CHAPTER-1 INTRODUCTION:

Indian Economy- Mergers & Acquisitions

The Indian economy has undergone a major transformation and structural change
during the past decade or so as a result of economic reforms introduced by the
Government of India since 1991 in the wake of policy of economic liberalization and
globalization. In this liberalized era, size and "core competence" have become the
focus of every business enterprise. Naturally, this requires companies to grow and
expand in businesses that they understand well. Thus, leading corporate houses have
undertaken a massive restructuring exercise to create a formidable presence in their
core areas of interest. Mergers and acquisitions (M&As) is one of the most effective
methods of corporate restructuring and has, therefore, become an integral part of the
long-term business strategy of corporate.

The M&A activity has its impact on various diverse groups such as corporate
management, shareholders and investors, investment bankers, regulators, stock
markets, customers, government and taxation authorities, and society at large.
Therefore, it is not surprising that it has received considerable attention at the hands
of researchers world over. A number of studies have been carried out abroad
especially in the developed capital markets of Europe, Australia, Hong Kong, and US.
These studies have largely focused on different aspects, viz., (a) the rationale of
M&As, (b) allocational and redistribution role of M&As, (c) effect of takeovers on
shareholders' wealth, (d) corporate financial performance, etc. Some studies have also
been carried out to predict corporate takeovers using financial ratios. M&As, being a
new phenomenon in India, has not received much attention of researchers. In fact, no
comprehensive study has been undertaken to examine various aspects especially after
the Takeover Code came into being in1997. This study has been undertaken to fill this
gap.

Until upto a couple of year‘s back, the news that Indian companies having acquired
American-European entities was very rare. However, this scenario has taken a sudden
U turn. Nowadays, news of Indian Companies acquiring foreign businesses are more
common than other way round.

Buoyant Indian Economy, extra cash with Indian corporates, Government policies and
newly found dynamism in Indian businessmen have all contributed to this new
acquisition trend. Indian companies are now aggressively looking at North American
and European markets to spread their wings and become the global players.

The Indian IT and ITES companies already have a strong presence in foreign markets;
however, other sectors are also now growing rapidly. The increasing engagement of
the Indian companies in the world markets, and particularly in the US, is not only an
indication of the maturity reached by Indian Industry but also the extent of their
participation in the overall globalization process.

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 The Top 10 acquisitions made by Indian companies worldwide
Acquirer Target Company Country targeted Deal value ($ ml) Industry

Tata Steel Corus Group plc UK 12,000 Steel

Hindalco Novelis Canada 5,982 Steel

Videocon Daewoo Korea 729 Electroni

Electronics Corp. cs

Dr. Betapharm Germany 597 Pharmace

Reddy‘s utical
Labs

Suzlon Hansen Group Belgium 565 Energy

Energy

HPCL Kenya Petroleum Kenya 500 Oil and

Refinery Ltd. Gas

Ranbaxy Terapia SA Romania 324 Pharmace

Labs utical

Tata Steel Natsteel Singapore 293 Steel

Videocon Thomson SA France 290 Electroni

cs

VSNL Teleglobe Canada 239 Telecom

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Mergers & Acquisitions

Meaning of Merger
A merger is a tool used by companies for the purpose of expanding their operations
often aiming at an increase of their long term profitability. There are 15 different
types of actions that a company can take when deciding to move forward using M&A.
Usually mergers occur in a consensual (occurring by mutual consent) setting where
executives from the target company help those from the purchaser in a due diligence
process to ensure that the deal is beneficial to both parties. Acquisitions can also
happen through a hostile takeover by purchasing the majority of outstanding shares of
a company in the open market against the wishes of the target's board. In the United
States, business laws vary from state to state whereby some companies have limited
protection against hostile takeovers. One form of protection against a hostile takeover
is the shareholder rights plan, otherwise known as the “poison pill”.

In business or economics a merger is a combination of two companies into one larger

company. Such actions are commonly voluntary and involve stock swap or cash
payment to the target. Stock swap is often used as it allows the shareholders of the
two companies to share the risk involved in the deal. A merger can resemble a
takeover but result in a new company name (often combining the names of the
original companies) and in new branding; in some cases, terming the combination a
"merger" rather than an acquisition is done purely for political or marketing reasons.

Historically, mergers have often failed to add significantly to the value of the
acquiring firm's shares. Corporate mergers may be aimed at reducing market
competition, cutting costs (for example, laying off employees, operating at a more
technologically efficient scale, etc.), reducing taxes, removing management, "empire
building" by the acquiring managers, or other purposes which may or may not be
consistent with public policy or public welfare. Thus they can be heavily regulated.

Classification of Merger

Horizontal mergers: take place where the two merging companies produce similar
product in the same industry.

Vertical mergers: occur when two firms, each working at different stages in the
production of the same good, combine.

