Merger Aqui & Takeover

Merger, Acquisition And Takeover
Chapter 1: Introduction
MERGER, ACQUISITION AND TAKEOVER
BASIC CONCEPTS
Mergers and acquisitions represent the ultimate in change for a business. No other event is more difficult, challenging, or chaotic as a merger and acquisition. It is imperative that everyone involved in the process has a clear understanding of how the process works. Hopefully this short course will provide you with a better appreciation of what is involved. You might be asking yourself, why do I need to learn the merger and acquisition (M & A) process? Well for starters, mergers and acquisitions are now a normal way of life within the business world. In today's global, competitive environment, mergers are sometimes the only means for long-term survival. In other cases, such as Cisco Systems, mergers are a strategic component for generating long-term growth. Additionally, many entrepreneurs no longer build companies for the long-term; they build companies for the short-term, hoping to sell the company for huge profits. In her book The Art of Merger and Acquisition Integration, Alexandra Reed Lajoux puts it best: Virtually every major company in the United States today has experienced a major acquisition at some point in history. And at any given time, thousands of these companies are adjusting to post-merger reality. For example, so far in the decade of the 1990's (through June 1997), 96,020 companies have come under new ownership worldwide in deals worth a total of $ 3.9 trillion - and that's just counting acquisitions valued at $ 5 million and over. Add to this the many smaller companies and nonprofit and governmental entities that experience mergers every year, and the M & A universe becomes large indeed.
History of Mergers and Acquisitions

Tracing back to history, merger and acquisitions have evolved in five stages and each of these are discussed here. As seen from past experience mergers and acquisitions are triggered by economic factors. The macroeconomic environment, which includes the growth in GDP, interest rates and monetary policies play a key role in designing the process of mergers or acquisitions between companies or organizations. FIRST WAVE MERGERS The first wave mergers commenced from 1897 to 1904. During this phase merger occurred between companies, which enjoyed monopoly over their lines of production like railroads, electricity etc. The first wave mergers that occurred during the aforesaid time period were mostly horizontal mergers that took place between heavy manufacturing industries. End of 1st Wave Merger Majority of the mergers that were conceived during the 1st phase ended in failure since they could not achieve the desired efficiency. The failure was fuelled by the slowdown of the economy in 1903 followed by the stock market crash of 1904. The legal framework was not upportive either. The Supreme Court passed the mandate that the anticompetitive mergers could be halted using the Sherman Act. SECOND WAVE MERGERS The second wave mergers that took place from 1916 to 1929 focused on the mergers between oligopolies, rather than monopolies as in the previous phase. The economic boom that followed the post World War I gave rise to these mergers. Technological developments like the development of railroads and transportation by motor vehicles provided the necessary infrastructure for such mergers or acquisitions to take place. The government policy encouraged firms to work in unison. This policy was implemented in the 1920s. The 2nd wave mergers that took place were mainly horizontal or conglomerate in nature. Te industries that went for merger during this phase were producers of primary metals, food products, petroleum products, transportation equipments and chemicals. The investments banks played a pivotal role in facilitating the mergers and acquisitions

End Of 2nd Wave Mergers The 2nd wave mergers ended with the stock market crash in 1929 and the great depression. The tax relief that was provided inspired mergers in the 1940s. THIRD WAVE MERGERS The mergers that took place during this period (1965-69) were mainly conglomerate mergers. Mergers were inspired by high stock prices, interest rates and strict enforcement of antitrust laws. The bidder firms in the 3rd wave merger were smaller than the Target Firm. Mergers were financed from equities; the investment banks no longer played an important role. End of the 3rd Wave Merger The 3rd wave merger ended with the plan of the Attorney General to split conglomerates in 1968. It was also due to the poor performance of the conglomerates. Some mergers in the 1970s have set precedence. The most prominent ones were the INCO-ESB merger; United Technologies and OTIS Elevator Merger are the merger between Colt Industries and Garlock Industries. FOURTH WAVE MERGER The 4th wave merger that started from 1981 and ended by 1989 was characterized by acquisition targets that wren much larger in size as compared to the 3rd wave merger.

Mergers took place between the oil and gas industries, pharmaceutical industries, banking and airline industries. Foreign takeovers became common with most of them being hostile takeovers. The 4th Wave mergers ended with anti takeover laws, Financial Institutions Reform and the Gulf war FIFTH WAVE MERGER The 5th Wave Merger (1992-2000) was inspired by globalization, stock market boom and deregulation. The 5th Wave Merger took place mainly in the banking and telecommunications industries. They were mostly equity financed rather than debt financed. The mergers were driven long term rather than short term profit motives. The 5th Wave Merger ended with the burst in the stock market bubble. Hence we may conclude that the evolution of mergers and acquisitions has been long drawn. Many economic factors have contributed its development.
Important Terminology Related To Mergers and Acquisitions

Asset Stripping Asset Stripping is the process in which a firm takes over another firm and sells its asset in fractions in order to come up with a cost that would match the total takeover expenditure. Demerger or Spin off Demerger refers to the practice of corporate reorganization. During this process a fraction of the firm may break up and establish itself as a new business identity. Black Knight The term generally refers to the firm which takes over the target firm in a hostile manner. Carve - out The procedure of trading a small part of the firm as an Initial Public Offering is known as carve-out. Poison Pill or Suicide Pill Defense Poison Pill is an approach which is adopted by the target firm to present itself as less likable for an unfriendly subjugation. The shareholders have full privilege to exchange their bonds at a premium if the buyout takes place. Greenmail Greenmail refers to the state of affairs where the target firm buys back its own assets or shares from the bidding firm at a greater cost. Dawn Raid The process of purchasing shares of the target firm anticipating the decline in market costs till the completion of the takeover is known as Dawn Raid. Grey Knight A firm that acquires another under ambiguous conditions or without any comprehensible intentions is known as a grey knight. Macaroni Defense

