer for the
Raiders Company or acquiring company. This would force the raider to defense him and
consequently call off his raid.

VI. Asset restructuring

The target company can sell assets that the bidder wants to another company. This
action makes the target company less desirable to the bidder.

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VII. Crown Jewels Lock up

This is a contract to sell the firms valuable assets at below market price if the
hostile bid succeeds. It is based on the agreement that a particular asset of the firm is so
highly valued that it attracts raider. The asset may be a highly profitable division, an
undervalued fixed asset or an intangible asset like brand or patent. When a target
company uses the tactic of divesture it is said to sell the crown jewels.

VIII. Divesture

In a divesture, the target company divests of spin off some of its businesses in the
form of an independent subsidiary firm. Thus it reduces the attractiveness of he existing
business to the acquirer.

IX. Share Repurchase

This involves buying back its own shares from the public. This is a sound strategy
and has several advantages: The number of shares available to the raider is reduced. Once
the target acquires certain shares, these shares will no longer be available for the bidder to
purchase.

6.12 IMPORTANT TERMS RELATING TO MERGERS AND ACQUISITIONS42

Important terms relating to mergers and acquisitions are vital to the understanding
of the entire process of mergers and acquisitions. Every word encountered in the process
of mergers and acquisitions need to be carefully understood for a sound understanding of
the subject. There are many important terms relating to mergers and acquisitions. These
terms may appear to be completely unrelated to mergers and acquisitions but
nevertheless, these terms may indicate a very important process in mergers and
acquisitions. Some of the important terms relating to mergers and acquisitions are as
follows:

42
Success of a merger or acquisition – a consideration of influencing factors

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Sandbag
Sandbag is referred to as the process by which the target firm tends to defer the
takeover or the acquisition with the hope that another company, with better offers may
takeover instead. In other words, it is the process by which the target company "kills
time" while waiting for a more eligible company to initiate the takeover.

Raider
May be referred to an acquiring company, which is always on the lookout for
firms with undervalued assets. If the company finds that a company (target) does exists
whose assets are undervalued, it buys majority of the shares from that target company so
that it can exercise control over the assets of the target firm.

Saturday night special

Saturday night special is referred to as an action of the corporate companies,

whereby one company makes an attempt to takeover another company all of a sudden by
executing a public tender offer. The name is derived from the fact that such attempts were
made towards the weekends. However, such practices have been stopped as per Williams
Act. It has now been obligatory that if a company acquires more than 5% of stocks from
another company, this has to be reported to the SEC or the Securities Exchange
Commission.

Macaroni defense
This is referred to the policy wherein a large number of bonds are issued. At the
same time the target company also assures people that the return on investment for these
bonds will be higher with the takeover has taken place. This is another strategy embraced
by the target firm for not succumbing to the pressures of the acquiring company.

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6.12 HOSTILE TAKEOVER APPROACHES

A hostile takeover allows a suitor to take over a target company's management

unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the target
company's board rejects the offer, but the bidder continues to pursue it, or the bidder
makes the offer without informing the target company's board beforehand. A hostile
takeover can be conducted in several ways. A tender offer can be made where the
acquiring company makes a public offer at a fixed price above the current market price.

An acquiring company can also engage in a proxy fight, whereby it tries to persuade
enough shareholders, usually a simple majority, to replace the management with a new
one which will approve the takeover

Another method involves quietly purchasing enough stock on the open market,
known as a creeping tender offer, to effect a change in management. In all of these ways,
management resists the acquisition but it is carried out anyway. The main consequence of
a bid being considered hostile is practical rather than legal. If the board of the target
cooperates, the bidder can conduct extensive due diligence into the affairs of the target
company. It can find out exactly what it is taking on before it makes a commitment. But
a hostile bidder knows only publicly- available information about the target, and so takes
a greater risk. Also, banks are less willing to back hostile bids with the loans that are
usually needed to finance the takeover.

Advantages to the acquirer company

 The acquirer is benefited by way of reduction in procurement costs and

operational synergies resulting in improved margins.
 The acquirer is able to acquire new technology and add to its manufacturing
capacities.
 The acquirer is able to increase its market share and acquire new brands.

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Disadvantages for the acquirer company
Studies have revealed that returns to the shareholders of the acquirer company are
minimal. Minority share-holders of the acquirer company may not be in favour of
deployment of funds towards acquisition since there could be no direct benefits flowing.

Secondly, the acquiring company may offer hefty premiums to ensure the success of its
bid. Such inflated prices are generally unjustified and unsubstantiated by sound reasoning
since there is a 'blind rush' to acquire.

Thirdly, the acquirer company could face financial hazards like 'hidden liabilities'and
valuation pitfalls.

6.14 MANAGERIAL CHALLENGES OF MERGERS AND ACQUISITION

Meaning of Mergers and Acquisitions:

A transaction involving two or more companies in the exchange of securities and only
one company survives is called Merger. Merger and acquisition result in several
advantages in the acquiring company and the target company. There are three types of
Merger. The reasons of Merger are mainly to reduce the competition, economics of scale,
tax advantage, etc.

