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INTRDUCTION

BACKGROUND:
Merger and Acquisition have become a routine feature than an exception in the present day business
scenario. In a merger companies join up with each other sharing their resources to reach a common goal.
Shareholders of both the entities continue as join owners of the merged entity. In an acquisition , as the
denotes, one firm out rightly purchases the assets or shares or both of another company whose
shareholders lose their claim on the acquired outfit once the deal is over. As businesses expanding with
diversification becoming the order of day, merger and acquisition are being adopted as strategic tools for
growth. Restricting to core area makes no business sense any longer, as one can see the way both the
houses of reliance are foging ahead with entry into virtually ever field. Tatas are rewriting their corporate
history with acquisition galore. No different is the case with the other major industrial houses. All the
augurs well for our country which is poised to become an economic force to reckon with, very soon.

Winning the race to future and the rest world requires a strong sense of purpose and speed. Yet, few
companies, if any, have what it takes to run the race on their own. The idea of racing as a team is somehow
uplifting to the human spirit. The logic of bringing many heads together to achieve what was previously
considered difficult or impossible on an individual basis is somehow compelling.

The trends towards globalization of all national and regional economies has increased the intensity of
mergers , in a bid to create more focused, competitive, viable, larger players, in each industry. The recent
liberalization has made mergers more necessary and acceptable. The globalization may entail
redundancies and closures of inefficient units as a consequence of technological upgradation and
modernization . As it open the flood gates of competition between unequal partners. The working units
below average efficiency are more favourable to mergers and takeover.

Merger or amalgamation may take two forms:

 Merger through absorption


 Merger through consolidation

Absorption:
In absorption, one company acquires another company. All companies except one lose
their identity in merger through absorption. The merger of Tata Oil Mills Ltd. (TOMCO) with
Hindustan Lever Ltd. (HLL) is an example of absorption

Consolidation:

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

Acquisition:

A fundamental charectaristic of merger (either through absorption or consolidation) is that the


acquiring company (existing or new) takes over the ownership of other companies and
combine their operations with its own operations. In an acquisition two or more companies
may remain independent, separate legal entity, but there may be change in control of
companies. Hindustan lever limited buying brands of Lakme is an example of asset
acquisition.

Takeover:

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

It has been defined as a split or division. As the same suggests, it denotes a situation opposite
to that of merger. Demerger or spin-off, as called in US involves splitting up of conglomerate
(multi-division) of company into separate companies.

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

Reverse Merger

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

a) The transferee company is a sick company and has carry forward losses and Transferor
Company is profit making company. If Transferor Company merges with the sick transferee
company, it gets advantage of setting off carry forward losses without any conditions. If sick
company merges with healthy company, many restrictions are applicable for allowing set off.
b) The transferee company may be listed company. In such case, if Transferor Company
merges with the listed company, it gets advantages of listed company, without following strict
norms of listing of stock exchanges.

For example Godrej soaps Ltd. (GSL) with pre merger turnover of 436.77 crores entered into
scheme of reverse merger with loss making Gujarat Godrej innovative Chemicals Ltd.
(GGICL) (with pre merger turnover of Rs. 60 crores) in 1994.

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