Macaroni Defense is an approach that is implemented by the firms to protect them from any hostile subjugation. A company can prevent itself by issuing bonds that can be exchanged at a higher price. Management Buy In This term refers to the process where a firm buys and invests in another and employs their managers and officials to administer the new established business identity. Hostile Takeover Unfriendly or Hostile acquisitions take place when the management of the target firm does not have any prior knowledge about it or does not mutually agree for the proposal. The disagreements between the chief executives of the target firm may not be longlasting and the hostile subjugation may take up the form of friendly takeover. This practice is prevalent among the British and American firms. However, some of them are still against hostile subjugations. Management Buy Out A management buy out refers to the process in which the management buys a firm in collaboration with its undertaking entrepreneurs
Chapter 2: Merger
MERGER
A merger is a corporate strategy of combining different companies into a single company in order to enhance the financial and operational strengths of both organizations. A merger usually involves combining two companies into a single larger company. The combination of the two companies involves a transfer of ownership, either through a stock swap or a cash payment between the two companies. In practice, both companies surrender their stock and issue new stock as a new company. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of: 1. 2. 3. 4. Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes.
As per companies act 1956: The terms merger and amalgamation have not been defined in the Companies Act, 1956 though this voluminous piece of legislation contains more than 50 definitions in Section 2 of the Act. For the purpose of this act the terms Merger and Amalgamation are synonymous. The statutory provisions relating to merger and amalgamation are contained in sections 390 to 396A.
As per general dictionary meaning : According to Oxford Dictionary, the expression merger or amalgamation means combining of two commercial companies into one merging of two or more business concerns into one respectively. Merger is a fusion between two or more enterprises, whereby the identity of one or more is lost and the result is a single enterprise whereas
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Amalgamation signifies blending of two or more existing undertakings into one undertaking, the blended companies losing their identities and forming themselves into a separate legal identity. There may be amalgamation either by the transfer of two or more undertaking to a new company, or by the transfer of one or more undertaking to an existing company
Types Of Merger
Horizontal Mergers Horizontal mergers occur when two companies sell similar products to the same markets. A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs. Vertical Mergers A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The parts division, in turn, would be guaranteed a steady stream of business. Market Extension Mergers The main benefit of a market extension merger is to help two organizations that may provide similar products and services grow into markets where they are currently weak. Rather than try to establish a retail presence in Europe, Wal-Mart could merge with a European retailer that is already successful and has good brand recognition. Even though the two organizations are both big-box retailers selling similar products, they have found success in different parts of the world. As a single organization, they have a diverse, global presence. Product Extension Mergers Two companies may merge when they sell products into different niches of the same markets. A manufacturer of high-end stoves may merge with a company that makes budget-conscious models. The combined organization now has a complete product line that spans various price points. Conglomerate Mergers Conglomerate mergers occur when two organizations sell products in completely different markets. There may be little or no synergy between their product lines or areas of business. The benefit of a conglomerate merger is that the new, parent organization gains diversity in its business portfolio. A shoe company may join with a water filter manufacturer in accordance with a theory that business would rarely be down in both markets at the same time. Many holding companies are built upon this theory.
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Pros And Cons Of Mergers

A look at the pros and cons of mergers. Are mergers in the public interest or are mergers just beneficial for top executives and shareholders? When looking at mergers it is important to look at the subject on a case by case basis as each merger has a different possible benefits and costs. These are the most likely advantages and disadvantages of a merger.
Pros of merger
1. Network Economies. In some industries, firms need to provide a national network. This means there are very significant economies of scale. A national network may imply the most efficient number of firms in the industry is one. For example, when T-Mobile merged with Orange in the UK, they justified the merger on the grounds that: The ambition is to combine both the Orange and T-Mobile networks, cut out duplication, and create a single super-network. For customers it will mean bigger network and better coverage, while reducing the number of stations and sites which is good for cost reduction as well as being good for the environment. 2. Research and development. In some industries, it is important to invest in research and development to discover new products / technology. A merger enables the firm to be more profitable and have greater funds for research and development. This is important in industries such as drug research. 3. Other Economies of Scale. The main advantage of mergers is all the potential economies of scale that can arise. In a horizontal merger, this could be quite extensive, especially if there are high fixed costs in the industry. see: Examples Note: if the merger was a vertical merger or conglomerate, the scope for economies of scale would be lower. 4. Avoid Duplication. In some industries it makes sense to have a merger to avoid duplication. For example two bus companies may be competing over the same stretch of
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roads. Consumers could benefit from a single firm with lower costs. Avoiding duplication would have environmental benefits and help reduce congestion. 5. Regulation of Monopoly. Even if a firm gains monopoly power from a merger, it doesnt have to lead to higher prices if it is sufficiently regulated by the government. For example, in some industries the government has price controls to limit price increases. That enables firms to benefit from economies of scale, but consumer doesnt face monopoly prices.
Cons of Mergers
1. Higher Prices. A merger can reduce competition and give the new firm monopoly power. With less competition and greater market share, the new firm can usually increase prices for consumers. For example, there is opposition to the merger between British Airways (parent group IAG) and BMI. (link Guardian) This merger would give British Airways an even higher percentage of flights leaving Heathrow and therefore much scope for setting higher prices. Richard Branson (of Virgin) states: This takeover would take British flying back to the dark ages. BA has a track record of dominating routes, forcing less flying and higher prices. This move is clearly about knocking out the competition. The regulators cannot allow British Airways to sew up UK flying and squeeze the life out of the travelling public. It is vital that regulatory authorities, in the UK as well as in Europe, give this merger the fullest possible scrutiny and ensure it is stopped. 2. Less Choice. A merger can lead to less choice for consumers. 3. Job Losses. A merger can lead to job losses. This is a particular cause for concern if it is an aggressive takeover by an asset stripping company A firm which seeks to merge and get rid of under-performing sectors of the target firm. 4. Diseconomies of Scale. The new firm may experience dis-economies of scale from the increased size. After a merger, the new bigger firm may lack the same degree of control and struggle to motivate workers. If workers feel they are just part of a big multinational they may be less motivated to try hard. The desirability of a Merger depends upon: 1. How much is competition reduced by? E.g. A merger between Tesco and Sainsburys would lead to a significant fall in competition amongst UK supermarkets. This would lead to higher prices for basic necessities.
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2. How significant are economies of scale in the industry? A merger between Tesco and Sainsbury may enable some economies of scale, but it would be relatively low compared to two oil drilling companies. The fixed costs in oil exploration are much higher. Therefore, there is more justification for a merger in oil exploration than in supermarkets. 3. How Contestable is the market. After the merger can new firms still enter or are barriers to entry sufficiently high to deter new firms?
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PURPOSE OF MERGERS AND ACQUISITION
The purpose for an offeror company for acquiring another company shall be reflected in the corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position. Other possible purposes for acquisition are short listed below: -
(1) Procurement of supplies: 1. to safeguard the source of supplies of raw materials or intermediary product; 2. to obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.; 3. To share the benefits of suppliers economies by standardizing the materials. (2)Revamping production facilities: 1. to achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources; 2. to standardize product specifications, improvement of quality of product, expanding 3. market and aiming at consumers satisfaction through strengthening after sale 4. services; 5. to obtain improved production technology and know-how from the offeree company 6. to reduce cost, improve quality and produce competitive products to retain and 7. Improve market share. (3) Market expansion and strategy: 1. to eliminate competition and protect existing market; 2. to obtain a new market outlets in possession of the offeree; 3. to obtain new product for diversification or substitution of existing products and to enhance the product range; 4. strengthening retain outlets and sale the goods to rationalize distribution; 5. to reduce advertising cost and improve public image of the offeree company;
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6. Strategic control of patents and copyrights. (4) Financial strength: 1. to improve liquidity and have direct access to cash resource; 2. to dispose of surplus and outdated assets for cash out of combined enterprise; 3. to enhance gearing capacity, borrow on better strength and the greater assets backing; 4. to avail tax benefits; 5. to improve EPS (Earning per Share). (5) General gains: 1. to improve its own image and attract superior managerial talents to manage its affairs; 2. to offer better satisfaction to consumers or users of the product. (6) Own developmental plans: The purpose of acquisition is backed by the offeror companys own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation, accounting, valuation, etc. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities, secure additional financial facilities eliminate competition and strengthen its market position. (7) Strategic purpose: The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate strategies. Thus, various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination. (8) Corporate friendliness: Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. The combining corporate aim at circular combinations by pursuing this objective.
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MERGER AND ACQUISITION STRATEGY PROCESS
The merger and acquisition strategies may differ from company to company and also depend a lot on the policy of the respective organization. However, merger and acquisition strategies have got some distinct process, based on which, the strategies are devised. Determine Business Plan Drivers Merger and acquisition strategies are deduced from the strategic business plan of the organization. So, in merger and acquisition strategies, you firstly need to find out the way to accelerate your strategic business plan through the M&A. You need to transform the strategic business plan of your organization into a set of drivers, which your merger and acquisition strategies would address. While chalking out strategies, you need to consider the points like the markets of your intended business, the market share that you are eyeing for in each market, the products and technologies that you would require, the geographic locations where you would operate your business in, the skills and resources that you would require, the financial targets, and the risk amount etc. Determine Acquisition Financing Constraints Now, you need to find out if there are any financial constraints for supporting the acquisition. Funds for acquisitions may come through various ways like cash, debt, public and private equities, PIPEs, minority investments, earn outs etc. You need to consider a few facts like the availability of untapped credit facilities, surplus cash, or untapped equity, the amount of new equity and new debt that your organization can raise etc. You also need to calculate the amount of returns that you must achieve. Develop Acquisition Candidate List Now you have to identify the specific companies (private and public) that you are eyeing for acquisition. You can identify those by market research, public stock research, referrals from board members, investment bankers, investors and attorneys, and even recommendations from your employees. You also need to develop summary profile for every company. Build Preliminary Valuation Models This stage is to calculate the initial estimated acquisition cost, the estimated returns etc. Many organizations have their own formats for presenting preliminary valuation.
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Rate/Rank Acquisition Candidates Rate or rank the acquisition candidates according to their impact on business and feasibility of closing the deal. This process will help you in understanding the relative impacts of the acquisitions. Review and Approve the Strategy This is the time to review and approve your merger and acquisition strategies. You need to find out whether all the critical stakeholders like board members, investors etc. agree with it or not. If everyone gives their nods on the strategies, you can go ahead with the merger or acquisition
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Chapter 3: Acquisition
ACQUISITION
An Acquisition usually refers to a purchase of a smaller firm by a larger one. Acquisition, also known as a takeover or a buyout, is the buying of one company by another. Acquisitions or takeovers occur between the bidding and the target company. There may be either hostile or friendly takeovers. Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. Acquisition refers to one company buying the assets and operations of another company and absorbing what is needed while simply discarding duplicated or unnecessary pieces of the acquired business
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There Is Different Type Of Acquisition

