Mergers and Acquisitions (M

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Mergers and Acquisitions (M A)

• An Overview

Prepared by YOGESH MITTAL
Yogesh_mittal2_at_yahoo.co.in
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Subject Index

• Precedents
• Reasons for Mergers and Acquisitions ( M A )
• Basic Terms and their distinction
• Considerations in events of M A
• Legal aspects
• Finance aspects
• Taxation Matters
• Accounting for Amalgamations
• Scheme of Amalgamation
• Acquisition and takeovers
• Way forward

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Precedents

• Takeover of Ashok leyland by Hindujas
• Chabbria group took over Falcon tyres
• Ceat tyres taken over by Goenkas
• Pepsi Coke taking over Parle and Indian soft
  drink companies
• Take over of Tetley by Tata Tea.
• Grasim acquired UltraTech through a Swap
• Tata Motors acquisition of Daewoo
• Jindal Vijaynagar steel merged Euro Iron steel,
  Euro energy and JSW Power
• ITC, Somani group through BIFR.
• Recently Vijay Malaya took over Shaw Wallace

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Why M A

• Horizontal growth for enlarged markets optimum
  utilization
• Vertical combination to economize cost and reduce
  tax burden
• Diversification of Business
• Combination of management, financial and human
  resources. Synergies
• Improve dividend yield, earnings, book value of
  entities and cash flow of the entities.
• Attraction to foreign investors
• Financial Restructuring and
• Tax Planning

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Terminologies

• Blending of two or more existing undertakings
  Amalgamation
• Sale of business
• - As a going concern Slump Sale
• - Individual assets - Itemised sale
• Merger / Amalgamation of existing business
  Merger
• Sell to a subsidiary Subsidiarisation
• Demerger
• Secondary market / negotiated purchase of shares
  Share Purchase
• Issue of fresh shares (preferential issue)
  Fresh Issue.

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Crystal Clear
Items Reconstruction Amalgamation Merger Acquisition takeover
Meaning / Nature Winding up an existing co. its transfer to a new co. in its place Full/partial transfer of one/more cos to another including merger Dissolving one/ more entities to form or get absorbed into another co Transferor sell outright on a going concern basis with all its worth
Share holding pattern New Cos remain substantially same Same shareholders but different rights Same shareholders different rights Form and nature can change substantially
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Considerations

• Legal Aspects
• Companies Act, 1956
• MRTP Act
• Industrial Development regulation Act
• Sick Industrial (special provisions) Act
• SEBI Regulations
• Finance Aspect
• Synergy
• Valuation of firm DCF / APV
• Taxation Aspect I.T.Act, 1961
• Accounting Aspect AS 14
• Procedural Aspects Scheme of Amalgamation

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Legal Aspects I

• Companies Act, 1956 Sections 391 to 396
• An application to be made to the court along with
  
• scheme of amalgamation, companys final
  accounts.
• Court has powers to supervise and modify the
• structuring of the scheme. Court can
  order a meeting of
• shareholders, members as it deems fit.
• If a ¾ majority of such a meeting consents and
  the
• scheme is sanctioned by court, file it
  with registrar.
• Court can order for merger of 2 cos. In public
  interest
• In case of court merger, the transferor co. will
  be
• dissolved without winding up whereas in
  acquisition, the
• transferor co. continues to exist.
• MRTP Now Competition Act
• Power retained with the government to order
  discontinue or restructuring of such combination
  agreement as would obtain dominant position.

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legal Aspects II

• Industrial (Development And Regulation Act)
• High court can order to appoint anyone to
  takeover the management of the entity for running
  or restarting.
• License of the amalgamating co. shall
  automatically be transferred to amalgamated co.
• Sick Industrial (Special Provisions) Act
• Not applicable to non-industrial co.and small
  scale or ancillary undertaking.
• Section 18 empowers BIFR to sanction the merger
  of a sick co. with another co. vice versa
  considering the employees views.
• SEBI
• Regulation 3 of SEBI regulations provides for the
  non applicability of takeover provisions to
  Amalgamations effected u/s 391 to 394 of
  companies act and Sick Industrial units u/s 18

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Finance Aspect Returnsgtcost

• Synergy is the economic value of benefits arising
  out of Amalgamation.
• Synergy VAB (VA VB) Hence, it signify the
  difference between combined value and individual
  values of entities.
• Synergy can be a vital but a sole determinant of
  Amalgamation. Post merger integration, managerial
  talent can result in abnormal returns.
• Valuation of the transferor entity can be done by
  DCF Methodology i.e. discounting the estimated
  future cash flows of entity (less) value of debt
  and other obligations as estimated.
• An alternative approach to value target co. can
  be APV
• Value the company as if it were financed entirely
  with equity.
• Estimate the value of financing side effects like
  tax shields etc
• Add the two to arrive at APV.