1. Scope changes – One of the rules of M & A is that change is inevitable. Managers
should analyze each request and then communicate the impact of each change and the
alternatives, if any exist. You can‘t eliminate change, but you can make your stakeholders
understand how the change affects the schedule, cost, scope, and quality of the project.

2 .Failure to manage risk – Many mergers have a list of risks, but no further analysis or
planning happens unless triggered by an adverse event during merger execution. At that
point, they can either act to avoid the risk through alternatives analysis, reduce the
probability and/or impact with mitigation strategies, or plan a response to the risk event
after it happens.

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3. Insufficient team skills – The busiest people also tend to be the most highly skilled.
Finding out that a team member is incompetent can be very difficult since most
incompetent people do not know that they are incompetent. If one of the team member is
incapable, then whole merging process will be flopped.

4. Challenges in Organizing for Acquisitions -A number of factors impart a momentum

to acquisition decision and deal making the individual players may find difficult to
control. Companies and key decision makers need to be conscious of these pressures and
pulls and not allow them to over whelm the logic of the deal. Otherwise the deal will turn
out to be a sub optional one and will lead to value destruction. This emphasizes the
importance of establishing an acquisition function or the A Team.

5. Vision and goals are not well-defined– Two companies vision and mission are
different, because every company should have its own objectives. After merging the
manger job is to set common vision for the company.

6. Challenges in Deal Structuring and Negotiation -There are a number of potential

risks concerned with the deal-structuring and negotiation stage. Selection of an
acquisition team lacking in balance of expertise from operations, laws, human resources
management and other relevant functions to carry out negations or hostile bids if
necessary and engaging advisers with little relevant experience or standing may lead to a
costly and aborted acquisition attempt.

7. Challenges in Post-acquisition Integration -The post-acquisition integration stage is

intended to implement the acquisition‘s strategic and financial goals. In practice, there
may be a ‗disconnect‘ between the previous stages and this stage because there is a lack
of continuity between the A team that developed the acquisitions strategy and guided the
negotiation on the one hand and the integration teams mainly involving operations
managers on the other.

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8. Challenges in Post-acquisition Audit and Organizational learning -The audit
process is often regarded as a fault-finding exercised rather than as an opportunity for
learning. These attitudes depend upon the culture of the organization, its openness to
learning, how harsh the attitude of top management to failure is etc.

6.15 FAILURE OF MERGERS AND ACQUISITION

Historical trend shows that roughly two third of mergers and acquisitions will
disappoint on their own terms. This means they lose value on their stock market. In many
cases mergers fail because companies try to follow their own method of doing work. By
analyzing the reason for failure in mergers and eliminating the common mistakes, rate of
performance in mergers can be improved. Discussions on the increase in the volume and
value of Mergers and Acquisitions during the last decade have become commonplace in
the economic and business press.
Merger and- acquisition turned faster in 2010 than at any other time during the
last five years. Merger and acquisition deals worth a total value of US$ 2.04 billion were
announced worldwide in the first nine months of 2010. This is 43% more than during the
same period in 2006. It seems that more and more companies are merging and thus
growing progressively larger. 80% of merger and acquisitions failed because they do not
focus on other fields, common mistakes should be avoided. M&As are not regarded as a
strategy in themselves, but as an instrument with which to realize management goals and
objectives.
A variety of motives have been proposed for M&A activity, including: increasing
shareholder wealth, creating more opportunities for managers, fostering organizational
legitimacy, and responding to pressure from the acquisitions service industry. The overall
objective of strategic management is to understand the conditions under which a firm
could obtain superior economic performance consequently analyzed efficiency-oriented
motives for M&As. accordingly; the dominant rationale used to explain acquisition
activity is that acquiring firms seek higher overall performance.

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6.16 RESEARCH HAS CONCLUSIVELY SHOWN THAT MOST OF THE
MERGERS FAIL TO ACHIEVE THEIR STATED GOALS.
Some of the reasons identified are:
 Corporate Culture Clash
 Lack of Communication
 Loss of Key people and talent
 HR issues
 Lack of proper training
 Clashes between management
 Loss of customers due to apprehensions
 Failure to adhere to plans
 Inadequate evaluation of target

FAILURE AN OCCUR AT ANY STAGE OF PROCESS

STRATERGY & Lack of compelling

strategy &
lack of regorous Lack of decipline in
TARGET decision M&A Process
Rationale

Inadequate & Not thinking about Over confidence in

DUE DILIGENCE Incomplete Due Intergartion until to ability to change or
diligence late turnover

Inadequate
ACQUISITION Delay & Ambiguity Bad Execution
Resources

Failure to pay Lack of shared

Inadequate Plan &
attention to vision & conflicting
INTERGRATION process of
operations & Corporate /
Integration
Customers National Culture.

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6.17 WHY MERGER FAILS

The main reasons for mergers failure are ―autonomy, self-interest, culture clash‖ all
included or lies in leadership. At both implementation and negotiation stages, mergers
fail due to failure of leadership. Lack of leadership qualities of managers may cause
mergers and acquisitions a failure. Leadership is, thus a crucial management task in
strategic restructuring.