Reverse Takeover: Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. a. Reverse takeover occurs when the target firm is larger than the bidding firm. In the course of acquisitions the bidder may purchase the share or the assets of the target company. b. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Reverse Merger: A deal that enables a private company to get publicly listed in a short time period. a. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets. b. Achieving acquisition success has proven to be very difficult, while various studies have showed that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its Outcome.
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Pros And Cons Of Acquisition

Benefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions can generate cost efficiency through economies of scale, can enhance the revenue through gain in market share and an even generate tax gains. The principal benefits from mergers and acquisitions can be listed as increased value generation, increase in cost efficiency and increase in market share. Benefits of Mergers and Acquisitions are the main reasons for which the companies enter into these deals. Mergers and Acquisitions may generate tax gains, can increase revenue and can reduce the cost of capital. The main benefits of Mergers and Acquisitions are the following:
Pros of Acquisition:
Greater Value Generation Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale. Merger & Acquisition also leads to tax gains and can even lead to a revenue enhancement through market share gain. Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more value than the separate firms. When a company buys out another, it expects that the newly generated shareholder value will be higher than the value of the sum of the shares of the two separate companies. Mergers and Acquisitions can prove to be really beneficial to the companies when they are weathering through the tough times. If the company which is suffering from various problems in the market and is not able to overcome the difficulties, it can go for an acquisition deal. If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost efficient company can be generated. Here, the target company benefits as it gets out of the difficult situation and after being acquired by the large firm, the joint company accumulates larger market share. This is because of these benefits that the small and less powerful firms agree to be acquired by the large firms.
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Gaining Cost Efficiency When two companies come together by merger or acquisition, the joint company benefits in terms of cost efficiency. A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets reduced. An increase in cost efficiency is affected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down Mergers and Acquisitions are also beneficial When a firm wants to enter a new market When a firm wants to introduce new products through research and development When a forms wants achieve administrative benefits To increased market share To lower cost of operation and/or production To gain higher competitiveness For industry know how and positioning For Financial leveraging To improve profitability and EPS An increase in market share is one of the plausible benefits of mergers and acquisitions. In case a financially strong company acquires a relatively distressed one, the resultant organization can experience a substantial increase in market share. The new firm is usually more cost-efficient and competitive as compared to its financially weak parent organization.
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Cons of Acquisition:
The idea is to increase your revenues by acquiring a functioning company that will contribute to your income. However, acquisitions can present some difficulties and actually put you at a disadvantage. Consider the pitfalls before you pursue an acquisition. Culture Clashes Even a company has a personality, a culture that permeates the entire organization. If you acquire a company that has a way of doing things that conflicts with yours, the employees of the acquired company may bristle at your management style. Conversely, your employees may not accept managers and supervisors from the acquired company. You can try to keep the two companies completely separate, but in such a case the two organizations will have to communicate, so the culture clash can still cause problems. For example, if your culture is based on the idea of meeting deadlines and the acquired company has a more relaxed view of delivering work or products on time, you may find yourself disciplining the management of the acquired company. Redundancy When you acquire a company, you may have employees who duplicate each other's functions. This can cause excessive payroll expenditures where you pay for two employees to do the work of one. That can reduce motivation among employees. If you get rid of excess employees, you may cause resentment among the workforce. The decreased morale can reduce productivity. For example, laying off excess production staff may cause remaining production personnel to fear they will lose their jobs. The resulting stress may distract them from the work at hand. Conflicting Objectives The acquired company may have different objectives than yours. In fact, this is likely, because the two companies have been operating independently up until the acquisition. For example, your original company may embrace the objective of expanding in to new markets, while the acquired company may be in pullback mode, with the objective of reducing costs. The resistance you meet as you try to spend on marketing initiatives can undermine your efforts. Increased Debt If you borrow money to acquire a company, that debt goes on the books of the original company. In order to service that debt, you need revenues from the acquired
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company. Since many companies become the target of acquisitions because they are struggling financially, you may find that the financial problems of the acquired company prevent you from generating the income you need to pay the new debt. In addition, acquired companies tend to have their own debt, which you assume when you buy them. The growing debt may outpace new revenues. Market Saturation If you acquire a company that is in the same line of business as your original company, your hopes for market expansion may hit a barrier: the two companies together already dominate the market. You may find it difficult to grow sales after the acquisition because not enough new customers exist outside of the customer base you and the acquired company have established
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The Acquisition Process

Researching Target Companies
The acquisition of companies should be not be a scattershot approach, since the acquiring entity will end up with a jumble of unrelated businesses. Instead, a serial acquirer typically builds a database of the companies competing in the market in which it has an interest. This may be organized as a matrix, with each company categorized by such factors as revenue, profitability, cash flow, growth rate, number of employees, products, intellectual property, and so forth. The database will never be complete, since privately-held companies in particular are not willing to reveal information about themselves. Nonetheless, there are many sources of information that can be used to continually improve the database, such as public company filings, personal contacts, third party reports, and patent analysis. The acquirer should also maintain a listing of the acquisitions that have taken place in the industry recently, with particular attention to the market niches in which they are most common. This is useful for discerning the prices at which other sellers might expect to be sold, since everyone in the industry reads the same press releases, and so is aware of the acquisitions. A recent upsurge in prices might indicate to an acquirer that the market is overheated, and so is not worth participating in during the near term.
The Initial Contact