Market Extension Merger and Product Extension Merger:

 Market Extension Merger:
As per definition, market extension merger takes place between two
companies that deal in the same products but in separate markets. The main
purpose of the market extension merger is to make sure that the merging
companies can get access to a bigger market and that ensures a bigger client
base.

 Product Extension Merger:

According to definition, product extension merger takes place between two
business organizations that deal in products that are related to each other and
operate in the same market. The product extension merger allows the merging

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 companies to group together their products and get access to a bigger set of
consumers. This ensures that they earn higher profits.

Congeneric mergers: occur where two merging firms are in the same general
industry, but they have no mutual buyer/customer or supplier relationship, such as a
merger between a bank and a leasing company.

Conglomerate mergers: take place when the two firms operate in different
industries.

A unique type of merger called a reverse merger is used as a way of going public
without the expense and time required by an IPO.

The contract vehicle for achieving a merger is a "merger sub"

Accretive mergers: are those in which an acquiring company's earnings per share
(EPS) increase. An alternative way of calculating this is if a company with a high
price to earnings ratio (P/E) acquires one with a low P/E.

Dilutive mergers: are the opposite of above, whereby a company's EPS decreases.
The company will be one with a low P/E acquiring one with a high P/E.

The completion of a merger does not ensure the success of the resulting organization;
indeed, many mergers (in some industries, the majority) result in a net loss of value
due to problems. Correcting problems caused by incompatibility—whether of
technology, equipment, or corporate culture— diverts resources away from new
investment, and these problems may be exacerbated by inadequate research or by
concealment of losses or liabilities by one of the partners. Overlapping subsidiaries or
redundant staff may be allowed to continue, creating inefficiency, and conversely the
new management may cut too many operations or personnel, losing expertise and
disrupting employee culture. These problems are similar to those encountered in
takeovers. For the merger not to be considered a failure, it must increase shareholder
value faster than if the companies were separate, or prevent the deterioration of
shareholder value more than if the companies were separate.

Meaning of Acquisition
An acquisition, also known as a takeover, is the buying of one company (the ‗target‘)
by another. An acquisition may be friendly or hostile. 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. Acquisition
usually refers to a purchase of a smaller firm by a larger one. 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.

Types of Acquisition A company is said to have "Acquired" a company, when one

company buys another company. Acquisitions can be either:

 Hostile

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  Friendly

In case of hostile acquisitions, the company, which is to be bought has no information

about the acquisition. The company, which would be sold is taken by surprise.

In case of friendly acquisition, the two companies cooperate with each other and settle
matters related to acquisitions.

There are times when a much smaller company manages to take control of the
management of a bigger company but at the same time retains its name for the
combination of both the companies. This process is known as "reverse takeover".

Kinds of acquisitions: There may be two types of acquisitions depending on the

option adopted by the buying company. In one case, the buying company may buy all
the shares of the smaller company. The other option is buying the assets of the smaller
companies.

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 CORPORATE RESTRUCTURING

Restructuring of business is an integral part of the new economic paradigm. As

controls and restrictions give way to competition and free trade, restructuring and
reorganization become essential. Restructuring usually involves major organizational
change such as shift in corporate strategies to meet increased competition or changed
market conditions. This activity can take place internally in the form of new
investments in plant and machinery, research and development at product and process
levels. It can also take place externally through mergers and acquisitions (M&A) by
which a firm may acquire other firm or by joint venture with other firms. This
restructuring process has been mergers, acquisitions, takeovers, collaborations,
consolidation, diversification etc. Domestic firms have taken steps to consolidate their
position to face increasing competitive pressures and MNC’s have taken this
opportunity to enter Indian corporate sector.

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Forms of corporate-restructuring
1. Expansion

• Amalgamation: This involves fusion of one or more companies where the

companies lose their individual identity and a new company comes into
existence to take over the business of companies being liquidated. The merger
of Brooke Bond India Ltd. and Lipton India Ltd. resulted in formation of a
new company Brooke Bond Lipton India Ltd.

• Absorption: This involves fusion of a small company with a large company

where the smaller company ceases to exist after the merger. The merger of
Tata Oil Mills Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL) is an example
of absorption.

• Tender offer: This involves making a public offer for acquiring the shares of
a target company with a view to acquire management control in that company.
Takeover by Tata Tea of consolidated coffee Ltd. (CCL) is an example of

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 tender offer where more than 50% of shareholders of CCL sold their holding
to Tata Tea at the offered price which was more than the investment price.

• Asset acquisition: This involves buying assets of another company. The

assets may be tangible assets like manufacturing units or intangible like
brands. Hindustan lever limited buying brands of Lakme is an example of
asset acquisition.

• Joint venture: This involves two companies coming whose ownership is

changed. DCM group and DAEWOO MOTORS entered into a joint venture to
form DAEWOO Ltd. to manufacturing automobiles in India.