The following are the reasons for failure of mergers:

1. Mergers fail in providing economies of scale.
2. Un-utilization or minimum utilization of staff and working hours.
3. The inability to appeal country-wide and regionally to refunders.
4. Personal desires
o Desire towards authority but not to responsibility.
o Desire towards to control and commanding/directing the subordinates.
5. The people, who are having the negative views on mergers.
6. The negative believes of the partners and the people in the society.
7. Inefficient and inactive person of a leader or director in merged firm.
8. The inability of preparing national policy issues, which are interested by the
members in the merged firm.
9. The inability of the leader in bridging the cultures within the merged organization.
10. Lack of leadership qualities of merged organizations‘ directors and partners.

In addition to the above, many mergers fail, which may be broadly classified into the
following ―seven sins‖, which seem to be committed too often by those making
acquisitions:

1. Paying too much.

2. assuming a boom market won‘t crash.
3. Leaping before looking.
4. Straying too far afield.

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 5. Swallowing something too big.
6. Marrying disparate corporate cultures.
7. Counting on key managers staying.

6.18 CAUSES OF FAILURES

There could be many causes of failed mergers and acquisitions. It is most likely that a
failed merger would be a result of poor management decisions and overconfidence. There
could be personal reasons considering which managers tend to enter into such activities
and hence tend to ignore the primary motive of mergers, creating shareholder value.
Sometimes however, good decisions may also backfire due to pure business reasons.
These factors can be summarized by the following points.

Overpayment

A very common cause of failed mergers is overpayment. This situation arises

essentially due to overconfidence or the urge for expansion. Overpayment often has
disastrous consequences. Overpayment leads to expectations of higher profitability
which is often not possible. Excessive goodwill as a result of overpaying needs to be
written off which reduces the profitability of the firm (DePamphilis, 2005).

Integration issues

It is rightly said that ―Few business marriages are made in heaven‖ (Sadler, 2003).
Both merging companies need to be compatible with each other. Business cultures,
traditions, work ethics, etc. need to be flexible and adaptable. Inefficiencies or
administrative problems are a very common occurrence in a merger which often
nullifies the advantages of the merger (Straub, 2007). Often it is necessary to identify
the people needed in the future to see the merger through. There must be some urgency
between the parties and good communication between them. Due to lack of these
qualities, mergers often do not produce the desired results (Sadler, 2003).

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 Personal Motives of Executives

Managers often enter into mergers to satisfy their own personal motives like empire
building, fame, higher managerial compensation, etc. As a result, they often lose focus
on the fact that they need to look at the strategic benefits of the merger. As a result,
mergers that do not necessarily benefit the organisation are entered into. These
executives enter into these mergers for the purpose of seeking glory and satisfying
their ‗executive ego‘, leading to failure of mergers
(http://finance.mapsofworld.com/merger-acquisition/failure.html)

Selecting the target

Selecting the appropriate target firm is an extremely important stage in the merger
process. Executives must be able to select the target that suits the organisations
strategic and financial motives and needs. Often the incapability or lack of motivation
and interest on the part of executives leads to incorrect target selection. Lubatkin
(1983) very appropriately said that selecting a merger candidate may be more of an art
than a science (Straub, 2007).

Strategic Issues

Strategic benefits should ideally be the primary motive of any merger activity.
However, managers sometimes tend to overlook this aspect. Faulty strategic planning
and unskilled execution often leads to problems. Over expectation of strategic benefits
is another area of concern surrounding mergers. (Schuler, Jackson, Luo, 2004). These
issues which form the core of all merger activities are not addressed adequately leading
to failures of mergers.

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6.19 THE “SYNERGY TRAP” 43

There are several explanation synergies overpayment which are mainly related to
behavioral and operational factors: some of these arguments can be summarizing them as
follows.
o Biased valuation. Since the deal is usually designed by deal makers hired by the
acquirer, who are interested only in the conclusion of the deal, no matter
whether the valuation lead to an excessive acquisition price.
o Manager‘s hubris. High-profile and self-confident managers may overestimate
their capacity in delivering synergies after the acquisition, especially if they
believe the M&A may represent a key element for their professional success.
o Post-integration failures. Companies may fail in the implementation of new
synergic strategies if they do not send enough accuracy and commitment to plan
also the post-merger phase. Moreover, there are several mistakes that both
analysts and managers make in the valuation of synergies.
o First, acquiring companies often subsidize target firm stockholders since they fail
in correctly identifying the various sources of synergy.
o Secondly, analysts may choose the wrong discount rate: synergies have to be
valued by using the combined cost of capital, i.e. the weighting average between
the cost of capital of the bidder and Target Company, while the discount rate
must incorporate the correct level of risk that characterizes synergies cash flows.
o Furthermore, synergy value has to be computed separately from the control
value, avoiding to combine them and to attribute the wrong discount rate.
Finally, an excessive optimism about the timing of synergy gains may also cause
some bias to the valuation.

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Negative Synergies 44
Until now, synergies have been described as positive and desired aspects creating
added value. This section is shedding new light on synergies and describes some negative
implications synergies can bring.