The first step in the acquisition process is the initial contact with a prospective acquiree. There are a number of methods that an acquirer can use to scout out possible acquisition candidates. Here are several of the more common methods: Discrete contact. One of the better ways to buy a business is the discrete inquiry. This is initiated by a simple phone call to the owner of the target company, requesting a meeting to discuss mutual opportunities. The wording of the request can vary; use whatever terms necessary to initiate a one-on-one discussion. The intent is not necessarily an immediate offer to buy the company; instead, this may simply begin a series of discussions that may last for months or even years, while the parties become accustomed to each other. Joint venture. One of the better methods for determining the best possible acquisition candidates is for the acquirer to enter into joint venture agreements with those companies who might eventually be acquisition candidates. The creation and management of these joint ventures gives the acquirer an excellent view of how well the other company operates, thereby giving it more day-to-day operational detail than it
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could have obtained through a standard due diligence investigation. The arrangement may also make the owners of an acquisition candidate more comfortable with how they would be treated if acquired. Third party. There may be situations where the acquirer does not want anyone to know of its interest in making acquisitions within a certain market. If so, it can retain the services of an investment banker, who calls target companies on behalf of the acquirer to make general inquiries about the willingness of the owners to sell.
The Non-Disclosure Agreement

If the target company concludes that it may have an interest in selling to the acquirer, the parties sign a non-disclosure agreement (NDA). This document states that all information stamped as confidential will be treated as such, that the information will not be issued to other parties, and that it will be returned upon request. These agreements can be difficult to enforce, but are nonetheless necessary.
The Letter of Intent

Once the NDA has been signed by both parties, the target company sends its financial statements and related summary-level documents concerning its historical and forecasted results to the acquirer. Based on this information, the acquirer may wish to proceed with a purchase offer, which it documents in a letter of intent (LOI) or term sheet. The acquirer should request an exclusivity period, during which the target company commits to only deal with it. In reality, many sellers attempt to shop the offered price around among other possible buyers, which violates the terms of the exclusivity agreement. When this happens, the acquirer may elect to walk away from further discussions, since the seller has proven to be unreliable.
Due Diligence
The acquirer then sends a list of due diligence requests to the target company. This topic is addressed in the Due Diligence article. It is entirely likely that the target company will not have the requested information in a format ready for immediate distribution. Instead, it may take a considerable amount of time to find some documents. In addition, since the target was not necessarily preparing itself to be sold, it may not have audited financial statements. If so, the acquirer may want to wait for these statements to be prepared, which could take about two months. Audited financial statements give some assurance that the information in them fairly presents the financial results and condition of the target company.
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Final Negotiations
The due diligence process can require a number of weeks to complete, with a few stray documents being located well after the main body of information has been analyzed. Once the bulk of the information has been reviewed, the due diligence team leader can advise the senior management of the acquirer regarding issues found and any remaining areas of uncertainty, which can be used to adjust the initial calculation of the price that the acquirer is willing to offer. The usual result is a decrease in the price offered. If the acquirer wants to continue with the acquisition, it presents the seller with the first draft of a purchase agreement. Since the acquirer is controlling the document, it usually begins with a draft that contains terms more favorable to it. The attorney working for the seller must bring any unsatisfactory terms to the attention of the seller, for decisions regarding how they can be adjusted. If the seller does not retain an attorney who specializes in purchase agreements, the seller will likely agree to terms that favor the acquirer. The parties may not agree to a deal. A serial acquirer should have considerable experience with which types of target companies it can successfully integrate into its operations, as well as the maximum price beyond which a deal is no longer economically viable. Thus, the acquirer should compare any proposed deal to its internal list of success criteria, and walk away if need be. Similarly, since the acquirer likely has a hard cap above which it will not increase its price, the seller must decide if the proposed price is adequate, and may elect to terminate the discussions.
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Chapter4: Takeover
TAKEOVER
In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company. A takeover is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers. For example, process of takeover is unilateral and the offer or company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offered company being more co-operative The takeover could take place through different methods. A company may acquire the shares of a unlisted company through what is called acquisition under Section 395 of the Companies Act , 1956. However where the shares of the company are widely held by the general public, it involves the process as set out in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended in 2002, 2004 and 2006 . In this paper the researcher shall limit his analysis to listed companies. The term Takeover has not been defined under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 , the term basically envisages the concept of an acquirer taking over the control or management of the target company . When an acquirer, acquires substantial quantity of shares or voting rights of the target company, it results in the Substantial acquisition of Shares
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There are different kinds of takeover
FRIENDLY TAKEOVERS Before a bidder makes an offer for another company, it usually first informs that company's board of directors. If the board feels that accepting the offer serves shareholders better than rejecting it, it recommends the offer be accepted by the shareholders. In a private company, because the shareholders and the board are usually the same people or closely connected with one another, private acquisitions are usually friendly. If the shareholders agree to sell the company, then the board is usually of the same mind or sufficiently under the orders of the shareholders to cooperate with the bidder. This point is not relevant to the UK concept of takeovers, which always involve the acquisition of a public company. Hostile takeovers HOSTILE TAKEOVERS A hostile takeover allows a suitor to bypass 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. Tender offers in the USA are regulated with the Williams Act.
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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. REVERSE TAKEOVERS A reverse takeover is a type of takeover where a private company acquires a public company. This is usually done at the instigation of the larger, private company, the purpose being for the private company to effectively float itself while avoiding some of the expense and time involved in a conventional IPO. However, under AIM rules, a reverse take-over is an acquisition or acquisitions in a twelve month period which for an AIM company would: exceed 100% in any of the class tests; or result in a fundamental change in its business, board or voting control; or in the case of an investing company, depart substantially from the investing strategy stated in its admission document or, where no admission document was produced on admission, epart substantially from the investing strategy stated in its pre-admission announcement or, depart substantially from the investing strategy.
BACKFLIP TAKEOVER These kinds of takeovers are rare today. In this type of takeover, the acquirer turns itself into a subsidiary of the target company. BAILOUT TAKEOVER As the name suggests, this type of takeover occurs when a financially sound company takes over the reins of a financially sick company, or a company that is in turmoil of any sort. LEVERAGED BUYOUT This type of takeover or acquisition happens when the acquiring company borrows a significant amount of money to meet acquisition costs. Generally, in this type of takeover the assets of the target company are used as collateral against the loan that the acquirer makes. In busted takeovers a type of leveraged buyout certain assets of the target company are sold off to fund the acquisition.
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Procedure For Takeover