2. CONTRACTION
There are generally the following types of contraction:

• Spinoff: This type of demerger involves division of company into wholly

owned subsidiary of parent company by distribution of all its shares of
subsidiary company on Pro-rata basis. By this way, both the companies i.e.
holding as well as subsidiary company exist and carry on business. For
example Kotak, Mahindra finance Ltd. formed a subsidiary called Kotak
Mahindra Capital Corporation, by spinning off its investment banking
division.

• Split-ups: This type of demerger involves the division of parent company into
two or more separate companies where parent company ceases to exist after
the demerger.

• Equity-carve out: This is similar to spin offs, except that same part of
shareholding of this subsidiary company is offered to public through a public
issue and the parent company continues to enjoy control over the subsidiary
company by holding controlling interest in it.

• Divestitures: These are sale of segment of a company for cash or for

securities to an outside party. Divestitures, involve some kind of contraction. It
is based on the principle if “anergy” which says 5-3=3!
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• Asset sale: This involves sale of tangible or intangible assets of a company to
generate cash. A partial sell off, also called slump sale, involves the sale of a
business unit or plant of one firm to another. It is the mirror image of a
purchase of a business unit or plant. From the seller’s perspective, it is a form
of contraction:

From the buyer’s point of view it is a form of expansion. For example, When
Coromandal Fertilizers Limited sold its cement division to India Cement
limited, the size of Coromandal Fertilizers contracted whereas the size of India
Cements Limited expanded.

3. CORPORATE CONTROLS

• Going private: This involves converting a listed company into a private

company by buying back all the outstanding shares from the markets. Several
companies like Castrol India and Phillips India have done this in recent years.
A well known example from the U.S. is that of Levi Strauss & company

• Equity buyback: This involves the company buying its own shares back from
the market. This results in reduction in the equity capital of the company. This
strengthens the promoter’s position by increasing his stake in the equity of the
company.

• Anti takeover defenses: With a high value of hostile takeover activity in

recent years, takeover defenses both premature and reactive have been
restored to by the companies.

• Leveraged buyouts: This involves raising of capital from the market or

institutions by the management to acquire a company on the strength of its
assets.

Merger is a marriage between two companies of roughly same size. It is thus a

combination of two or more companies in which one company survives in its
own name and the other ceases to exist as a legal entity. The survivor

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 company acquire assets and liabilities of merged companies. Generally the
company which survives is the buyers which retiring its identity and seller
company is extinguished.
Amalgamation
Amalgamation is an arrangement or reconstruction. It is a legal process by which two
or more companies are to be absorbed or blended with another. As a result, the
amalgamating company loses its existence and its shareholders become shareholders
of new company or the amalgamated company. In case of amalgamation a new
company may came into existence or an old company may survive while
amalgamating company may lose its existence.

According to Halsbury’s law of England amalgamation is the blending of two or more

existing companies into one undertaking, the shareholder of each blending companies
becoming substantially the shareholders of company which will carry on blende
undertaking. There may be amalgamation by transfer of one or more undertaking to a
new company or transfer of one or more undertaking to an existing company.

Amalgamation signifies the transfers of all are some part of assets and liabilities of
one or more than one existing company or two or more companies to a new company.

The Accounting Standard, AS-14, issued by the Institute of Chartered Accountants of

India has defined the term amalgamation by classifying (i) Amalgamation in the
nature of merger, and (ii) Amalgamation in the nature of purchase

1. Amalgamation in the nature of merger: As per AS-14, an amalgamation is called

in the nature of merger if it satisfies all the following condition:
· All the assets and liabilities of the transferor company should become, after
amalgamation; the assets and liabilities of the other company.
· Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately
before the amalgamation, by the transferee company or its subsidiaries or their
nominees) become equity shareholders of the transferee company by virtue of the
amalgamation.

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· The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee
company is discharged by the transferee company wholly by the issue of equity share
in the transferee company, except that cash may be paid in respect of any fractional
shares.
· The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
· No adjustment is intended to be made in the book values of the assets and liabilities
of the transferor company when they are incorporated in the financial statements of
the transferee company except to ensure uniformity of accounting policies.
· Amalgamation in the nature of merger is an organic unification of two or more
entities or undertaking or fusion of one with another. It is defined as an amalgamation
which satisfies the above conditions.

2. Amalgamation in the nature of purchase: Amalgamation in the nature of

purchase is where one company’s assets and liabilities are taken over by another and
lump sum is paid by the latter to the former. It is defined as the one which does not
satisfy any one or more of the conditions satisfied above.
As per Income Tax Act 1961, merger is defined as amalgamation under sec.2 (1B)
with the following three conditions to be satisfied.
1. All the properties of amalgamating company(s) should vest with the amalgamated
company after amalgamation.
2. All the liabilities of the amalgamating company(s) should vest with the
amalgamated company after amalgamation

3. Shareholders holding not less than 75% in value or voting power in amalgamating
company(s) should become shareholders of amalgamated companies after
amalgamation
Amalgamation does not mean acquisition of a company by purchasing its property
and resulting in its winding up. According to Income tax Act, exchange of shares with
90%of shareholders of amalgamating company is required.