Whereas a positive synergy leads to that one plus one adds to a sum that is greater
than two, a negative synergy creates outcomes where one plus one equals less than two.
The concepts of diseconomies of scale and diseconomies of scope are examples used to
describe the undesired results brought with negative synergies.
Other examples of negative synergies are that of lost accounts due to duplication,
employees who leave the organization (and take the accounts with them), increased IT
costs, and managers who lose focus on the ongoing business due to integration and cost
cutting focus with lost revenues as a consequence.
Synergies and overoptimistic calculations of these have often been blamed for the
failure of many M&As, and synergies have in several cases been used as main incentives
for justifying bad deals. What is a successful M&A deal? A definition says; ―If the
acquirer did not increase the shareholder value or did not achieve the financial,
commercial or strategic objectives set at the time of buying the business‖, the M&A is
said to be a failure.

The problems with synergies are diverse and complex, ―Six synergy problems to avoid‖
outlined by summarizes it:

1. Synergies are defined too narrowly and/or too broadly. Management does not bother to
define and value synergies for what they are, as it takes some efforts to both measure and
follow up them after the deal closure.

2. Missing the window of opportunity. The longer time that passes after the deal closure,
the harder it is to capture the synergies. If synergies are not captured 18-24 months after

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the M&A, the likelihood of finishing the work diminishes severely since people will not
stay focused and soon fall back to the pre-M&A situation.

3. Incorrect or insufficient use of incentives. Management often use different incentives

to achieve corporate goals, the same thing should be done in regards to work associated
with synergy realization. Incentives should be clear and accurate with direct connections
to the desired achievements. If this is done, management will not only show the
importance of capturing synergies but also set standards for how they should be achieved.

4. Not having the right people involved in synergy capture. Management should handle
the overall synergy implementation, but the actual processes and the hands on changes in
the organizations are best done by employees who know the work. As the employees are
likely to have best practice procedures and also be less critical, their results will be better
than if persons with less knowledge try to achieve things they know little about.

5. Mismatch between cultures and systems. As one of the success factors for capturing
synergies is to work with measureable goals, it demands that organizations have the
ability to handle goal oriented work procedures. If an organization is not used to working
with performance measures obstacles are likely to occur. The key is to build in desired
results in existing systems and processes, for example through integrating it into the
budget.

6. Using wrong processes. Identification, quantification, valuation and prioritization

should not exist only on paper. To actually achieve something suitable tracking systems
where synergy targets are linked to relevant financial plans that consider time frames will
facilitate synergy related work processes and help to avoid obstacles.

6.20 HOW TO PREVENT THE FAILURE

Several initiatives can be undertaken in order to prevent the failure of mergers
and acquisitions.

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Following are those:
 Continuous communication is of utmost necessary across all levels –
employees, stakeholders, customers, suppliers and government leaders.
 Managers have to be transparent and should always tell the truth. By this way,
they can win the trust of the employees and others and maintain a healthy
environment.
 During the merger process, higher management professionals must be ready
to greet a new or modified culture. They need to be very patient in
hearing the concerns of other people and employees.
 Management need to identify the talents in both the organizations who may play
major roles in the restructuring of the organization. Management must retain
those talents.

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 CHAPTER-7
CONCLUSIONS AND SUGGESTIONS

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7. CONCLUSIONS OF THE STUDY
Reviving business excellence and thereby creating a value for a company is considered to
be the most vital as well as significant objective of today‘s business enterprises with an
aim to ensure long run survival and sustainable growth over the period of time. Corporate
restructuring implies restructuring the corporate sector from multi dimensional angles
with a view to obtain competitive edge and thereby ensuring business success. The study
concludes how the Acquirer, acquired, shareholders and also the company benefits from
the Merger & acquisition.

7.1 THE ACQUIRER COMPANY’S PERSPECTIVE

Reasons which motivate mergers and acquisitions have been extensively
investigated by the literature, leading to different theories that cannot be attributed to an
univocal explanation. One of the main purpose for concluding an M&A deals is
certainly companies seek for growth, which results in a consequent improvement of
their strategic positioning. Growth objectives can either be reached internally through
investments in technological and operational innovations or new product development
(organic growth) or externally, by means of acquisitions (external growth). The
latter may have different connotations for the company, such as larger size, higher
revenues or higher returns: however, growth cannot be considered per se the reason for
concluding an M&A deal since it needs to be integrated in the company‘s strategic plan,
coherently with its specific business life cycle. External growth implies many
advantages like for example the possibility of attaining the target company know-how
in order to manage new production processes (Potito, 2009): this achievement will allow
the firm to fast reach its strategic goals, without waiting for new investments break-
even or for new product lines to be successfully understood by the market. New
strategy rapid implementation will also give the possibility to gain a significant
competitive advantage over competitors, taking profit from the ―first-mover‖
positioning. Growth by acquisition will also allow the company to expand in new market
without losing the focus on its core business: as a matter of fact, it will be able to
combine its undisputed experience within its sector with the strengths and expertise