I. Threshold of disclosure to be made by acquirer(s): 1) 5% and more shares or voting rights: A person who, along with PAC, if any, (collectively referred to as " Acquirer" hereinafter) acquires shares or voting rights (which when taken together with his existing holding) would entitle him to more than 5% or 10% or 14% shares or voting rights of target company, is required to disclose at every stage the aggregate of his shareholding to the target company and the Stock Exchanges within 2 days of acquisition or receipt of intimation of allotment of shares 2) Any person who holds more than 15% but less than 55% shares or voting rights of target company, and who purchases or sells shares aggregating to 2% or more shall within 2 days disclose such purchase/ sale along with the aggregate of his shareholding to the target company and the Stock Exchanges. 3) Any person who holds more than 15% shares or voting rights of target company and a promoter and person having control over the target company, shall within 21 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration, disclose every year his aggregate shareholding to the target company 4) The Target company, in turn, is required to inform all the stock exchanges where the shares of target company are listed, every year within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration (II) Trigger point for making an open offer by an acquirer 1) 15% shares or voting rights: An acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 15% or more voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire atleast additional 20% of the voting capital of target company from the shareholders through an open offer. 2) Creeping acquisition limit: An acquirer who holds 15% or more but less than 55% of shares or voting rights of a target company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year ending March 31 only after making a public announcement to acquire atleast additional 20% shares of target company from the shareholders through an open offer . However in the case where only 5% or less shares or voting rights could be acquired in aggregate , whether the person acquired it individually or together with persons acting in concert Public announcement is not required to be
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made. This is called creeping acquisition . An acquirer who seeks to acquire further shares shall not acquire such shares during th period of 6 months from the date of closure of public offer at a price higher than the offer price. However this shall not be applicable where the acquisition is made through stock exchanges 3) Consolidation of holding: An acquirer who holds 55% or more but less than 75% shares or voting rights of a target company, can acquire further shares or voting rights only after making a public announcement to acquire atleast additional 20% shares of target company from the shareholders through an open offer. no acquirer, (including persons acting in ) who holds 55 per cent or more but less than 75 per cent of the shares or voting rights in a target company, shall acquire any additional shares or voting rights, unless he makes a public announcement to acquire shares in accordance with these regulations In order to appreciate the implications arising here from, it is pertinent for us to consider the meaning of the term public announcement III. Public Announcement A Public announcement is generally an announcement given in the newspapers by the acquirer, primarily to disclose his intention to acquire a minimum of 20% of the voting capital of the target company from the existing shareholders by means of an open offer However, an Acquirer may also make an offer for less than 20% of shares of target company in case the acquirer is already holding 75% or more of voting rights/ shareholding in the target company and has deposited in the escrow account in cash a sum of 50% of the consideration payable under the public offer The Acquirer is required to appoint a Merchant Banker registered with SEBI before making a PA and is also required to make the PA within four working days of the entering into an agreement to acquire shares, which has led to the triggering of the takeover, through such Merchant Banker. The other disclosures in this announcement would inter alia include the offer price, the number of shares to be acquired from the public, the identity of the acquirer, the purposes of acquisition, the future plans of the acquirer, if any, regarding the target company, the change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer would be completed. The basic objective behind the PA being made is to ensure that the shareholders of the target company are aware of the exit opportunity available to them in case of a takeover / substantial acquisition of shares of the target company. They may, on the basis of the
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disclosures contained therein and in the letter of offer, either continue with the target company or decide to exit from it. IV. Procedure to be followed after the Public Announcement In pursuance of the provisions of Reg. 18 of the said Regulations, the Acquirer is required to file a draft Offer Document with SEBI within 14 days of the PA through its Merchant Banker, along with filing fees of Rs.50,000/- per offer Document (payable by Bankers Cheque / Demand Draft). Along with the draft offer document, the Merchant Banker also has to submit a due diligence certificate as well as certain registration details .The filing of the draft offer document is a joint responsibility of both the Acquirer as well as the Merchant Banker. Thereafter, the acquirer through its Merchant Banker sends the offer document as well as the blank acceptance form within 45 days from the date of Public Announcement , to all the shareholders whose names appear in the register of the company on a particular date The offer remains open for 30 days. The shareholders are required to send their Share certificate(s) / related documents to the Registrar or Merchant Banker as specified in the PA and offer document. The acquirer is obligated to offer a minimum offer price as is required to be paid by him to all those shareholders whose shares are accepted under the offer, within 30 days from the closure of offer. V. Exemptions The transactions being allotment to underwriter pursuant to any underwriting agreement, acquisition of shares in ordinary course of business by Registered. Stock brokers on behalf of clients, by a) Registered. Market makers, b) public financial institutions on their own account, c) banks & Financial Institution as pledgees, etc. Acquisition of shares by way of transmission on succession or by inheritance are however exempted from making an offer and are not required to be reported to SEBI, acquisition of shares by Govt. companies, acquisition pursuant to a scheme framed under section 18 of SICA 1985, of arrangement/ restructuring including amalgamation or merger or de-merger under any law or Regulation Indian or Foreign; Acquisition of shares in companies whose shares are not listed,. However, if by virtue of acquisition of shares of unlisted company, the acquirer acquires shares or voting rights (over the limits specified) in the listed company, acquirer is required to make an open offer in accordance with the Regulations. VI. Minimum Offer Price and Payments made It is not the duty of SEBI to approve the offer price, however it ensures that all the relevant parameters are taken in to consideration for fixing the offer price and that the
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justification for the same is disclosed in the offer document. The offer price shall be the highest of : - Negotiated price under the agreement, which triggered the open offer. - Price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA - Average of weekly high & low of the closing prices of shares as quoted on the Stock exchanges, where shares of Target company are most frequently traded during 26 weeks prior to the date of the Public Announcement In case the shares of target company are not frequently traded, then the offer price shall be determined by reliance on the following parameters, viz: the negotiated price under the agreement, highest price paid by the acquirer or PAC with him for acquisition if any, including by way of public rights/ preferential issue during the 26-week period prior to the date of the PA and other parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis a vis the industry average. Acquirers are required to complete the payment of consideration to shareholders who have accepted the offer within 30 days from the date of closure of the offer. In case the delay in payment is on account of non-receipt of statutory approvals and if the same is not due to willful default or neglect on part of the acquirer, the acquirers would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations. Acquirer(s) are however not to be made accountable for postal delays . If the delay in payment of consideration is not due to the above reasons, it would be treated as a violation of the Regulations. VII. Safeguards incorporated so as to ensure that the Shareholders get their payments Before making the Public Announcement the acquirer has to create an escrow account having 25% of total consideration payable under the offer of size Rs. 100 crores (Additional 10% if offer size more than 100 crores) [xxiii]. The Escrow could be in the form of cash deposited with a scheduled commercial bank, bank guarantee in favor of the Merchant Banker or deposit of acceptable securities with appropriate margin with the Merchant Banker. The Merchant Banker is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to make payment, Merchant Banker has a right to forfeit the escrow account and distribute the proceeds in the following way. 1/3 of amount to target company
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1/3 to regional Stock Exchanges, for credit to investor protection fund etc.1/3 to be distributed on pro rata basis among the shareholders who have accepted the offer. The Merchant Banker advised by SEBI is required to ensure that the rejected documents which are kept in the custody of the Registrar / Merchant Banker are sent back to the shareholder through Registered Post. Besides forfeiture of escrow account, SEBI can take separate action against the acquirer which may include prosecution / barring the acquirer from entering the capital market for a period etc. VIII. Penalties The Regulations have laid down the general obligations of the acquirer, target company and the Merchant Banker. For failure to carry out these obligations as well as for failure / non-compliance of other provisions of the Regulations, Reg. 45 provides for penalties. Any person violating any provisions of the Regulations shall be liable for action in terms of the Regulations and the SEBI Act. If the acquirer or any person acting in concert with him, fails to carry out the obligations under the Regulations, the entire or part of the sum in the escrow amount shall be liable to be forfeited and the acquirer or such a person shall also be liable for action in terms of the Regulations and the Act. The board of directors of the target company failing to carry out the obligations under the Regulations shall be liable for action in terms of the Regulations and SEBI Act. The Board may, for failure to carry out the requirements of the Regulations by an intermediary, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration under section 12 of the Act. Provided that no such certificate of registration shall be suspended or cancelled unless the procedure specified in the Regulations applicable to such intermediary is complied with. For any mis-statement to the shareholders or for concealment of material information required to be disclosed to the shareholders, the acquirers or the directors where he acquirer is a body corporate, the directors of the target company, the merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for action in terms of the Regulations and the SEBI Act. The penalties referred to in sub-regulation (1) to (5) may include criminal prosecution under section 24 of the SEBI Act; monetary penalties under section 15 H of the SEBI Act;
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directions under the provisions of Section 11B of the SEBI Act Regulations have laid down the penalties for non-compliance. These penalties may include forfeiture of the escrow account, directing the person concerned to sell the shares acquired in violation of the regulations, directing the person concerned not to further deal in securities, monetary penalties, prosecution etc., which may even extend to the barring of the acquirer from entering and participating in the Capital Market. Action can also be initiated for suspension, cancellation of registration against an intermediary such as the Merchant Banker to the offer.
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Merger, Acquisition And Takeover What Is the Difference Between A Merger And A Acquisition
Merger and acquisition is often known to be a single terminology defined as a process of combining two or more companies together. The fact remains that the so-called single terminologies are different terms used under different situations. Though there is a thin line difference between the two but the impact of the kind of completely different in both the cases.
Merger is considered to be a process when two or more companies come together to expand their business operations. In such a case the deal gets finalized on friendly terms and both the companies share equal profits in the newly created entity.
When one company takes over the other and rules all its business operations, it is known as acquisitions. In this process of restructuring, one company overpowers the other company and the decision is mainly taken during downturns in economy or during declining profit margins. Among the two, the one that is financially stronger and bigger in all ways establishes it power. The combined operations then run under the name of the powerful entity who also takes over the existing stocks of the other company.
Another difference is, in an acquisition usually two companies of different sizes come together to combat the challenges of downturn and in a merger two companies of same size combine to increase their strength and financial gains along with breaking the trade barriers. A deal in case of an acquisition is often done in an unfriendly manner, it is more or less a forceful or a helpless association where the powerful company either swallows the operation or a company in loss is forced to sell its entity. In case of a merger there is a friendly association where both the partners hold the same percentage of ownership and equal profit share. Merger Acquisition
The case when two companies (often of The case when one company takes over same size) decide to move forward as a another and establishes itself as the new single new company instead of operating owner of the business. business separately. The stocks of both the companies are The buyer company swallows the
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surrendered, while new stocks are issued business of the target company, which afresh. ceases to exist. For example, Glaxo Wellcome and Dr. Reddy's Labs acquired Betapharm SmithKline Beehcam ceased to exist and through an agreement amounting $597 merged to become a new company, known million. as Glaxo SmithKline.
What Is the Difference Between A Merger And A Takeover