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ACQUISITION
Acquisition refers to the acquiring of ownership right in the property and asset
without any combination of companies. Thus in acquisition two or more companies
may remain independent, separate legal entity, but there may be change in control of
companies. Acquisition results when one company purchase the controlling interest in
the share capital of another existing company in any of the following ways:
a) Controlling interest in the other company. By entering into an agreement with a
person or persons holding
b) By subscribing new shares being issued by the other company.
c) By purchasing shares of the other company at a stock exchange, and
d) By making an offer to buy the shares of other company, to the existing
shareholders of that company.

MERGER
Merger refers to a situation when two or more existing firms combine together and
form a new entity. Either a new company may be incorporated for this purpose or one
existing company (generally a bigger one) survives and another existing company
(which is smaller) is merged into it. Laws in India use the term amalgamation for
merger.
· Merger through absorption
· Merger through consolidation
Absorption: Absorption is a combination of two or more companies into an existing
company. All companies except one lose their identity in a merger through
absorption. An example of this type of merger is the absorption of Tata Fertilisers Ltd.
(TFL) TCL, an acquiring company (a buyer), survived after merger while TFL, an
acquired company ( a seller), ceased to exist. TFL transferred its assets, liabilities and
shares to TCL.
Consolidation: A consolidation is a combination of two or more companies into a new
company .In this type of merger, all companies are legally dissolved and a new entity
is created. In a consolidation, the acquired company transfers its assets, 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.

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TAKEOVER
Acquisition can be undertaken through merger or takeover route. Takeover is a
general term used to define acquisitions only and both terms are used interchangeably.
A takeover may be defined as series of transacting whereby a person, individual,
group of individuals or a company acquires control over the assets of a company,
either directly by becoming owner of those assets or indirectly by obtaining control of
management of the company.
Takeover is acquisition, by one company of controlling interest of the other, usually
by buying all or majority of shares. Takeover may be of different types depending
upon the purpose of acquiring a company.
1. A takeover may be straight takeover which is accomplished by the management of
the taking over company by acquiring shares of another company with the intention of
operating taken over as an independent legal entity.
2. The second type of takeover is where ownership of company is captured to merge
both companies into one and operate as single legal entity.
3. A third type of takeover is takeover of a sick company for its revival. This is
accomplished by an order of Board for Industrial and Financial Reconstruction
(BIFR) under the provision of Sick Industrial companies Act, 1985. In India, Board
for Industrial and Financial Reconstruction (BIFR) has also been active for arranging
mergers of financially sick companies with other companies under the package of
rehabilitation. These merger schemes are framed in consultation with the lead bank,
the target firm and the acquiring firm. These mergers are motivated and the lead bank
takes the initiated and decides terms and conditions of merger. The recent takeover of
Modi Cements Ltd., by Gujarat Ambuja Cement Ltd. was an arranged takeover after
the financial reconstruction Modi Cement Ltd. The fourth kind is the bail-out
takeover, which is substantial acquisition of shares in a financially weak company not
being a sick industrial company in pursuance to a scheme of rehabilitation approved
by public financial institution which is responsible for ensuring compliance with
provision of substantial acquisition of shares and takeover Regulations, 1997 issued
by SEBI which regulate the bailout takeover.

Takeover Bid
This is a technique for affecting either a takeover or an amalgamation. It may be
defined as an offer to acquire shares of a company, whose shares are not closely held,
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addressed to the general body of shareholders with a view to obtaining at least
sufficient shares to give the offer or, voting control of the company. Takeover Bid is
thus adopted by company for taking over the control and management affairs of listed
company by acquiring its controlling interest.
While a takeover bid is used for affecting a takeover, it is frequently against the
wishes of the management of Offeree Company. It may take the form of an offer to
purchase shares for cash or for share for share exchange or a combination of these two
firms.
Where a takeover bid is used for effecting merger or amalgamation it is generally by
consent of management of both companies. It always takes place in the form of share
for share exchange offer, so that accepting shareholders of Offeree Company become
shareholders of Offeror Company.

Types of Takeover Bids

There are three types of takeover bid
1. Negotiated bid
2. Tender offer
3. Hostile takeover bid

Negotiated bid: It is also called friendly merger. In this case, the management
/owners of both the firms sit together and negotiate for the takeover. The acquiring
firm negotiates directly with the management of the target company. So the two firms
reach an agreement, the proposal for merger may be placed before the shareholders of
the two companies. However, if the parties do not reach at an agreement, the merger
proposal stands terminated and dropped out. The merger of ITC Classic Ltd. with
ICICI Ltd. and merger of Tata oil mills Ltd. With Hindustan Lever Ltd. were
negotiated mergers.
However, if the management of the target firm is not agreeable to the merger
proposal, then the acquiring firm may go for other procedures i.e. tender offer or
hostile takeover.