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coming from the acquired company, thus optimizing resources coming from both
of them but at the same time preserving individual identities and competitive
advantages. Finally, entry and legal barriers will no longer represent a problem for the
company who will decide to implement an external growth strategy.
The second reason why companies may decide to conclude M&A operations can
be Identified in the opportunity of increasing their efficiency. The efficiency theory
(Trautwein, 1990) argues that mergers and acquisitions are executed in order to
achieve synergies, which can be classified into three main categories: operational,
financial and managerial synergies. It will be given account for the topic of
synergies in the next paragraph while, concerning the efficiency theory, it is
relevant to point out one of the main result included primarily within operational
synergies, i.e. cost reduction. Companies are induced to drive M&As with the purpose of
increasing their savings by implementing two possible strategies that the literature
identify with the names of ―economies of scale‖ and ―economies of scope‖. ―Economies
of scale‖ are characterized by a reduction of average costs in correspondence of
increased volumes of sales: this effect can be achieved whenever fixed costs are
spread out over larger units of products. On the other hand, when a company realizes
―economies of scope‖ it can obtain the same reduction of average costs thanks to a
differentiation strategy: enlarging the product offering and diversifying the revenues
geographic distribution ensures an improvement in the product mix without decreasing
the company‘s profits. These two effects give reasons in particular to horizontal
mergers, i.e. Operations which aim at integrating companies within the same industry
who will consequently enlarge and consolidate their market share. Companies who
integrate horizontally will gain the possibility of increasing their sales prices as the
result of their improved bargaining power; furthermore they will acquire new
competences, combine different or complementary technical resources and marketing
activities and increasing their client basis.
The third theory supporting M&A reasons is the ―monopoly theory‖, which claims that
deals are planned and concluded in order to increase market power. This theory usually
applies to vertical integration and conglomerate acquisitions: the former in the
process by which companies expand their business into areas that are at different

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points on the same supply chain, for instance by acquiring suppliers or
distributors; conversely, conglomerates include companies who operate in different
sectors or even different markets: they place themselves at the opposite side of horizontal
integration and are usually executed by companies belonging to rather saturated
and mature markets. Firms who realizes vertical integrations or conglomerate
acquisitions seek to achieve larger independency within their industry especially by
increasing the control of the end market, as well as deterring potential new entrants.
Moreover, cross-subsidization of products and reduction of competition in more than one
markets represent main objectives companies are willing to achieve, especially through
conglomerates. As a matter of fact, non-correlation between different activities or
different businesses contribute to reduce the overall risk carried by companies, while
increasing their chances and success opportunities. It is possible to identify other
factors and causes that motivate companies to plan acquisitions and mergers which
cannot be attributed to economic reasons, albeit they gave room different theories
particularly linked with behavioral and even irrational issues (Trautwein, 1990;
Morck, Schleifer and Vishny, 1990).
One of these reasons is the acquisition of undervalued companies: it has been
argued that managers are willing to conclude M&A deals if they believe the target
company is underestimated. This approach takes the name of ―valuation theory‖: this
theory rests on the presence of information asymmetries, since managers believe they
have better information on the target firm than those of the stock market. Therefore,
according to the bidder management, these stock have been trading at a discount
compared to their peers, thus they represent a good investment opportunity. The valuation
theory assumes the presence of agency between managers and shareholders, who
are pursuing different objectives: takeovers have precisely the function of restoring this
equilibrium of interests with the possibility of introducing a high-skilled management,
capable to maximize the company‘s value. Target companies will have a significant
incentive to accept the offer as soon as they see the possibility of increasing their stock
prices as a consequence of the improvement in the company‘s performances. However,
one of the critics that has been moved to the valuation theory claims that it contrasts with
the efficiency market hypothesis, which assumes that all public and private

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information are incorporated in stock prices and for this reasons undervalued firms
should not exist. Conversely, some other authors (Wensley, 1982) gave evidences
that the two arguments are not mutually exclusive: when the bidder makes his
offer, he will reveal his private information to the market and gradually the stock
price will adjust to a new level as a result of the action of rational investors. In this way
the efficient market argument does not preclude the existence of undervalued companies,
although it refuses the possibility for the bidder to have a competitive advantage thanks to
his private information because of the market immediate reaction. Even if not directly
addressed by the valuation theory, information asymmetries may also lead
overvalued bidders to conclude stock-financed acquisition: in this case, managers of
the acquiring firm will take profit from their
Private information by using an overvalued ―currency‖ as method of payment, thus
protecting themselves from possible future losses due to stock price reassessment towards
their fair value. Another theory involving behavioral issues is the so-called
―empire-building theory‖: according to this hypothesis, M&A operations are concluded
because of managers‘ willingness to maximize their own utility. It has been given
evidence that, in some circumstances, managers overpay target companies because
they pursue personal interests instead of shareholders ones: M&As may, for
example, improve managers‘ job securities or improve their portfolio diversification
(Morck, Schleifer and Vishny, 1990). When companies conclude an M&A deal, this
usually represent a key point, especially if the transaction size is particularly relevant:
consequently, the deals has a noticeable effect also for managers career and
reputation, giving them the possibility of realizing great professional and personal
achievements. For this reason managers may overpay the target company, just for the
aim of concluding a deal which would significantly increase their prestige. M&A
deals may also destroy shareholders worth if they are driven by managers excessive
optimism or if they are affected by managers‘ hubris. Both these arguments are related
with the assumption that managers overestimate their ability of effectively driving the
target in order to achieve the expected synergies and to justify the premium paid.
Managers believe that their valuation of the target company is better than that of the

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market: a sort of manager‘s irrationality compared to market rationality (Forestieri,
2009).