In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously separate firms into a single legal entity. Significant operational advantages can be obtained when two firms are combined and, in fact, the goal of most mergers and acquisitions is to improve company performance and shareholder value over the long-term. The motivation to pursue a merger or acquisition can be considerable; a company that combines itself with another can experience boosted economies of scale, greater sales revenue and market share in its market, broadened diversification and increased tax efficiency. However, the underlying business rationale and financing methodology for mergers and takeovers are substantially different. A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. For example, back in 1998, American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals as the chairmen in both organizations became joint-leaders in the new organization. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presense in North America. A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially
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amounts to buying the company in the face of resistance from the smaller company's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired. Target companies can employ a number of tactics to defend themselves against an unwanted hostile takeovers, such as including covenants in their bond issues that force early debt repayment at premium prices if the firm is taken over.
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Chapter 5: Legal Perspectives

MERGERS AND ACQUISITIONS LAWS IN INDIA
A business identity goes for mergers and acquisitions for strengthening a disjointed market and for elevating their functional competence in order to boost their competitive streak. Many countries have propagated Mergers and Acquisitions Laws to control the operations of the trade units within. Most of the mergers and acquisitions have been successful in elevating the functional competence of companies but on the flip side this activity can lead to formation of monopolistic power. The anti-competitive results are accomplished either by synchronized effects or by one-sided effects. An open and unbiased competition is ideal for capitalizing on the consumers' interests both in contexts of capacity and worth.
Laws governing Mergers and Acquisitions in India

Mergers and Acquisitions in India are governed by the Indian Companies Act, 1956, under Sections 391 to 394. Although mergers and acquisitions may be instigated through mutual agreements between the two firms, the procedure remains chiefly court driven. The approval of the High Court is highly desirable for the commencement of any such process and the proposal for any merger or acquisition should be sanctioned by a 3/4th of the shareholders or creditors present at the General Board Meetings of the concerned firm. Indian antagonism law permits the utmost time period of 210 days for the companies for going ahead with the process of merger or acquisition. The allotted time period is clearly different from the minimum obligatory stay period for claimants. According to the law, the obligatory time frame for claimants can either be 210 days commencing from the filing of the notice or acknowledgment of the Commission's order. The entry limits for companies merging under the Indian law are considerably high. The entry limits are allocated in context of asset worth or in context of the company's annual incomes. The entry limits in India are higher than the European Union and are twofold as compared to the United Kingdom.
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The Indian M&A laws also permit the combination of any Indian firm with its international counterparts, providing the cross-border firm has its set up in India. There have been recent modifications in the Competition Act, 2002. It has replaced the voluntary announcement system with a mandatory one. Out of 106 nations which have formulated competition laws, only 9 are acclaimed with a voluntary announcement system. Voluntary announcement systems are often correlated with business ambiguities and if the companies are identified for practicing monopoly after merging, the law strictly order them opt for de-merging of the business identity.
Provisions under Mergers and Acquisitions Laws in India

Provision for tax allowances for mergers or de-mergers between two business identities is allocated under the Indian Income tax Act. To qualify the allocation, these mergers or de-mergers are required to full the requirements related to section 2(19AA) and section 2(1B) of the Indian Income Tax Act as per the pertinent state of affairs. Under the Indian I-T tax Act, the firm, either Indian or foreign, qualifies for certain tax exemptions from the capital profits during the transfers of shares. In case of foreign company mergers, a situation where two foreign firms are merged and the new formed identity is owned by an Indian firm, a different set of guidelines are allotted. Hence the share allocation in the targeted foreign business identity would be acknowledged as a transfer and would be chargeable under the Indian tax law. As per the clauses mentioned under section 5(1) of the Indian Income Tax Act, the international earnings by an Indian firm would fall under the category of 'scope of income' for the Indian firm.
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
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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:(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 wont 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. (5) In a case where amalgamation of two companies is sought for, before approving the scheme of amalgamation, a report is to be received from 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.
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(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.
(II) The Competition Act, 2002

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. (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.
(III) 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.
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(IV) SEBI Takeover Code 1994
SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to 55%, provided the acquirer doe s 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 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.
(V) 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: (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
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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)]
(VI) Mandatory permission by the courts