Tender offer: A tender offer is a bid to acquire controlling interest in a target

company by the acquiring firm by purchasing shares of the target firm at a fixed price.
The acquiring firm approaches the shareholders of the target firm directly firm to sell
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their shareholding to the acquiring firm at a fixed price. This offered price is
generally, kept at a level higher than the current market price in order to induce the
shareholders to disinvest their holding in favor of the acquiring firm. The acquiring
firm may also stipulate in the tender offer as to how many shares it is willing to buy or
may purchase all the shares that are offered for sale.
In case of tender offer, the acquiring firm does not need the prior approval of the
management of the target firm. The offer is kept open for a specific period within
which the shares must be tendered for sale by the shareholders of the target firm.
Consolidated Coffee Ltd. was takeover by Tata Tea Ltd.by making a tender offer to
the shareholders of the former at a price which was higher than the prevailing market
price.
In India, in recent times, particularly after the announcement of new takeover code by
SEBI, several companies have made tender offers to acquire the target firm. A
popular case is the tender offer made by Sterlite Ltd. and then counter offer by Alean
to acquire the control of Indian Aluminium Ltd.

Hostile Takeover Bid: The acquiring firm, without the knowledge and consent of the
management of the target firm, may unilaterally pursue the efforts to gain a
controlling interest in the target firm, by purchasing shares of the later firm at the
stock exchanges.
Such case of merger/acquisition is popularity known as ‘raid’. The caparo group of
the U.K. made a hostile takeover bid to takeover DCM Ltd. and Escorts Ltd.
Similarly, some other NRI’s have also made hostile bid to takeover some other Indian
companies.
The new takeover code, as announced by SEBI deals with the hostile bids.

Takeover and merger

“The distinction between a takeover and merger is that in a takeover the direct or
indirect control over the assets of the acquired company passes to the acquirer in a
merger the shareholding in the combined enterprises will be spread between the
shareholders of the two companies”.
In both cases of takeover and merger the interests of the shareholders of the company
are as follows:

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1. Company should takeover or merge with another company only if in doing so, it
improves its profit earning potential measured by earning per share and
2. The company should agree to be taken if, and only if, shareholders are likely to be
better off with the consideration offered, whether cash or securities of the company
than by retaining their shares in the original company.

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MERGER PROCEDURE
A merger is a complicated transaction, involving fairly complex legal considerations.
While evaluating a merger proposal, one should bear in mind the following legal
provisions.

Sections 391 to 394 of the companies act, 1956 contain the provisions for
amalgamations. The procedure for amalgamation normally involves the following
steps:

1. Examination of object Clauses: The memorandum of association of both the

companies should be examined to check if the power to amalgamate is available.
Further, the object clause of the amalgamated company (transferee Company) should
permit it to carry on the business of the amalgamating company (transferor
company) .If such clauses do not exists, necessary approvals of the shareholders,
boards of directors and Company Law Board are required.

2. Intimation to stock Exchanges: The stock exchanges where the amalgamated and
amalgamating companies are listed should be informed about the amalgamation
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 amalgamation proposal by the Respective Boards: The

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

4. Application to the National Company Law Tribunal (NCLT): Once the draft of
amalgamation proposal is approved by the respective boards, each company should
make an application to the NCLT so that it can convene the meetings of shareholders
and creditors for passing the amalgamation proposal.

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5. Dispatch of notice to shareholders and creditors: In order to convene the
meeting of shareholders and creditors, a notice and an explanatory statement of the
meeting, as approved by the NCLT, should be dispatched by each company to its
shareholders and creditors so that they get 21 days advance intimation. The notice of
the meetings should also be published in two newspapers. An affidavit confirming
that the notice has been dispatched to the shareholders/creditors and that the same has
been published in newspapers should be filed with the NCLT.

6. Holding of Meetings of shareholders and creditors: A meeting of shareholders

should be held by each company for passing the scheme of amalgamation. At least 75
percent (in value) of shareholders in each class, who vote either in person or by proxy,
must approve the scheme of amalgamation. Likewise, in a separate meeting, the
creditors of the company must approve of the amalgamation scheme.

7. Petition to the NCLT for confirmation and passing of NCLT orders: Once the
amalgamation scheme is passed by the shareholders and creditors, the companies
involved in the amalgamation should present a petition to the NCLT for confirming
the scheme of amalgamation. The NCLT will fix a date of hearing. A notice about the
same has to be published in two newspapers. After hearing the parties the parties
concerned ascertaining that the amalgamation scheme is fair and reasonable, the
NCLT will pass an order sanctioning the same. However, the NCLT is empowered to
modify the scheme and pass orders accordingly.