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Taxation Matters

• Transferor Company can claim Capital gains
  exemption u/s 47(vi)
• WDV of depreciable assets of transferor co. as on
  the appointed day to be added to the respective
  block of transferor co. Other Assets can be taken
  at actual cost Expl (2) to Section 43(6)( C).
• Depreciation claim to be split up between both
  cos. as per number of days
• Only accumulated business loss unabsorbed
  depreciation can be transferred. Capital loss to
  lapse. Transferee co. should be an Industrial
  undertaking, Shipping Company, Hotel or a Bank to
  claim benefits.
• Tax benefits u/s 10A,10B,80IA,80IB shall be
  available continuously.
• Amalgamation expenses can be claimed as deduction
  equally over 5 years period.
• No transfer for shareholders of transferor Co.
  hence no tax liability. Period for which shares
  are held in transferor co. to be considered for
  indexation.

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AS 14 Accounting Interpretations

• Applicable for Amalgamation as defined in
  Companies Act, 1956. Not applicable for other
  ways of reconstruction, takeover.
• AS 14 to be followed only for accounting in books
  of transferee co. For transferor Co. has to be as
  per common principles.
• Consideration includes shares, securities, cash
  and other assets by means of which obligation is
  discharged.
• Amalgamation in nature of merger Pooling of
  Interest
• All Assets and liabilities of transferor taken
  over by transferee Co.
• Consideration paid in equity shares except for
  fractional shares
• Business of transferor co. to be carried on by
  transferee Co.
• Shareholders of at least 90 or more in the
  transferor Co. to become shareholders in
  transferee co.
• The Assets and Liabilities to be taken over at
  book values without making any adjustments by way
  of revaluation or otherwise.
• Amalgamation in nature of purchase Purchase
  method
• If any of the conditions regarding amalgamation
  in nature of merger is not satisfied.

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Accounting Methods

• Pooling of interest
• In the Financial statements post Amalgamation,
  line by line addition of all assets and
  liabilities of all entities except share capital.
• Any Excess realised / loss suffered to be
  adjusted by reserves.
• For statutory reserves open Amalgamation
  adjustment a/c.
• Amortize goodwill arising out of such events over
  5 years.

• Purchase Method
• Assets and liabilities to be recorded in the
  books at the value at which they are taken over
  by the transferee co.
• Any surplus over net assets to be debited to
  goodwill and loss suffered to be credited to
  capital reserve.
• Reserves and surplus shall not be transferred to
  the purchasing co.
• Treatment of statutory reserves and goodwill
  shall remain same as in pooling of interest
  method.

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Scheme of Amalgamation or Merger

• No prescribed format for a scheme and is designed
  to suit terms and conditions relevant to proposal
• Provision for vesting the assets and liabilities
  of transferor co. should be clearly defined. If
  transferee co. does not want to takeover any
  item, should mention it specifically.
• Define the effective date from which the scheme
  is intended to come into operation.
• Valuation of the shares to decide the exchange
  ratio. The method has to be appropriate and
  acceptable to majority.
• Position of employees has to be clearly set out
  with a specific mention of transfer of employees
  at same terms and conditions.
• The application for merger can be made by the
  company, members, creditors or liquidator.

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Acquisitions and Takeovers

• It is the purchase of one of the business as a
  going concern / acquisition of controlling
  interest in it in a friendly or a hostile way.
• Takeover by reverse bid wherein a smaller co.
  gains control of a larger co.
• Buy out is the acquisition by incumbent
  management of the business where they are
  employed. Full buy out is still a concept popular
  in OECD countries.
• Direct negotiations / acquisitions of shares are
  the most common ways of takeover in India
• No one shall acquire shares/voting rights of
  entitlements of over 15 without Public
  Announcement as prescribed by SEBI.
• Guidelines for takeovers are embodied in clause
  40B of the Listing Agreement of SEBI
• Tax shield for unabsorbed losses and depreciation
  u/s 72A can be
  exploited through Acquisitions

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Way Forward

• From 15 mergers in 1988 India registered over 500
  mergers by 1998.
• A liberal economy, globalization and simplified
  procedures can boost the process in future
• The Professional management of pre and post
  merger issues can result in favor
• Business houses can look for new opportunities to
  exploit the scenario effectively.

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THANK YOU