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.
(VII) Stamp duty

Stamp act varies from state to State. As per Bombay Stamp Act, conveyance includes an order in respect of amalgamation; by which property is transferr ed to or vested in any other person. As per this Act, rate of stamp duty is 10 per cent.
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Intellectual Property Due Diligence In Mergers And Acquisitions
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. Due diligence is the process of investigating a partys ownership, right to use, and right to stop others from using the IP rights involved in sale or merger ---the nature of transaction and the rights being acquired will determine the extent and focus of the due diligence review. Due Diligence in IP for valuation would help in building strategy, where in:(a) If Intellectual Property asset is underplayed the plans for maximization would be discussed. (b) If the Trademark has been maximized to the point that it has lost its cachet in the market place, reclaiming may be considered. (c) If mark is undergoing generalization and is becoming generic, reclaiming the mark from slipping to generic status would need to be considered. (d) Certain events can devalue an Intellectual Property Asset, in the same way a fire can suddenly destroy a piece of real property. These sudden events in respect of IP could be adverse publicity or personal injury arising from a product. An essential part of the due diligence and valuation process accounts for the impact of product and company-related events on assets management can use risk information revealed in the due diligence. (e) Due diligence could highlight contingent risk which do not always arise from Intellectual Property law itself but may be significantly affected by product liability and contract law and other non Intellectual Property realms. Therefore Intellectual Property due diligence and valuation can be correlated with the overall legal due diligence to provide an accurate conclusion regarding the asset present and future value
Legal Procedure for Bringing About Merger of Companies

(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
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on the business of the merged company. If such clauses do not exist, necessary approvals of the share holders, board of directors, and company law board are required. (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 BODs. 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
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Chapter 6: True Examples

MERGER OF TECH MAHINDRA AND MAHINDRA SATYAM About Tech Mahindra
Tech Mahindra is a leading provider of solutions and services to the telecommunications industry with a majority stake owned by Mahindra & Mahindra Limited, in partnership with British Telecommunications plc. Tech Mahindra serves telecom service providers, equipment manufacturers, software vendors and systems integrators worldwide and their proven delivery models, distinctive IT skills and decades of domain expertise enable clients to maximize returns on their IT investment Tech Mahindra registered revenue of USD 1,127 million in the year ended March 31, 2011 and is ably supported by 42,500 professionals who provide a unique blend of culture, domain expertise and in-depth technology skill-sets. A SEI-CMMi Level 5 organization, Tech Mahindra's development centers are ISO 9001:2008 and BS7799 certified. Tech Mahindra has principal offices in the UK, United States, Germany, UAE, Egypt, Singapore, India, Thailand, Taiwan, Malaysia, Philippines, Canada and Australia. Tech Mahindra Ltd is part of the US $14.4 billion Mahindra Group, a global industrial federation of companies and one of the top 10 business houses based in India. The Group's interests span automotive products, aviation, components, farm equipment, financial services, hospitality, information technology, logistics, real estate and retail.
About Mahindra Satyam Mahindra

Satyam is a leading global business and information technology services company that leverages deep industry and functional expertise, leading technology practices, and an advanced, global delivery model to help clients transform their highest-value business processes and improve their business performance.
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The company's professionals excel in enterprise solutions, supply chain management, client relationship management, business intelligence, business process quality, engineering and product lifecycle management, and infrastructure services, among other key capabilities. Mahindra Satyam is part of the $14.4 billion Mahindra Group, a global federation of companies and one of the top 10 business houses based in India. The group focuses on enabling people to rise. Mahindra operates in the key industries that drive economic growth, enjoying a leadership position in tractors, utility vehicles, information technology, vacation ownership, rural and semi-urban financial services, etc. Mahindra has a significant and growing presence amongst others, in the automotive industry, agribusiness, aerospace, automotive components, consulting services, defence, energy, industrial equipment, logistics, real estate, retail, steel and two wheelers. Mahindra Satyam development and delivery centers in the US, Canada, Brazil, the UK, Hungary, Egypt, UAE, India, China, Malaysia, Singapore, and Australia serve numerous clients, including many Fortune 500 organizations.
Journey of Mahindra Satyam:
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Merger, Acquisition And Takeover Why This Merger Held?

This merger is a key part of tech Mahindra strategy to deliver industry leading performance
In January 2009, Satyam founder B. Ramalinga Raju confessed to having misstated accounts to the tune of Rs 7,136 crore over several years by inflating cash and bank balances and playing down liabilities at the company he set up in 1987. His confession caused an employee exodus and flight of clients from the company that then ranked as Indias fourth biggest software services firm. Tech Mahindra bought almost 43% of Satyam in an auction overseen by governmentappointed directors, beating two other contenders to acquire the firm that Nayyar last year compared with a patient emerging from a near-death experience. The merger will help trim costs, enable the combined entity to offer a wider range of services including new technologies. Tech Mahindra Ltd were merge Satyam Computer Services Ltd with itself, buying the remaining stake in the Hyderabad-based firm in an all-stock transaction worth Rs 5,150 crore and creating a software services provider with the size and reach to compete with bigger rivals. The combined entity was had an annual revenue of $2.4 billion (Rs 12,142 crore), with more than 350 clients across industry sectors in 54 countries and 75,000 staff. It were rank as Indias fifth biggest software services firm, behind Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd and HCL Technologies Ltd. The boards of the two companies met and approved the merger at a share swap ratio of 2:17, giving shareholders two Tech Mahindra shares for every 17 owned in Satyam Computerrebranded as Mahindra Satyam after its purchase in April 2009 by the Mahindra group company On June 25, Tech Mahindra completed the acquisition of Mahindra Satyams merger and created the fifth-largest IT Company in the country with revenues of over $2.7 billion.
Key highlights of the merger

The exchange ratio recommended by the valuers and approved by both the boards is 2 shares of Tech Mahindra (face value of Rs. 10 each), for every 17 shares of Mahindra Satyam (face value of Rs. 2 each).
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On a pro-forma basis, the Mahindra Group will own 26.3% in the combined entity, British Telecom will own 12.8%, 10.4% will be held as treasury stock, 34.4% to be held by the public shareholders of Mahindra Satyam and the balance 16.1% will be held by the public shareholders of Tech Mahindra. Tech Mahindra will issue 10.34 crore new shares, thereby increasing its outstanding shares to 23.08 crore and its equity capital to Rs 230.8 crore.
on the stock market in 1995, Satyam soon went on to become one of the country's top five IT companies and its share price was trading Rs 250 level in late 2008. It came to be known by January 2009 that Satyam (a Sanskrit word that means truth) was home to India's biggest ever corporate scam, admitted to by its own founder and then Chairman B Ramalinga Raju , and the scandal broke the company's share price to as low as Rs 11.50.
Merger Benefits and Synergies

The merger will result in the creation of a new offshore services leader with revenues of approximately US$2.4bn in revenues, approximately 75,000+ strong work force and 350+ active clients (including Fortune Global 500 companies), across 54 countries. The joint entity will have a unified go-to-market strategy with deep competencies and a balanced mix of revenues from Telecom, Manufacturing, Technology, Media & Entertainment, Banking Financial Services and Insurance, Retail and Healthcare. Revenues will be well balanced with a diversified global footprint that would boast of contribution from Americas at 42%, Europe at 35% and Emerging Markets at 23%, The combined entity will leverage Tech Mahindras expertise in Mobility, System Integration, and delivery of large transformations and to better penetrate the opportunity presented by Mahindra Satyams diverse set of clients across multiple verticals. Likewise Mahindra Satyams expertise in Enterprise Solutions will enable a more complete value proposition to be delivered to Tech Mahindras clients. The combination will benefit from operational synergies, economies of scale, sourcing benefits, and standardization of business processes.
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Here Are 10 Things To Know About The Merger.