8. Filing the order with the Registrar: Certified true copies of the NCLT order must
be filed with the Registrar of Companies within the time limit specified by the NCLT.

9. Transfer of Assets and Liabilities: After the final orders have been passed by the
NCLT, all the assets and liabilities of the amalgamating company will, with effect
from the appointed date, have to be transferred to the amalgamated company.

10. Issue of shares and debentures: The amalgamated company, after fulfilling the
provisions of the law, should issue shares and debentures of the amalgamated
company. The new shares and debentures so issued will then be listed on the stock
exchange.
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Important elements of merger procedure are:
Scheme of merger
The scheme of any arrangement or proposal for a merger is the heart of the process
and has to be drafted with care. There is no specific form prescribed for the scheme. It
is designed to suit the terms and conditions relevant to the proposal but it should
generally contain the following information as per the requirements of sec. 394 of the
companies Act, 1956:
1. Particulars about transferor and transferee companies
2. Appointed date of merger
3. Terms of transfer of assets and liabilities from transferor to transferee
4. Effective date when scheme will came into effect
5. Treatment of specified properties or rights of Transferor Company
6. Terms and conditions of carrying business by Transferor Company between
appointed date and effective date
7. Share capital of Transferor Company and Transferee Company specifying
authorized, issued, subscribed and paid up capital.
8. Proposed share exchange ratio, any condition attached thereto and the fractional
share certificate to be issued.
9. Issue of shares by Transferee Company
10. Transferor company’s staff, workmen, employees and status of provident fund,
Gratuity fund, superannuation fund or any other special funds created for the purpose
of employees.
11. Miscellaneous provisions covering Income Tax dues, contingent and other
accounting entries requiring special treatment.
12. Commitment of transferor and Transferee Company towards making an
application U/S 394 and other applicable provisions of companies Act, 1956 to their
respective High court.
13. Enhancement of borrowing limits of transferee company when scheme coming
into effect.
14. Transferor and transferee companies consent to make changes in the scheme as
ordered by the court or other authorities under law and exercising the powers on
behalf of the companies by their respective boards.

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15. Description of power of delegates of Transferee Company to give effect to the
scheme. Qualifications attached to the scheme which requires approval of different
agencies.
16. Effect of non receipt of approvals/sanctions etc.
17. Treatment of expenses connected with the scheme.

PROCESS OF MERGER AND ACQUISITION

Step I: Finding the Right Candidate

• Few items to consider as initial filtering criteria:
• The maximum and minimum revenue range
• Geographic location
• Years in business
• Market share
• Reputation (either good or poor)
• Distribution channels
• Technology provided
• Corporate culture
• Specific business strengths, such as R&D, sales/marketing, or production
• Low-cost as opposed to high-price provider
• Services or products provider
• Industry
• Publicly traded or privately held
• Reputation of the management team

Services of an investment banker at this initial qualification stage:

These companies take a percentage of the transaction total (usually five to fifteen
percent) for assisting with the initial search and with the consummation of the final
deal.
Using a broker usually speeds up the filtering stage of the acquisition process, but it is
not cost-free.
Their fees must be paid at some point and are embedded into the purchase price.

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Additional considerations to be noted:
The M&A process can become quite complicated unless the transaction value is small
and the number of parties involved are few:
The Buyer has a team of experts, as does the seller.
Should either party be involved in publicly traded company, the complexity increases
again?
Should either party be involved in litigation of any kind, the complexity increases yet
again?

Step II: Initiate Discussions

The seller and buyer will have a number of internal meetings early in their respective
processes that help define the various objectives of the purchase/sale.
Notice that none of these meetings involve anyone outside of the immediate company
since this is the planning stage for both buyer and seller respectively.
The next meetings often involve a business broker who will assist in either marketing
the firm if you are the seller or finding viable acquisition targets for the buyer.
Once the target companies are determined, initial meetings will be set up to
investigate the willingness of the parties to either buy or sell.
After these initial meetings, a letter of intent (or letter of understanding or expression
of interest) is often prepared stating both parties’ desires to proceed to the next step.
• This letter is critically important because it represents a written understanding
between the parties involved.
• A letter of intent can be effectively used as a communication tool that ensures
that both parties are working in the same direction and with the same overall
intentions.
The seller and buyer both have a vested interest in finding deal stoppers at an early
stage.

Step III: The Due Diligence Stage

Due diligence is usually the most time-consuming, nerve wracking, and expensive
stage of the M&A process. The intent of this stage is to help the buyer understand the

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inner workings of the seller’s company. The better the understanding, the more
realistic are the expectations and price.
It requires that the buyer be given a high degree of access to the selling company’s
customers, financial records, legal records, and operations, sales, and marketing
functions. The due diligence teams are typically looking for items that either validate
the offered price or items that diminish the company’s value and its purchase price.