Irrational arguments also represent the basis of the ―process theory‖, which claims that
companies‘ decisions of acquiring other firms or to merge with them are not the result of
a rational strategic plan but the consequence of irrational choices, governed by the
following forces:
 Difficulties connected to individual natural limited capabilities in
processing information which lead to incomplete valuations and common
simplifications;
 Companies past practices and routines that are rather difficult to be
changed: companies believe that past solutions that have contributed to
successfully solve critical situations may apply also for new challenges, even
if the context has changed or if some conditions are no longer applicable;
 Political games rising from inside the organization gain the upper hand on
rational strategic decisions.

Finally, it is relevant to point out some elements that particularly affect cross-border
mergers and acquisitions: as a matter of fact, there are some issues that have a
peculiar influence on these kind of deals compared to domestic operations and
which may lead companies to perform additional valuations in order to determine
the convenience of the deal. One of these factors are geographic differences since it
has been observed that companies are more likely to conclude deals the shorter the
geographic distances with the potential partner, due to reasons connected with the
frequency of trading activities and cultural backgrounds between the two countries.
Furthermore country-specific factors like different accounting disclosure and
governance structures also have a significant role. Valuation also contributes to increase
the likelihood of M&A deals to be concluded between two countries: valuation can
substantially vary over time for each country as a result of fluctuations in
exchange rates, macroeconomic adjustments and stock market movements. Some
analysis gave evidence (Erel, Liao and Weisbach, 2012) of the fact that volumes

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of mergers between particular country pairs are strictly correlated with differences
in exchange rates returns, country-level stock returns and country-level market-to-
book ratios. It has been proved that companies coming from wealthier countries
(where the currency has recently appreciated) and who have relatively high market-to-
book value usually purchase firms who experience a downturn in their domestic
economy. Finally, it has been observed that differences in firm-level stock returns are
more common among cross-border transactions compared to domestic ones. As it can
be learnt so far, there are different determinants which drive companies to
conclude M&A transactions beyond the market re-assessment and rationalization: some
of them are influenced by economic factors whereas other possible arguments are based
on behavioral issues. It is now relevant to investigate on the driving reasons for acquired
companies to conclude the deal, trying to understand if they are truly in a weaker
position or if they are motivated by great achievements coming from the transaction.

7.2 THE ACQUIRED COMPANY’S PERSPECTIVE

In the M&A market it is not unusual that the acquired company is the one who
makes the deal proposal: this situation usually occurs when these companies are facing
considerable losses in their core business or when they are gradually losing their
competitive positioning. Large companies and holdings may decide to dismiss some
businesses or subsidiaries if perceived as no longer coherent with business strategies and
new market trends. Companies may also opt for divestitures when they are part
of a precise strategic plan especially for large and well-diversified companies:
investments and disinvestments are implemented in order to maximize the company‘s
value.
It has been observed that companies increase their pressure for selling part of their
business as well as for claiming a change of directions when they need liquidity: when
companies are not in the position of further increase their level of leverage, they may
decide to conclude disinvestment in order to avoid bankruptcy. However, liquidity
needs may also be connected with critical investment, which can no longer be
postponed. In some circumstances, shareholders believe that their firm‘s financial

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crisis is due to wrong decisions carried out by incompetent managers: a possible solution
for introducing new managerial skills is to sell part of the company to private
equities of venture capitals, who will start the balance sheet reconstructing activity
usually followed by new strategic plan, in order to maximize the value of their
partnership in the company. Another common cause that drives shareholders and
entrepreneurs to sell their companies and conclude their working activity is their
weakened motivation: as a matter of fact, they see low growth perspectives within their
sector or if they believe to have lost their competitiveness.

Therefore it appears to this entrepreneur that the only way to preserve the company‘s
reputation is to sell it. This phenomenon may also occur within family businesses
when the new generation chooses not to continue the business activity. Finally,
unsolvable conflicts between shareholders represent another voluntary selling
decision in order to allow the company to continue its activity with a new
direction unbiased by internal power fights.

7.3 THE SHAREHOLDERS PERSPECTIVE

The shareholders wealth has increased after merger in long run as well as short
run. Shareholders were satisfied with the exchange ratio given under the scheme of
merger as it finally proved to be beneficial to the shareholders. Dividend payout ratio and
price earnings ratio of company in post merger period was satisfactory. Company
performance has improved post merger leading to better valuation.

Under the shareholder wealth maximization perspective, all firms‘ decisions including
acquisitions are made with the objective of maximizing the wealth of the shareholders of
the firm. In mergers and acquisitions, management of the target firm will oppose bidding
firms to takeover if they believe this action would not be in the best interest of its
shareholders. Target managers that oppose a bid defend their reasoning by claiming that
the bid price is not adequate enough.