1. Shares of the two companies moved in tandem and closed off the day's high. Tech Mahindra gained 5.5% to end at Rs. 683.90 on the BSE. Mahindra Satyam shares advanced 4.6% to Rs. 77.55. The BSE Sensex closed 285.5 points or 1.65% higher at 17,601.71. 2. The swap ratio is 2 shares of Tech Mahindra (face value of Rs. 10 each), for every 17 shares of Mahindra Satyam (face value of Rs. 2 each). "The swap ratio is in-line with yesterday's closing price and 2 weeks and 6 months average. It is a fair swap ratio for the two stocks. I don't see any immediate reaction on the two stocks," Hitesh Shah, Director (Research) at IDFC Securities told NDTV Profit. 3. The swap ratio of 8.5 shares of Satyam for every share in Tech Mahindra is positive for Tech Mahindra at current prices, traders and analysts said. "Investors will look forward for diversification of revenue stream," Sanjive Hota, senior research analyst at Sharekhan, said. Tech Mahindra stock could see some near-term upside due to the longer-term benefits, which could come in the form new set of investors, Citi said in a note. 4. According to the merger scheme approved by both the Boards, the merger is proposed to be undertaken through a Court approved Scheme of Arrangement under Sections 391 to 394 of the Companies Act, 1956. The proposed Scheme of Arrangement will be subject to the approvals of the Bombay High Court at Mumbai and the Andhra Pradesh High Court at Hyderabad. The merger will further be subject to various statutory approvals, including those from the shareholders and the lenders / creditors. 5. On a pro-forma basis, the Mahindra Group will own 26.3% in the combined entity, British Telecom will own 12.8%, 10.4% will be held as treasury stock, 34.4% to be held by the public shareholders of Mahindra Satyam and the balance 16.1% will be held by the public shareholders of Tech Mahindra. 6. Tech Mahindra will issue 10.34 crore new shares, thereby increasing its outstanding shares to 23.08 crore and its equity capital to Rs. 230.8 crore. 7. Implications: The merger will result in the creation of a new offshore services leader with revenues of approximately $2.4 billion in revenues, approximately 75,000+ strong work force and 350+ active clients (including Fortune Global 500 companies), across 54 countries. The combined entity will create a diversified company in terms of geographical reach and revenues mix (Americas will contribute 42%, Europe 35% and Emerging Markets 23% to the overall revenue). The combined entity will become 5th largest IT company in terms of market cap.
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8. The merged entity will have a net cash of Rs. 1,800 crore on its books against a net debt of Rs. 1,100 crore currently. The earnings per share of the merged entity would be Rs. 79 per share. 9. The impact on the promoter group 'Mahindras' will be limited, as they hold virtually similar percentage of stake in both the entities. That is, they hold about 42.65% stake in Mahindra Satyam and 47.65% stake in Tech Mahindra. 10. Since the swap ratio is close to 9:1, the merger transaction is deemed "market-price" neutral, which means that there may not be any arbitrage opportunity left for the shareholders of both the companies. "However, the swap ratio close to 9:1 appears to be "value" decretive for the shareholders of Mahindra Satyam and "value" accretive for the shareholders of Tech Mahindra", Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities Limited said
Impact of merger on stock price of Tech Mahindra

Tech Mahindra & Mahindra Satyam analysis 9 months back and came up with a swap ratio a little below 10 to 1. The actual swap ratio as announced by Tech Mahindra management 8.5 Mahindra Satyam shares for every Tech Mahindra share. This is quite close to what we analysed. When we did our analysis, the situations were different and Mahindra Satyam was still making losses. Now that the swap ratio has been announced, lets see how the stock prices will move. The stock price of Mahindra Satyam and Tech Mahindra has already seen good movement today. We have taken actual data of last 3 quarters and projected data for March, 2012 quarters to arrive at the projected data for FY2012. Lets do who gets what in this merger. Swap Ratio = 8.5 : 1 Tech Mahindra Mahindra Satyam Pro forma Companies 1259.55 11765.66 No of stocks (in lakhs) 648.7 74.15 Price of share (20 March 2012 closing price) 38.46 8.66 EPS (Projected EPS for FY2012) 0.118 1 Share ratio (1/8.5 = 0.118) 1259.55 1384.20 2643.75 No of shares after mergers 48442.293 101890.6156 150332.91 Earnings (in lakhs) 56.86 EPS of combined Entity after the merger is completed 18.40 Gain of Tech Mahindra Shareholders (EPS Accretion) -1.97 Gain of Mahindra Satyam Shareholders (EPS Dilution)
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From the perspective of Tech Mahindra shareholders: Tech Mahindra shareholders have gained out of this transaction as the data shows EPS accretion for it. This is well deserved gain because when Tech Mahindra acquired Satyam, it was treading on an unknown path. Thanks to the shareholders of Tech Mahindra, its visionary leadership team, and persistence on the face of odds against it, the company has stabilized and has started showing positive earnings since last 3 quarters. From the perspective of Mahindra Satyam: From Mahindra Satyam perspective, this is beneficial too. The swap ratio may not look as good given the fact that Mahindra Satyam has started making profits since last 3 quarters. As the calculation shows, it is EPS dilution from Mahindra Satyam perspective. However, we should not forget that the profit started accruing in as a result of Tech Mahindra acquiring Satyam and putting all its effort to make it profitable and bring it out of the mess that it was put into. In fact Tech Mahindra did take lot of beating when it decided to acquire Satyam. Its rating was downgraded and many brokers changed their recommendation. Hence it will not be an exaggeration to say that Satyam was rescued by Tech Mahindra when everyone was putting ridiculous valuation on it. Stock price movements: Projecting price is the most difficult part and we will not try to pretend that we have a glass screen where we can see everything. However, based on our analysis, the price of Tech Mahindra shares should touch Rs 850 in a years time. This is based on post-merger EPS of Rs 56.86 as shown in the table and a reasonable PE ratio of 15 which Tech Mahindra enjoys even now.
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Merger Aqui &amp; Takeover

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Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

History of Mergers and Acquisitions

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Important Terminology Related To Mergers and Acquisitions

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Pros And Cons Of Mergers

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

There Is Different Type Of Acquisition

Merger, Acquisition And Takeover

Pros And Cons Of Acquisition

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

The Acquisition Process

The Initial Contact

Merger, Acquisition And Takeover

The Non-Disclosure Agreement

The Letter of Intent

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

There are different kinds of takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Procedure For Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

What Is the Difference Between A Merger And A Takeover

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

Chapter 5: Legal Perspectives

Laws governing Mergers and Acquisitions in India

Merger, Acquisition And Takeover

Provisions under Mergers and Acquisitions Laws in India

Laws Regulating Merger

(I) The Companies Act, 1956

Merger, Acquisition And Takeover

Merger, Acquisition And Takeover

(II) The Competition Act, 2002

(III) Foreign Exchange Management Act,1999

Merger, Acquisition And Takeover

(V) The Indian Income Tax Act (ITA), 1961

Merger, Acquisition And Takeover

(VI) Mandatory permission by the courts

(VII) Stamp duty

Merger Aqui & Takeover

Merger Aqui & Takeover