What happens when both parties are direct competitors in the same industry space and
there is a possibility of the deal falling through?
What happens when both parties operate in the same industry space?
The seller does not want to reveal unnecessary information to the buyer, should the
deal not consummate in a final purchase.
This fear of disclosure is particularly acute when the buyer is the seller’s direct
competitor, and for very good reason.
Every company would love to know the detailed financial, marketing, and sales
aspects of its competitor, and due diligence requires that this information be disclosed.
Should the transaction fall apart, the seller is placed at a decided disadvantage
compared to the buyer, who disclosed little or no confidential information about its
own internal processes during due diligence. Once again, the letter of intent comes
into play.
Sellers should make their secrecy boundaries clearly known in the letter of intent.The
buyer can either accept or reject those boundaries at this earlier stage instead of being
caught by surprise later.

Non disclosure agreements (NDA’s) are also executed early in the process
specifically with the intent of protecting the secrecy needs of the parties involved.

Alternate approach
As an alternative approach to immediate full disclosure to the buyer by the seller, an
interim stage can be defined.
Here, the buyer gains access to certain information with the intention of deciding on a
purchase price and set of acceptance conditions.

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This approach provides both the seller and buyer with some level of protection. Due
diligence, by its very nature, pushes the threshold of confidential information
disclosure and should be treated with the respect it deserves.

Step III – (A): A sample due diligence checklist

A legal structure review, including tax liabilities, employee disagreements, any other
pending litigation
A review of ownership and capitalization structure
A general breakdown of the customer base, with a more detailed analysis required to
make an effective assessment
A review of intellectual property rights, including trademarks, patents, and other areas
of unique and intrinsic value. This is particularly true for technology companies.
Outstanding loans that are guaranteed by the company and/or its owners
Technology evaluation that includes development tools, cycles, processes and
personnel. Key value areas should be highlighted and evaluated in light of acquisition
goals.
Financial statement review for the prior three to five years, including the minutes of
board meetings and so on
Annual reports and required stock exchange filings for any publicly traded company.
This action can also be taken during the prequalification screening stages.

Due diligence process – in conclusion

Due diligence is a complicated process which should be given major emphasis.
It is that stage where the buyer determines whether the target company is worth
pursuing.
Sellers also get a chance to learn more about the internal workings at the buyer’s
company, which also enables them to determine for themselves if a cultural fit
between the two exists.
A willing seller is critical during due diligence. The integrity of all parties must be
intact or the seller could fight the buyer’s information requests at every step, making
it a tough and stressful process for all concerned.
Further, due diligence works both ways, especially if the buyer expects the seller to
take stock.
Due diligence is an integral and critical part of the M&A process.
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The way it is handled tells a lot about the buyer and seller while providing the
foundation upon which a final purchase price is based.
The more the buyer and seller know about each other, the more accurately they can
assess the likelihood of a successful future business relationship. Plan for this process
takes time. Spend the required time in the due diligence stage and thoroughly
understand what you are committing to with the sale or purchase.

Arranging finance:
Financing depends on the financial condition of the acquired company as well as the
acquiring company.
The buying and/or selling company must be creditworthy or the deal will simply not
go through.
Buyers have usually lined up financing when the letter of intent is signed – sellers can
ask about the buyer’s ability to fund the purchase before signing the LOI.
Sellers may seriously consider stalling the M&A stage until the buyer has shown itself
to be creditworthy.

Negotiating & signing agreements:

The lawyers begin negotiating the specific terms and condition of the deal. The role of
the business manager is to make sure the overall business intentions are met. The end
result should be a legally binding agreement that also makes business sense.

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MERGER AND ACQUISITION IN TELECOMMUNICATION INDUSTRY:
 The telecommunication industry witnessed the first round of merger wave
through the Birla-Tata-AT&T consortium.

 Tata’s acquisition of VSNL Ltd., the largest ISP subscriber, provided the
company NLD licence, 32 earth stations, 12 international gateways and link to
five submarine cables, and importantly, it got assured traffic from the state
owned BSNL and MTNL for two years. VSNL later acquired Tyco Global
Network for $130 million in all cash deal which would give it a control over
the 60,000km cable network spanning over three continents.

 Reliance Infocomm bought Flag Telecom to get access to the undersea cable
network, to enable them to connect key regions like Asia, Europe and the US.

 The acquisition of Hutchison’s stake in Essar by Vodafone was the largest

ever consolidation in telecom space, with an enterprise value of $19 billion.