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7.4 TRENDS IN MERGERS AND ACQUISITIONS IN INDIA

Regulatory changes and economic reforms have been major reasons for bringing
significant changes in M&A scene in India.

Acquisitions have become more popular than the mergers in Indian context due to
facilitation from SEBI Takeover code, 1997, and also due to convenience in handling
such transaction in comparison to mergers that create more post-integration challenges
for acquirers. However, the cost of acquisitions is also on the rise and this higher cost of
acquisition is probably one reason why growth rate of acquisition has come down during
the study period.

With service sector contributing more than 57% of Indian economy, majority of M&As
in India during study period have been in service sector. Within that the financial services
sector has seen a significant rise in M&As and the trend is likely to continue in future.

The major reasons for increasing consolidations in India are the industry specific
advantages, cost reduction, exploiting core competence and global competition. These
factors have skewed the M&A activity in India towards horizontal and vertical mergers
and acquisitions. The diversified M&A have been thus reduced to negligible number.

The rise in cross-border M&A activity is indicative growing competence of Indian

business entities and their desire to build big businesses by capturing global markets.

Long Term Operating and Financial Performance of Acquirers

(i) The analysis of financial ratios to gauge implications of mergers and acquisitions on
operating performance of acquirers reveals that M&A activity has not been able to
provide much needed

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Synergic benefits to the acquirers. Most of the positive ratios have registered a decline in
real terms while in other cases, the negative ratios such as debt-equity ratio has increased
during post merger period. Even if the decline reported is not statistically significant in
several cases, the absence of strong evidence of improvement in profitability or solvency
or efficiency ratios indicates that the mergers and acquisitions have failed to bring about
improvement in long term operating performance. In other words, there is no value
addition done to the acquirer firms so as to increase the wealth of shareholders in future.

(ii) With reference to sectoral analysis of operating performance post merger it can be
concluded that drugs and pharmaceuticals sector has relatively performed better in
comparison to other sectors under study. On the other hand textile sector has been worst
performer on fundamental parameters. The cash flow position has improved in post
merger period for the acquirers across various sectors, but this has not translated into
recognizable gains in profitability and efficiency of operations.

(iii) Within financial services sector, the non-banking acquirers have seen relatively
better real performance in comparison to banking acquirers though the absence of
statistical significance to this improvement renders it weak evidence of improved
performance.

(iv) Year on year analysis of financial ratios of acquirers across different sectors provide
evidence of statistically significant decline in profitability/efficiency/solvency ratios but
does not provide similar evidence on increase in performance parameters.

(v) With reference to long term buy and hold returns it can be concluded that no
significant positive returns have accrued to shareholders of acquirers in various sectors
during Post announcement period. Shareholders of Acquirers firms in textile sector are
found to earn significant positive buy and hold abnormal returns for upto 2 years holding
period. The significant positive long term returns when the sector has performed the
worst in terms of operating performance is indicative of market inefficiency and
excessive expectations by investor on probable benefits of mergers in this sector.

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Mergers and acquisitions have increased significantly in India in recent times. The
inorganic growth option has occupied a significant place in strategy formulation process
of Indian corporate sector. While mergers have occurred in India in 1970s and 1980s, the
focus then was on revival of sick units, social good and managing the forces of strict
regulations including licensing raj and permits. The focus of corporate restructuring
through mergers and acquisitions has since then changed. Particularly, with
implementation of economic reforms in 1991 and opening up of Indian economy, the
Indian corporate firms have started looking at mergers and acquisitions from a very
different perspective - that of being competitive, increasing market share, cost reduction
and control, product portfolio diversification, supply chain management and exploiting
core competence. The objective of mergers and acquisitions today is not only building a
strong business empire and improving profitability, but passing on the benefits of
mergers to shareholders in terms of increased wealth.

Some studies indicate that companies merge for improving efficiencies and
lowering costs. Other studies show that companies acquire to increase market share and
gain a competitive advantage. The ultimate goal behind a merger and acquisition is to
generate synergy values. Good strategic planning is the key to understanding if synergy
values do in fact exist. A well-researched and realistic plan will dramatically improve the
chances of realizing synergy values.

7.5 SUGGESTIONS
Literature on mergers and acquisitions globally has time again established the fact
that M&A activity does not contribute significantly to shareholder wealth creation. The
general conclusion of this research is that mergers and acquisitions in India are nothing
different from those of the rest of the world in terms of their implications on shareholders
wealth. The findings of this study are useful to the prospective acquirers, corporate
strategists and investors in general. With reference to the conclusions drawn from this
study we provide the following suggestions:

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 (i) Since mergers and acquisitions have not found to be contributing -
significantly to profitability, liquidity and solvency or operational efficiency,
the acquirers need to assess whether paying substantial purchase
considerations for these transactions is economically viable for the firm in the
long run. Given the fact that acquisitions premiums are rising, it becomes
imperative for acquirers to evaluate the inorganic growth strategy against the
organic growth options available.
(ii) The acquirers need to identify appropriate target that has complimentary fit
within the acquirers own organizational structure, product portfolio and work
culture. Post merger integration issues may be one significant reason for
failure of M&As to improve long term operating and financial performance of
acquirer companies. Organization structure with similar management
problems, cultural system and structure will facilitate the effectiveness of
communication pattern and improve the company's capabilities to transfer
knowledge and skills.
(iii) Acquirers need to find out if they are overpaying for their acquisitions as it is
one of the most important reasons for failure of mergers and acquisitions in
creating shareholder value. It is suggested that the valuations for a target firms
be carefully decided based on rational judgments and not because the acquirer
can afford paying extra premiums.
(iv) Very few observations of long term buy and hold returns from merger are
found to be statistically significant and that too for the worst performing
sector. Investors need to study the fundamentals of acquirer firm before
investing in its shares for long term. The mismatch between market valuation
and fair valuation of firm once discovered can result in substantial losses to
investors thereby eroding their wealth from holdings in acquirer firm.

7.6 SCOPE FOR FURTHER RESEARCH

(i) The study can be extended to more sectors based on availability of data in future.

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(ii) Future research on the topic can also be directed to include cross border mergers and
acquisitions which are increasingly becoming significant in Indian economy. A detailed
sectoral analysis of these mergers and acquisitions can be made to identify if there are
any concrete gains to acquirers. This is particularly important given that cross border
M&As involve a very large purchase consideration.
(iii) An analysis of contribution of various sectoral factors on operating and financial
performance of acquirers during post merger period may be undertaken to provide deeper
insight into determinants of post merger performance.
(iv) There is an urgent need to develop suitable methodology to separate the effects of
multiple mergers on operating and financial performance of acquirers. This can enable a
selection of larger sample in M&A studies and thus significantly improve reliability of
such studies.

7.7 CONCLUSIONS
Corporate Mergers and Acquisitions are very crucial for any country's economy.
This is so because the Corporate Mergers and Acquisitions can result in significant
restructuring of the industries and can contribute to rapid growth of industries by
generating Economies of Scale, increased competition in the market and raise the
vulnerability of the stockholders as the value of stocks experience ups and downs after a
merger or acquisition. Although the concept of Merger and Acquisition are different from
one another but both can be used as engines of growth. As a result, M&As are considered
as most strategic concepts to make sure growth for the companies in the Corporate world.
Most of the big companies these days are indulging in merger and acquisition and in the
coming years this process is only going to get bigger. More than 61% of the merger and
acquisition are not successful. Therefore, it is of utmost need that the success rate of
mergers and acquisition be improved. This can only be done if all the aspects involved in
merger and acquisition are given proper attention. It is to be borne in mind that a merger
or an acquisition done in haste cannot be successful. Before a merger or an acquisition
actually takes place a thorough due diligence of the target company should be done.
Based on that result the parent company should decide whether to go ahead with the
merger or acquisition or not.

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 M&As have been found to be beneficial in the sense that Indian companies grew
in size, and attain better market share which is substantiated by empirical analysis.
Throughout the period of study, turnover increased after the companies experienced an
M&A. This gives strength to the argument that Indian companies are focusing on their
core areas and expanding mostly in related areas of strength which is helpful in
realization of synergistic benefits. Further, it has been observed that M&As in India are
strategic in nature that motives range from growth and expansion to high quality of
human resources, strong brand presence and global identity and leadership. To remain
ahead of competitors, business leaders need to have a global vision, be pro-active, able to
take calculated risk and initiate and manage acquisition and consolidation process
smoothly. When the acquisition faces too many challenges or the timeline for completion
stretches out longer than anticipated, too much of the managerial focus is diverted away
from internal development and daily operations. The post-acquisition organization can be
harmed due to lack of managerial resources, resulting in fewer synergies or at the least,
delays in savings realized from synergies. The key to success keeping fundamentals in
place i.e. to bring into line acquisitions to the entire business strategy, plan and execute a
vigorous integration process and take adequate awareness of all relevant regulatory
norms.

Extant literature refers to strategy, international business, finance and sociology

suggested that macroeconomic factors such as economic, legal, political, social, and
cultural and localness influences both inbound and outbound trade, investment and
business decisions. While following this streak, the study has presented relevant
institutional laws refer to the market for corporate control strategies in India, which
include acquisitions, mergers, takeovers, and cross-border deals. The observations
include, higher valuation inbound-deals had been delayed or failed due to weak financial
infrastructure, erratic nature of government officials and political intervention. Even as
opposing this institutional dichotomous behavior, the newly elected government has
aimed to be a focus for higher inflow of investment from other developed and emerging
markets by easing investment rules and offering tax holidays. The then, it has suggested a

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set of guidelines for institutional framework in general and multinational managers in
particular that advocating foreign direct investment through acquisition route. In short,
the review and recommendation would help various stakeholders including economists,
policy makers, M&A advisors, legal consultants, investment bankers, multinational
managers, private equity firms, and overseas investors and MNCs intending to invest in
Indian business. Lastly, this dissertation has ignored empirical observations with regard
to characteristics/financial performance of local and foreign acquisitions in the given
country, which left to further research.

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