Mergers and Acquisitions In Telecommunication Industry

Acquirer Target Sector Stake (%) Value Date

NTT- Tata- Tele- 26% $2.7 billion 13-11-08

DoCoMo Teleservices Communications
ltd.
Vodafone Hutchison Tele- 67% $11.1 billion -02-2007
Essar Communications

Bharti Zain Tele- 100% $10.7 billion -03-2010

Communications

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NTT- DoCoMo-Tata- Teleservices ltd.
Japanese Telecom giant NTT DoCoMo acquired 26 per cent stake in Tata
Teleservices. With a subscriber base of 25 million in 20 circles, the company paid Rs
20107 per subscriber to acquire the stake.

Vodafone-Hutchison Essar
Vodafone bought the controlling stake of 67% held by LI Ka Shing Holdings in
Hutch Essar

Bharti-Zain
Bharti entered into a legally binding definitive agreement with Zain Group (“Zain”) to
acquire the sale of 100% of Zain Africa BV, its African business excluding its
operations in Morocco and Sudan, based on an enterprise valuation of USD 10.7
billion. Under the agreement, Bharti will acquire Zain’s African mobile services
operations in 15 countries with a total customer base of over 42 million.

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 CHAPTER-2 REVIEW OF LITERATURE
2.1 LITERATURE REVIEW

1. Jarrod McDonald, Max Coulthard, and Paul de Lange(2005) analysis say that
the Mergers and acquisitions (M&As) continue to be a dominant growth
strategy for companies worldwide. This is in part due to pressure from key
stakeholders vigilant in their pursuit of increased shareholder value. It is
therefore timely to identify key planning steps that will assist CEOs and
company boards to achieve M&A success.

This study used semi-structured interviews to: identify the link between
corporate strategic planning and M&A strategy; examine the due diligence
process in screening a merger or acquisition; and evaluate previous experience
in successful M&As.

The study found that there was a clear alignment between corporate and M&A
strategic objectives but that each organisation had a different emphasis on
individual criterion. Due diligence was also critical to success; its particular
value was removing managerial ego and justifying the business case. Finally,
there was mixed evidence on the value of experience, with improved results
from using a flexible framework of assessment.1

1
Jarrod McDonald, Max Coulthard, and Paul de Lange,“Planning for a successful
merger or acquisition”, Global Business and Technology, Volume 1, Number 2,
Year:2005

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 2. Rhodes (2002) analysis say that the merger and acquisition will immediately
impact the company with changes in ownership, in ideology, and eventually in
practice. In order to have a more successful expansion, the company should
provide some marketing strategy for the company. The company should
provide a strategy that could generate revenues and profits from three sources
and these are sales at company-owned stores, royalties from possible franchise
stores and franchisee fee from the new store openings and sales of soft drinks.

Expansion of the business is an important and interesting approach that needs

to emphasize, it is important for the company to meet the demand with an
adequate supply of goods and services. This can be accomplished by effective
distribution channels and effective marketing. By cutting back on the costs
involved in making and marketing, the company, less expensive and can be
more profitable soft drinks can be produced.2

2
Rhodes, K. “Making Mergers a Growth Strategy”, Root Strategic Assets, Spring, Year:2002.
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 CHAPTER 3 : RESEARCH METHODOLOGY

3.1 OBJECTIVE OF THE STUDY:

 To analyze the effect of going global through merger and acquisition
on investors earnings respectively
 Impact on companies’ financial position after acquisition or after being
acquired
 To compare the closing price of 3 companies before and after post
acquisition
 To compare the key financial ratios of 3 companies before and after
acquisition
 To analyze percentage cumulative abnormal return of one month both
before acquisition and after acquisition
 To achieve synergy in business operations.

3.2 RESEARCH DESIGN:

Type of research:
Exploratory Research
Exploratory studies help in understanding and assessing the critical issues of
problems. However, the study results are used for subsequent research to
attain conclusive results for a particular problem situation. Exploratory studies
are conducted for three main reasons, to analyze a problem situation, to
evaluate alternatives and to discover new ideas.

3.3 SOURCES OF DATA COLLECTION:

The study that is conducted being exploratory one the research source of data
used is of two types:

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  Primary Data
 Secondary Data

Primary data: Interaction by personally talking with some of expert.

Secondary data: is collected from various sources like internet, books,
newspapers & magazines.
 Books:-Mergers and Acquisitions text and cases by B Rajesh
Kumar, Corporate Restructuring by Prasad G. Godbole.
 Cases:-of the NTT DoCoMo- Tata Teleservices, Vodafone-
Hutchison Essar, Bharti-Zain.
 Journals:- Journal of Global Business and Technology(2005),
Root Strategic Assets, Spring(2002).

3.4 SCOPE OF THE STUDY:

 To know about effective organizational growth.
 To know how company increases its revenue/ market share/ market
power.
 To know companies innovation/ Discoveries in products and
Technology.
 To know how company responses to economic scenarios and increased
speed to market.

3.5 LIMITATIONS OF THE STUDY:

 The study is limited to three selected companies of Telecommunication
Industry only.
 The study is limited to analyze short term performance of the merger &
acquisition.

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